I. Introduction

On Dec. 19, 2011, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule titled ‘‘Medicare, Medicaid, Children’s Health Insurance Programs: Transparency Reports and Reporting of Physician Ownership or Investment Interests’’ (the Proposed Rule).¹ The Proposed Rule is promulgated pursuant to provisions of the Patient Protection and Affordable Care Act (the Act) passed in 2010, commonly referred to as the ‘‘Sunshine Provisions.’’² The Act requires that certain manufacturers (referred to in the Proposed Rule as Applicable Manufacturers) of covered drugs, devices, biologicals, and medical supplies (referred to herein as Covered Products) annually report to the Secretary of the Department of Health and Human Services ‘‘payments or other transfers of value’’ (referred to herein as Covered Transfers) to physicians and to teaching hospitals (referred to herein as Covered Recipients) and that Applicable Manufacturers and certain group purchasing organizations (GPOs) (referred to in the Proposed Rule as Applicable GPOs), report information regarding the ownership or investment interests (referred to herein as Covered Ownership Interests) held by physicians (or their immediate family members) (referred to herein as Covered Owners) in such Manufacturers and GPOs and Covered Transfers to such Covered Owners.

The Proposed Rule, and the Act that it seeks to implement, is the latest instance of an accelerating trend to mitigate against the perceived downside of financial relationships between the life sciences industry on the one hand and physicians and institutional health care providers on the other hand without so restricting such relationships that the beneficial collaboration between health care providers and industry is strangled. The fulcrum in these balancing efforts is increasing transparency, with the belief that public scrutiny and accountability will discourage the types of financial relationships that could undermine the independent scientific judgment of health care providers. Whether the Proposed Rule strikes the right balance likely will be the subject of many of the comments. There are widespread concerns that the increasing public scrutiny of otherwise private financial matters will discourage physicians from engaging with the life sciences industry on research and other scientific collaborations and in helping to found life sciences companies. Further, there are concerns that the intricacies of the Proposed Rule will, in turn, discourage the life sciences industry from working with physicians.

While the guidelines do in large part merely track the requirements of the Act, they reflect certain refinements that will significantly impact industry, and to a lesser extent perhaps, physicians. Further, if adopted as the final rule, the Proposed Rule contains a number of key definitions and important provisions that are difficult to apply to the operations and structure of the life sciences industry, and is likely to result in significant uncertainty as to compliance obligations. The industry needs to carefully examine the Proposed Rule, including the associated dollar cost and the business impact in other respects, and provide feedback before these significant changes are finalized.

II. Executive Summary

The Proposed Rule, if adopted in its present form, is likely to have a meaningful impact across the life sciences industry. Large Applicable Manufacturers with well-developed fraud and abuse compliance and transparency programs will need to modify such programs to comport with the requirements of the Rule. Even those with transparency requirements embedded in existing Corporate Integrity Agreements (CIAs) will need to consider seeking to amend them to reflect the final guidelines. Smaller Applicable Manufacturers that have not yet established mature fraud and abuse programs and that may rely heavily on physician leadership and investment will need to quickly adapt to the requirements of the final rule.

The economic and business impact of the Proposed Rule should not be underestimated. The large-scale investment in reporting and tracking systems made by a handful of companies under the most recent CIAs will now need to be repeated across the industry. Similarly, small companies will need to invest in this area and as a result impose a heightened level of discipline on their organizations. Perhaps as importantly, the expansive nature of the Proposed Rule inevitably will impact individual behavior and the industry/physician relationships that have long been at the core of much medical innovation. Companies and physicians will need to be more strategic in their financial relationships. Finally, in its current form, the Proposed Rule contains a number of definitions and provisions that are difficult to graft onto well-established and widely understood terms, processes, and relationships within the life sciences sector. Absent clarification in the final rule in response to comments, Applicable Manufacturers and Applicable GPOs may find a poorly lit path to compliance with the new regulatory requirements.

III. Who Is a Covered Reporter: Applicable Manufacturers and Applicable GPOs

The Act requires two distinct, but similar, transparency reports. First, Section 1128G(a)(1) of the Act sets forth the requirements for reports by Applicable Manufacturers describing Covered Transfers to Covered Recipients.³ Second, Section 1128G(a)(2) of the Act sets forth the requirements for reports by Applicable Manufacturers and Applicable GPOs describing Covered Ownership Interests of Covered Owners and information on any Covered Transfers to such individuals.⁴

A. Section 1128G(a)(1): Reports by Applicable Manufacturers of Payments or Other Transfers of Value

As a first step, the Proposed Rule seeks to define ‘‘Applicable Manufacturers’’ consistent with the definitional parameters set forth in the Act. The Act defines a ‘‘manufacturer of a covered drug, device, biological, or medical supply’’ as an entity that ‘‘is engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply (or any entity under common ownership with such an entity which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply).’’⁵ The Act limits itself to manufacturers that are ‘‘operating in the United States, or in a territory, possession, or commonwealth of the United States.’’⁶

In light of this statutory outline, the Proposed Rule proposes to define ‘‘Applicable Manufacturer’’ as an entity that is:

1. Engaged in the production, preparation, propagation, compounding, or conversion of a covered drug, device, biological, or medical supply for sale or distribution in the United States, or in a territory, possession, or commonwealth of the United States; or
2. Under Common ownership with an entity in paragraph (1) of this definition, which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological, or medical supply for sale or distribution in the United States, or in a territory, possession, or commonwealth of the United States.’’⁷

The Preamble to the Proposed Rule notes that its proposed definition may be somewhat narrower than other common regulatory definitions of manufacturer, for example, in regulations promulgated by the Food and Drug Administration.⁸ However, the scope of Applicable Manufacturer is broadened by several interpretive choices made by the agency in the Proposed Rule:

• Pre-market approval stage: The use of the word ‘‘distribution’’ in addition to sale in the Proposed Rule definition would seem to capture companies that are in the pre-market approval stage of the life sciences development spectrum and are distributing Covered Products in connection with conducting clinical trials. However, the Proposed Rule does not clarify this particular point specifically although such an interpretation is consistent with the research-related commentary in the Proposed Rule. If CMS does intend for these regulations to apply to companies that are distributing, but not yet marketing or selling, Covered Products, a wide range of start-up companies and well capitalized biotech companies, often with physician leadership and ownership, would be affected.
• Global reach: CMS finds that the opportunity for undue influence exists ‘‘regardless of where the product is actually manufactured’’ and therefore the Proposed Rule seeks to include companies that operate globally but still sell or distribute Covered Products domestically.⁹
• Diverse Portfolio: This is an all or nothing definition.  Manufacturers that produce more than one product are Applicable Manufacturers even if only one product in that diversified portfolio is a Covered Product.¹⁰ Further, the Proposed Rule would require that an Applicable Manufacturer report all Covered Transfers to a Covered Recipient, regardless of whether any particular Covered Transfer is associated with a portfolio product that is a Covered Product.¹¹ Thus, larger companies with significant portfolios that include products that are not Covered Products would find that they would have transparency obligations for financial relationships that relate solely to otherwise non-Covered Products.
• Outsourcing: The Proposed Rule definition includes companies that hold FDA ‘‘approval, licensure, or clearance’’ for a Covered Product regardless of whether the company outsources the actual manufacturing of the product to a third-party company.¹² In support of this approach, CMS states that it sees such outsourcing companies as still ‘‘engaged’’ in the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of the Covered Product.¹³
• Common Control: The Act also seeks to regulate companies as Applicable Manufacturers if they are under ‘‘common ownership’’ with another Applicable Manufacturer even if such company is not itself engaged in manufacturing and selling if the company provides assistance or support to the Applicable Manufacturer with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a Covered Product for sale or distribution in the United States, or in a territory, possession, or commonwealth of the United States.¹⁴ Accordingly, the Proposed Rule proposes to define ‘‘common’’ ownership as ‘‘when the same individual, individuals, entity or entities, directly or indirectly, own any portion of two or more entities.’’¹⁵ CMS does indicate that it is considering an alternative definition of common ownership that would narrow the definition to those instances meeting the requirements of the proposed definition but only in which the same individual, individuals, entity or entities own 5 percent or more of the total ownership in two or more entities.¹⁶ In either case, CMS intends for this definition of common ownership to ‘‘apply to a range of corporate arrangements,’’ for example, ‘‘parent companies and subsidiaries, and brother/sister corporations.’’¹⁷

