Shannon L. Wiley

Asembia is great not only for networking conversations that can lead to transactions but also for taking stock of your organization, identifying the capabilities that would complement your strategic position and, perhaps, discovering potential partners to fill those needs.

This year is off to an active start in specialty mergers and acquisitions, and synergy is the name of the game. That means pharmacies looking to go to market in the next 18 months can take steps to be better positioned for integration and scalability. Also, investors and strategic buyers can hone diligence checklists to find the best suited targets.

We are seeing vertical power plays in the large-scale transactions, such as CVS/Aetna, ESI/Cigna, and McKesson’s purchase of RxCrossroads and CoverMyMeds. However, Diplomat’s 2017 acquisition strategy is more in line with typical specialty pharmacy acquisition plans—a focus on building existing capabilities and expanding into adjacencies. In 2017, Diplomat purchased pharmacy benefit managers LDI Integrated Pharmacy Services and National Pharmaceutical Services, infusion pharmacies Focus Rx and Accurate Rx, as well as WRB Communications, a communications and contact center. Strategic investors and private equity firms are still aiming to build enterprise strength, but specialty pharmacies should not expect revenue and patient volume to carry the day&mdash;unique tuck-in capabilities are a must.

Integration capabilities, scalability, and a stable platform are hallmarks of a desirable target. A specialty pharmacy can take certain proactive measures to be more attractive and improve its position to hit the ground running post acquisition. A buyer, particularly one rolling up an enterprise, should be planning its exit when buying pharmacies. Corporate structure and asset allocation within the enterprise are fundamental drivers in a seller’s strategy. Specialty pharmacies that consider exit strategies from the outset will be well served.

Every acquisition requires integration, whether it be management teams only or a true merger combining operations, contracting, and even physical space. Two of a specialty pharmacy’s most important assets are its contracts and its key employees. Careful drafting of contracts, as well as sales force and management team noncompete language, can be crucial to ensuring a smooth transition postacquisition. Specialty pharmacies covet limited distribution drug contracts, lucrative pharmaceutical services relationships, and payer network inclusion, but antiassignment provisions or the other party’s required consent to add pharmacies to the contract reduce the contract’s value in a transaction.

Specialty pharmacies should consider negotiating the ability to assign the contract or add locations without consent, even if just to affiliates, in all valuable contracts. The flip side of assigning contracts is getting out of contractual obligations, such as wholesale prime vendor agreements that duplicate the acquirer’s contracts or otherwise not desirable postclosing. Unilateral “without cause” termination rights are hard to negotiate, which means if a specialty pharmacy gets the right to a without-cause termination, usually the counterparty will get the right, as well. That double-edged sword might not be worth the risk to a specialty pharmacy. Regardless, without-cause termination should be considered in all valuable contracts.

Protecting their industry footprint is also important to buyers, whether it be with key management employees that have the capability to start competing businesses or sales employees with deep relationships with customers. Severance is a fact of life in most acquisitions; therefore, specialty pharmacies should think about noncompete language when hiring. Employees can be asked to sign noncompete agreements as conditions of continued employment posthire, but this creates employee leverage, which can be difficult to navigate in the middle of a transaction. Buyers may insist on certain noncompete agreements as a condition to close the deal, which amplifies employee leverage. The negotiation is even trickier when the employee is a key sales team member or part of management. After all, noncompetes are a delicate topic under the best of circumstances. States vary on what is permitted in these agreements, which adds a layer of complexity. Specialty pharmacies should consider noncompete provisions at the time of hire and the scope of such agreements within the parameters of what will be enforceable under state law and would give a buyer comfort in a transaction.

Being prepared for the diligence process is also key in a smooth transaction and can facilitate integration. Our article in the December 2015 issue of 

, “Surviving Diligence: Key Concepts for Specialty Pharmacy Transactions,” provides tips for surviving diligence.

Scaling a business is just as important as integrating it, from a buyer’s perspective. This requires both flexibility and the foundation to make operational changes and increase capacity. For example, a specialty pharmacy may have primarily mail order or retail payer contracts, but to maintain network inclusion at higher volumes, a specialty contract would be required. A specialty pharmacy should understand the eligibility requirements for specialty network inclusion, such as holding multiple accreditations. According to Adam Fein, PhD, in an April 10, 2018, Drug Channels post, 729 unique pharmacy locations were accredited with the 3 major independent accreditation organizations at the end of 2017—almost double the 2015 number. Clearly, accreditation should be high on the priority list. If it is not feasible to pursue the accreditations, the specialty pharmacy should be mindful of the criteria and work toward meeting those&mdash;and certainly not take acts that might impede accreditation.

A specialty pharmacy can also take other acts to further scalability. For example, consider adjacent space when negotiating leases, and try to lock in price or negotiate volume discounts for future volume increases when negotiating vendor agreements. Push chief operating officers and operations management to be thoughtful and creative in developing teams and business flows. Connectivity among remote pharmacies can be key for allocating additional volume to a certain pharmacy.

A solid platform is a key component of being a valuable asset. This includes 50-state licensures free of any material unresolved disciplinary actions or limitations, broad payer coverage, strong relationships with drug manufacturers, and a robust compliance program. Certain state Medicaid programs require a pharmacy to have a brick-and-mortar presence in the state or an adjacent state; know and capitalize on those opportunities. Just as important as a strong platform is the ability to communicate and document capabilities. Documents of internal audits, compliance committee meetings, and management meetings can be pivotal in demonstrating capabilities. Clear and accurate financial documents also are essential. Often, a buyer is more concerned with a precise understanding of the specialty pharmacy’s platform than with the components of platform itself. To a buyer, understanding the asset is fundamental.

