Healthcare Franchises: Just What the Doctor Ordered, or Prescription for Trouble?

Vol. 15, No. 2


Gordon & Rees, LLP

I. Introduction

According to recent estimates, healthcare spending in the United States will reach $4.5 trillion—over 19 percent of the nation’s gross domestic product—by the year 2019. Healthcare is second only to the food sector in franchise growth. This growth may offer remarkable opportunities for franchisors of healthcare concepts, as an aging and longer-living population demands more healthcare services.

Seasoned franchise lawyers are familiar with the many issues that must be considered when developing more “conventional” franchise systems, such as restaurants, tutoring services and automotive care concepts. Those same lawyers may be surprised to learn that the patchwork of federal and state laws controlling the sale of franchises is just the tip of the iceberg when it comes to regulations that govern franchises offering healthcare services.

Healthcare franchises include concepts such as Pearle Vision®, Doctors Express® and Health Mart®. The franchisors of these concepts offer vision centers, urgent care clinics and pharmacies, respectively. There are, of course, many other examples of franchised healthcare businesses, including dental offices, chiropractic clinics and med-spas.

Healthcare franchises are appealing to wellness providers, for the same reasons that conventional franchise concepts are appealing to laypersons. The operational support, established training methods and promotional programs that franchisors offer may help a healthcare franchisee navigate through a daunting array of regulatory issues. Still, the reality is that when a franchised business offers the services of licensed healthcare professionals, an ill-conceived pricing promotion or coupon can result in a substantial financial penalty and a prison sentence for unwary franchisors or franchisees.

Healthcare franchisors and their counsel must be aware that practices that seem harmless when performed within the traditional franchise model may create substantial liabilities when applied to a healthcare franchise. A thorough understanding of the interplay of franchise law and healthcare law is essential to avoid such liabilities, and to provide proper operational guidance to franchisees.

Among the most significant regulatory issues that affect licensed healthcare professional franchises are restrictions against the corporate practice of medicine, prohibitions on certain types of payment arrangements and prohibitions against self-referrals.

II. Corporate Practice of Medicine

In broad terms, the prohibition against the corporate practice of medicine means that laypersons and general-purpose corporations may not employ physicians to practice medicine—effectively confining the delivery of medical services to entities owned and controlled only by licensed medical professionals and precluding the sharing of professional fees between physicians and non-licensed entities. The term “physicians” may include optometrists, dentists, chiropractors, podiatrists and, of course, medical doctors. The ban on the corporate practice of medicine may be found in state statutes, attorneys general opinions, medical practice acts or a combination of these. The purpose of the prohibition is to ensure that licensed healthcare professionals maintain independence over the care of their patients without the undue influence of unlicensed corporations and laypersons.

The ban on the corporate practice of medicine means that franchised businesses that directly provide healthcare services cannot be owned or controlled by non-licensed persons or general corporations. If healthcare services are to be provided in conjunction with the franchise model, an independent licensed professional must provide them, or own the franchise. Further, a licensed healthcare professional may not share a professional fee with a non-licensed franchisor or franchisee. Doing so is considered to be assisting an unlicensed person to practice medicine. For example, a general corporation or layperson may own a vision center franchise and be in the business of selling eyeglass frames and sunglasses. If that vision center also offers optometry examinations, an independent doctor of optometry must provide them. There must be a clear separation of the healthcare services and the retail services offered by the vision center. Of course, this is true whether the vision center is franchised or not.

In some states, such as New York, violating the prohibition on the corporate practice of medicine is a felony. See N.Y. Educ. Law § 6512. In California, corporate practice of medicine violations are punishable by imprisonment from six months to five years, and a fine of $50,000 or double the amount of the fraud, whichever is greater. See Cal. Bus. & Prof. Code § 2417.5, as amended by Assembly Bill 2566.

A franchise lawyer evaluating a healthcare franchise should consider two threshold questions in connection with the ban on the corporate practice of medicine: (1) do the services furnished by the franchisee constitute a “professional service” subject to corporate practice restrictions, such as optometry or dentistry?; and (2) if so, can the franchise be structured in a manner that preserves the autonomy of the licensed professional?

Courts and government authorities differentiate between the business and the medical elements of delivering healthcare services. By focusing on the delivery of business services and leaving medical decisions to licensed healthcare professionals, a franchise system increases its ability to survive challenges alleging the corporate practice of medicine.

