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Federal Sunshine Act Proposed Regulations Highlight Reporting and Compliance Challenges for Drug and Device Manufacturers

Thursday, January 26, 2012
Contributed by Tracy E. Miller, Cadwalader, Wickersham & Taft LLP

Section 6002 of the Patient Protection and Affordable Care Act (PPACA), commonly referred to as the Physician Payments Sunshine Act (Sunshine Act), mandates public disclosure of payments and “other transfers of value” by pharmaceutical, device, biological and medical supply companies to physicians and teaching hospitals for a wide array of purposes, including consulting, speaking engagements, advisory board service, travel, food, and clinical research.1 Although the Sunshine Act required the U.S. Department of Health and Human Services (HHS) to release a final rule implementing its provisions by October 1, 2011, with January 1, 2012 as the start date for manufacturers to collect information for public disclosure, the Centers for Medicare and Medicaid Services (CMS) released Proposed Regulations in December 2011.2 In light of the late release of the Proposed Regulations, CMS pushed back the date on which manufacturers must collect payment data until after release of the final rule in 2012. As currently proposed, manufacturers will report data on payments and other transfers of value for part of 2012 on March 31, 2013, with posting on a public website in September 2013. The Proposed Regulations seek public comment by February 17, 2012 on many issues that will be resolved in the final rule. Reflecting an expansive interpretation of the information that must be reported, the Proposed Regulations set forth highly detailed reporting requirements, underscoring the challenges that manufacturers will face as they prepare to carry out their obligations under the Sunshine Act. In addition to preparing to report to CMS, manufacturers must prepare for the scrutiny by prosecutors and the press that is likely to follow the disclosure of information about their financial relationships with physicians and teaching hospitals. Indeed, information about payments by device and pharmaceutical manufacturers to physicians disclosed as a result of corporate integrity agreements and congressional investigations to date has garnered widespread press and public attention.3

Reporting Obligations

— Manufacturers Bound by the Sunshine Act Under the Sunshine Act, the reporting obligation extends to manufacturers of a drug, device, biological, or medical supply for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (CHIP) (Covered Products) that operate in the United States or in a U.S. territory, possession, or commonwealth (Applicable Manufacturers). Entities under common ownership with an Applicable Manufacturer that assist the Applicable Manufacturer in marketing, selling or distributing a Covered Product in the United States are also “Applicable Manufacturers” and must report under the Sunshine Act. Applicable Manufacturers must report to CMS on an annual basis any payment or other transfer of value (Payments) made to a physician or teaching hospital, including detailed information about the nature and value of remuneration provided during the prior calendar year. Covered Products include drugs, devices, biological or medical supplies reimbursed directly by the federal government or under a composite rate such as the hospital inpatient prospective payment system. The Proposed Regulations, however, exclude over-the-counter medications and biological products and certain Class I and Class II medical devices and medical supplies (those that do not require premarket approval or notification to the FDA) from the definition of Covered Products. As a result, manufacturers that produce only those products do not fall within the ambit of the Sunshine Act. In interpreting the Sunshine Act’s definition of Applicable Manufacturers, the Proposed Regulations cast a broad net, including manufacturers of a Covered Product if their products are sold or distributed in the United States, regardless of where the products are actually produced or where the manufacturer is located or incorporated. Any manufacturer that produces at least one Covered Product must report its Payments to physicians and teaching hospitals, even if the payments themselves are unrelated to a Covered Product. Moreover, manufacturers that hold FDA approval, licensure or clearance for a Covered Product are Applicable Manufacturers under the Proposed Regulations, even if they contract out the physical production of the Covered Product to another entity. — Defining Covered Recipients Applicable Manufacturers must report payments they make to “physicians” and “teaching hospitals” (Covered Recipients). The Sunshine Act defines “physicians” broadly to include doctors of medicine and osteopathy, as well as dentists, podiatrists, optometrists, and licensed chiropractors. CMS recommends that manufacturers use the National Plan & Provider Enumeration System (NPPES) to identify physician Covered Recipients and their National Provider Identification (NPI) numbers. The Proposed Regulations define “teaching hospital” as any hospital that receives direct or indirect graduate medical education payments from Medicare. CMS will list teaching hospitals that are Covered Recipients on a public website. — What Must Be Reported The Sunshine Act requires Applicable Manufacturers to report a wide array of information about payments and “other transfers of value” to Covered Recipients. As set forth in the Sunshine Act, Applicable Manufacturers must report to CMS:

