Vet Clinic Acquisitions Require Regulatory Diligence

In recent years, healthcare-focused private equity firms and start-ups are looking to minimize risk by investing in less regulated healthcare sectors.  As a result, the acquisition of veterinary clinics has emerged as a growing area of interest. But with this area for investment, it is important to recognize that although the veterinary clinic sector may be less regulated than other healthcare models, key areas of compliance risk remain and must be evaluated and addressed.

Corporate Practice of Veterinary Medicine

Many states have enacted laws which prohibit the “corporate practice” of veterinary medicine.  While nuances exist among states, the doctrine generally prohibits a non-veterinarian or an entity, such as a general business corporation, from owning an interest in a veterinary practice or employing veterinarians for the purpose of practicing veterinary medicine.  Such laws generally are designed to prevent non-clinicians from interfering with or influencing the veterinarians’ professional judgment, and will inform the ability of investors to enter into purchase agreements with selling veterinarians.

Several states, including New York, New Jersey, Minnesota, and North Carolina, prohibit the corporate practice of veterinary medicine.  In order to avoid violating these prohibitions on the corporate practice of veterinary medicine, investors sometimes utilize a so-called “friendly veterinarian” model.  Under this model, the investor will acquire only the non-regulated clinic assets through a management vehicle and the veterinarian-owner remains in place as the owner of the clinic and employer of any other veterinarians.  The clinic contracts with a management entity that provides management services and “leases” the non-regulated assets back to the clinic.  The PC is kept “friendly,” or aligned through the use of a stock transfer restriction agreement.

Care must be taken that the terms of the management agreement not be too controlling.  Although there is no single rule as to when a given management arrangement may constitute corporate practice, the focus in any enforcement action likely will be on the level of control the management entity exercises over the operation of the veterinary practice, specifically the professional judgment of licensed veterinary professionals. Where a high level of control exists, the arrangement may be found to be a sham intended to disguise the de facto practice of veterinary medicine by an unlicensed entity. Factors that may be considered in evaluating whether a structure violates the prohibition on the corporate practice of veterinary medicine include the extent to which the manager controls decisions or extracts above fair market value revenue in the form of a management fee.

Those looking to invest in the veterinary space need to take the corporate practice of veterinary medicine into consideration when developing their business models.  We advise that companies look into whether the states where they are considering operating have a prohibition against the corporate practice of veterinary medicine, and if so, analyze how their model will need to be modified to fit within the law.  The good news is that many states (e.g., Connecticut, Georgia, and Massachusetts) have no such prohibition, while other states (e.g., Florida, Oregon, and California) take a middle-ground approach and do not prohibit the corporate practice of veterinary medicine, but require only that the veterinary clinic designate a licensed veterinarian-manager to provide professional supervision over the practice of veterinary medicine.

Advertising

Most state boards of veterinary medicine regulate veterinary advertising in some capacity. Not surprisingly, many states prohibit veterinary clinics from using advertising that is false or misleading.  Other states, including California and Florida, have specific regulations governing advertising of emergency services, requiring specific disclosures about when a licensed veterinarian will be on premises, the hours the facility will provide emergency services and the address and telephone number of the premises.

New York is one of the more restrictive states with regard to veterinary advertising. In addition to prohibiting false, fraudulent, deceptive or misleading advertisements, New York prohibits veterinarians from guaranteeing services, making unsubstantiated claims relating to the cost of professional services or professional superiority, or offering bonuses or inducements (other than a discount) for established fees for professional services.

Most veterinary clinics engage in advertising on their websites, Facebook pages, and Instagram with little consideration of the foregoing regulations. However, companies looking to invest in the veterinary space should conduct diligence in this area to avoid potential regulatory enforcement down the line.

Fee Splitting and Kickbacks

A handful of states regulate fee splitting arising from the practice of veterinary medicine. For example, Nevada and Pennsylvania prohibit arrangements among veterinarians to split fees or provide rebates in connection with the referral of a client (the pet owner), unless the client has been fully informed. Texas, on the other hand, takes a more stringent approach and prohibits veterinarians from paying or receiving a kickback, rebate, bonus, or other remuneration for treating an animal or for referring a client to another provider of veterinary services, regardless of whether the client consents.

In addition, a Texas veterinary “kickback” scheme made recent news in veterinary circles as it is one of the first jurisdictions to address veterinary kickbacks in a lawsuit. In Pet Rays & Horizon Radiology, LLP, v. LogicRad, Inc. & VDIC, Inc., plaintiffs brought allegations against defendants LogicRad, Inc.  (“LogicRad”) and VDIC, Inc. (“VDIC”).  The complaint focused on the Radiographic Digital Converter (RDC), a machine which takes several high-resolution photographs of an X-Ray image in digital form.  The images can then be uploaded to providers of veterinary telemedicine services.  Because some alternatives to the RDC are much more costly and inefficient, it is one of the most widely used radiograph devices in the veterinary industry.  Defendant VDIC was one of the few providers of veterinary telemedicine in the United States.  As part of its telemedicine service, VDIC produced and sold VetMedStat software.  When defendant LogicRad, a wholly owned subsidiary of VDIC, bought the RDC technology, LogicRad began loading all RDCs with VetMedStat software and allegedly offering “kickbacks” to distributors who referred veterinarians to VDIC consultants.  Ultimately, this case highlights what may become a more pronounced kickback focus nationwide.

The American Veterinary Medical Association (AVMA) has also weighed in on the issue. The AVMA’s Principles of Veterinary Medical Ethics, which some states adopt and incorporate into their veterinary regulations, state that “In connection with consultations or referrals, it is unethical for veterinarians to enter into financial arrangements, such as fee splitting, which involve payment of a portion of a fee to a recommending veterinarian who has not rendered the professional services for which the fee was paid by the client.”

While only a few states regulate veterinary fee splitting and kickbacks at this time, it appears to be a growing area of regulation and enforcement that investors should evaluate.

Conclusion

Although regulatory oversight in the veterinary space may be less stringent than other avenues of healthcare in some respects, enforcement remains real and prevalent in certain areas as outlined above. Aside from corporate practice, advertising, and referrals, other areas to consider when looking to expand in the veterinary arena include:

• DEA compliance and state controlled substance regulation;
• medical record retention and confidentiality requirements;
• telemedicine regulations;
• radiologic equipment transfers; and
• the use of unlicensed veterinary technicians.

For more information about regulation of vet clinics and structuring acquisitions, please contact  Kara G. Silverman.