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Compounding Pharmacy Fraud Defense

Defense Against False Claims Act & Anti-Kickback Statute Violations

The federal government is intent on eliminating fraud and abuse in the health care industry. This includes aggressive targeting of compounding pharmacies. Compounded medications are customized medications made based on a practitioners’ prescription in which ingredients are mixed together in the strength, dosage, and form required to treat a patient’s specific needs. The federal government is also carefully scrutinizing physicians, pharmacists, executives, marketing companies, and others involved with these pharmacies.

As evidenced by recent investigations and settlements, the federal government is increasing scrutiny over the compounding drug industry, which investigators believe is rife with fraud and abuse. Although allegations of fraudulent practices extend throughout the industry, including Medicare and Medicaid, the government has paid particular attention to TRICARE, a government program for military health insurance that paid $1.75 billion for compounded drugs in FY 2015 alone.

Fraudulent Schemes

In response to such a substantial spike in TRICARE costs, federal authorities are now aggressively investigating fraudulent schemes, including potential false claims, kickback arrangements, and improper auto-refill programs. Typically, these schemes operate through the use of aggressive marketing tactics that obtain patient authorization for physicians to write prescriptions that are sent to a compounding pharmacy, often without a patient ever meeting or speaking to a doctor.

In addition to citing lack of medical necessity and failure to establish physician-patient relationships as a basis for False Claims Act (FCA) violations, the federal government also claims that compounding pharmacies routinely over-bill federal payors to provide incentives and other kickback arrangements to doctors who agree to write prescriptions, in violation of the federal Anti-Kickback Statute (AKS).

Investigations to identify alleged fraud and abuse under the FCA and AKS involve:

  • Data mining to identify increases in prescriptions for a particular compounding drug when there is a commercially available drug which serves the same purpose
  • Physicians who prescribe high amounts of pain creams, scar creams, and wrinkle creams. These include orthopedic surgeons, podiatrists, spine surgeons, pain management specialists, sports medicine doctors, chiropractors, and physician’s assistants
  • Prescribing physicians who receive compensation from compounding pharmacies through medical director fees, speaking fees, and profit distribution
  • Fraud committed against TRICARE and other federal payors, including Medicaid and Medicare
  • Arrangements involving a high percentage of out-of-state physicians prescribing medications
  • Unauthorized or automatic refills
  • Evaluations of telemedicine protocol in absence of true physician-patient relationships

False Claims Act & Anti-Kickback Statute Violations

  • False Claims Act – Many of the federal investigations into compounding pharmacies arise out of the False Claims Act, which prohibits the presentation of a false or fraudulent claim for approval, or false records or statements, to defraud the federal government. FCA violations can result in a civil penalty between $5,000 to $10,000 per claim, as well as a sanction up to 3 times the amount of damages (treble damages) sustained by the government.
  • Anti-Kickback Statute – The Anti-Kickback Statute (AKS) makes it a felony to knowingly and willfully solicit, offer, pay, or receive remuneration in exchange for the referral of federal health care program business. Convictions are punishable by fines (up to $25,000 for a single violation), imprisonment (up to 5 years for a single violation), and exclusion from federal health care programs, as well as potential civil monetary penalties, including treble damages plus $50,000 for each violation.

Under the False Claims Act and Anti-Kickback Statute, multiple parties involved with compounding pharmacies can face prosecution for their involvement in an alleged fraudulent scheme. For example, government authorities may allege:

  • A marketing company violated the AKS by providing physicians unlawful kickbacks
  • Physicians violated the AKS by issuing prescriptions without meeting standards of telemedicine
  • Compounding pharmacies violated the AKS by providing kickbacks to physicians who write compound medication prescriptions with claims submitted to a federal payor
  • Pharmacies fraudulently billed TRICARE or other federal payors

Telemedicine in Absence of Physician-Patient Relationship

As federal authorities allege that many schemes operate without establishing proper doctor-patient relationships, they must investigate whether proper telemedicine protocol was followed. Telemedicine can be legal when it constitutes a proper doctor-patient relationship, treatment is medically necessary, and all the following components are met:

