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Sunshine and Its Glare

Looming transparency legislation would create significant administrative burdens and liability exposure for medical device manufacturers.

Wayne Wolff

May 1, 2008

12 Min Read
Sunshine and Its Glare

GOVERNMENTAL & LEGAL AFFAIRS

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Photo by JUPITERIMAGES/H. TORRES

Across nearly every business function, today's medical device firms face a greater degree of public, regulatory, and congressional scrutiny than they did just a few short years ago. As such, it's unsurprising that legislative efforts designed to increase transparency into payments made to doctors by medical device manufacturers are gaining wide support.

The Physician Payments Sunshine Act was introduced in the U.S. House of Representatives on March 13, 2008, as HR 5605. If enacted in its current form, it would require medical device manufacturers to submit quarterly and annual reports of payments and other transfers of value made to physicians and affiliated entities. All reports would be required to be made available to the public online, and failure to comply could result in fines of between $10,000 and $100,000, as well as loss of tax deductions for product marketing and advertising.

In September 2007, a similar bill was introduced in the Senate (S 2029). Upon introduction, the Senate version was referred to the Senate Committee on Finance, where it appears to have been abandoned. While the new House bill contains many of the same requirements as the Senate bill, it also proposes a few new ones. This article discusses the drawbacks and benefits of the current shape of the legislation, steps that manufacturers would need to take to comply with the legislation's requirements, and proposed revisions that could reduce industry concerns.

Requirements and Penalties

The Physician Payments Sunshine Act seeks to mandate quarterly reporting of payments or other transfers with a value of more than $25 to physicians and other entities. The requirements would apply to drug, device, and medical supply manufacturers as well as their agents, or third parties acting on their behalf. Types of payments to be reported include compensation, food, entertainment, gifts, trips, travel, participation in a medical conference or other educational seminar, funded research, product rebates or discounts, consulting fees or honoraria, dividends, and other economic benefits.

In order to comply with the quarterly reporting requirements, manufacturers would be required to assign a value to all economic benefits transferred to physicians or covered organizations with a value of more than $25. This would likely include assigning a value to device education and training provided to physicians.

The legislation also requires an annual report summarizing the information from the quarterly reports, as well as disclosing the aggregate amount of all gifts or transfers with a value of less than $25. Disclosing the aggregate amount of all transfers under $25 would presumably require compiling and reporting the value of all gifts and marketing drop-off items. Such items would include—but would not be limited to—pens, notepads, calendars, office display and other small-value items, meals for physicians and staff, speaking and consulting fees, travel expenses, discounts, cash rebates, and services. Information from the quarterly and annual reports would be made available to the public online.

Exclusions to the disclosure requirements include product samples for patients, general funding for clinical trials, transfers to physician patients not acting in a professional capacity, and compensation to physicians employed by the manufacturer. Not exempted from disclosure are device samples provided to physicians, including demonstration units and models for physician evaluation.

In order to fully comply with these reporting requirements, manufacturers would be prudent to establish a comprehensive system for reporting all such payments and transfers made by sales representatives, training and marketing personnel, clinical trial coordinators, and other potentially applicable employees and consultants. Such an effort mandates the development of procedures for reporting physician gifts and marketing materials of minimal value. The establishment of a centralized clearinghouse for such information would facilitate accurate quarterly and annual reporting, and permit appropriate and consistent valuation of training, lectures, and other services provided by physicians.

The proposed House bill would impose fines of between $10,000 and $100,000 for knowingly failing to submit information as required in the quarterly and annual reports. A separate fine would be imposed for each such failure. The "knowingly" requirement in HR 5605 differs from the predecessor Senate bill, which sought to impose fines for any failure. The House bill does not specify criteria for determining whether a failure to report a particular payment or transfer was done knowingly. Likewise, the bill does not outline criteria for determining what constitutes a single violation versus multiple violations.

HR 5605 also differs from S 2029 by adding a tax penalty for noncompliance. If a company is penalized for noncompliance, it could also lose its tax deductions for all advertising, promoting, and marketing expenses for that year.

Sunshine Act Drawbacks

As with any legislation imposing new requirements on device manufacturers, the Physician Payments Sunshine Act presents several drawbacks for industry. Issues of particular concerns are as follows.

