REGULATORY ISSUES IMPACTING SUPPLY CHAIN

REGULATORY ISSUES IMPACTING SUPPLY CHAIN Michael Nachman Associate General Counsel John W. Jones, Jr. Partner Allan A. Thoen Partner April 27, 2017 2017 In House Counsel Conference

Presenters: John W. Jones, Jr. Partner Michael Nachman Associate General Counsel Allan A. Thoen Partner

3 Agenda Enforcement Landscape: Why We Care The Supply Chain Regulatory Framework Case Examples and Discussion 17674350v1

4 Enforcement Landscape Federal, State and Local Highly Fragmented and Widely Dispersed Examples of Agencies with Investigative Enforcement authority DOJ, OIG, FDA, SAGs, MFCUs, OCR, FTC State Inspector Generals Counties (NY) Data Mining/Civil Damage Recoveries

5 Enforcement Landscape Why Do We Care? Costs of Non-Compliance Fines and Penalties Suspension/Exclusion Programs Disgorgement Imprisonment

Enforcement Landscape 6

7 Enforcement Landscape Enforcement Activity OIG Semiannual Report to Congress 2016 2016 Recoveries 5.66 B Audit Receivables 1.2 B Investigative Receivables 4.46 B Exclusions 3,635 Criminal Actions 844 Civil Actions 708

8 Enforcement Landscape Recent Settlements Olympus Corp. - $646 M Wyeth and Pfizer - $784.6 M Tenet Healthcare Corp. - $513 M Novartis Pharmaceutical Corp. - $370 M Toumey Healthcare System - $237 M

9 Supply Chain: Overview

10 Supply Chain: Manufacturers Manufacturers are the first step in the pharmaceutical supply chain Manufacturers manage the distribution of drugs from their facilities to drug wholesalers May also distribute directly to pharmacies, hospital chains, and government purchasers Rarely, manufacturers distribute directly to consumers Types of Manufacturers Brand-name manufacturers Generic manufacturers Biologics manufacturers Virtual pharmaceutical manufacturers emerging model

11 Supply Chain: Wholesale Distributors Wholesale distributors purchase pharmaceuticals from manufacturers for distribution to end users May also provide specialized services such as: specialty drug distribution drug repackaging electronic order services reimbursement support drug buy-back programs Top 3 Wholesalers AmerisourceBergen Cardinal McKesson

12 Supply Chain: Third Party Logistics (3PLs) May perform both traditional manufacturer and distributor functions Supply chain operations and management services such as: Receipt & handling of pharmaceuticals Warehousing & storage of drug products Transportation of products Reverse logistics

Supply Chain: Pharmacy Benefit Managers (PBMs) PBMs work with third party payors to manage consumer drug purchases PBMs may control: Coverage / formulary Reimbursement Patient out-of-pocket cost PBM tools include Formularies Rebates Pharmacy networks Mail-order pharmacy services 13

Supply Chain: Group Purchasing Organizations (GPOs) Purchasing agents authorized to act for their members Members may include any type of provider Hospitals Physician practices GPOs negotiate agreements with suppliers Economies of scale for better terms than members could obtain individually Funded by administrative fees paid by suppliers 14

15 Supply Chain: Pharmacies Purchase product from wholesaler Dispense to patient Reimbursed by PBM / Payor Types of pharmacies Traditional Retail (independent or chain) Specialty Mail-order Institutional Long-term care Closed-door

16 REGULATORY FRAMEWORK

17 Regulatory Considerations False Claims Act Anti-Kickback Statute Other regulatory considerations Civil Monetary Penalties Statute State AKS laws State licensing laws FDA and DEA 17674350v1

18 False Claims Act Imposes liability on any person who submits a claim to the federal government that such person knows (or should know) is false Intent requirement: Reckless disregard Deliberate ignorance of the truth or falsity of the information No specific intent needed Civil Penalties Up to $10,000 per claim (minimum of $5,000 per claim) Treble damages Possible reduction in penalties for self-disclosure

