Private Equity Investment in Plastic Surgery Practices: 5 Key Healthcare Regulatory Due Diligence Considerations

Morgan Lewis

Morgan Lewis

Intrigued by a fragmented market and the potential for scalability, private equity firms are turning to plastic surgery physician practices for new investment opportunities. This Insight discusses key healthcare regulatory due diligence considerations for private equity firms approaching such an investment and for plastic surgery physician practices preparing for a future sale.

In addition to traditional surgical cosmetic procedures, plastic surgery practices are increasingly offering non-surgical medical spa or “med spa” services, which include non-surgical aesthetic medical services, as well as non-medical aesthetic services. The med spa portion of a plastic surgery practice typically offers non-medical procedures, such as laser hair removal, microneedling, and tattoo removal, through non-clinicians, such as medical assistants, cosmetologists, and estheticians. Some common non-surgical aesthetic medical treatments, which are typically performed by mid-level providers or registered nurses, include neurotoxin injections, injectable dermal fillers, and laser skin resurfacing and rejuvenation.

In light of the expanded scope of services, plastic surgery practices (especially those with a med spa component) present unique healthcare regulatory due diligence considerations, beyond some of the common physician practice diligence issues.

1. Corporate Practice of Medicine

A plastic surgery practice, especially one with a robust med spa component, may have non-physician injectors as owners (where a physician is engaged as a “medical director”) or minority owners (where a physician owns the practice, along with a mid-level provider). Engaging in a plastic surgery practice acquisition requires understanding the Corporate Practice of Medicine (CPOM) doctrine, a principle not at issue in non-healthcare transactions.

Many states have enacted CPOM doctrines, prohibiting lay entities (i.e., entities not owned by practicing physicians) from engaging in the practice of medicine. CPOM prohibits lay entities from both owning physician practices and directly employing physicians for the practice of medicine. In the context of a plastic surgery practice acquisition, CPOM may prevent anyone other than licensed physicians from owning and operating the business. Additionally, CPOM may restrict whether mid-level providers, such as nurse practitioners and physician assistants, can be minority owners in the business.

Private equity investors should evaluate the current organizational structure of the business, including who owns the plastic surgery practice and med spa portions of the business, and whether these business lines are organized as separate entities, to determine whether the business as a whole has been historically appropriately structured. To the extent the investor discovers any organization issues, the parties can engage in preclosing reorganizations to remediate the discovered issues.

Further, a private equity investor should evaluate whether it is necessary to establish the “Friendly PC” model under state law to facilitate the transaction. Under the Friendly PC model, the plastic surgery practice (including the med spa) is organized as a professional entity that is owned by a physician or other appropriate licensed provider. The professional entity continues to employ the physicians and certain licensed providers while a lay entity, a management company (which can be owned by the private equity investor), acquires the non-clinical assets from the professional entity and employs the non-clinical employees. The entities then enter into a management services agreement permitting the management company to manage the non-clinical business operations of the plastic surgery practice and med spa in exchange for a fee.

It should be noted that some states do not have CPOM, and therefore use of the “Friendly PC” model may not be necessary. However, the private equity investor should consider whether use of the “Friendly PC” model nonetheless is sensible in states without CPOM when considering its plans to scale the business into other states with CPOM.

2. Business Licensure

A plastic surgery practice that operates a med spa may be required to hold more permits than a typical physician practice. Private equity investors should evaluate whether state law requires the med spa portion of the business to be licensed as a healthcare clinic, salon, or both.

Furthermore, private equity investors should consider whether state law will require an entity-level license for the practice to own or operate medical devices and other equipment to provide services. For example, some states require entities that own lasers to register the laser and satisfy specific safety standards. A private equity investor will want to ensure these licenses are active and that the practice has established procedures for maintaining the licenses.

3. Scope of Practice

Plastic surgery practices (especially those with a med spa component) typically employ or engage a variety of licensed and non-licensed individuals to provide services to the public, more so than most other physician practice specialties. Relying on a workforce that may consist of non-physicians and to some extent, non-clinicians, can present unique scope of practice issues.

