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Three shady — and all too common — things that digital health startups do to make money

  • Nixon Peabody's Jill Gordon says these 3 practices are fairly common among digital health start-ups.
  • There's a complex web of regulations that govern how medicine is practiced.
  • Many start-ups will violate these rules, knowingly or not.
Pharmaceutical drugs
Scott Tysick | Getty Images

Health technology is a booming sector, with more than $3.5 billion in venture money flowing into the space in the first half of the year alone.

As often happens, when the money flows, the crooks follow. The health-tech space is filled with dodgy growth hacks and downright illegal practices.

I asked one of the top lawyers in the space, Nixon Peabody's Jill Gordon, to detail the three dodgiest practices that she sees (and attempts to thwart) in digital health.

Paying doctors: The "old free stuff scam"

Getting a new technology into the hands of doctors and their patients is no easy feat. One common — and typically illegal — approach that some start-ups take, or at least pitch to Gordon before she dissuades them, is to provide free stuff or cash to doctors in exchange for selling or pitching their product.

"That always raises red flags," she says.

Why is it shady? It's often a violation of federal anti-kickback statutes, which prohibit the exchange of anything of value in an effort to induce the referral of federal health care business. An example of that might be for a company to offer to reward doctors to provide services to Medicare or Medicaid patients.

What's the penalty? Fraud penalties for health providers recently doubled to more than $20,000 per claim. In addition, some violations are punishable with a prison sentence.

License? What license? 

Many start-ups that offer medical care will claim that their providers are licensed. That might well be true, but there are still limits to what even licensed health professionals can offer.

In particular, Gordon has seen some home care companies that have doctors on call who dispense medication in the home.

Why not? In these cases, these companies don't realize that there are state pharmacy laws governing drug distribution. "It's one thing to write a script," says Gordon. "It's quite another to carry around a bag of pills, write a label and hand it to a patient."

Other examples? Telemedicine start-ups that provide virtual care to patients across the country have exploded. But Gordon has noticed a common "misconception" that only their physicians need to be licensed in the state where the patient is located. Nope. "In fact, the entity that employs the physician that bills for the service also needs to be qualified to practice medicine in that state," said Gordon.

Diagnosing disease? No sweat

Companies that make medical claims need to have some evidence. In one case, Lumosity agreed to return $2 million to customers after the FTC charged it with misleading consumers about how its products could help performance at work and school and delay brain degeneration.

Why is it illegal? Gordon is frequently in a position of talking start-ups out of making false claims, which violate the Federal Trade Commission's rules around advertising. Under the law, such claims must be truthful, and cannot be deceptive or unfair.

Trusting the white coat: According to Gordon, there are also special rules around what's known as "white coat marketing," meaning that paying a clinician to advertise a product that isn't backed up by evidence is treated with even higher scrutiny. "People don't realize it's marketing," she said. "And physicians command a higher level of trust."

Diagnose vs. screen: One common misconception is that diagnosing a disease ("you have a medical condition") is the same thing as screening ("you should seek further medical attention") for it. There is a regulatory process associated with both sorts of claims, but making a diagnosis requires a far greater investment into clinical studies and research.