Enhanced service agreements (“Service Agreements”) between specialty pharmacies and drug manufacturers are attractive to both parties. For manufacturers, these arrangements provide an opportunity to improve medication adherence (and sales), gather data that can support marketing efforts and strategies, enhance market share in a competitive marketplace and generally improve patient care. For specialty pharmacies, the main benefits include the enhanced service fees, but also the opportunity to distinguish their operations from those of competing pharmacies. Service Agreements, while clearly beneficial, do have potential downsides, including potential legal risks, and must be constructed in a way that complies with applicable laws, rules and regulations.
“Core” vs. “Enhanced” Services
The legal analysis of Service Agreements is predicated upon the distinction between “core” and “enhanced” services – a distinction which, while seemingly readily apparent, is quite subtle. Typically, “core” services are the types of services that a pharmacy is expected to perform, without third-party compensation. These generally include activities that that the pharmacy is required to perform as a licensed pharmacy, as set forth in Board of Pharmacy rules and regulations. These can also include services that the pharmacy is otherwise contracted to or required to provide under a payer agreement, or that the pharmacy customarily provides without charge, as part of its general service offering. For example, “core” clinical services are the types of services that patients expect in the course of receiving pharmacy services (e.g., medication usage monitoring; drug interaction checks; insurance /health benefits assistance; and patient counseling).
“Enhanced” services are services that the specialty pharmacy only provides in exchange for payment, by agreement with a manufacturer, and are not typically part of the pharmacy’s offering to patients, or manufacturers. Examples may include communication with patients via text messaging or online video services, closer monitoring of drug inventory in the patient’s home, medication synchronization, medication management, medication adherence packaging and outreach, comprehensive medication reviews, disease state management, and data collection and analysis (such as lab values).
The demarcation line between “core” and “enhanced” services is not always clear. Depending upon the disease state, the pharmacy may provide different service levels as part of its “core” function. However, the pharmacy should be cautious in characterizing these differences as “core” vs. “enhanced.” By way of example, if the manufacturer requires certain performance metrics in connection with a particular disease state, such as increased frequency, timing differences, or the collection of additional data related to the underlying “core” service, the services may cross the “line” into the enhanced category.
Legal Framework
The distinction between “core” and “enhanced” specialty pharmacy services is analyzed primarily through two sperate legal frameworks: (a) federal and state anti-kickback laws; and (b) government price reporting.
a. The Anti-Kickback Statute
The Anti-Kickback Statute (“AKS”) is a federal law in the United States (with state analogues in many instances) that prohibits the exchange (or the offer to exchange) of any form of remuneration to induce or reward referrals for services or items reimbursable by federal healthcare programs, such as Medicare and Medicaid. The AKS was enacted to protect patients and federal healthcare programs from fraud and abuse. It aims to ensure that medical decision-making is not influenced by financial motivations, but rather, it’s based on the best interests of the patient.
In the context of a Service Agreement, the kickback concern is twofold: (i) the pharmaceutical manufacturer may attempt to incentivize increased utilization of its medications by a pharmacy’s patients, by making payments to the pharmacy in excess of fair market value compensation; and (ii) a “reverse” kickback” – the pharmacy may endeavor to induce the manufacturer (or the manufacturer directed hub) to send referrals to the pharmacy by offering services at a reduced rate, or entirely gratis. In the first case, a fee in excess of prevailing rates – or “fair market value” – suggests that the intent of the arrangement is not merely payment for enhanced medication adherence services but is rather intended to incentivize the pharmacy to drive increased utilization of the manufacturer’s products by its customers. An excessive fee may be construed as a kickback and could encourage either manufacturer or pharmacy employees to file a whistleblower complaint. In the second case, if a pharmacy provides additional medication support at a reduced rate, or for free, such services are clearly a benefit to the manufacturer, as they are intended to increase utilization of the manufacturer’s products and may be construed as an effort to direct patient referrals to the specialty pharmacy.
The “gold” standard that either party may employ to ensure that a prevailing rate is being paid for services is to engage an independent consultant to analyze the proposed rates and identify appropriate market rates. At the very least, the parties should make a documented (i.e., written) effort to evaluate the proposed rates against what two parties acting independently and in mutual self-interest would arrive at in an arm’s length negotiation. We also recommend that the pharmacy keep detailed track of “core” and “enhanced” services and any pricing considerations and note any exceptions and the justification of same. This will help support the pharmacy’s analysis of what it considers “core” vs. enhanced” and avoid inconsistencies that might suggest an inappropriate transfer of consideration to the manufacturer.