Whether it is a pharmacy or a private equity investor that is in the process of acquiring assets, buyers must anticipate and plan for either going to market in the future or spinning off discrete assets. They should be mindful of corporate structure and asset allocation during the purchase process. In addition, buyers should share their long-term strategy with their corporate and regulating legal counsel, asking for guidance on tax implications and structures that make selling business lines easier.

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Asembia is great not only for networking conversations that can lead to transactions but also for taking stock of your organization.

Use Asembia to Take Stock Before Going to Market

IN APRIL 2017, a group of related hospice providers settled claims that its common sales force provided kickbacks to referral sources for $12.2 million.

The settlement serves as a reminder of the need for robust policies addressing sales force interactions with referral sources, along with internal tracking and audit measures that ensure compliance with those policies. Such policies and tracking mechanisms can help avoid kickback and self-referral liability and avoid confusing and costly due diligence issues in transactions.

Whistleblowers alleged that hospice defendants International Tutoring Services, LLC; Goodwin Hospice, LLC; Phoenix Hospice, LP; Hospice Plus, LP; and Curo Health Services, LLC, submitted false claims to Medicare and Texas Medicaid due to the alleged payment of kickbacks by the defendants to the referral sources. The purported kickbacks included cash, gift cards, lunches, dinners, happy hours, tickets to sporting events, holiday gifts, cars, manicures and pedicures, guns, and the services of skilled nursing staff free.

Sales members were instructed to give more expensive items to administrators and directors of nursing and less expensive items to charge nurses and nursing staff. Along with the monetary settlement, prosecutors requested permission to intervene and prosecute fraud claims against 2 former executives.

Many specialty pharmacies permit their sales force to engage in some degree of expenditure on referral sources, but many lack detailed guidelines, policies on prohibited activity, or spending limits. Even fewer track expenditures attributable to each referral source.

Without tracking mechanisms in place, a specialty pharmacy may end up spending more than it intends on a particular referral source. As highlighted by the settlement, inappropriate interactions between a sales force (or any employee) and current or potential referral sources can run afoul of the federal Anti-Kickback Statute.

The Stark laws may also be implicated, in addition to state anti-kickback statutes that generally track the federal law, but do vary in some material ways. Therefore, specialty pharmacies should consult applicable state laws for variations.

The federal Anti-Kickback Statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by federal or state health care programs. Remuneration includes the transfer of anything of value, in cash or in kind, directly or indirectly, covertly or overtly.

Expenditures on sales forces, such as meals, sports tickets, happy hours, and gift cards, are all likely to be considered remuneration. The Anti-Kickback Statute is intent-based, but actual knowledge of, or specific intent to violate, the law is not required. If any single purpose is to induce referral or federal health care program business, the law is considered violated.

There is no express safe harbor or exception under the Anti-Kickback Statute regarding expenditures on referral sources. For this reason, specialty pharmacies often rely on varied guidance for guardrails. Some rely on the Code for Interactions with Healthcare Professionals published by PhRMA (PhRMA Code).

This is a voluntary code that outlines ethical relationships between pharmaceutical manufacturers and health care professionals. Because drug manufacturers experience different marketing dynamics and regulatory concerns than specialty pharmacies, some find the PhRMA Code does not offer a total solution for specialty pharmacy compliance.

Others rely on the Stark Nonmonetary Compensation exception (discussed below), but because there is no express regulatory basis for relying on the exception for Anti-Kickback Statute compliance, some specialty pharmacies find it is not the right fit for their risk tolerance. Still others take different approaches.

Also, the Stark law is implicated by expenditures on physician referral and arguably applies to amounts spent on those employed by physicians, such as nurses. Stark prohibits a physician from making referrals for certain designated health services, payable by Medicare or Medicaid, to an entity the physician (or an immediate family member of the physician) has a financial relationship with by way of ownership or compensation.

It also prohibits an entity from filing claims with Medicare or Medicaid for any DHS furnished pursuant to a prohibited referral. Prescription drugs are considered a DHS, and expenditures on sales forces, such as meals and sports tickets, are likely to be considered financial relationships. The Stark law is a strict liability statute, meaning that failure to comply constitutes a violation of the law regardless of intent.

The Nonmonetary Compensation exception, often relied upon by specialty pharmacies, permits payment from an entity in the form of items or services (not including cash or cash equivalents) that do not exceed an aggregate of $398 in 2017, as long as the compensation (1) is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician, (2) may not be solicited by the physician or the physician’s practice (including employees and staff members), and (3) does not violate the Anti-Kickback Statute or other federal or state law or regulation. The monetary limit is adjusted each year.

Despite the potential liability for inappropriate sales force interactions with referral sources, the exact application of these regulations and the parameters for appropriate spending on referral sources is far from clear. This lack of clarity can frustrate the creation of a definitive policy and often leads to a helter-skelter approach.

It is important that specialty pharmacies consult with their counsel to determine a legal analysis and compliance approach with which they have the most comfort. There is no one-size-fits-all approach. No item or service should ever be given to a referral source (or potential referral source) if one purpose is to induce referrals.

This should be the cornerstone of every pharmacy policy regarding interactions with referral sources. Aside from this general tenet, there are some other basic parameters that fit well in most, if not all, polices. Although each pharmacy’s policy will vary, below are some near-universal takeaways for compliant interactions with referral sources:

		No item or service should ever be given to a referral source (or potential referral source) if one purpose is to induce referrals.

		Set yearly individual spending limits. While specialty pharmacies may get comfortable with different amounts, a spending ceiling drives consistency and makes tracking compliance with a policy much easier.

