What Types of Financial Relationships Between a Referring Physician and a Pharmacy Are Prohibited Under the Anti-Kickback Statute?

The Statute Prohibits the Arrangement You Believe Is Legitimate

Most physicians who enter financial relationships with pharmacies do not believe they are committing a federal felony. That belief is the first condition the government relies upon when constructing its case. Under 42 U.S.C. 1320a-7b(b), any remuneration offered, paid, solicited, or received in exchange for referring a patient for services reimbursable by a federal healthcare program constitutes a criminal offense. The word “remuneration” is statutory. It means anything of value. It means the lease payment that arrives on the first of each month. It means the percentage of revenue deposited into an account bearing the physician’s name. It means the consulting fee, the speaker honorarium, the equity interest that was presented as an investment opportunity, and the arrangement that counsel at the time described as compliant because it satisfied the requirements of a safe harbor it did not, upon closer examination, satisfy at all.

The penalty for each violation is a fine of up to $100,000 and imprisonment of up to ten years. Exclusion from Medicare and Medicaid follows. The civil monetary penalty adds $100,000 per kickback, plus treble damages. These are not theoretical consequences reserved for the most egregious offenders. In 2024, a Texas pharmacy owner received a sentence of four years and four months in federal prison and an order to pay over $59 million in restitution for structuring what he characterized as “investment opportunities” for physicians who directed prescriptions to his pharmacy. The physicians participated. The physicians were exposed.

Per Referral Compensation Is the Clearest Violation

The arrangement that the government prosecutes with the least difficulty is compensation tied to the volume or value of referrals. A pharmacy that pays a physician a fixed fee for each prescription directed to it has constructed, in the language of the statute, a per-click referral fee. The Third Circuit addressed this structure in United States v. Greber, where a diagnostic company forwarded 40 percent of Medicare reimbursements (capped at $65 per patient) to referring physicians under the label of “interpretation fees.” The court held that if one purpose of the payment was to induce future referrals, the statute had been violated. Not the primary purpose. Not the sole purpose. One purpose.

That standard has governed federal enforcement for four decades. It means that a physician who receives payment from a pharmacy, even payment that also compensates for a genuine service rendered, violates the Anti-Kickback Statute if inducing referrals constitutes any portion of the payment’s rationale. The “one purpose” test is the reason that compensation structures tethered to prescription volume collapse under investigation, regardless of the additional services the physician may claim to have provided.

The question is never whether the physician performed a service. The question is whether the payment would have existed in the same form, at the same amount, had the physician referred no patients to the pharmacy at all.

We have addressed the structure of federal healthcare investigations in prior articles. The pattern in pharmacy kickback cases follows a predictable sequence: PDMP data reveals a concentration of prescriptions directed to a single pharmacy, financial records reveal payments flowing from that pharmacy to the prescribing physician, and the government applies the Greber standard to establish that one purpose of those payments was referral inducement. The physician’s intent at the time the arrangement commenced is relevant. It is not dispositive.

Lease Arrangements That Conceal What They Contain

The space rental safe harbor at 42 C.F.R. 1001.952(b) permits a physician to lease office space to or from a pharmacy under conditions that are, if we are being precise, more restrictive than most practitioners realize. The lease must be in writing and signed by the parties. It must specify the premises covered. Its term must extend no fewer than twelve months. The aggregate rental charge must be established in advance, must reflect fair market value, and must not account for the volume or value of referrals between the parties. The space leased must not exceed what is reasonably necessary for legitimate commercial purposes.

Each requirement is conjunctive. Failure to satisfy any single condition removes the arrangement from safe harbor protection. And the condition that collapses most frequently in enforcement actions is the fair market value requirement, because fair market value under the safe harbor carries a definition the parties seldom consult. The regulation specifies that fair market value means the value of the rental property for general commercial purposes, not adjusted to reflect the additional value one party would attribute to the property as a result of its proximity or convenience to sources of referrals. A physician’s office located in the same building as a pharmacy possesses referral convenience. That convenience is precisely what the fair market value calculation must exclude.

