Physician Payment Sunshine Act
December 14, 2009

On November 7, 2009, the House of Representatives passed its health care reform bill, H.R. 3962, the Affordable Health Care for America Act, by a vote of 220-215. The Senate is now debating its health care reform bill, H.R. 3590, the Patient Protection and Affordable Care Act and a Senate vote on final passage could come in the next few weeks. While the timing is not certain, Senate leaders have signaled that they would like to pass their bill by Christmas, with the hopes of getting a final bill (i.e., a bill agreed upon by both the House and Senate) to President Obama’s desk by January.

Notably, both the House-passed bill and the pending Senate bill include a variety of ancillary legislative changes that could impact your business practices. One such initiative would require medical manufacturers to disclosure their provision of gifts and a wide range of other things of value to doctors and other medical professionals. While perhaps little-noticed, these provisions have been included in the reform “mix” all year, starting with S. 301, the Physician Payment in the Sunshine Act, introduced by Senators Charles Grassley (R-IA), Herb Kohl (D-WI), and Amy Klobuchar (D-MN) in January 2009. Also of note, this week, Senator Grassley transmitted letters to several prominent medical organizations asking them to voluntarily provide details about the amount of money and other things of value that they and their directors receive from drug and device makers.

If health care reform becomes law, it is likely these provisions, in some form, will be included. Notably, such requirements at the federal level would add a layer of complication to existing state-level medical gift restriction and disclosure laws. Over the summer, Massachusetts and Vermont enacted laws (See previous Kelley Drye advisory, "New Gift and Entertainment Disclosure Rules to Affect Pharmaceutical and Healthcare Companies") that not only require disclosure of physician gifts and payments, but also severely restrict gifts and payments to doctors, hospitals and medical practices licensed in those states.  

Neither the House nor the Senate bill contains these gift limits and prohibitions, but detailed information would be required to be disclosed and would be made available on a public website. Items subject to disclosure include payments for items provided to healthcare professionals by companies manufacturing or distributing medical products, including pharmaceutical products and medical or biologic devices. Covered items can include: gifts, food, entertainment, travel, honoraria, research funding, education or conference funding, ownership or investment interests, consulting fees, and speaking fees, among others. Significantly, payments to fund medical research or to host seminars or continuing medical education programs would also need to be disclosed.

If enacted as currently drafted, these federal disclosure provisions will apply to all 50 states, but should not pre-empt state laws which exist in a handful of states. Because these types of gifts and payments are relatively common, such a public disclosure law could potentially require changes in operations, internal controls, and marketing efforts. Another layer of complexity will no doubt emerge, because existing state disclosure requirements and the proposed federal disclosure requirements will not be consistent, unless the currently proposed federal pre-emption language is modified. These new federal disclosure rules, if enacted, may require disclosure of a different range of activity than pre-existing state laws (Please click here to read BNA article, "Pharmaceutical Manufacturing Federal and State Gift and Lobbying Restrictions: Confluence of Laws and Conflict of Standards”).  At this stage, state requirements which are more restrictive or require additional disclosure will remain in effect, in addition to the proposed new federal disclosure requirements under debate.

Of note, prior to final passage, a few key differences between the House and Senate disclosure proposals will need to be addressed. These distinctions are summarized as follows:

Effective date: The effective date of the House bill is January 1, 2010, with the first report due March 31, 2011. The effective date of the Senate bill is January 1, 2012 with the first report due March 31, 2013.

Who must report:
Manufacturers, distributors, clinical investigators of drugs, devices, biologicals or medical supplies for which payment is available under the Social Security Act will be required to report. Under the Senate proposal, pharmacies are exempted. Under the House plan, wholesalers are exempted.

What recipients are covered:
Both bills cover doctors and teaching hospitals. Additionally, the House version includes physician practices; any licensed prescribers; pharmacies and pharmacists; health insurance providers, group health plans, health benefit plans, and any employees of such entities; pharmacy benefits mangers and employees; all hospitals; medical schools; sponsors of continuing medical education; patient and disease advocacy groups; health care professional organizations; biomedical researchers; and group purchasing organizations.

