healthlaw reference

-Summer 2003 -

OIG Issues Pharmaceutical Compliance Guidance

By Michael A. Cassidy, Esq.

Benefits of a Compliance Program

"The OIG believes a comprehensive compliance program provides a mechanism that addresses the public and private sectors’ mutual goals of reducing fraud and abuse; enhancing health care provider operational functions; improving the quality of health care services; and reducing the cost of health care." The OIG also believes that pharmaceutical manufacturers can obtain the following "important additional benefits" from establishing a voluntary compliance program:

• A concrete demonstration to employees and the community at large of the company’s commitment to honest and responsible corporate conduct.

• An increased likelihood of preventing, or at least identifying and correcting, unlawful and unethical behavior at an early stage;

• A mechanism to encourage employees to report potential problems and allow for appropriate internal inquiry and corrective action; and

• Through early detection and reporting, minimizing any financial loss to the government and any corresponding financial loss to the company.

Industry Risk Areas

One purpose of the OIG’s various compliance announcements is to alert various sections of the healthcare industry to the specific risk areas within that industry. For the pharmaceutical industry, the OIG has identified three significant risk areas:

1. Integrity of Data Used to Establish or Determine Government Reimbursement,

2. Kickbacks and Other Illegal Remuneration, and

3. Compliance With Laws Regulating Drug Samples.

The CPG then proceeds to identify specific types of conduct within these various risk areas which should be closely

examined in light of these basic concerns.

Data Integrity and Reimbursement

Since the Medicare reimbursement program is predicated upon a reimbursement formula, i.e. 95% of the Average Wholesale Price, the integrity of the data submitted by the manufacturers in order to establish the Average Wholesale Price is a critical component.

In addition to determining the appropriate reimbursement, there are a host of reimbursement - related areas which the OIG identifies as risk areas, such as:

1. Product support services like billing assistance and reimbursement consultation,

2. Reimbursement guarantees linked to federal reimbursement,

3. 3. Product switching fees paid when customers or physicians switch drug brands, and

4. Detailing payments, ie. payments to compensate physicians for the time spent listening to the pharmaceutical manufacturers product presentations.

Kickbacks and Illegal Remuneration

Because kickbacks, i.e. remuneration in exchange for prescribing certain drugs, is one of the major risk areas the OIG reviewed a number of traditionally accepted practices. While acknowledging that the practices were not illegal per se, the OIG cautioned the industry that safeguards must be present, such as FMV, independent conduct, etc., in the following areas:

1. Educational grants,

2. Research sponsorship,

3. Formulary relationship, and

4. Consulting/medical director’s positions.

The OIG also devoted a sub-section of the kickback analysis to gifts and business courtesies, making specific reference to the PhRMA Code. The PhRMA Code is a set of voluntary marketing guidelines adopted by the Pharmaceutical Research and Manufacturers of America, a major industry association, effective July 1, 2002. It concentrates primarily upon the ethical and effective marketing of pharmaceuticals. The focus of the PhRMA Code is upon the interactions of pharmaceutical representatives and healthcare professionals, and the thesis is that all interactions should be intended to benefit patients, related to healthcare educational activities, and should not provide incidental benefits with the exception of occasional and modest meals.

The PhRMA code provides specific advice regarding:

1. Informational presentations;

2. Third party educational meetings;

3. Use of consultants;

4. Speaker training meetings;

5. Scholarship and educational funds; and

6. Educational or practice related items.

Drug Samples

The final significant risk area is the provision of the free drug samples. Providing free samples for the benefit of patients is a well-accepted practice in the industry, and one that is encouraged by the OIG. However, the Prescription Drug Marketing Act of 1987 (PDMA), 21 U.S.C. §353(c)(1), governs the distribution of drug samples and prohibits the sale of samples. There have been several recent high profile government actions against healthcare practitioners and pharmaceutical companies in this area.

Michael A. Cassidy is the Chair of the firm’s Health Care Practice Group. For more information on these issues, please contact Mike Cassidy at 412.594.5515 or via e-mail at mcassidy@tuckerlaw.com.

