Medical Spa Legal Compliance Issues Get You Down? Try These Legal Remedies



Medical Director arrangements

If you have a medi-spa where the physician is never there but serves as “Medical Director,” think again.

A lot of people misunderstand the concept of “medical director.”  A medical director is supposed to direct a medical operation – other doctors, as well as nurses or physician assistants.  Not a general corporation or LLC.

The term “medical director” is often a trigger for enforcement.

The best way to understand this is that in a medical spa or similar health and wellness venture, there are really two entities.  There is the professional medical corporation, which houses the clinical piece.  The MD can be medical director of that professional medical corporation.

Then there is the general corporation or LLC, which can house much of the esthetic piece, and the business that manages and markets the medical practice.

In essence we have a business within a business – a medical practice, housed within a larger operation that is branded as the medi-spa.

This is particularly an issue in a state such as California, which has a very strong prohibition against what’s called the Corporate Practice of Medicine—the idea is that companies cannot practice medicine, only doctors or their professional medical corporations can be in charge of medical decision-making.

There must be a clear separation between the clinical, medical role on one hand, and the administrative, management, or marketing role on the other. This separation is the legal basis for the “management (MSO) model” that our law firm uses when non-physician entrepreneurs want to enter into a business arrangement with physicians.

See some of our prior posts on medical spa compliance legal issues:





“Fee splitting” – Enforcement

Fee-splitting means that the patient is paying a fee which gets split between the doctor and the non-doctor.  Doctors are supposed to be pure – just focusing on patient health – and not have conflicts of interest where the business takes them from good medicine.  This is all in high theory, of course, and doesn’t take into account the real world where insurance is so enmeshed in healthcare practice – but having said that, the statutes and regulations still prohibit fee-splitting.

The MSO model, mentioned earlier, is meant to safeguard medical spas and similar ventures from fee-splitting issues.  In actual practice, these issues can get quite complicated.  We have many good articles about fee-splitting on this blog.

The basic prohibition is often contained in a state statute that prohibits a physician, or other licensed healthcare provider, from paying or receiving a payment in exchange for the referral of patients.

Say John is a doctor and he say, “I’ll pay you $50 for every patient you send me” – that’s a kickback.  Suppose John charges $100 and gives you $50 for that referral.  Now he’s split his $100 fee with you.

In that situation, Dr. John has committed professional misconduct and could be disciplined by the state medical board.  He could potentially lose his medical license.

Kickbacks can also bring on criminal penalties under other statutes.  If Medicare reimbursement is involved then we are looking at federal law and federal enforcement.

Now these are very obvious examples of illegal payments.  But again in actual practice, people come up with very creative compensation arrangements, and there are exceptions and safe harbors to the rules, and this can all get very complex and nuanced.

As a summary, here’s a handy chart:

  • Fee-splitting refers to a situation in which a physician literally splits his or her fee with a non-physician. For example, the doctor gets $100 for a visit and gives you $50 for referring the patient.
  • Self-referral refers to a situation in which the physician refers the patient, for another healthcare service in which the physician has a financial interest. For example, your doctor sends you for lab tests where he or she owns the laboratory. Some types of self-referral (usually for what are known as “designated health services” or DHS) are prohibited, whereas others are allowed but require a disclosure of financial interest by the physician. There are both federal and state law prohibitions that vary in significant detail as to what activities and what streams of payment are a violation.
  • A kickback refers to a situation where the physician pays, or receives, compensation in exchange for a referral. In the fee-splitting scenario, for example, the physician is paying for the referral. This can be a federal violation where federal payment is involved, and a violation of state statutes, which also vary in significant detail. Some state statutes speak to “brokering” or “steering” patients.

Malpractice; Negligence Concerns

Malpractice means negligent conduct.  The legal definition is two things: (1) practicing below the standard of care, and (2) injuring a patient.

For example, you’re a surgeon and you sawed off the wrong leg.  Obviously negligent.

What if you’re a doctor in a small town and you hire a nurse who everyone sees drinking, night after night for hours on end, at the local bar?  The nurse comes in very hungover, and staggering through the halls, gives a patient the wrong pill.  You could be liable for the nurse’s negligence.

