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Structuring Physician-Pharmacy Ventures: Minimizing Regulatory Risks, Ensuring Reimbursement

Navigating Corporate Practice of Medicine/Pharmacy, Anti-Kickback and Stark Laws, and State Regulation

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, NOVEMBER 19, 2015

Reesa N. Handelsman, Wachler & Associates, Royal Oak, Mich. Rick L. Hindmand, McDonald Hopkins, Chicago Todd A. Nova, Hall Render Killian Heath & Lyman, Milwaukee

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STRUCTURING PHYSICIAN-PHARMACY VENTURES: MINIMIZING REGULATORY RISKS, ENSURING REIMBURSEMENT

Reesa Handelsman Wachler & Associates, P.C. rhandelsman@wachler.com 248.544.0888 Rick Hindmand McDonald Hopkins LLC rhindmand@mcdonaldhopkins.com 312.642.2203 Todd Nova Hall Render tnova@hallrender.com 414.721.0464

Agenda

• Overview - Drivers of Increased Pharmacy Integration Chatter
• State Law, AMA
• Stark & Anti-Kickback
• Risk Profile
• Institutional Considerations
• Pharmacy Management Agreements

6

Integration Drivers – Payment Systems

• Current: PPS Model
• Effective October 1983.
• Today includes - Acute Care I/P (DRG); Outpatient (APC); FQHC (Visit PPS)
• Some limited exceptions - RHC; Hospice; CAH; etc.
• Future: Value-Based Purchasing (VBP)
• Per CMS, current payment systems reward quantity, rather than quality
• What is VBP?
• Reward quality of care through incentives and transparency
• Link payment more directly to the quality of care provided
• May 6, 2011 VBP Regulation:
• “The overarching goal of these initiatives is to transform Medicare from a

passive payer of claims to an active purchaser of quality health care for its beneficiaries.”

7

Integration Drivers –VBP… And Beyond

Source: Centers for Medicare and Medicaid Services – January 26, 2015.

Consider – Role of pharmacy and other vertically integrated providers

CMS: Better Care. Smarter Spending. Healthier People: Paying Providers for Value, Not Volume (January 26, 2015)

8

• But when will real impact be seen?
• CMS January 26, 2015 announcement - significant push

away from FFS Medicare payments to “alternative” payment models

• Today – approximately 20% of payments tied to VBP
• Tomorrow (in addition to a focus on working with State

Agencies including Medicaid)…

Integration Drivers –VBP… And Beyond

9

Integration Drivers – Beyond VBP

Source: Centers for Medicare and Medicaid Services – January 26, 2015.

10

• CMS Bundled Payments for Care Improvement (BPCI) Initiative
• 1/1/2013: CMS announces the organizations selected to participate
• Organizations to enter into payment arrangements that include financial and

performance accountability for episodes of care

• 4 Models:
• Model 1: Episode of care focused on the acute care inpatient hospitalization. Awardees

provide a standard discount to Medicare from the usual Part A hospital inpatient payments

• Separate TC and PC, but gainsharing permitted
• Model 2: Starting at inpatient admission, episodic care payments for a 30-, 60- or 90-day

period

• Model 3: Starting at post-acute admission, episodic care payments for a 30-, 60-or 90-

day period

• Model 4: Prospective bundled payment arrangement
• Lump sum payment made to a provider for the entire episode of care includes PC

and TC

• Can still be in ACO

Integration Drivers – Beyond VBP

11

CMS BPCI Initiative Models 2-4: Year 1 Annual Report to CMS (February 2015)

• “…BPCI appears to have affected provider performance.”
• “We observed statistically significant declines in SNF use and increases in HHA

use…”

• “Readmissions dropped more for BPCI Model 2 participants, although ED visits

without a hospitalization increased…”

• Late March 2015 - H.R. 2: “The Medicare Access and CHIP Reauthorization Act of

2015” (SGR fix)

• Reiterates a commitment to APMs
• Indicates APMs viewed as pay-for mechanisms

Integration Drivers – Beyond VBP

12

• CMS CCJR Proposed Rule (July 14, 2015)
• Certain Hospitals in 75 MSAs nationally must participate
• Includes:
• Drugs and biologicals
• Physician services
• DME
• Therapy services
• SNF services
• LTCH services
• Hospice
• Reconciliation payments may be shared with collaborators

