Digital Health Legal Roadblocks: Is the MSO Structure the Answer to Kickback and Corporate Practice of Medicine Concerns?

This article was originally published at Cohen Healthcare Law Group

Did Joe’s Digital Health Venture Need a Healthcare Lawyer?

Joe hired a healthcare lawyer to help him figure out how to create a digital health or telemedicine venture where he would market a certain new series of healthcare treatments to a targeted patient population.  Joe was interested in a couple of different markets:

  • Dermatology and skin care; skin creams
  • Anti-aging medicine
  • Holistic health care by licensed naturopathic medical doctors
  • Functional medicine treatments
  • Dietary supplements focused on fitness and wellness

Joe has a superstar medical doctor ready to assume the position of Medical Director for his telehealth and mobile health platform.

Joe wants to offer the MD equity in the healthcare venture, and also, get the medical doctor to review questionnaires the users would submit in response to Joe’s marketing.

Joe is worried about corporate practice of medicine, Stark, self-referral, anti-kickback and fee-splitting, HIPAA and privacy and security, and other regulatory issues.  He also needed his legal agreements drafted.

Joe had consulted with his business lawyer, but got the wrong advice.  Then he went to two healthcare law firms, and in each case, the lawyer mumbled “conflict of interest” and then said “no” to the whole idea.  Joe was an entrepreneur and would not get discouraged.  He searched for a healthcare lawyer who could give him targeted, focused advice on whether his idea was viable.

Somewhere along the line, he searched for “MSO lawyer” and came to a healthcare lawyer who could give him real healthcare legal advice.

Is the MSO Dead?

Some people think the MSO is a business structure invented some decades ago to help managed care, and no longer has any usefulness today

MSOs are not relegated to the ash-heap of history.  On the contrary, the MSO is alive and well as a legal structure intended to withstand enforcement scrutiny for corporate practice of medicine and anti-kickback and fee-splitting concerns.

The reason is that the MSO absorbs the management and marketing functions of the healthcare venture—leaving the clinical functions to the medical doctor.

As an MSO, your healthcare venture can contract, under a management services agreements (MSA), to provide management and marketing services to physicians (MDs and Dos), chiropractors, acupuncturists, clinical psychologists, behavioral health professionals, and other licensed and non-licensed healthcare providers, who will offer services to patients under one roof.

State laws don’t necessarily say what MSOs can and can’t do.  They don’t regulate MSOs, directly.  They don’t have the word “MSO” in their statutes.  You have to read between the lines.

The State Law Counterparts to Stark and the Federal Anti-Kickback Statute (AKS)

States have their own legal counterparts to the federal Stark and Anti-Kickback Statute.  Sometimes the state law version is known as “mini-Stark.”

For example:

NYS Public Health Law Section 238-a prohibits referral of certain designated health services to an entity (or an immediate family member) with which the practitioner has a financial relationship. Those services include: clinical laboratory services, pharmacy services, radiation therapy services, physical therapy services or x-ray or imaging services.

In California, the Physician Ownership & Self-Referral Act (PORA), Business and Professions Code §650.01, contains California’s “mini-Stark” rules.

In California, Business and Professions Code §650 lays out the rules governing kickbacks and fee-splitting.  Section 650(a) contains the anti-kickback and fee-splitting prohibition; 650(b) contains the self-harbor.

Beyond 650, there are other anti-kickback and fee-splitting laws to keep in mind when structuring the payment provisions of the MSO and creating any contractual agreements.  Those laws include California Health & Safety Code (HS) §445 (Medical Referral Services), which states:

No person, firm, partnership, association or corporation, or agent or employee thereof, shall for profit refer or recommend a person to a physician, hospital, health-related facility, or dispensary for any form of medical care or treatment of any ailment or physical condition.

In addition, similar language to Business & Professions Code 650 can be found in Labor Code §3215 with respect to services or benefits payable under California’s workers compensation program.

The principle behind these laws is that referrals must not “be induced … by considerations other than the best interests of the patients” (i.e., by promise of financial remuneration).  It is this principle that guides the California Medical Board (CMB) in its ongoing, and intense, close scrutiny of MSO payment arrangements.

California’s anti-kickback law does not require intent to refer patients.  No showing of increased patient costs is required, regardless of how fees are characterized, nor is it necessary to find a physician-patient relationship in order for there to be a violation.

Ultimately the MSO will want to have clear documentation to show regulators that clinical personnel providing services to patients are removed from inducement. We can assist you with preparing such documentation.

Do Bundled Services Present a Kickback Issue?

