Texas AG Probes Physician Investment in Pharmacies

February 22, 2015
Martin Merritt

A Texas case investigating physician investment in compounding pharmacies could have nationwide implications for any form of ancillary service.

According to a lawsuit filed January 30 by Healthscripts of America in District Court in Austin, Texas Attorney General Ken Paxton issued Civil Investigative Demands (CIDs) to a number of Texas physicians who have invested in compounding pharmacies. The CIDs, according to the suit (In re Healthscripts Specialty Pharmacy, et al. Cause No. D-1-GN-15-000380), were issued in aid of the attorney general's authority to investigate Deceptive Trade Practices Act (DTPA) violations, which came on the heels of news articles questioning the legality of physician ownership in compounding pharmacies.

Physician ownership in any ancillary services company is usually analyzed under the Texas Solicitation of Patients statute Tex. Occ. Code 102.001; a criminal statute which broadly forbids any licensed healthcare entity, including pharmacies, from knowingly paying remuneration in cash or in kind for the solicitation of patients.

The statue is not limited to Medicare and Medicaid, but applies equally to private insurance and cash payers. The statute contains a safe harbor protecting any practice authorized by the federal Anti-Kickback Statute (AKS).  One of these, and the safe harbor at issue in the lawsuit, is the "Small Business Investment Safe Harbor," 42 CFR 1001.952(a)(2) . The Small Business Investment Safe Harbor contains eight applicable standards which must be met by physician investors. These include several financial requirements (i.e., that 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 pharmacies income be generated from physician investors; and the return on investment must be proportionate to the capital investment). Some of these requirements naturally will not be known (or even knowable) at the time of the investment.

Thus, in Texas, physician investment in compounding pharmacies is legal under the Solicitation of Patients statute, if done correctly. The statute expressly authorizes the attorney general to institute a civil action for injunction or civil monetary penalties, if the statute is violated.  The DTPA, a consumer protection statute, authorizes CIDs if the Texas attorney general’s office believes a consumer protection provision may have been violated.  While DTPA CIDs are common, it is very rare to see DTPA CIDs asking physician investors for financial records and any communications related to an investment covered by the Solicitation of Patients statute.

Healthscripts has not been accused of any wrongdoing at this time. The Healthscripts lawsuit seeks to set aside the CIDs, which ask individual physician investors to "produce all documents of your involvement and communications with Healthscripts" and "produce a copy of all documents showing the amount of remuneration of any kind paid to these prescribers who invested money ... "

Although the lawsuit at this time is confined to Healthscripts assertion of privilege against the disclosure of financial information sought by the attorney general in the CID, the case could have nationwide implications for physician investors in any form of ancillary service.

Most states have some form of laws against payment for healthcare referrals. Some are merely statements of medical ethical principles, others authorize private causes of action by whistleblowers. Absent involvement of a federal government program, like Medicare, investigations under these state statutes is usually quite rare. That is why the Texas case is so unusual: seldom does a state's attorney general seek to investigate physician investments. It is most unusual for an attorney general to dig so deeply into what would appear to be the finer nuances of the safe harbor for physician investments.