In this episode, Brad and Michael share stories of two hair transplant practices facing regulatory challenges while expanding across state lines. Tune in to learn how opening new locations varies between states with and without corporate practice of medicine (CPOM) laws. Find out why understanding state-specific ownership and delegation rules is crucial to avoid compliance issues. Plus, discover how formal partnership agreements can keep your expansion plans on track.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, my co-host, Michael Byrd.
Michael: Thanks, Brad. As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season we’re talking about businesses who decide to double down on their business. They’re going to scale. Our theme this season is Growing a Business.
Brad: All right, Michael, for those who don’t know, that is just one season. What are the other ones?
Michael: Yes. So we have four seasons of a business. We have the building season, which is starting a business. We have the operating season running a business. We’re in the scaling season right now, and then the buying and sailing season.
Brad: Perfect. All right, Michael, have you ever heard of [00:01:00] the X-Men?
Michael: Yeah. Hugh Jackman, one of them?
Brad: No, no. Michael. Oh, no Michael. Hugh Jackman is an actor that plays a character in the movie X-Men.
Michael: Oh, yeah. Okay.
Brad: For those not familiar with the X-Men, they are a superhero team that initially appeared in Marvel comic books and subsequently became well known for television shows and films and video games, and apparently Hugh Jackman.
Michael: Would it make any difference if I objected strenuously and said, no movie talk, no superhero talk, not on this podcast. Brad, this is a legal show, not a comic book show. Would that help?
Brad: Okay. Why don’t you just hold that thought first, Michael. Okay, Michael, I found a real life X-Men.
Michael: Well, if you’re going to go there, you’re going to have to explain who the X-Men are and what they do. If you know, need context before you start talking about a real life version of a comic.
Brad: The X-Men are humans who are born with this genetic [00:02:00] trait called the X gene, which grants these natural superhuman abilities generally manifesting when they hit puberty.
Michael: You said puberty. Give us some examples of the superhuman powers you referenced.
Brad: Shoot lasers out of your eyes. Can create storms, make ice fireballs super strong. Things like that.
Michael: I think my kids, when they went through puberty were X-Men.
Michael: Well, these are pretty outlandish, seriously. And you’re about to tell me you found a real life person with what knives in their hands.
Brad: That’s Wolverine. But that is exactly what I’m about to do. This ties to a story I read out of Belgium. a Belgium man was acquitted of drunk driving case.
Michael: Brad, you don’t listen. Sometimes you need to focus. You’re in the middle of talking about your real X-Men story.
Brad: Yeah, I am. Oh, the Belgium man was [00:03:00] arrested when his blood alcohol level exceeded the country’s 0.22 grands per liter. And he had also had been previously arrested and had fines for drunk driving.
Michael: Oh. His superpower is bad decisions.. I have a lot of college buddies who are X-Men.
Brad: You have friends?
Michael: Yes, exactly.
Brad: Unfortunately, or fortunately, depending on your perspective, he had a remarkable rare condition reported fewer than a hundred times known as the auto brewer syndrome. This disorder causes the stomach’s natural yeast to produce ethanol, which leads to issues with blood alcohol level. But the thing is, he never drinks.
Michael: Interesting. Okay. But again, what does this have to do with X-Men?
Brad: He basically has a super power like the X-Men where his body is brewing. I mean, imagine the money he’s going to save over a lifetime on beer.
Michael: I like where your head is at. I’m not sure it works like that, Brad. I mean, especially [00:04:00] since he never drinks, I’m betting that he’s not just walking around drunk all the time.
Brad: Okay. Well!
Michael: Why did you tell me this story?
Brad: I just had a gut feeling you would like the story.
Michael: Please. No, Brad. Let’s move to today’s story.
Brad: All right, Michael, today we have two stories on hair transplant practices.
Michael: Well, I think we have our first vocabulary word. What do you mean when you say hair transplant practice?
