The Ketamine Industry is Nothing Like Cannabis

05 Nov The Ketamine Industry is Nothing Like Cannabis

You are an experienced cannabis operator. You have dealt with nonsensical regulations. You’ve navigated the world of dealing with a highly regulated substance. You’ve solicited large investments and beat out your competitors. You’ve learned enough about corporate governance and tax to go toe to toe with the best.

Think you can easily pivot to the ketamine industry? Not so fast.

If you’ve been reading the Canna Law Blog for the last year or so, you’ll have no doubt seen a ton of our posts on the ketamine industry, all of which make crystal clear that the ketamine industry is literally nothing like cannabis. And yet, there are a lot of folks out there who think they can easily make the pivot.

Harris Bricken was likely the first law firm in the United States to develop a practice group specific to ketamine transactions. Since we got into the space, I can’t tell you how many times our ketamine lawyers have heard things like “well, it’s another controlled substance, how different could it be?” Or “we have experience dealing with cannabis, which is highly regulated, that should help us in the ketamine industry”.

In a lot of cases, this is just plain wrong. It’s key not to treat this like another “green rush”, as there’s a lot more to lose. In this post, I’ll break down some of the big picture things that make the two industries completely different.

I want to be clear before I jump in though that this is not an attempt to turn people away from the industry. However, people need to have realistic expectations and understand that the level of regulations and enforcement is lightyears ahead of what they’ve experienced in cannabis. And so are the costs. Experienced counsel, willingness to invest time and resources in compliance, and an understanding that things just can’t move a million miles an hour can help lighten the load.

Regulators that Actually Give a S*#@\

Unlike with cannabis, the ketamine industry is a small subset of the healthcare industry. We’ll get to a lot of the substantive differences between ketamine and cannabis in a moment, but one of the biggest differences is in just how aggressive healthcare regulators are.

Generally speaking, cannabis regulators don’t have the staff, decades of experience, or in some cases competence to enforce their own rules the same way we’d see in many other industries. I can count on one hand the number of public cases of state cannabis agency enforcement actions in California since 2018. Yes, there are some states that are more aggressive with enforcement, but that pales in comparison to the healthcare industry.

Because ketamine is administered in a healthcare setting, businesses need to deal with a swath of federal agencies that literally have no patience for shenanigans – the Drug Enforcement Administration and the U.S. Department of Health & Human Services Office of Inspector General (OIG), to name a few of the federal ones.

These agencies don’t take BS from anyone. I subscribe to OIG’s email blasts and get emails every single day about enforcement actions. Many of these are guilty pleas, meaning criminal enforcement. In other words, these agencies can and often do take people to the mat criminally for violating state and federal law, and have the power and endless resources of the federal government backing them. This is no joke!

All of this is to say that cannabis businesses or business owners considering jumping into the ketamine industry need to seriously reflect on the potential for scrutiny, the likes of which they just haven’t had to put up with in the cannabis industry. The shenanigans and shortcuts that have unfortunately become hallmarks of many areas of the cannabis industry will not cut it.

Miles of Regulations

If you have the mental stamina, you can easily read through any state’s cannabis regulations in a single sitting (please don’t try this at home folks). When it comes to healthcare, it may take you a full day to simply gather and download all the sets of regulations that could apply. You can read a bit about some of the regulations here.

Healthcare regulations can get so complex that there are legal practitioners who build their entire practices on one or two different sets of agency rules (like HIPAA lawyers). Even seasoned healthcare attorneys will be quick to admit that they don’t understand nearly everything there is to know about healthcare laws. Compliance is not something that a business can just mosey on into. It will take time, and money.

CPOM Doctrine

Think cannabis ownership laws are bad? Think again. Many states have laws banning or restricting what they call the corporate practice of medicine (CPOM). A general rule is that the more politically liberal the state (CA, NY, etc.), the more restrictive the rules are (with some big exceptions). You can see our list of some of the strictest states here or here.

So what are CPOM rules exactly? You can read a post I wrote about this in early 2020 here. Here’s a key takeaway (considering that this is very California specific):

California law requires that a medical practice be owned by a specific entity (a professional medical corporation) and that a majority of owners of the corporation be physicians with limits on ownership by non-physicians to other medical professionals. There are similar laws for medical partnerships. What this means is that ketamine clinics must generally be owned by licensed physicians, and cannot have owners who are not licensed medical professionals.

