Policy and Medicine

The Medicare Drug Savings Act 2013

In mid-April, Senator Jay Rockefeller and 18 Senate Democrats introduced legislation to protect seniors and reduce the deficit by $141.2 billion according to the Congressional Budget Office (CBO) by “making sure pharmaceutical companies pay their share,”  reported FiercePharma.  Similar proposals were also included in the President’s most recent budget proposal and the President's Commission on Fiscal Responsibility and Reform. 

Other Senate co-sponsors include Bill Nelson (D-FL), Amy Klobuchar (D-MN), Tammy Baldwin (D-WI), Richard Blumenthal (D-CT), Barbara Boxer (D-CA), Sherrod Brown (D-OH), Dick Durbin (D-IL), Al Franken (D-MN), Angus King (I-ME), Patrick Leahy (D-VT), Jeff Merkley (D-OR), Jack Reed (D-RI), Bernie Sanders (I-VT), Brian Schatz (D-HI), Jeanne Shaheen (D-NH), Debbie Stabenow (D-MI), Tom Udall (D-NM), and Sheldon Whitehouse (D-RI). 

According to the sponsors, the Medicare Drug Savings Act would eliminate a special deal for brand-name drug manufacturers that allows them to charge Medicare higher prices for prescription drugs for some seniors and people with disabilities.  The bill would require drug companies to provide rebates to the federal government on drugs used by dual eligibles – people eligible for both Medicare and Medicaid, who are predominantly low-income seniors and people with disabilities – just as was done for dual eligibles on Medicaid before Medicare Part D was created in 2006.  Rebates would also be available to other enrollees in the low-income-subsidy plan in the Medicare Part D Prescription Drug Program. 

With the exception of Medicare Part D, all large purchasers of prescription drugs negotiate better prices, including Medicaid and private insurers.  This bill simply restores negotiated prices for low-income Medicare beneficiaries. 

This bill would correct excessive payments to drug companies, while also saving taxpayers and the federal government from footing the unnecessary cost.  Over the past ten years, the 11 largest drug companies alone took in $711.4 billion in profits, including a 62 percent increase from 2003 to 2012. 

Ranking Members Henry A. Waxman, Sander M. Levin, George Miller, Jim McDermott, and Robert E. Andrews introduced the companion bill in the House. 

“This bill would make sure drug companies no longer receive this unnecessary and excessive payment. It would responsibly help to reduce the deficit – without impacting Medicare beneficiaries – by making sure drug companies don't get more than they're due,” Senator Rockefeller said in a statement.   AARP and the National Committee to Preserve Social Security and Medicare support the legislation. 

Before the Medicare prescription drug program was created in 2006, brand-name drug manufacturers paid rebates for dually eligible beneficiaries on Medicare and Medicaid. All dual eligibles' prescription drugs were discounted by rebates negotiated by the federal government and some received additional discounts negotiated by state Medicaid plans. But since Medicare Part D was created, drug companies no longer had to provide these rebates and they have been unfairly making more money off of prescription drugs for dual eligibles at the taxpayers' expense. The bill retains incentives for drug manufacturer innovation and would not impose price controls. 

However, Matthew Bennett, senior vice president of the Pharmaceutical Research and Manufacturers of America (PhRMA), said in a statement that the legislation “would bring higher premiums and copays, more restricted access to medicines for seniors and Americans with disabilities, and diminished research on the next generation of medicines,” reported by Kaiser Health News.  “Unlike familiar consumer rebates that return savings to shoppers, this policy would undermine a successful and popular program to send ‘rebates’ to the Federal Treasury, not seniors,” Bennett said. 

340B Drug Discount Program 

In related news, FierceHealthFinance reported that the American Hospital Association (AHA) has asked the Health Resources and Services Administration (HRSA) to delay by at least six months the imposition of a new rule for the 340B drug discount program that would bar institutions from purchasing drugs for outpatients through a group purchasing organization  The delay “would give hospitals enough time to modify their inventory management practices to meet the new GPO policies and avoid expulsion from the 340B program,” the article noted.

AHA claimed the lack of public hearings on the matter left hospitals unprepared to adjust to the rule change, which was enacted on April 7.  The required changes include tweaks to overhauled inventory management systems, establishing new accounts with drug wholesalers and staff training, according to a letter sent April 3 by AHA Executive Vice President Rick Pollack to the HRSA. 

“The rule change and AHA request come amid suspicions by U.S. Senator Charles Grassley, an Iowa Republican, that hospitals have been profiting from the drug discount program. It is intended to provide low-cost pharmaceuticals to uninsured patients or those who lack the financial means to obtain them on their own.” 

“Instead, some hospitals have been using their 340B discounts to purchase drugs at steep discounts, then selling them to insured patients at hefty markups, FierceHealthcare previously reported.  Duke University Hospital, for instance, profited to the tune of $69.7 million on drugs it purchased through the 340B program in 2012.  Duke purchased the drugs for $65.8 million, then sold them to patients for $135.5 million.”

Stop Trading on Congressional Knowledge Act: Gets Kicked Down The Road for Privacy Reasons

In 2012, Congress passed the Stop Trading on Congressional Knowledge Act (STOCK Act), which originally was meant to prohibit insider trading by members of Congress and their staffs.  The legislation came after a CBS 60 Minutes investigation suggested some members of Congress were using insider information to gain a competitive edge over other investors in the stock market.   

The STOCK Act included language requiring high-level staff at nearly all federal agencies to publicly disclose their financial records,” wrote Regulatory Focus—covering about 28,000 officials.  Here is a summary of the Act from Congress. 

Last week, however, Congress voted “to entirely dismantle the STOCK Act, saying they would re-draft a similar piece of legislation that took into account concerns raised by outside groups,” writes Regulatory Focus.  “Both chambers of Congress quickly — and near silently — approved the repeal legislation at the end of last week by unanimous consent, just before heading home to their districts,” reported The Hill. 

What should be interesting about this development is that groups of individual employees, particularly in the medical and science fields, were protesting the publication of their private financial information—yet in the same realm, Congress passed the Sunshine Act which requires the same information, in even greater detail, to be published.  Are physicians who bill Medicare or federal health programs any different?  

It would be interesting to see how arguments from private physicians would play out in court under similar theories of privacy and invasion raised by the federal employees.  How is publishing payments for consulting or having ownership interests in a hospital any different from what these federal workers complained about?  While we are in favor of increased transparency when it comes to physician-industry collaboration, the STOCK Act provides a preview of things to come for physicians and teaching hospitals.   

Will patients use the database to threaten the security of physicians if they are unhappy with their treatment?  Will already rampant healthcare fraudsters use the Sunshine database to create new billing numbers and defraud physicians?  Who is really going to use this information, and how much will it expose physicians to security and identity threats?  The answers to these questions, for now, are unfortunately, uncertain with respect to the Sunshine Act. 

The bill signed by Obama, S. 716, “eliminates the requirement in the STOCK Act to make available on official websites the financial disclosure forms of employees of the executive and legislative branches other than the President, the Vice President, Members of and candidates for Congress, and several specified Presidentially nominated and Senate-confirmed officers; and delays until January 1, 2014, the date by which systems must be developed that enable public access to financial disclosure forms of covered individuals.” 

Two major elements of the law remain: (1) Insider trading is illegal, even for members of Congress and the executive branch; and (2) for those who are covered by the now-narrower law, disclosures of large stock trades are required within 45 days.  It will just be harder to get to them.  As the Wall Street Journal pointed out, “Congressional and executive-branch staff would still be required to report their stock trades publicly but people seeking the information would have to request it in person.” 

Some government-worker advocacy groups praised the decision.  “In the interest of ensuring that government works effectively, which includes safeguarding employees’ sensitive information, this was the right decision,” Senior Executives Association President Carol Bonosaro said in statement.  Bonosara noted that the new bill eliminates the ability of people to go “phishing.” 

Background 

Prior to the legislation, certain federal employees had to file financial disclosure reports with the federal government, known as an OGE-278, describing their assets and nonfederal income, as well as those of their spouses and dependent children (details here).  The OGE-278 filers include about 600 senior staff members (not all scientists) at the National Institutes of Health (NIH), according to Holli Beckerman Jaffe, director of NIH’s ethics office. 

Under the law, agencies were to post those disclosures on their Web sites, and eventually the forms were to be put in a central database that will be publicly searchable and sortable.  Currently, while the disclosures are publicly available, most are kept only at the agencies and must be requested individually.  However, online access to such forms raised tremendous concern from scientific and national security groups regarding increased vulnerability to identity theft and cybercrime. 

In September 2012, the STOCK Act was temporarily blocked by U.S. District Court Judge Alexander Williams until Oct. 31.  His opinion, noted his concerns that the law violated federal workers’ right to privacy by requiring them to disclose their bank, retirement, stock and other asset holdings.  Here is the complaint and motion for preliminary injunction. 

Shortly thereafter, Congress voted to delay the measure by six months, which President Obama signed.  Under the legislation, S.3625, reporting requirements would not go into effect until after the National Academy of Public Administration (NAPA) had time to study how best to provide for disclosure and issue recommendations to that effect—six months.  The published report pointed out “substantial national security, personal security, and law enforcement issues on this matter,” reported Jay Carney, President Barack Obama’s press secretary.  “And it is also worth noting that NAPA concluded that in the context of the executive branch, that posting requirements had no positive impact in identifying conflicts,” he added.   

At the time the STOCK Act was passed, Joshua Zimmerberg told the Washington Post that his personal financial information should not “be posted for the world to see just because he’s a federal employee.”  As chief of a cellular and molecular biophysics lab at NIH, he is one of 28,000 high-level civil servants and political appointees who would have been affected by the STOCK Act. 

Zimmerberg joined other researchers and government officials to file the injunction case that led to Judge Williams opinion, which drew heavily on a June 19 letter to Congress from an ad hoc group of former national security officials who said that “posting this detailed financial information on the Internet will jeopardize the safety of executive branch officials.”  The Senior Executive Association (SEA) was the lead plaintiff.  Other plaintiffs include several individuals and the American Foreign Service Association, the Assembly of Scientists (AOS) and the National Association of Immigration Judges.  SEA identified 11 unintended consequences of the law, “most of which we think would have a serious impact on government operations,” Bonosaro said.  Those consequences include: 

• “Federal executives will become prime targets for identity thieves.”
• “Federal employees posted overseas . . . may have their finances scrutinized by foreign interests, including terrorists.”
• “The online posting requirement could easily jeopardize the cover of U.S. intelligence personnel posted at U.S. embassies.”
• “Implementation of the Stock Act is also likely to make it significantly harder to attract capable political appointees to the current administration, as well as future administrations.” 

