Recognizing and Avoiding Fraud Landmines, Part 2


The risks are too high for the pharmacy to be cavalier regarding compliance with antifraud laws.

This is Part 2 in this series of 3 articles summarizing federal and state antifraud laws.

Pharmacies operate in a highly regulated environment. They must comply with federal antifraud laws, state antifraud laws, state Board of Pharmacy (BOP) regulations, DEA regulations, accreditation requirements (when applicable) and guidance from Medicare, Medicaid, PBMs and commercial insurers. If a pharmacy is doing something it should not be doing, then 'someone knows about it.' That 'someone' can be an employee, a competitor, a referral source, a governmental agency, or a third party payor (TPP).

If a pharmacy violates 1 or more of the federal and/or state antifraud laws, then it can have potential criminal liability, potential civil liability, and pharmacy license and DEA permit suspension or revocation. The risks are too high for the pharmacy to be cavalier regarding compliance with antifraud laws. It is important that on a day-to-day basis, the pharmacy be aware of the applicable federal and state antifraud laws and be aware of whether it is in compliance with the laws.

Part 1 summarized federal and state antifraud laws. Parts 2 and 3 discuss specific fraud landmines to avoid.

W2 Employee vs. 1099 Independent Contractor

The Office of Inspector General (OIG) has repeatedly expressed concern about percentage-based compensation arrangements involving 1099 independent contractor sales agents. In Advisory Opinion No. 06-02, the OIG stated that “percentage compensation arrangements are inherently problematic under the Anti-Kickback Statute, because they relate to the volume or value of business generated between the parties.”

A number of courts have held that marketing arrangements (involving 1099 independent contractors) are illegal under the federal anti-kickback statute (AKS) and are, therefore, unenforceable. Additionally, the OIG has taken the position that even when an arrangement will only focus on commercial patients and 'carve out' beneficiaries of federally-funded health care programs, the arrangement will still likely violate the AKS.

On the other hand, there are both an exception and a safe harbor to the AKS that state that it is acceptable to pay percentage-based compensation to marketing reps who are bona fide W2 employees of the pharmacy.

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 pharmacy cannot pay commissions to the marketing company. Doing so will violate the AKS. The OIG has adopted safe harbors that provide immunity for arrangements that satisfy certain requirements.

The employee safe harbor permits an employer to pay production-based compensation to marketing reps who are bona fide employees. Note that only a human being can be an employee; an “it,” such as a marketing company, cannot be an employee.

The only way that a 1099 independent contractor can be paid for marketing Medicare-covered items or services is if the arrangement complies with, or substantially complies with, the Personal Services and Management Contracts safe harbor (PSMC Safe Harbor) to the AKS.

Gifts to Physicians

A physician is a referral source to the pharmacy. If a pharmacy provides meals, gifts, and entertainment to a physician, or subsidizes a trip that the physician will take, then both the pharmacy and the physician need to comply with the federal and state laws that govern these arrangements.

While the Stark physician self-referral statute (Stark), pursuant to the Non-Monetary Compensation Exception (NMC Exception), allows a pharmacy to spend up to $416 in 2019 for noncash/noncash 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 noncash/noncash 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 need to comply with applicable state law. Even though the pharmacy and the physician will need to confirm this, it is likely that compliance with NMC Exception will avoid liability under state law.

Paying For a Facility’s EHR

Many pharmacies work with skilled nursing facilities (SNFs) and custodial care facilities (collectively referred to as 'Facilities'). A Facility is a 'referral source' to the pharmacy. If the pharmacy gives "anything of value" to the Facility, then the pharmacy is at risk of being construed to be "paying for a referral" … hence, a 'kickback.'

In order for a Facility to serve Medicare and Medicaid patients, federal law imposes a number of requirements on the Facility. These requirements cost the Facility money in order to comply. One such requirement is for the Facility to have a pharmacy perform a monthly drug regimen review (DRR) on each patient.

Electronic medication administrative records (eMARs) are not required for DRR; hard copy records are acceptable. Nevertheless, a Facility may desire to utilize 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. It is at this juncture that the Facility and pharmacy find themselves on the proverbial 'slippery slope.' Assume that the pharmacy receives referrals from the Facility and desires to pay 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 is the Electronic Health Records 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 satisfied. Three of the more important requirements are:

  • The Software must be interoperable at the time it is provided to the recipient.
  • The donor cannot place a restriction on the use, compatibility, or interoperability of the item or service with other EHR systems.
  • The recipient must pay 15% of the donor’s cost for the items and services prior to receipt, and the donor cannot finance or loan funds for this payment.

Medical Director Agreement

A pharmacy can enter into an independent contractor Medical Director Agreement (MDA) with a referring physician. The MDA must comply with the Personal Services and Management Contracts safe harbor and the Personal Services exception to the Stark physician self-referral statute. Among other requirements:

  • The MDA must be in writing and have a term of at least 1 year.
  • The physician must provide substantive services.
  • The compensation to the physician must be fixed 1 year in advance and be the fair market value equivalent of the physician’s services.

Sham Telehealth Arrangements

When a pharmacy is marketing to patients in multiple states, the pharmacy may run into a 'bottleneck.' This involves the patient’s local physician.

A patient may desire to purchase a product from the out-of-state pharmacy but it is too inconvenient for the patient to drive to his physician’s office. Or if the patient is seen by his local physician, the physician may decide that the patient does not need the product and so the physician refuses to sign an order. Or even if the physician does sign an order, he may be hesitant to send the order to an out-of-state pharmacy.

In order to address this challenge, some pharmacies are entering into arrangements that will get them into trouble. This has to do with telehealth companies. A telehealth company has contracts with many physicians who practice in multiple states. The legally compliant telehealth company contracts with, and is paid by self-funded employers that pay a membership fee for their employees, health plans, and patients who pay a per visit fee.

Where a pharmacy will find itself in trouble is when it aligns itself with a telehealth company that is not paid by employers, health plans, and patients, but rather, is directly or indirectly paid by the pharmacy. Here is an example: pharmacy purchases leads from a marketing company … the marketing company sends the leads to the telehealth company … the telehealth company contacts the leads and schedules audio or audio/visual encounters with physicians contracted with the telehealth company … the physicians write orders for products…the telehealth company sends the orders to the pharmacy … the marketing company pays compensation to the telehealth company for its services in contacting the leads and setting up the physician appointments … the telehealth company pays the physicians for their patient encounters … the pharmacy mails the product to the patient … the pharmacy bills (and gets paid by) a third party payer.

Stripping everything away, the pharmacy is paying the ordering physician. To the extent that a pharmacy directly or indirectly pays money to a telehealth physician, who in turn writes an order for a product that will be sold by the pharmacy, the arrangement will likely be viewed as remuneration for a referral (or remuneration for “arranging for” a referral).

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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