 B. Section 1128G(a)(2): Reports on Physician Ownership and Investment Interests Under Section 1128G(a)(2)

The Act requires Applicable Manufacturers and Applicable GPOs to report certain information concerning ownership and investment interests held by Covered Owners in such entities and Covered Transfers to such Covered Owners.¹⁸ The Act defines an Applicable GPO as a ‘‘group purchasing organization (as defined by the Secretary) that purchases, arranges for, or negotiates the purchase of a [Covered Product], which is operating in the United States, or in a territory, commonwealth, or possession of the United States.’’¹⁹ Drawing on the discretion granted to the Health and Human Services secretary, CMS proposes to define Applicable GPOs as ‘‘an entity that (1) operates in the United States or in a territory, possession, or commonwealth of the United States, and (2) purchases, arranges for, or negotiates the purchase of a [Covered Product] for a group of individuals or entities, and not solely for the entity itself.’’²⁰ CMS states that its intention in defining Applicable GPO in this way is to expand the definition in order to include not only ‘‘traditional’’ GPOs that negotiate purchase agreements for their members, but to also include GPOs that purchase Covered Products for resale or distribution to individuals and groups, such as physician owned distributors (PODs).²¹ This definition, however, would not include entities that buy Covered Products solely for their own use, for example, hospitals and large group practices.

IV. What Products Are Implicated: CoveredProducts

A. Covered Products

The Act limits reporting obligations to Applicable Manufactures of a ‘‘covered drug, device, biological, or medical supply’’²² which in turn is defined in the Act as a drug, device, biological, or medical supply for which payment is ‘‘available’’ under Medicare, Medicaid, or the Children Health Insurance Program (CHIP).²³ In some cases, these federal programs reimburse for such products individually making payment availability documented and straightforward. The Proposed Rule proposes, however, that since payment is still indirectly available as part of a composite rate through a bundled payment under one of these federal health programs, such drugs, devices, biologicals, or medical supplies should be included in the scope of products covered by the regulations. ²⁴

Accordingly, the Proposed Rule would define covered drug, device, biological, or medical supply (referred to herein as ‘‘Covered Product’’) as:

With respect to a drug or biological, this definition is limited to those drug and biological products that, by law, require a prescription to be dispensed.  With respect to a device or medical supply, this definition is limited to those devices (including medical supplies) that, by law, require premarket approval by or premarket notification to the Food and Drug Administration.’’²⁵

The Preamble to the Proposed Rule explains that CMS proposes to exclude over-the-counter (OTC) products from the definition of a Covered Product because Covered Recipients have ‘‘less influence over patients’ choice of OTC products.’’²⁶ If the final rule incorporates this approach, then manufacturers of solely OTC drugs and biologicals would not be required to submit reports at all. However, as noted above, if their portfolio of products included OTC and prescription-requiring products, they would be required to report all Covered Transfers. In addition, CMS proposes to limit the devices and medical supplies that qualify as Covered Products to those that require premarket approval by or notification to FDA because products that do not are ‘‘so routinely used’’ that CMS does not believe that Congress intended to capture manufacturers of such items.²⁷ CMS explains that it believes this limitation is appropriate because manufacturers of these excluded products ‘‘have not been shown to have extensive relationships with’’ Covered Recipients and because any such relationships are ‘‘less likely to influence patient care.’’²⁸ If this approach were adopted in the final rule, entities that solely manufacture many Class I devices and certain Class II devices would be entirely exempt from the reporting obligations. However, in the Preamble, CMS notes some concern with this approach, especially as it relates to GPOs as GPOs often purchase or arrange for the purchase of such routine devices and supplies. Accordingly, CMS specifically seeks comment on whether this limitation should be carried over into the final rule.²⁹

V. Who Are the Targeted Receivers of Value:  Covered Recipients and Covered Owners

A. Covered Recipients

Pursuant to Section 1128G(a)(1) of the Act, Applicable Manufacturers must report all Covered Transfers to Covered Recipients or entities or individuals at the request of, or designated on behalf of, Covered Recipients.³⁰ The Act defines ‘‘Covered Recipient’’ as ‘‘(1) A physician, other than a physician who is an employee of an applicable manufacturer; or (2) teaching hospitals.’'³¹ The Act further describes a ‘‘physician’’ to have the meaning set forth elsewhere in the Act, which includes ‘‘doctors of medicine and osteopathy, dentists, podiatrists, optometrists, and licensed chiropractors.’’³²  Employee is also defined in the Act as an individual who is ‘‘employed by’’ or an ‘‘employee’’ of an entity when the individual ‘‘would be considered to be an employee of the entity under the usual common law rules applicable in determining the employer-employee relationship (as applied for purposes of section 3121(d)(2) of the’’ Internal Revenue Service Code of 1986.³³

Teaching hospital, however, is not elsewhere defined in the Act. The Preamble proposes to define teaching hospital by linking it to Medicare graduate medical education (GME).³⁴ The Proposed Rule recommends this approach because ‘‘GME payments are provided to support the training of medical residents, and hospitals that receive such payments are easily identifiable.’’³⁵ Accordingly, the Proposed Rule proposes to define a teaching hospital as ‘‘any institution that received payments under section 1886(d)(5)(B) of the Act (IPPS Indirect Medical Education (IME)), section 1886(h) of the Act (direct GME), or section 1886(s) of the Act . . . during the most recent year for which such information is available.’’³⁶ Although CMS acknowledges that this definition will not encompass hospitals that have accredited residency programs but that do not receive GME or psychiatric hospital IME, CMS says that it has no way to ‘‘readily identify’’ such institutions.³⁷ In this way, the Proposed Rule is narrower than other conflict-of-interest and financial relationship management guidances and regulations that would apply to or guide a broader array of institutional providers, such as many regional medical centers or community hospitals.

B. Covered Owners

Pursuant to Section 1128G(a)(2) of the Act, Applicable Manufacturers and Applicable GPOs must report on investment and ownership interests in them held by ‘‘physicians’’ and their immediate family members and Covered Transfers to such individuals.³⁸ We refer to such physicians and their immediate family members as ‘‘Covered Owners.’’ Unlike with Covered Recipients, the Act does not exclude physicians who are employed by the Applicable Manufacturer or Applicable GPO in question.³⁹ Accordingly, Covered Owners would include physicians, or immediate family members, who are also employed by the Applicable Manufacturer or Applicable GPO in which the individual holds a qualifying investment or ownership interest.

