OIG Issues Favorable Advisory Opinion on Drug Manufacturer’s Direct-To Patient Discounted Drug Sales Program

July 29, 2014

By Jay W. Cormier & Alan M. Kirschenbaum

In an advisory opinion posted on Monday, July 28, 2014, the Office of the Inspector General of the Department of Health and Human Services (“OIG”) determined that no enforcement action would be taken against a drug manufacturer’s direct-to-patient discounted sales program that operates outside of  Federal health care programs.  

Advisory Opinion 14-5 involves a program under which a brand name drug manufacturer offers to sell one of its products to patients at a heavily discounted fixed cash price.  The opinion explains that this product is either not included on most third party payor formularies due to the availability of generic equivalents, or, where it is covered, it is placed on non-preferred formulary tiers and subject to prior authorization, step therapy, or other coverage and reimbursement restrictions.  Under the discount program, Medicare Part D patients with a valid prescription are able to obtain the drug from an online pharmacy, which dispenses the product on behalf of the manufacturer at a fixed price established by the latter.  The manufacturer supplies the product to the pharmacy pursuant to a bailment arrangement, under which the manufacturer retains title to the product until the Pharmacy dispenses it to patients.  The manufacturer pays the pharmacy a fair market value fee for the dispensing services.  Neither the pharmacy nor the patient seeks reimbursement for the product from any third party payor, government or private, nor does either the manufacturer or the pharmacy discuss or otherwise market any other product or service to patients who have opted into the discount program. 

In analyzing this program under the Federal health care program antikickback statute (“AKS”, 42 USC 1320a-7b(b)), 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 program to purchase the Product.  OIG concluded that that the risk of the first type of inducement was minimized because the manufacturer certified that it would not use the discount as a vehicle to market other Federally reimbursable products that it manufactures.  With regard to the second type of inducement, if the discount program were terminated, few Part D enrollees would be able to obtain coverage of the product through their Part D plans because of the prevalent coverage exclusions and limitations applicable to the drug, whereas  enrollees could easily obtain coverage of generic equivalents.

The OIG also found that the dispensing arrangement with the pharmacy did not constitute an unlawful swapping arrangement under the AKS – i.e., a vehicle for the manufacturer to provide fees to the pharmacy for dispensing the product to cash paying patients as an inducement for the pharmacy to recommend the manufacturer’s other drugs that are covered under Federal programs.  The OIG’s primary consideration in this regard was the manufacturer’s certification that the fees paid to the pharmacy are consistent with fair market value in an arm’s-length transaction, and do not take into account the value or volume of referrals or other business generated between the parties.

The OIG also determined that the arrangement does not have the potential to influence Medicare or Medicaid beneficiaries to use the online pharmacy for federally reimbursed products, so that there is minimal risk of a violation of the civil monetary penalty prohibiting beneficiary inducements (42 USC 1320a-7a(a)(5)).