Appellate Court Upholds Agency’s Denial of Physician Practice Proposal

Issue of the Case

When a group medical practice applies to the state board of pharmacy to open and operate an in-office pharmacy to serve patients and that application is denied by the regulatory board, may the group practice successfully challenge that denial in court?

Facts of the Case

A group of 4 physicians operating a hematology and oncology practice in a mid-Atlantic state applied for a pharmacy permit to establish a “closed-door clinic pharmacy.” This would be within the practice location and would serve only patients treated by the physician members of the group.

The state board of pharmacy considered the application, resulting in a vote to deny the request to establish and operate an in-office pharmacy. The basis for the decision was documented in a 7-page explanation.

While reviewing the application, the board focused on the first argument advanced by the applicants: whether a state statute that prohibits physicians from referring patients to sources of health care services owned by them would bar the business initiative. That statute included several exceptions regarding application of the law to specific situations. One such exception identified by the applicants stated that “the restrictions on referral of patients...shall not apply to...medical treatment or a procedure that is provided at the practitioner’s medical office.” The attorney for the medical practice members argued that pharmacies do provide medical treatment.

The applicants also argued that the state board of pharmacy had acted beyond its authority, because the legislature, when enacting the statute, had assigned enforcement responsibility to the state board of medical examiners. Thus, in the view of the physicians, the board of pharmacy was acting outside its authorized scope of enforcement. A third argument made by counsel for the applicants was that the board’s decision to deny the application amounted to “impermissible anticompetitive conduct.”

The Ruling

The appellate court rejected all the arguments advanced by the attorneys for the medical group practice members and upheld the state board of pharmacy’s decision to deny the application.

The Court's Reasoning

The court began its published opinion by reviewing the role of a court of appeals when reviewing a decision made by an administrative agency. The court acknowledged that “agencies have expertise and superior knowledge...in their specialized fields,” so an agency’s decision should be upheld “unless there is a clear showing that it is arbitrary, capricious, or unreasonable, or that it lacks fair support in the record.”

Further, appellate courts “accord deference to the agency’s interpretation of a statute it is charged with enforcing.” Finally, “deference to agency interpretation of a statute is appropriate as long as that interpretation is reasonable and does not conflict with the express or implied intent of the legislature.”

The court affirmed the conclusion of the professional regulatory board that pharmacies do not provide medical treatment. The court pointed to the different scopes of practice and educational backgrounds of pharmacists and physicians, concluding that “physicians provide medical care, while pharmacists provide pharmaceutical care.” Based on that distinction, the court concluded that the “in-office” exception to application of the statutory prohibition was inapplicable.

The court then turned to the argument that the professional licensure board had exceeded the scope of its authority by “interpreting, applying, and enforcing” the relevant state statute. The argument made by the attorney for the medical group practice was that the state’s pharmacy practice act only empowered the board to regulate the practice of pharmacy. That boundary, the argument ran, meant the board had no authority to regulate physicians; that authority existed with the medical board.

The pharmacy practice act identified the board’s responsibilities and powers as including action to “deny...the permit of any pharmacy practice site” if the board finds “that any conduct of the...applicant is violative of any federal, state, or local laws or regulations relating to the practice of pharmacy.” In the view of the judges overseeing this case, that grant of authority covered the board of pharmacy’s action here in enforcing the relevant state statute.

The next argument advanced by the medical group was that the pharmacy board engaged in anti-competitive conduct, because the members of the board are “active market participants” (ie, practicing pharmacists). The group inferred that the board’s vote to deny the application was motivated by a desire “to protect its members’ financial interests by prohibiting nonpharmacists from competing against them in the free market.”

The judges pointed out that the medical group’s attorney had presented no evidence of improper activity by the board members. Rather, the court was asked to “infer that the board acted with an anticompetitive motive.”

The court rejected that argument, because the state government had taken proactive steps in reviewing the decision, involving experienced state employees outside the board of pharmacy to review the decision prior to implementation.

The concluding sentence of the court’s opinion is a highly appropriate summation: “In sum, petitioner fails to convincingly show the board acted with an improper motive or arbitrarily, capriciously, or unreasonably.”

About the Author

Joseph L. Fink III, JD, DSC (HON), BSpharM, FAPHA, is a professor emeritus of pharmacy law and policy and former Kentucky Pharmacists Association Professor of Leadership at the University of Kentucky College of Pharmacy in Lexington.