Senators Charles Grassley, R-Iowa, and Herb Kohl, D-Iowa, introduced legislation in January that will set a nation-wide standard requiring pharmaceutical and device companies to disclose publicly details about their financial relationships with physicians. The Physician Payment Sunshine Act of 2009 (the Act), which is available here, would preempt some, but not all, state laws requiring reporting, resulting in a potentially complicated patchwork of reporting requirements across the country. Under the Act, companies would face fines of up to $1 million if they knowingly fail to disclose “payments or other transfer of value” to physicians worth more than $100 per year. The Act, as currently drafted, applies to all manufacturers of drugs, devices and biologicals for which payment may be made under Medicare, Medicaid or SCHIP. The Act also requires these manufacturers and the group purchasing organizations that purchase or negotiate for pricing on the manufacturers’ products to disclose any physician ownership in their businesses that is not held in the form of publicly traded stocks or mutual funds.

This new bill is similar to legislation Senators Grassley and Kohl introduced two years ago, which Congress as a whole never considered. The revised Act would impose a significant burden on pharmaceutical and device companies due to several key changes  such as the preemption provision, increased penalties for nondisclosure and a significantly lower reporting threshold.  

Payments and Gifts Requiring Disclosure 
The Act offers a very broad definition of “payments or other transfers of value” that must be reported, including the following:

• payments of cash, in-kind items or services, stock, or other ownership interests;

• speaking or consulting fees;

• fees for continuing medical education;

• honoraria, travel, food or entertainment;

• grants for education or research;

• royalties or licenses; or

• any other form of payment or other transfer of value determined by the Secretary of the Department of Health and Human Services (HHS).

Decreased Aggregate Reporting Threshold 
Another significant change to the revised bill is that companies must report any payments or gifts given to a physician or physician group that exceed an aggregate threshold amount of $100 per year rather than $500 per year under the prior bill. This low threshold will force extensive and burdensome reporting by many companies providing only minimal honorarium or other nominal payments to physicians.

Exclusions and Frequency of Reporting
The Act also includes a few changes that may reduce the otherwise heavy burden the bill places on the drug and device industries. For example, the revised bill requires only annual reporting from pharmaceutical/device companies rather than the quarterly reporting called for under the prior bill. In addition, the Act sets forth several exclusions to the reporting requirements for product samples, educational materials, trial loans of devices, discounts and rebates, charity donations in-kind, and returns on investments in publicly traded securities provided to physicians.

Increased Penalties 
The Act includes steep penalties for knowingly failing to report the required information to HHS- $10,000 to $100,000 fines for each payment not reported with a $1 million maximum penalty per company per calendar year. This aggregate penalty cap was increased to $1 million from $250,000 in the previous bill. Such a high penalty gives the HHS Secretary a powerful tool to enforce the reporting requirements. In addition, for each unintentional failure to report, fines range from $1,000 to $10,000 for each unreported payment with a $150,000 cap for the year.

Distributors Must Comply with Reporting Requirements  
The Act’s disclosure requirements only apply to manufacturers of a covered drug, device or biological. However, the legislation proposes a definition of “manufacturer” that explicitly includes any entity that distributes the covered drug, device or biological. 

Preemption 
Several states, including Minnesota, Massachusetts, Vermont, Maine, West Virginia and the District of Columbia have existing gift disclosure laws. Moreover, Oregon, Mississippi, Illinois, Connecticut, and Texas have already introduced such legislation in 2009. Colorado has a draft bill that would require distributors to report gifts, but it has not yet been introduced. However, the Act would preempt state laws requiring disclosure of any payments or transfers of value that must be reported under the Act. Thus, states would not be able to collect  the same information that the federal government is collecting. 

Nevertheless, the  Act would  not preempt state laws that contain reporting requirements seeking information outside the scope of the federal law. As a result of this narrow preemption, a patchwork of state law requirements more far-reaching than the requirements of the proposed legislation may emerge despite the attempt to establish a uniform national standard. Moreover, states still would  be able to prohibit certain marketing practices, such as the ban on gifts over a certain amount in Minnesota and Massachusetts.

Congress likely will enact some version of this bill in 2009. If enacted, companies would be required to submit their first annual report to HHS on March 31, 2011. To discuss how these requirements may impact your business, please contact:

Larri Short
short.larri@arentfox.com
202.775.5786

Linda A. Baumann
baumann.linda@arentfox.com
202.857.6239

Lisa C. Edwards
edwards.lisa@arentfox.com
202.857.6339