2022-2023 Medical Product and Service Regulatory Initiatives

The medical product and healthcare service industry is one of the most closely regulated sectors in the U.S. Several agencies actively exercise authority with constantly changing legislation and policies to keep pace with transformative technologies and emerging public health concerns. Issues such as digital health, generic drugs, cannabis, and medical practice consolidation are at the forefront of broadcast media and trade press, but they represent only a subset of regulatory focus areas potentially impacted this year.

Below we describe several actions forecast for 2023 by the federal government that are expected to have broad impact within the medical product and service industry. The summary below is intended to focus on those actions that are most highly anticipated and is not meant to provide an exhaustive overview of all federal regulations or guidance affecting the industry. Readers should keep in mind that individual states also promulgate regulations and guidance that could impact the sector.

  • Prescription Drug Reform: On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA). The drug pricing provisions in Subtitle B of Title I of the IRA, entitled “Prescription Drug Pricing Reform,” enact government price negotiation authority for the Medicare program, establish inflation penalties in the form of rebates, and fundamentally redesign the Part D program. The IRA amends the Part D noninterference clause that prohibits the Secretary of Health and Human Services (HHS) from negotiating prescription drug prices, and instead requires Centers for Medicare and Medicaid Services (CMS) to negotiate with manufacturers for “selected drugs”—the subset of “qualifying single source drugs” with the highest Part B and D spend in a given year—to establish a “maximum fair price” (MFP). The IRA further requires manufacturers to make selected drugs available at the MFP to “MFP-eligible individuals” (i.e., Medicare beneficiaries), and certain entities that furnish services to such beneficiaries, effective beginning January 1, 2026. Part D plans must also cover selected drugs on their formularies, subject to limited exceptions. Per statute, the negotiation provisions will be implemented through a combination of the Negotiation Agreement and, for initial price applicability years 2026-2028, program instruction and other forms of program guidance. CMS is likely to release most of the key guidance regarding the IRA’s drug negotiation provisions before manufacturers are required to sign the Negotiation Agreement on October 1, 2023. While the legislation is now enacted, many issues and questions remain regarding its implementation, which will be addressed through a combination of guidance, program instruction, agreements with manufacturers, and notice-and-comment rulemaking. Much of the initial program guidance for the drug negotiation provisions will be released in the first nine months of 2023, making the first two quarters of 2023 a critical time to engage with the CMS to help shape the implementation of this significant element of the legislation. Key guidance is also expected during 2023 regarding the Part B inflationary rebates and elements of the Part D redesign.
  • Telemedicine: Telemedicine has emerged as a major focus of anti-kickback enforcement. This is reflected in a string of law enforcement actions against “purported telemedicine companies” across 2022. While the facts and circumstances of each case differed, often they involved at least one practitioner ordering or prescribing items or services for purported patients they never examined or meaningfully assessed to determine the medical necessity of items or services ordered or prescribed. In addition, telemedicine companies allegedly paid practitioners a fee that correlated with the volume of federally reimbursable items or services ordered or prescribed by the practitioners, which was intended to and did incentivize a practitioner to order medically unnecessary items or services. The Office of Inspector General (OIG) for the HHS issued a Special Fraud Alert directed at healthcare practitioners warning them about suspect practices in telemedicine arrangements. More recently, the OIG launched a special webpage devoted to telehealth and embarked on education campaign. Enforcement and education both reflect a conviction that telemedicine companies are often paying practitioners fees correlated with the volume of federally reimbursable items or services ordered or prescribed by the practitioners, which was intended to and did incentivize a practitioner to order medically unnecessary items or services.
  • Medicare Advantage: Medicare Advantage plans (MA Plans) will undergo scrutiny and see more enforcement activities under the False Claims Act. This is, to a considerable degree, due to the increasingly central role that the MA Plans play in Medicare. In 2022, enrollment in MA Plans reached nearly 30 million beneficiaries, approximately half of Medicare participants. Federal law enforcement has recently intervened in a series of high-profile cases against MA Plans and the insurance companies that operate them. Unlike traditional Medicare, Medicare Advantage (Part C) does not directly reimburse healthcare providers for services rendered. Instead, Medicare pays MA Plans pay a capitated, or fixed, rate for care to Medicare Advantage beneficiaries. This rate is determined, in part, by a complex Request for Anticipated Payment that factors in the beneficiaries’ relative health, as well as diagnoses codes. Certain diagnoses increase the amounts paid for the beneficiary. In 2022, the OIG analyzed specific health plans’ use of both chart reviews and health risk assessments. The analysis found that one insurance company was responsible for 40 percent of payments for diagnoses reported only in chart reviews or health risk assessments. The OIG has also audited specific Medicare Advantage plans and publicized its finding of overpayments for improper diagnoses. Government enforcement in the Medicare Advantage space continues to increase. With more Americans reaching Medicare eligibility, we can only expect Medicare Advantage plans to continue to grow. With billions of dollars in potentially improper payments at stake, the U.S. Department of Justice (DOJ) and the OIG will likely deploy more resources to this area.
  • EKRA Enforcement: Mark Schena, the president of Arrayit Corporation, has been found guilty by a jury for violations of the Eliminating Kickbacks in Recovery Act (EKRA), healthcare fraud, wire fraud, and securities fraud. On May 18, 2021, a superseding indictment was issued against Mark Schena for his role in promoting Arrayit online and publicly by making false and misleading statements to the public regarding Arrayit’s COVID-19 testing technology and requirements to bundle with allergy testing, among other false and misleading representations to investors. Schena was charged with violations of conspiracy to commit healthcare fraud and wire fraud, healthcare fraud, conspiracy to pay kickbacks, violations of EKRA, and various violations of security fraud. The government alleged that Schena had offered and paid, as well as conspired to pay, and paid, illegal kickbacks to physicians and marketers to induce the ordering of bundled COVID-19 testing and allergy testing, many of which were not medically necessary, not eligible for reimbursement, or not provided. On September 1, 2022, a jury found Schena guilty on all counts.
  • Antitrust in Healthcare: Megadeals among national payors and household names have grabbed headlines and been targets of enforcement by the DOJ, Antitrust Division and the Federal Trade Commission (collectively, the “agencies”). From the agencies’ perspective, the private equity (PE) investment model is at the core of their concerns. PE investments are predicated on higher-than-average returns to investors, which in turn require higher than average growth of the portfolio companies owned by the PE fund. Organic growth (growth without acquisition) can be elusive and can take much longer than growth through M&A activity. In some cases, it truly is easier to “buy” rather than “build” growth. Hence, the “roll-up” is a “tried and true” PE strategy for growth. The roll-up process consists of acquiring a number of smaller players in different and sometimes adjacent market geographies at relatively lower valuation multiples to build a company with greater presence and improved financial performance, that will yield a higher valuation multiple when the company is sold. While these consolidation plays can create all-around better companies, can improve quality and access to care, as well as open opportunities for adoption of better practices and technologies that elevate an industry or change the standard of care, there is a perception shared by the federal regulatory agencies, that such growth strategy is more likely to reduce access and quality of care and increase prices in certain markets. Thus, the agencies have been focused on roll-up acquisitions by PE-backed healthcare companies, many of which occur over a sustained period of time, but are not reported or noticed by the agencies because the transaction values fall below the Hart-Scott-Rodino size of transaction threshold (currently $101 million).
  • Medical Device Augmented Reality and Virtual Reality: The U.S. Food and Drug Administration (FDA) held a two-day workshop in July 2022 to discuss benefits, risks, and applications of the digital health technology to solicit input and recommendations on relevant regulatory issues. In particular, the workshop was intended to address the novel attributes of digital health visualization, tracking techniques, and embedded software; specific challenges related to specific populations (e.g., pediatric or cognitively impaired) who may use this technology; and ways patient perspectives could be incorporated in the FDA and industry benefit-risk decision making, as well as the healthcare provider decision-making process related to using or prescribing the technology. Later that year, the FDA published a list of augmented reality (AR) and virtual reality (VR) devices that have received marketing authorization. In light of recent agency activity, it’s likely that the FDA will announce a policy on AR and VR devices in the near future.
