Our articles thus far analyzing the finalized regulations implementing the Physician Payment Sunshine Act—Section 6002 of the Affordable Care Act—have focused on the highly technical nature of the reporting requirements, definitions, and other regulatory areas. This article, however, focuses on the costs CMS has estimated the Sunshine Act will have on affected stakeholders—doctors, hospitals, and manufacturers—as well as the regulatory impact analysis CMS conducted in issuing the regulation.
CMS estimated that the total cost of these provisions will be approximately $269 million in the first year and $180 million annually thereafter. Interestingly, CMS admitted having “no empirical ability to estimate the monetary benefits of this provision.” Nevertheless, they emphasized that the “nonmonetary benefits, … are difficult to quantify.”
Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and promoting flexibility. Section 4 of Executive Order 13563 calls upon agencies to consider approaches that "maintain flexibility and freedom of choice for the public," including the "provision of information to the public in a form that is clear and intelligible." A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).
The Regulatory Flexibility Act (RFA) requires agencies to analyze options for regulatory relief of small entities, if a rule has a significant impact on a substantial number of small entities. Under the RFA, "small entities" are those that fall below size thresholds set by the Small Business Administration, or are not-for-profit organizations or governmental jurisdictions with a population of less than 50,000. CMS did not receive any comments on these aspects of the RFA, so have finalized it as proposed.
For purposes of the RFA, CMS estimated that the majority of teaching hospitals and physicians, and most applicable manufacturers and applicable GPOs are small entities under either the size or not-for-profit standard. According to the Small Business Administration size standards6 the threshold size standard for "small" pharmaceutical manufacturers is 750 employees, for biological products, and surgical equipment, surgical supplies, and electromedical/electrotherapeutic apparatus manufacturers is 500 employees and for drug and medical equipment wholesalers is 100 employees.
CMS estimated that approximately 75 percent of applicable manufacturers and applicable GPOs are smaller than these size standards. CMS said it believes that “many small applicable manufacturers and applicable GPOs will have no relationships, thus will not have to report, so the burden on them will be negligible.”
For small entities with financial relationships to report, CMS said that they will only have a small number to report, making the reporting process significantly less burdensome. CMS said “that the average burden of the reporting requirements will be about $80,000 in the first year (the sum of 0.25 FTEs of compliance officer at $48 hourly rate and 1 administrative support FTE at $26 hourly rate times 40 hours and 52 weeks) for smaller manufacturers, and even less in subsequent years. This amount is far below the 3 percent of revenues that HHS uses as a threshold for "significant impact" under the RFA, so these regulations will not have a significant effect on these small entities.
For example, if a firm with only 100 employees generates annual revenues of $200,000 per employee, or $20 million, a cost of $80,000 would be less than 0.5 percent of the revenues. Firms this small would potentially face costs considerably less than $80,000, and hence an even lower effect.
Most teaching hospitals and physicians are small entities under the RFA, since most teaching hospitals are not-for-profit and some have revenues below $34.5 million. CMS estimated that 95 percent of physician practices have revenues under $10 million. CMS said that the regulatory effects of this provision on physicians and teaching hospitals are “relatively minor.” Physicians and teaching hospitals are provided with the opportunity to review and correct this information, but are not involved in the data collection or reporting processes.
CMS estimated that this review would take 1 hour from the individual physicians and 5 hours for the supporting staff to perform the duty to maintain records and review the reports annually.
For teaching hospitals, it is estimated that on average 40 hours of compliance officer and 80 hours of supporting staff would needed. Given that their review will take such a small amount of their time annually, the costs faced by physicians and teaching hospitals are not substantial.
As a result, CMS said that the cost burden of this review and correction period will be far below the 3 percent threshold for "significant impact" and determined that the rule will not have a significant economic impact on a substantial number of small entities in any category of entities it affects.