Brad: A hair transplant practice typically is focused on people who have already tried other hair loss treatments and it didn’t work. These practices rely on surgery that moves hair to – good hair to a bald or thinning area of the scalp. And it’s called hair restoration or hair replacement.
Michael: Okay. Alright, continue.
Brad: Our story first starts in Cleveland, Ohio, where a group of entrepreneurs decide to launch a company, and we’ll call it Fathead Hair Restoration.
Michael: [00:05:00] Okay. Explain the name.
Brad: Fathead Hair Restoration was founded by two enterprising young men who adopted many of, of the ideals of a wellness clinic.
Michael: Brad, are you trying to say code words like they owned it as they were former patients of a hair clinic?
Brad: Yes. Okay. Both the founders really liked their experience and believed that it would be a great cash cow if they modeled it correctly. And even though they weren’t doctors and did not understand all the medical aspects, they could see a place where could provide great outcomes for people and get that new set of locks. And they spent a lot of time developing this great brand idea and website and a ton of marketing. They added a physician partner and launched in Ohio their Limited Liability Company (LLC).
Michael: So to be clear, we had non-physicians and physicians co-owning the LLC together.
Brad: Correct. And yes, and that is allowed in Ohio, so it’s not part of the big issue this story, and Fathead hair restoration was [00:06:00] was growing very quickly. And one of these entrepreneur founders was from Chicago and thought, Hey, it’d be great to have Fathead Hair Restoration LLC in his city. So the team found a key spot in the west loop of Chicago and developed it, and the team updated the website on the Fathead Hair Restoration website and add the Chicago location. The owners designed the Chicago location to have same kind of look and feel. So if you’re in the Cleveland office or the Chicago office, it kind of felt the same way. And then the physician who was working at the Cleveland location was also licensed in Illinois, so actually he would just hop on a plane and fly over when they would have patients there to work on.
Michael: Okay. Well the next time we’re in our Chicago office, I may need to go see them about my hairline. It seems like someone keeps stealing it bit by bit.
Brad: That is so wrong of them.
Michael: I know.
Brad: Well, the Fathead Hair Restoration in Chicago started to grow so fast, they actually needed a full-time surgeon in Chicago, and the Chicago entrepreneurs [00:07:00] approach one of his cousins who happened to be a plastic surgeon in Chicago. I’m just going to call this person Dr. Tour.
Michael: Okay. Why Dr. Tour?
Brad: Well, on the West Loop of Chicago, there’s a brewery called On Tour, so I thought it’d be a good name.
Michael: Of course, Brad, you’re clearly spending too much of your time researching breweries either in person or online – well, I’m not sure.
Brad: Is there something wrong with that?
Michael: No. You continue.
Brad: Well, Dr. Tour is excited by the idea of joining forces with Fathead Hair Respiration LLC, and not only was he going to get paid to work at the Chicago location, he also had the opportunity to become an owner of the LLC.
Michael: Okay, keep going.
Brad: Things seem to be going great until Dr. Tour is delivered a letter from the Illinois Department of Financial and Professional Regulations, AKA, the IDFPR.
Michael: Oh, no. for those who don’t know, that’s the enforcement arm of the medical board in Illinois. What did the letter say?
Brad: Well, the IDFPR had received a complaint filed against Dr. Tour, that Dr. Tour was [00:08:00] allowing non-physicians to use his medical license in the state of Illinois as he was working for an Ohio LLC.
Michael: Ouch.
Brad: Yeah. Ouch. Michael, that’s the first story, so let’s go on to our second story. And the second story starts off with a physician who owned a clinic called Shiner Hair Replacement Center. And it was owned solely by Dr. Bock, who was located in Austin, Texas.
Michael: Clearly you’re going Shiner Bock right here.
