Cardinal Health 2009 Annual Report Download - page 35

laws and regulations, it could suffer civil and criminal penalties. Additionally, in connection with these laws and
regulations, the Company may be subjected to federal or state government investigations and possible penalties
may be imposed upon the Company, false claims actions may have to be defended, private payors may file
claims and the Company may be excluded from Medicare, Medicaid or other government-funded healthcare
programs. Any such proceeding or investigation could have an adverse impact on the Company’s results of
operations.
Deficit Reduction Act of 2005
The Deficit Reduction Act of 2005 (“DRA”) was intended to reduce net Medicare and Medicaid spending
by approximately $11 billion over five years. Effective January 1, 2007, the DRA changed the federal upper
payment limit for Medicaid reimbursement from 150% of the published price for generic pharmaceuticals to
250% of the lowest average manufacturer price (“AMP”). On July 17, 2007, Centers for Medicare and Medicaid
Services (“CMS”) published a final rule implementing these provisions and clarifying, among other things, the
AMP calculation methodology and the DRA provision requiring manufacturers to publicly report AMP for
branded and generic pharmaceuticals. On December 19, 2007, a federal district court issued a preliminary
injunction prohibiting use of the AMP calculation in connection with Medicaid reimbursement pending
resolution of a lawsuit claiming that CMS had acted unlawfully in adopting the rule. On July 15, 2008, the U.S.
Congress enacted into law over the U.S. President’s veto the Medicare Improvements for Patients and Providers
Act of 2008. The law delays the adoption of CMS’s July 17, 2007 rule and prevents CMS from publishing AMP
data until October 1, 2009.
The Company expects the use of an AMP benchmark to result in a reduction in the Medicaid reimbursement
rates to its customers for certain generic pharmaceuticals, which may indirectly impact the prices that the
Company can charge its customers for generic pharmaceuticals and cause corresponding declines in the
Company’s gross margin. There can be no assurance that the changes in the reimbursement formula and related
reporting requirements and other provisions of the DRA will not have an adverse effect on the Company’s
business.
Health Information Practices
Services and products provided by certain of the Company’s businesses involve access to healthcare
information gathered and assessed for the benefit of healthcare clients. Greater scrutiny on a federal and state
level is being placed on how patient identifiable healthcare information should be handled and on identifying the
appropriate parties and the means to do so. Changes in regulations and/or legislation such as the Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”) and its accompanying federal regulations, such as those
pertaining to privacy and security, may affect how some of these information services or products are provided.
In February 2009, the Health Information Technology for Economic and Clinical Health Act (“HITECH” Act)
was signed into law. The HITECH Act augmented HIPAA by further expanding existing healthcare privacy
requirements, expanding HIPAA’s reach to cover additional entities and increasing penalties associated with
noncompliance. In addition, certain of the Company’s operations, depending upon their location, may be subject
to additional state or foreign regulations affecting personal data protection and how information services or
products are provided. Failure to comply with HIPAA, the HITECH Act and other such laws may subject the
Company and/or its subsidiaries to civil and/or criminal penalties, which could be significant.
Franchising Laws
The Company’s franchising operations, through Medicine Shoppe, are subject to Federal Trade Commission
regulations and rules and regulations adopted by certain states that require franchisors to make certain disclosures
to prospective franchisees prior to the sale of franchises. In addition, many states have adopted laws that regulate
the franchisor-franchisee relationship. The most common provisions of such laws establish restrictions on the
ability of franchisors to terminate or refuse to renew franchise agreements. From time to time, similar legislation
is proposed or is pending in additional states.
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