  • the name of the physician or teaching hospital to which the Payment was made;
  • the business address of the physician or teaching hospital, and, if the recipient is a physician, the physician’s specialty and NPI;
  • the amount and date(s) of the Payment;
  • a description of the form of the Payment (i.e., cash, in-kind items or services, stock, stock option or any other ownership interest, dividend, profit, or return on investment);
  • a description of the nature of the Payment (i.e., consulting fee, honoraria, gift, entertainment, food, travel (including the specified destination), education, research, charitable contribution, royalty or license, current or prospective ownership or investment interest, direct compensation for serving as faculty or as a speaker for a medical education program, or grant); and
  • if the Payment is related to marketing, education, or research specific to a particular drug, device, biological, or medical supply, the name of the product.

In addition to payments made directly by Applicable Manufacturers to a Covered Recipient, Applicable Manufacturers must also report payments made to an individual or institution at the request of or designated by a Covered Recipient. For instance, payments provided to a physician through a group practice as well as charitable contributions made at the request or on behalf of a physician or teaching hospital would be reportable. Applicable Manufacturers must also report the names of third parties (such as Continuing Medical Education (CME) providers, professional associations, and patient and disease advocacy organizations) that receive and make Payments to Covered Recipients, if the Applicable Manufacturer is aware of the Covered Recipient’s identity.4 In these instances, Applicable Manufacturers would report the name of the third party as well as the teaching hospital or physician that received the Payment. CMS recognizes that Payments may be related to more than one Covered Product, and seeks public comment on whether Applicable Manufacturers should be required to report only one Covered Product associated with the Payment, or multiple Covered Products. Under the Proposed Regulations, Applicable Manufacturers must identify and separate Payments by the nature of the activity. For example, if a manufacturer pays a physician for meals, travel, and consulting in one trip, the payment for travel, meals, and consulting would each be reported in a distinct category. CMS also recognizes that Payments may fall into more than one category, and proposes that Applicable Manufacturers make “reasonable determinations” when reporting, with the option of presenting their assumptions or reasoning behind the categories when reporting to CMS. — Food and Beverage Reporting The “food and beverage” category presents significant complexities for Applicable Manufacturers, as recognized in the Proposed Regulations. Under the Sunshine Act, Applicable Manufacturers must report the value of all food and beverages provided to Covered Recipients above the minimum threshold of ten dollars. The Proposed Regulations provide guidance in different scenarios and seek comments on other methodologies to report these components. As proposed, if food valued at $60.00 is served buffet style in a physician’s office, Applicable Manufacturers should report the full cost of $60.00 as provided to the physician, even if he or she did not eat any of the meal. If the meal is delivered to a physician practice group with five physicians, $12.00 would be reported for each physician, regardless of which physicians ate the food. On the other hand, buffet meals and snacks provided at conferences are excluded from the reporting obligation. The Proposed Regulations seek comments on requiring reporting on all speaking engagements as one category, without differentiating CME and other speaking engagements, and the idea of a catch-all category to report Payments that do not fit into the other categories proposed. — Reporting Research Payments For Payments supporting research, the Proposed Regulations lay out a framework and specific guidance, dividing research into “direct” and “indirect” categories, with Payments made directly to a covered physician or teaching hospital reported as “direct research” and Payments to a clinic, non-covered hospital, or other institution labeled as “indirect.” For both direct and indirect research, Applicable Manufacturers would report the total amount of the Payment for physician(s) who are the principal investigator(s), if the identity of the principal investigator(s) is known to the manufacturer. For Payments provided to teaching hospitals that in turn provide some or all of the funds to physicians as the principal investigator, CMS proposes that the Applicable Manufacturer would report the Payment as made to both the principal investigator and the teaching hospital. However, in that case, CMS would not aggregate the Payment amount into the total for the physician when the information is disclosed on a public website. The Proposed Regulations limit the research category overall to bona fide research activities, defined as clinical investigations that are subject to a research protocol and a written contract between an Applicable Manufacturer and individual or entity conducting the research. Applicable Manufacturers must report funding for “research” that does not meet this standard in another category. — Exceptions to Reporting Certain Payments to physicians or teaching hospitals are excluded from the reporting obligation, including but not limited to:

  • a transfer of anything of value less than ten dollars, unless the aggregated amount transferred by an Applicable Manufacturer to a Covered Recipient exceeds $100 annually (adjusted each year for inflation after 2012);
  • product samples intended for patient use;
  • patient educational materials that directly benefit patients:5
  • the loan of a device for a trial period not to exceed 90 days for the purpose of evaluating the device;
  • items or services provided under a contractual warranty, where the terms of the warranty are set forth in the purchase or lease agreement;
  • discounts, including rebates; and
  • Payments made indirectly to a Covered Recipient where the Applicable Manufacturer is unaware of the identity of the Covered Recipient.

— Protection of Proprietary Information In order to maintain the confidentiality of proprietary information related to product development, the Sunshine Act established a delay for public disclosure of Payments by Applicable Manufacturers for product development and research for a potential new medical technology, drug, device, biological, or medical supply. Applicable Manufacturers must still report Payments for research in the same timeframe as other Payments, but the information will not be disclosed to the public until the earlier of the approval, licensure, or clearance of the Covered Product by the FDA, or four calendar years after the date of payment. The Proposed Regulations advise Applicable Manufacturers that it is their obligation to inform CMS that publication should be delayed when they report the Payments, and to inform CMS in the appropriate annual submission if the product has been approved and CMS can therefore disclose the associated Payments. — Reporting Physician Ownership Interests In addition to reporting Payments to a physician or teaching hospital, Applicable Manufacturers as well as Group Purchasing Organizations (GPOs) must report certain ownership or investment interests held by physicians or their immediate family members in the Applicable Manufacturer or GPO. Required disclosures include stock (excluding interests held in a publicly traded security or mutual fund), stock options (other than those received as compensation until exercised) partnership shares, limited liability company memberships, and loans or other financial instruments secured by a portion of the entity’s property or revenue. Disclosures must encompass interests held by a physician and his or her immediate family members, and must specify: (i) the name of the physician and whether the interest is held by an immediate family member; (ii) the physician’s address, NPI number and specialty; (iii) the dollar amount invested by the physician or immediate family members; (iv) the value and terms of each investment interest; and (v) any Payment provided to a physician holding an ownership or investment interest. — Reporting and Public Disclosure Under the Proposed Regulations, the Chief Executive Officer, Chief Financial Officer, or Chief Compliance Officer of each Applicable Manufacturer would be required to submit an attestation, that, to the best of his or her belief or knowledge, payment information reported is correct and complete. CMS proposes that Applicable Manufacturers and GPOs that have information to report would register with CMS prior to the submission date to facilitate communication with CMS. Applicable Manufacturers that do not make any Payments to Covered Recipients in the prior year and do not have physician ownership or investment interests to report, would not be required to report to CMS for that year, although CMS may require all Applicable Manufacturers to register with CMS regardless of whether they have information to report. On or before September 30, 2013, and on June 30 of each year thereafter, CMS is required to disclose the information reported under the Sunshine Act on a public website that is easily searchable by manufacturer, by physician, and by teaching hospital. Applicable Manufacturers, Covered Recipients, GPOs, and physician investors and owners must have the opportunity to review and correct the information at least 45 days prior to the disclosure date. CMS has proposed that physicians and teaching hospitals would be responsible for informing an Applicable Manufacturer about any disagreement regarding the Payments reported. CMS will not arbitrate any disputes about the reports; if a dispute cannot be resolved by the parties, CMS will disclose the Payments as reported by both the Applicable Manufacturer and Covered Recipient. Notably, once the 45-day review period has passed, CMS has proposed that the Payment reports are final and cannot be amended. — Preemption of State Laws Throughout public debate about the Sunshine Act, federal preemption of state laws was a contentious issue. As adopted, the Sunshine Act preempts state legislation and regulations that mandate disclosure of the same information reported under the Sunshine Act. Several states currently require reporting of Payments to physicians by pharmaceutical companies,6 but only Massachusetts currently mandates such reporting by device manufacturers.7 Consistent with the Sunshine Act’s preemption clause, pharmaceutical and device manufacturers subject to state reporting laws will have to file state reports for information that is not covered by the Sunshine Act. — Penalties Each Applicable Manufacturer that fails to report information as required under the Sunshine Act will be subject to a civil penalty of not less than $1,000 and not more than $10,000 for each Payment not reported, up to a cap of $150,000 per annual reporting period. For intentional violations, the penalty will range from $10,000 to $100,000 for each Payment not reported as required, with a cap of $1,000,000 per Applicable Manufacturer or GPO. The Proposed Regulations set forth the factors that would be considered in setting the civil monetary penalty, including the length of time the Applicable Manufacturer or GPO failed to report, the amount of Payments that should have been reported, and the level of culpability. CMS and the HHS Office of Inspector General have the authority to audit or inspect any records that pertain to compliance with the Sunshine Act.