For reasons such as these and those cited in the letter from the former national security officials, Judge Williams said the “plaintiffs have shown that they are likely to suffer irreparable harm” because of the posting provision.  If the government publishes that information online, Williams added, it is like “a bell that one cannot unring.” 

The letter from esteemed former security officials stated that “this new uncontrolled disclosure scheme for executive branch officials will create significant threats to the national security and to the personal safety and financial security of executive branch officials and their families, especially career employees.”  “Placing complete personal financial information of all senior officials on the Internet would be a jackpot for enemies of the United States intent on finding security vulnerabilities they can exploit.” 

“I feel that this is just wrong,” Zimmerberg, speaking for himself and not his agency, said in a telephone interview.  “There’s a limit to what is in the balance between an invasion of privacy for a federal worker and a way to stop corruption.”  Interestingly, non-federal researchers and physicians will have all this payment data reported on them through the Physician Payment Sunshine Act.  

“We believe that this indiscriminate disclosure puts filers at the mercy of anyone who wishes to harm or defraud us or our families,” Scientists said in their letter.  “Many senior employees, faced with diminished privacy rights, are discussing leaving the government for the private sector.  Colleagues at universities are concerned and less likely to accept positions at national laboratories, thereby putting U.S. institutions at a disadvantage in recruiting and retaining the nation’s most prominent and creative scientists.” 

A number of senior executives said they were considering leaving the service, and a number actually did so to avoid the online posting, SEA President Carol Bonosaro said when the legislation first passed. 

In addition to the employee organizations, the union representing certain Congressional Research Service employees, Social Security administrative law judges, and immigration judges also has objected to the law.  The International Federation of Professional and Technical Employees said the Stock Act poses “a serious threat to the safety and security [of employees], not to mention the unwarranted invasion of their privacy.”

CBO Report: Improved Patient Adherence Benefits Medicare

Prescription medicines help people avoid the disability and death caused by disease, and help lower overall treatment costs. In fact, medical advances, including prescription medicines, have lowered death rates for heart disease, stroke, cancer, and other deadly diseases.  Two years ago, a report from Eli Lilly noted how if it were not for the declines in death rates from heart disease and stroke, we would lose 1 million more Americans every year.  

In addition, the 5-year survival rates for cancer have risen by 26% just since 1984.  And while HIV/AIDS was the 8th leading cause of death in the US in 1996, today, it’s not even ranked in the top 15.  Moreover, every $1 spent on statin therapy for heart attack survivors produced as much as $9.44 in health gains and routine use of beta-blockers for acute heart attack sufferers produced as high as $38.44 in health gains. 

While it is clear that people who take their drugs have enormous success in achieving better health outcomes, what is also clear is that patients who do not adhere to their medications may suffer adverse effects, thereby imposing increased and additional costs on our healthcare system.  For example, taking an antibiotic may prevent a more severe infection, and adhering to a drug regimen for a chronic condition such as diabetes or high blood pressure may prevent complications.  In either of those circumstances, taking the medication may avert hospital admissions and thus reduce the use of medical services. 

Policy changes that influence Medicare beneficiaries’ use of prescription drugs, such as those altering the cost-sharing structure of the Part D prescription drug benefit, “probably affect federal spending on their medical services.”  Consequently, the Congressional Budget Office (CBO) recently reviewed research and released a report showing that a 1% increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent.   

That estimate, which applies only to policies that directly affect the quantity of prescriptions filled, represents a change in the agency’s estimating methodology.  Likewise, a 1 percent decrease in prescription drug use would cause medical spending to increase by roughly one-fifth of 1 percent. 

For example, a policy that increased prescription drug copayments for certain Medicare beneficiaries might save $4 billion in federal drug costs in a given year but reduce the number of prescriptions filled that year by 1 percent.  That reduction in use would result in a one-fifth of 1 percent increase in the affected population’s total spending for medical services.  If that total spending would otherwise be $250 billion in that year, then those costs would increase by $0.5 billion. 

The net effect of the policy, combining the savings on drug costs and the costs of increased use of medical services, would be a savings for the federal government of $3.5 billion in that year. 

Forbes reported that “Pharmaceutical companies lose an estimated $188 billion annually in revenues in the U.S. because patients fail to take their prescribed medications, according to a study by consulting firm Capgemini.”   Moreover, the pharma industry could add a whopping $564 billion per year to global sales if patients stuck to their drug regimens as prescribed, the report found.  The loss represents 59% of all pharma revenues, which were $320 billion in the USA and $956 billion globally in 2011 according to IMS figures, PharmaTimes reported. 

Non-adherence is a problem across almost all chronic conditions, not only for diabetes, hypertension, and high cholesterol, but also for HIV, oncology, transplant, and glaucoma.  In the US diabetes market alone, revenue loss is estimated to be $11.4 billion. 

CBO Report  

Medicare’s Part D program—which was created in 2003 with the passage of the Medicare Prescription Drug, Improvement, and Modernization Act and implemented in 2006—the number of prescriptions filled by Medicare beneficiaries increased by more than 10 percent, according to one estimate.  More recently, the Part D benefit was expanded by the Affordable Care Act—which, between 2011 and 2020, is gradually closing the gap in coverage in which beneficiaries were responsible for all of the costs for their prescription drugs.4 That change is expected to further boost the use of prescription drugs. 

A substantial body of evidence indicates that people respond to changes in cost sharing by changing their consumption of prescription drugs.  From beneficiaries’ perspective, the price of a prescription drug is the portion of the prescription’s cost that they bear. The use of prescription drugs—or number of prescriptions filled—increases in response to price reductions and falls in response to price increases. That response is widespread, found within both the elderly population and the nonelderly population, and among both enrollees in public health care plans and people with private health insurance. 

Numerous studies have demonstrated the effect of price changes on the use of prescription drugs overall, and several others have found that lower prices for drugs used to treat chronic conditions improve the likelihood that patients take their medication as prescribed. 

Under its new assumption, spending on Medicare services will drop by roughly 1%. That's a savings of $35 billion out of an estimated $5.6 trillion from 2013 to 2022.

With Part D spending set to increase by $86 billion from the increased use in the next decade, the net increase in federal spending would actually be $51 billion after the $35 billion in reduced Medicare services is taken into account. 

The National Community Pharmacists Association (NPCA) commended CBO for acknowledging “the growing body of evidence verifying what community pharmacists have known for some time. Namely, that the more patients have their prescriptions filled and adhere to medications their doctors prescribe, the healthier they will be and the likelihood of costlier interventions including hospitalisations diminishes - reducing health care costs,” reported PharmaTimes.

American Academy of Pain Medicine Incoming President Asks: Without Industry Involvement - Where Will the Education and Research Funds Come From?

According to a recent article from Anesthesiology News, “The U.S. Senate Finance Committee is set to complete their investigation into the extent and implications of financial ties between the manufacturers of pain-relieving opioid drugs and professional pain societies, including the American Academy of Pain Medicine (AAPM).”  As we noted back in May of this year, the Senate sent letters to several pharmaceutical companies and professional medical associations regarding their relationships.   

According to the article, written by Lynn Webster, MD, incoming president of the AAPM, the Committee will be investigating “the amount of money provided to professional societies to create and deliver educational content on how to prescribe and consume opioid medications.”  The two senators leading the probe, Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa), “seek to establish if industry support for educational content has led to misleading information that minimizes opioid harm.”  

Consequently, as president-elect of the AAPM, the principal U.S. organization for the specialty of pain medicine, Dr. Webster welcomed “the opportunity to shed light on these issues and fear the potential for distortion.” 

Dr. Webster maintained that, “Pain professionals absolutely have a responsibility to ensure pharmaceutical companies do not push marketing messages into educational programs.”  He acknowledged the potential for problems in the creation of educational content that is underwritten by industry, such as the required education that manufacturers must fund under the Food and Drug Administration’s (FDA) recently released Risk Evaluation and Mitigation Strategy (REMS) for long-acting and extended release opioids.  Problems could include: 

• allowing marketing priorities to direct educational content
• exaggerating benefits of a medication or medical device while downplaying its risks;
• omitting mention of significant but inconvenient data; or
• failing to cite head-to-head comparisons of competing products, particularly conventional treatments.  

Consequently, Dr. Webster asserted that, “Established firewalls, already in place, must be used to prevent undue influence.”  He then explained several firewalls that are used by AAPM.  First, is unrestricted grants.  While educational content at AAPM meetings may be supported in part by unrestricted grants from pharmaceutical or medical device companies, these grants specify that the grantor have no control over the content of the presentation. 

A second firewall is the AAPM disclosure policy.  Speakers and session leaders must fully disclose relevant financial relationships, including research grants; honoraria or other payments; and advisory board or speakers’ bureau commitments.  These relationships are published openly and are available for scrutiny by session attendees. The nationally recognized Accreditation Council for Continuing Medical Education (ACCME), which regulates continuing medical education (CME), has set these standards. In 2011, the ACCME reaccredited the Academy with its highest distinction: “accreditation with commendation.” 

Dr. Webster asked that the Senate Finance Committee investigate “whether and to what extent the educational content has been influenced by dollars” from industry.  He explained that the senators should not only examine the dollar amounts, but “also the educational content itself for evidence of bias or misinformation.”  To do so, he noted that the senators must seek counsel from “unbiased professionals with appropriate credentials in the field of pain medicine—not by parties with a history of bias for or against a particular form of therapy, nor by individuals without ‘real-life’ clinical experience caring for patients with intractable pain.”   

The AAPM president-elect affirmed that medical professionals must never direct CME content based on corporate marketing priorities.  However, he correctly recognized that “not all industry involvement is harmful.”  He explained that while “good journalistic form to ‘follow the money,’ taint does not naturally and inevitably follow.”  Instead, journalists need to realize that “new and existing drugs need lots of complicated research to answer important questions. Questions like:  

• Who should get the drug and at what dosage and time points?
• What are the risks and how do they change for different study populations?
• How effective is the medication when compared with placebo or other available therapies?         

Given that industry supports all facets of American health care delivery, Dr. Webster proposed the following question: “If industry does not pay for the necessary research and education for medical professionals and patients, who will?”  He noted that while company’s have funded research “on newer pain therapies created with the goal of having less potential for harm than currently available opioid formulations,” “no such support” has come from government or other sources.   

