I. Introduction

During the last decade, the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) have aggressively investigated and prosecuted life sciences companies under the FCPA for alleged misconduct and improprieties involving members of the medical profession. As a result, such companies increasingly have begun monitoring relationships with physicians and medical practitioners overseas, who often qualify as “foreign officials” under the FCPA. Although applicable only in the United States, recent federal legislation now imposes on companies strict reporting obligations relating to their relationships with health care professionals. This raises questions as to whether and to what extent companies subject to U.S. regulations may opt to globalize their domestic transparency systems, whether in response to similar current or anticipated demands imposed by non-U.S. regulators or otherwise.

On February 8, 2013, the United States Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) published a final rule implementing transparency requirements established by Section 6002 of the Patient Protection and Affordable Care Act.1 Referred to as the Physician Payment Sunshine Act, this part of the statute requires manufacturers of drugs, devices, biologicals, and medical supplies that are covered by Medicare and Medicaid annually to report payments or other transfers of value made to physicians and teaching hospitals.2 In addition, manufacturers must report information about ownership or investment interests held by physicians in such entities.3 The purpose of the statute is to reduce the potential for conflicts of interest that physicians or teaching hospitals could face as a result of their relationships with manufacturers. CMS’s final rule requires companies to begin collecting data on August 1, 2013, and to begin submitting reports by March 31, 2014.4

The Sunshine Act already has had a significant impact on health care companies operating in the United States that have been designing and implementing spend-tracking systems to capture and report the required data. The Sunshine Act also has implications for multi-national organizations’ ex-U.S. operations. Covered companies may want to consider implementing flexible transparency and spend-tracking systems on a global scale that simultaneously ensure compliance with U.S. law while taking into account similar policies and legislation in other countries. But this is no simple choice. Although the benefits of a single “global system” are enticing, the Sunshine Act’s unique requirements and attendant costs pose substantial hurdles to implementing the required transparency and tracking systems outside the United States.

II. Sunshine Act Final Rule: A Brief Overview

The recently published CMS rule requires data collection and reporting by “applicable manufacturers,” which include entities operating in the United States that fall within one of the following categories:

  1. An entity that is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply, but not if such covered drug, device, biological or medical supply is solely for use by or within the entity itself or by the entity’s own patients. This definition does not include distributors or wholesalers (including, but not limited to, repackagers, relabelers, and kit assemblers) that do not hold title to any covered drug, device, biological or medical supply.
  2. An entity under common ownership with an entity in paragraph (1) which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological or medical supply.5

There are two primary reporting obligations. First, applicable manufacturers must report all payments or transfers of value to “covered recipients,” who are defined as “(1) [a]ny physician, except for a physician who is a bona fide employee of the applicable manufacturer that is reporting the payment; or (2) [a] teaching hospital.”6 Payments and transfers of value subject to reporting include consulting fees, speaking fees, honoraria, gifts, entertainment, food, travel, lodging, charitable contributions, royalties or licenses, and research grants, among others.7 Manufacturers must report specified information for each payment or transfer of value, including the recipient’s identifying information and details about the payment or transfer, including whether it relates to a particular drug or device.8 Companies must disclose both direct and indirect payments (i.e., payments or transfers of value made through a third party to a covered recipient).9 There are exceptions to these requirements. For example, no reporting is necessary for the transfer of (1) anything that has a value of less than $10 (unless the aggregate amount exceeds $100 during the calendar year), (2) educational materials intended for patient use, (3) product samples intended for patient use, and (4) medical devices that are being loaned for a period of fewer than 90 days for the purpose of evaluation.10

Second, each applicable manufacturer must annually disclose all ownership and investment interests in the manufacturer held by a physician or an immediate family member of a physician during the preceding calendar year.11 In addition to the recipient’s identifying information, manufacturers must report the dollar amount invested by each physician or immediate family member and the value and terms of each ownership or investment interest.12 Failure to adhere to the Sunshine Act’s reporting requirements can result in civil monetary penalties.

