By Michael J. Coco

What providers and pharmacists don’t know about their employees can hurt them.  That’s the hard lesson learned by a New Jersey pharmacy that had no reason to think the pharmacy it purchased came with an experienced, licensed pharmacist employee with an unsuspected criminal background.  Providers should know that falsifying documents, records and applications is unethical and likely to have serious legal and civil consequences.  Last month, the New Jersey Appellate Division upheld a decision by the state’s Medicaid program to deny an application submitted by Township Pharmacy on the basis that the pharmacist submitted false information when it certified that none of the predecessor employees had criminal backgrounds.

The plaintiff in Township Pharmacy was an experienced pharmacist who purchased an existing pharmacy establishment and, in doing so, retained employees who were employed by the predecessor pharmacy.  One particular employee, B.L.R., was with the pharmacy for nine years, had recently undergone a background check, and was awarded a pharmacy license by the state.  The plaintiff had every reason to believe that B.L.R. had a criminal history.  When the State conducted an investigation, it discovered that B.L.R. did in fact have a criminal history and denied the plaintiff’s application for Medicaid participation.

On appeal, the Appellate Division upheld Medicaid’s decision, notwithstanding the fact that the plaintiff had a good-faith belief that none of his employees had criminal records.  In applying something of a strict liability standard, the court opined that the pharmacist’s failure to carry out his due diligence in conducting background checks resulted him submitting a “false” application to Medicaid.  Because Medicaid can deny an application based on false information submitted, the decision was upheld.

This case acts as a warning to both pharmacists and providers to conduct thorough due diligence after any entity purchase or merger.  Not only can Medicaid deny an application, but the Township Pharmacy ruling appears to allow a strict liability standard for any “false” application and the penalties for such falsification include suspension and disbarment from participating in any State contracting.  In other words, a good-faith error on a Medicaid application could result in a practitioner’s suspension or disbarment from Medcaid, New Jersey Family Care, or any other State program regardless of whether it is related to the Medicaid program.

The take-home point of Township Pharmacy is to conduct thorough due diligence, especially after a merger or acquisition.  The case also has strong implications for anyone purchasing a physician office and employing the physician owners.  Providers can guard against this concern by requiring physicians to disclose any prior criminal history when entering into an asset-purchase agreement, and allowing for termination and indemnification in the event that an undisclosed criminal history is discovered.  Providers may also wish to make a background check a prerequisite to the purchase of an entity.  Finally, providers should be mindful that other questions on Medicaid applications should be answered with care.