The Office of Inspector General (OIG) has concluded that it would not impose sanctions on a pharmaceutical manufacturer for operating a direct-to-patient product-sales program that allows certain customers to purchase a manufacturer’s brand-name product for a fixed cash price from an online retail pharmacy vendor outside of any applicable prescription-drug insurance benefit. See OIG Advisory Opinion No. 14-05 (posted July 28, 2014).

Among other key facts supporting the OIG’s conclusion, the agency cited the fact that the arrangement would operate entirely apart from any federal program – even for purposes of tracking Medicare Part D out-of-pocket spending – meaning that no federal dollars would be involved. As described below, the OIG also focused on the arrangement’s limited scope of dispensing and marketing only one drug often not covered by plan formularies, suggesting that broader arrangements would be suspect.

Indeed, the OIG stated that it might reach a different conclusion if “the Product had no generic equivalents, or was covered by more plan formularies, or more generously by some plan formularies,” which the agency viewed as increasing the risk of a discount creating an improper inducement – and which could also result in Part D having to pay for pricier drugs if direct-to-patient product-sales programs ended.

Further, apart from the fraud-and-abuse analysis of the OIG’s advisory opinion, the arrangement could potentially otherwise affect interactions with federal programs – for example, enrollment of a majority of customers in the arrangement could arguably lower the usual and customary price submitted to Medicare Part D for the relevant product.

Although the Advisory Opinion may not be relied upon by anyone other than the requesting entity, manufacturers and pharmacies should consider how the OIG would likely apply a similar analysis to any proposed direct-to-patient product-sales programs, as well as any other risks that may be implicated in moving to a similar model.

Key facts of the Arrangement

  • A pharmaceutical manufacturer sells a brand-name product (the Product) to customers – including Medicare Part D beneficiaries – that allows them to obtain the Product on an outpatient basis when it may not otherwise be readily available to them. As described below, this program operates entirely apart from any federal healthcare reimbursement.
    • Lower price available under the Arrangement: According to the manufacturer, although the Product is eligible for Part D coverage, it is often omitted from plan formularies because of generic equivalents. Even when covered, patient reimbursement for the Product is often capped at a maximum allowable cost at or near the cost of the generic equivalents. In contrast, the sales price under the Arrangement for a 30-day supply of the Product is much lower than the manufacturer’s wholesale acquisition cost (WAC) for that supply.
    • Notification of Part D: When participants sign up in the Arrangement, they must identify their type of prescription-drug insurance and must agree to share information with third parties, including their insurance plans and the Centers for Medicare and Medicaid Services. For Part D participants, the manufacturer sends a written notice to the Part D plan so that the plan can conduct any appropriate drug utilization review and medication therapy management.
    • No purchase outside Arrangement; no communication beyond Arrangement: Part D participants must agree to obtain the Product only through the Arrangement for the full Part D coverage year if Part D coverage would otherwise be available. Part D participants are automatically re-enrolled for the next entire Part D coverage year unless they opt out. Neither the manufacturer nor the pharmacy advertise or promote any other products or services to the participants.
    • No claims submitted to any federal healthcare program or third-party payer: The Arrangement operates entirely outside of all federal healthcare programs. Part D participants and other federal beneficiaries must not submit any reimbursement claim for the Product purchased under the Arrangement to any third-party payer, including federal healthcare programs, nor include the amounts paid for the Product under the Arrangement in any submission for true-out-of-pocket expenses (TrOOP) calculations under a Part D plan.
    • Dispensation handled by pharmacy: The manufacturer supplies the Product to the licensed pharmacy through a bailment arrangement in which the manufacturer retains title to, and bears the risk of loss for, the Product until the pharmacy dispenses it to participants. The pharmacy receives a set flat monthly fees: (i) to operate a toll-free customer-service number for the Arrangement; (ii) for Product storage in excess of twenty-one days; and (iii) a flat fee per transaction or per occurrence for Product ordering and warehousing, participant enrollment, dispensing, shipping, inventory management, and physician and participant communication. The manufacturer also paid a flat, one-time fee for initial program start-up services based on the estimated cost to provide each service. The pharmacy must comply with a service agreement that – among other conditions – prohibits offering any inducement to a healthcare provider to prescribe, or switch participants to the manufacturer’s drugs, including the Product. The pharmacy also sells the Product to other customers for a non-discounted price at retail pharmacies. The manufacturer certified that its fees reflect arm’s-length negotiations and fair-market value (consistent with an independent third-party valuation), and noted that it could audit the pharmacy’s compliance with the agreement.
    • Contact with healthcare professionals: Other than the manufacturer’s website, participants learn of the Arrangement from healthcare professionals. Healthcare professionals receive information from the manufacturer’s sales representatives, and information disseminated at medical conferences and through medical journal advertisements.

