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Shedding Light on Drug and Device Company Relationships With Physicians and Teaching Hospitals: The Sunshine Act Proposed Rule Arrives

Health Law Update Alyce C. Katayama

On December 19, 2011, CMS published the much anticipated proposed rule implementing the Sunshine Act. The proposed rule may be found at and will ultimately be codified at 42 CFR ยงยง 403.900-403.914. Both the Sunshine Act and this rule proceed from the view that while some collaboration among physicians, teaching hospitals and industry may be beneficial to innovation and improvement in the health care system, payments from manufacturers to physicians and teaching hospitals can introduce conflicts of interest that inappropriately influence research, education and clinical decision making.
Congress required that the proposed rule be published by October 1, 2011. CMS recognizes that the delayed publication of the proposed rule means that the final rule was not published prior to January 1, 2012, when the statute requires manufacturers and group purchasing organizations to begin collecting the required information. Therefore, CMS has decided not to require such collection until after publication of the final rule. CMS anticipates that those required to report will need 90 days after the final rule is published to prepare to collect information.

CMS invites comments on many aspects of the proposed rule, including whether parts are unduly complex or burdensome and whether there are viable alternative ways to gather the required data. Affected companies should promptly analyze how the rule will affect their operations and seriously consider submitting comments in one of the four methods specified. Comments must be submitted no later than February 17, 2012.

Key Definitions
To understand the regulatory scheme, one must first examine the definitions of the key terms. "Applicable manufacturers" ("AMs"), those required to report payments and other transfers of value, are defined in the proposed rule as entities (1) that are engaged in the production, preparation, propagation, compounding or conversion of a covered drug, device, biological or medical supply for sale or distribution in the United States, or in a territory, possession or commonwealth of the United States; or (2) are under common ownership with such entities and provide assistance or support with respect to production, preparation, propagation, compounding, conversion, marketing, promotion, sale or distribution. This definition tracks the statute. A manufacturer will be subject to the Sunshine Act if its covered products are sold or distributed in the U.S., regardless of where they are actually produced or where the entity is actually located or incorporated.

"Covered drug, device, biological or medical supply" is broadly defined as any such item for which payment is available under Medicare, Medicaid or the Children's Health Insurance Plan or waivers of such programs, either separately or as part of a composite payment rate such as the hospital inpatient prospective payment system. The covered drugs or biologicals are limited to those which by law require a prescription to be dispensed. Covered devices and medical supplies are limited to those which by law require premarket approval by or premarket notification to the FDA.

"Covered Recipients" ("CRs") are "physicians," except physicians employed by AMs, and "teaching hospitals," defined in the proposed rule as any institution which receives indirect medical education ("IME") or direct graduate medical education ("GME") support. To make sure that CRs, particularly physicians, are accurately identified in the required reports, CMS recommends that applicable manufacturers use the National Plan & Provider Enumeration System ("NPPES") maintained on the CMS Web site. NPPES includes a database of physician national provider identifiers ("NPIs") and has a lookup function. CMS proposes to publish a list of hospital CRs, as it believes that it may not be immediately apparent to AMs whether a particular hospital meets the proposed definition of a teaching hospital and no currently published database includes this information. "Physicians" are defined as MDs, DOs, DDSs, DPMs, ODs and DCs.

"Applicable Group Purchasing Organizations" ("AGPOs") are defined by the rule as entities that (1) operate in the United States, or in a territory, possession or commonwealth of the United States; and (2) purchase, arrange for or negotiate the purchase of a covered drug, device, biological or medical supply for a group of individuals or entities, and not solely for use by the entities themselves. The commentary makes it clear that CMS intends to regulate not only traditional GPOs that negotiate contracts for their members but also entities that purchase covered products for resale or distribution, including physician owned distributors ("PODs") and other types of physician-owned companies ("POCs"). This definition and related commentary are particularly interesting because CMS has seized this rule making as an opportunity to deal with PODs and POCs which have been on the Stark and anti-kickback radar both in Congress and at CMS, but have remained unaddressed for some years now.

"Immediate family member" would be defined as one of the following: spouse; natural or adoptive parent, child or sibling; stepparent, stepchild, stepbrother, or stepsister; father-, mother- daughter-, son-, brother- or sister-in-law; grandparent or grandchild; or spouse of a grandparent or grandchild.

Required Reports
AMs must report on payments and transfers of value to CRs that equal or exceed $10 in a single instance or $100 cumulatively in a calendar year. In addition, AMs and AGPOs must report on both: (1) ownership and investment interests of physicians and their immediate family members and (2) payments/transfers of value to those owners/investors. CMS expresses some concern about possible duplicative reporting and offers suggestions on how reporters can provide some clarity in this area but believes it is necessary to ensure transparency.