Implications for Manufacturers

— Preparing to Report The Proposed Regulations address some of the major questions posed by implementation of the Sunshine Act, but leave many issues open for public comment and further consideration by CMS. Device and other Applicable Manufacturers should take the opportunity to review and comment on the scope and specifications for reporting under the Proposed Regulations. Applicable Manufacturers should also take advantage of the additional time afforded for implementation to prepare to collect and report Payment data, and to assess their compliance program and risks. Applicable Manufacturers must establish systems and software to identify, track, and aggregate payments to physicians and teaching hospitals. Smaller device manufacturers may have limited experience in tracking detailed Payment information. Many larger device and pharmaceutical manufacturers already track Payments but must also develop the capacity to aggregate the information across different departments (for example, marketing, research, publications, and grants), assure that policies are in place to standardize reporting in accord with Sunshine Act specifications, and monitor company-wide compliance. — Assessing Compliance Risks Applicable Manufacturers should also prepare for public disclosure of the information. Although CMS will not publish the information until September 2013, potential enforcement under the Sunshine Act will be triggered by the date that Applicable Manufacturers must begin to collect the information for purposes of public reporting. Notably, information reported about Payments to physicians and teaching hospitals as well as physicians’ investment and ownership interests may present significant compliance risks for both manufacturers and providers. Specifically, the information may trigger investigation of potential violations under the Anti-Kickback Statute (AKS) and False Claims Act (FCA).8 Once reported, if the Sunshine Act information prompts an investigation about a particular Payment, regulators and prosecutors are likely to scrutinize a manufacturer’s overall compliance program, not only individual Payments. Under the 2010 Federal Sentencing Guidelines, an organization’s compliance program, including oversight of the program by the governing body, will be assessed in setting the penalty9 for violations of criminal law. — Key Area for Focus—The Anti-Kickback Statute Federal and state anti-kickback statutes bar the offer, provision or receipt of remuneration of any kind, directly or indirectly, to an individual or entity to induce or in exchange for the referral of goods or services that are funded by the United States Government or a State health care program (e.g., Medicare or Medicaid).10 Payments to physicians for speaking, travel, consulting and other services may violate the AKS if any one purpose of the payment is to induce physicians to prescribe medication or use a device or medical supply paid for by Medicare or Medicaid.11 Federal and state anti-kickback laws have been a powerful tool for U.S. Attorneys and State Attorneys General who have prosecuted device and pharmaceutical companies for paying kickbacks to physicians for a wide array of activities: consulting and speaking fees, meals and travel, research funding, and royalty payments, among other benefits conferred. Settlement awards have reached billions of dollars and left many pharmaceutical and device companies with onerous reporting obligations under Corporate Integrity Agreements.12 The AKS includes a safe harbor for personal services that, among other elements, requires that the services be provided under a written contract for a period of at least one year, and that payments be set in advance and not dependent on the value or volume of referrals to any federal health care program.13 Another core element of the safe harbor is that the payment