Gifts, big and small, can have an impact on how we feel and what we do. We all know it. When your co-worker unexpectedly gives you a holiday box of chocolates, you feel guilty and petty about snubbing him because he stole your stapler.

And no one knows more about using gifts to win people’s hearts than the drug industry. In what may be a surprise to many patients, the majority of doctors accept some kind of payment, gift, drug samples, meal, or other gift from the drug industry. These range from the free lunches delivered to their hard-working office staff, to hundreds of thousands of dollars in consulting or speaking fees. A 2009 survey found that 84 percent of doctors had some interaction with a drug company that involved payment, gifts, travel, consultancy or speaking fees, drug samples, or other reimbursements or payments.

While some exchanges, like samples or legitimate research are generally appropriate, other relationships are problematic. And some of these relationships have landed drug companies in hot water, leading to over seven billion dollars in settlements with the federal government over the last four years. For instance, Allegan, the manufacturer of Botox, created phony advisory boards “to reward hundreds of [the drug’]s top injectors,” according to a federal prosecution settled for $600M in 2010. How did 200 of these physicians ‘advise’ Allergan? By flying an oceanfront resort in Newport Beach, California in 2005 and 2006, and getting paid $1,500 to listen to presentations on unapproved, off-label uses of Botox. But Allergan is not alone. Forest labs paid doctors $1,000 for letting a salesman follow them around all day, while prompting the doctor to prescribe Forest’s anti-depressants Celexa and Lexapro. A Forest subsidiary pleaded guilty to one felony and two misdemeanors, and Forest paid the feds a $313 million settlement. Other examples  abound.

So last week,  the Centers for Medicare and Medicaid Services (CMS) gave patients, consumers, and others a different kind of gift – strong draft regulations on public disclosure and transparency of drug and device industry payments and gifts to doctors to implement the Physician Payments Sunshine Law, the ground-breaking transparency law passed in 2010 as part of the Affordable Care Act. This law will allow anyone to see when and how much their doctor is being paid or given gifts by the drug companies.

The scope of what drug companies must report – any “payment or transfer of value” – is  very broad, and will include nearly anything that has any value: a coffee mug, pens, dinner at a nice restaurant, or a big consulting contract. But the law allows for a number of exceptions: drug samples, educational materials for patients, and small items under $10 in value, so long as the total value in a calendar year doesn’t add up to more than $100.

But when a drug maker doesn’t make a payment directly and the money goes through a third party, to a doctor or hospital, what happens? 

Under the law, the payment is not reported if the drug manufacturer is unaware of the identity of the doctor or teaching hospital that receives the payment made indirectly via a third party. This is potentially a significant loophole that could encourage pharma to simply farm-out their gift-giving to marketing firms, etc. and attempt to sidestep the public transparency purpose of the law.

The good news is CMS wants to narrow this loophole as much as possible, and has proposed a strong standard to prevent the loophole from undermining the law. The draft rule has defined being “unaware” of a doctor’s identity to be when the manufacturer does not actually “know . . . the identity of the covered recipient,” so long as the manufacturer has not tried to act in “deliberate ignorance”  or “reckless disregard” of learning the identity doctors or hospitals that received payments from them via a third party. So a drug company cannot simply turn a blind eye to where their funds are being distributed by third parties.

CMS has further advised that if the names of the recipients are ‘publicly available,’ then the manufacturer is deemed to know the identity and must report these payments. Similarly, if an “agent” of the manufacturer, such as a staff member, employee, or paid consultant knows these identities, then the manufacturer must report.

How might this work? Well, if Pfizer paid a medical education company to pay for the travel and registration costs for all the cardiologists at a state university medical school, Pfizer would need to report these payments. Similarly, if Merck paid an event planner a lump sum that was intended to cover the travel costs of all the doctors presenting at a professional conference, Merck would need to report these transfers of value because the identities of these doctors would be publicly available, or would likely be easily available to conference attendees,

A recent blog by Daniel Carlat looks at how this will affect disclosure of industry payments to continuing medical education companies that then pay doctors to speak.

While there are a lot of details that must be worked out, CMS is setting the stage for broad transparency to bring the financial relationships to light. This is a nice year-end gift for patients, consumers, health plans, and advocates who are eager to know about and better understand the relationship that drugmakers have with their doctors and hospitals.

Wells Wilkinson, Director, Prescription Access Litigation project

Last week Community Catalyst and six California-based senior and consumer groups wrote to the California delegation of the U.S. House in support of a federal system to track the authenticity of prescription drugs.

The letter expressed support for the leadership of Reps. Bilbray (R-CA) and Matheson (D-UT) in sponsoring the Safeguarding America’s Pharmaceuticals Act of 2011 (H.R. 3026). The bill would protect patients from counterfeit and diverted drug products by establishing an FDA mandated national drug identification and tracking system. The letter was signed by the Gray Panthers (statewide and Berkeley-East Bay), the California Alliance of Retired Americans (CARA), Congress of California Seniors, CALPIRG, and CA Citizens for Health Freedom, as well as Community Catalyst.

Prescription drug counterfeiting has become one of the most lucrative crimes in the world. As such, there is no reason not to use modern technology to track the distribution of our vital medications and ensuring that the drug distribution system is secure. The network of businesses that move drugs from manufacturer to the patient is extremely complex, creating opportunities for highly profitable schemes to move stolen or counterfeit drugs into legitimate channels of distribution—and then to patients. These illicit products can be degraded, clinically dangerous, or ineffective, putting patients at risk. For example:

• Cancer and transplant patients were exposed to counterfeit Epogen and generic Procrit in 2002. Criminals netted a profit of $46M and more than 90,000 vials may have reached patients. This was exposed when some patients suffered painful side effects.
• Cancer, cholesterol and other drugs were bought from Medicaid patients on the streets of New York and resold to a wholesaler and then to pharmacies. Two men were convicted in 2008 for the $6.8M scheme.
• Thieves stole 129,000 bottles of insulin in 2009. Stored under unknown conditions, the temperature sensitive drug was sold back to pharmacies and ultimately to diabetics.
• Counterfeit Lipitor™ from Central America was illegally imported and sold into U.S. distribution in 2003.

Drug products move between large wholesalers, smaller wholesalers, large chain drugs stores or small pharmacies. While smaller wholesalers are required to maintain drug ‘pedigrees’ (paper or electronic transaction histories) under federal law, the larger “authorized distributors” of manufacturers are exempt. We need a uniform track and trace system to verify the history of all drugs, throughout each of the distribution channels.

This is of special significance to the state of California, which took the lead on the “pedigree” issue in 2004, when it passed legislation spearheaded by the Board of Pharmacy, CA senior groups and Health System Pharmacists. But the implementation of a state tracking and authentication system was delayed until 2015-17 by subsequent legislation, in order to allow the federal government to create one uniform national system.

Since then, 28 other states have also passed some form of drug pedigree law, but varying provisions make industry compliance complicated and open to abuse. Comprehensive federal legislation like the Safeguarding America’s Pharmaceuticals Act of 2011 (H.R. 3026) would ensure consistency, as well as meet the California legislature’s deadline and goals.

H.R. 3026 would:

• Require manufacturers to place a unique identification number on each package of drugs (the smallest salable unit) bought and sold in the United States.
• Establish an electronic tracking system to allow companies to verify the authenticity of the drugs they buy and sell, and requiring every entity that receives a drug during distribution to perform such authentication.
• Strengthen national guidelines for state wholesaler licensure standards.

Eight years ago, Cesar Arias, a pharmacist and drug inspector for the state of Florida, told congressional investigators:

“No patient in the nation can know with 100 percent certainty that the drugs they are getting are what they are purported to be — or if they are, that they have not been in the trunk of someone’s car, or sitting in a hot warehouse or a crack house in South Florida .”

It is well past time to heed his warning.

– Marcia Hams, Prescription Access and Quality &
Wells Wilkinson, Prescription Access Litigation

Yesterday, the Massachusetts Attorney-General’s office announced a $24 million dollar settlement resulting from an investigation of pricing fraud in state programs by fourteen different drug makers. This settlement follows a ground-breaking national settlement of a lawsuit filed by the Prescription Access Litigation project at Community Catalyst in 2001, with Health Care For All, Mass Senior Action, MassPIRG and eleven other consumer groups nationwide representing the interests of consumers.

