The Sunshine Act Final Rule: CMS Sheds Light on Reporting Physician and Teaching Hospital Payments

by Bradley Arant Boult Cummings LLP
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On February 1, 2013, the Centers for Medicare & Medicaid Services (CMS) released a final rule implementing the Physician Payment Sunshine Act (the “Act”). The Act requires certain manufacturers of covered drugs, devices, and biological and medical supplies operating in the United States (“Applicable Manufacturers”) to disclose annually most direct and indirect payments and other “transfers of value” made to physicians and certain teaching hospitals (“Covered Recipients”). Additionally, Applicable Manufacturers and applicable group purchasing organizations must report ownership or investment interests held by physicians or immediate family members of physicians. Failure to report may result in civil monetary penalties.

Payments and Other Transfers of Value

As an initial matter, the final rule sets out the types of payments and other transfers of value that must be reported. The final rule defines several key terms and phrases:
  • “Applicable Group Purchasing Organization” means an entity operating in the United States that purchases, arranges for, or negotiates the purchase of a covered drug, device, or biological, or medical supply on behalf of a group of individuals or entities (but not solely for its own use)
  • “Applicable Manufacturer” means an entity operating in the United States that either (i) is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, or biological, or medical supply, but not if such covered drug, device, or biological or medical supply is for use solely within the entity or by its patients (and not including distributors or wholesalers that do not hold title to any covered drug, device, or biological or medical supply) or (ii) an entity under common ownership with an Applicable Manufacturer described in section (i) that provides assistance or support to the Applicable Manufacturer with respect to production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, or biological or medical supply.
  • “Physicians” means physicians that meet the Medicare definition, i.e., licensed doctors of medicine and osteopathy, dentists, podiatrists, optometrists, and chiropractors; the term does not include nurse practitioners or residents.
  • “Teaching hospitals” are institutions that receive Graduate Medical Education payments, Indirect Medical Education (IME) payments, or psychiatric hospital IME payments during the last calendar year for which such information is available.
  • “Payment or other transfer of value” means a transfer of anything of value. Whether the payment or other transfer has value to the particular Covered Recipient is irrelevant. Instead, the test is whether the payment or other transfer has “discernible” economic value on the open market in the United States. CMS has not established a comprehensive method by which to determine value; rather, it gives the Applicable Manufacturer flexibility to determine value. However, the Applicable Manufacturer must make a “good faith” effort to determine a payment or transfer’s value.
  • “Indirect payments or other transfers of value” include payments or other transfers of value made to Covered Recipients through a third party at the request, direction, or instruction of the Applicable Manufacturer.

Payments subject to the Act include consulting fees, honoraria, faculty and speaker compensation, grants, gifts, entertainment, food, travel, charitable contributions, royalties or licenses, current or prospective ownership or investment interests, and any other nature of payment or transfer of value. Each payment or other transfer of value (or portion of such) must be designated as belonging to only one category. CMS will provide a list of categories from which to select.

Under the final rule, the disclosure requirement for the Applicable Manufacturers under common ownership that assist with the manufacture, marketing, sale, or distribution of a covered drug, device, or biological or medical supply is limited to payments or other transfers of value that are specifically related to the covered drug, device, or biological or medical supply for which they provided assistance to the manufacturer.

Applicable Manufacturers must report the following information for each payment or other transfer of value to a Covered Recipient:

  • the full name of the Covered Recipient (as listed in the National Plan & Provider Enumeration System), and if the payment or other transfer of value is made to a group of Covered Recipients, such as a physician group, the name of the individual physicians who are the intended beneficiaries of the payment, on whose behalf the payment was made, or who requested the payment, should be reported;
  • the primary business address of the Covered Recipient;
  • for physician Covered Recipients, the physician’s specialty, National Provider Identifier (NPI), at least one state professional license number and the state in which it is held;
  • the amount of payment or other transfer of value; 
  • the date of payment or other transfer of value (multiple payments or other transfers of value may be aggregated with the date of the first payment or transfer reported, or they may be reported separately);
  • the form of payment or other transfer of value (cash, in-kind items or services, stock, stock options or other ownership interests, dividends, profits, or other returns on investment);
  • the nature of the payment or other transfer of value;
  • the names of the related covered drugs, devices, or biological or medical supplies;
  • eligibility for delayed publication;
  • payments or other transfers of value to third parties at the request of or on behalf of Covered Recipients (e.g., charitable contributions in the name of a Covered Recipient), though the third party may be identified as “individual” or “entity”; and
  • payments or other transfers of value to physician owners or investors.

The preamble indicates that payments made or other transfers of value to a charity at the request of a Covered Recipient in lieu of directly making such payment or other transfer of value to the Covered Recipient in payment of a fee should be categorized as fees and not as charitable contributions, however. Thus, if a physician waives his or her customary fee but asks that payment be made to a charity, the payment should be reported as a consulting fee with the physician as the Covered Recipient, but the entity paid would be the charity. Payments or other transfers of value, other than those made for expected services or benefits, made to teaching hospitals that have tax-exempt status are considered reportable as charitable contributions.

Certain types of payments and other transfers of value are excluded. Important exclusions include payments or other transfers of value related to certain continuing education programs; indirect payments or other transfers of value where the Applicable Manufacturer is unaware of the Covered Recipient’s identity; payments or other transfers of value less than $10 (unless the aggregate of the payments exceeds $100 in a calendar year); and coupons and educational materials to be used with patients. Loans of covered devices, devices under development, or medical supplies to a Covered Recipient for a trial period of 90 days (or 90 days’ average use) are excluded, as are in-kind items used for charity care.


Special Rules for Research Payments

CMS segregated the reporting for research payments from other payments (grants, consulting, royalties, entertainment, CME, etc.) and streamlined reporting at the study level, without requiring the identification of all physician researchers and indirect payments. For pre-clinical studies before any human studies have begun, the study name and related covered product will not be required.

While Applicable Manufacturers must report payments related to research and development, those payments may be designated as subject to delayed publication. All payments or other transfers of value related to research under a clinical trial agreement for new products will be granted a delayed publication date, but new applications of products on the market will be granted a delay only if the research does not meet the definition of “clinical investigation” (i.e., Phases I through IV clinical research for drugs and biologicals and approval trials for devices). The payments will be reported on the first annual publication date after the earlier of the date of FDA approval, licensure or clearance, or four calendar years after the date of payment or transfer of value.

Applicable Manufacturers are permitted but not required to submit an assumptions document to explain their underlying assumptions, valuation methodologies, and reporting methods. Many Applicable Manufacturers reporting research payments will want to inventory, account for, and validate information and create an assumptions document to support their report since their officers must certify the accuracy and completeness of the report. Applicable Manufacturers filing reports of research payments likely will expect organizations making payments on their behalf (e.g., contract research organizations) to report to the Applicable Manufacturer any relevant payments and transfers through their master research agreements.


Reports of Physician Ownership and Investment Interests

Under the final rule, Applicable Manufacturers and Applicable Group Purchasing Organizations (“Applicable GPOs”) must annually report all ownership and investment interests that were held by a physician or physician’s immediate family member during the prior calendar year.

The final rule does not provide a comprehensive definition of “ownership or investment interests,” but instead sets forth a nonexclusive list of the types of interests the term includes. Ownership or investment interests may be direct or indirect and may consist of debt, equity, or other means. The final rule considers stock, interests in partnerships or limited liability companies, and loans or bonds secured by an Applicable Manufacturer’s or Applicable GPO’s property or revenue -- either in full or in part -- to be ownership or investment interests.

