Considerations for “Start-Ups” and New Service Lines in Virtual Care
Health care providers of all types are increasingly interested in exploring the idea of expanding or adding virtual care services. Hall Render Shareholders Chris Eades and Colleen Powers discuss what considerations should be made before adding virtual care to your business.
Attorney, Hall Render
Attorney, Hall Render
Chris Eades: Hello. Welcome to Hall Render’s virtual care podcast series. Today’s focus will be on virtual care startups, whether a new virtual care enterprise or perhaps an expansion of virtual care services. My name is Chris Eades. I’m a shareholder here at Hall Render and a member of our firm’s virtual care team. I’m joined today by one of my fellow shareholders, Colleen Powers, who’s a member of our health transactions group and who has particular experience with startup entities, applicable business structures, and healthcare-related transactions.
Welcome, Colleen. Maybe before we dive in, could you tell us a little more about your individual practice?
Colleen Powers: Sure. Thanks, Chris. I’m glad to join you today. My practice is, as Chris mentioned, primarily focused on healthcare business transactions and also working with startup entities, whether that’s kind of figuring out the developmental stages of what do you want the business to ultimately achieve and then how do you determine the appropriate corporate structure and form that that should take to achieve those aims? I work with hospitals, health systems, physician, physician groups, and other entities that are kind of ancillary service providers in the healthcare space.
Chris Eades: Great. Well, Colleen, on the point of startups, we are increasingly contacted by healthcare providers and other types of business entities that are interested in providing virtual care services or perhaps expanding virtual care services. These entities often want to roll out these ventures in multiple states, if not all states, right? It’s, at this point in time, typically a more expansive business plan.
There are always a host of virtual care-specific professional practice rules and payer rules that we need to assist to navigate. But more fundamentally, there are a number of business-specific requirements and considerations that come into play. I appreciate you taking some time today maybe to highlight those considerations. Let’s start with the type of entity. When a healthcare provider or other individual wants to start down this road to providing virtual care service or services, what are the primary options available in terms of the type of entity?
Colleen Powers: Sure. There are, I would say, two that are really commonly in play here. One is an LLC, or a limited liability company. Then, the other is a corporation. The corporation can really take two different forms. You can either be treated as an S corporation or a C corporation. With respect to the S corporation, there are some more restrictions around that. There’s some limitations around the number of shareholders. There are certain parameters around who can be a shareholder. There’s restrictions on the types of classes of shares that may be had. That being that there can only be one class. There’s also some restrictions around profit allocation. However, if you look then at the other side of the corporation structure, you have your C corps. Those are ultimately going to be subject to double taxation. In those cases, the profits of the corporation are taxed at the entity level. Then also there’s taxation that occurs when dividends are distributed to shareholders.
The other form, and the one that we see put in play most often, is the limited liability company. With that, there’s a lot more flexibility from a tax standpoint. There’s also a lot more flexibility with respect to what states tend to require of a limited liability company, kind of everything from filings to what needs to be in place from a governance standpoint. For example, an LLC or a limited liability company will allow the owner, owners to say whether it’s going to be member-managed or managed by a board of directors. LLCs tend to be certainly the most favored form of corporate entity, just because of all the flexibilities that come with that corporate structure.
Chris Eades: Let’s maybe then focus on LLCs a bit more. Can you speak to what’s involved generally in creating an LLC? You just mentioned some of the documents that may come into play, but maybe highlight what’s involved to establish an LLC and some of the most relevant documents that will come into play and the basic timeline for accomplishing all of this.
Colleen Powers: Sure. With an LLC, and this holds true for corporations as well, your first step is going to be filing your articles with the applicable state that you’re going to essentially set up that operation in. For LLCs, they are referred to as articles of organization. Generally, corporations are articles of incorporation. Every state is going to have these days, fortunately, a pretty simple form that many of them will allow you to do it online. You have to plug in some basic information such as the name of the entity, address where it’s going to conduct business. You need to have a registered agent and address where any mailings can be sent to. Some states will require you to have a physical location beyond a PO box in that state where you’re conducting business. Ultimately, once you file those articles, it can really take anywhere from, we’ve seen less than 24 hours for it to be approved by the secretary of state, to really up to a few weeks. It’s very state-dependent.
