Creating Private-Sector Standards of Conduct

Interpretive problems arise from the multiple roles of physicians and other health care providers in our free-market economy. First, they are professionals with fiduciary duties to their patients. Second, they are customers — or the effective decision-makers for customers — of manufacturers of pharmaceuticals and medical devices, who generally seek to maximize sales of their products. Such products are a significant sector of the national economy. Third, some providers are also suppliers of services to manufacturers: they conduct research necessary for regulatory approval of new products or new claims for products; they serve on advisory boards; and they consult for manufacturers on particular medical issues. Fourth, a substantial part of the cost of medical products selected by providers is covered by federal programs; that fact creates a substantial federal interest in the financial dealings between the manufacturers and the providers. Dealings between medical-products manufacturers and providers engage many public policies besides the anti-kickback policy. The public has a strong interest in the development of new medical products and new information about existing products, for which the research providers conduct for manufacturers is critical. The First Amendment's commercial speech doctrine generally protects truthful, non-misleading communications by manufacturers to providers about the manufacturers' products. Advice by providers to manufacturers is critical to the efficient deployment of finite resources for research and marketing. Public policy also favors competition, which includes competition among manufacturers in their relations with providers (within legal limits, whatever they are). And public policy should also encourage private-sector institutions to develop voluntary standards of conduct, especially where they are likely to be broadly effective.

A Hypothetical Case

Suppose a medical-products manufacturer selects several physicians to conduct research supporting a new claim for its product – and it so happens that these physicians are heavy prescribers of that same product. Is their selection “remuneration” for previous heavy prescribing and an inducement to future heavy prescribing, and thus an unlawful kickback?

Or is it not a kickback because the manufacturer is paying no more than the market rate for research, the physicians were selected because they have the kinds of practices most conducive to the contemplated research, and they remain totally free with respect to future prescribing?

Suppose the physicians and their significant others are invited to discuss the project at a Caribbean resort at company expense? Does the inclusion of significant others convert an otherwise proper arrangement into something unlawful or at least unseemly? Or is it merely an incidental, immaterial goodwill gesture to a business counterpart? Does the use of the Caribbean resort matter?

Although such questions may raise passions, the answers are debatable. These and related questions were not addressed in prior “fraud alerts” issued by OIG. See 59 Fed. Reg. 65,372 (Dec. 19, 1994) or in OIG's advisory opinions, see http://www.oig.hhs.gov/fraud/advisoryopinions/opinions.html; and they are only partially addressed by the regulation establishing a safe harbor for personal services contracts, 42 C.F.R. ' 1001.952(d).

The PhRMA Steps In

Into this gray area stepped the Pharmaceutical Research and Manufacturers of America (PhRMA), the trade association of the research-based pharmaceutical manufacturers. In April 2002, PhRMA issued a voluntary “Code on Interactions with Healthcare Professionals,” effective July 1, 2002. It is available at http://www.phrma.org/publications/policy/2002-04-19.391.pdf. The Code addresses a range of issues, including the ones raised in the foregoing hypothetical. Section 4.a, dealing with consultants, requires that “the venue and circumstances of any meeting with consultants [be] conducive to the consulting services … ” That probably rules out the Caribbean resort. Section 4.b states: “ It is not appropriate to pay … travel or lodging expenses to … non-consultant attendees at company-sponsored meetings … ” That rules out company payment for the significant others (who probably would not be interested in attending at an office building, anyway).

The Code does not expressly address the selection of consultants. Section 8, however, states that “[n]o … consultant contracts … shall be provided or offered to a health care professional in exchange for prescribing products or for a commitment to continue prescribing products. Nothing should be offered or provided in a manner or on conditions that would interfere with the independence of a healthcare professional's prescribing practices.” Section 4.a states that it is appropriate to pay consultants “reasonable compensation” for the services they provide and “reimbursement for reasonable travel, lodging, and meal expenses incurred as part of providing those services.”

Section 9 “strongly encourage[s]” each member company of PhRMA “ to adopt procedures to assure adherence to this Code.” The preamble to the Code nevertheless describes it as voluntary. The Code's prohibitions could be viewed as prohibiting a number of means by which pharmaceutical manufacturers compete for the services of providers. Making the Code voluntary not only preserves the autonomy of individual companies, but also eases antitrust concerns.

Consequences to the Company

Formal adoption of the Code by a company has consequences for that company. Meaningful adoption means incorporation of the Code into written company policy; reflection of it in training materials and other internal communications; periodic auditing of compliance; and, as necessary, discipline and other appropriate responses to noncompliance. Adoption of the Code thus strengthens its use in internal — and external — assessment of the company's conduct.

