New OIG Pharmaceutical Compliance Guidance Raises Questions About Financial Relationships

On April 28, 2003, the Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services released its Compliance Program Guidance for Pharmaceutical Manufacturers (the Guidance), the latest in a recent series of OIG compliance guidances directed to a specific sector of the health care industry. The Guidance outlines steps to assist pharmaceutical manufacturers in promoting compliance with applicable health care laws and regulations, particularly the U.S. Anti-Kickback Statute, False Claims Act and Medicaid Drug Rebate Act (also known as the Medicaid Best Price Act). Generally, the Guidance reaffirms positions advanced by the OIG in an initial draft released in October of 2002 (Draft OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 67 Fed. Reg. 62057 (October 3, 2002)). However, the final Guidance revises the OIG’s position on several issues, including consulting arrangements with physicians and educational and research grants.

The release of the Guidance reflects the OIG’s heightened scrutiny of financial relationships between drug manufacturers, drug purchasers and prescribers. Although the OIG states that the Guidance creates no new law and that compliance is voluntary, the Guidance calls into question certain common industry practices. Accordingly, drug manufacturers, purchasers and prescribers should evaluate their business relationships to assess compliance with the principles set forth in the Guidance and determine what, if any, changes may be advisable to current business practices.

Implementation of Compliance Program
The Guidance recommends that drug manufacturers implement a comprehensive compliance program and outlines the elements that the OIG believes are necessary for an effective program. The recommended program elements are derived from the U.S. Federal Sentencing Guidelines, which allow for reduction in an offender’s sentence when a crime occurs despite "an effective program to prevent and detect violations of law." The elements of an effective compliance program include a designated compliance officer, the development and distribution of a written code of conduct, attention to employee education programs, enhanced communication among employees and policies for investigating and remediating violations of the internal compliance guidelines. Most pharmaceutical companies already have general corporate compliance programs that include these elements.

Suspect Arrangements
The Guidance addresses business practices that, in the OIG’s opinion, pose a significant risk of liability under the federal health care laws mentioned above. The Guidance is not meant to summarize all "potential risk areas for pharmaceutical manufacturers" and limits discussion to three areas that are "currently of concern to the law enforcement community." The identification of a particular business practice in the Guidance does not mean that the practice is necessarily illegal. However, business practices that fall within the three described areas should be assessed because they may be viewed as suspect by the OIG.

Integrity of Data and Government Reimbursement
The Guidance warns pharmaceutical companies against directly or indirectly manipulating sales and price data. The Guidance suggests that pharmaceutical manufacturers may be held responsible for the average wholesale prices (AWP) reported by private publishers such as the Red Book, the Blue Book or Medispan, whose listings are based on price data furnished by manufacturers. Because the U.S. Centers for Medicare and Medicaid Services (CMS) uses this published data to set federal reimbursement rates, manipulation of pricing information furnished to private publishers can inappropriately increase government health care spending. CMS also relies on pharmaceutical manufacturers to report the average manufacturer price (AMP) and Medicaid best price (MBP) for each drug for purposes of the Medicaid Drug Rebate program. The AMP is the average price at which a manufacturer sells a product, other than to federal purchasers and state drug assistance programs. The MBP is the lowest price paid by a manufacturer’s customers, excluding certain specified purchasers. CMS uses AMP and BMP data to calculate the 15.1 percent rebates that manufacturers must pay to state Medicaid programs under the Medicaid Drug Rebate Act. Moreover, many Medicaid programs and commercial insurance companies use the reported AWPs as a benchmark in setting pharmaceutical reimbursement rates.

To avoid liability under the False Claims Act and federal Anti-Kickback Statute for AWP or AMP manipulation, the Guidance indicates that reported prices should reflect actual wholesale price transactions adjusted to account for all forms of purchasing concessions. These concessions may take the form of price reductions, discounts, rebates, up-front payments, free or discounted "bundled" goods or services, grants, coupons or other items of value.