Chris Eades: Maybe before we move on to the next question here, you had mentioned that with respect to certain states, and it does sound like this is state-specific, that there may be requirements to have an actual brick and mortar presence in a particular state as opposed to just a PO box. Is that correct?
Colleen Powers: Yes, some states will require that. There are not many these days that do require that, but some do. The other thing to keep in mind is that there’s a lot of services, or business entities, I should say, that serve as a registered agent or registered address in that area. You can pay a third-party to kind of stand in the shoes in that way and serve in that capacity.
Chris Eades: Gotcha. Yeah, and I thank you for that. I just want to highlight that point, I guess, for the audience. We talk a lot in the context of virtual care about the barriers to virtual care. One of the barriers is the regulatory complexity in terms of trying to offer these services in multiple different states. But one thing it certainly sounds like that startups and other entities need to be mindful of as they move into these different states, is it’s not just the virtual care-specific rules that may come into play, but also some of these just business-specific rules in terms of establishing these entities.
For example, in terms of what you mentioned, and I’m aware of the same, that there are some states out there that actually require on their books per their regs, a brick and mortar presence to establish a legal entity in that state. That certainly could be a factor when your business model is to not be there physically, but instead be there virtually.
Colleen Powers: Yeah, that’s right, Chris. Some of them kind of go beyond the needing to have the registered agent there to have an actual brick and mortar in a particular state. That’s generally to establish the entity. As you’re thinking about your virtual startup, you might think about where one or more of the owners actually has a home. That can be your registered office. But then, if you think about all the other states in which you want to conduct operations, that’s where you then need to consider the need to file with each of those additional states where you’re conducting business as an entity that is doing business in their state. That’s an additional filing that you need to be mindful of any time you’re conducting business in another state that you’re then registering that entity with those respective secretary of states as well.
Chris Eades: Colleen, what are some of the other more basic business issues that a newly-created entity should consider? Once we’ve established here what type of entity and we’ve gone through those initial steps to create the entity, what are some of the other more essential considerations that immediately come into play?
Colleen Powers: Sure. I think then you want to start thinking about the activities that you’re conducting and what additional filings need to occur with respect to the various federal and state agencies. One that’s going to be applicable across the board is you’re going to need to obtain a tax identification number, a TIN, also referred to as a employer identification number, or EIN. Those terms tend to be used interchangeably. That needs to be obtained from the IRS. That process is really pretty straight forward. That’s kind of step two once you’ve actually formed the entity.
Other considerations are if you’re going to have employees, then you’ll want to file with the State Department of Workforce Development, or whatever that equivalent is, to indicate that you do have employees on your books. Any states where you’re conducting operations you’ll also want to consider do you need to register with those local or state department of revenues as well? I think it’s kind of sitting down and mapping out any of those other agencies that might be in play and that you might have some reporting obligation to.
Another thing to think about that’s kind of just outside of the legal realm, but you’ll want to sit down with a broker and sort through what is the scope of your services and what sort of insurance coverages do you need to appropriately protect your business. At a minimum, I think about directors and officers, insurance and coverage that’s going to provide any of the owners and officers with some protection.
Then finally, I would say ensuring that you along the way are following appropriate corporate formalities to ensure that you preserve the integrity of the business. By that, I mean that there’s a clear distinction between what you were doing as an individual and what you were doing as a business. That means ensuring that you have meetings. Those are documented by minutes and you show those actions that are being taken as the corporate entity separate from yourself. That allows you to ensure that if there’s a third-party claim, that third-party claimant would come to and look at the business entity as the party to pursue some recourse against and not you as an individual personally.
