The first two-plus months of tracking payments under the Physician Payment Sunshine Act are now in the rearview mirror. Though novel questions continue to arise (albeit with less frequency), CMS has attempted to keep up, offering additional FAQs. Several of the more recent FAQs are of particular interest to medical device manufacturers.
In its latest round of FAQs, CMS responded to a question regarding whether free repairs or services on devices, or additional training, would be excluded from reporting based on the contractual warranty exclusion, at 42 C.F.R. § 403.904(i)(6). CMS noted that the warranty exclusion is applicable if the transfer of value in question is provided for in the terms of the original service or lease agreement. This response raises a tricky question in situations where a sales rep provides service on a device as part of a routine sales call, where the warranty on the product has expired. In the preamble, CMS agreed with comments suggesting that post-warranty services, and other types of services provided under service or maintenance agreements, should be deemed to fall within the warranty exclusion. That accommodation, while certainly helpful, does not address the case of services provided by a sales rep where no warranty or service agreement existed. Because such services are generally considered to be within the ambit of the sale rep’s job responsibilities, does that mean that CMS would consider such activities to also fall within the warranty exclusion as discussed in the preamble? Even after five rounds of FAQs, it is unclear whether CMS would consider that a reportable transfer of value has occurred in such a situation.
Two FAQs regarding the definition of “applicable manufacturer” reinforce the broad scope of the Sunshine Act. One questioner inquired whether payments were reportable where payment for a company’s products sold to hospitals and ambulatory surgery centers is limited to commercial insurance and private payor only. CMS noted that the operative question is whether payment is AVAILABLE under Medicare, Medicaid, or CHIP (Children’s Health Insurance Program). Accordingly, CMS appears to take the position that payments are reportable if the product is theoretically reimbursable under Federal health care programs, regardless of whether reimbursement actually occurs, and even if Federal health care program beneficiaries are expressly carved out of a business model. The implications of this breadth are underscored by another FAQ, which reiterates CMS’s position in the preamble to the Final Rule that if a single product is covered, then all of a company’s payments are reportable, regardless of whether they are related to the covered product.
CMS has stated that manufacturers should include the cost of journal reprints as a reportable payment, and should calculate the value based on the cost paid to acquire the reprint from the publisher or distributor divided by the number of recipients. While this is fairly straightforward, this FAQ raises additional questions. First, does this mean that materials that do not have an associated acquisition cost, such as brochures, are not reportable? That would seem to be a fair interpretation, except that in the preamble CMS clarified that it considered items provided to physicians (such as textbooks and wall charts) to be reportable unless there was a clear downstream benefit to patients. That logic suggests that brochures, even if very inexpensive to produce, would nonetheless be reportable. CMS stated in the same FAQ covering reprints that companies can use their assumptions document to explain the method of calculating costs associated with such items. In the absence of a de minimis exception for brochures, however, it seems likely that companies will have to track this cost and report if the total payments to a brochure recipient exceeds the overall $10 annual de minimis threshold.
Related to the issues around reprints and educational brochures, the Washington Legal Foundation is continuing to push CMS regarding its conclusion that textbooks, reprints, and other educational materials are reportable, on the ground that the free distribution of these items enjoys constitutional protection. WLF stated in a letter to CMS (here) that if the Sunshine Act resulted in a reduction of the number of textbooks, reprints, and the like provided to physicians by manufacturers, they would likely file suit. No suit has yet been filed, and WLF may well wait until data is available to support its contention that Sunshine will chill dissemination of educational materials, but with no sign from CMS that it is willing to treat educational materials differently from other transfers of value, such a suit would seem inevitable.