We now have only 36 days to go until August 1, 2013, when the new data collection obligations imposed on “applicable manufacturers” and group purchasing organizations under the physician payment “sunshine” rules of the Patient Protection and Affordable Care Act (the “Sunshine Act”) take effect. On February 1, 2013, the Centers for Medicare & Medicaid Services (CMS) released its final rule interpreting the Sunshine Act. The Sunshine Act essentially imposes two principal obligations on “applicable manufacturers:”

  • Applicable manufacturers of a “covered drug, device, biological, or medical supply” are required to report annually on certain payments or other transfers of value to physicians and teaching hospitals.
  • Applicable manufacturers and group purchasing organizations are required to report information about certain ownership or investment interests held by physicians and their immediate family members in such entities.

As we discussed in an earlier blog entry regarding the proposed rule by Bethany Hills, CMS initially defined “applicable manufacturer” to mean an entity operating the in the United States that is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply, including entities under common ownership (five percent ownership or more) that provide assistance or support with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug or device for sale or distribution in the United States.

Revised Definition of Applicable Manufacturer

As proposed, the definition of “applicable manufacturer” may have included foreign entities that contribute to the manufacturing process of a covered product but have no business presence in the United States. To avoid this unintended result, the final definition of “applicable manufacturer” was revised to exclude such foreign entities and reads as follows:

Applicable manufacturer means an entity that is operating in the United States and that falls within one of the following categories:

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

The intent of CMS was that the reporting requirement apply to “any manufacturer, foreign or not, which operates in the Unites States (including by selling a product) … regardless of where the product is physically manufactured.” Therefore, under the final rule, entities based outside of the United States that do have operations in the United States are subject to the reporting requirements.

Definition of Operating in the United States

A foreign entity will be deemed to be “operating in the United States” if it satisfies one of the following two requirements:

  • It has a physical location within the United States or in a territory, possession, or commonwealth of the United States.
  • It otherwise conducts activities within the United States or in a territory, possession, or commonwealth of the United States, either directly or through a legally-authorized agent.

In order to prevent applicable manufacturers from circumventing the reporting requirements by making payments to covered recipients indirectly through foreign excluded entities, such payments must be reported by the applicable manufacturer as an indirect payment or other transfer of value, so long as the applicable manufacturer is aware of the identity of the covered recipients receiving the payments from the foreign entity.

For an applicable manufacturer to be “unaware” of the identity of a physician or teaching hospital receiving the indirect payment, the applicable manufacturer must not have actual knowledge or act in deliberate ignorance or in reckless disregard of the truth or falsity of the information.

Conclusion

The final rule significantly narrows the application of the Sunshine Act to foreign entities by excluding such entities when they contribute to the manufacturing process of a covered product but have no business presence in the United States. Nevertheless, payments by excluded foreign entities to physicians or teaching hospitals may trigger reporting requirements when such payments are made on behalf of applicable manufacturers.