Hospital Owned Specialty Pharmacies May be in Hot Water with the FEDS

We’ve ranted about the encroachment of hospital and health system owned specialty pharmacies more times that one can count. The growth of these organizations seemed unabated…. till recently. We’ve noticed more scrutiny of these arrangements as noted in the article below.

The article points out a number of concerns with how the specialty pharmacies are structured. As we’ve read in previous news reports, many of these entities are owned but not always operated by the hospital or heath system…. and therein lies the rub. Contracting with a third-party specialty pharmacy management company poses a set of legal and regulatory issues that hospital and health-system compliance departments will have to expertly navigate. It’s time for hospitals that are involved in these ventures to make sure that the reimbursement models they implement with third-party companies comply with both federal laws and state laws…. particularly as relates to percentage-based fee arrangements and joint ventures.

At the heart of the debate are a host of anti-kickback statutes. These have been the bane of many a health care organization from a solo physician practice to mega, integrated delivery systems that have frequently resulted in big fines. But anti-kickback is often difficult to define, especially when it is being applied to new business models such as owned but not operated specialty pharmacies.

Outsourcing Speciality Pharmacy Expertise? Warnings to Heed

As more health systems enter the specialty pharmacy space, many are using an outside third-party entity to manage their on-site specialty pharmacies. Although the arrangements offer many benefits, stakeholders need to be ready for state and federal scrutiny surrounding anti-kickback statutes, reimbursement and other compliance issues that could derail these arrangements if they are not managed proactively.

In these partnerships, the pharmacies are still owned by the hospitals, but they’re managed by outside vendors with specific expertise in specialty pharmacy operations—such as Recept, Shields Health Solutions and Trellis Rx—in exchange for fees and, sometimes, a share of the profits.

“There are core competencies that come with running specialty pharmacies, and depending on what expertise a hospital or health system already has on board, the management companies can really help with those, including access to payor networks, access to limited distribution drugs and assistance with accreditation,” said Todd Nova, JD, an attorney with Hall, Render, Killian, Heath & Lyman, an Indianapolis-based firm specializing in health law.

Jones explained that the Department of Health and Human Services Office of Inspector General (OIG) will focus on a number of factors to ensure that the arrangement between the health system and management company is compliant with key statutes.

Anti-kickback regulations are a major focus for HHS OIG, he noted. The regulators have highlighted several areas of concern that would raise red flags suggesting a questionable contracting arrangement, he said:

The owner (the hospital or health system) expands into a related line of business, which is dependent on referrals from, or other business generated by, its existing business.
The hospital or health system neither operates the new business itself nor commits substantial financial, capital or human resources to the venture—in this case, a specialty pharmacy. Instead, it substantially contracts out virtually all of the new business.

The third-party contractor is an established provider of the same services as the new line of business and, absent the contract, would be a competitor, providing items and services in its own right, billing insurers and patients in its own name, and collecting reimbursement.
The owner and third-party contractor share in the economic benefit (the profits) of the business, in the economic benefit of the owner’s new business.
Payments to the third-party management company vary by the value or volume of business generated for the specialty pharmacy by the hospital.

“Summed up, the arrangement needs to be commercially reasonable, at arm’s length and at fair market value. And the hospital has to be at risk,” Jones said. “You can’t just have a management company coming in and taking over everything and giving the hospital a fee for this contractual arrangement.”

Pay Attention to Physician Relationships
Another key issue, Jones noted, is the relationship between the hospital’s prescribing physicians and the pharmacists in the specialty pharmacy managed by the third-party company. “What, if anything, is your management company doing for those doctors?” he asked. “You have to evaluate that. Equipment and free services, for example, are a real hot-button item for the OIG with regard to the Anti-Kickback Statute. I recommend that you make sure everything is at arm’s length and at fair market value, with no free services unless directly blessed by the OIG.”

Nova also stressed the need for caution, citing this specific caveat: “The compensation methodology for the third-party management company must not create perverse incentives to overutilize the health care system, such as dispensing higher-cost drugs for no additional therapeutic benefit.”

‘Watch This Space’
To date, Nova said, OIG hasn’t scrutinized these partnerships—but watch this space. “Although there has not been a lot of affirmative movement at this point, I anticipate that will change in the near to midterm. This is care that is funded both directly and indirectly by federal payment programs, and you absolutely have to be aware of that.”

When scrutinizing contractual arrangements with a third-party specialty pharmacy management company, focus on utilization, costs and outcomes, and what the relationship does with respect to those issues, Jones said. “If you can reduce costs, keep utilization low, improve patient outcomes and not be anti-competitive, then it should be a very good arrangement under the Anti-Kickback Statute.”


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