Drug industry pricing fraud became widespread in the mid-1990s, when high but fictitious list prices were used as an incentive to sell products. Doctors or pharmacies made more money using a drug whose actual cost was far less than the amount they were paid by Medicare and Medicaid. This fraud led to our class action lawsuit and a ground-breaking 2007 trial on behalf of Massachusetts consumers and private sector insurers. It was found that AstraZeneca, Bristol-Myers Squibb and Warrick (a subsidiary of Schering-Plough, which was bought by Merck in 2009) had violated consumer protection laws through their deceptive pricing tactics. This victory ultimately convinced 28 different drugmakers to pay over $360 million to settle claims with the private sector health plans and consumers. (See more here.)

And now, on behalf of public programs here in Massachusetts, the Attorney-General has recovered funds from a number of these companies for the same kind of unfair and deceptive pricing. For example, manufacturer Warrick sold an albuterol drug from 1995 to 2003, all the while reporting a list price that was nearly seven-times the actual sales price. The State’s trial in 2010 found that Warrick had cost Massachusetts $4,563,328, and had made 28 false statements in violation of the state’s False Claims Act. After treble damages, 12 percent interest, and legal fees, a $24 million settlement looked like a good deal to Warwick’s new owner, Merck.

How can Massachusetts better protect its public programs from deceptive pricing in the future?

Currently, Massachusetts uses industry-published list prices as a basis to reimburse pharmacies. One option is to adopt the Average Acquisition Cost (AAC) method of paying pharmacies for the drugs MassHealth purchases for its members. The AAC method does not use easily manipulated manufacturer “list” prices (at issue in the court case). Instead, pharmacies are paid based on their actual cost of acquiring the drug from the manufacturer, plus a dispensing fee, thereby reducing overpayment and saving money for MassHealth. This evidence-based pricing method has been adopted by Alabama and Oregon, and it has been recommended by Medicaid headquarters in Washington D.C. And like Alabama and Oregon, Massachusetts could make these regularly-audited drug prices available to the public, so that private insurance plans could also adopt this method and save money, hopefully reducing premium costs. Community Catalyst describes more about AAC in its new Medicaid Report Card.

– Wells Wilkinson, Director, Prescription Access Litigaton, and
Marcia Hams, Director of Prescription Access and Quality, Community Catalyst

Yesterday, CMS started to make up for lost time when it issued the draft regulations on the Sunshine law in the Affordable Care Act. This new law requires manufacturers of drugs, medical devices (e.g. stents, replacement knees etc), and biologics to report all payments they make to doctors and teaching hospitals to HHS, which must disclose these payments in a publicly available, on-line searchable database.

In response, Senators Grassley and Kohl cancelled a hearing to explore why CMS had missed an earlier deadline and thus delayed the start of the new transparency program. This was of concern to both consumer advocates eager that these payments become public, and to industry representatives who are concerned about how to comply with the transparency law starting next year.

The delayed release of the new draft rules does mean that industry will not have to record or report payments that are made before the final version of the rule enters into effect, likely no earlier than April or May of next year. CMS is accepting public comment on the draft rules until Feb. 17, 2012. But CMS is standing by the law’s required September, 2013 deadline for disclosing to the public any 2012 payments that are made after the rule is final.

While we are disappointed that the first public transparency reports may not have a full year’s data, we think it is more important to allow CMS adequate time to ensure that the final regulations are as strong and effective as possible. From our point of view, good regulations will help ensure that industry reports payments fully and precisely, so that patients, the public and CMS itself can best understand what these payments are for, and evaluate whether a payment is appropriate.

One highlight of the draft rule was how CMS captured the purpose of the law’s new public transparency program. CMS states that, while industry collaboration can be beneficial, “payments to physicians and teaching hospitals can also introduce conflicts of interest that may influence research, education and clinical decision making in ways that compromise clinical integrity and patient care, and may lead to increased health care costs.”

The on-line database of industry payments, to be made publicly available by Sept. 30, 2013, will include the name and identifying information for the manufacturer making the payment, the doctor or teaching hospital receiving it, the amount of each payment, the drug or device associated with the payment or “transfer of value”, and the form and “nature” of the payment. We were pleased that CMS proposed broadly inclusive definitions of manufacturers, their subsidiaries, and third parties who may make payments on their behalf, although CMS has asked for comment on this definition.

