New Jersey Court Affirms Prohibition of Physician Practice from Opening and Operating In-Office Pharmacy

At the end of 2021, the Superior Court of New Jersey, Appellate Division upheld the decision by the New Jersey Board of Pharmacy (the “Board”) denying the application from a New Jersey oncology practice (the “Petitioner”) to register, open, and operate a pharmacy within its medical practice. Below, we discuss the decision and how this could impact national virtual care platforms that offer services to New Jersey patients and refer those patients to pharmacies within a related corporate structure.

Case Summary

The Petitioner in this case is a medical practice that is wholly owned by four doctors. These doctors sought to open a “closed door clinic pharmacy” within their practice to provide pharmacy services exclusively for the patients of its physicians. The Board denied Petitioner’s pharmacy application, finding that the proposed pharmacy would violate New Jersey’s “Codey Law,” which prohibits physicians from referring patients to healthcare services where they hold “a significant beneficial interest.”[1] This is analogous to the federal Stark Law,[2] which prohibits physicians from referring patients to an entity to receive certain designated health services, including outpatient prescription drugs, if the physician has an ownership or investment interest or other compensation relationship with that entity.   

The Board also concluded that the proposed pharmacy would not fit within the Codey Law exception allowing referral of patients to medical treatments or procedures provided at the practitioner’s office and for which a bill is issued directly in the name of the practitioner or the practitioner’s medical office, similar to the in-office ancillary services exception under Stark, because pharmacies do not provide medical treatment. The Board noted its decision was consistent with several advisory opinions from the Board of Medical Examiners stating that “although physicians may own pharmacies, the Codey Law would prohibit a physician from referring the physician’s own patients to the pharmacy in which he or she held an ownership interest.”

The Appellate Division rejected each of Petitioner’s claims, finding in part that the Board’s actions did not fall beyond the scope of its authority and did not amount to impermissible anti-competitive conduct. This holding makes it clear that New Jersey does not permit ownership of pharmacies by physicians in connection with their medical practice. 

Impact

New Jersey healthcare providers, both brick and mortar practices and digital health practices, should be aware of the Codey Law and its broad prohibitions on referrals to entities that the providers have an interest in. The issues surrounding the referral of patients to these “in-house” ancillary services like pharmacies have broad implications that extend to virtual care platforms operating in different jurisdictions and offering a variety of connected healthcare services within the overall platform. For example, digital health companies with captive pharmacies or pharmacies with related ownership will need to navigate this New Jersey law in addition to federal and state fraud and abuse laws, licensing, and reimbursement questions. With many virtual healthcare companies looking to build out their services nationwide and offer patients a one-stop-shop solution, these entities must steer their way through the federal and state regulatory landscape to be compliant.

At the forefront of both the life sciences and technology industries, MoFo is uniquely qualified to understand the challenges in the digital health industry and to help clients embrace analytics-driven insights to identify solutions to the most pressing issues they face. We help clients navigate complex regulatory, compliance, healthcare system, and marketplace issues. For more information, please contact a member of our FDA Regulatory and Compliance Team.

 


[1] N.J.S.A. § 45:9-22.5(a). N.J.S.A. § 45:9-22.4 defines “significant beneficial interest” to mean “any financial interest but does not include ownership of a building wherein the space is leased to a person at the prevailing rate under a straight lease agreement, or any interest held in publicly traded securities.”

[2] 42 U.S.C. § 1395nn.