1. Boston New York San Francisco Washington, DC Glenn Krinsky Ropes & Gray One Embarcadero Center Suite 2200 San Francisco, CA 94111-3627 glenn.krinsky@ropesgray.com

2. OVERVIEW General Contracting Issues Anti-Kickback Laws PhRMA Code Self-Referral (Stark Law) Anti-Trust Questions

3. CONTRACTS

4. Term and Termination Considerations –Automatic renewal vs. notice of renewal –With cause (e.g., for breach) –Without cause –Immediately –Effects of Termination GENERAL CONTRACT ISSUES

5. Indemnification Definition –Process whereby one party secures another party against an anticipated loss –The indemnified party seeks to make the indemnifying party responsible for a third party claim. Considerations –Reciprocal vs. one-sided –To whom it applies (e.g., shareholders, members, trustees, officers, directors, employees) –Scope of coverage (e.g., “arising out of or relating to […]”) –Standard of conduct (e.g., negligent, gross negligence) GENERAL CONTRACT ISSUES

6. Indemnification (con’t) Sample Provision (from a managed care contract): Indemnification by Customer. Customer agrees to hold harmless APCS, its directors, officers, employees and agents from any claim, suit, cost or expense, of any kind, including but not limited to, the cost of defense incurred by [Supplier], as a result of any actions or omissions by Customer in connection with its performance of the terms and conditions of this Agreement, including, but not limited to, (i) breach of its obligations under this Agreement, and/or (ii) allegations, judgments, findings or determinations that APCS is vicariously liable for such actions or omissions by Customer, but excluding any allegations or judgment that Customer failed to oversee APCS’ compliance with the terms, conditions and obligations under this Agreement or the Law. GENERAL CONTRACT ISSUES

7. Limitation on Liability Sample Provision: "In no event shall [drug company] be liable for any indirect, incidental, special, consequential or punitive damages, including loss of profit, revenue, data or use, incurred by [physician], whether in contract or tort." GENERAL CONTRACT ISSUES

8. ANTI-KICKBACK

9. ANTI-KICKBACK LAWS FEDERAL LAW No person may knowingly and willfully offer or pay any remuneration to induce any person: –To refer patients for items or services reimbursable under a Federal health care program; or –To purchase, lease, order or arrange for any good, facility, service or item reimbursable under a Federal health care program. No person may solicit or receive any remuneration for making referrals or for purchasing/leasing/ordering goods or services.

10. ANTI-KICKBACK LAWS PENALTIES Applies to individuals (officers, employees, physicians) and entities (hospital, home health agency) Civil: Fines up to $25,000 Criminal: Felony - maximum 5 years in prison Exclusion from Federal health care programs Possible False Claims Act violation: $50,000 for each violation plus three times the kickback amount

11. ANTI-KICKBACK LAWS EXAMPLES OF PROHIBITED KICKBACKS Payment or receipt of cash, rebates, or in-kind benefits in order to induce referrals or the purchase/ordering of goods or services Fee-splitting arrangements (e.g., paying a referring physician an excessive fee for “interpretation” of test results) Offering significantly discounted office space or equipment to physicians with admitting privileges at the hospital Offering free training for a physician’s office staff beyond the training necessary to provide services at the hospital

12. ANTI-KICKBACK LAWS SAFE HARBORS INCLUDE: Personal services and management contracts Employment Space rental and equipment rental Discounts (if properly disclosed) Ambulatory Surgical Centers Waiver of beneficiary coinsurance/deductibles for inpatients Practitioner recruitment Investments in Group Practices Generally arrangements must be provided at fair market value and may not vary based upon the volume or value of referrals

13. ANTI-KICKBACK LAWS SAFE HARBORS INCLUDE: Personal services and management contracts Employment Space rental and equipment rental Discounts (if properly disclosed) Ambulatory Surgical Centers Waiver of beneficiary coinsurance/deductibles for inpatients Practitioner recruitment Investments in Group Practices Generally arrangements must be provided at fair market value and may not vary based upon the volume or value of referrals

