There has been a notable uptick in clinical research sites being bought out by private equity and venture capital companies. This trend signifies the growing recognition of the value these sites hold, not just in terms of their operational capabilities, but also through the critical data they generate. However, for both buyers and sellers, there are significant considerations to keep in mind to navigate these transactions successfully and ethically.
Before purchasing clinical trial sites, a private equity or venture capital company (collectively, “Buyer”) must have a clear thesis as to why such acquisitions make sense. Various reasons have included wanting to:
- acquire the data associated with clinical trial participants;
- dominate a clinical research market for a specific disease state;
- dominate a specific clinical research geographical area; or
- vertically integrate into the clinical research space.
Small clinical trial sites are typically structured to ensure that a physician is providing services to the clinical trial site—i.e., the physician serves as a contractor to the clinical trial site and is providing medical services as part of that contract. This, however, can raise significant issues during an acquisition. This article discusses several crucial considerations for Buyers and one option for addressing them.
Privacy Considerations
The Health Insurance Portability and Accountability Act (HIPAA) Privacy Rule requires compliance with “national standards to protect individuals’ medical records and other individually identifiable health information” (“protected health information” or PHI). HIPAA applies to a variety of stakeholders who conduct certain healthcare transactions electronically. State laws also have a meaningful impact on data collection and privacy in this space. California investors alone may need to deal with the California Consumer Privacy Act of 2018, the California Privacy Rights Act of 2020 amending it, and the state’s Confidentiality of Medical Information Act. Without a federal law unifying and simplifying requirements, this hodgepodge of privacy requirements has been, and continues to be, a challenge for Buyers and must be appropriately reviewed to minimize susceptibility to seemingly unlimited fines and penalties.
Compliance with privacy requirements can be pivotal for a deal. Buyers hoping to acquire data associated with clinical trial participants have approached sites to acquire access to subject data in the context of licensing or a sale and thereby enable data brokers to maximize their data chests. However, the lack of appropriate and preexisting consent has often stymied such goals due to the inability to contact past clinical trial subjects at scale.
Regulatory Due Diligence
The quality of clinical research and the integrity of the data produced hinge on robust quality programs and oversight mechanisms. For Buyers, assessing the effectiveness of these programs at the target site is crucial. This assessment includes evaluating the site’s adherence to Good Clinical Practice guidelines and whether a competent quality assurance team is present. An effective quality assurance program may often include having in place defined goals, a clear list of standard operating procedures that are routinely updated and that staff are routinely trained on, and audits.
These audits should be conducted by both internal stakeholders and external consultants to minimize bias. Externally, clinical trial sponsors and clinical research organizations will routinely conduct such audits, since they are intended to improve the functioning at an individual site and also to ensure that if the US Food and Drug Administration (FDA) ever audits the site, the records are appropriately maintained. However, the FDA may nevertheless find problems at the clinical trial site. Such findings, even if addressed, have been deemed devastating by multiple clinical trial sites. It is therefore important for a potential investor to identify potential audit findings and evaluate the implications of such findings on valuation.
Preventing the Corporate Practice of Medicine
One of the foremost considerations in the context of clinical trial site acquisition is the consideration and prevention of the corporate practice of medicine. This doctrine, which varies by state, generally prohibits corporations or non-physicians from practicing medicine or employing physicians to provide professional medical services. It is intended to ensure that medical decisions are made by qualified medical professionals rather than corporate entities driven by profit motives, or individuals who may not adequately appreciate the medical decision-making process.
Some argue that research is exempt from corporate practice of medicine rules. Nevertheless, this conclusion is generally deemed to be premature and may need to be evaluated on a case-by-case basis. By way of example, while the definition of the practice of medicine varies from state to state, the implementing regulations of the Texas Medical Practice Act specifically define “Actively engaged in the practice of medicine” as including “clinical medical research” and “the practice of clinical investigative medicine.”
Some states, such as Michigan, will not allow physicians to be employed by non-physicians and only allow physicians to form professional corporations, professional associations, or professional limited liability companies so that they are owned exclusively by physicians. Accordingly, in such states, a clinical trial site engaged in the practice of medicine cannot be owned by a Buyer who is not a physician. On the other hand, several states, including Arizona, allow non-physicians to own a portion of a professional corporation that practices medicine, but they limit this to a 49 percent interest or other noncontrolling interest. In certain states, this also means that only the physician’s office can bill for medical services. In other states, however, no such requirements are imposed on clinical trial sites. This variability can have a dramatic impact on the value of a clinical trial site, and the appropriate structure of the relationship between a physician and a clinical trial site. It is therefore important to conduct a state-by-state analysis to evaluate the definition of the practice of medicine, its application, and its implication for the corporate practice of medicine to evaluate how it applies to your target research site.
Ownership Considerations
When a Buyer purchases a clinical trial site, they hope to not only own the site, but also prevent the physician performing the research from starting a competing clinical trial site next door.
As discussed above, depending on the state, Buyers may not be able to actually own the doctor’s office or the research site that performs medical services—since that could violate state law.
The Federal Trade Commission (FTC) has proposed banning noncompetes. A Texas district court recently struck down the FTC’s new final rule banning noncompetes. However, this created a circuit split with a Pennsylvania district court, which determined that the plaintiff failed to show it would be irreparably harmed by the noncompete rule and that the FTC had the authority to issue the noncompete rule. Nevertheless some states like Pennsylvania have independently banned noncompetes for healthcare practitioners. Buyers therefore have limited ways to prevent physician flight or prevent physicians from starting a competitor next door.
When the Buyer can neither purchase the physician’s office due to state law, nor prevent the physician from starting a competitor next door, it can be unclear what the Buyer is actually buying.
A Structural Solution
There is, however, a simple, time-tested way to address many of the privacy, regulatory, and corporate practice of medicine problems described above: creating a management service organization (MSO) to handle the nonmedical aspects of the clinical research site. Such a structure enables physicians to maintain control over medical decisions at their medical office, while the MSO can be owned by the Buyer and will provide the physician’s office with services related to clinical research. Such services may include regulatory assistance, sales and marketing, training, and more.
In such a situation, PHI provided to a doctor’s office is subject to HIPAA. However, a HIPAA waiver would be obtained from the patient to enable sharing information with the MSO. This would have the further advantage of sharing the same PHI with pharmaceutical companies or medical device companies (collectively, “Sponsors”), which are also not “covered entities” as defined by HIPAA and are therefore not subject to HIPAA regulations in the context of research. This is especially important since most Sponsors refuse to sign a HIPAA “Business Associate Agreement.” The signing of the HIPAA waiver reduces the risk of privacy-related liability.
In the event a Buyer has a holding company holding multiple MSOs, working with this MSO structure minimizes impact to the holding company and related companies. For example, if a single MSO is affected by a regulatory concern related to the FDA, or privacy, a Buyer may choose to disband or disavow that individual MSO and continue to operate its remaining MSOs without all of them being tainted by the regulatory finding.
Conclusion
For clinical research sites, partnering with Buyers can provide much-needed resources and support, but it also requires careful planning and due diligence to ensure that the partnership is aligned with the mission and values of both sides. Investors and sites preparing for sale and purchase must understand the nuances of complying with corporate practice of medicine doctrines, ensuring proper patient consent for data use, and evaluating the strength and quality of programs to ensure a smooth acquisition process.