Integration Drivers – Beyond VBP

13

Integration Drivers – Reimbursement

• General payment (Drugs):
• Office-Based
• PFS RVU (non-facility) administration
• E&M
• Drug cost
• Part B: ASP + 6% (was percentage of AWP)
• Hospital-Based
• APC
• PFS RVU (facility – where available)
• Drug cost (Part A, Part B bundled or pass-through)
• Part B: ASP + 6 % (bundled if drug cost <$95 for 2015)
• Pharmacy
• Part D ingredient cost plus dispensing fee
• Part B reimbursement not available for any drug usually self-administered
• Ingredient cost:
• 340B pricing

14

Integration Drivers – Others

• Proposed hospital discharge planning rule (November 3, 2015)
• Codification of multi-disciplinary discharge planning approach (including pharmacy) – attending

physician must be involved

• Requires medication reconciliation
• Discharge prescriptions likely enhanced focus
• CMS considering mandatory PDMP checks
• Acute care payment reductions:
• DSH
• CAH
• Utilization shifts:
• Decreased acute inpatient care
• Decreased infusion
• Increased oral drugs (more limited provider involvement)
• Many of which are specialty

15

Integration Drivers - Impact

• With shift to population health and cost reduction incentives, what are we to do?
• Focus first on the clear quality and cost drivers through coordination (including

pharmacy/specialty)

• Highest cost patients are demonstrably concentrated

16

Integration Drivers - Impact

• Healthcare moving away from acute care toward:
• Integrated post-acute, home health, primary/preventive and specialty

pharmacy networks

• BUT

, vertically integrated networks are complex

• Without an integrated network: i) control over population health

components of care (including pharmacy) is reduced; and ii) cost to subcontract for services included in the bundle are higher

• Past focus: horizontal integration
• Future focus: vertical integration

17

Integration Drivers – Pharmacy-Specific

• Risk Evaluation & Mitigation Strategies (REMS)/Limited Distribution
• Competing interests for REMS manufacturers:
• Difficult for small (physician) pharmacies to gain access to certain drugs
• Technology and full-spectrum data access
• Integrated EMRs
• E-Prescribing
• PDMP reporting
• Shortages
• Narrow payor networks
• Disconnect between specialty pharmacy locations and regional payor networks
• Less of an issue as more payors require national delivery scope
• As clinically integrated networks (CINs) more frequently include payors, complexity
• increases. What if a specialty pharmacy with access to a limited distribution drug

refuses to participate in a provider-sponsored plan?

• State pharmacy society concerns regarding specialty consolidation

18

Integration Headwinds

• Recent Bipartisan Budget Act of 2015 – elimination of off-

campus provider-based payment benefit

• Physician desire for independence
• Physician practice inertia

19

• Shifting incentives to favor integrated delivery systems

(generally)

• Shifting care modalities (post-acute)
• Sharing of value-based savings with providers
• Economies of scale (EMR, compliance, operations support)
• Critical mass (both ACO and limited distribution implications)

Future Trends

20

• What are we seeing?
• Physician practices shifting from infusion to retail/oral pharmacies
• Providers and payors ramping up non-infusion pharmacy operations
• Enhanced physician involvement in institutional pharmacy operations

(management)

• Increased mail order pharmacy operations
• Challenges for smaller vertically integrated network acquisitions
• Challenges for smaller physician practice (e.g., bundled payments,

compliance)

• What are you seeing?

Future Trends

21

State Medical & Pharmacy Practice Acts

• State variations
• Written prescription
• Disclosure
• Registration
• Supervision
• Security
• Temporary or emergency supply
• Labelling & record-keeping
• Dispensing device
• Location restrictions

22

State Fee-splitting/Fraud & Abuse

• State variations
• % of fees
• Referrals
• Anti-kickback

23

AMA Code of Medical Ethics

• Opinion 8.06 – prescribing and dispensing

― Prescribe based solely on medical considerations & patient need ― No payment or compensation for prescribing ― Dispensing must primarily benefit the patient ― Self-referral guidelines ― Patient freedom of choice ― Avoid indemnification for prescribing ― Written prescription

• Opinion 8.063 – sale of health-related products

― NA to sale of prescription items

24

AMA Code of Medical Ethics (cont’d)

• Opinion 8.0321 – Physician self-referral

― Generally, physicians should not refer if:

― Financial interest ―

• utside the office

― physician doesn’t provide care

― Based on objective and medically relevant criteria ― Appropriate & high quality ― Steps to address conflicts of interest ― Informed consent

25

Stark overview

• 42 U.S.C. § 1395nn
• Generally prohibits a physician from making a referral to an entity in which

he or she (or an immediate family member) has a financial relationship for a designated health service (DHS) unless the arrangement is covered by a statutory or regulatory exception.