19 False Claims Act Private parties may bring an action under the FCA on behalf of the United States Qui tam relators may share in a percentage of the proceeds from an FCA action or settlement Criminal False Claims Act, 17 U.S.C. 287, imposes criminal fines and penalties, including imprisonment, upon individuals and companies False certification theory AKS and other violations can be basis of FCA claims Escobar and materiality

20 Federal Anti-Kickback Statute Criminal Statute Purposes Prevent over-utilization and increase in costs to government programs Prevent interference with patient freedom of choice Prevent anti-competitive practices

21 Federal Anti-Kickback Statute Prohibition AKS prohibits Knowingly and willfully paying, receiving or offering remuneration as an inducement to: purchase items or services reimbursable by a federal healthcare program refer an individual for services reimbursable by a federal healthcare program Applies to both sides of a transaction

22 Federal Anti-Kickback Statute Elements Remuneration anything of value direct or indirect cash or in kind Referral return for referring or arranging for referrals Intent to induce referrals knowing and willful specific intent not required can be inferred from circumstances Greber one purpose test Government Programs Medicare, Medicaid, etc.

23 Federal Anti-Kickback Statute Severe Penalties Civil & Criminal Fines FCA Treble Damages and Qui Tam Suits Exclusion from Government Programs Prison

24 Federal Anti-Kickback Statute Safe Harbors Safe harbors are statutory and regulatory provisions that exempt specific types of arrangements Safe harbors are narrowly construed Use of safe harbors is voluntary Arrangements not structured to fit within a safe harbor are not per se illegal Case-by-case assessment

25 Services Safe Harbor Payment as compensation for services is not remuneration as long as written agreement meets the following requirements: At least 1 year term Specifies services if part-time, specifies exact schedule of intervals, length of intervals and charge Aggregate compensation is set in advance Consistent with fair market value Does not take into account the volume or value of referrals

26 Discount Safe Harbor Concession must be a discount Arms-length price reduction to induce purchase Made at time of sale Commercially reasonable terms Rebate is a form of a discount but not given at time of sale (e.g., volume rebates Seller obligations Disclose discount to buyer and advise of reporting obligations Not impede buyer from meeting reporting obligations Buyer obligations depend on buyer type Report or reflect discount on cost report or claim to the extent required Make available information on discounts to Federal or State officials on request

27 How Much Discount Can Be Offered? Safe Harbor requires that arms-length transactions Discount should be commercially reasonable Permissible levels may vary by market segment or class of trade No back-dating Avoid prebates

28 Other Considerations No cash rebates Rebates should be in the form of credits or a check Checks must be payable to the legal entity that makes the actual purchases (not an individual) Rebate credits should be redeemable for a reasonable period of time No use it or lose it restriction on the rebate credit If rebates are paid through a GPO: Member consent / disclosure / 100% pass-through

29 Can Volume Rebates Be Offered? Volume rebates are based on the quantity purchased Allowed if: Amount of the rebate is commercially reasonable Terms of the rebate are set in advance Volume thresholds are actually enforced Cannot offer volume rebates where the customer has not met the minimum volume of purchases required to qualify for the rebate (i.e., can t be renegotiated within the term of the agreement)

30 GPO Safe Harbor Elements What is a GPO for purposes of the safe harbor? Purchasing Agent GPO must have purchasing authority for Members Authorization is part of agreement with Members GPO Members may not be wholly-owned by GPO or subsidiaries of a parent company that wholly-owns GPO

31 GPO Safe Harbor Elements Written Agreement with Members for which items or services are furnished Administrative Fee Disclosure Agreement provides that Vendors from which Members will purchase goods or services will pay a fee to GPO of 3% or less of purchase price Fees not fixed at 3% or less Agreement must specify the amount (or, if not known, the maximum amount) the GPO will be paid No fee caps set by safe harbor

32 GPO Safe Harbor Elements Disclosure to Health Care Provider Members GPO must provide written disclosure, at least annually, and to Secretary of HHS upon request, of the amount received from each vendor with respect to purchases made by or on behalf of health care provider members.

