Member Article

Following much anticipation on the part of health care industry members, CMS released its long-awaited final rule on the Physician Payment Sunshine Act in February 2013, supplying clarification and guidance on new financial disclosure requirements governing pharmaceutical and medical device manufacturers. The rule includes extensive and potentially time-consuming mandates for drug and device companies, including reporting of annual payments to physicians and teaching hospitals. And the costs for noncompliance are substantial: applicable manufacturers face stiff civil monetary penalties (CMP) from $150,000 to $1,000,000 for deficient reporting. We spoke with

Kyle Sampson from the firm Hunton & Williams LLP to provide legal insight on this topic and the consequences for your organization. 

What new reporting requirements are imposed upon medical suppliers and drug manufacturers by the Sunshine Act?

Under the Physician Payments Sunshine Act, which was enacted in March 2010 as section 6002 of the Patient Protection and Affordable Care Act, drug and device manufacturers are required to track and report annually to CMS the payments and other "transfers of value" they make to physicians and teaching hospitals for posting on a public website. Specifically, manufacturers are required to report all consulting fees, compensation for services other than consulting, honoraria, gifts, entertainment, food, travel, educational items, research grants, charitable contributions, and royalties provided to physicians. The final "transparency" rule issued by CMS to implement the Sunshine Act on February 1, 2013, provides that certain transfers of value are excluded from disclosure, including de minimis payments, samples not intended to be sold, educational materials that directly benefit patients, and in-kind items used for charity care. 

The transparency reporting requirements apply to "applicable manufacturers" of any "covered" drug, device, biological, or medical supply for which "payment is available" under Medicare, Medicaid, or the Children’s Health Insurance Program. A company is an "applicable manufacturer" if it is "operating in the United States" and is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply. An entity under common ownership with an applicable manufacturer that provides support to the manufacturer by, for example, assisting with the marketing, promotion, sale, or distribution of a covered drug or device also is an applicable manufacturer. Over-the-counter (OTC) drugs are not "covered" products, nor are Class I and 510(k)-exempt Class II devices (i.e. devices that do not require premarket approval or premarket notification clearance from FDA). As a result, manufacturers of OTC drugs or Class I and 510(k)-exempt Class II devices do not have to comply with reporting requirements – unless they also sell and distribute a covered product. If a manufacturer sells and distributes one covered product, then it must report all payments to physicians, even if they are not associated with the covered product. Manufacturers must begin to collect the required information on August 1, 2013, and they must report 2013 data (August 1 to December 31) to CMS by March 31, 2014.

CMS explicitly recognized that "collaboration among physicians, teaching hospitals, and industry manufacturers contributes to the design and delivery of life-saving drugs and devices." For its part, the device industry has long emphasized that the development of medical devices, unlike drugs and biologics, is often highly dependent on "hands on" physician interaction and collaboration from beginning to end. There is a real concern that the new disclosure requirements will have the effect of dissuading physicians from joining efforts to develop and test new products. Some physicians have expressed concern that their reputations could be damaged by inaccurate public reporting about the payments they have received from manufacturers. Whether the new requirements will have a chilling effect on industry-physician collaboration and discourage research remains an open question. Only time will tell. 

How does the Sunshine Act affect the potential liability of covered entities?

Disclosure of physician payments could very well lead to increased liability and fraud and abuse claims against drug and device manufacturers. When reports are made public in late 2014, prosecutors will look carefully to see if the information being disclosed can be used to establish liability under fraud and abuse statutes. Potential areas of liability include the anti-kickback statute, the False Claims Act, price reporting statutes, and off-label promotion. The government in recent years has repeatedly indicated that it plans to target drug and device executives as a way to combat fraud and abuse – so the stakes are high.

What are the anticipated implementation costs for the drug and device industry?

The substantial administrative burdens placed on drug and device companies that must now comply with the Sunshine Act, and the increased risk associated with reporting, make it hard to think of anything that is "good news." CMS itself estimated that the total cost of the reporting provisions will be approximately $269 million in the first year and $180 million annually thereafter. One good thing about the Sunshine Act is that it has preempted most (but not all) state-level reporting requirements. For example, just last month, Minnesota announced that, in light of the new federal requirements, it would not require manufacturers to report any sunshine data for calendar year 2012 and would seek to repeal its own state-level disclosure requirements. 

Beyond compliance, what should every drug and device company do today in response to the Act?

Drug and device companies should develop an immediate action plan for tracking their 2013 payments. First, of utmost importance, is making sure that all relevant payment data is being collected in a format that can be reported to CMS. Firms can do this by reviewing their manual or automated information technology systems that collect information from sales representative expense reports, contracts (for consulting, research, honoraria, etc.), and vendor-managed programs (such as physician speaker programs), to ensure that they collect all of the transparency report-required data.

Second, compliance departments should develop training programs for sales representatives and other company employees that explain the legal framework of the Sunshine Act and its implementing regulations and identify the company’s data collection and reporting obligations. Sales representatives, in particular, need to understand the requirements of the law, as they will be the primary data collectors for the gifts, entertainment, food, educational items, and the like, that are provided to physicians.

Third, companies should consider proactively communicating with physicians about the new world of sunshine disclosure. Educating physicians about the requirements of the law and the specific impact they may feel from reporting will be important to maintaining good commercial relationships. Even the most well-intentioned companies may report to CMS a payment that a physician then disputes.