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Health Care Law Alert

Legal Implications of Physician Consultants

Thursday, May 29, 2008

This article was originally published by Physician’s News Digest, www.physiciannews.com.

Increased federal investigation into alleged inappropriate arrangements between the pharmaceutical and medical device industries and physicians has led to significant scrutiny over many, even legitimate, consulting, design development and license agreements and other services arrangements. Most recently, the five major medical device manufacturers entered into settlements with the federal government for claims alleging that consulting contracts violated federal fraud and abuse laws. A number of laws, regulations and ethical tenets governing arrangements between physicians and manufacturers could present significant traps for the unwary physician.

Anti-Kickback Statute

The federal Anti-Kickback Statute proscribes the offering, payment, solicitation or receipt of any remuneration in exchange for a patient referral or referral of other business for which payment may be made by a federal health care program, including Medicare and Medicaid. Violations of the Anti-Kickback Statute can result in significant criminal penalties, civil penalties of up to $50,000 for each violation, as well as imprisonment. The primary concern for physician relationships with pharmaceutical and medical device manufacturers under the Anti-Kickback Statute is whether the compensation paid to the consultant physician constitutes disguised remuneration for referrals.

OIG has historically taken the position that fees for hollow consulting services could result in a violation of the Anti-Kickback Statute. The argument is that the transfer of anything of more than nominal value to a physician may induce the physician to recommend to his patients the purchasing or ordering of federal health care program-reimbursed items or services. Since physicians are in a position to prescribe drugs or recommend medical devices to their patients, any value transferred by a manufacturer to physicians with the expectation of a recommendation from such physician to such patients could present significant risk to the parties. Given the severity of the criminal and civil sanctions under the federal Anti-Kickback Statute, physicians need to carefully structure these arrangement and ensure that any such arrangements comply with applicable safe harbor regulations.

Personal Services Safe Harbor

For purposes of the federal Anti-Kickback Statute, under the personal services and management contracts safe harbor, remuneration would not include any payment made by a manufacturer to a physician as compensation for the services of the physician, provided all of the following requirements are satisfied:

  • The consulting agreement is set out in writing, signed by the parties and is for a term of not less than one year.
  • The consulting agreement must cover all of the services to be provided by the physician for the manufacturer for the term of the agreement and specify the services to be rendered.
  • If the consulting agreement is intended to provide for services on a periodic, sporadic or part-time basis, rather than on a full-time basis, then the agreement must specify exactly the schedule of such intervals, their precise length, and the exact charge for such intervals.
  • The aggregate compensation paid to the physician over the term of the consulting agreement must be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under federal health care programs.
  • The services performed under the consulting agreement must not involve the promotion or counseling of an activity or business arrangement that violates any state or federal law.
  • The aggregate services under the consulting agreement must not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.

Stark

Generally, Stark prohibits a physician (or immediate family member) who has a financial relationship with an entity from making referrals to that entity for the furnishing of designated health services for which payment may be made under the federal health care programs, unless an exception or safe harbor is satisfied. Stark is often implicated in the pharmaceutical and medical device contexts because physicians (who have some form of financial relationship with the pharmaceutical and medical device manufacturers) are in a position to influence their patients’ purchasing decisions over federal health care program reimbursed designated health services. For example, physicians may enter into a consulting or other form of services arrangement with the manufacturers such as to provide educational or training services to the physicians’ patients, which could implicate Stark. Any services agreement with physicians for the provision of such services would have to satisfy the requirements of the personal services safe harbor under Stark (which requirements are similar but not the same as the requirements under the personal services and management contracts safe harbor of the federal Anti-Kickback Statute) in order to avoid any risk to physicians. Violations of Stark could result in denial of payment, civil penalties, disgorgement of reimbursements received and exclusion from federal health care program participation.

False Claims Act

The False Claims Act prohibits a physician from submitting or causing to submit a false or fraudulent claim for payment to the government. The False Claims Act could be implicated when claims for payment are submitted based on a false certification that the physician submitting the claim has complied with all applicable laws and regulations. Where claims are submitted pursuant to an otherwise illegal arrangement (for example, an arrangement that violates the federal Anti-Kickback Statute or Stark), it is considered a false claim. Sanctions for violating the False Claims Act include treble damages, fines and administrative penalties.

Physicians also need to consider the ethical tenets and state medical board regulations applicable to any arrangement with a medical device or pharmaceutical manufacturer as well as applicable patient disclosure obligations. Trade associations, including AdvaMed and PhRMA, also have developed codes applicable to these industry relationships and should be considered when structuring these arrangements.

Understanding that there will always be gray areas, physicians and manufacturers should structure their arrangements to comply with applicable federal and state laws and regulations and ethical tenets. Some guidelines to follow include:

  • Any consulting arrangement should be for legitimate services such as the provision of training and education required of patients or the design and development of medical devices, and provide for reasonable compensation which is set at fair market value in an arms length transaction.
  • Physicians should not receive separate manufacturer payments in exchange for the physicians’ ordering of such manufacturer’s supplies for the physicians’ patients. Physicians may receive professional fees from payers for the services rendered, as well as be paid royalties for the sale of such supplies to third parties, provided any such royalty payment is consideration exchanged for the transfer of intellectual property to the manufacturer related to such devices.
  • The consideration exchanged for the transfer of intellectual property by a physician to a manufacturer could be structured as a royalty payment, and the length of any such royalty payment period should be reasonable in relation to the intellectual property transferred.
  • Payments strictly for consulting services (non-design, development and licensing services) should be fee-for-service-based.
  • Physicians should not, as part of any consulting arrangement, market a supplier’s product to the physicians’ federal health care program beneficiaries where payment for such marketing services to the physician is based on the volume of products sold or the success of such marketing efforts.
  • Physicians should not receive anything of value with the expectation of referring or arranging for the referral of business to a manufacturer.
  • The parties shall periodically revisit the consulting agreement to ensure compliance.
  • Consultants should be selected based on their qualifications and expertise. The number of consultants selected for any manufacturer project should be that amount necessary to achieve the identified purpose of the project.
  • The sponsoring of conferences by manufacturers should be primarily dedicated to promoting scientific and educational activities and any subsidy should be provided to the conference’s sponsor, not payment to physicians.
  • Reasonable honoraria to physician faculty members of conferences and reasonable expense reimbursement (such as for travel and lodging) may be appropriate.
  • Training and educational programs should be held in venues (such as hotels or facilities) which are conducive for the sharing of information or such training.

John W. Jones, Jr.

Written by

John W. Jones, Jr.
Phone: 215.981.4706
Fax: 215.981.4750
jonesj@pepperlaw.com


The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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