Health Law Advisory Bulletin
New Compliance Requirements Facing
Pharmaceutical Companies Under California's SB 1765
By John
P. Krave
[August 2005]
Pharmaceutical companies face new legal requirements
in California that seem likely to focus public and government attention
on their marketing practices and the adequacy of their corporate
compliance programs. SB 1765 (codified as Health and Safety Code
§§119400 and 119402), effective on July 1, 2005, is cause
for pharmaceutical companies to mitigate newly-created legal risks
by tailoring their compliance programs to conform with government
and industry guidelines and to review their relationships with customers,
physicians, and members of the companies' marketing networks. Most
important among its provisions, the new law requires all pharmaceutical
companies which conduct business in California to:
- Adopt and post on their websites comprehensive compliance programs
(CCPs) that comply with voluntary guidelines established by the
United States Department of Health and Human Services Office of
Inspector General (the OIG) and the Pharmaceutical Research and
Manufacturers of America (PhRMA);
- Incorporate into their CCPs expenditure limits on marketing
and promotional activities that comply with the OIG and PhRMA
guidelines;
- Remunerate physicians and other health care professionals for
consulting and other services only to the extent of the fair market
value of their services and in accordance with the OIG and PhRMA
guidelines; and
- Publish on their website a written declaration of compliance
with their respective CCPs.
SB 1765 may be a well-intentioned effort to prevent
marketing abuses that unnecessarily contribute to the cost of prescription
drugs, but may have the unfortunate effect of converting the OIG’s
and PhRMA’s voluntary guidelines into binding performance
standards with unpredictable legal and financial consequences for
all “pharmaceutical companies” within its scope. Below
is a summary of the SB1765 requirements and unresolved issues related
to the statute. I also describe how we might assist you in the mitigation
of legal exposure under SB 1765.
Requirements of SB 1765
The definition of “pharmaceutical company”
in SB 1765 includes any organization which engages in the “production,
preparation, propagation, compounding, conversion . . .processing
. . . packaging, repackaging, labeling, relabeling, or distribution
of dangerous drugs.” Because the definition also includes
individuals engaged in “pharmaceutical detailing, promotional
activities, or other marketing of a dangerous drug”, SB 1765
applies to any pharmaceutical company based in another state or
country that has even a limited marketing presence in California,
regardless of whether it conducts more substantial activities within
the state.
The definition of “dangerous drugs” contributes
to the breadth of SB 1765. As might be expected, the term “dangerous
drugs” applies to any drug that bears a cautionary legend
(e.g., “Rx Only”), requires a prescription for dispensation,
or is categorized as dangerous by the California State Board of
Pharmacy. The definition of “dangerous drugs” also includes
“devices” which require a prescription for dispensation,
thereby including some medical device manufacturers within the definition
of “pharmaceutical company.”
SB 1765 specifically requires all pharmaceutical companies
to engage in the following activities:
Adoption of OIG/PhRMA Guidelines.
Pharmaceutical companies must adopt and post on their websites
a CCP that is in accordance with the “Compliance Program
Guidance for Pharmaceutical Manufacturers” published by
the OIG in April 2003 and the “Code on Interactions with
Health Care Professionals” published by PhRMA on July 1,
2002 (together, the “OIG/PhRMA Guidelines”). The companies
must make conforming revisions to their CCPs within six months
following any update or revision to the OIG/PhRMA Guidelines.
Establishment of Specific Dollar Limits.
Pharmaceutical companies’ posted CCPs must establish a “specific
annual dollar limit on gifts, promotional materials or [other]
items or activities” that the companies may give to an individual
health care professional. The limits must conform to the OIG/PhRMA
Guidelines.
Declaration of Compliance. Pharmaceutical
companies must annually declare in writing, and post on their
websites, that they are in full compliance with SB 1765 and their
CCPs. Each company must post a toll-free number where persons
may obtain copies of its CCP and declaration.
