Why Franchising Works Differently in Healthcare

Franchising healthcare is becoming ever more popular. Med-spas, urgent cares, dental groups, and other practices are adopting this model. Often, this can be very beneficial, but it can create significant compliance issues if you’re not careful. New York follows strict Corporate Practice of Medicine (CPOM) rules, which can greatly complicate your deal if you don’t have a legal strategy. 

The medical transaction attorneys at Daniels, Porco & Lusardi, LLP can help you structure your deal in a compliant and strategic way.  

New York’s CPOM Doctrine Limits Traditional Franchise Control

In most industries, franchisors maintain tight control over franchisees. They dictate branding, operations, pricing, marketing, and quality standards. But in New York healthcare, this level of control can violate CPOM.

New York prohibits non-physicians from:

• Exercising control over clinical decision-making
• Influencing how medical services are delivered
• Sharing in professional fees
• Owning or controlling a medical practice

Traditional franchise agreements often include operational controls that, in a healthcare context, could be interpreted as directing clinical practice. For example:

• Mandating specific treatment protocols
• Requiring certain staffing models
• Setting pricing for medical services
• Imposing performance metrics tied to clinical output

In New York, these provisions may cross the line into unlawful control of a professional entity.

Professional Entities Must Be Physician-Owned

In many states, a franchisee can be a lay corporation. But in New York, any entity providing medical services must be owned by licensed physicians. This means:

• The franchisee must be a professional corporation (PC) or professional limited liability company (PLLC)
• Only licensed physicians can own voting shares or membership interests
• Non-physicians cannot hold equity or exercise control over the professional entity

MSOs Play a Central Role in New York Healthcare Franchising

Because franchisors cannot control clinical operations, many New York healthcare franchises rely on a management services organization (MSO) model. Under this structure:

• The physician-owned professional entity provides medical services
• The MSO (which may be owned by the franchisor) provides non-clinical support such as marketing, scheduling, billing, and administrative services
• The MSO charges a fair-market-value fee for its services

This model allows franchisors to maintain brand consistency and operational support without violating CPOM. However, the MSO must be carefully structured to avoid:

• Fee-splitting
• Excessive control over clinical operations
• Improper influence on medical decision-making

Branding and Marketing Controls 

Brand consistency is very important to franchising. But in New York healthcare, branding controls must be drafted with CPOM in mind.

Permissible controls typically include:

• Use of trademarks and logos
• Brand guidelines for signage and marketing materials
• Standards for patient experience and non-clinical operations

However, franchisors must avoid controls that could be interpreted as directing clinical practice, such as:

• Mandating specific clinical protocols
• Requiring physicians to use certain diagnostic tools
• Dictating medical service pricing
• Setting clinical performance benchmarks

The key is ensuring that branding requirements relate to the business side, not the practice of medicine.

Fee Structures Must Avoid Fee-Splitting

Traditional franchise models often rely on percentage-based royalties tied to revenue. In healthcare, this can be problematic.

New York prohibits fee-splitting arrangements where non-physicians receive a share of professional fees. As a result:

• Percentage-based royalties tied to medical revenue are risky
• Flat-fee or fair-market-value service fees are safer
• Any variable fee must be tied to non-clinical metrics, not clinical output

Franchisors must work closely with healthcare regulatory counsel to design compliant fee structures.

Compliance Oversight Is Essential

Because franchising in New York healthcare is uniquely complex, compliance oversight is critical. Best practices include:

• Conducting a regulatory review of all franchise and MSO agreements
• Ensuring the professional entity retains full clinical control
• Documenting separation between clinical and non-clinical functions
• Training franchisees and staff on CPOM and fee-splitting rules
• Reviewing marketing materials for compliance with advertising regulations

Franchise Your Medical Practice the Right Way in New York

If you are considering a franchise model for your practice, know that there are regulatory and compliance hurdles you must address. Trusting in the franchise owner or other party is not sufficient to protect your rights and those that belong to your patients. You need a skilled healthcare transaction attorney at your side.

The attorneys at Daniels, Porco & Lusardi, LLP are ready to help. Contact us today for a consultation.