Can Biotech and Pharma Companies pay contracted sales teams a commission-based fee?
The DOJ may be signaling a change to that answer.
The U.S. Department of Justice (DOJ) just sent a strong message to pharmaceutical and biotechnology companies who rely on contracted sales teams to push their products into the market: “commission-based compensation violates the Federal Anti-Kickback Statute (AKS)”.
This message seems to undermine years’ worth of relative stability in how these companies evaluate risks associated with commission-based compensation that does not fit squarely into a legal safe harbor under the AKS.
In this blog post we’ll cover a lot of ground:
What this change signals for Biotech and Pharmaceutical businesses with commission-based sales incentive programs;
How promising Biotech executives paid $114 Million for getting it wrong;
Why the DOJ decision is a warning shot;
How to structure a compliant sales rep arrangement;
What Biotech and Pharmaceutical businesses need to do right now (especially first-time product launchers).
Fortunately, the Department of Health and Human Services (HHS) recently modified the existing safe harbors under the AKS in a way that might blunt the impact of DOJ’s recent position. You’ll learn more about this below.
Given the state of flux, companies need to look at existing and future relationships with contracted sales agents and structure those relationships under the updated safe harbor. Taking that time now will help to ensure that launch plans that include contracted field teams do not have to be scrubbed in the future.
As always, if you want to explore how these actions change your company’s risk profile, we’re ready to help. Click here to start the conversation.
How a Promising Biotech Paid $114 Million for Wrongly Structuring Commission-Based Sales
By way of some background, in 2015, the DOJ intervened in a stunning fall-from-grace case involving once-promising Health Diagnostics Laboratory (HDL) and some of the company’s (and other) executives. Among other things, the case involved accusations that HDL paid a contracted field sales team a base-plus commission fee tied to revenue generated from HDL blood tests. Following a two-week trial in 2018, the executives in the case were found to be liable for a total of $114 Million for fraud against the US Government. The damages in the case were appealed to the US 4th Circuit, which upheld the damages in a decision issued in March 2021.
“These arrangements can, if not structured carefully, violate the AKS, which prohibits payments for patient referrals. This statute has exceptions, called “safe harbors”, that protect behavior that might otherwise technically violate the law. In addition, case law and various agency guidance documents have described other factors regulators may consider when determining whether to actually enforce the law. This “enforcement discretion” is a flexible and evolving “gray area” in AKS law, and the DOJ’s shifting analysis have just introduced what some perceive as a major evolution. ”
The DOJ Fires a Warning Shot
Since 1998, companies and their legal counsel have relied on an advisory opinion from the HHS Office of the Inspector General (OIG) that indicated that the government would consider a range of factors when determining whether an arrangement that doesn’t does not fit a safe harbor would invite enforcement. These factors include:
compensation based on percentage of sales;
direct billing of a Federal health care program by the Seller for the item or service sold by the sales agent;
direct contact between the sales agent and physicians in a position to order items or services that are then paid for by a Federal health care program;
direct contact between the sales agent and Federal health care program beneficiaries;
use of sales agents who are health care professionals or persons in a similar position to exert undue influence on purchasers or patients; or
marketing of items or services that are separately reimbursable by a Federal health care program (e.g., items or services not bundled with other items or services covered by a DRG payment), whether on the basis of charges or costs.
However, after the 4th Circuit’s decision on the HDL case, the DOJ, which works alongside OIG to prosecute healthcare fraud cases, issued a press release with surprising insights. The release did not highlight the risk factors that made the underlying relationships in the HDL case problematic, as is generally expected, and instead seems to broadly conclude that all commission-based compensation is unlawful. Specifically, the DOJ highlighted the following arguments asserted by the government:
that the parties violated the Anti-Kickback Statute when HDL paid commissions based on the number of blood tests sold;
that volume-based commissions constituted “remuneration” intended to induce sales representatives to sell as many tests as possible, and;
that the Anti-Kickback Statute prohibited paying contracted salespeople for recommending the tests.
