OIG's Compliance Program Guidance for Pharmaceutical Manufacturers

Rebecca L. Burke and Robert J. Saner II
May 2003

I. INTRODUCTION

The Office of Inspector General ("OIG") released the final version of its Compliance Program Guidance for Pharmaceutical Manufacturers on April 27. This Guidance reflects the OIG's continued effort to promote voluntary compliance in the health care industry. The Guidance focuses primarily on three risk areas: (1) integrity of data used by state and federal governments to establish payment amounts; (2) kickbacks and other illegal remuneration; and (3) compliance with laws regulating drug samples. The Guidance can be found on the OIG's website at http://oig.hhs.gov.

The OIG published a draft of the Guidance last fall (67 Fed. Reg. 62,057, October 3, 2002) and solicited comments from affected parties. It also held meetings with physician organizations to discuss the concerns of the physician community. In the final Guidance, the OIG has addressed some of these concerns, but has declined to adopt many of the specific requests made by physician and other health care organizations.

II. RISK AREAS

A. Integrity of Data used to Establish Government Reimbursement

Federal regulation of drug pricing determines what federal health care programs pay for covered drugs, and, in some situations, what drug purchasers pay for drug acquisition. The integrity of these payment formulas depends on the integrity of data reported by manufacturers. For example, Medicare payment for covered outpatient drugs is keyed to the "average wholesale price" or "AWP" of the product. The Medicaid drug rebate program keys off the "average manufacturer price" or "AMP" and the "best price" of the product. The "340B" drug discount program for which certain hospitals and other purchasers are eligible is linked to the Medicaid rebate program.

Hidden price concessions or services offered to some customers, and not reflected in reported prices, can inflate the calculation of AWP, AMP and "best price," leading to Medicare or Medicaid payments that the OIG considers inflated. Improper reporting of pricing data can form the basis of a government or whistleblower claim under the False Claims Act or a criminal charge under the False Statements Act and other authorities.

While the obligation to accurately report drug price information falls on the manufacturer in the first instance, when buyers (hospitals, physician practices and others) participate in schemes that result in inaccurate price reporting, they may face exposure along with the manufacturer. If they are on the receiving end of undisclosed discounts, rebates, free services and other concessions, they may also have kickback risks as discussed below.

B. Kickbacks and Other Illegal Remuneration

1. Overview

The federal anti-kickback law establishes criminal penalties as well as civil monetary sanctions and exclusion from federal health care programs for payments made for the purposes of inducing or rewarding the referral or generation of federal health care business. The statute applies to both the solicitation and acceptance of remuneration for referrals. Although liability turns on a party's intent, the Guidance identifies a number of arrangements or practices that present potential for abuse. In order to assess their risk, the OIG recommends that pharmaceutical manufacturers

Identify any remunerative relationships they have with entities or persons in a position to generate federal health care business such as purchasers, benefit managers, formulary committee members, group purchasing organizations, physicians, and pharmacists.
Determine whether any one purpose of the remuneration is to induce or reward the referral or recommendation of business payable by a federal health care program.

Any arrangement that fails both tests should be carefully scrutinized. However, the Guidance identifies certain aggravating circumstances that place an arrangement at greater risk for prosecution. They are:

Whether the arrangement has a potential to interfere with clinical decision-making or undermine the clinical integrity of the formulary process;
Whether the arrangement has a potential to increase costs to the federal health care program or patients;
Whether the arrangement may increase the risk of overutilization or inappropriate utilization;
Whether the arrangement raises patient safety or quality of care concerns.

The Guidance also emphasizes the availability of certain "safe harbors" under the anti-kickback law. While noting that failure to qualify for safe harbor status does not necessarily mean that an arrangement is illegal, the OIG urges pharmaceutical companies to structure their arrangements with physicians, hospitals, and others in a position to influence business in strict compliance with a safe harbor wherever possible.

The OIG Guidance on kickbacks is organized around three different types of individuals and organizations, all of which are sometimes in a position to influence the flow of business reimbursable under the federal health care programs, albeit sometimes in different ways: (i) drug purchasers and purchasing agents; (ii) physicians and others who prescribe or otherwise refer; and (iii) sales agents. Each of these is addressed separately in the OIG Guidance, and is separately summarized below, even though many of the risks inherent in one area have applicability to the others.

2. Relationships with Purchasers and their Agents

The OIG considers purchasers to include individuals and organizations (other than patients) who buy drug products, directly or indirectly, including hospitals, nursing homes, pharmacies, some physicians, group purchasing organizations and health plans. The Guidance organizes the anti-kickback law risks inherent in these transactions into three different types.

a. Discounts and Other Remuneration to Purchasers

The OIG recognizes that drug sales are highly competitive and discounting is common. However, the OIG believes that the Medicaid drug rebate program provides a strong incentive for sellers to provide price concessions or other incentives in ways other than upfront product price reductions that might easily qualify for the discount safe harbor if done in a straightforward manner.