A copy of the CPG is available on the OIG website at http://oig.hhs.gov/fraud/complianceguidance.html #1. The PhRMA Code can be accessed at that organizations website, i.e. www.phrma.org.

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HIPAA’s Final Security Rule: Better Than Expected

Just as providers are beginning to feel comfortable with HIPAA’s privacy rule, the Department of Health and Human Services ("HHS") released the final rule defining the electronic security standards. The proposed rule, released August 12, 1998, contained over 60 required implementation features, and made no allowance for small providers. As a result, HHS received approximately 2,350 comments to the proposed rule. In the final rule published February 20, 2003 HHS addressed those concerns and created a comprehensive rule that provides flexibility for small entities. Most covered entities will have until April 21, 2005 to comply with the new standards; however, small health plans will have an extra year to become compliant.
 

Who and What Is Covered By The Rule

The final rule makes the security standard applicable to all covered entities. This is the same group covered by the privacy rule and includes: (1) health plans, (2) health care clearinghouses, and (3) health care providers who transmit health information in electronic form. Covered entities must also implement standards to cover any member of their work force who works from home, or at an off site location.

The standards will apply to all electronic protected health information an entity creates, receives, maintains or transmits. Unlike the privacy rule, the security rule only applies to information in electronic form. In response to numerous comments, the final rule only applies to information in electronic form prior to transmission. Thus paper to paper faxes, person to person telephone calls and voice mail are not covered. The rule does apply to telephone voice response and faxback programs because these operations utilize pre-transmission electronic information. Note this guidance is different from that given in the transaction standard and only applies to the security rule.

Flexibility

In response to comments urging the HHS to make the rule scalable to allow implementation by all entities, the new rule vastly altered the standards and implementation specifications. The standards are written very generally to allow compliance by all sizes and types of entities. Some standards also contain implementation specifications, which provide guidance on how the standards should be implemented. These specifications are designated either as required or addressable to allow for even more flexibility. Required specifications must be implemented to comply with the rule; however, entities will have discretion regarding the addressable specifications.

When a standard contains one or more addressable specifications, the provider must choose whether to: (1) implement the specification, (2) implement an alternative security measure, or (3) not implement the specification or the alternative. When making this choice entities must determine whether the specification is reasonable or appropriate by looking at factors such as a risk analysis, risk mitigation strategy, cost, measures currently in place, etc. If the entity determines that the measure is appropriate and reasonable it must implement it. If a company decides to implement an alternative, or not implement the specification or an alternative, it must document its decision and rationale, and explain how the standard is being met in light of its choice. The generality of the standards and the flexibility of the specifications allow companies, regardless of type and size, to tailor a plan to fit their organization and comply with the rule.

The Standards

The rule breaks the standards into three categories: (1) administrative safeguards, (2) physical safeguards, and (3) technical safeguards. The administrative safeguard category contains standards requiring the development of policies and procedures that will allow an entity to secure its data and ensure its availability. These standards address office procedure, management, workforce protocols, etc. The physical safeguard category addresses the security of the system itself, including the workstations and the facilities where they are contained. The last category contains standards relating to access controls, and dictates what procedures users must utilize to access the electronic material. These standards govern issues such as passwords, automatic logoff, etc.

Documentation

The rule requires that companies develop and maintain documentation of all company policies and procedures required under this rule. The documentation must be kept in written or electronic form and updated as policies and procedures are altered. This documentation must be maintained for six years. This documentation should be available to any person who would need such information. For the average provider this rule will require more documentation than change. Most entities currently have password protected computers and databases. Most entities currently back up their files on a regular basis. Most entities do most of what is required by this rule already. To become compliant with this rule, entities will need to develop and maintain written documentation of what they already do and fill in policies and procedures as necessary.

The attorneys at Tucker Arensberg are working to develop compliance plans to meet the needs of our health care clients. If you have any questions regarding the new security standards, or what you need to do to prepare your office, please contact Mike Cassidy in our health care group.