		No item or service should be extravagant. Whereas meals may facilitate conversations about the specialty pharmacy’s value proposition, pedicures, sports tickets, concerts, and entertainment events should be avoided. Set a per item limit as well. A specialty pharmacy may get comfortable with an annual spending limit of $350 per referral source, but a single meal at which $300 was spent on a referral source is likely to be viewed as unacceptable by a regulator.

		Require receipts for expenditures and attendee lists so that expenses are allocated to the appropriate referral source.

		Review expenditures monthly or quarterly to monitor expenses.

		Train your sales staff at least once per year. When sales teams understand the reasons for rules, they are more likely to follow them. Train with realistic examples.

With clarity lacking, it becomes even more imperative to track spending on referral sources closely and evaluate expenditures, with an eye for detail.

Many specialty pharmacies permit their sales force to engage in some degree of expenditure on referral sources, but many lack detailed guidelines, policies on prohibited activity, or spending limits. 

The Need for Specialty Pharmacies to Track Spending on Referral Sources

 in the specialty pharmacy (SP) space during the last couple of years involved Novartis and the alleged offering of improper reimbursements for recommended uses of the drugs Exjade and Myfortic.

The case concluded in November 2015 when Novartis agreed to pay $390 million to resolve the claims. In the aftermath of the settlement, there was much attention given to SP/manufacturer service programs. Industry players scoured the various court documents, searching for practices and facts that might motivate future prosecutions of such drug adherence programs.

Although there is still much debate and ambiguity surrounding the particulars of these adherence programs, one aspect of the Exjade/Myfortic litigation provides straightforward practical guidance, but has received little consideration: the addendum to Novartis’ Corporate Integrity Agreement (CIA).

The CIA recites requirements for SP service programs, specific contract requirements, contract process procedures, and training specifics for Novartis. The CIA should not be disregarded, as it provides workable guidance for SPs structuring a pharma-contracting and services compliance program.

The CIA does not create an exhaustive legal compliance framework, and an individual legal analysis of each arrangement is essential. The CIA does, however, provide a checklist to help ensure compliance with the Anti-Kickback Statute (AKS), which makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive anything of value, in cash or in kind, to induce or reward referrals of items or services reimbursable by federal or state health care programs (eg Medicare, Medicaid, Tricare, etc).

As a reminder, the Exjade/Myfortic litigation involved Novartis’ Exjade Patient Assistance and Support Services (EPASS) program, which included 3 network SPs (among other things). At one point in the business relationship, referrals from the Novartis hub were allocated based on patient adherence.

		Patient adherence scores resulting in hub referrals did not take into account patients who discontinued Exjade use because their prescriber advised discontinuation over side effects.

		There were discussions with the SPs about low adherence rates and allocation of referrals, based on scorecard numbers.

		When a black box warning was added in 2010, SPs were not required to update patient adherence scripts with the information.

Defendants BioScrip and Accredo, settled earlier in the litigation for approximately $15 million and $60 million, respectively.

One set of the CIA requirements outlines basic compliance tenets of SP services provided on behalf of manufacturers. Employees responsible for developing, contracting, implementing, and auditing these programs should be aware of these basics.

During the negotiation and development stages, these essential guideposts should be considered:

		The manufacturer must have an articulable business need for each service.

		The compensation for the services must be fair market value.

		The services may not be reasonably expected to undermine, or otherwise interfere, with the clinical judgment of health care professionals (HCPs).

		The services cannot have the effect of encouraging HCPs to prescribe any specific product over another.

		Each arrangement must be vetted through a formal review and approval process.

As discussions of service arrangements mature into contracts, there are certain contract terms and elements of review that should be present for each arrangement. The framework below is a basic structure generally applicable to SP/manufacturer service agreements.

Also, the contracting process should be more than just an exercise of passing paper between the parties. The CIA outlines processes to ensure that material stakeholders are appropriately engaged in the development of service programs:

		Each arrangement must be memorialized, in writing, and signed by both parties.

		The contract must accurately include the entire business relationship.

		The contract should contain a manufacturer representation that there is a legitimate business need for the services.

		The contract should contain a representation, by each party, that it will not violate the AKS.

		There should be measurable key performance indicators (KPIs) associated with each service provided, and compensation should require meeting certain KPI metrics.

		Each material stakeholder should certify that the written agreement reflects all the material terms of the arrangement and recertify the same, annually.

		Each contract should be vetted through the formal contracting review process.

The CIA highlights that structuring arrangements in compliance with the AKS and drafting contracts that properly reflect the arrangement are only part of AKS compliance. Arrangements must remain in compliance.

Often, modifications to operations processes occur as service programs morph to fit changing market dynamics or to hone operational efficiencies. These modifications are too frequently informal and not vetted appropriately.

A compliance program is an essential tool to ensure that service programs do not migrate into offerings that are no longer in compliance with applicable law:

		The SP should create a tracking system to record the services and payments under each arrangement. The tracking system should be used to ensure that the SP is meeting its KPIs and that payment for the services is in accordance with the performance metrics.

		A compliance committee should be formed to monitor ongoing contract compliance. A senior management employee or executive, such as the chief compliance officer, should conduct an annual review of the compliance tracker and report the findings to the compliance committee.

		A protocol should be established to respond to suspected compliance issues reported by employees or raised through the contracting or annual review process.

		If risks are identified, an assessment of the risks should be performed. A plan for monitoring the risk should be created and implemented. If corrective action is warranted, it should be identified and implemented.

All employees should be trained annually on federal program requirements, internal policy requirements, individual responsibilities for complying with applicable regulations, sanctions associated with violations, and examples of improper practices.