For example, he noted how the National Institutes of Health (NIH) devotes only around 1% of its budget to pain research, despite the overwhelming need of 100 million Americans in chronic pain, as reported by the Institute of Medicine and supported by a recent Gallup poll.  Given that the government and industry are the only two viable funding sources available, he encouraged NIH and concerned senators to dig into government coffers to facilitate the pain research that is so desperately needed. 

Interestingly, Dr. Webster also pointed out that other sources of funding could also cause conflicts.  For example, he noted how a rise in overdose deaths among Medicaid enrollees in Washington state, as reported by The Seattle Times, “accompanied a government foray into medical decision making in which methadone was pushed as the preferred analgesic.  Methadone is cheaper than other opioids, but at what cost did this cost cutting take place?”  Accordingly, he noted that journalists should also follow the money to these sources that can cause harm.   

Ultimately, Dr. Webster correctly recognized that the educational initiatives that industry supports “spread information about appropriate and safe use of its products.”  Given that other companies use support from companies to educate doctors about diabetes or cancer, why should pain be any different?  And if this is what Congress and journals want, then where should the information come from?

Congress Putting Pressure on HHS to Tighten EHR Meaningful Use Standards

Several Republican Senators and House Members recently have increased pressure on Kathleen Sebelius, Secretary of the Department of Health and Human Services (HHS) expressing several concerns over several issues related to the adoption of EHRs through the Centers for Medicare & Medicaid Services (CMS) and the Office for the National Coordinator for Health IT (ONC)’s meaningful use program. 

In early October, House Republicans sent a letter to Sebelius asserting that the Stage 2 rules fail to achieve comprehensive interoperability, and leave our healthcare system in silos.  The letter was penned by Ways and Means Committee Chairman Dave Camp (R-MI), Energy and Commerce Committee Chairman Fred Upton (R-MI), Ways and Means Health Subcommittee Chairman Wally Herger (R-CA), and Energy and Commerce Health Subcommittee Chairman Joe Pitts (R-PA). 

“More than four and a half years and two final Meaningful Use rules later, it is safe to say that we are no closer to interoperability in spite of the nearly $10 billion spent.,” the letter’s authors say.  “With the bar for Meaningful Use set so low and with a focus instead on trying to pad participation rates, these challenges are predictable.  Incentive payments, particularly those funded by the Medicare trust funds and taxpayers, should be given to providers who are truly ‘meaningful users’ of EHR.” 

Camp and others want HHS to increase what is expected of meaningful users.  They say requiring a summary of transfer document 10 percent of the time is “insufficient.”  Electronic prescribing only 50 percent of the time, they say is “woefully inadequate.”   The letter also mentions the recent New York Times investigative report on coding, and how many providers may be using EHRs to abuse Medicare reimbursements.  “Hospitals and physicians who are deemed Stage 1 'meaningful users' are not required to know with certainty whether their systems are capable of exchanging information," they wrote.  

The Senate letter, written by senators, Tom Coburn (R-Okla.), Richard Burr (R-N.C.), Pat Roberts (R-Ks.), and John Thume (R-S.D.), asked the relevant staff from CMS and ONC to meet with Senate Finance and Senate Health, Education, Labor, and Pensions (HELP) Committees, noting a recent briefing by the government agencies did not give “enough time and opportunity” to cover the final rule. 

Some of the questions they asked in the letter came out of various recent media reports. This included asking if EHRs increase or reduce diagnostic tests, inappropriate EHR payments to providers, increased billing of Medicare due to EHRs, and meaningful interoperability. The senators say because Stage 2 of meaningful use directly affects the direction of health information technology in the country, they need a better understanding of these issues to conduct a proper oversight.  The Senators asked to meet no later than October 26, 2012.  

We previously wrote that the HHS Office of Inspector General (OIG) is also investigating EHRs closely, so it is likely that Congress will continue pressing HHS and ONC for more information, particularly given the amount of money being spent on implementing EHRS, the potential for abuse, and the tremendous dependence many of the provisions of the ACA have on EHRs. 

Ways and Means Committee Expresses Concern for Use of Health IT Funds

Over the past few months, we have reported several times that Congress is particularly interested in how the Department of Health and Human Services (HHS), the Office of the Inspector General (OIG) for HHS, and the Centers for Medicare and Medicaid Services (CMS) are using funds to implement programs and systems, particularly those that root out fraud, waste and abuse.   

An article back in April of this year expressed doubt over whether the money being spent by CMS was worth its return.  Specifically, a computer system designed to prevent fraud had only returned approximately $8,000—only one bad claim.   

Pushing for more transparency about how money is spent to implement programs not related to the Medicare and Medicaid programs, as a result of assignments that have been made to CMS through the Affordable Care Act (ACA), the Ways & Means Committee of the U.S. House of Representatives requires that the Government Accountability Office’s (GAO) Financial Management and Assurance (FMA) team review such expenditures.   

In a letter sent to GAO, the Committee explained how the Obama Admistration chose to move the Center for Consumer Information and Insurance Oversight (CCIIO), the agency in charge of implementing much of the ACA, into a business unit within CMS.  As was expected, Democrats “vastly understated” the extent of funding necessary to implement the law, as a result, leading to spending of CMS dollars that may be inappropriate.   

One news outlet reported that “By embedding the CCIIO within CMS, the administration should have greater ease finding funds within CMS to enable CCIIO to operate as part of the HHS secretary’s office.”   

In order to better understand the magnitude of money and resources being taken from the Medicare program, the Committee requested GAO’s FMA to conduct a complete full financial analysis, including financial and forensic audits, of CMS activity since the ACA was signed into law.  They asked for specifics about CMS’ financial and staff resources regarding the CCIIO.  The information is due to the committee by October 15, 2012. 

It will be interesting to see just exactly how much money is being spent on the CCIIO, particularly in light of the fact that CMS has recently delayed several important pieces of the ACA, most notably, the Physician Payment Sunshine Act.  Moreover, if Obama is reelected, will the Administration continue its current structure and use of CMS funds to operate the CCIIO? 

The revelation that healthcare reform is taking more resources and staff than expected is no surprise.  According to a study from Georgetown University's Center on Education and Workforce issued last month, the nation needs 5.6 million new jobs by 2020 to meet the growing demand for care under health reform.

The 2012 Elections and it's Impact on Healthcare Policy

Last week, in another historic Presidential election, Americans reelected President Barack Obama in a decisive victory that will lead to the continued full implementation of the landmark Patient Protection and Affordable Care Act (PPACA or ACA).  The Senate will remain in the control of Democrats, adding several more seats.  The House, however, will remain in Republican control—making it very difficult to overturn or change any piece of the ACA in the upcoming Congressional session.   

Shares in hospitals and other healthcare companies that will benefit from the health reform law jumped last week, but health insurers fell as the law sets limits on their profits and sets mandates on coverage. 

Big pieces of the ACA will be moving forward—including the Medical Loss Ratio (MLR) for insurance companies; coverage of pre-existing conditions; insurance for 26-year-olds; and bans on lifetime limits for insurance coverage.  It also means that the Patient Centered Outcomes and Research Institute (PCORI), which will carry out and offer grants for comparative effectiveness research will continue.   

Importantly for the Senate, there will be four (4) openings on the Senate Finance Committee, which oversees all of the federal dollars spent on health care; one opening on the Senate Health Education Labor and Pensions (HELP) Committee; and the Special Committee on Aging will be losing its Chairman Herb Kohl (D-WI)—who was co-author of the Physician Payment Sunshine Act—which we are watching closely for the final regulations.   

In addition to these policies and changes, Congress and the Obama administration must also face the Physician Payment Fix, or Sustainable Growth Rate (SGR)—which is scheduled to shrink by 29.5 percent on January 1, 2013—and another debt ceiling fight.   

Many health agencies will be affected by the President’s re-election.  Below is a summary of some of the major shifts in personnel, as well as some analysis and projections for how the ACA will continue to be implemented, including dates and important deadlines.  Analysis comes from several news stories, appropriately references, as well as DC based healthcare lobbying firm Thorn Run Partners and law firm SNR Denton’s 34-page report on what’s ahead for the 113th Congress and the Obama Administration over the next four years.

With many proposed and finalized regulations set to be issued in the next few weeks by many federal health agencies, such as the Centers for Medicare and Medicaid Services (CMS), the Office of the National Coordinator for Health Information Technology (ONCHIT), and the Department of Health and Human Services (HHS), healthcare stakeholders will have their hands full.  Rules and regulations will include and issues affected by the election include: 

Medicare 

• Sequestration – Medicare could be cut by two percent
• 2.3% Medical Device Tax
• Health Plan Provided Tax – The ACA included a health plan tax to fund part of the ACA.  Health plans serving public programs (Medicare, Medicaid and CHIP) are very concerned about the impact of the tax and want to be carved-out from the tax. 
• Medicare Part D Rebates –The Congressional Budget Office (CBO) has scored additional rebates in the Part D program as a savings well over $100 billion to the federal government; Average Sales Price (ASP) – Adjustments in the formula could be made to generate budget savings.
• Independent Advisory Board (IPAB) – with Democrat gains it is unlikely to be repealed.
• Reauthorization of Medicare Advantage Special Needs Plans (SNPs) – authorization for the program expires at the end of 2013.  However, to ensure the 2014 contract year can proceed, Congress must act to extend authorization by early 2013.  MedPAC has recommended changes to the program.
• The Medicare Competitive Bidding Program for durable medical equipment is set to expand drastically in 2013, although some are working to postpone its implementation or replace it entirely.  

The ACA will also include $716 billion in Medicare cuts. That’s a major source of funding for the law’s expanded health coverage, and it comes mainly from trimming Medicare payments to providers and paying less to Medicare Advantage plans in high-spending areas.  The catch is, about 70 percent of the first wave of Medicare Advantage cuts are effectively being masked right now through a separate program giving plans quality bonus payments, according to the Government Accountability Office.  Over the next two years, the bonuses offset less of the law’s cuts. 

Medicaid 

• States making final decisions on Medicaid expansion to all persons with incomes below 133 percent of the federal poverty level.  The ACA provides 100 percent federal funding for 2014, 2015 and 2016.  In 2017 the rate begins to decrease, but never below 90 percent.  However, some are concerned this commitment could be altered.
• Medicaid Per Capita Caps, Block Grants or a Blended Federal Rate – As part of entitlement reform discussions, it is possible Congress could alter the formula used to determine how much funding states receive for their Medicaid programs.
• Medicaid Provider Taxes – Proposals to reduce the cap on provider taxes, thus limiting the amount of funding they can generate, have been advanced by the Simpson-Bowles Commission and others.
• Duals Demonstrations - The Centers for Medicare and Medicaid Services (CMS) is expected to proceed to the roll out of the demonstrations projects in 26 states to integrate Medicare and Medicaid benefits and services for dual-eligible beneficiaries. 

