Franchising:
A Business Expansion Solution for the Healthcare Profession
Many healthcare professionals today ironically find themselves with sick businesses. And oddly, the prescription for their business growth may be right in front of their eyes. Itʹ s in the operations manuals guiding the McDonaldʹs® on the corner. Itʹ s in the store design assistance Subway® is using to promote its brand. And it’s in the strategic location strategies mapped out by Panera Bread®. For both the ailing physician who is looking for business help and for the prospering practitioner who cannot grow fast enough, the best course of treatment may in fact be the same: Franchising.
With healthcare professionals often studying for a decade or more just to be able to start their practice, any association with a channel of distribution most frequently equated with fast food could justifiably leave a bad taste in one’s mouth. But strip away the fast‐food connotation and what is left is a proven business model that combines marketing, business, and healthcare best practices with the name recognition and economies of scale associated with a branded channel of distribution. This powerful business combination is rapidly gaining acceptance within the medical community.
iFranchise Group (www.ifranchisegroup.com), is a leading franchise consulting firm that offers the skills of the nationʹ s top professionals in franchise strategic planning, operations training and documentation, franchise marketing and sales, advertising fund management, franchise recruitment, and digital solutions for emerging and established franchise companies worldwide. Within the health and medical industry our consultants have worked with concepts in urgent care, home healthcare, dentistry, pharmacy, weight loss, nutrition, massage, and optometry.
For more information on franchising your business contact us at info@ifranchisegroup.com or by calling (708) 957‐2300.
Increasingly in recent years, medical professionals have begun turning to franchising as a means of expanding in a rapidly changing medical marketplace. Today, everything from eye care (Pearle Vision®) and Dental Care (Comfort Dental®) to Chiropractic Care (The Joint®) and Urgent Care (Doctor’s Express®) have turned to franchising – with many franchise industry experts predicting that the medical profession will be the next industry to see dramatic growth in franchising and thus reap the benefits of the franchise business model.
For those who are not old enough to remember, there once was a time when many markets were dominated by independents. Today, the market that was once dominated by the corner grocery store is dominated by chains like 7‐Eleven®. The market that was once dominated by independent realtors is dominated by the likes of Century 21®. And the market that was once dominated by the independent pharmacist now features franchised systems like The Medicine Shoppe®. Could healthcare be next?
As defined by the Federal Trade Commission, in a franchise model, the franchisor licenses a system of operation, allows the use of a trademark, and receives some payment.1 In business format franchising the franchisor provides a format for the management and operation of the business. The system licensed usually includes elements such as site approval, site design or appearance requirements, promotional programs, training programs, and the provision of a detailed operations manual. The trademark element of the definition is satisfied if the franchisee is allowed to distribute goods and services which bear the franchisor’s trademark, service mark, trade name, advertising, or other commercial symbol. The payment element is met through essentially any payments to the franchisor of at least $500 during the initial six months of the franchisee’s operations. Payments can be in the form of initial franchise fees, mark‐up on product, royalty fees, training fees or other fees.
Thus, if a medical professional wants to develop a branded expansion program in which they would collect fees, chances are that the program would end up being a franchise.
There is some good news for those that still have a bad taste in their mouths: these programs do not have to be called franchises, per se. The programs simply have to be compliant with the applicable franchise laws.
While it will not happen overnight, franchising will increasingly play a dominant role in the professions. And, frankly, in some areas of the professions, it is happening already. Pearle Vision Centers®, with 775 operating locations, is one of the nation’s largest opticians – and each Pearle Vision Center® employs at least two optometrists. According to IBISWorld, the optometry industry is expected to increase at an annualized rate of 2.8% through at least 2018. As the number of people over 65 continues to grow and with ongoing changes in healthcare, a greater number of people are expected to have access to vision care. Industry research confirms both growth and consolidation for retailers and optometric practices.2
Within the realm of chiropractic, which has only more recently seen a rush to franchising, HealthSource® and The Joint® (founded by John Leonesio, the founder of Massage Envy®) combine for 545 locations and collectively employ an estimated 1300 chiropractors. This again makes them among of the biggest players in the chiropractic field – far beyond the average chiropractor.
So why this radical change in the marketplace? And why should we expect it to continue?
