The Department of Health and Human Services Office of Inspector General (“OIG”) recently issued a favorable advisory opinion that relates to whether two drug assistance programs would run afoul of the Federal anti-kickback statute (“AKS”).

In good news for the entity that requested the opinion, a United States corporate affiliate of a pharmaceutical manufacturer of the drug at issue (the “Requestor”), the OIG stated that it would not impose administrative sanctions for either program, despite the potential to generate prohibited remuneration under the AKS.  Although the advisory opinion is only applicable to the specific programs at issue and can be relied upon only by the Requestor, there are some potential considerations that could be applied more broadly to other arrangements.

Factual Background

The Requestor provides support services for the supply chain for the drug, which is used for pediatric patients with an ultra-rare condition that affects around 17 to 24 of the approximately 4 million children born each year in the United States.

The drug is a one-time, potentially curative regenerative tissue-based treatment, and it is the only treatment option for this condition. The tissue must be obtained from donors younger than 9 months undergoing cardiac surgery and is surgically implanted (after processing) into the child with the condition at one treatment center that is the only location authorized to administer the treatment, which is also manufactured on-site.

The patients’ treating physicians generally do not work at the treatment center but would only refer the patients there. The treatment center must purchase the drug prior to administering it. The Requestor estimates that approximate 50% of the patients have Federal healthcare coverage, typically through Medicaid and sometimes Tricare.

The Refund Program

Because this drug is indicated for such a rare condition, and because the cost of the drug is presumably quite high (the actual cost was redacted from the opinion), the treatment center was initially hesitant to purchase the drug.  Based on this hesitancy, the Requestor created a Refund Program, as follows:

• Requestor will waive or refund the entire wholesale acquisition cost (“WAC”) if the patient’s insurer refused to reimburse the treatment center after initially approving the drug; or

• Requestor will allow the treatment center to delay payment for the drug if there are reimbursement delays for a particular patient.

Refunds are subject to the treatment center complying with specific conditions, including clearing the patient to receive the drug, obtaining all necessary approvals from and submitting all required paperwork to the patient’s insurer, and correcting any procedural errors in paperwork.  Further, the Requestor cannot advertise the Refund Program to patients or physicians, and it must report the Refund Program on invoices for the drug and provide information about the Refund Program to Federal and State healthcare officials upon request.

If Requestor refunds the cost to the treatment center, the treatment center must refund any cost-sharing amounts to the patient.  Ultimately, the refund results in the patient receiving the drug for free, as ordinarily a denial by the insurer would result in the patient owing the treatment center for the cost of the drug. 

The OIG concluded that the Refund Program implicates the AKS, both because the Requestor offers or pays remuneration to the treatment center where the insurer refuses reimbursement and because the Requestor indirectly offers remuneration to the patient, some of whom are Federal healthcare beneficiaries, and that no safe harbor applies.  That said, the OIG said it would not impose administrative sanctions, because it believes the risk of fraud and abuse is low under the AKS for the following reasons:

• The Refund Program is limited in scope and time:  The drug affects a minimal number of patients and is a one-time treatment.  Further, the conditions for the Refund Program require prior approval from the insurer, so it is likely that the insurer will pay for the drug and the Refund Program will rarely, if ever, be triggered.  And even if the insurer does refuse to pay, there are time limits on when a refund can be paid.  That is, a refund or waiver under the Refund Program is only available if the drug was purchased during the three-year period of the Refund Program (starting approximately 7 months after FDA approval and continuing for three years after that), and can only be given up to 18 months after the date the drug was delivered to the treatment center.

• There is low risk that the Refund Program will interfere with clinical decision-making or utilization:  The drug is indicated only for this very rare condition, requires several steps to create, and is not at risk for being mass-produced.  And in the unlikely event that the referring physician happens to be affiliated with the treatment center and is also the administering physician, that physician would receive no financial benefit from implanting the drug or from the Refund Program.

• There is low risk of inappropriate utilization:  It is in the treatment center’s financial interest to administer the drug solely as prescribed by the physician and approved by the insurer.

• The Refund Program is unlikely to increase costs inappropriately to Federal healthcare programs:  To the contrary, patients with this condition typically have high healthcare costs – over $5.5 million or more in total costs in the first three years of life – and the drug is potentially curative, meaning that it could potentially reduce healthcare costs.  Moreover, the Refund Program requires transparency with the insurer and Federal healthcare programs.

The OIG also assessed whether the Refund Program would implicate the Beneficiary Inducement CMP laws, and determined that the answer was no, because of the limitations on the manufacture and administration of the drug (only at the single treatment center).  That is, all patients must receive the drug at the treatment center irrespective of whether the Refund Program is available or triggered.  The treatment center is the only location where patients can receive the drug at all.  Thus, any remuneration offered under the Refund Program would not induce patients to select the treatment center as their provider.

The Discount Program

Currently, the time between when the treatment center first seeks approval from the physician and insurer (including the treatment center signing a pricing agreement with the insurer) to administer the drug to a patient and when the drug is delivered spans many months.  During that timeframe, the WAC can change.  The Requestor created its Discount Program to give the treatment center more predictability about the price.  If the WAC is higher when the drug is delivered than when the pricing agreement was signed, the Requestor applies a discount to the WAC.

The OIG concluded that, although the Discount Program does implicate the AKS, it meets the safe harbor for discounts and, therefore, does not generate prohibited remuneration under the AKS, because the price reduction meets the definition of a “discount” and the Requestor meets the definition of an “offeror,” including because Requestor meets the requisite transparency requirements.

What does this mean?

As is typical, the advisory opinion only applies to the entity requesting it.  That said, the opinion potentially is instructive to other entities.  Axiomatically, where an arrangement meets a safe harbor, that arrangement would not trigger liability under the AKS.  However, even where an arrangement could or would implicate the AKS as a technical matter, if the arrangement does not trigger the abuses the AKS seeks to curtail, OIG may not seek to impose administrative sanctions. 

The OIG’s conclusions here appear to be focused on the fact that the Refund Program was not likely to interfere with clinical decision-making, was not likely to lead to inappropriate utilization of the drug, was not likely to lead to increased Federal healthcare costs, and was not likely to induce patients to select the treatment center as the provider.  Further, the OIG specifically noted the limited timeframe during which the Refund Program was available.  This could have potential implications for patient “bridge” programs or other patient assistance programs.

Reed Smith will continue to follow health care fraud and abuse developments. If you have questions about an arrangement you are utilizing or contemplating utilizing, do not hesitate to reach out to a Reed Smith attorney.