A handful of red-state governors, like Texas Gov. Rick Perry and Florida Gov. Rick Scott, have ruled out expansion. 

Insurance Exchanges 

The insurance exchanges are marketplaces, run either by the state, the federal government, or both, where people can get insurance coverage if they do not have insurance through their employer or a government program like Medicare.  Of course, if an individual does not have health insurance they will be penalized or taxed—unless they fall in one of the several exceptions, which are mostly related to income and poverty levels and the ACA provides grants or subsidizes such persons insurance.  The Congressional Budget Office has already raised its cost estimates for the subsidies by $112 billion — to $574 billion between 2012 and 2019 — before they even start. 

The first year, the penalty for ignoring it is only $95, or 1 percent of income, whichever is greater.  But the health plans have to start covering everyone with pre-existing conditions in 2014.  The penalties rise by 2016, but that makes two years that the insurers have to take in everyone, before the higher penalties help bring more healthy people their way. 

• States must indicate by this Friday November 16, 2013 the type of exchange they plan to operate – state, partnership or federally facilitated.
• Those states that have not chosen their exchange benchmark health plan are expected to do so by November 16, 2012 (the original deadline was October 1).
• The Center for Consumer Information and Insurance Oversight (CCIIO) must certify by January 1, 2013 whether a state is ready to pursue a state exchange.
• Numerous regulations governing state health exchanges are needed to allow states to create or finalize their exchanges.
• Some have suggested federal subsidies for persons receiving coverage inside of the health insurance exchanges could be reduced during deficit negotiations. 

According to POLITICO, 13 states and the District of Columbia have said they’ll definitely set up their own exchanges, and there are “somewhere between 20 and 30” states that could either build them or seek partnerships, citing to Joel Ario, managing director of Manatt Health Solutions and the former director of the HHS Office of Health Insurance Exchanges.  The rest will let the feds do it.  Here’s a map of states from Kaiser.  

There is a lot of risk that comes with the exchanges.  “To be successful, the health exchanges have to attract a mix of healthy and sick people so that the costs balance out.  There’s a risk that some won’t attract enough healthy people.  That means the people who do join will be those with health problems — leading to high premiums and the “rate shock” Holtz-Eakin warned about.”   

How it’s shaping up should be clear when enrollment opens next October. Kaiser’s Altman expects a mixed verdict, because states are so diverse.  “There will be great success stories and there will be failures, and a lot of state exchanges that will fall somewhere in the middle,” he said. 

There is also the numerous surveys and reports showing that many employers will decide its cheaper to stop covering their workers, pay a fine, and let them get coverage through the exchanges instead.   

HHS 

Many speculate that HHS Secretary Kathleen Sebelius will remain in office, particularly because holding another hearing on the Senate to confirm a new Secretary would open the door for Republicans to make continued criticisms of the ACA. 

Food and Drug Administration (FDA) 

Most also speculate that FDA Commissioner Margaret Hamburg is expected to stay at least through the first year of Obama’s second term, which is typical for senior staff.  Some speculate that Hamburg’s continued presence will mean continued scrutiny of manufacturers, and a continued focus on stepping up the pace of drug approvals.   

Several of Hamburg’s senior advisors have already shifted positions.  Jeannie Ireland has changed jobs and David Dorsey, a former Kennedy staffer, has moved out of Director in the Office of Policy—the regulations writing office.  Center for Drug Evaluation and Research (CDER) Director Janet Woodcock, and John Jenkins, head of CDER’s Office of New Drugs, are expected to stay in place, at least for now.  These folks are key to the pipeline for new drugs, which has been operating quite smoothly during the reign of Commissioner Hamburg.  Rachel Behrman, who supervises the Office of Prescription Drug Promotion (OPDP), also is expected to remain, which likely will lead to few changes in the OPDP staff or policies.  

Forbes did a good article on the outlook of the election for pharma and a historical look at FDA during Obama’s first term.  FDA Matters also did a good analysis of what the agency would look like after the election.  

On the Horizon  

There is a good possibility of a “lame duck” session in Congress. Without a deal on the “fiscal cliff,” the sequestration of government staff funds could cause huge layoffs throughout government, including FDA’s CDER—and up to $300 million at FDA.  Assuming that at least a short-term solution is found to avoid the “fiscal cliff,” the larger debate on the reform of the corporate tax code will begin in 2013.  

The Coalition for Healthcare Communications expects pressure on privacy from Senate Democrats and Obama appointees who will continue efforts  to limit the marketing use of data collected online.  Sen. Jay Rockefeller (D-WV), the most aggressive Member seeking limits and explicit op-out rules, will continue as the key chairman of the Senate Commerce Committee. On the other hand, two major industry supporters won re-election to the Senate: New York’s Kirsten Gillibrand and Kansas’ Claire McCaskill.   

Meanwhile, the House Commerce Committee leadership, which largely is supportive of the self-regulatory privacy program, will see few Member or staff shifts.  However, senior staff members who favor privacy rules are expected to remain in control at both the Federal Trade Commission (FTC) and the Department of Commerce. 

In addition to these issues, Liberty University is challenging the constitutionality of the ACA provision that requires most businesses with more than 50 workers to provide health coverage or pay a fine—and has vowed to fight all the way to the Supreme Court.  There are also numerous lawsuits regarding the mandatory requirement that insurance cover contraception. 

CMS Opens Anti-Fraud Command Center – Senators Question FPS Effectiveness

The Centers for Medicare & Medicaid Services (CMS) recently announced the Program Integrity Commend Center in Baltimore to what it hopes will speed up anti-fraud efforts.   

It’s a $3.6 million facility.  Equipped with a couple of dozen computer workstations, giant screens and new computerized detection systems, the facility will pull together some of the country’s biggest experts in the government's campaign to fight fraud, the Associated Press reported.  The Obama administration is asking Congress for $2 million to operate the command center. 

Several members from Congress, the Department of Health and Human Services (HHS), and the media, obtained invitations to walk through the new center.  The invitation to cover the event said reporters would see “examples of real-time missions,” but Medicare spokesman Brian Cook acknowledged that all they were shown were “demonstrations” of how the command center is supposed to work. 

Republicans, however, are not yet convinced the brand new facility is worth the taxpayer dollars.  As we noted back in April of this year, Senators from both sides of the aisle expressed concern about CMS’ Fraud Prevention System (FPS) as part of the National Fraud Prevention Program (NFPP), which was adopted by CMS fulfilling the mandates in the Small Business Jobs Act of 2010.  In fact, the system, which went online in mid-2011, had prevented exactly one bad claim by late last year. That totaled $7,591.  The new system and center will have to report to Congress soon on its progress.   

This new command center comes in addition to the recent launch of a ground-breaking partnership among the federal government, State officials, several leading private health insurance organizations, and other health care anti-fraud groups to prevent health care fraud.  “This voluntary, collaborative arrangement uniting public and private organizations is the next step in the Obama administration’s efforts to combat health care fraud and safeguard health care dollars to better protect taxpayers and consumers.” 

Issues with New Command Center and FPS 

Senators Orrin Hatch (R-Utah) and Tom Coburn (R-Oklahoma) said the Obama administration isn’t providing enough information about the FPS and new computer systems being used to identify suspicious Medicare and Medicaid billings.  Computerized screening of claims is at the heart of the command center’s mission.  The Senators requested specific data regarding performance metrics, targeting of claims for review and actual program results.   

“After our offices saw a live demonstration of the FPS, we have concluded there is a significant disconnect between the rhetorical claims made by the administration and the system’s actual current operational status,”  Senators Hatch and Coburn wrote in a letter to CMS Acting Administrator Marilyn Tavenner. 

Although CMS called the system “mature” and spent $77 million to procure the contract for FPS, Hatch and Coburn said “the number of predictive analytic algorithms, or ‘models,’ being applied to the live payment stream are underwhelming at best.  CMS should have hundreds of models in operation, but instead there is a handful, and even the contract fulfillment only requires a few dozen.”

The Senators also noted that very few models were specifically designed to target procedures, services or supplies at high risk for fraud.  They also expressed their concern that the video screen alone cost “several hundred thousand dollars.”   

“Institutionalizing relationships through establishing a (command) center may be useful, but if huge sums of money have indeed been spent on a video screen while other common-sense recommendations may have not been implemented due to ‘resource concerns,’ this seems to be a case of misplaced priorities,” the senators wrote.  They noted that “CMS needs to do a better job prioritizing what claims are under review and how those claims are reviewed.  Rather than merely prioritize the “top 10” possible fraudulent claims or schemes, they recommended that CMS maximize its efforts with law enforcement and its contractors to review dozens, even hundreds, of flagged claims concurrently.   

The Senators noted that CMS seems to agree with the idea that the FPS can demonstrate its effectiveness.  In an announcement earlier this year, CMS said that “reversing the traditional pay-and-chase approach to program integrity is the main goal of the National Fraud Prevention Program (NFPP).”   Despite this rhetorical commitment, the Senators recognized that “CMS has not been fully transparent regarding what progress the agency is making in implementing the system and how successful the efforts of the system have been to date.” 

In hearings, meetings, and public letters over the past several months, the Senators have repeatedly pressed CMS for a set of specific metrics and timelines for the implementation of the FPS and the metrics for measuring its performance, including the agency’s view on “what determines success.”  The responses have been polite, “but vague and largely qualitative.”  The Senators said this is concerning, because the old adage is true: “one cannot manage what one cannot measure.”

CMS, however, touted the new facility, which will bring together clinicians, data analysts, fraud investigators and policy experts in one physical space to “build and improve our sophisticated new predictive analytics that spot fraud, and to then move quickly on a lead, once potential fraud is identified,” Peter Budetti, CMS deputy administrator and director of the Center for Program Integrity, said in a blog post.  That coordination will help authorities move faster on investigations that usually take days or weeks to just hours, according to CMS.

Budetti said the goal is to let the government’s far-flung gumshoes talk directly with the experts running the new computerized detection systems, dramatically reducing the time it takes to conduct investigations.  “Our expectation is that this center will pay for itself many times over,” Budetti said in the AP article.  Medicare currently loses an estimated $60 billion dollars each year to waste, fraud and abuse.

