B&L, LLC d/b/a Orange Grove Medical Specialties, P.A., No. 4279 (November 19, 1997). Docket No. SIZ-97-7-16-22 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ________________________________ ) SIZE APPEAL OF: ) ) B&L, LLC d/b/a Orange Grove ) Docket No. SIZ-97-7-16-22 Medical Specialties, P.A. ) ) Decided: November 19, 1997 Appellant ) ) 504 Application ) ________________________________) APPEARANCES for Appellant Leon Darby DIGEST A medical practice is not affiliated with a large management firm with which it contracts for office management services, where the management firm performs all non-medical administrative functions, such as hiring and supervising personnel, office lease and equipment, and billing, in return for 40% of its gross billings, but the medical practice provides all medical services, and retains all authority over the hiring and control of physicians, the fee schedule, ordering pharmaceuticals, and joint authority over the budget. DECISION HOLLEMAN, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Parts 121 and 134 (1996). Issue Whether a medical practice is affiliated with a large management firm with which it contracts for office management services, where the management firm performs all non-medical administrative functions, such as hiring and supervising personnel, office lease and equipment, and billing, in return for 40% of its gross billings, but the medical practice provides all medical services, and retains all authority over the hiring and control of physicians, the fee schedule, ordering pharmaceuticals, and joint authority over the budget. I. BACKGROUND A. The Loan Application On February 27, 1997, Southern Development Council Inc., a Certified Development Company (CDC), submitted for approval to the Small Business Administration (SBA) District Office in Jackson, Mississippi, a loan application on behalf of B&L, L.L.C., a Mississippi limited liability company (B&L), and Orange Grove Medical Specialties, P.A., a Mississippi corporation (OGMS) (hereinafter collectively referred to as Appellant), under the SBA's 504 loan program. The purpose of the loan was to finance the purchase of land, construction of a building, and acquisition of equipment for a medical clinic. Appellant's application states Boyd P. Benefield, M.D., and Lynn E. Leatherwood, M.D., formed B&L for the purpose of building a new clinic to lease to OGMS for the practice of medicine, and each own 50%. Drs. Benefield and Leatherwood also each own 50% of OGMS stock. Appellant's application classifies itself under Standard Industrial Classification (SIC) code 8011, Offices and Clinics of Doctors of Medicine, with a corresponding size standard of $5 million in average annual receipts. [1] More than a year before its loan application, on February 1, 1996, Appellant executed a Management Services Agreement (Agreement) with Garden Park Community Hospital, LP d/b/a Columbia Garden Park Hospital (Columbia), an acknowledged large business. The Agreement stated Columbia would perform all non-medical aspects of the business of operating a medical clinic for 40% of the gross revenue. On April 14, 1997, the District Office denied Appellant's loan application. The District Office found the Agreement creates affiliation between Appellant and Columbia, thereby rendering Appellant other than small. Therefore, Appellant was ineligible to receive assistance under the 504 program. On April 17, 1997, the CDC requested, on behalf of Appellant, a reconsideration of the size determination and approval of the loan. It asserted B&L and OGMS were private corporations, solely owned by Drs. Benefield and Leatherwood, and were not affiliated with Columbia. On April 23, 1997, the District Office requested a size determination from the SBA Area III Office of Government Contracting in Atlanta, Georgia (Area Office). On April 29, 1997, the Area Office requested Appellant to submit, within three working days of receipt of the request, an SBA Form 355 and additional information, together with any written statement in support of its response. Appellant received the request on April 30th, but failed to file any response or request additional time to respond by the required date. On May 7, 1997, based upon Appellant's lack of response and upon its review of the information provided by the District Office, the Area Office drew an adverse inference. It then determined Appellant was an other than small business and ineligible to receive assistance. On May 27, 1997, the CDC submitted, on Appellant's behalf, the information requested. On June 4, 1997, the District Office submitted another request for a size determination to the Area Office. On July 7, 1997, the Area Office issued a size determination finding Appellant other than small. On July 16, 1997, Appellant filed the instant appeal. B. The Management Agreement The Agreement states Appellant is established to practice medicine. In order to focus on