What to Expect in 2015: An Overview of Potential Pharmaceutical Regulatory, Policy and Enforcement Developments January 2015 arnoldporter.com1 What to Expect in 2015: An Overview of Potential Pharmaceutical Regulatory, Policy and Enforcement Developments January 2015 Although the pharmaceutical industry has faced a rapid pace of regulatory and enforcement change in recent years, 2015 promises to be another year of important developments, some of which may have a profound impact on industry economics, responsibilities and practices, as well as the regulatory framework applicable to drug and biologic development. This Advisory is intended to assist our clients and friends by anticipating some of the more important and likely areas of change in the coming year relating to enforcement, payment policy, and Food and Drug Administration regulation. Centers for Medicare and Medicaid Services Medicare Accountable Care Organization Changes Accountable Care Organizations (ACOs), which hold out the promise of reducing costs and improving quality by introducing some aspects of managed care into the original, fee-for-service Medicare program, have grown to be one of Medicare’s major service delivery innovations. First introduced in Medicare in 2012, the number of ACOs participating in Medicare has grown significantly; more than 360 ACOs serve 5.6 million Medicare beneficiaries. Over 300 ACOs participate in the Medicare Shared Savings Program (MSSP), while a small group of “Pioneer” ACOs, which were generally further developed at start, are assume greater risk and may receive greater rewards. ACOs are intended to improve quality and reduce Medicare spending growth in relation to prior spending for the beneficiaries aligned with each ACO. If quality results are satisfactory and the ACO manages to reduce spending growth (beyond a minimum threshold level of savings), the ACO can receive a share of Medicare’s savings. CMS has disclosed mixed results from the early years of ACO operations. CMS recently reported that in the most recent year, “the ACOs improved significantly for almost all the quality and patient experience measures demonstrating that these organizations improve care.”1 The Medicare ACOs as a group reduced Medicare spending, qualifying for $460 million in shared savings and yielding Medicare net savings of $416 million. Although quality improvement appeared to be widespread, however, only a fraction of ACOs achieved savings. 1 CMS Fact Sheet, “Medicare ACOs continue to succeed in improving care, lowering cost growth,” accessible at http://www.cms.gov/Newsroom/Search-Results/index.html?filter=Fact%20Sheets 2 In the MSSP, in Year 1, the participating ACOs generally improved quality scores as captured in 33 measures. Fifty-six ACOs, or about a quarter of those participating in that period, held cost of care below targets sufficiently to qualify for shared savings. An additional quarter of the MSSP ACOs achieved some savings, but did not meet the minimum savings thresholds and hence did not receive, for this period, a share of savings. While such an outcome might be expected because both the MSSP program and many of the participating ACOs are in “early days,” some ACOs may continue to have difficulty achieving significant savings and hence, without seeing financial returns on their investments in ACO operations, they may grow discouraged and abandon the program. ACOs participating in the second year of the Pioneer program generally achieved improvements in quality of care. Eleven of ACOs achieved shared savings, while 3 experienced losses. The number of ACOs participating in the Pioneer program fell from 27 in year 1 to 23 in year 2 to 17 today. Since these ACOs were the more sophisticated and better prepared organizations at the commencement of Medicare’s implementation of ACOs, this development appears to cast some doubt on the viability of the specific ACO-program parameters CMS applied to these organizations. CMS is working actively to improve its ACO program.2 It is also shifting parameters, including changing the quality measures: in a recent final rule, CMS revised the set of measures, adding 8 and removing the same number, so for the 2015 reporting period ACOs will be subject to a somewhat more evolved set than in 2014.3 Further, on December 1, 2014, CMS issued a proposed rule that would change, if adopted, certain aspects of the ACO program in the future. Among other proposals, continuing ACOs would not be required to move toward assumption of risk for losses as quickly as a present. These changes appear aimed at facilitating continued participation of ACOs in Medicare, while still incentivizing ACOs to improve performance and gradually increase their assumption of risk. CMS remains upbeat about the future of ACOs as both the agency and the ACOs gain experience.4 Meanwhile, ACO have also been emerging in the private sector to serve those with private insurance (though these ACOs may differ substantially from Medicare’s models). The next couple of years promise to be a period of continuing trial for ACOs. While observers are unlikely to be able to declare either “success” or “failure” of this concept in some global sense, ongoing evolution of the models and of individual ACOs appears certain. As ongoing ACOs develop further, with more sophisticated care 2 See H. H. Pham, M. Cohen, and P. H. Conway, “ The Pioneer Accountable Care Organization Model: Improving Quality and Lowering costs,” JAMA 312: 1635-36 (October 22/29, 2014). 3 Final rule updating the Physician Fee Schedule for CY 2014 (76 Fed. Reg. 67547, 67907 - 67931; November 13, 2014). 4 Pham, et al.3 protocols and fuller coordination of various providers, they are likely to affect utilization patterns for pharmaceuticals, devices, and diagnostics, thus continuing to shift the landscape for supplier industries CMS’ Recent Invitation to Provide Additional Input on the ACO Fraud and Abuse Waivers The ACA provision authorizing MSSP ACOs permits HHS to waive requirements of the Medicare statute and the fraud and abuse laws in Social Security Act 1128A and 1128B “as may be necessary to carry out” the MSSP.5 In October 2011, CMS and the HHS office of Inspector General (OIG) jointly issued an interim final rule waiving these fraud and laws in circumstances where CMS and OIG felt they would otherwise prohibit or impede development and operation of MSSP ACOs.6 The ACO waivers in the CMS/OIG interim final rule address the Stark physician self-referral law, the anti-kickback statute, the civil monetary penalties (CMP) provision prohibiting hospital payments to induce a physician to reduce or limit care to a Medicare or Medicaid beneficiary (the gainsharing CMP), and the CMP provision prohibiting inducements to a Medicare or Medicaid beneficiary likely to influence the beneficiary’s choice of a provider, practitioner or supplier (the beneficiary inducements CMP). The interim final rule waives these laws for MSSP ACOs in five circumstances. The waivers are complicated and not always 100% clear, but involve the following: An “ACO pre-participation” waiver of the Stark law, the antikickback statute, and the Gainsharing CMP that applies to ACO-related start-up arrangements in anticipation of participating in the MSSP, Shared Savings Program, subject to certain limitations (among other things, the wwaiver “does not cover arrangements involving drug and device manufacturers”)7; An “ACO participation” waiver of the Stark Law, the antikickback statute, and the gainsharing CMP that applies broadly to certain arrangements “of an ACO, one or more of its ACO participants, or its ACO providers/suppliers, or a 5 Social Security Act § 1899(f). 6 76 Fed. Reg. 67992 (Oct. 20, 2011); 76 Fed. Reg. 67802 (Oct. 20, 2011). 7 76 Fed. Reg. at 68002.4 combination therof”8 during the term of the ACO’s participation agreement and for a specified period afterward; A “shared savings distributions” waiver of the Stark law, antikickback statute, and gainsharing CMP that applies to distributions and uses of shared savings payments; A “compliance with the Stark law” waiver of the gainsharing CMP and the anti-kickback statute for ACO arrangements that implicate the Stark law and meet an existing exception; and A “patient incentive” waiver of the beneficiary inducements CMP and the anti-kickback statute for medically related incentives offered by ACOs to beneficiaries to encourage “preventive care, adherence to treatment, drug, or follow-up care regimes, or management of a chronic disease or condition”; the waiver does not cover manufacturers’ provision of free or discounted items or services to beneficiaries, ACOs, or ACO participants or providers/suppliers.9 CMS published a notice in October 2014 that extended the ACO waivers to prevent them from expiring10 (as CMS is ordinarily required to finalize Medicare interim final rules within three years). In the notice, CMS also invited further comment on the waivers, stating that:“We also believe that we would benefit from additional input from stakeholders to inform our understanding of —(1) how and to what extent ACOs are using the waivers; (2) whether the existing waivers serve the needs of ACOs and the Medicare program; (3) whether the waivers adequately protect the Medicare program and beneficiaries from the types of harms associated with referral payments or payments to reduce or limit services; and (4) whether there are new or changed considerations that should inform the development of additional notice and comment rulemaking.”11 CMS did not mention a date for submitting additional input on the waivers. 