CMS proposes to define immediate family member as:

• spouse;
• natural or adoptive parent, child, or sibling;
• stepparent, stepchild, stepbrother, or stepsister;
• father-, mother-, daughter-, son-, brother-, or sister-in-law;
• grandparent or grandchild; or
• spouse of grandparent or grandchild.⁴⁰

Notably, the Proposed Rule does not include domestic or same-sex partners and does not clarify whether same-sex couples married under state law would qualify as ‘‘spouses’’ for the purpose of this federal law.  Still, the definition of ‘‘physician’’ for purposes of Applicable Owner is broad. Further, the inclusion of immediate family members will place a significant responsibility on Applicable Manufacturers and Applicable GPOs to identify investors and owners who qualify as immediate family members of physicians.

VI. Covered Financial Relationships: Covered Transfers and Covered Ownership Interests

A. Covered Transfers

The Act makes clear that all payments and other transfers of value to Covered Recipients must be reported, unless the payment or value transfer is explicitly excluded. In Section VII, this article discusses how CMS proposes that Applicable Manufacturers make such reports, including additional information on the categories of form and nature of the Covered Transfer.

The Act does contain a number of explicit exclusions, which we discuss in turn:

• Transfers Less than $10: Applicable Manufacturers do not have to report payments or transfers of value less than $10 unless the aggregate amount transferred to a Covered Recipient exceeds $100 in the calendar year.⁴¹ This $10 threshold is set by statute. The Act further states that this dollar threshold will be increased in lock-step with percentage increase in the consumer price index (CPI) for urban consumers (all items; U.S. city average) for the 12-month period that ended with June in the prior year.⁴² In the event that the aggregate Covered Transfers exceed $100, all Transfers must be reported, even those that fell beneath the threshold. For example, CMS explains in the Preamble, if an Applicable Manufacturer provides a Covered Recipient physician with (i) five meals, each worth $9 for a total of $45; (ii) a speaker fee of $150; and (iii) pens with a total value of $5, the aggregate compensation is $200 and the Applicable Manufacturer would report the entirety.⁴³
• Product Samples: Applicable Manufacturers do not have to report product samples that are not intended to be sold and are intended for use by patients.⁴⁴
• Education Materials: Applicable Manufacturers do not have to report education materials that will directly benefit patients or are intended for use by patients.⁴⁵ This exclusion only applies to materials (in any medium) but does not apply to services or other items. Further, CMS states in the Preamble that it is considering expanding this inclusion to cover materials that are used by the Covered Recipients to educate themselves on behalf of patients, but are not used by patients directly (like medical textbooks) and seeks comments on this proposal.⁴⁶
• Device Loan: Applicable Manufacturers do not have to report a loan of an otherwise device Covered Product if the loan is for a period that does not exceed 90 days and the purpose of the loan is to enable the Covered Recipient to evaluate the device.⁴⁷
• Warranties/Replacements: Applicable Manufacturers do not have to report items or services that are provided under a warranty provided that the warranty terms are set forth in the purchase or lease agreement for the otherwise device Covered Product.
• Patient: Applicable Manufacturers do not have to report anything of value transferred to a Covered Recipient physician when such individual is acting as a patient, and not in his/her professional capacity.
• Discounts: Applicable Manufacturers do not have to report discounts, including those in the form of rebates. Although rebates do not have to be reported under this statutory scheme, manufacturers still would have obligations to report discounts and rebates in accordance with any other rules promulgated as part of the Medicare and Medicaid programs and such rebates still would need to comply with the requirements of fraud and abuse laws.
• Charity Care: Applicable Manufacturers do not have to report in-kind items that are used to provide charity care. CMS proposes to define ‘‘charity care’’ as ‘‘items provided to a Covered Recipient for one or more patients who cannot pay, where the Covered Recipient neither receives, nor expects to receive, payment because of the patient’s inability to pay.’’ However, this exclusion does not apply to transfers of in-kind items to a Covered Recipient that is a charitable organization for use by that organization in caring for all of its patients (those who can pay and those who cannot pay).
• Dividend; Ownership Profits: Applicable Manufacturers do not have to report dividends or other distributions of profit from, or any ownership of an investment interest in, a publicly traded security or a mutual fund.
• Self-Insured Health Insurance: Applicable Manufacturers do not have to report payments for the provision of health insurance to an employee under a self-insured plan held by the Applicable Manufacturer.
• Licensed Non-Medical Professional: In the case of a Covered Recipient who is a licensed non-medical professional, Applicable Manufacturers do not have to report any transfers of value if the transfer is a payment solely for the services of a licensed non-medical professional.
• Legal Proceedings: Applicable Manufacturers do not have to report payments to a Covered Recipient physician for services of that individual in connection with a civil, criminal, or administrative proceeding.
• Unknown Recipients: Applicable Manufacturers do not have to report transfers of value made indirectly to a Covered Recipient via a third party if the Applicable Manufacturer is ‘‘unaware’’ of who the Covered Recipient is.⁴⁸ CMS proposes that an Applicable Manufacturer becomes aware of the identity of a Covered Recipient when the Applicable Manufacturer (i) has actual knowledge of the identity, (ii) acts in deliberate ignorance as to the identity, or (iii) acts in reckless disregard of the identity of the Covered Recipient. CMS notes that this proposed standard is consistent with standards set forth in certain fraud and abuse laws.⁴⁹ Finally, CMS proposes that awareness of the Covered Recipient’s identity by an agent of the Applicable Manufacturer, for example, by a CRO, will be imputed to the Manufacturer and would invalidate the use of this exclusion.⁵⁰ In addition, Applicable Manufacturers are required, by the Act, to report Covered Transfers to Covered Recipients made indirectly through third parties if the Applicable Manufacturer knows the identity of the Covered Recipient.
• Personal Relationships: CMS states in the Preamble that it does not intend to cover ‘‘purely personal transfers of value’’ and provides, by way of example, a scenario in which one spouse, employed by an Applicable Manufacturer, gives a present to another spouse, married to a Covered Recipient.⁵¹ CMS seeks comment on how to structure the final rule to exclude some exchanges.

In addition to the reporting of Covered Transfers mandated by Section 1128G(a)(1) of the Act, the Act also requires that both Applicable Manufacturers and Applicable GPOs report Covered Transfers made to Covered Recipients (or to an entity or an individual at the request of or designated on behalf of such physician) who are also Covered Owners.⁵² The Proposed Rule proposes that Applicable Manufacturers and Applicable GPOs follow the same procedures set forth above for Covered Transfers to Covered Owners.⁵³ In the Preamble, CMS notes its concern for duplicative reporting given the overlap with respect to Applicable Manufacturers (there is no overlap for GPOs as they are only obligated with respect to Section 1128G(a)(2)).⁵⁴ Accordingly, CMS proposes that Applicable Manufacturers submit one file for all of their Covered Transfers and another file for all of their Covered Ownership Interests.⁵⁵ In cases where the Covered Transfer is to an Applicable Owner, the Proposed Rule proposes that the Applicable Manufacturer would be asked to note that the Covered Recipient is also an Applicable Owner in order to avoid double counting by CMS when it aggregates payments.⁵⁶

B. Covered Ownership Interests

Pursuant to Section 1128G(a)(2) of the Act, Applicable Manufacturers and Applicable GPOs must report certain ownership and investment interests (referred to herein as ‘‘Covered Ownership Interests’’) in such entities held by Covered Owners (see Section V.B).⁵⁷ CMS proposes to define such ‘‘Covered Ownership Interests’’ in a manner that is consistent with and similar to the physician self-referral regulations.⁵⁸ A Covered Ownership Interest is one that is direct or indirect and can be achieved through debt, equity, or other means, such as financial instruments that are secured with an entity’s property or revenue.⁵⁹ According to the Act, a Covered Ownership Interest does not include interests in a publicly traded security or in a mutual fund.⁶⁰ The Proposed Rule proposes to also exclude retirement plan interests held by Covered Owners by virtue of their employment with the Applicable Manufacturer or Applicable GPO, stock options or convertible securities until they are exercised or converted to equity, or unsecured loans subordinated to a credit facility.⁶¹ 