that practice, Appellant has executed the Agreement with Columbia, which provides administrative and related services to health care professionals. The Agreement designates Columbia as Appellant's sole and exclusive agent for management, marketing, and administration of its business affairs. Appellant retains complete authority and control over its provision of medical services. Specifically, the Agreement provides that Columbia will be responsible for leasing office space, maintenance, and obtaining all equipment and supplies, except those supplies, such as pharmaceuticals, which only a licensed physician may order. Columbia will apply for any licenses or permits Appellant may require, except those applications which only a licensed physician may file. Columbia will perform marketing and public relations services, but all text and copy will be subject to Appellant's approval. Columbia also will hire, supervise, establish salaries for, and control, all non-medical personnel, and provide payroll services for all personnel. Columbia reserves the sole right to assign personnel; and its personnel may perform services for other practices Columbia serves. Columbia agrees to use its reasonable efforts to honor Appellant's requests concerning assignment of personnel. Columbia will make all the reports required of an employer, such as withholding taxes, unemployment, and workman's compensation insurance. Conversely, Appellant will hire and supervise all physicians. Columbia and Appellant will share certain functions. They will jointly prepare Appellant's operating budget. Columbia will perform all billing and collection, but Appellant will set the fees. Columbia will establish policies for creating and maintaining the medical records Appellant generates, which it will safeguard in accordance with the applicable confidentiality laws. Columbia will timely create and maintain such other records as are necessary for the practice. Columbia has access to Appellant's business bank account, but only for the purpose of carrying out the agreement. It may not withdraw funds if the withdrawal would leave Appellant unable to meet any accounts payable. Columbia's compensation will be 40% of Appellant's gross collections, defined as all medical fees, payments under managed care agreements, insurance payments, any payments from business interruption insurance, and any revenue from professional, community, or education programs. The contract is for one year, with three one-year options. Appellant may terminate for default. It also may elect not to renew at the end of each year. Appellant is thus not obligated to use Columbia's services indefinitely. Finally, if Appellant receives an offer to purchase the practice, Columbia has the right of first refusal. It may purchase the practice itself, if it can provide terms as favorable to Appellant as the offeror. C. The Area Office Determination The Area Office found Columbia controls all facets of the operation of the medical practice, with the exception of medical treatment and the pharmaceuticals. This includes managing the facility, licensing, permits, medical records, personnel, bank accounts, billings, accounts payable, maintenance, and designating hours of operation. The Area Office also interprets the Agreement's provision for Columbia to receive revenue generated by professional, community, or education programs as a fee for the doctors' activities outside the medical practice. The Area Office particularly noted Columbia's control over leases, records, and its complete access to Appellant's bank account. The Area Office found that Columbia's ability to move Appellant's non-medical personnel to another facility, where it has a similar contract, raised the possibility Columbia also could refer patients to that facility. The Area Office further found the Agreement makes Appellant and Columbia mutually dependent for the operation of the medical practice to such an extent that they may be treated as one party. D. Arguments on Appeal Appellant asserts B&L and OGMS are each other's only affiliate. Appellant further asserts the Agreement merely contracts with Columbia to provide business services, as it would any other vendor such as an accountant or a computer company. In addition, Appellant asserts its principals still own 100% of the business; they executed the Agreement in order to manage the non-medical aspects of the business more efficiently and less expensively than they could on their own. Appellant also asserts the contract is for one year and the principals, who freely entered into the contract, can renew or cancel it at their sole discretion. Appellant asserts the Area Office finding that Appellant and Columbia are mutually dependent is illogical, as Columbia is a much larger firm. Appellant further asserts the Agreement is not essential to either entity's financial existence. Appellant interprets as permissive, rather than mandatory, the regulatory language on which the size determination relies. 