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OIG Issues Favorable Advisory Opinion Regarding Tiered Rebate Program

Written by: Theresa C. Carnegie

Yesterday, the OIG issued a favorable advisory opinion regarding an ophthalmologic manufacturer’s (the "Requestor") tiered rebate program (the "Proposed Arrangement").

Under the Proposed Arrangement, the Requestor would provide a tiered, percentage rebate based on purchases of surgical supplies and devices ("Surgical Products"). The rebate would be calculated based on a customer’s total annual purchases, regardless of whether the Surgical Products are reimbursable by Federal health care programs. The Requestor would notify all customers of their obligation to report any rebates received based on sales of Federally reimbursable Surgical Products through the purchase agreement, invoices, and a year-end report that would include a summary of the customer’s total qualifying purchases, the rebate program tier, and the calculation of the total rebate.

In determining whether the Proposed Arrangement qualified for protection under the discount safe harbor, the OIG considered (i) whether the rebates offered under the program would meet the definitions of "discounts" and "rebates" under the safe harbor, and (ii) whether the Requestor would meet the "seller" requirements under the safe harbor.

Discount and Rebate Requirements

Although, the OIG ultimately concludes that the rebates offered under the Proposed Arrangement meet both the discount and rebate definitions under the safe harbor, it spends a large portion of the Advisory Opinion discussing its concerns regarding bundled discount arrangements. The OIG takes the position that bundled discounts – where one good or service is provided without charge or at a reduced charge to induce the purchase of a different good or service – do not qualify for protection under the discount safe harbor unless the goods or services are reimbursed by the same Federal health care program using the same methodology. The OIG is concerned that bundled discount arrangements can shift costs among reimbursement systems (e.g., between Part A and Part B) and distort the true costs of items. However, where the net price of the good or service can be properly reported (i.e., reimbursed by the same payment methodology), the risk of program abuse is removed and such lower costs may, in fact, benefit federal health care programs.

The OIG made a point of distinguishing the Proposed Arrangement from what the OIG considers problematic bundled arrangements, such as an arrangement where a customer receives a free surgical pack when it purchases five surgical devices, or where an entity offers a "reward," such as a computer or travel vouchers, in return for a certain purchasing volume. The OIG states that the former could not be protected under the safe harbor unless the items were reimbursed under the same payment methodology, and the later, is prohibited by the Federal anti-kickback statute.

After spending much of the Advisory Opinion discussing problematic bundled discounts, the OIG concludes that the Proposed Arrangement does not involve a "bundle" because 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. The rebates offered under the Proposed Arrangement meet both the definition of a discount and a rebate under the safe harbor.

Sellers’ Obligations

The OIG also concluded that the Requestor would be meet all of the applicable obligations of a seller under the discount safe harbor. The Requestor would notify the buyer of their obligation to report the portion of the rebate applicable to Federally reimbursed products through the program description and invoices and would provide the buyer with sufficient information to meet the it’s reporting requirements through the year-end report setting forth the customer’s total qualifying purchases, the rebate program tier, and the total rebate amount.

While this Advisory Opinion approves a tiered rebate program, the real focus seems to be a reminder of the potential risks posed by bundled discount arrangements. In fact, it is surprising that this Advisory Opinion was requested at all, as it is generally accepted that volume discount arrangements present low risk and can easily be structured to comply with the discount safe harbor. Nevertheless, the Opinion is a good reminder that all discount arrangements should be structured to comply with the discount safe harbor and that bundled arrangements should be carefully reviewed and structured so as not to run afoul of the OIG’s concerns regarding such arrangements.

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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.