CMS proposes that payment to a physician includes not only payment to an individual physician but also payment to the physician through a physician group or practice. Payments provided through a group or practice are to be reported individually under the name of the physician CR. If payment is made at the request of the CR to another individual or entity, the other individual or entity's name must be reported to "maximize transparency about the details of the payment or other transfer of value, by allowing end users to discern whether a CR actually received the payment, and if not, where the payment went."

Reporting Physician Ownership and Investment Interests
Ownership/investment interests are broadly defined as direct or indirect debt, equity or other interests, including stock options (other than those received as compensation, until they are exercised), partnership shares, LLC memberships, loans, bonds and other financial instruments. However, there are two important exclusions here: The first is for an ownership or investment interest in a publicly traded security or mutual fund and the second is for interests that arise from a retirement plan offered by the AM to the physician (or member of his immediate family) through employment with the AM. In addition, stock options and convertible securities received as compensation are not reportable until the stock options are exercised or the convertible securities are converted into equity.

The Sunshine Act and the proposed rule make a key distinction between AM reports of payments/transfers on the one hand and AM/AGPO reports of ownership/investment interests on the other hand. When an AM makes a payment to an employed physician, the payment is not reportable. However, the ownership and investment interests of physicians and their immediate family members, as well as payments/transfers to those owner/investor physicians, are reportable by the AM/AGPO, regardless of whether the physician is also an employee.

Given the breadth of the "immediate family member" concept, considerable effort may be required for non-publically traded AMs and AGPOs to gather the information needed to assure compliance. CMS is considering requiring, when the reportable ownership/investment interest is held by a physician's immediate family member, that the relationship and the name of the relative also be reported. It seeks comment on this point.

Nature of Payment
The Sunshine Act requires the reporting of 15 types of payments/transfers. CMS proposes that payments be categorized based on the "dictionary definition" of the statutory terms. However, AMs may, if they choose, submit with their data a document describing the assumptions they used when categorizing payments. CMS commentary to the proposed rule also offers some explanation to provide "additional context" for certain categories, namely charitable contribution, food, research and direct compensation for serving as faculty/speaker for a medical education program. CMS believes that compensation for serving as a speaker in any context, even if not at a formal CME program, should be reportable. If a payment/transfer doesn't fit into one of the distinctly labeled and now defined categories, then it must be reported with a nature of payment category of "other."

CMS proposes to require AMs to break down a multipurpose payment. For example, if a physician received a single payment which covered meals and travel in association with a consulting fee, three separate reports would be required: one for meals, one for travel and one for consulting fees - three separate line items. The good news is that CMS welcomes comments on this approach and an alternative approach of allowing multiple segregable categories to be reported as a single lump sum.

When Is A Transfer Reportable
AMs will need to exercise care to know when the $10/$100 reporting threshold has been triggered. For example, if a sales rep brings $25 worth of bagels and coffee to a solo physician's office for a meeting, the reportable "per CR cost" is $25, since there is only one physician in the picture. Since this is above the $10 minimum threshold for reporting, this must be reported. However, if the same bagels went to a group of five physicians, the per CR cost would be $5, and this "payment" would not need to be reported. This gets a little dicey when the bagels are going into a very large group practice or to some hospital-based physician at a teaching hospital, where the large denominator could take all of these transfers of value off the radar. Therefore, CMS is considering a different approach in these situations such as counting the number of physicians by department. Readers will be relieved to know that CMS proposes to not require AMs to report offerings of buffet meals, snacks or coffee at booths at conferences and similar events where it would be difficult to definitively establish the identities of the individuals who accept the offerings.

The dollar amounts ($10/$100) will be updated annually by the percentage increase in the CPI for all urban consumers (all items; US city average). Even if an AM strives for $9 lunches and $5 pens, all items provided over the course of a calendar year must be aggregated, and if the $100 threshold per CR is exceeded, then each of the items must be reported in the appropriate nature of the payment category.

Research Related Payments
CMS recognizes that reporting payments/transfers related to research is complex, since a large lump sum payment may be spread over many activities and may not go directly to a CR. To add complexity, some AMs use contract research organizations and other intermediaries to manage clinical research. Therefore, CMS proposes to require reports to indicate whether research related payments went directly or indirectly to CRs. It is not only AMs making research-related payments that need to report; payments made by contract research organizations, directly or indirectly to CRs, will also have to be reported. The entire amount of a research payment, whether direct or indirect, will be reportable rather than that portion attributable to an individual investigator, as it may be difficult or impossible for an AM to know the details of that attribution. CMS believes it is appropriate to report the aggregate payment to a teaching hospital on the public website, but proposes not to include that payment in the total for physician CRs.

