Great Investment For Doctors: Joint Venture Pharmacies

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This article originally was published in the Business & Law, Featured, and Finance sections of the Physicians News Digest Web site, www.physiciansnews.com, on December 12, 2013. Republished with permission.

With reimbursement levels declining, health care organizations, including pharmacies and physicians, continue to look for ways to diversify their businesses. A very attractive vehicle for increasing revenues has been ancillary joint venture arrangements, including joint venture pharmacies.

Joint ventures among physicians and health care companies were once commonplace in the health care industry. With stricter enforcement of the federal Anti-Kickback Statute and the passage of Stark, however, the industry quickly saw a decline in these ventures, many being acquired, merged out of existence and even sold. Greater certainty of state laws and the finalization of federal laws, however, has helped guide legitimate joint ventures.

Corporate Practice of Medicine/Pharmacy

The corporate practice of medicine doctrine, which has been adopted by certain states either through corporate formation statutes or case law, generally prohibits (with some exceptions) non-physicians from owning an interest in a medical practice (and the employment of physicians by non-physicians). This doctrine has been adopted by other licensed professions. Many states (although not all), however, permit non-pharmacists to own an interest in a pharmacy, thus allowing for non-licensed individuals or corporations to partner with pharmacies.

Federal Anti-Kickback Statute

Generally, the federal Anti-Kickback Statute prohibits an individual or entity from knowingly and willfully offering or paying, or from soliciting or receiving, remuneration in order to induce the referral or the arranging for the referral of business reimbursed by federal health care programs. The primary concern for a physician-pharmacy joint venture under the Anti-Kickback Statute (assuming it accepts federal health care program reimbursement) is whether distributions to investors constitute disguised remuneration for referrals. The U.S. Department of Health and Human Services Office of Inspector General (OIG) has adopted safe harbors to protect certain venture arrangements.

Safe Harbors

Historically, the investment interests safe harbor for small investments has been utilized to protect physician-hospital joint ventures. To get protection under this safe harbor, however, a physician-pharmacy joint venture has to satisfy a number of requirements, including what are commonly known as the 60/40 Investor Test and 60/40 Revenue Test. These tests require that no more than 40 percent of the value of the investment interests of each class of investment interests be held in the previous fiscal year or previous 12-month period (Look-Back Period) by investors who are in a position to generate business for the venture (Investment Test). In addition, no more than 40 percent of the venture’s gross revenue related to the furnishing of health care services in the Look-Back Period may come from business generated from investors (Revenue Test). Physician-pharmacy joint ventures may or may not be able to comply with these requirements. Typically, the difficulty will be with the Revenue Test. Complying with Stark, however, may be unlikely, forcing physician-pharmacy joint ventures to participate in non-federal health care programs only.

Stark

Generally, Stark prohibits a physician (or immediate family member) who has a financial relationship with an entity from making referrals to that entity for the furnishing of designated health services for which payment may be made under the federal health care programs, unless an exception or safe harbor is satisfied. Stark is often implicated in the physician joint venture context because physicians make referrals for designated health services, such as outpatient prescription drugs, to the entity and have an ownership or compensation relationship with the entity. Stark is a strict liability statute requiring compliance with an exception if the statute is implicated. Unfortunately, there is no exception that corresponds with the federal Anti-Kickback Statute’s small investment interests safe harbor that would protect the physician investment in the pharmacy.

State Laws

Many states have adopted anti-fraud and abuse and anti-referral laws and safe harbors and exceptions similar to the federal counterparts. Accordingly, even where physician-pharmacy joint ventures do not accept federal reimbursement, they will need to comply with applicable state laws. Additionally, medical practice acts and pharmacy board regulations may regulate referrals and over-utilization and, therefore, could also impact the structure of the venture. Finally, it is also good practice to structure any health care venture in accordance with OIG’s guidance in this area and the small investment interests safe harbor.

OIG’s Position on Joint Ventures

OIG has long been concerned with the fraud and abuse risk posed by health care ventures in which investors are also sources of referrals. In 1989, OIG issued a special fraud alert concerning suspect joint ventures. In the alert, OIG distinguishes between legitimate joint ventures and those that it considers suspect. Importantly, OIG indicated that under suspect joint ventures, physicians may be investors not so much for raising investment capital to start a business, but rather to lock up a stream of referrals from the physicians in exchange for compensation for those referrals. Some questionable features of suspect joint ventures include:

Selection and Retention of Investors

  • physician investors are chosen because they are in a position to make referrals to the venture
  • there is discrimination in the opportunity of physicians to invest based on their ability to make referrals
  • physician investors are encouraged to make referrals and may be encouraged to divest their ownership interest where they fail to maintain an acceptable level of referrals
  • the venture tracks referrals and distributes the information to investors.

Business Structure

  • one party to the joint venture may be an ongoing entity that is already engaged in a particular line of business and acts as the reference supplier under the arrangement with the venture, the venture being nothing more than a shell entity
  • the joint venture contracts out all of the services and conducts very few services on its own premises, even though it bills the federal health care programs for the services.

Financing and Profit Distributions

  • capital invested by physicians is disproportionately small, the risk involved in the venture is low, and the returns on investment are disproportionately large
  • physician investors may borrow their capital contribution from the entity and pay it back through deductions of profit distributions.