OIG draft guidelines may affect practitioners

Issue: March 2003

ByLarri A. Short, JD

A new set of federal guidelines that is aimed at the pharmaceutical industry has important implications for physicians as well. The draft guidelines, issued by the Office of Inspector General in October 2002, warn drug companies that some promotional activities may violate federal anti-kickback and fraud statutes.

The OIG’s draft compliance program guidance provides drug manufacturers with detailed suggestions on compliance and identifies fraud and abuse risks specific to pharmaceutical manufacturers.

The industry-specific compliance guidance, which the OIG has been issuing over the past 5 years, is not mandatory. Rather, each set of guidelines is a strong statement of the OIG’s belief that every covered company or organization should implement an effective health care corporate compliance program. According to the OIG, such programs should include certain elements, be executed in certain ways and have written policies and procedures consistent with the OIG’s view of how to comply with applicable laws and regulations. Although the guidelines themselves do not have the force of law or provide for penalties for noncompliance, there is a substantial risk that the OIG will view as unlawful any conduct that is inconsistent with the risk areas discussed in the guidelines.

While the recently issued guidance addresses the activities of pharmaceutical manufacturers specifically, it also speaks to relationships between drug manufacturers and other parties, such as prescribing physicians. Physicians are well advised to measure their dealings with pharmaceutical manufacturers against the OIG guidelines. In fact, physicians should implement policies and procedures as part of their own compliance programs to guide their interactions — and the interactions of their employees, with pharmaceutical sales representatives.

Two areas of particular vulnerability for pharmaceutical manufacturers — and in turn physicians — are compliance with the Prescription Drug Marketing Act (PDMA) as it relates to drug samples and marketing practices that can be construed to violate the federal anti-kickback statute.

Drug samples

Following the TAP Pharmaceuticals Inc. settlement in October 2001, it is no secret that the government is taking a hard line on the improper sale of free drug samples. Fourteen TAP employees or former employees have been charged criminally for encouraging physicians to bill Medicare for free samples of Lupron given to them as an inducement to prescribe Lupron instead of a competitor’s product. Many urologists are also under investigation, and some have already pleaded guilty to PDMA and federal anti-kickback law violations.

The OIG reinforces this concern about the improper sale of free drug samples in the new pharmaceutical manufacturers’ guidance by stipulating that pharmaceutical manufacturers should have written policies and procedures with respect to the offer of drug samples.

For purposes of the guidance, the definition of a drug “sample” is the same as that found in the PDMA — a unit of drug “that is not intended to be sold … and is intended to promote the sale of the drug.”

Unfortunately, while the guidance follows the PDMA language, it makes no explicit distinction between samples, which cannot be lawfully resold or billed to federal health care programs, and “free product” drawn from inventory, which manufacturers sometimes provide as a form of in-kind discount — buy 10, get one free — where the intent is for the free item to be sold.

This suggests that the OIG does not accept this differentiation, a position that is consistent with recent statements by several OIG spokespersons who have indicated that free product should never be billed to federal health care programs. Accordingly, the guidance stipulates that discounts may only be in the form of a “reduction in price.”

Interestingly, however, while the PDMA prohibits the sale of samples, the only explicit prohibition from billing Medicare for a free good or service of which we are aware is that a federal health care program cannot be billed when the patient has no obligation to pay (for example, a patient participating in a clinical trial under which the sponsor has already paid for the patient’s care).

Marketing practices: discounts

The OIG is particularly concerned that the marketing practices of pharmaceutical companies may violate the federal anti-kickback statute. The OIG makes a number of observations regarding pharmaceutical companies’ relationships with purchasers of their products and with physicians and other health care professionals who prescribe their products, recommend them or place them on formularies.

The federal anti-kickback statute prohibits the offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) that is intended to induce the referral of a patient for an item or service that is reimbursed by a federal health care program, including Medicare, Medicaid, Tricare and programs covering veterans’ benefits. Because of the broad nature of the law, the Department of Health and Human Services has the authority to provide protection from prosecution for some types of arrangements, provided they meet certain criteria.

One area of concern involves the provision of discounts. Although the anti-kickback statute specifically excepts discounts from its prohibition, the discount must meet certain standards, which the OIG interprets narrowly.

First, the OIG indicates that a discount must be in the form of a reduction in price for the good or service, which is based on an arm’s-length transaction. The OIG underscores that the exception covers “only actual reductions in the product’s price.” The reduction must be given at the time of sale, or in certain cases may be set at the time of sale, even if determined and paid as a rebate at a later date.

