OIG Releases Model Compliance Plan Guidance for the Pharmaceutical Manufacturing Industry - DWT Analysis and Comments

By Robert Homchick, Edwin Rauzi and Marissa Olsen
[October 2002]

The U.S. Department of Health & Human Services Office of the Inspector General (OIG) just released its Draft Compliance Program Guidance for Pharmaceutical Manufacturers. The draft may be downloaded at http://oig.hhs.gov/fraud/docs/complianceguidance/draftcpgpharm09272002.pdf. Inspector General Janet Rehnquist, in announcing the publication of the Guidance, observed that given the size of the pharmaceutical industry, "the need for compliance measures, oversight and enforcement is paramount."

The Guidance is consistent with the OIG's prior advice to other components of the health care delivery system, but contains a few surprises. Of particular note is the manner in which the Guidance synthesizes the government's positions in two of its high-profile cases. Specifically, the OIG identified as an area of serious concern the marketing of the "spread" between the cost of prescription drugs to physicians and payments by governmental programs by employees and agents of the pharmaceutical manufacturers. The Guidance asserts that those actions, coupled with "manipulation" of the average wholesale price (AWP), could lead to civil or even criminal investigations.

This position by the OIG is not new; it was taken in a settlement with the Bayer Corporation in 2001 and was prominently featured in the government's case against TAP Pharmaceuticals. Part of the theory in that case was that TAP's program of selling drugs to physicians at a discount was "improperly premised" on the notion that physicians would not pass on the discounts to patients and third party insurers. Although the government cannot cite a statute or regulation that explicitly requires purchasers to pass on such discounts, prosecutors continue to assert that the duty exists.

If the government actively pursues this theory, then many manufacturers and a great many more physicians could be ensnared. Although the government has not yet signaled its intention to apply this theory to hospitals, nursing facilities and other entities that provide pharmaceutical drugs to patients, the same reasoning seems to apply to other entities.

The Guidance cites three other areas of particular concern:

• kickbacks and other illegal remuneration
• compliance with laws regulating drug samples, and
• integrity of data used by state and federal governments to establish payment
  

Kickbacks and Other Illegal Remuneration

The federal anti-kickback statute prohibits offering, soliciting, paying or receiving remuneration to induce or reward referrals of federal health care business. It also constrains marketing and promotion of products that federal and state health care programs buy. Since the statute is worded broadly, and might otherwise endanger legitimate and even beneficial business arrangements, the government has promulgated "safe harbor" regulations. The model compliance plan discusses the potential application of the anti-kickback statute and several of the safe harbors with respect to three key relationships. Those relationships are between manufacturers and purchasers, physicians and other health care professionals and sales agents.

Purchasers

The anti-kickback statute can be implicated if pharmaceutical manufacturers use price concessions or similar benefits to induce purchase of their products if the product is reimbursable by any Federal health care program or if the price concession or similar benefit induces the purchaser to recommend the product to customers that submit claims to the federal health care programs.

The anti-kickback statute contains a broad exception for discounts offered to customers that submit claims to the federal health care programs if the discounts are properly disclosed and reported. The exception only covers reductions in the product's price given at the time of sale or set at the time of sale. The best example of an arrangement that meets these requirements is a rebate. Other types of discounts do not qualify for the exception and should be carefully reviewed, such as discounts covering several products in combination, other free or reduced price goods or services, educational or other grants, conversion payments, signing bonuses, or up-front rebates.

The OIG also addressed the AWP, which is often used as an element of calculating payments for prescription drugs, by both Medicare Part B and state Medicaid programs. In the OIG's view, the pharmaceutical companies influence both the price at which they sell and the price at which the government programs buy.

The AWP is calculated with reference to data reported by pharmaceutical manufacturers. It has come under increasing fire lately from Congress and federal regulators. To the outside observer, it seems to create the paradox of wholesale prices that are higher than retail prices. To the OIG, manipulating the AWP transfers "remuneration" to a seller's immediate customer from government purchasers, and thus comes within the scope of the anti-kickback statute, which prohibits offering, soliciting, paying or receiving such remuneration. In addition, as noted above, coupling AWP manipulation with "marketing the spread" is a practice that the OIG is intent on discouraging.

Physicians and Other Health Care Professionals

In another somewhat puzzling area of concern, the OIG criticized "switching" arrangements, which to persons outside of the health care industry might look like garden variety price competition. In the OIG's view, encouraging a purchaser of pharmaceutical products, such as pharmacies, pharmacy benefit management companies or physicians, to switch from one drug to a competing drug may be illegal. First articulated in a 1994 Special Fraud Alert, the suspect practice involves payments when the purchaser switches from a competitor's product to the seller's product. Although it is not clear what is meant, the OIG urges manufacturers to review these practices "very carefully."

