Ketamine clinic providers engaged in the off label application of ketamine for patient treatment are nothing new in U.S. healthcare. What is relatively new is that many “psychedelics” companies are trying to infiltrate the ketamine clinic scene. These companies hope to gain a foothold, then expand into a fuller suite of psychedelic treatment services once cities and states decriminalize and/or legalize.
This recent trend is creating some interesting overlap between psychedelic and established health care cultures. What many new companies don’t realize when considering their entry is that ketamine clinics exist in a world of heavy healthcare regulation on the state and federal levels. Ketamine is a Schedule III controlled substance. For whatever reason, many of these recent entrants believe that this kind of healthcare regulation doesn’t apply to them, but nothing could be further from reality.
For investors, management services organizations (MSOs), healthcare providers, and everyone in between looking to create, work with, buy the assets of, or acquire a ketamine clinic, here are the red flags and warning signs to look out for:
Corporate practice of medicine (CPOM)
This is a big one that shocks newbies to U.S. healthcare and ketamine. We’ve written extensively about the CPOM doctrine on this blog. See here, here, and here, for example. If you’re dealing with anyone in the ketamine space who is clueless regarding CPOM, you need to think twice about how serious they are regarding compliance.
Many of the largest markets for ketamine clinics–like California and New York–are medium to very strict CPOM states, and parties need to proceed with extreme caution regarding corporate set-up, as well as implementation of any kind of “captive PC model”. This includes attention to fee splitting and the fair market value of consideration paid to the MSO. An important footnote here is that CPOM is different from state to state and it’s created by statute and case law, both civil and administrative.
Another pitfall in the ketamine space for newcomers is the variety of state licenses required, depending on the type of patient treatment to be provided. There are different licenses required by different states, depending on factors like whether ketamine will be used to treat mental health disorders, or drug rehabilitation. There is no “one size” fits all approach to licensing–it needs to be researched and confirmed. And even then, actually speaking with regulators is the wisest way to proceed.
Most ketamine clinics do not take insurance. However, some are starting to take it. Whether it’s private insurance or attempting to get reimbursed by Medicare, Medicaid, or the VA, taking any insurance money, especially federal, can trigger very serious fraud and abuse laws and other regulatory compliance. Violations of certain of these laws can even lead to criminal prosecution under federal law. For a breakdown on what you need to know if you’re taking insurance, or planning on it, see here, here and here.
Many new players to ketamine have no idea how to diligence an existing MSO or professional entity or healthcare provider (they also oftentimes create deals that don’t comply with applicable health care laws). These operators typically hire standard M&A/corporate counsel who also have no idea how to diligence healthcare assets and personnel. Do yourself a favor and get legit corporate and transactional healthcare counsel that can help you as either a buyer or a seller navigate the healthcare specific due diligence that goes along with these clinics, as well as set up a compliant deal structure (including for JVs).
Applicable Standard of Care
If you’re new to ketamine clinics as an entrepreneur or investor, you may not realize that the drug’s application requires the direction and guidance of a licensed healthcare professional (depending on state law). To even possess and administer ketamine, a facility and practitioners need to be registered with the Drug Enforcement Administration (“DEA“); unlicensed laypeople can’t just start administering ketamine and treating patients– unless they want to be charged with the unlicensed practice of medicine and/or the healing arts.
Additionally, the off label use of ketamine for treatment of patients is exclusively up to the health care provider and the applicable standard of care for the relevant patient. More broadly, the applicable standard of care for ketamine in an off label capacity is a moving target. Some health care associations have issued guidance on what they believe it should be for their practitioners, but this is something that is up to the provider, not unlicensed, non-healthcare providers.
Many of the new kids on the block to ketamine want to implement telehealth. They get into areas that they shouldn’t mess with without significant study. Each state has its own telehealth laws. They inevitably include very specific laws and regulations around the online prescribing of controlled substances (plus the federal law framework around the same, too).
We’ve seen some of the worst behavior in the space when it comes to telehealth, and that’s probably because of the many COVID waivers issued by the federal and state governments around telehealth. However, almost all of those state waivers have expired or are expiring. It’s inevitable that enforcement is going to pick up around some of the ketamine telehealth practices we’ve seen put into action.
The big picture on ketamine red flags and warnings
While the psychedelics revolution we’re witnessing is pretty awesome, ketamine stands apart with its established healthcare regulatory framework. Starting and running a ketamine clinic is no picnic. It’s also expensive because different state and federal laws apply throughout the life of the clinic. Anyone looking into the space as a business opportunity should seriously consider the foregoing red flags and warnings before going full boar.
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