Taking Stock of Compliance Issues Impacting Specialty Pharmacy Arrangements

IN 2015, THE SPECIALTY PHARMACY INDUSTRY experienced extraordinary growth and innovation. However, this progress has been tempered by public concern over surging drug prices and the heightened scrutiny drug distribution arrangements have received from government regulators and enforcement agencies.

These divergent trends have produced mixed feelings of exuberance and anxiety, as stakeholders seek to craft business deals that can capitalize upon profit potential without inviting undue regulatory risk. To this end, it is worthwhile to take stock of some of the enforcement trends and compliance issues impacting specialty pharmacy arrangements.

The federal Anti-Kickback Statute (AKS) is the government’s weapon of choice in targeting purported misconduct in the pharmaceutical sector. The AKS is a criminal statute that outlaws the payment or receipt of remuneration in exchange for referrals or the purchase of any item or service that may be covered under a federal health care program.

Although the statute is designed to prohibit the provision of kickbacks, it has been broadly construed by the government to target a range of seemingly benign business and marketing activities. Furthermore, an AKS violation may qualify as a false or fraudulent claim under the federal False Claims Act (FCA), which allows for draconian civil penalties and damages against violators.

As a result, drug makers and suppliers may face harsh penalties unless their arrangements comply with the AKS by satisfying (or nearly satisfying) one of its regulatory “safe harbors.” In recent years, the US Department of Justice, along with federal and state regulators, has begun to target drug manufacturers and pharmacies for alleged misconduct under the AKS and the FCA.

For instance, in 2013, Amgen Inc agreed to pay $24.9 million to settle FCA claims connected with allegations that the company paid performance-based rebates to long-term care pharmacies to steer Medicare and Medicaid beneficiaries away from a competitor drug to Amgen’s Aranesp.

Also in 2013, Johnson & Johnson signed a $149 million settlement to dispose of similar allegations that it offered rebates to induce Omnicare to promote the company’s branded drugs over less costly alternatives.

More recently, in 2015, Novartis agreed to pay $390 million to settle allegations that it paid kickbacks in the form of patient referrals and rebates to pharmacies in an effort to promote the dispensing of its drug products.

In each of these enforcement actions, one or more of the implicated pharmacies entered into multimillion dollar settlements with the government to avoid protracted litigation and potentially ruinous liability.

The sheer size of these settlements and the government’s aggressive enforcement approach have provoked industry confusion and concern. After all, some of the arrangements targeted in these cases utilized components, such as performance-based rebates, that have become commonplace.

Nonetheless, even as the government has broadened its interpretation of the AKS, the underlying fraud and abuse principles—as expressed in agency special fraud alerts, bulletins, and advisory opinions—have been around for years.

Therefore, in the interest of clarity, it is helpful to review some of the unique compliance issues that may affect specialty pharmacy distribution plans. The fundamental question in assessing any drug distribution agreement under the AKS is whether it involves the provision of remuneration intended to induce referrals of federal health care program beneficiaries, items, or services.

Specialty pharmacy distribution arrangements may involve 2 potential referral streams:

• The pharmacy may promote the manufacturer’s products to prescribers and/or beneficiaries.
• The drug manufacturer may direct beneficiaries to one or more selected pharmacies through the use of limited distribution networks, reimbursement hubs, websites, or call centers.

These referral streams should be considered together with the remuneration passing between manufacturers and pharmacies, which may take the form of discounts, rebates, or service fees. Another important factor relates to the services that the pharmacy contracts to offer, which may involve administrative activities (eg, storage, handling, dispensing), pre-authorizations, refill reminders, and data reporting services, among others.

The first step in structuring a compliant specialty pharmacy arrangement is to ensure that the provided remuneration/compensation satisfies or nearly satisfies one of the applicable AKS safe harbors. Rebates and discounted payments can comply with the discount safe harbor, which, although it contains technical conditions, essentially requires that the price reductions are appropriately disclosed and passed along to the applicable federal health care program.

Safe-harbor compliance may be readily achieved in instances where the discounts are provided in return for product purchases. However, from the government’s perspective, performance-based rebates and service fees tied to services or sales may raise fraud and abuse concerns, even where they technically satisfy the discount safe harbor’s conditions.

Such payments will invite heightened scrutiny when the payment is contingent on the pharmacy engaging in marketing or drug-switching activities that involve direct interactions with prescribers or patients. On the other hand, payments furnished in return for the pharmacy’s provision of administrative services tailored to unique specialty medications may more easily pass muster.

Prior-authorization and refill reminder services fall between these 2 extremes and invite intermediate scrutiny. Because these activities involve interactions with prescribers and patients, they should be carefully scripted and narrowly focused on ensuring reimbursement or promoting drug adherence, rather than marketing.

Finally, the level of fraud and abuse risk will largely depend on the unique characteristics of the manufacturer-pharmacy relationship, including:

• Whether there is sufficient transparency to payors and patients
• Whether the arrangement may increase sales of more expensive drugs where less costly generic or therapeutic alternatives are available
• Fair market value considerations
• The potential for patient harm or interference with prudent prescribing practices
• The nature of underlying referral patterns

Ideally, the arrangement should not be perceived as intending to promote overutilization or to increase costs borne by government health care programs. As the industry turns to 2016, stakeholders will benefit from a better understanding of the general compliance issues and government enforcement trends, as outlined above.

As is the case with most complex health care arrangements, however, the ultimate analysis is highly fact-dependent and will require detailed review by counsel working in collaboration with internal business teams. With a more deliberate approach to crafting these arrangements, drug manufacturers, specialty pharmacies, and other entities should gain additional assurances when operating in this expanding sector. SPT

John “Jack” S. Linehan is a health care attorney in the Health Care and Life Sciences practice group of Epstein Becker Green and his practice focuses on pharmacy law, drug distribution and reimbursement, and related compliance and litigation matters. Mr. Linehan counsels pharmacies, drug manufacturers and distributors, insurers, and investors on regulatory issues, the federal and state fraud and abuse laws, and due diligence reviews. In addition, he represents clients in criminal and civil enforcement actions involving the False Claims Act, the Anti-Kickback Statute, and the Food, Drug, and Cosmetic Act.