Conducting what amounted to her first formal inspection, HHS Secretary Kathleen Sebelius set the bar high for the command center.  She told staffers it’s time for the government to move beyond its old strategy of “pay and chase,” pursuing fraudsters after Medicare and Medicaid have already paid.  “Preventing fraud and abuse is what this effort is about,” she said.   

The secretary spoke with three groups of staffers: one responsible for developing computer models to query billing data for suspicious patterns; another in charge of investigating data generated by the computer models, looking for mistakes as well as real fraud; and a third handling coordination with law enforcement around the country. Staffers said they expect the coordination to cut the time it takes to investigate suspected fraud schemes from months to days and weeks. 

Request for Information 

In concluding their letter, Senators Hatch and Coburn asked CMS to submit to them by
this past September, the following information: 

• A work plan for the FPS for the next six quarters, outlining specific goals, deliverables, timeframes, and metrics for evaluation.  
• An explanation of how the “One PI” (One Program Integrity –an effort to coordinate all PI pieces adopted by CMS in recent years) fits with FPS and NFPP. 
• An explanation of how the Integrated Data Repository and One PI efforts are now funded.
• An explanation of the need for the “command center” in Baltimore to run the FPS, as well as an account of the expenditures and staffing associated with the new “command center.” Please clarify the role and integration of the ZPIC staff with regard to the new center and what is different about the new center that requires its establishment.
• A specific explanation of how the fraud referrals from the 1-800 Medicare hotline –some of which have reportedly already been examined by the ZPICs and discarded —are now being integrated into the FPS.
• An explanation of the additional steps CMS must take if contractors identify false store fronts for Medicare billing addresses using technologies like Google Earth.
• A detailed explanation of the institutionalized feedback mechanisms CMS has in place to develop new models based on the experience, insight, and advice of all of its program integrity contractors.
• An explanation of how CMS handles cases of alleged or possible fraud that law enforcement declines to pursue.
• A timeframe for when CMS will comprehensively outline how it will assess the success of the FPS system.
• An explanation of what other possible revisions or modifications CMS may be considering to current auditing procedures, including changes to the scope of work for various CMS contractors.
• A detailed breakdown of all costs associated with FPS and the NFPP including administrative, implementation and operational costs.  Please include specific information about how the $77 million paid for the FPS contract is being divided amongst the various contractors and subcontractors working on FPS as well as detailed accounting of all costs, including staffing, for the FPS command center in Baltimore.
• An explanation of why CMS has not to date, been able to solely use FPS to stop any claims before they are paid.
• An explanation of why CMS has not used its exclusion authority to prevent fraudulent providers from continuing to bill the Medicare program. 
• A detailed breakdown of what dollar amount has been recouped as a direct result of enforcement actions taken against providers or suppliers who were first identified as problematic through FPS.
• A detailed explanation of what actions CMS took in response to our identifying more than three dozen physicians and non-physician practitioners with felony convictions or guilty pleas who have retained their Medicare billing privileges and/or the ability to order and refer in the Medicare program in November of last year.  Please details when actions were taken with regard to each individual. 

In addition, the Senators noted the new public-private partnership, and requested the following information (citing vagueness in this proposed partnership): 

• Specifics regarding exactly how this collaboration will work including what entities will be involved, whether HHS/CMS or another entity will be overseeing the effort and a timeline for expected key milestones of the effort.
• A step-by-step explanation of how the information will be shared (e.g., what systems will be used to transmit the data), what authorities allow the exchange of information, what impediments exist to sharing information (e.g., statutory language) and where the information will be stored/analyzed.
• A description of the third party who will be analyzing the data, as well as an explanation of how that entity will be selected and what their capabilities are to integrate and analyze such a large amount of information.
• Specifics regarding what will happen when leads are identified, how that information will be disseminated, and what the process will be for following up on those leads. 

Conclusion 

Just like alot of other projects the CMS Anti-Fraud Center may not be working on opening day but over time that should change considerably.   As with any new venture, it will take some time to work the bugs out.  Hopefully in the end, under the right leadership it will work out.

 

 

Physician Payment Sunshine Act: Senate Special Committee on Aging Roundtable “Let the Sunshine in: Implementing the Physician Payment Sunshine Act"

The U.S. Senate Special Committee on Aging held a roundtable discussion entitled, “Let the Sunshine in: Implementing the Physician Payments Sunshine Act.”  As we have written many times over the last four years, the Physician Payment Sunshine Act (Sunshine Act)—Section 6002 of the Affordable Care Act (ACA)—requires public disclosure of the financial relationships between physicians and applicable manufacturers, including pharmaceutical, medical device and biologics companies.   

The law also required the Department of Health and Human Services (HHS) to establish reporting procedures for manufacturers to submit information, as well as procedures for making that information available to the public, by October 1, 2011.  While the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule in December 2011, the law has yet to be implemented. 

The roundtable was moderated by Dr. Mark McClellan, Director, Engelberg Center for Health Care Reform at the Brookings Institution, and former CMS Administration and Commissioner of the Food and Drug Administration.  Senators Charles Grassley (R-IA) and Chairman of the Aging Committee Herb Kohl (D-WI)—co-authors of the Sunshine Act—made opening remarks.  Senator Richard Blumenthal (D-CT) also made comments.  While the CMS representative was in attendance, he not able to give substantive comment on the finalization of the rule—frequently noting he could not speak on a particular area or timeline.  Other round table members and their written statements included:

Diane Biagianti, Vice President, Chief Responsibility Officer, Edwards Lifesciences, Irvine, CA

Niall Brennan, Director, Policy and Data Analysis Group, Centers for Medicare and Medicaid Services, Washington, DC

Daniel Carlat, MD, Project Director, Pew Charitable Trusts, Washington, DC

Jeremy Lazarus, MD, President, American Medical Association, Washington, DC

Elizabeth O'Farrell, Senior Vice President, Policy and Finance Eli Lilly & Company, Indianapolis, IN

Douglas Peddicord, Ph.D., Executive Director, Association of Clinical Research Association (ACRO), Washington, DC

Charles Rosen, MD, Clinical Professor of Orthopedic Surgery, University of California, Irvine School of Medicine, Orange, CA

James H. Scully, Jr., MD, Medical Director and CEO, American Psychiatric Association, Arlington, VA  

Both Kohl and Grassley expressed their disappointment that almost one year after the statutory deadline to implement the Sunshine Act, and over two years since the passage of the ACA, CMS has still not issued a finalized rule.  They both expressed reaching out to CMS numerous times over the past year get a timeline for implementation for CMS, which has said it expects a final rule by the end of the year. 

Interestingly, Grassley expressed concern that “rumors” indicated that the rule was final, and that the Office of Management and Budget (OMB), which must review all regulations before they can be finalized, is stalling the rule until after the presidential election.  Grassley expressed his frustration, and noted the consequences the delay was having on industry and consumers due to the lack of guidance.  He recognized how companies need to buy and implement systems to track payments, train their employees, and ensure proper use of such systems.   

Kohl noted that the bill was “never meant to be burdensome.”  However, consumers and manufacturers have been left “in the dark” without a final rule.  Accordingly Kohl and Grassley urged CMS to finish the rules “and ensure that the definitions and guidelines are clear and workable for industry and patients alike … and the information is available to the public … easily understood, and provide[d with] enough context for patients to understand why their doctors’ names appear on this website.    

One interesting exchange happened when Senator Blumenthal asked if CMS could specifically reaffirm the time line for implementation of the bill including the date of data collection.  CMS acknowledged that this was a difficult question to answer as they were still in the clearance process, but they were hopeful that some data collection will occur in 2013.  Senator Blumenthal was not pleased with the use of the word hope and was encouraging CMS to provide more certainty. 

Consequently, Dr. McClellan focused the hearing on several major areas of concern: 

1. Continuing medical education (CME)
2. Payments for direct and indirect research
3. Indirect payments/third party payments
4. Implementation
5. Public reporting, online website
6. Process for resolving payment reporting disputes between manufacturers and doctors 

Continuing Medical Education (CME) 

As they acknowledged, CMS received numerous comments regarding CME and the impact the Sunshine Act may have on CME stakeholders.  American Medical Association (AMA) President Jeremy A. Lazarus, MD, provided substantial comments indicating AMA’s support for excluding certified CME payments from Sunshine Act reporting.  He noted that CMS’s proposed inclusion of certified CME is inappropriate because “the statutory language does not support such an interpretation.” 

With respect to CME, Lazaurs noted how AMA’s House of Delegates adopted an ethics policy on Financial Relationships with Industry in CME proposed by AMA’s Council on Ethical and Judicial Affairs (CEJA), which identifies the core ethical principles of transparency, independence, and accountability.  The policy provides practical ethical guidance to maintain the independence and integrity of continuing professional education and promote public trust. 

The AMA agreed that other educational activities including those that are characterized as CME (but which are not certified) could be subject to reporting as there could be direct transfers of value to individual physicians and industry could control and/or influence the content of the educational materials. He explained, however, that certified CME is independent and manufacturers have no control or input into the content, the speakers, slides or the attendees. In light of the foregoing, the AMA asserted that certified CME is not covered by the Sunshine Act and CMS should make this clear. 

Of interest, AMA noted that previous versions of the Sunshine Act, actually required reporting on CME or other educational programs.  Accordingly, because the statute does not include a reference to CME, AMA argued that the statutory language is clear “and certified CME does not involve transfers that trigger reporting.” 

On a similar note, Eli Lilly maintained that indirect payments—which CME would fall under—be reportable only when the applicable manufacturer controls or influences the selection of the covered recipients engaged by the third party.  Lilly noted that requiring such third party payment reporting based on CMS’ proposed standard would “require substantial changes in its existing processes to achieve.” Further, “such an expanded approach would challenge the independence of third parties and their justifiable interest in protecting their own dealings and compensation arrangements as proprietary and confidential.”  

Only one panel member—Dr. Charles Rosen, Clinical Professor of Orthopedic Surgery, University of California, Irvine School of Medicine was against the idea of exempting certified or accredited CME from reporting.  Dr. Rosen, however, seemed to have a misunderstanding of the accredited CME process for accredited providers that receive grants or support from pharmaceutical and device manufacturers.  In fact, Dr. Rosen repeatedly referred to the entity as the ACGME instead of the Accreditation Council for Continuing Medical Education (ACCME) not graduate medical education.   

Nevertheless, the strong support offered by the AMA, and the agreement among other panel members—including the lack of any other real objection to a certified CME exemption—demonstrated a clear consensus that certified CME is beyond the intent of Congress and the scope of the Sunshine Act.   

