On March 23, 2010, President Obama signed H.R. 3590, the Patient Protection and Affordable Care Act ("PPACA"), into law. Following the enactment of PPACA, H.R. 4872, the Health Care and Education Reconciliation Act of 2010, was enacted into law on March 30, 2010, "reconciling" and revising portions of PPACA. This expansive legislation includes provisions from the Physician Payment Sunshine Act ("Sunshine Act") introduced previously by Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) in 2009.[1] Early versions of the Sunshine Act were endorsed by the Pharmaceutical Research and Manufacturers of America, the Advanced Medical Technology Association, the American Medical Association and individual industry organizations.[2]

The Sunshine Act requires "applicable manufacturers," which are manufacturers of a "covered drug, device, biological, or medical supply," to report annually certain "payments or other transfers of value" provided to a "covered recipient." "Covered drug, device, biological, or medical supply" is defined as a product "for which payment is available under [Social Security Act] title XVIII or a State plan under title XIX or XXI (or a waiver of such plan)." "Covered recipients" are defined as physicians and teaching hospitals. The first report from applicable manufacturers is due to the Secretary of Health and Human Services ("Secretary") by March 31, 2013.

Additionally, Section 6002 includes a reporting provision for applicable manufacturers and "applicable group purchasing organizations" ("GPOs"). A GPO is defined as an organization "that purchase, arranges for, or negotiates the purchase of a covered drug, device, biological, or medical supply." Manufacturers and GPOs must submit to the Secretary beginning March 31, 2013, certain information related to ownership or investment interests held by a physician (or an immediate family member of the physician) in the manufacturer or GPO during the preceding year. The Sunshine Act excludes interests in a "publicly traded security and mutual fund" from this reporting requirement but provides the Secretary discretion to seek additional information.

Further, Section 6005 of the health reform legislation amends Title XI of the Social Security Act, 42 U.S.C. § 1301 et seq., to provide transparency requirements for health benefits plans and pharmacy benefit managers ("PBMs"), an undefined term. PBMs will be required to report certain information to the Secretary and to the health benefits plans with which the PBMs contract to manage prescription drug coverage. The time, form and manner of reporting will be determined by the Secretary. Section 6005 also does not specify when PBMs must begin reporting this information.

The Sunshine Act and Section 6005 will create several challenges and opportunities for manufacturers, GPOs and PBMs. This publication provides an overview of these transparency requirements and discusses some of the significant challenges and opportunities entities should consider as they strategize and await the details regarding implementation of these sections that will be addressed through the regulatory process.

OVERVIEW OF THE SUNSHINE ACT

Reporting

For each payment or transfer of value, the manufacturer must report the following information:

  • Name, business address and specialty and Medicare billing number for the covered recipient;
  • Amount of the payment or transfer of value;
  • Date of the payment or transfer of value;
  • Description of the form of the payment (e.g., cash, cash equivalents, in-kind items or services, stock, stock options, other ownerships interests, dividends);
  • Description of the nature of the payment (e.g., consulting fees, compensation for services other than consulting, honoraria, gifts, entertainment, food, travel, education, research, charitable contributions, royalties, licenses, ownership or investment interests, direct compensation for serving as faculty or as a speaker for a medical education program and grants);
  • Name of the covered drug, device, biological or medical supply, if the payment or other transfer of value "related to marketing, education, or research"[3] of a covered drug, device, biological or medical supply; and
  • Any other categories of information required by the Secretary.

The Secretary must establish the procedures for reporting this information no later than October 1, 2011.

Exclusions

The Sunshine Act excludes from the definition of "payment or other transfer of value" anything with a value of less than $10. However, items under $10 may not be excluded from reporting if the aggregate amount to a covered recipient exceeds $100 per calendar year.

In addition, the following items are excluded from reporting: free product samples intended for patient use; educational materials that directly benefit patients or are intended for patient use; short-term device loans for evaluation; items or services provided under a contractual warranty; transfer of anything of value when the covered recipient is a patient and not acting in his/her professional capacity; discounts and rebates; in-kind items provided for charity care; dividend or other profit distribution from, or ownership or investment in, a publicly traded security and mutual fund; payments for the provision of health care to employees under a manufacturer's self-insured plan; transfers to licensed non-medical professionals solely for non-medical professional services; and transfers to a physician solely for services related to a criminal, civil or administrative matter.

Public Reporting

The Secretary must make the reported information publicly available in a searchable format by September 30, 2013, and on June 30 of each year thereafter. Manufacturers and covered recipients will have an opportunity to review and submit corrections to the information before it is published. This process must be developed by the Secretary.