CASE EXAMPLES 33

34 Manufacturer / Pharmacy Arrangements U.S. v. J&J / Omnicare Settlement At Issue: Switching, Rebates, Data and Grants Lessons Learned for Supply Chain Members: Moving market share a primary driver or consequence of arrangement Government very interested in arrangements that could compromise patient care and increase government costs Services arrangements should be for legitimate services, documented and actually be performed Do what you say and document what you do (not just in agreement but in company files)

35 Manufacturer / Pharmacy Arrangements U.S. v. J&J / Omnicare Settlement Lessons Learned for Supply Chain Members: Arrangements should not compromise independent, professional judgment of physician Government will look to see if a party is acting as an extension of sales force to create referral nexus Active Intervention Programs Dear Doctor/Patient Authorization letters

36 Direct to Pharmacy Sales Can a manufacturer sell its drugs directly to pharmacies? Novartis Settlement Manufacturer selects 3 specialty pharmacies as exclusive sellers of Drug Two of the pharmacies are good at encouraging patients to refill the prescriptions but the third is not Manufacturer threatens to terminate third pharmacy for poor performance In response, pharmacy implements program to encourage patients to refill as many times as prescribed This works well, so manufacturer arranges for first two pharmacies to do the same Result?

Direct to Pharmacy Sales 37

38 Direct to Patient Sales Can a manufacturer sell its drugs directly to patients? Hypothetical Brand Drug is not readily covered by insurers because cheaper, therapeutically equivalent generic is available Manufacturer contracts with mail order pharmacy to serve as dispensing agent for the Drug Cash customers only; no claims to any third party payor Pharmacy stocks drug under bailment arrangement where manufacturer retains title Pharmacy dispenses to patients, and remits payment to manufacturer Manufacturer pays pharmacy dispensing and monthly service fees Result?

Direct to Patient Sales 39

40 Direct to Patient Sales OIG Advisory Opinion No. 14-05 Three key considerations for OIG Safeguards to ensure no cost to government healthcare programs from sale of Drug under the program No effort by manufacturer to use arrangement for Drug to promote or leverage sales of other products No clinical barriers prevented patients from switching to less costly generic equivalent upon leaving manufacturer s program Additional considerations Payments to pharmacy Publicizing the program Availability through other channels

41 Provision of Free Items to Customers Hypothetical Manufacturer of drugs, devices and other products used to treat eye disorders proposes to create a tiered, percentage rebate program. Customer rebates calculated based on total annual purchased of all included products by tier, e.g. $2X annual purchase = 5% rebate $3X annual purchase = 10% rebate Some included products reimbursed by government healthcare programs But not same reimbursement methodology (Part A, Part B) Some products not reimbursed at all Result?

Tiered Rebates 42

43 Tiered Rebates OIG Advisory Opinion No.13-07 Key considerations for OIG Goods or services are reimbursable under the same payment methodology Price of goods or services can be properly reported Tiered rebate not contingent on the purchase of another product Fixed terms disclosed in writing at the time of initial purchase

44 Group Purchasing Organizations Strategic Transactions Manufacturer Arrangements Member Arrangements

45 Group Purchasing Organizations Strategic Transactions Types of Transactions Joint Ventures Small Investment Interests Safe Harbor 60/40 Rules Profit vs. Nonprofit Coop Affiliations GPO and Personal Services Safe Harbor Access Agreements GPO Safe Harbor Services Agreements Personal Services and Management Contracts Safe Harbor

46 Group Purchasing Organizations Manufacturer Arrangements Administrative Fees Growth Incentive Fees Other Fees Rebates Services Marketing/Sales vs. Education Conferences/Summits

47 Group Purchasing Organizations Member Arrangements Dividend/Distributions Patronage Dividends (coop model) Offeror Rebates (Administrative Fee Return) Services: Value Add vs. Free Services and Goods (e.g., technology) Education vs. Sales/Marketing Extension of Supplier Sales Force Growth Incentive Fees

48 Principal GPO Industry Relationships Administrative Fee Payment to GPO Manufacturer pays GPO percentage of the value of purchases made by GPO Members OIG s Position: Federal Anti-Kickback Statute implicated since payment intended to induce GPO to arrange for or recommend the purchasing, leasing or ordering of Manufacturer s items or services. Elements of GPO Safe Harbor Protects any payment by a vendor of goods or services to an entity [GPO] that is authorized to act as a purchasing agent for a group of entities/individuals who furnish covered services, provided certain requirements are satisfied.

