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Who Can You Trust: Selecting Third-Party Vendors as Trusted Agents

Bruce J. Bellande, PhD, FACME, CCMEP, Chief Compliance Officer
DWA Healthcare Communications Group

In today's high-risk legal and regulatory environment, everyone is at risk, including everyone you do business with. The "didn't know or didn't approve of" defense is no longer a safe haven. Nor can mid-level managers protect upper level executives from prosecution. Today's FDA is enforcing compliance in the corner offices, and the stakes for noncompliance with federal mandates are very high, potentially including multimillion dollar fines, individuals' and companies' exclusions from government funding, prosecution in civil or criminal courts, and, if guilty, jail time. Moreover, the US Department of Health & Human Services Office of Inspector General (HHS OIG), Food and Drug Administration (FDA), Federal Trade Commission (FTC), and states' attorneys general are now on record for zero tolerance regarding violations of federal and state laws and regulations. This zero tolerance extends not only to pharmaceutical and device companies' owners, officers, directors, and managing employees, but also to company and field employees, including affiliated companies in the United States and worldwide, as well as their third-party vendors. And the grounds for prosecution have narrowed.

Given the global financial crisis and recent large drug company settlements with the Department of Justice for improper marketing practices, the issue of prosecuting company executives has become more relevant. Companies under investigation usually agree to pay huge fines without an admission of wrongdoing, and may agree to operate under Corporate Integrity Agreements designed to prevent the occurrence from happening again. The fines didn't seem to be reducing the conduct, however, so in March 2010, FDA Commissioner Margaret Hamburg announced the FDA's intention to pursue criminal prosecutions of corporate officers under Section 301 of the Food, Drug, and Cosmetic Act (FDCA).1 Her comments were echoed in October when the FDA's Deputy Chief for Litigation indicated that the FDA may pursue misdemeanor criminal charges against executives of pharmaceutical companies that promote off-label uses of their products. The FDA's enforcement powers had been previously enhanced with the passage of the Patient Protection and Affordable Care Act, which expanded the definition of a Federal healthcare offense to include the commission of any of the acts prohibited by Section 301 of the FDCA.2

New OIG Guidance

A major concern for corporations is their ability to be reimbursed by the federal government for pharmaceuticals and medical devices used by patients in the Medicare and Medicaid programs. This is a huge part of pharmaceutical and device company business. Under the Social Security Act (SSA), the Secretary of HHS has the authority, delegated to the OIG, to exclude individuals or entities who have engaged in wrongdoing from participating in federal healthcare programs. Some of these exclusions are mandatory under the law, while others (permissive exclusions) are at the discretion of the OIG. In October 2010, the OIG released a guidance regarding permissive exclusions under Section 1128(b) 15 of the SSA that indicated a new focus on holding a company's owners, officers, and managing employees personally accountable for a company's wrongdoing.3,4

Mid-December saw the first drug-company executive to fall under this policy when a director of KV Pharmaceutical Co. (also seen as K-V) was forced to resign and sell his controlling interest in the company after he was banned from doing business with the US government.5,6 Had he not taken this action, his company also would have been banned. According to the Department of Justice, Ethex Corp, a subsidiary of KV Pharmaceutical Co., pleaded guilty to felonies of misbranding prescription morphine tablets and intentionally withholding data from the FDA, putting patients at risk. As a result, KV paid a $23.4 million fine in March for these charges; fired its CEO and chairman (who had been barred from doing business with the government), and agreed to dissolve the subsidiary and dispose of its remaining assets. As long as the ousted executive and KV comply with the settlement, the agency agreed not to ban KV from doing business with the government.5 An OIG official stated that this was "the first time that an executive had been excluded under Section 1128(b) (15) authority" and that the OIG planned to implement this authority "more vigorously" than in previous years.7 (The executive's resignation proved to be a good move for KV as it was granted exclusive rights in 2011 to distribute branded progesterone shots for preterm births, a deal expected to be worth billions that could not have happened with the company on the OIG Exclusions List.8) In March 2011, the ousted executive pleaded guilty to guilty to two misdemeanor violations of the Food, Drug and Cosmetic Act and was ordered to pay a $1 million fine, forfeit $900,000, and serve a 30-day jail sentence.9

Park Doctrine

Central to the OIG guidance and to FDA enforcement efforts is the Park Doctrine,10 stemming from a 1975 case which held that business executives can be held strictly liable upon a finding that they were in a position to prevent, detect, or correct the violation, but failed to do so. The US District Court reaffirmed the Park Doctrine in December 2010 when it upheld an order that barred three pharmaceutical executives from participating in Medicare, Medicaid, and all other federal healthcare programs for 12 years. The exclusions were upheld based on the executives being "responsible corporate officers," despite having no evidence that the executives involved personally engaged in any wrongdoing or were even aware of it.11 With rigid use of the Park Doctrine to convict owners, principals, controlling managers, and others in a position to control the conduct of company employees or corporate practices, increasingly large personal fines, federal exclusions, and loss of employment for those affected are likely to continue. As in the case of the KV executive, even jail time is at risk.12

To further strengthen the OIG's hand in such cases, and in response to OIG recommendations, the US House of Representatives passed the Strengthening Medicare Anti-Fraud Measures Act of 2010 (HR 6130) that would expand the list of "affiliated entities" facing exclusion.1 The bill has yet to be acted on in the Senate, but its passage sent another strong message that corporate executives would be held accountable for the failings of their companies, whether or not they knew of the transgression.

