By Kathleen M. Boozang

CMS has published proposed rules for its implementation of the Physician Payment Sunshine Act (SUNSHINE ACT or Act), which was enacted by Congress as part of the 2010 Patient Protection and Affordable Care Act.  In short, the SUNSHINE ACT requires life science companies to report annually to CMS their conferral of anything of value, whether it be payment for services or a dinner, in connection with a particular product of the paying company.  By requiring CMS to post the information on its website, the Act seeks to ensure that interested patients become aware of physicians’ conflicts of interest that could affect their prescription of a branded drug or choice of a specific medical device.

The SUNSHINE ACT represents another example of the transparency movement, which has had varying degrees of success in either changing the behavior of the parties subject to disclosure, and/or enabling consumers to make better decisions based upon their access to the disclosed information.  It is likely that the SUNSHINE ACT will impact physicians and manufacturers’ behavior more than it will enlighten consumers about conflicts of interest.  Some physicians will simply conclude that accepting certain gifts or benefits from pharmaceutical or medical device companies isn’t worth having their names on the CMS website.  Some companies have already discovered that they haven’t necessarily reaped the value of the costs of gifting many physicians, or that the cost of recording certain activities simply isn’t worth the return on investment.  Unquestionably, certain transactions will continue to be valuable to both physician and company, and will continue.

It is unlikely that most patients will access the information either before or after a physician visit, or know what to do with the information even if they discover that their physician has an equity interest in the knee she plans to use in next week’s surgery – does such a close relationship with the knee manufacturer signal that the physician is great, or that something nefarious is going on?  The information is likely to be used by consumer watchdog groups, as well as hospital formulary committees and medical school deans interested in knowing the sources and amounts of outside income being earned by faculty.  Divorce attorneys are likely to find the information useful if their client’s soon-to-be ex-spouse hasn’t reported significant pharma consulting fees as income.

CMS rulemaking is behind schedule, thereby delaying the SUNSHINE ACT’s implementation.  It is likely, however, that the ultimate rules will still require that 2012 data be submitted, even if not by the deadline originally contemplated by Congress.

The statute requires manufacturers of drugs, devices, biological or medical supplies covered by Medicare, Medicaid or the Children’s Health Insurance Program (CHIP) (”applicable manufacturers”) to report annually to HHS payments or transfers of value to physicians and teaching hospitals (”covered recipients”).  Failure to comply will result in Civil Monetary Penalties.  HHS, in turn, must publish this information on a public web site which is searchable, downloadable and able to be aggregated.  Compliance with the SUNSHINE ACT’s reporting requirements does not exempt applicable manufacturers from application of fraud, waste and abuse laws.

Applicable Manufacturer

The proposed rule merges the SUNSHINE ACT definition of “manufacturer of a covered drug, device, biological, or medical supply”[1] with the statutory section clarifying that the entity covered by the SUNSHINE ACT must be “operating in the United States, or in a territory, possession, or commonwealth of the United States”[2] to define applicable manufacturer as one

(1)    Engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply for sale or distribution in the United States, or in a territory, possession, or commonwealth of the United States; or

(2)    Under common ownership with an entity in paragraph (1) of this definition, which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological, or medical supply for the sale or distribution in the United States, or in a territory, possession, or commonwealth of the United States.

The operative activity that invokes statutory coverage, then, is sale of a product in the United States, as opposed to where the product is produced, or where the entity is located or incorporated. Pursuant to the rationale that risks inhere in conflicts of interest irrespective of where the manufacturer is located if the product is sold in the United States, any entity under common ownership with the manufacturer that is involved in the production, distribution or sale of at least one covered product in the United States must report all payments and conferral of value upon covered recipients. Further, as proposed, the product sponsor (i.e., the entity that obtained FDA approval) is subject to the reporting requirement, even if the sponsor is not involved in the manufacture of the covered product.  CMS is considering alternative interpretations of the common ownership concept.