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Highlights of the New Tax Act

By Michelle L. Kopnski, Esq.

On May 28, 2003, President Bush signed into law the Jobs and
Growth Tax Relief Reconciliation Act of 2003. The goal of this Act is to stimulate the economy by lowering the maximum rate on capital gains and most dividends, accelerating the income tax rate reductions that were previously enacted, and increasing depreciation benefits for small business owners who purchase property and equipment. The following is a summary of the provisions of the Act.

Lowering of Maximum Rate on Capital Gains

For all sales and exchanges which occur on or after May 6, 2003, the Act lowers the tax rate on long-term capital gains. For those taxpayers who are in a tax bracket higher than 15%, the tax rate on long-term capital gains is now 15% for the years 2003 through 2008. For those taxpayers who are in the 10% or 15% bracket, the long-term capital gains rate is reduced to 5% for the years 2003 through 2007 with no taxes on long term capital gains in 2008. There is no lowering of the maximum rate for short term capital gains. Short-term capital gains remain subject to tax at ordinary income tax rates.

For taxpayers who own mutual funds, the lower tax rate on capital gains will apply generally to redemptions as well as capital gains distributions from those funds. In the case of capital gains distributions, the date on which the gains are realized by the mutual fund is the date for determining whether the new lower capital gains rate will apply. Thus, any capital gain which is realized by a mutual fund on or after May 6, 2003 will be taxed at the new lower rates, and any capital gain which is realized by the mutual fund before May 6, 2003 will be taxed at the old law’s rates of 20% (or 10% depending upon a person’s tax bracket.) With respect to installment sales, any capital gains that are received on or after May 6, 2003 will be taxed at the new lower rates even if the sale itself was entered into before May 6, 2003.

Lowering of Maximum Rate on Dividends

Any "qualified dividend income" that is received by a shareholder from either a domestic or qualified foreign corporation will be generally taxed at the same rate as the rates that apply to capital gains.

Therefore, for tax payers who are in a tax bracket higher than 15%, dividends will be taxed at the 15% rate for the years 2003 through 2008. Those taxpayers who are in the 10% or 15% bracket will pay tax at the rate of 5% on their "qualified dividend income" in 2003 through 2007, and will pay no tax on such dividends in 2008. A dividend will be considered "qualified dividend income" if the taxpayer meets certain holding periods. For dividends from common stock, the holding period is generally at least 60 days during the 120 day period beginning 60 days before the stock becomes ex-dividend. For dividends from preferred stock, the holding period is 90 days during the 180 day period beginning 90 days before the stock becomes ex-dividend.

There are a number of other exceptions with respect to whether a dividend is to be treated as "qualified dividend income." You should consult with your tax advisor prior to any dividend trans-action which might cause you to lose the favorable tax treatment for such transaction. With respect to distributions from mutual funds, that portion of any distribution that is a dividend will be treated as "qualified dividend income" on the taxpayer’s income tax return. However, distributions that are short term capital gains will continue to be taxed at ordinary income tax rates.
 

Acceleration of Child Credit and Tax Rates

Effective for tax years 2003 and 2004, the Act increases the amount of the child credit to $1,000. The credit under the old law was $600 for 2003 and 2004. According to the terms of the Act, the child credit is reduced to $700 after 2004, but increases back to $1,000 in 2010. The amount of the credit will be reduced for taxpayers whose "modified adjusted gross income" is over $110,000 for married couples filing jointly.

For tax years 2003 and 2004, the standard deduction for married taxpayers filing jointly will be twice the amount of the standard deduction for single taxpayers. Under "current" law, the standard deduction for couples filing jointly was 167% of the standard deduction for single taxpayers. For taxable years after 2004, the standard deduction for married couples filing jointly will return to 167% of the standard deduction for single taxpayers. Similarly, the Act expands the 15% income tax bracket for married taxpayers filing joint returns so that it is now double the 15% income tax bracket for single taxpayers. This expansion of the 15% rate bracket applies for tax years 2003 and 2004. For tax years after 2004, the rate bracket reverts to "current" law. Under "current" law, a reduction in the regular tax rates was scheduled to occur in 2004 and 2006. Under the new Act, for tax years 2003 and thereafter, the new tax rates will be 15%, 25%, 28%, 33%, and 35%. Under current law, the rates were 15%, 27%, 30%, 35%, and 38.8%.

