What physicians need to know before opening a medispa

April 27, 2021
Theresa M. DiGuglielmo, Esq.

,
Brandon S. Zarsky, Esq.

If properly structured, a medispa business presents an opportunity for physicians to increase recurring practice revenue, some of which may be generated by non-physicians.

According to a recent study [1], the global medical spa market is expected to reach USD 33.9 billion by 2026, with a compound annual growth ratio of 13.8%.

More than ever, physicians, non-physician providers, and non-licensed providers are interested in offering medical spa (sometimes known as “medispa”) services. If properly structured, a medispa business presents an opportunity for physicians to increase recurring practice revenue, some of which may be generated by non-physicians.However, while many of the aesthetic and cosmetic services offered are marketed as pampering treatments furnished in a spa-like setting, it is imperative to note that many of these services constitute the practice of medicine, and are therefore, highly regulated.

In recent years, investigations with respect to the unlicensed practice of medicine by cosmetologists and estheticians have become more common, and providers such as licensed practical nurses are being investigated for violations of state scope of practice laws.In addition, while medispa services are typically elective procedures for which patients pay privately, they are still subject to federal and state, rules and regulations. State-specific requirements dictate what services may be provided, and by whom.Furthermore, the involvement of non-physicians as owner-investors requires careful planning to avoid violations of state corporate practice of medicine limitations.The federal government has also taken an interest in certain financial arrangements, such as improperly structured space rental agreements, consulting, or medical director arrangements, which may be viewed as illegal inducements for referrals.For these reasons, the essential first step in the development of a medispa model is a comprehensive regulatory review.

Scope of Practice

For all physicians, the highest and best economic use of their clinical time is the performance of professional services that cannot be delegated to lower-level licensees.A plastic surgeon who regularly performs a significant number of cosmetic injections has less time to devote to the performance of surgeries, thus reducing practice revenues.If the surgeon employs a duly licensed, qualified, trained, and appropriately supervised delegee to perform the cosmetic injections, the simultaneous provision of surgical procedures by the surgeon and injections by the delegee results in something akin to passive income for the physician-owner of the practice.Another arrangement of interest to entrepreneurs in the medispa space is a business structure that enables non-physicians to be partial owners of the medispa. As explained below, this is typically achieved through a management services organization.

Corporate Practice of Medicine

The corporate practice of medicine (“CPOM”) doctrine prohibits corporations from practicing medicine and/or employing physicians and other licensed healthcare providers to provide professional medical services. This doctrine stems from the inherent conflict between a licensee’s duty to provide appropriate care and treatment to a patient, and the business entity’s (i.e., the licensee’s employer’s) interest in reducing costs while maximizing profitability. To combat this potential conflict, many states have enacted legislation, or have binding caselaw precedent, that prevents, or at least restricts, unlicensed individuals from obtaining ownership interests in medical practices.These prohibitions aim to ensure that profit interests do not interfere in the exercise of a licensee’s clinical judgment.In states with strong CPOM prohibitions, medical practice entities may only be owned by licensed physicians. In some states with less restrictive CPOM prohibitions, other types of professional healthcare providers (such as chiropractors, nurse practitioners, or physician assistants) can own all, or a minority interest, in a medical practice entity.

Individuals who are not legally permitted to directly own a medical practice (note that this is jurisdiction specific), but desire to be actively involved in the investment in, and continuing management of, a medispa can typically achieve their objective through a business structure that minimizes the risk of violating the CPOM prohibition: a formal relationship between a medical practice (comprised only of physicians) and a Management Services Organization (commonly referred to as an “MSO”) owned by physicians, non-physicians, or some combination thereof.

The MSO Model

Under this model, the MSO provides administrative, management, and other services to the medical practice, and licensed physicians are solely responsible for the actual practice of medicine.MSOs typically provide the following in exchange for a regulatorily compliant management fee:

  • lease of certain equipment and office space to the medical practice;
  • marketing of aesthetic services offered by the medical practice (subject to any limitations placed on advertising by licensees);
  • billing of aesthetic services furnished by the medical practice (all payments for medical services are made directly to the clinical entity); and
  • such other non-medical services ordinarily provided by a management services entity.

By clearly defining the role of the management entity as distinct from the clinical practice, the MSO model enables non-physicians to participate in the operation of the medispa without running afoul of the CPOM prohibition.Under this model, non-physicians have no ownership or direct involvement in the clinical practice, but they are legally permitted invest in the MSO and partake in its profits, which are in turn tied to the revenue stream of the medispa.That being said, this model must be carefully structured to ensure that the relationship is compliant with applicable regulations, which includes documentation of the arrangements in various formal documents, including but not limited to a Management or Administrative Services Agreement, and any necessary lease/sublease or license agreements.

While the MSO may handle many significant aspects of the medispa’s operation, it is important to note that excessive control by the MSO over the medical practice is not permissible, as similar relationships have been found by the court to be sham arrangements designed to circumvent the CPOM prohibition.While this legal analysis varies by jurisdiction, the physician owner(s) of the clinical entity must generally retain control over the medical practice to safeguard against an allegation that the non-physician owner(s) of the MSO is the de facto owner of the medical practice.

Private Equity’s Interest in the MSO Model

Private equity (“PE”) investors seeking to generate revenue in the highly regulated healthcare space need an investment vehicle that does not run afoul of the prohibition on non-physician ownership of a medical practice. PE firms often seek to form a management entity that acquire the practice’s hard assets, leases the assets back to the practice, and provides back-office functions, in exchange for a carefully calculated management fee.Medical practices that have already established a successful MSO model may be even more attractive to PE firms because the infrastructure, reporting, and metrics are already in place, which facilitates due diligence and may abbreviate the timeline for consummating a transaction.

Conclusion

Physicians seeking to expand their medical practices to include the provision of aesthetic services may wish to do so through the establishment of a medispa and should strongly consider doing so through the MSO model should they desire to bring on non-licensee investors.In addition to the benefits noted above, the MSO model may also provide a legally permissible way for physicians to shelter some practice assets and revenue.Whatever the objective when considering a medispa, experienced healthcare counsel should be engaged early in the planning process to address the myriad legal issues and minimize risk.

[1] Medical Spa Market Size, Share & Trends Analysis Report By Service (Facial Treatment, Body Shaping & Contouring, Hair Removal, Scar Revision), By Region (North America, Europe, APAC, MEA), And Segment Forecasts, 2019 – 2026