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Physicians seek to improve compliance, bolster bottom line by opening in-house pharmacies

Whether in a small office or large multi-location practice, dermatologists have many of the same universal concerns and goals — providing better patient care, improving outcomes, and enhancing practice revenue. One growing trend has proponents claiming to achieve all three in one fell swoop: bringing the business of pharmacy into physician offices. But those who consider adding an in-office pharmacy have many legal and regulatory concerns to consider before doing so.

From writing to filling

While the past decade has seen some pharmacy chains experiment with providing care in a retail-based setting, the trend of physicians bringing pharmacies in-house is one that has largely evolved in the last few years following decades of retail-based pharmacy serving as the primary model. Under the in-house pharmacy model, physicians become credentialed through their state’s board of medicine or pharmacy and begin purchasing drugs from one of any number of purchasing organizations or repackagers and dispensing as needed. 

Many physicians who choose to open pharmacies in their practices turn to one of a number of companies that specialize in offering turnkey options to doctors. The physician will provide volume and prescribing information to the vendor, receive revenue projections, and enter into a service contract with one of the companies. Once the contract has been entered into, the vendor will file the necessary state and federal paperwork and implement software and training for the physician’s staff. In addition, the vendor will contract with third-party insurers and the physician will have access to the vendor’s group purchasing organization. The entire process, according to Chad Lucero, executive vice-president of UniteRX, one turnkey provider, can take approximately 60-90 days from the time of contract signing to a physician having their in-office pharmacy up and running. [pagebreak]

Further, a number of turnkey companies offer delayed billing on orders of around 30 days, with most insurers reimbursing physicians within 15-25 days. In some cases, the vendor itself will pay the physician a percentage of the insurance rate for the dispensing, and seek full reimbursement from the insurer later. In either case, the vendor itself acts as a sort of financial buffer for the practice, allowing for the bill for pharmaceuticals to arrive around the time reimbursement does. According to Sandra Greenblatt, MBA, JD, a Miami-based health lawyer with experience in physician dispensing, any proposed financial arrangement must be checked against state fee-splitting and anti-kickback laws to assure compliance.

The combination of delayed billing and additional practice revenue can significantly shorten the time to recoup one’s investment, said Lucero, who spent 11 years working for a dermatology drug manufacturer before joining his present in-office pharmacy company.

“Physicians have responded to this trend because it’s relatively inexpensive to get started, and they can generally make up the financial outlay within 60 days,” Lucero said. “There seems to be a drug store on every corner, and it’s not because they sell batteries and candy near the registers. A lot of physicians seem to be unaware of this until they realize the reimbursement rates they’re able to achieve.” [pagebreak]

The idea of in-office pharmacies as a practice revenue source is attractive to many physicians because of the low bar to entry compared to finding a new partner or associate, taking on debt to expand the practice, or purchasing a new medical device for additional procedures. According to Birmingham, Ala., based in-office pharmacy company PharmaPoint, the amount of space required for such a facility is generally 250 to 300 square feet, with hot and cold running water and security measures compliant with one’s state pharmacy regulations. One added caveat of being credentialed as a pharmacy, according to Greenblatt, is subjecting oneself to the full scrutiny of one’s state pharmacy board, just as a retail pharmacy would be required to do.

“Here in Florida, to get registered as a dispensing practitioner, all you need is to complete a very simple process and pay a $100 fee. But all of the Florida pharmacy laws apply, and they are subject to inspection by the same department that oversees pharmacies,” Greenblatt said. “It’s not just a piece of paper. Now physicians really have to know compliance regulations and they have to set up their pharmacies in terms of storage, access, and record keeping as if they were a retail pharmacy and the doctor were the pharmacist. Whatever a pharmacy has to worry about, they now have to worry about.”

