Medical aesthetic services: a host of opportunities and legal uncertainties

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According to a September 2023 publication from IBISWorld, the U.S. health and wellness spa market size is estimated to be worth $23.2 billion in 2023, and is poised to reach $25.3 billion by 2028. The market's growth is significantly driven by an increased consumer demand for non-invasive cosmetic procedures and the rising popularity of drugs like Ozempic, some of which are prescribed “off-label” for weight loss. As primary care physicians struggle with financial challenges such as rising inflation and decreasing Medicare reimbursement, they may look to add aesthetic services to their practices. Tapping into patient demand can provide growth opportunities for physicians looking to generate new revenue streams. However, these service lines also bring a plethora of legal risks and uncertainties which medical aesthetic and anti-aging practices, as well as any affiliated management services organizations (MSOs), should be aware of.

In this article, we provide a high-level overview of some of the opportunities and pitfalls that new and existing stakeholders in the medical aesthetics and anti-aging marketplace should keep an eye on as we move into the second half of 2024 and beyond. We also provide some recommendations which medical aesthetic businesses should consider in order to better protect and maximize the value of their business ventures, especially given the increasing level of consolidation and mergers and acquisitions activity within the space.

Surge in consolidation and private equity transactions

Brandon Zarsky, Esq.
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Within the aesthetic medicine space, merger and acquisition activity, especially the purchase and/or consolidation of smaller medical aesthetic practices and medical spas into larger national brands, has increased rapidly over the last few years. This is evidenced by a growing number of private equity investors and venture capital firms showing increased interest in the space as a result of the potential for increased profitability. There has also been a rise in the number of national medical aesthetics, IV hydration, regenerative medicine, and anti-aging focused franchises across the country further demonstrating interest in the space.

While this trend towards greater consolidation in the marketplace provides potentially lucrative opportunities for startup and existing medical aesthetic businesses, it is paramount that these practices and med spas consider the following when structuring their businesses and pursuing potential private equity suitors, so as to ensure the highest potential purchase price or multiple based on earnings before interest, taxes, depreciation and amortization (EBITDA):

• It is important that the target entity for sale (or entities in the case of an MSO-based model) be properly formed and operated to minimize risk for the potential purchaser. In most states, many aesthetic services are considered to be the practice of medicine. This means the entity the provides the services may need to be owned entirely by medical professionals. If this is the case, it may make sense to consider utilizing an MSO based model.
• All medical aesthetic businesses should ensure trademark, patent, and copyright protections are in place to protect the practice’s valuable brand and intellectual property rights.
• Medical aesthetic businesses should also consider having confidentiality, intellectual property, social media policies, and restrictive covenants in place to protect their business goodwill and patient base.
• Multi-location medical aesthetic businesses with established brands and patient populations are generally considered to be the most attractive to purchasers looking to expand into a new geographic region. For that reason, such entities can command a higher EBITDA multiple and may be able to get the attention of higher profile purchasers.

Marketing aesthetic services

There are a number of issues medical aesthetic business owners and providers should be aware of and consider when marketing aesthetic services, especially when marketing controlled substances or procedures utilizing medical devices. Specifically, businesses should consider the state laws and U.S. Food and Drug Administration (FDA) and Federal Trade Commission (FTC) regulations that may impact their advertising strategies and content.

At the federal level, there are a number of FDA regulations limiting the types of statements that can be made about specific drugs and devices, especially in connection with advertising the benefits a particular treatment may provide. FDA rules also limit the types of statements that can be made when a drug or device is prescribed “off label.” Furthermore, the FTC’s regulations on deceptive advertising may limit the types of permissible statements which can be included in advertisements.

State laws and medical board regulations also commonly contain limitations on the use of patient images, social media statements, and the use of before and after photographs. Patient privacy laws may also require medical aesthetic businesses to obtain specific written consent from a patient to utilize a testimonial or image, and the content of such testimonial or image may be subject to further limitations.

Issues to consider when offering noninvasive weight loss treatments

The entrance of semaglutide-based, tirzepatide-based, and other similar drugs into the U.S. market has caused its fair share of legal controversy over the course of the last year. For example, a number of the semaglutide drugs, originally intended for the treatment of diabetes, have recently been the focus of legal actions by Eli Lilly against medical spas, clinics and compounding pharmacies. In addition, health care providers have received warning letters from insurance companies regarding the use of “off-label prescribing” of specific diabetes medications being prescribed regularly for weight-loss.

