United States: CMS Publishes Physician Payment Sunshine Rules; Manufacturers And Group Purchasing Organizations Are Required to Submit Detailed Annual Reports

On February 1, 2013, the Centers for Medicare and Medicaid Services (CMS) published the long-awaited rules (the "Rules") detailing manufacturers' and group purchasing organizations' reporting requirements under Section 6002 of the Affordable Care Act, otherwise known as the Physician Payment Sunshine Act (the "Act"). The Act generally requires applicable manufacturers and group purchasing organizations (GPOs) to report to CMS physician ownership or investment interests in the applicable manufacturer or GPO. Manufacturers must also report payments or transfers of value that are made to physicians or teaching hospitals. The focus of the Rules is apparent: Payments or transfers of value must be reported, and they must be reported only once. Thus, unique questions are presented for subsidiaries, co-promoters, joint ventures and entities engaged in limited applicable manufacturing. It may be prudent to carefully analyze each such arrangement to ensure that reports are timely made by the proper entity. CMS will eventually make all information reported publicly available online, and the penalties for missing or inaccurate reports are stiff. Therefore, affected entities should consider implementing a plan for collecting, monitoring and reporting all information covered by the Act and the Rules.

What Every Applicable Manufacturer and GPO Should Know

  • Data collection for reporting purposes must begin on August 1, 2013.
  • Records must be maintained for five years.
  • Reports must be submitted to CMS by March 31, 2014.
  • Applicable manufacturers and GPOs must assess all co-promoter, joint venture or collective manufacturing agreements to determine which entity must report under the Act.
  • The following information is subject to reporting by applicable manufacturers:
    • Payments or transfers of value,
    • From applicable manufacturers' or GPOs to physicians and teaching hospitals,
    • In excess of $10, or an annual aggregate in excess of $100; and
  • GPOs and applicable manufacturers must also report ownership or investment interests held by physicians.
  • CMS has the authority to audit, evaluate and inspect an organization for compliance with the Act.
  • Failure to report subjects an applicable manufacturer or GPO to civil monetary penalties (CMPs) of up to $100,000 annually, or $1,000,000 for knowing failures to report.
  • The Act preempts state law reporting requirements.

Who Must Report? Applicable Manufacturers and GPOs

The Act and the Rules impose reporting requirements on two entities: applicable manufacturers and GPOs. Only applicable manufacturers, however, are required to report payments or transfers of value to physicians or teaching hospitals. For manufacturers, the organization has reporting requirements if it is:

  • Engaged in the production, preparation, propagation, compounding or conversion of a covered drug for sale or distribution in the United States, including foreign manufacturers that operate in the United States by selling a product (regardless of where the product is physically manufactured); or
  • Under common ownership with such an entity with respect to such acts.

In situations of common ownership, co-promotion, joint ventures, distributor or wholesaler relationships, or the parent/subsidiary context, the scope of "applicable manufacturer" should be analyzed to ensure that the proper entity submits reports and that each party appropriately insulates itself from the improper reporting of the reporting entity. Applicable manufacturers generally include co-promoters of drugs or devices, but under the new rules, only the entity that actually furnishes the payment or other transfer of value must make a report, unless the parties agree to other reporting arrangements. Also subject to the reporting requirements are wholesalers and distributors (including repackagers, relabelers and kit assemblers) that actually hold title to the covered drug, device, biological or medical supply, as well as entities that hold an FDA approval, license or clearance for a covered product. Because only one entity needs to report covered payments or transfers of value, wholesalers and distributors would need to determine which of the wholesaler, distributor or manufacturer is actually making the payment or transfer of value, and that entity generally must report.

An applicable manufacturer generally does not include: (1) raw materials and component manufacturers; (2) hospitals, pharmacies and laboratories that produce or manufacture materials solely for their own use or use by their patients; or (3) pharmacies / compounding pharmacies that (a) maintain establishments that are compliant with state and local laws, (b) regularly engage in distributing prescription drugs or devices and (c) do not produce, propagate, compound or convert drugs/devices for sale other than in the regular course of their business of selling devices or drugs at retail to individual patients.

GPO, on the other hand, is defined to include GPOs operating in the United States that purchase, arrange for or negotiate the purchase of covered drugs, devices, biologicals or medical supplies. It does not include hospitals or large physician practices that purchase covered drugs, devices, biologicals or medical supplies for their own uses.