What types of payments or transfers of value are covered:
Both bills require disclosure of cash and cash equivalents; in-kind items or services; and stock, stock options, or any other ownership interest dividend, profit, or other return on investment. These categories specifically include cash and in-kind transfers of value, including securities investments; consulting fees or fees for other services; honoraria; entertainment; food; travel; education; research support; royalty or license revenue; investment interest; direct compensation for serving as faculty or as a speaker for a medical education program; and grants. The Senate version also requires disclosure of charitable contributions.

What ownership interests must be disclosed: Under both bills, physician ownership interest in manufacturers and group purchasing organizations must be reported. The House version also requires hospitals, health care entities, and distributors to report such ownership interests.

Exemptions: Both bills exempt the following: the loan of a covered device for 90 days or less; the replacement of items or services under a warranty; a transfer of value to a covered recipient when the recipient is a patient and not acting in the professional capacity of a covered recipient; in-kind charitable donations; dividends or distributions from ownership or investment interests in a publicly traded security or mutual fund; compensation to an employee solely employed by the manufacturer or distributor; payments made to a covered recipient through a health plan affiliated with an applicable manufacturer for medical care provided to employees of such manufacturer or their dependents; and, any discount or rebate.

The differences between the exemptions are as follows: the Senate bill exempts a gift or payment of less than $10, unless the aggregate amount exceeds $100 in a calendar year. In addition, the Senate bill excludes payments for expert testimony and payments to licensed non-medical professionals if the payment is for non-medical services; and patient educational materials and product samples. The House bill exempts payments and gifts under $5 with no aggregate limit. In addition, the House bill exempts any third party payment or other transfer of value in which the applicable manufacturer or distributor is: (1) unaware of the identity of the covered recipient and is not using such activity or service to market its product to the covered recipient; and (2) that is not designed to market or promote the product to the covered recipient. This differs slightly from the Senate version, which simply exempts third party transfers where the manufacturer does not know the identity of the recipient. Information relating to disclosure of drug samples in the House version, although required to be disclosed, would not be made available to the public.

Delayed reporting allowed for certain payments:
Both bills allow for a delay in reporting in connection with product development agreements and clinical trials.

Penalties:
Both bills propose penalties of not less than $1,000 but not more than $10,000 for each failure to report, with a cap of $150,000. A knowing failure to submit payment information would increase the penalty to not less than $10,000 but not more than $100,000 for each payment, with a cap of $1,000,000 or (House version only), if greater, 0.1 percent of the total annual revenues of the reporting entity.

Because these types of gifts and payments are used in marketing medical products, a federal public disclosure law will undoubtedly require changes in operations, internal controls, and marketing and sales efforts to the following universe: medical prescribers; medical practices; anyone ordering drug supplies; pharmacies; health insurance plans; hospitals; medical schools, sponsors of medical continuing education, and medical professional organizations; patient or disease advocacy groups; biomedical researchers; and group purchasing organizations, among others. Significantly, payments to fund medical research or host seminars or continuing medical education programs would also need to be disclosed.

What can you do?: To stay on the front end of these new provisions, companies should conduct an internal audit and legal review to determine possible changes in current gift giving and entertaining policies to make necessary changes. Further, a comprehensive understanding of existing state gift restriction and disclosure laws and the proposed federal bills is necessary to avoid confusion, reputational risk, and enforcement penalties which are proposed to range between $1,000 to $150,000 for non-knowing violations. If the federal provisions are enacted, pharmaceutical and health care manufacturers will need to decipher and address this burgeoning new area of law and develop the internal compliance programs necessary to administer them. Moreover, even without federal legislation, companies will need to stay tuned to state level initiatives such as those in Vermont and Massachusetts.

Campaign Finance and Political Law Practice

Kelley Drye helps its clients succeed in the political and government ethics arena by guiding them past the legal pitfalls that could lead to civil and even criminal penalties and adverse scrutiny. Through our comprehensive, continuing focus on evolving campaign finance and ethics rules and the tactics of enforcement authorities, we shape clients' advocacy programs, compliance approaches and defensive measures to reduce vulnerabilities and address problems. Many diverse corporations, trade associations and labor organizations turn to us for continuing assistance on government ethics, lobbying, "pay-to-play", gift restrictions and disclosures, and campaign finance and election law. We create tailored lobbying, government ethics, and political activity compliance programs for our clients designed to train employees on the relevant laws, reinforce the right behaviors, and clarify when to ask for guidance.

For more information on this client advisory, please contact: 

David E. Frulla
(202) 342-8648
dfrulla@kelleydrye.com