Less than one year from now, on March 31, 2014, drug manufacturers will disclose to the government nearly all of the payments they will have made to physicians and teaching hospitals for the five-month period ending on December 31, 2013. These voluntary disclosures of confidential commercial information will include a broad array of payments, encompassing everything from meals to consulting fees to research-related payments. The disclosures will not be made in response to a competitor’s document requests in civil litigation, nor to an inspector’s request to review records or an investigator’s subpoena or search warrant. And the disclosures will not remain confidential — the government will make them publicly available by posting them on the Internet no later than September 30, 2014. Drug manufacturers will make these disclosures less than a year from now in order to comply with the requirements of the Physician Payments Sunshine Act, enacted in 2010, and its implementing regulations, issued by the Centers for Medicare & Medicaid Services (“CMS”) at the U.S. Department of Health and Human Services (“HHS”) on February 1, 2013.

Sunshine Requirements
Although similar “sunshine” disclosure requirements have been operative in a handful of states for several years, the new federal disclosure requirements apply nationwide. In 2015 (and each year thereafter), drug manufacturers will be required to disclose to CMS the payments they made to physicians and teaching hospitals in the U.S. — from Alaska to Florida — during the preceding calendar year.

Payment Disclosures: Under the law, drug manufacturers must report every “payment or other transfer of value” (including gifts, consulting fees, research activities, speaking fees, meals, and travel) provided to a physician or a teaching hospital. This requirement applies to manufacturers of drugs and biologics that are reimbursed by a federal healthcare program and entities under common ownership with such manufacturers. (It also applies to manufacturers of medical devices and supplies.) For each payment, the report must include:

• The name of the recipient, as listed in HHS’s National Plan & Provider Enumeration System if the recipient is a physician;
• The primary business address of the recipient;
• In the case of a recipient who is a physician, the physician’s specialty, National Provider Identifier number, and state professional license number;
• The amount of the payment;
• The date of the payment;
• The form of the payment (e.g., cash or cash equivalent, in-kind items or services, stock, etc.);
• The nature of the payment (e.g., consulting fees, compensation for non-consulting services, honoraria, gifts, entertainment, food, travel, education, research, charitable contributions, royalty or license fees, investment ownership, speaker fees, grants, etc.);
• If the payment is related to a specific drug, the name of the drug;
• If the payment is made to an entity or individual at the request of the physician, the name of the other individual or entity that received the payment; and
• Whether the payment was provided to a physician who holds an ownership or investment interest in the manufacturer.

Exemptions: Some payments are exempt from the reporting requirements. Among these are indirect payments where the manufacturer does not know the identity of the physician; samples not intended to be sold that are intended for patient use; educational materials that directly benefit patients; discounts, including rebates; and in-kind contributions used for charity care. In addition, for 2013, payments less than $10 are exempt, unless the aggregate amount paid by a manufacturer to a physician during the calendar year exceeds $100, in which case all of the manufacturer’s payments to that physician must be reported. (In subsequent years, this threshold will rise with inflation.) Product samples also are exempt from the reporting requirements, though a separate provision of law requires companies to report sample information to federal regulators.

Research Payments: Although not exempt from reporting and public disclosure, payments made by manufacturers to physicians “under a product research or development agreement” may be published on CMS’s website on a delayed basis. Such agreements must include “a written agreement, a research protocol, or both.” Research-related payments will be delayed from publication if the payment was made in connection with:

• Research on or development of a new drug or biologic, or a new application of an existing drug or biologic; or
• Clinical investigations related to a new drug or biologic.

Publication will be delayed until the first annual publication date after the earlier of (1) FDA approval or licensure of the drug or biologic or (2) four years after the payment was made.

(Un)intended Consequences
Advocates of the law argue that it will bring to light potential conflicts of interest and drive down healthcare costs, since disclosure of manufacturer payments, they contend, will reduce any incentives physicians may have to overprescribe manufacturers’ products. Sen. Chuck Grassley (R-IA), a sponsor of the law, has claimed that “lack of transparency regarding payments made by the pharmaceutical and medical device community to physicians has created a culture that this law should begin to change substantially.” Once implemented, however, the Physician Payments Sunshine Act and CMS’s sunshine regulations — what the government has dubbed the “National Physician Payment Transparency Program” — may have consequences that were not intended by its advocates.

