OIG issues opinion on drug company kickbacks

In only its second advisory opinion of the year, the HHS Office of the Inspector General (OIG) has clarified whether certain discount pricing arrangements between pharmaceutical manufacturers and drug wholesalers violate the federal anti-kickback statute.

Essentially, the opinion gives drug companies more latitude in trading pricing discounts for marketing considerations.

The opinion is mildly surprising in that the OIG historically has expressed concern about such arrangements in which marketing activities are bartered for a percentage of products sold. D, McCarty Thornton, chief counsel to the IG’s office and author of the opinion, contends that such arrangements can, "in certain cases, encourage overutilization or the inappropriate steering of federal health care program business."

The opinion was written in response to a request from an unnamed pharmaceutical company.

According to the opinion, the company has proposed to enter into contracts with drug wholesalers for the purchase of "certain multi-source generic pharmaceuticals" at a fixed percentage price discount. In exchange for the discount, the wholesalers, whose customers include hospitals, pharmacies and other health care providers that serve federal beneficiaries, would provide "limited promotional support" for the drugs in question — in other words, marketing the drugs to their customers.

Under the company's proposed arrangement, the amount of the discount would be based on the amount of the wholesaler's contract product purchases minus returns, invoice adjustments and chargebacks, and multiplied by "a fixed percentage" not defined in the opinion.

At issue in all this is whether the exchange of discount for promotion and marketing constitutes an illegal kickback under either the Social Security Act (SSA) or the OIG's own civil monetary penalty provision for kickbacks. According to the SSA, payments cannot be made to induce referrals of business payable by a federal health care program. According to Thornton, the statute has been interpreted to cover any arrangement where one purpose of the payment was to "obtain money for the referral of services or to induce further referrals."

In analyzing the company's proposed arrangement, Thornton concluded that:

1. The arrangement is subject to the anti-kickback statute in that it does involve an exchange of remuneration (the discount) in exchange for marketing that could influence health care providers to purchase products.

2. Further, the arrangement isn't covered by the safe harbor governing price discounts. According to Thornton, the discount safe harbor only protects remuneration on a good or service received by a buyer that "submits a claim or request for payment for the good or service for which payments may be made in whole or in part under Medicare or a state health care program." Because the wholesalers won't be submitting claims to Medicare or Medicaid, the arrangement isn't covered.

3. Even so, the proposed arrangement isn't illegal because the discounts in question don't constitute "prohibited remuneration" under the anti-kickback statute. The reason, basically, is that even though the wholesalers won't be submitting claims to Medicare for the purchases, the Company's agreement to disclose information to the government "will insure that the discounts are properly reported and reflected in the Medicaid rebate."

Thornton notes that the opinion only applies to one specific case. It shouldn’t be relied upon as a broad policy by entities involved in similar but not identical arrangements, and it isn't binding for any agency other than HHS.