The American Society of Consultant Pharmacists (ASCP): America's Senior Care Pharmacists America's Senior Care PharmacistsAbout ASCP. Includes contact information.Membership resources and applicationMeetings, conventions, and many more educational opportunitiesThe Consultant Pharmacist, ASCP Update, Clinical Consult, Business Quarterly, TCP Supplements, and the ASCP Product CatalogExtensive resources for the new pharmacy practicionerNews and press releases from ASCPExtensive resources to help you advance your practiceUp-to-date information on legislative and regulative activities affecting your practice. Includes the ASCP Advocacy Center.Discussion forums and career resourcesWhat's happening in the next yearAmerican Society of Consultant Pharmacists Research and Education Foundation [an error occurred while processing this directive]

Therapeutic Interchange and the Fraud and Abuse Laws:
When Does a Substitution Program Become a Kickback?

Pharmacists are well-advised to examine their relationships with pharmaceutical manufacturers, managed care entities, and others and to re-evaluate those relationships that may raise concerns under the Anti-Kickback Act.

Margit H. Hahra

Therapeutic interchange, or "substitution," programs, in which a pharmacist is compensated for substituting, or causing the substitution of, a therapeutically equivalent drug for that originally prescribed by a patient's doctor, have increasingly come under fire from federal law enforcement authorities. The Office of Inspector General of the U.S. Department of Health and Human Services (HHS OIG) publicly expressed, in a 1994 Fraud Alert,1 concern that such programs might violate the Medicare and Medicaid Anti-Kickback Act, [42 U.S.C. § 1320a-7b(b)] when sponsored by manufacturers dealing directly with pharmacists and physicians. Recent developments suggest, however, that federal authorities are scrutinizing arrangements between manufacturers and intermediary entities, such as pharmaceutical benefits managers and other managed care organizations, as well as arrangements among intermediary organizations or between the intermediary organizations and pharmacists or physicians. Indeed, while there do not appear to have been any Anti-Kickback Act prosecutions to date relating to therapeutic interchange per se, Assistant U.S. Attorney James Sheehan told attendees at ASCP's annual meeting last November that his office is currently investigating such cases and that indictments may be issued soon.

Accordingly, pharmacists are well-advised to examine their relationships with pharmaceutical manufacturers, managed care entities, and others and to re-evaluate those relationships that may raise concerns under the Anti-Kickback Act. Suggestions as to how to assess those relationships in light of the 1994 Fraud Alert, recent pronouncements from enforcement authorities, and case law construing the Anti-Kickback Act with respect to analogous practices are set forth below.

What Does the Act Prohibit?

The Anti-Kickback Act imposes criminal liability for knowingly and willfully soliciting, receiving, offering, or paying remuneration to induce or in return for, among other things, recommending purchasing, leasing, or ordering any good, facility, service, or item payable under any federal health care program other than the Federal Employees Health Benefits Program.2 The 1994 Fraud Alert summarized these provisions by stating that a payment may generally be deemed improper under the Anti-Kickback Act if it is:

  • Made to a person in a position to generate business for the paying party
  • Related to the volume of business generated
  • More than nominal in value or exceeds fair market value of any legitimate service rendered to the payer, or
  • Is unrelated to any service at all other than the referral of patients.

Violation of the act is punishable by up to five years' imprisonment and a fine of up to $250,000 for individuals and $500,000 for organizations. In addition, the Balanced Budget Act of 1997, Pub. L. 105-33 (1997), imposes civil monetary penalties of $50,000 for each violation of the Anti-Kickback Act and damages of up to three times the total remuneration offered, paid, solicited, or received in violation of the act.3 Furthermore, violation of the Anti-Kickback Act is grounds for permissive exclusion from participation in Medicare and Medicaid programs.4

Practices that do not fit within a safe harbor are not necessarily illegal, but it is often unclear at what point conduct crosses the line between a legitimate practice and a violation of the Anti-Kickback Act.

