As widely reported, the Centers for Medicare and Medicaid Services (“CMS”) recently issued regulations implementing the Sunshine Act provisions of the Affordable Care Act.  These regulations require medical device and pharmaceutical companies to submit annual reports to CMS describing all payments and “transfers of value” to physicians and teaching hospitals.  Companies must begin to collect data on August 1, 2013, and the first annual report will be due on March 31, 2014.  CMS will post the reports on a public web site.

Less discussed is the additional reporting duty imposed on privately held drug and device companies.  Privately held companies must also report information about each shareholder/owner who is either a physician or who has a physician as an immediate family members.  The new regulation defines “immediate family member” broadly to include spouse, parent, child, sibling, stepparent, stepchild, stepsibiling, grandparent, grandchild, and spouse of grandparent or grandchild.  The ownership information that private companies must report includes: (1) name, address and specialty of the physician; (2) whether it is the physician or a family member who is the shareholder; (3) dollar amount invested by the shareholder; and (4) “value and terms” of each ownership or investment interest.  Ownership interests held by physicians or immediate family members of physicians on or after August 1, 2013, must be reported.

Furthermore, privately held drug and device companies are obligated under the regulation to report indirect ownership interests held by a physician or immediately family member of a physician.  For example, if a physician (or family member of a physician) is an investor in a private equity firm that has an ownership interest in a drug or device company, the reporting requirement would be triggered.

Privately held medical device and drug companies are now coming to grips with the requirement that they must publicly disclose this sensitive ownership information.  Some companies are considering de-equitizing certain shareholders and establishing phantom stock bonus programs to replace the foregone equity interests.  To avoid triggering the reporting requirement, any de-equitization must occur by August 1, 2013.

In addition, many are struggling to understand how the regulations apply if the company is owned in whole or in part by a private equity firm.  The Advanced Medical Technology Association (“AdvaMed”) has formally asked CMS to clarify what private companies must report when they are owned by private equity firms some of whose shareholders may be physicians or immediate family members of physicians.  As of May 6, 2013, CMS has not responded.

Under the Sunshine regulations, privately held device companies will be required to report annually CMS information about each shareholder who is a physician or who has an immediate family member who is a physician.  See 42 C.F.R. 403.906.  The reports will be publicly available on the CMS web site.  The first report is due on March 31, 2014.  The regulation states that “ownership or investment interests held on or after August 1, 2013 must be reported to CMS.”  42 C.F.R. 403.906(a)(2).

The required information includes: (1) name, business address, NPI, specialty, state license number of the physician; (2) whether it is the physician or a family member who is the shareholder; (3) dollar amount invested by the shareholder; and (4) “value and terms” of each ownership or investment interest.  CMS is finalizing the reporting form, but the draft template requires the reporting of the current dollar value, as of the reporting date, of the ownership interest and an up-to-200 character statement of “any applicable terms of the ownership or investment interest” (whatever that means).  42 C.F.R. 403.906(b).  (The final template is subject to change and could state a different date on which to measure the dollar value of the ownership interest.  But the regulation clearly states that if a physician or immediate family member is a shareholder any time between 8/31/13 and 12/31/13, then the company must submit a report.  The template clarifies the date on which the ownership interest is to be quantified.)

“Immediate family member” is defined in the regulation to include   42 C.F.R. 403.903.

Thus, if, as of 8/31/13, a shareholder or immediate family member is a physician, the company will need to submit an ownership report.