Ketamine Management Services Organizations (MSOs): The California Puzzle

08 Jun Ketamine Management Services Organizations (MSOs): The California Puzzle

Our law firm has seen an uptick in ketamine clients lately. And it’s no surprise as the drug picks up considerable speed with its off-label infusion applications for a slew of serious ailments, including depression and mood disorders. We’ve also been handling several M&A deals around ketamine clinics and the management companies that serve them. While the medical research and business interest in ketamine continues, any physician or investor looking to participate in or capitalize on such ketamine infusion clinics needs to get familiar (and fast) with: 1) what it takes to prescribe, store, and administer ketamine, and 2) the myriad laws and regulations around the corporate practice of medicine and the business set-ups that may run afoul of the same.

In California, the corporate practice of medicine is very serious business (see Business & Professions Code Sections 2052 and 2400). California actually requires stricter compliance than the Feds when it comes to the corporate practice of medicine doctrine and anti-kickback, fee-splitting, and self-referral laws and regs. This means that not just anyone can administer or manage ketamine infusion treatments here. In fact, in California, such treatments must be conducted by licensed physicians (although other licensed health care providers, like nurses, can potentially assist with those treatments). And those physicians cannot form just any corporate entity with which to do business–they have to incorporate as a professional medical corporation (which must be at least 51% owned by licensed doctors with the remaining 49% allowed to be owned by other licensed/registered health care providers). Further, physicians must be in complete control of the professional medical corporation and its clinical business and management decisions. This includes how patients are treated and managed, including their patient records and how often a patient is seen.

How then does any third party venture with physicians around ketamine infusion treatments? Very carefully is the answer. Cue the management services organization (MSO) structure as a prime and popular example.

MSOs are nothing new when it comes to how non-physician third parties can lawfully undertake non-clinical, administrative business alongside physician practice groups via management services agreements. And oftentimes those practice groups legitimately need MSOs to help manage their practices and grow their business by undertaking certain facility, administrative, advertising, and personnel logistics on behalf of the docs. Because California is so aggressive around the corporate practice of medicine bar, MSOs need to really watch it in two main areas when it comes to their interactions with physicians (and ketamine infusions are no exception).

1.  Control 

Under California’s corporate practice of medicine doctrine, it is very clear that MSOs (or non-physicians) cannot own, invest in, or control directly or indirectly any professional medical corporation/physicians group. The biggest pitfall here is the “control” part, where certain non-clinical management services that may be provided to the physicians by the MSO can border on unlawful control.

Control is going to be a fact-based inquiry, and the content of the MSO agreement is extremely important as a result. The California Medical Association Board of Trustees (back in 1994 and then again in 2010) adopted policies instructing physicians on what business/practice decisions have to be made by the physicians exclusively, versus those business decisions or actions that may be shared between physicians and non-physicians. In the context of an MSO, decision making falls into three basic categories:

1. “Exclusive”—”physician or lay entity has sole responsibility for the decision. Neither party has a duty to consult with the other, even on an informal basis.”
2. “Consultive”—”physician or lay entity is encouraged to informally seek or receive information or advice from the other, but each retains ultimate decision-making authority.”
3. “Shared”—”as a prerequisite to final action, the physician or lay entity makes a recommendation to the other through a formal process. While the ultimate decision-making authority rests with the party receiving the recommendation, the recommendation, in light of the significance of the interest involved is entitled to careful consideration.”

The main decisions, among many others, that stay exclusively with the physicians are things like setting purely medical practice policies and what gets included in patient medical records. For the MSO, their decision making authority can surround selecting administrative staff, equipment provision, and providing the clinic space (among certain others).

2.  Payment

The MSO’s compensation cannot just be whatever the parties decide under the MSO agreement. In California, pursuant to Business and Professions Code 650,

“. . . the offer, delivery, receipt, or acceptance by any person licensed under this division . . . of any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person, irrespective of any membership, proprietary interest, or co-ownership in or with any person to whom these patients, clients, or customers are referred is unlawful. . . . The payment or receipt of consideration for services other than the referral of patients which is based on a percentage of gross revenue or similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.”

Translation, the compensation paid to the MSO can only be for management services rendered, and it can be a percentage of gross profits (under some instances) but it must reflect the actual, fair market value of the services/equipment/facilities provided. Whether an MSO has a fee-splitting problem is another fact-based inquiry that hinges entirely on the content of the MSO agreement and practice of the parties. That said, the use of any profit sharing could immediately raise red flags with California regulators no matter what.

The MSO’s main revenue driver is the service fees it charges to the physicians — typically, rather than directly to patients to avoid the appearance of unlawful fee splitting or too much control — as consideration for the management services. This means that the MSO agreement between the MSO and the physicians is key, and the MSO typically is going to want a lengthier term with few termination rights as a result.

Ketamine infusions up the ante here for the MSOs (and the physicians) where ketamine’s off label administration is a bit of a wild west situation (see here), and the MSO will have to heavily rely on the physicians when it comes to compliance with outpatient health and safety regulations around these particular treatments. Physicians’ failure to compliantly and responsibly administer ketamine infusion treatments to patients can put the physicians at great risk for civil claims, administrative fines and penalties (including loss of licensure to practice). Even criminal prosecution is a possibility, for physicians and also the MSO as a participant or supporter (or aider/abettor) of that conduct.

Without a doubt an MSO set-up with physicians around ketamine infusions can be incredibly successful. However, if structured incorrectly, it can also be a complete regulatory and legal disaster in more ways than one for both sides. It’s important to understand the requirements and structure the relationship correctly from the outset.