8 76 Fed. Reg. at 68000. 9 76 Fed. Reg. at 68007. 10 79 Fed. Reg. 62356 (Oct. 17, 2014). 11 79 Fed. Reg. at 82357.5 Innovation Center Initiatives The Affordable Care Act established within CMS the Center for Medicare and Medicaid Innovation (CMMI) to test payment and delivery models with the potential to reduce costs and preserve or enhance the quality of care.12 CMMI of two phases. CMMI models are tested in Phase I and then, if certain criteria are met, may be expanded in duration and scope (via rulemaking) in Phase II.13 CMMI has been very active over the past year. Among other things, CMMI recently issued a Request for Information (RFI) seeking stakeholder input on various “health plan innovation initiatives,” including valuebased insurance design (VBID), “beneficiary and provider incentives,” and network design in Medicare Part D and Medicare Advantage plans (plus Medicaid MCO, Medigap, and retiree supplemental health plans).14 In addition to VBID, CMMI asked specifically about “robust” medication therapy management (MTM) models that could include features such as beneficiary or provider incentives, performance-based payment, and expanded beneficiary eligibility for MTM. Earlier in the year, CMMI issued an RFI on specialty care models, separate from oncology models.15 This RFI discussed two payment concepts: (1) “procedural episode-based payment opportunities” for outpatient surgeries and (2) “complex and chronic disease management episode-based payment opportunities.” In an August design paper, CMMI stated that it was developing an Oncology Care Model (OCM), as it has identified cancer care (particularly chemotherapy) as an area where care could be improved and spending reduced.16 OCM would involve a chemotherapy episode-based payment model, with an episode defined as six months after chemotherapy initiation. The payment model CMMI envisions for OCM is not entirely clear (participants would receive several types of payments, including ordinary fee-for-service payments), but the model sounds most like a shared savings model. CMMI could be moving forward with any or all of these models over the next year, and will also be continuing to test its ongoing “Bundled Payment for Care Improvement” models, which involve bundled payments for episodes of care focused around certain inpatient hospital stays, and its Pioneer ACOs. 12 SSA § 1115A(a)(1). 13 To test models in Phase I, CMMI has authority to waive a variety of otherwise-applicable statutory requirements, including any provisions in the Medicare statute or in the “fraud, waste, and abuse” provisions in title XI of the Social Security Act. Social Security Act § 1115A(d)(1). 14 Request for Information, CMMI (Oct. 2, 2014). 15 Request for Information, CMMI (Feb.1, 2014). 16 Preliminary design for an oncology-focused model, CMMI (Aug. 12, 2014).6 Part B Payment for Biosimilars and Reference Biologicals Biosimilar payment policy was not part of CMS’ 2014 agenda but will be part of the agenda for 2015. The Medicare Part B payment formula for biosimilars and reference biologics administered in the physician office setting was established by ACA. Biosimilars are to be paid 100% of their own Average Sales Price (ASP) plus 6% of the reference biological’s ASP.17 (This formula applies to all biosimilars, including interchangeable biosimilars.) The statutory wording indicates that the reference biological’s payment will continue to be 106% of its own ASP, not an ASP blended with the biosimilar’s ASP; thus, the payment scheme is not analogous to payments for multi-source drugs, where the brand are generic are both paid at 106% of a blended ASP. CMS issued implementing regulations, which closely track the statutory language, in 2010.18 This payment scheme provides a higher percentage margin on biosimilars than on the reference biological (assuming the biosimilar has a is lower ASP), but may not create strong incentives for physicians to reduce utilization of reference biologicals, since they would still be paid 106% of their own ASP. As a result, CMS may face pressure to “reinterpret” the physician’s office payment scheme once biosimilars enter the marketplace. The area where the law gives CMS more discretion--and where we expect CMS will be developing payment policy in 2015 -- is the hospital outpatient prospective payment system (OPPS). There are several reasons why CMS has considerable discretion over OPPS drug payments, including a provision broadly authorizing CMS to adjust otherwise--applicable OPPS payments when “necessary to ensure equitable payments.”19 In addition, there is a large category of drugs (specifically, drugs other than “Specified Covered Outpatient Drugs,” aka “non-SCODs”) that are not subject to any statutory payment formula in the first place.20 This category includes all drugs except radiopharmaceuticals and drugs that received OPPS pass-through payments before 200321 -- i.e., all drugs launched after 2002 except radiopharmaceuticals. If CMS faces pressure to maximize savings for Medicare from the introduction of biosimilars (as seems likely), OPPS will be a key area to watch. 17 Social Security Act § 1847A(b)(8). This payment rate, like the reference biological’s payment rate, will be adjusted for sequestration (i.e., the government’s 80% share of the Medicare allowed payment is reduced by 2% and the beneficiary’s 20% share is not reduced). 18 See 42 C.F.R. § 414.902 (defining “biological biosimilar product” and “reference biological”), § 414.904(j) (setting out “biosimilar biological” payment formula). 19 Social Security Act § 1833(t)(2)(E). 20 More specifically, the “non-SCODs” are not subject to any statutory payment formula after any pass-through period for which they may qualify. 21 Social Security Act § 1833(t)(14)(B)(i) (defining SCOD as a radiopharmaceutical or a drug that received passthrough payments before 2003). 7 CMS-Medicaid Initiatives to Restrict Coverage/Cut Payments for High Cost Drugs In an October 28, 2014 letter to Congressional leaders, the National Association of Medicaid Directors (NAMD) sought to start the Congressional debate about drug costs -- including price controls for high-cost drugs to treat diseases prevalent among Medicaid beneficiaries. While focusing on pricing for Hepatitis C drugs, NAMD emphasized that those issues represent “a new frontier for specialty drugs, which are anticipated to enter the market in the near future at increasingly high price points.” Less than a week later, control of the Senate shifted and the Republican majority in the House increased. As a result, the momentum for drug price controls has slowed -- at least in Congress. At the State Medicaid program level, though, initiatives to curb drug costs show no sign of abating, but the emphasis is largely on restricting utilization of high-cost drugs, rather than cutting Medicaid’s net payment rates for these drugs. Over the past year, State Medicaid programs have routinely been adopting coverage limits that appear to violate the Medicaid rebate statute’s requirement that States cover drugs of manufacturers with rebate agreements for FDA-approved and certain off-label uses.22 However, the rebate statute allows prior authorization for any drug (provided States respond to prior authorization requests within 24 hours and authorize a 72-hour supply in an emergency23), and the prior authorization provision apparently is being interpreted as overriding the statute’s coverage requirements. This seemingly obscure interpretive issue is central to drug coverage under the Medicaid program, which now covers almost 67.9 million Americans.24 It determines whether manufacturers get access to the Medicaid market by paying Medicaid rebates: the original bargain underlying the rebate statute. As coverage limits have grown, particularly over the past year,25 CMS has not weighed in on this issue. 22 Under the Medicaid rebate statute, State Medicaid programs generally must cover drugs of manufacturers with Medicaid rebate agreements for FDA-approved indications plus uses supported by certain compendia. 42 U.S.C. 1396r-8(d), (k)(6). See More Medicine Goes Off Limits in U.S. Drug Pricing Showdown, 22 Health Care Policy Report 1858 (Nov. 25, 2014) (reporting that, among 42 State Medicaid programs, 27 pay for Sovaldi only for people with severe liver damage and others also impose coverage limitations for patients with recent substance abuse problems). 23 42 U.S.C. § 1396r-8(d)(1)(A), (5). 24 Kaiser Family Foundation Recent, Trends In Medicaid and CHIP Enrollment: Analysis of CMS Performance Measure Data Through August 2014 (Oct. 28, 2014)(citing Medicaid and CHIP enrollment of 67.9 million as of August 2014). 