Structuring Discounts Arrangements in Compliance with Federal Anti-Kickback Law: OIG's Advisory Opinion 25-11

Offering discounts on pricing of medical products is often proposed as an advantageous business strategy in the health care industry. While offering discounts is a longstanding and common practice, if structured improperly, these discount arrangements can present compliance concerns under the federal Anti-Kickback Statute (AKS) and provide a theory for a False Claims Act case based on claims “tainted” or caused by an AKS violation. Understanding the regulatory framework for discount arrangements is essential in order to structure such arrangements to be in compliance with the AKS. The recent Office of lnspector General (OIG) Advisory Opinion 25-11 (AO 25-11) provided new insights and flexibilities on structuring discount arrangements and offered some of the most detailed guidance articulated by the OIG regarding permissible discount practices.

Overview of the Discount Safe Harbor

The AKS excludes discounts for items and services for which payment may be made under Medicare, Medicaid, or other federal health care programs from the statutory definition of “remuneration” through a long-standing safe harbor for permissible discount arrangements.[1] “Discount” is defined in the regulation as “a reduction in the amount a buyer (who buys either directly or through a wholesaler or a group purchasing organization) is charged for an item or service based on an arms-length transaction,” subject to certain exceptions.[2] A “rebate” is defined as “any discount the terms of which are fixed and disclosed in writing to the buyer at the time of the initial purchase to which the discount applies, but which is not given at the time of sale.”[3]

To be entitled to safe harbor protection, a discount arrangement must precisely meet all the terms and conditions of the discount safe harbor included in the regulation. A failure to precisely meet those terms and conditions does not, however, mean an arrangement automatically violates the AKS. Rather, if a safe harbor’s requirements are not met, the arrangement does not have a guaranteed protection from the AKS scrutiny and OIG will apply a “facts and circumstances” analysis to the arrangement.

Background of the Advisory Opinion Process

OIG Advisory Opinions can be requested by individuals or entities (requestors) to consider specific facts and circumstances, as described by the requestor. The applicant is not publicly identified but must confirm that it is either currently engaged in the arrangement as described or will be so engaged if it receives a favorable Advisory Opinion. A requestor that receives a favorable advisory opinion is protected from OIG administrative sanctions, provided that the arrangement is conducted consistent with the facts as presented to the OIG. Because of the importance of the facts and circumstances described (which would be expected to vary somewhat in any two situations), the Advisory Opinion technically only provides “cover” for the applicant and cannot be relied by others; nevertheless, the OIG’s focus on particular circumstances and its analysis provide critical insights for similarly situated applicants. OIG publishes all Advisory Opinions on its website. The Opinions are usually favorable to the requestor because OIG will typically allow a requestor to withdraw a request if OIG is prepared to rule unfavorably.

Overview of AO 25-11

Discount Arrangements Reviewed by OIG

AO 25-11 was requested by a biopharmaceutical manufacturer in connection with several proposed discount structures for three categories of vaccines to be offered to its various customers, including pharmacies, group purchasing organizations, mass immunizers, physicians, and other health care providers. The proposed discounts included several categories of discount arrangements:

Upfront Discounts. These are discounts based solely on a certain percentage off the vaccine’s list price or a contract price that are known and applied at the time of purchase. An example of an upfront discount is a prompt-payment discount, which is reflected on the sales invoice and is expressed as a percentage off the vaccine’s contract price for non-retail customers that order the vaccine from the manufacturer and pay for the vaccine within a specified period after the delivery.
Upfront Discounts with a Purchase Requirement. These are discounts that involve offering a certain percentage off the vaccine’s list price, known and applied at the time of purchase, that are contingent on the buyer meeting market share or volume purchase requirements for the vaccine during a specified prior time period. An example of such discount is a discount on purchases in a given quarter for customers whose purchases in the prior two quarters satisfied specified percentages of market share.
Upfront Bundled Discounts with a Purchase Requirement. These are discounts that involve a specified percentage off the vaccine Ns list price and the list price for vaccine B and/ or vaccine C that are known and applied at the time of purchase that are contingent on the buyer satisfying certain market share or volume purchase requirements for two or more of the vaccines during a prior measurement period. An example of such discount is price protection where, if a buyer maintains specified minimum market share tiers for all three vaccines in each six-month period, the buyer is entitled to the reduced contract price rather than being subject to contract price increases that apply when a product’s list price increases.
Bundled Rebates. These are amounts that retail buyers may earn on purchases made on vaccines if they meet the market share requirements during a specified time period. An example is a 3% incremental rebate that retail buyers may earn on purchases made on each of the three vaccines if they meet certain market share requirements during a specified time period.

In reviewing the above described arrangements, the OIG determined that each of the proposed arrangements would implicate the AKS because remuneration, in the form of the discounts and rebates, was offered in exchange for the buyer deciding to purchase the requestor’s products that may be paid for by a federal health care program. The OIG further determined that not all of the contemplated discount arrangements met the requirements of the discount safe harbor to the AKS. Nevertheless, the OIG concluded that all of those arrangements presented a low risk of fraud and abuse and that the OIG would not impose administrative sanctions with respect to the arrangements as described.

OIG Analysis and Conclusions

In reviewing the discount and rebate structures proposed by the requestor, the OIG provided commentary on the types of discount arrangements that the OIG views as meeting the discount exception to the AKS. The OIG also outlined the features of discount structures outside of the safe harbor that the OIG views as presenting low risk and the features that would not be considered as low risk. In analyzing these arrangements, the OIG provided valuable insight on whether the arrangements met the safe harbor’s definitions of a “discount” (i.e, “a reduction in the amount a buyer … is charged for an item or service based on an arms-length transaction”) or a “rebate” (i.e., “a type of “discount,” “the terms of which are fixed and disclosed in writing to the buyer at the time of the initial purchase to which the discount applies, but which is not given at the time of sale”).