Effects on Applicable Manufacturers and Applicable GPOs
CMS estimated that approximately 1,150 applicable manufacturers, (150 drug and biologic manufacturers, and 1,000 device and medical supply manufacturers), and approximately 420 applicable GPOs would submit reports. CMS based these estimates on the number of manufacturers reporting in States with similar transparency provisions, as well as the number of manufacturers registered with FDA. The number of drug manufacturers is based on reporting in Massachusetts, Minnesota, and Vermont, whereas the number of device manufacturers is based on reporting in Massachusetts and Vermont, since Minnesota does not require device manufacturers to report.
Because the State laws have higher payment thresholds and are specific to the physicians in the State, CMS estimated that the number of manufacturers reporting would be greater, so CMS increased the State reporting numbers by 50 percent. For device manufacturers, CMS also used data from the FDA to identify the total number of manufacturers to use as a ceiling, combining the two data sources CMS increased the State reporting numbers by 75 percent.
CMS did not receive comments on the number of reporting entities, except for information on the number of device manufacturers reporting in Vermont, where the legislature amended the transparency scheme in 2009 to include reporting by device manufacturers, so CMS finalized these assumptions.
Based on comments, CMS revised the estimated costs of the reporting requirements, but did not revise the activities the FTEs will be required to perform associated with reporting. Coordinating the data collection will require ensuring that all payments and other transfers of value are attributed to the correct covered recipient and reported in the manner required in this final rule. The estimates include CMS’ aggregate estimate of the overall time required to
- build and maintain the reporting systems (including the development of new information technology systems),
- train appropriate staff,
- obtain NPI and other information from the NPPES system (and if necessary supplement that information),
- establish whether any owners or investors have physicians as immediate family members (if necessary),
- organize the data for submission to CMS (within the organization and with any third party vendors),
- register with CMS and submit the required data,
- review the aggregated data that CMS produces,
- respond to any physician or teaching hospital queries during the review process, and
- resubmit and re-attest to certain disputed information (if necessary).
Finally, it also includes any time required to maintain records, as required. However, CMS said that much of this information will be collected and stored already for financial reasons, and thus, did not anticipate a significant burden. It allows for time applicable manufacturers and applicable GPOs may sometimes use for "pre-submission" reviews but assumes that would be rarely used, and only for complex cases. It also includes the time that applicable manufacturers may elect to spend to submit with their data a document describing their assumptions and methodology for categorizing the nature of payments.
The estimates also include a downward adjustment to reflect the potential time savings that would accrue to applicable manufacturers who register with the CMS system and thus have the ability to query CMS, receive informal guidance through a listserv or other methods of providing technical assistance, and ultimately obtain useful information on low cost methods of compliance.
CMS increased its estimates of the average FTE burden associated with the manufacturer and GPO reporting requirements.
For year 1, on average, smaller applicable manufacturers will have to dedicate 25 percent of an FTE employee (mainly in the range of zero to 50 percent), whereas larger applicable manufacturers may have to dedicate 1 to 10 FTE employees to comply with the reporting requirements (we assume 2 FTEs on average).
CMS estimated that reporting activities will be conducted by the managerial staff and supporting staffs, the compliance or similar level of staffs will oversee the reporting activities, which will largely be supported by staff involved with bookkeeping, accounting and auditing. Since there are many more small companies, CMS estimated that on average, 0.5 FTEs of compliance officer and 2 FTEs of supporting staff would be needed for each applicable manufacturer in the first year (2 FTEs of compliance officer and 8 FTEs of supporting staffs in 150 larger firms and 0.25 FTEs of compliance officer and 1 FTE of supporting staffs in 1,000 smaller firms).