  1. Physician establishes the person requesting treatment is in fact who the person claims to be
  2. An appropriate diagnosis is established by the physician through the use of acceptable medical practices
  3. The physician discusses the diagnosis and evidence of diagnosis with the patient in person at an established medical site

Investigators may also look closely at marketing representatives, including sales reps and others hired to promote compound medications, who relay symptoms to the telemedicine doctor, who then sends the prescription to the compounding pharmacy – especially if they are paid on a percentage of prescriptions they generate. If the initial contract with the marketing company was not a proper contract, and there was a kickback included, then every resulting prescription can be considered tainted, and all claims submitted to a federal health care program for reimbursement subject to being in violation of the AKS.

Pharmacy / Physician Kickback & Health Care Fraud Defense

Investigations are being waged in Texas and other states across the country by the Department of Defense (DOD), Department of Justice (DOJ), Health and Human Services Office of the Inspector General (OIG), State Attorney General, and, to some degree, the FDA and DEA. Depending on the nature of the allegations, structure of companies, and other individual facts, there may be a number of viable defense strategies, including:

  • Intent – The AKS is an intent-based statute, which means not every remuneration from a compounding pharmacy to a prescribing doctor is a violation. As long as no “one purpose” of such remuneration is to induce referrals, there may be a defense that no violation occurred. The False Claims Act also requires intent to submit a false claim or improper bill. Because there does not have to be an intent to violate the law in order for conduct to be considered a violation, there is a very fine line when proving a lack of intent to defraud.
  • Safe Harbors – “Safe Harbors” can protect certain businesses from civil and criminal prosecution, provided they can be considered certain types of arrangements, including personal services and management contracts. If a prescribing doctor is paid by a compounding pharmacy to speak about its products at events and conferences, that relationship may fall under the personal services safe harbor if all requirements are met (i.e. an agreement of at least 1 year in writing that has been signed by the parties and covers all services to be provided, and compensation that is set in advance, consistent with fair market value, and does not take volume or value of referrals into account).
  • Medical Necessity – Federal health care programs only pay for medically necessary services and products, which means billing for things that are medically unnecessary is a violation of the FCA. If a proper doctor-patient relationship was established, and physicians appropriately determined patients truly needed specially-made medications, then a defense can be raised to show medical necessity and proper compliance with telemedicine requirements. This may also involve proving that proper protocol for telemedicine were met.

Compounding pharmacies, physicians, and others may be notified of an investigation when they receive a civil investigative demand (CID) from the federal government, which requests documentation in regard to possible violations of the False Claims Act. These include documents pertaining to company records, financials, marketing agreements, physician relationships, and medical records. Investigations may also begin with a subpoena or unannounced visits from a federal agent.

Although a CID can trigger many concerns, including concerns over costs, there are steps that can be taken to reduce the scope of documents demanded in the CID, which can dramatically reduce time and expenses required in a response. For example, our team focuses on effectively interpreting the CID and facilitating discussions with federal prosecutors, who are often open to good faith negotiations about providing the government with the evidence it needs without the disproportionate financial expenses companies may incur in producing non-critical information. Such discussions can also facilitate potential resolutions and mitigated penalties.

Discuss Your Case during an Initial Consultation

If you have been made aware of an investigation or have concerns over a potential investigation, you need to act immediately. At Hendershot, Cannon & Hisey, P.C., we have extensive experience defending physicians and health care practices accused of fraud and abuse, and leverage over 130 years of combined experience to provide the counsel and aggressive representation required when clients face investigations and allegations. To discuss a potential case and how our award-winning health care attorneys can help, call (713) 909-7323.

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  • "Our firm defended a health care client against a fraud and abuse investigation by the Office of Inspector General. The client's response: Trey, On behalf of myself and M., I would like to extend our gratitude and appreciation for an outstanding job in our presentations regarding the OIG matter. Your honest and thorough work and your belief in our honesty and integrity as physicians, which was conveyed to the OIG and resulted in giving us the opportunity to meet with them, was a smart move and is greatly appreciated. We truly appreciate all your hard work and representation. Ben, I would also like to take this opportunity to thank you for finalizing the documents for the purchase of . . . in such a short time."

    - A.
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