OIG Sheds Light on When Price Reductions Must Meet Discounts Safe Harbor

Labs that offer discounts of any kind to referring physicians run the risk of liability under the Anti-Kickback Statute (AKS) and other federal laws. However, new OIG Advisory Opinion No. 21-06 gives the greenlight for a durable medical equipment (DME) manufacturer to provide reduced prices to hospitals that agree to carry out duties the manufacturer usually compensates third parties to provide. And while the proposed arrangement doesn’t involve lab services, the Opinion may have implications for labs.

The Legal Challenge

The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of an item or service reimbursable under Medicare or another federal health care program. Discounts and price reductions are a form of illegal “remuneration” the law prohibits.

However, an AKS “safe harbor” allows for “discounts,” i.e., reductions in the amount a buyer is charged for an item or service based on an arm’s-length transaction, provided that the arrangement meets strict conditions. Among other things:

• The seller must make the discount at the time of the sale of the item or service;
• If the discount is in the form of a rebate, the rebate terms must be fixed and disclosed by the seller in writing to the buyer at the time of the initial sale; and
• The buyer must provide, “upon request by the Secretary or a State agency” an “invoice, coupon or statement” from the seller that “fully and accurately” reports the discount.

The Proposed Arrangement

The arrangement at the center of Opinion 21-06 involves a DME manufacturer that sells its spinal implants and devices via a traditional distribution system, including deployment of sales representatives and/or distributors (“Intermediaries”). The Intermediaries typically perform extra services before, during and after surgeries in which the manufacturer’s products are used, e.g., with regard to training. The manufacturer pays the Intermediaries for performing these services and factors the compensation into the prices it charges hospitals for the products.

But under the proposed arrangement, the hospitals would buy the product directly from the manufacturer with no Intermediaries involvement. As part of the deal, the hospitals would perform the services normally carried out by the Intermediaries themselves. So, the manufacturer wanted to know if it would be okay to reduce the price of the products to account for the value of these services.

What the OIG Said

The OIG gave the all-clear. This wasn’t really a discount, the agency reasoned. “Rather than bestowing something of value, the reduction in price simply would reflect the reduction in services the Participating Hospital would be purchasing.” And to the extent that the price reduction doesn’t constitute remuneration, the arrangement wouldn’t violate the AKS, the OIG concluded.

Takeaway

The significance of this Opinion is the OIG’s approach of placing substance over form. Specifically, the agency considered the entirety of the arrangement; the mere fact that the hospitals got a reduced price wasn’t enough to make the arrangement a “discount.” And that’s good news because if an arrangement isn’t a “discount,” you don’t have to navigate the tricky and cumbersome discounts safe harbor.

 Of course, the substance-over-form approach can also cut the other way. Thus, arrangements may constitute discounts even if they don’t provide a price reduction, including situations where labs offer labeling and other forms of service to physicians for free.