The training should include components specific to the individual’s job function. Implementing a structure for vetting manufacturer service programs and revisiting through regular compliance reviews offer an excellent mechanism for mitigating risks associated with manufacturer service programs.

Through a formal process, all material stakeholders become involved and required sign-offs ensure certain basic compliance elements are met. The CIA offers practical guidance on building such compliance programs and should not be overlooked by SPs and industry stakeholders. 

Michael R. Hess is a member of Bass, Berry & Sims PLC and leads its specialty pharmacy, pharma services and distribution practice, and is based in the firm’s Memphis, Tennessee, office. He is the former chief counsel and vice president of strategic development at Accredo Health Group and assistant general counsel for Accredo’s parent, Medco Health Solutions. Bass, Berry & Sims PLC has more than 220 attorneys representing numerous publicly traded companies and Fortune 500 businesses. The firm has three offices in Tennessee (Nashville, Memphis, Knoxville) and one in Washington, DC. 

Shannon L. Wiley is an associate of Bass, Berry & Sims PLC in its specialty pharmacy, pharma services and distribution practice, and is based in the firm’s Memphis, Tennessee, office. Bass, Berry & Sims PLC has more than 220 attorneys representing numerous publicly traded companies and Fortune 500 businesses. The firm has three offices in Tennessee (Nashville, Memphis, Knoxville) and one in Washington, DC.

Industry stakeholders must carefully examine every detail of drug adherence programs to ensure compliance with the Anti-Kickback Statute.

Novartis Corporate Integrity Agreement Provides Outline for Pharma-Contracting Compliance Programs

—it’s a core part of every transaction, however, the quality and intensity of diligence varies widely.

Often, buyers and sellers of specialty pharmacies (SPs) focus so heavily on the financial aspects of a transaction that they overlook regulatory and operational issues that are essential for proper valuation or that may expose potential risks and liabilities that can undermine the ability to operate the pharmacy successfully.

Providing a buyer clear and concise documentation evidencing the SP’s operations and practices is often the key to a successful transaction. Even though a seller may have compliant practices, the lack of good documentation may kill a deal.

Good documentation can also be very helpful in the post closing integration process. Furthermore, a strong deal team is a must-have for both buyers and sellers.

Good deal teams often consist of executive-level SP staff, financial and accounting support, operations and billing consultants, and legal counsel with industry depth and a finger on the pulse of the market. Diligence is an exhausting and sensitive process.

Buyers with a thoughtful game plan and a seasoned deal team will be much more likely to spot a bad deal early and walk away or properly value and close a good deal. For a seller, preparation and a strong deal team can be essential to making a buyer comfortable and ensuring the deal closes.

Understanding potential buyers’ interests, pain points, typical concerns, and market “hot points” can help sellers get their house in order before going to market, thus easing tough discussions during diligence.

These preparations often include conducting a mock diligence interviews; gathering the documents typically requested during diligence; completing a review of the seller’s business and practices to identify and resolve difficult issues, and conducting market intelligence to highlight current “hot-issues” affecting recent transactions.

Often, the very act of gathering the documents required to complete a typical diligence request list will help a pharmacy identify gaps in its operational and regulatory compliance efforts. This proactive approach also allows enough time for the pharmacy to take appropriate corrective action if needed.

During the diligence process, buyers vet SPs for financial strength, operational prowess, and regulatory compliance. Buyers should strive to achieve a balance by focusing on important relevant information and digging in with strategic follow-up and corroborative requests.

Getting bogged down in minutiae can drive inefficiency, but allowing a seller to spoon-feed a buyer only selected information can lead to unwanted surprises later during integration. It is also important to be on the lookout for potential complications of “upsizing.”

Operational practices that are somewhat common in smaller SPs because of the SPs’ lack of regulatory and operational sophistication often have to change post close. The buyer must consider the impact of these changes on valuation, especially if the practices are revenue drivers or if the cost of improving compliance is material.

Even when the buyer can overcome these compliance concerns, it may insist on earn-outs or significant indemnification and escrow obligations. Good diligence is pointed and deliberate.

A review of the following areas allows a seller to highlight its practices and a buyer to get a material understanding of the asset.

: perhaps the most significant aspect of diligence is the quality of earnings (Q of E) assessment. Generating a Q of E report may take time, and buyers should start the process as early in diligence as possible. Since unexpected Q of E results can derail a deal, it is better to have that information early in diligence before significant time and money are invested. Early alignment between legal diligence and the preparation of the Q of E can be a great way to lower overall costs while driving more impactful analysis of financial practices of the pharmacy.

: a buyer should look at sales policies and practices to ensure compliance with Stark Law, the Anti-Kickback Statute, the Civil Monetary Penalties Law, and applicable state laws. Interactions, gifts, and entertainment provided to referral sources, including referral practice office and nursing staff, should be analyzed. Buyers tend to look for expense reports containing certain key information to confirm compliant practices. If expense reports do not provide sufficient documentation of sales staff activities, interviews with staff members may be required. Patient relationships, particularly in genetic diseases such as hemophilia, will be reviewed. Sales staff compensation structures will be reviewed. An SP considering going to market should consider periodic training of its sales staff, maintain close review of its practices, and require sufficient documentation to prove its compliant practices.

: reimbursement diligence is often deep and wide. Among the areas reviewed are billing and coding, co-pay collections, billing for non covered services and wastage, prior authorization practices, and determination of medical necessity. Buyers carefully review patient financial assistance programs to determine compliance and proper documentation. Reimbursement consultants dig deep to uncover disparities in an SP’s reported and actual practices. Noncompliant reimbursement practices can result in significant legal or recoupment liability. Sellers who cannot show solid billing practices may have to accept less-than-favorable indemnification obligations. SPs with lax co-pay collection practices, or financial assistance policies that do not require documentation of a bona fide financial need, may have to take a higher percentage of the purchase price as earn-out to share the risk that patients may go elsewhere once the SP converts to the buyer’s more rigorous policies post-close.