Some of these disguised discounts that may rise to the level of a prohibited inducement include:

product support services that have substantial independent value to the buyer, or shift reimbursement risk from the buyer to the seller;
educational and research grants or contracts too closely linked to product marketing;
"prebates" or other upfront payments, especially in situations where a purchaser is converting from one product to a competitor's product; and
selective concessions made to some, but not to all buyers in a manner that suggest a link to actual or anticipated volume.

Red flags in the education and research area include:

grants linked to product purchases;
manufacturer influence over program content permitting education to spillover into marketing; and
lack of objective criteria for the award of grants and contracts, suggesting that sales objectives may have had more of a role than legitimate education and research objectives.

It is clear from the Guidance that the OIG is suspicious of arrangements that could be structured as upfront discounts, but are not. Failure to structure these as discounts and seek the protection of the discount safe harbor is, by itself, apparently a risk factor to be considered. Similarly, the Guidance makes a strong case for structuring research, education and other support arrangements so as to conform with the personal services contract safe harbor.

b. Formularies and Formulary Support Activities

The Guidance expresses growing concern over attempts to influence formulary decision-making within purchaser institutions or pharmacy benefit managers. Relationships between manufacturers and formulary committee members should be monitored, and price negotiations should be kept distinct from considerations of clinical safety or efficacy. The OIG sees risks associated with manufacturer funding of formulary support activities that are similar to those associated with product support offered to purchasers. If the manufacturer is picking up costs that would otherwise be born by the institution establishing the formulary, the arrangement requires scrutiny.

c. Average Wholesale Price

The OIG highlights the risk of "marketing the spread." Since Medicare pays physicians 95% of AWP, if a manufacturer can keep its AWP high, while selling product to physician practices at substantially less, the physician gets a profit opportunity that may influence judgment over which drugs to buy. The OIG does not consider this legitimate discounting, since the financial benefit may transfer from the payor to the buyer, rather than from the seller to the buyer. Arrangements that effectively guaranty a particular "spread" would appear to be at very high risk.

3. Relationships with Physicians and Other Referral Sources

Much of the controversy surrounding the OIG Guidance has focused on the potential chilling effect it could have on manufacturer-sponsored research and educational activities by making such activities potential targets for kickback investigations. Although, as discussed below, the Guidance makes an effort to address the concerns expressed by many in the provider community on this issue, the OIG has stopped short of establishing specific safe harbors or exceptions for certain activities.

a. Factors Which Increase Risk

Although the OIG advises manufacturers and physicians to structure their relationships to fit within one of the safe harbors, it recognizes that this is often simply not possible. As an alternative to meeting safe harbor requirements, and in an apparent effort to address concerns of the physician community that the safe harbors do not apply to most arrangements between providers and pharmaceutical companies, the OIG has identified several factors which parties can use to determine whether their arrangements put them at risk:

Nature of the relationship between the parties. What influence does the physician have on generation of business for the manufacturer?
Relationship of remuneration to referrals or business generated. Does payment take into account the volume or value of business generated; is remuneration given only to persons who have prescribed or agree to prescribe the manufacturer's product?
Value of the remuneration: Is the remuneration more than trivial in value? Does payment for services exceed fair market value?
Impact on federal programs: Does the remuneration potentially increase costs to federal health care programs or beneficiaries or lead to overutilization or unnecessary services?
Potential Interference in clinical decisions: Would acceptance of the remuneration affect the integrity of the physician's professional judgment or lead to patient safety or quality or care concerns?

b. Compliance with the PhRMA Code on Interactions with

Healthcare Professionals

In April of 2002, the pharmaceutical industry adopted the PhRMA Code on Interactions with Healthcare Professionals. The OIG Guidance states that while compliance with the PhRMA code does not establish a safe harbor, "it will substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply. The PhRMA code focuses, in particular, on risks associated with gifts and other gratuities (discussed below). The PhRMA code can be found on the PhRMA website at www.PhRMA.org.

c. Specific Problem Areas

The Guidance discusses several specific areas which the OIG believes have been subject to abuse.

