On October 1, 2002, the Officer of Inspector General (OIG) of the U.S. Department of Health and Human Services posted on its website a "Draft OIG Compliance Program Guidance for Pharmaceutical Manufacturers" ("Guidance").
As in the case of the prior OIG compliance program guidance documents issued for other health care industry sectors, the Guidance suggests that pharmaceutical manufacturers include in their compliance programs the following seven elements recognized as fundamental to an effective compliance program:
- implementing written policies and procedures
- designating a compliance officer and compliance committee with authority to report directly to the board of directors and/or the president or CEO
- conducting effective training and education
- developing effective lines of communication
- conducting internal monitoring and auditing
- enforcing standards through well-publicized disciplinary guidelines
- responding properly to detected problems and undertaking corrective action
While the prior OIG compliance program guidance documents are in many ways similar, each addresses specific risk areas that the OIG believes should be addressed by written policies and procedures for that particular market segment. The Guidance identifies three broad risk areas for pharmaceutical manufacturers: integrity of data used to establish government reimbursement; kickbacks and other illegal remuneration; and compliance with laws regulating drug samples. The provisions relating to integrity of data focus on the need to report prices in a manner that accurately takes into account discounting practices (which are discussed in more detail in the section on kickbacks and other remuneration) as well as the importance of complying with the Medicaid Rebate Program.
The section in the Guidance discussing drug samples is straightforward and references the specific requirements of the Prescription Drug Marketing Act.
The most extensive portion of the "risk factor" section of the Guidance is the section addressing kickbacks and other remuneration that potentially violate the federal anti-kickback statute. This section of the Guidance addresses pharmaceutical manufacturers’ relationships with three groups: purchasers, physicians and other health care professionals and sales agents. The anti-kickback statute discussion in the Guidance is of interest not only to pharmaceutical manufacturers but also to medical device manufacturers, drug and device distributors, group purchasing organizations and their respective customers- all of which are likely involved in discounting and marketing practices, including those identified by the OIG in the Guidance.
Relationships with Purchasers
The OIG has addressed a variety of safe harbor issues in prior compliance program guidance documents as well as in other formal and informal statements and issuances. However, the Guidance includes the most extensive focus to date on the discount safe harbor and compliance issues surrounding innovative pricing. Discounts and other innovative pricing methodologies have been the subject of several recent significant investigations and lawsuits. The OIG warns that any type of remuneration provided as part of a sale, other than a price reduction covered by the discount safe harbor, may increase the risk of overutilization and lead to higher government program costs, inappropriate steering of federal health care program business or unfair competition. With this warning, discount arrangements that do not meet the discount safe harbor should be reviewed in light of the Guidance.
On one hand, the OIG indicates that virtually any arrangement other than a straightforward reduction in price could be suspect. On the other hand, the OIG does not take the position that such arrangements are per se illegal, but rather states that price concessions, such as free or reduced price goods, discounts on other products, conversion payments or up-front rebates, should be carefully reviewed. While parties can refer to the Guidance, the preambles to the original 1991 and revised 1999 safe harbor regulations, OIG Advisory Opinions and other pronouncements for guidance regarding the analysis of discounting practices, the OIG’s general suspicion regarding discount practices remains troubling for pharmaceutical manufacturers and the health care industry in general. Pharmaceutical manufacturers and others must be aware that practices they may view as negotiating a mutually satisfactory result for the buyer and the seller could be viewed by the OIG as potentially abusive, unless the arrangement passes muster under a careful analysis of the reimbursement and other potential effects of the arrangement.
The Guidance also reflects the OIG’s concern regarding the anti-kickback implications of non-price terms, such as the provision of free or below market rate goods or services to a purchaser, as part of a supply arrangement. The Guidance states that "[i]f the purchaser or referral source is in a position to make or influence referrals, and if the goods or services provided by the manufacturer eliminate an expense that the purchaser or referral source would have otherwise incurred, the arrangement is likely to be problematic from a kickback perspective." The Guidance specifically cautions pharmaceutical manufacturers to examine whether they are providing a valuable tangible benefit to the recipient of free or below market goods or services with the intent to induce or reward referrals. The concern expressed in the Guidance is not limited to arrangements between manufacturers and purchasers but, instead, extends to any "other potential referral source, such as a physician who might prescribe a manufacturer’s product or a PBM that might put it on a formulary." It is important to remember that the anti-kickback statute prohibits not only payments for referrals but also the offer or payment of anything of value in return for purchasing or ordering, or recommending the purchasing or ordering, of any item or service reimbursable by a federal health care program.
