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January 30, 2012

New Regulations Provide Guidance to Drug and Device Manufacturers for Establishing Effective Reporting Systems to Comply with Physician Payment Sunshine Act

The Centers for Medicare and Medicaid Services (CMS) has issued proposed regulations that provide guidance to manufacturers on whether and how they are required to disclose payments or other transfers of value made to covered recipients, including physicians and teaching hospitals, in accordance with the Physician Payment Sunshine Act (the "Sunshine Act") that Congress passed as part of the 2010 healthcare reform legislation. The proposed regulations contain many important changes and clarifications to the Sunshine Act, as summarized below, the most important of which is timing: Manufacturers are not required to collect payment data as of January 1, 2012. Instead, the data collection period is delayed until after implementation of the final regulations, expected later in 2012. CMS anticipates that the first report will be due as originally planned on March 31, 2013, disclosing payments made during the remainder of calendar year 2012 following implementation of the final regulations.

Despite the delayed implementation of the Sunshine Act, we recommend that manufacturers set up their data collection systems now based on the proposed regulations. CMS provided significant details regarding the method and manner of payment data required to be disclosed. Even though some fine points may change in the final regulations, the overall structure will likely remain. The data collection period is proposed to begin as soon as 90 days following publication of the final regulations, and failure to comply can result in stiff penalties ranging from $1,000 for a simple error to $1 million for knowing violations.

Definition of Applicable Manufacturer

The Sunshine Act applies to manufacturers of drugs, devices, biologicals or medical supplies that are covered under Medicare, Medicaid, or the Children's Health Insurance Program. CMS proposes to define "applicable manufacturer" as an entity that is (1) engaged in the production, preparation, propagation, compounding or conversion of a covered drug, device, biological, or medical supply for sale or distribution in the U.S. or a U.S. territory or (2) under common ownership of such an entity and that provides assistance or support to such an entity.

Under this definition, a manufacturer is deemed to be an applicable manufacturer if its products are sold or distributed in the U.S., regardless of where such products are actually made or where the entity is actually located or incorporated. CMS also proposes that if a manufacturer meets the definition with respect to at least one covered product, then all payments or transfers of value made by that manufacturer to a covered recipient would be required to be reported, regardless of whether the particular payment or transfer was associated with the covered product. Additionally, CMS clarifies that the definition applies to any entity that holds FDA approval, licensure, or clearance for a covered product, even if the entity contracts out the actual manufacturing to another entity.

The definition of applicable manufacturer includes companies under "common ownership" of other entities that fall within the definition, even though they themselves may not be involved in the "manufacturing" process but instead provide assistance or support to the applicable manufacturer. If two entities are under common ownership, and both individually meet the definition of an applicable manufacturer under paragraph (1) of the definition, then under the proposed regulation the entities would be required to report separately. On the other hand, if only one company under common ownership meets the definition under paragraph (1), and the other company is required to report under paragraph (2), then the affected entities are permitted to choose whether or not to report together.

For example, if a parent holding company has several operating subsidiaries, only one of which is involved in the manufacturing process described in paragraph (1) of the definition, then the manufacturing subsidiary should report under its own name. If, in addition, one or more of the other subsidiaries is required to report under paragraph (2) of the definition, then each subsidiary can report under its own name, or the parent can report for all of its subsidiaries together, in which case it must clearly name all of the entities included in the report but it need not break down which payments relate to which entity.

Definition of Covered Drug, Device, Biological or Medical Supply

CMS proposes to limit the definition of drugs and biologicals to those that require a prescription, thus excluding over-the-counter products. The proposed regulation specifies that a single prescription product will subject a manufacturer to reporting of all payments to covered recipients, even those made with respect to the manufacturer's non-prescription products. Furthermore, the proposed regulation limits the definition of devices to those that require either premarket approval by or premarket notification to the FDA. This would exclude many Class I devices and certain Class II devices, which are exempt from premarket notification requirements, such as tongue depressors and elastic bandages.

Content of Reports

Each payment or transfer of value that an applicable manufacturer makes to a covered recipient will have to be classified according to a 13-part category list. The specific categories of information required to be reported are set forth in the Sunshine Act. (See for a summary.) If a payment is associated with multiple categories, such as a payment to a consultant for meals and travel expenses in connection with the consulting services, the manufacturer will have to itemize each segment of payment and report it separately.

CMS defines the "date of payment" as the "date upon which a payment or transfer of value was provided to the covered recipient." The regulation proposes that when payments are provided over multiple dates, such as monthly payments under a consulting agreement, the applicable manufacturer can choose whether to report the total payment on the date of the first payment as a single line item or to report each individual payment as a separate line item.

With regard to payment for food and beverage, CMS proposes reporting on the value provided to each covered recipient, subject to the statutory thresholds ($10 per payment or $100 annual aggregate). In other words, if a sales representative brings $25 worth of bagels and coffee to a solo physician's office for a morning meeting, the manufacturer must report $25 to that physician, regardless of how many individuals partake. But if the same bagels and coffee were brought to a group practice with five physicians, the per-covered recipient cost would be $5, which is below the $10 threshold, so the payment would not need to be reported.

Given the complex reporting rules and consequences for non-compliance, manufacturers must establish robust reporting systems to capture the detailed information required to be reported.

For further information and assistance in interpreting these proposed regulations, please contact Holly Hoehner at (315) 425-2833 or or any member of the Health Care & Human Services Practice Area.


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