The voluntary character of the Code, however, may raise a painful issue when a company that has adopted and follows it loses out in competition against another company that has not and does not. That kind of problem arises with respect not only to voluntary codes but also to under-enforced statutes and regulations. The problem, endemic to regulatory systems applicable to marketplace behavior, is particularly troublesome where enforcement standards are unclear.

Compliance Program Guidance

In October 2002, OIG issued a proposed Compliance Program Guidance for the Pharmaceutical Industry, which covers several topics, including relations with providers. 67 Fed. Reg. 62,057 (Oct. 3, 2002). On the topic of manufacturer-provider relations, the proposed Guidance, without identifying any deficiency in the Code, characterized it as merely stating “the minimum standards” under the law, and threatened that arrangements that fail to comply with the Code “are likely to receive increased scrutiny from government authorities.” Id. at 62,063. The OIG did not withdraw those statements when it issued the Guidance in final form on April 28, but added: “Although compliance with the PhRMA Code will not protect a manufacturer as a matter of law under the anti-kickback statute, it will substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply with the applicable federal health care program requirements.” Compliance Program Guidance for Pharmaceutical Manufacturers at 31; see also pp. 33-34 (available at http://oig.hhs.gov/fraud/docs/complianceguidance/).

This treatment of the Code (particularly in the proposed Guidance) discourages the development and expansion of such voluntary codes. Although OIG says that compliance with the Code will not necessarily protect a manufacturer from prosecution, OIG fails to tell manufacturers what further prohibitions are needed for full compliance. One can understand the reluctance of an enforcement agency to commit itself to detailed statutory interpretations in advance of specific cases. But an enforcement agency with rule-making authority has a responsibility to provide substantive guidance where 1) the applicability of a criminal statute to identifiable types of marketplace conduct is uncertain; 2) the relevant conduct is subject to conflicting public policies; 3) the parties subject to the statute are likely to comply with clear substantive standards; and 4) in the absence of clear standards, competitive pressures are likely to lead to legally risky conduct. Here, specific comments by the OIG on the code's substantive provisions would clearly further the goal of compliance, since the code was created by a reputable private organization in a reasonable and good-faith attempt to guide conduct in an area covered by the statute and is likely to be adopted widely.

The threat of “increased scrutiny” gives no substantive guidance. OIG does suggest five useful sets of questions to be considered (final Guidance at 29-30), but it does not help in addressing the hard issues. Thus, pharmaceutical manufacturers are expected to train their employees and other agents on the Code, with no basis for confidence that the government will view compliance with the Code as even presumptively adequate with respect to its subject matter. OIG also fails even to address the aspects of the Code that arguably go beyond the requirements of law. By characterizing the Code as stating “minimum standards,” OIG arguably expands the scope of legal prohibitions without any discussion of whether such expansion can be justified, and without any apparent recognition that such expansion discourages the private sector from setting higher standards than the obvious statutory minimum.

Indeed, OIG seems not to recognize the public interest in the supplying of research, consulting, and other services by providers to manufacturers and, necessarily, payment therefor. OIG's proposed Guidance said: “While there may be legitimate purposes to these arrangements, they pose a substantial risk of fraud and abuse; without appropriate safeguards, they can result in payments for referrals.” Id. at 67,062 (emphasis added). Yes, there is a risk of fraud and abuse, and safeguards are needed; but there can be no reasonable doubt about the legitimacy and large public benefits of such arrangements in general.

Conclusion

In light of those benefits, OIG ought to make some effort to provide more useful criteria for distinguishing unlawful from lawful arrangements so as not to chill the latter. If it thinks the PhRMA Code inadequate, it should, in the interest of increasing voluntary compliance, suggest ways the Code can be improved, particularly because the Code is likely to become the industry standard. On subject matters as to which it views the Code as adequate, it should state that conduct undertaken in good faith in compliance with the Code will be treated as at least presumptively lawful. In the end, OIG is likely to achieve a much greater degree of actual prevention of the kinds of conduct the statute is directed against by using and helping to improve private codes such as PhRMA's than by inadvertently discouraging them.

Richard M. Cooper is Chairman of the Board of Editors of LJN's Business Crimes Bulletin, and is a partner at Williams & Connolly LLP in Washington, DC. He has represented the Pharmaceutical Research and Manufacturers of America.

Whether certain conduct is a crime depends on more than legislatures, judges, and juries. When prosecutors decide whether, whom, and what to charge, the policies underlying their decisions create operative standards of conduct. So, too, do those of agencies administering regulatory programs backed by criminal sanctions. But what about the private sector? Sensible standards of conduct articulated by trade associations can and should play a substantial role in drawing the line between acceptable business practices and bad conduct that can be subject to criminal sanctions.

