Overview of Pharmaceutical Compliance - ABA YLD 101 Practice Series

By Sarah K. Giesting

Over the last several years, buzz phrases like "effective compliance program" and "culture of compliance" have been pervasive in the pharmaceutical industry. Of course, these phrases beg the question, what is "compliance?"

Generally, compliance is an effort to encourage ethical conduct and a commitment to the law. This applies not only to the activities of the organization, but to each of its employees and agents. Therefore, a "compliance program" should be designed to prevent and detect unethical or unlawful conduct by the organization, its employees or its agents.

There is a wide variety of useful sources available to legal counsel and compliance professionals in developing, implementing and refining compliance programs, including industry guidance, federal and state legal parameters and enforcement activity. This article provides a brief overview of these tools.

Pharmaceutical Industry Guidance on Compliance
On May 5, 2003, the Department of Health and Human Services ("DHHS") Office of the Inspector General ("OIG") released its Compliance Program Guidance for Pharmaceutical Manufacturers ("OIG Guidance"). This is one of several model guidances issued by the OIG. The stated purpose of the voluntary guidance is to "engage the health care community in preventing fraud and abuse" in the Federal health care programs, such as Medicare and Medicaid.

The OIG Guidance sets forth seven elements for an effective compliance program from the Federal Sentencing Guidelines:

  1. Implementing written policies and procedures;
  2. Designating a compliance officer and compliance committee;
  3. Conducting effective training and education;
  4. Developing effective lines of communication;
  5. Conducting internal monitoring and auditing;
  6. Enforcing standards through well-publicized disciplinary guidelines; and
  7. Responding promptly to detected problems and undertaking corrective action.

In addition, the OIG Guidance identifies potential risks areas that pharmaceutical manufacturers should consider when developing compliance programs. The three areas of "significant concern" are (1) integrity of data used by state and federal governments to establish payment amounts; (2) kickbacks and other illegal remuneration; and (3) compliance with laws regulating drug samples. Numerous other "key areas of potential risk" also are discussed, including:

  • Discounts, payments and other remuneration provided to purchasers;
  • Product and reimbursement support services;
  • Educational grants and funding;
  • Research funding;
  • Formulary support services, formulary payments and interactions with formulary committee members;
  • Calculation of average wholesale price ("AWP") and "marketing the spread;"
  • Relationships with health care providers, including gifts, entertainment, business courtesies and other forms of remuneration;
  • Compensation paid by pharmaceutical companies to health care providers for certain activities, including promotional speaking, consulting services, advisory boards, detailing, switching arrangements, preceptorships and ghost writing; and
  • Drug samples.

It is significant to note that while this list certainly is not exhaustive, it provides a starting point for organizations to consider when developing, implementing and refining their compliance programs.

Further, the OIG Guidance notes that some of these concerns are addressed in the Pharmaceutical Research and Manufacturers of America Code on Interactions with Healthcare Professionals ("PhRMA Code"), effective July 1, 2002. Like to the OIG Guidance, the voluntary PhRMA Code addresses key interactions with health care providers, such as informational presentations, educational or professional meetings, consultant programs, speaker training, scholarships and gifts.

The OIG states that adhering to the PhRMA Code shows a pharmaceutical company's effort to reduce the risk of fraud and abuse associated with certain practices and "demonstrates a good faith effort to comply with the applicable federal health care program requirements." Similarly, the guidance provided by the OIG is rooted in the legal parameters, including federal and state anti-kickback statutes and false claims acts.  

Legal Landscape for the Pharmaceutical Industry
The Federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), makes it a civil and criminal offense to knowingly and willfully offer, pay, solicit or receive any remuneration to induce or reward the referral of items or services paid in whole or part by the Federal health care programs. The payment can be made directly or indirectly, and includes all types of remuneration, such as cash or other benefits.

Violation of the Anti-Kickback Statute is a felony punishable by a fine up to $25,000 and/or imprisonment up to five years. Additionally, violators may be subject to civil monetary penalties ("CMP") and exclusion from the Federal health care programs. Whenever possible, pharmaceutical companies should structure arrangements that may implicate the Anti-Kickback Statute to fit within an available safe harbor, such as the personal services safe harbor.

Similarly, the Federal False Claims Act, 31 U.S.C. § 3729 et seq., prohibits pharmaceutical companies from knowingly presenting or causing to be presented a false record to the Federal health care programs for payment. Violators are subject to a civil penalty of $5,500 to $11,000 plus three times the amount of damages to the Government per violation. Due to the potential for significant penalties under the False Claims Act, prosecutors frequently attempt to "bootstrap" an anti-kickback violation into a False Claims Act violation.

States also have a variety of laws intended to combat fraud and abuse, including state anti-kickback and false claims statutes, which must be considered.

Federal and state governments have a vested interest in ensuring that pharmaceutical companies stay within these legal parameters and may initiate a variety of enforcement actions if they fail to do so.

Recent Enforcement Activity in the Pharmaceutical Industry
Civil and criminal investigations may be handled by a number of legal enforcers and typically involve a combination of the following:

  • OIG
  • Department of Justice ("DOJ")
  • Federal Bureau of Investigation ("FBI")
  • Food and Drug Administration ("FDA")
  • U.S. Attorneys offices
  • State attorneys general offices
  • Medicaid Fraud Control Units ("MFCU")
  • Securities and Exchange Commission ("SEC")
  • Federal Trade Commission ("FTC")

Additionally, under the whistleblower provision of the False Claims Act, inappropriate conduct or practices may be brought to the attention of federal and state agencies through a private person. The statute allows the "relator" to file under seal a "qui tam" suit on behalf of the United States. The DOJ, along with other federal and state agencies, investigate the claims and the DOJ decides whether to (1) intervene in the suit; (2) decline to intervene, but permit the suit to move forward by the relator; or (3) move to dismiss the suit. The relator generally receives fifteen to thirty percent of the total government recovery, depending on a number of factors including whether the government intervened in the case.

Historically, pharmaceutical manufacturers chose to settle government investigations rather than proceeding to trial. This usually includes a fine, settlement or non-prosecution agreement and Corporate Integrity Agreement ("CIA"). The company and/or individual employees may or may not admit liability as part of the agreement. CIAs impose a number of requirements, typically for a period of five years, and require the pharmaceutical manufacturer to file several reports certifying the enclosed information. Failure to comply with the CIA requirements may subject the pharmaceutical company to stipulated penalties and/or exclusion from the Federal health care programs.

Although "compliance" has been a hot topic for the last several years, it shows no signs of lessening in import. The area certainly will continue to evolve as federal and state governments develop new and more intricate legal theories to prosecute pharmaceutical manufacturers. As such, it is critical that legal counsel and compliance professionals closely track developments in industry guidance, applicable federal and state laws, and enforcement activity.

Pharmaceutical Industry Compliance Resources:
OIG Compliance Program Guidance for Pharmaceutical Manufacturers:

68 Fed, Reg. 23731 (May 5, 2003)
OIG Fraud Prevention and Detection guidance and materials http://oig.hhs.gov/fraud.html
OIG Corporate Integrity Agreements
OIG Work Plan
FDA guidance and materials
Federal Sentencing Guidelines
PhRMA Code http://www.phrma.org/code_on_interactions_with_healthcare_professionals/


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About the Author

Sarah K. Giesting is an associate in the health law practice at Epstein Becker & Green, P.C. Sarah is located in the New York office and focuses her practice on pharmaceutical compliance and fraud defense. Sarah can be reached at (212) 351-4792 or sgiesting@ebglaw.com.

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