: operations diligence can be the most sensitive area of analysis for both buyers and sellers. Unlike other areas where the analysis tends to be more objective, each SP has its unique value proposition that has been purposefully crafted through deliberate operational processes. A buyer’s exacting analysis of the SP’s operations can prompt emotional responses, which are often counterproductive. SPs benefit from strategically crafting a deal team that harnesses external industry experts and key internal players well versed in both the seller’s offering and the buyer’s expectations.

: buyers often target SPs based on strategic payer coverage or limited distribution drugs. If those contracts can be terminated by the payer/manufacturer upon a change of ownership, buyers may become gun-shy. However, contract diligence is more than checking stacks of paper for change of ownership provisions and making lists of payer coverage and limited distribution drugs. The regulatory landscape for SPs is ever evolving, even more so recently. A savvy buyer’s counsel will dig in on key contractual relationships, particularly those in which manufacturers pay the SP for enhanced services, to ensure the target’s current obligations are in line with the buyer’s risk tolerance.

: adequate licensure may seem like a no-brainer for an SP going to market, but keeping up with the ever-changing state pharmacy law requirements can be burdensome for small to mid size SPs. A seller’s failure to maintain adequate licensure may raise concerns for a buyer and add unwanted friction to the negotiation process. Sellers would benefit from having a dedicated employee chart to assist with ensuring compliance with state pharmacy obligations. In the last year, many states have added requirements for compounding pharmacies. For SPs that compound any product, a review of state licensure could be beneficial.

: compliance diligence often goes beyond a review of policies. Buyers will also want to understand how well the seller monitors and complies with its policies. SPs considering going to market would benefit from revisiting their training modules and conducting a Health Insurance Portability and Accountability Act risk assessment.

: buyers are often reassured when management level employees, particularly those integral to operations, and sales staff have executed noncompete agreements. SPs considering going to market may want to put non-competition agreements in place as a preparatory act. Once employees learn of possible transactions, obtaining a non-competition agreement may be a more difficult task. 

A good diligence team can help sellers survive diligence and keep buyers from getting less than they bargained for. The best diligence teams not only know the industry, the market, and the SP’s strategic plan, but also show efficiency and sensitivity in their roles.

It is rare that one or two SP employees will know enough about the SP to run diligence alone. However, an executive management team member with a deep understanding of the roles and responsibilities of the SP’s management team and good working relationships with those team members can often run point effectively.

Consultants who have experience in the SP space can efficiently dig in on issues that otherwise would be difficult challenges in diligence. For example, accounts receivable reports usually do not clearly give a picture of an SP’s collection of co-pays, but a consultant savvy in the issue can provide a good analysis.

Legal counsel that understands the industry and market can help spot risks and valuation concerns for both buyers and sellers. Team members who are cognizant of the pain points of the other side are better suited to frame diligence requests and responses.

While a diligence team must be detail-oriented, it is just as important that buyer and seller teams approach diligence with a certain level of sensitivity. Building trust and respect during diligence facilitates a smooth and profitable integration. That is a win for both sides. 

 is a member of Bass, Berry & Sims PLC, in Nashville, Tennessee, and leader of its specialty pharmacy, pharma services, and distribution practice, based in Memphis, Tennessee. He is the former chief counsel and vice president of strategic development at Accredo Health Group and assistant general counsel for Accredo’s parent, Medco Health Solutions.

 is an associate of Bass, Berry & Sims PLC, in its specialty pharmacy practice, and is based in Memphis, Tennessee.

Financial concerns among buyers and sellers of specialty pharmacies often take precedence over concise operational documentation that can kill a potential deal.

Surviving Diligence: Key Concepts for Specialty Pharmacy Transactions

Specialty pharmacies need to carefully evaluate multiple aspects of manufacturer-sponsored free product programs.

On August 13, 2015, the Office of Inspector General (OIG) issued a favorable Advisory Opinion regarding a free drug program sponsored by pharmaceutical manufacturers

 in which a specialty pharmacy dispenses free drugs to patients experiencing delayed insurance verification, including patients insured under state or federal health care programs.

The OIG indicated that it will not impose administrative sanctions on the manufacturer or specialty pharmacy under the federal anti-kickback statute nor the civil monetary penalty law regarding beneficiary inducement based on the facts described.

The program at issue is unique, and the particular facts of the program appear to be material to the OIG's conclusion. For example, the specialty pharmacy involved in the program does not dispense to the public; and instead solely dispenses under manufacturer sponsored patient support programs.

As a result, a traditional specialty pharmacy that dispenses to the public cannot precisely mirror the fact pattern of this opinion. Additionally, the program drug has limited and lifesaving approved indications; also, very few patients are eligible for the program due to wide insurance coverage--facts which may not hold true for all free drug programs.

Regardless of the uncommon facts giving rise to the opinion, it does provide insight on how the OIG may view similar programs administered by traditional specialty pharmacies. Based on this opinion, specialty pharmacies should consider the following aspects of manufacturer-sponsored free product programs in which they are involved.

 Does the program incentivize or result in the overutilization of drugs reimbursed by state and federal health care programs? Would the physician prescribe and/or would the patient take the drug if not for the program?

 Does the program influence patients to take the program drug over alternative therapies? Are the programs advertised to patients?

 Does the program induce physicians to prescribe the drug? Are physicians paid a dispense or administration fee?

 Does the program result in costs to state or federal program beneficiaries?

