A few months ago, I wrote a post entitled “Making Money in the Psychedelics Industry Will be Harder than Cannabis.” The post was focused mostly on hardships that state-legal psilocybin businesses will face in places like Oregon and Colorado, where I think the deck is heavily stacked against them. Today I want to examine a business model that, in some senses, faces even more hurdles than psilocybin businesses: ketamine clinic management services organizations (MSOs).
Before getting into why MSOs face so many obstacles, it’s important to recognize that the ketamine industry is really nothing like the regulated cannabis industry or the emerging psilocybin industry. Ketamine is a schedule III drug under the Controlled Substances Act (CSA), meaning it is prescribed and/or administered by licensed healthcare professionals. If these processes are followed correctly, then ketamine administration is legal at both the federal and state level. BUT the problem is that healthcare regulations are exponentially more complicated than cannabis or psilocybin state-level regulations.
One way that ketamine clinics are hyper-regulated is through what’s known as the corporate practice of medicine (CPOM) doctrine. CPOM limits ownership of medical practices to certain licensed professionals. Some states don’t have CPOM requirements, but many do, and some are extremely restrictive. A layperson in California, for example, is categorically forbidden from owning an interest in a professional medical corporation.
That’s where MSOs come in. MSOs are organizations that provide discrete management services to ketamine clinics. Think of a management company for a cannabis business (or really anything else). MSOs generally are not regulated like medical practices are, meaning lay person ownership may not be an issue. But that’s essentially where the easy part ends. MSOs are highly regulated in a few key areas that make success difficult, if not nearly impossible. Here are some of them:
- MSOs make their money in exchange for providing management services to ketamine clinics. But many states severely restrict what kinds of services MSOs can even provide to medical practices. See here for a description of Washington’s restrictive laws. By limiting the amounts of services an MSO can provide, states definitionally limit the amount of money an MSO can make.
- MSOs may be restricted or even prohibited from any kind of fee-splitting or revenue sharing with a ketamine clinic. An MSO may want a percentage of revenues or some split of fees, but if a state says no to that, it’s not going to happen without massive consequences.
- There can be massive liability under federal laws and even state laws for referrals, including under the federal Stark Law. There can also be liability under state and federal anti-kickback laws (see here and here). It’s very easy to implicate these laws when ketamine clinics farm out services to MSOs, and can in some cases lead to criminal liability.
- State laws impose many restrictions on how physicians market or advertise their services. Physicians will often be responsible for the misdeeds of their agents, including MSOs. MSOs will therefore have their hands tied when it comes to advertising (assuming they follow the law) and may not be able to advertise in a way that is likely to bring in more patients.
- Insurance reimbursement is often not available for ketamine infusions, which can be notoriously costly. Many providers don’t even consider insurance and operate solely on a cash-pay basis. Because of the potential high cost of infusions, this naturally limits the scope of patients who would otherwise undergo treatment if they could afford it. And the limitation on business for the practice means that MSOs will be limited in their own service payments.
- MSOs usually do not have a great deal (or any) control over the physician practice. A physician may decide to close up shop, sell its business, or terminate an MSO agreement, leaving the MSO to hold the bag. There are some ways to deal with this in certain states, but it’s less than ideal and far from an ironclad way for an MSO to protect its relationship.
It should be clear that operating an MSO is tough. Making money is even harder. Folks who rush into the space with little background in this highly regulated field can expect to spend a LOT of money with an uphill battle just to recoup their investment. This isn’t to say that ketamine clinics and MSOs can’t succeed, but just that doing so will be tough.