Recent federal and state legislative efforts signal an increased focus on a significant and largely underappreciated public health threat – antimicrobial resistance (i.e., when a microorganism (such as a bacteria or virus) is able to resist the effects of medications such as antibiotics and antivirals, causing such medications to be ineffective). The results of a 2014 study underscore the magnitude of the threat of so-called “superbugs,” estimating that the number of deaths worldwide attributable to antimicrobial resistance will reach 10 million by 2050.  By comparison, the same study projected 8.2 million deaths from cancer, and 1.2 million deaths from traffic accidents by 2050.  Legislative efforts to address antimicrobial resistance span from encouraging development of new pathways to market for antimicrobial drugs to expanding data collection and monitoring efforts to better understand the scope of the problem.  The combination of new data and less-restrictive pathways to market simultaneously provide pharmaceutical companies with a faster entry into the market for antimicrobial drugs and a better understanding by local health departments and hospitals of the need for new drugs to combat resistant strains of microorganisms.

Federal Initiatives

On the federal side, the 21st Century Cures Act (the “Act”), signed into law by President Obama on December 13, 2016, includes several measures related to antimicrobial resistance.  For example, the Act creates a new approval pathway for “limited population drugs,” which are antibacterial or antifungal drugs “intended to treat a serious or life-threatening infection in a limited population of patients with unmet needs.” While the Act allows FDA to approve limited population drugs with less data than typically would be required, the approval is restricted to “the intended limited population,” and the manufacturer must meet additional labeling requirements to inform physicians of the drug’s limited approved use.  In addition, manufacturers of drugs approved through this pathway are required to submit any promotional materials to FDA at least 30 days before they plan to use them.

While adding specific labeling requirements for new drugs approved for limited populations, the Act also changes labeling requirements for susceptibility test interpretive criteria. Susceptibility test interpretive criteria includes the myriad of testing options used to determine whether a patient is infected with a specific microorganism or class of microorganism that can effectively be treated by a drug.  The Act requires pharmaceutical manufacturers to replace the currently existing susceptibility test interpretive criteria from the drug’s packaged insert or labeling with a reference to a FDA website to be built where such criteria for all drugs will be held.  Manufacturers have one year from the day the website is established to move its susceptibility test interpretive criteria to the so-called “Interpretive Criteria Website.”

The Act also increases monitoring and reporting of antimicrobial drug use and antimicrobial resistance at federal healthcare facilities, like VA hospitals and facilities run through the Indian Health Service or the Department of Defense. Further, it requires annual federal data reporting on aggregate national and regional trends related to antimicrobial resistance. A broad base of reliable data on antimicrobial resistance and the associated morbidity and mortality does not currently exist. However, along with the federal government, certain states are also making efforts to improve data collection in this space.

State Initiatives

Many states receive funding from the Centers for Disease Control (CDC) to collect data about patients with extremely resistant strains of microoganisms, like carbapenem-resistant Enterobacteriacea, or “CRE” – a bacteria that kills an estimated 600 Americans each year. The Illinois Department of Health, for example, developed a registry in 2014 that tracks positive lab tests for extremely drug-resistant organisms, including CRE.  Illinois began tracking this information following a deadly outbreak of CRE in 2013.  Health care facilities participating in the registry receive alerts when an infected patient is transferred in and must report CRE-positive culture results of patients within seven calendar days.  The most recent annual report shows a 7% increase in overall cases; however, a recent article posits that the increase may be somewhat attributable to better reporting efforts by hospitals gaining experience identifying CRE.  Similar programs exist in many states, but these programs typically do not track the outcomes of CRE cases.

A recently proposed bill in California (California Senate Bill 43) would require hospitals to include information within death certificates that identifies whether “any antimicrobial-resistant infection…was a factor in the death.”  Specifically, the bill would require the “attending physician [who] is legally obligated to file a certificate of death” to determine whether, in the physician’s professional judgment, an antimicrobial-resistant infection was a factor in the patient’s death.  State law already mandates tracking of over 80 communicable diseases, like HIV and Hepatitis (A-E), but only tracks antibiotic-resistant infections of VRE and MRSA if they are contracted while a patient is already in the hospital.

