On February 8, 2013, after a long delay, the Centers for Medicare & Medicaid Services (“CMS”) published in the Federal Register [1] the final rule (“Final Rule”) implementing the Physician Payment Sunshine Act (“Sunshine Act”) enacted pursuant to section 6002 of the Affordable Care Act. The Final Rule, while largely in line with the proposed rule, [2] makes some helpful clarifications and simplifies the requirements for reporting research payments.

In accordance with the Sunshine Act, the Final Rule has two primary reporting obligations. First, the Final Rule requires applicable manufacturers of drugs, devices, biologicals, or medical supplies covered by Medicare, Medicaid or the Children’s Health Insurance Program (“CHIP”) to report annually direct or indirect payments or transfers of value made to non-employee physicians (broadly defined) and teaching hospitals. Second, the Final Rule requires applicable manufacturers and group purchasing organizations (“GPOs”) to report annually any ownership and investment interests held by physicians (or any of their immediate family members) in the preceding calendar year as well as information on any direct or indirect payments or other transfers of value to such physician owners or investors (or any of their immediate family members). [3] For applicable manufacturers, there is obviously some overlap between the first and second reporting obligations, but CMS clarifies that applicable manufacturers should include payments or other transfers of value to physician owners or investors in the same report used to satisfy the first obligation.

Purpose. In discussing the rationale behind the rule, CMS recognizes that “disclosure alone is not sufficient to differentiate beneficial financial relationships from those that create a conflict of interests or other otherwise improper,” but hopes that disclosure will “discourage the development of inappropriate relationships.” [4] In addition, CMS cautions in the Final Rule that compliance with the Sunshine Act reporting requirements does not exempt applicable manufacturers, applicable GPOs, or any individuals or entities about which information is reported from complying with other applicable laws, such as the Federal Anti-Kickback Statute.

Timing. The final rule requires applicable manufacturers and GPOs to start collecting the required information on August 1, 2013. The data must be reported annually to CMS, with the first report covering August 1- December 31, 2013 due to CMS, electronically, by March 31, 2014. However, with respect to newly “covered” products, CMS is allowing applicable manufacturer’s a grace period of 180 days following the date a product becomes “covered” to begin complying with the data collection and reporting requirements. Applicable manufacturers and GPOs that have reportable data must first register with CMS before reporting.

I. Certain Payments or Transfers of Value to Covered Recipients

Who must report? As indicated above, applicable manufacturers of drugs, devices, biologicals, and medical supplies for which coverage is available from Medicare, Medicaid, or CHIP are subject to the first set of reporting requirements concerning transfers of value to non-employee physicians and teaching hospitals. In the Final Rule, CMS finalizes its proposal to exclude from the definition of “covered drug, device, biological, or medical supply” (“covered products”) any drug or biological that does not require a prescription in order to be dispensed and any device that does not require premarket approval or premarket notification to the FDA. In response to commentary, CMS stated its belief that “manufacturers are generally aware when payment is available for their [covered products] under a Federal health care program.” [5]

With certain exceptions, the Final Rule defines “applicable manufacturer” as “an entity that is operating in the United States” that either (i) “is engaged in the production, preparation, propagation, compounding, or conversion of” a covered product or (ii) is under common ownership [6] with any entity in [(i),], which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, or conversion of a covered product. “Assistance and support” is defined as being “necessary or integral to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale or distribution of a covered product.” [7] CMS gives the example of an entity under common ownership that produces the active ingredient in a covered drug as compared to an entity under common ownership that only aids the applicable manufacturer with human resource functions. CMS cautions, however, that indirect payments or transfers of value made to a covered recipient through an entity under common ownership that is not “necessary or integral” and is not an “applicable manufacturer” itself may still need to be reported as required for indirect payments or transfers of value.

