The Need for Specialty Pharmacies to Track Spending on Referral Sources

IN APRIL 2017, a group of related hospice providers settled claims that its common sales force provided kickbacks to referral sources for $12.2 million.

The settlement serves as a reminder of the need for robust policies addressing sales force interactions with referral sources, along with internal tracking and audit measures that ensure compliance with those policies. Such policies and tracking mechanisms can help avoid kickback and self-referral liability and avoid confusing and costly due diligence issues in transactions.

Whistleblowers alleged that hospice defendants International Tutoring Services, LLC; Goodwin Hospice, LLC; Phoenix Hospice, LP; Hospice Plus, LP; and Curo Health Services, LLC, submitted false claims to Medicare and Texas Medicaid due to the alleged payment of kickbacks by the defendants to the referral sources. The purported kickbacks included cash, gift cards, lunches, dinners, happy hours, tickets to sporting events, holiday gifts, cars, manicures and pedicures, guns, and the services of skilled nursing staff free.

Sales members were instructed to give more expensive items to administrators and directors of nursing and less expensive items to charge nurses and nursing staff. Along with the monetary settlement, prosecutors requested permission to intervene and prosecute fraud claims against 2 former executives.

Many specialty pharmacies permit their sales force to engage in some degree of expenditure on referral sources, but many lack detailed guidelines, policies on prohibited activity, or spending limits. Even fewer track expenditures attributable to each referral source.

Without tracking mechanisms in place, a specialty pharmacy may end up spending more than it intends on a particular referral source. As highlighted by the settlement, inappropriate interactions between a sales force (or any employee) and current or potential referral sources can run afoul of the federal Anti-Kickback Statute.

The Stark laws may also be implicated, in addition to state anti-kickback statutes that generally track the federal law, but do vary in some material ways. Therefore, specialty pharmacies should consult applicable state laws for variations.

The Statutes

The federal Anti-Kickback Statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by federal or state health care programs. Remuneration includes the transfer of anything of value, in cash or in kind, directly or indirectly, covertly or overtly.

Expenditures on sales forces, such as meals, sports tickets, happy hours, and gift cards, are all likely to be considered remuneration. The Anti-Kickback Statute is intent-based, but actual knowledge of, or specific intent to violate, the law is not required. If any single purpose is to induce referral or federal health care program business, the law is considered violated.

There is no express safe harbor or exception under the Anti-Kickback Statute regarding expenditures on referral sources. For this reason, specialty pharmacies often rely on varied guidance for guardrails. Some rely on the Code for Interactions with Healthcare Professionals published by PhRMA (PhRMA Code).

This is a voluntary code that outlines ethical relationships between pharmaceutical manufacturers and health care professionals. Because drug manufacturers experience different marketing dynamics and regulatory concerns than specialty pharmacies, some find the PhRMA Code does not offer a total solution for specialty pharmacy compliance.

Others rely on the Stark Nonmonetary Compensation exception (discussed below), but because there is no express regulatory basis for relying on the exception for Anti-Kickback Statute compliance, some specialty pharmacies find it is not the right fit for their risk tolerance. Still others take different approaches.

Also, the Stark law is implicated by expenditures on physician referral and arguably applies to amounts spent on those employed by physicians, such as nurses. Stark prohibits a physician from making referrals for certain designated health services, payable by Medicare or Medicaid, to an entity the physician (or an immediate family member of the physician) has a financial relationship with by way of ownership or compensation.

It also prohibits an entity from filing claims with Medicare or Medicaid for any DHS furnished pursuant to a prohibited referral. Prescription drugs are considered a DHS, and expenditures on sales forces, such as meals and sports tickets, are likely to be considered financial relationships. The Stark law is a strict liability statute, meaning that failure to comply constitutes a violation of the law regardless of intent.

The Nonmonetary Compensation exception, often relied upon by specialty pharmacies, permits payment from an entity in the form of items or services (not including cash or cash equivalents) that do not exceed an aggregate of $398 in 2017, as long as the compensation (1) is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician, (2) may not be solicited by the physician or the physician’s practice (including employees and staff members), and (3) does not violate the Anti-Kickback Statute or other federal or state law or regulation. The monetary limit is adjusted each year.

Creating Policies and Enforcing Them

Despite the potential liability for inappropriate sales force interactions with referral sources, the exact application of these regulations and the parameters for appropriate spending on referral sources is far from clear. This lack of clarity can frustrate the creation of a definitive policy and often leads to a helter-skelter approach.

It is important that specialty pharmacies consult with their counsel to determine a legal analysis and compliance approach with which they have the most comfort. There is no one-size-fits-all approach. No item or service should ever be given to a referral source (or potential referral source) if one purpose is to induce referrals.

This should be the cornerstone of every pharmacy policy regarding interactions with referral sources. Aside from this general tenet, there are some other basic parameters that fit well in most, if not all, polices. Although each pharmacy’s policy will vary, below are some near-universal takeaways for compliant interactions with referral sources:

• No item or service should ever be given to a referral source (or potential referral source) if one purpose is to induce referrals.
• Set yearly individual spending limits. While specialty pharmacies may get comfortable with different amounts, a spending ceiling drives consistency and makes tracking compliance with a policy much easier.
• No item or service should be extravagant. Whereas meals may facilitate conversations about the specialty pharmacy’s value proposition, pedicures, sports tickets, concerts, and entertainment events should be avoided. Set a per item limit as well. A specialty pharmacy may get comfortable with an annual spending limit of $350 per referral source, but a single meal at which $300 was spent on a referral source is likely to be viewed as unacceptable by a regulator.
• Require receipts for expenditures and attendee lists so that expenses are allocated to the appropriate referral source.
• Review expenditures monthly or quarterly to monitor expenses.
• Train your sales staff at least once per year. When sales teams understand the reasons for rules, they are more likely to follow them. Train with realistic examples.

With clarity lacking, it becomes even more imperative to track spending on referral sources closely and evaluate expenditures, with an eye for detail.