Given the magnitude of the potential threat, it is reassuring that legislative initiatives are showing an increased focus on antimicrobial resistance. New pathways to market for antimicrobial drugs and increased public awareness of the rising threat of “superbugs” should lead to additional innovation by drug manufacturers.  The limited population pathway may also cause some manufacturers to reassess their pipelines and strategies to market drugs toward limited populations.  For manufacturers facing expensive and burdensome FDA requirements to market new antimicrobials to a general population, the limited population pathway may provide a cheaper and faster entry into the market.  Early entry into the market can then fund additional efforts expand the label beyond a limited population.

The California Court of Appeals, Second Appellate District (the “Court”) in Epic Medical Management, LLC v. Paquette rendered an decision that was published earlier this year that is helpful to those who engage in provision of management services to physicians or medical groups (possibly other professionals as well) including, without limitation, hospitals, health systems or private equity backed organizations.  In this case, although not directly ruling on the legality of the arrangement, the Court states that if it had so ruled, it would have determined that a comprehensive management services agreement for management of a physician’s practice, which used a percentage-based compensation structure, does not violate California’s anti-kickback statute under Section 650 of the California Business & Professions Code or related fee-splitting or corporate practice of medicine prohibitions.  This decision is most directly relevant to practice, operations and investments in California, but it may also be of use as a point of reference, for context or for its potential persuasive value in other jurisdictions, particularly where corporate practice of medicine prohibitions still remain on the stronger side of the spectrum. 

A physician (“Physician”) and a lay management services company that was at least partially owned by physicians (“Company”) entered into what appears to be a fairly comprehensive management services agreement for the “non-medical aspects of [Physician’s] medical practice” (“Agreement”).  The services to be provided by the Company to the Physician included office space, equipment, non-physician personnel (including nurses), establishment of a marketing plan and marketing services, billing and collection services, accounting services and other support services.  The Agreement provided that the Physician would pay the Company a management fee for all of these services of one hundred twenty percent (120%) of the aggregate costs the Company incurred in providing all of the management services per month, not to exceed fifty percent (50%) of the collected professional revenue plus twenty five percent (25%) of the collected surgical revenues.  However, the compensation arrangement that the parties actually engaged in consisted of the Company charging and the Physician paying a fee of 50% of the revenue for office medical services, 25% of revenue for surgical services and 75% of pharmaceutical-related revenues.  Notably, it later was determined that this formula likely actually provided less profit to the Company than if the parties had stuck to their original compensation terms, as written in the Agreement. 

The parties performed under the Agreement for about 3.5 years until the relationship turned sour and the Physician terminated the Agreement.  The parties entered into arbitration and the arbitrator concluded that the Physician breached by not paying a portion of the management fees that were due (under the compensation structure, as modified by conduct of the parties).  The Physician moved to vacate the determination and award of management fees, arguing in part that the portion of the payments made to the Company under the modified compensation arrangement violated anti-referral prohibitions in California Business & Professions Code Section 650, among other things.  This argument was based in part on a relatively small number of patient referrals made by the Company to the Physician during the term of the Agreement. 

The trial court reviewing the arbitration award denied the Physician’s motion to vacate.  The trial court’s decision was based, in part on rationale that any illegality (if any) resulting from the small number of referrals of patients made by the Company to the Physician under the Agreement and the modified compensation structure was only “technical”, and not material enough to result in a violation.   

At the Second Appellate District level, the Physician argued that California has an absolute public policy against making payments to anyone making referrals, but the Court noted that Business & Professions Code Section 650 (b), expressly permits such payments in circumstances similar to those at issue and reflected in the Agreement.  Based in part on this, the Court concluded that there was no clear or likely contravention of public policy that would render the underlying arbitration award reviewable. 

However, the Court went further and stated that if the arbitration decision and award were reviewable, it would find that the Agreement did not violate the law

The language under Section 650(b) states, in part that “payment or receipt of consideration for services other than referral of patients which is based on a percentage of gross revenue or similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished…”.

The Court noted that the only way that the Agreement could have been found illegal is if it had been demonstrated and a finding had been made that the compensation paid to the Company was not commensurate with management services rendered under the Agreement, but there was no such demonstration or finding.  Moreover, the Court also stated that the terms of the Agreement showed a delineation between the medical elements of the practice that the Physician controlled and the non-medical elements that the Physician engaged the Company to handle.  The Court further noted that the Company exercised no control over the Physician’s practice, notwithstanding the modified, percentage-based compensation structure that the parties apparently actually engaged in and comprehensive services provided. 

The Court’s decision provides useful and recent guidance to hospitals, health systems, private equity investors and others who may engage in similar types of management services agreements in connection with their respective growth, alignment and investment strategies.