Given the increased scrutiny and litigiousness in this space, medical aesthetic practices looking to offer semaglutide-based weight loss treatments should consider the following:

• Providers should ensure they fully understand the limitations on their ability to prescribe “off label.” This can impact advertisements and may impact whether the treatment will be covered by a patient’s health insurance plan.
• Given the prevalence of telehealth-based models in the non-surgical weight loss space, businesses should carefully consider the state telehealth regulations of each of the jurisdictions where they plan to offer their services before commencing business. This could potentially impact the viability of certain business models in certain jurisdictions.
• Medical practices interested in compounding these weight-loss drugs should also ensure they are in compliance with state and federal compounding requirements applicable to these drugs. These considerations are especially important where these businesses plan to participate in commercial insurance plans, where there has already been increased scrutiny by carriers.

Navigating state regulations concerning scope of practice, CPOM, and other regulatory Issues

As the size of the medical aesthetics marketplace has increased, so have enforcement actions against medical aesthetic practices and their associated MSOs, and these actions have ramped up at both the state and federal levels. Specifically, state attorney general offices are initiating more enforcement actions against unauthorized procedures performed by non-clinicians. For example, New Jersey recently brought an enforcement action against a cosmetologist for providing services outside the scope of her license and an esthetician was recently fined over $20,000 for providing services such as Botox, platelet-rich plasma (PRP) injections, tattoo removal and hair removal procedures. Furthermore, many states are beginning to scrutinize improperly formed MSO structures. At the federal level, the FDA also recently issued a warning letter regarding unapproved substances and injections provided by aesthetic practices and medical spas.

Given this increased level of scrutiny, aesthetic practices and MSOs servicing medical aesthetic businesses should ensure that they are in compliance with state corporate practice of medicine (CPOM) requirements. As discussed above, in some instances, this may require the use of an MSO model in jurisdictions where medical practice ownership is limited to licensed medical professionals or physicians. If an MSO model is utilized, its owners and affiliated medical practice(s) should ensure the structure and related contractual agreements comply with applicable state-specific laws, such as fee splitting laws which could limit the types of legally compliant management fees. In New York, for example, 8 CRR-NY 29.1(b)(4) prohibits management fees that are a percentage of income or receipts of a medical practice.

Finally, medical aesthetic businesses should ensure compliance with any applicable scope of practice, supervision, and telehealth requirements. Supervision and scope of practice rules, which can vary greatly from state to state, may limit the number of nurses or physicians’ assistants a single physician can supervise, or may prohibit certain mid-level providers from utilizing certain types of medical devices like lasers or radiofrequency devices. Similarly, Telehealth rules may prohibit or permit telehealth encounters in certain circumstances and by certain providers. Some states, such as Connecticut, even have laws specifically applicable to the provision of cosmetic medical procedures within the state.

A note on the potential impacts of the FTC’s ban on employment based noncompete agreements

On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to issue a proposed final rule that would prevent most employers from enforcing noncompetes against their former employees or contractors. While the final rule is already being challenged in court and may potentially be stayed pending the outcome of the case, medical aesthetic businesses should consider taking action now to protect their patient goodwill from departing employees looking to compete.

Given the particular importance of a strong social media and brand presence within the aesthetic space, this could include implementation of a robust social media and intellectual property policy applicable to employees and contractors, limiting the use of intellectual property, images, patient testimonials, and proprietary information by former employees.

If the Final Rule is implemented as proposed, other strategies, such as offering minority ownership interest in the business or a local MSO, may become more widespread, as ownership-related non-competition agreements are not included in the scope of the current Final Rule.

Future outlook

Going into the second half of 2024 and beyond, we anticipate further growth in the medical aesthetic marketplace. However, as discussed above, we also anticipate increased scrutiny by regulators and ever-increasing competition caused by both the booming non-surgical medical weight loss space and departing employees looking to form competing ventures.

To maximize the available opportunities, and minimize potential fallout, stakeholders in the medical aesthetics marketplace should take immediate action to confirm their businesses are properly structured and they are in compliance with state-specific scope of practice and marketing rules. They should also take steps to protect their intellectual property and patient goodwill. This will not only protect their business from potential liabilities but maximize any potential purchase price or roll-over equity in the event of a sale or merger.

Finally, stakeholders in the medical aesthetics space should remain vigilant and keep an eye out for new state or federal legislation which may impact their business structure or service lines. This includes monitoring the status of the Final Rule and adjusting the business plans and policies to best protect their intellectual property and patient goodwill.

Brandon S. Zarsky, Esq., an attorney in Frier Levitt’s Healthcare Practice Group, focuses his practice on the representation of the firm’s varied health care clients. Brandon is heavily involved in Frier Levitt’s Wellness and Anti-Aging Practice Group, where he advocates for a diverse range of stakeholders within the medical aesthetics space. Some of Brandon’s medical aesthetics clients include aesthetic medical practices, weight loss clinics, and IV hydration clinics.