must be “fair market value.” As manufacturers prepare for disclosure under the Sunshine Act, they should evaluate their procedures and standards to assure that arrangements with physicians and teaching hospitals are conducted in accord with a consistent, sound fair market value analysis, especially for Payments to physicians who are key opinion leaders and therefore command higher remuneration. — Heightened False Claims Act Exposure PPACA extended the reach of the AKS as an enforcement tool by linking an AKS violation with potential liability under the FCA. Specifically, under Section 6402 of the PPACA, any claims submitted to federal health care programs that result from a kickback would automatically violate the FCA, with potential penalties up to three times the amount of each claim submitted and $11,000 per claim.14 The result is a significantly increased risk of liability under both the AKS and the FCA. Moreover, an organization can be liable under the FCA for filing or causing another party to file a false claim for reimbursement to a federal health care program.15 Therefore, if payments by a manufacturer to a physician violate the AKS, the manufacturer may also face liability under the FCA for the physician’s claims submitted to Medicare for medical services performed in connection with the product or device, and for the hospital’s Medicare claims for the product and associated medical care. — Re-Evaluating Business Practices and Risks The Proposed Regulations impose a burden on Applicable Manufacturers to track and report even small Payments, such as meals delivered to physician offices and small gifts if they have a value above ten dollars or aggregate above the $100 annual limit. In light of the regulatory burden and risk of non-compliance, Applicable Manufacturers should reconsider the role of such practices in their overall marketing and business plan. Device manufacturers should consider reviewing their practices for device loans in light of the 90-day period excluded from reporting. Manufacturers should also take stock of the impact of disclosure on physicians as well as their own public profile.16 Physicians, especially those outside large medical centers, may be unaware of the Sunshine Act, and may not fully appreciate the legal implications and potential risks the Payments pose to them under the AKS, the FCA, and the Stark Law.17 Along with recently released HHS final regulations on conflicts of interest in research and new FDA guidance for manufacturers on reporting conflicts, the Sunshine Act reflects government’s reliance on transparency as a key enforcement tool.18 The Sunshine Act may have broad impact even before it is fully implemented, by prompting both manufacturers and health care providers to assess their financial relationships as seen through the lens of prosecutors, the press, their customers, and their patients. Tracy Miller is a Senior Member of the Health Care Group at Cadwalader, Wickersham & Taft in New York City. Her expertise focuses on legal and regulatory matters for health care providers and life science companies, including corporate governance and compliance, health care quality, conflicts of interest, and legal issues posed by medical advances. Tracy advises clients on individual matters, compliance program effectiveness, and development of compliance policies and programs. She has spoken and written widely about health care law and policy, including the Sunshine Act and conflicts of interest in clinical research. Tracy is Vice Chair of the Conflicts of Interest and Transparency Group of the American Health Lawyers Association and the former Chairperson of the Health Law Section of the New York State Bar Association. She graduated with honors from Harvard Law School and Brown University.DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.  

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