California Ketamine Clinic: The Impact of Epic Medical Management, LLC v. Paquette
Principles of Medicine (“CPOM”) and state anti-kickback ban corporate practices vary from state to state. Although some states have statutory injunctions, other states rely on CPOM’s case law. These issues are usually not subject to serious litigation. When there is case law covering these topics, these decisions must be reviewed and understood. They will affect how you structure the ownership of the ketamine clinic, and similarly, how you will structure a management service agreement (“MSA”) under a strict CPOM state.
One such situation is Epic Medical Management, LLC v. Paquette, 244 Cal.App.4th 504 (2015). This case involves a dispute between the doctor and appellant Justin Dominic Paquette (Justin Dominic Paquette, MD) and the medical management company Epic Medical Management, LLC (“Epic Medical”). The clinic provides a contract for non-medical management services. The two parties have a dispute and agree to terminate the MSA. Epic Medical believes that this is an additional cost imposed by the MSA. But Dr. Paquette believes that the management company failed to perform its contractual duties and owed him money. The matter entered the arbitration process, and the arbitrator ruled that Epic Medical won the case. In the cross application for confirmation and setting aside the award, the court of first instance ruled that Epic Medical won the case and confirmed the award. Dr. Paquette appealed, arguing that the arbitration award could not be established because the contract explained by the arbitrator was illegal. The California Court of Appeals concluded that the issue is not reviewable, and if it is, the contract is not legally illegal.
According to MSA, Dr. Paquette hired Epic Medical to “provide reasonably necessary and appropriate management services to manage non-medical aspects [the doctor’s] Medical practice. Among them, Epic Medical is required to rent office space from Dr. Paquette, rent him all equipment that he deems reasonably necessary and appropriate, provide support services, provide non-doctor personnel, develop and implement marketing plans, conduct billing and collection, And provide accounting services. Dr. Paquette is responsible for providing medical services. Given its strict CPOM laws, this is a very standard relationship structure in California.
The main issue of the appeal revolved around the fees paid to Epic Medical. Although the two parties initially agreed on a payment method, their actions were modified during the three-and-a-half years before the termination of MSA. Specifically, Epic Medical charges a fee, which is paid by Dr. Paquette, and the fee is calculated as 50% of office medical services, 25% of surgical services, and 75% of medical expenses (referred to as the “50-25-75 method”).
At the arbitration hearing, Dr. Paquette argued that because some of the fees were paid for Epic Medical’s marketing services, these fees constituted an illegal rebate program for referral patients. There is no doubt that some physician members of Epic Medical did refer the patient to Dr. Paquette. Dr. Paquette’s position is that paying Epic Medical a certain percentage of the income generated by these patients constitutes an illegal rebate, which is prohibited by Article 650 (“Article 650”) of the Commercial and Professional Act. The arbitrator did not completely disagree with this description, but concluded that any such violations are “technical” and will not affect the award.
The first two subsections of Section 650 stipulate as follows:
(a) Except as [otherwise provided], The proposal, delivery, reception or acceptance of any person licensed under this section…any rebate, refund, commission, discount, patronage bonus, discount or other consideration as compensation or incentive, whether in monetary or other form, will Recommendations by patients, customers or customers to anyone, regardless of the membership, proprietary interest, or joint ownership of any person to whom these patients, customers or customers are recommended, are illegal. [¶] (b) The payment or collection of consideration for services other than patient referrals based on a percentage of total revenue or similar types of contractual arrangements, if the consideration is commensurate with the value of the services provided or is rented out by the recipient or provided to the payer The fair rental value of the premises or equipment.
In order to overturn the arbitrator’s decision, the court of appeal needs to find that the entire MSA is illegal and unenforceable. However, the Court of Appeal stated:
Even if it is currently assumed that the doctor is correct and the payment to the management company based on the 50-25-75 method constitutes a referral rebate, this does not apply to the entire contract. When doctors and management companies conduct business according to the agreement, referral patients account for a small percentage of patients.This [MSA] It is not a referral agreement, but an agreement used to manage the service. The referral is only an incidental part.
After analyzing section 650, the Court of Appeal concluded: “[g]Given the flexibility of Section 650, there is no absolute prohibition against payment of consideration to management companies-even companies that occasionally refer patients. In addition, after reviewing the case law that eventually led to the passage of Section 650 and subsequent amendments to the regulation, the Court of Appeal stated that Section 650(b) “allows contracts between doctors and non-doctors, in which compensation is based on gross income. Percentage, as long as the consideration is commensurate with the services provided and/or the facilities and equipment provided. “Based on the foregoing, the only way for the Court of Appeals to determine that MSA may be illegal is if the consideration is not commensurate with the services provided and/or the facilities and equipment rented to the doctor. To reach this conclusion, the Court of Appeals analyzed the payment to Epic Medical Of the payments, the profit margin was found to be 12.8%.
In the end, the Court of Appeals quickly ruled that MSA did not violate California’s CPOM. As the Court of Appeal pointed out, making such a decision requires a legal interpretation of the substantive provisions of the MSA. And, ultimately, the question revolves around whether the management company exercises or retains control or discretion over the practice of doctors. The Court of Appeal held that MSA “strictly distinguishes between medical factors controlled by doctors and non-medical factors handled by doctors’ management companies.” Therefore, it did not violate California’s CPOM principles.
Summary and lessons learned
This Epic Medical Decisions are valuable in many ways. But the decision also caused many problems, including:
- Although the appellate court held that the 12.8% profit rate was reasonable, did the court also consider a reasonable range? In other words, what about 15%, 20%, 25%, etc.?
- The Court of Appeal found that the referral of MSA involved a small number of patients, but when will it cross over to the violation? The court did not actually define the meaning of “small percentage”. Therefore, at least according to the appeal ruling, we do not know the exact definition of “small percentage”.
- Even if the Court of Appeal finds that Section 650 has not been violated, if a lawsuit is filed under the Federal Anti-Kickback Regulations (“AKS”) (criminal regulations), will the outcome be the same?
- Although the Court of Appeal held that the remuneration is basically a “fair market value,” what other evidence is needed for the federal AKS action?
Despite these problems, the decision does provide useful guidance. It reinforces the fact that California compensation must be “commensurate with the value of the services provided or the fair rental value.” This question relates to Section 650 and CPOM. In addition, the concept of “fair market value” payments is critical to the safe harbor of managed service agreements under the federal AKS. The decision also further supports the view that California’s compensation can be based on total income (not all states, such as New York). We now know that California may maintain a profit margin of 12.8%. Obviously, lower profit margins may also be enforceable (these are very fact-oriented issues, so there are no absolutes when it comes to these general rules).
If you are considering opening or acquiring a ketamine clinic in California, Epic Medical It is a decision that you should be very clear about.