CMS notes that ‘‘ownership and investment interests’’ are a category of payment nature that must be reported as a Covered Transfer by Applicable Manufacturers under Section 1128G(a)(1)(vi)(XII) of the Act.  Aware of the overlap, CMS proposes that if a Covered Transfer is in the form of an ownership and investment interest that also would qualify as a Covered Ownership Interest because the Covered Recipient is simultaneously an Applicable Owner, the Applicable Manufacturer need only report it as a Covered Transfer (i.e., pursuant to Section 1128G(a)(1) and not as a Covered Ownership Interest (i.e., pursuant to Section 1128G(a)(2)).⁶²

VII. What Must Be Reported: Reports of Covered Transfers and Covered Ownership Interests

A. Reports of Covered Transfers

Each Applicable Manufacturer must timely file a report of all Covered Transfers. If two or more entities are under common ownership with one another (under whatever definition is ultimately promulgated in the final rule), and each such entity would separately meet the definition of Applicable Manufacturer, then each such entity must separately file the required reports.⁶³ On the other hand, ‘‘if only one’’ of the entities meets the first prong of the Applicable Manufacturer definition and the other entities meet the second prong (i.e., the common ownership prong), the entities may choose whether to report collectively or separately.⁶⁴ The Proposed Rule does not clarify, however, whether the discretion to elect whether to report separately or together also would apply in cases where more than one of the entities met the first prong but still some entities met the second prong. For example, if entities A, B, C, and D are all under common ownership but entities A, B, and C qualify as Applicable Manufacturers under prong 1, the Proposed Rule does not clarify whether they still have the discretion to file separately or together since D meets prong 2—the Proposed Rule only specifically addresses the situation of ‘‘only one’’ qualifying under prong 1.

If a prong-1 Applicable Manufacturer does report on behalf of itself as well as prong-2 Applicable Manufacturers, the report must clearly name all of the entities involved in the report.⁶⁵ Further, the Proposed Rule proposes that if an Applicable Manufacturer under prong 1 elects to report for itself and at least one other entity under common ownership (prong 2), the reporting Applicable Manufacturer can choose whether to identify all of the Covered Transfers as its own or to separate out the Covered Transfers it made from the Covered Transfers made by the entity under common ownership.⁶⁶

In identifying Covered Recipients, the Act requires that Applicable Manufacturers must provide the Covered Recipient’s name and business address and for Covered Recipients who are physicians, their National Provider Identifier (NPI).⁶⁷ In light of the number of Covered Recipients, the Proposed Rule recommends that Applicable Manufacturers use the National Plan & Provider Enumeration System (NPPES), maintained by CMS on a publicly available website.⁶⁸ If, for whatever reason, a Covered Recipient physician’s NPI is not listed on the NPPES, the Applicable Manufacturer bears the responsibility for obtaining the physician’s NPI, to the extent the physician has an NPI.⁶⁹ The Preamble states that CMS also is considering whether to require the reporting of an additional unique identifier, for example a state license number, for those physicians who do not have an NPI.⁷⁰

 In identifying teaching hospital Covered Recipients, CMS proposes to publish a list of such teaching hospitals on the CMS website annually.⁷¹ In reporting a teaching hospital Covered Recipient, the Applicable Manufacturer would be required to provide the name and address of the teaching hospital.⁷²

The Preamble provides additional explanation and detail for each of the required elements for Covered Recipients.

• Name: For physician Covered Recipients, provide first and last name and middle initial.⁷³
• Business address: For physicians, provide full street address of the primary practice location; for teaching hospitals, provide full street address listed in the CMS-published list of teaching hospitals.⁷⁴
• Specialty and NPI: For physician Covered Recipients, use the provider taxonomy field and report a single specialty for the individual physician rather than any group NPI for any group NPI with which the Covered Recipient physician is associated.⁷⁵
• Date of Payment: Provide date on which the Covered Transfer was made; for Covered Transfers provided over multiple dates, Applicable Manufacturers can use their discretion in deciding to report the total payment on the date of the first payment or to report each individual installment (CMS says it also is considering requiring Applicable Manufacturers to report multiple payments in ‘‘a single consistent manner’’).
• Associated Covered Drug, Device, Biological or Medical Supply: The Act requires that Applicable Manufacturers report the name of the Covered Product associated with a Covered Transfer if the Transfer is related to ‘‘marketing, education, or research’’ of that particular Product.⁷⁶ For Covered Transfers that are related to a specific Covered Product, the Proposed Rule proposes that Applicable Manufacturers report the ‘‘name under which the product is marketed’’ on the basis that this likely is the name most recognizable to the public.⁷⁷ In the event that the Covered Product does not yet have a market name, the Applicable Manufacturer will report the scientific name.  

Further, the Proposed Rule proposes that if an Applicable Manufacturer makes a Covered Transfer related to multiple Covered Products, the Applicable Manufacturer needs to report only one Covered Product.⁷⁸ The Preamble notes that permitting the reporting of multiple Covered Products may be easier for Applicable Manufacturers since ‘‘many financial relationships are not specific to one product’’ but CMS notes that this would make it difficult to aggregate payments by Covered Product.⁷⁹ CMS seeks comments on this approach.

• Form of Payment; Nature of Payment: The Act requires that the transparency report include the form of the Covered Transfer and its nature. The Act provides a list of categories for both form and nature but grants discretion to the HHS secretary to set forth additional categories.⁸⁰ CMS proposes that the categories for nature and form should be distinct with minimal overlap between them. In addition, CMS proposes that if a particular Covered Transfer is associated with multiple categories, the break-out amount corresponding with each category would have to be reported separately.⁸¹ For example, if an Applicable Manufacturer made a Covered Transfer to a Physician for travel and meals associated with a consulting engagement, the Applicable Manufacturer would need to report three separate items and break out the component of the payment corresponding to each component.⁸² CMS believes that this proposal will be easier for the public to understand.  CMS understands, however, that it may be more consistent with ‘‘existing business processes’’ to permit Applicable Manufacturers to report Covered Transfers associated with multiple categories as a lump sum.⁸³ CMS believes that this approach may be confusing to the public and seeks comment on the optimal approach.

The Act sets forth three specific forms of payment—cash or cash equivalent; in-kind items or services; or stock, stock option, or any other ownership interest, dividend, profit, or return on investment.⁸⁴ CMS, in the Proposed Rule, declines to propose additional categories but seeks comments on whether additional categories should be enumerated.⁸⁵ Notably, the categories do not include Transfers made in the form of grants of intellectual property, for example, royalty rights.

