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Sidley Austin LLP
It is customary in the healthcare arena for manufacturers such as medical device companies to offer discounts and rebates to customers such as physicians, hospitals and surgical centers. In fact, the government encourages discounting as a way to stimulate competition and decrease prices for items that may be reimbursable by federal healthcare programs such as Medicare and Medicaid. However, the practice of providing discounts or rebates to providers can be subject to abuse, and the government has not shied away from investigating and prosecuting medical device companies for engaging in what it believes to be unlawful activities.
This column discusses some of the more prevalent discounting and rebate arrangements, sets forth the underlying healthcare fraud and abuse laws to which such arrangements are subject, notes several significant medical device settlements relating to discounting and mentions several steps a company could follow to better assess the propriety of its marketing programs and the potential legal risks those programs may raise.
What Is a Discount or Rebate?
By way of background, a discount generally is defined as a reduction in the amount a buyer is charged by a seller for a product. For example, if a manufacturer normally sells a product for a list price of $100, but decides to offer it for $90, then this would represent a 10% discount on that product. Simple enough.
A rebate is a form of discount, but it is provided to a customer after a certain number of purchases of a product are made, as long as the purchaser meets certain purchasing criteria that are defined in advance. For example, a manufacturer may offer a surgical center a rebate of 10% of all of its purchases of the manufacturer’s product over the course of the year, but only as long as at least 50 of the manufacturer’s product are bought. The rebate percentage may be increased if the total purchases exceeded 100. This generally is referred to as a volume rebate, since the amount of the rebate is dependent on the quantity of products purchased.
Other types of rebates can be more sophisticated and, therefore, possibly entail a higher degree of risk, at least according to the government. For example, a “bundled” rebate generally involves the provision of one item for free, or at a reduced charge, as long as a certain minimum quantity of another item is purchased. A “market share” rebate involves the provision of a rebate to a customer, based on buying more of a particular manufacturer’s product than a competitive manufacturer’s product.
The Law Behind These Practices
Although all of these types of arrangements—in some form—are fairly common in certain segments of the medical device industry, if they are not appropriately structured and implemented, they potentially can present significant risks under healthcare fraud and abuse laws. In particular, bundled arrangements have received scrutiny by enforcement officials in recent years.
In evaluating marketing practices involving discounts and rebates, the most important law that needs to be considered is the federal anti-kickback law. This law prohibits the offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) as an inducement or in return for the referral of a patient (or the arranging, recommending or ordering of) for any item or service that is reimbursed under a federal healthcare financing program, including Medicare, Medicaid and Tricare. Penalties for violation of the law include criminal prosecution, civil fines and exclusion from the federal healthcare programs.
The scope of the prohibited conduct is so broad that, absent specific exceptions included in the law, it would prohibit such routine business practices as volume discounts and rebates. In other words, read literally, the law would prohibit almost all forms of discounts and rebates, as it always is the case that the purpose of a discount or rebate is to encourage utilization of the manufacturer’s products.
Fortunately, however, there is a specific statutory exception to the law for certain discounting arrangements. In addition, there is a regulatory “safe harbor” for discounting arrangements. Although a detailed technical discussion of the requirements of both the exception and the safe harbor is beyond the scope of this column—as is the legal discussion of whether it is sufficient to rely only on the exception—as opposed to the more detailed (and hence more difficult to satisfy) safe harbor, the most important point for device companies to appreciate is that, to reduce the risk of exposure under the anti-kickback law, manufacturers need to fully disclose to their customers the existence of the discount arrangement, the nature of the discount and the fact that their customers may need to fully and appropriately disclose and pass-through these discounts to the insurance payor (Medicare, Medicaid, etc.). Typically, the way this is achieved is through very carefully drafted language in the underlying agreement as well as on the invoices that are furnished to customers.
In addition, the substance of the rebate is critical. For example, even if the appropriate disclosures are made, a rebate may not be protected if its terms are not set in advance but, instead, change throughout the course of the agreement. Further, a “prebate”—which involves an upfront payment to a customer before any product purchases are made—is considered by the government to be unlawful, as it essentially amounts to a kickback to a customer to induce purchases of that manufacturer’s products.
Learn From Past Cases
As noted above, certain bundling arrangements have been the subject of scrutiny by enforcement officials. The best example of that is the $600 million settlement agreement entered into between Ross/Abbott and the federal government in 2003. Although that case concerned the marketing of enteral nutritional products, it still is of relevance to orthopedic device companies because it provides a window into the government’s thinking on bundling arrangements.
In short, the government challenged the company’s practice of providing free feeding pumps to nursing homes based on the purchase of a certain number of pump sets that would be used with the free pumps. In particular, the government focused in on the apparent lack of transparency and full disclosure about the nature of the bundled arrangement.
The case is notable in that many feel that the provision of an item for free, based on the purchase of a certain quantity of other items, is not unlawful under the anti-kickback law and can be structured consistent with the discount exception and/or safe harbor. Nevertheless, the precedent set by this case may guide the government in future enforcement actions. In fact, Novartis and McKesson subsequently also entered into settlements dealing with their bundling arrangements in the enteral nutrition arena.
Given the government’s continued focus on the sales and marketing activities of pharmaceutical companies and the recent—and sure to increase—scrutiny of medical device companies (particularly the orthopedic industry), take steps to review and assess your discounting and rebate arrangements with customers. An internal audit, or review, of the full array of these types of transactions (volume rebates, bundling arrangements, etc.) would be one way to start, followed by the development or enhancement of company policies and procedures designed to address these types of arrangements. Finally, as has been mentioned many times in this column in previous issues, ensure that your sales and marketing staff is appropriately trained on the types of discounting and rebate arrangements that are permissible, as well as those that may be unacceptable.
Mark Langdon is an attorney with the Washington, DC office of the law firm Sidley Austin LLP. He is a nationally recognized expert on healthcare compliance issues, with a particular focus on fraud and abuse and reimbursement matters. Mark primarily represents device and pharmaceutical companies, hospitals and physicians. He can be reached at (202) 736-8162 or mlangdon@sidley.com.