45-Day Review, Dispute Resolution 

AMA expressed its concern that the proposed rule does not require manufacturers to provide physicians with the option of an ongoing opportunity to check reports nor does it indicate that the agency or some other independent third party will arbitrate disputes between physicians and manufacturers. They were also concerned with having only the 45-window once a year to challenge reports.  AMA noted that 45 days is a minimum, and that when disputes occur, Congress showed no intent that such disputed payments still be reported in the same time frame.  As a result, AMA maintained that the proposed rule would deny physicians substantive and procedural due process rights. 

Instead, AMA asked that CMS provide physicians with ongoing access to reports to make modifications and establish a neutral arbiter to resolve disputes.  AMA’s concern was that inaccurate reporting could mislead people, leading to government investigations, disciplinary actions, and other adverse consequences to physicians.   

Covered Recipient Notification/Preview: Under Edwards Lifesciences’ voluntary disclosure program, we provide physicians with reasonable notice and a preview of the information we plan to publish on our website. This gives them a better understanding of the process, sets their expectations so that they can respond to patient inquiries, and provides them an opportunity to verify our data. CMS’s draft regulation appropriately contemplates the need for a dispute resolution process prior to publication by CMS, and we believe that providing a minimum amount of time for a reasonable “back-and-forth” between the manufacturer and physician is necessary once CMS makes the data available to physicians.

Accurate Attribution, Meals 

AMA and several others took issue with CMS’ proposal to attribute a transfer of value/payment to a physician even when a physician did not receive value directly (and even in some instances indirectly) based on employment, affiliation, or association with an entity or person that did receive a direct transfer. AMA noted, however, that the Sunshine Act provides for actual transfers of value to a covered physician, not estimates.  CMS’ proposal to apportion payments among physicians in the organization or institution could result in grossly misleading reporting.   

Physicians employed by a large organization or institution could have funding and transfers imputed to their report that they cannot reject, did not receive directly (or even indirectly), and for which they have no knowledge so they are unable to effectively challenge it.  AMA also strongly opposed CMS' proposal to attribute to a physician transfers of value or payment that are made to other individuals where the physician personally did not request the transfer, it was not designated on their behalf, and they did not receive it. 

In particular, this issue was addressed regarding the provisions of meals or food. Lilly maintained that the meal allocation methodology in the proposed rule is unworkable and inappropriate in several ways:  

(1)  It would require applicable manufacturers to undertake the operationally unmanageable task of identifying and attributing value to physicians that do not partake in a meal but are employed by or associated with a group practice or department;

(2)  It would require allocation of meal expenses to physicians with whom the applicable manufacturer does not actually interact (and may be legally restricted from interacting); and

(3)  It would force attribution to physicians and/or teaching hospitals of meal value provided to non-physician employees, functionally broa-dening the statutory definition of “covered recipient.”  

Lilly asserted that the final rule should not force manufacturers to attribute value to anyone who does not actually receive a meal because it is factually inaccurate and therefore misleading and will result in disputes and confusion regarding the reliability and accuracy of the reported data. Further, “requiring manufacturers to identify affiliations and employment relationships for persons attending business meals adds an inordinate level of complexity in record keeping and related processes, which will substantially increase the burden and cost relative to the added benefits of these incremental disclosures. Finally, flexibility will be necessary to address variables such as opt-outs, excess food, and no-shows.”  

Implementation 

Diane Biagianti, Vice President and Chief Responsibility Officer Edwards Lifesciences Corporation, expressed her concern about implementing the Sunshine Act, noting that it took over 6 months to revamp and automate their systems, processes and procedures to meet the requirements under the law.  She also noted that it may also take several months to adjust their current reporting systems – and launch an effective employee training program – if they have not guessed properly on what CMS will require. 

She recognized that other manufacturers, who may not have their own voluntary program or the resources to implement fully in anticipation of the final regulations, may not be in as enviable position as Edwards in terms of preparation. Biagianti noted that a majority of medical device companies in the U.S. are small to midsized businesses that are less likely to have the resources to do this quickly.   

As the first medical device company to implement such a program on a voluntary basis, she noted how Edwards was “challenged to develop the policies that would apply to our own reporting program, to develop the systems and processes to manage the data, and to work out discrepancies in the unexpected situations that can sometimes arise through the normal course of business.”   

While Edwards was able to build and test their system for compliance, she noted how the company is “not as large and complex compared to some others.”  Nevertheless, she explained how Edwards still had to “develop systems to merge data from different financial reporting systems around the world to ensure that if any of our global operations incur an expense related to a U.S. physician, we are able to accurately capture and report that information.”  On this point, she noted the difficulty of reporting and aggregating without a unique indemnification number for each physician.  As a result, she recommended that CMS should publish a list of unique identification numbers for teaching hospitals and physicians. 

Although it was pointed out that a recent survey of industry executives said they were somewhat ready with implementing the Sunshine Act, this survey may have little value given that such comments were based off the proposed rule and much is likely to change between now and the finalized version.   

Identifying Covered Recipients 

Concern was also expressed about accurately capturing transfers of value to third parties “At the request of or designated on behalf of. . .” covered recipients. For example, individual clinicians may set up or work for small businesses that manage the financial transactions related to their consulting arrangements. Sometimes these businesses have names that provide data managers with little indication of any association with a physician (e.g., “Pinetree, LLC”). Even with aggressive employee training and education, it can be very challenging to identify every construct that could be used to manage a physician practice. Moreover, it is generally unknown by a medical device company how much, if any, of the compensation paid to the entity is received by the physician.  

In the interest of time, it was recommended that CMS take the approach proposed by AdvaMed: where a transfer of value is reportable to the Internal Revenue Service as gross income attributed to a covered recipient by the medical device company, it should qualify for reporting by that company under the Sunshine provisions.  In his written comments, Daniel Carlat, MD, Director of the Prescription Project for Pew Charitable Trusts, said that such an approach “allows for a possible scenario in which physicians could deliberately create LLCs or other entities so that the payments would be reported under a corporate name, as a way of avoiding disclosure under their own names.” 

Context of Payments  

Many panel members also emphasized the importance of manufacturers being able to provide ample opportunity to voluntarily provide meaningful context surrounding a transfer of value.  For example, information regarding the contribution an expert physician provided to a research project related to a disease she is uniquely familiar with could be very valuable to a patient’s understanding of that physician’s clinical capabilities.  Some suggested including different web pages for research payments so the public understood the context more.   

Research Payments – Direct and Indirect  

Douglas Peddicord, Ph.D., Executive Director, Association of Clinical Research Association (ACRO), Washington, DC, spoke primarily about the reporting of research payments.  He expressed his concern about research payment reporting by noting that 24% of doctors in the U.S. who conduct clinical research would be less likely to participate in the research if revenues (not revenues in excess of expenses or “profits” but gross revenues which is what CMS’s proposed rule requires) were disclosed, according to a 2010 survey.  Losing this many researchers will slow innovation and delay the delivery of needed treatments for patients. 

In contract research organizations (CROs), nearly all payments made to physicians and teaching hospitals on behalf of applicable manufacturers are “pass-throughs” for research; that is, the conduct of clinical trials. On average, CROs work with more than 500 research sponsors – applicable manufacturers – annually.  Payments can be made for basic research activities – for screening and recruiting patients, for engaging with the individual in the informed consent process, for administering test articles and monitoring patient reactions, for performing medical procedures, record-keeping and data submission, and the myriad activities involved in following a research protocol that is meant to produce accurate data for the evaluation of the safety and efficacy of a new drug, biologic or medical device by the FDA and other regulators. 

ACRO pointed to many inconsistencies with CMS’ proposal to report direct and indirect research payments, and urged CMS to exclude indirect payments from reporting.  While the Act requires reporting indirect payments and transfers that are made to a third party at the request of the physician or designated on behalf of the physician, “many payments related to research, such as travel and food costs, are not made at the request of a covered recipient or designated on behalf of a covered recipient, but are entirely incidental and thus, not reportable under the Act.” 

Instead, ACRO a standard for research payments or transfers of value that provides that in instances where a manufacturer (or CRO on its behalf) does not know the value of specific payments or imputed benefits that are presumed to flow to individual covered recipients and the payment or transfer is not made at the request of a covered recipient or designated on behalf of a covered recipient, such payments or transfers are not reportable.  To illustrate, to the extent that a manufacturer’s visibility into payments for research stops at the physician practice group or teaching hospital – and does not continue down to the specific dollar amount (whether gross or net ‘payment’) that ultimately flows to investigator A or B or C, the report that should be made to the Department by the manufacturer is of the total amount paid to covered recipients and there should not be any further effort required to derive or impute sub-amounts or divisions among physician recipients, to the extent that the manufacturer is not aware of those payments or transfers of value today. 

ACRO also recognized the tremendous compliance burden regarding tracing research payments, not only for manufacturers but on the physicians and hospitals who would be asked to report back to manufacturers the distribution of both direct and indirect payments to-the-penny, because that is the level of transparency that manufacturers will now believe they must have.  ACRO noted that CMS clearly underestimated the costs of dealing with such compliance and that the proposed rule “would force physicians to function as accountants or auditors to verify financial information that has nothing to do with the delivery of care or conduct of research within a medical practice or hospital.” 

ACRO also maintained that for research, all payments and transfers of value associated with a research project should be aggregated under the category of research, even if some of the transfers of value come in the form of food, travel, equipment, and the like—arguing against the “nature of payment” segregable categories.  Simply, if a payment or transfer of value occurs incidentally to a research project, the transfer of value would not occur at all absent the physician’s participation in the research project. Thus, to the extent that such payments or transfers are tracked to specific covered recipients, “the travel, food and other costs should be reported as research payments.”  

ACRO made an important point about bundling such payments: for those researchers whose payments would be delayed for four years, it would be misleading and inconsistent with the intent of the law to publish travel payments for researchers who’s other payments for research would not be published.  ACRO was also concerned about the potential for double and even triple counting of research payments that flow “directly” to teaching hospitals and “indirectly” to intermediary organizations and then “indirectly” again down to physician investigators. 

In addition, ACRO recommended that physicians who are employees of a CRO or who provide research services on a contract basis to a CRO should be excluded similar to how physician employees of applicable manufacturers are excluded.  Thus, ACRO proposed the following: “Any physician, except for a physician who is an employee... of an applicable manufacturer, or in the case of payments or transfers of value for research, an employee of or a person who provides research services on a contract basis to a CRO entity.” 