With respect to the nature of the payment, the Act lists 14 specific categories—consulting, compensation (other than consulting), honoraria, gifts, entertainment, food, travel, education, research, charitable contribution, royalty or license, current or prospective ownership or investment interest, direct compensation for serving as faculty or a speaker for a CME program, or grant.⁸⁶ If a Covered Transfer potentially could fall into more than one category, the Preamble states that Applicable Manufacturers should make a ‘‘reasonable determination’’ about the most appropriate category.⁸⁷

Further, the Proposed Rule proposes that, in order to ‘‘ensure consistency in the reporting and selection of categories,’’⁸⁸ Applicable Manufacturers may include in their transparency report the assumptions on which they relied in selecting categories.⁸⁹ These assumptions will not be included in the public website and will be used by CMS to monitor and assess category section. CMS specifically requests comment on whether the submission of the assumptions should be mandatory.⁹⁰

The Preamble states that CMS believes that these categories have meanings to the public that are understood by industry.⁹¹ Accordingly, CMS proposes to define the nature of the payment category by its ‘‘dictionary definition.’’⁹² Nonetheless, CMS provides some additional guidance with respect to select categories. For example, with respect to the food and beverage category, the Preamble discusses how to handle group meals and buffet style meals and beverages at conferences. A generally pragmatic approach is allowing for allocation of inoffice food expenses across the office’s Covered Recipients. Similarly, conference-related buffet meals, snacks, and beverages are omitted from the reporting requirements.⁹³ With respect to charitable contributions, reporting is required for contributions made at the behest of a Covered Recipient.⁹⁴

In addition, with respect to Research, CMS proposes to limit this category to ‘‘bona fide’’ research that is ‘‘subject to both a written agreement or contract between the Applicable Manufacturer and the organization conducting the research, as well as a research protocol.’’⁹⁵ CMS believes that this proposal will help to distinguish this category from other categories and to identify those Covered Transfers that are eligible for delayed publication to protect proprietary interests of the Applicable Manufacturer⁹⁶ (described below in Section XI).  CMS seeks comment on which category Applicable Manufacturers should use when reporting research-related Covered Transfers that nonetheless do not meet the research category definition because they are not subject to a research agreement and/or do not involve a research protocol.⁹⁷

In light of the complexity of research relationships, the use of research teams to conduct studies, and the fact that many Applicable Manufacturers use CROs or SMOs to identify and pay research sites, the Proposed Rule sets forth a method for Covered Transfers for the research category. Specifically, CMS proposes that there be separate categories for research Covered Transfers that went directly to a Covered Recipient and those that are made indirectly.⁹⁸ Indirect Covered Transfers would be those made to a clinic or hospital (other than a Covered Teaching Hospital) or institution conducting the research, which in turn compensates the Covered Recipient physician(s) for serving as principal investigator(s).⁹⁹ A direct Covered Transfer for research would be one that is provided directly to the physician or teaching hospital Covered Recipient.¹⁰⁰

When reporting Covered Transfers associated with research to a Covered Recipient physician serving as principal investigator, the Proposed Rule proposes that the Applicable Manufacturer should report the NPI.¹⁰¹ The Proposed Rule does not discuss how to manage compensation for physicians serving in roles other than principal investigator, such as co- or subinvestigator, study statistician, or other research team roles. In the case of indirect Covered Transfers, the Applicable Manufacturer must list the Covered Recipient physician who ultimately will receive the compensation, assuming that the Applicable Manufacturer knows who that is or reasonably can determine who it is.¹⁰²

In some cases, the Covered Transfers will be made to Covered Recipient teaching hospitals that are then conveyed to a physician Covered Recipient serving as a principal investigator. The Preamble acknowledges that such payments also could be reported as direct payments to the Covered Recipient teaching hospital.¹⁰³ However, CMS states that it is concerned about establishing inconsistent reporting methodologies for principal investigators conducting research at teaching hospitals versus other types of research sites.¹⁰⁴ Accordingly, to maintain consistency, CMS proposes that research-related Covered Transfers to teaching hospital Covered Recipients that would ultimately be related to a physician Covered Recipient must be reported for both the teaching hospital and the physician.¹⁰⁵

CMS notes that research agreement budgets include funds for services other than the work performed by the principal investigator.¹⁰⁶ However, CMS does not think that an Applicable Manufacturer necessarily will know the portion of the total payment that is passed on to the physician.¹⁰⁷ Accordingly, CMS proposes that for direct and indirect Covered Transfers that are research-related, the Applicable Manufacturer must report the entire payment amount.¹⁰⁸ CMS does not propose an exception to this approach for cases in which the research budget itemizes principal investigator compensation.  With respect to the aggregated information reported publicly, CMS proposes that it would report the payment amount separately for physician Covered Recipients and would not aggregate it into the total.¹⁰⁹ However, for teaching hospital Covered Recipients, the entire amount would be aggregated.¹¹⁰ CMS notes, however, that it is considering attributing the total payment amount to a physician Covered Recipient if it is a direct payment.¹¹¹

The Proposed Rule’s research provisions may well warrant considerable and focused attention by industry in submitting comments. Terms and distinctions used in the Proposed Rule may be difficult to interpret or administer in real-life industry settings and industry relationships.

The Proposed Rule also offers additional explanation for the category of direct compensation for serving as a faculty member of or speaker at a Continuing Medical Education (CME) program. CMS proposes to interpret this category ‘‘broadly’’ to cover any case in which an Applicable Manufacturer compensates a physician to serve as a speaker, and not just those instances involving ‘‘medical education programs.’’¹¹² Alternatively, CMS is considering adding an additional category to cover speaker compensation outside of CME settings, but would prefer to avoid proliferating categories if possible.¹¹³ Accordingly, CMS also is considering limiting this category to accredited CME settings and moving other speaking engagements into another existing category, such as consulting or honoraria. CMS encourages comments on this approach.¹¹⁴ Given other regulatory requirements that already severely limit the ability of Applicable Manufacturers to compensate Covered Recipient physicians as paid speakers at accredited CME programs, the application of the Proposed Rule’s provisions is not entirely clear.

Finally, to ensure that the statutory mandate that all Covered Transfers are reported, CMS proposes to exercise its discretion and add an additional ‘‘catch-all’’ category of ‘‘other.’’¹¹⁵ Applicable Manufacturers would be directed to use this category for any Covered Transfer that does not fit into another category and is not specifically excluded from reporting obligations.

B. Reports of Covered Ownership Interests

Applicable Manufacturers and Applicable GPOs must report Covered Ownership Interests held by Covered Owners. CMS proposes that this report should include the name, address, NPI, and specialty of the Applicable Owner.¹¹⁶ If the Applicable Owner is an immediate family member of the physician, the report also must indicate that the Covered Ownership Interest is held by a family member.¹¹⁷ CMS is still considering whether to require the report to specify the nature of the familial relationship (i.e., mother, sibling) and the family member’s name. CMS believes that this additional information would improve transparency, but is mindful of the additional effort involved in collecting this information and in the privacy concerns of reporting the family member’s name on the website. CMS seeks comment on this issue.¹¹⁸ CMS does not directly address whether withholding the family member’s name would be an adequate privacy protection for certain familial relationships where revealing the nature of the relationship essentially would reveal the specific person’s identify (for example, mother).  

Further, in the event that an Applicable GPO is reporting a Covered Transfer to an Applicable Owner, CMS proposes that the Applicable GPO use the data elements that are outlined in the Proposed Rule sections addressing Covered Transfer reporting by Applicable Manufacturers (described above).¹¹⁹

C. Standardized Reporting System

CMS states that it recognizes that Applicable Manufacturers and Applicable GPOs will need to collect and submit ‘‘large amounts of new data’’ and seeks to be flexible in establishing reporting mechanisms while at the same time promoting standardization in order to assist CMS in its aggregating obligations.¹²⁰ CMS specifically seeks comments on ways to facilitate postsubmission review and verification and resolution of any disagreements between Applicable Manufacturers and GPOs on one hand and Covered Recipients and Owners on the other. CMS also seeks feedback on how to maximize corrections prior to submission to CMS to minimize the volume of changes during the statutory review and correction period.¹²¹ For example, CMS proposes as one alternative that Applicable Manufacturers and Applicable GPOs share the applicable portion of their intended reports with Covered Recipients and Covered Owners.¹²² At this time, CMS is proposing this as a recommended, but optional, pre-review system but is seeking comment on whether it should be mandatory.

