United States: OIG Issues Favorable Advisory Opinion To Pharmaceutical Manufacturer On Direct-To-Patient Discount Sales Program

Last Updated: August 4 2014
Article by Larri A. Short, Brian D. Schneider and Stephanie Trunk

On July 28, 2014, the US Department of Health and Human Services' Office of Inspector General (OIG) issued a favorable opinion concerning a drug manufacturer's program to offer a certain branded drug via an online, mail order pharmacy directly to cash-paying customers at a discounted price. In Advisory Opinion 14-05, the OIG concludes that, while aspects of the proposed arrangement implicate the Anti-Kickback Statute (AKS), certain outlined safeguards provide OIG comfort with the proposed arrangement such that the OIG will not impose administrative sanctions on the manufacturer or pharmacy.

The Proposed Arrangement

According to Advisory Opinion 14-05, the pharmaceutical manufacturer's branded product was not widely covered by insurance due to the availability of generic equivalents. Insurers that do provide coverage for the manufacturer's product — including Medicare Part D plans — impose prior-authorization or step-therapy requirements on the product, or include the product on the non-preferred tier of the plan's formulary. Under the proposed arrangement, any patient with a valid prescription for the product could enroll in the program by phone, internet, or fax. As a condition of participation, enrollees agree not to submit claims for reimbursement to any insurer, including Medicare Part D plans or any other federal health care programs. Furthermore, enrollees agree that the manufacturer may share information about the enrollee's participation in the program with third parties, including each enrollee's applicable insurer. Once enrolled, patients are directed to a specific online, mail order pharmacy that stocks the drug and receive a discounted price on the product dispensed from the pharmacy in a cash transaction.

In turn, the manufacturer provides the product to the pharmacy on consignment, such that the manufacturer retains title to the product until it is dispensed to a patient. The manufacturer has certified that the pharmacy will be paid fair market value for dispensing the product to a patient participating in the manufacturer's program and related services. Specifically, the manufacturer pays the pharmacy a flat, per-transaction fee for dispensing a product to a program enrollee and a monthly fee for related services. The manufacturer dictates that program enrollees be charged a flat fixed fee for the drug dispensed, which the pharmacy collects from each patient and remits to the manufacturers. The pharmacy is expressly prohibited from submitting any claims for the drug to a third party payor for reimbursement.

The manufacturer also certified that neither it nor the pharmacy would market other products to the patients enrolled in the program.

OIG's Analysis

In analyzing this program under the AKS, the OIG recognized that the program operates entirely outside of all federal health care programs, meaning that patients obtain the product without using their Medicare Part D benefit or any other federal health care program benefit. Nevertheless, the OIG reasoned that the AKS could be implicated if (1) the discount induced patients to purchase other products marketed by the manufacturer that are reimbursed under federal programs, or (2) the discount induced patients to switch to the product and then — if the manufacturer terminated the discount arrangement — use their Part D plan or other federal health care program coverage to subsequently purchase the product.

The OIG nevertheless concluded that risk under the AKS is "sufficiently low." The OIG reasoned that the discount to patients was not likely an inducement for the patients to purchase other products because the manufacturer certified that it would not use the discount as a vehicle to market other federally reimbursable products that it manufactures. The OIG also concluded that the discount was not likely to induce patients to switch to the product — and continue using the product — if the discount program were terminated because few federal health care program beneficiaries (including Part D enrollees) were able to obtain coverage of the product through their plans due to exclusions, coverage restrictions, and the like. Furthermore, most enrollees had coverage of generic equivalents and could readily switch to a generic equivalent in the event the manufacturer terminated the discount program.

The OIG also acknowledged that the pharmacy's arrangement with the manufacturer also implicated the AKS, as the payment of fees to the pharmacy by the manufacturer could induce the pharmacy to refer or recommend the manufacturer's product. Furthermore, the arrangement between the pharmacy and the manufacturer does not qualify for the AKS protection under the personal services safe harbor because a portion of the proposed fee is on a per-transaction basis. However, the OIG found the service fees paid by the manufacturer to the pharmacy were unlikely to induce the pharmacy to refer or recommend the manufacturer's product. First, the manufacturer certified that the proposed fees were negotiated at arm's length and represented fair market value. Additionally, the monthly fees to the pharmacy represented arm's length transactions consistent with fair market value and did not take into account the volume or value of referrals. In addition, the requesting manufacturer certified that the pharmacy would be prohibited from marketing the manufacturer's other products to program participants.

Similarity to Patient Assistance Programs Operating Outside of Medicare Part D

The arrangement outlined in Advisory Opinion 14-05 resembles the manufacturer-sponsored patient assistance program operating outside of the Part D model described in the OIG Special Advisory Bulletin on Patient Assistance Programs for Medicare Part D Enrollees, published in the Federal Register on November 22, 2005 (SAB). Like the patient assistance programs operating outside of Part D described in the SAB, the arrangement described in Advisory Opinion 14-05 operates entirely outside of the Medicare Part D benefits and includes safeguards, such as notifying enrollees' respective Medicare Part D plans of the enrollees' receipt of the drug under the arrangement on a cash basis so that the Medicare Part D plan does not inadvertently reimburse the enrollee for the drug, count the enrollee's out-of-pocket cost for the drug toward the enrollee's true out-of-pocket costs (TrOOP), and include the drug in the enrollee's record for purposes of conducting drug utilization review and providing medication therapy management services. Unlike the patient assistance programs described in the SAB, however, anyone can enroll in the manufacturer's program described in Advisory Opinion 14-05 because there is no financial need criteria.


Advisory Opinion 14-05 confirms that discount and referral arrangements are less likely to raise concerns when they avoid federal reimbursement systems, including any opportunities to cross-sell to other federally reimbursable products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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