The OIG confirmed that the commonly offered upfront discounts calculated as a certain percentage off a product’s list price, which are price reductions known to the customer and applied at the time of sale, meet the definition of “discount” and are protected by the discount safe harbor to the AKS.
While indicating that the upfront discounts with a purchasing requirement also meet the discount safe harbor to the AKS, the OIG noted that the conclusion would have been different if any services were required to qualify for those discounts.
With respect to the upfront bundled discounts with a purchasing requirement, OIG determined that the bundled price concessions do not meet the definition of a protected “discount” under the discount safe harbor to the AKS because the bundles may include products reimbursed under different Medicare reimbursement systems. The OIG concluded, however, that the following features of bundled discounts present a low risk of fraud and abuse even if they do not meet the safe harbor requirements:

– Discounts are readily attributable to each separately billable item, and each Medicare reimbursement system benefits equally from the discount,

– Discount is offered for each product in the bundle as opposed to a deep discount, being offered on one product to induce the full price purchase of a different product, and

– Each product has at least one competing product with a similar list price.

In analyzing bundled rebates where there is no adjustment to the rebate terms during the contract year, and when the bundle includes only the products that are reimbursed by the same Medicare reimbursement system, the OIG concluded that such rebates meet the definition of a “discount” under the discount safe harbor. The OIG applied the same analysis for rebates that are bundled where the products are not reimbursed by the same methodology as outlined above for the upfront bundled discounts with a purchasing requirement.
The OIG made clear that discounts that require providing some level of services from a purchaser (e.g., marketing products or switching patients from one product to another) fall outside the discount safe harbor and likely would not be considered sufficiently low risk for OIG to issue a favorable advisory opinion.

Takeaways from AO 25-11

Compliance with the AKS remains a continued government enforcement focus and carefully reviewing discounting practices and agreements to confirm compliance is important for in-house counsel. While the OIG advisory opinions are binding only on a requestor, AO 25-11 provides helpful insights and a roadmap for structuring discount arrangements in compliance with the AKS. Specifically, the AO 25-11 confirms that many longstanding discounting practices qualify for the discount safe harbor and suggests additional flexibility with respect to certain discount arrangements that may be offered to buyers consistent with the AKS to meet market demands. Practical takeaways to consider from AO 25-11 when structuring discount arrangements and drafting purchase agreements to mitigate AKS scrutiny include:

Although AO 25-11 was directly related to discounts offered on vaccines by a biopharmaceutical manufacturer, the OIG’s analysis in AO 25-11 is instructive for a broad range of discount arrangements. Therefore, the insight provided by the OIG in this advisory opinion may be considered more broadly and applied to various other arrangements that involve discounts for items and services reimbursable by federal health care programs.
Consistent with the prior OIG guidance on AKS compliance, in AO 25-11 the OIG confirmed that failure to satisfy a discount safe harbor does not automatically render a discount arrangement illegal. With respect to discount arrangements that do not meet the discount safe harbor, the organizations selling items and services reimbursable by federal health care programs at a discount can mitigate the AKS risk by incorporating various safeguards articulated by the OIG in AO 25-11 to demonstrate that the arrangement presents low risk under the AKS. For example, steps can be taken to ensure that the discounts offered are readily attributable to each separately billable product and that discount is offered for each product in the bundle.
Specifying the terms pertaining to the discount or rebate in writing in advance of any purchase is viewed favorably by the OIG even if an arrangement does not precisely fit within a discount safe harbor. For example, if rebate terms are altered after an initial purchase, such practice will not meet the safe harbor requirements; however, the risk of the arrangement may be lowered if the customer will be made aware before the time of the initial purchase that adjustments may subsequently be made to the rebate terms, with documentation of that awareness through the agreement terms.
In accordance with the discount safe harbor requirements, buyers need to be provided with accurate and full information regarding the discount terms and informed of their reporting obligations in written agreements and invoices, as applicable, to ensure the buyers can appropriately disclose the discounts to federal health care programs (e.g, through cost reports).
While a lack of exclusivity is not a safe harbor requirement, not requiring exclusivity and allowing purchasers to have multiple purchasing sources is viewed favorably by the OIG, which commented in AO 25-11 that not requiring exclusivity may reduce the risk that customers would make stocking decisions based on factors that are not in the best interest of patients. Documentation that an arrangement is not exclusive can be made clear in the purchase agreement.
A discount arrangement should not involve any requirement for a purchaser to provide any marketing or other promotional services for a product in order to obtain a discount on the product. The OIG also emphasized that it would look negatively on a discount contingent on the expectation that the customer engages in activities to persuade switching from one product to another. Implementing internal policies and procedures to prohibit such practices, training personnel on such restrictions, and documenting such training are prudent safeguards in light of the OIG’s views expressed in AO 25-11. Further, including specific terms in a purchase agreement to clarify that the discount is not contingent on product switching and document that the buyer is not required, encouraged, or expected to provide any marketing or promotional services regarding the product may be considered.

Conclusion

AO 25-11 signals that OIG’s application of a “facts and circumstances” analysis can result in approvals of certain types of discounts and rebates that present with parameters consistent with the intent and protections of the safe harbor requirements. Product manufacturers and distributors may have expanded opportunities modeled after AO 25-11 or may wish to consider future applications for Advisory Opinions that might further approve arrangements that do not precisely meet the safe harbor requirements.

[1] 42 C.F.R. § 1001.952(h).
[2] 42 C.F.R. § 1001.952(h)(5).
[3] 42 C.F.R. § 1001.952(h)(4).

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