Therefore, for applicable manufacturers, the revised cost estimation assumes a compliance officer (0.5 full-time equivalents (FTEs)) and 2 FTEs of bookkeeping, accounting and auditing staff support in the first year. I n the second year and thereafter, CMS reduced the estimates, believing the system will be more automated. In year 2 and thereafter CMS assumed 0.375 FTEs (780 hours) of a compliance officer and 1.5 FTEs (3,120 hours) of bookkeeping, accounting, and auditing support. Thus, the total first-year FTE increased from 1.74 to 2.5 FTEs for applicable manufacturers. This is an average cost, while the large manufacturers may need more and the small manufacturers may need less FTEs.
The greater staff time for year 1 represents time for applicable manufacturers to alter their systems to collect and report this data. Once procedures and systems are modified, costs would be 25 percent lower, which reduces this value to an average of 0.375 FTEs of compliance officer and 1.5 FTEs of support staff in year 2 and annually thereafter. CMS emphasized “that these are very rough estimates” and noted that the actual burdens could easily average 25 percent lower or higher, and would depend on manufacturers' changes in practices.
While many individuals within the applicable manufacturer or applicable GPO may contribute to the data collection and reporting, CMS said that the majority of the work will be performed by the support staff and overseen by a compliance officer. According to the Bureau of Labor Statistics Occupational Employment Statistics, in May 2011, the average hourly rates for a compliance officer and bookkeeping, accounting and auditing staff in the pharmaceutical and medicine manufacturing field was $35.75 and $19.84, respectively. CMS applied a 33 percent increase to this amount to account for fringe benefits, making the total hourly compensation $47.55 and $26.39, respectively. The total number of hours for applicable manufacturers (including the hours for compliance officers and support staff) during year 1 would be 5,980,000 (1,150 applicable manufacturers x 100 hours (2.5 FTEs) x 52 weeks).
For year 2 and subsequent years, CMS estimated a total of 4,485,000 hours (1,150 applicable manufacturers x 75 hours (1.875 FTEs) x 52 weeks). On average, this equals 4,983,333 hours annually for all applicable manufacturers for the first 3 years.
The total number of hours for applicable GPOs (including the hours for compliance officers and support staff) for year 1 would be 305,760 (420 applicable GPOs x 14 hours (0.35 FTE) x 52 weeks) and for year 2 would be 229,320 hours (420 applicable GPOs x 10.5 hours (0.2625 FTEs) x 52 weeks). For the first 3 years in total, applicable GPOs will spend on average 254,800 hours annually.
In total, CMS estimates that for applicable manufacturers and applicable GPOs required to report, it will cost $193,037,104 for year 1 and will cost $144,777,828 for year 2 and annually thereafter. For the first 3 years, this averages to a cost of $160,864,253 annually. All estimates are in 2011 dollars.
In addition to FTE costs, CMS also assumed that there would be some infrastructure costs associated with the reporting requirements. CMS also acknowledged a “substantial amount of uncertainty in these estimates.” For example, CMS does not know how many companies will be using existing systems and technology to comply with the requirements and how many will be obtaining new equipment and technology; in both cases, there will be opportunity costs of using the systems for the reporting required by this rule, but with new systems, there might be higher-set-up costs.
Accordingly, CMS estimated that in year 1 the infrastructure costs for applicable manufacturers will be $10,000. This represents an average of $4,000 for small companies (estimated to be 1000 companies) and $50,000 for large companies (estimated to be 150 companies). The majority of these costs will be infrastructure costs, such as purchasing equipment and initial training, but assume that some costs will be required to maintain the systems. Therefore, in year 2 and annually thereafter, applicable manufacturers will spend about $1,000 annually to maintain their systems.
CMS noted that some costs might be offset by the fact that companies may now not need to report payments for States under the preemption provisions. Also, they noted companies already reporting under CIAs with HHS-OIG. But given the differing requirements for each State and CIA, and broad scope of the Sunshine Act, CMS could not approximate any lessened burden for entities already reporting.
