With the passage of the Patient Protection and Affordable Care Act and the increased scrutiny of healthcare costs, many individuals in the healthcare space are looking for alternative business opportunities and vehicles for investment. Once a business opportunity proves to be successful in a set market, business owners often want to expand their business to other states and other markets. While this can lead to many opportunities, it can be a trap for both the unwary and wary alike. In addition to the federal laws and regulations that govern the healthcare industry, each state has its own regulatory scheme that may hinder or even prohibit some business arrangements.

To avoid lawsuits or civil or criminal penalties under federal and state laws, it is essential that a healthcare business consider all possible regulatory areas that could impact the business arrangement. While most individuals working in the healthcare area are aware of the Stark laws (which generally prohibit physicians from ordering certain medical services from an entity in which they or an immediate family member have a financial interest), and the Anti-Kickback law (which generally prohibits remuneration in exchange for referrals), many are unaware of laws and regulations at the state level that could also impact a business’s structure or legality. A healthcare business opportunity or business structure that is compliant with one state’s law may not be compliant with another state’s laws due to restrictions and regulations in areas such as: state anti-kickback and self-referral laws, disclosure requirements, the corporate practice of medicine doctrine, fee splitting, or industry-specific restrictions.

This article will highlight potential areas of exposure for healthcare businesses that operate across state lines:

1. State Anti-Kickback and Self-Referral Laws

Application of the federal Anti-Kickback and Stark laws (the “federal fraud and abuse laws”) is predicated on the receipt of federal monies, including Medicare, Medicaid, and TRICARE. Some healthcare companies attempt to avoid the strict requirements and scrutiny of the federal fraud and abuse laws by structuring their business to only accept private insurance or self-pay. However, many states have adopted portions of the federal fraud and abuse laws, the application of which are not conditioned upon the payment of federal monies.

Texas, for example, has a statute that combines portions of the Anti-Kickback statute and Stark laws. Under Section 102.001 of the Texas Occupations Code, a person commits an offense if he or she “knowingly offers to pay or agrees to accept, directly or indirectly, overtly or covertly any remuneration in cash or in kind to or from another for securing or soliciting a patient or patronage for or from a person licensed, certified, or registered by a state health care regulatory agency.” This statute is broader than the federal law because it is not limited by the acceptance of federal funds. This means arrangements that may not trigger the federal fraud and abuse laws can still become an issue under Texas state law.

The key is knowing whether the state in which you are operating your business has anti-kickback and self-referral laws, and to know the limits, exceptions, and consequences of those laws. Because the laws vary greatly from state to state, a business arrangement that is perfectly acceptable in one state may be illegal in another state.

2. Disclosure Requirements

Another area that varies across state lines is the need to disclose certain business arrangements and/or investors. Some states do not prohibit physicians from referring patients to entities in which the physician has an ownership interest. The state may instead require transparency of the ownership interest and full disclosure to the consumer/patient. For instance, state law may require a physician to disclose his or her investment interest and/or offer the patient a list of alternative locations for treatment. Some states even have a specific form that must be provided to the patient and, in some jurisdictions, signed by the patient. While these requirements are not difficult to comply with, knowing the specific rules of each state requires some research and forethought.

3. Corporate Practice of Medicine

Many states prohibit what is commonly referred to as the “corporate practice of medicine.” This is a doctrine that generally prohibits a business entity from “practicing medicine” or employing a physician to provide professional medical services. As explained in the article Business Entities for Healthcare Services included in this issue of the Capital Newsletter, certain healthcare providers are subject to limitations concerning the type of business entity structure under which they can operate, as well as who can own those businesses. While the corporate practice of medicine doctrine has been in an existence a long time, many states have moved away from a strict prohibition. Under the corporate practice of medicine’s original form, only physicians had the ability to engage in the ownership or management of the healthcare entity under which they operated. Many jurisdictions, including Texas, have now created numerous exceptions that enable physicians in certain situations to be employed by non-physician owned entities and that permit other business arrangements involving ownership and management by non-physicians. One notable exception to this recent trend is the State of New York, which has very robust restrictions on the corporate practice of medicine. Thus, it is important for businesses looking to expand into new states to seek counsel to ensure compliance.

4. Fee Splitting

Some jurisdictions prohibit sharing with non-physicians the fees paid for the provision of healthcare services. This doctrine is similar to the corporate practice of medicine, and while some states distinguish between the two, other jurisdictions do not. Prohibitions on fee-splitting focus primarily on the source of payment for healthcare services, as well as who is permitted to collect those fees.

5. Other State-Specific Prohibitions or Requirements

In addition or in the alternative to the areas discussed above, some states have prohibitions or requirements within a particular sub-industry. For example, some states may regulate the business arrangements that are permissible for laboratories, home health care companies, or other ancillary healthcare services. And, even if the state does not prohibit certain business arrangements or structures within these sub-industries, the state may require the filing of disclosures, certificates or other forms with the state in order to operate within that state.

Healthcare businesses looking to operate in multiple states must be mindful of the state-specific requirements and ensure compliance with each state’s laws to avoid any pitfalls that could undermine the overall success of the business.