Brad: Maybe, I mean, anyway. Dr. Bock had established Shiner hair replacement center for several years at this point. And he was doing really well. Now, Dr. Bock had completed his fellowship in Los Angeles and always really wanted to excuse to get himself back there. He maintained his California medical license and he had a friend, we’ll call Dr. IPA, that owned a clinic in Los Angeles. Now, Dr. IPA was recently updated his medical office, had added an in-office surgical suite, and Dr. IPA, [00:09:00] he didn’t really have that large volume really using the surgical space, so he was willing to lease space to Dr. Bock to help offset Dr. IPA’s costs.
Michael: Well, I think you’re getting a little lazy with the Dr. IPA, but you did use a vocabulary word that we have discussed in other shows. Talk about in-office surgery suite.
Brad: Yeah, the in-office, surgical suite is exactly what it sounds like. It’s a suite inside a – generally speaking, it’s like an operating room inside the medical practice because it’s in their medical office. It’s used to perform the same surgical invasive procedures involved and level of anesthesia and general, even deep sedation is needed for that. And so for all intense purposes, the function of it acts like a regular surgical room, like in an ambulatory surgery center or even a hospital setting operating room, which probably most people are more familiar with those than they are with it being inside of office space itself.
Michael: And audience, these are actually common in [00:10:00] many states, including California. When these suites are accredited properly by an independent accreditation agency there in California, they’re registered with the medical board. And from a compliance perspective, it’s a less complicated setup than if you actually have a licensed surgery center. And I know we’ve discussed that concept on prior episodes.
Brad: Sure did. Well, thank you for those who don’t know. So Dr. Bock updates his website to add the LA location. Dr. IPA who he doesn’t do hair replacement, he started recommending Dr. Bock to Dr. IPA’s patients. And Dr. Bock started to fly out there to LA and provide these surgical procedures with his awesome team, including his surgical techs as Dr. IPA, again, didn’t have any employees that could assist Dr. Bock with these surgeries.
Michael: Yeah, probably a little context because we actually see some variation of this relatively often. And in particular, people going to LA which is interesting. But I guess the beach. Maybe [00:11:00] a draw, maybe. Yeah, maybe that’s it. The revenues from these services are high, and so it’s not uncommon to kind of have a traveling team that goes down whatever, once a month or some periodic schedule because economically it works if you get them booked.
Brad: That’s right. So Dr. Bock was slowly building up a good patient base and was really enjoying, obviously going out to LA I guess once a month to see the beach. Dr. IPA was happy as both his space was being used, and several of Dr. IPA’s patients were happy that they could get this surgery performed at Dr. IPA’s office. And everything that actually Michael was going great until the California Medical Board, sent a notice to Dr. IPA that he was allowing non-physicians to provide medical services in Doctor IPA’s practice.
Michael: Well, who are the non-physicians?
Brad: So Dr. Bock was taking his surgical hair replacement techs with him; they’re from Austin to [00:12:00] California. And they’re assisting with these procedures, including helping cut and move hair. Now, these surgical techs are unlicensed by any board, meaning that they’re not PAs or NPs or RNs, they’re just well-trained surgical techs, but they have no formal license.
Michael: Okay. And you said Dr. IPA received the notice from California. Did you mean to say Dr. Bock?
Brad: Nope. It went to Dr. IPA as the state of California thought that the servicers were being performed at Dr. IPA’s clinic since the surgeries were being performed at Dr. IPA’s office.
Michael: Okay. We have a lot to unpack. We have two stories today. Thank you Brad. Let’s go into commercial and start to address these issues when we come back.
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Brad: Welcome back to Legal 123 with ByrdAdatto. I’m your host, Brad Adatto, my co-host, Michael Byrd. And Michael, this season, our theme is Growing a Business, and we’re in the scaling season, and we just heard two stories on hair transplant practices that decided they wanted to scale by going to different states.