We raised the issue of bundled services in these prior posts:

Sometimes, you’ll hear a healthcare lawyer refer to an arrangement as a “technical violation of the anti-kickback rules.”  What this means is that the arrangement is likely to not create a high risk of enforcement.  If the safe harbor is not met to the letter, the arrangement still not might present a high probability of fraud and abuse, in the eyes of the regulators.

This doesn’t necessarily mean that your healthcare lawyer can green-light the arrangement.  The healthcare lawyer’s specialty is the yellow light—and whether to step on the gas, or abruptly break.  Red lights are easy: stop; green lights are rare; the nuances are in the yellow (and our healthcare lawyers prefer the more colorful metaphor, to “gray area;” lawyers shouldn’t be “gray,” in our opinion!).

Bundled services or packages fall within this yellow-light area.  Technically, literally, incentives or inducements are kickbacks.  “Buy two, get one free!” is an obvious inducement.  There is some limited allowance on the federal side for a de minimus gift; the free toothbrush you get at your dental checkup will hardly raise enforcement ire.

On the other hand, selling packages of services can raise anti-kickback as well as corporate practice of medicine issues.  From a corporate practice of medicine standpoint, if a non-MD, non-professional corporation, healthcare venture offers the user X services for Y dollars, it can appear that the venture is steering patient down a specific clinical pathway.

The enforcement risk is exacerbated if most of the profit goes to the healthcare venture, and it looks as though the physician is simply a “token” beneficiary of the arrangement.

Remember that the MSO must be compensated at fair market value for its services.  Anything the MSO receives beyond fair market value could be regarded as a kickback.  As well, if the MSO gets the lion’s share of the payment, then it looks like the MSO is pulling the strings, so to speak, on the patient’s diagnostic and therapeutic path.  And if the arrangement is no- to low-risk to the medical doctor, then again, the entire arrangement seems to be tipped in the MSO’s favor, with the MSO calling the shots and incentivizing the patient to pay for healthcare services that are not medically necessary.

This is a nuanced arena.  The MSO arrangement often creates a better legal structure, though as we just noted, the MSO is not a panacea or cure-all.  The whole structure needs to be carefully reviewed.

Sometimes, healthcare ventures like Joe’s aren’t clear about all the operational steps, money flow, compensation arrangements, and layers of control (i.e., who does what, when).  A good healthcare lawyer will take the operational plan—which a client like Joe should boil down to 1-2 pages—and rewrite the Background Assumptions so the entire picture is clear.  The operational flow has to clearly show exactly who is doing what step in the process, at what stage, with what handoff, and under what kind of compensation arrangement.  Only then can the healthcare lawyer do a proper anti-kickback and fee-splitting analysis.

Yet another CPM and CPP concern is that it appears here that the MSO is setting the fee structure, and potentially the clinical pathway as well, even if it varies somewhat, depending on which provider is seen in what order.

Risk Mitigation for the Healthcare MSO

The arrangement between the MSO, the healthcare providers, and the patients, must carefully navigate corporate practice and fee-splitting concerns.

Among other things:

  • The MSO should ensure that all clinical decision-making remains in the hands of the medical doctor.
  • The MSO should ask its healthcare lawyer to insert any guardrails against fraud and abuse that are established by federal anti-kickback law. Even if no Medicare payments are involved and federal law does not apply, the federal anti-kickback rules are persuasive to state healthcare enforcement authorities, and provide useful guidelines to help ensure that arrangements stay within the legal safe harbors.
  • The MSO fee should be at fair market value and not fluctuate per value or volume of patients. Per-patient fees are usually suspect.  The MSO fee should be justified.

Last, in the eyes of the law, the MSO works for the physician—and not the reverse.

The irony here is that the “MSO” or healthcare venture is really the one setting up the marketing, the management, bringing the user to the physician, and creating the enterprise.  The MSO views the medical doctor as the plug-in.  But in the eyes of the law, the medical doctor is the beginning, middle and end of the food chain in terms of providing professional medical services, and the MSO is incidental.

This “flip” can be quite a “head-trip” for healthcare entrepreneurs who do not understand why the law has it backwards—at least in terms of what actually happens in the marketplace.  Fortunately, our healthcare lawyers are experienced in navigating the nuances of healthcare law and mediating between legal rules that sometimes seem anachronistic and backwards, or at the least aimed at curbing the efforts rather than facilitating commerce—and our healthcare clients, who are serial entrepreneurs.

We understand the world of MSOs and professional medical corporations, and they can be perfect dance partners. Contact us to navigate your venture through the complexity of the laws of corporate practice of medicine and avoid any legal fallout.

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