The Office of Inspector General (OIG), U.S. Department of Health and Human Services, recently excluded a drug company executive from participating in federal health care programs. The executive is a former member of a St. Louis-based pharmaceutical company. According to published press reports, the executive is Marc Hermelin and the pharmaceutical company is K-V Pharmaceutical Co. The exclusion is significant because Hermelin was not convicted of a crime. Instead, the exclusion was based on the company’s compliance problems with the Food & Drug Administration. Hermelin is the first pharmaceutical company official who hasn’t been convicted of a crime to be excluded from federal health care programs by the OIG.
Under federal law, the OIG has the authority to exclude an individual owner, officer or managing employee of a sanctioned entity (i.e. an entity that has been convicted of certain offenses or excluded from participation in federal health care programs). A “managing employee” means an individual who exercises operational or managerial control over the entity or who directly or indirectly conducts the day-to-day operations of the entity. A “managing employee” could include a general manager, business manager or administrator.
This type of exclusion is derivative in nature, meaning the exclusion is based upon the individual’s role or interest in the company that is excluded. The exclusion is not necessarily based on any affirmative misconduct by the individual. OIG’s exclusion analysis is different depending on whether the individual is: (1) an owner or (2) an officer or managing employee.
The statute sets a higher standard for exclusion of an owner, requiring evidence that the owner knew or should have known of the conduct that formed the basis for the sanction. In general, if the evidence supports a finding that an owner knew or should have known of the conduct, OIG will operate with a presumption in favor of exclusion. This presumption may be overcome when OIG finds that significant factors weigh against exclusion.
For officers and managing employees, the statute includes no knowledge element. This means OIG has the authority to exclude every officer and managing employee of a sanctioned entity. OIG claims it does not intend to exclude all officers and managing employees, however, where there is evidence that an officer or a managing employee knew or should have known of the conduct, OIG will operate with a presumption in favor of exclusion. As with the presumption relating to owners, the presumption may be overcome if the OIG finds that significant factors weigh against exclusion.
In late October, OIG published guidance outlining the factors to be considered in implementing this exclusion authority. In general, OIG looks at (1) the circumstances of the misconduct and the seriousness of the offense; (2) the individual’s role in the sanctioned entity; (3) the individual’s actions in response to the misconduct; and (4) information about the entity such as the entity’s compliance history. The guidelines are subject to modification at any time and are not intended to limit the OIG’s authority to exclude individuals the OIG considers a risk to federal health care programs.
The published guidance followed by the exclusion of a board member may signal OIG’s increased willingness and interest in excluding owners, officers and managing employees of sanctioned entities. This means compliance problems can impact not only the organization, but the people responsible for running the organization.