Today’s legal strategy sessions involved a healthcare business that is really a healthcare practice in disguise. Let’s look at what legal strategy lessons we can learn here.
Is Joe’s Therapy Providing Professional Services
The first is a company (let’s called it Joe’s Therapy) that is growing exponentially in its home state and across states.
But what is Joe’s Therapy actually doing?
Joe has knack for meeting celebrities who can give him testimonials about the treatment Joe has provided.
Joe is not a medical doctor and in fact not any kind of licensed healthcare professional. He healed himself from a serious injury, illness, accident, whatever, using the Machine that Company X sold him. And now he’s the greatest eventually.
Joe bought rights to the Machine via a licensing agreement. And that agreement allows Joe to brand this as Joe’s Therapy.
Now what does the machine or Joe’s Therapy do?
Joe’s Therapy essentially plucks a therapy out of a licensed profession—it could be medicine, chiropractic, nutrition and dietetics, physical therapy, or several of these—and sells it to patients. Let’s call it Therapeutic Modality X.
Joe is providing professional services although if you look at all the branding on the website, it’s hard to say what Joe is actually doing. The customer is someone suffering from something, and Joe has the answers. It takes time to peel back the onion and see that this is a professional practice in the form of a branded service which in fact is offered by Joe the Plumber.
Note: Joe isn’t going to solve this legal dilemma by getting a “medical director.” See our prior posts:
There’s an old quote that says: “If you meet the Buddha on the road, kill him!” And what if your friendly neighborhood chiropractor asks you to be Medical Director, especially [...]
S Corp or LLC? Does it Matter?
Does Joe need a corporate restructuring? He went to his corporate lawyer who told him the business seemed sound enough, and after all the S-corp election had been filed.
Healthcare clients often ask whether they need a C or an S corporation or an LLC, and often, this is missing the boat entirely. The structure of the corporation is a piece of advice any corporate lawyer can give, or maybe your tax accountant.
Usually, “C” isn’t the answer and the choice is between an S corp and an LLC. The real issue here is whether Joe’s Therapy is engaging in professional practice, by selling and providing Therapy X to patients.
Because Joe’s Therapy is, well … therapy. And look at all those testimonials about treatment and results with respect to the injuries, illnesses, pains, ailments, accidents, that benefited from Joe’s Therapy.
As we’ve suggested, Joe’s Therapy in fact licenses a piece of equipment—let’s call it the Medical Device—from Company X. Company X has set up a “business opportunity” so that people like Joe (whose day job is as a plumber) can buy the Medical Device and create a business. Company X promises lots of things although it does have an earnings disclaimer.
But Wait—FDA Issues Lurk
The Medical Device company supposedly has this great machine that treats everything or maybe something very specific and does so in a proprietary way that is so simple, elegant and powerful that the testimonials are just astonishing (add superlatives here). And Joe has been very entrepreneurial in purchasing a license from the company that manufactures this miracle machine.
Of course, when we actually look at the FDA 510k clearance for the medical device, we see that the cleared indication of use is very narrow and that the company manufacturing the device is making many problematic claims (problematic from an FDA perspective, and also exposing itself to FTC enforcement action as well as lawsuits from third-party plaintiffs).
And because of the claims Joe is making for the Medical Device, it really is a medical device and can’t escape the regulatory requirements for medical devices.
See our prior post:
IF YOUR MEDICAL DEVICE REQUIRES FDA 510K CLEARANCE BUT YOU PUT IT ON THE MARKET WITHOUT A 510K, WHAT HAPPENS?
If your medical device requires FDA 510k clearance but you put it on the market without a 510k, what happens?
At any rate, the results just can’t be believed!
And this is why, in addition to his incredible self-healing journey, Joe has found that his karmic circumstances provided the perfect vehicle to make money. With Company X he has set up shop with his business opportunity. Months and many tens of thousands of dollars in revenue later, he finally seeks a legal read on his business.
It turns out that this is a prescription device that can only be sold under prescription by a physician or appropriate licensed professional.
