Watch the video here, or just keep reading below for a slightly polished transcript:

Compounding pharmaceuticals, specific drugs for specific patients, offers tremendous benefit. The problems arise when the benefit is for the prescribing physician. Then, we’re dealing with analyses under the federal Anti-Kickback Statute (AKS), the Stark Law, and their state law counterparts.

A recent federal appellate court opinion highlights what everyone (okay, just those not willing to lie to themselves) already knew but many (those willing to lie to themselves) were unwilling to admit: That it can be a violation of the AKS to receive something of value when simply serving as a gatekeeper for a patient’s previously existing choice.

Let’s stick with the compounding pharmacy example, at least for the moment:

Setting aside a plethora of issues from the distinction between compounding and manufacturing, to issues of direct patient solicitation, there are some in the compounding pharmacy business who believe that it’s okay to market specific compound medications directly to patients, using networks of physicians to rubber-stamp that pesky necessity, the prescription.

Often, the physicians in the network receive payment from the unlicensed pharmaceutical manufacturer compounding pharmacy for, essentially, issuing a prescription for the compounded drug in response to the patient’s request. How, those physicians tell themselves, can authorizing what the patient already wants, “Miracle Compounded Drug X,” from Lucky Larry’s Pharmacy in Leucadia, CA, be a referral to Lucky Larry?

Here’s where the cautionary tale of Kamal Patel, M.D. (U.S. v. Kamal Patel), comes into play. The unfortunate Dr. Patel wasn’t involved with compounding, he was involved in a home health care services kickback scheme. But the lesson is equally applicable.

Dr. Patel is an internal medicine physician. He routinely treated elderly patients, Medicare beneficiaries. He regularly prescribed home health care services to his patients. There was no allegation that he ever made any improper prescription for any service.

Due to the defection of a number of its partners who took a large portion of the existing business with them, the remaining owners of a home health care agency, Grand Home Health Care, made overtures to pay Dr. Patel a bounty per each of his patients who received home care from Grand.

Importantly, at least to Dr. Patel’s failed defense and to the fact situation, as it is akin to the compounding pharmacy example, it was the patients who chose to obtain home healthcare from Grand, it was not Dr. Patel who chose Grand as the provider.

The fact that a patient chooses a specific home health care service is not sufficient for the service to receive payment from Medicare. Instead, there must be a certification (essentially a prescription) by a physician. Dr. Patel signed the certifications that those patients required care from the home health care agency they chose, that is, from Grand.

The government brought charges against Dr. Patel under the AKS. The essential language of the AKS is “whoever knowingly and willfully solicits or receives any remuneration (including any kick-back, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program [shall be guilty of a felony]."

Dr. Patel argued that there was no referral: It was the patients who independently chose Grand. He never gave any input to influence their choice. Therefore, he argued that he could not be guilty of an AKS violation.

On the other hand, the government argued, and the court agreed, that “refer” includes not only a doctor’s recommendation of a provider, but also a doctor’s authorization of care by a particular provider.

Even though Dr. Patel played no role in his patients’ initial selection of Grand or their decision to continue using Grand, by certifying their care at Grand, Dr. Patel chose whether his patients could go to Grand at all. In the words of the court, "Patel acted as a gatekeeper to federally-reimbursed care. Without his permission, his patients’ independent choices were meaningless."

Dr. Patel then tried the "no harm, no foul" defense: He argued that by certifying the patient’s decision to use Grand, he did not cause the federal government to pay Grand any more than it would otherwise have to pay for home health care. After all, there was never any question that he had ever certified a patient for home health services who did not actually require home health services.

However the appeals court correctly pointed out that even if the Medicare system suffered no losses in this instance, the danger of fraud at the certification stage is quite clear. "A physician could refuse to certify a patient to a patient-chosen provider unless the provider paid the physician a kickback. This behavior could increase the cost of care. It could also contravene the second purpose of the AKS -- protection of patient choice -- by interfering with the patient’s choice if the selected provider refused to pay."

The appellate court upheld the trial court’s decision that Dr. Patel had violated the AKS. Dr. Patel was sentenced to 8 months in prison plus 200 hours of community service, and ordered to forfeit $31,900 of kickback payments.

Dr. Patel’s certification, that is, prescription, of home health care services from a patient-selected provider, is no different from another physician’s prescription of a compounded drug from a patient-selected pharmacy.

If that pharmacy, like Grand, made payments to the physician to induce that prescription (whether it’s blatantly offered as by Grand or whispered sotto voce in terms of payment for "something" that is actually for nothing) then both the physician and the pharmacist may be headed off to join Dr. Patel in the federal penitentiary for violating the AKS.

[Although it does nothing to change the analysis, physicians considering borderline deals of all sorts often ask questions (which they intend as statements) akin to, “how will they ever find out?” Perhaps Dr. Patel or the folks at Grand Home Health Care will let you know of one common way: The feds initially investigated Grand and its owners. To reduce their own exposure, Grand's owners flipped on Dr. Patel and wore a "wire" to record their communication.]

There are many legitimate ways for physicians to increase their practice income. They include, depending on state law, investments in compounding pharmacies and the direct dispensing of pharmaceuticals. But any deal must be structured in compliance with the AKS. And then, of course, also in compliance with other applicable laws, from Stark to state law considerations.

Go ahead, I encourage you, think entrepreneurially. But please be smart about it.