Michael: Yeah. And let’s kind of recap the Fathead Hair Restoration stories. So we have two entrepreneurs brimming with confidence, full head of hair, bouncing their step, and they thought everybody needs this. And so they decided to open their own clinic and they had a vision that had [00:14:00] all the kind of great slick marketing, nice office, et cetera. They found a doctor to partner with, and that sounds like they were having a ton of success in Ohio. As you mentioned, in Ohio, it’s allowed to be set up the way they were. They stumbled when they moved to Chicago, they opened their second location, and we’ll talk a little bit more about that. But they started up, things were going great, and then bam, got a letter from the IDFPR, you know, having a problem with them practicing medicine in the state, Fathead Hair Restoration, and in particular our Chicago doctor, Dr. Tour.
Brad: Well, I just want to make sure I understood you correctly. So, Michael, is it a problem that these non-physicians were owning the hair transplant company in Ohio? [00:15:00].
Michael: Way to listen, Brad. No, it’s not a problem. Ohio does not have the corporate practice of medicine. So that means anyone can own a business that’s practicing medicine.
Brad: For those that aren’t, Michael, just super high level again, as a quick reminder, what is CPOM or Corporate Practice of Medicine?
Michael: So the states that have corporate practice of medicine, there is a law that regulates who can own a business that is providing medical services. So Ohio, because it didn’t have the law was free. Illinois does have corporate practice medicine, actually, it’s a strict corporate practice of medicine state. And essentially if you’re providing medical services, it has to be owned by a doctor. And you can’t have a business that’s owned by entrepreneurs, no matter how much hair they have on their head.
Brad: Okay. Well said, but since Ohio is a CPOM state, why can’t they just bring that same entity to Illinois with that same [00:16:00] ownership?
Michael: Great question. And we actually get this a lot. Like, is there a workaround? I’ll go form this business in non-CPOM state and then just take that show on the road, and I’ll be good. And it doesn’t work like that. So remember – we’ve talked about this in other episodes. What gives you the authority to practice medicine is your license. The medical license is what you need, and so that is issued in a state. And so what they’re going to look for in Illinois is the license of the doctor that’s licensed in Illinois. And when they look at who can own; that’s not just a doctor. It has to be an Illinois licensed doctor. So you could have even a physician owned business in Ohio, and if that doctor’s not licensed in Illinois, it wouldn’t work. And so, [00:17:00] it doesn’t translate like that. It really gets down to, the easiest way for me to think about it is really getting down to the license of the person over the practice of medicine.
Brad: Gotcha.
Michael: Well, Bradford for those who don’t know. How could the Ohio based Fathead Hair Restoration have set their structure up in Illinois?
Brad: Fathead Hair Restoration just rolls off the tongue. Does it? Well, this is something we’ve talked about in other episodes, but this is a perfect example of that if they had come to Illinois with the idea of utilizing the management service organization model, it would’ve worked in Chicago or in this case, Illinois. What do we mean by the MSO? That’s a situation where this LLC in Ohio could be the management company, it has all the intellectual property, it has all the know-how and knowledge on how to run it, and had our friendly physician here who was actually their co-owner, open [00:18:00] up an Illinois professional limited liability company. They could have entered into a contract known as a management service agreement in which that Ohio entity would help manage and oversee that Illinois professional limit liability company, and that would’ve been perfectly okay. That step of separating that relationship, as some people call it, that church and state, meaning that one’s the medical provider, the PLLC; one’s the business side of it, which is the MSO, and via that legal contract is their connection. And so, that model would’ve been perfectly fine under this particular case. I don’t know if you want to add anything else to that.
Michael: Just one thought, I mean, it’s not uncommon for an entity, a business entity that may be practicing medicine in a state like Ohio to then function as an MSO in another state. That can work. There’s nothing that prohibits that entity from serving in those two different roles.
Brad: And going back to your starting point, it’s the [00:19:00] medical license, which driving that first issue, and this is not a medical license issue. This is just an entity that wants to provide services in more than one state. So Michael, let’s move on to our second story with the Shiner Hair replacement, Dr. Bock and Dr. IPA. Maybe you can give a quick summary since it was a little bit ago.