25 For example, in a recent survey 22 States reported that new clinical prior authorization criteria were already in place or under development to address concerns about new and emerging specialty drugs. Medicaid in an Era of Health and Delivery System Reform: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2014 and 2015, Kaiser Family Foundation (Oct. 2014). 8 While this seems surprising given CMS’ role as the Federal overseer of Medicaid, it appears that States have not been submitting proposed Medicaid State Plan Amendments reflecting the HCV drug coverage restrictions,26 which may have enabled CMS to avoid taking a position, at least publicly. At some point, perhaps over the coming year, CMS may have to speak up on this issue. Among other things, beneficiary lawsuits challenging coverage restrictions are predicted.27 This issue should be watched, because it is an important factor shaping the drug access landscape that goes beyond any particular product. Medicaid Expansion The Affordable Care Act provides for expansion of State Medicaid programs to families and individuals with incomes up to 138 percent of the Federal poverty line.28 Until 2017, the Federal government will pick up the whole tab for this expansion; after that time, the States will be responsible for a share, rising to 10 percent over four years, of the outlays attributable to the expansion population.29 The Supreme Court in June 2012 interpreted the statute to give States the option of choosing whether to expand or not, and by January 2015, 27 States and the District of Columbia have chosen expansion,30 four with the help of waivers permitting expansion programs with various innovative features. One of the major reasons cited for the reluctance of State governments to sign on to the ACA expansion is that even a 10 percent state match would strain future budgets. In addition, expanding eligibility to parents above prior eligibility levels to childless adults has elicited opposition. However, since subsidies provided under ACA to assist with purchase of insurance through the Exchanges31 are not available for 26 States must submit SPAs for CMS approval whenever necessary to reflect, among other things, “material changes in State law . . . or policy, or in the State’s operation of the Medicaid program.” 42. C.F.R. § 430.12(c)(2). CMS also must review and approve all Medicaid MCO contracts, which therefore could be another route for drug coverage restrictions to come before CMS for review. Id. § 438.6(a). 27 Hep C Patients Consider Suing States That Restrict Sovaldi Coverage, FDA Week (Aug. 7, 2014). 28 The expansion, in section 2001 of the Patient Protection and Affordable Care Act of 2010, is stated in terms of 133 percent of the Federal poverty line. However, a further amendment, in section 1004(e) of the Health Care and Education Reconciliation Act of 2010, in effect adds an additional 5 percentage points, resulting in an effective income ceiling for the expansion provision of 138 percent of the Federal poverty line. 29 This provision is more generous than the matching requirement for the balance of the Medicaid program, which requires states to pay for between 50 and 74 percent of Medicaid outlays. 30 The Kaiser Family Foundation provides up-to-date information on ACA and related expansions at http://kff.org/medicaid/ 31 These subsidies are the subject of a case, King v. Burwell, that will be decided by the Supreme Court later this year.9 individuals with incomes of less than 100 percent of the poverty level, the number of uninsured individuals in non-electing States will remain higher than estimated at time of passage of the ACA. The amounts that flow to providers serving those newly covered by Medicaid are substantial, and in nonelecting States providers such as hospitals have been prominent among those urging their States to expand. In the wake of the mid-term elections, additional States may move to expand Medicaid, though some may attempt an alternative to the ACA solution. Several States, including Arkansas, Iowa, and Pennsylvania, have secured the approval of the Department of Health and Human Services (HHS) under its demonstration authority to operate alternative models that involve some form of subsidies for individuals to purchase private insurance with Medicaid funds. Michigan is implementing an alternative demonstration model relying on managed care organizations. Several other states are reported to have applications for demonstrations in various stages of development. As of this writing, the governors of Tennessee, Wyoming, and Utah, though not officially endorsing ACA expansion, are exploring ways to tap Federal funding to cover their uninsured populations. Tennessee’s proposal, still pending approval of the legislature, is particularly interesting because the hospital industry has reportedly agreed to fund the additional State obligations that will be required starting in 2017, as discussed above. Hospitals, which face an unfunded mandate to serve the many uninsured patients under the Emergency Medical Treatment and Labor Act, are one of the principal beneficiaries of expanded coverage of the uninsured. Secretary of HHS Sylvia Burwell has indicated a strong interest in entertaining State proposals for expansion. The Obama Administration in its last two years in office may be willing to be more flexible that previously in assisting state efforts to expand. It is likely to regard expansion by whatever route as desirable in itself, and, motivated by the theory that once an expansion has occurred it is difficult to reverse even if political winds change, may be prepared to bend extra efforts to enable expansions before the next election. While Medicaid expansions can help improve the ability to pay for care, the ability of Medicaid beneficiaries to access care may be challenged to some degree because of expiration of another ACA provision. The ACA provided significant increases in Medicaid payment rates for primary care services during 2013 and 2014, but this provision expired at the start of 2015. Payment rates will likely fall to rates closer to those in 2012, which were viewed as inadequate by the authors of the ACA. 10 Researchers at the Urban Institute estimated that the expiration of the “primary care fee bump” would lead to an average reduction of fees for primary care services of over 40 percent.32 The last Congress did not accept President Obama’s proposal to extend the increases, and the new Congress does not seem likely to be any more receptive. Observers have expressed concern that, even though the fee increase was understood when enacted to be temporary, its removal will lead to increased access problems as Medicaid beneficiaries, including those newly eligible, seek care from physicians who are reluctant to serve them at low fee levels. Medicaid MCO Changes Today over half of Medicaid beneficiaries are enrolled in managed care.33 Federal regulations issued in 2002 govern key Medicaid managed care issues, including patient protections, network adequacy requirements, and grievance and appeal procedures.34 Since these regulations were issued, the Medicaid MCO populations has grown in size and changed in character. Growth has been driven by several factors, including budget pressures facing States, the fact that ACA subjected Medicaid MCO utilization to Medicaid rebates (thus eliminating the incentive for States to carve drugs out of Medicaid MCO contracts), and Medicaid expansion. In September 2014, the HHS Office of Inspector General (OIG) released a highly critical report on Medicaid managed care access.35 OIG found that MCO requirements vary widely across States (e.g., fourteen States did not have network adequacy standards for specialists), and recommended that CMS: “(1) strengthen its oversight of State standards and ensure that States develop standards for key providers, (2) strengthen its oversight of States’ methods to assess plan compliance and ensure that States conduct direct tests of [network] access standards [e.g. “mystery shopper” calls to providers ostensibly accepting Medicaid patients], (3) improve States’ efforts to identify and address violations of access standards, and (4) provide technical assistance and share effective practices.” 32 See Stephen Zuckerman et al., “Reversing the Medicaid Fee Bump: How Much Could Medicaid Physician Fees for Primary Care Fall in 2015?” Urban Institute, December 2014. Accessible at http://www.urban.org/health_policy/url.cfm?ID=2000025 33 Request for Information, CMMI (Oct. 2, 2014) (“Fifty-one percent of Medicaid beneficiaries are enrolled in comprehensive risk-based managed care plans”); Sarah Somers, Medicare Managed Care: Modernized Federal Regulations are Long Overdue, Health Advocate (Sept. 2014). 34 42 C.F.R. Part 438. 