And perhaps most material for specialty pharmacies:

 Does the program induce the patient to use a particular specialty pharmacy? Does the specialty pharmacy dispense to the general public? Is it the only specialty pharmacy in the program? Does the drug have multiple or high cost adjunctive therapies reimbursed by state or federal health care programs that the patient is likely to fill at the program specialty pharmacy? Does the disease state require multiple drugs reimbursed by state or federal health care programs that the patient is likely to fill at the program specialty pharmacy?

Because the opinion is based on specific and unique facts, it is advisable that specialty pharmacies involved with free drug programs become familiar with the details of the opinion, consider their existing program relationships, and seek competent health care regulatory counsel prior to structuring or participating in such programs.

The program drug is an antineoplastic approved by the FDA for four indications. For certain indications, the drug was approved through the FDA’s Breakthrough Therapy Designation, meaning it presents a substantial improvement over current therapies for serious or life-threatening diseases or conditions.

Moreover, the drug is used only after a prior therapy has failed. Other on-label treatments exist for the same indications, but most have boxed warnings. There is no clinical barrier to switching patients from the program drug to an alternative. The median time to first response for patients receiving the program drug for on-label indications is under two months.

The program's specialty pharmacy does not fill prescriptions for the general public; it dispenses drugs only for various manufacturer patient support programs. The specialty pharmacy is paid a fair market value dispensing fee for program drug.

To be eligible for the program, patients must meet all of the following five requirements. 

		have received a prescription for the drug;

		be insured (by, for example, a commercial insurer or a federal health care program); and

		have experienced a delay in a coverage determination of at least five business days.

Patients are referred to the specialty pharmacy through prescribers, the patient's traditional pharmacy (whether or not specialty), or an affiliated benefits investigation/patient assistance hub. If the patient is eligible, the specialty pharmacy dispenses the program drug.

Patients enrolled in the program can only receive the free program drug from the specialty pharmacy. Once the patient is no longer eligible for the program, all dispenses of the drug are filled by the patient's regular pharmacy.

Patients are initially eligible for one free 30-day supply under the program, but may qualify for one other 30-day refill in certain circumstances. No further program drug is dispensed regardless of the status of the appeal.

If a Medicare Part D beneficiary participates in the program, the specialty pharmacy notifies the patient's Part D plan sponsor that the drug is being provided to the patient outside the Part D benefit, meaning that no claim will be submitted and no part of the costs of the drug provided under the program should be counted toward the patient's true out-of-pocket costs. Part D beneficiary participants stay on the drug after receiving the free supply are responsible for substantial cost-sharing amounts.

However, it is expected that not many Part D beneficiaries will use the program. Since the drug was first approved and the program began, only 0.0008 percent of all shipments of the drug have been under the program, approximately one-third of which went to Medicare or Medicaid beneficiaries.

The program is not and will not be advertised to potential patients. The program is described on the manufacturer's websites, and sales representatives distribute approved printed materials about the program to healthcare providers.

The OIG analyzed the program under the federal anti-kickback statute (AKS) and civil monetary penalty law (CMP Law). The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal healthcare program.

The CMP provides for the imposition of monetary penalties against any person who offers or transfers remuneration to a Medicare or State health care program (including Medicaid) beneficiary that the benefactor knows or should know is likely to influence the beneficiary's selection of a particular provider, practitioner or supplier of any item or service for which payment may be made, in whole or in part, by Medicare or a State health care program (including Medicaid).

The opinion sets forth five primary safeguards upon which the OIG relied in finding the arrangement to be low risk under the AKS. The safeguards offer specialty pharmacies insight on how the OIG may interpret different aspects of their manufacturer sponsored free drug programs.

 The OIG found that the program was not prone to result in the overutilization of the program drug because of the limited indication for the drug, that the program was limited to on-label use; only patients with a five day or more delay in insurance coverage would receive the free drug, and the program was limited to, at most, two 30-day supplies of the drug.

Many of the factors cited by the OIG would be present in most manufacturer sponsored free product programs. For example, programs are typically limited to on-label use, are only available after a delay in insurance coverage is confirmed and limited in duration. However, the required time of delayed insurance and duration of program eligibility often vary by program. It is not clear to what extent the variability of these factors would result in an unacceptable risk of fraud and abuse. Also, it is not clear whether the OIG would have considered the program to have an unacceptable risk of overutilization if the drug had a wider indication or was not a second waive drug.

2.) Unlikely to Influence Patients to Choose Drug over Alternative Therapies. 

The OIG distinguished the program from "seeding programs" that offer a drug for free to induce a patient into choosing a particular drug because the program is not actively marketed to patients, only 0.0008 percent dispenses had been through the program; patients and prescribers assume that insurance will cover the drug when it is prescribed; and the patient is subject to applicable cost-sharing for non-program drug.

Manufacturers will likely control this aspect of risk in free drug programs. However, specialty pharmacies should be attuned to the opinion's guidance on this issue. For example, specialty pharmacies should not directly advertise the programs to patients. Notably, the OIG highlighted that prescribers and patients expected insurance to cover drug therapy. Manufacturer sponsored free drug programs for drugs that are not on formulary or where there is typically a lengthy prior authorization process may be viewed differently by the OIG, particularly if the alternative therapies tend to have wider insurance coverage. That is because, in those instances, the availability of free initial drug coverage may assuage prescriber concerns about coverage and/or time to initial dispense.

 The OIG noted that because the drug is self-administered and dispensed directly to the patient, prescribers do not have an opportunity to earn any kind of administration fee in connection with the drug.

While this concern is likely to be more material for manufacturers, specialty pharmacies should pay careful attention to potential inducement of referral sources arising from manufacturer sponsored free drug programs.

