On Dec. 19, 2011, the Centers for Medicare & Medicaid Services (CMS) released a Proposed Rule to implement § 6002 of the Patient Protection and Affordable Care Act (PPACA), commonly referred to as the Physician Payment Sunshine Act (Sunshine Act). The Sunshine Act was included in PPACA to enhance disclosure and transparency of financial arrangements among physicians, teaching hospitals, and manufacturers of federally reimbursable drugs and biologicals and covered medical devices and medical supplies, and thereby reduce the risk of inappropriate financial incentives interfering with medical judgment and patient care. The Proposed Rule details requirements for processing and reporting payments by pharmaceutical, device, biological and medical supply "applicable manufacturers"1 to physicians and teaching hospitals that are "covered recipients."2 The Proposed Rule also sets forth requirements for reporting ownership and investment interests held by physicians and their immediate family members in applicable manufacturers and group purchasing organizations (GPOs),3 as well as information on payments or other transfers of value to such physician owners or investors. CMS will publish submitted payment and ownership information on a public website.

While the Sunshine Act requires applicable manufacturers to commence data collection for such reports on Jan. 1, 2012, the Proposed Rule provides that manufacturers will not be required to begin collecting the information until after a final rule is published. CMS is considering requiring manufacturers and GPOs to begin collecting data 90 days after publication of the final rule. Physician and teaching hospital review and correction of data provided by manufacturers and GPOs will be required after CMS aggregates the submissions and provides them to the manufacturers, GPOs, covered recipients, and physician or teaching hospital for review.

Highlights of the Proposed Rule

Applicable Manufacturers

The Sunshine Act requires "applicable manufacturers" that sell or distribute federally reimbursable4 prescription drugs or biologics, or covered medical devices or supplies, to report annually to the Secretary of the U.S. Department of Health and Human Services (HHS) certain payments or other transfers of value to covered recipient physicians and teaching hospitals. Under the Proposed Rule, manufacturers of covered drugs, devices, biologicals, or medical supplies are "applicable manufacturers" to which reporting obligations apply if their products are sold or distributed in the United States regardless of where the covered drug, device, biological or medical supply actually is produced or where the entity actually is located or incorporated. Also, a manufacturer meets the definition of "applicable manufacturer" by selling or distributing at least one covered drug, device, biological, or medical supply in the United States, even though it also may manufacture other products that do not fall within that category. Accordingly, all payments or transfers of value made by an applicable manufacturer to a covered recipient must be reported regardless of whether the particular payment or other transfer of value is associated with a Medicare/Medicaid/CHIP-reimbursable product.

Under the Proposed Rule, the term "applicable manufacturer" includes entities that hold Food and Drug Administration (FDA) approval, licensure, or clearance for a covered drug, device, biologic or medical supply, even if they contract out the actual manufacturing of the product to another entity. Therefore, if the Proposed Rule is enacted, disclosure requirements will extend to subsidiaries or divisions set up to handle a company's non-reimbursable products.

Moreover, certain companies that are under "common ownership" with an entity that produces, prepares, propagates, compounds, or converts a covered drug, device, biological, or medical supply are also subject to the reporting requirements, even though they themselves may not be involved in the "manufacturing" process. The Proposed Rule defines "common ownership" as ownership of any portion of two or more entities by the same individual, individuals, entity, or entities, directly or indirectly.5 This definition applies to a variety of corporate relationships, including parent/subsidiary and brother/ sister corporations. If two entities are under common ownership, and both individually meet the definition of an applicable manufacturer, the entities must report separately. On the other hand, if an applicable manufacturer reports for at least one additional entity under common ownership, CMS proposes to allow the applicable manufacturer to decide whether to identify the payments as those from the entity under common ownership, or to combine them with its own payments and other transfers of value.

Covered Drug, Device, Biological, or Medical Supply

The reporting requirements are limited to applicable manufacturers of "covered drugs, devices, biologicals, or medical supplies." Covered drugs and biologicals are those that require a prescription. Covered devices and medical supplies are those that require pre-market approval by, or pre-market notification to, the FDA. Therefore, applicable manufacturers that manufacture only devices or medical supplies that are exempt from the FDA's pre-market notification requirements would not be required to report under the Sunshine Act. Manufacturers of devices or medical supplies that are exempt from pre-market notification requirements and at least one product that falls within the definition of a covered drug, device, biological or medical supply, however, are required to report all payments or transfers of value to covered recipients.

Payments or Other Transfers of Value

The Proposed Rule defines "payment or other transfer of value" as "a transfer of anything of value." This includes all remuneration - in cash or in kind - provided to a covered recipient. In addition, remuneration made to an individual or entity at the request of or as the designee of a covered recipient must be reported under the name of the covered recipient. This would include remuneration provided to a physician through a physician group practice, which would be reported individually under the name of the "physician covered recipient."

