A Physician, a Healthcare Startup, and a Healthcare Clinic Walk into a Healthcare Law Firm

TRANSCRIPT

This is Michael H. Cohen, founding attorney and President of the Cohen Healthcare Law Group, and welcome to today’s healthcare legal adventure.

A Tale of 3 Healthcare Legal Adventures

Three different clients came in today. One is a physician who specializes in functional medicine. The second one is a healthcare startup dealing with a product that everybody is going to want for greater wellness and getting revived, and then the third is a mental health clinic.

Now, this is three healthcare practitioners and startup founders walked into a bar kind of joke. What I’m going to do is talk to you about these different people. Of course, masking the names and details to protect their identities and their work, product, and inventions, and ideas, but simply, to give you a sense of the staggering depth and breadth of the legal pitfalls and roadblocks, and I’m going to say minefields. It’s a terrible metaphor, but the hazards that they have to navigate and things that can just take people by surprise. With that, let’s have a way the first.

A Physician’s Contractual Healthcare Legal Adventure

Our first client is a physician who is very well-known in the area of anti-aging and functional medicine, does a lot to keep people youthful and off of meds, and get them out of chronic disease, and just get them really healthy. To make a long story short, he’s looking at how to protect himself when he changes his role from being a physician in clinical practice and being somebody who gets involved with a healthcare startup. The question in a very generic sense is, “How do you protect yourself if things happen in the company and you’re the person who happens to be a doctor and is therefore handy target when things go down?”

I think there was a movie with Jim Carrey where he gets promoted, and he goes up the elevator, and they say, “Hey, how would you like your egg this morning?” He just looks really pleased, and then it turns out that he’s all over the internet because he has become the fall guy for the company. This is the kind of stuff that just takes a lot of sensitivity, and judgment, and knowledge of contract law. You have to understand employment agreements. You have to understand deal-making.

Again, not to say anything in public about this, but simply that I talked more in a webinar about like the three key legal mistakes that healthcare startups and practices often make. The first one is failure to diagnose, that they simply don’t spot the issue. They don’t see what the worst that could happen once you come down the pike.

In here, we have to diagnose very specifically what are the very real threats.

• Is the threat from the medical board?
• Is the threat to the physician’s side practice?
• Is it from a shareholder?
• Could there be an employee lawsuit?
• Could there be an FDA action?
• Could there be a regulatory action that somehow impacts the doc adversely?
• What can he do?
• How much control does he actually have over what the company says about his product, or what the company says that he says about the product, or what the company says about him?

Again, just staying very broad-brush here without getting deep into the weeds because we don’t want to reveal anything.

Contract drafting with a heavy regulatory component is something that we really put a lot of focus on in our healthcare law practice, and this is a gentleman who simply needs to know what the risk exposure is, and then how to tackle and shackle these different risks, and figure them out, and then embody the contract language.

I want to make a broader point here instead of getting into the wheeze about this legal issue and that. In addition to spotting the issues, you have to really understand that lawyers do certain things:

• Lawyers can help negotiate.
• Lawyers can push for advantages.
• Lawyers can craft a deal.
• Lawyers can be savvy about business.
• Lawyers also aren’t there to be deal-breakers.

It’s not about what the lawyer wants. It’s more about giving advice and counseling. Then, the client has to make a decision.

There are legal points and there are business points like a legal point might be, “I want this contractual provision as broad as possible in favor of my client. Here’s what I would advocate for,” and the business point might be, “Who can terminate under what conditions? When? Does one have to give a lot of notice and the other doesn’t? I mean, what’s the relative balance of power? What is the scope of the job? What is it that they’re supposed to do? What is it that they can’t do? Who has authority over them? How much do they get paid?”

These are deal points, so the lawyer has to really guide the client, “This is the deal point, and this is something you need to say like if you’re getting this offer on the back of a napkin, here’s the stuff you got to press for.” Then, of course, we’ll push forward. We’ll craft the language. We’ll make it make sense for you, and we’ll get the deal done, but in terms of articulating what the deal is, like you have to have a very high-level discussion with the principals.

Sometimes, physicians, and healthcare startups, and healthcare… even mature companies, executives, they make mistake because they delegate… They try to delegate to the lawyers, but they’re really advocating their business role. They don’t understand the difference, and then also, concurrently, they don’t officially articulate to the lawyer, “Hey, these are the business points. This is what I want you to really, really focus on when you create your language like don’t spend my retainer wordsmithing all that commas and a lot of minor stuff. These are the real important deal-breakers, and we need to make sure that they’re embodied in the right language so that I’m protected.”

