Invest in robust systems for calculating and reporting drug prices

Which, when coupled with the sheer volume of data involved in the calculations, are making automation of these calculations a business necessity. In fact, companies that fail to automate these processes, and at the same time address legal requirements, are at a much higher risk of generating and reporting prices that are inaccurate or erroneous—and of suffering significant penalties.

The list of regulatory programs that obligate pharmaceutical manufacturers to calculate and report multiple but distinct statutorily defined prices include the following:

• The Medicaid Rebate Program – requires monthly and quarterly calculations of Average Manufacturer Price (AMP) and Best Price (BP), monthly submission of customary prompt pay discount, and quarterly submission of nominal prices as defined in the Social Security Act.
• The 340B Program – requires use of the rebate percentage derived from these computations to calculate and report 340B ceiling prices applicable to purchases by eligible entities.
• Medicare Part B – requires manufacturers of drugs covered by Medicare Part B, which are primarily physician-administered drugs, to calculate and submit quarterly Average Sales Price.
• Veterans Health Care Act – requires manufacturers of covered drugs to calculate and submit their Non-Federal Average Manufacturer Price and Federal Ceiling Price in order to sell products to the Veterans Administration and other federal agencies.
• Federal Supply Schedule Contract – requires drug manufacturers that offer their products on the FSS to disclose commercial pricing data and tracking customer price reductions under the contract terms, as well as report and pay an Industrial Funding Fee that is like an administrative fee.

Compliance Program Obligations

Adding to the complexity of pricing calculations and reporting requirements is the necessity to have a rigorous compliance program that meets the guidelines from the Department of Health and Human Services Office of Inspector General (OIG) and specific legal mandates issued by the state of California. In April 2003, the OIG issued a document entitled “Compliance Program Guidance for Pharmaceutical Manufacturers” to assist manufacturers in developing internal controls and procedures to promote adherence to applicable statutes, regulations, and requirements of federal health care programs. The guidelines are not mandatory, but they do set forth health-care fraud risk areas and best business practices to minimize risk that many in the industry consider critical. For example, the very first risk area identified in the guidance is “integrity of data.” To control this risk and others, from the OIG’s perspective, a good compliance program requires written policies and procedures, as well as systems that are capable of producing accurate pricing data that comply with applicable legal requirements. Other important elements of an effective compliance program include training on legal requirements and internal self-audits.

California law, by comparison, specifically requires drug manufacturers doing business in that state to certify that they have compliance programs that incorporate the OIG Guidance. To make such a certification, it is imperative that manufacturers have the following in place:

• Systems designed to capture data and calculate prices as accurately as possible consistent with statutory, regulatory and contractual requirements
• Robust written policies and procedures and ongoing training of their employees responsible for the pricing
• Periodic reviews to ensure the system is operating correctly

Clearly, meeting these requirements can best be accomplished with an automated solution, developed from the ground up to facilitate pricing and reporting compliance with government regulations. With this approach, companies can minimize error-prone and costly manual procedures that can result in unwanted risk.

Audits

An automated pricing and reporting solution can also facilitate the audits that will become more common once CMS finalizes rules on AMP calculation methodology in mid-2007. Since the inception of the Medicaid Drug Rebate program, few Medicaid audits have been performed due to a lack of clarity concerning which transactions to include in AMP and BP calculations, and the lack of a standard methodology for calculating AMP. But that picture is likely to change once the new regulation is issued. Consequently, manufacturers must have systems that will consistently comply with the rules. Another driver for implementation of automated systems that facilitate compliance is the growing trend by outside auditors to review manufacturers’ pricing calculations. Failure to satisfy these auditors can delay financial reporting.

Contract Obligations

A system to facilitate government pricing calculations and reporting is also needed to ensure compliance with the various agreements that pharmaceutical manufacturers have with the Government that are used to implement drug pricing programs, such as the Medicaid Drug Rebate Agreement and the Pharmaceutical Pricing Agreement that governs sales to entities participating in the 340B program. When calculating prices, manufacturers must comply with the provisions of these agreements, which define terms and help fill in gaps in the statutory requirements.

Manufacturers also have FSS contracts with the Veterans Administration that incorporate the terms of the Master Agreements that govern statutory ceiling prices on sales to certain federal agencies. In addition to the price reporting obligations of the Master Agreements, the FSS contracts require price disclosures before award of the contract or addition of a product to the contract, and separate price reduction disclosures during the term of the contract. As discussed below, failure to take steps to ensure compliance with these obligations can result in substantial liability; and the most cost-effective way to ensure compliance is by automating pricing and reporting tasks with a market-proven and robust off-the-shelf solution.

False Claims Act Liability

Investment in such a solution can help to mitigate risks associated with the civil False Claims Act, 31 U.S.C. §3729, which authorizes whistleblowers to file suit in the name of the United States against persons that knowingly: submit false claims to the Government, including invoices predicated on false certifications as well as erroneous prices; cause others to submit false claims, or cause the Government to pay claims grounded in fraud, such as health-care provider claims based on false data submitted by the manufacturer. In addition, the statute authorizes “reverse” false claims actions in which the Government receives less in the fees or rebates to which it is entitled as a result of false manufacturer submissions.

Although companies may not be liable under the Act for mistakes or errors, intent to deceive is not required for civil FCA liability. The standard applied in civil FCA cases is reckless disregard for the truth. This standard is frequently described as turning a “blind eye” to the truthfulness or accuracy of the claim. For example, if a company negotiating an FSS contract certifies that its commercial sales practices are current, accurate, and complete, but lacks the means to know whether that certification is truthful, the company risks FCA liability.

Historically, most cases alleging violations of the FCA in the context of drug price reporting concerned intentional omissions, but in a recent case against a pharmaceutical manufacturer, no allegation of intent to submit false pricing was made. Rather, the Government alleged that the company knew it lacked systems and procedures capable of generating prices in accordance with its Medicaid price reporting compliance obligations, and, as a result, underpaid rebates due to the Government under the Medicaid program.

Once a False Claims Act case is pursued by the Government, the potential liability is enormous. In addition to treble damages, a penalty in the range of $5,500 to $11,000 applies to each claim (i.e., each invoice), regardless of the amount of actual damages. In cases involving multiple transactions, these penalties can quickly reach tens of millions of dollars or more. An FCA judgment can also result in debarment from federal procurement and non-procurement transactions. For that reason, as with Medicare and Medicaid fraud, companies are frequently forced to negotiate settlements of these cases.

Clearly, in the case cited above, the existence of a government pricing system would minimize the risk of exposure to these fines and could probably be cost-justified on this basis alone. But with all the other compliance obligations discussed, the need to implement a government pricing and reporting system becomes even more obvious. Simply put, a robust compliance program that includes an automated drug price reporting system is essential to risk management, and pharmaceutical companies will have an increasingly difficult time meeting mandates, guidelines, and contractual obligations without one.

Donna Lee Yesner is a Partner at McKenna Long & Aldridge LLP, a full-service law firm which provides business solutions in the areas of corporate law, government contracts, intellectual property and technology, complex litigation, public policy and regulatory affairs, international law, real estate, environmental, energy and finance.

David Blumberg is the Executive Vice President of Fulfillment Services at I-many, the leading provider of contract lifecycle management solutions for managing corporate commitments.

Please send comments to information@mckennalong.com or feedback@imany.com.