  • Global Quality Systems Harmonization: The FDA intends to amend the device Quality System Regulation to align more closely with the international consensus standard for devices (ISO 13485:2016). Currently, manufacturers of medical devices commercialized in the U.S. and other overseas jurisdictions must comply with two different regulatory standards for device current Good Manufacturing Practices. Aligning the FDA’s quality systems standards with other major markets across the world will streamline and simplify the processes and procedures under which devices are manufactured. This action is expected to improve efficiency, reduce operational confusion, and result in cost savings for device manufacturers.
  • Public Health Emergency Sunset:On January 30, 2023, the Biden administration announced its intent to end the national emergency and public health emergency (PHE) declarations on May 11, 2023. These emergency declarations have been in place since early 2020 and gave the federal government flexibility to waive or modify certain requirements in a range of areas, including emergency use authorizations (EUA) by the FDA. The FDA also reacted to the PHE by exercising enforcement discretion for premarket review and other requirements for dozens of device types including but not limited to infusion pumps, remote monitoring devices, masks, and imaging systems. Given that the federal policies surrounding enforcement discretion are tied to the PHE, its end is expected to remove the regulatory relaxations and trigger regulatory submissions later this year. The ending of the PHE will not impact the FDA’s ability to authorize devices (including tests), treatments, or vaccines for emergency use. Existing emergency use authorizations (EUAs) for products will remain in effect and the agency may continue to issue new EUAs going forward when criteria for issuance are met. If an EUA declaration is terminated, notice of termination will be published in the Federal Register. Before an EUA declaration is terminated, the Secretary will issue a Federal Register notice providing advanced notice to the public that the EUA declaration is being terminated.
  • Remanufacturing of Medical Devices: Many devices are reusable and need preventive maintenance and repair during their useful life. For these devices, proper servicing is critical to their continued safe and effective use. However, there is a lack of clarity regarding the distinction between “servicing” and “remanufacturing” of a device. Most notably, remanufacturing has implications for the regulatory responsibilities of entities performing these activities. Finalization of this guidance will help clarify whether activities performed on devices are likely “remanufacturing” in order to help provide better understanding of applicable regulatory requirements, potentially crystalizing a largely unregulated space for third-party medical device services to operate.
  • Direct-to-Consumer Prescription Drug Advertisements: The U.S. is part of the very small global minority that allows direct advertising of prescription drugs to consumers which the FDA plans to regulate more closely. In 2023, the FDA plans to issue a final rule concerning direct-to-consumer (DTC) advertisements of prescription drugs to reflect that the major statement relating to side effects and contraindications in DTC advertisements for human drugs in television or radio format must be presented in a clear, conspicuous, and neutral manner. The final rule will also establish standards for determining whether such requirement is satisfied.
  • Biologics Regulation Modernization: Since the biologics regulations were primarily drafted in the 1970s, before the passage of the Biologics Price Competition and Innovation Act of 2009, the FDA plans to issue a proposed rule in 2023 that will make high priority updates to the FDA’s biologics regulations with the goals of providing more clarity and regulatory certainty for manufacturers of both originator and biosimilar/interchangeable products and helping to prevent the gaming of FDA regulatory requirements to prevent or delay competition from biosimilars and interchangeable products. In light of the regulatory and commercial interests, this is a highly anticipated rule that will likely receive many diverse comments.
