N O V E M B E R 1 9 , 2 0 1 4

Avoiding Anti-Kickback, Pricing and Contracting Issues

Cynthia Bass 908-981-6778 cynthia.bass@sanofi.com

William A. Sarraille 202.736.8195 wsarraille@sidley.com

Disclaimer 2

Please note that this presentation and the discussion reflect the speakers’ views and not the views of sanofi or Sidley

Austin LLP.

Agenda 3

Connection between Price Reporting and AKS

An Example of the Complexity of the Interaction Between the AKS and Price Reporting: Bundles

Connection between Price Reporting and Anti-Kickback Statute (AKS)

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Long History of Intertwined AKS and Price Reporting Issues: Schering-Plough Example

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Schering-Plough accused of offering kickbacks in the form of “data fees” for useless data to reduce the cost of Claritin.

Civil Settlement (2004)

$292 million.

Criminal Plea Agreement

Schering Sales Corp (SSC) pled guilty to one count of violating anti-kickback statute.

$52.5 million criminal fine.

Mandatory exclusion of SCC from federal healthcare programs (but exclusion did not apply to Schering).

Corporate Integrity Agreement (2004)

Price Reporting Enforcement: Schering-Plough (cont)

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“Schering also entered into two additional contracts with PacifiCare during the course of 1998 to implement pilot health management programs at PacifiCare sites.” (Emphasis added).

“Schering agreed to help PacifiCare develop internet-based health management tools.”

Civil complaint described this project as “member retention based.”

“Schering agreed to implement a Seniors Health and Wellness demonstration project designed to evaluate educational and member retention efforts.”

“From the specific context of the negotiation and implementation of these arrangements, it was apparent that Schering tailored and intended their value to address PacifiCare’s concern that Claritin was more expensive than its competitor Allegra.” (Emphasis added).

Why the Overlap? 7

In many ways, a fundamental element of AKS compliance is to distinguish service relationships from price concessions.

Service fees are protected under the personal services safe harbor.

Price concessions are protected under the discount statutory exception and the regulatory safe harbor to the AKS.

Similarly, a fundamental element of price reporting compliance is to distinguish between bona fide service fees and price concessions.

Service fees are excluded from the metrics if they meet the required standards.

Price concessions are included in the metrics.

The Overlap Is Not Perfect: Nothing is That Easy

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Although similar concepts are at work under the AKS and the price reporting rules, the applicable standards are not the same.

What is a service fee for AKS purposes may be a discount for price reporting purposes.

The personal services safe harbor (42 CFR § 1001.952): Be set out in writing and be signed by parties;

Specify the services to be provided;

If intended for services on a periodic, sporadic, or part-time basis, specify:

The schedule of such intervals,

Their precise length, and

The exact charge for such intervals;

Not to be for less than 1 year;

Set aggregate compensation in advance, consistent with fair market value, and not take into account volume or value of any referrals; and

Not be for activities that violate any state or federal law

The bona fide service fee test: (42 C.F.R. § 447.502) Fee must be for bona fide, itemized services that are actually performed on behalf of the manufacturer;

The manufacturer would otherwise perform or contract for the services;

Fee represents FMV; and

Fee is not passed on in whole or in part to a client or customer.

Additional Potential for Overlap 9

“Free” Items and Other Forms of Patient/Provider Assistance

Potentially raise, again, both AKS and price reporting issues

Contingent vs. non-contingent free product

Bulk replacement programs, state programs, PAP product, etc.

Reimbursement support

Reimbursement guarantees

Coupons and co-payment assistance

MDRP: As an Example of Price Reporting Uncertainty – Another Area of Overlap

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2010 2011 2012 2013 2014

3/23 & 3/30/2010 - ACA passes; changes

statutory definition of AMP; modifies/adopts

other key elements of MDRP

8/10/2010 - FAA Act amends

statutory definition of AMP to

address 5i drugs 10/1/2010 - New definition of

AMP and other terms are

effective

11/15/2010 - CMS releases Final

Rule withdrawing pre-ACA AMP

regulations; instructs manufacturers

to comply with ACA

2/2/2012 - CMS releases AMP Proposed Rule

12/15/2010 - Withdrawal of pre-ACA

AMP regulations becomes effective

2015 - CMS releases AMP Final Rule

Streck: Uncertainty to the Point of Absurdity

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The Case

Manufacturer relationship with wholesalers/distributors

The Allegations

Service fee vs. discount treatment defendants

Damned if you do; damned if you don’t

The clawback issue

Additional purchase price?

A penalty separate from purchase price?

An adjustment to FMV payment under a service fee?

CMS: insult to injury

A belated “clarification”

Uncertainty under the AKS 12

All Too Many Examples

Fair market value in personal service arrangements

No guidance as to how the methodology to be used is calculated

Market quotes treated sometimes “as suspect”

Has the government abandoned the discount safe harbor as applied to market share rebates?

