Brad McCarty • July 9, 2019

The past decade has seen a stark increase in the number of private equity firms that are investing in healthcare. On the other side of that same coin are singular investors — or groups of investors — who are looking to diversify their portfolios by investing in healthcare. It only stands to reason that, by investing in what they know best, physicians stand a better chance to beat the odds. But the practice is not without its potential pitfalls, and it is important to know how to avoid them.

Active vs. Passive Interests

For the typical investor, their interest in a company will remain passive. If the company does well, then the investor has a greater chance to “cash out” once the company reaches a liquidity event. That said, there are many opportunities for a physician to take a more active interest in a company’s success, but these are also opportunities to run afoul of conflicts of interest.

As an example, let’s say that Dr. Jones invests in ABC Cardiology. ABC is developing a new heart medication that is entering a clinical trial. ABC reaches an agreement to pay Dr. Jones for each patient that she enlists into the trial. Even if a patient is an ideal candidate, the fact that Dr. Jones accepted payment gives her an active interest from the company. By refusing to accept payment, Dr. Jones can still offer her help to the company, but outside observers are less likely to see her as having a conflict of interest.

Dr. Jones could have chosen to take an active interest in the company in other ways. Serving as an advisor or screening potential clinical trial patients from other physicians are both viable options that could help ABC Cardiology reach its goals, but without direct patient interaction.

Walking on Sunshine

If the scenario described above sounds alarm bells for you, then you’re probably familiar with the Physicians Payments Sunshine Act. The Sunshine Act requires manufacturers of many drugs and medical devices covered by Medicare, Medicaid, and SCHIP to track financial relationships with physicians. These relationships are then reported to the Centers for Medicare and Medicaid Services (CMS), which then, in turn, reports payment information publicly.

While most people could agree that pay-for-play relationships are bad, there is another side to this story. It is still too early to tell how much impact, if any, this database will have. Further, it’s difficult to tell whether the impact is a net positive or a net negative. Many physicians have argued that it quite difficult or impossible to draw a hard line between appropriate and inappropriate interactions.

A Balancing Act

Many physician-investors find themselves walking a fine line when it comes to conflicts of interest. As AngelMD SVP of Clinical Investment Operations, Dr. Jeffrey Ross, points out, disclosure is often key.

“The heuristic is — As long as you clearly disclose your investment, you are generally okay to use the product or service, if the patient consents.”

But Dr. Ross also notes that this rule of thumb comes with a caveat — Even when a physician discloses his investment, there is still an opportunity for abuse. Making matters even more difficult, the public may perceive abuse even if it doesn’t exist.

With these concerns in mind, Dr. Ross always recommends taking the proverbial high road. He recommends “physicians, dentists, and other providers should always place the needs, interests, and well-being of their patients ahead of their own. If there is even slight concern that an investment in a certain health-related company may cloud your judgement or actions, don’t do it.”

Making a List

For the physician looking to diversify their portfolio, the appeal of early-stage healthcare investing is strong. To avoid the potential ethical pitfalls, it is important to follow a set of guidelines designed to keep most investors away from problems:

  • Whenever possible, choose a passive interest in the company
  • When choosing an active interest, avoid related patient interaction
  • Be certain to report any financial relationships with your portfolio companies
  • Clearly disclose your interest in a company if you plan to use its products
  • Above all else, put the patient’s interests first
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