Recognizing and Avoiding Fraud Landmines, Part 3


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

This is Part 3 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 I summarized federal and state anti-fraud laws. Part 2 and Part 3 discuss specific fraud landmines to avoid.

Sham Insurance Policies to Waive Copayments

Many patients cannot afford high copayments. In an attempt to address this issue, the pharmacy may be tempted to enter into an insurance arrangement that, unfortunately, turns out to be a 'sham.' This arrangement will normally take 1 of 2 forms.

  • The patient will pay a minimal "premium" (e.g., $10) to the pharmacy. In exchange, the pharmacy represents to the patient that he/she has purchased an "insurance policy" to cover the copayment.
  • The pharmacy will pay an upfront fee to the “insurance company” (ABC). ABC will, in turn, issue an “insurance policy” to the pharmacy. The pharmacy will collect little to no copayments from its patients. If the pharmacy is subjected to an audit/investigation and if the auditor/investigative agency asks to see if the pharmacy is collecting copayments from a list of named patients, then ABC will pay money to the pharmacy that constitutes all or a portion of the copayments the named patients should have paid.

Both of these arrangements are subterfuges—or ruses—in an attempt not to impose a large copayment obligation on the patient.

Data Mining

In order to increase reimbursement, a pharmacy may desire to engage in 'data mining.' While data mining is not wrong in and of itself, pharmacies need to be aware of the pitfalls attendant to certain data mining activities.

In a type of data mining arrangement, a company (ABC) assists the pharmacy in researching alternative product options that result in larger reimbursement. The pharmacy then approaches physicians and suggests that they switch their orders from the product with lower reimbursement to the product with higher reimbursement. The pharmacy will educate the physicians regarding the clinical benefits of the more expensive product. If the physicians agree and change orders, then the pharmacy makes more money.

Let us assume that a government health care program pays for the replacement product. If the pharmacy is paying percentage remuneration to ABC, the question becomes: Is ABC arranging for the referral of government program patients to the pharmacy and/or is ABC recommending the purchase of products that are reimbursable by a government health care program? If the answer is “yes,” then the federal antikickback statute is implicated.

Both sides of the equation can be argued. On the one hand, one can argue that because ABC is not having any contact with the physicians (i.e., ABC is only working with the pharmacy), then ABC cannot be construed to be "arranging for the referral" of patients nor "recommending the purchase of products." On the other hand, one can argue that by allowing the pharmacy to use the ABC software platform and by showing the pharmacy how to find similar products with higher reimbursement, then such acts rise to the level of "arranging for the referral” of patients and “recommending the purchase of products.” This is where the 'smell test' comes in. Governmental agencies have a great deal of discretion in deciding whether or not to bring an enforcement action.

If an arrangement falls within a 'gray area,' but it is not otherwise abusive or offensive, then the governmental agency will likely leave the arrangement alone. On the other hand, if it looks like the parties to the arrangement are 'gaming the system' to substantially increase their revenue, then the governmental agency (and/or a third party payor) will likely be motivated to shut the arrangement down.

Assume that no government program is involved. Assume that the only payors are commercial insurers. If the pharmacy is operating in a state in which there is a state antikickback statute that applies to all payors, then the preceding discussion applies.

Separate and apart from what the law says, does the data mining arrangement pass the 'smell test'? If the motivation behind the arrangement is not patient care, but rather is for the pharmacy to make more money, then even if the arrangement does not clearly violate the law but is nevertheless “offensive.” In this scenario, a governmental agency, PBM, or commercial third party payor may take steps to shut it down. If a PBM concludes that the pharmacy is a “dishonest player,” then the PBM may decide to terminate its contract with the pharmacy.

Purchase of Internet Leads

When a lead generation company (LGC) sells Medicare leads to a pharmacy, then it is important that the arrangement not violate the federal antikickback statute. It is acceptable for the pharmacy to “purchase a lead.” However, it is a violation of the federal antikickback statute for the pharmacy to “pay for a referral.”

There is a distinction between purchasing 'raw leads' from purchasing 'qualified leads.' A raw lead is when the LGC only collects the name, address and phone number of the Medicare beneficiary. A qualified lead is when the LGC collects additional information about the beneficiary such as physician’s name, Medicare number, diagnosis, products the beneficiary is currently using, etc. The chances of a raw lead becoming a paying customer for the pharmacy are pretty remote. On the other hand, the chances of a qualified lead becoming a paying customer increase appreciably. If the pharmacy purchases raw leads on a per lead basis, then the antikickback statute is likely not implicated. However, if the pharmacy purchases qualified leads on a per lead basis, then the antikickback statute will likely be implicated.

The arrangement should be structured 1 of 2 ways.

  • Purchase of Raw Leads—The only information that the LGC will collect and give to the pharmacy will be the lead’s name, address and phone number. The pharmacy can pay for these raw leads on a per lead basis.
  • Purchase of Qualified Leads—In addition to collecting the name, address and phone number, the LGC will collect the physician information, Medicare number, and other qualifying information. The compensation paid by the pharmacy for the LGC’s services will be fixed one year in advance (e.g., $60,000 over the next 12 months, or $5000 per month) and will be the fair market value equivalent of the services rendered by the LGC. Fixed annual compensation is an important element to the Personal Services and Management Contracts safe harbor to the federal antikickback statute.

Collection of Copayments

A pharmacy may be inclined to suggest to potential patients that if they purchase from the pharmacy, then the pharmacy will waive the patients' copayments. While it is acceptable for a pharmacy to waive a copayment when a patient establishes an inability to pay, the pharmacy can be subjected to liability if it routinely waives copayments.

There are 2 important federal statutes prohibiting routine waivers of copayments for beneficiaries of federal and state health plans. The law that most specifically addresses waiver of copayments is the beneficiary inducement statute. That statute prohibits the pharmacy from offering "remuneration" to a beneficiary if the pharmacy knows (or should know) that the remuneration is likely to influence the beneficiary to obtain items or services from the pharmacy. The definition of "remuneration" specifically includes waivers or reductions of copayment amounts, except when the waiver is not advertised, the pharmacy does not routinely waive copayments, and either the pharmacy in good faith determines that the beneficiary is in financial need, or the pharmacy fails to collect the copayment after making reasonable collection efforts.

The other relevant federal statute is the previously discussed federal antikickback statute. The Office of Inspector General (OIG) has long taken the position that routine waivers of copayments violate the federal antikickback statute.

It is important for a pharmacy to adopt and enforce a policy of waiving copayments only in individual cases where the pharmacy determines that the patient is financially needy. In all other cases, the pharmacy should pursue normal collection efforts.

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


  • Recognizing and Avoiding Fraud Landmines, Part 1
  • Recognizing and Avoiding Fraud Landmines, Part 2

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