REGULATORY ISSUES
IMPACTING SUPPLY CHAIN
Michael Nachman
Associate General Counsel
John W. Jones, Jr. Partner
Allan A. Thoen Partner
April 27, 2017
2017 In House Counsel Conference
Presenters:
John W. Jones, Jr.
Partner
Michael Nachman
Associate General Counsel
Allan A. Thoen
Partner
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Agenda
• Enforcement Landscape: Why We Care
• The Supply Chain
• Regulatory Framework
• Case Examples and Discussion
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Enforcement Landscape
• Federal, State and Local
• Highly Fragmented and Widely Dispersed
• Examples of Agencies with Investigative Enforcement
authority
• DOJ, OIG, FDA, SAGs, MFCUs, OCR, FTC
• State Inspector Generals
• Counties (NY) Data Mining/Civil Damage Recoveries
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Enforcement Landscape
• Why Do We Care?
• Costs of Non-Compliance
• Fines and Penalties
• Suspension/Exclusion Programs
• Disgorgement
• Imprisonment
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Enforcement Landscape
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Enforcement Landscape
• Enforcement Activity
• OIG Semiannual Report to Congress – 2016
2016
Recoveries
Audit Receivables
Investigative Receivables
Exclusions
Criminal Actions
Civil Actions
5.66 B
1.2 B
4.46 B
3,635
844
708
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Enforcement Landscape
Recent Settlements
• Olympus Corp. - $646 M
• Wyeth and Pfizer - $784.6 M
• Tenet Healthcare Corp. - $513 M
• Novartis Pharmaceutical Corp. - $370 M
• Toumey Healthcare System - $237 M
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Supply Chain:
Overview
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Supply Chain:
Manufacturers
• Manufacturers are the first step in the pharmaceutical
supply chain
• Manufacturers manage the distribution of drugs from their
facilities to drug wholesalers
• May also distribute directly to pharmacies, hospital chains, and
government purchasers
• Rarely, manufacturers distribute directly to consumers
• Types of Manufacturers
• Brand-name manufacturers
• Generic manufacturers
• Biologics manufacturers
• Virtual pharmaceutical manufacturers –
emerging model
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Supply Chain:
Wholesale Distributors
• Wholesale distributors purchase pharmaceuticals from
manufacturers for distribution to end users
• May also provide specialized services such as:
• specialty drug distribution
• drug repackaging
• electronic order services
• reimbursement support
• drug buy-back programs
• Top 3 Wholesalers
• AmerisourceBergen
• Cardinal
• McKesson
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Supply Chain:
Third Party Logistics (3PLs)
• May perform both traditional manufacturer and distributor
functions
• Supply chain operations and management services such
as:
• Receipt & handling of pharmaceuticals
• Warehousing & storage of drug products
• Transportation of products
• Reverse logistics
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Supply Chain:
Pharmacy Benefit Managers (PBMs)
• PBMs work with third party payors to manage consumer
drug purchases
• PBMs may control:
• Coverage / formulary
• Reimbursement
• Patient out-of-pocket cost
• PBM tools include
• Formularies
• Rebates
• Pharmacy networks
• Mail-order pharmacy services
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Supply Chain:
Group Purchasing Organizations (GPOs)
• Purchasing agents authorized to act for their members
• Members may include any type of provider
• Hospitals
• Physician practices
• GPOs negotiate agreements with suppliers
• Economies of scale for better terms than members could obtain
individually
• Funded by administrative fees paid by suppliers
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Supply Chain:
Pharmacies
• Purchase product from wholesaler
• Dispense to patient
• Reimbursed by PBM / Payor
• Types of pharmacies
• Traditional Retail (independent or chain)
• Specialty
• Mail-order
• Institutional
• Long-term care
• Closed-door
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REGULATORY
FRAMEWORK
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Regulatory Considerations
• False Claims Act
• Anti-Kickback Statute
• Other regulatory considerations
• Civil Monetary Penalties Statute
• State AKS laws
• State licensing laws
• FDA and DEA
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False Claims Act
• Imposes liability on any person who submits a claim to the
federal government that such person knows (or should
know) is false
• Intent requirement:
• Reckless disregard
• Deliberate ignorance of the truth or falsity of the information
• No specific intent needed
• Civil Penalties
• Up to $10,000 per claim (minimum of $5,000 per claim)
• Treble damages
• Possible reduction in penalties for self-disclosure
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False Claims Act
• Private parties may bring an action under the FCA on
behalf of the United States
• Qui tam relators may share in a percentage of the proceeds from
an FCA action or settlement
• Criminal False Claims Act, 17 U.S.C. § 287, imposes
criminal fines and penalties, including imprisonment, upon
individuals and companies
• False certification theory
• AKS and other violations can be basis of FCA claims
• Escobar and materiality
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Federal Anti-Kickback Statute
• Criminal Statute
• Purposes
• Prevent over-utilization and increase in costs to government
programs
• Prevent interference with patient freedom of choice
• Prevent anti-competitive practices
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Federal Anti-Kickback Statute
• Prohibition – AKS prohibits
Knowingly and willfully paying, receiving or offering
“remuneration” as an inducement to:
• purchase items or services reimbursable by a federal
healthcare program
• refer an individual for services reimbursable by a
federal healthcare program
• Applies to both sides of a transaction
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Federal Anti-Kickback Statute
Elements
• Remuneration
• Intent – to induce referrals
• “anything of value”
• knowing and willful
• direct or indirect
• specific intent not required
• cash or in kind
• can be inferred from
• Referral – return for
referring or arranging for
referrals
circumstances
• Greber “one purpose” test
• Government Programs –
Medicare, Medicaid, etc.
