Sunshine, Gifts, and Other Bad Things: Understanding the New Aggregate Spend Landscape and the Challenges for Compliance

I. Current Landscape

The pharmaceutical, biologic, and medical device industry has witnessed the prevalence of increased regulation on the federal and state level, including so-called “aggregate spend disclosure” laws that require manufacturers and distributors to disclose information about their financial relationships with health care professionals, organizations, and other nonhealth care organizations.

These laws typically apply to a broad list of recipients (e.g., physicians, nurses, hospitals, universities, patient/professional associations), activities (e.g., “lunch and learns,” consulting/speaking arrangements, donations, clinical trial payments), and payment types (e.g., food, textbooks, grants, charitable contributions).

The current slate of aggregate spend disclosure laws arose out of concern for the high cost of drugs and government investigations that revealed questionable relationships between physicians and drug companies. Moreover, recent studies suggest that the prescribing habits of physicians are influenced by even modest gifts. ¹Brennan T.A., Rothman D.J., Blank L., et al., Health Industry Practices That Create Conflicts of Interest: A Policy Proposal for Academic Medical Centers, JAMA, 295: 429-433 (2006).

As a result, in 1993 Minnesota was the first state to require wholesale drug distributors to report certain payments made to practitioners, ²Minn. Stat. §151.47(f) (1993). The same statute also bans certain gifts that are given to practitioners. Minn. Stat. §151.46 (1993). although the law would not be enforced until years later. Starting in 2001, several other jurisdictions, including Vermont, ³Vt. Stat. Ann. tit. 18, §4632 (2001). Maine, ⁴Maine Rev. Stat. Ann. tit. 22, §2698-A (2003). West Virginia, ⁵W. Va. Code §5A-3C-13 (2004). and the District of Columbia, ⁶D.C. Code Ann. §§48-833.01—48-833.09 (2004). enacted disclosure laws for pharmaceutical manufacturers.

In 2008, states began expanding their scope to include biologic and medical device manufacturers and distributors, as evidenced by the enactment of disclosure and gift ban laws in Massachusetts ⁷Mass. Gen. Laws ch. 111N, §1 et seq. (2008). and Vermont. ⁸2009 Vt. Acts & Resolves 247572.1. Significantly, the recently enacted federal health reform law includes the Sunshine Act, ⁹Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h (2010). meaning that widespread reporting in all 50 states of corporate payments made to or incurred on behalf of physicians and teaching hospitals now has become a reality.

Although each state law is unique, the aggregate spend disclosure laws generally include similar components. First, the law defines what companies are covered by the law (i.e., who must report). As noted above, most state laws apply to pharmaceutical manufacturers, although the two most recent laws (Massachusetts and Vermont) also cover manufacturers of biological products and medical devices. Certain states also require reporting by distributors and labelers.

Second, the laws define who is a reportable recipient, which generally includes prescribers and health care providers (including hospitals and health clinics), and may include health plan benefit administrators and other organizations that do not provide health care services, such as patient support/advocacy organizations, continuing medical education (CME) vendors, and professional associations.

Third, the laws provide which types of payments are (or are not) required to be reported, often based on the nature (i.e., form) and purpose of the transaction (although the distinction between nature and purpose is often blurred, and in some cases combined).

Finally, most laws typically have a transactional and/or annual dollar threshold that will trigger reporting. Despite these categorical similarities, the specifics of each of the laws vary from state to state, creating a hodgepodge of similar, but meaningfully different, requirements.

Notably, within the last several months, a number of states have proposed aggregate spend disclosure laws. In fact, as of April 23, the following states have proposed laws or recommended regulations that require pharmaceutical payment/gift disclosure: Alaska, Arizona, Colorado, Connecticut, Hawaii, Illinois, New Jersey, New York, and Ohio. Minnesota has proposed changes to its existing law.

Certain of these proposed laws would require bifurcated reporting wherein disclosures also will be made by the spend recipients, underscoring the importance of accurate and consistent reporting.

With the exception of Alaska, Illinois, and Ohio, all of these states have proposed laws that also would govern device manufacturers, and many would impose additional requirements, such as compliance requirements relating to CME activities, and disclosure of data not submitted under the Sunshine Act.

