Massachusetts District Court Guts Discount Safe Harbor

By Serra J. Schlanger & Alan M. Kirschenbaum –

For 25 years, drug and device manufacturers and their customers have relied on the discount safe harbor under the Federal health care program antikickback statute (“AKS”) to protect procompetitive discount arrangements that save money for purchasers, patients, and payors, including government programs like Medicare and Medicaid. Unfortunately, a recent opinion from the Federal District Court for the District of Massachusetts eviscerates the safe harbor, rendering it virtually useless – at least in that jurisdiction.

On August 23, 2016, Judge Rya Zobel denied Omnicare, Inc.’s motion for summary judgment in the ongoing qui tam case, United States ex rel. Banigan v. Organon USA, Inc., et al. (Case 1:07-cv-12153-RWZ).  In their complaint, filed on September 13, 2007, the relators allege that Omnicare, a long-term care pharmacy chain, violated the Federal False Claims Act by soliciting and/or receiving kickbacks from drug manufacturer Organon for Remeron prescriptions and by submitting kickback tainted claims to Medicaid.  According to the relators, Omnicare purchased Remeron through membership in several group purchasing organizations (“GPOs”).  Organon offered various GPOs market share rebates on Remeron in exchange for the GPOs promoting the potential benefits of the agreement to their member pharmacies in order to increase Remeron’s market share.  The relators also allege that Omnicare entered into a direct purchasing agreement with Organon that followed the same pattern: the pharmacy accepted a volume-based discount in exchange for a promise to promote the agreement’s potential financial benefits to its clients.  Although the United States and 28 states declined to intervene in the case, the litigation is continuing towards trial.

In a motion for summary judgment, Omnicare argued, among other things, that the discounts were protected by the AKS’ statutory discount exemption and the regulatory safe harbor for discounts promulgated by the Office of the Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”). Pursuant to the statutory exemption, the AKS’ prohibition against unlawful remuneration shall not apply to “a discount or other reduction in price . . . if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a Federal health care program.”  42 U.S.C. § 1320a-7b(b)(3()A).  The regulatory safe harbor protects discounts received by charge-based providers if the discounts are “made at the time of the sale,” are “fixed and disclosed in writing . . . at the time of the initial sale,” and if the provider furnishes documentation of both the discount and the provider’s awareness of its obligation to report the discount “upon request by the Secretary or a State agency”.  42 C.F.R. § 1001.952(h)(1)(iii).

Judge Zobel found that Omnicare was able to satisfy the first requirement of both the statutory exemption and the regulatory safe harbor because the GPO and direct purchase contracts contained and disclosed all of the terms of the agreements between Omnicare and Organon. However, Judge Zobel determined that Omnicare could not satisfy the second element of either the statutory exemption or the regulatory safe harbor.  With regards to the statutory exemption, Judge Zobel stated “Omnicare has offered not an iota of evidence that the discounts were reflected at all, much less ‘appropriately,’ in its charges to Medicaid.”  Judge Zobel’s conclusion ignores the fact that there is no established mechanism for charge-based providers, including long-term care pharmacies, to identify their costs or the discounts they receive in the claims they submit to Medicaid for pharmaceuticals.  The OIG long ago removed a requirement that charge-based providers disclose the amount of discounts on claims submitted to Federal programs.  64 Fed. Reg. 63518, 63529 (Nov. 19, 1999).

Even more puzzling and of more concern, Judge Zobel found that Omnicare could not satisfy the second element of the regulatory safe harbor because Omnicare had not “made the relevant disclosures pursuant to a governmental investigation, as . . . no such investigation took place during the relevant time period.” Although Omnicare testified that the company would have provided the requisite information had a governmental agency requested it, Judge Zobel concluded that “government action [is] a necessary condition” for the regulatory safe harbor.

Judge Zobel’s interpretation is inconsistent with the OIG’s intent in establishing this disclosure requirement. In the 1991 Final Rule setting forth the regulatory safe harbor for discounts, the OIG stated that “if the Secretary or a State Medicaid agency requests information, the buyer must provide the appropriate invoices from the seller.” 56 Fed. Reg. 35,952, 35,979 (July 29, 1991) (emphasis added).  The OIG does not suggest that the government must request information in order for the safe harbor to apply.

Judge Zobel’s Opinion illogically concludes that buyers receiving discounts must meet a condition that is out of their control in order to qualify for protection under the regulatory safe harbor: they must first be asked by the government for discount information, and then they must provide the information.  Under Judge Zobel’s interpretation, the safe harbor is of negligible utility.  Buyers do not have control over whether HHS or state Medicaid agencies may initiate an investigation or other request for documentation that Judge Zobel indicates is a “necessary condition” of the safe harbor, and an infinitesimal proportion of all buyers receive such requests.  Based on the OIG’s 1991 explanation, the regulation clearly was intended to require buyers to provide discount documentation only if it is requested by the government.

Omnicare 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.  We are hoping for a more reasoned decision upon reconsideration or appeal.  We will keep our readers informed about this litigation.