Just going back a few moments ago, I talked about three classic mistakes. One, failing to spot the issue. Second is underestimating the direct hit like what could go wrong and how things could go south, and you really got to … like you got to be an optimist, but you got to wear the pessimist glasses just to see the dark future so that you can avoid it, prevent it, mitigate it, and then put in the good stuff so you can create the bright future, so we have both of those roles at the same time.

I know it’s a little bit yin and yang, paradoxical. I said to this doc, by the way, looking at Barry, I said, “Wow, you’re all over conventional Western medicine, and oh my gosh, you got the Eastern too like you are the total synthesis, which a lot of our clients are.” It’s a beautiful thing to say.

Number one mistake, failing to properly diagnose the issues, the critical possible pitfalls. Number two, failing to predict the big hit, the main hit, and three is not anticipating all the little side things that could go wrong, so those are three mistakes that we want to cure, and in general… and I’m giving you a sense of what you get into when you’ve got a contract negotiation, and it’s not just all about salary. Sometimes, it’s about like power, and control, and ability to walk away and liability, and who’s going to pay if there’s a big liability, so that’s the kind of thing that we want to protect about whether we’re dealing with a functional medicine doc, or an executive for a healthcare startup, or really, a physician getting into a deal with a healthcare venture.

Of course, there are other issues like Corporate Practice of Medicine, and kickbacks, and fee splitting, and HIPAA, and all those other juicy regulatory goodies that we get into elsewhere in our blog and podcast, but that’s my physician story of the day, and now we’ll move on to scenario number two.

Healthcare startups shouldn’t pay for the mahogany conference table

All right, so our next healthcare legal adventure is a healthcare startup entrepreneur. This individual had raised a substantial amount of money for another healthcare startup, did extremely well, very savvy. He went to another healthcare law firm, and they told him … Actually, I won’t give you the legal issue here because I really want to be generalized and just completely just … preserve the confidentiality, but basically, this other healthcare law firm said, “Absolutely not. There is ‘no way in hell’ that you’re going to be able to do that.”

Now, I’m not sure when the last time somebody in your life used “hell” in a citation. It sounds like Catholic school, or Hebrew school, or some other school, but in any rate, I told him, “I’m not going to give you a categorical no.” At the same time, the client said, “Well, are you saying that if I do X, Y, Z, it’s no big deal?” Well, I’m a lawyer. I would never say, “No big deal,” even if I was at a restaurant ordering an appetizer. I mean, we’re just like … I can say pretty wild things in my private time and even swear on occasion, but I’m not going to say, “There’s no way in hell that you can do something.” I’m not going to give … I’m not going to say, “No big deal.” I’m not going to give a categorical yes or categorical no.

Now, that doesn’t mean that you’re like the land of mush and all you could say is, “Gray area. Gray area,” like a robot. Nobody wants a no-man or woman for a lawyer. Nobody wants a yes-man or a yes-woman, and nobody wants a gray area robot. You got to wear like some spunky socks these days. I learned that nobody wears black socks anymore like that’s just very old-school. You don’t want to be square. You don’t want to be uncool. You got to wear your multicolored, brightly-patterned, very interesting socks.

It is nuanced. It is definitely not gray, and there’s no categorical yes. There’s no categorical no. I mean, you’re in the yellow light zone. The question is, do you accelerate through the yellow light, or do you brake? A lot of that depends on your risk profile. Now, this was the absolutely pivotal issue, and I gave a qualified answer that told him how to do something, whereas the other law firm just basically said, “Absolutely not.”

Look. This isn’t Catholic school. This isn’t Hebrew school. I don’t think he’s going to go to hell. I don’t think that he… because he ate a shrimp or whatever, or decided that he’s going to do something. These rules are very strict, and they’re out of date. I mean, Corporate Practice of Medicine. People can’t practice medicine unless they’re doctors and companies shouldn’t be involved in clinical decision-making. The reality is a lot of healthcare is delivered no longer in the brick-and-mortar, but over this little technological development called the internet.

Whether it’s software, or mobile medical app, or telemedicine company, or an MSO model, which we talk about extensively elsewhere in our Healthcare Law blog and Healthcare Legal Adventures podcast, there’s going to be a delivery of a digital health service, and so it’s necessarily going to grind up against the old-school rules of Corporate Practice of Medicine and a kickback at fee splitting.