Covered Drug, Device, Biological, or Medical Supply (”covered product”)

The SUNSHINE ACT focuses upon those products for which Medicare, Medicaid and CHIP pay.  This is relatively straightforward in many contexts, but CMS seeks to ensure that it captures situations where such products are part of a composite rate payment, such as the inpatient or outpatient hospital reimbursement, or the end-stage renal disease prospective payment system.  As such, CMS proposes to define “covered drug, device, biological, or medical supply” as:

Any drug, device, biological, or medical supply for which payment is available under Title XVIII of the Act or under a State plan under title XIX or XXI (or a waiver of such plan), either separately, as part of a fee schedule payment, or as part of a composite payment rate (for example, the hospital inpatient prospective payment system or the hospital outpatient prospective payment system).  With respect to a drug or biological, this definition is limited to those drug and biological products that, by law, require a prescription to be dispensed.  With respect to a device or medical supply, this definition is limited to those devices (including medical supplies) that, by law, require premarket approval by or premarket notification to the Food and Drug Administration.

CMS seeks comments on its plan to exclude from the scope of regulation those manufacturers who produce and sell only over the counter (OTC) products.  More specifically, this exemption would not extend to a manufacturer who sells even one prescription product who is otherwise subject to the reporting requirements of the SUNSHINE ACT.  Similarly, CMS seeks to interpret the SUNSHINE ACT to cover only those medical devices that require premarket approval, on the theory that this is the segment of the market most likely to have extensive provider relationships.  If a device manufacturer produces a single product that requires pre-market approval, it would have to report all payments and conferrals of value to covered recipients.

Covered Recipients

The SUNSHINE ACT defines “covered recipients” as (1) a physician, other than a physician who is an employee of an applicable manufacturer; or (2) a teaching hospital.   The term physician includes both doctors of medicine and osteopathy as well as podiatrists, optometrists and licensed chiropractors. CMS interprets the statute to include within its scope those who act on behalf of covered recipients.  Teaching hospital is not defined by the statute; CMS seeks comments on its proposal to identify such entities by virtue of their receipt of Medicare graduate medical education funds. CMS will publish this list annually on its website for manufacturers’ reference.

CMS plans to utilize the National Plan & Provider Enumeration System, which it maintains on its website, to collect the data regarding covered recipients required by the SUNSHINE ACT: covered recipient’s name and business address, and, for physicians, the National Provider Identifier and specialty.

Payments or Other Transfers of Value

The report must also include the date, form (i.e., cash, stock, ownership interest), nature (i.e., education, research, consulting fees, food) and amount of payment, and the market name of the product associated with the payment.  CMS continues to consider how to handle payments made to a single covered recipient related to multiple products.  CMS seeks to generate data in a form most easily understood by consumers.

The statutory definition requires such conferrals to be reported irrespective of whether they were requested by the physician or hospital and includes those made by third parties as long as the applicable manufacturer knows the identity of the covered recipient. CMS proposes that payments made through a group practice be reported under the specific recipient physician’s name.  If a physician requests the conferral to be directed to another physician or entity, the manufacturer should report the conferral under the requesting physician’s name as well as the name of the actual recipient.

Charitable contributions by an applicable manufacturer to, at the request of, or on behalf of a covered recipient are reportable.

The SUNSHINE ACT excludes from its reporting requirement the following payments:

• Transfers of value less than $10, unless the aggregated amount exceeds $100 in a calendar year
• Product samples not intended to be sold that are intended for patient use
• Educational materials that directly benefit patients or are intended for patient use
• The loan of a covered device for a period not to exceed 90 days, to permit evaluation
• Items or services provided under a contractual warranty
• A transfer of value or payment to a covered recipient when that person is receiving the conferral in his/her capacity as a patient
• Discounts, including rebates
• In-kind items used for the provision of charity care
• A dividend or profit distribution from ownership or investment interest in a publicly traded security or mutual fund
• Self-insurance payments to covered employees by an applicable manufacturer
• Non-medical services
• Transfers of value made by third parties where the applicable manufacturer is unaware of the identity of the covered individual

CMS will be moving rapidly to respond to comments and finalize these rules, which will likely involve changes from the discussion here.  State laws that pre-date the Act are pre-empted to the extent that they require reporting of the same information, which leaves them the discretion to retain those reporting requirements that are not redundant.  States seeking to impose as much of a burden on manufacturers as possible are likely to retain their individualized reporting requirements, others may find the costs not worth the benefits now that the feds have finally stepped in.

[1] Section 1128G(e)(9).

[2] Subsection (e)(2) further clarifies that the entity covered by the SUNSHINE ACT must be “operating in the United States, or in a territory, possession, or commonwealth of the United States.”

This post originally appeared at Health Reform Watch.