Administrative Burden. The Sunshine Act in its present form will impose a significant administrative burden on the medical device industry. To ensure full and accurate compliance, manufacturers would be well advised to establish a focused compliance committee or appoint a compliance officer to create and publish company guidelines and implement internal controls and procedures that comport with required standards under the legislation.

Such a process would ideally include education for applicable personnel, such as sales representatives, training and marketing staff, and clinical trial coordinators. Formal training would help ensure that relationships with physicians are appropriate. It would also help ensure that payments or transfers are reported to the compliance committee in a timely fashion.

Staff members should be in­formed of the penalties for failure to comply with reporting requirements. They should also be briefed on which types of payments and transfers of value require reporting. For example, all meals provided to physicians would have to be reported to a company's compliance committee. If the value of a meal or gift were more than $25, then it would have to be reported with adequate detail as required by the legislation. If the value of the meal or gift—even trivial gifts such as pens and pads bearing the company or product name—were less than $25, it would still have to be reported to meet the annual aggregate-value reporting requirements.

When discounts or rebates valued at more than $25 are provided to hospitals and similar entities, companies would be required to identify every employed and tenured physician at the entity and disclose such information in their quarterly and annual reports. Companies may also be required to assign a value to education, training, and technical support provided to physicians.

A manufacturer's compliance committee should be responsible for overseeing preparation of the quarterly and annual reports on a companywide basis. As discussed, these reporting requirements encompass payments and transfers that are likely to be made in a variety of settings by various departments and organizations within a company. Thus, consistent and appropriate valuation of gifts, fees, training, and services provided to physicians would be necessary. Further, quarterly and annual audits of staff reports to the compliance committee would help ensure proper and accurate reporting.

The costs of establishing administrative procedures and controls to ensure compliance with the provisions of the Physician Payments Sunshine Act would be significant. However, the potential liability exposure to a manufacturer for failure to comply is also significant—particularly if failure to report a particular type or category of transfer is interpreted as representing multiple violations. The loss of tax deductions for all marketing and advertising expenses would also serve as a substantial penalty to most medical device manufacturers. In addition, the failure to report and resulting administrative penalty could become the basis of litigation.

Broad Definition. The proposed bill defines payment or other transfer of value very broadly, as "a transfer of anything of value that exceeds $25," and includes a list of types of applicable payments. Proponents of changes to the bill, including industry association AdvaMed (Washington, DC), believe that the legislation should be more tailored and require reporting of only the specific, enumerated types of payments.1 Changes to this effect would provide manufacturers with clearer guidelines for compliance.

Possible Patient Confusion. Unlike the predecessor Senate bill, HR 5605 requires the reporting of "the purpose of expenditure according to categories as specified." The legislature's intended goal in having a manufacturer identify the circumstances surrounding the payment or transfer of value is presumably to enable patients and the public at large to judge whether a physician's prescription or use of a particular drug or device has been influenced by a manufacturer's conduct. However, the type and amount of detail a manufacturer is expected to include in this section of the report is undefined.

More important, there is a significant chance that many members of the general public will not understand that certain financial relationships between manufacturers and physicians are completely appropriate, legal, and even advantageous to the promotion of public health. The Physician Payments Sunshine Act intends to assist patients in making informed medical decisions and choosing physicians. But identifying certain financial transactions in the absence of a full understanding of the complexity and benefits of company-physician relationships could lead to confusion and mistrust on the part of patients.

The Bright Side of the Sunshine Act

Despite its drawbacks for industry, the Physician Payments Sunshine Act could bring several benefits to the manufacturing community. Amid the current climate of public distrust of pharmaceutical and device manufacturers, the legislation's goal of increased transparency is one that has been embraced by many industry players and associations. Indeed, if the context of financial transactions with physicians is carefully and accurately explained in public reports, such increased transparency may result in a greater understanding and willingness of patients to accept and support ethical and beneficial relationships between physicians and medical device manufacturers.

Likewise, medical device manufacturers' relationships with physicians may also benefit from public disclosure of this type of information. At present, some physicians are reluctant to receive payments for services that could be negatively interpreted as having been made to influence medical decisions. In many such cases, there is currently no convenient method for physicians to publicly disclose the specifics surrounding such arrangements. Physicians who are concerned with such an appearance of impropriety may be more willing to enter into relationships with manufacturers when they know information regarding the exchanges will be accurately explained to the public. Indeed, in an industry that relies heavily on direct interaction with physicians, public disclosure regarding such contact may boost public trust and encourage and improve education, collaboration, and innovation.