  • Cannabis Federal Regulation Relaxation: In October 2022, President Biden granted clemency to certain low-level federal marijuana offenders and directed the Attorney General to review the status of marijuana under federal law. On December 2, 2022, President Biden signed into law the Medical Marijuana and Cannabidiol Research Expansion Act (H.R. 8454), which aims to ease requirements for research involving marijuana and cannabidiol (CBD). The Controlled Substances Act (CSA) authorizes the Attorney General, in conjunction with the HHS, the FDA, and the U.S. Drug Enforcement Administration, to reschedule or even deschedule substances after consideration of its medical use and its potential for abuse and dependence. The Marijuana Opportunity Reinvestment and Expungement Act (MORE Act, H.R. 3617) would remove marijuana and tetrahydrocannabinol (THC) from control under the CSA and would require expungement of past convictions for a variety of federal marijuana offenses, among other things. The MORE Act passed the House in April 2022 and is currently pending before the Senate. The Cannabis Administration and Opportunity Act (S. 4591) would remove from Schedule I both marijuana and THC derived from the cannabis plant. It would also provide for expungement of certain past marijuana convictions, but it would retain federal criminal liability for cannabis-related activities not authorized under the law of the states where they occur. In addition, among other things, it would provide guidance for regulation of cannabis products under the FD&C Act. Other proposals maintain marijuana’s status as a controlled substance, but propose moving it to a less restrictive schedule, particularly by potentially allowing it to be dispensed by prescription for medical purposes. The Small and Homestead Independent Producers Act of 2022 (H.R. 8825) would allow shipment of marijuana within and between states that have legalized the substance. At the same time, initiatives are proposed to more closely regulate cannabis use, at least within certain circumstances. The Welfare for Needs not Weed Act (H.R. 4536) would prohibit the use of benefits under the Temporary Assistance for Needy Families block grant at any store that offers marijuana for sale. Other proposals would seek to address the issues of workplace impairment or driving under the influence of marijuana and other substances.
  • CBD Foods: In November 2022, the FDA issued a series of warning letters to five companies that sell CBD-infused food and beverages, continuing its enforcement against companies selling in breach of the FD&C Act. In a December 2022 interview with The Wall Street Journal, FDA Principal Deputy Commissioner Janet Woodcock, who has led the agency’s efforts looking at cannabis regulation and other regulators at the agency, indicated that the FDA is studying whether legal cannabis is safe in food or supplements and plans to make recommendations for how to regulate the growing number of cannabis-derived products in the coming months. However, while the FDA typically targets products claiming to cure or mitigate health concerns, focusing on dietary supplements and citing unapproved drug claims as the primary regulatory issue, one of the warning letters issued in November was based only on the assertion that CBD is not an approved food additive. The letters also indicate the FDA is particularly concerned about products that may appeal to children, including cookies, lollipops, and gummies, as well as products containing Delta-8, a psychoactive cannabinoid. The FDA has not indicated that it would slow enforcement actions in 2023.
  • Cannabis and Finance: The Secure and Fair Enforcement Act (SAFE Banking Act of 2021, H.R. 1996/S. 910), which passed the House in April 2021, protects institutions that provide financial services to cannabis-related businesses from regulatory sanctions. The SAFE Banking Act failed in the House in late December 2022 after its exclusion from the omnibus appropriations legislation. However, members of Congress have suggested there is still a path forward for the Act in 2023, as they’re planning to include second amendment rights provisions in an effort to obtain bipartisan support. The Capital Lending and Investment for Marijuana Business Act (CLIMB Act, H.R. 8200) was introduced in the House and has been referred to the House Committee on Financial Services. Similar to the SAFE Banking Act, the bipartisan bill seeks to expand the cannabis industry’s access to financial opportunities by providing public or private capital sources for investment in and financing of cannabis business. The CLIMB Act differs from the SAFE Banking Act in two ways. First, it prohibits any federal agency from civility and criminally penalizing any business or individual that provides financial services to a state-legal marijuana business. This ensures businesses, including consultants, lawyers, insurers, advertisers, and debt or equity lenders, that receive funds or compensation from legitimate marijuana businesses, would not be subject to civil or criminal repercussions. Second, the CLIMB Act provides a securities safe harbor, allowing cannabis businesses to list securities on the national securities exchange.

For questions regarding developments in the medical product and cannabis space, please contact James Ravitz, Georgia Ravitz, Eva Yin, Paul Gadiock, or any member of Wilson Sonsini’s FDA regulatory, healthcare, and consumer products practice.

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