While an "applicable manufacturer" and GPO may include a variety of entities in the supply chain, there is a key limitation to both definitions—reporting requirements are limited to applicable manufacturers and GPOs of a covered drug, device, biological or medical supply. CMS has defined this to mean any drug, device, biological or medical supply for which payment is available under Medicare or Medicaid, but it does not include over-the-counter drugs and biologicals or many Class I and Class II devices that are exempt from the premarket notification requirements.

What Must Be Reported?—Payments, Transfers of Value and Certain Ownership and Investment Interests

Payments and Transfers of Value

Although the definitions of an applicable manufacturer and GPO are tied to work related to a "covered drug, device, biological, or medical supply," CMS has said that payments or transfers of value do not need to be related to the covered drug, device, biological or medical supply—all payments or transfers of value to a physician or teaching hospital must be reported, unless the applicable manufacturer derives less than 10 percent of its gross revenue from covered drugs, devices, biologicals or medical supplies.

Payments and transfers of value can include:

  • Cash or a cash equivalent;
  • In-kind items or services;
  • Stock, a stock option or any other ownership interest, dividend, profit or other return on investment;
  • Consulting fees;
  • Compensation for services other than consulting;
  • Honoraria;
  • Gift;
  • Entertainment;
  • Food;
  • Travel;
  • Education;
  • Research;
  • Charitable contribution;
  • Royalties or licenses;
  • Current or prospective ownership or investment interest;
  • Direct compensation for serving as faculty or as a speaker for a medical education program;
  • Grants; and
  • Any other nature of the payment or other transfer of value.

There are several exceptions, including product samples or educational materials that benefit patients or are for patient use, but the largest exception is that payments or transfers of value of less than $10 need not be reported, unless the aggregate annual amount exceeds $100.

Certain Ownership and Investment Interests

GPOs and applicable manufacturers must also report physician ownership and investment interests. Physicians do not need to be employees of the GPO or applicable manufacturer, and the reporting requirements extend to immediate family members of any physician.

The definitions of ownership and investment interests mirror those in the physician self-referral law, commonly referred to as the Stark Law, and include both direct and indirect interests, such as stock; stock options; partnership shares; limited liability company memberships; loans; bonds; and any other interest through debt, equity or other means. Such interests do not include interests arising out of retirement plans, stock options or convertible securities received as compensation, or unsecured loans subordinate to credit facilities.


Penalties for non-compliance with the reporting requirements are substantial. Failure to report may subject applicable manufacturers and GPOs to an annual CMP of at least $10,000, but not more than $100,000. If the failure to report was knowing, CMPs may be imposed up to $1,000,000. These penalties are compounded when an entity submits a consolidated report on behalf of applicable manufacturers under common ownership—the entity submitting the report must attest to the accuracy of a report, and if it is false, the entity submitting the report will be subject to the maximum penalties for each individual manufacturer included in the consolidated report. Thus, robust indemnity provisions appear to be a necessity in co-ownership situations or under reporting agreements.

Whether the maximum penalties will be imposed is left to the discretion of CMS, but factors CMS considers in imposing CMPs include the:

  • Length of time the GPO or applicable manufacturer failed to report;
  • Amount of payment or transfer of value that was not reported;
  • Level of culpability;
  • Nature and amount of information reported in error; and
  • Degree of diligence exercised in correcting the report.

To facilitate the audits and evaluations authorized by the Act, applicable manufacturers and GPOs must maintain their books and records for five years.

State Law Preemption

Finally, the Act preempts state law reporting requirements, which means that applicable manufacturers and GPOs presently reporting the same information under state and local laws will no longer be obligated to do so, and no state or local government may require separate reporting of the information required to be reported under the Act, unless the information is being collected by a federal, state or local governmental agency for public health purposes. Applicable manufacturers and GPOs may want to consider treading carefully, as the Act's preemption has not yet been tested in courts. As a result, it may be worthwhile to carefully analyze any state and local reporting laws against the Act before any applicable manufacturers or GPOs cease reporting under state and local laws.


The Act now imposes hefty reporting requirements that may dramatically increase costs associated with the collection, monitoring and management of information related to payments or transfers of value to covered recipients. As the reporting period commences in less than six months—and the penalties are stiff—it may be prudent to develop appropriate policies and processes now to ensure accurate and compliant information gathering and reporting.

If you have any questions about this Alert or would like more information, please contact Elinor L. Hart, Frederick (Rick) R. Ball, any of the attorneys in our Pharmaceutical, Medical Device, Pharmacy & Food industry group or the attorney in the firm with whom you are regularly in contact.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.

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