Given the potential breadth of the Anti-Kickback Act, the HHS OIG has, at Congress' direction, issued a number of regulatory "safe harbors" that describe practices the HHS OIG deems innocuous and accordingly "shall not be treated as a criminal offense ... and shall not serve as the basis for an exclusion."5 However, the safe harbors are narrowly defined and often do not protect standard industry practices. Practices that do not fit within a safe harbor are not necessarily illegal, but it is often unclear at what point conduct crosses the line between a legitimate practice and a violation of the Anti-Kickback Act.

Note that the gravamen of an Anti-Kickback Act violation is the knowing and willful intent to induce a referral. Proving the requisite degree of intent can be challenging, especially beyond a reasonable doubt. For this reason, and to take advantage of steep monetary fines, prosecutors are increasingly relying on the civil False Claims Act, 31 U.S.C. §§ 3729-3733, to prosecute kickbacks. The False Claims Act imposes monetary penalties of $5,000 to $10,000 per claim plus treble damages for the knowing submission of false or fraudulent claims or the making of a false record or statement to secure payment of a false or fraudulent claim. The False Claims Act is being used on the theory that the federal government would not knowingly reimburse a party for a sale induced through an illegal payment, and that therefore a claim related to such a sale is rendered "false or fraudulent" so long as the defendant acted with the intent of inducing payment from the government.6 While not universally accepted by the courts,7 the threat of treble damages has been successfully used to induce settlements from suspect parties, often even before a criminal indictment or civil complaint is filed.

The threat of treble damages has been successfully used to induce settlements from suspect parties, often even before a criminal indictment or civil complaint is filed.

What Makes a Substitution Program Suspect?

Among the prescription drug marketing schemes that have been criticized by the HHS OIG are incentives offered to pharmacists for the performance of marketing tasks. The OIG has specifically identified the following practices as suspect:

  • Any payment offered in exchange for prescribing or providing specific prescription products (especially if related to the volume of business generated)
  • Offers of cash or other benefits to pharmacists for performing marketing tasks (including sales-oriented educational or counseling contacts)
  • Any payment to a provider for changing or recommending a change in a prescription unless the payment is fully consistent with a safe harbor regulation or other federal provision governing the reporting of prescription drug prices.8

Pharmacists therefore should exercise caution when such practices are implicated in an arrangement for counseling patients or physicians as to therapeutic equivalents.

The safest route is to structure any compensation arrangement for such counseling services into a safe harbor, typically the safe harbor for personal services and management contracts codified at 42 C.F.R. § 1001.952(d). That safe harbor protects contractual arrangements that meet six criteria:

  • The agreement is set out in writing and signed by both parties
  • The agreement specifies the services to be performed
  • If the services are to be performed on a part-time basis, the schedule for performance is specified in the agreement
  • The agreement is for not less than one year
  • The aggregate amount of compensation is fixed in advance, based on fair market value in an arms-length transaction, and not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made by Medicare or a state health care program
  • The services performed under the agreement do not involve the promotion of business that violates federal or state law.9

The fifth criterion is often missing in substitution programs, which frequently compensate pharmacists on the basis of the volume of substitutions generated. For example, such programs often set quarterly targets for market shifts in the volume of prescriptions for certain products and compensate pharmacists through rebates pegged to performance in relationship to such targets. Although the targets are set in advance, such compensation arrangements fail to meet the fifth criterion of the personal services safe harbor because aggregate compensation is not set in advance and the rebates are keyed to the volume of prescriptions generated.10

The fifth criterion is arguably the most important of the safe harbor's requirements, as it addresses the underlying concern of the Anti-Kickback Act (i.e., that compensation not be linked to the volume or value of referrals). Nevertheless, as noted above, practices that fall outside a safe harbor are not necessarily illegal. Federal enforcement authorities have indicated that in assessing substitution programs that fall outside a safe harbor-as well as assessing whether a program legitimately fits within a safe harbor-they consider the following:

  • What is the pharmacist being paid to do? As a threshold matter, the services for which the pharmacist is being compensated should be specified in the contract. In addition, a payment for services rendered is likely to be considered a kickback in disguise if the services either fall within the scope of the pharmacist's otherwise expected duties or are of little or no value to the payer. For example, consultant pharmacists are expected to regularly review the drug regimens of nursing facility residents, monitor potential side effects, instruct residents or medical staff or both as to the proper use and storage of drugs, and establish and maintain recordkeeping systems sufficient to accurately reconcile the receipt and disposition of drugs.11 Payments for such services from sources other than the contracting nursing facility may therefore be suspect. Similarly, the HHS OIG's 1994 Fraud Alert criticized programs involving payments to providers for the completion of negligible reporting tasks, such as providing minimal feedback on treatment outcomes that are too abbreviated to have clinical merit.12

    Furthermore, an arrangement that on paper appears to fit within a safe harbor may nevertheless be deemed a kickback if the services are never performed or if the parties understand the true purpose of the arrangement as facilitating payments in exchange for referrals. For example, last fall, Amarillo, Texas-based Pro Med Pharmacy Inc. paid $1 million to settle charges that it had paid kickbacks to durable medical equipment vendors in exchange for referrals of patients for nebulizer drugs. Pro Med compensated the vendors pursuant to contracts that required the vendors to help patients make proper use of the drugs and to document the provision of such services. However, one federal investigator has been quoted as saying that when enforcement authorities questioned the vendors about the compensation, the vendors referred to the compensation as their "referral payment."13

  • How is the pharmacist being paid? A payment for services rendered is less vulnerable to challenge under the Anti-Kickback Act if it is tied to the performance of the services themselves. For example, investigators became suspicious of pharmacies reviewed in the course of the Pro Med investigation when they noticed that payments to durable medical equipment vendors were made per drug shipment, not per service rendered to a beneficiary.14

    In the context of rebate arrangements, rebates based on the total volume of prescriptions and targets set in advance and determined on an annual basis may be less vulnerable to challenge than per-prescription rebates and targets set on a more frequent basis. Similarly, bonuses or other incentive payments may be less vulnerable than percentage rebates. Keep in mind, however, that any compensation arrangement tied in any way to the volume or value of referrals may give rise to kickback concerns.

    Similarly, non-monetary remuneration may be suspect. For example, the Fraud Alert denounced a "frequent flier" campaign in which a drug manufacturer gave providers airline frequent flier mileage credit every time they filled out a questionnaire for a new patient placed on the manufacturer's product.15

  • What is the pharmacist being paid? Any payment should be consistent with the fair market value of the services being compensated. Over- or under-compensation may suggest that the payment is not actually tied to the performance of services.

  • What factors motivate the pharmacist to recommend a change? The government is particularly concerned that remuneration from a pharmaceutical manufacturer or other source not interfere with the pharmacist's fiduciary duty to act in the best interest of the patient. Thus a pharmacist should be able to document his or her consideration of factors other than the potential reimbursement for recommending the substitution of an alternative therapy. For example, was the cost to the patient or payer considered? Were the efficacy, convenience, and potential side effects of the various alternatives considered? Did the pharmacist assess the likelihood of compliance with the particular regimen recommended, in terms of both the characteristics of the individual patient and the setting in which the regimen would be followed? Did the pharmacist provide the patient or the prescribing physician with sufficient information to make a meaningful decision about whether to follow the pharmacist's recommendation? Note, however, where the intent to induce a referral exists. That the fact that the substitution benefited the patient is not sufficient to protect a payment for recommending the substitution from scrutiny under the Anti-Kickback Act. HHS OIG staff have stressed that, as noted above, the gravamen of an Anti-Kickback Act violation is the intent to induce a referral and that no safe harbor exists for conduct that incidentally may also benefit patients where such intent exists.

Other Concerns

Unfortunately, the Anti-Kickback Act is not the only potential source of restrictions on therapeutic substitution programs. At least one state is currently considering a ban on substitution programs,16 and a number of states have challenged such programs under state unfair or deceptive practices laws.17