J&J

Does the government believe that mixed service and discount relationships are inherently “suspect”?

Amgen

Status of adherence programs?

Novartis

Proper treatment of “bundles”

More about that later

The Importance of Reasonable Assumptions as a Mitigation Tool: MDRP

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Given the current (unsettled) state of regulatory guidance applicable to the MDRP, manufacturer reasonable assumptions are particularly important

In the absence of specific guidance, a manufacturer may make reasonable assumptions in its price reporting calculations, consistent with the relevant statutes, regulations, and the manufacturer’s customary business practices

To mitigate price reporting risks, reasonable assumptions should be documented

Manufacturers are required to retain records documenting their assumptions for 10 years from the date the manufacturer reports the data to CMS

Reasonable assumptions cannot be documented if the underlying contracting, negotiation, pricing, and business issues are not known; this underscores the importance of communication between contracting and price reporting personnel

Can be beneficial even in an AKS context, though not directly applicable

The Importance of Reasonable Assumptions as a Mitigation Tool: Medicare Part B

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Requirement for Reasonable Assumptions for ASP

Unlike the MDRP, where submission of reasonable assumptions is not required (though often is advisable), in the ASP context, manufacturers’ quarterly ASP submissions must include a statement of the manufacturer’s ASP methodology and reasonable assumptions used in its ASP calculation

Confidentiality of Reasonable Assumptions for ASP

Any information disclosed by manufacturers to CMS in connection with ASP data submissions is confidential, and CMS will not share the information, unless permitted by law

The Importance of Reasonable Assumptions as a Mitigation Tool: VHCA Drug Pricing Program

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The VA has clarified that any anticipated changes in a manufacturer’s method for accounting for chargebacks, or other changes in the manufacturer’s methodology for calculating Non-FAMP, must be explained to the VA prior to submitting annual data

This differs from the MDRP and Medicare Part B, where reasonable assumptions are submitted contemporaneously with the price reporting data

The VA also mandates that any changes in calculation methodology be implemented in accordance with Generally Accepted Accounting Principles (GAAP)

Overlap Even When There Isn’t Overlap: The J&J Case

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Relator claimed Best

Price manipulation with

data fees

The settlement ultimately

did not include price

reporting allegations

But government

supported its AKS claims

regarding an allegedly

“sham” data agreement

by pointing to alleged

effort to amend a Best

Price

U.S Civil Complaint in the District of Mass.: “J&J did not want to pay the strategic overlay … because J&J feared the additional two percent discount on Risperdal would set a lower best price on Risperdal, and thus would substantially increase J&J’s overall Medicaid rebate liabilities to the states. J&J and Omnicare signed their Consulting and Services Agreement in October 2000. The agreement had a term of July 1, 2000, to April 1, 2004, and called for J&J to pay Omnicare …a total of $4,650,000. In exchange, Omnicare was to provide [physician prescribing data and market share reports].” “In mid-1999, …Instead of J&J paying $300,000 to

Omnicare as a strategic overlay (which would have been

reportable to Medicaid for best price purposes), J&J and

Omnicare orally agreed that J&J would pay Omnicare

$300,000 for ‘educational funding.’”

The “Value” of Combined AKS and Price Reporting Allegations

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AKS Allegations: Driving up the Settlement Value of a Case

Criminal

Exclusion leverage

Greater history of individual enforcement

Price Reporting

Traditionally lower standard of intent than AKS

Reckless, not specific intent

Significant damages potential in BP cases

Effect on the “Trading Range” of Settlements

Bundling: A Study in AKS and Price Reporting Interplay

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A Study in the Overlap in and Tension Between the Price Reporting and AKS Guidance

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Evolution in Price Reporting Guidance: Slow and Tortured

Pre-DRA Final Rule

The concept of a bundle was relatively narrow and simple (focusing often on a physical dimension), and thus bundling as then defined was less of an issue, e.g.:

Buy one bottle of pills and get the second bottle for 50% off.

Buy one tablet and get a bottle of cream free.

Under the DRA Final Rule

The concept of a bundle was dramatically expanded (beyond any physical dimension), and previously established practices were suddenly (and unexpectedly) viewed as bundling.

The words/comments that drive the expansion:

“regardless of physical packaging”;

involving the “same drug” or “another product”;

with a “performance requirement” (explicitly including market share and formulary placement); and

involving “all [affected] quarters including prior purchases” (a/k/a “temporal bundles”).