Chris Eades: That’s a really important point. I’m glad that you mentioned it. We tend to talk about insurance in this realm more in the context of professional liability insurance, which is also, of course, important. But I think these other types of insurance that you mentioned, certainly business entities want to be familiar with. To your point, want to not only have the coverage, but establish their entity in a way that will end up affording them the protections that they intended to have. We will no doubt see, as we get further into virtual care, more litigation involving these providers. It’s just so very important I think as a provider to recognize that even though you may be physically located in one state, if you are offering the service in another state, maybe across the country, that you can very easily then be sued in that other state, right? It’s not just a matter of will you prevail in that litigation? It’s a matter of needing to actually be there in that state to deal with that litigation, which in and of itself is a huge concern. I think that’s a good point.
Let’s segue maybe into corporate practice of medicine. This is an issue that is increasingly coming up in the virtual care arena, particularly when an entity wants to provide services in different states. Corporate practice of medicine, or CPOM, not a new concept, obviously. CPOM exists in general, of course, to prevent corporations or other business entities from actually practicing medicine or other healthcare specialties. Or put differently, the concern here is that we want to make sure that only licensed individual providers who are trained to do so are practicing medicine, or these other specialties, and that these individuals are not being unduly influenced by corporations or other business structures.
Again, not a new concept. Most states have a CPOM rule, probably about two thirds of the states, I would say. But CPOM state to state is highly variable, much like all the rest of this stuff that we ended up talking about in the context of virtual care. Very few states actually have just a very simple, straightforward CPOM statute. Quite often it’s a collection of maybe some cases, sometimes really old case law statutes and rules that kind of collectively you have to piece together to establish what the CPOM structure is for a state.
Then even then, you have this really significant variability. Some states are highly restrictive, for example. California is probably the best example. New York has some fairly restrictive CPOM rules. Other states are restrictive, but has some pretty expansive exceptions. Many states, for example, have exceptions that allow hospitals to employ providers, things along those lines. Some states have these rules, but haven’t enforced them in years. Then you have variability in terms of application. Do these rules apply only to physicians? Or do they apply to other types of healthcare practitioners, maybe behavioral health or pick your other specialty?
Highly variable, many would say CPOM is an outdated concept just given what we’ve seen with the employment of practitioners across the board and contracting, et cetera, but it’s still something that exists and that we have to pay attention to. And as I mentioned at the outset, is increasingly a concern here, right, because it’s so easier now for us to be in different states to practice through virtual care. It means that as an entity, if that’s who we are to provide these services or that’s who we want to be, we’ve got to consider whether we’re going to violate the CPOM rules state to state.
With all of that said, Colleen, in those states where CPOM is a pretty significant issue and there’s no viable exception that would exist, what type of business structure do you see commonly employed to navigate or be in compliance, I should say, with the CPOM rules?
Colleen Powers: Sure. Yeah, that’s a good point and something that tends to come up a fair amount. What we tend to see is the deployment of what we commonly refer to as a friendly PC or a friendly physician model. With that, we’ll look to establish an entity that is ultimately owned by a licensed professional, tends to be a physician or a dentist or whatever field you’re operating in at the moment and whatever that state requires. Then, we’ll just kind of categorize them all as a licensed professional.
That licensed professional will then ultimately own a corporate entity. That corporate entity then holds any of the assets or decision points, I should say, that are required to be held by a licensed professional pursuant to that state’s regulations. It tends to involve and require that entity to then hold the medical records or ensure that it indicates that that entity is responsible for anything related to a clinical decision or patient care policies and procedures. As you mentioned, Chris, I mean, every state is completely unique and so is the subspecialty of the services that are ultimately contemplated to be provided. There needs to be a careful analysis of what the state laws say.
Then, so once you kind of craft that friendly PC and give that friendly PC the requisite control and assets that needs to be managed by a licensed professional. Then we look to put some other related documents in place, which ultimately then tend to move the financial proceeds of that entity over to another. It tends to be an MSO or management services organization-like entity. Then that MSO entity essentially is the sister to the friendly PC. That entity is then going to manage and hold everything else that is not required to be managed by the licensed provider under applicable law.