Furthermore, the Food and Drug Administration (FDA) recently published draft guidance suggesting that a pharmaceutical manufacturer, under certain circumstances, could be held responsible for promotional activities performed on its behalf by non-subsidiary health care organizations where such activities do not comply with the Food, Drug, and Cosmetic Act's guidelines for pharmaceutical labeling and advertising.18 The guidance states that in assessing responsibility, the FDA will consider the relationship between the parties (and will generally hold the manufacturer responsible if a contract to promote the manufacturer's product exists) and whether the manufacturer has control of or influence over the promotional activities performed on its behalf (e.g., through scripts, identification of target markets, or other attempts to affect content or dissemination).19 Should the FDA deem a manufacturer responsible for the non-subsidiary organization's marketing activities, the manufacturer will likely have to choose either requiring review and approval of communications with physicians and patients in exchange for rebates, discounts, or other remuneration or eliminating rebates, volume discounts, or other arrangements establishing a financial relationship between the manufacturer and the pharmacist. In any case, the guidance, if implemented, is expected to significantly impede the free flow of information between pharmacists and physicians or patients.

Finally, whereas past enforcement activities have tended to be brought by the FDA or state consumer protection authorities, in the future increased coordination among state consumer protection authorities, state Medicaid fraud units, the FDA, the HHS OIG, and the U.S. Attorney's Offices is expected.

Avoiding Liability

Despite the prevalence of substitution programs and recent threats of increased enforcement activity, there is disturbingly little available in the way of formal guidance from enforcement authorities regarding the permissible parameters of such programs.

Nevertheless, pharmacists involved in such programs can protect themselves by observing a few general principles:

  • Whenever possible, try to structure any compensation relationship relating to a substitution program to fit within the personal services and management contracts safe harbor, or at least carefully examine and minimize any tie between compensation and prescription volume

  • Evaluate all substitution programs in light of those factors identified by enforcement authorities as critical to their analysis of whether a program gives rise to a kickback violation

  • Obtain a copy of the 1994 Fraud Alert available on the HHS OIG's web page at www.dhhs.gov/progorg/oig and avoid arrangements that implicate the practices criticized therein

  • Monitor legislative and enforcement initiatives in the state in which you practice pharmacy to keep abreast of developments affecting substitution programs.

References

1. HHS OIG Fraud Alert 94-18.1994.

2. 42 U.S.C. § 1320a-7b(b).

3. See 42 U.S.C. § 1320a-7a(a)(7).

4. 42 U.S.C. § 1320a-7(b)(7).

5. 42 C.F.R. § 1001.952.

6. See, e.g., United States ex rel. Pogue v. American Health Corp., 914 F. Supp. 1507 (M.D. Tenn. 1996).

7. See, e.g., United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899 (5th Cir. 1997)

8. HHS OIG Fraud Alert 94-18.

9. Id.

10. Such arrangements also arguably do not meet the fourth criterion of the safe harbor, in that the compensation terms are set for less than a year.

11. 42 C.F.R. § 483.60.

12. HHS OIG Fraud Alert 94-18 (Aug. 1994).

13. Rodrigue G. Medicare kickbacks on drugs investigated; US attorney targets national firms, lawyers say. Dallas Morning News, Feb. 28, 1998.

14. Id.

15. HHS OIG Fraud Alert 94-18.

16. Conlan MF. Anti-therapeutic substitution. Drug Topics 1998;142:(7);54.

17. Interestingly, such challenges have thus far tended to focus upon ownership relationships between drug manufacturers and pharmacies, and have been resolved through settlements requiring, among other things, disclosure of the relationship to physicians and consumers. See, e.g., In re Merck & Co. and Medco Containment Servs., Inc. (Oct. 1995). The current federal enforcement focus upon other financial relationships, however, may well lead to state challenges of rebate arrangements and other forms of compensation linked to marketing efforts.

18. FDA Draft Guidance, promoting medical products in a changing healthcare environment: I. Medical product promotion by healthcare organizations or pharmacy benefits management companies. 1997.

19. Id.

Margit H. Nahra, JD, an associate with the Washington, D.C. law firm of Michaels, Wishner & Bonner, P.C., specializes in health care fraud and abuse counseling. She also serves as chair of the health law section of the District of Columbia bar.

Copyright © 1998, American Society of Consultant Pharmacists, Inc. All rights reserved.

[Return to Contents]
[Return to The Consultant Pharmacist] | [Return to Publications]


The Consultant Pharmacist is published by the
American Society of Consultant Pharmacists.