The question is, how do you get as compliant as possible? I even think “compliance” is like a black and white word or a red light/green light kind of word. I mean, it isn’t yes and no. It’s not like pulling a lever in a vending machine and out pops the candy, which is statute that says, “Thou shalt,” or, “Thou shall not.” It’s more like interpolating between the laws that are current, but were made a long time ago in industry practice now.

Having said that, “Everyone else is doing it,” is not the answer either, so again, you can’t be categorical no. You can’t be a categorical yes. What you could do is you could say, “Okay. I see what you’ve got is a classic telemedicine model. We’ll use the MSO structure. We’ll get you the documents. We’ll craft a legal strategy for you. We’ll make sure that the clinical people are working for the right clinical supervisors, and we’ll make sure that you’re structured as a management and marketing entity.”

Well, okay, so we put this all together. Then, the client said, “In addition, I was like…” We kept trying to frame this to get a pass. We said like, “Well, are you saying that I’m free from liability if I just do it the way you’re suggesting?” No. I’m not a get-out-of-jail-free card, and your lawyer is not going to tell you that there’s no risk. We said mistake number three is to fail to properly estimate the side hit.

One of the side hits is you could get… Say, you claimed for unfair business competition. Some competitor could say that you’re violating one of these rules, Corporate Practice of Medicine, Anti-Kickback Law, et cetera. Even though the regulatories don’t think you are, or don’t care enough about it, or see it as a technical violation, but not necessarily an enforceable one or not one worth their enforcement dollars, energy, and time, so you’re fine and sailing through on the regulatory front, but some competitor decides to get a bee in their bonnet, and they file in California an unfair competition, unfair business competition, Business and Professions Code 17200 claim, so you got to watch out for and anticipate the side claims.

That’s basically the broad-level picture that I want to give you about this, and also, I want to give you insights along the way about working with a lawyer because a lawyer is not like waving the incense saying, “You’re going to get into heaven here, and you’re not going to go to hell.” I’m talking about… Well, heaven I guess would be more on the business side. You get your product to market, and you don’t go to legal or regulatory hell. You don’t go to purgatory either. You wash away your sins. You’re cleansed, and you get an IPO. There you have it.

Anyway, I hope that this becomes our first billion-dollar client. We’re certainly… If you want to mention that raise, we’d love to have you, and trust that we gave more nuanced advice than this last healthcare legal team, and he’s on his way with some foundational stuff. Please remember us when you get to $10 million because we do securities work too, and there’s no reason to move on to people who are going to charge you three times the hourly rate simply so that you can admire the polish on their mahogany table.

Healthcare regulatory risk – watch for the side hit

All right, so this last one is very interesting. Again, I’m going to say very little substantively that’s going to be identifiable, but the gist of it is that they created a professional corporation, and states differ in terms of who can be in what professional corporation, whether it’s medicine, or chiropractic, or behavioral health, or mental health. In California, you can mix and match. To some extent, the kinds of healthcare practitioners that can be shareholders, directors, officers, and/or employees of a professional corporation, PC. In some states, it’s called a PLLC. It’s a Professional Limited Liability Company, but at any rate, some states, you can mix and match. Some states, you can’t. California has the Moscone-Knox Professional Corporations Act, which does allow some mixing and matching.

One of the issues here is that different healthcare professions have a different scope of practice. Meaning, they are legally authorized to do different things, and these things might look very similar, but when you get into the nitty-gritties, some of these professionals can supervise one another and some can’t, and so there is a pecking order of hens here, if you will, and you can’t peck up the chain. If you peck up the chain… I’m tempted to continue the linguistic play here, but just to keep it simple, it’s not fun.

What happened with this particular professional healthcare company composed of clinicians is that they made a lot of money, did very well, got a lot of revenue, and are helping lots and lots of patients. Unfortunately, the state disagrees now with their model and their structure, and let’s move from hens to ducks. They did not line up their regulatory ducks at the get-go, and it’s not their fault in a way. You can’t find these rules. I mean, it’s very hard to find these rules. Even if you find them, you got to figure out what they mean. They’re not necessarily written in English, and one rule contradicts the next.

I remember when I was a kid and I studied the Talmud. Literally, you have one finger on the Mishnah, which is the core text, and then you’ve got your other finger on the Gemara, which came a couple hundred years later and it’s commentary, and then you have your finger on the different commentators who came many hundreds of years later like there would be Rashi or Tosafot. For those of you who went to an orthodox Hebrew school, you know what I’m talking about. For most of you, you have no idea what I’m talking about. It probably seems like I went on an incredible tangent, but I like to do that because I’m a metaphor guy, and there’s a wonderful book called The Talmud and the Internet where they say that the Talmud was actually… The first hyperlinks were in the Talmud because you put your finger here, you put your finger there. It basically is open a new tab. That’s what you’re doing.