Finally, ACRO reaffirmed is position that fair-market payments made for legitimate research activities should have been excluded from the provisions of Section 6002.  They pointed to several state sunshine laws with such requirements for payments for bona fide research activities. 

The final rule should allow at least 180 days from publication until the commencement of data collection.  

Lilly recommended that the final rule provide applicable manufacturers with at least 180 days to implement the final rule, noting that it took up to 23 months to file its first full quarterly publication, as well as modifications that would need to be made to comply with the Sunshine Act.  Lilly noted a series of necessary steps required to implement any change to business processes: first the requirements must be clearly defined (which cannot occur until the final regulation is issued), then the requirements must be translated into required changes on various impacted processes, then those required changes need to be built into documented procedures and configured into IT systems, then those modified IT systems must be tested and validated to ensure they do what they are supposed to do, then the people who use those procedures and systems must be trained.  Each and all of these steps must occur and must occur in linear order to effect the required changes. Consequently, the more the final rule requires changes to the business and IT system rules already in place, the more complex the implementation implications for manufacturers and the more lead time that necessarily will be required.  

Phased Approach 

Lilly urged CMS to look at the phased implementation of Lilly’s corporate integrity agreement (CIA) requirements and consider a three phase approach to enable manufacturers and CMS to manage the complexity of data collection and reporting in a more measured and controlled manner and to reduce the risk of error or incomplete reporting.    

Phase I, for which data collection could commence in early 2013, could include all direct payments from manufacturers to physicians and teaching hospitals.  These direct payment data are the most readily identifiable and accessible in most company systems.  It was recommended that Phase 1 direct payments not include payments for research made to CROs or payments to reimburse expenses as the processes needed enable detailed reporting of these payments do not usually exist.  This would cover about 70% of all payments.   

Phase II could reasonably commence 6-12 months later and could include all reimbursed expenses as well as any indirect research payments made by CROs. Reimbursed expenses are suggested to be separated from Phase I because reporting of such expenses will likely require modifications to billing and invoicing practices, expense re-categorization to align to Sunshine Act definitions and requirements, and modifying IT systems to ensure that elements of such reimbursements get reported under the proper categories with the proper associated level of detail, all as dictated by the yet-to-be-issued final rule.  By the end of Phase II, there could be over 90% visibility into disclosure required under the Sunshine Act.  

Finally, Phase III could commence 12-18 months after Phase I and would complete the Sunshine Act reporting requirements by adding disclosure of any non-cash transfers of value.  Non-cash transfers of value would include transfers such as business meals, travel and educational materials for physician benefit.  Importantly, these non-cash value transfers represent a very small percentage of total value transfers to be reported under the Sunshine Act.  Specifically, for Lilly, in 2011, of all the value reported on Lilly’s payment registry, only 8% represented non-cash value. On the other hand, to capture this data for such reporting requires significant business process modifications.  For instance, for some non-cash items, new processes will be required to first assign a market value, then to record the distribution at the individual recipient level, and to train personnel to identify situations where such capture is required.  

Patient Materials  

The Sunshine Act expressly excludes educational materials intended for patient use from reporting. In the proposed rule, however, CMS states that this exclusion is limited to written or electronic materials and does not include services or other items. CMS’s interpretation of the statutory exclusion for educational materials is unnecessarily restrictive, and as a result, Lilly expressed concerne that the continued availability of patient-centered programs and services (e.g., patient assistance programs or patient starter kits) would be jeopardized, with a potential negative impact on patient care.  

Accordingly, Lilly urged the final rule to (1) explicitly interpret the exclusion more broadly to encompass any materials, including programs, services, and items provided to covered recipients for the direct use or benefit of patients or (2) further clarify that such programs, services, and items do not need an express exclusion because they do not constitute transfers of value to covered recipients.  

The Definition of ‘Applicable Manufacturer’  

Lilly expressed concern with the definition of “applicable manufacturer” requiring tracking and reporting of payments outside the U.S. because such foreign affiliates are not preparing to report under the statute.  As a result, Lilly urged CMS to define the term to include only manufacturers operating in the U.S.  

Significant Paperwork Burden on Physicians 

AMA expressed its concern that the current proposed rule would impose a paperwork burden on all physicians who will need to maintain ongoing records of every activity they engage in so they are able to ensure accurate reporting, and that CMS  “greatly underestimated” the amount of time physicians will spend reviewing and challenging cumulative reports. 

Conclusion 

Ultimately, many of the speakers recognized the importance of physician industry relationships, but emphasized that transparency is necessary for patients, and hoped to achieve a reasonable and effective way of approaching it through the Sunshine Act.  

There was considerable amount of agreement amongst the participants which should help move the process along. 

After the hearing it was much clearer that creating rules to accurately guide the management, collection and reporting process is complex and it is no wonder it has taken this amount of time for CMS to come up with the final rule.  Collection of data will be complicated and implementation will be time consuming.  As Mark McClellan noted there are some days he misses being CMS administrator and others he doesn’t and this may be one of those days.

Senate Commerce Committee Report on Drug Shortages and the Gray Market “Where Have They All Gone”

Drug shortages continue to make the headlines in both mainstream media and on Capitol Hill. According to drug shortage tracking conducted by the Food and Drug Administration’s (FDA) Center for Drug Evaluation and Research (CDER) and the American Society of Health-System Pharmacists (ASHP), drug shortages more than quadrupled between 2005 and 2011.  For example, CDER reported that drug shortages increased from 61 in 2005 to 251 in 2011. 

FDA defines a drug shortage as “a situation in which the total supply of all clinically interchangeable versions of an FDA-regulated drug is inadequate to meet the current or projected demand at the patient level.”   

To address this issue, Congress passed in July the Food and Drug Administration Safety and Innovation Act (FDASIA), which gives FDA significant new authorities to combat drug shortages, as we previously reported.  While numerous causes for drug shortages have been identified, one serious problem remains: the “gray market.”  Consequently, the U.S. Senate Commerce, Science and Transportation Committee recently held a hearing and published a report addressing the gray market.  

Background on Congressional Investigation 

The rising number of drug shortages has been concentrated primarily in the area of generic sterile injectable drugs, liquids packaged in sterile glass vials that are

“parenterally” administered to the body through syringes or an intravenous (i.v.) administration set.  Drugs administered in this manner reach their target treatment area more quickly than oral drugs, but also carry greater risks of infection and complications caused by incorrect dosages.  Administering a drug intravenously usually requires a trained health care professional who can carefully monitor the dosage and the patient’s reaction to the drug.  As a result, drug shortages are affecting mostly acute care patients being treated by providers in hospitals and out-patient facilities. 

Of the 251 drug shortages the CDER reported in 2011, 182 of the shortages (73%) involved sterile injectables.   An October 2011 analysis of short-supply drugs conducted by the IMS Institute for Healthcare Informatics also found that most of the reported shortages involved generic sterile injectable drugs.  The largest numbers of drugs in this group (20) were sterile injectables used in chemotherapy treatment for cancer patients. The sterile injectables in shortage have also included frequently-used items such as anesthetics for surgery, “crash cart” drugs used in emergency rooms, and electrolytes for intravenous feeding. 

In October 2011, House Committee on Oversight and Government Reform Ranking Member Elijah Cummings opened this investigation by sending information request letters to five “gray market” companies that were taking advantage of drug shortages to charge exorbitant prices for drugs used to treat cancer and other life-threatening conditions.  These companies’ questionable business practices put patients at risk and cost the United States health care system hundreds of millions of dollars each year. 

During drug shortages, hospitals are sometimes unable to buy drugs from their normal trading partners, usually one of the three large national “primary” distributors, AmerisourceBergen, Cardinal Health, or McKesson.  At the same time, hospitals are deluged by sales solicitations from gray market companies offering to sell the shortage drugs for prices that are often hundreds of times higher than the prices they normally pay.   

The five companies were aggressively marketing five prescription drugs to hospitals that were at the time in short-supply, according to the FDA.  Four of the drugs are used to treat various forms of cancer, and one is used to treat seizures during pregnancy.  The letters asked the companies where they had obtained the short-supply drugs they were offering for sale and how much they were charging hospitals for the drugs.  

In December 2011, Senator John D. Rockefeller IV, Chairman of the Senate Committee on Commerce, Science, and Transportation, and Senator Tom Harkin, Chairman of the Senate Health, Education, Labor, and Pensions Committee, joined Ranking Member Cummings in the investigation.  Since that time, the three Members of Congress have requested information from more than 50 prescription drug industry experts, regulators, and stakeholders about how short-supply prescription drugs are distributed, marketed, and sold. 

A key source of information in the investigation has been “drug pedigree” documents, which record the distribution route a drug has traveled since it left the manufacturer. Many businesses that distribute drugs in the United States are required, either by state or federal laws, to provide these pedigrees to their customers. 

Congressional investigators carefully studied 300 of these “paper pedigrees,” which list the names of all parties that purportedly took possession of the drug and the dates of their possession. The 300 pedigrees show 125 different companies that were involved in selling short-supply prescription drugs.  The Committee used the pedigrees to reconstruct how and when drugs entered gray market distribution chains and contacted companies listed in the pedigrees to collect information regarding the prices for which they purchased and re-sold the drugs. The Committee obtained specific information from the companies listed on 58 of the pedigrees, including the prices for which they purchased and sold the drugs and the dates they possessed them. 

The drug “pedigree” documents showed that some short-supply injectable drugs “leak” into longer gray market distribution networks, in which a number of different companies – some doing business as pharmacies and some as distributors – buy and resell the drugs to each other before one of them finally sells the drugs to a hospital or other health care facility.  In more than two-thirds (69%) of the 300 drug distribution chains reviewed in the investigation, prescription drugs leaked into the gray market through pharmacies.  Instead of dispensing the drugs in accordance with their professional duties, state laws, and the expectations of their trading partners, these pharmacies re-sold the drugs to gray market wholesalers.  Some pharmacies sold their entire inventories into the gray market.  The wholesalers in turn sold the drugs − usually at significant markups − to other gray market companies. 

