We want to alert our manufacturer clients to the potential importance of a specific provision included in our analysis of the recent health care reform legislation. As we note at page 108 of our memorandum:

Medicaid Exclusion from Participation Relating to Certain Ownership, Control, and Management Affiliations (Sec. 6502)

[T]his provision requires Medicaid agencies to exclude individuals or entities from participating in Medicaid for a specified period of time if the entity or individual owns, controls, or manages an entity that: (1) has failed to repay overpayments during the period as determined by the Secretary; (2) is suspended, excluded, or terminated from participation in any Medicaid program; or (3) is affiliated with an individual or entity that has been suspended, excluded, or terminated from Medicaid participation.

In recent years, a number of pharmaceutical and device manufacturers that have been subject to investigation and enforcement activity by the Office of Inspector General, the Department of Justice, and/or state entities, have opted to have subsidiaries — sometimes all but defunct ones — plead guilty to a criminal kickback charge for which they are excluded from participation in Medicare and Medicaid under the mandatory exclusion provisions of 42 U.S.C. 1320a-7(a). The parent organization or another subsidiary then has continued to conduct business as usual, though typically subject to a Corporate Integrity Agreement.

The cited provision in the PPACA legislation could be interpreted to mean that, if a pharmaceutical manufacturer’s subsidiary or affiliate takes a plea and is excluded, then state Medicaid programs must exclude the parent company from Medicaid participation. This in turn means that the parent’s products will not be reimbursed by Medicaid programs — in effect, that patients will not have access to that manufacturer’s products. This is a draconian measure not previously contemplated as a mandatory matter. Further, such an action could be a predicate for Medicare exclusion as well. There remain some undefined terms in the legislation (for example, the period of exclusion), and it is unclear whether state Medicaid agencies might interpret the provision to allow them to adopt some type of “permissive exclusion” process, rather than having exclusions be automatic.

While at first blush this provision appears to be adverse to manufacturers in the sense that it authorizes additional sanctions, its practical implications in the context of global resolutions of dual track criminal-civil investigations are less clear. On the one hand, it could arguably provide even greater leverage to prosecutors than already exists. On the other hand, since the exclusion implications of a criminal kickback plea would likely be wholly unacceptable to a manufacturer, it could either act as a barrier to global resolutions or alternatively might force the parties to consider other sorts of pleas that are not subject to mandatory exclusion (e.g., pleas to FDA violations).