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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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