35 State Standards for Access to Care in Medicaid Managed Care, HHS OIG (Sept. 2014), http://oig.hhs.gov/oei/reports/oei-02-11-00320.pdf.11 In a companion report issued in December, OIG found that (among providers listed as participating in Medicaid MCOs) over half could not offer appointments to enrollees, 35% could not be found at the location listed by the plan,” 8% said they were not participating in the plan, and another 8% were not accepting new patients.36 Of providers offering appointments, OIG found that over a quarter had wait times of over 1 month. OIG recommended that CMS work with States to assess the number of providers offering appointments, ensure that plan networks meet enrollee needs, ensure that plans are complying with existing standards, and assess whether additional standards are needed. Currently, CMS is updating the Medicaid MCO regulations for the first time in twelve years.37 CMS officials have said that changes will include efforts to align the Medicaid MCO regulations with other public programs to facilitate movement between programs.38 The extent to which CMS will strengthen Medicaid MCO network adequacy requirements to respond to the OIG reports is unclear -- States can be expected to fight new limits on their discretion, and the National Association of Medicaid Directors has urged CMS to avoid uniformity, citing the diversity of States and their Medicaid populations39 -- but CMS agreed with all the recommendations in the two OIG reports. The Medicaid Rebate Final Rule A CMS proposed rule on Medicaid rebates published in February 2012 had several high-profile elements: a major change in the Average Manufacturer Price calculation methodology; a broad interpretation of the “line extension” drugs subject to higher rebates than other branded drugs; and an expansion of the rebate program to Puerto Rico and the Territories.40 Since that time, many dates predicted for issuance of a final rebate rule have come and gone. The currently predicted date (which comes from the Regulatory Agenda on the OMB Office of Information and Regulatory Affairs website) is April 2015. This date appears realistic, but further delay could occur. 36 Access to Care: Provider Availability in Medicaid Managed Care, HHS OIG (Dec. 2014), https://oig.hhs.gov/oei/reports/oei-02-13-00670.pdf. 37 Regulatory Agenda, Office of Management and Budget, Office of Information and Regulatory Affairs, RIN 0938- AS25 (CMS-2390-P) (“This proposed rule would align Medicaid Managed Care regulations with existing commercial, Marketplace, and Medicare Advantage regulations.”). 38 CMS Offers Hints On How It May Update Medicaid Managed Care Regs Next Year, Inside Health Policy (Oct. 29, 2014). 39 Letter to Cindy Mann, Director, Center for Medicaid and CHIP Services, from Darin Gordin, TennCare Director and Thomas Betlach, Arizona Health Care Cost (Oct. 20, 2014), available at http://medicaiddirectors.org/sites/medicaiddirectors.org/files/public/namd_mmc_quality_improvement_proposals_10_2 0_14.pdf. 40 77 Fed. Reg. 5318 (Feb. 2, 2012). 12 Exchanges Drug Benefits Following a notoriously rocky start, the Exchanges enrolled an estimated 6.7 million individuals in health plans in 2014, with enrollment above 9 million expected for 2015. For 2014, the drug benefits provided by Exchange plans have surprised many observers by their high co-insurance rates for many branded drugs, and in some cases by imposing high coinsurance rates on all drugs to treat conditions like HIV/AIDS,41 prompting the AIDS Institute and the National Health Law Program to file a complaint with the HHS Office of Civil Rights.42 Initial reports on drug coinsurance rates offered by Exchanges plans for 2015 suggest that coinsurance rates for specialty drugs are increasing. 43 CMS has recognized these problems and proposed some changes -- for 2016/2017 -- in a recent proposed rule.44 Specifically: CMS would replace the current drug coverage standards for Essential Health Benefit (EHB) plans (which require that, in each USP Model Guidelines category and class, plans must cover at least the same number of drugs as the State’s EHB benchmark plan (or one drug, if the benchmark plan covers zero drugs in a class)). The replacement would be a requirement for a P&T committee that operates according to Part D-like standards, which apparently would make binding decisions on which drugs to include on formulary and recommendations to the plan on their tiering. The P&T committee would be required to ensure (among other things) that the plan’s formulary “does not substantially discourage enrollment by any group of enrollees” and “provide[s] appropriate access to drugs that are included in broadly accepted treatment guidelines.” (But States would generally oversee and enforce the P&T committee standards.) “As an alternative to, or in combination with,” the P&T committee approach, CMS “is considering whether to replace the USP standard with a standard based on the American Hospital Formulary Service (AHFS) [drug classification system].” If CMS adopted AHFSbased minimum coverage standards, it would “require at least the greater of one drug in 41 See, e.g., Avalere Health, An Analysis of Exchange Plan Benefits for Certain Medicines (June 2014). 42 See www.healthlaw.org/publications/browse-all…/HHS-HIV-Complaint. The complaint is still under review at HHS but has led to a consent order between the Florida Office of Insurance Regulation and one of the insurers named in the complaint (CIGNA). 43 Avalere Health, Exchange Plans Increase Costs of Specialty Drugs for Patients in 2015 (Dec. 2, 2014). 44 79 Fed. Reg. 70674 (Nov. 26, 2014).13 each AHFS class and subclass or the same number of drugs in each AHFS class and subclass as the state’s EHB-benchmark plan.” CMS would improve the process for patients to request exceptions to obtain coverage of non-formulary drugs, and clarified that cost-sharing on drugs covered under the exceptions process count toward ACA’s annual cost-sharing cap. Plans would have to decide exceptions within 72 hours (or 24 hours, in exigent circumstances) and offer enrollees whose exception requests were denied an external review. To promote transparency, CMS would require that plans make their formularies (including information on tiering and “any restrictions on the manner in which a drug can be obtained”) easily accessible on their websites. CMS’ proposed rule has a separate section concerning the EHB prohibition on discriminatory benefit designs, which is not specific to drugs but has important examples relating to drug coverage. Specifically, a plan would violate the nondiscrimination requirement by refusing to cover a single-tablet combination drug or an extended release product without a good reason, or by “plac[ing] most or all drugs that treat a specific [chronic] condition on the highest cost tiers.” This latter example -- the only provision in the proposed rule that directly addresses the problem of uniformly high coinsurance rates for specialty drugs - - apparently is an interpretation of the current EHB regulations and therefore could potentially affect drug coinsurance rates before 2016. However, plans’ 2015 benefit designs and premiums have already been approved and it is not clear how CMS would expect plans to respond to new non-discrimination guidance at this juncture. The Availability of Low-Income Premium Cost-Sharing Subsidies on the Federal Exchange In July, two federal appeals courts issued conflicting rulings on whether low-income enrollees in plans offered on the Federally-run Exchange may receive tax credits to subsidize their premiums. A panel of judges on the D.C. Circuit ruled 2-1 that ACA only allows premium subsidies for insurance purchased on a State-run Exchange,45 and a unanimous panel of the 4th Circuit reached the opposite conclusion, ruling that the IRS could provide tax credits to subsidize premiums for insurance purchased on any Exchange, 45 Halbig v. Burwell, 758 F.3d 390 (D.C. Cir. 2014).14 State-run or Federally-run.46 The issue is important because today 36 states use the Federal Exchange, and 86% of current Federal Exchange enrollees are eligible for premium subsidies.47 ACA makes premium subsidies available to people with incomes between 100-400% of the Federal Poverty Level who are covered by a qualified health plan “enrolled in through an Exchange established by the State.”48 The Supreme Court surprised many by agreeing to decide whether ACA permits premiums subsidies for enrollees in Federally-run Exchanges49; a decision is expected in summer 2015. For several reasons, a Supreme Court ruling that premium subsidies on the Federal Exchange are illegal would threaten to unravel ACA’s coverage expansion: Millions could lose eligibility for premium subsidies; over 4.5 million Americans bought subsidized policies through the Federal Exchange in 2014.50 Limiting subsidies to State-run Exchanges could also cut the effectiveness of the individual mandate. The individual mandate requires individuals to maintain “minimum essential coverage” and generally is enforceable via a financial penalty. But the penalty does not apply if the cheapest coverage available to a person, less any premium subsidies, would exceed 8% of his or her projected household income.51 By one estimate, 99% of otherwise subsidy-eligible individuals on the Federal Exchange would become exempt from the mandate if premium subsidies on that Exchange ended, because unsubsidized insurance premiums would exceed 8% of their income.52 Limiting subsidies to state-run Exchanges could affect the employer mandate in a similar way. The employer mandate uses the threat of penalties to induce large employers 46 King v. Burwell, 759 F.3d 358 (4th Cir. 2014). 