The time commitment, Greenblatt said, is often higher than physicians assume. In Florida and a number of other states, the physician must review the prescriptions before the sales transaction, sign off on everything, and keep detailed logs. Moreover, she said, the physician has to be physically present. Patients wanting a refill, for example, can’t come in and obtain a refill during the dispensing physician’s off-hours. Some states allow for additional responsibilities to be fulfilled by a pharmacy technician, but the physician must oversee the entire process. [pagebreak]

Concerns about cost, disruption adoption

The profitability of an in-office pharmacy depends on a physician’s prescribing practices and patient volume. Vendors, including Lucero’s, will request prescribing and volume data from the physician at the outset to create a projection of profits or loss over the first projected year of adoption.

“It’s important for physicians and vendors to understand the individual practice, because this isn’t for everybody,” Lucero said. “We’ve run the analytics for all types of practices, and the bottom line is that if you’re not filling 15 to 20 prescriptions per day, you’re probably not going to make the money that you think you can.”

While many insurers handle in-office dispensing along the same route as pharmaceutical dispensing in relation to reimbursement, a handful of companies, most prominent among them Cigna and Aetna, will not offer reimbursement to physician pharmacies. For physicians whose patients primarily use non-participating plans, the idea of in-office dispensing is a non-starter.

Those whose patients could take advantage of an in-office pharmacy using their insurance must also be cognizant of concerns being raised by lawmakers. Legislative battles have taken place in states including Florida, where, as documented in a July 2012 New York Times article, one in-office pharmacy vendor spent over $3 million to defeat a bill banning physicians from dispensing. The workers compensation regulations in many states allow for a change in the average wholesale price that can be charged by physician dispensers once drugs are repackaged for office sale. This has led to legislative action in Maryland, Hawaii, and the aforementioned public case in Florida. [pagebreak]

In analyzing the cost of muscle relaxant carisoprodol in pharmacies and physician offices in six states, the Times found physician offices charging up to 9.2 times more for the same medication. The issue of markups will continue to attract attention and be debated.

In addition to regulatory and payer-related concerns, personal relationships and the inertia of established practice can work against the speed of change. Rob Raasch, president of Muskogee, Okla., based EHR company R&D MedTech, which works with a partner providing in-house pharmacy services, said that in many rural areas, physicians are loath to disturb existing relationships with pharmacies.

“It’s a definite value proposition for physicians, but the ones we do business with usually have relationships with pharmacists in the community,” he said. “It’s been our experience that rural doctors in our area don’t want to upset that balance.”

Patient and physician response

For proponents of in-office pharmacies, one oft-cited statistic from a 2007 study by the Opinion Research Corporation shows that given the opportunity, 75 percent of patients would prefer to have their prescription filled at the point of care if given the choice. [pagebreak]

In addition, Lucero said, physicians who have brand preference can avoid the usual substitution calls from pharmacies that would prefer patients switch to a slightly different drug.

“Many doctors feel that in the existing retail system, pharmacists often get involved to change a prescription that has already been written and approved because they’re incentivized to move from a brand to a generic or a more profitable brand,” Lucero said. “Not all doctors have brand loyalty or brand preferences, but some feel that a certain drug will work better than a generic for a certain patient or condition. They’re getting challenged on that front frequently.”

In addition to convenience for both patient and physician, anecdotal evidence appears to support the idea that drug dispensing at the point of care can improve patient outcomes by giving the prescribing physician a clearer picture of a patient’s refill history and overall compliance with the course of treatment. When integrated with a physician’s EHR, in-office pharmacy software can track a patient’s first prescription fill and subsequent refills and attach the information to a patient’s chart.

“In our survey feedback, a lot of physicians say that they’re able to achieve better outcomes over the course of treatment because of the influence on patient compliance,” Lucero said. “There are times now when a doctor doesn’t know if the patient ever obtained a refill, or even the initial prescription, and patients aren’t honest with their physicians 100 percent of the time.”

David Martin, RN, the CEO of Atlanta-based VeinInnovations, said that the drugs that his office dispenses for schlerotherapy — their only in-office dispensing method — achieve better results when physicians carefully monitor and adjust the concentrations and continually monitor outcomes. [pagebreak]

“It helps greatly that we have more control over the concentrations of the medicines that we use, and that’s in fact why we do it,” he said. “A lot of our dispensing has to do with cosmetic procedures, and we’re usually able to clearly track the outcomes.”