The Secretary must delay publication of information related to payments made in connection with "product research or development agreements" and "clinical investigations" until the earlier of: (1) the date of the approval or clearance of the covered product by the FDA, or (2) four calendar years after the date of the payment. "Clinical investigation" is defined to include any "experience involving 1 or more human subjects, or materials derived from human subjects, in which a drug or device is administered, dispensed, or used." "Product research or development agreements" is defined to include agreements for "services furnished in connection with research on a potential new medical technology or a new application of an existing medical technology or the development of a new drug, device, biological, or medical supply…"

Penalties

The Sunshine Act provides civil monetary penalties for non-compliance. Manufacturers that fail to report "in a timely manner in accordance with rules or regulations" are subject to a civil monetary penalty of $1,000 to $10,000 for each payment or other transfer of value not reported as required. The limit on this provision for each annual submission is $150,000.

Similarly, manufacturers that "knowingly" fail to report "in a timely manner in accordance with rules or regulations" are subject to a civil monetary penalty of $10,000 to $100,000 for each payment or other transfer of value with an annual maximum of $1 million. "Knowingly" is defined as "a person, with respect to information - (1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information, and no proof of specific intent to defraud is required."[4]

Manufacturers also may be subject to other penalties for non-compliance.

Preemption

The Sunshine Act states that, as of January 1, 2012, it "shall preempt any statute or regulation of a State or of a political subdivision of a State that requires an applicable manufacturer . . . to disclose or report, in any format, the type of information . . . regarding such payment or other transfer of value."

However, the Sunshine Act specifically states that it "shall not preempt any statute or regulation of a State or of a political subdivision of a State that requires the disclosure or reporting of information" that is: (1) not of the type required to be disclosed or reported by the Sunshine Act; (2) an exclusion under the Sunshine Act, except as to the exclusion on items with a value below $10; (3) any other person or entity that is not an applicable manufacturer or covered recipient; or (4) information provided for public health surveillance, investigation or other public health or health oversight purposes.

Annual Report to Congress and the States

The Secretary must submit annually a report to Congress of the information provided to the Secretary, aggregated by manufacturer or GPO, and a description of any enforcement actions taken. The first report is due April 1, 2013, and annually thereafter.

Additionally, the Secretary must submit annually to each state a report that includes a summary of the information provided to the Secretary related to the covered recipients in that state. The first report is due September 30, 2013, and by June 30 each year thereafter.

OVERVIEW OF SECTION 6005

Reporting

PBMs must report the following information to the Secretary and to the health benefits plans with which they contract to manage prescription drug coverage: (1) percentage of all prescriptions that were provided through retail pharmacies compared to mail-order pharmacies; (2) percentage of prescriptions for which a generic drug was available and dispensed (i.e., generic dispensing rate) paid by the health benefits plan or PBM; (3) aggregate amount and type of rebates, discounts or price concessions that the PBM negotiates related to patient utilization; (4) aggregate amount of rebates, discounts or price concessions that are passed through to the plan sponsor and total number of prescriptions that were dispensed; and (5) aggregate amount of the difference between the amount the health benefits plan pays the PBM and the amount the PBM pays retail and mail-order pharmacies, as well as the total number of prescriptions dispensed.[5] Section 6005 does not define these terms.

Exclusions

PBMs do not need to report bona fide service fees; inventory management fees; product stocking allowances and fees associated with administrative services agreements and patient care programs, such as medication compliance programs and patient education programs. Section 6005 does not define these terms.

Penalties

A PBM that fails to provide the required information on a timely basis is subject to penalty of $10,000 per day. A PBM that knowingly provides false information is subject to a civil money penalty up to $100,000 for each item of false information.

PBMs also may be subject to other penalties for non-compliance.

Confidentiality

Generally, information provided to the Secretary and health benefits plans is confidential and may not be disclosed by the Secretary or the plan.

SIGNIFICANT CHALLENGES AND OPPORTUNITIES

Below is a discussion of some of the significant challenges and opportunities that manufacturers, GPOs, PBMs and plans should consider as the development and implementation of federal transparency begins. Additional challenges undoubtedly will develop as the process moves forward, but preparations should begin for these requirements. A comprehensive work plan to prepare for compliance with federal transparency requirements must be developed by all of these affected entities. Entities should consider the following:

Manufacturers

  • Certain manufacturers have gained significant experience through state law reporting[6] implementation. These manufacturers should consider sharing this valuable information with the Secretary, as the Secretary develops the regulatory framework for the Sunshine Act. Specifically, manufacturers should take advantage of opportunities to comment on proposed regulations or other guidance and offer to meet with regulators to educate them on lessons learned from state law reporting.
  • Definitions provided by the Sunshine Act differ in key respects from current state marketing laws that will impact the preemption analysis. In addition, the definition of "covered drug, device, biological, or medical supply" in the Sunshine Act, which hinges on reimbursement status, triggers reporting obligations for manufacturers that previously were not included within the scope of certain current state laws.
  • Current state marketing laws are preempted only in part by the Sunshine Act. Manufacturers need to evaluate carefully all current state marketing laws to determine the extent of reporting that will still be required. For example, while the Sunshine Act requires manufacturers only to report payments or other transfers of value made to physicians and teaching hospitals, current state marketing laws also may require reporting of payments to other persons authorized to prescribe, dispense or purchase drugs or devices. Current policies, processes and systems will need to be reevaluated and updated. Manufacturers should take this opportunity to develop a robust infrastructure for tracking and reporting all payments and other transfers of value at the federal and state levels.
  • Although the Sunshine Act does not require manufacturers to report a payment or other transfer of value with a value of less than $10, this de minimis exception is overridden if the aggregate amount of the payments or transfers to a covered recipient exceeds $100 annually. As such, manufacturers likely will need to track all payments and transfers, regardless of value.
  • Several pharmaceutical and medical device manufacturers have contractual requirements arising from settlement agreements that require the manufacturers to make certain payments and other transfers of value available publicly. These manufacturers should evaluate the impact of the Sunshine Act on these other reporting obligations. A manufacturer could take the opportunity to discuss this legislative development with its OIG monitor and discuss whether contractual obligations are satisfied by compliance with the Sunshine Act. Manufacturers also should review and consider voluntary transparency disclosure initiatives for consistency and to facilitate implementation of Sunshine Act requirements.
  • The Sunshine Act does not provide for delayed reporting by the Secretary of payments or other transfers of value made for post-marketing clinical trials and studies. Manufacturers should consider the impact on these activities.
  • Manufacturers and covered recipients will have an opportunity to submit corrections to the information reported by the manufacturers to the Secretary. It is unclear how the Secretary will address a situation in which the information provided by the covered recipient differs from that of the manufacturer. Manufacturers should consider implementing a process to ensure that all reported payments can be verified and appropriate documentation provided to the Secretary, if necessary. Manufacturers also should consider whether to develop a process whereby covered recipients review the information before it is provided to the Secretary.
  • The Sunshine Act provides manufacturers with the opportunity to review and update key contractual provisions with business partners. For example, contracts with third-party vendors should include contractual obligations to report information needed by the manufacturer to comply with the Sunshine Act provisions and an audit right to confirm compliance. Record retention provisions should be reviewed. Contracts with covered recipients also should be considered carefully.
  • Manufacturers should consider the impact of Section 6005 on their agreements and arrangements with PBMs. Specifically, manufacturers should evaluate carefully all agreements and arrangements with PBMs to understand what information will be reported and how it will be reported under Section 6005. Contract provisions should be considered in this regard. Manufacturers also should be aware that regulators are considering additional transparency requirements for the industry's relationships with PBMs.[7] Manufacturers should consider the impact of this potential requirement as manufacturers evaluate these PBM arrangements and agreements.

GPOs/PBMs/Health Benefits Plans/Covered Entities

  • GPOs should evaluate and determine what resources and infrastructure will be needed to identify, track and report the required information and otherwise comply with the Sunshine Act.
  • Section 6005 does not define key terms, such as "bona fide service fees" and "inventory management fees." Interested parties, including PBMs, health benefits plans and others should take advantage of the opportunity to comment on proposed regulations promulgated by the Secretary in connection with the implementation of Section 6005.
  • PBMs should review agreements and other arrangements with manufacturers to understand what information may be subject to reporting. PBMs also should consider reviewing and updating agreements with business partners, including provisions related to disclosure rights and obligations.
  • Section 6005 does not provide specifically for preemption of state law requirements. PBMs need to consider carefully the coordination of Section 6005 with current state law reporting requirements and government settlement obligations.
  • PBMs must invest in a robust infrastructure that will facilitate compliance with Section 6005 and other reporting obligations. This infrastructure will require significant dedicated resources and support from the organization's senior management.
  • Covered entities such as physicians and teaching hospitals should evaluate and determine what resources and infrastructure will be needed to identify, track and review reported information under the Sunshine Act.
  • Health benefits plans should consider the impact of Section 6005 on their contracts with PBMs. Plans should take this opportunity to review and update their PBM contracts to understand what information will be reported to them and to the Secretary and how it will be reported.