Paying a Physician’s Expenses

By: Jeffrey S. Baird, Esq.

A common question asked by pharmacies is whether they can subsidize a physician’s expenses. Examples include:

• May a pharmacy pay a physician’s out-of-pocket expenses to attend a continuing education conference?
• May a pharmacy purchase equipment (such as iPads) for the physician’s employees to use at the physician’s office?

Federal Anti-Fraud Laws

The federal anti-kickback statute (“AKS”) prohibits a pharmacy from giving “anything of value” to a physician in exchange for the physician (i) referring federal health care program (“FHP”) patients to the pharmacy, (ii) arranging for the referral of FHP patients to the pharmacy, or (iii) recommending the purchase of a service or product from the pharmacy that is covered by an FHP. The term “anything of value” is quite broad and includes (i) payment of money, (ii) payment of expenses, and (iii) providing gifts.

A violation of the AKS is a criminal offense. But 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. If an arrangement does not fall within a safe harbor, that does not necessarily mean the AKS is violated; rather, it means that a thorough examination of the arrangement will need to be made under the wording of the AKS, court decisions, and other published legal guidance.

The federal Stark physician self-referral statute (“Stark”) prohibits a physician from referring Medicare and Medicaid patients to a pharmacy with which the physician has a financial relationship … unless the financial relationship fits within a Stark exception. The term “financial relationship” includes (i) an ownership interest by the physician in the pharmacy and/or (ii) compensation (or anything else of value) from the pharmacy to the physician. Violation of Stark results in civil liability. There are a number of exceptions to Stark, including the Non-Monetary Compensation Exception (“NMC Exception”) that allows a pharmacy to spend up to a certain dollar amount each year on a physician. For calendar year 2018, that amount is $407. The expenditures must be in the form of items or services; the expenditures cannot be in the form of cash or cash equivalents. Other requirements of the exception are:

• the compensation is not determined in any manner that takes into account the volume or value of referrals from the physician;
• the compensation may not be solicited by the physician; and
• the compensation arrangement does not violate the AKS or any federal or state law or regulation governing billing or claims submission.

State Anti-Fraud Laws

Each state has an anti-kickback statute that is similar to the AKS. Some state anti-kickback statutes only apply to referrals of patients covered by the state’s Medicaid program. Other state anti-kickback statutes apply even if the patient (i) is covered by a commercial insurer or (ii) is a cash-paying patient. And most states have a physician self-referral statute that is similar to Stark.

In addition, each state has a set of statutes and regulations that are specific to physicians. These physician-specific statutes and regulations may also address whether a pharmacy can pay the expenses of a physician.

Answers to Specific Questions

First Question: The first question is this: “May a pharmacy pay a physician’s out-of-pocket expenses to attend a conference?” If the physician refers Medicare and/or Medicaid patients to the pharmacy and the pharmacy has provided nothing of value to the physician during the current calendar year, then Stark allows the pharmacy to pay (in 2018) up to $407 of the physician’s expenses to attend a conference. If the pharmacy has previously spent, for example, $100 on the physician during the current calendar year, then Stark allows the pharmacy to pay up to $307 of the physician’s expenses to attend a conference. Note that the pharmacy must pay the expenses directly to the conference, hotel, airline, etc. on the physician’s behalf and cannot pay the expenses to the physician, or provide a coupon or voucher to the physician since these would be considered “cash or cash equivalents.” There is not an AKS safe harbor that applies to this scenario. As such, technically, the pharmacy and physician can comply with Stark but still violate the AKS. From a practical standpoint, if the pharmacy and physician comply with the NMC Exception, then it is unlikely that (i) a federal enforcement agency will assert a violation of the AKS and (ii) a state enforcement agency will assert a violation of a state anti-fraud statute.

Second Question: The second question is this: “May a pharmacy purchase equipment (such as iPads) for the physician’s employees to use at the physician’s office?” In July 1997, the OIG published a letter from the Chief of its Industry Guidance Branch addressing the question of “whether the provision of free fax machines, free computers and free fax lines by a supplier of transtelephonic monitoring services to physicians, who refer patients to such supplier, implicates the Medicare and Medicaid anti-kickback statute.” In its letter, the OIG cited commentary in a final rule issued by the OIG in 1991, which promulgated safe harbors to the AKS. In that commentary, the OIG contrasts situations in which (i) a computer is given to a physician that can only be used to print results of lab tests, and (ii) a computer is given to a physician that the physician is free to use for a variety of purposes. With regard to the first situation, the OIG stated “that the computer has no independent value apart from the service being provided and that the purpose of the free computer is not to induce an act prohibited by the [anti-kickback] statute …” With regard to the second situation, the OIG stated that “the computer has a definite value to the physician, and, depending on the circumstances, may well constitute an illegal inducement.”

The letter goes on to state that the OIG is aware of arrangements in which free equipment is provided “with a condition that such equipment is only to be used in connection with [the supplier’s] service. However, in determining whether a free or ‘loaner’ computer or fax machine constitutes illegal remuneration, the substance – – not the form – – of the transaction controls and any reasonably foreseeable ‘misuse’ of the equipment implicates the entity providing the equipment as well as the user.” In evaluating any arrangement in which free equipment is given to a referral source, the OIG looks at the following factors in determining whether the arrangement might violate the AKS:

• The criteria used by the provider of the equipment to determine which physicians receive the equipment;
• The ownership of the equipment;
• The location and access to the equipment at the physician’s office;
• The procedures used by the physician and provider of the equipment to police unauthorized use of the equipment;
• The value added to the core service being provided by the additional general purpose equipment; and
• The number and extent of similar arrangements that the provider of the equipment has with other physicians.

The safest way for a pharmacy to reduce the kickback risk associated with the provision of free equipment is to limit the functionality of the equipment so that it can only be utilized in conjunction with the pharmacy’s services. For example, if the pharmacy furnishes an iPad in order to enable the physician, or his employees to submit orders and documentation to the pharmacy, that is all the physician and his employees should be able to do with the iPad. The physician and his employees should not be able to access personal email accounts, surf ESPN.com, change a Facebook status, etc.

If, on the other hand, it is not possible to limit the functionality of equipment, then each of the factors listed above should be used to develop ways to reduce the risk associated with the equipment. The following thoughts and comments provide some assistance:

• Criteria used to determine who receives the equipment – While it may seem that a pharmacy would only want to incur the expense of providing order-simplifying technology like an iPad to those who refer a high number of patients or who order significant amounts of the pharmacy’s drugs, the OIG would disfavor an arrangement in which the receipt of an iPad is tied to the number of referrals received or the amount of product ordered.
• Ownership of the equipment – The pharmacy should own the equipment.
• Location and access to the equipment at the physician’s place of business – The pharmacy might consider requiring each physician to sign a written agreement in which the physician consents to follow certain rules related to the use of e.g., iPads, such as the following: (i) the iPad is only to be used for submitting orders and documentation to the pharmacy, and (ii) the iPad must be left at the physician’s office every night.
• Procedures used to police unauthorized activity – If the equipment furnished are iPads, then the pharmacy might consider investing in the installation of iPad usage monitoring software on each of the iPads. This type of software is commercially available. While purchasing monitoring software and requiring an employee to spend some time at regular intervals to review iPad usage reports would impose some additional cost to the pharmacy, it could serve as an efficient way to reduce the risk associated with furnishing iPads.

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.