Physician Payment Sunshine: Former Prosecutors Asks What Happened to Medical Suppliers

Many sections of the recently enacted Patient Protection and Affordable Care Act (PPACA) are delegated to the Executive Branch, and in particular the Department of Health and Human Services, the actual implementation of the law.

Consequently, a recent article in Forbes examined the proposed implementation of the Physician Payment Sunshine Act regulations, which require government reporting of payments made by members of the health care industry to physicians and teaching hospitals.  The article was written by Michael Loucks a partner in Skadden, Arps, Slate, Meagher & Flom‘s Boston office, having previously served as Acting U.S. Attorney for Massachusetts leading numerous high-profile health care fraud prosecutions; and Alexandra Gorman, an Associate at Skadden.  We discussed Loucks’ move to the private side last year.

Background

Although in theory, laws and regulations should be applied equally to all citizens impacted by the specific restrictions, “in the real world, disparate treatments occur.”  For example, a regulator “may have improperly construed Congressional intent and adopted more stringent rules than intended.  Or, in reviewing one citizen’s application, the regulator may misapply its own rules and hold that citizen to a higher standard than required.  Or, an individual may choose to avoid the barrier and act in defiance of the regulation.”

Other laws command regulators to exercise enforcement powers, or to require reporting that can lead to enforcement.  How a regulator uses such powers, and as to whom it chooses to enforce them, will also have a disparate impact among similarly situated individuals.  Not all regulators are created equal; a citizen may have the misfortune of engaging in regulated activity in a jurisdiction with an aggressive regulator.  Because all human endeavors, including regulation, involve mistakes (or worse), those residing in an aggressively regulated environment will from time to time suffer from regulatory mistakes that their competitors situated elsewhere will be lucky to avoid.

In American society, these vagaries of regulatory behavior constitute the legal norm.  There is no “right” to a competent regulator.  If Congress passes a law, and the regulator enacts a regulation true to the rule of law, and does not thereafter act in an arbitrary and capricious manner, in our society the action of the regulator will be upheld.

Not infrequently, disputes emerge regarding what Congress really meant when it enacted a law.  As the Supreme Court has recognized, if Congressional intent is clear, the court and the agency must give effect to that intent.  Thus, the first place to look is the law, and the first tool to use is the dictionary.  “If the language is plain and the statutory scheme is coherent and consistent” courts look no further in divining congressional intent.  Indeed, courts routinely reject “a regulation that clearly conflicts with the plain text of the statute.”

Of course, agencies often misbehave, drafting regulations that do not conform with the legislation passed by Congress.  The authors use a hypothetical law to demonstrate the “clear and vague” nature of many parts of PPACA.  They note, however, that it is not a “fanciful example,” and that such “regulatory conduct is in fact taking place right now in the implementation” of the Sunshine regulations. 

Sunshine Act

As we have written numerous times, Section 6002 of PPACA requires all “applicable manufacturer[s]” that “ provide[] a payment or other transfer of value” to a physician or teaching hospital to report those payments to the Secretary of Health and Human Services; failure to provide these reports exposes the “applicable manufacturer[s]” to civil monetary penalties of up to $1,000,000.

Congress specifically defined “ applicable manufacturer” to mean “a manufacturer of a covered drug, device, biological, or medical supply which is operating in the United States, or in a territory, possession, or commonwealth of the United States.”  Congress further stated that:

(1) “[t]he term ‘covered drug, device, biological, or medical supply’ means any drug, biological product, device, or medical supply for which payment is available under title XVIII or a State plan under title XIX or XXI (or a waiver of such a plan)”; and

(2) “[t]he term ‘manufacturer of a covered drug, device, biological, or medical supply’ means any entity which is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply (or any entity 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).

As Loucks and Gorman point out, “PPACA does not elsewhere define the term “medical supply.”  Relying on Dictionary.com, they noted that “medical” means “of or pertaining to the science or practice of medicine,” and “supply” means “a quantity of something on hand or available, as for use; a stock or store.”  In the absence of Congressional direction to the contrary, the authors note that “medical supply must mean all things that doctors use in providing medical care: tongue depressors, gowns, wheel chairs, crutches.”

It cannot be questioned that, as enacted by Congress, these transparency reporting requirements apply to all manufacturers of any drug or medical device or medical supply for which payment is made by either the Medicare or the Medicaid programs.  According to Loucks there can be no question, for example, that Congress intended that manufacturers of over-the-counter (OTC) drugs be subject to these reporting requirements.   Similarly, there can be no question that Congress intended that all manufacturers of medical supplies are subject to these reporting requirements.

