Requirements for Opening a New Pharmacy

Opening a new pharmacy can be a challenging process as pharmacies are heavily regulated at both the State and Federal levels. Prospective owners must take into consideration multiple aspects including forming a legal entity, obtaining a pharmacy license, identifying and obtaining other state and federally issued licenses/registrations needed to operate a pharmacy, obtaining business insurance, and registering for business tax accounts, among other things.

As identifying licensing and registration requirements are part of the regulatory challenges that new pharmacy owners are met with, satisfying these requirements is vital to obtaining the authority to operate a pharmacy.  In this article, we lay out the core requirements for any prospective pharmacy owner seeking to start and operate a successful pharmacy.

Forming a Legal Entity

The initial step for opening a new pharmacy typically involves forming a legal business entity. To reduce the risk of individual owners becoming personally liable for the debts of the pharmacy business, it is advisable to operate from a legal entity to own and operate the business.  The legal entity can take the form of a corporation, limited liability company (“LLC”), or limited partnership.  Each type of entity has its advantages and disadvantages depending on circumstances, such as the number of owners and whether all owners will be actively involved in the business.  In most cases, the LLC will be the preferred type of entity.  It has the most flexibility, and for federal income tax purposes as well as most state income taxes, the entity can elect to be taxed as a C-Corporation, S-Corporation or Partnership. 

  • C-Corporation – A C-Corporation is a taxpaying entity and is therefore susceptible to double taxation. If the corporation shows a profit, the corporation will have to pay corporate income tax, and if any profit is paid to the shareholders as a dividend, the shareholders will be liable for income tax on the dividend. 
  • S-Corporation – An S-Corporation is a pass-through entity. The corporation files a tax return but does not pay any tax.  The return shows how the profits are allocated among the shareholders and the shareholders pay income tax on their respective share of the profits.  There are certain restrictions on S-Corporations, including a limit on the number of shareholders, a requirement that all shareholders be individuals, and a requirement that there be only one class of stock.
  • Partnership – Partnerships are also pass-through entities but have none of the restrictions on ownership and classes of stock that apply to an S-Corporation. Therefore, a partnership (or an LLC that elects to be taxed as a partnership) can have any number of equity owners, the owners can be individuals or entities, and there can be multiple classes of ownership interest.
  • Limited Liability Company – An LLC with only one owner is a disregarded entity for tax purposes. It does not file a tax return at all.  Rather, all of the income and expenses are reported on the owner’s tax return.  Although disregarded for tax purposes, the single-member LLC is a separate entity for legal purposes and provides the same limit of liability for the owner as a corporation.

As with any business, it is important to maintain general business liability insurance to cover loss or damage to property from fire or other casualties, as well as legal liability for negligence, such as a slip and fall, and legally required insurance, including Workers’ Compensation, Disability, and Unemployment Insurance.  

Obtaining Necessary Insurance

There are additional types of insurance that are advisable for a pharmacy, including but not limited to professional liability insurance, cyber-risk insurance to cover liability resulting from data breaches and other cyber risks, and product liability insurance. Moreover, many pharmacy benefit managers (“PBMs”) have specific insurance coverage requirements which typically include general liability, professional liability, and malpractice insurance coverage in amounts necessary to ensure that pharmacies and its personnel are insured against any claims arising out of third-party lawsuits that either result from normal business operations or claims that are made against the pharmacy or its personnel for bodily injury caused by professional error.  While many require pharmacies to maintain minimum liability insurance of $1,000,000 per occurrence/$3,000,000 aggregate, certain networks require higher coverage levels, sometimes reaching $10 million in the aggregate.

Provider Identification Numbers

Once the entity has been formed, it will be necessary to obtain a Federal tax identification number, also known as an employer identification number.  There will also be a process to register the entity with the State for purposes of State income and sales tax, as applicable.  Separate bank accounts will need to be set up for collection of payroll taxes and sales tax.  These are sometimes referred to as “trust fund taxes” because the funds are collected by the employer from the employee or customer on behalf of the government and are considered to be held in trust.  Therefore, if these taxes are not properly paid over to the government, there can be personal liability for those taxes regardless of having an entity that owns and operates the pharmacy. 

Thereafter, a National Provider Identifier (NPI) is one of the first registrations that should be pursued for a new pharmacy as it will be necessary for many of the other licensing applications and as a part of meeting HIPAA standards. At same the time, a new pharmacy should apply for a National Council for Prescription Drug Programs (NCPDP) number that enables the pharmacy to identify itself to all third-party processors by one standard number to adjudicate claims and receive reimbursement.

Applying for Pharmacy Licensure and DEA Registration

In order to operate as a pharmacy, the company will need to apply for a state Board of Pharmacy permit. Each state has its own requirements for a pharmacy permit, but many Board of Pharmacy permit applications generally request information including, but not limited to the following: : (i) the legal business entity name; (ii) classification of the type of pharmacy; (iii) parameters of the physical pharmacy; (iv) the pharmacist-in-charge; (v) staff members; (vi) ownership structure and names of owners/officers; and (vii) disciplinary and criminal history of owners/staff/officers of pharmacy; and (viii) dispensing of compound medications.

Along with the Board of Pharmacy permit, a new pharmacy that dispenses controlled substances will likely need to apply for a controlled substance registration from the corresponding State Board of Pharmacy. Similarly, a Drug Enforcement Administration (DEA) registration is needed for a new pharmacy that will be dispensing any controlled substances. DEA permits are often also required as a condition for participation in payor networks, even if the pharmacy does not dispense controlled substances.  With respect to a pharmacy DEA registration, the DEA generally requires the following information: (i) business information such as names, address, tax ID, etc.; (ii) type of business activity (i.e. retail pharmacy, nursing home, practitioner, etc.); (iii) corresponding valid and active state license information; and (iv) background information pertaining to controlled substances in the applicant’s background.

Contracting with Third Party Payors and PBMs

Once NPI/NCPDP numbers and state license(s) are received, the pharmacy can begin credentialing with PBMs. Specifically, at the time of credentialing into a PBM network, pharmacies will be required to supply the most up to date and accurate information about the pharmacy business, such as ownership information, pharmacy staff, disciplinary actions, wholesalers, drug mix, mail order percentages, etc. The PBM will review the information provided by the pharmacy and decide whether to credential the pharmacy or not. Once successfully credentialed, it is imperative that pharmacies comply with PBM contractual obligations to report any changes to the information provided at the time of credentialing, as we have seen pharmacies face further action for failing to report changes.

Owners must be aware of various legal and regulatory requirements involved in opening a pharmacy and should consult with expert life sciences counsel who can help navigate the many rules and regulations of starting your own pharmacy.  Our life science attorneys are equipped to provide guidance as your pharmacy prepares to open for business. Contact Frier Levitt to speak to an attorney.