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Federal Anti-Kickback Statute
Severe Penalties
• Civil & Criminal Fines
• FCA – Treble Damages and Qui Tam Suits
• Exclusion from Government Programs
• Prison
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Federal Anti-Kickback Statute
Safe Harbors
• Safe harbors are statutory and regulatory provisions that
exempt specific types of arrangements
• Safe harbors are narrowly construed
• Use of safe harbors is voluntary
• Arrangements not structured to fit within a safe harbor are not per
se illegal
• Case-by-case assessment
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Services Safe Harbor
• Payment as compensation for services is not
remuneration as long as written agreement meets the
following requirements:
• At least 1 year term
• Specifies services
• if part-time, specifies exact schedule of intervals, length of intervals and
charge
• Aggregate compensation is set in advance
• Consistent with fair market value
• Does not take into account the volume or value of referrals
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Discount Safe Harbor
• Concession must be a “discount”
• Arms-length price reduction to induce purchase
• Made at time of sale
• Commercially reasonable terms
• Rebate is a form of a discount but not given at time of sale (e.g.,
volume rebates
• Seller obligations
• Disclose discount to buyer and advise of reporting obligations
• Not impede buyer from meeting reporting obligations
• Buyer obligations – depend on buyer type
• Report or reflect discount on cost report or
claim to the extent required
• Make available information on discounts to
Federal or State officials on request
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How Much Discount Can Be Offered?
• Safe Harbor requires that “arms-length” transactions
• Discount should be commercially reasonable
• Permissible levels may vary by market segment or class of trade
• No back-dating
• Avoid prebates
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Other Considerations
• No cash rebates
• Rebates should be in the form of credits or a check
• Checks must be payable to the legal entity that makes the actual
purchases (not an individual)
• Rebate credits should be redeemable for a reasonable
period of time
• No “use it or lose it” restriction on the rebate credit
• If rebates are paid through a GPO:
• Member consent / disclosure / 100% pass-through
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Can Volume Rebates Be Offered?
• Volume rebates are based on the quantity purchased
• Allowed if:
• Amount of the rebate is commercially reasonable
• Terms of the rebate are set in advance
• Volume thresholds are actually enforced
• Cannot offer “volume rebates” where the customer has
not met the minimum volume of purchases required to
qualify for the rebate (i.e., can’t be renegotiated within the
term of the agreement)
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GPO Safe Harbor
Elements
• What is a GPO for purposes of the safe harbor?
• Purchasing Agent
• GPO must have purchasing authority for Members
• Authorization is part of agreement with Members
• GPO Members may not be wholly-owned by GPO or subsidiaries of
a parent company that wholly-owns GPO
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GPO Safe Harbor
Elements
• Written Agreement with Members for which items or
services are furnished
• Administrative Fee Disclosure – Agreement provides that
Vendors from which Members will purchase goods or
services will pay a fee to GPO of 3% or less of purchase
price
• Fees not fixed at 3% or less – Agreement must specify the
amount (or, if not known, the maximum amount) the GPO
will be paid
• No fee caps set by safe harbor
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GPO Safe Harbor
Elements
• Disclosure to Health Care Provider Members
• GPO must provide written disclosure, at least annually, and to
Secretary of HHS upon request, of the amount received from each
vendor with respect to purchases made by or on behalf of health
care provider members.