Equally as important is the concept of commercial reasonableness. Even if a payment is determined to be fair market value for the service provided, the question must be asked whether the manufacturer would pay the fee in the absence of the possibility of “referrals.” If it would be commercially unreasonable for a manufacturer to pay for an item or service – for example, paying for data that is never actually viewed or utilized – the payments could nevertheless implicate the AKS, even if they are fair market value.
The AKS, and its state law parallels, also provide for safe harbors that are relevant to these arrangements – the personal services and management contract safe harbors. Each of these safe harbors have elements that must be satisfied. Our attorneys can work with you to ensure that the arrangement is structured accordingly and will be deemed to not be a violation of the law.
b. Government Price Reporting
Fees paid to specialty pharmacies by manufacturers may also directly impact government price reporting. Government price reporting in pharmacy refers to the process by which the price paid for drugs under government payor programs (e.g. Medicare and Medicaid) is impacted by the fees the manufacturer pays to third parties, and how those fees are treated. A bona fide service fee, as a legitimate administrative fee, is excluded from statutory pricing calculations that the manufacturer submits to the government. This directly impacts the calculation of the “Government Price”. Bona fide service fees paid by manufacturers to trading partners must be for legitimate, necessary services that are reasonable and performed by an entity other than the manufacturer. These fees are not intended to induce purchases or increase sales but are instead compensation for specific services rendered. The specialty pharmacy enhanced services fee is an example of such a fee. The services must provide an actual, tangible benefit to the manufacturer.
To be considered bona fide, a service fee must satisfy each of the four prongs as identified by the Centers for Medicare & Medicaid Services (“CMS”):
- The fee paid must be for a bona fide, itemized service that is actually performed on behalf of the manufacturer;
- The manufacturer would otherwise perform or contract for the service in the absence of the service arrangement;
- The fee represents fair market value for the services rendered; and
- The fee is not passed on in whole or in part to a client or customer of any entity.
Why does this matter? Because the Affordable Care Act provides that a drug’s Average Manufacturer Price (“AMP”) should not take into account bona fide service fees, and hence these fees are an important component of government price reporting compliance for pharmaceutical companies. In fact, the proper assessment by manufacturers of bona fide service fees impacts the calculation of several key pricing metrics (including AMP, Average Sales Price and Best Price) used to determine reimbursement rates and compliance with government programs. By excluding bona fide service fees, the manufacturer can avoid the artificial inflation of these prices, which can increase rebate amounts owed to government payers and impact the manufacturer’s market competitiveness. Accordingly, it is important for the manufacturer to receive appropriate legal guidance as to whether a particular enhanced service provided by a specialty pharmacy meets all of the four-prong bona fide services test, and therefore the associated fees should be excluded from a manufacturer’s AMP calculations. Accurate reporting of this (and two other components – discounts and rebates on the product, and prices paid for the product) is necessary to avoid over or underpayments and subsequent audit risks and disputes with government entities.
Overall, a bona fide service fee assessment of relevant third-party arrangements is a critical component of effective risk management and compliance with government price reporting obligations, as proactive and periodic evaluations help ensure accurate price reporting, compliance with legal and regulatory requirements, and effective market access strategy and management.
How Frier Levitt Can Help
While Service Agreements have clear benefits to manufacturers, specialty pharmacies, and patients, these arrangements are potentially fraught with legal and compliance risk. These arrangements are on the government’s list of enforcement priorities, and whistleblower suits are a continuing risk. Frier Levitt’s experienced attorneys can work with you to ensure that you are in compliance with federal and state anti-kickback safe harbors, and fair market value pricing. The advice of counsel is crucial in navigating the distinction between “core” and “enhanced “services, and in generating an analysis of the Service Agreement’s impact on government pricing determinations. Whether you have existing Service Agreement’s and have a specific concern regarding such an arrangement, or are seeking to establish one, contact our office to speak with an attorney today. Frier Levitt can provide the guidance necessary to ensure complaint pharmacy Services Agreements.