Chris Eades: Probably, Colleen, a good segue into mentioning state-specific fee-splitting provisions. Again like CPOM, some states have them, some states do not. Some states may have one, but not the other. But the point being that the state may have specific fee-splitting prohibitions that disallow a provider from apportioning some percentage of fees to a business entity and really for the same essential reason that we see the CPOM rule. We don’t want undue, or the state does not want undue influence or control over what the practitioner is ultimately doing.
I think the takeaway here on that point, from my perspective anyway, would be A, recognize that those fee-splitting rules may be out there, B, recognize that if you do create a friendly PC structure where there is this management concept in play, be sure that whatever the payment structure is from friendly PC to back the sister entity for those management services does not run afoul of those fee-splitting provisions. In other words, you may not be able to structure that relationship based upon a percentage of fees or some sort of an apportionment directly from those fees. It may need to be another payment structure that is consistent with those fee-splitting provisions.
Colleen, are there any other, you mentioned I think a lot, but in recognizing that it is state-specific, but are there other considerations for establishing a friendly PC?
Colleen Powers: Just as you dig into that sister structure that I mentioned, there tends to be some additional agreements that are in place between those two entities. For example, the licensed professional that ultimately owns the friendly PC will generally sign some form of an agreement which outlines the scope of the arrangement. That does have some restrictions tied to their ownership. It tends to include some provisions about the succession plan. If that licensed professional is no longer practicing there, then they agree and commit to transition that to another licensed healthcare professional that is someone that the MSO entity might support, for example. There’s kind of a mix of other documents that are in play to ultimately dot the I’s and cross the T’s and pull the arrangement together.
Chris Eades: Colleen, beyond the creation of new entities, you’re heavily involved in healthcare-related acquisitions and mergers. Do you see the potential for these types of transactions in the context of virtual care?
Colleen Powers: Yeah, I mean, absolutely. We’re seeing a lot of consolidation right now that’s built around the notion that scale really allows for increased efficiencies and results in healthier companies, both from a care delivery and a profitability standpoint. I think about in the virtual care environment, if you can do one of the few things, whether it’s building a comprehensive network of providers that’s attractive to a potential buyer, you have the best practices in place for that platform or you’ve developed some unique software that really causes that virtual care environment to run really well, I think each of those are very interesting pieces that a virtual care provider can bring to the table and ultimately be the basis for an even larger platform. I think if you do that, that makes you a very attractive target too. For example, we’re seeing private equity in the healthcare space increasingly. This just seems like an area that is right for that.
Chris Eades: When an entity is considering a potential transaction along these lines, what initial steps or considerations do you usually recommend?
Colleen Powers: Yeah, I would think about, as an owner of the organization or officer, what do you want for that entity one day? What do you want it to evolve into? Then, how long do the key stakeholders in the arrangement want to ultimately be in this game? Because once you move into a sale, I think one of the key questions is what role do the individuals want to play? Do you want to preserve some level of control? Do you want to be in a president or officer’s seat and involved intimately in the growth and development of the organization? Or are you looking for something where you’ve kind of built something and you want to sell it off and move on to something completely different?
I think answering that question is really the first step to figuring out who is going to be an attractive potential partner for you. Then the other thing I’d say is, it’s important to keep a close eye on the market. A lot of times being one of the first ones to the table with a very solid platform is going to yield the biggest return on your investment. I think watching market forces is another key factor. Then ultimately figuring out who’s out there as a potential buyer and starting to feel out what opportunities might be available.
Chris Eades: Well, great, Colleen. Thanks for your insight. To our audience, thanks for joining us today. If you or your organization have any questions or topics that you would like to share with us, certainly feel free to contact us via our website at hallrender.com. Feel free to reach out to me at firstname.lastname@example.org or certainly Colleen at email@example.com. Thanks again.