In other words, states that restrict CPOM will only allow physicians or other select medical professionals to own medical clinics (which is where ketamine by definition needs to be dispensed).

For non-physicians trying to get into the space, we’ve seen all kinds of totally non-compliant efforts to circumvent these rules. And let me tell you, many of them won’t work and could actually risk a physician – an actual person and not just a business – losing their ability to practice medicine.

One of the things we’ve seen crop up repeatedly is management services organizations (MSOs). Essentially, these are companies that work with medical practices to provide certain administrative or other non-clinical services in exchange for compensation (think of a management company for a cannabis company, just very different). Here too, the possibilities are ripe for abuse, and I’ll circle back to that at the end of this post.

Recently, a colleague of mine also wrote about joint ventures in the space and how the OIG can insert itself into the picture.

In some states, a lot of this is academic as the CPOM rules barely exist. But in the big and highly regulated states like California, this is something businesses really need to worry about and really need to consider very precisely. Spending a few hours with an attorney while a deal is still being negotiated is a lot better than spending hundreds of thousands defending an enforcement action or indemnifying a physician who is under an enforcement action.

Byzantine Licensing

In my home state, to open a cannabis business, you generally need a local permit or license and a state license. The process for getting one is a nightmare for many operators, but it at least functions on a specific trajectory that’s easy enough to figure out, especially if you have a competent team of attorneys or industry experts.

When it comes to healthcare, things couldn’t be different. First off, doctors and maybe nurses are involved. They all need their own licenses and, in some states, various certifications. In some states, certain fictitious business name registrations (which are different for medical practices) may need to be obtained.

If they want to administer ketamine, they need to register with the DEA (for example, see this post). The actual administration facility may also need a DEA registration, and the place where ketamine is stored (if different) may need another. There may be state-level registrations or licenses for the business as well (heavily state dependent). There may be Medicare licenses, CLIA waivers, etc., depending on the nature of the business. The alphabet soup of acronyms goes on.

Things get really hairy when it comes to M&A transactions. Going through the change of ownership (sometimes called CHOW) process on a half dozen licenses can be difficult. I complain a lot about the change of ownership process in California’s cannabis industry, but it’s literally potatoes compared to what you experience in the healthcare industry.

We’ve seen more than a few people shocked by the fact that they can’t close an M&A deal in a short time or that it will take such significant resources to do so. We’ve even heard people confused as to why it was not as simple as cannabis. Our answer is usually based on the fact that there are tomes full of regulations and regulators who actually give a damn. Businesses that want to pivot into the industry need to be well aware of the costs.

Fee-Splitting and Kickback Nightmares

I could go on for quite a while about all the differences between cannabis and healthcare, but one of the most prominent differences is the restrictions on how people are paid. I know, I know, there are restrictions in the cannabis industry, but they pale in comparison to what we see in ketamine.

First off, we have rules that prohibit fee-splitting. These often match up well with the CPOM rules. For example, California has very specific rules about healthcare providers splitting fees with third parties (including MSOs). So here too, both the physician group and MSO will need to seriously evaluate payment for the MSO’s provision of services. We wrote about one of the big court cases on this area of the law here.

There are also federal and state anti-kickback statutes. My colleague, Ethan Minkin, did a fantastic post analyzing the federal statute here. It is a criminal statute. As my colleague succinctly noted:

Thus, the golden rule is “thou shall not pay for referrals” – unless you enjoy spending time in prison and paying tremendous monetary penalties.

As an aside, whether something constitutes a referral can be super complex, and you can read about that here.

There is also the federal Physician Self-Referral Law, otherwise known as the “Stark Law”. The Stark Law prohibits referrals for certain services where federal insurers can reimburse for those services. This may not be the case for many ketamine businesses now since federal insurance programs may not even reimburse for the services, but when the tides turn, it’ll be a big deal. And it is a strict liability civil statute. In plain English, that means that if you violate the statute – even unintentionally – you can be penalized.

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Cannabis law is complicated, but orders of magnitude less than healthcare law. Wisdom and experience from one industry does not necessarily translate well – or at all – to the other. Cannabis operators seeking to jump in and make a quick buck need to seriously consider the decision. We’ll keep posting about these issues, so make sure to stay tuned.