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OIG Approves Pharmacy’s Provision of Free or Below Market Value Items in Limited Circumstances

Written by Theresa Carnegie and Carrie Roll

Last Friday, the Office of Inspector General (OIG) issued Advisory Opinion No. 12-19 approving three of four proposed arrangements involving a pharmacy’s provision of free or below market items and services to community homes where the pharmacy’s patients reside.

Under two of the proposed arrangements, the pharmacy would provide free pre-populated medication administration records (MARs), physician order forms, and treatment sheets to community homes that have residents who obtain prescriptions from the pharmacy.  The documents would be provided either in paper format or via an interoperable web-based software program.    

Under the third arrangement, any community home within certain states could purchase a sublicense from the pharmacy for a web-based software program different from the software program at issue under the second arrangement.  The pharmacy would charge the community home a price that is below the price the software developer would normally charge the community homes for such a sublicense.  The software would allow the community homes to perform certain administrative functions and to maintain electronic MARs.  The pharmacy stated that the software program is not “interoperable” within the meaning of the electronic health records regulatory safe harbor.  

Under the fourth arrangement, the pharmacy would provide a sublicense for the same web-based software program as under the third arrangement free of charge to community homes for use only in connection with residents who obtain prescription medications from the pharmacy.  The company certified that the cost of providing the free sublicenses would be significant. 

Although the OIG stated that all of the proposed arrangements implicate the Anti-Kickback Statute, the OIG determined that the first three arrangements contained certain safeguards that would adequately protect federal health care programs:

  • Community homes can neither prescribe nor influence or control the prescription of any medication and therefore are unlikely to be able to increase the number or type of their residents’ prescriptions.  The OIG thus concluded that under all of the proposed arrangements the risk of distorted medical decision making, overutilization, and increased federal health care program costs is reduced.
  • The pharmacy’s cost of providing the pre-populated materials would be nominal as the company already gathers such information to fill a prescription.  Accordingly, the risk of unfair competition is mitigated due to the fact that the pharmacy’s competitors could offer a similar benefit at a nominal cost.
  • The arrangements would likely enhance patient safety and quality of care by reducing transcription errors in the medication administration process.  The OIG distinguished the proposed arrangements from arrangements where parties merely shift costs associated with meeting an obligation, without creating or providing an additional benefit to patients.
  • The OIG reiterated its position that when an item or service can be used only as part of the underlying service being provided, the free items or services have no independent value apart from the underlying service and concluded that this is the case with respect to certain functions of the software provided to the community homes under the second arrangement.
  • Under the third arrangement, the pharmacy would offer a general across-the-board price reduction on the software sublicense, as opposed to a discount offered only to customer community homes.
  • The third arrangement includes additional safeguards such as that the price of the sublicense would reflect fair market value and the reduced sublicense fee would not be below the pharmacy’s cost. While the OIG acknowledges that the pharmacy would offer the sublicense to the community homes for less than the amount the software developer would normally charge the community homes, it is interesting that the OIG nevertheless accepts that the discounted price offered by the pharmacy is fair market value.

The OIG determined that it could impose administrative sanctions under the fourth arrangement.  The OIG stated that its chief concern with the fourth arrangement is the increased risk of unfair competition because it could induce community homes to select a pharmacy that offers the best benefit rather than the best direct services to patients.  The OIG made this determination based on three factors:  

  • Because the community homes would acquire the right to use the software for their own use without incurring the corresponding costs of obtaining that right, the provision of free sublicenses would have clear independent value to the community homes. 
  • The cost of the sublicenses is significant and providing the sublicenses to community homes for free could give the pharmacy a significant advantage over its competitors who may not be in a position to offer a similar benefit. 
  • Because the software is not interoperable, data created by the community homes would not be readily transferable to other systems, resulting in data lock-in and, thereby, referral lock-in.  The arrangement could give rise to a significant incentive for community homes to steer patients to the pharmacy to obtain and maintain access to the free sublicense.  Although the third arrangement appears to create the same “data-lock” and “referral-lock” as the fourth arrangement, the OIG seems to focus on the fourth arrangement’s offer of a free sublicense, as opposed to a discounted sublicense, and its limited application to community homes utilizing the pharmacy’s services.

The Advisory Opinion provides helpful guidance on the factors the OIG may take into consideration in determining whether the offer of free or below market items or services to actual or potential referral sources will violate the Anti-Kickback Statute.  A wide variety of providers, such as laboratories and physicians entering into software interface arrangements, should take this guidance into consideration in structuring similar arrangements.  

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Karen S. Lovitch

Chair, Health Law Practice & Co-Chair, Health Care Enforcement Defense Practice

Karen advises industry clients on regulatory, transactional, operational, and enforcement matters. She has deep experience handling FCA investigations and qui tam litigation for laboratories and diagnostics companies.
Theresa advises clients on all aspects of the pharmaceutical supply chain, including counseling industry stakeholders on a range of business, legal, transactional, and compliance matters. She provides clients with strategic counseling and creative business modeling that considers legal restrictions and regulatory risk in light of innovation and business goals.

Carrie Roll