Useful Revisions

In response to industry criticism of certain stipulations in the predecessor Senate version of the Physician Payments Sunshine Act, the more recent HR 5605 included some noteworthy differences. For example, the Senate version of the bill would have applied only to companies with annual revenues of more than $100 million. In response, many larger companies voiced concern that the legislation would result in an uneven playing field. Smaller companies with less than $100 million in annual revenue constitute a significant portion of the industry, meaning a large number of physician relationships would remain hidden from public scrutiny.

HR 5605 is more inclusive, in that the annual revenue threshold for reporting has been lowered from $100 million to $1 million. However, many small and start-up companies, including many physician-owned entities, would still be exempt under HR 5605. The potential marketing advantage and lack of transparency in these companies' financial arrangements seemingly go against the spirit of the legislation.

Small companies have argued that the administrative and financial burden of the legislation would be too great for many of them to manage. But while the reporting burden would arguably be proportionally greater for a smaller company than a larger, the amount of reporting required by a small company would also presumably be much less.

As the legislation moves forward, the issue of thresholds is likely to be a topic of much debate. AdvaMed has proposed an alternative approach to this issue: Rather than using annual revenue as a threshold for reporting, the association suggests, the legislation should require disclosure by any company that makes more than $250,000 in reportable physician payments annually.

Furthermore, AdvaMed and others suggest that several additional revisions could be made to the current legislation to reduce industry concerns while still maintaining the overall goal of enhanced disclosure. For example, AdvaMed has proposed that the legislation expressly preempt state laws requiring disclosure of relationships with physicians. It would be overly burdensome and costly to require manufacturers to comply with 50 different state standards for tracking and reporting, and it would be more difficult for patients to access and use the disclosed information in a meaningful way. Additionally, AdvaMed points out that the new federal standard will be broader and more comprehensive than existing state standards.

Depending on its wording, an express federal preemption provision may also negate any state legislation seeking to impose more-stringent marketing requirements. For example, a recently introduced Massachusetts State Senate bill would, if enacted, impose an outright ban on providing anything of value to healthcare providers.2 Such a ban would presumably prohibit any spending on operational training seminars or in-house education for physicians, nurses, and technicians.

In addition, a provision should be added to the Physician Payments Sunshine Act that would preclude state consumer fraud causes of action in instances where manufacturers' physician payments are deemed legal, ethical, and properly reported under the act. Currently, patient groups, insurance companies, and other parties commonly file consumer fraud claims in which they claim that unnecessarily expensive pharmaceuticals and medical products were purchased as a result of secret and improper financial influence exerted by manufacturers over physicians. Public reporting of all manufacturer-physician financial relationships would remove the allegedly secret nature of such contact. Unless protections are included, the Physician Payments Sunshine Act could serve as a roadmap for plaintiffs looking for opportunities to file such lawsuits.

Conclusion

Given the current political climate and trend toward increased scrutiny of pharmaceutical and medical device marketing practices, it is likely the Physician Payments Sunshine Act—with the requirements set forth in HR 5605 or something substantially similar—will become law. As discussed in this article, such reporting requirements would create significant administrative burdens and liability exposure for medical device manufacturers. As a result, the establishment of comprehensive internal procedures and employee training programs to ensure compliance is well advised.

References

1. "Physician Payment Disclosure Legislation" [policy recommendations] (Washington, DC: AdvaMed,
    2008 [cited 27 March 2008]); available from Internet: www.advamed.org/NR/rdonlyres/58B239DD-
    58E9-46AF-954B-0699AB8F4926/0/AdvaMedDisclosurePositions022208.pdf.

2. An Act to Promote Cost Containment, Transparency, and Efficiency in the Delivery of Quality Health
    Care, Senate Bill, No. 2526 (introduced March 2008 [cited April 9, 2008]); available from Internet:
    www.mass.gov/legis/bills/senate/185/st02/st02526.htm.

Wayne Wolff is a partner at Sedgwick, Detert, Moran & Arnold (San Francisco). He specializes in medical device litigation defense.

Copyright ©2008 MX

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