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Consulting for drug and medical device companies

By Jeffrey B. Miller, Esq..

“Whistleblower Lawsuit Says Manufacturer Generously Rewards Doctors.”

“OIG Cautions Pharmaceutical Industry on Relationships with Physicians.”

“Department of Justice Issues Subpoenas to Four Manufacturers Questioning Physician Relationships.”

Headlines like these have become increasingly common across the pharmaceutical and medical device industries in recent years. In the past year alone we have read about law enforcement initiatives resulting in settlements in the hundreds of millions of dollars, and alleging activities that range from outright bribery to inappropriate physician gifts and entertainment to illegal research and consulting arrangements. Manufacturers and physicians have been fined. Some have been excluded from billing their services to government funded programs (such as Medicare and Medicaid). In a few extreme cases some have been sentenced to prison. The sensitivity of this issue has reached all corners of the medical community. This past January 26 the Journal of the American Medical Association published a statement from a group of influential physicians calling on academic medical centers to take the lead on eliminating practices between physicians and pharmaceutical manufacturers that pose “challenges to the principles of medical professionalism.” Activities cited include “small gifts, pharmaceutical samples, continuing medical education, funds for physician travel, speaker bureaus, ghostwriting, and consulting and research contracts.”

Many manufacturers and physicians alike have thought twice about their business relationships, questioning how they can ensure that their relationships satisfy the requirements of the law. One significant part of these relationships is their consulting arrangements. These professional partnerships between physicians and manufacturers are critical to providing the best possible care for patients. Physicians desire the safest, most effective medicines and medical devices possible for the care of their patients. Manufacturers want to provide these products, but cannot effectively develop them or properly introduce them to the medical community without physician expertise. In this complex (and sometimes counter-intuitive) regulatory environment, defining the limits appropriate for these relationships can be a challenge. The purpose of this article is to provide physicians some insight into the issues that they should discuss with manufacturers, and with their own legal professionals, when considering consulting arrangements with manufacturers.

The primary federal law that governs physician-manufacturer consulting arrangements is the federal Anti-kickback Statute. In the physician-manufacturer context this statute essentially prohibits physicians from soliciting or receiving anything of value (“remuneration”) from a manufacturer in exchange for recommending the manufacturers’ products to government funded program (Medicare, Medicaid, Tri-Care) beneficiaries. Similarly, manufacturers are prohibited from offering or providing any such remuneration. The form of the remuneration makes no difference – it can be in cash or in kind, with no minimum value required. It can be paid directly or indirectly, overtly or covertly. The basic test of whether enough value has been provided to implicate the statute is whether the remuneration has materially influenced the physician’s professional clinical judgment.

As we have seen through the headlines, violating the federal Anti-kickback Statute is a serious crime. It is classified as a felony, and is punishable for individuals by restitution plus fines of up to $25,000, and imprisonment for up to five years. Corporate penalties can mount into the millions. Furthermore, the Department of Health and Human Services, Office of Inspector General (OIG) is required to exclude persons and/or entities from participation in government-related health care programs (e.g., Medicare, Medicaid and Tri-Care) where they have been convicted under the statute. Additional civil monetary penalties are also possible.

To help persons and organizations to know that their arrangements satisfy the requirements of the federal Anti-kickback Statute the government has created statutory exceptions and regulatory safe harbors. The exceptions describe arrangements that Congress has carved out of the statute as legal. The safe harbors are specifically defined circumstances that the OIG has determined it will not pursue. According to the OIG, these exceptions and safe harbors are designed to protect patients by ensuring that physician medical decisions are made solely on the bases of appropriate clinical factors, and not on personal financial concerns. They are also designed to curb over-utilization of federal health care program reimbursed services, and to hold down cost increases to federal health care programs. To ensure that their consulting arrangements satisfy the requirements of the federal Anti-kickback Statute, physicians and manufacturers should try to structure their arrangements to fit within an exception or a safe harbor.

