On February 8, 2013, the Centers for Medicare & Medicaid Services (“CMS”) published a final rule implementing the Affordable Care Act’s “sunshine” provisions. The rule establishes new reporting requirements for payments to physicians by drug and device manufacturers, and certain others, and for physician ownership and investment interests in manufacturers and group purchasing organizations (See 78 Fed. Reg. 9458 (Feb. 8, 2013), codified at 42 C.F.R. pts. 402 & 403). We encourage manufacturers and group purchasing organizations to familiarize themselves with the requirements of this rule promptly, because data collection requirements become effective on August 1, 2013, and reporting is required by March 31, 2014.
The final rule is divided broadly into two parts. The first part addresses payments and other transfers of value to physicians. The second part addresses physician ownership and investment interests. Each of these is discussed below.
Reporting of Physician Payments
Who Must Report?
The rule requires “applicable manufacturers” to report payments and transfers of value to physicians. In general, the rule applies to “applicable manufacturers” engaged in the production, preparation, propagation, compounding, conversion of a covered drug, device, biological or medical supply for sale or distribution in the United States.
Initially, “applicable manufacturers” are manufacturers operating in the United States. The term does not include manufacturers whose operations are wholly outside of the United States. The phrase “operating in the United States” means having a physical location in the United States (including its territories, possessions or commonwealths), or conducting activities in the United States.
“Applicable manufacturers” are manufacturers of covered drugs, devices, biological and medical supplies, and distributors and wholesalers that take title to the product. The term “applicable manufacturer” includes entities engaged in the production, preparation, propagation, compounding, conversion, marketing, promotion, sale or distribution of a covered drug, device, biological or medical supply, and it includes repackagers, relabelers and kit assemblers that take title to the product. However, the term does not include entities, such as hospitals and pharmacies that prepare covered items solely for their own use or that of their patients. The term also does not include distributors or wholesalers (including repackagers, relabelers and kit assemblers) that do not take title to the product.
The term “applicable manufacturer” also includes entities under common ownership with the entities described above, which provide 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. For example, this includes entities that manufacture ingredients, but does not include entities that provide solely human resources functions. Common ownership for this purpose is five percent or greater ownership.
A “covered” drug, device, biological or medical supply is such an item for which coverage is available under Medicare, Medicaid or CHIP. This includes coverage in bundled payments, such as implantables covered under IPPS and drugs covered under the ESRD composite rate.
A “drug” or “biological” is a drug or biological that by law requires a prescription to dispense. The intention of CMS was to exclude over the counter (“OTC”) drugs. A “device,” including a medical supply that is a “device,” is a device that requires clearance under the FDA premarket notification process or approval under the FDA’s Premarket Approval process. CMS’s intention was to exclude items that can be marketed without a premarket notification or approval, such as ACE bandages and other low risk devices.
What Must Be Reported?
Reportable payments are payments and transfers of value made, directly or indirectly, by applicable manufacturers to physicians and teaching hospitals. “Physicians” are physicians, osteopaths, dentists, podiatrists, optometrists, and chiropractors. “Teaching hospitals” are hospitals that received Medicare payment for graduate medical education during the last calendar year for which such information is available. CMS will periodically publish a list of teaching hospitals for purposes of the sunshine rule. Physicians and teaching hospitals are referred to in the rule as “covered recipients.”
Payments and Transfers
It is important to note that all payments to covered recipients must be reported, not just payments in respect of covered drug, devices, biological or medical supplies, subject to the limitations mentioned below. In general, direct and indirect payments and transfers of value by applicable manufacturers to covered recipients must be reported. Also, direct and indirect payments by applicable manufacturers to third parties on behalf of covered recipients must be reported. An example of this is payment to a charity at the request of a physician.
Indirect payments and transfers of value are payments made by an applicable manufacturer to a covered recipient through a third party, where the applicable manufacturer directs that the payment be made to the covered recipient. These include payments made through sales representative and distributers.
Limitations on reporting apply in some circumstances. First, applicable manufacturers for whom total (gross) revenue from covered drugs, devices, biological or medical supplies constituted less than 10 percent of total (gross) revenue during the fiscal year preceding the reporting year are only required to report payments or other transfers of value that are related to one or more covered drugs, devices, biological or medical supplies.
Second, entities that are applicable manufacturers only by virtue of supporting or assisting other applicable manufacturers are only required to report payments and transfers of value that are related to a drug, device, biological, or medical supply for which they provided support or assistance.
Third, applicable manufacturers that have divisions that do not manufacture any covered drugs, devices, biological or medical supplies (for example, animal health divisions) are only required to report payments by these separate divisions that relate to covered drugs, devices, biological or medical supplies.
Fourth, applicable manufacturers that only manufacture covered drugs, devices, biological or medical supplies under contract, and that neither hold the FDA approval, licensure or clearance nor are involved in the sale, marketing, or distribution of the item, are only required to report payments or other transfers of value that are related to one or more covered drugs, devices, biological or medical supplies.
Other Information That Must Be Reported
The following information must be reported regarding payments and other transfers of value that are required to be reported, in a format that will be specified by CMS:
- Name and address of covered recipient;
- In the case of physicians, certain physician identifiers;
- Amount of payment or other transfer of value;
- Date of payment or transfer of value (in some cases a stream of payments may be aggregated and reported as of the date of the first payment);
- Form of payment or transfer of value (i.e., cash or cash equivalent, in kind items or services, ownership interests, returns on investment); and
- Nature of payment or transfer of value (e.g. consulting fee, compensation for services other than consulting, honoraria, gift, entertainment, food and beverage, travel and lodging, and other categories listed in the rule).