The Proposed Rule also proposes a comma-separated value (CSV) format for electronic reporting. Under this system, each line item would correspond to a specific Covered Transfer or Covered Ownership Interest. Following the submission, CMS proposes that an authorized representative from the submitting Applicable Manufacturer or Applicable GPO submit a signed attestation certifying the accuracy of the transparency report.  The attestation must be signed by the chief executive officer, chief financial offficer, or chief compliance officer.  

Although throughout the Preamble, CMS discusses the required data elements to be submitted by the Applicable Manufacturer or GPO, CMS summarizes these elements toward the conclusion of the Preamble.

D. Review Period

The Act requires that the HHS secretary afford Applicable Manufacturers and Applicable GPOs, Covered Recipients, and Covered Owners a 45-day period to review the data before they are published on the CMS website. Accordingly, CMS proposes that once the due date for data submission has passed, CMS will aggregate the data by Covered Recipient and Covered Owner and then make them available to the Covered Recipients, Covered Owners, and Applicable Manufacturers and GPOs for their review. With respect to Covered Recipients and Owners, CMS proposes several ways to notify them. For example, CMS proposes to permit Covered Recipients and Covered Owners to register with CMS and indicate how they would like to be notified. CMS also proposes to use list-serves and public websites. CMS also is considering asking Applicable Manufacturers and GPOs to indicate whether the Covered Recipient or Applicable Owner wishes to be notified. CMS proposes that these notifications would be provided annually to publicize the review period.¹²³

CMS states in the Preamble that it does not want to be ‘‘actively involved in arbitrating disputes’’ between Covered Recipients and Covered Owners on one hand, and Applicable Manufacturers and Applicable GPOs on the other.¹²⁴ CMS reports that it is working to develop a ‘‘streamlined and automated process for reporting disputes and changes.’’¹²⁵ For now, CMS proposes that Covered Recipients and Covered Owners may request the contact information of an Applicable Manufacturer or Applicable GPO from CMS in the event of a dispute about a transparency report.¹²⁶ It will be up to the relevant parties to settle the dispute and it will be the obligation of one or more parties to notify that a Covered Transfer or Covered Ownership Interest is in dispute and, ultimately, how such dispute is resolved within the 45-day review period.¹²⁷ If the dispute cannot be resolved and the involved parties have ‘‘contradicting information’’ that cannot be reconciled, CMS proposes that the data would be marked as contradictory on the website and both the original submission and the contested data would be presented.¹²⁸ CMS further proposes that in aggregating the amounts, CMS will use the data proffered by the Covered Recipient or Applicable Owner (as applicable).¹²⁹ CMS seeks comments on this approach and discussed alternatives.¹³⁰ Once the 45-day period is past, CMS proposes that no additional modifications would be accepted for that calendar year.¹³¹ Further changes would be delayed until the data are refreshed the following year, subject to CMS’s discretion to make changes at any time.¹³²

VIII. Publicly Available Information

The Act obligates CMS to publish on a publicly available website the aggregated data for each Covered Recipient and Applicable Owner.¹³³ The first publication for calendar year 2012 is by Sept. 20, 2013. Thereafter, CMS will publish the data for the preceding year by June 30. The Act requires that the website be searchable, understandable, downloadable, and easily aggregated across many levels.¹³⁴ CMS seeks comment on how best to structure the website to maximize its utility and accessibility.

CMS will delay making public information on Covered Transfers that qualify for delayed publication, as provided for in the Act. Specifically, the Act states that publication of information on the CMS website about Covered Transfers from Applicable Manufacturers to Covered Recipients made pursuant to product research or development agreements or clinical investigation may be delayed in order to protect the confidentiality of proprietary information relating to research and development of Covered Products.¹³⁵ Notably, the Act does appear to contemplate that research might be performed by Applicable GPOs (perhaps to inform purchasing recommendations), as the delayed publication pathway does not appear to extend to Applicable GPOs.

The Act specifies that information about Covered Transfers in connection with research that are delayed in their publication must be published on the first publication date after the earlier of the approval, licensure, or clearance by FDA of the Covered Product or four calendar years after the date of the Covered Transfer.¹³⁶  To illustrate this rule, the Preamble includes the following example. In April 2013, an Applicable Manufacturer makes a Covered Transfer to a teaching hospital Covered Recipient for a clinical investigation of a Covered Product, pursuant to an agreement. The Applicable Manufacturer would be required to report this Covered Transfer to CMS by March 31, 2014, but the information would not be made public on the CMS website in 2014 since the product had not yet been granted FDA approval, licensure, or clearance. If the Covered Product is subsequently granted approval, licensure, or clearance in October 2015, then CMS would publish the information as part of calendar year 2015 data in June 2016. If, however, the Covered Product had not yet been approved, licensed, or cleared by FDA by the beginning of 2018, then CMS would publish the 2013 payment in 2018.¹³⁷

CMS proposes that the default will be that researchrelated Covered Transfers will be published on time.¹³⁸ It will be incumbent on the Applicable Manufacturer to request a delayed publication. Further, Applicable Manufacturers will need to request a continuation of delayed publication each year.¹³⁹ Once the information can be published, because FDA has approved, licensed, or cleared the Covered Product, the Applicable Manufacturer is required to notify CMS that the data can now be published.¹⁴⁰ If not published sooner, all Covered Transfers related to research that have been delayed for publication automatically will be published after the four year period has expired.¹⁴¹ This means that Covered Transfers made earlier in the year will be granted slightly more than exactly a four-year delay, but CMS proposes that this approach is preferable because it allows Covered Transfers made late in the year to be afforded the full four-year delay period.¹⁴²

To be eligible for delayed publication, CMS proposes that the research-related Covered Transfer must be in connection with ‘‘bona fide research or investigation activities, which, if made public, would damage the [Applicable M]anufacturer’s competitive and/or proprietary interests.’’¹⁴³ CMS proposes that ‘‘bona fide research’’ is limited to those cases in which there is a ‘‘written statement or contract between the [A]pplicable [M]anufacturer and [C]overed [R]ecipient, as well as a written research protocol.’’¹⁴⁴

Recognizing that many Applicable Manufacturers contract with CROs, which in turn contract with physicians and research sites, CMS proposes that, provided that the Applicable Manufacturer has a written agreement with the CRO, the CRO may have the written research agreement with the Covered Recipient in order to qualify for delayed publication.¹⁴⁵

The Act provides for delayed publication of research related Covered Transfers in connection with research on ‘‘medical technology’’ for both new products and for new applications of existing products. CMS also notes that the Act appears to distinguish between the scope of delayed publication rights for payments related to ‘‘research’’ as opposed to payments for ‘‘development’’ or ‘‘clinical investigations.’’ For research, delayed publication extends to new Covered Products and new applications for existing Covered Products. For development and clinical investigations, delayed publication appears to be afforded by the Act only to new Covered Products.  CMS acknowledges that it is ‘‘difficult to meaningfully separate’’ these categories and that, in industry, the terms research and development are often used interchangeably.  Accordingly, CMS proposes to treat the terms research and development similarly with respect to delayed publication but also is considering an alterative proposal of assigning different meanings to research and development and seeks comment on whether a meaningful distinction can be drawn between the two terms. With respect to clinical investigations, CMS states that it believes this has a distinct meaning from research or development. The Act specifies that a clinical investigation is one that involves human subjects or materials derived from human subjects.  CMS notes that this definition differs from the definition of a clinical investigation most likely familiar to Applicable Manufacturers that is set forth in regulations promulgated by FDA. For clinical investigations, CMS proposes that delayed publication is only available for investigations of new Covered Products. Applicable Manufacturers may have difficulty distinguishing between research, development, and clinical investigation and should carefully consider submitting comments seeking clarification of these terms and the rationale for the different approaches.