For consulting relationships, there are essentially two choices that satisfy an exception or safe harbor: employment relationships or independent contractor relationships. Each of these relationships has it own specific requirements. Of these two choices, employment relationships are the easiest way to comply with most of the elements of the federal Anti-kickback Statute’s safe harbor requirements, with the fewest limitations. Essentially, physicians must be bona fide employees as defined in the Internal Revenue Code. This determination is based upon Internal Revenue Code requirements and a 20-factor weighing test applied by the Internal Revenue Service (and if a dispute arises, by the courts). Most significantly, for the physician to be treated as an employee the manufacturer must assert control over both: (1) what services that the physician is required to perform; and (2) how he or she performs those services. Physicians interested in employment relationships should consult with their attorneys for more information on satisfying this standard. If this level of control is not desired or cannot be achieved, or if an employment relationship is not desired by either party, physicians should consider independent contractor relationships.

Independent contractor relationships are the most common relationships for consulting services. While often most convenient from a services and management standpoint, there are significant requirements for satisfying the applicable safe harbor. As a result, full satisfaction of the safe harbor requirements may not be achieved. First, there must be a written agreement between the parties that covers all of the services that the physician will provide. These services must be reasonably necessary to accomplish the business purpose of the agreement, and no more. In other words, the consulting services provided must bring demonstrable value to the manufacturer. Compensating small numbers of physicians for bona fide consulting or advisory services is likely to satisfy this requirement. However, the government has taken the position that compensating large numbers of physicians for the same services, or as “consultants” to attend meetings or conferences in primarily passive capacities, or to present ghost-written papers or speeches (even where there is full disclosure of the physicians’ conflicts of interest) is suspect.

If the independent contractor agreement is intended to provide for the physician’s services on a periodic or sporadic basis, the safe harbor requires that agreement to specify the exact schedule of the services, and the exact amount to be paid to the physician for his or her work in accordance with that schedule. For example, if the physician is to provide consulting services at meetings once a month, the schedule of meetings and the amount paid per meeting must be set forth in the agreement. The key terms in the agreement, such as the services to be provided and the compensation paid, cannot be changed for one year.

The amount and form of the compensation is also limited. First, the compensation must be an annual aggregate amount (like a salary). This requirement effectively excludes hourly rates and similar compensation structures from safe harbor protection – a significant limitation if the exact time required for the services cannot be readily determined in advance. Second, the compensation must be consistent with fair market value, without any relation to the volume or value of any referrals or business that may be otherwise generated between the parties for which payment may be made under federally funded health care programs, if any. Under the statute, “fair market value” is defined as the value of the services for general commercial purposes, not adjusted for any additional value that one party might bring that could be attributed to that party’s ability to generate business.

The determination of fair market value compensation is not a “cookie-cutter” process. There are a variety of legitimate techniques that can be used, and the government subscribes to no particular technique, other than that the value should be based upon the worth of the services provided in the marketplace. Compensation is often valued by comparison to marketplace compensation based on benchmark comparisons and assumptions. This technique uses marketplace salary surveys as the baseline, incorporates market conditions, and physician and position uniqueness, and then determines a rate which is consistent with the market compensation. Other legitimate techniques may also be available. Physicians interested in learning more about the fair market value of their services should contact their local legal counsel or financial consultants for more information.

Due to the plethora of limiting requirements for independent contractor relationships, it may not be possible for all physician consulting relationships to satisfy the requirements of the safe harbor. Failing to satisfy the requirements of a safe harbor does not mean that the arrangements are illegal; only that they are not insulated from government prosecution. To be illegal the arrangements would have to violate the federal Anti-kickback Statute itself, requiring case-by-case analyses of the particular facts and circumstances involved in each arrangement, including a showing of criminal intent to reward or induce the generation of business. Physicians should be extremely careful on approaching arrangements that fail to achieve safe harbor protection, however. Should the facts and circumstances demonstrate that even one purpose of the arrangement was to reward or induce referrals, the arrangement could be found to violate the statute.

Physician-manufacturer consulting arrangements are critical to providing the best possible care for patients. In the current health care environment many manufacturers and physicians alike have questioned how they can ensure that their relationships satisfy the requirements of the law. Satisfying the requirements of a safe harbor to the federal Anti-kickback Statute is an important goal in the process. Physicians with questions or concerns regarding the federal Anti-kickback Statute, or any other aspect of their relationships with manufacturers, should contact their local attorneys.

Jeffrey B. Miller, Esq., is Chief Compliance Officer and Counsel, Synthes, Inc.

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