Some of the notable clarifications, distinctions and/or exceptions in the Final Rule regarding who must report include:

  • Reporting obligations apply to manufacturers who have a physical location within the U.S. or otherwise conduct activities within the U.S. or in a territory, possession or commonwealth of the U.S. CMS clarifies that entities with U.S. operations are not permitted to circumvent reporting obligations by making payments to covered recipients indirectly through a foreign entity that has no operations in the United States.
  • Manufacturers who create covered products solely for use by or within the entity itself or by the entity’s own patients are not “applicable manufacturers” and, therefore, are not subject to the reporting requirements. This exception appears intended to cover hospitals, hospital-based pharmacies and laboratories, as well as pharmacies and compounding pharmacies that meet certain conditions.
  • Distributors or wholesalers (including repackagers, relabelers and kit assemblers) that do not hold title to any covered product are not applicable manufacturers and are not subject to the reporting requirements. Conversely, an applicable manufacturer that has products with titles held by distributors does not need to report payments or transfers of value made by the distributor or wholesaler to covered recipients, since these will be made by the distributor or wholesaler. As a result, “physician owned distributorships” that hold title to covered products appear to be captured by the rules.
  • Whereas applicable manufacturers are generally required to report all payments to covered recipients regardless of whether they relate to a covered product, in the following situations the reporting obligation is more limited:
    • Applicable manufacturers whose total (gross) revenues from covered products do not exceed 10% of its total (gross) revenue during the fiscal year preceding the reporting year are only required to report payments or transfers of value that are related to one or more covered product.
    • Entities that are under common ownership with a manufacturer of a covered product and provide assistance or support in the production, preparation, propagation, compounding, or conversion of such covered product are only required to report payments and transfers of value that are related to a covered product for which such entity provides assistance or support.
    • Applicable manufacturers that only manufacture covered products pursuant to a written agreement to do so for another entity, do not hold FDA approval, clearance or licensure for the covered product, and are not involved in the sale, marketing or distribution of the product are only required to report payments or other transfers of value that are related to one or more covered products.
    • Applicable manufacturers do not need to report payments or transfers of value made by separate operating divisions that do not manufacture any covered products (e.g., animal health divisions) unless the payments/transfers are related to a covered product.

Covered Recipients. Covered recipients include non-employee physicians (i.e., doctors of medicine or osteopathy, dentists, podiatrists, optometrists, chiropractors) and teaching hospitals. The reports do not need to include payments to residents or non-physician practitioners. Teaching hospitals are defined as hospitals that receive indirect medical education, direct graduate medical education or psychiatric hospital indirect medical education payments. CMS will publish annually 90 days prior to the beginning of a reporting year a list of “teaching hospitals” that applicable manufacturers can rely on for the entirety of the data collection year.

All Payments or Transfers of Value; Generally. The annual reports to CMS must capture all direct and indirect payments or other transfers of value, meaning anything of value whether made directly or indirectly by the applicable manufacturer to the covered recipient. Indirect payments or transfers of value are defined to include only payments/transfers made through a third party that the applicable manufacturer “requires, instructs, directs, or otherwise causes the third party to provide…, in whole or in part, to” a covered recipient. Reporting of indirect payments or transfers of value is not required if the applicable manufacturer does not know, act in deliberate ignorance of, or act in reckless disregard of the identity of the covered recipient during the reporting year or by the end of the second quarter following the reporting year. CMS explained its intention “is to prevent applicable manufacturers from directing payments to a discrete set of covered recipients whose identities the manufacturers may not actually know, but could easily ascertain.”

In addition, applicable manufacturers must report payments and transfers of value that are made to third parties at the direction or on behalf of a covered recipient. For example, if a physician directs a manufacturer to make a payment to a relative or a charitable organization that payment needs to be reported.

All Payments or Transfers of Value; Exceptions. CMS has finalized several exceptions to the general requirement that all payments or transfers of value must be reported. For 2013, payments or other transfers to covered recipients that are valued at less than $10 individually and $100 in the aggregate do not need to be reported. For subsequent years, this amount will increase annually based on a Consumer Price Index (“CPI”) adjustment. Each year, CMS will publish the new amounts before the beginning of the reporting year. Notably, payments or transfers of value less than $10 (or the subsequently CPI-adjusted amount) provided at large-scale conferences and public events do not need to be reported or included in calculating the yearly aggregate threshold (i.e., $100 for 2013).

In addition, there is a limited exception for payments or transfers of value made to compensate continuing education speakers. The exception only applies, however, if: (1) the manufacturer does not pay the physician speaker directly; (2) the manufacturer does not select or influence the third party’s selection of the speaker; and (3) the continuing education program meets the accreditation or certification requirements of the Accreditation Council for Continuing Medical Education, the American Academy of Family Physicians, the American Dental Association’s Continuing Education Recognition Program, the American Medical Association or the American Osteopathic Association. Payments or other transfers of value for physician speaking engagements that do not meet the requirements above must be reported by the applicable manufacturer.

