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So, You Want to Be in the Pharmacy Business? Building from scratch, acquisitions & other considerations.

pharmacy businessBy: Michael Silverman

Like many entrepreneurial endeavors, owning a pharmacy requires careful planning and an astute risk versus reward analysis. However, unlike other industries, venturing into a healthcare business brings with it an entire new world of regulations, and rightly so. Pharmacies don’t sell widgets they sell prescription drugs, and to people whose well-being depends on it being done correctly. As such, there’s a host of state and federal laws a pharmacy must abide by, intended to safeguard patients and the healthcare system as a whole. Don’t let regulatory hurdles alone serve as an insurmountable deterrent from entering into what can be a profitable and fulfilling profession; proactive compliance is the key to success! Here’s an overview of the general steps necessary to become a pharmacy owner, be it from scratch or by acquiring an existing practice. For the purposes of this article, let’s assume it’s a community/retail pharmacy that will be located in Florida.

So what’s better – building from scratch or buying something that’s already out there? Typical lawyer answer – it depends! But I won’t stop there; here are some considerations that must be taken into account to make a proper decision: (1) how quickly does the business need to be up and running? It’s typically a faster process to commence business by acquiring an existing pharmacy rather than buying one, but that depends on (2) what is out there in the current marketplace? If a stock acquisition, all of the known and unknown liabilities will be inherited by the new owner; proper due diligence on the pharmacy’s past is essential.

Creating a Pharmacy from Scratch a clean slate is great if you have the time!

  • Entity Formation: What state will the new entity be formed in and how will it be legally recognized (e.g. Corporation, LLC, etc.)? Ensure the proper state/county/city business permits are obtained.
  • Location, Location, Location: Where is the best place to be? Busy shopping center? Close to medical practices with prescribing practioners? Lease or buy? How does the independent community pharmacy set itself apart from corporate competition? Specialized individual patient care and community outreach? Make sure the location is zoned appropriately for the use of a community/retail pharmacy. Keep in mind pharmacy licensure requirements when renovating.
  • Apply to the Board of Pharmacy (“BOP”) and Prepare for Inspection: Among other requirements () to pass and receive a license, the pharmacy needs the following: Click HERE.
    • A Pharmacist in Charge (“PIC”) that is licensed as a pharmacist with the BOP and will be responsible for ensuring the pharmacy’s operations adhere to the BOP’s rules and regulations. A Florida licensed pharmacist can only serve as the PIC for a single pharmacy at a time unless the BOP has approved otherwise;
    • A Policy and Procedures Manual outlining, among other matters: (i) general dispensing and operating procedures; (ii) technician supervision/ratio; (iii) continual quality improvement programs, and (iv) controlled substance dispensing/inventory/record keeping (if applicable);
    • A locked and secured prescription drug department;
    • A private patient consultation area;
    • To meet other miscellaneous criteria such as: (i) proper staff identification; (ii) proper licensure display; (iii) prescription department access to sink; and (iv) posting of signage indicating hours of operation, pharmacist meal breaks, and patient access to generic drug equivalents.
  • Additional Applications: Once the inspection is passed and pharmacy license issued by the BOP, the pharmacy should now apply for the following as applicable it its practice: NCPDP number, NPI number, and DEA license. After going through this process the pharmacy is then ready apply to bill insurance carriers, which can be done through a PSAO and/or directly through PBMs.
  • Miscellaneous Matters: Choosing the correct pharmacy billing software/hardware; obtaining the requisite professional liability and property/casualty insurance as mandated by particular applications.

Buying an Existing Pharmacy in speeding up the process, conduct due diligence or possibly face an unanticipated death knell.

There may be an inclination to bypass the length of time and energy involved in starting a pharmacy from the ground – finding a location, securing a lease/buying a property, doing necessary build out, preparing for inspection, passing inspection and getting issued a license by the FL BOP. Obtaining DEA license. Enrolling with insurance providers. Finding patients. Leasing/buying appropriate pharmacy billing software. The process sounds exhausting and can easily take over 6 months, all while generating no revenue.

