The Department of Health and Human Services Office of Inspector General (OIG) recently issued an advisory opinion related to a proposed arrangement offering discounts to dental providers. This favorable advisory opinion, issued on December 9, 2024, offers fresh guidance and reminders to dental professionals and dental services organizations (DSOs) about how to structure discount programs.

The request for the advisory opinion was submitted by a dental supplies distributor that owns a separate entity (the “Dental Division”) which provides supplies, equipment, and business support services to customers, including dentists, dental specialists, dental laboratories, and DSOs. The requestor currently maintains a customer loyalty program whereby customers earn points on purchases of Dental Division items and services. Customers are eligible for benefits that are established through various tiers, with benefits increasing in value as the customer purchases more items or services.

Opinion focused on expansion of program

The request for the advisory opinion focused on a proposed expansion of this loyalty program, which would:

  • Allow customers to earn points (each worth approximately $0.005) by purchasing items and services from the Dental Division or the requestor’s other subsidiaries (“Participating Entities”);
  • Allow customers to redeem points for discounts on a wide range of dental products (“Redeemable Items and Services”) manufactured and supplied by Participating Entities, so long as the customer is not in the lowest tier of the program; and
  • Establish tiers to the program, based on the customer’s spending history over the 12-month period prior to the customer’s redemption of the points. The tiers would include benefits including priority servicing for in-office equipment, and discounts for in-office service labor rates and education events.

Importantly, each point would be worth a redemption value of $0.005, none of the Redeemable Items and Services would be offered at or below cost, and the points would have no value if not redeemed for Redeemable Items and Services.

Why OIG issued a favorable opinion of the expansion

The OIG explained that the proposed arrangement “would result in two remuneration streams that would implicate the Federal anti-kickback statute,” namely (1) the points given to customers that could be redeemed to reduce the dollar amount paid for Redeemable Items and Services, and (2) providing benefits to customer based on the amount of the customer’s purchases.

The OIG also determined that neither would qualify as a “discount” under the discount exception and safe harbor to the anti-kickback statute. The points would not meet the definition of a “discount” because the points are “other remuneration” and would not reduce the purchase price of Redeemable Items and Services.  Likewise, the tiered benefits based on volume of purchases would not fit the definition of a “discount” because they also include “other remuneration”, like priority services and extended warranties, in addition to discounted support items and services.

Nonetheless, the OIG concluded that the proposed expansion of the loyalty program contained certain features mitigating against administrative sanctions under the federal anti-kickback statute:

  • The current dollar value of each point ($0.005) was low enough that it would “somewhat mitigate” the risk of steering customers generally.
  • Points could be used toward the discounted purchase of approximately 200,000 items offered.
  • The program would not permit the points to be redeemed for free items or services, as nothing is offered below cost or for free.
  • The rewards offered within the tiered benefits are not independently valuable and are tied specifically to the products or services purchased by the customer (and therefore, inherently different from more problematic incentives such as concert or sports tickets, travel, or personal gifts, “which encourage improper steering or foment unfair competition”).
  • The tiers would not provide new, independently valuable rewards when moving up a tier, but rather “simply provide a more thorough array of customer support services.”

While OIG’s advisory opinions are binding only on the requestor, given the OIG’s analysis and opinion, entities interested in implementing similar discount or membership programs would be wise carefully to assess the proposed loyalty program. Among other things, if the program does not squarely fit within the discount safe harbor, it would be important to avoid the clearly noted problematic practices, such as offering independently valuable rewards in a tiered benefit program, offering items and services for free or for below cost, or offering points redeemable for only certain products or services or in return for lavish rewards.

Red Smith will continue to follow developments in health care fraud and abuse enforcement. If you have any questions about this advisory opinion or have an arrangement that you would like to seek an advisory opinion on, please do not hesitate to reach out to the health care attorneys at Reed Smith.