Discounts have always represented an especially delicate compliance challenge under the federal Anti-Kickback Statute (“AKS”). Because the inherent nature of discounts is arguably to induce the purchase of a particular product that may be reimbursable in whole or in part by a federal healthcare program, many providers and suppliers are reluctant to enter into any discount arrangement that does not squarely meet the discount safe harbor promulgated by the Office of the Inspector General (“OIG”) pursuant to the AKS. This Health Law Alert addresses a new advisory opinion, 13-07, which, while technically applicable only to its specific requestor, demonstrates new flexibility by the OIG in the manner in which it assesses whether certain discount arrangements fall within the safe harbor.

Overview of Discount Safe Harbor

The AKS, which imposes criminal penalties on those who knowingly and willfully solicit or receive any remuneration to induce the purchase of goods or services that are reimbursable by a Federal healthcare program, includes a regulatory safe harbor for discount programs. Specifically, the regulatory safe harbor permits the use of discount programs that: (1) fall within the regulatory definition of “discount,” and (2) meet the applicable standards for buyers, sellers, or offerors of a discount. A discount is defined as “a reduction in the amount a buyer . . . is charged for an item or service based on an arms-length transaction.” While this definition is rather broad, the regulation provides that a discount does not include so-called “bundled” discounts, i.e., “[s]upplying one good or service without charge or at a reduced charge in order to induce the purchase of a different good or service, unless the goods or services are reimbursed by the same Federal healthcare program using the same methodology.”

Previous Advisory Opinion Guidance

In 2002, the OIG issued Advisory Opinion 02-10, which addressed a proposed uniform discount based on aggregate annual purchases of any and all equipment and supplies. Although the OIG stated that it would not impose sanctions because the proposed discount did not present a substantial risk of program abuse, the OIG determined that the proposed discount fell outside the safe harbor because it constituted a bundled discount encompassing goods that were reimbursed under different payment methodologies. Advisory Opinion 13-07 (the “Advisory Opinion”), which addresses a similar across the board rebate program in which goods would be reimbursed under different methodologies, represents a noteworthy departure from the guidance given in Advisory Opinion 02-10 and signals a more flexible approach in the way that the OIG views these types of discounts.

Advisory Opinion 13-07

(i) Proposed Rebate Structure

The Requestor was a manufacturer of pharmaceutical products and surgical supplies used to treat ophthalmologic disorders and strengthen vision. At issue was whether the Requestor’s tiered rebate program for its customers generated prohibited remuneration under the AKS. According to the Advisory Opinion, under the Requestor’s rebate program, customers received a percentage rebate upon reaching certain total annual purchase volumes (e.g., $1,000 in purchases = 5% rebate; $2,000 in purchases = 10% rebate). The rebate did not vary based on the number of federally reimbursable products purchased or the type of product purchased (i.e., all of the Requestor’s surgical supplies and devices were included in the rebate program; only capital equipment was excluded).

To determine whether the discount safe harbor protected the tiered rebate program from being subject to adverse enforcement under the AKS, the OIG addressed two questions: (1) whether the proposed rebate program qualified as a “discount” pursuant to the regulatory definition, and (2) whether the Requestor’s proposed efforts satisfied the seller’s duties under the safe harbor to notify the buyer that the buyer might have obligations to report the discounts to federal health care programs.

(ii) Bundled Discount?

In answering the first question, the OIG described its traditional apprehension toward discounts on bundled items – in particular, the potential for such discounts to “shift costs among reimbursement systems and distort the true cost of items.” However, the OIG emphasized that “discounts offered on one good or service to induce the purchase of a different good or service where the net value can be properly reported do not pose a risk of program abuse and may benefit the programs through lower costs or charges achieved through volume purchasing and other economies of scale.” This principle applied, according to the OIG, even where the products were reimbursable under different methodologies.

The OIG found that the proposed rebate program did not produce the same problems with ascertaining a product’s net value as typical bundled discounts do. This value transparency stemmed from two particular characteristics of the rebate structure:

  • A “discount on one product would not be contingent on the purchase of another product” (i.e., all purchases of the Requestor’s products would be aggregated to determine the rebate percentage); and
  • A discount “would be readily attributable to each item purchased” (i.e., under the proposed arrangement, for a customer receiving a 10% rebate based on its aggregate annual purchasing volume, any item that cost $100 would actually be $90, any item that cost $200 would actually be $180, and so forth.)

The OIG distinguished this structure from a bundled discount where, for example, a customer might receive a free surgical pack upon purchasing a certain number of surgical supplies reimbursed under a different methodology. Because the proposed rebate program did not involve a “bundle,” regardless of the fact that the products at issue “are not necessarily reimbursable under the same methodology,” the OIG found that the proposed rebates met the definition of “discount” under the safe harbor. In addition, the proposed arrangement met the definition of “rebate” within the safe harbor regulations because its terms were fixed and “disclosed in writing to the buyer at the time of the initial purchase to which the discount applies.”

(iii) Seller’s Obligations

The OIG also concluded that the Requestor met the seller’s obligations under the safe harbor by providing the following notifications to participating customers:

  • A program description (in the initial contract) detailing the terms of the rebate program and notifying the buyer of its obligations to report the portion of the rebate applicable to federally reimbursable products;
  • Invoices stating that items included on the invoice “may be subject to a later rebate and thus may trigger reporting obligations to federal health care programs;” and
  • A year-end report including a summary of the total qualifying purchases, an explanation of the rebate tier reached, and a calculation of the customer’s total rebate.

Concluding Considerations

It is important to note that the OIG dedicated considerable time to discussing its concern with “bundled” discounts. Over the years, the government has viewed performance or volume-based rebates and discounts with skepticism. This skepticism recently was highlighted by the government’s False Claims Act lawsuit against Novartis Pharmaceuticals Corp., involving allegations that Novartis disguised kickbacks as rebates and discounts. Discount programs should, therefore, be carefully structured to: (1) prevent making a discount on one product contingent on the purchase of another; (2) ensure that a discount is readily attributable to each item purchased; and (3) fully disclose all aspects of the program.