• Stark’s 3 main concepts as applied to physician-owned pharmacies:

― DHS: includes outpatient prescription drugs ― Referral: satisfied if physicians will prescribe outpatient prescription drugs payable under Medicare or Medicaid to the Practice’s patients ― Financial interest: satisfied if either a direct or indirect (i) ownership or investment interest or (ii) compensation arrangement exists

26

In-Office Ancillary Services (IOAS) Exception to Stark

• 42 CFR 411.355(b)
• Applies to both ownership and investment interests and compensation

arrangements

• Available to a single physician or a physician group that meets the definition
• f “group practice” under Stark
• With regard to DME, only applies to infusion pumps
• Carves out from Stark’s prohibition on physician referrals for outpatient

prescription drugs that meet requirements relating to: ― The performance and supervision of services ― The location of services ― The billing of services

27

IOAS Exception – Performance & Supervision

• f Services
• Pharmacist must be supervised by the referring physician or another physician

in the group practice, provided that the supervision complies with all other applicable Medicare payment and coverage rules for the services.

• What level of supervision is then required to meet the IOAS exception?
• General supervision?

― Service furnished under physician’s overall direction and control ― No physical presence requirement ― Training requirement

28

IOAS Exception – Location of Services

• The pharmacy services must be furnished in either

― A “centralized building” used by a group practice for the provision of some of all of the group practice’s DHS; or

― Exclusive use by group practice on a full-time basis ― A group practice may have more than one centralized building ― Is this available for a wholly-owned subsidiary pharmacy of a group practice?

― The “same building” in which one of three tests, involving certain availability, practice and other requirements, is met.

― Shared street address ― Excludes exterior spaces ― Does not mandate exclusive use of space

29

IOAS Exception – Billing of Services

• Pharmacy services must be billed by one of the following:

― The physician supervising the service ― The group practice if the supervising physician is a member of the group practice or a “physician in the group practice” (as defined under Stark) under a billing number assigned to the group practice ― An entity that is wholly owned by the supervising physician or by that physician’s group practice under the entity’s own billing number or under a billing number assigned to the physician or group practice ― An independent third party billing company acting as an agent of the physician, group practice, or entity specified above under a billing number assigned to the physician, group practice, or entity, provided that the billing arrangement meets certain legal requirements

30

Additional Stark Exceptions for Wholly-Owned Subsidiary Pharmacies

• Physician supervision services  Personal Service Arrangements Exception

(42 CFR 411.357(d)) ― Arrangement in writing, signed by the parties, specifies the services ― Covers all services to be furnished by the physician to the pharmacy ― Services are reasonable and necessary for legitimate business purposes ― Duration of at least one year ― Compensation set in advance, does not exceed FMV and is not determined in a manner that takes into account the volume or value of any referrals or other business generated ― Does not involve counseling or promotion of business arrangement or activity that violates state or federal law ― Complies with specified holdover-related provisions

31

Additional Stark Exceptions for Wholly-Owned Subsidiary Pharmacies

• Rental of Office Space Exception (42 CFR 411.357(a))  if referring

physician or group practice owns/leases space to the pharmacy ― Set out in writing, signed by the parties, specifies the premises ― Duration of at least one year ― Space is exclusively used by lessee when used by lessee and does not exceed that which is reasonable and necessary for the legitimate business purposes of the arrangement ― Commercially reasonable even in absence of referrals ― Rent is set in advance, consistent with FMV and not determined:

― In manner taking into account volume/value of referrals or business generated, or ― Formula based on % revenue or per-unit of service rental charges (for services provided to patients referred by lessor to lessee)

― Complies with specified holdover-related provisions

32

Federal Anti-Kickback Statute (AKS) Overview

• 42 U.S.C. § 1320a-7b(b)
• Prohibits a person or entity from knowingly and willfully offering, paying,

soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward the: ― Referral of an individual for the furnishing of any item or service that may be reimbursed under a federal health care program, or ― The purchase, lease, ordering or arranging for or recommending the purchasing, leasing or ordering of any item, facility or service that may be reimbursed under a federal health care program.