13 C.F.R. Section 121.103(a)(3) Appellant also asserts a finding of affiliation is not warranted, because neither doctor owns any Columbia stock and Columbia does not own any stock in Appellant. In addition, Appellant asserts the Agreement is consistent with industry standards. Therefore, the Presiding Judge should not consider it a contract that creates affiliation. Finally, Appellant claims Columbia's option of right of first refusal to purchase the practice was included in the contract to provide for an orderly continuation of the practice in the event of the death of either Dr. Benefield or Dr. Leatherwood. Appellant asserts this provision does not give Columbia an option to purchase, or any advantage or ability to control the doctors' decision in the event they decide to sell their practice. It simply gives Columbia the privilege of tendering an offer for the medical practice before they sell it to someone else. II. DISCUSSION Appellant filed the instant appeal within 30 days of receiving the size determination, and it is thus timely. 13 C.F.R. Section 134.304(a)(2). The issue here is whether the Agreement, without more, gives Columbia, a large firm, the power to control Appellant, thus creating affiliation. 13 C.F.R. Section 121.103(a)(1). The Presiding Judge notes there is no common ownership or management between Columbia and Appellant, and they are in different types of business: respectively, management/administration and medical practice. The precise issue here is one of first impression. In order to resolve it, the Presiding Judge must consider this Office's precedent in similar, but not identical, cases where one concern was alleged to have the power to control another because of a contract between the firms. For example, this Office held that employees a personnel agency provided to a challenged firm are employees of the challenged firm, but did not consider the issue of whether the personnel agency was affiliated with the challenged firm. Size Appeal of Amertex Enterprises, Ltd., No. 2442 (1986). This Office also reversed a Regional Office decision finding a challenged firm affiliated with a personnel agency which supplied it with employees, and performed all the administrative functions customarily performed by an employer in return for a percentage of the total payroll. Size Appeal of Maryland Assemblies, Inc., No. 3134 (1989). This Office held this agreement did not give the personnel agency the power to control the challenged firm. [2] This Office further held that a medical practice, whose doctors also are members of a medical school faculty and whose office space is located at the medical school, was not affiliated with the medical school. There was no common ownership and the two entities were in different businesses, one education and the other practicing medicine. Size Appeal of University Medical Associates, No. 3561 (1991). This Office also found a construction firm affiliated with a large firm under a management contract which gave the management firm total authority over the firm's construction contracts, the challenged firm's ultimate product. Size Appeal of Picazo Constructors, Inc., No. 3964 (1994). Where challenged firms are franchisees of large firms, the general rule is there is no affiliation if a franchisee has the right to profit from its efforts and bears the risk of loss commensurate with ownership. 13 C.F.R. Section 121.103(g). In contrast, this Office held that, if the franchise agreement gave the franchisor so much control over operations that it controlled the franchisee's ultimate product, the firms were affiliated due to that control. Size Appeal of Dani Enterprises, Inc., and C. Patrick Kennedy, No. 3379 (1990). There, because the firm was a personnel agency, control over personnel was control over the firm's product. The Presiding Judge also finds instructive this Office's ostensible contractor rule analysis, where the question is whether a subcontracting agreement results in affiliation. 13 C.F.R. Section 121.103(f)(3). The test is which firm will perform the vital and primary requirements of the procurement at issue. Size Appeal of CardioMetrix, Inc., No. 4051 (1995). While no procurement is at issue here, the provision of medical services to the public is the vital and primary task of the business, and Appellant will perform that function. It is instructive to note that, in a case concerning Medicaid reimbursement, the court denied Medicaid reimbursement to a medical practice for the services of allied health professionals (e.g., psychologist, physical therapist) who leased office space from the practice. The allied health professionals were required to consult with the practice on their cases, to follow the practice's administrative procedures, and to bill through the practice. However, the court found the allied health professionals were not under the