The OIG has observed that rent exceeding fair market value creates a presumption of illegitimate payment for patient referrals from the tenant to the physician-landlord. Rent below fair market value creates the inverse presumption: an implicit agreement to refer patients to the landlord in exchange for reduced cost. The corridor is narrow. The physician who leases space to a pharmacy at a rate that fluctuates with the pharmacy’s revenue, or that was calculated by reference to prescription volume projections, has constructed an arrangement the safe harbor was designed to exclude.

Percentage Compensation Structures and the Absence of Protection

No safe harbor protects compensation arrangements between a physician and a pharmacy where the physician’s return is calculated as a percentage of the pharmacy’s revenue derived from the physician’s referrals. This is the arrangement that appears, in five of the eight pharmacy kickback matters our firm reviewed this past year, as the structural foundation of the government’s case. The physician receives a share of profits. The profits derive from prescriptions the physician wrote. The share varies with the volume of those prescriptions. The government does not require testimony about intent when the financial architecture speaks for itself.

The personal services and management contracts safe harbor at 42 C.F.R. 1001.952(d) offers protection for certain physician-pharmacy consulting relationships, but its requirements eliminate precisely the structures that physicians find most attractive. Compensation must be set in advance, must reflect fair market value for services rendered, and must not vary with the volume or value of referrals. A written agreement must specify the services to be provided. Its term must be at least one year. The arrangement must serve a commercially reasonable business purpose independent of the generation of referral business.

A physician who serves as a pharmacy’s “medical director” at a compensation rate that increases when the pharmacy’s federally reimbursed prescription volume increases has not satisfied the safe harbor. The title is irrelevant. The compensation methodology determines protection, and the methodology in these cases is designed to reward precisely the conduct the statute prohibits.

Ownership Interests and the 60/40 Rule

The investment interest safe harbor at 42 C.F.R. 1001.952(a) permits physician ownership in entities, including pharmacies, under conditions that separate investment return from referral activity. For small entities (those with total assets of less than $50 million), no more than 40 percent of any class of investment interest may be held by investors who are in a position to make or influence referrals to the entity. The terms offered to physician investors must be identical to those offered to passive investors who generate no referral business. The entity may not market itself to investors by reference to its proximity to referral sources. And return on investment must correlate with the amount of capital invested, not with the volume of patients referred.

This spring, as federal enforcement of pharmacy fraud continues to accelerate, the ownership interest cases that generate the most severe penalties involve physicians who received equity stakes in pharmacies at below-market valuations, or who received equity in exchange for no capital contribution at all, where the arrangement’s value resided in the physician’s capacity to direct prescriptions. The equity interest was not an investment. It was remuneration. The return was not a dividend. It was a referral fee distributed through a corporate structure designed to provide the appearance of legitimate commerce.

Whether a given ownership arrangement satisfies the safe harbor requires an analysis that most physicians, at the time they enter the arrangement, have not requested from counsel familiar with the Anti-Kickback Statute’s requirements. That absence of analysis does not constitute a defense. The statute requires only that the defendant acted “knowingly and willfully,” and the courts have interpreted that standard to require only that the defendant knew the conduct was unlawful or acted in deliberate ignorance of the law.

What the Government Examines When It Examines a Relationship

The investigation begins with data. ARCOS distribution records reveal dispensing volume. PDMP records reveal prescribing concentration. Claims data reveals reimbursement patterns. Financial records, obtained through the administrative subpoena authority we have written about before, reveal the flow of funds between the pharmacy and the physician. The government does not commence these investigations without a theory. It commences them without having disclosed its theory to the subjects.

