Clinical Study: Legitimate or Disguised Kickback?

By: Jeffrey S. Baird, Esq.

Introduction

Historically, governmental regulatory agencies have not been overly aggressive in bringing enforcement actions against pharmacies under the Medicare anti-kickback statute, state anti-kickback statutes, and other anti-fraud laws. This is changing for a number of reasons.

First, because pharmacies are billing a number of government health care programs (Medicare, Medicaid, TRICARE, etc.), governmental agencies are focusing their attention on pharmacies. Second, there is a growth in compounding pharmacies … and many compounding pharmacies are engaging in aggressive marketing. Third, as a result of the New England Compounding Center tragedy, there is now a brighter spotlight on compounding pharmacies. Fourth, governmental agencies are better funded and staffed, and their sophistication in scrutinizing potentially fraudulent arrangements has increased. Finally, many pharmacy employees are aware of their right to file a qui tam (whistleblower) lawsuit if the employees become aware that their employer is engaging in fraudulent activities.

As a result, pharmacies, and particularly, compounding pharmacies, need to be aware that they are under the microscope the same way that other health care providers are under the microscope. An arrangement that is coming under government scrutiny is the “clinical study.” Is this a legitimate arrangement designed to gather valuable data? Or is this a smoke screen designed to allow a compounding pharmacy to pay money to a referring physician?

Description of a Suspect Clinical Study

A suspect clinical study involving compounded pain creams might be structured as follows: (i) the physician will refer patients to the pharmacy for compounded pain creams; (ii) once a patient starts using a pain cream, then the physician will obtain information from the patient such as “on a scale of 1 to 10, with 1 being no pain and 10 being excruciating pain, describe your pain after applying the pain cream;” (iii) the physician will forward the information to the pharmacy; and (iv) the pharmacy will pay compensation to the physician on a per patient/per month basis.¹

In determining whether a clinical study is a legitimate study designed to obtain valuable information about the efficacy of the compounded pain cream, or is a subterfuge designed for the pharmacy to pay money to a referral source, the pharmacy needs to examine federal and state law.

Federal Law

The Medicare anti-kickback statute (“AKS”) makes it a felony to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program.² In most clinical studies, because a pharmacy typically pays the physician on a per patient/per month basis, the government will likely conclude that the clinical study is intended to motivate physicians to generate patient referrals.

A pharmacy may take the position that it is not paying the physician for referrals – but rather – is paying the physician for legitimate services. Several courts have addressed this issue and have come up with the “one purpose” test. Under this test, if “one purpose” behind a payment is to induce referrals, then the AKS is violated notwithstanding that (i) the primary purpose of the payment is to pay for legitimate services and (ii) the payment is fair market value.

There are a number of safe harbors to the AKS. If an arrangement falls within a safe harbor then as a matter of law, the AKS is not violated. The Personal Services and Management Contracts Safe Harbor permits payments to referral sources as long as the arrangement complies with specific elements, including the following: (1) payments must be pursuant to a written agreement, and (2) the aggregate compensation paid must be set in advance (e.g., $12,000 over the next 12 months or $1,000 per month), be consistent with fair market value, and not be determined in a manner that takes into account the volume or value of any referrals or business generated.³

Because the compensation in a typical clinical study is based on a per patient/per month basis, then the compensation is calculated in a manner that takes into account the volume of referrals from the physician to the pharmacy. As such, the typical clinical study does not meet the standards of the Safe Harbor.

A clinical study may attempt to avoid problems with the AKS by stating that “no patients, covered by a government health care program, will be included in the study and the physician will never be compensated by the pharmacy for any time or effort spent with any patient with such coverage.” However, the Office of Inspector General (“OIG”) has taken the position that if a party is generating both commercial and federally-funded health care program referrals to an entity, any arrangement where the entity pays that party on a per patient basis for the commercial patients and the federally-funded health care program patients are “carved out” from the payment, nevertheless violates the AKS. The OIG’s reasoning is that compensation relating to the commercial patients also rewards the referral of patients covered by a government health care program. Therefore, a pharmacy may not circumvent the AKS by only paying compensation relating to commercial patients if the physician is also referring federally funded health care program patients to the pharmacy.

Because the typical clinical study incentivizes referrals, there is a risk that the physician will generate patients, covered by a government health care program, for the pharmacy. Although the clinical study might provide that the pharmacy will not compensate the physician for any time spent with patients, covered by a government health care program, the arrangement will likely violate the AKS if the physician also refers such patients to the pharmacy. In addition, the physician’s referral of patients, covered by a government health care program, to the pharmacy will likely violate the federal Stark law, which prohibits a physician from making referrals to a pharmacy with which the physician has a direct or indirect financial relationship.⁴

State Law

Assume that the physician refers no patients to the pharmacy who are covered by a government health care program. In this scenario, the pharmacy does not have to contend with federal anti-fraud laws. However, the pharmacy must review the clinical study arrangement under applicable state law.

All states have anti-fraud statutes that are similar to the federal anti-fraud statutes. Most states have anti-kickback statutes similar to the AKS. Some state anti-kickback statutes come into play only if the payer is the state Medicaid program; other state anti-kickback statutes apply even if the payer is a commercial insurer (or even if the patient pays cash). A number of states have physician self-referral statutes that are similar to the federal Stark statute.

For example, New York defines professional misconduct in the practice of medicine to include “[d]irectly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services.”⁵ Significantly, this prohibition applies to items and services covered by any payer.

Although New York’s kickback laws only apply to items or services covered by the New York Medicaid program⁶, New York’s physician self-referral law applies to items and services covered by any payer. Specifically, the wording of the New York physician self-referral statute prohibits a physician from referring a patient to a pharmacy for pharmacy services if the physician or an immediate family member of the physician has a direct or indirect compensation arrangement with the pharmacy.⁷ The referring physician and the pharmacy furnishing the services in violation of this prohibition are jointly and severally liable to the payer for any amounts billed and collected.⁸

New York regulations specify certain relationships that are not considered compensation arrangements implicated by the self-referral prohibition. For example, the personal services exception provides that a personal service arrangement is not considered a compensation arrangement as long as certain conditions are met, including a requirement that the compensation is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.⁹ This exception is similar to the Personal Services and Management Contracts Safe Harbor to the AKS.

In most clinical studies I have encountered, the pharmacy compensates the physician on a per patient/per month basis. Because the compensation is determined in a manner that takes into account the volume of referrals, the clinical studies arrangement does not fall within the safe harbor, nor within most state personal services exceptions. Consequently, there is a significant risk that a clinical study, in which compensation is on a per patient/per month basis, runs afoul of a number of state anti-fraud statutes.

Conclusion

The bottom line is that if the physician is referring patients to the pharmacy, and if the pharmacy is paying compensation on a per patient basis, then: (i) if some of the patients referred are covered by a government health care program, the AKS and Stark law will likely be violated, or (ii) if the physician refers no patients to the pharmacy who are covered by a government health care program, then a state anti-fraud statute may nevertheless be violated.

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 jbaird@bf-law.com.