49 Principal GPO Industry Relationships Administrative Fee Payment to GPO Marketing Manufacturer s Products and Services GPO s enter into marketing arrangements with Vendors or required to market Manufacturer products Implicate federal Anti-Kickback Statute Payment covered by GPO safe harbor Administrative fee payments in excess of 3% market rate Consider applicability of personal services safe harbor

50 Principal GPO Industry Relationships Discounts & Rebates Discounts Safe Harbor OIG Position: Discounts and rebates constitute remuneration to Members to induce Members to purchase Vendor s products and services Federal Anti-Kickback Statute implicated Discounts (point of sale) sale of product or service at discounted price to Member

51 Principal GPO Industry Relationships Discounts & Rebates Discounts Safe Harbor Rebate (post-sale) rebate based on value of purchases by Member Discount: A reduction in the amount a buyer (i.e., a GPO Member) is charged for an item or service based on an arms-length transaction OIG s Position: Discount is the difference between price vendor normally sells a product and the price the vendor sells product to a particular buyer Examples: Prompt-pay discounts Across the board price reductions

52 Discounts, Rebates and Value Add Goods and Services Discount does not include the following types of items and services: cash payments or cash equivalents (except rebates); supplying one good or service without charge or at a reduced charge to induce the purchase of a different good or service (known as bundling of products); a reduction in price application to one payor, but not to Medicare or a state health care program; a routine reduction or waiver of any coinsurance or deductible amount owed by a program beneficiary; warranties; services provided in accordance with a personal or management services contract; or other remuneration, in cash or in kind, not explicitly described above. Rebates: Any discount the terms of which are fixed and disclosed in writing at the time of sale, but which is not given at the time of sale OIG Fraud Alert: Up-front rebates, prebates and signing bonus payments not protected by discounts safe harbor

53 Principal GPO Industry Relationships Manufacturer and GPO Discounts / Rebates to Members Discounts safe harbor GPO obligations considered offeror Offeror: Entity that is not a seller, but promotes the purchase of an item or service at a reduced rate Offeror obligations Similar to Manufacturer obligations Advise Member of its disclosure/reporting obligations Refrain from taking action that would impede Member s ability to meet obligations Recommended: Fully and accurately report discount to Member Buyer/member must comply with reporting/disclosure obligations

54 Principal GPO Industry Relationships GPO / Manufacturer Payments to another GPO Access Agreements (Adv. Opin. 1-6) Shared Service Arrangements OIG may take position Federal Anti-Kickback Statute implicated GPO safe harbor Personal services safe harbor

Michael Nachman Associate General Counsel corporate attorney specialized in commercial transactions practicing for twenty years, with AmerisourceBergen since 2009 responsibilities include providing legal support for sales and marketing teams, primarily within the Community and Specialty Pharmacy division representative clients include retail pharmacies, buying groups/group purchasing organizations, chains, PBM s, specialty pharmacy, and long term care providers.

John W. Jones, Jr. Partner, Leadership Team Member Health Sciences Department member of Pepper s Leadership Team of the Health Sciences Department and leader of several of the firm s health-related groups, including the Group Purchasing and Buying Cooperative Practice almost 20 years experience representing health care providers and suppliers on the transactional and regulatory side with a wide range of regulatory issues including fraud and abuse, supply chain, and compliance pre-and-post product launch significant experience in M&A, compliance, regulatory and structural governance matters

Allan A. Thoen Partner Health Sciences Department practice focuses on representation of clients in the health care sector experience includes multiple trials and representation of clients in jurisdictions across the country, including defense of False Claims Act and Anti-Kickback Act litigation representation of pharmaceutical and chemical manufacturers in connection with government investigations and inquiries representation of pharmacies in connection with government investigations and inquiries and compliance counseling regarding pharmacy law