A good example is the recent development of a Compliance Program Guidance for Pharmaceutical Manufacturers under the Medicare/ Medicaid anti-kickback statute, 42 U.S.C. ' 1320a-7b(b)(1)-(2), by the Office of the Inspector General (OIG) of the Department of Health and Human Services. In general, the anti-kickback statute prohibits the payment of any “remuneration” to a provider of health care to influence the provider's selection of any goods or services to be used in health-care covered by Medicare, Medicaid or another federal health care program. The statute has exceptions, 42 U.S.C. ' 1320a-7b(b)(3); and several safe harbors for specific kinds of arrangements have been created by regulation, 42 C.F.R. ' 1001.952. Nevertheless, there remains a large gray area, which makes it hard to know what is prohibited in many kinds of circumstances.

Interpretive Problems

Interpretive problems arise from the multiple roles of physicians and other health care providers in our free-market economy. First, they are professionals with fiduciary duties to their patients. Second, they are customers — or the effective decision-makers for customers — of manufacturers of pharmaceuticals and medical devices, who generally seek to maximize sales of their products. Such products are a significant sector of the national economy. Third, some providers are also suppliers of services to manufacturers: they conduct research necessary for regulatory approval of new products or new claims for products; they serve on advisory boards; and they consult for manufacturers on particular medical issues. Fourth, a substantial part of the cost of medical products selected by providers is covered by federal programs; that fact creates a substantial federal interest in the financial dealings between the manufacturers and the providers. Dealings between medical-products manufacturers and providers engage many public policies besides the anti-kickback policy. The public has a strong interest in the development of new medical products and new information about existing products, for which the research providers conduct for manufacturers is critical. The First Amendment's commercial speech doctrine generally protects truthful, non-misleading communications by manufacturers to providers about the manufacturers' products. Advice by providers to manufacturers is critical to the efficient deployment of finite resources for research and marketing. Public policy also favors competition, which includes competition among manufacturers in their relations with providers (within legal limits, whatever they are). And public policy should also encourage private-sector institutions to develop voluntary standards of conduct, especially where they are likely to be broadly effective.

A Hypothetical Case

Suppose a medical-products manufacturer selects several physicians to conduct research supporting a new claim for its product – and it so happens that these physicians are heavy prescribers of that same product. Is their selection “remuneration” for previous heavy prescribing and an inducement to future heavy prescribing, and thus an unlawful kickback?

Or is it not a kickback because the manufacturer is paying no more than the market rate for research, the physicians were selected because they have the kinds of practices most conducive to the contemplated research, and they remain totally free with respect to future prescribing?

Suppose the physicians and their significant others are invited to discuss the project at a Caribbean resort at company expense? Does the inclusion of significant others convert an otherwise proper arrangement into something unlawful or at least unseemly? Or is it merely an incidental, immaterial goodwill gesture to a business counterpart? Does the use of the Caribbean resort matter?

Although such questions may raise passions, the answers are debatable. These and related questions were not addressed in prior “fraud alerts” issued by OIG. See 59 Fed. Reg. 65,372 (Dec. 19, 1994) or in OIG's advisory opinions, see http://www.oig.hhs.gov/fraud/advisoryopinions/opinions.html; and they are only partially addressed by the regulation establishing a safe harbor for personal services contracts, 42 C.F.R. ' 1001.952(d).

The PhRMA Steps In

Into this gray area stepped the Pharmaceutical Research and Manufacturers of America (PhRMA), the trade association of the research-based pharmaceutical manufacturers. In April 2002, PhRMA issued a voluntary “Code on Interactions with Healthcare Professionals,” effective July 1, 2002. It is available at http://www.phrma.org/publications/policy/2002-04-19.391.pdf. The Code addresses a range of issues, including the ones raised in the foregoing hypothetical. Section 4.a, dealing with consultants, requires that “the venue and circumstances of any meeting with consultants [be] conducive to the consulting services … ” That probably rules out the Caribbean resort. Section 4.b states: “ It is not appropriate to pay … travel or lodging expenses to … non-consultant attendees at company-sponsored meetings … ” That rules out company payment for the significant others (who probably would not be interested in attending at an office building, anyway).

The Code does not expressly address the selection of consultants. Section 8, however, states that “[n]o … consultant contracts … shall be provided or offered to a health care professional in exchange for prescribing products or for a commitment to continue prescribing products. Nothing should be offered or provided in a manner or on conditions that would interfere with the independence of a healthcare professional's prescribing practices.” Section 4.a states that it is appropriate to pay consultants “reasonable compensation” for the services they provide and “reimbursement for reasonable travel, lodging, and meal expenses incurred as part of providing those services.”

Section 9 “strongly encourage[s]” each member company of PhRMA “ to adopt procedures to assure adherence to this Code.” The preamble to the Code nevertheless describes it as voluntary. The Code's prohibitions could be viewed as prohibiting a number of means by which pharmaceutical manufacturers compete for the services of providers. Making the Code voluntary not only preserves the autonomy of individual companies, but also eases antitrust concerns.