However, the final rule does exclude certain interests from the definition of “ownership or investment interest,” and those interests are not subject to the reporting requirements. These exclusions include interests in publicly traded securities or mutual funds, interests in an Applicable Manufacturer or Applicable GPO received by a physician or physician’s immediate family member arising from a retirement plan offered as part of such individual’s employment with the organization, unexercised stock options and convertible securities received as compensation, and unsecured loans subordinated to credit facilities. Additionally, the definition excludes an ownership or investment interest about which the Applicable Manufacturer of Applicable GPO did not know. Importantly, the final rule provides a standard by which to determine whether a person “knows” about certain information that tracks the knowledge standard under the federal Civil False Claims Act.

For ownership and investment interests, the Applicable Manufacture or Applicable GPO must annually report to CMS (i) the physician’s name (as listed in NPPES) and whether the physician or an immediate family member held the ownership or investment interest; (ii) the physician’s primary business address; (iii) regardless of whether the physician or an immediate family member held the ownership or investment interest, the physician’s specialty, NPI, and at least one state professional license number and the state in which it is held; (iv) the dollar amount of the investment; and (v) the value and terms of each ownership or investment interest. Furthermore, payments or other transfers of value to or on behalf of a physician owner or investor must be reported as if such were made to a Covered Recipient.

Global Rules

Once an Applicable Manufacturer or Applicable GPO files its report, Covered Recipients and physician owners or investors are allowed to review such reports and offer corrections during a review period, which must be at least 45 days prior to CMS’s public release of the information. A Covered Recipient must initiate a dispute within a narrow time frame if it disagrees with the report. Failure to resolve disputes within such time frame may result in a delay in a corrected report’s release or the release of a disputed report (CMS will indicate that a report is subject to dispute).

Records sufficient to audit compliance with the final rule must be maintained for at least five years from the date that CMS publishes the payment (i.e., at least nine years for product development). Finally, state sunshine reporting laws requiring Applicable Manufacturers to disclose the type of information required under this rule are preempted.


Moving Forward

While the responsibility for reporting lies with the Applicable Manufacturer or Applicable GPO, these entities will certainly shift some responsibility for record-keeping and accounting to Covered Recipients, and in the case of research, to CROs, through their contracts. For this reason, we have provided below a list of action items to assist clients in preparing for this new era of disclosure. 

  • Applicable Manufacturers, Covered Recipients, research institutions, and principal investigators should identify key contacts for reporting and resolution of discrepancies during the tight dispute resolution timeframes
  • Applicable Manufacturers and Covered Recipients should inventory existing payments and transfers of value affected by the upcoming August 1, 2013 data collection period
  • Validate completeness of Covered Recipient information, including Teaching hospital Tax ID Number (to be available from CMS by May 1, 2013) and Physician demographic information, including NPI, state license, specialty, and primary business address. For research payments, also identify other research institutions, individuals, or entities receiving direct payments for which reporting will be required
  • Applicable Manufacturers need to establish an internal or external process and valuation methodology for payments and “transfers of value” to Covered Recipients and consider the development of an assumptions document to delineate the valuation and reporting methods
  • Parties to arrangements covered by the final rule should update their conflict-of-interest policies and ensure applicable arrangements documented in a written agreement that clarifies reporting obligations and time frames, required documentation maintenance procedures, whether the reporting will be subject to delayed publication, and a dispute resolution process
  • Applicable Manufacturers should analyze whether continued reporting will be required under state disclosure laws.
  • Update record retention policies to ensure source documents for reporting are maintained

For more information on the Physician Payment Sunshine Act and the final rule, or if you need assistance preparing for the August 1, 2013, compliance date, please contact Amy Leopard, Tripp Haston, or one of the other attorneys in the Life Sciences Industry Team or Health Care Practice Group at Bradley Arant Boult Cummings. Our Life Sciences Team provides a wide range of legal services to clients in the pharmaceutical, medical device, biotechnology, and health care industries and is working diligently to prepare compliance materials that will help our clients meet the requirements of the Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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