4.) Unlikely to Induce Use of the Program Pharmacy.

 The OIG noted that because the program pharmacy’s dispensing is limited to manufacturer programs, it is unlikely that the Program would induce the patient to obtain other federally reimbursable drugs from the pharmacy.

The specialty pharmacy in the opinion is unlike a traditional specialty pharmacy in that it does not dispense to the public. Thus, most specialty pharmacies cannot take comfort in this aspect of the opinion. However, this does not necessarily mean that the OIG would find a similar program to result in an unreasonable risk of fraud and abuse if administered by a traditional specialty pharmacy. Certain arrangements may raise more concerns than others. For example, if a specialty pharmacy acts as the sole program pharmacy dispensing program drug, a regulator may find that the program induces patients to use the pharmacy for drugs reimbursed by federal programs. This concern may be heightened if the program drug has multiple adjunctive therapies covered by federal healthcare programs or if the applicable disease state is associated with multiple therapies covered by federal health care programs. If a manufacturer would like to use a pharmacy as its exclusive dispenser for a free drug program, specialty pharmacies may want to consider only dispensing the program drug under the free drug program and foregoing traditional dispenses

5.) No Cost to Federal Health Care Programs.

 The OIG found there was little risk that the program would result in cost to federal health care programs. This is because no patient, pharmacy, payor or other third party is billed for the free program drug, and the specialty pharmacy notifies the beneficiary's Part D plan sponsor that it is providing the drug to the patient outside of his or her Part D benefit so that no claim should be submitted to the Part D plan sponsor for the free drug.

If specialty pharmacies engage in manufacturer sponsored free drug programs that do not exclude federal program beneficiaries, they should ensure Medicare Part D plan sponsors are notified of the free drug dispense to ensure that the beneficiary does not incur any costs. Typically, patients do not incur costs in such programs. Specialty pharmacies should pay close attention to contracting terms allocating the risk of the manufacturer's decision to include federal program beneficiaries in their free drug program.

The opinion found that it was unlikely that the program would induce beneficiaries to use the program specialty pharmacy for drugs reimbursed under state or federal healthcare programs because it only dispenses the free drug as part of manufacturer patient support programs. In other words, there could be no inducement of drugs reimbursed by state or federal programs because there is no reimbursement for free drug. Further, the OIG reasoned that the specialty pharmacy does not dispense drugs to the general public; thus, it is not likely that the program would influence a beneficiary to select the program specialty pharmacy for other products.

The opinion offers little guidance for traditional specialty pharmacies that dispense to the general public on the risk under the CMP law. As with the AKS analysis above, the opinion does not necessarily indicate that the OIG would find a similar program run by a specialty pharmacy that dispenses to the public to result in an unreasonable risk of fraud and abuse if administered by a traditional specialty pharmacy. However, the Opinion does highlight the need for specialty pharmacies to consider patient inducement concerns associated with free drug programs.

In approaching opportunities to participate in manufacturer sponsored free drug programs, or evaluating existing relationships, specialty pharmacies should pay close attention to contract terms establishing responsibility and liability for program eligibility requirements. Also, while programs that exclude state and federal program beneficiaries are likely to pose less of a risk of fraud and abuse, even those programs need to be reviewed carefully and in light of all services provided to patients and on behalf of the manufacturer. The opinion offers insight into key factors that a regulator is likely to analyze if a free drug program comes under its review. Specialty pharmacies should familiarize themselves with the reasoning of the OIG and apply it to existing and future relationships.

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		The drug is cobranded; thus the Opinion appears to be requested by two manufacturers.

		AO 15-11, August 12, 2015. Available at 

http://oig.hhs.gov/fraud/docs/advisoryopinions/2015/AdvOpn15-11.pdf

		This designation is only available only for drugs: "(1) intended to treat a serious or life-threatening disease or condition (alone or in combination with one or more other drugs); and (2) for which preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development." AO 15-11, citing 21 U.S.C. § 356(a).

		The OIG reiterated its position that manufacturers are not "providers, practitioners, or suppliers" for purposes of the Beneficiary Inducements CMP; thus, the Program does not implicate the statute with respect to the Requestor manufacturers.

How Will the OIG Free Drug Program Advisory Opinion Impact Specialty Pharmacy?

There are several key factors a specialty pharmacy must consider when deciding whether to participate in a limited distribution network.

Limited distribution networks (LDNs), particularly in the oncology space, are increasingly being used by manufacturers to reduce costs, improve efficiency, and ensure quality control in the distribution chain while maintaining broad patient access and quality of service. Although adherence services are often key components of many LDNs, the market and the structure of such arrangements appear to be in flux due to recent prosecutions, especially on adherence services.

A specialty pharmacy looking to participate in LDNs or wanting to evaluate existing arrangements should consider 3 primary factors to ensure competitiveness and compliance with the law:

		Provision of sufficient infrastructure and high-quality service

		Knowledge of current market contracting trends

		Understanding of applicable law, including current legal prosecutions

Specialty pharmacies are typically vetted for LDN inclusion by their payer access, geographic footprint (licensure and Medicaid provider status, not necessarily brick-and-mortar locations), and ability to provide consistent high-quality service.

Broad payer access is a must for inclusion in LDNs, as is the ability to distribute throughout the United States (and sometimes Puerto Rico). Beyond these mandatory dispensing issues, specialty pharmacies must distinguish themselves with superior service and data reporting.

Essential core services for LDNs include speedy benefits investigation and quick turnaround time for shipments. First dispensing time is often critical to manufacturers. Focusing on these basics is absolutely paramount for a specialty pharmacy to be a competitive choice for an LDN.