Switching Arrangements: These are arrangements in which pharmaceutical manufacturers offer physicians cash or other benefits for each prescription they change to the manufacturer's product. These types of arrangements have long been considered suspect by the OIG and would also violate the PhRMA code.
Consulting and Advisory Payments: The Guidance states that fair market value payments to physicians for bona fide consulting or advisory services would generally not raise any significant concern. The OIG is, however, concerned with less than bona fide arrangements, such as those in which physicians are paid as "consultants" simply to attend meetings or conferences in a passive capacity, or for services connected with a manufacturer's marketing activities, such as speaking or preceptor or "shadowing" services and ghost-writing of papers or speeches. Likewise, the PhRMA code states that it is not appropriate to pay honoraria or travel expenses for individuals to attend meetings if they are not on the faculty or not providing bona fide consulting services.
The OIG recommends that consulting and advisory arrangements be the subject of written agreements which document the bona fide nature of the arrangement, including the need for the service, the nature of the services provided, and the fair market value of the payment. The agreement should be in place prior to payment. The PhRMA code also sets forth several factors which would support a bona fide consulting arrangement.
Payments for Detailing: Often characterized as "consulting fees," this involves payment to physicians for time spent listening to sales representatives market pharmaceutical products or for accessing web sites to view marketing information or perform "research." The OIG views such payments as highly suspect.
Business Courtesies and Other Gratuities: This involves benefits such as entertainment, recreation, travel, meals furnished in association with information or marketing presentations, gifts and gratuities. These types of benefits are addressed in detail by the PhRMA code. Although the OIG does not state that compliance with the PhRMA code provides absolute protection from anti-kickback liability, it does state that such compliance "should substantially reduce the manufacturer's risk." The PhRMA code:
- Allows items primarily for the benefit of patients that are not over $100 in value;
- Allows items of minimal value if associated with the physician's professional practice (e.g., pens, notepads and similar items with the company or product logos);
- Prohibits items for the personal benefit of the physician (e.g., floral arrangements, artwork, music CDs, tickets to sporting events).
- Prohibits payments in cash or cash equivalents (e.g., gift certificates) except as compensation for bona fide services.
Educational and Research Funding: This is the area that elicited the most concern from members of the physician community in part because it affects physician organizations as well as individual physicians. Many physician organizations depend on pharmaceutical company grants to fund their educational programs; and a large number of physicians participate in research sponsored by pharmaceutical companies.
With respect to research activities, the American Medical Association and other groups had urged the OIG to provide an exception or safe harbor for protection of research which is approved by an Institutional Review Board. The OIG declined to do so.

Rather, the OIG reiterated its position that payments to physicians for research be structured, whenever possible, to fit within the safe harbor for personal services. If this is not possible, then the manufacturer should document that the payments for research are at fair market value and are for legitimate and necessary services. In addition, the manufacturer should analyze whether the funding for research is based, in any way, on the physician's referral of the manufacturer's product and whether the research is for a bona fide purpose.

The Guidance emphasized that research contracts that originate through the sales or marketing functions of a company, or are offered in connection with sales contracts, are particularly suspect and recommends that manufacturers separate the awarding of research contracts from marketing functions.

The OIG seems more favorably disposed to educational activities, especially those sponsored by medical societies offering continuing medical education ("CME"). The Guidance states that "absent unusual circumstances, grants or support for educational activities sponsored and organized by medical professional organizations raise little risk of fraud or abuse, provided that the grant or support is not restricted or conditioned with respect to content or faculty."

The Guidance notes that CME is subject to its own code of conduct and that this is a useful starting point for reviewing pharmaceutical company support of CME programs. However, the OIG declined to establish an exception for CME that met the standards of the Accreditation Council for Continuing Medical Education ("ACCME"). This may be due, in part, to the fact that the ACCME is in the middle of revising its standards on commercial support of CME. In a footnote, the Guidance states that tuition payments for CME programs made by pharmaceutical companies to physicians or medical students could raise concerns.

The PhRMA code also states that subsidies offered directly to an individual physician to attend an educational conference is not appropriate but that it would be permissible to give support to the conference sponsor who could then use the funds to reduce overall costs for all attendees. The PhRMA code also permits the giving of scholarships to permit residents or fellows to attend educational conferences provided the selection of individuals who will receive the funds is made by the academic or training institution.

D. Relationships with Sales Agents

This aspect of the Guidance is directed at the relationships between manufacturers and their own sales forces, and thus has less relevance to the provider community. It establishes no new standards for marketing activities or compensation of sales personnel, but strikes familiar themes developed in previous enforcement actions, suggesting that "extraordinary" incentive bonuses and "lavish entertainment" can be indicia of efforts to improperly induce sales.

E. Drug Samples

The Prescription Drug Marketing Act of 1987 governs the distribution by manufacturers of free drug samples for marketing purposes, and forbids their sale by the recipients of the free samples, generally physicians. 21 U.S.C. § 353(c)(1). Resale by a physician not only violates the Prescription Drug Marketing Act "PDMA"), but can also be the basis for kickback and false claims actions. The Guidance urges manufacturers to stress PDMA compliance through training of their own sales forces, labeling of the samples themselves, and education and reminder notices to the physician recipients of their obligations not to resell.

For questions about this memorandum, please call Rebecca Burke, Robert Saner, or the Power, Pyles, Sutter and Verville attorney with whom you usually work.