Increases in Depreciation Allowances

For all tax years ending after May 5, 2003, the Act provides an additional first year depreciation deduction which is equal to 50% of the adjusted basis of "qualified property" purchased. Generally speaking, "qualified property" is property to which the Modified Accelerated Cost Recover System applies with a recovery period of 20 years or less. In order for property to be considered "qualified property", the property must be acquired after May 5, 2003 and before January 1, 2005. Unfortunately, if property was subject to a binding written contract prior to May 6, 2003, the property will not qualify. In addition to the increase in the depreciation allowance for certain "qualified property", the Act also increases the maximum amount that may be deducted under Section 179 of the Internal Revenue Code from $25,000 to $100,000 with the phase-out threshold level raised from $200,000 to $400,000 for property which is placed in service for tax years beginning in 2003, 2004 and 2005.

Planning Opportunities

The Act creates a number of planning opportunities for taxpayers who are able to take advantage of the lower tax rates on long-term capital gains and dividend distributions. In addition, the Act provides substantial tax savings for businesses that purchase "qualified property" after May 6, 2003.

Michelle Kopnski is an attorney in the firm’s Health Care Practice Group. For more information on this topic, please contact Michelle at 412.594.5522 or via e-mail at mkopnski@tuckerlaw.com.

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In each issue, we spotlight a member

of the Health Care Practice Group.

In this issue, we spotlight...

MICHELLE L. KOPNSKI

Michelle L. Kopnski, an attorney in the firm’s Health Care Practice Group, concentrates her practice in the areas of corporate transactions, federal, state and local taxation and non-profit and tax-exempt entities. Michelle has her LL.M., an advanced tax degree, from the prestigious masters program at the New York University School of Law.

Michelle’s practice also includes a concentration in complex corporate transactions including negotiation, analysis, documentation and implementation of mergers, acquisitions and divestitures involving public and privately held companies; creation and implementation of start-up and business development strategies for manufacturing and service organizations; design of partnership and limited liability company transactions; additional practice concentration in federal, state and local taxation; negotiation and management of corporate tax positions with IRS appellate officers; preparation and presentment of corporate tax petitions before commonwealth revenue and appellate boards; and formation and representation of non-profit and tax-exempt entities.

Michelle has experience handling extensive design, structuring and management of employee benefit programs including primary responsibility for coordination of benefit programs for a 20,000+ employee public company and its subsidiaries, which maintained nine separate employee benefit plans. She has also dealt with issues of ERISA and DOL compliance in employee plan administration.

Michelle received her undergraduate degree from West Virginia University, her law degree from West Virginia University College of Law. Michelle is licensed to practice in Pennsylvania and West Virginia.

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Proposed COBRA Regulations:

In an effort to ensure that individuals receive accurate and timely information regarding their right to continuation of health care coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Department of Labor released proposed regulations which clarify both the timing and content of required notices. The proposed regulations identify the information that must be included in the notices given: (1) to individuals by employers when the individuals first become covered by a group health plan; (2) to group health plans by employers or employees after a qualifying event; and (3) to individuals by plan administrators regarding the COBRA election. The proposed regulations are scheduled to be effective on January 1, 2004 for most group health plans.

Flex Accounts: Debit & Credit

The IRS recently released guidance on the use of debit and credit cards for the reimbursement of medical expenses under a health flexible spending account or health reimbursement account. The guidance, released as Revenue Ruling 2003-43, provides guidelines on how to implement a debit and credit card arrangement and illustrates the substantiation requirements that must be met in order for the reimbursements to be excluded from an employee’s federal taxable income. Employers contemplating such an arrangement should consider this guidance carefully.

For a copy of the guidance, please contact Rich Kennedy at 412.594.5507.

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