14. ANTI-KICKBACK LAWS If contract contains Discounts: –Sell and price each item separately –Retrospective Rebates: Customers must keep Medicare/Medicaid cost reports Specify the terms for retroactive discounts and amounts available; file invoice and rebate calculations together –Contracts should not provide discounts for nonreimbursable items in exchange for the purchase of an expensive reimbursable item

15. ANTI-KICKBACK LAWS CALIFORNIA ANTI-KICKBACK LAWS Section 650: –The offer, delivery, receipt or acceptance by any person licensed under this division … of any rebate, refund, commission, reference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients or customers to any person…

16. CALIFORNIA ANTI-KICKBACK LAWS Section 650.1 –Any amount payable to any hospital, …, or any person or corporation prohibited from pharmacy ownership … under any rental, lease, or service arrangement with respect to the furnishing or supply of pharmaceutical services and products, which is determined as a percentage, fraction, or portion of (1) the charges to patients or (2) any measure of hospital or pharmacy revenue or cost, for pharmaceuticals and pharmaceutical services is prohibited. ANTI-KICKBACK LAWS

17. POINTS TO KEEP IN MIND Anti-kickback law creates broad prohibition on payment or receipt of kickbacks in exchange for referrals Narrow safe harbors available if detailed requirements met If safe harbors are not met, not necessarily a violation (depends on facts and circumstances) Federal government will issue advisory opinions approving or rejecting a proposed arrangement between providers State law regulation as well federal regulation Increased investigation and enforcement Unfavorable publicity from investigation even if no violation

18. ANTI-KICKBACK LAWS CALIFORNIA PENALTIES Applies to individuals (officers, employees, physicians) and entities (hospital, home health agency) Civil: Fines up to $2500 Criminal: Misdemeanor - maximum 6 months in prison

19. ANTI-KICKBACK LAWS Activities that could warrant OIG investigation: –Any payment, including cash or other benefit, given to a patient or provider for changing a prescription or recommending or requesting such a change, from one product to another, unless the payment is fully consistent with a “safe harbor” regulation, or other federal provision governing the reporting of prescription drug prices.

20. ANTI-KICKBACK LAWS Hypothetical: Company presents a contract containing a provision providing free medical supplies if there is a 20% increase in number prescriptions written –PROBLEM: Any prize, gift or cash payment, coupon or bonus offered to physicians in exchange for, or based on, prescribing or providing specific prescriptions products

21. ANTI-KICKBACK & PhRMA CODE “Although compliance with the PhRMA Code will not protect a manufacturer as a matter of law under the anti- kickback statute, it will substantially reduce the risk of fraud and abuse and help demonstrate a good faith effort to comply with the applicable federal health care program requirements.” –Final OIG Compliance Guidance

22. PhRMA CODE Interactions with Healthcare Professionals Basic Principles –Basis of Interactions –Independent Decision-Making Pharmaceutical Manufacturer Presentations Third Party Educational Meetings Consultants Speaker Training Meetings Scholarships and Educational Funds Educational and Practice-Related Items

23. PhRMA HYPOTHETICAL There are only two companies that make widgets and gadgets. –Company X makes a GREEN widget and the ONLY gadget available. –Company Y makes an ORANGE widget. –The GREEN and ORANGE widgets are very similar in quality and can be viewed as interchangeable in the delivery of the final service. Company X begins to offer a contract in which the prices of (and quantity-based rebates for) GREEN widgets and ONLY gadgets are tied together in one contract. Specifically, increased purchases of GREEN widgets result in a higher rebate for purchases of ONLY gadgets.

24. PhRMA Hypothetical might violate PhRMA Code provision dealing with Independence and Decision Making –Could be construed as a practice related item or support offered in exchange for prescribing products –Could be construed to interfere with the independence of a healthcare professional’s prescribing practices.