In connection with the non-surgical procedures that may be rendered through a med spa portion of the business, services may be rendered by non-physicians. For example, it is common for registered nurses to furnish neurotoxin injections and injectable dermal fillers. It is also fairly common for non-licensed individuals to administer laser hair removal. However, it would not be unusual for a successful plastic surgery practice to operate in a non-compliant manner, and a private equity investor should confirm during the diligence process that employees are not operating outside the scope of their applicable practice.

To this extent, private equity investor should assess whether certain non-surgical cosmetic procedures can be performed by clinicians and non-clinicians alike or whether state law prohibits certain licensees from performing that procedure. Notably, whether a procedure is classified as a medical procedure varies from state to state. For example, some states classify microneedling as a medical treatment that cannot be performed by non-clinicians unless supervised by a physician, whereas other states permit microneedling to be performed by non-clinicians without supervision.

To further complicate matters, non-clinicians that are prohibited from performing certain procedures on their own may be able to perform the procedure so long as the procedure is delegated by a supervising clinician.

Further, state law may restrict whether clinicians may appropriately supervise non-clinicians. For example, in some states, a physician may be permitted to supervise a registered nurse but not a cosmetologist. Acting without proper supervision or outside the scope of a license may result in disciplinary action against the licensee, whether a clinician or non-clinician.

4. Application of HIPAA

Even plastic surgery practices that are wholly self-pay or cash-pay businesses may be considered covered entities for the purposes of the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (collectively, HIPAA). A private equity investor should assess whether the plastic surgery practice is a covered entity.

To the extent that the practice is a covered entity, a private equity investor should evaluate the practice’s HIPAA compliance program, training, use of its notice of privacy practices and policies and procedures, business associate agreements, performance of security risk assessment, and exposure to unauthorized disclosures and data breaches, as a private equity buyer would for any covered entity. Private equity investors should then further tailor their HIPAA diligence to plastic surgery practices.

For example, many practices use before and after photos on their website and in other marketing materials. When photos are created by a covered entity and relate to a patient’s healthcare, they are generally subject to protection under HIPAA. In many cases, for before and after photos to be used in marketing materials, the patient’s authorization must be obtained and satisfy elements established under HIPAA. If no authorization is obtained or the authorization is invalid, the photos on public display may violate HIPAA.

Additionally, the plastic surgery practice’s notice of privacy practices should address the use of a patient’s protected health information in marketing materials.

5. Application of the Stark Law and the Anti-Kickback Statute

Another critical consideration for private equity investors conducting healthcare diligence of plastic surgery practices are two federal fraud and abuse laws, the Anti-Kickback Statute (AKS) and the Stark Law. A plastic surgery practice may engage in certain marketing activities or profit-sharing programs that may be prohibited or incur risk under the AKS and the Stark Law, to the extent applicable to the practice.

Generally, in order to implicate these laws, the plastic surgery practice must participate in one or more federal healthcare programs, such as Medicare or Medicaid. While most plastic surgery practices and med spas are cash or self-pay businesses, some may participate in federal healthcare programs. For example, a practice may offer neurotoxin injections to treat non-cosmetic conditions that may be covered by federal healthcare programs.

In such cases, even though the majority of the services offered by the practice may not be covered by federal healthcare programs and those services that are covered may not represent a significant amount of revenue, if the practice has enrolled in a federal healthcare program and to the extent the practice receives federal healthcare program revenue, then the practice may be subject to the AKS and the Stark Law.

Further, a plastic surgery practice may employ a dermatologist and provide general dermatology services. Though the general dermatology services may not represent a significant amount of revenue, to the extent it includes federal healthcare program revenue, then the whole practice may be subject to the AKS and the Stark Law.

A private equity investor should confirm during diligence whether the plastic surgery practice participates in a federal healthcare program, and to the extent the practice does participate, the private equity investor should confirm that the practice does not engage in any business practices that incur AKS risk and the business is Stark Law compliant.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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