As required by Section 1128G(1)(C)(ii), CMS proposes to publish the following data pertaining to Covered Transfers in a form that can be aggregated:

• Applicable Manufacturer or GPO name;
• Covered Recipient name;
• business street address;
• specialty (physicians only);
• NPI (physicians only);
• amount of Covered Transfer in U.S. dollars;
• date of Covered Transfer;
• form of Covered Transfer;
• nature of Covered Transfer;
• name of Associated Covered Product, if applicable; and
• name of entity that received the Covered Transfer, if not the Covered Recipient directly, if applicable.¹⁴⁶

CMS also proposes to publish the following data pertaining to Covered Ownership Interests in a form that can be aggregated:

• Applicable Owner’s name;
• Applicable Owner’s specialty;
• Applicable Owner’s business street address;
• whether the Covered Ownership Interest is held by the Applicable Owner or an immediate family member;
• dollar amount of the Covered Ownership Interest; and
• any Covered Transfers to that Applicable Owner, and, if so, the amount of the Covered Transfer, the date of the Covered Transfer, the form and nature of the Covered Transfer, and the name of the associated Covered Product, if applicable.¹⁴⁷

CMS also proposes that the website will include information on any enforcement actions taken in the prior year, background information on relationships between industry and providers and teaching hospitals, and information on Covered Transfers that were granted delayed reporting.¹⁴⁸ In addition to these elements required by the Act, CMS also proposes that the website include a statement that disclosure of a Covered Transfer on the website does not mean that such Transfer was appropriate or that it presents a conflict of interest or any impropriety.¹⁴⁹

IX. Penalties

Section 1128G(b) of the Act permits the imposition of civil monetary penalties for failure to report required information on time.¹⁵⁰ The CMP may be of at least $1,000 but no more than $10,000 for each Covered Transfer or Covered Ownership Interest. The maximum penalty in a calendar year is $150,000. For knowing failures, the penalty will be at least $10,000 but no more than $100,000 for a specific Covered Transfer or Covered Ownership Interest with a maximum annual penalty of $1 million.¹⁵¹ The term ‘‘knowingly’’ is given the meaning from the False Claims Act.¹⁵²

CMS proposes the following list of illustrative factors upon which it may rely in setting a CMP:

• length of time that has passed, including the length of time that the Applicable Manufacturer or GPO knew of the Covered Ownership Interest or Covered Transfer;
• amount of the Covered Transfer or Covered Ownership Interest;
• level of culpability;
• nature and amount of information reported incorrectly; and
• degree of diligence in correcting the error.¹⁵³

X. Preemption

The Proposed Rule carries through the preemption concepts from the Act. Namely, state and local laws are preempted to the extent that they cover the same type of information concerning Covered Transfers by Applicable Manufacturers to Covered Recipients. That said, states and local governments are free to require the reporting of additional information.¹⁵⁴

XI. When Are the Relevant Timetables: Timing

As an initial matter, it is worth noting that comments are due by Feb. 17.¹⁵⁵

Pursuant to the Act, Applicable Manufacturers must report information pertaining to Covered Transfers to CMS ‘‘on’’ March 31, 2013, for CY 2012 and on the 90th day of each calendar year thereafter. Applicable Manufacturers and GPOs must report the required information regarding physician ownership and investment interests and Covered Transfers by the same date.¹⁵⁶ Civil monetary penalties can be imposed for late payments.¹⁵⁷ CMS proposes to interpret ‘‘on’’ as meaning ‘‘by’’ such that initial reports would be due by March 31, 2013, and subsequent reports would be due by the 90th day of the calendar year.¹⁵⁸ CMS proposes that only Applicable Manufacturers and GPOs that have relevant information to report would be required to register for that calendar year; those with nothing to report would not be required to register.¹⁵⁹ CMS proposes that this registration process would open at the beginning of the calendar year, but Applicable Manufacturers and GPOs could register at any time up until immediately prior to submitting their transparency reports.¹⁶⁰ In registering, Applicable Manufacturers and GPOs would designate a point of contact for CMS.¹⁶¹ CMS notes, however, that it is considering an alternative whereby every Applicable Manufacturer and GPO would register and in the event that such entity had no transparency reports to file, the chief executive officer, chief financial officer, or chief compliance officer would be required to submit an attestation stating that to the best of his/her knowledge and belief, the entity had no reportable Covered Transactions or Covered Ownership Interests to report from the prior calendar year.¹⁶² CMS states that it is considering this alternative as a means to help inform CMS of the extent of these financial relationships and as a means of ensuring that entities ‘‘perform a more thorough evaluation’’ to determine whether reportable Covered Transactions or Covered Ownership Interests are in play.¹⁶³

The Proposed Rule acknowledges, however, that due to the timing of the rulemaking process, a final rule will not be published with sufficient lead time to enable Applicable Manufacturers and GPOs to begin collecting the necessary information on Jan. 1, 2012.¹⁶⁴ Accordingly, the Proposed Rule proposes that CMS will not require Applicable Manufacturers and GPOs to begin collecting information until after any final rule is published.¹⁶⁵ CMS has proposed a preparation period of 90 days and seeks comments on the appropriateness of such a timetable.¹⁶⁶ In addition, CMS indicates that it hopes to issue the final rule in 2012 and is considering requiring the reporting of some CY 2012 data by March 31, 2013.¹⁶⁷

In light of the proposed 90-day preparation time and the agency’s apparent interest in having at least a preliminary reporting process begin this year, Applicable Manufacturers and GPOs should carefully review the Proposed Rule, consider submitting comments, and begin to assess their readiness to implement a process similar to that which is laid out in the Proposed Rule.

XII. Issues to Consider

The Proposed Rule will require a huge data collection effort by large and small manufacturers alike, probably in excess of the efforts acknowledged in the Proposed Rule. CMS has laid out a somewhat expansive view of the data to be collected that will touch most aspects of multidimensional and in many cases global entities. For example, consider the need for multinational companies to collect data from non-U.S. subsidiaries that may provide marketing support to a U.S. affiliate from time to time and also use U.S. physicians as consultants in their home countries; or consider the impact on companies with both OTC and pharmaceutical operations and their efforts to collect data in accordance with the Proposed Rule. These are just two of the myriad process related issues companies will need to consider as they analyze the implications of the Proposed Rule for their operations.

Companies also need to contemplate the impact of CMS’s construct for the nature and form of transfers of value. CMS seeks to take a pragmatic and reasoned approach in the Proposed Rule. Yet the proposal can easily result in significant sums being attributed to individuals when in fact the back story is more complex.  The reality of the media attention to the payments reported by manufacturers to date whether due to CIA requirements or voluntary disclosures may be instructive as to what the future holds for all companies.

Perhaps the single area of the Proposed Rule most in need of clarification relates to research payments. The demarcation between research, development, and clinical investigations is not readily apparent. Yet this is an area of considerable industry expenditure. Companies will be well served by availing themselves of the opportunity to comment on this section of the Proposed Rule in particular.

Finally, the nature of CEO or CFO attestations of this process needs careful consideration. Given the granular nature of the information required, it is unlikely that senior executives will be conversant with the details. Yet presumably the thought behind the proposal is to impose personal accountability. Corporate structure and processes will need to be examined and perhaps reconsidered in order to provide senior management with the visibility and assurance they inevitably will need in order to comply.

