Attorney General: William Summa, Jr., Chairman, Commission of Pharmacy, 1994-029 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General Richard Blumenthal

November 1, 1994

William Summa, Jr.
Chairman, Commission of Pharmacy
165 Capitol Avenue
Hartford, CT 06106

Dear Chairman Summa:

This letter is in response to your request for our opinion as to whether a pharmacy engages in fee-splitting, in violation of Conn. Gen. Stat. 20-175(7), if physicians who own stock in the pharmacy receive certain benefits from their stock ownership. As you note in your letter, this office issued an opinion on October 2, 1992 concerning physician ownership of pharmacies. In that opinion we concluded that under Conn. Gen. Stat. 20-175(7) the Commission of Pharmacy ("the Commission") can revoke the license of a pharmacy which engages in fee-splitting with physicians. We further found that "[f]ee-splitting occurs when a pharmacy provides an economic incentive for a physician to refer his patients to that particular pharmacy, and the physician in fact benefits because his patients use the pharmacy." 92 Conn. Op. Atty. Gen. (10/2/92) p. 2. Among the examples of fee-splitting which we cited was the receipt of dividends by a physician from his ownership interest in a pharmacy.

We understand from your letter that the Commission is currently investigating a group of pharmacies in which physicians own stock, but do not receive any dividends as a result of their stock ownership. According to your letter, the corporate structure of the pharmacies has been altered so that no dividends will ever be distributed. Although the physicians' patients are patronizing the pharmacies in question, you state that the only apparent financial benefit to the physicians will occur if and when they sell their pharmacy stock at a profit. Given these circumstances, and in light of our prior opinion, you have requested our advice on the following questions:

1. Has a pharmacy engaged in fee-splitting, in violation of Connecticut General Statutes, Section 20-175(7), if the physicians who hold stock ownership of the pharmacy have not receive any present financial benefit, but only have an indefinite and uncertain future benefit?

2. Has a pharmacy engaged in fee-splitting, in violation of Connecticut General Statutes, Section 20-175(7), if the physicians who hold stock ownership of the pharmacy sell the stock at a profit?

As explained below, we conclude that physicians are prohibited by 1993 Conn. Pub. Acts No. 93-374 from owning stock in a pharmacy acquired on or after July 1, 1993, unless the stock is in a publicly-held corporation, traded on a national exchange or over-the-counter market, in which the physician, his spouse and dependent children, in the aggregate, own no more than one half of one percent of the total shares issued by the corporation. We further conclude that if a physician owns stock in a pharmacy which he acquired prior to July 1, 1993, the pharmacy is engaging in fee-splitting in violation of Conn. Gen. Stat. 20-175(7) if the physician benefits financially from his patients' use of pharmacy. While the receipt of dividends is one form of benefit, a physician could also benefit if, as a result of his patients' use of the pharmacy, the value of his stock increased or his losses were reduced. Only if the physician does not receive any financial benefit from his patients' use of the pharmacy would his stock ownership not constitute fee splitting in violation of Conn. Gen. Stat. 20-175(7).

As you are undoubtedly aware, there is relatively recent legislation which is relevant to the questions you have raised. Following the issuance of our October 2, 1992 opinion, the General Assembly adopted 1993 Conn. Pub. Acts No. 93-374, "An Act Concerning of Licensed Pharmacies by Licensed Practitioners," which took effect on July 1, 1993. Public Act 93-374 states that:

No licensed practitioner, as defined in section 20-184a of the general statutes, or spouse, except a spouse who is a pharmacist licensed under chapter 382 of the general statutes, or dependent child of a licensed practitioner shall have ownership or investment interest in a pharmacy licensed in accordance with section 20-168 of the general statutes. 1993 Conn. Pub. Acts No. 93-374(a).1 Subsection (c) of the act provides that "ownership o[r] investment interest" shall not include ownership of investment securities in a publicly-held corporation which is traded on a national exchange or over-the-counter market, provided the licensed practitioner, his spouse or his dependent children do not, in aggregate, own more than one-half of one percent of the total shares issued by the corporation. The act took effect on July 1, 1993, and explicitly does not apply to practitioners who had an ownership or investment interest in a pharmacy prior to that date or who inherit such an interest. 1993 Conn. Pub. Acts No. 93-374(b).

To the extent that your questions involve physicians who purchased stock on or after July 1, 1993, Public Act 93-374 applies to them. Under the act, whether or not a physician receives dividends or other present financial benefit is irrelevant. All stock ownership is prohibited, regardless of the present or future benefits, unless it fits within the exception set forth in subsection (c).