Legal analysis of the Arrangement

The OIG concluded that although the Arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute, the OIG would not impose administrative sanctions on the Requestor under the Anti-Kickback Statute or the Civil Monetary Penalties Act.

Minimal risk of fraud or abuse under Anti-Kickback Statute

According to the OIG, the Arrangement implicates the Anti-Kickback Statute (AKS) – which makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals or purchases of items or services reimbursable by a federal healthcare program – because:

  1. the manufacturer’s remuneration to participants in the form of a discount on the Product’s price could (a) induce participants who are federal healthcare beneficiaries to buy other products reimbursed by federal healthcare programs or (b) induce a switch to the Product that – if terminated – may lead beneficiaries to return to their plans, such as Part D, to buy the Product, leading to higher costs for patients and their plans; and
  2. the manufacturer’s remuneration to the pharmacy could result in the pharmacy arranging for or recommending the purchase of the manufacturer’s other products for which payment may be made by a federal healthcare program.

The OIG noted the potential applicability of the AKS’s safe harbor for personal services and management contracts, 42 C.F.R. § 1001.952(d), but found it inapplicable because the per-transaction payment to the pharmacy meant that aggregate payment was not set in advance, as required. Nevertheless, the OIG found that the Arrangement had safeguards sufficient to ensure that there is minimal risk of fraud and abuse because:

  • Limited coverage of the Product: The OIG found limited risk in the remuneration to federal beneficiaries because the Arrangement involved only a Product not included on most plan formularies because of the availability of generic equivalents. As a result, most Part D beneficiaries did not have coverage for the Product and likely could not purchase the Product with Part D if the Arrangement ended.
  • No marketing of other products: The OIG found limited risk in the remuneration to federal beneficiaries because the manufacturer certified that it would not use the discount offered under the Arrangement as a vehicle to market its other federally reimbursable products, nor allow the pharmacy to attempt to influence participants to choose the pharmacy as its supplier for other federally reimbursable products. The OIG also cited in support of the limited risks that the manufacturer had certified that the pharmacy must refrain from offering any inducement to a healthcare provider to prescribe or switch participants to the Product or the manufacturer’s other products, which the OIG noted the manufacturer could audit to confirm.
  • No federal payments implicated: Finally, the OIG focused on the fact that the requestor operates the Arrangement entirely outside of all federal healthcare programs, meaning that participants forgo any use of these benefits, such as Part D reimbursement. As the OIG noted, no claims were filed for the Product with Part D or any other federal healthcare program, not even toward TrOOP spending.

Unlikely inducements to warrant sanctions under Civil Monetary Penalties Law

According to the OIG, the Arrangement potentially implicates the Civil Monetary Penalties Law (CMP) because the pharmacy, at the manufacturer’s request, provides remuneration to beneficiaries in the form of the Product discount.

The OIG would not, however, subject the manufacturer to administrative sanctions under the CMP. According to the OIG, the discount would not likely induce beneficiaries to select the pharmacy to supply items eligible for federal reimbursement because:

  • No requirement to purchase other products: The OIG pointed out that participants are not required to purchase any items other than the Product from the pharmacy, limiting the possibility of an inducement to buy federally reimbursable items.
  • No marketing of other products: The manufacturer had certified to the OIG that it would not use the discount offered under the Arrangement as a vehicle to market its other federally reimbursable products to participants, nor permit the pharmacy to use the Arrangement to influence participants to choose the pharmacy as their supplier for other federally reimbursable products.
  • No federal payments implicated: Again, the OIG noted that the discount applies to a Product for which no payment would be made by Medicare or Medicaid.

While this Advisory Opinion cannot be relied upon by anyone other than the requestor and addresses only one of the many types of direct-to-patient product sales programs, it serves as a useful tool to evaluate potential exposure for similar programs.

Of course, the potential applicability of the federal Anti-Kickback and Civil Money Penalties statutes depends upon the specific facts and circumstances of the arrangement. Consequently, manufacturers and pharmacies should carefully analyze any proposed direct-to-patient product sales program to assess whether the details of that proposed arrangement implicates either of these or other potentially relevant laws and regulations.

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