Chilling Effect on Industry-Physician Relationships: First, the disclosure requirements may have a chilling effect on industry-physician relationships. It is unclear whether advocates of the law intended this consequence. When enacting the sunshine regulations, CMS explicitly recognized that “collaboration among physicians, teaching hospitals, and industry manufacturers contributes to the design and delivery of life-saving drugs and devices.” For its part, the pharmaceutical industry has long emphasized that “relationships with healthcare professionals are critical to our mission of helping patients by developing and marketing new medicines.” Others, however, including Sen. Grassley, have decried the “cozy” relationships between industry and doctors. Whatever the intended consequences of the law, the new disclosure requirements may have the effect of dissuading physicians from joining efforts to develop and test new products. Indeed, some physicians have expressed concern that their reputations could be damaged by inaccurate public reporting about the payments they have received from manufacturers.

Even the most well-intentioned companies may report to CMS a payment that a physician disputes. Under the law, physicians will be provided at least 45 days to review and dispute information about payments disclosed by manufacturers. When payment information reported to CMS by a manufacturer is ready for review, physicians will be able to log into a secure website to view all of the information reported about that physician. Any disputes are to be resolved directly between the physician and the manufacturer. For manufacturers, educating physicians about the requirements of the law and the specific impact they may feel from disclosure of payments they have received will be important to maintaining good commercial relationships.

Preemption of State Laws: Second, the disclosure requirements may have the effect of displacing state-level reporting requirements. Although salutary from the perspective of drug manufacturers, preemption of state-level sunshine laws was not the intent of lawmakers. As promulgated, CMS’s sunshine regulation preempts “any statute or regulation” of a state that requires a manufacturer “to disclose or report, in any format, the type of information regarding the payment or other transfer of value required to be reported” by the federal regulation. Instead of expressly preempting all state sunshine requirements, the federal law preserves state laws that require disclosure of different “types” of information — posing an interpretive and administrative burden for companies. Even so, in light of the new federal requirements, some states appear to be pulling back: Maine repealed its sunshine law in 2011, and Minnesota announced earlier this year that it would not require manufacturers to report any sunshine data for calendar year 2012 and would seek to repeal its own state-level disclosure requirements. Companies obviously will need to stay abreast of developments in the states.

Substantial Burden on Manufacturers: Finally, the disclosure requirements will impose substantial administrative burdens — and increased risk associated with reporting — on drug manufacturers. Advocates of the law either intended these consequences or were indifferent to them. CMS estimates that the total cost of the reporting provisions to industry will be approximately $269 million in the first year and $180 million annually thereafter. These administrative costs include making sure that all relevant payment data is being collected in a format that can be reported to CMS, including by building or acquiring manual or automated information technology systems that collect information from sales representative expense reports, contracts (for consulting, research, honoraria, etc.), and vendor-managed programs (such as physician speaker programs), and ensuring that company systems collect all of the transparency report-required data. The administrative burden of training sales representatives and other company employees on sunshine requirements also adds to these costs.

In addition, disclosure of physician payments may lead to increased liability and fraud and abuse claims against drug manufacturers. When reports are made public in late 2014, prosecutors (as well as whistleblowers) will look carefully to see if the information being disclosed can be used to establish liability under fraud and abuse statutes. Potential areas of liability include the anti-kickback statute, the False Claims Act, price reporting statutes, and off-label promotion. The government in recent years has repeatedly targeted drug companies, so the likelihood of increased prosecutions is high.

There are significant penalties for failing to comply with the law. Failing to comply with reporting requirements could result in civil monetary penalties totaling as much as $150,000, which may increase to $1,000,000 if the failure is knowing. The HHS’s Office of the Inspector General is authorized to audit, evaluate, and inspect manufacturers for compliance with sunshine requirements. Given the significant administrative burden and cost associated with compliance (approaching and even exceeding $1,000,000 for many companies), and the increased risk associated with reporting (which is hard to measure), it is possible that a drug manufacturer will decide not to comply with the law and instead write a $1,000,000 check to the government instead. Now that would be a consequence not anticipated by proponents of the law!

The National Physician Payment Transparency Program, which will be fully implemented nationwide later this year, is sure to have far-reaching consequences — some of them intended and some of them not. While the law’s disclosure requirements could chill industry-physician relationships, and might have the practical effect of displacing similar state-level requirements, they undoubtedly will impose (and, indeed, already have imposed) a substantial burden on manufacturers seeking to comply. Whether the law will insulate patient treatment decisions from possible conflicts of interest or drive down healthcare costs, as advocates of the law believe, remains to be seen.

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Kyle Sampson is a partner in the Washington, D.C. office of Hunton & Williams LLP (www.hunton.com) and a member of the firm’s Food and Drug Practice. He can be reached by email at [email protected].