At the inaugural AMA Physician Entrepreneur Forum held in Chicago last month, Dan Gebremedhin, MD, reviewed the legal, operational and compliance risks that physician entrepreneurs must anticipate and manage as they grow.
“I’ve personally led nine investments for our firm, and our firm has invested in about 55, and we see a lot of regulatory issues pop up every single day,” Dr. Gebremedhin said. “You can reach out to a regulatory lawyer for a quick curbside consult and learn enough to get your hands dirty, but if you want to move forward with a healthcare venture, my advice is to get a very good regulatory lawyer.”
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Dr. Gebremedhin was an internist at Massachusetts General Hospital and a faculty instructor at Harvard Medical School. He has a master’s degree from the Harvard Business School and significant investing and entrepreneurial experience in both healthcare and physician-led healthcare ventures. He is a partner at Flare Capital Partners, a pioneer in healthcare investing, which partners with founders to improve outcomes, lower costs and reshape healthcare’s operating systems with software, data and augmented intelligence (AI).
The firm has extensive experience navigating the complicated risk and regulatory landscape faced by healthcare ventures, and to emphasize the serious consequences of noncompliance, Dr. Gebremedhin recounted specific cautionary tales of a handful of healthcare ventures that scaled quickly and tripped regulatory barriers. In some cases, the legal scrutiny resulted in criminal charges, fines or prison time for company executives.
Get comfortable with regulatory complexity
Just as many regulations affect healthcare businesses and the physician entrepreneurs who launch them, there are common legal and operational pitfalls that physician-led ventures need to avoid.
“Many investors veer away from healthcare because of the regulatory complexity,” he said. “As a healthcare investor, you need to become familiar and comfortable with the risk landscape.”
There are eight large regulatory bodies or streams of regulatory law that affect physician businesses, healthcare businesses and physician entrepreneurs, according to Dr. Gebremedhin, and regulations can vary from state to state. Engaging regulatory lawyers right from the start will help navigate the complex landscape and reduce scrutiny by the Food and Drug Administration (FDA), Drug Enforcement Administration (DEA), Federal Trade Commission, HIPAA, state privacy laws, Health Breach Rules, Anti-Kickback and Stark Laws, and regulations that govern certificate of need and the corporate practice of medicine.
“We invest in software and services, and the FDA is increasingly monitoring software that acts as a medical device and AI that may make clinical recommendations,” he said, then warned potential entrepreneurs of what can happen.
“The DEA is going to get involved anytime you are prescribing controlled substances. They’re going to make sure that you’re doing it appropriately,” Dr. Gebremedhin said. He also mentioned HIPAA regulations, reminding physician-led ventures to be “extremely judicious” about patient confidentiality, consent and data-sharing when handling personal data.
When pressure to grow creates risk
Dr. Gebremedhin presented an example of how one direct-to-consumer-focused healthcare business got tripped up by regulatory law.
A company that started with text messaging talk therapy eventually moved to managing ADHD care. The firm prescribed controlled substances without any prior patient relationship through a tech-enabled process in which a patient filled out a questionnaire, had an interaction with a physician or other health professional and received a prescription within 39 minutes. A “very, very significant inquiry” into the company followed, resulting in a fine and the CEO’s removal.
Interestingly, the violations were not based on the company’s prescribing practices, but on its marketing to patients, which included putting cookies on patients’ computers and reusing that data without their consent.
“High-flying, fast-growing companies can fall prey to the pressures and challenges of achieving and maintaining momentum,” he said. “There’s real stress in startups to hit the numbers, and there’s a lot of pressure when you take venture capital. That’s when people sometimes cut corners.”
The common thread in many such cases?
“Pressure to grow and to improve margins without a clear understanding and proof of the value you are creating for your customers,” Dr. Gebremedhin stated.
Build compliance into the business
It is vital for physician entrepreneurs to be familiar with key regulations and have adequate clinical governance to ensure that protocols for prescribing, coding and delivering care are being followed. They must make sure that the appropriate administrative layers to track the number of patients and outcomes are in place, and that reporting back to enterprises and third-party regulators is done properly and to the letter.
“There’s always a desire to grow, but when that desire becomes desperation, there’s pressure to cut corners,” Dr. Gebremedhin said. “But sustainability is more important than growth. Having a sustainable, long-lasting business is a better driver and a better true North.”