The point is you got to read law like the Talmud like that’s how you have to read law. You’re constantly opening new windows, and you have to see… They’re all like disputing with each other. What’s beautiful about the Talmud is the rabbis are making legal arguments at one another across the centuries, and that’s what… It’s a kind of hypertext. It is a hypertext because time passes, the body disintegrates, the ideas remain, and we talk across the centuries to each other. How beautiful is that?

That’s how you have to read the law, and in this case, people don’t always know enough to even know… Go back to my Jewish roots again. We say Passover, their four sons who ask about, “What is the meaning of the Passover?” There’s the wise son, there’s the bad son, there’s the simple son, and then there’s the son who doesn’t know what question to ask. For him, you have to tell him, “This is the story, the Passover.”

Now, he and she will make a gender neutral in this day and age. The point is the client, you, the healthcare venture, practitioner, entrepreneur don’t always know even the question asked… even if he asked the question, people have to really dig and dig, and come up with the answer, and it doesn’t just jump off the page like it really is the process of interpreting these commentators across the veil of many years trying to figure out what the heck this means.

If you do it at the beginning and you get a good legal strategy memo, you can sort this stuff out. You could be on your way. You might have asked $5,000, $10,000, maybe $15,000. Super complicated. Maybe a little more, but heck, you could cry all the way to the bank a million or $2 million later, and how much better to have that preventative advice then… Now, you’ve built your clinic. You’ve built your healthcare startup. You put your venture together. You got the funding. Your grandma was the angel investor, but now you’ve got a million from actually a real investor, and you don’t want to let him down.

One day, you get an email from some state regulatory department. They say, “Hey, the whole thing is screwed up, and by the way, now that this has happened, your fair game for the other regulatory agencies, your fair game for…” Remember, in the last segment, I mentioned these class action lawsuits, this plain of trolls, unfair competition, Business and Professions Code 17200. You failed to anticipate the direct hit. You failed to diagnose, and now you get the side hit. Guess what? Three in one. It’s just a bad day.

Now, fortunately for this client, we were able within an hour actually, less, to put together a legal strategy session, a legal strategy for them within the legal strategy session to be followed up by a legal strategy memo, or potentially, we’ll just move to drafting the documents, and you could literally hear a sigh of relief from the client. Literally, the shoulders went back to their normal position in time and space.

Again, from this description, you have no idea who the client is. You don’t even know which of the healthcare profession it involves or which state it was, and so if they’re listening to this, they may not even recognize themselves. In fact, sometimes, I make an amalgamation of people I suppose because… not to give away my biological chronological age here, but I remember dragging it, which I used to watch as a kid. “The stories you are about to hear are true. The names have been changed to protect the innocent.”

I think in all fairness, people are innocent. They simply don’t know. What they don’t know, they don’t know, so one of the purposes of the podcast is to provide in a hopefully entertaining way a tale of different, what I call, healthcare legal adventures. If I call them case studies or legal scenarios, or start drowning on about sub-sub paragraphs within some code, you’ll be really bored, and it’s like a conversation killer at a cocktail party, so they’re healthcare legal adventures and regard them as adventures.

Let’s be positive. There are ways to navigate, and in this podcast, we’ll also give you some tips, tricks, tools, and strategies. For now, the more you learn about the different scenarios, the more you learn to look ahead. In fact, some of our best referrals are from healthcare startups that got stuff done preventatively and they don’t want to see their colleagues making mistakes that they did make or might have made, and they want to nip stuff in the bud. That’s where we work. We love startups, and we love companies of every size, and shape, and maturity. Simply do good and leave a good name. Walk on the earth in peace, and continue to accelerate health and wellness.

Continuing your healthcare legal adventure

You’ve been listening to the Healthcare Legal Adventures podcast. This is Michael H. Cohen, President and founder of Cohen Healthcare Law Group. If you’d like to hear more episodes, simply go to cohenhealthcarelaw.com. Go to the tab that says, “Blog/Podcast,” and you can download more episodes or visit our other website at healthcarelegaladventures.com where you’ll find online courses, DIY forms, and other resources to help you with your healthcare legal adventure. We look forward to seeing you on the next episode.