CMS also finalized special rules for food and beverage provided to covered recipients. Applicable manufacturers are not required to report or track buffet meals, snacks, soft drinks, or coffee made generally available to all participants of a large-scale conference or event. Comparatively, they are required to report meals provided to group practices. In this situation, when an individual physician’s meal is not separately identifiable (e.g., when platters are provided to a group practice), the Final Rule stipulates that the applicable manufacturer is required to determine the value per person by dividing the entire cost of the food and beverages by the total numbers of individuals who partook, including both physicians and non-physicians. The per person value must be reported for each physician who partook in the meal.

The following payments or transfers of value also do not need to be reported:

  • Product samples, including coupons and vouchers that can be used by a patient to obtain samples, which are not intended to be sold and are intended for patient use;
  • Educational materials and items that directly benefit patients or are intended to be used by or with patients;
  • Loans of a covered drug or device under development or providing a limited quantity of medical supplies for a short-term trial period not to exceed a period of 90 days (or a 90 day supply) for evaluation of the device or medical supply by the covered recipient
  • Items or services provided under a contractual warranty;
  • Transfers to a physician when he or she is the patient, research subject or participant in data collection for research and not acting in a professional capacity;
  • Discounts, including rebates;
  • In-kind items used to provide charity care;
  • Dividends or other profit distributions from, or ownership or investment interest in, a publicly traded security or mutual fund;
  • Payments for the provision of healthcare to employees and their families;
  • With respect to covered recipients who are licensed non-medical professionals, transfers of anything of value to the covered recipient if the transfer is payment solely for the non-medical professional services of the licensed non-medical professional;
  • Payments to physicians solely for the physician’s service with respect to legal proceedings and legal defense (e.g., administrative proceeding, legal defense, civil or criminal action and arbitration); and
  • Payments to a physician made solely in the context of a personal, non-business-related relationship.

Report Details. CMS indicated in the Final Rule that it plans to provide reporting templates for reporting entities. The annual reports to CMS must contain, among other things, each of the following:

  1. Covered recipient information (i.e., the name, address, specialty, NPI, and state license number). CMS indicates that the applicable manufacturer bears the responsibility for determining a physician covered recipient’s NPI and expects applicable manufacturers to make a good faith effort to identify and obtain the NPI, including requesting an NPI from the physician, checking the National Plan & Provider Enumeration System (“NPPES”) database, and calling the NPPES help desk. CMS recognizes that the Sunshine Act does not grant CMS authority to require physicians to disclose their NPI to applicable manufacturers; however, CMS strongly encourages physicians to provide their NPI because it is essential for matching payments/transfers to physicians. CMS may require a manufacturer that fails to report an NPI for physicians who have an NPI to re-submit the data. CMS indicated it may also consider such failure inaccurate reporting, which may be subject to penalties.Amount of payment or other transfer of value. A payment made to a group of physicians (or teaching hospitals) should be distributed among individual physicians (or teaching hospitals) who requested the payment, on whose behalf the payment was made, or who are intended to benefit. CMS does not dictate a mechanism for allocating the payment among the applicable physicians, stating instead that “many payments or other transfers of value may need to be divided evenly, whereas others may need to be divided in a different manner to represent who requested the payment, on whose behalf the payment was made, or who was intended to benefit.” [8] In an example, CMS states that where an applicable manufacture donates a set of dermatology textbooks to a group practice, the manufacturer should attribute the transfer of value “only to the dermatologists at the practice by dividing the costs equally across all dermatologists.”
  2. Date of the payment/transfer. For payments or transfers of value made over multiple dates, applicable manufacturers may report each payment/transfer as a separate line item or a single line item for the total using the first payment date as the reported date.
  3. Form of the payment. The four forms of payment are: (1) cash or cash equivalent; (2) in-kind items or services; (3) stock, stock options or other ownership interests; or (4) dividend, profit or other return on investment.
  4. Nature of the payment. Each payment or other transfer of value must be categorized into one of the 16 categories designated by CMS (e.g., consulting fee, honoraria, gift, entertainment, food and beverage, travel and lodging, etc.)
  5. Name(s) of the related covered product(s) (and/or that the payment is related to a non-covered product).

