Ketamine Due Diligence: What Any Buyer Should Know, Part 2

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Ketamine Due Diligence: What Any Buyer Should Know, Part 2

As mentioned in Ketamine Due Diligence: What a Buyer Should Know – Part 1, we’ve worked on several acquisitions of Ketamine clinics, and one of the most important aspects of any business is due diligence. This post discusses some of the state health regulations that a buyer might want to focus on in a ketamine deal.

Corporate Practice of Medicine Teaching

One of the issues a buyer needs to consider is the Corporate Practice of Medicine (CPOM) doctrine. This is clearly a state issue and each state has a different regulatory system. For some states like Arizona, the CPOM doctrine is loosely defined by common law. At the other end of the spectrum, states like California have strict regulatory and legal systems over CPOM issues.

At its core, the CPOM doctrine is designed to prevent health professionals from making medical decisions or decisions that affect a provider’s practice. For example, if the buyer is a publicly traded company, would a supplier want the buyer to lead the provision of care by the supplier? Would a supplier be okay if the buyer stopped selling certain products because the margins are not big enough? Aside from the CPOM doctrine, providers have their own ethical and moral obligations that should never be exceeded by anyone outside the healthcare sector.

As mentioned above, in Arizona the CPOM doctrine is defined solely by case law. There are two appeal decisions involving opticians that serve as the basis for the CPOM doctrine. For example, Funk Jewelry Co.’s first decision was against State ex rel. La Prade, 46 Ariz. 348 (1935). The Arizona Supreme Court phrased the issue as follows:

The main question we need to decide is whether the complaint alleging that the company’s defendant, through a registered optician, uses objective and subjective means and methods other than the use of drugs to increase the refractive power of the human eye determine, or any visual or muscular abnormalities thereof, as well as prescribing or adjusting lenses or prisms for correction or alleviation, give cause for an injunction against such practice.

The Supreme Court then stated:

Article 11, Chapter 58 (Sections 2570-2576), Revised Code of 1928, contains legislation defining and regulating the practice of optometry. It stipulates that a person who wishes to practice optometry, over 21 years of age, of good moral character and with certain educational qualifications, must pass and obtain an examination before the governor-appointed State Optometry Committee Registration certificate. The qualifications of an optician described in this way naturally exclude a company from the practice. It cannot qualify and cannot receive a certificate of registration. It does not belong to the class of people that the legislature wanted to authorize to practice optometry. It lacks the necessary moral and intellectual qualities.

Finally, the Supreme Court found:

That a company may not be in the legal, medical, or dentistry fields is a clear question in this state. None of these professions, which are personal or professional relationships involving privacy, fall into the same category as pharmacists, architects, or other professions where there is no such relationship.

Based on the foregoing, including legal interpretation and authority from other jurisdictions that prohibited the pursuit of business professions, the Arizona Supreme Court ruled that the defendant’s employment of an optician was against optometry laws.

At the other end of the spectrum is California, with a broad and rigid CPOM doctrine. California’s CPOM is based on professional law and case law that have evolved over many decades. A full discussion of the California CPOM is beyond the scope of this article. However, if you are considering opening or buying a ketamine clinic in California, we recommend reaching out to a legal advisor who is fluent in the CPOM doctrine. Deal structures in California tend to be more involved than other states because of the CPOM doctrine, and often require a variety of companies and relationships to conduct a compliant operation.

State licensing problems

Depending on which state you live in, you may face state licensing issues that you need to investigate. We know of at least one ketamine clinic in Arizona that is approved as an outpatient treatment center (“OTC”) From the Arizona Department of Health Services. However, we do not know the exact services that are provided by this clinic, which could affect whether a clinic needs to be state licensed.

In Arizona, an OTC is defined as “a class of non-stationary healthcare facilities that provide physical or behavioral health services for the diagnosis and treatment of patients.” AAC § R9-10-101 (156). Seems pretty wide? Yes.

Behavioral health services, in turn, are defined as:

Services relating to mental health and substance use disorders and which are either: (a) provided by or under the supervision of a qualified professional (e.g. doctors and nurses) under Title 32 and whose field of activity permits the provision of these services, or (b) Conducted on behalf of patients by behavioral health workers in accordance with the rule. ARS 36-401 § (A) (11).

So imagine ketamine being used to treat a substance use disorder. Would that then make the clinic subject to a state license? In this case there is certainly a compelling argument. This is just one example of how a ketamine clinic can be a regulated entity in Arizona.

What if the clinic you’re buying is already licensed in Arizona or another state? What do you have to do to comply with the guidelines? The first step is to review your state’s regulatory and legal licensing systems. If your state has a change of ownership or control requirement, the buyer may need to notify the state and update the clinic’s application. Alternatively, if you don’t buy shares in the ketamine clinic, you may need to apply for a license with the new facility that will run the clinic.

That being said, and moving on to Part 1 of this article, you may need to update your Medicare application if the clinic is licensed as a Medicare provider, or you may need a new license if you are not purchasing the clinic’s inventory. Great care must be taken to ensure that you apply under the right conditions. The Medicare application that has sections for modifying an application is the Medicare 855 form.

Works agreements

Arizona passed a new limited liability law (the “New law”), Which came into force on August 31, 2019, but should be implemented gradually. The new law applies to Arizona LLCs incorporated, converted, or domesticated on or after September 1, 2019, and applies to all other LLCs as of September 1, 2020. There are several issues under the New Act that should be considered if the selling company or other entity involved in your business was organized before the new act came into effect.

Some of the problems under the new law include:

  1. Initiation of derivative claims on behalf of a limited liability company and handling of limited liability companies for foreign protected series;
  2. Voting rights, information rights and dissociation / dissolution rights of limited liability companies and
  3. Fiduciary duties and indemnity claims of limited liability companies.

These are just a few examples of issues to review and consider. In addition, you can very well determine that changes to such company agreements are necessary. Under the new law there are many “optional” provisions that you can include in a company agreement.

Before entering into a transaction with an Arizona LLC, the business advisor should thoroughly review these agreements and inform their clients of the various ways the agreement can be modified or changed (whether required or permitted under the new law).

Conclusion

Healthcare is an industry that requires extensive in-depth knowledge and an incredible attention to detail. Government legal issues can be ubiquitous in addition to federal issues for a ketamine deal (and any other healthcare-related deal). Any buyer or seller in this industry should turn to lawyers who are fluent in health laws. Otherwise, the penalties for violating these laws can be very severe, including criminal penalties and prison terms.

In other words, just like medicine – preventative care can save you a lot of time, money, and headaches. The duty of care and the retention of the correct legal counsel are synonymous with the preventive care of the legal and business world.