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Overview

Ever since the United States Supreme Court generally upheld the constitutionality of the Patient Protection And Affordable Care Act ("Act"), pharmaceutical and medical device manufacturers, as well as group purchasing organizations, have been earnestly implementing policies and procedures to comply with section 6002 of the Act which is referred to as the Physician Payment Sunshine Act ("Sunshine Act"). The Sunshine Act requires such manufacturers and group purchasing organizations ("GPOs") to report to the Department of Health and Human Services ("HHS") any "payment or other transfer of value" to physicians and teaching hospitals. The Sunshine Act required such reporting to start on March 31, 2013, for the calendar year 2012 reporting period and for every calendar year thereafter. The term "payment or other transfer of value" is very broadly defined with a very low threshold. Anything over $10 with certain exceptions must be reported. The failure to report may result in monetary penalties, the amount which varied depending on whether the failure to report is "knowing."

Much to the chagrin of the industry and Senators Chuck Grossley, R-Iowa and Herb Kohl, D-Wis., the Centers for Medicare and Medicaid Services ("CMS") did not publish the final regulations implementing the Sunshine Act in the Federal Register until February 8, 2013, 76 Fed. Reg. 78742 ("Final Rule") which resulted in CMS changing the reporting deadlines so no collection or reporting is required for 2012 payments and reporting for 2013 will be for payments or transfers of value made from August 1, 2013 to December 31, 2013 which have to be reported to CMS by March 31, 2014. This QuickCounsel will address key changes contained in the Final Rule and the implications for the industry.

Although state laws are not the focus of this QuickCounsel, in-house counsel should be aware that several states (including California, Connecticut, the District of Columbia, Maine, Massachusetts, Minnesota, Nevada, Vermont and West Virginia) have similar laws and regulations.

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Background

On December 19, 2011, CMS published in the Federal Register its proposed rule, 76 Fed. Reg. 78742-78773, to be codified at 42 C.F.R. Parts 402 and 403 ("Proposed Rule") addressing the implementation of the Sunshine Act. The comments to the Proposed Rules submitted by manufacturers and other interested parties reveal that the Proposed Rule, while addressing certain pertinent details of the Sunshine Act, left certain questions unanswered or ambiguous. CMS addressed these questions and ambiguities on February 8, 2013 by publishing its long-awaited Final Rule implementing the Sunshine Act which requires applicable manufacturers of drugs, devices, biologicals or medical supplies covered under Medicare, Medicaid or the Children's Health Insurance Program (herein collectively referred to as the "Covered Products") to annually report to HHS certain payments or other transfers of value to physicians and teaching hospitals.

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Revised Deadlines

CMS rightly recognized that it did not meet the statutory deadline for enactment of the new regulatory program; and thus, the Final Rule changed the start date for calendar year 2013 data collection to August 1, 2013 instead of the statutory start date of January 1, 2012. Manufacturers and GPOs are required to report the collected information to CMS by March 31, 2014. All information required by the Sunshine Act will be published by CMS on a public website. For all following years the statutory collection and reporting deadlines will apply.

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Key Clarifications and Revisions

The Final Rule generally reflects the provisions contained in the Proposed Rule. CMS has made certain clarifications and revisions to the Proposed Rule after considering the approximately 373 public comments it received.

Definition of Applicable Manufacturer

CMS recognized that the definition of applicable manufacturer in the Proposed Rule had the unintended consequence of capturing foreign entities that had little or no interaction with U.S. healthcare providers. Therefore, the Final Rule limits the definition of "applicable manufacturer" to mean an entity that is "operating in the United States and falls within one of two categories:

  1. an entity that is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply but not if such covered drug, device, biological or medical supply is solely for use by or within the entity or by the entity's own patients. This definition does not include distributors or wholesalers (including, but not limited to, repackagers, relabelers and kit assemblers) that do not hold title to any covered drug, device, biological or medical supply. An entity under common ownership with an entity in paragraph (1) of this definition, which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological or medical supply."

By excluding entities which produce Covered Products solely for its own use or by the use of its own patients, pharmacies and hospitals have been excluded from the reporting requirements unless they are in joint venture with manufacturers or fall under common ownership and applicable payments are made through them.

CMS declined to increase the percentage of ownership required to determine whether an entity had common ownership with an applicable manufacturer. CMS confirmed that under circumstances where the same individual, individuals, entity or entities directly or indirectly owned five percent or more total ownership of two entities, common ownership will exist and will apply to a range of corporate arrangements including, but not limited to parent corporations, direct and indirect subsidiaries and brother or sister corporations. The Final Rule permits entities under common ownership to submit individual or consolidated reporting.

CMS further narrowed the scope of applicable manufacturer by providing that even though an entity may meet the definition of applicable manufacturers if certain limitations exist there are certain limitations on reporting. Accordingly, an applicable manufacturer for whom total (gross) revenues from Covered Products constitute less than 10 percent of total (gross) revenue during the fiscal year preceding the reporting year are only required to report payments or transfers of value that are related to one or more Covered Products register and attest to CMS to the fact that less than 10 percent of total revenues are related to Covered Products.

