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The OIG Green Lights Brand Manufacturer’s Discount Drug Program

Health Law Update Edward D. Rickert, Simone Colgan Dunlap

On July 28, 2014, the U.S. Department of Health and Human Services, Office of Inspector General (“OIG”) posted Advisory Opinion 14-05 (“Opinion”) that addressed a pharmaceutical manufacturer’s (“Manufacturer”) discounts to patients for a brand name medication purchased from a mail order pharmacy. The program as described in the request would permit eligible patients to purchase the Manufacturer’s brand-name drug for a deeply discounted and fixed cash price from a mail order pharmacy that has contracted with the Manufacturer (“Pharmacy”), where neither the Pharmacy nor the patient seeks reimbursement for the product from any third-party payor, government, or private (“Program”). Despite noting that the Program created some risk for fraud and abuse, the OIG ultimately concluded that it would not impose sanctions under the civil monetary penalties prohibition on inducements to government beneficiaries (“CMP”) or the Federal Anti-Kickback Statute (“AKS”) against either the Manufacturer or the Pharmacy in connection with the Program.

“Roadmap” of the Program

The Program is specific to one of the Manufacturer’s brand-name prescription drugs (“Product”). Significantly, the Product is not included on the vast majority of third-party payor formularies, including Medicare Part D plan formularies, due to the availability of generic equivalents. Where covered, the Product is usually placed on nonpreferred formulary tiers and is subject to restrictions on coverage and reimbursement, e.g., step therapy or limiting reimbursement to an amount at or near the cost of a generic equivalent. As a result, patients prescribed the Product may have difficulty obtaining the Product due to lack of availability at retail pharmacies and high costs.

The Program attempts to remedy limited access to the Product by allowing eligible patients who have enrolled in the Program (“Participants”) to purchase the Product directly from the Pharmacy at a reduced rate. Enrollment is open to patients with a valid prescription for the Product. Participants can be uninsured, commercial prescription drug insureds, or be beneficiaries of Medicare Part D or another federal health care program. As a condition of enrollment, Participants must agree to permit Manufacturer to share Program information with third parties, including third-party payors, and to not submit claims for the Product to a third-party payor, including any submission of TrOOP calculations under a Part D plan. In addition, Part D Participants must agree to obtain the Product exclusively through the Program for the applicable coverage year and are automatically re-enrolled in the Program at the end of the coverage year.

Directing Traffic: The OIG Analysis

Civil Monetary Penalties Law

Under the CMP, the OIG has the authority to seek civil monetary penalties against any person who offers or transfers remuneration to a Medicare or state health care program beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of items or services for which payment may be made by a government payor. 42 U.S.C. 1320a-7a(a)(5).

Here, the OIG determined the Program could potentially implicate the CMP because the Pharmacy, on behalf of the Manufacturer, provides remuneration to government beneficiaries in the form of a discount on the price of the Product. The discount could thus induce beneficiaries to use the Pharmacy to supply other items reimbursable by a government payor and violate the CMP. However, the OIG concluded that the discount was unlikely to influence a beneficiary to select the Pharmacy to supply other items/services for which payment may be made by a government payor for the following reasons:

  • Participants are not required to purchase any items other than Product from the Pharmacy as part of the Program.
  • The Manufacturer will only communicate with Participants regarding the Product or a related disease state.
  • The Manufacturer will not communicate with Participants about Manufacturer’s or Pharmacy’s products or services unrelated to the Program. Note, the Manufacturer will continue to advertise its products, including the Product, to the general public.
  • The Pharmacy will not market or promote its products or services unrelated to the Program to Participants.

Anti-Kickback Statute

The AKS is a criminal statute that prohibits the exchange (or offer to exchange) of anything of value in an effort to induce or reward the referral of federal health care program business. See 42 U.S.C. § 1320a-7b. The OIG has been given authority to adopt “safe harbors” to protect specifically identified business and financial practices from criminal and civil prosecution, provided they fall within parameters defined to minimize the risk for potential corruption. See 42 C.F.R. § 1001.952.

