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Converting your physician dispensing program to a licensed pharmacy: Key considerations

February 2017

As oral oncology medications continue to replace infused cancer therapies, independent oncology practices find themselves facing new challenges. With substantial changes occurring in treatment protocols, reimbursement rates and industry regulations, practices are now in competition with specialty pharmacies and pharmacy benefit managers (PBM), who want to control reimbursement for oral medications. To remain competitive, many practices are contemplating whether they should convert their physician dispensing programs into licensed pharmacies. 

The changing dispensing landscape and the shift toward oral specialty drugs

Historically, most cancer therapies were delivered intravenously in the physician’s office or clinic. Clinicians were certain the regimens they prescribed were delivered to the patient, and knew exactly when the dose was administered. Reimbursement for Medicare patients was per the Medicare Part B Physician Fee Schedule and was updated quarterly based on Average Sales Price (ASP) plus 6 percent. Commercial payers were largely aligned with this fee structure as well, making reimbursement for infused cancer treatments very predictable for oncology practices.

Today, the surge of new oral medications for cancer has created different challenges for independent practitioners. Because patients self-administer oral medications, physicians have less control over whether the treatments are taken as prescribed; therefore, monitoring of compliance and persistency becomes more important to delivering optimal outcomes. The reimbursement landscape for oral medications also poses unique challenges. The fee structure is controlled by a number of pharmacy benefit managers (PBMs), and reimbursement rates change with much greater frequency than they do for injectable drugs, making cash flow less predictable.

When dispensing oral medications, oncology practices face significant competition from the growing specialty pharmacy industry, including both independent specialty pharmacies and those owned by PBMs. With significant dollars at stake, all of the key stakeholders are seeking to increase control over the oral oncolytics market—and in turn, independent practices are feeling squeezed. For example, last year, CVS Caremark announced plans to exclude physician dispensing programs from their network, which would have resulted in community practices being required to send oral specialty medication prescriptions to the CVS Health specialty pharmacy instead of filling it in their own dispensary. Although the decision was reversed, there is concern that other PBMs with specialty pharmacies will pursue similar strategies.

In response to growing pressures from PBMs and other stakeholders to limit physician dispensing, some community physician office practices are taking steps to compete more effectively with outside specialty pharmacies, and retain their ability to dispense medications for their patients, such as pursuing accreditation or formalizing medication therapy management (MTM) programs. 

In addition, many physician office practices are considering converting their dispensing program into a fully licensed pharmacy to ensure they can continue to fill prescriptions for their patients. 

Key considerations for converting to a licensed pharmacy

1. Federal and State regulations
State laws regarding physician ownership of licensed pharmacies vary by state.  In some states, interpretation of federal and state anti-kickback laws, conflict-of-interest and ethics rules, and patient-care standards have led to prohibition of pharmacy ownership by a physician or physician group. The first step in the initial planning process is to determine whether the physician practice may own and operate a pharmacy in their state, and review any special requirements for such ownership.   Physician pharmacy ownership is currently prohibited in 13 states: Arizona, California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Montana, Nevada, New Hampshire, New York, North Dakota and Rhode Island. Ownership is also prohibited in Puerto Rico.

Assuming that pharmacy ownership is permissible in their state, practices can contact their state’s Board of Pharmacy for precise regulations related to licensing and operating a licensed pharmacy. These regulations, which vary state to state, provide specific requirements for the pharmacy, including floor plan, square footage, equipment (sinks, refrigerators, counters, etc.), access and security.  Practices must consider if they have adequate space and or if they can meet these requirements through remodeling or construction.

Certain federal laws, including Stark Law (42 U.S.C. § 1395nn) and the Anti-Kickback Statute (42 U.S.C. § 1320a-7b), are also implicated by physician ownership of a licensed pharmacy. In order to comply with these laws, a physician owned licensed pharmacy must operate within certain narrowly tailored exceptions – such as the “In-Office Ancillary Services Exception” to the Stark Law or the “Investments in group practices” exception to the Anti-Kickback Statute. Before converting, practices should work with legal counsel to ensure the licensed pharmacy is set up to operate in a manner that does not violate the Stark Law, Anti-Kickback Statute or any other federal laws or regulations.

2. Investments in facilities and staff
Practice owners must evaluate the facility investments that will be needed to bring the pharmacy in line with state regulations. In addition to the cost of construction and facilities, staffing needs must be assessed. A licensed pharmacy must be staffed by a Pharmacist-In-Charge, or PIC. Although many larger physician dispensing programs already employ a pharmacist, some programs will need to hire one. This is one of the largest new ongoing expenses that will impact the business plan.

While the addition of a pharmacist is a significant investment, there are many advantages to the practice. In addition to their expertise and clinical contributions to patient care, pharmacists are also able to bill for medication therapy management (MTM) services. For practices participating in the Oncology Care Model, pharmacists can assist with the MTM services and documentation challenges created by Medicare Part D drug inclusion.

Practices converting to a licensed pharmacy must also undergo reclassification with the National Council for Prescription Drug programs (NCPDP). Pharmacies have a different type of NCPDP number than physician dispensing programs. The change in NCPDP number will need to be coordinated with the Pharmacy Services Administrative Organization (PSAO) (to ensure smooth transition for managed care contracts), the GPO (to ensure GPO contracts remain active), and practice systems, such as the pharmacy dispensing software (to ensure claims are adjudicated under the correct NCPDP number). Practices should also consult their GPO and/or distributor to address any potential class of trade restrictions in existing supply arrangements. There is also a fee of $275 per location to reclassify the physician dispensing program to a licensed pharmacy. Lastly, some states require physicians to obtain dispensing licenses.

3. Evaluating the financial impact
Considering the potential costs from construction, resources, staffing and credentialing, a proforma should be created to support the business plan for conversion to a licensed pharmacy. The original proforma for the physician dispensing program may be used as a starting point, and can be updated with current patient volumes, capture rates and revenue metrics. The incremental costs for conversion must be weighed against the potential loss of the ability to provide specialty medications to most patients, as pressure increases on physician dispensing programs. 

Practices must also consider how Medicare Part D drugs are included in MACRA and the impact of sending prescriptions to outside entities beyond just the lost revenue. For example, in the Oncology Care Model, patients receiving aromatase inhibitors can only be counted as patient episodes eligible for Monthly Enhanced Oncology Services (MEOS) payments if detailed information is available on date of actual start of the therapy. Since practices are likely unable to provide the precise start date if they have not filled the prescription, reimbursement for OCM patients may be compromised.

4. Consultative expertise
Just as starting a physician dispensing program is a complex process, so is converting to a licensed pharmacy.  Committed project management by an experienced and knowledgeable team is critical for successful conversion.  When evaluating potential consultative partners, practices should look for a partner that has vast experience in starting licensed pharmacies in multiple states and has a proven playbook for standing up a pharmacy quickly. Additionally, practices should seek assistance from partners that have experience with pharmacy audits and can help the practice prepare for such an event.  In addition to the benefits of partnering with someone that understands the tactical aspects of establishing a licensed pharmacy, working with a consultative partner that has an existing relationship with the practice can ease the transformation and identify ways to maximize current GPO contracts as well. 

Competition for dispensing oral specialty medications will continue as this market grows.  The evolution of value-based care reimbursement models is strengthening the desire of community oncology and urology practices to provide complete and total care for their patients, including dispensing oral specialty medications and more closely monitoring patients for quality outcomes. Conversion to a licensed pharmacy is one way that community physician office practices can ensure that they remain at the center of patient care for patients on oral specialty medications.

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