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OIG Releases Model Compliance Plan Guidance
for the Pharmaceutical Manufacturing Industry
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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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