All too often, a payment from an applicable manufacturer does not go directly to a physician or teaching hospital. Instead, the applicable manufacturer indirectly provides a payment to a covered recipient by making a payment to a third party that then transmits the payment to the covered recipient that actually performed the services (e.g., a pass through payment). Alternatively, a covered recipient may request that the applicable manufacturer provide the payment to a third party “at the request of” or “on behalf of” a covered recipient rather than the covered recipient receiving the payment. The actual recipient of the payment is often a charitable entity. The final Sunshine Act regulations acknowledge these payment streams and, as a general requirement, mandate the reporting of these payments to physicians and teaching hospitals as well as payments to non-covered entities or individuals “at the request of “ or “on behalf of” a physician or teaching hospital. Yet, there are notable nuances and exceptions to the rule.
Indirect Payments: What Are They? When Are They Reportable?
In an effort to clarify when an indirect payment is subject to reporting, the final regulations include a definition of “indirect payments or other transfers of value”:
payments or other transfers of value made by an applicable manufacturer…to a covered recipient…through a third party, where the applicable manufacturer…requires, instructs, directs, or otherwise causes the third party to provide the payment or transfer of value, in whole or in part, to a covered recipient(s)….
The preamble includes an example of an applicable manufacturer providing an unrestricted donation to a physician professional organization for use at the organization’s discretion. In turn, the organization uses the funds to provide a grant to physicians. Since the applicable manufacturer did not require, instruct, direct, or otherwise cause the recipient of its donation, the organization, to use the funds for grants to physicians, this does not fall within the regulatory definition of “indirect payment or other transfer of value” and, as such, is not reportable as either a direct or indirect payment to a covered recipient. On the other hand, if the applicable manufacturer provides a donation to the organization with an earmark for the payment to be used to provide grants to physicians, this would constitute an indirect payment reportable against the ultimate covered recipient. This is so even if the manufacturer did not specify or suggest which physicians would receive the grants.
Payments “At the Request Of” and “On Behalf Of”: Follow the Money
It is not unusual for a physician or teaching hospital to request that an applicable manufacturer to provide a payment to a third party rather than directly to the covered recipient. An example would be the request that the payment be provided to the physician’s practice or an affiliated entity rather than directly to the physician. In circumstances such as this, the covered recipient is directing the path of the payment, not the applicable manufacturer. The final regulations require that such payments must be reported in the name of the covered recipient. The name of the entity that received the payment or, if an individual, the word “individual” would also be included in another field on the disclosure report.
A physician or teaching hospital may also direct an applicable manufacturer to provide a payment to a charitable entity as a donation on behalf of the covered recipient. Similar to the above scenario where the payment is directed to a third party “at the request of” a covered recipient, when a covered recipient directs a payment be made to a third party, such as a charity, “on behalf of” the covered recipient, such payment must be reported in the name of the covered recipient; the disclosure must also include the name of the charity that received the payment at the direction of the covered recipient.
Indirect Payments: Exclusion Provision
Although the Sunshine Act and regulations provide an exclusion of indirect payments to third parties, this is applicable in very limited circumstances. In order for an indirect payment to be excluded from reporting, the payment must (1) qualify as an indirect payment or transfer of value, and (2) the applicable manufacturer must be unaware of the identity of the physician or teaching hospital receiving the payment during the reporting year or by the end of the second quarter of the following report year.
For an applicable manufacturer to be “unaware” of the identity of the physician or teaching hospital receiving the indirect payment, the applicable manufacturer must not have actual knowledge or act in deliberate ignorance or in reckless disregard of the truth or falsity of the information.
The preamble specifically provides that for this exclusion only, when an applicable manufacturer makes a payment to a third party with the intent of keeping the identity of the covered recipient anonymous, the applicable manufacturer will not be acting in deliberate ignorance or reckless disregard of the identity of the covered recipient and will be deemed “unaware” of the identity of the covered recipient. The specific example provided is the engagement of a market research firm to conduct a double-blinded market research study. The payment to the firm, part of which may ultimately go to physicians for participation in the research, would qualify as an indirect payment excluded from reporting because the physicians are intended to be anonymous in their participation.
Where a payment is made to a third party, and the third party is directed to make payments to an identifiable group of covered recipients, such as the top billing cardiologists in a certain city, the applicable manufacture would be deemed “aware” of the covered recipients and required to report against such covered recipients assuming that the covered recipients can be identified during the reporting year or through the second quarter (June 30th) of the subsequent year following the transfer of the payment to the covered recipient by the third party. The applicable manufacturer must report such indirect payments in the calendar year that the third party provided payment to a covered recipient and the applicable manufacturer became aware of the identity of the covered recipient. For example, the applicable manufacturer makes a payment to a third party on August 31, 2013, but the third party provides the payment to a covered recipient on December 31, 2013. Further, the applicable manufacturer does not become aware of the identity of the covered recipient until early in calendar year 2014. In this circumstance, the payment would be reported for calendar year 2014. We view this example of reportable indirect payments as the most troublesome and potentially difficult for applicable manufacturers to track. In this scenario, the applicable manufacturer must track the payment being provided by the third party, identify the covered recipient, and report payments provided by the third party to a covered recipient in the subsequent calendar year.
Don't forget to check out our other posts regarding the Sunshine Act Final Regulations: