Physician Joint Venture Pharmacy Opportunities Require Guidance

Florida physicians are being approached to become owners of pharmacies to which they may refer, often compounding pharmacies, but may be unaware of the regulatory issues involved.  Physicians need to be aware of the core laws that apply, which include the Florida Patient Self Referral Act (FPSRA), the Florida Anti Kickback Statute, the Patient Brokering Act and the Federal Investment Interest Safe Harbor.

Under the FPSRA, absent a statutory exception, a health care provider, including a medical doctor and various other types of providers, may not refer a patient for the provision of designated health services or “any other health care item or service” to an entity in which the health care provider is an investor.  Pharmaceutical services are not a “designated health service” under the FPSRA.  However, the referral restrictions under the FPSRA apply also to referrals for “any other health care item or service”, arguably encompassing referrals for pharmaceutical services. Fla. Stat. 456.053(3)(c), 456.053(5).

A health care provider that is an investor in a non-publicly held entity (which comprise the bulk of physician pharmacy investment opportunities) may not refer a patient for “any other health care or service” to the entity unless the following requirements are met:

1. No more than 50 percent of the value of the investment interests are held by investors who are in a position to make referrals to the entity.
2. The terms under which an investment interest is offered to an investor who is in a position to make referrals to the entity are no different from the terms offered to investors who are not in a position to make such referrals.
3. The terms under which an investment interest is offered to an investor who is in a position to make referrals to the entity are no different from the terms offered to investors who are not in a position to make such referrals.
4. The terms under which an investment interest is offered to an investor who is in a position to make referrals to the entity are not related to the previous or expected volume of referrals from that investor to the entity.
5. There is no requirement that an investor make referrals or be in a position to make referrals to the entity as a condition for becoming or remaining an investor.
6. With respect to either such entity or publicly held corporation:
7. The entity or corporation does not loan funds to or guarantee a loan for an investor who is in a position to make referrals to the entity or corporation if the investor uses any part of such loan to obtain the investment interest.
8. The amount distributed to an investor representing a return on the investment interest is directly proportional to the amount of the capital investment, including the fair market value of any preoperational services rendered, invested in the entity or corporation by that investor. . . .

The above FPSRA referral restrictions apply regardless of payor source. Therefore, under Florida law, for physicians (holding investment interests in a pharmacy which sells pharmaceuticals to the public) to be able to refer patients to such pharmacy, the pharmacy would need a minimum of 50% of investment interests to be held by investors that are not in a position to refer to the pharmacy – in addition to the other requirements listed above.

Physician investors also need to know that Florida law requires physician investors to disclose their investment interests to patients as provided in Fla. Stat. 456.052.

The Florida Anti Kickback Statute, (Fla. Stat. 456.054) is also an issue for investing physicians.  The law makes it unlawful for a health care provider to offer or receive a kickback, directly or indirectly, for referring patients, and applies regardless of whether payment for services are made by a government or private payor.  A kickback means a remuneration or payment by or on behalf of a provider to any person as an incentive or inducement to refer patients for services when the payment is not tax deductible as an ordinary and necessary expense.  The Florida Anti Kickback Statute does not list any exemptions explaining the types of arrangements that will not be prosecuted; however, it states that violations of F.S. 456.054 will be considered a criminal act of patient brokering, and will be punishable as provided in the Florida Patient Brokering Act, Fla. Stat. 817.505.  Under the Florida Patient Brokering Act (FPBA) some guidance can be found concerning arrangements that will not be deemed kickback violations.

The Florida Patient Brokering Act (FPBA), Fla. Stat. 817.505, makes it unlawful for a person to receive any commission, bonus, rebate, kickback, or bribe, directly or indirectly, in cash or in kind, or engage in any split-fee arrangement, in any form whatsoever, in return for referring patients or patronage to or from a health care provider or health care facility. Its applicability, like the Florida Anti Kickback statute, is not limited to remuneration for which payment may be made by a state or federal government health plan. The FPBA expressly exempts for criminal prosecution:

(a) Any discount, payment, waiver of payment, or payment practice not prohibited by 42 U.S.C. s. 1320a-7b(b) or regulations promulgated thereunder. (Federal Anti Kickback Statute and Safe Harbor Regulations) Fla. Stat. 817.505(3)

Therefore, investment interest arrangements structured to comply with the Federal Anti Kickback statute and regulations (as well as the FPSRA requirements) will minimize the risk of a governmental agency successfully alleging that income received from a physician’s investment interest in a pharmacy to which he/she refers constitutes a kickback or serves as an illegal inducement to refer the patient to the pharmacy.

The Federal Anti Kickback Statute to which the FPBA refers has detailed regulations called Safe Harbors, which outline specific activities that will not be prosecuted as kickback violations.  Thus, compliance with the safe harbor regulations can give an entity assurance it will not be subject to criminal sanctions or penalties under the Federal law.  The relevant Safe Harbor applicable to physician investors is the Investment Interests Safe Harbor, which states in pertinent part:

(i) No more than 40 percent of the value of the investment interests of each class of investment interests may be held in the previous fiscal year or previous 12 month period by investors who are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity.

(ii) The terms on which an investment interest is offered to a passive investor, if any, who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity must be no different from the terms offered to other passive investors.

(iii) The terms on which an investment interest is offered to an investor who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity must not be related to the previous or expected volume of referrals, items or services furnished, or the amount of business otherwise generated from that investor to the entity.

(iv) There is no requirement that a passive investor, if any, make referrals to, be in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity as a condition for remaining as an investor.

(v) The entity or any investor must not market or furnish the entity’s items or services (or those of another entity as part of a cross referral agreement) to passive investors differently than to non-investors.

(vi) No more than 40 percent of the entity’s gross revenue related to the furnishing of health care items and services in the previous fiscal year or previous 12-month period may come from referrals or business otherwise generated from investors.

(vii) The entity or any investor (or other individual or entity acting on behalf of the entity or any investor in the entity) must not loan funds to or guarantee a loan for an investor who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity if the investor uses any part of such loan to obtain the investment interest.

(viii) The amount of payment to an investor in return for the investment interest must be directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.

By now, physicians are well aware that having an ownership interest in ANYTHING they refer to is likely to be regulated.  As such, physician investors in compounding or other pharmacies need to be carefully informed about all of the legal risks involved, including some of the core laws above.