As in the draft guidance, the final Guidance expresses concern regarding active marketing of the "spread" by pharmaceutical companies. The "spread" is the difference between the wholesale price of the manufacturer and the reimbursement rate recoverable by the purchaser. "Marketing the spread" refers to the practice of encouraging product purchases based on the potential profit that customers can realize from the spread in relation to similar margins on competing brand-name or generic drugs. AWP manipulation in conjunction with marketing the spread (i.e., acting to inflate profits to drug purchasers) would appear to be particularly suspect conduct in the view of the OIG. The Guidance describes it as evidence of "unlawful intent."

The Guidance also indicates that the federal Anti-Kickback Statute is potentially implicated when manufacturers manipulate the AWP to increase customer profits from federal drug reimbursement programs. The Guidance, however, does not clarify how to accurately calculate an AWP, an issue of debate within the industry. In addition, though the Guidance states that "marketing considerations" should not "inappropriately" influence AWP reporting by manufacturers, it is not clear what "inappropriately" means in this context. Manufacturers by definition must consider marketing and profitability in the course of setting prices. On the other hand, inaccurate reporting of wholesale price sales for purposes of manipulating AWP is clearly improper in the view of the OIG. What is not entirely clear is whether the OIG views marketing the spread alone, in the absence of AWP manipulation by the manufacturer, as potentially involving the offering of illegal "remuneration" under the Anti-Kickback statute.

Kickbacks to Purchasers Providers and Agents
The federal Anti-Kickback Statute prohibits anyone from knowingly or willfully paying, offering, soliciting or receiving remuneration in order to induce the ordering or purchasing of items, including pharmaceuticals reimbursable under government health care programs. To prevent business arrangements from being viewed as suspect, the Guidance suggests that manufacturers ask the following questions:

• Does the arrangement or practice have potential to interfere with or skew clinical decision-making? Is all provided information fully accurate?
• Does the arrangement or practice have the potential to increase costs to the federal healthcare program? Does the arrangement have the potential to be a disguised discount to circumvent the Medicaid Rebate Program Best Price calculation?
• Does the arrangement or practice have the potential to increase the risk of overutilization?
• Does the arrangement or practice raise patient safety or quality of care concerns?

The Guidance specifically addresses Anti-Kickback risks in manufacturer relationships with purchasers, physicians and sales agents.

Relationships with Purchasers
Manufacturer discounts to induce the purchase of particular drugs carry potential liability under the federal Anti-Kickback Statute. The Guidance recommends that, whenever possible, manufacturers should structure discounts within the Anti-Kickback Statute safe harbor for group purchasing organizations.

The final Guidance expands on the draft guidance by including a detailed discussion of manufacturer grants to purchasers for research and education. The OIG advises manufacturers to use "Chinese walls" for marketing and grant making activities to demonstrate that grants are bona fide and not improperly influenced by marketing considerations. The OIG also recommends that research grants be structured within the personal services safe harbor to the Anti-Kickback Statute. This may be difficult to accomplish since many grants are not given in exchange for "fair market value" research consideration, and the precise schedule and intervals of research activities are not knowable in advance or conducive to being reduced to written agreements.

The final Guidance also expands on the draft guidance by addressing manufacturer relationships with health insurers and pharmacy benefit manufacturer companies (PBM) with respect to influencing formulary listings. The OIG acknowledges in the Guidance that formularies can promote the effective cost-management of drug benefits, so long as formulary selection is driven by considerations of clinical efficacy uncompromised by improper financial inducements. Practices that the OIG believes pose a significant potential for abuse include financial relationships with formulary committee members, lump-sum payments for formulary placement and the use of rebates outside of the safe harbors for group purchasing organizations or managed care arrangements.

Relationships with Providers
Because health care providers may refer, order or otherwise influence the volume of drugs prescribed, some common relationships between manufacturers and providers raise potential Anti-Kickback concerns for the OIG. The final Guidance voices the OIG’s concerns that payments to physicians engaged by manufacturers for consulting and advisory services may be disguised kickbacks to induce prescribing the manufacturer’s products. The Guidance cites hiring physicians to help ghostwrite marketing speeches, or funding manufacturer-sponsored preceptorships in which physicians learn by "shadowing" other providers, as examples of arrangements that the OIG may find questionable.

