Shine On: Lessons for Disclosure of Industry Payments to Physicians from New Empirical Research on Sarbanes-Oxley’s Conflict of Interest Disclosure Requirement

Woodcut, 16th or 17th Century

In Placebo Ethics: A Study in Securities Disclosure Arbitrage, an interesting (and very readable) article published earlier this year in the Virginia Law Review, Usha Rodrigues and Mike Stegemoller present the results of their empirical research into Section 406 of the Sarbanes-Oxley Act of 2002, which “requires companies to disclose their codes of ethics (or explain why they do not have them), and then to disclose any waivers from that code granted to top corporate officers.”  Briefly, Rodrigues and Stegemoller found that “at least for related-party transactions, firms regularly engage in a kind of ‘disclosure arbitrage,’ neglecting to disclose ethics waivers at the time when transactions occur (in violation of Section 406 of Sarbanes-Oxley),” but complying with a regulation requiring disclosure of such transactions in their year-end proxy statements.  Rodrigues and Stegemoller’s observations about Section 406 have relevance beyond securities law including (and of particular interest to readers of this blog) to recent efforts to regulate conflicts of interest in medicine through disclosure of relationships between physicians and the pharmaceutical and medical device industries.

For several years, a small number of states have required drug and device companies to report their relationships with physicians practicing in those states.  Section 6002 of the Patient Protection and Affordable Care Act takes it to the next level, requiring “drug, device, biological, or medical supply” companies to report all of the payments they make to physicians and teaching hospitals in all of the 50 states.  The Secretary of Health and Human Services is required to make the payment information public “through an Internet website,” in a form that is clear, understandable, and searchable, and in a format that is easily aggregated and downloaded.  While drug and device companies do not need to submit their first reports under PPACA until March 31, 2013, those reports are to include all payments made to physicians and teaching hospitals in 2012.  As a result, drug and device companies are hard at work right now putting systems in place to accomplish the information gathering and organizing that nationwide reporting will require.

In a number of important ways, the disclosure regime established by PPACA comports with Rodrigues and Stegemoller’s findings and recommendations.  First, having found that disclosure via company websites (as is allowed under Section 406 of Sarbanes-Oxley) has a number of downsides, they recommend that disclosure be made through EDGAR, the SEC’s consolidated, easy-to-use, indefinitely accessible database.  As Duff Wilson reports here, several companies have begun disclosing the payments they make to physicians on their own websites and downsides similar to those pointed out by Rodrigues and Stegemoller have been noted.  For one, a patient interested in learning more about a given doctor’s relationships with industry would have to search each company’s website individually and then compile the results.  The companies have not made this easy to do; most use formats that make it very difficult to aggregate or analyze the data they report.  PPACA’s HHS-run website will solve these problems.

Relatedly, Rodrigues and Stegemoller found that, given the chance, companies will choose to bury “unsavory related-party transactions” “in the rubble of sundry disclosures.”  This pitfall, too, should be avoided under PPACA’s disclosure regime.  (If anything, the statute is too lean-and-mean, providing that payments be labeled with bare descriptors like “consulting fees” and “gift.”)

Finally, Rodrigues and Stegemoller suggest that one of the problems with Section 406 of Sarbanes-Oxley is that it sets forth a “soft” disclosure requirement; a company is permitted to determine for itself what its code of ethics permits or does not permit and, a fortiori, under what circumstances a (disclosable) waiver of that code will be required.  Predictably, this leads to “companies evad[ing] illegality by watering down their codes to such a degree that they no longer forbid the very Enron-style conflicts of interest that led to the adoption of Section 406.”     Section 6602 of PPACA, by contrast, sets forth a “hard” disclosure requirement.  Companies have to disclose all payments, not just those that they have determined create a conflict of interest.

There is one concern raised by Rodrigues and Stegemoller with regard to Section 406 of Sarbanes-Oxley that may apply to Section 6602 of PPACA — the problem of enforcement (or lack thereof).  They note that “the basic consequence of underenforcement is the imposition of disclosure requirements on paper that are ignored in real life.”  Overlapping disclosure requirements (such as those that Rodrigues and Stegemoller exploited to conduct their research) are one way to determine whether required disclosures are made.  With regard to physician payments, a valuable cross check would be provided by the draft Public Health Service conflict regulations’ requirement that any significant financial interest that (1) is still held by a principal investigator or senior/key person, (2) is related to government-funded research, and (3) is a financial conflict of interest must be disclosed to the public via the world wide web; the disclosures that physician-investigators must make to medical journals will also serve this function.