47 Assistant Secretary for Planning and Evaluation, U.S. Department of Health & Human Services, “Health Insurance Marketplace: Summary Enrollment Report for the Initial Annual Enrollment Period (May 1, 2014), available at http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Apr2014/ib_2014apr_enrollment.pdf. 48 ACA § 1401, adding Section 36B to the Internal Revenue Code (emphasis added). The “enrolled in through an Exchange established by the state” language appears in Internal Revenue Code §§ 36B(2)(b)(A) and 36B(c)(2)(A)(1). 49 Because the D.C. Circuit had agreed to rehear its Halbig v. Burwell decision en banc, thus ending the circuit split, a grant a certiorari from the Supreme Court had not been widely expected. 50 Robert Pear, “New Questions on Health Law as Rulings on Subsidies Differ.” New York Times (July 22, 2014), available at http://www.nytime.com/2014/07/23/us/court-rules-against-obamacare-exchange-subsidies.html_r=0. 51 ACA § 1501(b). 52 Urban Institute and Robert Wood Johnson Foundation, Halbig v. Burwell: Potential Implications for ACA Coverage on Subsidies (July 2014).15 (those with at least 50 employees) to provide their full-time employees with health insurance.53 But those penalties only apply if a large employer fails to offer suitable coverage and one or more of its employees enrolls in an Exchange plan “with respect to which an applicable tax credit . . . is allowed or paid.”54 Thus, these penalties hinge on the availability of premium subsidies; if those subsidies ended in States that use the Federal Exchange, the employer mandate would end there as well. ACA suggests that cost-sharing subsidies (available to people in a silver plan with household income between 100-250% of FPL) are only available to enrollees eligible for a premium subsidy. 55 Thus, in States where a premium subsidy is not available because the Federal government runs the Exchange, cost-sharing subsidies similarly would not be available. CMS’ contingency plans for an adverse Supreme Court ruling obviously have not been publicized (except CMS’ contracts with plans on the Federal Exchange provide that the issuer has developed its product on the assumption that qualifying enrollees will receive subsidies and “[i]n the event this assumption ceases to be valid during the term of this Agreement, CMS acknowledges that Issuer could have cause to terminate this Agreement subject to applicable state and federal law”).56 A key question is whether CMS could issue regulations or guidance providing that “State-run” Exchanges could contract with CMS to run all or most of their functions. Such a fix could be problematic, however, because ACA authorizes States to contract with an “eligible entity” to carry out one or more responsibilities of their Exchanges and “eligible entity” does not include CMS.57 Even if States contracted out their Exchange functions to one or more contractors that help to run the Federal Exchange (which could complicate the contracting strategy), questions exist as to how quickly this could be done. According to a recent analysis: Current CMS regulations require State-based Exchanges to secure conditional CMS approval at least 6.5 months before launch (a problem CMS could eliminate); 53 ACA §1513. 54 ACA § 1513. 55 ACA § 1402 (f)(2)(“ No cost-sharing reduction shall be allowed under this section with respect to coverage for any month unless the month is a coverage month with respect to which a [premium tax] credit is allowed to the insured (or an applicable taxpayer on behalf of the insured) under section 36B of such Code”) (emphasis added). 56 CMS Adds Language to Give Insurers an Out If Subsidies Disappear, Modern Healthcare (Oct. 23, 2014). 57 ACA § 1311(f)(3). “Eligible entity” under this provision means a person “incorporated under, and subject to the law of, 1 or more states” that also satisfies certain additional criteria, or the State Medicaid agency.16 Most of the States using the Federal Exchange would need the approval of their legislature to establish a State Exchange; and Only 8 of these States have legislative sessions extending beyond June (meaning their legislatures would either need to authorize a State Exchange before the Supreme Court ruling is expected, or they might be unable to operate their own Exchanges before 2017).58 Apart from logistical obstacles, not all of the States currently using the Federal Exchange would necessarily want to create a State Exchange if the Supreme Court were to invalidate Federal Exchange subsidies; the issue is politically volatile and some States may have continued concerns about the burdens of operating their own Exchanges no matter how much CMS were able to simplify the task. Food and Drug Administration 21st Century Cures Initiative and the Obama Administration “Precision Medicine Initiative” Over the course of 2014 the House of Representatives Committee on Energy & Commerce has been engaged in a wide-ranging, bipartisan examination of areas in which legislation may be needed to accelerate the development of new medicines, including development of white papers, holding public hearings, meeting with stakeholders, and considering written comments. Early in 2015, we can expect that effort to mature into the introduction of legislation focusing on a range of areas for reform. The Chairman of the Energy & Commerce Committee has stated a goal of getting the legislation to the House floor by Memorial Day. Although a parallel formal effort has not occurred in the Senate, we expect similar – but not identical – legislative proposals to emerge from the Senate Health, Education, Labor and Pensions (HELP) Committee. Such legislation may include: Efforts to increase efficiencies and reduce burdens in clinical research, including reducing the need for multiple institutional review board (IRB) approvals. Accelerating the consideration and validation of biomarkers and clinical markers for effectiveness that can be used in drug development and approval processes. Reforming NIH funding processes to better reflect disease area health impact, and expanding funding for Alzheimer’s Disease research. 58 Predicting the Fallout from King v. Burwell -- Exchanges and the ACA, Nicholas Bagley, David K. Jones, and Timothy Stoltzfus Jost, New England Journal of Medicine (Dec. 11, 2014).17 Expansion of exclusivities, possibly based on the model found in the Generating Antibiotic Incentives Now (GAIN) Act, enacted as part of the 2012 FDA Safety and Innovation Act legislation. Even more expansive legislation is possibly, such as the approach taken in the “MODDERN Cures Act” introduced by Rep. Lance (R-NJ), which would create new exclusivity incentives for both innovative diagnostics and “dormant” investigational therapies for unmet medical needs. Others have revived proposals for so-called “wild card” exclusivity, which would allow for trading of a voucher providing an extension of either patent life or a market exclusivity period. However, the more aggressive proposals in this area could strain the bipartisan nature of the legislative effort, and the costs associated with such proposals may be deemed prohibitive. Additional measures to spur development of new antibiotics for resistant pathogens, such as the development of a limited population pathway for antibacterial drugs. Changes to FDA’s current approach to limiting manufacturer dissemination of off-label scientific information, both with respect to clinical information and pharmacoeconomics. Provisions focusing on enhancing the availability of telemedicine, including reducing restrictions and enhancing coverage. It remains to be seen whether the 21st Century Cures legislation will ultimately venture into the ongoing debate over FDA’s proposal to greatly expand its regulation of laboratory-developed tests (LDTs). The Committee recently requested feedback on the proposal, posing a series of questions regarding the impact on industry and patients, and potential diagnostic-related proposals. Whether in the context of 21st Century Cures or otherwise, given the potential impact on the clinical laboratory industry we can expect FDA’s proposed plan to get significant scrutiny in the new Congress. Although FDA may need to adjust its current plans over time, enhanced regulation of LDTs has significant support in the pharmaceutical industry – many companies want assurance of the reliability of companion diagnostics – as well as in the diagnostic test kit industry. It also appears that the Obama Administration is not leaving this area to Congress. In his recent State of the Union address, President Obama stated that he wanted “the country that eliminated polio and mapped the human genome to lead a new era of medicine —one that delivers the right treatment at the right time,” noting that he is “launching a new Precision Medicine Initiative to bring us closer to curing diseases like cancer and diabetes —and to give all of us access to the personalized information we need to keep ourselves and our families healthier.” The President did not elaborate on this initiative, but further details are expected in the fiscal 2016 budget, which will be released