25. ANTI-KICKBACK Any gifts or benefits made available in drug contracts should be structured in accordance with the PhRMA Code and the consultation of an attorney

26. STARK

27. STARK LAW GENERAL RULE If a physician (or family member) has a financial relationship with an entity, then: –the physician may not make a referral for “designated health services” reimbursable by Medicare or Medicaid; and –the entity may not bill for services provided pursuant to a prohibited referral.

28. STARK LAW PENALTIES Denial of claim, must refund any payment Civil monetary penalty: $15,000 per claim, possible triple damages Failure to report: $10,000 per day Exclusion from Medicare and Medicaid programs

29. STARK LAW REFERRAL MEANS Requesting, ordering, certifying or recertifying need for designated health service Request for consultation with another physician who orders or performs test or procedure Establishing a plan of care that includes designated health service

30. DESIGNATED HEALTH SERVICES INCLUDE: Clinical laboratory services Physical therapy services Occupational therapy services Speech-language pathology services Radiology, radiation therapy services Durable medical equipment and supplies Parenteral and enteral nutrients, equipment and supplies Prosthetics, orthotics and prosthetic devices and supplies Home health services Outpatient prescription drugs Inpatient and outpatient hospital services STARK LAW

31. EXAMPLES OF FINANCIAL INTERESTS INCLUDE: Investment interest Ownership interest Direct compensation arrangements Providing goods or services –Medical direction services –Staffing –Use of space and supplies Forgiveness of debt or non-recourse loans Any other “benefit” STARK LAW

32. EXCEPTIONS TO STARK LAW INCLUDE: In-office ancillary services Rental of office space or equipment Employment arrangements Personal service arrangements Certain “Group Practice” arrangements Physician recruitment Medical staff incidental benefits (parking, meals, etc) Compliance training (for hospital related services) Certain types of products/services (preventive screening tests, immunizations and vaccines, eyeglasses, contact lenses) Managed care risk sharing arrangements STARK LAW

33. POINTS TO KEEP IN MIND Creates broad prohibition on referrals for designated health services where financial relationship exists Narrow exceptions apply if detailed requirements met. Increased investigation and enforcement in recent years Unfavorable publicity from investigation even if no violation STARK LAW

34. COMPARE ANTI-KICKBACK WITH SELF-REFERRAL Anti-kickbackStark/Self-referral Laws Knowing and willfulNo bad intent required No person may pay or receive No physician may refer All items and servicesDesignated health services Safe harbors availableMust meet an exception Criminal penaltiesCivil penalties

35. STARK LAW Stark is not an issue with private drug contracts –No self-referrals involved

36. ANTI-TRUST

37. ANTITRUST Statutes Sherman Act -- Section 1 –Contract, combination or conspiracy in restraint of trade is illegal Sherman Act -- Section 2 –To monopolize, or attempt to monopolize, is a felony Federal Trade Commission Act –Unfair methods of competition

38. Others –Clayton Act Section 3, Section 7 –Robinson-Patman Act (Not-for-Profit Institution Exemption) –Hart-Scott-Rodino Act State antitrust laws ANTITRUST Statutes

39. STATE OF CALIFORNIA Cartwright Act (State Antitrust Law) Unfair Practices Act (prohibits price discrimination in California as a restraint of trade) Unfair Competition Act

40. ANTITRUST Per se illegal conduct Applies to types of conduct which are inherently anticompetitive and presumed to be illegal No need to demonstrate market power No defense is available Examples –“Naked” price-fixing –Group boycotts –Market divisions

41. Market definition As a practical matter, what are reasonably available substitutes? Product market –Likely based on specialty, e.g. primary care, cardiac, transplant surgery –Analysis may focus on several different physician services markets Geographic market –Could vary by specialty Very fact-intensive inquiry ANTITRUST

