What’s All the Fuss? Core Versus Enhanced Services

The question of what is a core service versus what is an enhanced service lies at the center of most manufacturer service contracts, and high-stakes prosecutions show how important it is to get the distinction right.

Yet, despite the prevalence of core/enhanced considerations in the industry, the market continues to wrestle with which services are core or enhanced, and under what circumstances. Core services are basic to the specialty pharmacy service offerings, which the pharmacy provides without compensation from a third party.

Enhanced services are services that a specialty pharmacy only provides with payment from a third party, usually a drug manufacturer. For pharmacies and manufacturers, understanding the legal underpinnings of the distinction between core and enhanced services is essential to a clear contracting strategy and for legal compliance.

Specialty pharmacies that track which services are core or enhanced, consistently apply their characterization in service programs, and maintain documentation of exceptions to their general core versus enhanced characterizations help mitigate anti-kickback risk, and are in a better position to respond to requests for proposals, and expedite manufacturer service contracts. Likewise, manufacturers that ensure all compensated services are enhanced for the specialty pharmacy help mitigate anti-kickback and government price-reporting risks.

Characterizing services as core or enhanced can be nuanced. As part of its core model, specialty pharmacy may provide different levels of service for limited-distribution drugs or certain disease states. Additionally, a service may generally be core, but if a manufacturer requires certain performance metrics, performing to those metrics, as well as the penalties associated with failing to meet the metrics, may push those activities to enhanced.

For example, a pharmacy may perform prior authorizations (PAs) on all prescriptions, but typically initiate the PA on the fifth day after receipt of the prescription. If a manufacturer required the specialty pharmacy to initiate the PA within 24 hours of receipt of the prescription, the timing guarantee may be enhanced. In contrast, even if the specialty pharmacy does not have an internal process, but typically initiates PAs the same day the referral is received, the pharmacy would have difficulty justifying that the service is enhanced.

The 2 primary legal considerations associated with core and enhanced service distinctions are government price-reporting and federal and state anti-kickback laws. Manufacturers must consider whether the services meet the definition of a bona fide service fee under government price-reporting rules for average sales price, average manufacturer price, and best price. A manufacturer’s payment to a specialty pharmacy for a service that is core could be seen as subterfuge to avoid price-reporting obligations that might lower average sales price or average manufacturer’s price.

Under anti-kickback laws, if a service is core, but a specialty pharmacy receives a fee from a manufacturer for performing that service, the fee may be perceived as a kickback to promote that manufacturer’s drug. Inversely, if the specialty pharmacy usually only performs a service for a fee, but performs that service for a manufacturer without a charge, the performance of the service without charge may be perceived as a kickback to the manufacturer to induce it to send referrals to that specialty pharmacy (a “reverse kickback”).

The likelihood that providing enhanced services for free will be deemed a kickback increases if there is involvement from a manufacturer-directed hub with the ability to award referrals. Allegations of a reverse kickback were stated in the Novartis/Exjade litigation, which resulted in Novartis settling for approximately $370 million and specialty pharmacy defendants Accredo and BioScrip settling for approximately $60 million and $15 million, respectively. In that case, it was asserted that the pharmacies induced Novartis to reward them with referrals through Novartis’ EPASS hub.

Johnson & Johnson paid more than $2.2 billion in 2013 and Omnicare paid $98 million in 2009, to settle claims that, among other things, Johnson & Johnson contracted with Omnicare to pay for data it did not receive and considered paying for data it had previously received for free. This demonstrates the importance of ensuring that all services contracted for are actually performed and that any service arrangement should be reasonable in light of the pharmacy’s past and current contracts.

The Exjade litigation and resulting Novartis Corporate Integrity Agreement touch on a related issue—that all services must be contained within the agreement. As business relationships evolve over time, care should be taken to ensure all services are accurately memorialized in a written agreement.

There are several “safe harbors” under the federal anti-kickback statute, and many state anti-kickback laws parallel the federal statute. Generally, if a safe harbor is met, the arrangement is deemed to not be a violation of the law. The personal services and management contract safe harbor is relevant to enhanced pharmacy services agreements.

The factors of that safe harbor are that the agreement:

• is written, signed by the parties, covers all of the services under the arrangement, and is for a year or more
• specifies exactly the schedule of services and the exact charge for each such performance
• provides for aggregate compensation that 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 for which payment may be made in whole, or in part, under Medicare, Medicaid, or other federal health care programs (In obtaining fair market valuation, third-party valuations may withstand more scrutiny, as a regulator is more likely to view a third-party valuation as objective.)
• provides for services that do not involve the counseling or promotion of activities that violate law
• provides for aggregate services that do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services

Specialty pharmacies should also maintain a tracker of core and enhanced services. Specialty pharmacies should note any instance in which they receive a fee for a service that has previously been considered core and document the reason.

For example, details such as whether the manufacturer is requiring data reporting, additional phone calls to the physician or hub, a performance metric, or if a drug is a limited-distribution drug, should be noted in the tracker.

Over time, exceptions should also be applied consistently. Legal counsel should review any arrangements in which the pharmacy chooses to charge for a “core” service. It has become common for manufacturers to list a pharmacy’s core services in service agreements, particularly for limited-distribution drugs.

Specialty pharmacies should also take care not to contractually obligate themselves to perform core services in a certain manner, which could move the services to enhanced. Instead, contractual references to core services should provide latitude for the specialty pharmacy to perform the services within the range of its normal established processes and should not have mandated performance metrics.

There is tremendous variation in the details of the service descriptions among manufacturers. A specialty pharmacy that has thought through its core and enhanced service offerings is better positioned to more efficiently negotiate with manufacturers, maintain a consistent approach to its core service offerings, and be compliant with applicable law in the face of multiple manufacturer agreements and ever evolving business relationships.