Also common in LDNs are specialized services, such as working with the manufacturer’s hub or offering hub-like services, and the ability to keep consigned product inventory separate. Notably, LDN drugs are more likely than non-LDN drugs to be under a Risk Evaluation and Mitigation Strategy (REMS), have black box warnings, or have complicated adverse effect (AE) management. Operationalizing these LDN-specific services often requires a different work flow than core services and may require careful planning and training to execute. For example, communicating protected health information with the manufacturer’s hub may require the use of a Health Insurance Portability and Accountability Act authorization early in the patient’s treatment before a specialty pharmacy typically receives such authorization.

Furthermore, the primary means of patient contact for many specialty pharmacies is via the phone. Manufacturers focus on specialty pharmacies that can develop and maintain a close relationship with their patients, which is often viewed as the backbone of a successful therapy adherence program. Finally, the ability to provide access to data—in some cases, real-time access to data&mdash;is a must for inclusion in LDNs. Particularly in the case of REMS drugs or AE management, manufacturers often want almost immediate access not only to drug utilization data, but also clinical outcomes data.

Certain contractual terms are common in LDN agreements and require a different analysis than is required in other distribution agreements, such as “own use” provisions, listings of specialty pharmacy facilities included in the network, diverted product limitations, return of product at termination, AE reporting, and side effect management/provision of manufacturer literature or scripted communications.

Own use provisions, the description of in-network facilities, and diverted product provisions often work in tandem and should be considered in light of one another. Specialty pharmacies may want to negotiate terms to permit the transfer of product among all its facilities and easy inclusion of new facilities into the network. Similarly, vague or broadly worded diverted product provisions can also limit or make unclear the ability of specialty pharmacies to transfer products among facilities or continue with other standard uses of the product. Negotiating these terms to allow for unencumbered interfacility exchange and broad distribution is optimal. If a manufacturer’s internal processes do not allow for convenient inclusion of new facilities or impose certain restrictions on distribution, understanding those limitations up front may drive the decision making of specialty pharmacies down the road. For that reason, the discussion may be beneficial even if favorable terms are not reached.

Limitations on the ability to return product can have material consequences in LDNs. Specialty pharmacies should complete a careful reading of these terms to ensure that if the pharmacy is removed from the LDN, the pharmacy will not be stuck with a product the pharmacy is prohibited from dispensing.

LDNs tend to have more robust AE reporting requirements than non-LDN drugs, as many are under a REMS or have black-box warnings. Ensuring adequate reporting may require a specialty pharmacy to segregate patient communications for the LDN drug to a subset of employees trained on the unique AE requirements. This may have the added benefit of engendering a relationship with the patient that is important to facilitating successful therapy adherence.

Patients taking LDN drugs may experience more frequent side effects and require more intensive management to remain adherent to their therapy. Manufacturers may provide scripts or literature regarding drug side effects that are used for introductory communications. Specialty pharmacy clinical staff should ensure that these scripts do not interfere with their counseling of all relevant side effects within the applicable standards of professional practice. In negotiating contract terms, a specialty pharmacy should include the ability to approve or disapprove of any manufacturer literature or scripts and prohibit any language that could be construed to limit the professional clinical judgment of the specialty pharmacy professional staff.

Generally, LDN relationships are governed by the same principles as other distribution and service agreements. However, there are some key considerations unique to the LDN landscape. Those include valuation of services and ensuring that the professional judgment of the specialty pharmacy clinical staff is not encumbered or influenced by LDN inclusion. Recent prosecutions have left many in the specialty pharmacy space questioning the boundaries of permissible adherence services, leaving the market in flux on these issues. The touchstones for analyzing an LDN are:

		The specialty pharmacy is compensated for the fair market value of the services provided, and the arrangement is commercially reasonable

		The professional judgment of the specialty pharmacy clinical staff is not influenced

Typically, specialty pharmacies bifurcate core pharmacy services provided for free from other services that are only provided if the manufacturer pays for the service. Yet, inclusion in an LDN may require services beyond a specialty pharmacy’s core offerings. It is unclear whether inclusion in the LDN is sufficient consideration for some level of enhanced services. Specialty pharmacies must carefully consider the value of being in the LDN compared with the services required. While it is beyond the scope of this article to delve into the nuances of this analysis, specialty pharmacies may find their legal and operations teams are well suited to work together on this issue.

Recent prosecutions have brought into focus the need to ensure that no service offerings interfere with the professional judgment of the specialty pharmacy clinical staff. Two common offerings—adherence services aimed at keeping the patient on therapy and nondisadvantage clauses&mdash;have been highlighted.

In a recent prosecution, prosecutors targeted manufacturer-compensated SP communications that focused on common side effects and risks while allegedly not highlighting more serious side effects and risks. The market continues to analyze and incorporate these recent prosecutorial actions, but SPs may want their clinical staff and legal team to evaluate any required adherence communications, including printed materials or scripts.

Also recently, government prosecutors targeted a clause disallowing a specialty pharmacy to favor a competitive product over the contracted product. With the uptick in prosecutorial attention to adherence service, specialty pharmacies may want to reevaluate the clinical oversight and checks and balances in place that evidence a specialty pharmacy’s efforts are in the best interest of the patient and not simply aimed at inducing referrals.

In summary, a specialty pharmacy must have certain infrastructure and operational processes in place to be an attractive candidate for inclusion in LDNs. Also, there are specific contractual and legal considerations unique to LDNs. Given the current legal landscape, specialty pharmacies should ensure that LDN relationships do not impede the professional judgment of their staff. 

There are several key factors a specialty pharmacy must consider when deciding whether to participate in a limited distribution network.  
