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Legal Update
Vetting Vendor Arrangements
Anjana Patel
Publish Date: March 17, 2008

In recent years, vendors and physicians have increasingly found themselves under federal government scrutiny for arrangements that incentivize physicians to use or generate referrals of the vendors' products or services, often in violation of the federal Anti-kickback Statute and the Stark Law. Here's an overview of some of the legal issues that impact vendor-physician arrangements.

The bounds of the law
Under the Anti-kickback Statute, an individual may not knowingly solicit, receive, offer or pay remuneration to reward referrals or in exchange for the purchase of any item or service paid for by a federal healthcare program. The OIG's guidance on physician-vendor practices notes that vendors should consider the following issues:

  • whether the incentive provided to the physician will interfere with his clinical decision-making;
  • whether the physician has been given accurate and complete information;
  • whether there is a potential risk of increased cost to federal healthcare programs, overutilization or inappropriate utilization; and
  • whether there are any patient safety or quality concerns.

The Stark Law prohibits a physician from referring certain types of items and services paid for by Medicare or Medicaid to an entity in which the physician has a financial interest, whether ownership or compensation. Unlike the Anti-kickback Statute, Stark is a strict liability statute, meaning financial relationships must comply with regulatory exceptions in order to be compliant.

The Advanced Medical Technology Association (AdvaMed), the Pharmaceutical Research and Manufacturers of America (PhRMA) and other industry organizations have developed their own codes of ethics. While compliance is voluntary and the codes lack the force of law, observance demonstrates a good-faith effort to enforcement authorities.

The structure of compliance
There's no magic formula for structuring a compliance arrangement, but here are some recommendations to consider (based on guidance from the OIG as well as AdvaMed's and PhRMA's codes of ethics) to reduce the risk that your arrangements will attract government scrutiny. Avoid payments or gifts of cash or cash equivalent (such as gift certificates). Also avoid:

  • "tying" arrangements, in which cash, gifts or other benefits are delivered upon a physician's referrals of a vendor's products;
  • "switching" arrangements, in which a physician is rewarded for changing a patient's prescription to a vendor's product from a competing one; and
  • "detailing" arrangements, in which a physician is compensated for the time he spends listening to marketing information.

Any gifts a physician receives should be of minimal value, generally less than $100, and should primarily benefit patients or serve an educational function, such as anatomical models or textbooks. Promotional products are acceptable if they relate to the physician's practice. Pens and notepads are suitable, for instance, but golf balls are not.

An arrangement subject to the Stark Law must comply with an applicable exception for gifts. For example, non-cash gifts with an annual value of up to $329 are acceptable if the physician doesn't solicit them and they don't take into account the physician's referrals. (The allowable amount is adjusted annually.)

Similarly, a healthcare facility may provide certain incidental benefits to its medical staff members if such benefits are of nominal value (less than $28, adjusted annually), don't take into account referrals generated and are used at the facility in connection with the provision of medical services.

Facility operations
Product support services such as training are generally acceptable since they don't have substantial independent value. Likewise, product presentations are permitted as long as they're "modest," informational, and provide scientific and educational value.

Vendors shouldn't influence or control the content of an educational program and should follow FDA guidelines in their involvement. Direct subsidies to a CME conference organizer are permissible as long as the monies are used to reduce conference fees for all attendees. While PhRMA's code prohibits a vendor from paying for a physician's travel, lodging, meals or other personal expenses, AdvaMed's lets a vendor pay for reasonable travel and modest lodging.

Avoid research whose only purpose is to generate business or to promote a product. Consulting and medical directorship agreements should be structured to comply with the Anti-kickback Statute safe harbor for personal services and the Stark Law exception for personal services.

Arrangements involving payments to a large number of physicians may raise concerns that not all of them are providing legitimate, necessary services, but are instead being paid for referrals. Limit vendor arrangements to a small number of physicians who are paid a fair market value fee for bona fide and reasonable consulting and advisory services.