direction of the medical practice, even though they surrendered some control, because their continuing exercise of independent judgment was sufficient to render then independent of the medical practice. Downtown Medical Center v. Bowen, 944 F.2d 756, 767-9 (10th Cir. 1991). Thus, based on the case law discussed above, to decide whether affiliation exists, the Presiding Judge must determine whether Appellant, through the Agreement, has relinquished control of the core of its business, its ultimate product, and its primary task. Appellant is classified under SIC code 8011, which means the purpose of this business is not to run an office, process paperwork, and supervise personnel, but to provide medical services. Appellant has retained control over all the medical functions, specifically, hiring and supervision of all physicians, setting medical fees, ordering pharmaceuticals, and approval of the firm's advertising and publicity. Further, Columbia does not have total financial control, as it prepares the budget jointly with Appellant, and may not withdraw funds from the firm's account if that would leave the firm unable to meet its obligations. All of Columbia's other tasks are incidental to the practice of medicine, and the question of who controls them is incidental to the question of who controls the business. Columbia merely is a vendor of office management services; it has no more control over the business than any other vendor. Therefore, there is no basis for the Area Office's finding of mutual dependence. With regard to the Area Office's other concerns, Columbia may assign employees to other facilities, but it is obligated under the contract to continue to provide adequate services to Appellant; it cannot leave the facility unstaffed. Indeed, the ready exchange of administrative personnel among facilities further supports the finding that they do not perform the vital functions of the medical practice. As to the Area Office's concern about Columbia's possible referral of patients to other medical practices, it is pure speculation, unsupported by the record. Further, the Area Office's concern about Columbia's receiving payments for activities performed by the physicians outside their medical practice is misplaced. This apparently refers to the Agreement's provision that fees from professional, community, or education programs are included in gross receipts. However, while these activities do not take place in the office, they occur because of the doctors' medical expertise, and are part of any professional's practice of his or her profession. They also require some administrative support. Thus, they cannot be characterized as activities outside the medical practice. In addition, Columbia's right of first refusal should not be confused with an option to purchase (see 13 C.F.R. Section 121.103(d)); it simply is the right to meet any offer made to Appellant. This right is triggered only if Appellant's principals first decide to sell the business. While prior cases have mentioned right of first refusal as an indicia of affiliation, they have done so where other extensive ties exist between the firms, which gave the alleged affiliate control of the challenged firm. Size Appeal of Procurement Automation Institute, Inc., No. 4236 (1997). Where, as here, the challenged firm retains control of its business, no authority exists to find a right of first refusal is an indicia of affiliation. The Presiding Judge concludes the Agreement does not give Columbia control over Appellant, and thus does not amount to affiliation between the two. Accordingly, Appellant has established the size determination is based on a clear error of law or fact, and thus has met its burden of proof in this appeal. Size Appeal of Rebmar, Inc., No. 4173 (1996). III. CONCLUSION Accordingly, the Area Office decision is REVERSED, and the instant appeal is GRANTED. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 134.316(b). ____________________________ CHRISTOPHER HOLLEMAN Administrative Judge _________________________ [1] In its Form 355, Appellant erroneously classifies itself under the nonexistent SIC code 6511. Appellant apparently has misunderstood the Standard Industrial Classification Manual, Office of Management and Budget (1987). It used the heading for Industry Group 651, Real Estate Operators (Except Developers) and Lessors, without realizing 651 is not itself a SIC code designation. Because both the 8011 SIC code used in the size determination, and all Industry Group 651 SIC codes have average annual receipts size standards of $5 million (except SIC code 6515, Leasing Space to Federal Government by Owners, which is not applicable here), Appellant's error is immaterial. [2] This Office also held the personnel agency in Maryland Assemblies was not a joint venturer with the challenged firm because it had no right to participate in the profit or loss of the business. Posted: November, 1997