Michael: Yeah. So the recap is we have Dr. Bock living in Austin, Shiner Hair Replacement has built a great team and a great practice. And Dr. Bock drawn back to his glory days of living in the sunshine of LA where it’s sunny every day and probably not the Austin Summer heat, thought it would be great to figure out a way to at least get there. And in this case, he was going once a month after he had made an arrangement with Dr. IPA. Dr. IPA had the space, they reached a deal for him to kind of lease the space ,come in once a month. And we talked [00:20:00] about this because the economics were so good for these procedures, he would fly his whole team down and they would go and have cases stacked for a day and do their cases and then fly back. And that was all well and good until Dr. IPA, am I remembering this correctly?
Brad: Keep going.
Michael: Dr. IPA got a letter from the California Medical Board saying you’re engaged in unauthorized practice of medicine and or aiding and abetting. And so what we started to unpack is that there was a problem with the providers on the team that were coming in the eyes of California.
Brad: Exactly. And so in this story, again, going back, we have two doctors working together, so we don’t have any of the CPOM issues that was raised in that first story, and Dr. Bock was doing an amazing job in Texas with well-trained surgical techs that you were just describing. Why did the California medical Boards send that notice to that investigation [00:21:00] then?
Michael: And this is tricky for our audience members who have experience in hair transplantation. The techs are everything. I mean, these machines require a lot of training, and the techs are oftentimes actually training the licensed providers on how to use these the first time. And so, it’s a effective and common way that these procedures are done. And in Texas, it’s no big deal because we’ve talked about this on prior episodes. Texas sets up its supervision and delegation rules, or they basically put it on the doctor. If it’s your license that’s on the line, you have to determine standard of care. And if you deem that one of these techs can meet the standard of care with their kind of specialized training to be involved and be delegated to help with these procedures, then that’s allowed, and so it works just [00:22:00] fine. When you go to California, California, their delegation rules are not like that. The delegation rules in California are very specific. They’re statutory – if you’re doing a medical procedure, an RN or higher can be involved, and that’s it. Unlicensed people are not allowed to participate in the practice of medicine or be part of the team.
Brad: Yeah. And that’s a good point. Again, just because you can do it, one state doesn’t always translate the same people can do it even if there are well trained. But Michael, would it make a difference if the surgical techs had received certifications from Texas that they were competent in this surgical procedure?
Michael: No, it’s also a fair question. It does matter in Texas, right. Because in Texas it’s all on the doctor. And so if the doctor can show that they have this specialized training, then that’s really effective to show [00:23:00] that they can meet the standard of care. California doesn’t care about your level of training. They do care about that, but only if you have the appropriate license, which as I said in California, it’s an RN or hire.
Brad: Right. But let’s double click in there again then. So if I have a training certification and I have a very descriptive name, are you saying that that doesn’t equate the same thing as a board certification?
Michael: You’re just trying to trigger me?
Michael: We’ve talked about this in other episodes. Yeah, putting a fancy name next to it doesn’t change anything. I mean, there is great value in all states to your formal license, and we can agree with that, right? So if you go to school and you are an RN, nurse practitioner, PA, then that works. When you have these certificates [00:24:00] that show that you’ve gotten a certain level of training, that is helpful to show that you’ve got skills, but it doesn’t solve anything. What doesn’t help at all and probably actually hurts, is when you come up with a fancy way to describe yourself on your website.
Brad: I thought that would help a lot. Okay, skills are important, agree. Board approval, more important. Alright, Michael. there was another element to Dr. Bock and Dr. IPA and that was the use of the in-office surgical suite. And I’m just going to, for those not paying attention, it’s illegal in California to have it in-office surgical suite.
