On May 12, 2020, in an unpublished opinion, the Superior Court Appellate Division upheld a Board of Pharmacy (“Board”) decision to deny a specialty pharmacy application submitted by Summit Medical Group (“SMG”), In the Matter of the Application of Summit Medical Group, d/b/a SMG Pharmacy to Operate a Pharmacy in the State of New Jersey.  The three judge panel unanimously upheld the Board’s determination that the proposed structure of the specialty pharmacy would violate the Codey Law, and therefore would be an impermissible structure.  The Appellate Court noted that because pharmacy is a prohibited “health care service” under the Codey Law, an exception must apply.  The Appellate Court deferred to the Board’s decision and concluded that the “in house” exception would not be applicable for the proposed structure since dispensing of medication by a pharmacist is neither a “medical treatment” nor a “medical procedure”.  Accordingly, the Appellate Court found that the Board’s record contained evidence to support the Board’s decision that the proposed pharmacy structure would violate the Codey Law.  The Codey Law prohibits physicians from referring patients to health care services in which they maintain a financial interest.  (N.J.S.A. 45:9-22.4-22.9).

This Appellate Court case sheds light on the “in house” exception” of the Codey Law, which exempts “a medical treatment or 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 office” from the Codey Law referral prohibition.  (N.J.S.A. 45:9-22.5).

SMG had filed an application to establish a pharmacy practice located in the same building where SMG conducts its oncology practice. The pharmacy would be wholly owned by the physicians who owned the SMG medical practice and would have exclusively filled prescriptions needed by SMG patients according to oncologic treatment protocols.   Since the pharmacy is a “health care service” under the Codey Law, the Board requested SMG to address whether the proposed structure would violate the Codey Law.  SMG had submitted that the proposed structure would fall under the “in house” exception of the Codey Law, which exempts “a medical treatment or 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 office” since the pharmacy would bill under the same tax ID as the medical practice, and that for all purposes, the pharmacy would be fully owned and operated within the medical practice.  The Board denied the application and SMG filed the appeal.  Ultimately, the Appellate Court deferred to the Board’s decision.

The takeaway from this case is that despite the pharmacy operation being fully owned by the medical practice, operating under the same Tax ID, having the pharmacists being employed by the medical practice, and having all of the billing under the medical practice’s Tax ID number, the pharmacy services are prohibited “health care services” under the Codey Law.  They are not eligible to be exempted under the “in house exception” on the grounds that dispensing pharmaceuticals is neither a “medical treatment” nor a “medical procedure,” and that pharmacies and pharmacists do not provide “medical treatments.”