First and foremost, many medical professionals may have not had the opportunity to receive any training that would allow them to effectively run their own businesses. After more than a decade of studying how the human body works, the typical doctor may never have had a single course on marketing, accounting, finance, or management; this is why the business training and documentation portion of a franchise system is so important.
At the same time, the typical professional is being squeezed left and right. Malpractice insuranc e costs and frivolous litigation continue to threaten the practitioner’s bottom line. Insurance companies paying medical benefits are putting doctors and medical facilities under increasing pressure to cut costs. In order for practitioners to collect the money they are due, they have to either navigate arcane billing systems, hire billing firms, engage software vendors, or leverage internal resources...all while trying to practice medicine.
2 http://www.ibisworld.com/industry/default.aspx?indid=1560
And while the medical professional is being squeezed, the market is growing tremendously. The aging of the population continues to feed the boom for services as does a proliferation of new treatments. A society focused on health and fitness has more and more people looking for an instant cure to whatever ails them. And increased access to insurance will put more of all types of people in the market. The net effect of this is that the medical professional is often forced to work unreasonable numbers of hours or process patients in an assembly‐line fashion just to be able to make ends meet.
And did we mention the Patient Protection and Affordable Care Act? Currently, of course, the full implications of The Affordable Care Act are not fully understood – even by its proponents. But one thing does seem certain – The Affordable Care Act will bring more change, perhaps more rapidly than in any previous period in history, and that change will bring heartache to some and opportunity to others.
The bottom line, of course, is that franchising will work in the professions because it provides the same advantages that it does in other industries:
1. The patient will benefit by gaining access to an established brand that provides a standard of care to which they are accustomed. Perhaps their benefits will come in the form of new treatment modalities, increased speed of service, improved pricing based on economies of scale, or the ability for today’s mobile American to access the same standard of care in a variety of different markets.
2. The franchisee (assuming it is a doctor) will benefit from reduced risk, improved marketing, improved bill collections, improved coding, improved profitability, and an ability to focus on the practice of medicine instead of the assembly‐line workday that they have been forced to endure these past years. For the medical professional who wants to concentrate on patient care, own their own business, but not spend their days drowning in details of business management, franchising offers an attractive solution.
3. And the franchisor will benefit as do franchisors in other industries ‐‐ achieving a level of profitability that they could never hope to achieve by building their own practice or practice group. For medical professionals looking to expand their businesses by opening additional locations in new markets, franchising allows growth using someone else’s capital and sweat equity. History has shown that opening additional locations through an owner/operator rather than through hiring more staff or location managers can provide greater financial results.
All that being said, franchising in the professions is significantly more complex than franchising a pizza parlor. Anyone considering franchising in the professions first needs to be sure he or she understands the implications of the various laws that can impact the choice of expansion strategy. But while the complexity of medical laws will certainly make franchising a healthcare business more difficult than some other types, it is important to bear in mind that many professional care franchises have already navigated these waters. A brief overview of these laws and regulations and how they have been solved can provide some insight:
The Stark Law3, at the federal level, places a limitation on physician referrals of designated health services for Medicare or Medicaid patients if the physician has a financial relationship with the referred‐to entity. In some cases, state versions go further and prohibit referrals in even broader instances than just the Medicare/Medicaid realm. The franchise relationship can be structured to avoid Stark Law issues. If the franchisor/physician refers patients to a franchisee/physician the franchise structure will need to assure that the referrals are not for any of the delineated “designated health services” or that the referral does not involve federal or state‐reimbursed programs or, more appealing, that the program is structured in such a way as to fall within an exception to the law. The law recognizes an exception for payment by the franchisee/physician under a service arrangement as long as the franchisor is truly only receiving compensation for the types of services and support it actually provides and not as a referral fee. Other requirements also apply. To structure the franchise expansion model so it falls under this exception might require franchisees to pay flat fees instead of fees tied to revenues to avoid the referral‐for‐fee nature of the transactions. Clearly, the Franchise Agreement4 needs to be drafted in such a way to comply with the law.
3 42 U.S.C.S 1395nn.
4 The iFranchise Group does not practice law but can refer you to an experienced franchise attorney. In franchise documentation drafting, any kind of lawyer won’t do. You need an attorney who is experienced in franchise law.
