Medical Spa Due Diligence Questions

If you the buyer of a medical spa in an M&A transaction, what kinds of due diligence questions should you ask regarding regulatory compliance? Medi-spas tend to trigger enforcement hot buttons, principally because of two legal rules: the prohibition against corporate practice of medicine, and prohibitions against fee-splitting and kickbacks.

Due Diligence Questionnaires

Due diligence questionnaires and requests are common in M&A (mergers & acquisitions) transactions, and one can find standardized checklists online. These cover in depth such areas as:

corporate/business records
financial information
real and personal property
intellectual property
contracts and other arrangements
insurance
taxes
employee information
litigation and legal compliance
and other information

Medical Spa Due Diligence Questionnaires

I searched online for a medical spa due diligence questionnaire or checklist and surprisingly, could not find anything, other than my own article on Key Legal Issues for Medical Spas and Aesthetic Medical Practices, which was published by the International Association for Physicians in Aesthetic Medicine (IAPAM). This article states:

Both physicians who want to either open a medical spa or add aesthetic medical procedures to their existing practice, and entrepreneurs who want to either open a medical spa or incorporate aesthetic medical procedures to a wellness center, can benefit from a better understanding of some of key legal issues involved.

The article discusses medical spa legal issues such as:

Legal structure for the medi-spa
Clinical practice structure
Credentialing healthcare providers
Medical malpractice (negligence) and professional liability insurance
Informed consent
Professional discipline
Anti-kickback and fee-splitting considerations

(The International Association for Physicians in Aesthetic Medicine is a voluntary association of physicians and supporters that sets standards for the aesthetic medical profession. The goal of the association is to offer education, ethical standards, credentialing, and member benefits. IAPAM membership is open to licensed medical doctors (MDs) and doctors of osteopathic medicine (DOs).)

The only place I mentioned “due diligence,” though, was in connection with physicians holding the standard of care so as to avoid malpractice liability.

Some of the issues are relevant – such as making sure that no one is engaged in unlicensed practice of medicine; a sometimes challenging task since medical spas can blur the boundaries of medical and non-medical functions and therapies. But due diligence in terms of the “due care” for negligence analysis is totally different than M&A due diligence questionnaires and checklists.

Due Diligence Questions for the Medi-Spa

So here’s a short list of some key due diligence issues to consider when acquiring a medical spa. These, which are additional to standard due diligence questions, include:

Physician supervision: Is a non-physician essentially “renting a license” and thereby engaging in unlicensed or illegal corporate practice of medicine? Or is the physician truly exercising supervisory control over nurse and physician assistants? Does the MD have written, standardized protocols and procedures, that are legally compliant, with the nurse practitioners; and compliant, delegation of services agreements with the physician assistants?
Scope of practice: Are practitioners delivering services within the scope of their licensure? For example, if nurses are not allowed by law to operate certain equipment (such as a laser), are they refraining from such operation? If practitioners are non-licensed (such as, in California, medical assistants), are they acting within their legally authorized scope, and not beyond it?
Good faith exam: Does the MD or NP conduct a good faith exam with every patient? Is the exam documented in the medical record?
Standard of care: What does the MD in charge do to ensure that the standard of care is followed for every patient?
Separation of medical (clinical) from administrative (management) tasks: Is the medical management company (or MSO) contractually constrained by a management agreement and accompanying policies and procedures to a non-medical, purely administrative role? This can be an enforcement hot button in a state such as California, in which the MSO’s control over physician advertising, space within the medi-spa, and/or selection of medical equipment can potentially indicate excessive intrusion into the clinical domain and thus corporate practice of medicine.
Ownership of medical records: Are medical records owned by the medical practice (or professional medical corporation), and not by the MSO?
Hiring: Are clinical staff hired and fired by the professional medical corporation, and not by the management company?
Privacy and security compliance: Is the medi-spa abiding by HIPAA and/or any relevant set of state laws with respect to privacy, confidentiality, and security of protected health information? Are business associate agreements in place where they need to be?
Regulatory compliance: Has the medi-spa ever been under regulatory investigation or been penalized (for example, for failure to obtain a facility license from the board of cosmetology)?
Services and therapies: Is there a clear delineation between medical therapies (such as Botox, which should be offered by the medical doctor or his or her professional medical corporation, and relevant clinical staff hired by them), and esthetic, non-medical therapies (such as facials and massages) which can be offered by practitioners other than physicians and physician-supervised licensees?
Medical director: In California and other states with a strong corporate practice of medicine prohibition, is the physician functioning through his or her professional medical corporation, and not serving as “medical director” to a general corporation or LLC (such as the MSO, which can not legally practice medicine)? Medical director agreements are enforcement hot buttons.
Ownership: Is the professional medical corporation at least 51% owned by the medical doctor, and are the minority shareholders, if any, healthcare licensees? (In California, this is governed by the Knox-Keene Professional Corporation Act).
Ownership and Compensation: Does any licensed healthcare practitioner that has an ownership, employment or compensation interest in the professional medical corporation have an ownership, employment or compensation interest in the management company–and if so, must self-referral and anti-kickback laws be reviewed for compliance?
Kickbacks: Are there discount coupons or packages of medi-spa therapies and services that raise anti-kickback issues?
Medicare & Medicaid: Are any Medicare or Medicaid reimbursable services being offered.

This is a foundational checklist for due diligence compliance questions in the medical spa acquisition. A preliminary inquiry can lead to further questions.

Medical Spa M&A Legal: Separating the Medical from the Management

The main point to remember is that talking about “owning” a medi-spa is complicated in a strong practice of medicine state (such as California, New York, or Texas).

Typically, there are two entities: the medical practice or professional medical corporation (which practices medicine, and provides medical services such as Botox), and the management company (MSO or medical services organization), which provides administrative and management services and sometimes marketing services, too.

The MSO usually tries to brand the medical spa under its name or banner, and owns the IP as well as software which it licenses to the medical practice; the MSO may also lease space from the building and sublease to the professional medical group. When the MSO has built a lot of value in the branding, it is ready for a buyer. The buyer (unless a physician) cannot own a professional medical corporation; so the buyer is purchasing the MSO.

This means the buyer must ensure that the MSO has been careful about compliance so as to avoid charges of corporate practice of medicine and fee-splitting — in addition to have all its other ducks in a row (contractual, financial, and so on) as these will be the subject of regular due diligence inquiry.

An experienced medical spa attorney can navigate due diligence questions for the purchaser. Contact us with any questions regarding your proposed medical spa opening or acquisition. Or book a one-hour, legal strategy consultation.