Average Wholesale Price
Another area addressed by the Guidance that relates to the discount issue is the concept of "marketing the spread." The OIG’s position is that a pharmaceutical manufacturer’s manipulation of the average wholesale price (AWP) of a drug, which forms the basis upon which the drug is reimbursed by Medicare, coupled with active marketing of the "spread" between the AWP-related Medicare reimbursement and the price available to a physician or other customer, is evidence of unlawful intent. The Guidance notes that "[t]o the extent that a manufacturer controls the ‘spread,’ it controls its customers profit." In other words, a manufacturer’s actions in keeping the price the government pays artificially high permits the manufacturer’s customers to realize a large "spread" between the amount paid for the product and the amount received on resale to the patient or other payor including Medicare. The OIG’s theory that "marketing the spread" constitutes an anti-kickback statute violation has been well known for some time and is currently being litigated. The OIG recommends that manufacturers review their AWP reporting practices and methodology to ensure that marketing factors do not influence the process.
Relationships with Physicians and Other Health Care Professionals
The Guidance also addresses pharmaceutical manufacturers’ relationships with physicians and other health care professionals who may not be the actual purchasers of the manufacturers’ products but may be in a position to order or prescribe the products. This section of the Guidance pulls together several concerns that have been the subject of several OIG pronouncements in the past and which also apply beyond the pharmaceutical realm. These include switching arrangements (addressed in a 1994 Special Fraud Alert) that involve payments to pharmacies, pharmacy benefit managers, physicians and other prescribers in order to change a patient’s prescription from a competing product to the manufacturer’s product; consulting or research agreements that do not involve bona fide services or for which more than fair market value is paid; and gifts, grants and entertainment provided to parties in a position to prescribe or order the manufacturer’s products or influence the use of the products. Interestingly, the Guidance suggests the PhRMA Code on Interactions with Healthcare Professions (PhRMA Code) promulgated by the Pharmaceutical Research and Manufacturers of America as a "starting point" for compliance purposes. Although the PhRMA Code has generally been viewed as quite conservative, the Guidance characterizes it as a minimum standard for evaluating practices involving gifts, gratuities and other benefits. It states that "compliance with the relevant sections of the PhRMA Code will not necessarily protect a manufacturer from prosecution or liability for illegal conduct."
Relationships with Sales Agents
The Guidance also addresses relationships with sales agents, which, while specifically affecting pharmaceutical manufacturers, also affects vendors and providers of other types of health care products and services. The Guidance expresses concern over the compensation to sales agents that may create "an undue incentive to engage in aggressive marketing or promotional practices," or where the sales agent’s duties expressly or implicitly include paying remuneration to purchasers or prescribers. The Guidance refers to the safe harbors for personal service arrangements and employment and recognizes that these safe harbors may protect many compensation arrangements with sales agents. Because the safe harbor for employees, for example, permits virtually any type of compensation arrangement, compliance with the employment safe harbor would not, in and of itself, address the OIG’s concern that some compensation arrangements (e.g., commission-based arrangements) could be viewed as incentivizing aggressive marketing practices and evidence that the company intended to engage in them. Consequently, even when a sales agent’s compensation is protected by a safe harbor, a company should consider whether the compensation scheme could encourage the sales agent to engage in illegal activity (e.g., giving kickbacks to referral sources) in practice.
Therefore, an analysis of the activities and compensation of a health care company’s sales force should not end with the safe harbors. In this respect, the Guidance urges pharmaceutical manufacturers to develop regular and comprehensive training programs for their sales forces; institute and implement corrective action and disciplinary policies for sales agents who engage in improper marketing; use the OIG advisory opinion process to address questions about particular practices used by the sales force; and establish an effective system for tracking, compiling and reviewing information about sales force activities. Of note is the OIG’s failure to discuss contract sale forces that promote the products of many manufacturers simultaneously. Many smaller entities simply cannot afford to have their own field force. This topic has long been an OIG concern.
Finally, it is important to note that, as in the case of other compliance guidance documents, the OIG has taken the position that when a compliance officer/committee or member of senior management becomes aware of credible evidence of misconduct, the company has an obligation to promptly report the misconduct to the appropriate authorities within a reasonable period. Depending upon the nature of the misconduct, "reasonable" may be immediate notification or as late as 60 days.
The Guidance has been published in draft form. The OIG will accept comments from interested parties submitted no later than 60 days after publication in the Federal Register. Clearly, many pharmaceutical manufacturers may be interested in responding. However, manufacturers and distributors of medical devices and other items that utilize discount programs or market to health care providers, as well as health care providers that are considering entering into arrangements that involve discounts, may be interested in submitting comments as well.
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McDermott, Will & Emery’s Health Law and Trial Departments have in-depth experience in the areas raised by the Guidance. Our Health Law Department has counseled a broad array of health care clients in these areas and frequently assists in drafting comments to the OIG in particular. In addition, our Pharmaceutical Litigation Group has extensive experience in the areas of pharmaceutical lawsuit investigations, class action litigation on pharmaceutical pricing, the Prescription Drug Marketing Act and AWP claims. The group includes former senior prosecutors from U.S. Attorneys’ offices and the U.S. Department of Justice, as well as several lawyers who previously served in senior positions at the U.S. Department of Health and Human Services, the U.S. Food and Drug Administration and other agencies. Currently, the Firm serves as counsel for major defendants in AWP litigation and as regional and local counsel in a range of pharmaceutical and medical product litigation.