on February 2, 2015.18 Other FDA Issues to Watch Although the Drug Quality and Security Act was just recently enacted, the Compounding Quality Act (CQA) may also be a legislative focus. While we are still awaiting significant FDA guidance documents clarifying CQA requirements, there is significant concern regarding the application of certain CQA requirements, such as the impact on physician office-use compounding, and the breadth of outsourcing facility activities. With the proliferation state “right to try” legislation seeking to mandate access by the terminally ill to investigational drugs, Congress is under considerable pressure to act, and FDA is also seeking to address and communicate the availability of existing expanded access mechanisms. One recently introduced legislative measure, H.R. 5805, the “Andrea Sloan Compassionate Use Reform and Enhancement Act” (CURE Act), sponsored by Representative Michael McCaul (R-TX) would not alter the existing criteria that must be met for FDA to approve an expanded access request or the expanded access submission process or evidentiary requirements. The legislation would, however, impose two new requirements on certain sponsors and manufacturers/ distributors of drug products to take advantage of existing expedited marketing approval programs to develop expanded access policies, and impose a requirement on the manufacturer or distributor of a drug product receiving a request under the expanded access provisions of the FDCA to notify the requestor within five days of a denial. The CURE Act also would require the Government Accountability Office (“GAO”) to issue a report on expanded access, mandate the establishment of an Expanded Access Task Force within the Department of Health and Human Services, and require FDA to finalize its current draft guidance on expanded access programs. Another area of potential activity is FDA’s proposal to create a new framework for drug labeling changes that would allow generic drug companies to initiate new label warnings. FDA has delayed the finalization of the proposal, and strong objections have been raised by the generic drug industry and in Congress. If FDA moves forward with the proposal as initially framed, legislative action to create a more middle ground approach is highly likely. It is also likely that FDA will attempt to respond to concerns about its unduly restrictive approach to pharmaceutical and medical device off-label speech. FDA’s guidance agenda includes references to new draft guidance relating to “Manufacturer Communications Regarding Unapproved Uses of Approved Medical Products,” as well as long-awaited draft guidance on the FDA Modernization Act Section 114 health care economic promotion provision. It remains to be seen how effective those efforts will be in fending off legislation and First Amendment litigation.19 User Fee Reauthorization Process Begins In parallel with the consideration of the 21st Century Cures legislation in the House, and anticipated Senate proposals, FDA and industry are beginning the process for the ultimate Congressional reauthorization of user fees two years from now. Many additional issues will come into play between now and user fee reauthorization, including FDA review performance, FDA’s biosimilars program, oversight over programs adopted as part of FDASIA in 2012, such as drug global supply chain provisions, and a recent FDA proposal to completely transition drug package inserts to electronic form. If the 21st Century Cures legislation or its Senate counterpart legislation does not get enacted, we can expect the issues identified above to remain important factors in the user fee debate. Enforcement The health care sector continues to be an enforcement priority for the Obama administration. In a November 2014 press release, the Department of Justice touted the almost $6 billion it recovered in fiscal year 2014, of which $2.3 billion was attributable to health care matters. DOJ stated: The $2.3 billion in health care fraud recoveries in fiscal year 2014 marks five straight years the department has recovered more than $2 billion in cases involving false claims against federal health care programs such as Medicare, Medicaid and TRICARE, the health care program for the military. This steady, significant and continuing success can be attributed to the high priority the Obama Administration has placed on fighting health care fraud. The pharmaceutical industry accounted for a substantial part of the $2.3 billion in health care fraud recoveries in fiscal year 2014.59 In the same press release, DOJ paid special attention to the role played by whistleblowers, noting their role in the headline: First Annual Recovery to Exceed $5 Billion; Over 700 Whistleblower Lawsuits for Second Consecutive Year. 60 According to DOJ, whistleblowers were accountable for recoveries of nearly $3 billion related to lawsuits filed under the qui tam provisions of the False Claims Act and received $435 million in connection with those suits.61 59 Press Release: Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014, DEP’T OF JUSTICE, http://www.justice.gov/opa/pr/justice-department-recovers-nearly-6-billion-false-claims-act-casesfiscal-year-2014 (Nov. 20, 2014). 60 Id. 61 Id.20 There is no question the number of whistleblower complaints is not only increasing, but also represents an enormous share of all new false claims act matters, particularly all new health care matters. As DOJ noted, the number of qui tam suits rose from 30 in 1987, to 300 to 400 a year from 2000 to 2009, to more than 700 for each of the last two fiscal years.62 Based on DOJ’s posted statistics in fiscal year 2013,63 the number of non qui tam new matters actually decreased from previous years to 22, while the number of health care related qui tam complaints exploded to 500, representing 95% of the new DOJ health care new cases for that year, as well as the majority of all new qui tam cases. While previously DOJ’s declination meant the end of the case, whistleblowers are now pursuing cases on their own—often based on their misunderstanding of the regulatory scheme, the law and the facts. Use Of The False Claims Act To Reach Alleged Regulatory Violations In two declined qui tams (one in the First Circuit, the other in the Fourth Circuit), appellate courts have upheld decisions dismissing complaints based on rulings that alleged regulatory violations (adverse event reporting requirements and cGMP requirements, respectively) of the Federal Food, Drug, and Cosmetic Act (FDCA), did not equate to violations of the False Claims Act (FCA).64 DOJ acknowledged “ not every violation of the FDCA is a per se violation of the FCA because not every violation has a nexus to payment.”65 According to DOJ, violations of cGMP regulations that are “significant, substantial, and give rise to actual discrepancies in the composition or functioning of the product” may be relevant to an FCA claim if the violations affect the government’s decision to pay a claim for the drug.66 Similarly, DOJ advised the court that reimbursement for prescription drugs is not conditioned upon compliance with adverse event reporting requirements and that FCA liability might occur “in the rare circumstance in which concealed adverse events are so serious and unexpected that FDA would have withdrawn approval for the drug making claims for reimbursement ineligible for payment.”67 62 Id. 63 Fraud Statistics-Overview (Dep’t of Justice, Dec. 23, 2013), available at http://www.justice.gov/civil/docs_forms/CFRAUDS_FCA_Statistics.pdf. 64 See United States ex rel. Ge v. Takeda Pharm. Co., 737 F. 3d. 116 (1st Cir. 2013); United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694 (4th Cir. 2014). 65 United States’ Statement of Interest as to Defendants’ Motion to Dismiss, Omnicare, Inc., 745 F.3d 694 (No. CCB- 07-1283), 2011 WL 10857612 (D. Md.). 66 Id. 67 Brief for United States as Amicus Curiae in Support of Neither Party at 5, Takeda Pharm. Co., 737 F.3d 116 (No. 13-1089)21 While these decisions are only applicable to cases within their respective circuits,68 DOJ’s statements of its position will be useful in defending other cases in which the alleged false claims are based upon claimed regulatory violations.69 Nonetheless, these theories have gained currency with relator’s counsel, and industry should expect that persistent or high profile regulatory problems will continue to be a focus in qui tam cases against industry. Post-Caronia: Off-Label Marketing Cases Will Persist Despite the Second Circuit’s decision in United States v. Caronia that the First Amendment protects offlabel speech from forming the basis for a criminal conviction,70 relators and DOJ continue to pursue allegations of off-label marketing against both pharmaceutical and device manufacturers through injunctive actions, criminal and civil cases. DOJ chose not to seek Supreme Court review of Caronia and continues to claim the decision affected only criminal prosecutions under the FDCA of truthful, off-label marketing. In post-Caronia statements of interest in declined qui tam cases, DOJ asserts Caronia and the First Amendment are inapplicable in the particular facts and circumstances. According to DOJ, “the FCA does not prohibit off-label promotion of prescription drugs; rather, the FCA prohibits conduct that causes the submission of false claims to the Government for payment. The First Amendment is, thus, not implicated in the context of an FCA claim, such as this one, where a defendant causes others to submit false claims for payment to the Government for non-reimbursable prescription drugs.”71 In November 2014, DOJ filed charges against a device manufacturer and the CEO for allegedly selling a device for uses beyond those approved by the FDA and conspiring to defraud the United States by 68 The Supreme Court denied petitions for certiorari in both cases. See United States ex rel. Ge v. Takeda Pharm. Co., 135 S.Ct. 53 (Oct. 6, 2014) (cert. denied); United States ex rel. Rostholder v. Omnicare, Inc., 135 S.Ct. 85 (Oct. 6, 2014) (cert. denied). 