Research Reporting. There are special rules applicable to reporting payments and/or transfers of value related to research that are subject to a written agreement, research protocol, or both. CMS broadly defines research as “as systematic investigation designed to develop or contribute to generalizable knowledge relating broadly to public health, including behavioral and social sciences research.” CMS elaborates by commenting that the definition includes “pre-clinical research and FDA Phases I-IV research, as well as investigator-initiated investigations.” In addition, CMS clarifies that the written agreement requirement may include an “unbroken chain of agreements” to capture the reality that many applicable manufacturers use other entities such as contract research organizations or site management organizations to conduct their research.

Research payments and transfers of value must be reported separately from other payments or transfers of value and must include information that differs from the categories listed above in order to capture research related information, such as to whom the payment/transfer is made, how it is made and who is involved (e.g., the principal investigator). Importantly, the Final Rule simplifies the reporting of research payments as compared to the process contained in the proposed rule, so that a single research payment is reported just once and includes the entity paid, as well as the name of the principal investigator(s). [9]

Consolidated Reporting of Common Ownership. Certain applicable manufacturers under common ownership may, but are not required to, file a consolidated report for all of their related entities. Consolidated reports must identify each applicable manufacturer and/or entity under common ownership that the report covers and must specify on each individual payment line which entity made the payment or transfer of value. In addition, there is some flexibility regarding who reports payments or transfers of value made in the context of joint ventures or cooperative agreements between two or more applicable manufacturers.

Attestation. Along with the report, the reporting entity must submit an attestation by the CEO, CFO, CCO or other officer of the reporting entity that the information reported is timely, accurate and complete (to the best of the individuals knowledge and belief). Reporting entities may also submit an assumptions document explaining the reasonable assumptions made and methodologies used when reporting.

II. Certain Ownership or Investment Interests

Each applicable manufacturer, as well as applicable GPOs, must report to CMS on an annual basis all physician (and/or physician immediate family member) ownership or investment interest in the applicable manufacturer or GPO held during the preceding calendar year. For purposes of this rule, immediate family member is broadly defined to include spouses, natural and adoptive parents, children and siblings, step-relations, in-law relations, grandparents and grandchildren as well as their spouses.

For purposes of this rule, applicable manufacturer is defined in the same manner as discussed above. An “applicable GPO” is defined as an entity that operates within the U.S. and “purchases, arranges for or negotiates the purchase of a covered drug, device, biological, or medical supply for a group of individuals or entities, but not solely for use by the entity itself.” In the preamble discussion, CMS recognizes that the GPO definition may not include every physician-owned distributorship (“POD”) model, but that CMS intends for it to capture as may PODs as possible, while still aligning with the statutory language.

As defined, ownership or investment interests may be direct or indirect and through debt, equity or other means and include, but are not limited to: (i) Stock, stock options (other than those received as compensation until exercised); (ii) partnership shares; (iii) LLC membership and (iv) loans, bonds or other financial instruments that are secured with an entities property or revenue or a portion thereof. There are a handful of exceptions to the definition: (1) interests in a publicly traded security or mutual fund; (2) interest that arises from a retirement plan offered by the applicable manufacturer or GPO to the physician (or immediate family member) as a result of employment; (3) stock options and convertible securities received as compensation, before being exercised or converted; (4) an unsecured loan subordinated to a credit facility; and (5) an interest about which the applicable manufacturer or applicable GPO did not “know” about. With respect to stock options, CMS clarified that prior to being exercised stock options are considered compensation and would need to be reported as such if provided to a covered recipient (e.g., non-employee physician).

These reports must include: (i) physician information, such as name, address, specialty, NPI number, and state license number; (ii) whether the interest is held by the physician or an immediate family member; (iii) the amount invested; (iv) the value and terms of the investment; and (v) direct and indirect payments or other transfers of value to the physician holding an investment or ownership interest, or to a third party on behalf of a physician owner or investor. The same rules discussed above apply generally to the reports of payments and other transfers of value though the rules apply to both applicable manufacturers and applicable GPOs and to the physician owner or investor rather than covered recipients.

For applicable manufacturers, the requirements of this second set of reporting obligations obviously overlaps with the first set discussed above. Again, CMS has clarified that each transfer of value need be reported only once, so that applicable manufacturers must report payments or other transfers of value provided to physician owners or investors (regardless of whether the physician owner is a covered recipient) in its report for payments and other transfers of value, noting that the individual receiving the payment is a physician owner or investor. Thus, physicians that would otherwise not be covered recipients because they are employees of the applicable manufacturer, must be included in the payments and transfers of value report if they are owners or investors.