Applicable manufacturers that qualify through common ownership are only required to report payments or other transfer values that are related to Covered Products for which the entity provided assistance or support to an applicable manufacturer who produced the Covered Product. Additionally, applicable manufacturers that do not manufacture the Covered Product or do so only under a written agreement to manufacture the Covered Product for another entity, do not hold the FDA approval, license or clearance for the Covered Product and are not involved in the sale, marketing, or distribution of the Covered Product are only required to report payments or other transfer values that are related to one or more Covered Products.

Reporting of Food and Beverage Value

Even though CMS declined to increase the de minimis payment exclusion from a value of less than $10 and annual aggregate threshold of $100 in calendar year 2013, it did recognize the inherent difficulty in tracking the allocation of food and beverage costs provided in a group setting where the cost of each individual recipient cannot be separately identifiable. Accordingly, the Final Rule requires the applicable manufacturer to calculate the value per person divided into the entire cost of food and beverage by the total number of individuals who partook in the meal, including non-covered recipients. The manufacturer must report the per person value of the meal as a payment or other transfer of value only for covered recipients who actually partook in the food or beverage. The Final Rule retained the provision that manufacturers are not required to track or report the value of meals, snacks, soft drinks or coffee made generally available to all participants of a large scale conference or similar large scale event.

Payments or Other Transfer of Value through a Third Party

The Final Rule further provided additional guidance regarding indirect payments made by a third party for an applicable manufacturer. The Final Rule defined "indirect payment or transfer of value" to be those payments or transfers where the applicable manufacturer "requires, instructs, directs or otherwise causes the third party to provide such payment or transfer of value to a covered recipient. It is important to note that even if the manufacturer is aware of the identify of the covered recipient, the payment made by the third party will be imputed back to the applicable manufacturer and is reportable.

Broadening of Research Payments

The Final Rule broadens the applicability of the payment category for research by requiring that research payments would only be subject to either written agreement or research protocol but not necessarily both. The Final Rule defined "research" as "a systematic investigation designed to develop or contribute to generalized knowledge relating broadly to public health, including behavioral and social sciences research. This term encompasses basic and applied research and product development." This definition is based on the Public Health Service Act definition that includes pre-clinical research, FDA Phases I-IV - research, and investigator initiated research. Any research related payment that does not meet this definition must be reported under another payment category.

Additionally, CMS declined to implement the provision in the Proposed Rule to separately classify research payment as "direct" and "indirect." Rather, applicable manufacturers must now report research-related payments, including research-related payment made indirectly to a covered recipient through a third party, separately from other payments and transfer of value on a different reporting template to be provided by CMS. CMS will separately list on the public website research-related payments from all other payments provided to covered recipients. The change in CMS' position was prompted by the many comments it received raising concern that the significant amounts related to research payments may be misinterpreted by the public.

CMS has provided on its website templates for the reporting of research payment, non-research payment and physician ownership.

Applicability of Delayed Publication

The Final Rule grants delayed publication of research-related payments that are made pursuant to a written research agreement for research related to new products or a new application of existing products.

In keeping with the intent of the Sunshine Act for transparency in payments made to physicians and teaching hospitals, CMS is requiring the separate reporting by applicable manufacturers and GPOs of payments or transfer of values pertaining to ownership and investment interests of physicians and their immediate family members, as well information on any payments or other transfer of value provided to such physician owners or investors from the reporting of payments or transfer value made to physicians who have no ownership or investment interest in the applicable manufacturer or GPO. CMS conceded that there will be some overlap between these two submissions but contends it is requiring the two types of information to be reported separately to assure the relevant reporting obligations of applicable manufacturers and GPOs are clearly distinguished.

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Other Payment Categories

CMS continued to require payments be reported by categories and added a new payment category for space rental or facility fees provided to teaching hospitals. It further revised the speaker payment category by distinguishing between payments made for accredited continuing education program which may not have to be reported under certain situations and other speaking payments. CMS now requires the reporting of the "nature of payment" which may be burdensome to manufacturers who have already implemented their collection system without this category and now need to change their systems.

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Conclusion

As CMS emphasized, the health industry must note that compliance with the reporting requirements of the Sunshine Act does not exempt manufacturers, GPOs, cover recipients, physician owners or investors, immediate family members, or other entities and other persons from any potential liability associated with payment or transfer of value or ownership of investment interests under other federal fraud and abuse laws such as the Anti-Kickback Statute or the False Claims Act. Nevertheless, CMS correctly stated that the reporting of a payment or transfer of value on the public website does not mean that any party involved in such reporting engaged in any wrongdoing or misconduct. It may be helpful for trade associations representing the entities and individuals affected by the Sunshine Act to develop programs to educate the public on this last point.

Additionally, it is advisable for applicable Manufacturers and GPOs to make known to physicians and teaching hospital their obligation to report payments prior to finalizing any transaction to ensure the parties are in agreement as to how any payment or value will be categorized for reporting purposes. Consensus by the parties on how payment will be allocated among the multiple categories on the front end will avoid dispute and challenges to the information reported to CMS on the back end.

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Additional Resources

Region: United States
Interest Area: Health Law
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
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