The draft rule also proposed that the categories of payments should be distinct from one another to ensure the utility of the information to patients, to researchers and the public. However, we do have concerns that the final rule will not honor that intent if it does not provide clear definitions on how the categories (such as education, gifts, consulting, etc.) differ from one another. The draft rule as it stands now leaves out clear and specific definitions, which would open the door to varying interpretations by each company, a problem we have already seen in the public disclosures required under court settlements. This results in data that is inconsistent, confusing, and not useful to the public.

Overall the CMS framework is solid and reflects the spirit and intent of the Sunshine law, which was supported not only by consumers but by leaders in the medical profession, the Institute of Medicine, MedPac, and many in industry.

The draft regulations include many thoughtful discussions of reporting issues and invite further comment on many of them— a clear opportunity for consumer advocates concerned about the drug industry’s abuse of financial incentives to doctors or teaching hospitals. We will be submitting our recommendations to address this issue and hope others will as well.

– Marcia Hams, Director of Prescription Access and Quality &
Wells Wilkinson, Staff Attorney

Recently, the Government Accountability Office published a report entitled, “Food and Drug Administration: Better Coordination Could Enhance Efforts to Address Economic Adulteration and Protect Public Health.”

The report describes economic adulteration as follows:

“Economic adulteration is not a new problem and ranges from simple actions, such as adding material to increase a product’s weight, to more sophisticated substitutions or additions that are designed to avoid detection by tests known to be used to authenticate ingredients or products. Economic adulteration differs from other forms of intentional adulteration, such as bioterrorism or sabotage, whose primary purpose is to cause harm.”

Once again, the heparin scandal, the poster child for the vulnerability of the U.S. drug supply, is cited in the report as a prime example of economic adulteration. In 2007-2008, heparin was discovered to contain over-sulfated chondroitin sulfate, a toxic contaminant that mimics heparin. The contamination was evidently economically motivated, and was linked to a number of serious allergic reactions and deaths in the U.S.

Economic adulteration is distinguishable from unintentional violations of current Good Manufacturing Practices, which can also cause a drug to be adulterated. For example, we have seen cases where drugs have been mislabeled, made too strong or too weak, or contaminated with microorganisms, but those problems were a result of poor manufacturing practices, not intentional adulteration with an economic motive. (See, e.g., GlaxoSmithKline statement about its failure to follow cGMP.)

According to the new GAO report, FDA officials and stakeholders cited two main challenges to addressing economic adulteration. The first:

“Globalization has led to an increase in the variety, complexity, and volume of imported food and drugs, which complicates FDA’s task of ensuring their safety. In addition to globalization, an increase in supply chain complexity—the growth in the networks of handlers, suppliers, and middlemen—also complicates FDA’s task.”

This is not the first time globalization has been identified as a problem, but it is a reminder for Congress and the Administration of the challenges facing FDA.

The second problem identified in the report was lack of information from industry. Here, there are two main issues. First, because companies regularly test ingredients from suppliers, they have information on potential adulterations that would be useful to the FDA. However, industry is reluctant to share that information when it does not have to (such as when an adulterated ingredient has entered into commerce) because of fears of exposing themselves to litigation for accusing a supplier of intentionally adulterating products if their findings turn out to be erroneous. Second, FDA would benefit if industry would share more information about what substances might be used to adulterate products. Companies develop tests to monitor products they receive from their suppliers but often are reluctant to share the information with the government because it is proprietary.

These accounts in the report highlight the necessity of involving industry in any solutions to our drug supply safety problems. Fortunately, we have seen a lot of industry support for improving the safety of the drug supply (including the generic industry’s recent agreement with the FDA to pay user fees), and hope the collaborations can continue to improve, as both industry and government will succeed only if they keep the consumer and patient’s safety as the highest priority. But in order to combat economic adulteration (and other forms of drug contamination) and protect the food and drug supply of the U.S., the FDA needs to have the tools and resources necessary to deal with these 21st century concerns.

Additional coverage of the report is available at:

• Pharmalot
• FDA Law Blog
• In-Pharma Technologist

– Anna Dunbar-Hester, Policy Analyst