• Remuneration includes the transfer of anything of value, directly or

indirectly, overtly or covertly, in cash or in kind.

33

AKS Overview (cont’d)

• Intent-based criminal statute

― Statutory exceptions and regulatory safe harbor protection requires strict compliance with terms ― Failure to comply with an exception or safe harbor does not mean an arrangement is per se illegal  facts and circumstances analysis

• Covers arrangements where “one purpose” of the remuneration was to induce

referrals

• Violation is a felony punishable by a maximum fine of $25,000, imprisonment

up to five years, or both.

• OIG may impose civil monetary penalties and exclude parties from federal

health care programs

34

AKS: If Practice Directly Owns the Pharmacy

• Employees safe harbor (and statutory exception) applies to referring

physicians who are employees of the group practice

• 42 CFR 1001.952(i)
• Remuneration does not include any payment made by an employer to an

employee, who has a bona fide employment relationship with the employer, for employment in the furnishing of any item or service for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.

• Employee has the same meaning as it does for the purposes of 26 U.S.C.

3121(d)(2) (Internal Revenue Code)

35

AKS: If Practice Directly Owns the Pharmacy

• Personal services and management contracts safe harbor applies to

referring physicians who are independent contractors of the group practice

• 42 CFR 1001.952(d)
• In general, must meet the personal service arrangements Stark exception

requirements in addition to the following requirements: ― If part-time services, agreement must specify the exact schedule of such intervals, their precise length, and the exact rent for such intervals; and ― The aggregate compensation must be set in advance and the aggregate services contracted for must not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose

• f the services.

36

AKS: If Wholly-Owned Subsidiary of Practice Owns Pharmacy

• Investments in group practices safe harbor (42 CFR 1001.952(p))

― Protects return on investments in solo or group practices (that meet group practice definition under Stark) ― Only protects equity interests in the group/practice itself and not subdivisions of the practice/group ― Compliance with IOAS as evidence of intent

• Small Entities Investment Interests Safe Harbor (42 CFR 1001.952(a))

― Unavailable for arrangements that comply with the IOAS exception to Stark

• Compliance with IOAS exception as evidence of intent under AKS

37

AKS: If Wholly-Owned Subsidiary of Practice Owns Pharmacy

• Personal Services and Management Contracts Safe Harbor (42 CFR

1001.952(d)) – discussed above ― Physician supervision services

• Space rental safe harbor (42 CFR 1001.952(b))

― If referring physician or group practice owns/leases space rented to pharmacy ― In general, must meet the rental of office space Stark exception requirements in addition to the following requirements:

― Lease must cover all of the premises leased during the term; ― Aggregate rental charge is set in advance; and ― If part-time lease, must specify the exact schedule of such intervals, their precise length, and the exact rent for such intervals

38

Jointly-Owned Pharmacy

• Joint ownership by multiple physicians (not in the same group practice) or by

multiple group practices, or a combination of both

• Stark: Will not comply with IOAS exception
• AKS: May comply with small entity investment interests safe harbor

― Likely problematic requirements (of the 8 safe harbor requirements):

― No more than 40% of the value of investment interests in the pharmacy be held by investors who are in a position to make or influence referrals, furnish items or services, or otherwise generate business for the pharmacy ― No more than 40% of the pharmacy’s gross revenue may come from referrals

• r business otherwise generated by investors

― The terms on which the investment interest is offered to a passive investor (i.e., an investor not responsible for the day-to-day management of the pharmacy) who is in a position to make or influence referrals, furnish items or services to, or otherwise generate business for the pharmacy be no different from the terms offered to other passive investors