In addition to these required actions, SB 1765 defines
a range of permissible conduct in which pharmaceutical companies
may engage:
Exempt Conduct. Pharmaceutical
companies may, without financial limitations, provide health care
professionals with drug samples for free distribution to patients,
financial support for continuing medical education forums, and
financial support for health education scholarships, but only
if they provide these subsidies and support in a manner that complies
with the OIG/PhRMA Guidelines.
Services Agreements. Pharmaceutical
companies may compensate health care professionals for consulting
and other services in any amount, provided that such payments
(i) do not exceed the fair market value of the professional’s
performance, and (ii) are provided in a manner consistent with
the OIG/PhRMA Guidelines.
Unresolved Issues
SB 1765 raises a number of unresolved issues, including
the following:
Enforcement Agency. SB 1765 does
not charge any particular state agency with the duty or authority
to issue interpretive regulations or to otherwise enforce its
terms. The legislative history of SB 1765 suggests that the Attorney
General will enforce the law pursuant to the broad statutory proscriptions
against unfair business practices codified in Business and Professions
Code §17200 discussed below.
Extent of Required Compliance.
All compliance guidelines issued by the OIG for various industries,
including the OIG guidelines for pharmaceutical manufacturers,
emphasize that CCPs are necessarily scalable in order to accommodate
a company’s size and resources. Because the OIG guidelines
are voluntary rather than mandatory in character, they describe
only basic elements of a successful CCP and identify compliance
issues likely to confront a pharmaceutical manufacturer without
specifying the required resources or precise structure of an acceptable
program. As a result, the guidelines lack clear standards by which
to judge whether a pharmaceutical company has adopted a sufficiently
comprehensive CCP or has otherwise violated SB 1765.
Contents of Required Compliance Declaration.
Each pharmaceutical company must post on its web site a declaration
attesting to its “compliance with both its Comprehensive
Compliance Plan and with [SB 1765].” Because SB 1765 provides
no further detail concerning this requirement, the necessary scope
and contents of the declaration remain unclear. Does certification
of compliance require, for example, attestation to full compliance
with all applicable laws relevant to the plan? What must a company
disclose if it has violated its CCP or any applicable law? May
the Compliance Officer execute the declaration, or must the Chief
Executive Officer or Chief Financial Officer do this? Must the
declaration be executed under penalty of perjury?
Unclear Geographical Limits. SB
1765 applies to pharmaceutical companies that operate within California,
but fails to describe the impact of foreign state operations.
Does SB 1765 require a company with a California presence to comply
with PhRMA marketing limits in its Florida operations? The question
is especially difficult if the company operates outside the OIG/PhRMA
Guidelines but does not violate any laws in the process. Can the
company truthfully post the required declaration if it has engaged
in legal violations or has a flawed compliance program in a foreign
state or country.
Likely Enforcement
Litigation filed by private or governmental plaintiffs
and alleging “unfair business practices” prohibited
under Business and Professions Code §17200 et seq. (“§17200”)
may be the most likely enforcement vehicle for SB1765 compliance.
Courts may award a range of remedies against a pharmaceutical company
for violation of §17200, including “restitution”
(i.e., the restoration of property acquired through illegal means),
equitable remedies in the form of restraining orders and injunctions,
and reimbursement for attorneys' fees expended by the plaintiff.
The California Attorney General has already indicated
his intention to use §17200 as the basis for enforcement actions
against pharmaceutical companies that violate SB 1765. More worrisome,
courts have permitted private litigants to sue in the capacity of
“private attorneys general” in order to prevent the
continuation of unfair business practices under §17200, which
has served as a powerful vehicle by which plaintiff-oriented law
firms have gained restitution and recovered significant attorneys’
fees from corporate defendants who have technically violated particular
statutes.
Some plaintiffs may combine §17200 claims with
causes of action alleging violation of California or federal laws
prohibiting the submission of false claims to third party payors.
