Legal Intelligencer article by Lamb McErlane PC Health Law attorneys Vasilios J. Kalogredis and Rachel E. (Lusk) Klebanoff.

The Superior Court of New Jersey, Appellate Division, recently issued an important ruling upholding a determination by the New Jersey Board of Pharmacy (the “Board”) that a medical practice may not own an in-practice pharmacy to which the physician owners refer patients. The case stemmed from a 2019 decision of the Board that denied application of Oncology and Hematology Specialists, P.A., a New Jersey medical practice (the “Petitioner”), to register, open, and operate an in-office pharmacy for its practice. The case is In re Oncology & Hematology Specialists, P.A., No. A-2080-19 (App. Div. Dec. 22, 2021).

The Petitioner, owned by four medical doctors, had sought to open a pharmacy within its practice location that would be exclusively for patients of the practice. The Board denied the practice’s application citing New Jersey’s Codey Law, N.J.S.A. 45:9-22.4 to -22.9, which prohibits physicians from referring a patient to “a health care service in which the practitioner, or the practitioner’s immediate family, or the practitioner in combination with the practitioner’s immediate family has a significant beneficial interest” (N.J.S.A. 45:9-22.5(a)), unless an exception applies. A “significant beneficial interest” is defined as “any financial interest.” N.J.S.A. 45:9-22.4. Moreover, the Codey Law definition of “health care services” explicitly includes pharmacies.

Because the Petitioner planned to open a pharmacy for its practice to which it would refer its own patients, the Codey Law was implicated and thus an exception would have to apply for it to be permissible under the law. Despite Petitioner’s arguments to the contrary, the Board found that Petitioner’s plans for a pharmacy did not fall within an exception, including the exception for medical treatments in a practitioner’s office, because in the Board’s opinion, a pharmacy does not provide medical treatment.

The Petitioner raised numerous issues on appeal, including: (1) the “in-office” exception to the Codey Law was applicable, (2) the Board of Pharmacy acted beyond the scope of its authority in considering the Codey Law, which is under the authority of the Board of Medical Examiners, (3) denial of the application amounted to impermissible anti-competitive conduct, and (4) the doctrine of equitable estoppel required the Board of Pharmacy to approve the application.  The Court rejected each of Petitioner’s claims and affirmed the findings of the Board.

The “in-office” exception provides that the Codey Law prohibitions do not apply to medical treatment or a procedure that is provided at the practitioner’s medical office and for which a bill is issued directly in the name of the practitioner or the practitioner’s medical office.  Neither “medical treatment” nor “procedure” is defined in the Codey Law, but the Board and the Court determined that a pharmacy does not provide either “medical treatment” or “procedures.” The Board had noted that its decision was consistent with the advisory opinions rendered by the Board of Medical Examiners, which, per the Board, state that a physician may own a pharmacy, but the physician may not refer patients to said pharmacy.

On appeal, the Court determined that the Board was within its rights to deny the pharmacy’s application based on violation of the Codey Law because the New Jersey Pharmacy statute allows the Board to deny a pharmacy application if the conduct in said application is in violation of any federal state or local laws or regulations relating to the practice of pharmacy. The Court concluded that the Codey Law reasonably relates to the practice of pharmacy as it explicitly defines pharmacies as health care services.

The Court also rejected the Petitioner’s anti-competition and equitable estoppel arguments. Interestingly, Petitioner’s equitable estoppel argument was based on an assertion that the Board allowed another medical practice to operate an in-office pharmacy and, therefore, Petitioner “reasonably expected” its pharmacy permit would be granted. Based on this assumption, the Petitioner claimed it incurred costs in excess of $500, 000 relating to its pharmacy application. The Board conceded it made a mistake in approving the arrangement, and it rescinded the permit issued to the medical practice identified by Petitioner.

This ruling by the New Jersey Appellate Court is important. While Pennsylvania does not currently have its own Codey-like anti-referral law, the Court’s recent holding clearly demonstrates the state of the law in New Jersey surrounding the ownership of pharmacies by physicians in connection with their medical practices. This case now makes clear that in the case of any ancillary services or products that do not amount to a medical treatment or procedure, the state agencies charged with administering the law (including the New Jersey Boards of Medical Examiners and Pharmacy), and now the courts, are going to take a very strict view and interpretation of the statute.

Physician groups should be aware of the broad applicability of the New Jersey Codey Law as it applies to referrals to entities that a practitioner has an interest in, and structure (or reevaluate) their practices and businesses accordingly.

Read the article online on Law.com here.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

Rachel E. (Lusk) Klebanoff, Esq. is a senior associate at Lamb McErlane PC who focuses on health law and health care litigation. She represents physicians, dentists, nurses, medical group practices, and other health-related entities in transactional, regulatory, and compliance matters. rlusk@lambmcerlane.com. 610-701-4416.

*March 31, 2022 Legal Intelligencer \ Law.com article.