Another Blow to the Discount Safe Harbor in Massachusetts District Court

By Serra J. Schlanger & Alan M. Kirschenbaum –

Judge Rya Zobel of the Federal District Court for the District of Massachusetts has dealt another blow to the Federal health care program antikickback statute (“AKS”) discount safe harbor, which drug and device manufacturers and their customers use to protect procompetitive discount arrangements. As we previously reported, on August 23, 2016, Judge Zobel denied Omnicare’s motion for summary judgement after concluding that Omnicare could not satisfy the second elements of either the AKS statutory discount exemption or the regulatory safe harbor for discounts (United States ex rel. Banigan v. Organon USA, Inc., et al.  (Case 1:07-cv-12153-RWZ)).

Just one day after issuing her opinion in the Omnicare case, Judge Zobel used similar reasoning to reverse her prior decision to dismiss the False Claims Act (“FCA”) allegations against defendant CCS Medical Inc. in the on going qui tam case, United States ex rel. Herman v. Coloplast Corp., et al. (Case 1:11-cv-12131-RWZ).  In this case, the relators allege that Coloplast gave CCS price discounts in exchange for CCS’s conversion of patients from a competitor’s product to Coloplast’s product.

Judge Zobel had ruled in favor of CCS on July 29, 2016 after CCS argued that its discount arrangement with Coloplast fell within the protection of the discount safe harbors.  The relators filed a Motion for Reconsideration on August 3, 2016, arguing that CCS could not rely on the safe harbor or discount exemption when the intent of the price reduction was to induce referrals or patient conversions.  Although the United States declined to intervene in the case, the government filed a Statement of Interest on August 8, 2016 to “state its position on the confines of the ‘discount’ exception to the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b)(3)(A).”  The government argued that “if a price reduction is conditioned on more than the purchase of a product, then it is not a mere discount and it is irrelevant whether that price reduction was ‘properly disclosed.’”

On August 24, 2016, Judge Zobel reversed her prior decision that had dismissed the FCA allegations against CCS.  Following the logic in her Omnicare opinion, Judge Zobel found that CCS had not met the second elements of either the statutory discount exemption or the regulatory safe harbor for discounts by showing that the discounts were “‘appropriately reflected in the costs claims or charges made’ to a federal healthcare program, or that CCS has provided certain information concerning the discounts to a governmental agency pursuant to its request.”  In reinstating the FCA allegations against CCS, Judge Zobel again ignored the fact that (1) there is no established mechanism for charge-based providers to identify their costs or the discounts they receive in the claims they submit to Medicare or Medicaid, and (2) buyers receiving discounts do not have control over government investigations or requests for documentation.

Even though Judge Zobel did not discuss the specifics of the discount arrangement between Coloplast and CCS in her Opinion, the government’s Statement of Interest explicitly stated the government’s view that “a price reduction conditioned on promotional or conversion campaign activities is not a ‘discount’ within the meaning of the discount exception at 42 U.S.C. § 1320a-7b(b)(3).” The government argued that “this exception is narrow and ‘covers only reductions in the product’s price.’”  The government further stated that “[r]emunerations to health care providers for switching patients from one product to another, and for other efforts to increase a product’s utilization do not qualify as protected price reductions, even if the parties label the remuneration as ‘rebates’ or ‘discounts.’” 

The utility of the statutory discount exemption and the regulatory safe harbor for discounts is currently under attack in Judge Zobel’s court.  Similar to Omnicare, CCS has filed a motion requesting that the Court reconsider Judge Zobel’s Order or alternatively certify the matter for immediate review by the First Circuit. CCS has also joined Omnicare’s request for certification for interlocutory appeal on the discount issues.  Interest in “proper, consistent, and fair enforcement” led the Pharmaceutical Research and Manufacturers of America (PhRMA) to file an amicus brief on September 23, 2016 in support of CCS’ motion.  In addition to objecting to Judge Zobel’s perplexing interpretation of the disclosure elements of the discount exemption and safe harbor, PhRMA raised significant constitutional concerns about the government’s attempt to “regulate through a statement of interest in litigation.” PhRMA explained that “[d]ue process considerations prohibit the Government from adding new terms to the safe harbor – or from carving out certain types of discounts arrangements from the safe harbor – in a litigation brief when the defendants did not have advance notice of the Government’s position and an opportunity to respond.”  We will continue to monitor the Omnicare and Coloplast cases and to keep our readers informed about this litigation and its implications on the future use of the discount exemption and safe harbor.