Starting a business in the healthcare industry requires careful analysis and planning. A healthcare startup must navigate issues such as corporate practice of medicine laws, Stark Law, Anti-Kickback Statute, Sunshine Act, HIPAA, and more. Of course, as with all startups, the business model must make sense while complying with securities regulations, employment laws, and basic principles of corporate governance. ASG Law can help guide new healthcare businesses through these matters.
The first step in setting up a startup in the healthcare field is to analyze the proposed structure for compliance. Many states, including Illinois, prohibit what is known as the “corporate practice of medicine,” meaning that only physicians or physician-owned entities can provide medical services (with some exceptions, such as licensed hospitals under certain circumstances). Therefore, a non-physician owned healthcare startup must ensure that its proposed services do not constitute the practice of medicine; or that the service is one that can be provided by non-physicians. Fee-splitting between physicians and their vendors is also often prohibited.
Startups that aim to provide services or products to medical practices must navigate self-referral and anti-kickback statutes. The federal Stark Law and related state statutes prohibit (with many exceptions) physician ownership in an entity to which the physician refers patient for “designated health services” (such as clinical laboratory services and durable medical equipment). The federal Anti-Kickback Statute and related state statutes prohibit any remuneration for referrals. These statutes often play a large role in structuring the relationship between physician groups and managed service organizations.
Failure to comply with securities regulations can have severe consequences for both the startup and its investors. Such regulations apply even when raising relatively small amounts from “friends and family.” Including capital requirements and sources in the business’s initial strategy is key. Issues include how the raise should be structured (equity, debt, hybrid), control of the business, and percentage ownership. If employees, advisors and contractors are going to be compensated with equity, then such compensation scheme needs to be properly structured.
Appropriate disclosures must also be made to potential investors. The requirements for such disclosures vary depending upon the size of the raise, and the qualifications of the investors; but care must always be given that the information is not misleading. Disclosures can require special attention in the healthcare industry, where the business is not providing medical services directly, but rather is relying on servicing physicians or physician groups.
If a healthcare startup’s revenue is generated from government reimbursements or insurance company payments, then accreditation and provider contracts (if dealing with a private payor) are crucial. The accreditation process can be lengthy, burdensome, and non-intuitive. Negotiating contracts with insurance companies can be challenging, especially for new or innovative services and products. Having a guiding hand can be the difference between success or failure for a new business.
As with all startups, choosing the right entity, such as an LLC or C-Corp, impacts how the business will be managed. Further, it is important to have policies and agreements in place for employees and independent contractors. Finally, vendor contracts, customer contracts, and joint venture agreements must not only protect the business’s rights, they must comply with necessary regulations, such as HIPAA.