Regulatory concerns

Physicians curious about adding a pharmacy to their office, Lucero said, most often ask about the Stark Law and state regulatory implications. First and foremost, there is the requirement to allow patients to fill the prescription at the dispensary of their choice. From there, the Stark Law exceptions take center stage.

Most vendors point to the in-office ancillary services exception of Stark, which permits the physician owner(s) and members of the group to refer patients for Designated Health Services. A prescription drug dispensed in the office but taken at the patient’s home is covered by that exception. But, according to PharmaPoint, to qualify for that exception, the Designated Health Services must be furnished by the referring physician or another physician member in the same group practice in the same building in which the furnishing physician provides “substantial physician services unrelated to the furnishing” of the Designated Health Services. (In other words, the in-office pharmacy must literally be in the same building where the diagnosis and prescription writing takes place.) [pagebreak]

While most companies offering in-office pharmacy setup and management service have done extensive research into how they legally operate under federal and state regulations, Greenblatt said that some companies approaching doctors in her home state were offering deals that were, at best, ill-advised, and most likely in violation of anti-kickback statues.

“For a time, many of these vendors were coming in and offering to pay rent on a physician’s drug closet. Now, the vendors don’t have any ownership of or rights to the drugs, as they’re not a licensed pharmacy, and the pharmaceuticals are the property of the physician,” Greenblatt said. “It was a pretty blatant attempt to offer kickbacks to get an office’s business. The lesson to physicians on this issue is to be careful who you partner with.”

On a state level, determining legality can be a demanding task. The North Carolina Board of Pharmacy provides an FAQ for pharmacists on the topic of dispensing.

“North Carolina law contains a no self-referral’ statute applicable to physicians. Physicians must carefully consider whether a dispensing practice violates this statute,” the FAQ notes, later adding that “Many companies that market dispensing systems and products to physicians are very likely non-compliant with many North Carolina laws governing the practice of pharmacy ...  purchasing products from such companies could expose a dispensing physician to significant legal risks.” [pagebreak]

While many vendors retain expert legal counsel, most still advise physicians to seek their own expert counsel where doubts exist about the prospect of opening a pharmacy. Greenblatt agrees, as physicians should realize vendors’ counsel do not represent the physicians’ interests.

In states where regulatory matters are settled in favor of in-office pharmacies, many physicians have the ability to thrive in their new roles as both prescribers and dispensers. One of Lucero’s prospective clients, a dermatologist in Georgia, does a great deal of compounding — 300 prescriptions per month in compounds alone. He, along with three other dermatologists, is exploring getting a license for a compounding pharmacy.

“There’s no general demographic or typical’ physician that finds success adopting this idea,” Lucero said. “It’s still extra work you’re taking on, and there are regulatory issues to deal with.” But the potential benefits for physicians and patients make it an idea worth exploring, Lucero said. 

For more on in-office pharmacies, navigate to this month's online-exclusive slideshow.


AAD position statement

The American Academy of Dermatology published a position statement in 1998 (amended in 1999) on the topic of physician dispensing. In it, the Academy states that the practice should only take place when “manifestly in the best interest” of the patient. Dispensing, the statement said, is an ethical practice, save for under the following circumstances, mostly related to the dispensing of cosmeceuticals:

  1. When the dermatologist places his/her own financial interests above the welfare of his/her patients.
  2. When creating an atmosphere which is coercive to patients such that they feel compelled to purchase drugs from the dermatologist.
  3. When dispensing drugs under a dermatologist’s private label without clearly listing the ingredients, including generic names of the drugs.
  4. When dispensing to patients drugs which are easily available at proprietary pharmacies without advising patients of this availability.
  5. When representing drugs as being a special formula not elsewhere available, when that is not the case.
  6. When selling health-related products whose claims of benefit lack validity.
  7. When refusing to give refills of drugs except that they be purchased from the dermatologist.
  8. When charging patients at an excessive mark-up rate.

For the full statement, visit



AAD position statement