Of course, like much of PPACA, Congress delegated to the agency the duty to “establish procedures … for applicable manufacturers and applicable group purchasing organizations to submit information” on the payments made to physicians and teaching hospitals.  The authors noted that “Secretary Sebellius is presently proposing to ignore the express direction of Congress in several key ways.  She acknowledges this in the preamble to her proposed regulations.”

• “We are proposing to limit drugs and biologicals [to those that] require a prescription to be dispensed, thus excluding drugs and biologicals that are considered ‘over the counter.’”
• “[W]e are also proposing an additional limitation to the definition as it pertains to devices and medical supplies [to those that] require premarket approval by or notification to the FDA.”

Does the Secretary let all manufacturers of over the counter drugs get an exclusion?  Not quite.  The Secretary modified her OTC limitation as follows: “We propose that all payments or transfers of value made by an applicable manufacturer to a covered recipient must be reported as required . . . regardless of whether the particular payment or other transfer of value is associated with a covered drug, device, biological or medical supply.” Thus, the OTC manufacturer who sells one brand drug must comply, but the OTC manufacturer without that brand drug need not. 

“In the event we adopt this interpretation, applicable manufacturers who manufacturer [sic] only OTC drugs or biologicals . . . would not be required to report at all” but “manufacturers who manufacture both OTC drugs or biologicals and at least one product that falls within” the Secretary’s re-casting of the definitions “would be required to report all payments or transfers of value.” As the article notes, “The Secretary justifies her deliberate disregard of the express intent of Congress with the following two statements:”

“We believe this limitation may be appropriate for applicable manufacturers, because manufacturers that solely produce these exempt products have not been shown to have extensive relationships with covered recipients.”

“Additionally, we believe this limitation might be appropriate because these financial relationships (to the extent they exist) are less likely to influence patient care.”

As Loucks and Gorman explain, “the Secretary does not justify the rewriting of the statute on the basis of an interpretation of the terms to allow such exclusions, or on supporting Congressional intent.  Rather, the Secretary, embarks on what she has admitted is entirely speculative ‘fact finding.’”  This leaves the authors asking whether “the Secretary’s proposed regulations lawful?”  The authors ask:

–       Must prescription drug manufacturers and manufacturers of Class II and Class III medical devices comply with the law, all the while knowing that the Secretary has excused, by executive fiat, many competitors from having to make similar reports? 

–       Can manufacturers of OTC drugs, Class I medical devices, and any medical supplies choose not to report payments to physicians and teaching hospitals because the Secretary has failed to establish procedures for such reporting? 

–       Will companies who are primarily manufacturers of OTC drugs spin off divisions that manufacture branded products, solely to avoid a reporting requirement that their pure OTC competitors are not saddled with?

The authors take issue with the Secretary’s assumption that these exempted payments “are less likely to influence patient care.”  Instead, they point out how “Over the past thirty years, there have been hundreds of prosecutions of suppliers of durable medical equipment supplies for providing kickbacks to doctors to influence their prescribing behavior.”  Accordingly, they assert that it is “improper, unfair, and contrary to express Congressional intent for the Secretary to arrogate to herself legislative authority to re-write an Act of Congress, limiting its reach, and thus the cost of its enforcement, to only some of the players in the marketplace.”

Another issue the article raises is the cost of Sunshine.  CMS estimated only 1,150 manufacturers who will be forced to comply, with per manufacturer first year costs of $169,815, dropping to $126,874 every year thereafter. “Based upon her arbitrary limitation of the regulation to just prescription drug manufacturers and the manufacturers of Class II and III medical devices, the Secretary predicts a total cost of regulatory compliance of $224,360,000 in the first year, and of $163,080,000 in each year thereafter.”

However, this number does not include the 5,000 or more manufacturers of OTC, class I medical devices, or medical supply manufacturers. The authors wondered whether “the Secretary’s decision was motivated by not wanting to publish in the Federal Register in an election year that compliance with the regulations she was proposing would cost the health care industry well in excess of one billion dollars every year.”

Conclusion

“Regardless of the Secretary’s ultimate intent, the concern remains the same: who is regulating the regulator?  In the current environment, the regulator wields a substantial delegation of power, with substantial deference from the courts and with potentially devastating consequences on commerce, economic competitiveness, and even citizens’ health and safety.