Now that the final rule has been released, health care companies have begun to finalize their data collection systems and make determinations about applicable policies and procedures to ensure compliance. During this interim period, careful consideration should be given to recent FCPA investigations and the growing trend in transparency legislation worldwide. For some companies, it may be wise to implement some form of spendtracking and data collection systems globally, although adopting a single global practice will be challenging.

III. Global Implementation of Transparency Systems

a. Arguments in Support of Global Implementation

i. Improving FCPA Compliance

The life sciences industry has been a frequent target of FCPA enforcement. Particular scrutiny has been applied to payments, gifts, and other transfers of value to state-employed health care providers in foreign countries, whom the government views as “foreign officials” under the FCPA. The passage of the Sunshine Act may provide an opportunity to improve companies’ FCPA compliance. Specifically, implementing Sunshine Actcompliant tracking procedures on a global scale may assist companies in monitoring their relationships with foreign medical professionals. Essentially functioning as an early warning system, a global spendtracking system theoretically could help curtail, if not avoid, time-consuming investigations and expensive settlements that have become commonplace.

For example:

  • In April 2011, Johnson & Johnson (“J&J”) agreed to pay $70 million to the DOJ and SEC for alleged FCPA violations, including allegations that J&J subsidiaries “paid bribes to public doctors in Greece who selected J&J surgical implants, public doctors and hospital administrators in Poland who awarded contracts to J&J, and public doctors in Romania to prescribe J&J pharmaceutical products.”13
  • In December 2012, Eli Lilly & Co. agreed to pay $29 million in connection with allegations that its subsidiaries made improper payments “to foreign government officials to win millions of dollars of business in Russia, Brazil, China, and Poland.”14 In particular, the SEC alleged that “[e]mployees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to governmentemployed physicians.”15

A number of other life sciences companies are the subject of pending FCPA investigations. Worldwide spend-tracking and data collection systems could prove useful in monitoring relationships with state-employed health care practitioners, uncovering improper spending activities, and training personnel on how to remain within the limits of U.S. law. Ultimately, the global implementation of transparency systems would help to ensure compliance with the Sunshine Act while serving as a proactive tool for monitoring FCPA compliance.

ii. Recent Proliferation of Transparency Legislation & Polices

Companies may also want to consider implementing spend-tracking systems on a worldwide scale given the growing trend in global transparency, as evidenced by recently adopted legislation and professional guidelines. Some companies are already doing so.

Inspired in part by U.S. law, France passed its own Sunshine Act in 2011, which requires companies to develop transparency and disclosure protocols.16 The law establishes two types of reporting rules: (1) public declarations of interest by experts regarding any connection they may have with covered companies, and (2) the disclosure of agreements between covered companies and recipients. With regard to the latter, information to be disclosed includes research and development contracts, grants, speaking arrangements, consulting contracts, grants, gifts, payments, and any other benefits. Although the law’s implementing decree was expected in January 2013, it has not been published and thus the law is not yet enforceable.

In 2011, Slovakia passed several amendments that subject health care companies to certain restrictions and requirements regarding their relationships with medical practitioners. Specifically, pharmaceutical companies are prohibited from financing, sponsoring, or supporting events geared toward health care professionals unless the purpose is solely educational or scientific.17 In addition, companies must report all advertising and marketing expenses, as well as any direct or indirect non-monetary benefits provided to health care professionals. Lastly, health care professionals who are authorized to prescribe or dispense drugs are forbidden from accepting payments, gifts, or nonmonetary benefits from covered companies.

A number of foreign trade associations have embraced the concept of selfregulation with respect to relationships between life sciences companies and medical practitioners. The European Federation of Pharmaceutical Industries and Associations (“EFPIA”) represents 33 European national pharmaceutical industry associations.18 The EFPIA Code of Practice on Relationships Between the Pharmaceutical Industry and Patient Organizations requires members to publish reports detailing any financial support (direct or indirect) provided to patient organizations, as well as any agreements existing between the parties.19 The Association of the British Pharmaceutical Industry (“ABPI”) is a health care trade association with more than 180 members in the United Kingdom.20 The group’s code of practice already requires members to disclose a wide variety of information regarding relationships with medical practitioners, including donations, gifts, grants, payments, sponsorships, and consultancy agreements.21 Industry organizations in Australia and the Netherlands have adopted similar measures requiring health care companies to publicly disclose financial relationships with medical professionals, while a professional association in Japan also requires that members implement specific transparency policies.