Both state and federal laws empower private whistleblowers to prosecute
cases of fraudulent billing, and which carry the risk of protracted
litigation and millions of dollars in fines and treble damages for
comparatively insignificant billing irregularities. These suits
may link violations of SB 1765 and the submission of false claims
by alleging, for example, that a company’s failure to operate
a satisfactory CCP eventually resulted in kickbacks and illegal
drug orders or caused the violation of average wholesale price laws
or other complex pricing mechanisms.
As evident from recent class action litigation against
the nonprofit hospital industry, legal risks may be especially high
in this era of rising health care costs and an evident desire among
some class action attorneys to scapegoat perceived profiteers, regardless
of the merits of particular cases. The ambiguities of SB 1765 and
the resulting potential for complex litigation arising out of technical
violations of the statute should serve as a powerful incentive for
pharmaceutical companies to adopt compliance programs that lower
their regulatory profile and thereby reduce the likelihood of legal
attack.
Preventive Measures
While it is certainly not possible to eliminate all
legal risks occasioned by SB 1765 and the potential for related
litigation, several measures can at least reduce this possibility:
Evaluate Current Compliance Program.
The potential for SB 1765 litigation against a pharmaceutical
company is plainly much greater if its CCP markedly diverges from
the OIG/PhRMA Guidelines and other requirements of SB 1765. Many
companies’ CCPs and policies are several years old, and
may not reflect their current business model. Legal counsel should
compare existing plans with apparent requirements of SB 1765 as
discussed here. Interviews with key senior management may be advisable
to ensure the currency of a CCP. If a company entirely lacks a
CCP, adoption of a plan is long overdue.
Pricing Analysis. The OIG has expressed
concern that some companies manipulate the average wholesale price
of their products in order to increase their customers’
profits by ensuring artificially high federal reimbursement to
those purchasers in possible violation of the federal anti-kickback
law. Hidden discounts and a variety of other disguised price concessions
further challenge the integrity of data used to determine government
reimbursement rates for pharmaceuticals. As a result, pharmaceutical
companies should review their ongoing and prospective relationships
with their most significant customers to determine whether pricing
terms and structures (particularly with respect to average wholesale
price and the extension of discounts or concessions) comply with
Federal law.
Contract Review. Recent government
enforcement efforts have focused on pharmaceutical companies’
contractual relations with physicians and other consultants, distributors,
sales representatives, and other persons in a position to refer
business. The government’s primary concern is whether a
company's relationship with these persons and organizations has
the potential to skew clinical decision-making or increase federal
health care costs in violation of anti-kickback laws. Pharmaceutical
companies should consider a review of all relationships with these
third parties, regardless of the extent or quality of documentation,
to ensure their legality.
Establish Tracking System. Pharmaceutical
companies should work with management information systems staff,
consultants, and legal counsel as appropriate to develop systems
to enforce promotional and marketing limits and track consulting
and other fees paid to health care professionals. In many cases,
it may be possible to establish contracting templates that company
management must complete in order to establish the legality of
certain business relationships that pose noteworthy compliance
risks. At minimum, the existence of a sophisticated tracking system
demonstrates corporate good faith and concern for legal compliance.
Davis Wright Tremaine LLP attorneys are, of course,
available to further discuss SB 1765 with you and help to reduce
potential risks from the new law. Please let us know how we can
be of further assistance in this important endeavor.
For assistance with health law matters or for additional
information, please contact:
Other
Contacts:
Kathy
Drummy, Los Angeles, (213) 633-6800, kathydrummy@dwt.com
Gerry
Hinkley, San Francisco, (415) 276-6530, gerryhinkley@dwt.com
Tom
Jeffry,
Los Angeles, (213) 633-6800, tomjeffry@dwt.com
Steve
Lipton,
San Francisco, (415) 276-6550, stevelipton@dwt.com
This Health Law Advisory is a publication
of the Health Law Group of Davis Wright Tremaine LLP. Our purpose
in publishing this Advisory is to inform our clients and friends
of developments in health care law. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular
situations.
Copyright 2005, Davis Wright
Tremaine LLP.
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