A new section of the Guidance discusses "drug detailing" practices, which are marketing practices designed to educate providers about the available scientific information relating to a specific drug. The OIG describes as "highly suspect" compensation given to providers in return for their attendance at "educational" presentations or for filling out minimal paperwork. The final Guidance also expresses concern that the Anti-Kickback Statute may be implicated by "switching" arrangements (referring to the practice of offering rebates to a physician for switching from a competing product to the manufacturer’s product).

The Guidance also identifies "indicia of questionable research" that may cover disguised kickbacks. The indicia include research contracts that come through the drug company’s marketing department; research that is not reviewed by the manufacturer’s science department; research that is "unnecessarily duplicative" or not needed for any purpose other than the generation of business; and post-marketing research used as a pretense for product promotion.

As noted above, the Guidance recommends that, whenever possible, manufacturer relationships with providers, including research relationships, be structured within the personal services safe harbor to the Anti-Kickback Statute. However, many common business relationships cannot fit squarely within this safe harbor. For these more complicated business relationships, the Guidance refers manufacturers to model guidelines published by the Pharmaceutical Research and Manufacturers of America (PhRMA). PhRMA is a trade association composed of research-based pharmaceutical and biotechnology companies. In April of 2002, PhRMA adopted its Code on Interactions with Health care Professionals (the Code) to provide its members with rules for ethical interactions with providers. Generally, the Code focuses on structuring relationships to preserve the provider’s independence of clinical decision-making. The Code advises manufacturers that "nothing should be offered or provided in a manner or on conditions that would interfere with the independence of a healthcare professional's prescribing practices."

The Guidance indicates that compliance with the Code can "substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply with the applicable federal health care program requirements." This endorsement by the OIG suggests that manufacturers and providers would be well advised to follow the rules outlined in the Code.

Relationships with Sales Agents
The Anti-Kickback Statute is potentially implicated by certain compensation arrangements that incent sales agents to sell goods or services that are, directly or indirectly, reimbursable by federal health programs. The OIG urges manufacturers to fit compensation arrangements with sales agents into the personal services or employment safe harbors. The employment safe harbor protects any remuneration paid to a bona fide employee. The personal services safe harbor, however, does not safeguard incentives paid to independent contractor sales agents who are in a position to influence physician prescribing patterns. Of greater concern is the OIG’s position in the Guidance that even safe-harbored arrangements can evidence a manufacturer’s improper intent when "evaluating the legality of the manufacturer’s relationships with persons in a position to influence business for the manufacturer." Large bonuses or expense accounts exemplify the kind of compensation that, according to the Guidance, could lead the OIG to find improper inducement of "sales through lavish entertainment or other remuneration."

Drug Sample Regulation
The Guidance warns that violation of the Prescription Drug Marketing Act (PDMA), which regulates the distribution of drug samples, may result in liability under the Anti-Kickback Statute. Drug samples, if marketed by sales agents to physicians for resale or submission for reimbursement to governmental payment programs, may be viewed as kickbacks offered to physicians to influence their prescribing practices. The Guidance recommends that, in addition to compliance with the PDMA, potential risks can be minimized by closely monitoring the distribution and labeling of drug samples. Sales agents should be trained to inform sample recipients that the drugs cannot be sold or billed.

The Guidance raises questions regarding many common pharmaceutical industry arrangements with sales agents, purchasers, providers and prescribers. While recommending that arrangements be structured to meet Anti-Kickback Statute safe harbors, in some instances, the OIG suggests that it may not respect the impregnability of safe harbor protection. Although the OIG cites the PhRMA Code with favor, it offers little guidance or comfort for the many business arrangements in the pharmaceutical industry that fall outside the narrow scope of the Anti-Kickback safe harbors. Drug manufactures, drug purchasers and providers should review and reevaluate, as necessary, their current arrangements in light of the heightened government sensitivity to, and scrutiny of, financial relationships with pharmaceutical companies.