Healthcare Law Update: September 2017

Nathan A. Adams IV is a Partner in our Tallahassee office. Michael Hantman is a Partner in our Miami office. Matthew R. Goldfarb is an Associate at our Chicago office. Daniel I. Small is a Partner, Andrew Namkung and Melissa A. Wong are Associates in our Boston office.

OIG Advisory Opinions

Manufacturer's Free Replacement of Spoiled Pharmaceutical Products Authorized

By Andrew I. Namkung

On Aug. 25, 2017, the U.S. Department of Health and Human Services' (HHS) Office of Inspector General (OIG) published Advisory Opinion 17-03, allowing under the Federal Anti-Kickback Statute (AKS) a pharmaceutical manufacturer (requestor) to offer physicians, clinics and hospitals (customers) free replacements of the manufacturer's products that become spoiled. The requestor is a manufacturer of biologics and other pharmaceutical products (products) that require specific handling, such as the maintenance of a certain temperature or the avoidance of exposure to direct sunlight.

Specifically, under the arrangement, the requestor would replace for free products that become unusable or spoiled after the customers' purchase due to (1) mishandling or breaking, (2) improper storage, (3) admixture error, or (4) an unforeseen patient condition or the patient missing an appointment. The replacement would be not available if the product was already administered or billed for, and there would be quantity limitations on how many products may be replaced. The OIG began by observing that the arrangement would not qualify for the regulatory safe harbor or statutory exception for warranties because the arrangement is for products that were spoiled due to circumstances other than a defect or the requestor's failure to meet specifications. Rather, the arrangement is for replacement of products spoiled after the sale.

The OIG nevertheless approved the arrangement under the AKS because, first, the arrangement increases patient safety and quality of care by decreasing the risk that a customer might administer spoiled products to patients to avoid financial loss. Second, because the arrangement only replaces products that were already selected and intended to be used but were not administered or billed for, the risk of overutilization or increased costs to federal health care programs is low. Third, because the arrangement also includes quantity limitations, the risk of a customer choosing these products over other similar pharmaceutical products is low. Finally, the OIG noted that just as a homeowner would not act recklessly in reliance of a homeowner's insurance policy, the arrangement would not unduly influence the customer into diminishing efforts to maintain the quality of the product or otherwise abuse their rights under the arrangement. As a result, the OIG concluded that it should not impose administrative sanctions under the AKS for the arrangement.

Enforcement

Claimed Purchase of Unapproved Drug Ingredient Leads to FCA Claim

By Nathan A. Adams IV

In United States ex rel. Campie v. Gilead Sciences, Inc., 862 F. 3d 890 (9th Cir. 2017), the court of appeals reversed the district court's order dismissing relators' claim against their former employer, alleging it violated the False Claims Act (FCA) by allegedly making false statements about its compliance with U.S. Food and Drug Administration (FDA) regulations regarding certain HIV drugs, and by firing one of the relators who discovered and reported the violations. The relators alleged that the defendant in its new drug application to the FDA represented that it would source the active ingredient emtricitabine from specific registered facilities, but actually contracted with another facility for the ingredient. The defendant sought FDA approval for this roughly two years later, but allegedly falsified or concealed data in support of this application. The defendant allegedly never acknowledged nor notified the FDA about certain bad test results or contamination and adulteration problems. The defendant argued that a claim for nonconforming goods is limited to situations where, in contrast to this case, the goods had no value or an express specification in a payment contract between supplier and government is violated. The court disagreed and found that the relators adequately alleged a factually false certification by claiming the defendant supplied "misbrand[ed]" goods; and the defendant adequately alleged an implied false certification by claiming the defendant submitted claims for payment or reimbursement for the HIV drug, thereby implicitly representing that it provided medications approved by the FDA manufactured at approved facilities and not adulterated or misbranded. The district court rejected the relators' claims in part because the alleged fraud was directed at the FDA, rather than the payor, and because payment was not conditioned on the falsity, but the court of appeals considered this irrelevant. The court of appeals also disagreed with the district court about materiality: "Mere FDA approval cannot preclude False Claims Act liability, especially where, as here, the alleged false claims procured certain approvals in the first instance."

Claimed Defects in Metal-on-Metal Hip Replacement Device Gives Rise to Indirect False Claim Submission

By Nathan A. Adams IV

In United States ex rel. Nargol v. Depuy Orthopaedics, Inc., No. 16-1442, 2017 WL 3167622 (1st Cir. July 26, 2017), the court of appeals ruled that relators who brought a qui tam action...