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CASE EXAMPLES
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Manufacturer / Pharmacy Arrangements
U.S. v. J&J / Omnicare Settlement
• At Issue: Switching, Rebates, Data and Grants
• Lessons Learned for Supply Chain Members:
• Moving market share – a primary driver or consequence of
arrangement
• Government very interested in arrangements that could
compromise patient care and increase government costs
• Services arrangements should be for legitimate services,
documented and actually be performed
• Do what you say and document what you do (not just in agreement
but in company files)
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Manufacturer / Pharmacy Arrangements
U.S. v. J&J / Omnicare Settlement
• Lessons Learned for Supply Chain Members:
• Arrangements should not compromise independent, professional
judgment of physician
• Government will look to see if a party is acting as an “extension of
sales force” to create “referral” nexus
• “Active Intervention Programs”
• Dear Doctor/Patient Authorization letters
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Direct to Pharmacy Sales
Can a manufacturer sell its drugs directly to pharmacies?
Novartis Settlement
• Manufacturer selects 3 specialty pharmacies as exclusive sellers of
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Drug
Two of the pharmacies are good at encouraging patients to refill the
prescriptions but the third is not
Manufacturer threatens to terminate third pharmacy for poor
performance
In response, pharmacy implements program to encourage patients to
refill as many times as prescribed
This works well, so manufacturer arranges for first two pharmacies to
do the same
Result?
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Direct to Pharmacy Sales
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Direct to Patient Sales
Can a manufacturer sell its drugs directly to patients?
Hypothetical
• Brand Drug is not readily covered by insurers because cheaper,
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therapeutically equivalent generic is available
Manufacturer contracts with mail order pharmacy to serve as
dispensing agent for the Drug
Cash customers only; no claims to any third party payor
Pharmacy stocks drug under bailment arrangement where
manufacturer retains title
Pharmacy dispenses to patients, and remits payment to manufacturer
Manufacturer pays pharmacy dispensing and monthly service fees
Result?
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Direct to Patient Sales
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Direct to Patient Sales
OIG Advisory Opinion No. 14-05
• Three key considerations for OIG
• Safeguards to ensure no cost to government healthcare programs
from sale of Drug under the program
• No effort by manufacturer to use arrangement for Drug to “promote
or leverage sales of other products”
• “No clinical barriers” prevented patients from switching to less
costly generic equivalent upon leaving manufacturer’s program
• Additional considerations
• Payments to pharmacy
• Publicizing the program
• Availability through other channels
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Provision of Free Items to Customers
Hypothetical
• Manufacturer of drugs, devices and other products used
to treat eye disorders proposes to create a tiered,
percentage rebate program.
• Customer rebates calculated based on total annual purchased of
all included products by tier, e.g.
• $2X annual purchase = 5% rebate
• $3X annual purchase = 10% rebate
• Some included products reimbursed by government healthcare
programs
• But not same reimbursement methodology (Part A, Part B)
• Some products not reimbursed at all
• Result?
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Tiered Rebates
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Tiered Rebates
OIG Advisory Opinion No.13-07
• Key considerations for OIG
• Goods or services are reimbursable under the same payment
methodology
• Price of goods or services can be properly reported
• Tiered rebate not contingent on the purchase of another product
• Fixed terms disclosed in writing at the time of initial purchase
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Group Purchasing Organizations
• Strategic Transactions
• Manufacturer Arrangements
• Member Arrangements
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Group Purchasing Organizations
Strategic Transactions
Types of Transactions
• Joint Ventures
• Small Investment Interests
Safe Harbor
• 60/40 Rules
• Profit vs. Nonprofit
• Coop
• Affiliations
• GPO and Personal
Services Safe Harbor
• Access Agreements
• GPO Safe Harbor
• Services Agreements
• Personal Services and
Management Contracts
Safe Harbor
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Group Purchasing Organizations
Manufacturer Arrangements
• Administrative Fees
• Growth Incentive Fees
• “Other” Fees
• Rebates
• Services
• Marketing/Sales vs. Education
• Conferences/Summits
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Group Purchasing Organizations
Member Arrangements
• Dividend/Distributions
• Patronage Dividends (coop model)
• “Offeror” Rebates (Administrative Fee Return)
• Services: Value Add vs. “Free” Services and Goods (e.g.,
technology)
• Education vs. Sales/Marketing – Extension of Supplier
Sales Force – Growth Incentive Fees
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Principal GPO Industry Relationships
Administrative Fee Payment to GPO
• Manufacturer pays GPO percentage of the value of
purchases made by GPO Members
OIG’s Position: Federal Anti-Kickback Statute implicated since
payment intended to induce GPO to arrange for or recommend the
purchasing, leasing or ordering of Manufacturer’s items or services.
