In February 2013, the Centers for Medicare and Medicaid Services (“CMS”) implemented certain disclosure provisions of the Affordable Care Act, which effectively heighten the healthcare industry’s reporting obligations,1 requiring certain manufacturers of drugs, devices, biologicals, and medical supplies to report all payments or transfers of value to physicians and teaching hospitals. The reporting obligations also require that these manufacturers, as well as certain group purchasing organizations (“GPOs”), report ownership or investment interests held by physicians. The reported information, which manufacturers and GPOs must begin collecting on August 1, 2013, will be made available to the public.

The Increased Reporting Requirements Supplement a Current Legal Landscape that Prohibits Payments for Referrals, as well as Referrals for Services when a Financial Relationship with a Physician Is Present

The August 1, 2013 reporting obligation to begin collecting data for public reporting will supplement the existing legal obligations of the healthcare industry regarding payments or transfers of value. Currently, the healthcare industry must comply with the Anti-Kickback law.2 The Anti-Kickback law prohibits any form of “remuneration,” made directly or indirectly, overtly or covertly, in cash or in kind to induce the purchase, recommendation to purchase, or referral of any kind of healthcare goods, services or items paid for by the Medicare or Medicaid programs. The term remuneration, which includes kickbacks, bribes, and rebates, is interpreted under the law as anything of value, including discounts and free goods or services. Both sides of the transaction are prohibited—the receipt of a kickback, as well as the offer to give or the giving of a kickback. A willful violation of the law is a felony offense, punishable by a fine up to $25,000 and/or five (5) years in jail.

There are, however, numerous safe harbors which can be relied upon to avoid violations of the Anti-Kickback law. The safe harbors include, but are not limited to, certain space and equipment rental agreements, certain personal services and management contracts, payments made to bona fide employees, and payments made for practitioner recruitment.3

The federal government has recently prosecuted an increased number of cases under the Anti-Kickback law. For example, on August 30, 2012, Merigrace Orillo was sentenced to twenty (20) months in federal prison as a result of her conviction for a kickback scheme.4 She was also ordered to repay over $700,000 to the Medicare Trust Fund. Orillo, who co-owned and operated a home healthcare agency, admitted that she knowingly assisted in paying cash kickbacks to a Chicago doctor. The kickbacks were paid in return for the doctor referring patients to Orillo for home healthcare services. At the sentencing hearing, the court found that Orillo’s scheme caused a loss of more than $700,000 to the Medicare program.

Further, the August 1, 2013 obligation to begin collecting data for public reporting will increase the existing legal obligations of the healthcare industry regarding financial relationships with physicians. Currently, the healthcare industry must comply with Stark, the federal physician anti-referral statute.5 Stark prohibits a physician from making a “referral” of Medicare or Medicaid program patients for certain “designated health services” (“DHS”) to an entity with which the physician or an immediate family member, directly or indirectly, has a “financial relationship.” Stark also prohibits the entity from presenting a claim to the Medicare or Medicaid program for DHS furnished pursuant to a prohibited referral.

The Stark Law definition of “referral” is broad. Under the Stark Law, a “referral” can include a physician’s request for, ordering of, or certifying/recertifying the need for, any DHS reimbursable under Medicare or Medicaid. This includes a request for a consultation with another physician and any test or procedure ordered by or to be performed by that other physician which includes the provision of any DHS, or the establishment of a plan of care that includes the provision of a DHS.

A “financial relationship” can be a direct or indirect “ownership or investment interest” held by a physician, including his family members or an entity in which he has a direct or indirect interest, in the entity that furnishes the DHS. A “financial relationship” can also be a “compensation arrangement,” such as a lease or services agreement, between the physician, including his family members or an entity in which he has a direct or indirect interest, and the provider of the DHS. Like the Anti-Kickback law, the Stark Law contains a number of exceptions which can be relied upon to avoid violations, such as a nonmonetary compensation to physicians (up to a certain threshold determined annually), real estate and equipment leases, and personal services agreements.6

Also, as with violations of the Anti-Kickback law, the federal government has recently prosecuted an increased number of cases under Stark. For example, in November 2012, Freeman Health System, a healthcare provider and hospital, agreed to pay $9,316,139 to resolve allegations that it violated Stark.7 The United States alleged that Freeman Health System improperly compensated some of its physicians. Specifically, the United States alleged that Freeman Health System provided incentive pay to seventy (70) physicians employed at clinics operated by the health system based on the revenue generated by the physicians’ referrals for certain diagnostic testing and other services performed at the clinic, and that this financial arrangement created an incentive to refer patients for such procedures in violation of Stark.