Laws prohibiting the corporate practice of medicine seek to assure that non‐licensed professionals do not control the decisions of medical professionals in providing healthcare. The goal is always to assure the licensed professional retains autonomy of judgment when treating the patient. In the franchise setting, concerns arise if the franchised business providing healthcare is owned by someone who is not a licensed healthcare professional. The most commonly cited case in this area involved Pearle Vision Centers® and the need to separate the medical judgment of optometrists from the business of selling glasses and contacts. In structuring a franchise program, the actual provision of healthcare can be separated from the business services to preserve autonomy. Franchising allows the business end to be handled appropriately, while leaving the independent medical judgment in the hands of the licensed professional. For example, some franchise systems in this sector set up a separate management company to manage the business.
HIPAA5 rules require healthcare providers to maintain the privacy of medical records, medical billing, and patient accounts. It is easy to see how this could be problematic in a franchise setting where the franchisor typically retains access to customer information and has rights to the information after termination of the agreement. The number of landmines in this area are dizzying, as a brief look at the types of cases the US Department of Health and Human Services deals with in this regard (e.g., violations when an employee accidentally puts an insured’s card in another’s bag, waiting room conversations, employer’s access to employee records, or a medical faci lity granting an attorney access to information without a proper limiting agreement).6 Therefore, franchise attorneys familiar with the law have drafted agreements which will fall within the law’s exceptions – such as only giving the franchisor access to permitted information and documenting the franchisor’s legitimate need to look at the information from an operational standpoint.
5 The American Health Insurance Portability and Accountability Act of 1996
6 http://www.hhs.gov/ocr/privacy/hipaa/enforcement/examples/allcases.html#case20
If the franchisor’s marketing drives new patients to the franchisee, or if the franchisor oversees a central number which directs patients to a specific franchisee, can the franchisor be considered a referral source for the patient? If so, Medicare Anti‐Kickback statutes also need to be considered. Recently, there has been close scrutiny of medical professionals advertising on daily deal or coupon websites, because these sites typically take a percentage of the amount the potential patient spends as their commission and this can also trigger Anti‐Kickback Statute concerns.7
Fee‐splitting statutes also need to be considered if the franchisee/physician owns one company which manages the practice (the franchise) and receives fees essentially from itself (another entity) as the physician providing medical services.
After thorough strategic planning and sound legal advice, franchise systems can be set up to fall within one of the safe harbors of these statutes, so that amounts a franchisor collects because of the franchise relationship do not cause a violation. For example, some franchisors charge a flat fee that is truly the fair market value of the services it provides to the franchisee and not in any way tied to profitability.
7 See The Office of Inspector General (“OIG”) addressed this topic in Advisory Opinion 12‐02, issued on March 27, 2012. http://oig.hhs.gov/fraud/docs/advisoryopinions/2012/AdvOpn12‐02.pdf
Medical professionals seeking business expansion through franchising must acknowledge that they are entering a new business ‐‐ the business of selling and servicing franchises. And while the task seems daunting, there is a cadre of experts who can help with the various aspects of becoming a franchisor. The first advisor medical professionals want to consider hiring is the franchise consultant. Franchise consultants (such as the authors) can play a vital role both in the decision to franchise and in the ultimate franchising structure and plan. The second advisor to hire is an experienced franchise attorney with specific experience in healthcare franchising. Out of over 1 million lawyers in the US, perhaps only 2,000 specialize in franchising as best we can estimate. Of those, half serve as corporate counsel. Perhaps half of the remainder represent franchisees. Of the remaining 500 franchise lawyers, a good number focus on litigation rather than the transactional (business) side of franchising. And of the 250 or so lawyers remaining, many have little or no experience in franchising in the professions.*
*NOTE:
iFranchise Group has identified a handful of attorneys who meet these criteria, and we are happy to make referrals as needed.
We take no fees, so we can be impartial in this process.
Franchising in the professions, particularly the healthcare profession, can be very complex for many reasons, from logistic to legal and beyond. However, in an ever‐changing marketplace, healthcare franchises may be the best available solution to meet today’s and tomorrow’s industry issues head on, and to provide benefits for patients and professionals alike. And given the success that some of the healthcare pioneers have had in this segment, all signs point toward the increased acceptance of franchising as a growth vehicle within the professions.
If you would like further information on franchising in the professions or would like a referral to a qualified franchise attorney, contact us at 708‐957‐2300 or info@ifranchisegroup.com