Building a Legally Compliant Referral Network


In entering into an arrangement with a physician in a rural area, the pharmacy needs to focus on the Stark rural provider exception.

One way for a pharmacy to grow is to enter into relationships with physicians, hospitals, and other referral sources. In doing so, it is critical that the pharmacy comply with federal and state anti-fraud laws.

Legal Guidelines

The federal anti-kickback statute (“AKS”) prohibits a pharmacy from giving “anything of value” to a person/entity in exchange for referring (or arranging for the referral of) patients covered by a government health care program.

Under the Stark physician self-referral statute (“Stark”), if a physician has a compensation or ownership interest with a pharmacy, then the physician cannot refer Medicare/Medicaid patients to the pharmacy unless a Stark exception applies. One of the exceptions provides that a health care provider may provide non-cash equivalent items to a physician if such items do not exceed an annual amount established by CMS. For 2018, such amount is $407.

Safe Harbors

Because of the breadth of the Medicare anti-kickback statute (“AKS”), the OIG has published a number of “safe harbors.” A safe harbor is a hypothetical fact situation such that if an arrangement falls within it, then the AKS is not violated. If an arrangement does not fall within a safe harbor, then it means that the arrangement must be carefully scrutinized under the language of the AKS, applicable case law, and other published guidance.


All states have enacted statutes prohibiting kickbacks, fee splitting, patient brokering, or self-referrals. Some state anti-fraud statutes only apply when the payer is a government health care program. Other state anti-fraud statutes that apply regardless of the identity of the payer.

W-2 Employee vs. 1099 Independent Contractor

The OIG has repeatedly expressed concern about percentage-based compensation arrangements involving 1099 independent contractor sales agents. For example, in Advisory Opinion No. 06-02, the OIG stated that “[p]ercentage compensation arrangements are inherently problematic under the Anti-Kickback Statute, because they relate to the volume or value of business generated between the parties.”

Utilization of a Marketing Company

If a marketing company generates patients for a pharmacy, when at least some of the patients are covered by a government health care program, then the AKS prohibits the pharmacy from paying commissions to the marketing company.

Expenditures for Physicians

While the Stark non-monetary compensation exception allows a pharmacy to spend up to a set amount per year (e.g., $407 in 2018) for non-cash/non-cash equivalent items for a physician, the AKS does not include a similar exception. Nevertheless, if the Stark exception is met, it is unlikely that the government will take the position that the non-cash/non-cash equivalent items provided by the pharmacy to the physician violate the AKS.

In addition to complying with Stark and the AKS, the pharmacy and the physician also need to comply with applicable state law. Lastly, while the Stark non-monetary compensation exception applies to expenditures on behalf of a physician, the exception does not apply to expenditures on behalf of the physician’s staff. Expenditures on behalf of the physician’s staff must be examined in light of the AKS.

Paying Physician to Provide Education Program

It is permissible for a pharmacy to pay a physician to present an education program if the following requirements are met:

  • The program is substantive and valuable to the audience.
  • The compensation paid to the physician is the fair market value equivalent of the time and effort the physician expended to prepare for and present the program.

Collaboration With Hospital to Prevent Readmissions

Under the Hospital Readmissions Reduction Program, if a patient is readmitted after discharge within a certain period of time, for a particular disease, then the hospital can be subjected to future payment reductions for Medicare. The hospital can contract with a pharmacy to monitor/work with discharged patients so that they are not readmitted soon after being discharged.

Paying for a Facility’s EHR

A requirement for a long term care facility (“Facility”) to serve Medicare and Medicaid patients is for the Facility to have a pharmacy perform a monthly drug regimen review ("DRR") on each patient. A Facility may desire to utilize electronic medication administrative records (“eMAR”) software (“Software”) for DRR and for other purposes. The Facility and a pharmacy (that receives referrals from the Facility) may wish to enter into an arrangement in which the pharmacy pays for the Software. By virtue of paying for the Software, the pharmacy is providing “something of value” to the Facility … hence, the AKS is implicated.

The applicable safe harbor to this type of arrangement is the EHR Safe Harbor. It states than an entity may donate software and training services “necessary and used predominantly to create, maintain, transmit, or receive electronic health records” if 12 requirements are met. These requirements are discussed in a prior Pharmacy Times article I wrote entitled “Donating EHR Software to a Facility.”