Who is the appropriately licensed professional? We’ll have to look at state scope of practice laws.
Corporate Practice of Medicine and Fee-Splitting / Anti-Kickback Issues
But first, why does Joe have an out-of-state medical doctor providing a routine prescription to Joe’s customers simply because Joe makes a request (and by the way pays the physician $100 for each such prescription).
Here Joe will run into the prohibition against corporate practice of medicine, and against kickbacks and fee-splitting, that we’ve discussed so many times on this blog.
See our prior post:
CORPORATE PRACTICE OF MEDICINE & ANTI-KICKBACK / FEE-SPLITTING RULES: DEEP DOWN THE REGULATORY RABBIT HOLE
Many healthcare ventures seek to avoid corporate practice of medicine (or psychology) and fee-splitting violations, but they need to first understand how deeply down the rabbit hole these [...]
There are also telemedicine issues, because the medical doctor is from out-of-state. More fundamentally, the out-of-state medical doctor may be engaged in unlicensed medical practice in Joe’s state. And, the out-of-state medical doctor could be seen as prescribing without a good faith or appropriate prior exam.
See our prior post:
Internet prescribing has been the bad boy of telemedicine, lagging behind telemedicine rules for medical practices generally; is this about to change?
While telemedicine rules are expanding in many states, and state medical boards are softening their position on whether an in-person visit with the medical doctor is required, there is still a legal dilemma here in that Joe is essentially trying to hire a doctor (and an out-of-state one at that), kick money to that MD or DO for writing a prescription for a patient the physician never sees (not even virtually).
It turns out that to make the MD’s job easier, Joe even takes the medical history himself (or has an assistant do it).
Would the MSO Model Work
What is Joe’s company, really?
When we look at what he is doing, fundamentally, he seems to be wanting to offer a particular healthcare service, which is within the scope of practice of a licensed healthcare professional, but he can’t do so because his license is as a plumber.
(And plumbers, by the way, are great. It’s just that they can’t deal with your inner plumbing).
What Joe has looks to us more like a management and marketing services organization (MSO) somewhat analogous to that of a telemedicine company.
See our prior post:
Corporate Practice of Medicine on Steroids: How Your MSO and Professional Medical Corporation Could Work Together Without Courting Legal Disaster
You, MSO is my own variation on I Claudius. Poor Uncle Claudius, everyone said. Ended up becoming Emperor of Rome. Through craft and careful strategy. So you have an MSO and want to operate [...]
Positioned like an MSO, Joe might have be on a sounder legal footing especially if he is careful to distinguish the business side from the professional service.
The MSO model has several benefits.
- It separates the clinical (professional) practice from the business side. The business side is responsible for management and marketing. The MSO itself doesn’t practice medicine, or psychology, or chiropractic, physical therapy, or any other licensed healthcare profession.
- The MSO model puts the professional practice where it needs to be from a corporate practice perspective: at the helm.
- The MSO model requires that the MSO receive fair market value for the services it provides, thus helping to alleviate concerns about fee-splitting.
- The MSO model is well-recognized.
Now remember that nothing is ironclad.
Even MSOs can go too far. See our post:
Corporate practice challenges medical management (MSO) organizations, especially in New York AG, as shown by recent enforcement action.
A legal strategy is exactly that. When the stormtrooper’s come, the legal strategy says: “These droids aren’t the ones you’re looking for.” These droids have thought about the legal underpinning of their model and they’ve done due diligence and covered some of the basics.
Healthcare is moving more and more out of the doctor’s office and onto the Internet and into our phones. No longer is the white-coated physician in the medical office the pinnacle of healthcare nor even the first stop.
Businesses are sprouting up that cannibalize the healthcare journey into sellable components.
Yet alongside all the healthcare entrepreneurship, the laws and regulations contain strictures, often anachronistic, creating traps for the unwary. One size does not fit all. There are some strategies and models we can deploy – such as the MSO – and stretch to fit new situations. We also have to understand what a healthcare operation is fundamentally offering, and how this will look in the eyes of the law – before designing and implementing a more compliant legal structure.