III. The “Anti-Kickback” Statute

42 U.S.C. § 1320a-7b is known as the federal "Anti-Kickback" Statute (“AKS”). The AKS prohibits healthcare providers, whether licensed or unlicensed, from offering or receiving cash payments or anything of similar value in exchange for referrals that are paid for by federal programs. Senior care services, pharmacies and dental franchises are but a few of the categories for which AKS awareness should be a high priority. Providing rebates on professional services, demanding unreasonably high payments for medical support services (such as billing and transcription), furnishing tickets to entertainment events or any other remuneration that can be considered a cash or “in kind” payment may violate the AKS. See 42 U.S.C. 1320a-7b(b).

The AKS arose out of government concerns that inappropriate payments made to healthcare professionals might influence those professionals to specify products and services that are medically unnecessary or potentially injurious to patients. Likewise, offering patients any type of payment that encourages the utilization of federal payment programs may have the same effect on healthcare decisions. To protect both patients and the taxpayers that fund Medicaid and Medicare from personal and economic harm, Congress enacted a prohibition against the payment of “kickbacks” in any form. Cash, goods or just about any type of benefit in kind can be deemed a kickback. Statutory exceptions, known as “safe harbors,” set forth acceptable practices not subject to prosecution under the AKS, despite appearing to fall within the statute’s parameters. See 42 C.F.R. § 1001.952. These safe harbors apply only to those arrangements that precisely meet all of the many requirements contained in each exception.

Thirty-seven states and the District of Columbia have anti-kickback laws. State anti-kickback laws typically apply to all third-party payers, while the federal statute only applies to payments in connection with federal healthcare programs. Some state anti-kickback laws lack the intent requirements of the federal law and may also differ from federal law with regard to the types of safe harbors applied. For example, the federal AKS exempts compensation paid by an employer to a legitimate employee, while Florida’s anti-kickback statute does not. Interestingly, Florida courts have also held that state anti-kickback law is preempted by federal anti-kickback law. State v. Harden, 873 So.2d 352 (Fla. Dist. Ct. App. 2004).

Although franchises are independently owned and operated businesses, federal authorities have not hesitated to pursue franchisors in AKS lawsuits arising from the actions of franchisees. In the year 2000, TLC Home Health Services LLC and its affiliates (“TLC”) had approximately 150 franchised units. The franchisees performed home healthcare services and submitted costs to Medicaid for services rendered to Medicaid recipients. TLC agreed to pay a six-figure settlement to resolve its potential AKS liability for the actions of a single franchisee. See Office of the Inspector General Fraud Report, 02‑15‑2005. TLC’s settlement was offered notwithstanding the fact that its franchisee was separately (and successfully) prosecuted by the Office of the Inspector General for paying commissions to consultants who provided “marketing services.” These consultants were paid a fee for each new homecare patient that their marketing steered to the franchisee. That fee was considered a payment to encourage overutilization of services submitted to a federal program for payment. TLC also paid $1.4 million to settle an action under the federal False Claims Act, which action was brought because of the unlawful activities of yet another franchisee. See U.S. ex rel. Pina et al. v. Staff Builders, Inc. et. al., Civ. No. 96-86664 (S.D. Fla. Sept. 23, 1996).

The AKS safe harbors are numerous, subject to change and highly technical. This makes a thorough analysis beyond the scope of this article, but safe harbors may include payments in connection with:

  • Space rental
  • Equipment rental
  • Personal services and management contracts
  • Referral services
  • Compensation to legitimate employees
  • Group purchasing organizations
  • Price reductions offered to health plans
  • Ambulatory surgical centers
  • Electronic health records items and service

Each of the above is described in a separate, detailed section of the AKS. See 42 C.F.R. § 1001.952. The complete list of exceptions may be found at:

Franchisors and franchisees should ensure that arrangements in which a healthcare franchisee is offering discounts, exchanges or reduced-cost services to a patient, or receiving the same from a supplier, are precisely described in documents that have been reviewed by counsel experienced in both healthcare and franchise law.

The Balanced Budget Act of 1997 provides for civil monetary penalties for violations of the AKS in amounts up to $50,000 per violation and assessments equal to not more than three times the amount of the remuneration paid under the arrangement. See 42 U.S.C. 1320a-7(a)(7). Violating state anti-kickback laws may subject a provider to disciplinary action by a state’s licensing board in addition to other sanctions. Counsel are well advised to carefully analyze the preferred supplier and discounting aspects of any franchise system that involves reimbursement by any third-party payer.