42. Factors corroborating a venture’s anticompetitive nature Statements evidencing anticompetitive purpose Recent history of anticompetitive behavior or collusion Obvious anticompetitive structure w/o plausible legitimate justification (e.g. high market shares, exclusivity) Absence of mechanisms with potential for efficiencies Collateral agreements or spillover ANTITRUST

43. Antitrust and Pharmaceutical Products Conduct that could potentially create Antitrust violations: –Monopolization –Agreements Not to Compete –Agreements on Price or Price-related Terms –Agreements to Obstruct Innovated Forms of Health Care Delivery or Financing –Illegal Tying and Other Arrangements

44. Monopolization Monopolization: the willful acquisition or maintenance of monopoly power. Monopoly power: the power to control prices or exclude competition. Monopolization requires both that the defendant possess monopoly power and that the defendant have willfully acquired, maintained, or exercised that power. ANTITRUST

45. Illegal Tying Section 3 of the Clayton Act –unlawful for any person: (1) engaged in and acting in interstate or foreign commerce, (2) to lease, sell, or contract to sell, (3) goods or commodities, (4) for use or consumption within the United States or places within its jurisdiction, (5) on the condition that the lessee or purchaser will not deal in the goods of a competitor of the lessor or seller, (6) where the effect of such an arrangement may be to lessen competition substantially or tend to create a monopoly in any line of commerce. ANTITRUST

46. Illegal Tying (con’t) (1) There must be (a) a sale, (b) a lease, or (c) a contract for sale. (2) The sale or lease must be of a good, ware, merchandise, supply or other commodity. (3) The particular arrangement must have the probable effect of substantially lessening competition or tending to create a monopoly. (4) The adverse effects must occur ''in any line of commerce.'' (5) The seller or lessor must be engaged in and acting in the course of interstate commerce. ANTITRUST

47. Illegal Tying (con’t) The lawfulness of tying arrangements now is generally analyzed under the rule of reason. In Jefferson Parish Hospital District No. 2 v. Hyde, the Court indicated that the per se rule applies only if the seller has market power over the tying product. Elements: –(1) two separate products, –(2) the sale of one product conditioned on the sale of another, –(3) the seller's economic power over the tying product, –(4) foreclosure of a ''not insubstantial'' amount of commerce in the market for the tied product, –(5) an anticompetitive effect in the market for the tied product, and

48. ANTITRUST Analyze competitive effects Consider venture’s share and concentration in the relevant market Is entry timely, likely and sufficient? Could customers defeat a price increase? –What is the role of third-party purchasers? –Are there sophisticated and powerful customers?

49. ANTITRUST HYPOTHETICAL There are only two companies that make widgets and gadgets. –Company X makes a GREEN widget and the ONLY gadget available. –Company Y makes an ORANGE widget. –The GREEN and ORANGE widgets are very similar in quality and can be viewed as interchangeable in the delivery of the final service. Company X begins to offer a contract in which the prices of (and quantity-based rebates for) GREEN widgets and ONLY gadgets are tied together in one contract. Specifically, increased purchases of GREEN widgets result in a higher rebate for purchases of ONLY gadgets.

50. ANTITRUST HYPOTHETICAL ISSUE: Is the contract illegal? –Does the contract create an illegal tying arrangement?

51. ANTITRUST ANALYSIS –Two separate products: YES –The sale of one product conditioned on the sale of another: NOT DIRECTLY –The seller's economic power over the tying product: YES –Foreclosure of a ''not insubstantial'' amount of commerce in the market for the tied product: NO, IF CONTRACT ONLY APPLICABLE TO ONE BUYER UNLESS VOLUME IS SUFFICIENTLY LARGE –An anticompetitive effect in the market for the tied product: NEED MORE INFORMATION

52. HYPOTHETICAL Result –Could possibly be considered “onerous coercion” Company X produces the ONLY gadget. –Could possibly be permissible arrangement Contract does not require the purchase of Green widget; just provides an incentive.