III. Review, Correction and Publication

CMS will annually publish the information gathered through the reporting process in a searchable format to a public website. CMS recommends, but does not require, that reporting entities voluntarily provide covered recipients the opportunity to review the data prior to its submission to CMS. Prior to publication, CMS will give applicable manufacturers, applicable GPOs, covered recipients, and physician owners and investors 45 days to review and submit corrections to the information submitted. Covered recipients and physician owners or investors may initiate a dispute if they disagree with the information reported. In order for disputes to be corrected prior to publication, the parties need to resolve disputes and submit changes to the information previously submitted to CMS within 15 days following the 45-day review period. Disputes that are not resolved within that time period will be marked as disputed, and any resolution will not be reflected in the published information until the next time the data is refreshed.

Research payments or other transfers of value may be delayed from publication on CMS’ website if made pursuant to a written research development agreement, a research protocol, or both in the following situations:

  1. research on or development of (i) a new drug, device, biological or medical supply or (ii) a new application of an existing drug, device, biological, or medical supply; or
  2. clinical investigations regarding a new drug, device, biological or medical supply.

Although payments must still be reported, CMS will not publish the payments until the earlier of (i) the date of approval, licensure or clearance of the covered produce by the FDA or (ii) four calendar years after the date of the payment/transfer was made. The applicable manufacturer must indicate whether or not the payment/transfer is eligible for delayed publication and continue to indicate annually whether FDA approval is pending or has been obtained. Failure to notify CMS when FDA approval occurs may be considered a failure to report, subject to civil monetary penalties.

IV. Penalties

Any applicable manufacturer or GPO may be subject to a civil monetary penalty of between $1,000 and $10,000 for each payment or other transfer of value or ownership or investment interest not reported timely, accurately or completely. In the aggregate, civil monetary penalties for failures to report in an annual submission of information will not exceed $150,000. Comparatively, knowing failures to report timely, accurately and completely carry penalties of between $10,000 and $100,000 per payment, transfer, or ownership/investment interest, with an aggregate limitation of $1,000,000. Notably, failures and knowing failures to report will be aggregated separately; however, the maximum combined annual penalty for an applicable manufacturer or applicable GPO is $1,150,000.

Note that the penalties may be applied for “failure to report timely or accurately an entire transaction, as well as failure to report timely or accurately certain fields related to a transaction.” It appears CMS expects to treat certain errors in reporting more harshly than others. For example, failures to make a good faith attempt to report the NPI of a physician who has an NPI could be considered a failure to report; whereas, failures to provide the primary business address (as long as what was provided is a legitimate business address of the covered recipient) will not be penalized. Further, CMS does not expect to impose penalties for errors corrected during the review, correction and dispute resolution periods as long as the original submission was made in good faith.

In addition, for applicable manufacturers under common control with other applicable manufacturers that choose to submit consolidated reports to CMS, the manufacturer that submits and attests to the report’s accuracy will be subject to the penalties for the other entities in its report. However, the maximum aggregate penalties will be calculated separately for each underlying applicable manufacturer included in the consolidated report.

V. Pre-emption

With limited exception related to information collected for public health purposes, the federal Sunshine Act and the implementing regulations created by this Final Rule preempt any state statute or regulation that requires an applicable manufacturer to disclose or report, in any format, the type of information regarding payments or other transfers of value required to be reported by these rules.

If you have any questions or would like further information, please contact any of the attorneys in our Healthcare Practice Group.

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[1] 78 Fed. Reg. 9458 (Feb. 8, 2013).
[2] The proposed rule was published in the Federal Register on December 19, 2011 (67 Fed. Reg. 78742).
[3] Id.(to be codified at 42 C.F.R. §403.906).
[4] Id. at 9459.
[5] Id. at p. 32.
[6] Common ownership refers to circumstances where the same individual, individuals, entity or entities directly or indirectly own 5% or more total ownership of two entities, including, but not limited to, parent corporations, direct and indirect subsidiaries, and brother or sister corporations. Id. (to be codified at 42 C.F.R. § 403.902).
[7] Id. (to be codified at 42 C.F.R. § 403.902).
[8] 78 Fed. Reg. at 9471.
[9] 78 Fed. Reg. at 9483.