Search for Attorney CPA

Consulting and Royalty Agreements with Physicians:

by Maria D. Garcia on Categories: health law

Consulting and Royalty Agreements with Physicians:

By Maria D. Garcia - Zumpano Patricios & Winker, P.A.

In recent years, consulting agreements and royalty (or percentage based structure) payments to physicians from pharmaceutical and medical device manufacturers have become more prevalent in the U.S. medical industry.  Generally, physicians are hired as consultants to assist in designing, testing and developing products, technology, and scientific processes. This type of business relationship raises various red flags in light of the Federal Anti-Kickback Statute1,  which makes it a criminal offense to knowingly and willfully offer or pay remuneration to induce the referral of federal health care program business. Both medical device manufacturers and physicians must be aware of the potential pitfalls when engaging in these arrangements.

These types of arrangements may appear to fit under the “personal services and management contracts” safe harbor exception under the Federal Anti-Kickback Statute.  However, specifically, to meet the “personal services and management contracts” safe harbor for various payment and business practices, these arrangements would have to, among other requirements, ensure that the aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties.2

Many consulting agreements do not meet this safe harbor because the aggregate payment amounts are not set in advance.  While the regulations are clear that        “[c]ompliance with a safe harbor is voluntary, however, an arrangement that does not fit in a safe harbor are not necessarily illegal. Rather, they must be evaluated in a case-by-case basis.” 3   Nonetheless, fitting within the safe harbor is a key to reducing risk of violation of the law, especially given the draconian consequences that may ensue from a violation.

The main source for guidance is the Department of Health and Human Services Office of the Inspector General (“OIG”).  The OIG has indicated that the interaction between device manufacturers and health care professionals “can be especially valuable because physicians play an essential role in the development, testing, and extensive training involved in producing effective and safe medical devices…”4  “Device companies can legitimately compensate physicians for their actual time and intellectual contributions to product innovations and training in the appropriate use of devices.” 5 

However, in testimony before the Senate Special Committee on Aging, Gregory E. Demske, assistant inspector general for legal affairs, specified that “in an environment where physicians routinely receive substantial compensation from medical device companies through stock options, royalty agreements, consulting agreements, research grants, and fellowships, evidence suggests that there is a significant risk that such payments will improperly influence medical decision making.” Demske further testified that industry payments to physicians are sometimes not related to the actual contributions of the physician, but instead serve as kickbacks intended to influence the physician’s medical decision making. “These abusive practices are sometimes disguised as consulting contracts, royalty agreements, or gifts” he said.  Moreover, the “companies and physicians who engage in such kickback schemes are subject to criminal, civil, and administrative prosecution.” Specifically, the OIG has warned that the financial relationship between device manufacturers and physicians “merits scrutiny under the anti-fraud statutes because the relationships raise the types of risks that those statutes are designed to address.”6

Whether a particular arrangement infringes on the statute depends on the specific facts and circumstances of the arrangement, as well as the intent of the parties.  Although the OIG recognizes the importance and benefit to the medical community found in consulting and royalty arrangements, it is clear that medical device manufacturers must carefully craft these contracts with the provisions of the Federal Anti-Kickback Statute in mind and conservatively seek guidance from the OIG.

Finally, the OIG has stated that, in order to mitigate risks inherent in the physician-industry financial relationship, “the health care industry, medical community, and the government must develop and implement additional approaches to reduce the risks raised by these arrangements,”7 in addition to government enforcement. Therefore, it is imperative that companies monitor recommendations from the OIG to avoid eventual prosecution and/or sanctions imposed by the OIG for impermissible arrangements and payments to physicians. 

When offering guidance to physicians, the OIG has advised that when considering a consulting agreement with a medical device company, physicians should ask themselves: “(1) Does the company really need my particular expertise or input? (2) Does the amount of money the company is offering seem fair, appropriate, and commercially reasonable for what it is asking me to do?”8 The importance of a fair market value appraisal by a qualified third party, to verify whether in fact compensation is at fair market value for real services to be performed, cannot be over emphasized. Also, beware, if your contribution to a proposed arrangement is your ability to prescribe a drug or use a medical device or refer your patients for particular services or supplies, the proposed consulting arrangement likely is one you should avoid as it could violate fraud and abuse laws.”9 Both medical device manufacturers and physicians should heed this advice since the Federal Anti-Kickback Statute may hold both parties liable for impermissible transactions.

By Maria D. Garcia
Zumpano, Patricios & Winker
312 Minorca Ave.
Coral Gables, FL 33134

South Florida Legal Guide - Midyear 2012 Edition
1 42 U.S.C. § 1320a-7b(b).  
2 42 CFR 1001.952 (d)(5).
3 Id.
4 From Testimony by Gregory E. Demske, Assistant Inspector General for Legal Affairs, Department of Health and Human Services, before the Senate Special Committee on Aging on Examining the Relationship Between the Medical Device Industry and Physicians on February 27, 2008.
5 Id.
6 Id.
7 From Testimony by Gregory E. Demske, Assistant Inspector General for Legal Affairs, Department of Health and Human Services, before the Senate Special Committee on Aging on Examining the Relationship Between the Medical Device Industry and Physicians on February 27, 2008.
9 Id.

Tags: consulting and royalty agreements with physicians: a look at this business relationship in light of the federal anti-kickback statue

Related Articles

  3. Who Controls My Medical Records?
  5. Payor Unilateralism in Managed Care Agreements: Physicians and Other Health Care Providers Beware
© 2023 . All rights reserved.