While an asset acquisition of a pharmacy is a good method to avoid some of these ‘starting from scratch’ hurdles and to save some time, the ONLY way in Florida to avoid having to obtain a new pharmacy permit/license number (i.e. filling out an entirely new application) is to do a stock acquisition. See 64B16-28.2021 of the Florida Administrative Code. A stock acquisition of an existing pharmacy is a great short cut, however, buying a pharmacy that is bound to be a bust is surely a worse bet than taking the slow road. The decision between creating a pharmacy and acquiring one largely depends on the current marketplace. Mitigate the risks of a stock acquisition by conducting thorough due diligence, and do not tread lightly here!

A stock acquisition means there will be no change in the entity’s FEIN and results in no disruption to the pharmacy’s operations. The Florida BOP doesn’t even need to be notified of the change of ownership (“CHOW”) until 15 days after closing. It also means that any and all liabilities, known and unknown, will be imputed to the new owner. There may be indemnification clauses in the Stock Purchase Agreement, whereby the previous owner agrees to pay or reimburse the new owner for any liabilities from prior to the CHOW (and that is certainly something that a buyer should insist upon), but that essentially just leaves the buyer with a civil cause of action against the seller if they refuse to pay. It does not protect the new owner from issues that may drastically effect the pharmacy’s ability to conduct business.

Accordingly, in a stock acquisition, it’s imperative to thoroughly review, among other things:

  • All applications submitted to (1) any state Board of Pharmacy; (2) any federal entity (e.g., DEA); (3) any state or federal payor (e.g., Medicaid); (4) any PSAO, PBM, or insurance provider;
  • Financial data: P&L statements, tax Returns, vendors and wholesaler liabilities;
  • Claims data: review claims submitted by the pharmacy to ensure compliance with state/federal regulations and with PBM/insurance provider contractual requirements. This is vital for ongoing monetary and contractual implications, as noncompliant claims submissions from the previous owner can result in fines, recoupments of past business and relationship terminations effecting ability to do future business.

Purchasing a pharmacy whose insurance network application has been previously denied will likely create issues for the new owner’s network application after the CHOW. Purchasing a pharmacy that has had (or may have) troubling audit results may lead to unanticipated monetary recoupments, or even worse, termination from that insurance network after the CHOW. Purchasing a pharmacy that has previously been terminated from an insurance network will create an uphill battle for the new owner to get back into that network after the CHOW. Given that the top three PBM insurance networks account for 70%+ of the patient base, unknowingly not being able to ultimately service patients in those networks can have a devastating effect on the pharmacy operations and ability to be successful.

After conducting proper due diligence and in deciding to move forward with the stock acquisition, among the necessary CHOW notifications, the pharmacy must inform the Florida BOP, DEA (in advance), and payors of the acquisition.

Applicable to Both Formations & Acquisitions – regardless of whether a pharmacy is created or acquired, among other things it will have to:

  • Comply with state and federal regulations, including but not limited to:
    • Stark, Anti-Kickback, HIPAA;
    • Drug Quality Security Act;
    • BOP Initial Licensure requirements, outlined above:
      • g., whether starting a pharmacy from scratch or acquiring an existing one, the PIC and all owners/officers are required to be fingerprinted by an approved vendor of the Florida Department of Law Enforcement for background screening purposes.
    • BOP Ongoing Licensure requirements, outlined above:
      • g., proper P&P manuals, continuing education, quality control, etc.
    • Generate Ongoing Business: it’s great that the pharmacy is in network with insurers and has the ability to bill patients, buts that does little good if it doesn’t have any customers!
    • Source Drugs Appropriately: ensure compliance with both drug sourcing laws and the insurance network’s requirements.

Comprehensive, often difficult to decipher regulations is what sets owning a pharmacy (or other healthcare related entity) apart from other entrepreneurial endeavors. That however should not be the sole reason for a good actor to abstain from entering what could otherwise be an enjoyable, lucrative, and satisfying endeavor. Be it a ‘from scratch’ pharmacy or an acquisition, carefully weigh the pros and cons, and know the issues inherent with each option. In a brand new pharmacy the owner can be certain that there are no skeletons in the closet; that however comes with costs, both monetary and time. With an existing pharmacy, long story short: know what’s being bitten into before you CHOW. Regardless of the route taken, ensure a supportive team is along for the journey.