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Focus on Regulation

OIG approves tiered rebate program based on combination of purchases

StethoscopeThe Office of Inspector General for the Department of Health and Human Services (OIG) released a new Advisory Opinion on July 1 (OIG Advisory Op. 13-07) approving a proposed arrangement by a manufacturer to establish a tiered rebate program for its customers. Even though the proposed arrangement would aggregate the volume of purchases for products that may not be reimbursable under the same methodology, the OIG found that the arrangement was properly structured to fit in the discount safe harbor of the Anti-Kickback Statute. The Advisory Opinion contains some important clues as to the OIG’s current attitude towards the reach of the discount safe harbor as applied to bundled sales of different kinds of products and other aggregated purchases that the OIG clarifies do not constitute bundled sales. As discussed more fully below, the Advisory Opinion seems to conclude that irrespective of the type of buyer, rebates on aggregate volume purchases may be offered on products that would be treated as operating (as opposed to capital) costs, but does not provide any guidance on whether capital equipment can be included among the products for purposes of the rebate.

The Requestor of the Advisory Opinion was a manufacturer of products used to treat ophthalmologic disorders including pharmaceuticals, surgical equipment, vision aids, and related products. Under the proposed arrangement, the Requestor would establish a tiered rebate program where the Requestor would aggregate customers’ purchases of surgical supplies and devices (surgical products) – whether or not reimbursable by federal healthcare programs (FHCPs) – to determine the percentage of the customers’ rebate. The manufacturer would notify its customers of the rebate and their reporting obligations in three stages: 1) in the contracts between the parties; 2) in the invoice; and 3) in an end-of-year report that would include a summary of all qualifying purchases, an explanation of the rebate tier the customer reached, and a calculation of the total rebate to which the customer is entitled.

After reviewing the requirements of the discount safe harbor and its previously expressed concerns about discounts on bundled sales, the OIG determined that the proposed arrangement satisfied the safe harbor requirements. The OIG acknowledged that the products in the proposed arrangement are not necessarily reimbursable under the same methodology (if at all), but stated that fact was, “not essential here because the Proposed Arrangement does not involve a bundle.” The OIG reasoned that under the proposed arrangement, a discount on one product would not be contingent on the purchase of another product and the discount “would be readily attributable to each item purchased.” For example, if a customer would receive a ten per cent rebate for volume of purchases of US$1 million, a customer that purchased US$1.1 million in surgical products would receive US$110,000 in rebate. According to the OIG, the customer would “know that the net price of any item that cost US$100 would actually be US$90.”

The OIG’s conclusion that the arrangement need not be analyzed under the “same methodology” requirement applicable to bundles confirms that sellers can structure volume purchase programs that involve different products, even when they may be paid for by Medicare in different ways, so long as the discount (a) is not contingent on the purchase of any particular products, (b) can be readily attributed to each item purchased, and (c) is the same percentage discount for each type of item. It also seems to confirm that the type of buyer (cost-report or not) does not matter. However, the range of products to which this analysis applies remains a bit unclear.

  • Customers – The OIG discussed the seller’s safe harbor reporting requirements for cost-reporting providers and other types of buyers and gave no indication that its opinion was limited to one class or the other. Thus, it appears that the Advisory Opinion gives a green light to this kind of discount arrangement whether applied to hospitals, ambulatory surgery centers (ASCs), physician offices, or other kinds of providers.
  • Capital equipment – Without comment, the OIG specifically noted in a footnote that none of the products on which rebates could be earned were capital equipment. So at least for the purposes of this Advisory Opinion, the OIG’s analysis seems to apply only to aggregated purchases of items that would not be treated as capital costs.
  • Separately reimbursable – There is no indication in the Advisory Opinion that the OIG considered it relevant whether any of the products would be separately reimbursable, or if all of the products would have been paid under a prospective payment or procedural fee schedule methodology.
  • The opinion addresses “all of the Requestor’s surgical supplies and devices.” Because the Requestor is described as a seller of “pharmaceutical products, surgical equipment, vision aids, and related products,” it may be reasonable to assume that the products subject to the rebate may include any of those kinds of products that might be used in connection with a surgery. Many pharmaceuticals are separately reimbursable in a physician’s office or ASC, and some ophthalmological surgeries take place in these settings. Thus, it may be reasonable to surmise that aggregate volume discounts of this kind – involving across-the-board percentage rebates that can be applied to all of the products – may be used for mixtures of products that are separately reimbursable and paid under a prospective payment or procedural fee schedule methodology.
  • On the other hand, in prior enforcement actions and the OIG guidance, situations involving bundled pricing for separately reimbursable products have been subject to particularly strict government scrutiny. In this case, the opinion addresses “all of the Requestor’s surgical supplies and devices,” which, under most federal healthcare program methodologies, are not separately reimbursable (i.e., they typically are included in the payment for the surgery). Thus, caution still may be advisable for any volume discount arrangements involving aggregate purchases where separately reimbursable items are included; this caution might be mitigated if the provider were to reflect the discounted price in a reduced charge for the separately reimbursable item.

The OIG also found that the proposed arrangement satisfied the notification requirements for sellers required by the safe harbor. Specifically, the Requestor would provide:

  • “a program description to customers describing the terms of the rebate program and a notification that the customer may have obligations under the discount safe harbor to report the portion of the rebate applicable to federally reimbursed products”;
  • “invoices to customers . . . that would state that the items included on the invoice may be subject to a later rebate and thus may trigger reporting obligations to federal healthcare programs”;
  • “at the end of each calendar year . . . a year-end report that would include a summary of the customer’s total qualifying purchases, an explanation of the rebate program tier for which the customer qualified, and a calculation of the total rebate to which the customer is entitled.”

As noted above, the OIG seemed to think it important that this reporting would show the buyer that in essence each individual product subject to the rebate should receive the same percentage rebate.

Finally, it is important to note that while the OIG does consider whether the arrangement is a “bundle” for purposes of the discount safe harbor (and ultimately concludes it is not) the opinion does not address in any way (1) whether the arrangement qualifies as a bundled sale as that term is defined for purposes of the Medicaid Drug Rebate Program, or (2) how the arrangement should be treated in government price reporting calculations.