Risky business: Franchises offer opportunities and gambles

After nine years in practice, Brent Greenberg, MD, was fed up with the hassles that come with the business of medicine. So he decided to look for something that would complement his work and still generate revenue.

What he found was a skin-care clinic franchise looking for physicians to own outlets. In August, Dr. Greenberg and another physician paid a $75,000 franchise fee to open Dermacare of Rancho Bernardo, a laser aesthetic skin care franchise in San Diego.

Dr. Greenberg, a family physician in Escondido, Calif., said the franchise was consistent with his interest in skin care -- and his interest in gaining control of his practice's future by finding something to buttress the reimbursement cuts his practice is seeing.

"For me going into this area, it's part of the desperation factor. I'm tired of working 14-hour days," he said.

It appears that more and more franchises are reaching out to physicians who think the same way. These franchises offer the chance to launch a medical spa, skin-care center, weight-loss facility, smoking cessation center or other services perceived to be in high demand by cash-paying patients.

In return, physicians pay a franchise fee and a portion of all revenue. Also, the physician agrees to operate under the franchiser's rules. There isn't the freedom of an independent business, but franchisers say there aren't as many of the hassles -- including building up a brand name.

There are no exact numbers on franchises with physician owners, but a quick Web search turns up numerous results for chains pitching to physicians.

Hannelore Leavy, founder and executive director of the Union City, N.J.-based International Medical Spa Assn., said although the industry didn't really take off until four years ago, there are now nearly 1,500 medical spas operating in the United States, about a quarter of which are franchises.

Dr. Greenberg's franchiser, Phoenix-based Dermacare Laser & Skin Care Clinics, says it has about 150 franchises nationwide, all owned by doctors, and it is growing quickly.

"Investing in one of our franchises provides a cash-based opportunity for physicians to generate revenue and still practice medicine without the insurance reimbursement headaches associated with a traditional practice," Dermacare founder and CEO Carl Mudd said in a July 21 news release. "As an added benefit, a Dermacare franchise offers substantial value as a financial asset."

Before considering if owning a franchise is a good business deal -- and given that some franchisers demand a significant portion of revenue and control, it may not be -- a key question to ask is: Is it consistent with the ethical practice of medicine?

Robert Greenberg, MD, chair of the ethics committee of the American Academy of Dermatology, said much of the issue boils down to whether these facilities have the best interests of the patients in mind. (He is not related to Brent Greenberg, MD.)

"The patients' best interest should be foremost. There is a major ethical issue if you promote or sell things to patients that aren't in their best interests, don't have any value -- if they're worthless or snake oil," he said.

Though the ethical line is a little harder to discern when considering cosmetic services that patients request, he said physicians still need to offer something of value to patients at franchise businesses. "If it's just to make money and sell the products to patients whether they need it or not, that bothers me a great deal," he said.

The AMA does not have policy that specifically speaks to medical franchises. But it does address investment in health facilities and selling products out of the practice and the inherent conflicts of interest such ventures can bring.

In each policy, there are strong warnings about doing anything to pressure or otherwise unduly induce patients into using your facility's services or buying your products. The policies state that physicians should be up-front with their patients about their investments. In most cases, physicians who own franchises also continue their existing practices.

"In general, physicians should not refer patients to a health care facility which is outside their office practice and at which they do not directly provide care or services when they have an investment interest in that facility," AMA policy states. "The requirement that the physician directly provide the care or services should be interpreted as commonly understood." That doesn't mean the physician always has to be on site, but "there has to be significant on-site involvement" -- clinical, not just administrative.

"If [doctors] place their good name and medical license" behind a medical franchise, then "they have a responsibility to themselves but also to the patients treated under the auspices of their name to ensure that good quality care is delivered," said Robert Clark, MD, PhD, a dermatologist in Cary, N.C.

Dr. Clark and his partners opened an independent medical spa in November 1998. They avoided using the franchise model, which he said can be abused by franchisers using physicians for their names only.

A complicated deal

Franchisers, of course, say they are not using physicians for credibility, but are leading the charge for a new kind of medicine -- retail medicine, as reflected in greater consumer awareness of price, quality and convenience. The same kind of awareness that has led, for example, to the rapid growth of branded, in-store clinics.

The pitch from franchisers is that they offer the business expertise, marketing savvy, brand-name recognition and equipment, and financing economies of scale physicians couldn't get otherwise. "What you're getting is a lot of headaches prevented, trying to figure this all out on your own," Dr. Brent Greenberg said.

Still, it's not always as easy as it looks.

"In choosing a franchise opportunity, ask what are they offering, who is their market, what types of services are they backing and does that fit with the physician?" said Monica Tuma Brown, a spa and wellness consultant from Wayzata, Minn. Also, "you really want to look at how much support you get from the franchiser." That could mean examining whether the franchiser offers training programs, how the product and equipment lines are selected, what location restrictions may be in place and more.

Roman Kupchynsky, an attorney with Gardere Wynne Sewell LLP in Dallas, added: "To me, you need to look at the term, how easy is it to get in and out of the contract, what are the termination penalties, what are your obligations, what do you have to pay and what are your royalty obligations? And how easy is it for them to pull the plug on you, and if they do, does it terminate the business?"

Check the laws

A physician also needs to investigate state laws about how much time and supervision physicians must give to the facilities. Then there are regulations about which medical personnel can perform which task.

For example, a recently passed Florida law says that only dermatologists and plastic surgeons can oversee medical spas. Those within the franchise world say they expect to see more stringent regulations come down as "retail medicine" grows, and some franchisers have gone public to say they support that direction because it will boost consumer confidence in the whole industry.

Also, self-referral is illegal under federal law, and most state laws govern the corporate practice of medicine and fee-splitting. Attorneys say physicians have to ensure, first, that their contracts give them total control over medical decisions. They also need written assurance that there is no expectation that their practice is serving as a base of referrals.

Lawyers also advise physicians to set up a separate legal entity to handle the franchise so it does not appear that money from the practice is making its way to the franchiser. Attorneys say creating that separate entity is also the best way to protect practice assets from any potential legal claim against the franchise.

And there's no substitute for a physician's own research. Matthew Werner, MD, a family physician in La Quinta, Calif., asked questions about the company's balance sheet, researched its reputation and did as much due diligence as he could before agreeing to open a medical spa with Solana MedSpas.

Solana uses a syndication business model -- unlike a franchise, each facility can be independently named, marketed and branded. But the facilities operate under business agreements similar to those of franchises.

Dr. Werner and his wife, Edith Gonzalez Werner, MD, also a family physician, became interested in opening a medical spa after attracting significant interest for the spa-like skin care services that they offered in their medical practice.

After paying an initial $55,000 fee to Solana, they opened La Quinta MedSpa in November 2005. Dr. Werner said a percentage of the monthly revenue goes to Solana, though he wouldn't say how much. So far, it seems to be a positive investment. "I can't say we're taking out tons of money. But we're paying the bills," he said. "[And] we're real enthusiastic."