69 For example, in a January 2015 decision dismissing relator’s complaint (but with leave to amend), a Northern District of California judge followed Rostholder in holding relator had failed to state FCA claims for alleged violations of cGMP requirements. The court explained “reimbursement requests for drugs that, while approved by the FDA, were subsequently ‘adulterated’ or ‘misbranded’ as a result of ‘having been proceeded in violation of FDA safety regulations’ [does] not give rise to FCA liability.” United States ex rel. Campie v. Gilead Sciences, Inc., No. C-11- 0941 EMC, 2015 WL 106255, at *13 (N.D. Cal. Jan. 7, 2015) (order granting motion to dismiss). 70 United States v. Caronia, 703 F.3d 149 (2d Cir. 2012). 71 Statement of Interest of the United States, United States ex rel. Cestra v. Cephalon, Inc., No. 10 Civ. 6457 (SHS), 2013 WL 6698175 (S.D.N.Y. Nov. 7, 2013).22 concealing the illegal sales activity.72 The criminal charges relate to a FCA settlement earlier last year in which the company agreed to pay $520,000 to settle allegations in an intervened qui tam case in which the government’s complaint in intervention alleged the company marketed its device for uses beyond those for which it had been approved by FDA.73 In October 2014, the United States filed a civil complaint for injunctive relief against a device manufacturer and its president to prohibit the continued sale and distribution of an allegedly adulterated and misbranded medical device which, according to DOJ, was marketed for treatment of more than 200 disease and disorders when it had been cleared for only one use.74 DOJ and Relators’ Claims Will Continue to Emphasize Anti-Kickback Act Violations Following the 2010 Affordable Care Act changes making violations of the criminal Anti-Kickback Statute violations of the FCA—eliminating the requirement of specific intent to violate the statute—we have seen continued emphasis on kickback cases against a broad range of providers in the health care industry. As part of this kickback focus, in the past year DOJ has brought kickback actions against both pharmaceutical and device manufacturers and alleged recipients of kickbacks. Most of these cases have arisen from qui tam complaints, including one that appears to have led to criminal charges.75 While some of the cases were settled prior to DOJ’s intervention decision, DOJ also filed a number of complaints in intervention based, in part, on allegations of kickback payments as violations of the FCA. DOJ will likely bring cases involving alleged kickbacks to health care providers that involve more complicated business arrangements than meals at expensive restaurants or tickets to sporting events. Following a Special Fraud Alert issued by the Office of Inspector General for the Department of Health 72 Press Release: Vascular Solutions Inc. and its CEO Charged with Selling Unapproved Medical Devices and Conspiring to Defraud the United States, DEP’T OF JUSTICE, http://www.justice.gov/opa/pr/vascular-solutions-inc-andits-ceo-charged-selling-unapproved-medical-devices-and-conspiring (Nov. 13, 2014). 73 Press Release: Vascular Solutions Inc. to Pay $520,000 to Resolve False Claims Allegations Relating to Medical Device, DEP’T OF JUSTICE, , http://www.justice.gov/opa/pr/vascular-solutions-inc-pay-520000-resolve-false-claimsallegations-relating-medical-device (July 28, 2014) 74 Press Release: United States Files Enforcement Action Against South Dakota Laser Medical Device Distributor, DEP’T OF JUSTICE, http://www.justice.gov/opa/pr/united-states-files-enforcement-action-against-south-dakota-lasermedical-device-distributor (Oct. 24, 2014). 75 Press Release: Government Files Suit Against Missouri Neurosurgeon and Medical Device Supplier for Violations of the False Claims Act and Anti-Kickback Statute, DEP’T OF JUSTICE, http://www.justice.gov/opa/pr/government-filessuit-against-missouri-neurosurgeon-and-medical-device-supplier-violations (July 17, 2014); Press Release: Cape Girardeau Neurosurgeon, Owner of Medical Device Supplier and Their Two Companies Indicted on Federal AntiKickback Charges, DEP’T OF JUSTICE, http://www.justice.gov/usao/moe/news/2014/september/midwest_neurosurgeons.html (Sept.18, 2014).23 and Human Services on Physician-Owned Entities,76 last year DOJ filed a FCA complaint with allegations of kickbacks against a spinal implant company, neurosurgeon, physician-owned distributorships and their owners with allegations that tracked many of the issues raised in the Special Fraud alert.77 We can expect DOJ to pursue kickback cases in which the alleged remuneration (whether through straight forward or more complex methods) is accompanied by allegations that the kickbacks led to provision of medically unnecessary services or over-utilization of products.78 Enforcement Based on Government Contracting Requirements Although many pharmaceutical manufacturers do not consider themselves government contractors in the traditional sense, a failure to follow the numerous requirements accompanying sales of products to the government can create another basis for potential FCA exposure. For example, in September of 2014, a device manufacturer settled an FCA case for $11.3 million based on allegations that it violated the federal Trade Agreements Act by falsely claiming devices sold to the Departments of Defense and Veterans Affairs were made in the United States.79 Because the devices were made in Malaysia, a country with which the United States does not have a trade agreement, sales of Malaysian products by government contractors to federal agencies allegedly violated the federal Trade Agreements Act and as a result, the FCA.80 Like the kickback cases, this case also involved a qui tam brought by a former employee of the device manufacturer.81 Increased Attention To Criminal Liability And Individual Defendants As DOJ leaders continue to state publicly, DOJ is focused on prosecution of individuals. Attorney General Holder, recently said: 76 “Special Fraud Alert: Physician-Owned Entities,” OIG, DHHS (Mar. 26, 2013), http://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf. 77 Press Release: United States Pursues Claims Against Neurosurgeon, Spinal Implant Company, Physician-Owned Distributorships and Their Non-Physician Owners for Alleged Kickbacks and Medically Unnecessary Surgeries, DEP’T OF JUSTICE, http://www.justice.gov/opa/pr/united-states-pursues-claims-against-neurosurgeon-spinal-implantcompany-physician-owned (Sept.8, 2014). 78 Id. 79 See Settlement Agreement, United States ex rel. Cox v. Smith & Nephew, Inc., Case No. 08-cv-2832-JTF-tmp (W.D. Tenn. Sept. 3, 2014), ECF No. 212-1. 80 Id. 81 Id.24 Corporate misconduct must necessarily be committed by flesh-and-blood human beings, so wherever misconduct occurs within a company, it is essential that we seek to identify the decision-makers at the company who ought to be held responsible . . . . A corporation may enter a guilty plea and still see its stock price rise the next day, but an individual who is found guilty of a serious fraud crime is most likely going to prison.82 In keeping with this focus on charging individuals, in two recent cases DOJ pursued criminal charges against high level executives, as well as their companies. As described above, following a civil settlement for alleged off-label marketing DOJ indicted the CEO of a device company and the company, for alleged promotion of off-label uses of the device.83 Similarly, in December 2014, DOJ held a press conference to announce guilty pleas by the former CEO of a device company (as well as the company) based on allegations of distribution of an unapproved device.84 The former CEO faces a potential prison sentence.85 Executives in the pharmaceutical industry also face potential criminal charges even when they had nothing to do with the alleged conduct. DOJ continues to rely on the responsible corporate officer theory (also known as the Park doctrine)86 as the basis for strict liability prosecution of individuals in FDAregulated industries. Although there were no responsible corporate officer prosecutions against pharmaceutical executives last year, DOJ continues to bring strict liability prosecutions against executives in other FDA-regulated industries. While the constitutionality of potential prison terms for such strict liability violations will be tested this year in sentencing issues arising from responsible corporate officer prosecution of egg company executives, DOJ is likely to continue bringing strict liability criminal cases until any such convictions are overturned. 