Do Payments for Research, Continuing Education, and Food and Beverage Have to Be Reported?
Research, continuing education, and food and beverage payments are subject to special reporting rules. Research payments must be reported but the information required to be reported differs from that described above.
Payments or transfers of value for speaking at continuing education programs are not required to be reported if all of the following conditions are met: (i) the event meets the accreditation or certification requirements of one of several bodies enumerated in the rule; (ii) the applicable manufacturer does not pay the speaker directly; and (iii) the applicable manufacturer does not select the speaker or provide a list of individuals from whom the speaker is to be selected. Payments for continuing education that do not meet all of these requirements must be reported, but the information required to be reported differs from that set forth above, as in the case of research payments.
Payments for food and beverage, where the cost of each covered recipient’s meal and beverage is not readily identifiable, must be allocated by dividing the total cost of the food and beverage over the total number of persons who partook in the meal, and reporting the result for each covered recipient.
What Types of Payments Do Not Need to Be Reported?
The final rule sets forth several exclusions from the reporting requirements for payments to covered recipients. These are as follows:
- Indirect payments where the applicable manufacturer is unaware of the identity of the covered recipient;
- Payments or other transfers of value of less than $10 for CY2013 (indexed for inflation for subsequent years), unless the aggregate value of the payments exceeds $100 for the covered recipient (indexed for inflation for subsequent years);
- Payments or other transfers of value of less than $10 in CY2013 (indexed for inflation for subsequent years) at large scale conferences, even if the aggregate total for a covered recipient exceeds $100 (indexed for inflation for subsequent years);
- Product samples and vouchers that can be used by patients to obtain product samples;
- Educational materials that directly benefit patients or are used with patients (for example, anatomical models used with patients);
- Short term loans of devices to permit evaluation;
- Items provided under a contractual warranty;
- Discounts, including rebates; and
- In-kind items used for the provision of charity care.
The final rule also contains certain technical exceptions of relatively narrow application.
Reports of Physician Ownership and Investment Interests
The final rule also requires, in general, that each “applicable manufacturer” and each “applicable group purchasing organization” report ownership or investment interests held by a physician or immediate family member of a physician during the preceding year. An “applicable group purchasing organization” is an entity that: (i) operates in the United States; and (ii) purchases, arranges for or negotiates the purchase of a covered drug, device, biological or medical supply not solely for the use of the entity itself.
Although the reach of the rule is broader, the preamble to the rule makes it clear that the rule is primarily directed at physician owned distributorships. The rule requires specific identifying information to be reported. For CY2013, only ownership or investment interests held on or after August 1, 2013 need be reported. In general, ownership and investment interests in publicly traded companies do not have to be reported. The information required to be reported includes payments and return on investments, and generally is the same as that required for payments and transfers of value by applicable manufacturers to physicians, discussed above.
Procedure for Reporting; Publication by CMS
Entities that have data to report are required to register with CMS within 90 days of the end of a calendar year for which a report is required. Consolidated reports are permitted for applicable manufacturers under common control, but not required. Payments need not be reported more than once. Applicable manufacturers and applicable group purchasing organizations are permitted to file assumptions documents, which are not to become public. The final rule also provides a 45-day period for review, but this period does not extend the timetable for making the information public. As noted above, initial reporting is required by March 31, 2014.
Covered recipients may notify CMS of disputes. A period is provided for resolution of disputes.
CMS makes the reported information publically available on its web site. Disputes that are not resolved are noted in the data publication. A process is also provided for error correction.
More importantly, a process is provided for delayed publication of payments made under product research or development agreements and clinical investigations. This process is available in the following instances: (i) research on or development of a new drug, device, biological or medical supply, or a new application of an existing drug, device, biological or medical supply; (ii) clinical investigations regarding a new drug, device, biological or medical supply. A written agreement, research protocol or both is required for the delayed reporting to apply.
An applicable manufacturer must request delayed reporting from CMS. A manufacturer must also notify CMS of FDA approval. Failure to do so may be considered a violation of reporting requirements. Nevertheless, this provision (which also refers to a FOIA exception), affords some trade secrets protection to information required to be reported.
Penalties for Failure to Report
The final rule imposes rather severe penalties for failure to report. In general, each failure to report is subject to a civil monetary penalty of up to $10,000, up to a maximum of $150,000 per year, unless the failure was knowing. Where the failure was knowing, the penalty is up to $100,000 for each failure to report, not to exceed $1,000,000.
In general, the statute and final rule preempt similar state sunshine laws. This is intended to diminish the problem of a patchwork or multiplicity of sunshine laws with which compliance is required. Nevertheless, preemption issues will need to be addressed carefully on a state by state basis to make an informed determination as to what reporting requirements are preempted.
In summary, the final sunshine rule fills in many gaps and makes CMS’s handling of the many issues in the Affordable Care Act’s sunshine provisions more clear. This Alert provides an overview of the final rule and CMS’s handling of the sunshine law. However, there are many nuances that necessarily could not be covered in this Alert and matters of interpretation under the final rule. Interested persons should consult counsel regarding specific questions under the rule.