Other kinds of price concessions, including but not limited to discounts on “other products,” other free goods or services, educational or other grants, conversion payments, signing bonuses or “up-front rebates,” do not qualify for the discount exception and must be carefully reviewed. Although one may interpret the OIG’s reference to “other products” to mean products other than drugs, spokespersons for the OIG have indicated that “other products” is used in the guidance to mean that, to qualify for the exception, a discount may be earned based only on the volume of purchases of a particular drug.

The OIG also takes the position in the guidance that bundling of drugs does not qualify for the statutory exception. Yet prior guidance from the OIG indicated that one product may be offered at a discount or for free as inducement for the purchase of a different product as long as both products are reimbursed “under the same methodology.” Thus it would seem, for example, that to the extent that drugs administered in a physician’s office are all reimbursed on the basis of a single methodology — 95% of the average wholesale price (AWP) — physicians should be able to buy one drug at a reduced price, or even obtain it for free, as an inducement for the purchase of a different drug reimbursed under the same methodology. Nevertheless, the pharmaceutical manufacturers’ compliance guidance seems to draw a contrary conclusion.

Remuneration/price reduction

The OIG emphasizes that any remuneration provided as part of a sale, other than a price reduction covered by the discount exception, potentially implicates the anti-kickback statute. Non-price terms of sale make it difficult, according to the OIG, to ensure that the value of the remuneration is accurately reported and that there is not cost shifting between private payers and the federal programs. The test, for the OIG, is that if there is a good or service provided by the manufacturer that eliminates an expense that the purchaser or referral source would have otherwise incurred itself, the arrangement is likely to be problematic from a kickback perspective. As an example, the OIG indicates that the anti-kickback statute would be violated if a manufacturer were to provide reimbursement support by waiving the customer’s obligation to pay for a product when the purchaser’s charges are not compensated by a third party, such as Medicare.

Switching arrangements

The OIG explicitly addresses relationships between pharmaceutical companies on the one hand and physicians and other health care professionals on the other. Some arrangements are singled out for criticism. They include “switching arrangements,” whereby a pharmacy, pharmacy benefits manager (PBM), physician or other practitioner is paid each time a patient’s prescription is changed from a competing product to the manufacturer’s product.

Consulting arrangements

The OIG warns pharmaceutical manufacturers to proceed cautiously when they engage physicians to act as consultants, advisers or researchers, to collect data, to serve on advisory boards or focus groups or to speak at meetings. According to the OIG, these types of arrangements should be carefully reviewed, both individually and in the aggregate, to assure that the services provided under the contract are reasonable and necessary for the manufacturer’s business, that actual services are provided and that fair market value is paid for the services.

Unfortunately, the OIG offers no guidance regarding how to calculate the fair market value of time spent by a physician on services unrelated to patient care. It should be understood that physicians also are on notice to review carefully any opportunities offered by pharmaceutical manufacturers before accepting the engagement.

PhRMA guidelines

The last item of importance to physicians deals with the OIG’s direction that pharmaceutical manufacturers comply, at a minimum, with the voluntary standards set by the Pharmaceutical Research and Manufacturers Association (PhRMA) Code on Interactions with Healthcare Professionals, which became effective in July 2002.

The code covers gifts, gratuities and other business courtesies as well as entertainment, recreation, travel, meals and other benefits offered to health care providers in association with pharmaceutical marketing activities. It also addresses sponsorship or other financing relating to third-party educational conferences, scholarships and educational funds, and grants for research and education. Again, as the frequent recipients of these benefits, physicians should recognize that they are equally at risk of scrutiny for possible anti-kickback violations since the law assigns liability to both sides of an illegal transaction.

Importantly, the OIG cautions that, while the PhRMA Code provides important benchmarks, compliance with the relevant sections will not necessarily protect the manufacturer from prosecution or liability for illegal conduct. In each instance, the OIG recommends that a pharmaceutical manufacturer ask if a particular payment or gift is given only to persons who have prescribed or agree to prescribe their products or are in a position to arrange business for the company. In addition, a manufacturer should ask if a payment or a gift is in excess of the fair market value of the services rendered to the manufacturer. Presumably if the answer to either question is yes, both the manufacturer and the physician could face heightened enforcement risk. n

For Your Information:

Allison Weber Shuren, MSN, JD, and Larri A. Short, JD, can be reached at Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut Ave. NW, Washington DC 20036.

The Draft OIG Compliance Program Guidance for Pharmaceutical Manufacturers can be found on the Office of Inspector General Web site: www.oig.hhs.gov.

The Pharmaceutical Research and Manufacturers Association (PhRMA) Code on Interactions with Healthcare Professionals can be found on the PhRMA Web site: www.phrma.org/publications/policy//2002-04-19.391.pdf.