Consequences to the Company

Formal adoption of the Code by a company has consequences for that company. Meaningful adoption means incorporation of the Code into written company policy; reflection of it in training materials and other internal communications; periodic auditing of compliance; and, as necessary, discipline and other appropriate responses to noncompliance. Adoption of the Code thus strengthens its use in internal — and external — assessment of the company's conduct.

The voluntary character of the Code, however, may raise a painful issue when a company that has adopted and follows it loses out in competition against another company that has not and does not. That kind of problem arises with respect not only to voluntary codes but also to under-enforced statutes and regulations. The problem, endemic to regulatory systems applicable to marketplace behavior, is particularly troublesome where enforcement standards are unclear.

Compliance Program Guidance

In October 2002, OIG issued a proposed Compliance Program Guidance for the Pharmaceutical Industry, which covers several topics, including relations with providers. 67 Fed. Reg. 62,057 (Oct. 3, 2002). On the topic of manufacturer-provider relations, the proposed Guidance, without identifying any deficiency in the Code, characterized it as merely stating “the minimum standards” under the law, and threatened that arrangements that fail to comply with the Code “are likely to receive increased scrutiny from government authorities.” Id. at 62,063. The OIG did not withdraw those statements when it issued the Guidance in final form on April 28, but added: “Although compliance with the PhRMA Code will not protect a manufacturer as a matter of law under the anti-kickback statute, it will substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply with the applicable federal health care program requirements.” Compliance Program Guidance for Pharmaceutical Manufacturers at 31; see also pp. 33-34 (available at http://oig.hhs.gov/fraud/docs/complianceguidance/).

This treatment of the Code (particularly in the proposed Guidance) discourages the development and expansion of such voluntary codes. Although OIG says that compliance with the Code will not necessarily protect a manufacturer from prosecution, OIG fails to tell manufacturers what further prohibitions are needed for full compliance. One can understand the reluctance of an enforcement agency to commit itself to detailed statutory interpretations in advance of specific cases. But an enforcement agency with rule-making authority has a responsibility to provide substantive guidance where 1) the applicability of a criminal statute to identifiable types of marketplace conduct is uncertain; 2) the relevant conduct is subject to conflicting public policies; 3) the parties subject to the statute are likely to comply with clear substantive standards; and 4) in the absence of clear standards, competitive pressures are likely to lead to legally risky conduct. Here, specific comments by the OIG on the code's substantive provisions would clearly further the goal of compliance, since the code was created by a reputable private organization in a reasonable and good-faith attempt to guide conduct in an area covered by the statute and is likely to be adopted widely.

The threat of “increased scrutiny” gives no substantive guidance. OIG does suggest five useful sets of questions to be considered (final Guidance at 29-30), but it does not help in addressing the hard issues. Thus, pharmaceutical manufacturers are expected to train their employees and other agents on the Code, with no basis for confidence that the government will view compliance with the Code as even presumptively adequate with respect to its subject matter. OIG also fails even to address the aspects of the Code that arguably go beyond the requirements of law. By characterizing the Code as stating “minimum standards,” OIG arguably expands the scope of legal prohibitions without any discussion of whether such expansion can be justified, and without any apparent recognition that such expansion discourages the private sector from setting higher standards than the obvious statutory minimum.

Indeed, OIG seems not to recognize the public interest in the supplying of research, consulting, and other services by providers to manufacturers and, necessarily, payment therefor. OIG's proposed Guidance said: “While there may be legitimate purposes to these arrangements, they pose a substantial risk of fraud and abuse; without appropriate safeguards, they can result in payments for referrals.” Id. at 67,062 (emphasis added). Yes, there is a risk of fraud and abuse, and safeguards are needed; but there can be no reasonable doubt about the legitimacy and large public benefits of such arrangements in general.

Conclusion

In light of those benefits, OIG ought to make some effort to provide more useful criteria for distinguishing unlawful from lawful arrangements so as not to chill the latter. If it thinks the PhRMA Code inadequate, it should, in the interest of increasing voluntary compliance, suggest ways the Code can be improved, particularly because the Code is likely to become the industry standard. On subject matters as to which it views the Code as adequate, it should state that conduct undertaken in good faith in compliance with the Code will be treated as at least presumptively lawful. In the end, OIG is likely to achieve a much greater degree of actual prevention of the kinds of conduct the statute is directed against by using and helping to improve private codes such as PhRMA's than by inadvertently discouraging them.

Richard M. Cooper is Chairman of the Board of Editors of LJN's Business Crimes Bulletin, and is a partner at Williams & Connolly LLP in Washington, DC. He has represented the Pharmaceutical Research and Manufacturers of America.