Physician ownership in compounding pharmacies: Legal landmines to avoid

The ever-expanding use of hormones and drugs, such as GLP-1s and peptides, (collectively “Pharmaceuticals”) has many people turning to compound pharmacies. Section 503A of the Drug Quality and Security Act (DQSA), Pub. L. 113-54 (Nov. 27, 2013) exempts pharmacy compounding from three (3) sections of the Federal law that manufacturers are required to meet: (1) FDA approval of products prior to marketing; (2) compliance with Current Good Manufacturing Practices (CGMP); and (3) labeling with adequate directions for use. Because certain safeguards, including labeling, are absent, unlike the prescriptions dispensed at a pharmacy, selecting a reputable compound pharmacy, which includes seeking assurances of CGMP and Drug Enforcement Administration (DEA) compliance is crucial.

While compound pharmacies are licensed by an individual state and may compound prescription Pharmaceuticals for an individual patient with a prescription and in limited quantities in anticipation of the receipt of a prescription (DQSA, §503A). Relatedly, an “outsourcing facility” must do the following: (1) register with the Food & Drug Administration (FDA); (2) mandatory compliance with CGMP requirements; (3) FDA inspection based on a risk-based schedule; and (4) meet other conditions, such as reporting adverse events and providing the FDA with requisite information about the products being compounded. (DQSA, §503B). Notably, according to the FDA, “[b]iological products are not eligible for the exemptions for compounded drugs.” Testosterone can be compounded; however, it is a controlled substance and an area that the DEA strictly monitors. It should go without saying that record-keeping compliance is paramount.

Entrepreneurial-spirited physicians may seek to capitalize on this trend through either compound pharmacy ownership and/or dispensing compounded Pharmaceuticals in their office or during home visits. So, what landmines need to be anticipated? Let’s begin with three fundamental items: (1) is physician investment in a compounding pharmacy permissible in a particular state; (2) is the ownership and referral structure consistent with and compliant with the fraud, waste and abuse (FWA) laws’ statutory requirements of the Federal Anti-Kickback Statutes (AKS) and related state law (e.g., Tex. Occ. Code Ann. §102.1003); and (3) physician office or at-home (non-palliative care) dispensing of compounded Pharmaceuticals.

Question 1: Is the physician investment in the compounding pharmacy permissible under a State’s law? The answer is it depends on the individual State. In Texas, for example, physicians may have an ownership interest. This is the threshold question; however, as the Texas Pharmacy Association noted in a newsletter, “Discussions also took place regarding physician ownership of pharmacies. Mary Robinson, executive director of the Texas Board of Medical Examiners, spoke about pharmacy and physician relationships. She stated that the only time the medical board will be involved is when the doctor in question requests a prescription from a pharmacy that he owns or partially owns. Some compounding pharmacies advertise to physicians to invest in their pharmacy which can lead to physicians referring patients to that pharmacy to obtain specific products.” Therefore, making certain that FWA laws are adhered to is the next issue to tackle.

Question 2: Is the ownership and referral structure compliant with Federal and State FWA laws?

This is quite tricky to achieve because, to fully meet the AKS requirements, the relevant provision is the "Small Business Investment Safe Harbor," 42 CFR 1001.952(a)(2), which is often referred to as the “40/60 Rule.” The Small Business Investment Safe Harbor contains eight elements that must be met by physician investors, including the requirements:

• No more than 40 percent of a pharmacy may be owned by persons in a position to make or influence referrals;
• No more than 40 percent of the pharmacy’s income be generated from physician investors; and
• The return on investment must be proportionate to the capital investment.

Additionally, there are requirements to notify patients of the financial interest under both Stark Law and State laws, such as Texas.

Question 3: Can the compounded Pharmaceuticals (non-palliative care) be dispensed in a home or physician office setting?

The first step is to consult the respective State law(s). According to the Texas Medical Association, the general answer is “No.” Specifically,

A. Generally, a physician may not “provide, dispense, or distribute” drugs from his or her practice, except for the patient’s immediate needs, which has been defined as “until the patient can access a pharmacy.” You may not charge for these drugs.

• If the drugs are samples you received free from the drug manufacturer, you can dispense them for the entire course of treatment so long as labeling requirements are met and you don’t charge for the drugs.
• Similarly, you can dispense to patients, at no charge, drugs you receive free from the drug manufacturer for an indigent pharmaceutical program.

State law allows an exception for physicians in certain rural areas, who may dispense drugs to patients “for the cost of supplying those drugs.” These physicians must notify the medical board and the Texas Board of Pharmacy that they live in a rural area and must follow other requirements spelled out in the law.

Texas Medical Board rules, Chapter 169, rules and Texas Occupations Code, Chapter 158, address physicians’ ability to supply drugs to their patients.

In sum, physician investment in compounding pharmacies and the dispensing of compounded drugs, especially controlled substances (e.g., testosterone), whether in office or in-home (non-palliative) should be approached by taking the following steps: (1) does a State allow a physician to invest in a compounding pharmacy; (2) does the investment squarely meet all of the elements AKS, Stark Law and State law safe harbors; and (3) can physicians prescribe and administer the compounded drugs either in office or in-home (non-palliative)? Failing to address these three items may result in Government enforcement actions, both criminal and civil.

Rachel V. Rose, J.D., MBA, advises clients on compliance, transactions, government administrative actions and litigation involving health care, cybersecurity, corporate and securities law, as well as False Claims Act and Dodd-Frank whistleblower cases. She also teaches bioethics at Baylor College of Medicine in Houston. Rose can be reached through her website, www.rvrose.com.