OIG's Latest Advisory Opinion: When Is A Discount A "Discount"?

Key Takeaways

• OIG clarifiedwhat does and does not qualify as a "discount" under the Discount Safe Harbor.Prompt-payment, supply reservation and volume-based discounts may qualify if conditions are met.
• OIG reaffirmed its concerns about certain types of bundled discounts.Such discounts can shift costs across federal health care programs and obscure net pricing.
• But OIG also highlighted that bundled discounts can be structured in ways that are lower risk.Bundled discounts across different payment methodologies can be low risk if they have certain features, such as price transparency and sharing of savings across health care programs.

On December 18, the Office of Inspector General (OIG) publishedAdvisory Opinion No. 25-11, which provides one of the most detailed OIG articulations to date of how the Anti-Kickback Statute (AKS) and the Discount Safe Harbor apply to a variety of discount and rebate arrangements — specifically, their application to discounts and rebates on the sale of certain vaccines. While OIG affirmed that certain upfront and volume-based discounts can meet the safe harbor's definition of a "discount," it also drew sharp lines around arrangements that fall outside its protection, particularly bundled discounts spanning Medicare Parts B and D, or those tied to promotional or marketing services. The opinion also contains important signals about how OIG views conduct falling outside the Discount Safe Harbor, outlining factors that increase or decrease the risk of fraud and abuse — and offering pointed warnings about configurations that could trigger greater scrutiny.

Background and Scope of Advisory Opinion

As summarized in the opinion, the requestor, a biopharmaceutical manufacturer, offers a variety of discount and rebate arrangements to customers of three of its vaccines (given the pseudonyms Vaccine A, Vaccine B and Vaccine C for purposes of the opinion).

The requestor sought an opinion on the following categories of discounts and rebates:

1. Upfront discounts (single drug only):These are reductions in price that are known and applied at the time of purchase, including flat upfront discounts, prompt-payment discounts (contingent on payment within a specified period after delivery of the drug), and supply reservation discounts, which are contingent upon reserving units of Vaccine A for a certain vaccination season.
2. Upfront discounts with a minimum purchase requirement (single drug only):Similar to the above category, these are reductions in price known and applied at the time of purchase, but they are unlocked only if the buyer meets certain minimum purchase requirements. Purchase requirements can be defined as a volume purchase requirement or a market share target, including tiered market share discounts that offer steeper discounts for hitting given market share benchmarks.
3. Bundled upfront discounts with a minimum purchase requirement:Distinct from the above categories, these bundled discounts offer reductions in price that are contingent upon meeting volume or market-share targets for more than one vaccine.
4. Bundled rebates:The requestor offers various bundled rebates on the three vaccines, including bundled incremental rebates on Vaccine A, Vaccine Band Vaccine C if volume requirements are met for purchase of all three vaccines.

For all of the discount and rebate arrangements, requestor certified that it complies with the notification and reporting requirements of the Discount Safe Harbor. The requestor also included a number of features that OIG considers "safeguards against fraud and abuse," including prohibiting discount or rebate terms not memorialized in a written discount agreement and on customer invoices and an assurance that discounts and rebates are not contingent on the customer providing any additional services or promotional activities on behalf of the requestor (e.g., utilization management or other conduct that could impede the use of a competing vaccine).

OIG's Analysis

OIG concluded that all of these discounts and rebates implicate the AKS because they involve requestor's offer and payment of remuneration in exchange for its customers' agreement to purchase vaccines, which may be payable by a federal health care program. From there, the analysis breaks down into two essential categories of discounts and rebates.

First, the opinion addresses variations of upfront discounts for a single drug, which include flat upfront discounts, prompt-payment discounts and supply reservation discounts, as well as upfront discounts with minimum purchase requirements (based on volume or market share) to unlock the discounts.

A discount is only a "discount" under safe harbor if it meets certain requirements, including that the terms are fixed and disclosed in writing at that time of the initial purchase to which the discount applies, and that the discount does not include "services provided in accordance with a personal or management services contract." OIG concluded that all of requestor's non-bundled vaccine discounts meet OIG's definition of "discount" and the other conditions of the Discount Safe Harbor and therefore are protected from prosecution under the AKS.