Effects on Physicians and Teaching Hospitals
Using the Bureau of Labor Statistics Occupational Outlook Handbook, CMS estimated that information may be available for as many as 897,700 physicians. However, not all physicians will have relationships with applicable manufacturers or applicable GPOs. Based on feedback, CMS estimated that less than 50 percent of the physicians have transactions with industry, which reduces the universe of affected physicians to approximately 448,850.
Further, CMS said that many physicians maintain relationships with applicable manufacturers that are relatively insignificant from a financial point of view, and thus estimated that many physicians will not devote any time to reviewing and correct the aggregated reports from CMS. Thus, CMS estimated that only 50 percent of the remaining 448,850 physicians will review the report, which reduces the number of affected physicians to 224,425 for year 1.
For year 2, CMS anticipated a further reduction in the number of physicians choosing to review the data because they would be familiar with the type of information on the database. Thus, CMS reduced the number of physicians reviewing by another 25 percent, to 168,319 physicians. CMS also reduced the amount of time it would take the physicians choosing to review the information, since they will be familiar with the review, correction and dispute process.
For teaching hospitals, about 1,100 hospitals receive Medicare GME or IME payments, all of which are defined as teaching hospitals for this provision. CMS said that the vast majority of teaching hospitals would have at least one financial relationship with an applicable manufacturer, and said there would not be a reduction in the number of teaching hospitals that review the information after the first year because teaching hospitals probably have more complex financial relationships.
CMS increased the time dedicated to the physician and teaching hospital review, acknowledging the need to maintain ongoing records of the activities for verification purposes. However, CMS assumed that most of these recordkeeping activities will fall on the duty of the office assistants, but the physician may need to review the records. The hours of bookkeeping are added in the revised cost estimation for physician and teaching hospital accordingly. CMS also increased the physician hourly rate to $137 per hour, which is based on the most recent data from Bureau of Labor Statistics.
The hospital compliance officer's annual hours were also increased from 10 hours to 40 hours. In addition, CMS revised the cost estimation to include 80 hours of administrative supporting staff at teaching hospitals to maintain the records. The role of the compliance officer will be review and oversight, while the administrative supporting staff will conduct the recordkeeping.
In response to the comments, even though there is no requirement for physician and teaching hospitals to review the reports or maintain records of interaction, CMS estimated the covered recipients may maintain records to facilitate reviews. In the final rule, CMS estimated the supporting staffs such as bookkeeping, accounting, and auditing would perform the tasks while the compliance officer would oversee the review process.
When reviewing the information reported, physicians and teaching hospitals are allowed to review the information attributed to them by applicable manufacturers and applicable GPOs that submitted data to CMS. In response to feedback, CMS added estimates for recordkeeping for physicians and teaching hospitals and assumed that support staff would perform these functions. CMS estimated that on average, physicians would need 1 hour annually to review the information reported. For physicians that choose to review the information, this would range from a few minutes for physicians with few relationships with applicable manufacturers, to at most 10 or 20 hours for the small number of physicians who have lengthy disputes over a payment or other transfer of value, or ownership or investment interest.
In addition, CMS estimated 5 hours annually of supporting staff for each physician to help them to maintain records to facilitate the review. CMS said that teaching hospitals will have to review more payments or other transfers of value and have more complex relationships, so on average, it would take a representative, such as a compliance officer, from a teaching hospital 40 hours annually to review the submitted data, ranging from 10 hours for small teaching hospitals that receive few payments or other transfer of value, to 200 hours for teaching hospitals that have lengthy disputes. CMS also estimated 80 hours annually of administrative support staff for each teaching hospital to help them maintain their records.
The average hourly rate for the supporting staff is $16.35 which rises to $21.75 with 33 percent fringe benefits. The total number of hours for physicians (including supporting staffs in physician offices) would be 1,346,550 (224,425 x 6 hours) for year 1 and 757,436 hours (168,319 x 4.5 hours) for year 2, which averages to 953,807 hours annually for the first 3 years. The total estimated cost for the review and correction period for physicians and the supporting staffs in year 1 is $55,152,444.
