October 30, 2020

Novel DOJ Settlement For Sunshine Act Violations

On October 29, 2020, the U.S. Department of Justice (“DOJ”) announced a unique False Claims Act (“FCA”) settlement with medical device manufacturer Medtronic USA Inc. (“Medtronic”) for $9.2 million to resolve allegations that: 1) the company paid kickbacks to induce a neurosurgeon to use its products; and 2) Medtronic failed to accurately report payments to this neurosurgeon in violation of the Physician Payments Sunshine Act (“Sunshine Act”). DOJ’s settlement represents a shot across the bow for pharmaceutical and medical device manufacturers who must report payments or other transfers of value under the Sunshine Act, and reinforces the importance of maintaining appropriate policies, procedures, processes, and systems for timely, complete, and accurate reporting to the Open Payments Program administered by the Centers for Medicare & Medicaid Services (“CMS”).

This settlement arises from an investigation into certain financial arrangements between Medtronic and South Dakota-based neurosurgeon Wilson Asfora, M.D. that spanned the period September 1, 2010 to September 30, 2019. Specifically, the government alleged that Medtronic, at Dr. Asfora’s request and contrary to the company’s compliance policies, agreed to pay for events at Carnaval Brazilian Grill, a local restaurant owned by Dr. Asfora and his wife. Per the allegations in the settlement agreement, Medtronic held over 130 events at Carnaval for which it paid over $87,000 to Dr. Asfora’s restaurant.

Medtronic’s sales personnel allegedly stated in internal expense reports that the events were held to discuss educational content or business information. However, the government alleged that these events were social events that included the provision of lavish meals and alcohol to social acquaintances, business partners, favored colleagues, and referral sources selected by Dr. Asfora, with little or no discussion of Medtronic products. The government contended that Medtronic’s conduct caused the submission of false claims to Medicare, Medicaid, and TRICARE for implantable SynchroMed II intrathecal infusion pumps that Dr. Asfora was improperly induced to order or utilize.

Separately, the government claimed that, between April 1, 2014 and April 1, 2020, Medtronic failed to report to CMS the full value of its payments or transfers of value to or at the direction of Dr. Asfora. The government alleged that, while Medtronic sales employees knew of Dr. Asfora’s ownership of Carnaval and his requests that Medtronic pay for restaurant events, this information was withheld from Medtronic’s compliance department. As a result, the government claimed that Medtronic underreported to CMS payments for 74 events that were made to or at the direction of Dr. Asfora from August 8, 2013 to July 9, 2019. Instead of reporting the total amount paid to Carnaval as required by the Sunshine Act regulations, Medtronic allegedly reported to CMS only the attributed value of the food and drinks that each physician attending the event personally consumed. In connection with this resolution, Medtronic agreed to pay a total of $8.1 million to resolve the government’s FCA claims predicated on alleged violations of the Anti-Kickback Statute (AKS), plus an additional $1.1 million to resolve the alleged Sunshine Act violations.

Interestingly, the settlement agreement does not indicate how the government arrived at the settlement amount for Medtronic’s alleged failures to report payment data to CMS as required by the Sunshine Act. Under the Sunshine Act’s implementing regulations, pharmaceutical and medical device manufacturers may be liable for civil monetary penalties (“CMPs”) of up to $150,000 per reporting period for failing to timely, accurately, or completely report payments or other transfers of value. However, the regulations also authorize CMPs of $10,000 to $100,000 per knowing violation, up to a maximum of $1,000,000 per year, as adjusted for inflation. Combined CMPs for inadvertent or minor violations and knowing violations are subject to a $1.15 million annual cap, as adjusted for inflation. Thus, the resolution in this case represents close to the maximum possible annual penalty a manufacturer may receive, albeit covering multiple reporting years.

Further, the government’s public statements announcing the resolution suggest that pursuing life sciences companies for under- or misreporting of payments or other transfers of value under the Sunshine Act may represent a developing trend in DOJ enforcement. Indeed, the U.S. Department of Health and Human Services Deputy General Counsel and CMS Chief Legal Officer stated that CMS “looks forward to continued partnership with the Department of Justice to resolve allegations of manufacturers skirting their Open Payments obligations.” Accordingly, notwithstanding the historic lack of public enforcement activity since the Sunshine Act took effect in 2013, this settlement suggests that the government intends to aggressively pursue companies going forward for perceived egregious deficiencies in their reporting of financial relationships with physicians and other covered recipients.

In light of this warning – and the upcoming expansion of the Sunshine Act effective January 1, 2021 to require reporting of payments or transfers of value made to physician assistants, nurse practitioners, and other advanced practice providers – pharmaceutical and medical device manufacturers should carefully evaluate their policies and procedures for collection and reporting of data pursuant to the Sunshine Act. Such policies and procedures should ensure that established tracking mechanisms are in place, that reportable payments and transfers of value are clearly defined, and that appropriate education is provided to the company’s sales force and other personnel on the applicable obligations and associated penalties for noncompliance. This settlement also serves as a reminder to life sciences companies of the importance of adopting adequate controls and oversight mechanisms for sales personnel, as well as positive lines of communication between the sales function and the compliance department around Sunshine Act and counterpart state law reporting requirements.