II. Federal `Sunshine Act’ Requirements

A federal aggregate spend disclosure law was first introduced in 2007 in the U.S. Senate by Sens. Chuck Grassley (R-Iowa) and Herb Kohl (D-Wis.), who assert that citizens have the right to know whether financial interests may be affecting physician decision making.

In this context, Grassley quoted Justice Brandeis, who said, “Sunlight is the best disinfectant,” thereby giving the “Sunshine Act” (or as it was originally introduced, the Physician Payments Sunshine Act of 2007) its name. Historically, and consistent with its patient-centric focus, the Senate version of the “Sunshine Act” has focused on relationships between physicians and life sciences manufacturers.

In 2009, and following the recommendations of the Medicare Payment Advisory Commission (MedPAC), which recognized that many other relationships within health care affect patient access and choice, the U.S House proposed its own version of the Sunshine Act that included a much broader list of reportable recipients beyond physicians (e.g., pharmacy benefit managers, health plans, group purchasing organizations).

Ultimately, on March 23, a Senate version of the federal aggregate spend provision was signed into law, and true to previous proposals, it focuses on payments to or on behalf of physicians and academic medical centers. The law applies to an “applicable manufacturer,” which means a manufacturer (defined broadly and including many different activities) of a “covered drug, device, biologic or medical supply” which is operating in the United States, or in a territory, possession, or commonwealth of the United States. ¹⁰Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(e)(2) (2010).

The term “covered drug, device, biological, or medical supply” means any drug, biological product, device, or medical supply for which payment is available under Medicare, Medicaid or a state SCHIP plan (or a waiver of such a plan). ¹¹Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(e)(5) (2010). It is unclear whether the law applies to premarket companies (e.g., certain products used in clinical trials are reimbursed by Medicare), or if the law only covers commercially available products.

Transactions are reportable if they are provided to (or at the request of or designated on behalf of) a “covered recipient,” a term that is defined to include physicians and teaching hospitals. ¹²Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(e)(6) (2010). The term “physician” includes medical doctors, doctors of osteopathy, dentists, podiatrists, optometrists, and chiropractors. ¹³Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(e)(11) (2010). The term does not include, however, a physician who is an employee of the reporting manufacturer.

A broad list of transfers of value are required to be disclosed, including certain transfers that are not currently reportable under any of the existing state disclosure laws (e.g., royalties and licensing fees). ¹⁴See Patient Protection and Affordable Care Act, 42 U.S.C. §§1320a-7h(a)(1)(A)(vi), 1320a-7h(e)(10)(A) (2010) In addition, although certain product samples are exempt from reporting, a separate section of the law includes the reporting of information applicable to drug samples. ¹⁵Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7i (2010).

Similar to the state aggregate spend disclosure laws, the federal law also exempts certain transfers of value from disclosure (“exclusions”), such as certain product samples and educational materials, as well as transfers under the dollar threshold. ¹⁶Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(e)(10)(B) (2010). Specifically, companies are not required to report a transfer of anything the value of which is less than $10, unless the aggregate amount during the calendar year exceeds $100. This means that companies must track transactions under $10 and report them if the total reportable amount for the covered recipient exceeds $100 during the year.

The Sunshine Act provides for civil money penalties (CMP) ranging from $1,000 to $10,000 for each payment or transfer not reported, up to a maximum of $150,000 for any annual submission. ¹⁷Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(b) (2010). Any manufacturer that knowingly fails to submit information, however, would be subject to a CMP of not less than $10,000 but not more than $100,000 for each payment or transfer not reported, up to a maximum of $1,000,000 annually. ¹⁸Id.

Companies are required to submit their first report by March 31, 2013, and annually thereafter. ¹⁹Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(a)(1)(A) (2010). It appears that Jan. 1, 2012, is the date on which companies must begin tracking transfers of value reportable under the law. By Oct. 1, 2011, the secretary of health and human services is required to establish procedures for submitting information.

Information submitted under the Sunshine Act will be made publicly available through a searchable website that allows for easy aggregation and downloading of data on industry-physician relationships. Information to be made available includes near complete information about the physician or teaching hospital, transactional information, and enforcement actions taken against manufacturers for Sunshine Act violations.