A more legitimate area of concern is the practice of engaging physicians and other health care professionals to act as consultants, advisors, or researchers, with ill-defined duties. The OIG's recommendation that manufacturers pay only for providing actual and reasonable services and that the arrangements are not merely token arrangements created to disguise otherwise improper payments, is beyond dispute. The requirement that manufacturers purchase only "necessary" consulting and advisory services, however, could be more difficult to implement.

Educational or other grants offered by manufacturers may implicate the Anti-Kickback statute. The terms of such arrangements should be reviewed carefully and outside counsel consulted.

The Pharmaceutical industry also distributes many other items and services as part of their collective efforts to move the merchandise. The OIG correctly notes that the following items have been offered or provided to purchasers of pharmaceutical products:

• entertainment, recreation, travel, meals, or other benefits in association with
  information or marketing presentations;
• sponsorship or other financing related to third-party educational conferences and
  meetings attended or taught by physicians or others in a position to generate or
  influence referrals;
• scholarships and educational funds;
• grants for research and education; and
• gifts, gratuities, and other business courtesies.

Here, the OIG endorses informally a voluntary code promulgated by the Executive Committee of the Pharmaceutical Research and Manufacturers of America (PhRMA) that became effective July 1, 2002. It is available through PhRMA's web site at http://www.phrma.org. The OIG notes complying with the PhRMA Code, in and of itself will not protect a manufacturer, but that arrangements that fail to satisfy the PhRMA Code are likely to receive "increased scrutiny." The Guidance also seems to take the position that the PhRMA Code defines minimally acceptable conduct, rather than serving as an aspirational model.

Sales Agents

In another somewhat surprising turn, the OIG expressed interest in the ways in which pharmaceutical manufacturers compensate their sales forces. The OIG expressed concern about business practices that are common, such as providing gifts or grants to purchasers and paying salespeople on commission, which might create an undue incentive to engage in aggressive marketing or promotional practices. The OIG recommended that pharmaceutical manufacturers structure arrangements with sales agents to meet the personal services safe harbor under the Anti-Kickback statute. This safe harbor had been thought by many to apply primarily to physicians, and not to salespersons.

Compliance with Laws Regulating Drug Samples

Drug samples are addressed directly by the Prescription Drug Marketing Act of 1987 (PDMA). Drug samples are intended to "promote the sale of the drug," but it is illegal for physicians to sell samples to their patients. As Inspector General Rehnquist put it in her speech announcing the Guidance, "Free means free." The TAP Pharmaceutical case, mentioned above, involved allegations that physicians were selling Lupron samples to their patients. It is not surprising that the OIG looks askance at the practice. In addition to violating the PDMA, the practice probably implicates the anti-kickback statute and may be characterized as submitting a false claim to the government; all three of those statutes define severe sanctions and penalties.

Integrity of Data Used by State and Federal Governments to Establish Payment

As noted above, government payments rely, in part, on data from the pharmaceutical manufacturers. The OIG emphasizes this data must reflect price reductions, rebates, up-front payments, coupons, goods in kind, free or reduced price services, grants, other price concessions, or similar benefits. If the discount or price concession is offered on purchases of multiple products, it should be fairly apportioned among the products. The Average Manufacturer Price and Best Price, which are used to calculate rebates pharmaceutical manufacturers pay to State Medicaid programs, should be accurately reported.

CONCLUSION

The model compliance guidance for pharmaceutical manufacturers builds upon principles the OIG has used in offering guidance to many other components of the health care delivery system. In some ways, however, the Pharmaceutical Guidance pushes those principles to their logical extreme. Although pharmaceutical manufacturers cannot legitimately claim surprise, some might raise eyebrows at discouraging commission payments to salespeople and the implication that encouraging purchasers to buy your product instead of your competitor's is nefarious. At the root of it all is the government's desire to attain "most favored nation" status, and thus always receive the lowest price. To date, however, the legal entitlement to the lowest price in all instances-particularly prescription drugs-remains much in doubt.

FOR FURTHER INFORMATION, PLEASE CONTACT:

Authors:

Robert Homchick, 206-628-7676, roberthomchick@dwt.com

Edwin Rauzi, 206-628-7761, edrauzi@dwt.com

Marissa Olsen, 206-628-7714, marissaolsen@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.

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