With regard to physicians who owned pharmacy stock prior to July 1, 1993, the analysis is different. Prior to July 1, 1993 when Public Act 93-374 took effect, there was no general prohibition against physician ownership of pharmacy stock. On the contrary, Conn. Gen. Stat. 20-168 made clear that "any person, firm or corporation" could own a pharmacy (emphasis added). See also Conn. Gen. Stat. 20-180 (stating that "[n]othing herein shall...prevent any person from becoming a partner in or the owner of a pharmacy conducted by a licensed pharmacist."). Although physicians were not prohibited from owning pharmacies before July 1, 1993, pharmacies were, and still are, prohibited from splitting fees with physicians. Conn. Gen. Stat. 20-175(7). As we concluded in our October 2, 1992 opinion, "[f]ee-splitting occurs when a pharmacy provides an economic incentive for a physician to refer his patients to that particular pharmacy, and the physician in fact benefits because his patients use the pharmacy." 92 Conn. Op. Atty. Gen. (10/2/92) p. 2.

The purpose of the ban on fee-splitting, as stated in the legislative history of Conn. Gen. Stat. 20-175, is to protect and benefit the public. 40 Conn. S. Proc., pt. 4, 1961 Sess. 1151 (May 2, 1961) (remarks of Sen. Hickey). Presumably, the concern is that a physician who has an economic incentive to refer his patients to a particular pharmacy will refer to that pharmacy, rather than to the pharmacy which is most convenient for the patient, provides the best service, has the lowest prices or employs the most highly regarded pharmacist. As we concluded in our prior opinion, only if a physician has no economic interest in which pharmacy his patients use will the public be protected from the danger that a physician's judgment may be influenced by his desire to make a profit. On the other hand, this conclusion does not prohibit a physician from owning stock in a pharmacy, such as a nationwide chain, in which the physician's percentage ownership is so minimal that he does not receive any measurable financial benefit from his patients' use of the pharmacy. See 92 Conn. Op. Atty. Gen. (10/2/92) p. 7. In such a case, there is little, if any, concern that the physician's ownership interest will influence his judgement to the detriment of his patients. Accordingly, any benefit which the physician receives from owning stock in such a pharmacy does not constitute fee-splitting.

You ask whether a pharmacy has engaged in fee-splitting if a physician owns stock in the pharmacy, which he acquired prior to July 1, 1993, but does not receive any apparent present financial benefit as a result of his stock ownership. Unlike physicians who own stock in a nationwide chain, it is our understanding that the physicians in the situation you present own more than a minimal percentage interest in the pharmacies at issue.2 The principle question is whether the physicians receive any present financial benefit from their patients' use of the pharmacies in question. As you are aware, even if a physician does not receive dividends, his patients' use of the pharmacy may benefit him by increasing the value of the business and, in particular, the value of his stock, or by simply maintaining the viability of the pharmacy as a going concern. At the very least, even if the pharmacy is not doing well financially, the fact that the physician's patients are using the pharmacy could reduce the physician's losses and benefit him as a result. In each case, if the physician stands to gain financially from his patients' use of the pharmacy, he will have "an economic incentive" to steer his patients to the pharmacy in which he has an interest, rather than to the pharmacies which will best meet the needs of his patients. Thus, we conclude that unless a physician's percentage ownership interest in a pharmacy is so minimal that he does not receive any financial benefit from his patients' use of the pharmacy, a physician's ownership of stock in a pharmacy which is used by his patients violates the statutory ban on fee-splitting set forth in Conn. Gen. Stat.  20-175(7).

Very truly yours,

RICHARD BLUMENTHAL
ATTORNEY GENERAL

Jane R. Rosenberg
Assistant Attorney General

RB/JRR/lmr


Footnote:

1 The term "licensed practitioner" is defined in Conn. Gen. Stat. 20-184a as "any person licensed by the State of Connecticut, any other state, the District of Columbia or the Commonwealth of Puerto Rico and authorized to prescribe medication within the scope of his practice." Physicians are licensed by the state and authorized to prescribe medication. See Conn. Gen. Stat. 20-9.

2 We understand from conversations with the legal division at the Department of Consumer Protection that at least one of the pharmacies under investigation is owned by approximately 35 physicians, each of whom owns up to 100 shares of the 3500 shares of stock issued by the pharmacy.


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