Reports of Payment and Other Transfer of Value

Applicable manufacturers must include specific categories of information in their reports. First, the report must include the covered recipient's name and business address and, for "physician covered recipients," the physician's National Provider Identifier (NPI)6 and specialty. Also, the report must include the date the payment or transfer of value was made. As in the case of a consulting agreement with monthly payments, some payments or transfers of value may be provided over multiple dates. CMS proposes that in such situations, applicable manufacturers use their discretion as to whether to report the total payment on the date of the first payment as a single line item or each individual payment as a separate line item.

The Sunshine Act lists 15 categories applicable manufacturers must use to describe the nature of the payment or transfer of value. Under the Proposed Rule, applicable manufacturers must make "reasonable determinations" as to how to categorize their payments, and may voluntarily submit with their data a document describing the assumptions used when categorizing the nature of payments.

Physician Ownership or Investment Reports

In the Proposed Rule, CMS specifically seeks comments on whether a minimum reporting threshold would be appropriate. Also, CMS is considering whether to require the reporting of information about immediate family members of covered physicians in order to bring additional transparency to the nature of the relationships. CMS acknowledges that even if family members' names are reported, such names will not be made public.

CMS proposes to require applicable manufacturers and GPOs to register with CMS prior to report submission. CMS is seeking comment, however, on whether all manufacturers and GPOs should be required to register, or only those that have information to report.

Enforcement, Audits, Recordkeeping

Under the Proposed Rule, violators of the reporting requirements are subject to civil monetary penalties ranging from $1,000 to $10,000 for each failure to report, and from $10,000 to $100,000 for each knowing failure to report. The penalties are subject to an annual cap of $150,000, or $1,000,000 if the failure to report is "knowing." Because CMS has interpreted the Sunshine Act to require submission of accurate and complete information, a civil monetary penalty could be imposed for an incomplete report.

Furthermore, under the Proposed Rule, HHS Office of the Inspector General (OIG) and CMS have the right to audit, evaluate, and inspect applicable manufacturers and GPOs for compliance with the reporting requirements. Applicable manufacturers and GPOs must maintain all records and documents for at least five years from the date remuneration is reported.

State Laws and Preemption

The Sunshine Act preempts any state or local laws requiring reports of payments or other transfers of value made by applicable manufacturers to covered recipients. The preemption is limited in scope, however, and does not apply to state laws or regulations that require reporting of different information; reporting involving entities other than applicable manufacturers and covered recipients; or reporting to a federal, state or local governmental agency for various public health purposes and investigations.

Next Steps

The Proposed Rule indicates that CMS is considering alternative proposals for reporting under the Sunshine Act. As a result, there may be significant changes between the Proposed Rule and any final rule. Comments are due February 17, 2012 at 5 p.m. Eastern Standard Time. While data collection by manufacturers and GPOs may be delayed until final regulations are issued later this year, reporting entities should continue to update and finalize their compliance plans to ensure they are ready to meet the data collection and reporting requirements once the final rule is issued.

Additional Coverage

Drinker Biddle has also released an analysis of the Proposed Rule as it relates to the medical research industry. To view that publication, visit http://www.drinkerbiddle.com/files/ftpupload/pdf/CMSsProposedSunshine.pdf .

To view a copy of the Proposed Rule, visit http://www.federalregister.gov/articles/2011/12/19/2011-32244/transparency-reports-and-reporting-of-physician-ownership-or-investment-interests-medicare-medicaid .

Footnotes

1 The Proposed Rule clarifies that an "applicable manufacturer" for purposes of the Federal Sunshine Law is an entity that is either: (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 such entity 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 sale or distribution in the United States, or in a territory, possession, or commonwealth of the United States. 76 Fed. Reg. 243 at 78744 (Dec. 19, 2011).

2 "Physician covered recipients" include doctors of medicine and osteopathy, dentists, podiatrists, optometrists and licensed chiropractors who are not employees of an applicable manufacturer. The Proposed Rule defines "teaching hospital" as a hospital that received payments under the IPPS Indirect Medical Education (IME), direct Graduate Medical Education (GME), or psychiatric hospitals, IME programs during the most recent year for which such information is available.

3 The Proposed Rule clarifies the definition of an "applicable GPO" as an entity that: (1) operates in the United States, or in a territory, possession or commonwealth of the United States; and (2) purchases, arranges for or negotiates the purchase of a covered drug, device, biological, or medical supply for a group of individuals or entities, and not solely for use by the entity itself. "Applicable GPOs" therefore include both traditional GPOs that negotiate contracts for their members, and physician-owned distributors (PODs) of covered drugs, devices, biologicals, and medical supplies.

4 "Federally reimbursable" means reimbursable under Medicare, Medicaid, or the Children's Health Insurance Program (CHIP).

5 CMS is considering an alternate interpretation that would limit the common ownership definition to circumstances where the same individual, individuals, entity, or entities own 5% or more of total ownership in two or more entities

6 CMS is also considering whether applicable manufacturers must report another unique identifier, such as state license number, for physicians who are identified but do not have a NPI.

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