Once operational, this first-of-its-kind database promises to be among the most comprehensive and accessible set of information on aggregate spend in the world. Furthermore, the disclosed information will be presented in a report to Congress and the states.

III. Preemption

Some of the more interesting aspects of the federal Sunshine Act are the preemption provisions. In this context, the Sunshine Act expressly preempts any state statute or regulation that requires an “applicable manufacturer” to report the “type of information” required to be submitted regarding a “payment or other transfer of value.” ²⁰Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(d)(3)(A) (2010). The term “payment or other transfer of value” is defined as a transfer of anything of value, subject to certain exclusions (e.g., certain product samples, educational materials). ²¹Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(e)(10) (2010).

Although there remains ambiguity as to the extent that state disclosure laws will preempted, it appears that most—if not all—of the existing state disclosure laws likely will remain in effect in some form, and based on current legislative activity in this area, new state laws likely are forthcoming.

The Sunshine Act expressly saves certain state laws from preemption. Specifically, the federal law will not preempt state disclosure requirements (or parts thereof) that require companies to report information not disclosed under the Sunshine Act.

Thus, in addition to required disclosures for public health, investigations, and health oversight purposes, surviving preemption likely will be state laws that: (i) apply to individuals and entities that do not meet the definition of applicable manufacturer; (ii) require disclosure of spend/payment to individuals and entities other than physicians and teaching hospitals; and (iii) require disclosure of spend/transfers of value that is either not covered or exempt from federal reporting (e.g., transfers under $10, educational materials). ²²See Patient Protection and Affordable Care Act, 42 U.S.C. §1320a-7h(d)(3)(B) (2010).

Notably, as mentioned above, within the last several months a number of states have proposed aggregate spend disclosure laws.

IV. `Sunshine Can Cause Sunburn’

For the first time ever, state and federal regulators will have access to massive amounts of searchable, minable, and highly revealing data about the myriad of financial and other industry relationships. Although much of the reported spend data will reflect legitimate, if not beneficial, industry-physician relationships, recent enforcement actions underscore the tension that such relationships create under laws such as the federal anti-kickback statute.

Indeed, the impending availability of such rich spend data combined with mounting pressure by the federal government to ferret out fraud and abuse and the proliferation of would-be whistleblowers has all of the ingredients of the “perfect storm.” Consequently, pharmaceutical and device manufacturers should proactively mitigate the collateral risks attendant with widespread aggregate spend disclosure.

Given the inherent challenges of aggregate spend compliance—particularly on a national scale—affected manufacturers should create new policies and procedures that require employees and vendors to capture all relevant information prior to or contemporaneous with the reportable transaction. Companies also will need to train their employees and agents on these new and evolving requirements as well as the specific procedural requirements needed to capture and report spend data. Companies also should plan to audit and monitor aggregate spend compliance.

Likewise, companies may need to amend contracts with their consultants (so as to permit the disclosure of compensation-related information) and vendors that incur spend on the organization’s behalf. With respect to the latter, contracts with vendors should include compliance provisions that expressly require the collection, tracking, and reporting of timely and accurate data back to the company and in a format capable of being processed by the organization’s IT systems.

Further, such agreements should require adherence to company-specific spend/gift caps and limitations. Finally, companies should consider broader indemnities to protect the manufacturer in the event of inaccurate or incomplete vendor reporting.

Lastly, while compliance with the Sunshine Act and the growing body of state laws by itself is a significant challenge, in light of recent statements made by state enforcers who plan to use this data to pursue and prosecute companies under state and federal anti-kickback and consumer fraud theories, affected manufacturers should evaluate the effectiveness of their compliance programs generally, and specifically whether activities and relationships that give rise to reportable spend (e.g., consulting relationships, grant awards) satisfy applicable legal requirements.

V. Conclusion

With the proliferation of inconsistent state disclosure laws, and the impending federal reporting in all 50 states, compliance with aggregate spend reporting requirements promises to remain an operational and compliance challenge for years to come. Full compliance with the new laws will require constant review of state legislative activities, ongoing and corporate-wide operational changes, contract review and amendment, and the implementation of systems and processes to ensure accurate and complete reporting.