The Increased Reporting Requirements Will Capture Payments or Transfers of Value made to Physicians and Ownership or Investment Interests Held by Physicians

Pursuant to CMS’ February 2013 heightened reporting obligations, “applicable manufacturers,” which include certain manufacturers of drugs, devices, biologicals, and medical supplies covered by Medicare, Medicaid, and the Children’s Health Insurance Program, must comply with two categories of reporting requirements. Additionally, “applicable GPOs,” which are entities that purchase, arrange for, or negotiate the purchase of covered drugs, devices, biologicals, or medical supplies for a group of individuals or entities, must comply with the second category of reporting requirements. These two categories of reporting requirements are two of the many steps in the Affordable Care Act designed to create greater transparency in the healthcare industry.

First, applicable manufacturers must report annually to the Secretary of Health and Human Services all payments or transfers of value to “covered recipients.” Payments or transfers of value include gifts, consulting fees, research activities, speaking fees, meals, and travel. “Covered recipients” include physicians and teaching hospitals. CMS will refer to this category of reporting as “National Physician Payment Transparency Program: Open Payments.”

Second, applicable manufacturers and applicable GPOs must report ownership or investment interests held by physicians or immediate family members of a physician. Applicable manufacturers and applicable GPOs are not required to report ownership or investment interests held by teaching hospitals.

CMS will publish the reported information to the public on a publicly available website. CMS is required to design the website in such a manner that the published information can be easily aggregated, downloaded, and searchable. CMS must provide applicable manufacturers, applicable GPOs, covered recipients, and physician owners and investors at least forty-five (45) days to review, dispute, and correct the reported information before it is made public. If a covered recipient or physician owner or investor disagrees with the information reported, the covered recipient or physician owner or investor can initiate a dispute. The dispute is sent to the appropriate manufacturer or GPO, and the dispute must be resolved directly between the parties. In response to concerns over disputes that may be initiated late in the forty-five (45) day period, CMS included an additional fifteen (15) day window, following the forty-five (45) day period, to resolve disputes before posting the reported information on a publicly available website. The reported information that appears on the publicly available website must be easily aggregated, downloadable, and searchable.

Applicable manufacturers and applicable GPOs must begin their data collection on August 1, 2013. CMS will require applicable manufacturers and applicable GPOs to report the data for August 2013 through December 2013 by March 31, 2014. CMS will then release the data publicly by September 30, 2014.

In the case of payments or transfers of value that are required to be reported, the reporting obligations set forth above preempt any state or local requirements to report the same type of information.

Any applicable manufacturer or GPO that fails to timely, accurately, or completely report the required information is subject to a civil monetary penalty. The penalty will be between $1,000 and $10,000 for each payment, transfer of value, ownership interest, or investment interest that is not reported timely, accurately, or completely. The total amount of the civil monetary penalty imposed on an applicable manufacture or GPO with respect to failures to report in an annual submission will not exceed $150,000.

If the applicable manufacturer or GPO knowingly failed to timely, accurately, or completely report the required information, the civil monetary penalty increases substantially. The penalty will be between $10,000 and $100,000 for each payment, transfer of value, ownership interest, or investment interest that is knowingly not reported timely, accurately, or completely. The total amount of the civil monetary penalty imposed on an applicable manufacture or GPO with respect to knowing failures to report in an annual submission will not exceed $1,000,000.

Compliance officers for applicable manufacturers and applicable GPOs should supplement their Compliance Programs to include steps that will enable them to satisfy with these requirements. In order to comply with the increased reporting obligations, applicable manufacturers must implement compliance mechanisms that will accurately capture all payments or transfers of value that are required to be reported. All employees of applicable manufacturers should be required to accurately record, and maintain documentation supporting, any payments or transfers of value to physicians and teaching hospitals, including gifts, consulting fees, research activities, speaking fees, meals, and travel. The employees should be required to submit this recorded information, along with supporting documentation, to the Compliance Officer or another designated official within the company on a regular basis. The Compliance Office or other designated official should then be required to compile and review this information for accuracy in advance of the reporting deadline.

Also, applicable manufacturers and applicable GPOs must implement compliance mechanisms that will accurately identify all physician ownership or investment interests that must be reported. The Compliance Officer or another designated official within the company should create a questionnaire to submit to every existing owner or investor to determine whether he or she is a physician or immediate family member of a physician. If a new owner or investor joins the manufacturer or GPO, he or she should be required to complete the same questionnaire. The Compliance Office or other designated official should then be required to compile and review this information for accuracy in advance of the reporting deadline.