In the compounding pharmacy enforcement wave that produced over $1 billion in settlements and criminal penalties between 2015 and 2025, the government’s theory was consistent across jurisdictions: pharmacies paid physicians to prescribe expensive compounded medications that were reimbursable by federal programs, the physicians directed patients to those pharmacies in exchange for compensation tied to prescription volume, and the claims submitted to Medicare, TRICARE, or the Department of Labor’s workers’ compensation program were therefore false under 31 U.S.C. 3729 because they resulted from kickback-tainted referrals. A pharmacist in the Southern District of Texas was convicted in connection with a conspiracy involving over $110 million in fraudulent billings. The prescriptions cost the pharmacy approximately $15 each to compound. They were billed to the government at rates reaching $16,000 per prescription.

You sign the arrangement and then you discover what the arrangement means.

Safe Harbors Require Precision That Most Arrangements Lack

The safe harbors are not general principles of protection. They are regulatory specifications, and compliance with them is evaluated against every element, not against the arrangement’s general resemblance to a protected category. A physician who leases space to a pharmacy under a written agreement, at a rate that appears consistent with fair market value, but whose lease term renews on a month-to-month basis rather than for a fixed period of at least one year, has failed to satisfy the safe harbor. The arrangement may still be lawful. It does not benefit from the protection that would place it beyond the government’s reach.

DEFENSE TEAM SPOTLIGHT

Todd Spodek

Lead Attorney & Founder

Featured on Netflix's "Inventing Anna," Todd Spodek brings decades of high-stakes criminal defense experience. His aggressive approach has secured dismissals and acquittals in cases others deemed unwinnable.

NY Bar Admitted Multi-State Licensed Federal Courts

Meet the Full Team

The OIG has stated that failure to satisfy a safe harbor does not render an arrangement per se illegal. It renders the arrangement subject to case-by-case analysis under the totality of facts and circumstances. That analysis occurs on the government’s timeline, under the government’s interpretive framework, with the burden of demonstrating legitimate purpose resting on the parties who structured the arrangement. The distinction between safe harbor protection and case-by-case survival is the distinction between a physician who sleeps without concern and a physician who receives a subpoena on a Wednesday morning and spends the remainder of the week attempting to recall the terms of an agreement signed three years prior.

Safe harbor compliance is not an aspiration. It is either complete or it is absent, and the physician who assumes partial compliance affords partial protection has misunderstood the regulatory architecture at its foundation.

The Statute’s Reach Extends Beyond What Changed Hands

The Anti-Kickback Statute does not require that a payment succeed in generating referrals. It prohibits the offer and the solicitation as independent acts. A physician who proposes a referral fee arrangement to a pharmacy, even where the pharmacy declines and no payment is made, has violated the statute’s solicitation provision. A pharmacy that offers a physician below-market rent for the purpose of securing prescription volume, even where the physician does not alter prescribing patterns, has violated the statute’s offer provision. The conduct is complete upon the proposal. It does not require consummation.

This breadth is what distinguishes the Anti-Kickback Statute from the commercial bribery statutes that physicians may have encountered in other contexts. In the commercial world, referral fees are common, disclosed, and lawful. In federally reimbursed healthcare, the same fee structure constitutes a felony because the payor is not a private party bearing the cost of its own purchasing decisions. The payor is the federal government, and the statute exists to ensure that medical judgment is not subordinated to financial incentive when the treasury bears the cost of that judgment’s exercise.

The prohibition is old. The conduct it addresses is not. The arrangements that physicians and pharmacies construct in the present spring of 2026 differ from those the statute’s drafters contemplated in 1972 only in their sophistication, not in their substance. Equity interests, consulting agreements, lease arrangements, joint ventures, data-sharing fees, and prior authorization support services all function, when improperly structured, as vehicles for the same prohibited exchange: remuneration for referrals.

A consultation with counsel who concentrates in federal healthcare enforcement is where the distinction between a prohibited arrangement and a permissible one acquires the precision the statute demands. The conversation is protected by privilege. It should occur before the arrangement is executed, not after the subpoena arrives.