This is a is a staunch departure from the facts-based analysis that the OIG has traditionally used in such instances. Many in the industry worry that this was meant as a warning shot to companies engaged with contracted sales teams—you better qualify for a safe harbor, or else.
Contracted services, like those available from contract commercialization organizations (CCOs), offer a more affordable way for growing life science companies to get to market without out-licensing or divesting the product.
Small and mid-sized pharmaceutical and medical device companies rely on CCOs to provide contracted field sales and medical teams, assistance with publication planning, reimbursement support, and preparation of market-ready promotional materials. Without these services, many these innovator biotech companies would never get off the ground. Further, it is standard for pharmaceutical and medical device companies that directly hire sales representatives to implement a base-plus commission sales incentive program (and we carefully review those incentive programs for compliance under the employment safe harbor to the AKS statute).
The impact of the HDL case and DOJ’s seeming shift in reasoning could significantly hamper growth for early-stage and innovator pharmaceutical and medical device companies that cannot afford to directly hire sales staff.
So how do you structure compliant sales rep arrangements?
Recent changes to the AKS safe harbors may make it easier to structure compliant commission-based contracted sales compensation arrangements.
On December 2, 2020, the OIG’s final rules included several reforms to the AKS, including three changes to the safe harbor most commonly used for independent contractors: the “personal services and management contracts” safe harbor.
Before the new rules, a company needed to set the total amount of compensation to be paid to an independent contractor or vendor over the course of (at least) a year, in advance. This can be difficult for a business to predict, especially for contractors who are not working full time, or whose productivity is directly related to the revenue of the company (like sales reps).
The new safe harbor no longer requires that the company set aggregate compensation in advance, but that the company set a methodology to determine compensation in advance. Sales rep agreements should be structured to qualify under this new methodology-base safe harbor or as mentioned, the employment safe harbor when feasible.
What do you need to do RIGHT NOW?
Review existing sales force agreements
With the change in administration, we are already seeing an increase in federal and state-based fraud and abuse enforcement. While it is unclear whether the 2020 changes to the AKS safe harbor would have impacted the outcome in the HDL case, it certainly establishes greater flexibility in structuring compliant compensation arrangements that may include some incentive-based payment methodologies.
The task for the industry now is to stop and think about their current or proposed commercialization plans and consider whether contracts with sales teams remain compliant and are de-risked.
Companies launching new products (especially those in high competition therapeutic areas) need to carefully consider how they intend to compensate all of their field-based teams. Some companies may determine it might be better to employ a new team rather than contract for a team – relationships which can be structured under the AKS’ employment safe harbor. Whether contracting or employing field teams, first time launchers need to fully understand how incentive payments impact sales behavior, and whether the government perceives that behavior as fraud.
Finally, and yes, this always seems like a throw-away line at the bottom of every legal memo, it is important to remember that many state laws also prohibit kick-back payments for medical referrals.
State anti-kickback laws often prohibit more activities than the Federal AKS law – and often do not have well defined exceptions. Consequently, these state-based prohibitions can derail some marketing plans and lead to changes in how launch plans are implemented throughout the US.
Although federal AKS rules come with the possibility of high fines and possible jail time, state-based laws can and do get enforced, usually as a consequence of a federally related case. Therefore, leading up to launch, pharmaceutical and medical device companies should also be identifying and modifying their agreements to meet any state-based exceptions or safe harbors as well.
Consider a more detailed compliance assessment
We recommend that first-time product launchers invest in a full commercialization compliance assessment to review, among other things, the sufficiency of sales team incentive payment programs, promotional and marketing materials, and all company interactions with healthcare providers and influencers.
We understand that first-time launchers are trying to get product market ready on limited resources which is why we offer the assessments under both fixed fee and fractional GC arrangements. If you would like to invest in this important assessment, please reach out to Tommy Miller to get started.