Payments in the research category may be eligible for delayed publication (but not delayed reporting) to protect the proprietary interests of AMs. The proposed rule tracks the statute here and would make delayed publication (for up to four years) available when payments/transfers relate to bona fide research, development agreements and clinical investigations on new covered products as well as new applications of existing products. However, for clinical investigations, delayed publication would be available only for payments related to new covered products and not for payments related to new applications of covered products.

Although CRs (teaching hospitals and physicians) and physician owners/investors are not subject themselves to the reporting requirements of the Sunshine Act, CMS anticipates that they may be interested in reviewing the data reported about them. Therefore, CMS proposes to allow, but not require CRs and physician owners/investors, to register with CMS to ensure they receive communication about the data submitted and the processes for review.

Of course, such review may lead to disputes. CMS will not be actively involved in arbitrating disputes between AMs/AGPOs and CRs/physician owners-investors regarding the receipt, classification or amount of any payment or transfer of value or ownership or investment interest. However, there will be a mechanism for reporting disputes and reporting to CMS concerning the resolution of those disputes during the 45-day information review period.

The Sunshine Act allows the imposition of civil monetary penalties for failure to report required information and for failure to report on a timely basis in accordance with the CMS regulations. Higher penalties are imposed for knowing failure. "Knowing," as in the context of the False Claims Act, means having actual knowledge or acting in deliberate ignorance or reckless disregard of the truth or falsity of information. No specific intent to defraud need be proven. CMS amplifies on the penalty provisions by proposing to also impose penalties when information is reported in an inaccurate or an incomplete manner. Also note that required reports must contain a CEO, CFO or chief compliance officer certification, creating additional exposure under the False Claims Act and other antifraud statutes.

Of course, recordkeeping is a part of this, and the AMs/GPOs must maintain books, documents and other materials sufficient to permit an audit for at least five years from the date of payment or other transfer. CMS will have an opportunity to access the data and audit AMs/AGPOs regarding their compliance.

By the Numbers
CMS estimates that there are 1,150 AMs (150 drug/biologic and 1,000 device/medical supply) and approximately 420 AGPOs, including about 260 PODs that have some form of physician ownership or investment.

CMS estimates that smaller AMs will have to dedicate 0.5 FTE to this effort, whereas larger ones may need 5-to-15 FTEs. If you do the math, this means that in the first year a total of about 2,000 new compliance positions will be created. CMS estimates that once procedures and systems are in place, there will be a 25 percent reduction in staff time necessary to maintain compliance, but admits that the actual burden could turn out to be 25 percent higher. The annual salary-and-benefits cost for a compliance officer in the pharmaceutical field in 2010 was $97,595. Using that personnel cost figure, CMS estimates total costs of $199,387,000 for year one and $148,979,000 for year two and thereafter. CMS expects that some entities may decide that the costs of reporting outweigh the benefits of having reportable relationships.

The CMS estimate does not include the costs of compliance for AGPOs, nor does it include the costs associated with reviewing and correcting data before it is publicly reported. Also note that in estimating the staff time required for compliance efforts, CMS subtracted the substantial time saving which it believes will accrue to covered entities through their ability to query CMS and receive informal guidance through a list serve or other methods of providing technical assistance and useful information on low-cost methods of compliance.

CMS admits it has "no empirical basis for estimating the frequency of . . . problems, the likelihood that transparent reporting will reduce them, or the likely resulting affects on reducing the costs of medical care." However, this lack of a foundation does not deter CMS, since it notes that the costs of the proposed rule are small in relation to the size of the affected industry sectors.

CMS proposes to include a disclaimer on the Web site where Sunshine Act reports will be available to the public. The disclaimer will indicate that the disclosure of a payment or transfer does not necessarily indicate that there is a conflict of interest or wrongdoing, nor does it indicate that the payment was legitimate. CMS also makes crystal clear that compliance with these reporting requirements does not exempt AMs, AGPOs, CRs, physician owners/investors or anyone else from any potential liability associated with the reported payments/transfers and ownership/investment interests, for example, under the Anti-Kickback statute or the False Claims Act.

For more information on the Sunshine Act and its potential impact on your organization, contact Alyce Katayama (414) 277-5823 / [email protected] or your Quarles & Brady attorney.