OIG Issues Advisory Opinion regarding Rebate Program

On June 24, 2013, the U.S. Department of Health & Human Services, Office of Inspector General (“OIG”) issued Advisory Opinion 13-07 regarding whether a Proposed Arrangement in which a rebate program that provided a tiered, percentage rebate based on purchase of surgical supplies and devices would generate prohibited remuneration under the anti-kickback statute and constitute grounds for sanctions. The OIG concluded that the Proposed Arrangement would not generate prohibited remuneration under the anti-kickback statute because the arrangement qualified for safe harbor protection and accordingly, the OIG would not impose administrative sanctions.

The Requestor of the advisory opinion is a corporation that manufactures products used to treat ophthalmologic disorders and to improve vision, including pharmaceutical products, surgical equipment, vision aids, and related products. Some of the Requestor’s products are reimbursable directly or indirectly by Federal health care programs. The Requestor proposed an arrangement by which it would establish a rebate program that would provide a tiered, percentage rebate based on purchases of surgical supplies and devices. The rebate would be calculated based on a customer’s total annual purchases of these surgical products. The Requestor certified that the rebate amount would not vary based on the number of Federally reimbursable products a customer purchases. The Requestor also certified that it would notify all customers receiving rebates of their obligation to report any rebates received based on sales of Federally reimbursable surgical products. The notification would be presented in the contract, the invoices the Requestor would send to participating customers, and the year-end report that would be given to each participating customer.

The OIG stated that The Department of Health and Human Services has promulgated safe harbor regulations found at 42 C.F.R. § 1001.952 that define practices not subject to the anti-kickback statute because the practices would be unlikely to result in fraud or abuse and the discounts encourage price competition that benefit Federal health care programs. To determine if the Proposed Arrangement would qualify for protection under the safe harbor, the OIG engaged in a multi-part analysis beginning by (1) determining if the proposed rebate program involves a “discount” as defined in the safe harbor, and then (2) determining whether the Requestor would meet the requirements of a seller under the safe harbor.

In determining that the Proposed Arrangement involved a “discount,” the OIG referenced the preamble to the 1999 final rule, which noted 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.” See 64 Fed. Reg. 63,518, 63,5302 (Nov. 19, 199). The OIG found that this principle also applies to the Proposed Arrangement. Under the Proposed Arrangement, 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 OIG deemed the rebates offered to meet the definition of “discount” under the safe harbor.

The OIG also found that the rebates offered in the Proposed Arrangement met the definition of “rebate” because the program description provided in the contract would explain the terms of the rebate program, the types of products involved, and the purchasing volume required to reach each tier of the rebate program.
Finally, the OIG discussed the requirements of the safe harbor that sellers have certain notification requirements, depending on the type of buyer. See 42 C.F.R. § 1001.952(h)(2). The safe harbor regulations mandate that where the value of the discount is not known at the time of sale, the seller must report the existence of a discount program on the invoice, coupon or statement submitted to the buyer and inform the buyer in a reasonably calculated manner to give notice of its obligations. Id. When the value of the discount becomes known, the seller must provide the buyer with documentation of the calculation of the discount identifying the specific goods or services purchased. Id. The Requestor certified that it would meet all of the obligations of a seller under the safe harbor by providing a program description to customers describing the terms of the rebate program and a notification of their obligations to report the rebate applicable to Federally reimbursed products, providing invoices to customers that the items included on the invoice may trigger reporting obligations, and providing a year-end report summarizing the customer’s total qualifying purchases, explaining the tier for which the customer qualified, and calculating the total rebate to which the customer is entitled. As such, the OIG found that the Requestor had committed to meet the seller’s requirements. 

Ultimately, the OIG concluded that the Proposed Arrangement would not generate prohibited remuneration under the anti-kickback statute because it qualified under the safe harbor regulations. Of importance though, is the OIG’s point to reiterate their concern about discounts on bundled items. However, the Proposed Arrangement at issue is not a “bundle” because a discount on one product would not be contingent on the purchase of another product.
If you have any questions regarding this Advisory Opinion, please contact Brian Heaton at (317) 238-6354 or bheaton@kdlegal.com or Tom Hutchinson at (317) 238-6254 or thutchinson@kdlegal.com.