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As the Compliance Net Tightens...

Pharmaceutical ExecutivePharmaceutical Executive-02-01-2012
Volume 0
Issue 0

Time to stop and think about CMS's 'Proposed Rule' on transparency and what it means for the life sciences business model.

Over the past several years, the seemingly routine relationships between all sides of the medical and scientific communities have come under increasing scrutiny in response to well-publicized concerns over issues of physician independence and conflicts of interest.

As part of the health reform bill—the Patient Protection and Affordable Care Act (ACA) passed in 2010—Congress included requirements for life sciences manufacturers and group purchasing organizations (GPOs) to report certain types of financial and physician ownership interests. The provisions are commonly referred to as the "Sunshine" provisions because they are designed to shine a bright light of transparency on the personal financial interests of physicians and on the institutional financial interests of academic medical centers, as they relate to life sciences companies. In particular, ACA requires that certain manufacturers of covered drugs, devices, biologics, and medical supplies annually report to the Secretary of HHS "payments or other transfers of value" to physicians and to teaching hospitals. Further, the ACA requires that these same manufacturers, along with GPOs, report information regarding the ownership or investment interests held by physicians (or their immediate family members) in such manufacturers and GPOs, along with payments or other transfers of value to such individuals. Although the ACA itself sketched out the basic reporting requirements, the true impact of the provisions will depend largely on the promulgated regulations.

On December 19, 2011, CMS issued the much-awaited proposed rule, entitled "Medicare, Medicaid, Children's Health Insurance Programs: Transparency Reports and Reporting of Physician Ownership or Investment Interests" (the Proposed Rule). The Proposed Rule warrants careful review by life sciences companies. CMS affirms in the preamble that collaboration between the life sciences sector and the healthcare provider sector is important and can serve a vital public health function, and that the purpose of the Sunshine provisions is not to chill or discourage such relationships. However, anecdotal reports indicate that even just the steps taken to date to promote transparency have prompted companies and individual and institutional healthcare providers to become more wary about entering into such relationships. For many physicians (and their immediate family members), the Proposed Rule would make public, in significant detail, what would otherwise be private and personal financial information. For manufacturers and GPOs, the Proposed Rule will necessarily require a compliance regime specifically to meet the requirements—and has the potential to significantly change the way these companies operate.

While the Proposed Rule tracks the requirements of the ACA, it also incorporates a number of discretionary scope-setting decisions and certain refinements which will significantly impact industry:

All or Nothing Model

The Proposed Rule intends that manufacturers that produce more than one product are covered by the Act are regulated manufacturers even if only one product in that diversified portfolio is a covered drug, device, biological or medical supply regulated by the ACA. Further, the Proposed Rule would require that a manufacturer report all transfers of value to physicians and teaching hospitals, regardless of whether any particular transfer is associated with a portfolio product that is a covered product. Thus, larger companies with significant portfolios that include products that are not covered drug, devices, biologics and medical supplies would find that they would have transparency obligations for financial relationships that related solely to otherwise non-covered products.

Benefit from industry updates and case studies related to this article

CBI's Bio/Pharma Forum on Regulatory Policy

Where Regulatory Professionals Examine FDA Updates, Current and Pending Legislation and the Impact on Business

May 7-8, 2012

Washington, District of Columbia

Impact on Startups

The Proposed Rule purports to cover manufactures that distribute or sell covered products. The use of the word "distribution" in addition to sale in the Proposed Rule definition would seem to capture companies that are in the premarket approval stage of the life sciences development spectrum and are distributing covered drugs, devices, biologics, or medical supplies in connection with conducting clinical trials. The Proposed Rule does not clarify this particular point, although such an interpretation appears consistent with the Proposed Rule's discussion of research on new products. If CMS does intend for these regulations to apply under such circumstances, a wide range of startup companies and well-capitalized biotech companies would be affected.

Financial Relationship Management Responsibility

Life sciences companies have already established mechanisms for tracking financial relationships and ensuring that such financial relationships are for bona fide transactions consistent with fair market value. Some state laws additionally require tracking of all expenses, including things such as meals. The Proposed Rule would capture all of these financial relationships on a national basis. Moreover, the Proposed Rule's "all or nothing" approach and the proposed inclusion of foreign entity expenditures, funds that may support U.S. activities in some fashion, will exponentially add to the level of investment and tracking required. Indeed, the Proposed Rule makes clear that compliance with these state and federal anti-fraud and abuse provisions is not sufficient to meet either the letter or spirit of the Proposed Rule.

R&D and Clinical Investigation Provisions

The Proposed Rule seeks to address separately financial relationships attendant to "clinical investigations," "research," and "development." The Proposed Rule's approach to distinguishing, however, between these three categories does not easily track how such terms are used by life sciences companies and researchers. The distinctions drawn by the Proposed Rule matter, as they may affect whether a life sciences company can avail itself of the delayed publication pathway intended to protect the proprietary interests of a life sciences company for a reasonable period of time by delaying the public reporting of certain financial relationships that might reveal otherwise confidential pipeline development information. CMS notes that the ACA appears to distinguish between the scope of delayed publication rights for payments related to "research" as opposed to payments for "development" or "clinical investigations." For research, for example, the ACA extends delayed publication to new products and new applications for existing products. For development and clinical investigations, however, the ACA appears to afford delayed publication only to new products—and not to new applications for existing products. CMS's proposed solution, however, is to treat the terms "research" and "development" similarly with respect to delayed publication, but to treat "clinical investigations" as distinct from research or development. Despite CMS's conviction that clinical investigations can be consistently and meaningfully distinguished from research or development, manufacturers, in particular, may have difficulty tracking the distinctions in light of real-world operations and everyday usage.

Impact on Immediate Family Members

The ACA mandates that manufacturers and GPOs report on investment and ownership interests held by physicians and their immediate family members and transfers of value to such individuals. CMS proposes the following definitions for 'immediate family member:'

» Spouse;

» Natural or adoptive parent, child, or sibling;

» Step-parent, step-child, step-brother, or step-sister;

» Father-, mother-, daughter-, son-, brother-, or sister-in-law;

» Grandparent or grandchild; and/or

» Spouse of grandparent or grandchild.

Notably, the Proposed Rule would not include domestic or same-sex partners and does not specify whether same-sex couples married under state law would qualify as "spouses" for the purpose of this federal law. In any case, the inclusion of such a broad net of immediate family members will place a significant and complicated responsibility on manufacturers and GPOs to identify investors, and owners who qualify as immediate family members of physicians. This will require information-capture mechanisms beyond those which are required for typical fraud and abuse compliance. In addition, the immediate family members, who may themselves not be physicians and may have no knowledge of the Proposed Rule, may be surprised to find their otherwise private financial relationships a matter of public record.

The Proposed Rule is a genuine attempt to implement the Sunshine provisions in a balanced way. However, some of its proposals may result in an expansion of the key provisions of the ACA and should be closely scrutinized by life sciences companies. The additional expense associated with implementing the law will be great. The bigger impact, however, may be to the life sciences business model—once the people who invest in, work with, and work for the industry begin to feel its impact.

Glenn M. Engelmann is Senior Counsel at McDermott, Will & Emery. He can be reached at gengelmann@mwe.com

Jennifer S. Geetter is a Partner at McDermott, Will & Emery. She can be reached at jgeetter@mwe.com

Benefit from industry updates and case studies related to this article

CBI's Bio/Pharma Forum on Regulatory Policy

Where Regulatory Professionals Examine FDA Updates, Current and Pending Legislation and the Impact on Business

May 7-8, 2012

Washington, District of Columbia

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