Why Some Healthcare Startups and Practices Succeed While Others Fail: Legal Intel

TRANSCRIPT

Hi, this is Michael H. Cohen, Founding Attorney at Cohen Healthcare Law Group. We’ve counseled hundreds and hundreds of healthcare companies, ventures and practices over the last 30 years. I’d like to talk to you about the difference between what makes a successful healthcare venture grow versus what leads to an unsuccessful healthcare business venture. I can say this with confidence, because we’ve seen these same patterns, and trends over, and over, and over again amongst our healthcare clients.

Some become incredibly successful.

We have had companies go literally from one person in the garage to $10 million, $8 million.

We have one company in the digital healthcare space, and every client comes up and says,

“Oh, you know, we want to be like this company.”

It’s like people say, “I want to be the next Uber, or I want to be the YouTube that got bought by Google.”

Or, whatever the latest success story is. Maybe by the time I make the video, and you watch it, these companies that are no longer the success story, things happened down the way.

But, I’m just using those to say we have clients like that, that just become giants. They dominate their particular micro niche. It may not be micro computing, but it could be digital healthcare for X. X could be fertility, X could be hair regrowth, X could be sleep, X could be fitness. It could nutrition, any facet of health and wellness. It could be using a particular brand of medicine, or one of its cousins like acupuncture, or functional medicine, or integrative medicine, or concierge medicine, any variation, and this client becomes the industry standard.

Now, what makes these companies successful is believe it, or not, that they have the willingness to invest in the resources that they need to create the societal impact that they need. Yes, they are judicious about resources. Yes, they have a legal budget, like they have a marketing budget. They don’t just pour untold moneys into things, but they do think about compliance and regulatory risk as well as legal risk.

The other day I was giving legal advice to a client in the home health space, and interestingly, or maybe not interestingly, maybe maddeningly, the law parses these different slivers of client types into micro variations, but these variations are very important in the eyes of the law. For example, there’s a healthcare organization, a home health organization, or HHO versus a home healthcare agency, or HHCA, and these little differences make a big difference.

What’s the difference? Well, they have different licenses, and what does it cost to upgrade from an HHCO to an HHCA? The client told me, “Well, it’s about $40, 000.” Is it worth it? It depends on the revenues that they’re going to get, but from a legal perspective, from a regulatory exposure perspective, there is a significant difference, which is that when you look at the definition of what a home healthcare aid can do, it involves a bunch of things which include helping the patient to self-administer, whereas when you can do what a home health agency does, you can hire an RN to do skilled nursing.

And, skilled nursing includes, as it turns out administering. What’s the difference between self-administering, and administering? Well, the difference is that, if you give someone medicine, and they put it into their mouth, then you’ve administered the drug, but if you actually put the pill in their mouth, because they can’t put it in themselves, then you’ve gone beyond self-administering, and you’re administering. Well what’s the big deal? You’ve moved somebody’s hand an inch, maybe a micro inch.

But, the difference is that once you’ve administered, now suddenly you’re not doing what Joe, the plumber can do, because Joe, the plumber can plunge a toilet, but he can’t administer a drug, or Josephine the plumber, let’s just make it gender neutral. She can’t administer the drug. The law actually carves out these really separate definitions, like administer versus self-administers, which is different than dispense, which is different than furnish, which is different than prescribe, which is different than treat, which is different than diagnose.

For example, some of these things you can, and can’t do depending on your licensure. Some of these things you can do depending on another practitioner. For example, you have to be under physician supervision. Some of them you can do, but you can only do them in a certain way. Like for example, you can do an acupuncture treatment, but you can’t just generally treat. Sometimes you can do things in a way that’s limited by the law. For example, if you are a substance abuse treatment center, and you want to hire a physician, you can do so for incidental medical services, IMS, but they can’t practice primary care.

There are these micro definitions in the law, and depending on what those definitions say, you can or cannot do certain things. It makes a lot of difference from the perspective of business strategy, because legal strategy is business strategy. In this situation, as just one example among thousands and thousands, the two principle partners disagreed on whether to escalate their business venture to this other legal category. A lot of times figuring out the right legal category is half the battle, and that takes strategy, and that can be done in a reasonable way without busting the bank, but in a way that really fuels that $40, 000 business decision in this case, which can then potentially lead to a $4 million revenue decision, and these are the choices that people have to make, but they’re best made informed.

What happens if you don’t? We could talk about benefits, we could talk about pain points. Well, if you don’t, if you administer, or facilitate, or let’s say aid in a bed, administering by a non-licensee, or a person who’s not supposed to be administering then we get into unlicensed practice of medicine, and that’s where my whole legal career started, is looking at unlicensed practice of medicine, how it’s defined as a crime, and misdemeanor can be a felony, can result in fines, and imprisonment. It can put you in jail. It’s very serious.

If we were talking on the FDA side, we would be talking about warning letters, we could be talking about seizures of goods, cease and desist letter. Just completely stopping the business, cold and distracts. We could talk about potentially criminal fines if there’s a sense by FDA that the product is risky, and so, again, legal strategy informs business strategy, and what makes a difference is the willingness to commit to that reasonable amount of legal advice that can move the needle on the business side.

As an example, sometimes there’re clients who say, “Well, we don’t have the money”. Really? You don’t have $5000, $10000, $15000 maybe $20000, $25000 if you’re extravagant for some legal review of your situation? What about just even under the bottom figure, just to have a contract reviewed, basic contract? So many people sign agreements, and they just don’t look at what’s in them. I was presented with a lease the other day for a house, and it gives the landlord’s company the right to use my picture in social media. By the way, I moved out, I hated the place, but the lease said that they could use my image for promotional purposes. I mean that’s just outrageous.

You really have to look at what you’re signing, and you have to look at what the terms are, and people get into deals all the time, they get into nasty non-compete clauses. Even if the clauses are enforceable, do you really want to go to battle with a Goliath about it? These are things that you need to think about. Notice, I moved the camera a little closer there, Goliath. That was for emphasis there, because your facial expressions will change when you know what hits the fan, and you’re presented with these things after the fact.

One client came back after a year of not doing anything, and I said,

“How are things going?”

“Well, you know, such and such university is trying to steal our intellectual property. We’re terrified.”

“Well, would you like to have that reviewed?”

“Oh, we don’t have any money.”

“Okay, sorry to hear that. What are your revenues?”

“Well, we’ve kinda crabbed together, you know, X thousand dollars a month.”

I did the math. Gee, that’s half a million dollars a year.

“You do have revenue.”

“Yeah, but it’s not enough.”

“It- it’s not enough. I mean, you wouldn’t spend, you know, a tiny fraction of a percentage of that just to have a contract review that could be a million dollar revenue contract for you, but you’re afraid to even look at it, because the big university could steal your intellectual property.”

So, what happened to that agreement? Is it in the closet that they signed it without legal review? Did they play Russian roulette? Did they roll the dice? Don’t roll the dice to get legal advice.

The companies that are successful, they get the review, they get these agreements modified, they negotiate that, they pursue, and then, they make a solid business decision informed by healthcare and corporate legal advice. Michael H. Cohen, Cohen Healthcare Law Group. Thank you for watching, and we look forward to working with you soon.