Exclusion Criteria

The following four criteria are to be used by regulatory investigators as they consider placing an individual or company on the federal exclusion list.3

 

  1. Circumstances/seriousness of the offense
  2. Individual's role
  3. Individual's actions in response to misconduct
  4. Information about the entity  
  • Prior history
  • Size and scope of the offense
  • Subsidiaries, alliances, and third parties
  • Previously found guilty
  • Corporate structure
  • Products 


Notice that prior knowledge or approval is not part of the list. It is important to remember that any company violating federal compliance laws can be prohibited from receiving lucrative government contracts; any corporate executive or middle manager can be held personally accountable for those actions; and that accountability is not just financial, it could also mean imprisonment. So the stakes for compliance are high, and likely to get higher unless the new Congress acts to ease some of these regulatory repercussions.

Implications

What does this mean for everyone working in the healthcare industry? A rigorous corporate compliance program is your only protection,13 not only in-house, but from vendors as well. When you partner with a third-party vendor as a trusted agent, you are partnering with that vendor's previous practices and business reputation. Ultimately, their compliance is your compliance.

Because of the gravity of regulatory responsibility and the dire consequences, it is essential that pharmaceutical and device manufacturers exercise due diligence and be very judicious in selecting and working with medical education and communication companies. One of the most important questions to ask an existing or new corporate partner is whether that company has a compliance program and, if so, what components are included in the program. Most importantly, you need to feel confident that they are actually compliance competent - proficient in consistently and conscientiously applying these practices in all that they do for you.

What follows is a sampling from a checklist of 18 criteria that can be of valuable assistance in assessing the risk level of working with third parties and affiliates with or without compliance programs, and discerning the level of trust to have based on the parties' responses to this checklist.

  • Does the third party/affiliate have a compliance program?
  • Has the third party set objectives and does it understand the context of risk identification, assessment, and prioritization as the basis for a risk management plan?
  • Is the party up-to-date with current or new laws, codes, and guidances, as well as changes and updates?
  • Does the party have a compliance officer who reports directly to the CEO? 

For the complete checklist and for more information on other compliance tools and the complexities of complying with regulatory requirements, contact Bruce Bellande, PhD, FACME, CCMEP, Chief Compliance Officer, at bruce_bellande@dwahcg.com.

References

1. Kowal, SM. FDA to prosecute more aggressively with more potent weapons. K&L Gates Web site. Newsstand. November 2, 2010. www.klgates.com/newsstand/detail.aspx?publication=6741

2. Lewis M. Healthcare reform law: healthcare fraud and abuse and program integrity provisions March 31, 2010. Morgan Lewis Web site. http://www.morganlewis.com/pubs/WashGRPP_PrgmIntegrityProvisions_LF_31mar10.pdf

3. Matos, K. OIG issues guidance on individual permissive exclusions. Health Reform Watch Web site. http://www.healthreformwatch.com/2010/10/31/oig-issues-guidance-on-individual-permissive-exclusions/

4. OIG. Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act. http://oig.hhs.gov/fraud/exclusions/files/permissive_excl_under_1128b15_10192010.pdf

5. Silverman E. Pharma exec banned from federal health programs. November 17, 2010. http://www.pharmalot.com/2010/11/pharma-exec-banned-from-federal-health-programs/

6. OIG excludes K-V chairman pursuant to new guidance. November 30, 2010. Available at http://www.wellsphere.com/healthcare-industry-policy-article/oig-excludes-k-v-chairman-pursuant-to-new-guidance/1292155

7. Herrmann T. The New OIG "Responsible Corporate Officer Doctrine." Journal of Health Care Compliance. Volume 13, Number 1. January-February 2011. pages 47-52. Available at http://www.compliance.com/wp-content/uploads/2011/01/JHCC_01-11_Herrmann1.pdf

8. KV gets boost from FDA approval of prenatal drug.  http://www.stltoday.com/business/local/article_80ef6848-2d96-5fae-a3c7-6ae97bf1ab60.html

9. Silverman E. Former KV exec pleads guilty to selling big pills. Pharmalot Web site. March 10, 2011. http://www.pharmalot.com/2011/03/ former-kv-exec-pleads-guilty-to-selling-big-pills /

10. Edwards J. Smelling a rat: feds threaten drug CEOs with "Park Doctrine, but what is it? BNET. October 14, 2010. Available at http://www.bnet.com/blog/drug-business/smelling-a-rat-feds-threaten-drug-ceos-with-8220park-doctrine-8221-but-what-is-it/6090

11. Andonova E, Diesenhaus J, Drissel D, Spivack P, and Trilling H. Risky business: the pursuit of healthcare industry executives and managers. Health News Weekly. Trilling, Hogan Lovells US LLP. Available at http://www.hoganlovells.com/files/Publication/17fcf424-72cc-4a86-beed-73ddaf30eb23/Presentation/PublicationAttachment/711acf45-88ac-4501-a99b-43af30c19ce5/HLW_article_11_12_10.pdf

12. Fleder J and Walsh A. Will proposed amendments to the US sentencing guidelines have a far-reaching impact for persons regulated by the FDA? FDA Law Blog. March 3, 2011. Available at http://www.fdalawblog.net/fda_law_blog_hyman_phelps/2011/03/will-proposed-amendments-to-the-us-sentencing-guidelines-have-a-far-reaching-impact-for-persons-regu.html

13. Wiggin and Dana. Recent developments highlight the breadth of OIG's exclusion authority. Wiggin and Dana Advisory: Health Care Department. February 2011. http://www.wiggin.com/showAdvisory.aspx?Show=12585


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