39

Expanded Risk Profile

• Audits
• Regulatory scrutiny
• Expanded responsibilities
• Controlled substances – DEA/state, security, registration, employee screening,

records, reporting obligations, disposal

• Compunded drugs
• Sales records
• Second-guessing
• Sunshine laws

40

Institutional Considerations

• Provider Owned or Operated Pharmacy – Specialty
• Considerations:
• REMS/limited distribution drugs
• How to reach critical mass (chicken or the egg)
• Payor contracting challenges
• Some third-party payors already have their own vertically integrated specialty

pharmacy operations

• Legal Structure (separate entity, for-profit, non-profit)
• Unrelated business income tracking and reporting
• Scope of patient base – include non-patients?
• Own use considerations
• If mail order, out of state licensure issues
• Shared service rules

41

Institutional Considerations

• Hospital System Approaches/Considerations – Discussion Points

– DHS includes “outpatient prescription drugs.”

• “Outpatient Prescription Drugs” includes those payable by Part B

and Part D – Joint ventures between hospitals and physicians where the physicians refer to the JV pharmacy not feasible – In the provider-based setting, referrals to physician-owned pharmacies must consider Stark IOASE standard

• Includes 340B Contract Pharmacy arrangements with physician-
• wned pharmacies

– Physician dispensing/delivery in the institutional setting

• Large Physician Practices as Quasi-Institutional Entities

– Consider multi-state, multi-entity group practice considerations

• Central Fill pharmacies

42

• Primary allegations were that Adventist:

– Provided compensation and benefits to the employed physicians in excess of fair market value; – Determined physician bonuses, in part, based on physician referrals for hospital services; and – Allowed the physician practices to operate at a loss in return for generating referrals to Adventist hospitals.

• Payments to induce referrals to Adventist (including hospital pharmacy

programs)

Institutional Considerations

43

Pharmacy Management – AKS Considerations

• AKS prohibits a person or entity from knowingly and willfully offering, paying,

soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward the: ― Referral of an individual for the furnishing of any item or service that may be reimbursed under a federal health care program, or

― Referral includes marketing services, etc.

― The purchase, lease, ordering or arranging for or recommending the purchasing, leasing or ordering of any item, facility or service that may be reimbursed under a federal health care program

44

Pharmacy Management – AKS Safe Harbors

• Personal Services and Management Contracts Safe Harbor:

― Affects compensation structure, etc.

• Equipment Rental Safe Harbor (42 CFR 1001.952(c)):

― Set out in writing and signed by the parties; ― Lease covers all equipment leased during the term; ― If part-time lease, specifies exact schdule, interval length and rent; ― Term of at least one year; ― Aggregate rental charge is set in advance, consistent with FMV in an arms- length transaction, and not determined in a manner that takes into account the volume/value of referrals or other bsuiness generated between parties; & ― Equipment rented does not exceed what is reasonably necessary to accomplish commercially reasonable business purpose of lease.

45

Pharmacy Management – AKS Safe Harbors (cont’d)

• Discount Safe Harbor (42 CFR 1001.952(h))

― Is manager an ”offeror” of a discount? ― Safe harbor conditions:

― Offeror must inform the entity submitting the claim or request for payment in a manner reasonably calculated to give notice to the entity of its obligations to report such a discount and to provide information upon request to the Secretary of the Department of Health and Human Services or a state agency; and ― The offeror must refrain from doing anything that would impede the buyer’s

• r seller’s ability to meet their obligations under the discount safe harbor.

46

Pharmacy Management – AKS Contractual Joint Venture Risks

• OIG Special Advisory Bulletin of 2003
• Focuses on arrangements where health care provider in one line of business

expands into a related healthcare business by contracting with an existing provider of a related item/service to provide the new item/service to the provider’s existing patient population

• Suspect indicia of a “questionable” contractual joint venture arrangement:

― New line of business ― Captive referral base ― Little or No Bona Fide Business Risk ― Status of manager as would-be competitor ― Scope of services provided by manager ― Remuneration ― Exclusivity

47

Pharmacy Management – Key Contractual Terms for the Management Company

• Duration and Termination
• Staffing and Non-solicitation
• Management fee structure
• Non-compete
• Confidentiality

48

Management Agreement – Key Contractual Terms and Considerations for the Physicians

• Pharmacy management company
• Physician concerns

― Due diligence ― Compliance ― Professional judgment and control/corporate practice of medicine ― Fee-splitting ― Marketing and contracting activities ― Flexibility/termination ― Modification for changes in law/reimbursement

49