Products to Facility

It is not uncommon for a Facility to request a pharmacy to provide items for the Facility to use (e.g., iPads, drug carts). It is permissible for a pharmacy to provide items to a Facility only if (i) title to the items remains with the pharmacy and (ii) the Facility can only use the items in its interactions with the pharmacy.

Avoiding “Sham” Clinical Studies

In a sham clinical study program, (i) the physician refers patients to the pharmacy; (ii) the pharmacy provides prescription drugs to the patients; (iii) the physician “collects data” from the patient; (iv) the physician shares the information with the pharmacy; (v) the information is rudimentary, the pharmacy does not need it, and it is the same information that the pharmacy can secure itself; and (vi) the pharmacy pays the physician a dollar amount per patient per month. Sham clinical studies violate the AKS.

Copayment Assistance Program

In September 2014, the OIG issued a Special Advisory Bulletin addressing copayment coupons, and it stated that copayment coupons offered to insured patients to reduce or eliminate their out-of-pocket copayments for specific drugs constitute remuneration to induce the purchase of those drugs. The Bulletin, which addresses copayment coupon programs only in the context of the AKS, goes on to state that (i) copayment coupons used for drugs covered by a federal health care program implicate the AKS and (ii) coupons purposefully used to induce or reward purchases of drugs covered by a federal health care program violate the AKS.

The OIG makes it clear that programs can be designed to allow parties like manufacturers or wholesalers to lawfully help patients who cannot afford their drugs. The lawful programs consist primarily of independently-run charitable programs.

Preferred Provider Agreement

The pharmacy can enter into a Preferred Provider Agreement with a referral source whereby, subject to patient choice, the referral source will recommend the pharmacy to its patients.

Employee Liaison

A pharmacy may designate an employee to be on a facility’s premises. The employee liaison may not assume responsibilities that the facility is required to fulfill.

Medical Director Agreement

A pharmacy can enter into a Medical Director Agreement with a physician. The MDA must comply with the (i) Personal Services and Management Contracts safe harbor to the AKS and (ii) the Personal Services exception to Stark. Among other requirements, (i) the MDA must be in writing and have a term of at least one year; (ii) the physician must provide substantive services, and (iii) the compensation to the physician must be fixed one year in advance and be the fair market value equivalent of the physician’s services.

Renting Space To/From a Physician

A pharmacy can rent space to/from a physician so long as the rental agreement complies with the (i) Space Rental safe harbor to the AKS and (ii) space rental exception to Stark. Among other requirements, (i) the rental agreement must be in writing and have a term of at least one year; and (ii) the rent must be fixed one year in advance and be fair market value.

Joint Venture

A joint venture arises when two or more individuals/entities own something together. A hospital and a pharmacy can jointly set up and own a pharmacy (“JV Pharmacy”) so long as the JV Pharmacy is not a “sweetheart deal” for the hospital. If the Small Investment Interest safe harbor cannot be met, then the requirements of the OIG’s 1989 Special Fraud Alert (“Joint Ventures”) and April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”) must be met.

Pharmacy Owned/Managed Physician Clinic

In some states, a pharmacy can own a physician clinic … and employ the physician. Other states will not allow a physician to be employed by a pharmacy. In those states (i) the medical practice will be owned by a legal entity (e.g., Professional Association or “P.A.”) owned by a physician; (ii) the physician will be employed by his/her P.A.; and (iii) the pharmacy will rent the space to the P.A., rent furniture, fixtures and equipment to the P.A., and provide services to the P.A.

Working With Physicians in Rural Areas

In entering into an arrangement with a physician in a rural area, the pharmacy needs to focus on the Stark rural provider exception. Rural providers are defined as those that furnish at least 75% of their services to residents of a “rural area.” “Rural area” is defined as “an area that is not a Metropolitan Statistical Area (“MSA”) or New England County Metropolitan Area (“NECMA”). In addition, a Micropolitan Statistical Area is considered to be a rural area under Stark.


Jeffrey S. Baird, Esq. is Chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents pharmacies, home medical equipment companies, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or

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