For year 2 and annually thereafter, the estimated cost for physician and supporting staffs to conduct review and correction is $31,023,250. For the first 3 years, the average cost for all physicians review and correction will be $39,066,314 annually.
For teaching hospitals, a compliance officer will review the payments and other transfers of value with supporting staff to maintain any necessary records. The hourly average rate for compliance officer in hospitals is $32.94 or $43.81 when fringe benefit costs are applied. The average hourly rate for the supporting staff in a teaching hospital is $16.22 which rises to $21.57 with 33 percent fringe benefits. For year 1, the total number of hours would be 132,000 (1,100 x 120 hours).
For year 2 this would decrease to 99,000 hours (1,100 x 90 hours). For the first 3 years, the average number of hours for teaching hospitals will be 110,000 annually. The total estimated cost for the review and correction period for teaching hospitals is $3,825,800 for year 1 and $2,869,350 for year 2 and annually thereafter. On average, the cost for all teaching hospitals will be $3,188,167 annually for the first 3 years.
CMS assumed that the combined infrastructure and maintenance costs for teaching hospitals will be the same as those for GPOs. For physicians, we assume a total cost of $2 million in the first year, and 10 percent thereafter.
Effects of Third Parties
CMS estimated that 58 third parties will incur costs under this final rule. Given the range of entities that could be third parties, CMS said it is difficult to estimate the hourly rate for these entities. CMS assumed that the role will be similar to that of compliance officers in applicable manufacturers and applicable GPOs, since it may require them to track similar relationships. Therefore, CMS estimated the hourly rate for third parties will be $47.55 ($35.75, plus a 33 percent increase for fringe benefits), which is the same hourly rate for a compliance officer at an applicable manufacturer or applicable GPO.
CMS estimated that third parties may need to spend 40 hours in year 1 on tasks that are associated with the reporting requirements. CMS decreased this estimate by 25 percent in year 2 (for a total of 30 hours) to account for increased familiarity with the systems. In total, third parties will dedicate 2,320 hours in year 1 and 1,740 hours in year 2 with a total cost of $110,316 in year 1 and $82,737 in year 2.
CMS recognized that “collaboration among physicians, teaching hospitals, and industry manufacturers can contribute to the design and delivery of life-saving drugs and devices.” Moreover, CMS asserted that it is “important to develop a system that encourages constructive collaboration, while also discouraging relationships that threaten the underlying integrity of the health care system.”
Nevertheless, CMS noted that “some payments from manufacturers to physicians and teaching hospitals can introduce conflicts of interests that may influence research, education, and clinical decision-making in ways that compromise clinical integrity and patient care, and lead to increased program costs.” However, CMS reiterated, as it did in the proposed rule, that the agency has “no empirical basis for estimating the frequency of such problems, the likelihood that transparent reporting will reduce them, or the likely resulting effects on reducing the costs of medical care.”
Although a few States do have similar reporting requirements, determining the benefits based on their experiences is difficult, and we have previously written about studies showing that State transparency or disclosure laws have no affect on the prescribing patterns of doctors.
Despite the lack of any evidence, CMS maintained that “transparency can shed light on the nature and extent of relationships, and discourage inappropriate conflicts of interest.” CMS, in part, based its reasoning on the assertion that “the costs for preparing reports are small in relation to the size of the affected industry sectors.” However, CMS did not acknowledge the potential harm the Sunshine database may have on physician-industry collaboration by stigmatizing such relationships to the point where physicians fear working with industry, which could lead to slower drug/device development, and in some cases, physicians who are not aware of new and important safety updates.
Finally, CMS said that the preemption clause benefits applicable manufacturers and applicable GPOs by allowing them to comply with a single set of reporting requirements for this information, lessening the potential for multiple, conflicting State requirements. This benefit may also lead to potential cost-savings, since a single reporting system for reporting this information is less burdensome than multiple programs.