Michael: You’re just testing me, Brad. No, California. It is allowed. Physicians commonly actually use these. And I mentioned this a little bit earlier at the beginning when we’re just kind of a comment to the story. There’s some rules that go to it. The facility has to be accredited, which again is different [00:25:00] than licensed. Accredited is, there’s four different agencies that are approved by the medical board. And if you have this accreditation, which is not some easy process; there’s a process that goes with that, then you can kind of have this surgical suite as part of your medical practice. And so yeah, they’re very common.
Brad: Now, if that’s not the issue, why did the medical board send the notice to Dr. IPA and not Dr. Bock?
Michael: Well, so remember that this is Dr. IPA’s practice that has the surgical suite. So when you have something happening at this location and you go look it up on the medical board, it’s going to show doctor IPA, and so to the outside world if patients are getting treated in that location, that’s Dr. IPA. And actually, [00:26:00] now that I think about it, you never said this in the story, but did Dr. IPA and Dr. Bock or their entities have any written agreement on this kind of lease relationship you talked about?
Brad: No. Remember they’ve known each other for a long time, so this was a handshake deal that Dr. Bock would pay Dr. IPA when he was using Dr. IPA’s office. And further, Dr. IPA’s surgical suite was part of Dr. IPA’s medical practice, meaning that there was no real separation between the surgical side and the actual just office side.
Michael: Yeah. And so this is important audience, because absent in agreement, this could be viewed as Dr. Bock showing up inside his practice and treating patients in Dr. IPA’s practice because there’s nothing that would say otherwise. And so, now you have Dr. IPA, not only with this potential [00:27:00] kind of compliance risk with the medical board, but malpractice risk that his practice is actually providing these treatments. If you have documentation and you’re saying, we’re subleasing this space to your practice, and you can come in and use the space, and then you double click on that in the agreement and talk about who’s responsible. You hear fancy words like indemnification, and requirements for insurance and other things that would help make the risk align with what they’re actually trying to do.
Brad: Yeah. And audience members, this is why often you might find out that especially with plastic surgery practice, there may be three different entities; one for the in-office surgical suite, one for the actual side where they come treat you, and then finally the non-evasive. But then you know, exactly what we learned later, believe it or not Michael, is Dr. IPA, the complaint was filed by a competitor that just thought it was Dr. IPA’s [00:28:00] because they didn’t realize Dr. Bock’s entity was actually one using the space and Dr. Bock was the one actually supervising the techs.
Michael: Yeah, to the outside world, that’s a common scenario. And of course competitor, we’ve talked about that a ton of times. So, talk about what ended up happening with these two stories.
Brad: So the Chicago location of Fathead Hair Restoration was closed. Dr. Tour was just too nervous by the Board of Investigation to even start considering using the MSO model, so it went away. Now, Dr. IPA’s California board investigation, unfortunately still open. He did obviously terminate the relationship with Dr. Bock, and Michael, I keep saying Beck. Now Michael, these two stories you think about it, demonstrate how quickly you can really step in it when you’re scaling. I mean, the first story is really about a business that which was legit and legal in one state, and this doesn’t work in the [00:29:00] very next state. And in our second story, we have a business model that is using unlicensed individuals to assist with surgery, which is completely legal in one state and not in the next. And finally, almost not to be thought of, but we have a story of a physician needing someone to use their space, not really separating their liability and making it clear to the outside world what entity is actually present. So, Michael, some final thoughts.
Michael: You don’t want to ignore compliance when scaling a business, Brad. Anytime there’s a material change to the business; new location, new service line, new type of employee that you’re bringing on, it’s so important to recognize that you have to assess the impact on compliance. Now, of course, if you want to be like my college buddies with kind of the X-man superpower of bad decisions, then you can just ignore what I just said.
Brad: Fair enough. Well, Michael, next Wednesday, we have two great guests joining us. We have Morris Shore and [00:30:00] Amy Anderson, who will speak on the functional challenges of scaling. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website byrdadatto.com
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