Second, the opinion analyzes requestor's various bundled discount and rebate programs. Because the bundles include vaccines reimbursed under different methodologies — Vaccines A and C are reimbursed under Medicare Part B, while Vaccine B is reimbursed under Medicare Part D — these discounts and rebates do not fall within the safe harbor's definition of "discount." OIG emphasized that the safe harbor does not protect:

Accordingly, much of the analysis turns on whether any of the discounts or rebates involve bundled items reimbursed by two different reimbursement systems, such that a reduced price on one item is used to induce purchases of other products for which the federal health care programs pay the full price.

Consistent with past statements, OIG warned that bundled discounts and rebates can "shift costs among reimbursement systems or distort the true costs of all items." OIG also noted that bundled discounts can make it difficult to determine the net price of any product for reporting purposes. In this instance, because the three vaccines are not all reimbursed under the same federal health care program using the same methodology, the bundled discounts are not "discounts" under the Discount Safe Harbor and do not enjoy safe harbor protection.

Nevertheless, OIG concluded that the requestor's bundled discounts and rebates present a low risk of fraud and abuse because:

• The market share or volume requirements are clear for each of the vaccines in the bundle;
• The upfront percentage price reduction is clear for each vaccine; and
• Each Medicare reimbursement system (e.g., Medicare Parts B and D) benefits equally from the discounts.

Citing its 1999 preamble, OIG emphasized that bundled discounts that fall outside of the safe harbor nevertheless can present a low risk in certain circumstances:

OIG noted that the requestor's bundled discounts differ from a scenario where, for example, a discounted Part A drug induces the purchase of a full-price Part B item, which would shift costs from Part A — where hospitals are reimbursed based on a prospective bundled payment — to Part B — where drugs typically are separately reimbursable, potentially distorting prices for both products.

Takeaways: Structuring Discounts and Rebates to Minimize Risk

The opinion elaborates on what is considered a "discount" for purposes of the Discount Safe Harbor. Reductions in price can meet the definition, even if they are contingent upon other factors, including:

• Prompt-payment discounts (a reduction in price in exchange for remitting payment within a designated period following delivery of the product)
• Supply reservation discounts (incremental discounts that reserve a certain volume of units in advance —e.g., a designated number of vaccines for the upcoming vaccine season)
• Market share or volume purchase requirements (including tiered market share price reductions)
• Bundled discounts based on volume or market share targets, as long as the items or services are reimbursed under the same methodology

In its analysis of the Discount Safe Harbor, OIG issued multiple warnings about ways that discount arrangements could diverge from the safe harbor. And OIG went even further, issuing a pointed warning — in two places in the opinion — that discounts that hinge on providing services not only fall outside the safe harbor but likely would not be considered sufficiently low risk for OIG to issue a favorable advisory opinion. OIG flagged a few categories of services that it considers particularly suspect when linked to discounts or rebates, including promotional activities, marketing, or switching patients from one product to another.

The opinion also provides important insights into ways to structure bundled discounts and rebates that, although they fall outside the safe harbor, may nevertheless present a low risk of fraud and abuse.Per OIG's analysis, factors that reduce risk for bundled discounts include:

• Discounts are readily attributable to each separately billable item (as opposed to a situation where a discount is offered on one item in exchange for purchasing a certain volume of a different item)
• Each Medicare reimbursement system benefits equally from discounts
• All items in the bundle are discounted — rather than offering a deep discount on one product to induce the purchase of another
• Each product has at least one competing product with a similar list price—reducing the risk that the bundled discounts obfuscate pricing in the bundle to raise prices to maintain a higher list price

At the end of the day, OIG's analysis provides a roadmap for a variety of discount and rebate arrangements that either fall within the Discount Safe Harbor or present a low risk of fraud and abuse.Further, OIG's opinion offers significant warnings about the types of arrangements that could present a higher risk of enforcement. Although this advisory opinion — like all OIG advisory opinions — only applies to the facts presented here, it nevertheless gives insights into how OIG views a variety of discount and rebate structures in terms of fraud and abuse risk.

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