Gray Market Companies Aggressively Mark Up Drug Prices 

As the drugs pass through these gray market distribution chains, they are significantly marked up, sometimes to prices that are hundreds of times higher than the prices that hospitals and other health care providers normally pay. The markups in these chains often bear no relation to the companies’ cost of purchasing, shipping, or storing the drugs.  Instead, they reflect intent to take advantage of the acute demand for short supply drugs by charging health care providers exorbitant prices.  Some companies marked up vials by more than 100%, even if they never took physical custody of the vials or only held them for a short time. The hospital that purchased the drug ended up paying $600 per vial for a drug that a pharmacy had purchased for $7 per vial.  Hospitals purchase short-supply drugs at these exorbitant prices because, as one hospital explained, “We have no other choice … We have to take care of our patients.”  The investigation also found that: 

• “Fake Pharmacies” Acquire Prescription Drugs from Authorized Distributors and then Sell Them Into the Gray Market: A number of businesses hold pharmacy licenses that do not dispense drugs, but instead appear to operate for the sole purpose of acquiring short-supply drugs that can be sold into the gray market.
• “Drug Brokers” Recruit Pharmacies to Purchase Drugs for the Gray Market.
• Gray Market Business Practices Are Widespread: Pedigree and price information collected for five different short-supply injectable drugs, documenting the activities of 125 different companies, showed similar patterns of leakage and aggressive gray market price markups.  For all five drugs, units normally costing $10 to $20 were regularly marked up to prices of $200 or more while they traveled through the gray market.
• Gray Market Drugs Are Marked Up as They Quickly Pass from Owner to Owner.  On average, the prescription drugs examined in the investigation were owned by three to four different gray market businesses before being sold to a hospital; most of the drugs traveled through the gray market in five days or less.
• Gray Market Companies Sometimes Charge Hospitals Significantly Different Prices for the Same Drug Product on the Same Day.  

The Appearance of Gray Market Companies 

As a growing number of sterile injectable drugs went into short supply in 2010 and 2011, hospitals around the country began receiving increasing numbers of telephone,

fax, and e-mail solicitations from “gray market” drug companies.  These companies claimed to have supplies of short-supply drugs that the hospitals could not obtain through their normal distribution channels.  The companies’ offers generally mentioned the fact that the drugs were in short supply and often suggested that their supplies were very limited. 

The gray market companies appeared to be taking advantage of supply shortages to sell the drugs at prices much higher than hospitals paid their normal suppliers.  An analysis by the Premier Healthcare Alliance of 636 solicitations made to hospitals in early 2011 found that gray market companies were selling short-supply drugs at prices that were on average 650% higher than the prices hospitals paid for the drugs through their group purchasing agreements. In some cases, companies were selling the drugs at markups as high as 3,000% to 4,000% over their typical contract prices.  In addition, some hospital pharmacists believe that gray market wholesalers contact them to learn which drugs the hospitals are having trouble acquiring so that the gray market wholesalers can quickly attempt to buy quantities of those drugs. 

When the Institute for Safe Medication Practices (ISMP) surveyed a large group of hospitals in July and August 2011, it received hundreds of comments complaining about the gray market solicitations and asking “why hospitals can’t get these products, but the ‘scalpers’ can.”  Hospital pharmacists also “reported feeling pressured by physicians and hospital administrators to purchase medications from the gray market.” 

Choosing between having no supply of a drug or purchasing the drug at an exorbitant price from an unknown gray market company raised difficult ethical and business questions for hospitals.  Many hospitals and other stakeholders expressed concern about the safety of drugs purchased from gray market companies because they did not understand how gray market vendors obtain short-supply prescription drugs.  Hospitals do not know where the drugs come from or if they were stored properly. 

How Drug Distribution Chains Typically Work 

A typical drug distribution chain has three elements: (1) a manufacturer, which creates and sells a prescription drug to (2) a wholesale distributor, which then sells the drug to (3) a hospital or pharmacy, which dispenses it to patients.  In some cases, additional authorized parties might be involved in these chains.  Drug manufacturers sometimes sell their products to “repackagers,” before the drugs are distributed.  In addition, large “primary” distributors sometimes sell drugs to “secondary” distributors, which then sell the drugs to pharmacies or hospitals.  Such sales to secondary distributors comprise only a small percentage of primary distributors’ sales. 

Distributors that have an ongoing relationships with manufacturers serve as “authorized distributors of record” (ADR) for the manufacturers.  About 85% of all revenues in the wholesale market are generated by three national distributors −AmerisourceBergen, Cardinal Health, and McKesson − that serve as ADRs for many manufacturers.

Distributors that predominantly buy prescription medicines from the manufacturers and predominantly distribute them directly to health care providers such as hospitals and pharmacies are called “primary” distributors.  “Secondary” distributors are also sometimes ADRs, and they obtain access to drugs from primary distributors or other sources.   

Distributors and pharmacies play distinct roles in the distribution chain and are subject to different regulatory and licensing requirements.  Under federal law, distributors have the authority to purchase drugs from manufacturers and deliver them to pharmacies, hospitals, and other parties that are not patients.  Pharmacies are the end point of the chain, responsible for dispensing the drug in a manner that is consistent with the appropriate treatment of a patient. 

In addition to the obligations that come with their licenses as distributors or pharmacies, companies involved in drug distribution chains often also have contractual obligations to their trading partners.  Most large distributors purchase drugs from manufacturers pursuant to ADR agreements, which sometimes restrict the distributors’ freedom to buy and sell the drugs.  The drug manufacturer Hospira, for example, requires its ADRs to commit that “they will purchase Hospira products directly from Hospira, and only sell Hospira products to end users of our products.” 

Primary wholesale distributors commonly place similar “own use” restrictions on their customers.  For example, one of the primary wholesale distributors requires most of its customers that hold themselves out as “Final Dispensers,” such as pharmacies, to certify “that they do not and will not redistribute prescription pharmaceuticals purchased from [that primary wholesale distributor] into the Secondary Market.”  The same primary wholesale distributor also requires its secondary wholesaler customers to sell to “Final Dispensers” the pharmaceutical products they purchase from that primary wholesale distributor.  Another primary wholesale distributor typically requires its final dispenser customers to agree to use purchased products for their “own use” and its secondary wholesaler customers to agree to sell purchased products only to final dispensers. 

Ensuring that drugs pass through as few hands as possible on their way to patients helps to ensure the integrity and safety of the drug supply chain. According to the FDA, counterfeit drugs are most likely to be introduced as part of a drug supply chain involving multiple wholesalers.   

Detailed Findings of Senate Report 

1. Significant Markups Throughout Gray Market Distribution Chains.  The Committee found that inflated prices were often the result of unnecessarily long distribution chains, diverted into longer “gray market” distribution networks that include significant markups at almost every level, often hundreds of times higher than the prices the hospitals and other health care providers normally paid for them. 

2. Similar Results Found for All Five Shortage Drugs Examined.  The pedigree and price information that was collected on the five sterile injectable drugs that were the subject of this investigation show a similar pattern.  

3. Additional Information on Gray Market Chains.  Some of the most significant results of this analysis were the following: 

• In more than half of the transactions, prices for the drugs increased by $200 per unit or more while traveling through the gray market. In six chains, the price increase was $500 or more per unit. The largest increase was $975 per unit.
• On average, drugs traveling through these gray market chains were owned by three to four separate business entities before reaching the hospital or provider that administered the drugs to a patient.
• Most of the drugs traveling through the gray market (60.8%) were sold to hospitals within five days or less after they entered the gray market.55 In 13 chains, the drugs remained in the hands of gray market companies longer than 10 days. 

The hospitals that purchased short-supply drugs through the 300 gray market chains staff reviewed include a range of small and large hospitals, urban and rural hospitals, for- profit hospitals, and military, veteran, and other nonprofit hospitals located in all regions of the United States. To estimate the financial impact that gray market purchases have on hospitals, congressional investigators compared actual gray market prices for one form of each of the five drugs reviewed to hospitals’ contract price for the same drug product. The per-unit costs in the gray market were dramatically higher than the hospitals would have incurred to purchase the same drugs from their primary wholesale distributors: 

Analysis revealed that hospitals overspent nearly $750,000 on over 2,100 units of the five prescription drugs examined as a result of purchasing the drugs from the gray market instead of their normal distributors. The more than 2,100 units included in this analysis are just a fraction of the total number of drug units that were sold in the 300 gray market chains. 

How Drugs Enter the Gray Market 

1. Drugs Entering Gray Market Primarily Through Pharmacies 

2. Some Pharmacies Selling Their Entire Inventories into Gray Market.  Evidence that some pharmacies are selling short-supply injectable drugs to gray market wholesalers suggests that these pharmacies are not complying with their states’ pharmacy laws that limit re-sales. Some states allow pharmacies to re-sell portions of their inventories in emergency circumstances, while other states permit up to 5% of pharmacies’ annual sales to come from re-selling their drugs. The parameters of these exceptions rules vary from state to state. Some states’ rules appear to be intended to resolve local supply problems by allowing pharmacies to sell drugs to each other, while other states’ rules may permit pharmacies to re-sell their drugs to wholesalers.

Documents obtained during the investigation indicate that some pharmacies are clearly exceeding these limited re-sale exceptions.  

3. Using Pharmacies as Purchasing Agents for Shortage Drugs.  Documents obtained during the investigation indicate that wholesalers and independent brokers often approached pharmacies and convinced them to purchase shortage drugs on their behalf, promising significant profits.  Twenty-one of the 25 pharmacies that responded to requests for information about their purchases and sales of shortage drugs stated that wholesalers or brokers representing wholesalers had asked them to purchase shortage drugs for them. 

Documents obtained during the investigation also reveal that brokers and consultants monitor the release of new drug shipments from manufacturers and their distributors. For example, on January 20, 2012, one broker sent an e-mail indicating that a new batch of metoprolol had been released, and asked various pharmacies to buy up the shortage drug, “we just [sic] found some it’s been a release find it get sale it [sic].”

Metoprolol is a drug used to improve survival after a heart attack and in the treatment of heart failure.  Wholesalers operating in the gray market purchased a significant portion of prescription drugs through pharmacies.  

4. Establishing Fake Pharmacies.  Documents obtained during the investigation identified numerous entities that appear to have established “fake pharmacies” to gain greater access to shortage drugs. After obtaining these drugs, the “pharmacies” typically did not dispense the drugs to patients pursuant to their pharmacy licenses, but instead sold them to wholesalers they also owned or in which they had interests. 

Gray market drug distributors sometimes cite shipping costs as one of the reasons they mark up the per unit price of the drugs they sell.  But in many transactions examined in the investigation, the gray market companies billed shipping as a separate line item cost on their invoices. The shipping costs varied, but generally were less than $100 per invoice.  In some transactions, the gray market companies never took physical possession of the drugs and instead arranged for drugs to be “drop shipped,” directly from the company from which they purchased the drugs, to the customer to which they sold them.