Over the past few years, the health care industry has really taken a hit. There have been changes in the delivery of health care, reductions in payments for services and increasing regulatory burdens. These developments have forced health care entrepreneurs, investors and providers to think outside of the box and explore opportunities to open and grow franchises in a number of ambulatory care and ancillary service areas. These include home health, medical spas, physical therapy, vaccine and travel medicine centers, vision centers, direct-to-consumer laboratory testing and urgent care centers, to name a few.

However, along with these opportunities come myriad federal and state health care laws that can impact the structure and operation of these businesses and, potentially, their ultimate success or failure. Therefore, when contemplating a health care franchise, it is important for franchisors and franchisees to be aware of these laws and, at the outset, assess whether any will pose hurdles, if not complete roadblocks, to their franchising plans before sinking money into a business that may not work. While federal laws may apply in every state, each state in which a franchisor or franchisee will operate will have different rules.

1. The corporate practice doctrine

A number of states’ laws prohibit a legal entity from engaging in the practice of a profession that requires individual licensure unless it meets certain requirements. This is often referred to as the “corporate practice” or “corporate practice of medicine” doctrine. Generally, in “corporate practice” states, in order for a legal entity to provide health care services, the legal entity must be owned by professionals who are licensed to provide the same services the corporation will provide. Ownership of legal entities that provide professional health care services by unlicensed laypersons or other non-professional corporations is not allowed. A corporation that fails to comply with state rules could be subject to civil fines and penalties, lawsuits by the state’s attorney general, and/or revocation of the entity’s authority to transact business in that state.

2. Anti-kickback laws

The federal government and most states have laws prohibiting the payment of compensation or anything of value in exchange for patient referrals. In the case of federal law, this includes any services paid for by any federal health care program (e.g., Medicare, Medicaid, TriCare, Champus). State laws may be broader to include services paid for by any third-party payor, including commercial payors. Many arrangements you would think of as common in operating a business — space or equipment leases, services and management contracts, the issuance of ownership shares, etc. — may implicate anti-kickback laws, particularly if any of these arrangements are between a business and a health care provider who refers patients to the business. Violations of federal and state anti-kickback laws can result in civil fines and penalties, professional disciplinary action (pursuant to many state professional licensing laws), and, in some cases, potential criminal penalties.

3. Fee-splitting

Many state licensing laws prohibit licensed professionals from splitting their professional fees or other revenue with entities or other licensed people who are not legally affiliated with the licensed professional (such as through an employment arrangement) and did not provide any professional service. Fee-splitting laws go hand-in-hand with anti-kickback laws, as the underlying rationale for both is the prohibition of payments to individuals who did not provide the service being billed and/or in exchange for patient referrals. Because most, if not all, fee-splitting laws are found under state professional licensing laws, violations of fee-splitting prohibitions may result in professional disciplinary action against licensed professionals engaged in the improper arrangement.

4. Physician self-referral laws

Federal law and some state laws prohibit physicians from referring a patient for certain health care services to any entity with which the physician has a financial relationship. A financial relationship is broadly defined and includes investment interests. In the absence of an applicable exception, physicians may not refer patients to such entities, and any entity providing services related to an improper referral could be (and in the case of federal law, is) barred from billing for the services. Improper physician self-referrals may result in disciplinary action against the referring physician (in the case of many state prohibitions), overpayment liability for the entity billing for services related to an improper referral, and potential false claims liability under state or federal law.

5. Business format franchises

Health care franchises typically are structured as business format franchises, in which the franchisor generally provides operating systems, designs, layouts, equipment and supplies, accounting, computer and point-of-sale systems, group advertising and promotions, training, a common trademark and brand recognition. However, the medical professional (who may also be the franchisee) is responsible for the actual practice of medicine or other related profession, and nothing the franchisor provides or requires can or should supersede the independent professional judgment of the health care professional. Both the franchisor and franchisee should understand the limits on the franchisor’s services, as well as the limits on the franchisor’s ability to impose certain system standards as it relates to the practice of the underlying profession.

Whether, and to what extent, any of these laws apply to any particular health care franchise involves a complex analysis of the structure and proposed operation of the franchise and the applicable state and federal laws. Although the offer or sale of health care franchises will be subject to the registration and disclosure rules similar to other franchises, there may be special issues to consider. Because of the potential legal liability, those considering establishing or taking ownership in a health care franchise would be wise to consult with legal counsel experienced in the health care regulatory landscape and the issues unique to health care franchising.

For more information, please contact attorneys in Greensfelder’s Health Care Group.