82 Press Release: Attorney General Holder Remarks on Financial Fraud Prosecutions at NYU School of Law, DEP’T OF JUSTICE, http://www.justice.gov/opa/speech/attorney-general-holder-remarks-financial-fraud-prosecutions-nyuschool-law (Sept. 17, 2014). 83 See generally, supra note 63. 84 Press Release: Otismed Corporation and Former CEO Plead Guilty to Distributing FDA-Rejected Cutting Guides for Knee Replacement Surgeries, U.S. ATTORNEY’S OFFICE D.N.J., http://www.justice.gov/usao/nj/Press/files/Otismed%20News%20Release.html (Dec. 8, 2014). 85 See Plea Agreement with Charlie Chi (Aug. 29, 2014), available at http://www.justice.gov/usao/nj/Press/files/pdffiles/2014/OtisMed/Plea%20Agreement%20Charlie%20Chi%20FINAL.p df. 86 See United States v. Park, 421 U.S. 658 (1975).25 With the announcement in September 2014 by Assistant Attorney General Leslie Caldwell that the criminal division will review qui tam complaints and wants to hear directly from whistleblowers, we may see an increase in criminal prosecutions of companies and individuals stemming from those complaints.87 Suspension of the FCA Statute of Limitations Can the government suspend the civil FCA statute of limitations? That question, which has enormous potential ramifications for all FCA cases—not just those involving defense contractors—is pending before the Supreme Court in United States ex rel. Carter v. Kellogg Brown & Root Servs., Inc (“KBR case”).88 If the government prevails, the government and relators will have carte blanche to bring FCA cases potentially decades after the conduct occurred. As petitioner noted in its petition for a writ of certiorari: The panel decision . . . has grave implications for potential defendants, by requiring them to defend against stale claims years or even decades later, as memories fade and helpful evidence is lost. It places intolerable burdens on companies, by requiring them to either retain documents indefinitely or risk discarding records that may only become relevant years later when an unforeseen claim is filed.89 The KBR case also raises the issue of the applicability of the first to file bar (which prevents multiple qui tam suits based on the same underlying conduct) to qui tam cases in which the previously filed case is no longer pending. The Supreme Court will resolve a circuit split in which the courts have disagreed about when a case is a pending action.90 The Government and Relators Will Pursue Overpayments As False Claims The Affordable Care Act made failure to report and return overpayments within 60 days of identifying the overpayment a false claim under the so-called reverse false claim provisions of the FCA (keeping money the government is entitled to).91 Although the Affordable Care Act was effective in 2010, there may be 87 Justice News: Remarks by Assistant Attorney General for the Criminal Division Leslie R. Caldwell at the Taxpayers Against Fraud Education Fund Conference, DEP’T OF JUSTICE, http://www.justice.gov/criminal/pr/speeches/2014/crm-speech-140917.html (Sept. 17, 2014). 88 See Petition for Writ of Cert., United States ex rel. Carter v. Kellogg Brown & Root Servs., Inc., No. 12-1497, 2013 WL 3225969 (U.S. June 24, 2013). Oral argument was held on January 13, 2015. 89 Petition for Writ of Cert., Kellogg Brown & Root Servs., Inc., No. 12-1497, 2013 WL 3225969, supra note 78 at *23. 90 See United States ex rel. Shea v. Verizon Wireless, No. 1:09-cv-01050 (D.C. Cir. Apr. 11, 2014), compared to United States ex rel. Carter v. Halliburton Co., et al., No. 710 F.3d 171 (4th Cir. 2013). 91 31 U.S.C. 3729(a)(1)(G)26 cases involving overpayments working their way through DOJ investigation that are still under seal. Last year, the government intervened for the first time in a case alleging that a company violated the FCA by repaying an alleged overpayment over time, rather than within the requisite 60 days.92 The company and the government are fighting over the meaning of “identification” of a false claim in a pending motion to dismiss the complaint.93 If the government prevails, both relators and the government will likely bring additional overpayment cases. DOJ And Relators Will Attempt To Prove Liability For FCA Cases Through The Use Of Statistical Sampling Courts have allowed use of statistical samples to prove damages in FCA cases.94 Last year a district court in Tennessee significantly expanded that use by allowing the government to use sampling to prove liability under the FCA. Reasoning that the fraud fighting goals of the FCA did not require claim-by-claim review, the court permitted the government to select a random sample of patients who received high intensity physical therapy, examine the medical records of those patients to determine whether the therapy was medically necessary and then extrapolate those findings across the entire universe of services to attempt to show liability for all claims in that category.95 Other courts have required relators to identify the specific false claims allegedly submitted to the government in order for the complaint to survive the heightened pleading requirements under Federal Rule of Civil Procedure 9(b).96 Given the number of circuits, however, that have now adopted a less restrictive pleading standard— permitting relators to show indicia leading to a strong inference of fraud, rather than showing actual allegedly false claims—this expanded use of statistics will likely continue, making it substantially easier for the government or relators to show liability. Coupled with last year’s release of physician payment information and 2012 Medicare claims data, relators will have an easier time surviving motions to dismiss. 92 Complaint-In-Intervention, United States ex rel. Kane v. Continuum Health Partners, Inc., Civil Action No. 11-2325 (ER) (S.D.N.Y. June 27, 2014), available at http://www.justice.gov/usao/nys/pressreleases/June14/ContinuumHealthPartnersincLawsuotPR/Continuum%20Healt hPartners,%20Inc.,%20et%20al.%20Complaint%20in%20Intervention.pdf 93 Id. 94 See, e.g. United States v. Fadul, Civil Action No. DKC 11-0385, 2013 WL 781614, at *14 (D. Md. Feb. 28, 2013). See also U.S. ex rel. Bunk v. Birkart Globistics GmbH & Co., No. 1:02-CV-1168 AJT/TRJ, 2014 WL 7359585 (E.D. Va. Dec. 24, 2014) in which the court set aside a $101 million FCA jury verdict, in part, because it found the statistical model used to estimate compensatory damages was unreliable. 95 United States ex rel. Martin v. Life Care Ctrs. of Am., Inc. Nos. 1:08-cv-251, 1:12-cv-64, 2014 WL 4816006 (E.D. Tenn. Sept. 29, 2014). 96 See United States ex rel. Nathan v. Takeda Pharms. N. Am. Inc., 707 F.3d 451 (4th Cir. 2013); cert. denied, 134 S. Ct. 1759 (U.S. 2014)27 HHS-OIG’s Proposed Expansion of its Exclusion Authority Last spring HHS-OIG published a proposed rule expanding its existing authority to exclude health care providers from participation in federal health care programs. 97 If HHS-OIG implements the proposed rule this year it will acquire (1) new testimonial subpoena authority to investigate healthcare fraud violations; (2) the ability to exclude individuals or entities for healthcare fraud or kickback violations without the constraint of any statute of limitations; and (3) the ability to tie the exclusion of former owners or controllers to the same period of time as the exclusion of their former entity. HHS-OIG currently receives information concerning potential exclusions from a number of sources, including the Department of Justice, as well as the entity or individual against whom the exclusion is proposed. If HHS-OIG implements the proposed rule, we can expect it to issue testimonial subpoenas which will likely lead to exclusion mini-trials. Additionally, there will probably be due process challenges to any HHS attempt to exclude individuals or entities for conduct occurring before the criminal or civil statute of limitations governing the underlying conduct. Similarly, attempts to exclude individuals who are no longer affiliated with an excluded entity will be challenged in court. If you have any questions about any of the topics discussed in this advisory, please contact your Arnold & Porter attorney or any of the following attorneys: Daniel A. Kracov +1 202.942.5129 Daniel.Kracov@aporter.com Jeffrey L. Handwerker +1 202.942.6103 Jeffrey.Handwerker@aporter.com Rosemary Maxwell +1 202.942.6040 Rosemary.Maxwell@aporter.com Marilyn May +1 202.942.6830 Marilyn.May@aporter.com 97 Medicare and State Health Care Programs: Fraud and Abuse; Revisions to the Office of Inspector General’s Exclusion Authorities, 79 Fed. Reg. 26810 (May 9, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-05- 09/pdf/2014-10390.pdf © Arnold & Porter LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.28 Thomas A. Gustafson +1 202.942.6570 Thomas.Gustafson@aporter.com Mahnu V. Davar +1 202.942.6172 Mahnu.Davar@aporter.com © Arnold & Porter LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.