Many physicians involved in clinical research studies have negotiated consultant agreements with pharmaceutical companies. Under these types of contracts, physicians agree to provide consulting services that may include attending medical advisory board meetings, assisting with strategic planning, making presentations at meetings, providing training to other physicians on use of company-related products, drafting study protocols, identifying research opportunities and potential clinical sites, reviewing data and medical techniques, consulting with other physicians, and publishing articles and reports. Pharmaceutical companies may compensate physicians with a monthly salary, stock options, product discounts, and product royalties. While such contracts may seem innocuous, the parties must be careful to evaluate the arrangements under the Federal Anti-Kickback Statute and any applicable state anti-kickback provisions. There is a risk that these consulting arrangements could be viewed as a kickback to the physicians to the extent that the physicians are purchasing drugs or devices from these companies in connection with services rendered to patients.

The Federal Anti-Kickback Statute prohibits the knowing or willful offer, solicitation, payment, or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) that is intended to induce the referral of a patient for an item or service that is reimbursable by federal health care financing programs, including Medicare, Medicaid, TRICARE, and programs covering veterans’ benefits. See Section 1128B(b) of the Act. The Office of Inspector General (“OIG”) takes the view that the Anti-Kickback Statute has been violated if one purpose of an arrangement is to induce referrals, notwithstanding the fact that there may be other legitimate purposes for which the payment is made. Several courts have affirmed this interpretation. As a result, virtually any financial relationship between a health care provider and a referral source has potential anti-kickback implications. Although an arrangement is prohibited under the Anti-Kickback Statute only if there is an intent to induce or reward referrals, the government could infer such an intent from circumstantial evidence that suggests that one of the reasons for the business arrangement was a prohibited intent.

The federal government has authority to enforce the law through criminal prosecution and, upon conviction, substantial fines and forfeitures, and imprisonment for up to five years. Moreover, a violation also serves as the basis for exclusion from the Medicare and Medicaid programs, as well as other federal programs. The U.S. Department of Health & Human Services also has the authority to impose an administrative penalty of up to $50,000 for each kickback violation. Starting in July 1991, the OIG published the first of a series of final rules (“safe harbor regulations”) defining payment practices that would not be subject to civil sanction or criminal enforcement under the Anti-Kickback Statute. The most applicable safe harbor to consulting contracts is the “personal services” safe harbor. This safe harbor provides protection to payments made by a principal to an agent as compensation for the services of the agent, so long as seven standards are met:

1. The agency agreement is set out in writing and signed by the parties;
2. The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent;
3. If the agency agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;
4. The term of the agreement is for not less than one year;
5. The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare or a state health care program;
6. The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law; and
7. The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.

In 1994, the OIG issued a Special Fraud Alert on “Prescription Drug Marketing Schemes.” The OIG noted that many prescription drug marketing activities had moved “far beyond traditional advertising and educational contacts.” The OIG expressed concern that patients may be using prescription drug items, unaware that their physician was being compensated for promoting the product. As an example of a problematic relationship, the OIG identified a “research grant” program in which physicians were given substantial payments for de minimis record-keeping tasks. In the Special Fraud Alert, the OIG noted that these types of schemes pose a danger to federal health care programs, particularly to the Medicaid program, because financial incentives may interfere with a physician’s judgment in determining the most appropriate treatment for a patient and could lead to greater costs for the federal government in reimbursing suppliers for the products.

While it is necessary to meet all of the requirements referenced above to receive protection under the safe harbor, it is prudent to satisfy as many as possible when full compliance is not attainable. Government officials likely will pay careful scrutiny, for example, to contractual arrangements that lack hours requirements, use loose termination provisions, fail to clearly delineate contractual duties, provide compensation in excess of fair market value for services rendered, or provide incentives to either generate referrals or influence the physician’s judgment on clinical trial work. Further, the government also may be concerned if consulting and research duties are combined under one contract, making it difficult to determine how payment is being allocated between research and consulting responsibilities.

It is also important to note that effective as of July 1, 2002, the Pharmaceutical Research and Manufacturers of America (“PhRMA”), a national association of research-based pharmaceutical and biotechnology companies, published a voluntary Code on Interactions with Healthcare Professionals. PhRMA states that it is appropriate for consultants to be offered reasonable compensation for those services and reimbursements for travel expenses, but warns that it is inappropriate for companies to use token consulting or advisory arrangements. PhRMA makes the following recommendations to support the existence of a bona fide consulting arrangement:

• A written contract specifies the nature of the services to be provided and the basis for payment of those services;
• A legitimate need for the services has been clearly identified in advance of requesting the services and entering into arrangements with the prospective consultants;
• The criteria for selecting consultants are directly related to the identified purpose, and the persons responsible for selecting the consultants have the expertise necessary to evaluate whether the particular healthcare professionals meet those criteria;
• The number of healthcare professionals retained is not greater than the number reasonably necessary to achieve the identified purpose;
• The retaining company maintains records concerning and makes appropriate use of the services provided by consultants; and
• The venue and circumstances of any meeting with consultants are conducive to the consulting services and activities related to the services that are the primary focus of the meeting, and any social or entertainment events are clearly subordinate in terms of time and emphasis.

In summary, consulting arrangements between physicians and pharmaceutical companies can be problematic if they are not structured as bona fide relationships. If consulting physicians are purchasing products from these pharmaceutical companies, the government could allege that agreements are merely offered as inducements for the purchase of the products. Pharmaceutical companies and practitioners are urged to be cautious in this area that is clearly the subject of increasing scrutiny.

If you have any questions or if you would like more information, please contact:

Connie A. Raffa
212.484.3926
raffa.connie@arentfox.com