IV. Franchise Daily Deals

Websites such as Groupon® and LivingSocial® have recently come under scrutiny for offering discounts on healthcare services, including those provided by franchises. A recent deal offered “$50 for $200 credit towards exam and eyeglasses” at locations of a vision center franchise. Another deal offered “$24 for four chiropractic adjustments normally priced at $116” at participating chiropractic franchises. In both cases there is a real possibility that the law was broken. Daily deal sites keep up to half of the payments received from deal offer recipients and, in the above instances, the recipients become patients. These transactions may constitute fee splitting with a non-licensed person or general corporation, which is strictly prohibited by federal and state corporate practice of medicine laws. Moreover, there may be a violation of the AKS, because a payment was made to the deal site for a patient referral, and for goods and services that may be reimbursable under government programs. Adding to the complexity of the issue is that legal standards concerning which procedures constitute the practice of medicine and which healthcare professionals are included in fee-splitting prohibitions vary by jurisdiction. While most states are still grappling with this issue, medical boards in Oregon have advised chiropractors and dentists against participating in daily deal websites. See

V. Prohibitions Against Physician Self-Referral

Certain federal and state laws prohibit a licensed healthcare professional from referring patients to designated health service (“DHS”) providers if the referring professional or a family member has a financial relationship with that DHS provider. The applicable federal law is 42 U.S.C. § 1395nn, commonly known as the “Stark Law.” The law is named for U.S. Congressman Pete Stark, sponsor of the initial bill. Creation of the Stark Law was spurred by studies showing that the number of tests ordered by physicians increased if the referring provider possessed an ownership interest in the testing facility. If the franchise system offers a business that is likely to receive payments from Medicare or Medicaid, the franchisor must structure the system to comply with the Stark Law.

As is the case with the federal AKS, several states enforce their own self-referral laws (or “mini” Stark Laws). While the federal Stark Law only applies to referrals for the service classifications set forth in the statute and when the services provided as a result of the referral may be paid by a federal benefits program, some states limit referrals by licensed healthcare professionals regardless of whether the payer is a governmental entity.

Among the 34 states that have statutes against self-referrals are Arizona (Ariz. Rev. Stat. § 32-1401(25)(ff)); California (Cal. Bus. & Prof. Code §650.01–02); Colorado (Colo. Rev. Stat. § 26-4-410.5); Minnesota (2004 Minn. ALS 198 (S.B. 2080)); and New York (10 NYCRR §34.1, et seq.). State laws vary widely in several respects. In California, the self-referral prohibition applies not only to persons licensed in the “healing acts,” but their immediate family members. See Cal. Bus. & Prof. Code § 650.01-02. Arizona’s self-referral law applies only to medical doctors and surgeons. See A.R.S. § 32-1401(27)(ff). In other instances, application of state law depends on the type of services being referred. For example, Montana’s self-referral law specifically prohibits medical practitioners from owning pharmacies. See Mont. Code Ann. § 37-2-103.

The following is a partial list of the DHS facilities to which patients must not be referred if a financial interest is present:

  • Clinical laboratories
  • Physical therapists
  • Occupational therapists
  • Outpatient speech pathologists
  • Radiologists and other providers of imaging services
  • Durable medical supplies providers
  • Home healthcare service providers
  • Pharmacies

Considering the number of franchised medical testing labs, pharmacies and home healthcare businesses currently operating, the relevance of the federal Stark Law and “mini” Stark Laws to franchising should be clear. The consequences of violating the federal Stark Law are severe. They include a $15,000 per referral fine and imposition of a $100,000 civil penalty for each ongoing arrangement considered to be an attempt to evade the law. See 42 U.S.C.S. § 1395nn.

VI. Practical Tips

Here are a few guidelines for healthcare franchisors and franchisees alike:

  1. The combination of legal issues relating to franchising and legal issues relating to healthcare can create unexpected liabilities if operations and system standards are not clearly established before a single franchise is sold.
  2. Franchisors and franchisees should ensure that national and local promotional materials are reviewed by counsel familiar with anti-kickback statutes, as well as franchise advertising law.
  3. Supplier and vendor agreements should be carefully analyzed so as to identify any rebate, discount or kick-back that might be considered an impermissible payment given or received by franchisors and franchisees.

VII. Conclusion

Healthcare businesses account for over 14 million jobs in the United States and are expected to create approximately three million new jobs over the next decade. Ten of the top 20 fastest growing careers are in healthcare. As our population ages and life expectancies increase, the need for healthcare also will increase, thus enhancing the potential opportunity for healthcare franchises to flourish. In order to take advantage of this opportunity, healthcare franchisors, franchisees and their counsel must be prepared to continually monitor and manage the complex array of franchise and healthcare laws and regulations at all levels of the government. While definitely a challenge, the payoff may be well worth the investment.


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