• Elements of GPO Safe Harbor
Protects “any payment” by a vendor of goods or services to an entity
[GPO] that is authorized to act as a purchasing agent for a group of
entities/individuals who furnish covered services, provided certain
requirements are satisfied.
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Principal GPO Industry Relationships
Administrative Fee Payment to GPO
• Marketing Manufacturer’s Products and Services
• GPO’s enter into marketing arrangements with Vendors or required
to market Manufacturer products
• Implicate federal Anti-Kickback Statute
• Payment covered by GPO safe harbor
• Administrative fee payments in excess of 3% market rate
• Consider applicability of personal services safe harbor
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Principal GPO Industry Relationships
Discounts & Rebates – Discounts Safe Harbor
• OIG Position: Discounts and rebates constitute
remuneration to Members to induce Members to purchase
Vendor’s products and services
• Federal Anti-Kickback Statute implicated
• Discounts (point of sale) – sale of product or service at
discounted price to Member
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Principal GPO Industry Relationships
Discounts & Rebates – Discounts Safe Harbor
• Rebate (post-sale) – rebate based on “value” of
purchases by Member
• Discount: A reduction in the amount a buyer (i.e., a GPO Member)
is charged for an item or service based on an arms-length
transaction
• OIG’s Position: Discount is the difference between price vendor
normally sells a product and the price the vendor sells product to a
particular buyer
• Examples: Prompt-pay discounts
Across the board price reductions
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Discounts, Rebates and
Value Add Goods and Services
Discount does not include the following types of items and services:
• cash payments or cash equivalents
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• services provided in accordance with
(except rebates);
a personal or management services
contract; or
supplying one good or service
without charge or at a reduced
• other remuneration, in cash or in kind,
charge to induce the purchase of a
not explicitly described above.
different good or service (known as
• Rebates: Any discount the terms of
bundling of products);
which are fixed and disclosed in
a reduction in price application to one
writing at the time of sale, but which is
payor, but not to Medicare or a state
not given at the time of sale
health care program;
• OIG Fraud Alert: Up-front rebates,
a routine reduction or waiver of any
prebates and signing bonus payments
coinsurance or deductible amount
not protected by discounts safe
owed by a program beneficiary;
harbor
warranties;
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Principal GPO Industry Relationships
Manufacturer and GPO Discounts / Rebates to Members
• Discounts safe harbor – GPO obligations – considered
“offeror”
• Offeror: Entity that is not a seller, but promotes the purchase of an
item or service at a reduced rate
• Offeror obligations
• Similar to Manufacturer obligations
• Advise Member of its disclosure/reporting obligations
• Refrain from taking action that would impede Member’s ability to meet
obligations
• Recommended: Fully and accurately report discount to Member
• Buyer/member must comply with
reporting/disclosure obligations
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Principal GPO Industry Relationships
GPO / Manufacturer Payments to another GPO
• Access Agreements (Adv. Opin. 1-6)
• Shared Service Arrangements
• OIG – may take position Federal Anti-Kickback Statute
implicated
• GPO safe harbor
• Personal services safe harbor
Michael Nachman
Associate General Counsel
• corporate attorney specialized in commercial transactions
• practicing for twenty years, with AmerisourceBergen since 2009
• responsibilities include providing legal support for sales and
marketing teams, primarily within the Community and Specialty
Pharmacy division
• representative clients include retail pharmacies, buying
groups/group purchasing organizations, chains, PBM’s, specialty
pharmacy, and long term care providers.
John W. Jones, Jr.
Partner, Leadership Team Member | Health Sciences Department
• member of Pepper’s Leadership Team of the Health Sciences
Department and leader of several of the firm’s health-related
groups, including the Group Purchasing and Buying Cooperative
Practice
• almost 20 years experience representing health care providers
and suppliers on the transactional and regulatory side with a wide
range of regulatory issues including fraud and abuse, supply
chain, and compliance pre-and-post product launch
• significant experience in M&A, compliance, regulatory and
structural governance matters
Allan A. Thoen
Partner | Health Sciences Department
• practice focuses on representation of clients in the health care
sector
• experience includes multiple trials and representation of clients in
jurisdictions across the country, including
• defense of False Claims Act and Anti-Kickback Act litigation
• representation of pharmaceutical and chemical manufacturers in
connection with government investigations and inquiries
• representation of pharmacies in connection with government
investigations and inquiries and compliance counseling regarding
pharmacy law