Although Sunshine Act-compliant record-keeping may not entirely satisfy transparency legislation or professional guidelines in other countries, global implementation could provide companies with a sound framework that could be tailored to meet the requirements of a particular regulatory system. Adopting a global spend-tracking system also would avoid the need to create transparency systems on a piecemeal basis as new laws and regulations are passed.

b. Arguments Against Global Implementation

The complexity and costs associated with implementing Sunshine Actcompliant systems in the United States are still unknown, but are expected to be substantial. For example, CMS has estimated that the cost of compliance for applicable manufacturers will be approximately $269 million during the first year and about $180 million for each year thereafter. Those figures may underestimate additional costs that inevitably will arise from unforeseen complications which companies may face. Given this uncertainty, health care companies might be disinclined to expand Sunshine Actcompliant reporting systems on a global scale.

Companies must take a number of steps to comply with the Sunshine Act, including identifying products and devices that are covered by the statute, defining payments and transfers of value subject to reporting, and assessing current relationships with health care professionals and teaching hospitals to determine which parties qualify as covered recipients. In addition, policies relating to transparency protocols and record retention must be developed or reexamined. Most importantly, companies must complete the challenging process of designing and developing adequate data collection systems and train relevant personnel (e.g., employees, third party contractors, and covered recipients). Although some companies have had a head start given provisions in their Corporate Integrity Agreements requiring public disclosure of various types of physician payments, even those companies’ systems must be adjusted to conform with CMS’s recently issued rule.

Furthermore, it is inevitable that complications will arise based on the sheer volume of information that must be compiled, processed, and submitted to CMS. Companies undoubtedly will encounter discrepancies among data sources that must be reconciled, complexities in determining how spend data should be identified and categorized, and challenges in deciding how to properly interpret the Sunshine Act’s reporting exceptions. Companies also will have to ensure that they are adequately adhering to their reporting policies, a process that likely will require additional internal auditing and quality control mechanisms. In addition, the data must be validated and certified prior to submission, a process that likely will necessitate dedication of additional human and technological resources. Nor will the extensive data management efforts cease once the information has been reported. Companies must maintain all books, contracts, records, documents, and other evidence regarding payments, transfers of value, and ownership and investment interests for five years from the date that the information is published on CMS’s website.22 CMS has acknowledged that some records will likely need to be retained for a longer period.23 Companies also will be subject to periodic government audits, evaluations, and inspections.

It is unlikely that implementing global Sunshine Act-compliant data collection systems would simplify any of these issues, especially given differences between U.S. law and foreign legislation and standards.24 Global requirements relating to spend tracking and data collection are far from uniform. Although a handful of countries have enacted transparency laws, some are merely at the early stages of drafting legislation, others rely on self-regulation by professional associations, and many have yet to address the issue at all. As a result, developing even the most basic global data collection system will involve some educated guesswork. Implementing policies on a global scale would thus increase the already uncertain costs of compliance, which could grow exponentially.

Companies understandably may be hesitant to establish global transparency systems before fully understanding the domestic costs and complexities related to compliance with the Sunshine Act, and before the contours of emerging legislation and standards in foreign countries are fully known.

IV. Conclusion

Given the global trend toward transparency regulation, companies should at least consider whether expanding data collection and spend-tracking systems to their ex-U.S. operations would be a viable and beneficial option. Adopting a thoughtful, holistic approach to the worldwide implementation of Sunshine Act-compliant systems could streamline the transparency process and assist companies in more easily satisfying emerging legislation and regulations, as well as facilitate companies’ efforts to monitor FCPA compliance. It may be prudent, however, to first assess the full impact and cost of complying with the U.S. reporting requirements.