At the outset, the OIG noted that the Program did not satisfy the requirements of a safe harbor. The personal services and management contracts safe harbor did not apply because the payments to the Pharmacy were not set in advance. Rather, for a number of services, the Manufacturer paid the Pharmacy on a per-transaction basis.

Remuneration Provided to Beneficiaries

The OIG believed that the Program implicated the AKS because the Manufacturer provides remuneration to Participants in the form of a discount on the price of a Product, which could induce Participants to purchase other products made by Manufacturer for which payment may be made by a federal health care program. Also, the discount may induce Participants to switch to the Product. If Manufacturer discontinues the Program, Participants will then be more likely to seek coverage for the Product from their federal health care program prescription benefit leading to increased costs to federal health care programs. Nevertheless, the OIG deemed these risks to be sufficiently low due to the following reasons:

  • The Manufacturer will not use the discount as a vehicle to market other federally reimbursable products it manufacturers or permit the Pharmacy to use the Program to influence the Participants to choose the Pharmacy as a supplier for other federally reimbursable items.
  • It is unlikely that the Program will induce Participants to purchase the Product with the assistance of a federal health care program when the Program concludes because: (i) there are no clinical barriers from switching from the Product to a clinically equivalent generic drug; and (ii) most Medicare Part D plans do not cover the Product; where coverage is available, it is significantly restricted.

Remuneration Provided to Pharmacies

The OIG was also concerned that the fees the Manufacturer paid to the Pharmacy could influence the Pharmacy to arrange for or recommend the purchase of the Product or Manufacturer’s other products for which payment may be made by a federal health care program. However, the OIG also found that this risk was sufficiently low due to the presence of the following safeguards:

  • The fees paid to the Pharmacy are based on arm’s length negotiations, are consistent with fair market value as determined by a third party, and do not take into account the volume of value of referrals or other business generated between the Pharmacy and the Manufacturer.
  • The “per transaction” fees only take into account items and services provided by the Pharmacy that are necessary to dispense the Product and do not include marketing or other items or services unrelated to dispensing the Product.
  • The Program is distinguishable from other problematic “carve-out” arrangements because there are no facts suggesting that the fees paid to the Pharmacy reward the Pharmacy for arranging for or recommending the Manufacturer’s other products. The OIG specifically cited to the parties’ agreement not to offer, market, or promote products and services unrelated to the Program to Participants, the Pharmacy’s agreement not to offer any inducements to health care providers to prescribe or switch patients to Manufacturer’s products, and the Manufacturer’s right to audit the Pharmacy to comply with the terms of the agreement as factors that reduce the risk that the Manufacturer would use the Program to influence referrals from the Pharmacy.

Although not highlighted in the Opinion, the fact that the Manufacturer does not have an exclusive distribution agreement with the Pharmacy for the Product also likely factored into the OIG’s conclusion.

Potential Speed Bumps

Notably, the OIG stated that its conclusions might have been different if the Product had no generic equivalents, was covered by more formularies, or was more generously covered by formularies. If present, these facts increase the likelihood that the Program will ultimately increase costs to government payors by inducing Participants to use the Product under the Program until the Program ceased or until the beneficiary could move to a plan with a formulary with coverage or a lower copayment for the Product.

Lessons for Potential Drivers and Passengers

Despite the fact that the Program was offered outside of any applicable prescription drug benefit, much less a government-funded benefit, the OIG was unwilling to rely on this fact in evaluating the Program. This approach is consistent with past OIG advisory opinions and underscores the importance of considering whether a proposed arrangement may have indirect effects on government health care programs when evaluating compliance. Entities interested in creating similar programs should look to the numerous fraud and abuse protections built into the Program for guidance.

Please note, the advisory opinions cannot be legally relied upon by any other party other than the party that requested the opinion. For more information about this Opinion, advisory opinions, the AKS, or other related issues, please contact: Simone Colgan Dunlap at (602) 229-5510 /, Ed Rickert at (312) 715-5139 /, or your Quarles & Brady attorney.