XIII. Conclusion

The Proposed Rule is an attempt to develop sensible implementation guidance for the Sunshine Act. That said, the level of detail and the number of open areas illustrates the significance and complexity of these reporting requirements. Companies will need to consider not only changes to, and investment in, their financial reporting systems, but potentially changes in corporate structure and their strategies for engaging with the medical community. Physicians on the other hand will need to get comfortable with the amount of transparency now associated with their interactions with industry.  

To be clear, the Proposed Rule reflects recent efforts to place more of the responsibility for managing these financial relationships on industry, rather than providers. Individual and institutional providers have been grappling with conflicts of interest for some years now, especially in light of influential guidelines posed by the Institute of Medicine, the Association of Academic Medical Centers, and the American Medical Association.  Although these guidelines all called for a so-called ‘‘principled partnership’’ between providers and industry, health care providers may have felt the most urgency to address financial relationships, perhaps because industry focused on the related, but distinct, compliance issues of fraud and abuse. Indeed, the Proposed Rule notes that compliance with the Act does not insulate individuals and entities from liability under the Federal Anti-Kickback statute or the False Claims Act, and presumably the reverse is true. The Proposed Rule, coming on the heels of FDA’s draft guidance for reporting certain financial relationships in connection with clinical investigations subject to FDA oversight, is likely to alter this focus.

_{1 Medicare, Medicaid, Children’s Health Insurance Programs; Transparency Reports and Reporting of Physician Ownership or Investment Interests, 76 Fed. Reg. 78742 (proposed Dec. 19, 2011) (to be codified at 42 C.F.R. parts 402 and 403).}

_{2 Patient Protection and Affordable Care Act, Pub. L. No.111-148, sec. 6002, § 1128G, 124 Stat. 119, 689-696 (2010) (tobe codified at 42 U.S.C. §§ 1320a-7h).}

_{3 Id. at § 1128G(a)(1).}

_{4 Id. at § 1128G(a)(2).}

_{5 Id. at § 1128G(e)(9).}

_{6 Id. at § 1128G(e)(2).}

_{7 76 Fed. Reg. at 78743-78744.}

_{8 Id. at 78744.}

_{9 Id.}

_{10 Id.}

_{11 Id.}

_{12 Id.}

_{13 Id.}

_{14 Id.}

_{15 Id.}

_{16 Id.}

_{17 Id.}

_{18 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(2).}

_{19 Id. at § 1128G(e)(1).}

_{20 76 Fed. Reg. at 78752.}

_{21 Id.}

_{22 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(e)(2).}

_{23 Id. at § 1128G(e)(5).}

_{24 76 Fed. Reg. at 78745.}

_{25 Id.}

_{26 Id.}

_{27 Id.}

_{28 Id.}

_{29 Id.}

_{30 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1).}

_{31 Id. at § 1128(e)(6).}

_{32 Social Security Act § 1861(r)(1), 42 U.S.C. 1395x(r)(2006).}

_{33 Id. at § 1877(h)(2), 42 U.S.C. § 1395 (2006).}

_{34 76 Fed. Reg. at 78745.}

_{35 Id.}

_{36 Id. at 78745-78746.}

_{37 Id. at 78746.}

_{38 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(2).}

_{39 Id.}

_{40 76 Fed. Reg. at 78752.}

_{41 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(e)(10)(B)(i).}

_{42 Id.}

_{43 76 Fed. Reg. at 78750-78751.}

_{44 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(e)(10)(B)(ii).}

_{45 Id. at § 1128G(e)(10)(B)(iii).}

_{46 76 Fed. Reg. at 78751.}

_{47 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(e)(10)(B)(iv).}

_{48 Id. at § 1128G(e)(10)(A).}

_{49 76 Fed. Reg. at 78751.}

_{50 Id.}

_{51 Id. at 78750.}

_{52 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(2).}

_{53 76 Fed. Reg. at 78753.}

_{54 Id. at 78752-78753.}

_{55 Id. at 78753.}

_{56 Id.}

_{57 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(2).}

_{58 76 Fed. Reg. at 78752.}

_{59 Id.}

_{60 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(e)(10)(B)(ix).}

_{61 76 Fed. Reg at 78752.}

_{62 76 Fed. Reg. at 78752.}

_{63 Id. at 78744}

_{64 Id.}

_{65 Id.}

_{66 Id.}

_{67 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1)(A)(ii).}

_{68 76 Fed. Reg. at 78746.}

_{69 Id.}

_{70 Id.}

_{71 Id.}

_{72 Id.}

_{73 Id.}

_{74 Id.}

_{75 Id. at 78746-78747.}

_{76 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1)(A)(vii).}

_{77 76 Fed. Reg. at 78747.}

_{78 Id.}

_{79 Id.}

_{80 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1)(A)(viii).}

_{81 76 Fed. Reg. at 78747.}

_{82 Id.}

_{83 Id.}

_{84 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1)(A)(v).}

_{85 76 Fed. Reg. at 78748.}

_{86 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1)(A)(vi).}

_{87 76 Fed. Reg. at 78748.}

_{88 Id.}

_{89 Id.}

_{90 Id.}

_{91 Id.}

_{92 Id.}

_{93 Id.}

_{94 Id.}

_{95 Id. at 78749.}

_{96 Id.}

_{97 Id. at 78749-78750.}

_{98 Id. at 78749.}

_{99 Id.}

_{100 Id.}

_{101 Id.}

_{102 Id.}

_{103 Id.}

_{104 Id.}

_{105 Id.}

_{106 Id.}

_{107 Id.}

_{108 Id.}

_{109 Id.}

_{110 Id.}

_{111 Id.}

_{112 Id. at 78750}

_{113 Id.}

_{114 Id.}

_{115 Id.}

_{116 Id. at 78752.}

_{117 Id.}

_{118 Id.}

_{119 Id. at 78753.}

_{120 Id.}

_{121 Id.}

_{122 Id.}

_{123 Id. at 78755.}

_{124 Id.}

_{125 Id.}

_{126 Id.}

_{127 Id.}

_{128 Id.}

_{129 Id.}

_{130 Id.}

_{131 Id.}

_{132 Id.}

_{133 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(c)(1)(C)(ii).}

_{134 Id. at § 1128G(c)(1)(C)(ii) and (iii).}

_{135 Id. at § 1128G(c)(1)(E).}

_{136 Id. at §§ 1128G(c)(1)(E)(i)(I) and (II).}

_{137 76 Fed. Reg. at 78756.}

_{138 Id.}

_{139 Id.}

_{140 Id.}

_{141 Id.}

_{142 Id.}

_{143 Id.}

_{144 Id.}

_{145 Id. at 78757.}

_{146 Id. at 78755-78756.}

_{147 Id. at 78756.}

_{148 Id.}

_{149 Id.}

_{150 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(b).}

_{151 Id. at § 1128G(b)(2).}

_{152 False Claims Act, 31 U.S.C. 3729(b) (2006).}

_{153 76 Fed. Reg. at 78757-78758.}

_{154 Id. at 78758.}

_{155 Id. at 78742.}

_{156 Patient Protection and Affordable Care Act, sec. 6002,§ 1128G(a)(1) and (2).}

_{157 Id. at § 1128G(b).}

_{158 76 Fed. Reg. at 78753.}

_{159 Id.}

_{160 Id.}

_{161 Id.}

_{162 Id. at 78753-78754.}

_{163 Id. at 78754.}

_{164 Id. at 78743.}

_{165 Id.}

_{166 Id.}

_{167 Id.}