A Sea Change in What It Means to “Bundle” 20

The evolution of the Medicaid definition of a bundle (pre- to post DRA Final Rule):

Government’s position: mere clarification

MRA definition

“Bundled Sale refers to the packaging of drugs of different types where the condition of rebate or discount is that more than one drug type is purchased, or where the resulting discount or rebate is greater than that which would have been received had the drug products been purchased separately.”

“Bundled sale means an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug, drugs of different types (that is, at the nine-digit National Drug Code (NDC) level) or another product or some other performance requirement (for example, the achievement of market share, inclusion or tier placement on a formulary), or where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs been purchased separately or outside the bundled arrangement.”

Quick Review of the Bundling Basics: The Allocation

Essentially, the allocation methodology calls for any bundled discount to be allocated based on the weight of the product’s undiscounted sales.

In addition to the allocation method prescribed in the definition, the DRA Final Rule provides the following example:

“For bundled sales, the discounts are allocated proportionally to the total dollar value of the units of all drug sold under the bundled arrangement. Bundled sales where multiple drugs are discounted, the aggregate value of all the discounts in the bundled arrangement shall be proportionally allocated across all the drugs in the bundle.” 42 C.F.R. § 447.502

“Products A and B are sold under a bundled arrangement and have a combined bundled discount equal to $200,000 on total undiscounted sales of $1 million. If Product A has undiscounted sales of $600,000 and product B has undiscounted sales of $400,000, the manufacturer would allocate 60 percent of the combined bundled discount to Product A when calculating AMP. Forty percent of the combined bundled discount would be allocated to Drug B. The effective unit price of each product would be calculated by subtracting the discount allocated to each drug product $600,000 - $120,000 = $480,000 for Product A; $400,000 - $80,000 = $320,000 for Product B) and dividing the result by the number of units for each drug product in the bundled sale.” 72 Fed. Reg. at 39159 (Jul. 17, 2007)

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The Evolution of Bundling (cont)

Early Reactions to the Expansion of Bundling

Labelers shied away from bundling, going out of their way to contract around bundling, particularly across products and time periods.

Bundles across time periods were often avoided by attempting to eliminate any contingency for a future purchase by including termination rights for customers at strategic intervals.

Use of some types of bundles (e.g., formulary and portfolio bundles) continued, particularly where the allocation of the bundled discount required little or no allocation (a/k/a/ “self-allocating”).

More Recent Expanded Interest in Bundling

Interest on the rise—often prompted by payers and other customers

Long-term price protection or variable discount arrangements increasingly being used

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The Evolution of Bundling (cont)

Reasons behind the expansion of bundling

Payers and providers seeking deeper discounts and more cost predictability from labelers

In exchange, labelers looking for a business benefit to justify those concessions

Sales and finance groups have more confidence in forecasting sales involving bundles, although many price reporting and legal personnel remain opposed or, at least, concerned

Some pricing systems are better designed to contend with bundling

Value-based purchasing developments in the EU and an increased interest in the US is encouraging new types of arrangements

Labelers generally have a higher risk tolerance in the face of expiring patents and leaner pipelines

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Bundles: The AKS Issues

A properly price reported bundle can still be an AKS issue, however.

To protect discounts under the AKS, manufacturers can structure discounts to satisfy the discount safe harbor to the AKS.

Among other requirements, under the safe harbor, the items or services apart of a bundle must all be reimbursed under the “same methodology”.

In a 2000 proposed rule, the OIG proposed clarifying “same methodology” to mean “the same DRG, prospective payment, or per diem, but not . . . fee schedules.”

Subsequent developments suggest the more reasonable interpretation (consistent with the plain language of the term) to the reimbursement system

The statutory exception for discounts as a possible alternative

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OIG Guidance on Identifying a Bundle: AO 13-07

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When is a bundle not a bundle?

The Requestor, a manufacturer of products used to treat ophthalmologic disorders, including drugs and devices, sought the OIG’s review of a tiered, percentage rebate program, based on its customers’ total purchases of its surgical products.

Some, but not all, of the Requestor’s surgical products are reimbursable by federal programs.

Under the arrangement, rebates would be calculated based on a customer’s total annual purchases, regardless of whether the products are reimbursable by federal health care programs. For example, a customer who purchased $X of products during a calendar year would receive a 5% rebate, a customer who purchased $2X of products in a calendar year would receive a 10% rebate, and so on.

According to the OIG, the products in the arrangement are not necessarily reimbursed under the same methodology.

The concepts at work here: transparency and the potential for “separateness” in earning discounts.

Shouldn’t the AKS and the price reporting rules be consistent?

“However, that is not essential here because the [a]rrangement does not involve a ‘bundle.’ Not only would a discount on one product not be contingent on the purchase of another product, the discount also would be readily attributable to each item purchased. Therefore, we deem the rebates offered under the [a]rrangement to meet the definition of ‘discount’ under the safe harbor.”

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Thank You!

Questions?