Kevin P Hein February 8 2011 Mitigating risk in a land of opportunity Faegre Baker Daniels LLP | Franchising - USA Kevin P Hein Franchising IntroductionCorporate practice of medicineFee-splittingPhysician self-referralsAnti-kickbackPrivacy lawsIntroductionBy 2020, healthcare spending in the United States is expected to increase to $4.5 trillion – or 19.3% of the nation's gross domestic product. This growth offers tremendous opportunity to both franchisors and medical professionals.Currently, more than 100 franchise systems specialise in medical services, including in-home healthcare and senior care. Current franchisors merely scratch the surface of available opportunities. Franchising in healthcare requires compliance with franchise laws and numerous state and federal healthcare laws. Landmines await the unwary franchisor. Franchisors that proactively anticipate the complexity of this regulatory landscape – and design appropriate models – will be well positioned to take advantage of unprecedented market opportunities.Corporate practice of medicineNearly every state imposes corporate practice of medicine laws that restrict corporate entities from employing physicians (and in some cases, other licensed medical professionals) or influencing their personal judgement. These laws vary significantly from state to state.When franchisees are subject to the corporate practice restrictions, regulatory exceptions must be used. In most cases a franchise programme can be structured to preserve the ability of the healthcare provider to exercise professional judgement and comply with state law.Courts and regulatory bodies distinguish between the business and the medical elements of delivering services. By focusing on the delivery of business services and leaving medical decisions to duly licensed healthcare professionals, a system can survive a challenge on the grounds of corporate practice.Fee-splittingSome states prohibit medical professionals from sharing any portion of patient fees with non-medical entities or business personnel. These laws exist to ensure that medical professionals are not confronted by the 'divided loyalty' dilemma, where the physician's medical decisions for a patient are influenced by his or her own financial interests.These restrictions can wreak havoc on any franchisor trying to use a traditional franchise model to structure a new healthcare franchise. Generally, the types of medical service offered by the business will determine the applicability of fee-splitting statutes. If the procedure must be administered by a licensed healthcare professional, fee-splitting issues should be addressed in the model.Physician self-referralsCertain state and federal laws prohibit a doctor – unless an exception applies – from referring patients to entities in which the doctor owns a financial interest.Depending on the nature of the service, these laws may restrict doctors from owning an interest in the franchise entity. If the franchise model depends on referrals from doctors in order to generate patients or customers, the pool of potential franchisees may be narrowed in states that ban all self-referrals.Federal law outlines specific categories of service (and exceptions that apply) where the services provided by the doctor are reimbursed by Medicare or Medicaid. In some situations, doctors must disclose ownership interest to patients before services are provided. In many states self-referrals are prohibited, regardless of the payer.In states requiring disclosure, it is critical that the franchisor work with healthcare counsel to ensure that disclosure is made appropriately.If the franchise model includes payment for services by Medicare or Medicaid, the franchisor must structure the model so that the franchisee and its referring physician can comply with federal law.Anti-kickbackThe federal anti-kickback statute prohibits giving any type of cash payments or in-kind benefits to doctors in exchange for referrals for services covered by federal programmes such as Medicare and Medicaid.Violating this federal statute is a felony, so healthcare counsel should carefully analyse any franchise model. While the federal law applies only when billing a federal health care programme such as Medicare or Medicaid, some states have similar laws for all payers.Privacy lawsEvolving federal and state laws protect the privacy interests of all medical patients, and violations of these rules are serious. Patients must be notified – with negative consequences for the entire brand.The federal Health Insurance Portability and Accountability Act of 1996 imposes specific privacy obligations on covered entities and their associates that have access to patient information through franchisee files or a franchisor-sponsored website. A franchisor must determine the extent of its obligations and develop an appropriate compliance plan.A number of states have implemented additional laws protecting patients, data and financial privacy. Any franchise plan must include a plan to ensure that these obligations will be met.By consulting with lawyers who offer dual experience in the area of both franchise and healthcare law, savvy franchisors can take advantage of opportunities – and avoid landmines – in the rapidly growing healthcare industry.For further information on this topic please contact Jennifer Evans or Kevin Hein at Faegre & Benson LLP by telephone (+1 303 607 3500), fax (+1 303 607 3600) or email ([email protected] or [email protected]).