What happens in a medi-spa is you have a multidisciplinary model of care.  Which means that practitioners share information about patients and work collaboratively.  This is wonderful from a patient care perspective.  From a liability perspective, it means that liability could also be shared.  Who is to say where one provider’s treatment ends and another’s begins?

If there is malpractice, two things can happen: (1) the practitioner can be liable in damages if the patient gets injured and sues.  (2) the practitioner’s board can initiate disciplinary proceedings.

The surgeon who sawed off the wrong leg would probably lose his medical license.  But if the nurse botched the Botox injection, there could be questions as to whether the physician was providing sufficient supervision.

What if the medi-spa was started by a billionaire entrepreneur, and the doc was his or her cousin, who lived nearby but never came in?  I recently counseled a medical spa where the business person behind the venture was very successful; he and the Nurse Practitioner ran a multimillion dollar operation.  I asked where the doctor was. They said: “playing golf.”

They are likely to get in hot water.  As they used to say on Perry Mason, a long time ago: “I rest my case.”

Use of Physicians vs. Nurses vs. Physician Assistants

In medical spas, as in all healthcare ventures, there is often a conflict between what’s most economical – what makes most business sense; and, what makes most sense from the perspective of risk management.

Compliance is rarely 1,000%.  If you have a physician perform all the procedures, that’s probably playing it safe on the medical and legal side, but hardly leveraging your assets – especially since NPs typically have a very expanded scope of practice.  On the other hand, if the MD is never there, you’re highly leveraged economically but in a high-risk category in terms of compliance.

We recommend having legal counsel review your operational plan, and develop a compliance plan that’s tailored to you.  You’ll need to figure out a level of physician supervision that makes sense from a clinical as well as legal risk management perspective; have compliant, standardized procedures for NPs and RNs, and a delegation of services agreement for the PA; be sure to comply with rules regarding dispensing of medications, especially controlled substances; and overall, have a practice environment that can withstand a visit from a patient who’s really an undercover investigator.

In addition, you’ll want to understand the scope of practice of your estheticians and be sure the practitioners stay within what they’re allowed to do.  Be careful about upselling procedures.  The whole operation has to be airtight, and the branding should distinguish the medical parts and show that a doctor is in charge there.

These things help show the regulators that the business is mindful of compliance checkpoints.

FDA and FTC Issues

In our law practice we deal with healthcare products as well as services.  Products include drugs – like Botox; dietary supplements – like multi-vitamins and omegas; and cosmetics.

Here we look at the marketing materials to see whether any claims run afoul of FDA guidelines, or those by the Federal Trade Commission (FTC) which regulates advertising.

For example, manufacturers of dietary supplements and of cosmetics can’t make drug claims.  If you say, for example, that this cream removes cellulite, you’re making a drug claim, because that is something that OTC drugs are supposed to do.  In an nutshell, a drug claim is a claim to diagnose, prevent, or treat disease – but the hitch is that the rules define “disease” very broadly.

Recently, a cosmetics company came to our firm with a warning letter they’d received from FDA.  We reviewed their website, and basically, every product – over 100 products – had drug claims.  Even though FDA had only identified 9 such claims in its warning letter, we knew that the company could get busted–even shut down.  We worked through the website and marketing materials and got all the claims compliant.

Another company made all sorts of quasi-scientific claims for its dietary supplements, but it forgot that FTC prohibits false and misleading advertising.

If you’re a doctor, a medical spa, an industry consultant, any individual or company, and you branch into manufacturing and distributing products, you need to beware of FDA and FTC rules.

The Future of Medi-Spas

In the future, we’ll see technology coming more and more into practice.  Genetics, nanotechnology and robotics are revolutionizing healthcare.  Also new sciences that will open up from the convergence of exponential technology.

Laws and regulations will have a hard time keeping up with all these developments.  A lot of legal concept that currently constrain healthcare will seem very archaic.

We’ll have more intelligence available to each of us in the cloud than ever was available to all of humanity.

Empathy, compassion, connection – these will still be important.  And when it comes to managing risk, good advice and common sense will keep ventures and practices in a place where they can thrive.

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Contact our healthcare law and FDA attorneys for legal advice relevant to your healthcare venture.

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