DOJ Weighs in on Discount Safe Harbor

By Serra J. Schlanger & Alan M. Kirschenbaum –

We previously reported (here and here) on two opinions handed down by Judge Rya Zobel of the Federal District Court for the District of Massachusetts construing the discount safe harbor under the Federal health care program antikickback statute (AKS).  In both cases, Judge Zobel held that the buyer’s discount disclosure requirement under the safe harbor cannot be met unless the government requests the disclosure.  In other words, government action is a necessary condition of protection under the safe harbor, despite the fact that the government typically does not request such documentation.  There have been noteworthy developments in both of these cases.

In one of the cases, United States ex rel. Herman v. Coloplast Corp., et al. (Case 1:11-cv-12131-RWZ), the United States filed a Statement of Interest on October 6 that includes a footnote directly refuting Judge Zobel’s interpretation.  In footnote 2, the government states “if the Secretary or a State agency requests disclosure, the buyer must provide the requested information to retain protection under the safe harbor. If, however, the Secretary or a State agency has not requested disclosure, safe harbor protection remains available if all other requirements are met. . . .” (emphasis added).  The DOJ’s view is consistent with that expressed by PhRMA in its amicus brief, and is also consistent with the long standing position of the OIG.  One can only hope that the DOJ and PhRMA will succeed in enlightening the Court on the proper interpretation of the discount safe harbor’s disclosure requirement.

Less helpfully, the DOJ reiterated the position set forth in its previous Statement of Interest in this case that, “if a reduction in price is conditioned on more than a simple purchase, it is not a mere discount” and therefore is not eligible for protection under the discount safe harbor. According to the DOJ, “[n]othing in the AKS or HHS-OIG regulations suggests that a manufacturer and a distributor can hide a personal services contract within a discount, particularly a discount based on volume or market share.” 

We wonder how the DOJ’s interpretation applies to manufacturer formulary rebates that are ubiquitous in both commercial and Medicare Part D plans, under which manufacturer rebates are conditioned not simply on purchases but also on the payor providing certain services – i.e., maintaining a specified formulary status for the drug and enforcing the plan formulary. Under the DOJ’s restrictive view, these rebates presumably would not be eligible for protection under the discount safe harbor.  The DOJ’s interpretation might also exclude many value-based purchasing arrangements that are gaining momentum in the marketplace as cost-saving measures, such as performance-based rebates triggered by specified clinical outcomes, rather than simply purchases.  Indeed, CMS is proposing to initiate value based purchasing models under Medicare Part B.  It is uncertain whether the DOJ’s restrictive interpretation of the discount safe harbor could subject these arrangements to liability under the AKS. 

In the second case before Judge Zobel, United States ex rel. Banigan v. Organon USA, Inc., et al. (Case 1:07-cv-12153-RWZ), defendant Omnicare filed a reply brief on October 7 in further support of its motion for reconsideration or interlocutory appeal.  Omnicare is challenging Judge Zobel’s interpretation of the disclosure requirement of the discount safe harbor, discussed above.  Omnicare’s brief correctly notes that the ability of manufacturers and their customers to enter into discounts and rebate arrangements depends on the availability of the discount safe harbor.  Citing to our September 14 blog post, Omnicare adds that “the Court’s interpretation of the [discount safe harbor’s] second prong ‘eviscerates the safe harbor, rendering it virtually useless’ to charge-based providers.”  We will continue to closely follow the Organon and Coloplast cases in this blog.