Moving the HME Industry Forward


Discount Safe Harbor: Substance Over Form

September 7, 2015

AMARILLO, TX – It is a common practice for manufacturers to offer volume-based discounts to DME suppliers to encourage the suppliers to purchase increasing quantities of products. When manufacturers and DME suppliers enter into discount arrangements, it is important that they do not “cross the line” over into kickback territory. The way to avoid “crossing the line” is for the arrangement to comply with the (i) discount exception to the federal Anti-Kickback Statute and (ii) discount safe harbor to the federal Anti-Kickback Statute.

Anti-Kickback Statute
The federal Anti-Kickback Statute makes it a felony to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals or items or services reimbursable by a federal health care program.  Many courts have adopted the “one-purpose” test:  if one purpose of a payment is to induce referrals, then the Anti-Kickback Statute is violated, regardless of whether the payment is fair market value for otherwise legitimate services rendered.

Discount Exception Under The Anti-Kickback Statute
The federal Anti-Kickback Statute contains an exception for discounts that may be applicable to an arrangement between a DME supplier and a manufacturer. The exception protects “a discount or other reduction in price obtained by a provider of services or other entity under a Federal health care program 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.” The requirements for immunity for discount arrangements are further enumerated in the federal safe harbor regulations.

Discount Safe Harbor To The Anti-Kickback Statute
Due to the broad language of the federal Anti-Kickback Statute, the Office of Inspector General (“OIG”) has adopted “safe harbor” regulations to protect arrangements that may otherwise violate the statute. However, safe harbor protection is only afforded to those arrangements that precisely meet all of the conditions set forth in the safe harbor. Arrangements that do not fit within safe harbors are evaluated for fraud and abuse risk on a case-by-case basis based on the totality of the circumstances.

The discount safe harbor exempts from the definition of remuneration those discounts on items or services for which the federal government may pay, either fully or in part, under Medicare, Medicaid, or another federal health care program. “Discount,” as used in the regulations, refers to either (1) a reduction in the amount a buyer is charged for an item or service based on an arms-length transaction or (2) a rebate, which is an amount that is described in writing at the time of the purchase but is paid at a later date. The safe harbor specifically excludes the following from the definition of a discount:

• Cash payments or cash equivalents (except rebate checks);
• Supplying one good or service without charge or at a reduced charge to induce the purchase of a different good or service, unless the goods and services are reimbursed by the same Federal Programs using the same methodology and the reduced charge is fully and appropriately disclosed to the Federal Programs;
• Other remuneration, in cash or in kind not explicitly described by the safe harbor.

The safe harbor establishes distinct disclosure obligations for the different types of entities in a discount arrangement:  sellers (e.g. manufacturers), buyers (e.g. providers that purchase goods or services), and offerors (e.g. parties who serve as middlemen and arrange for discounts between buyers and sellers).

The safe harbor’s obligations for buyers are further defined depending on whether the entity is (1) acting under a risk contract; (2) reports costs on a cost report; or (3) submits a claim or a request for payment is submitted for the discounted item or service and payment may be made, in whole or in part, under Medicare, Medicaid, or other federal health care programs.

A DME supplier must comply with specific standards in order to invoke the protection of the discount safe harbor. First, the “discount must be made at the time of the sale of the good or service or the terms of the rebate must be fixed and disclosed in writing to the buyer at the time of the initial sale of the good or service.” Second, the buyer must provide, “upon request by the Secretary or a State agency” an “invoice, coupon or statement” from the seller that “fully and accurately” reports such discount.

Court Decisions
United States ex rel. Lisitza et al. v. Johnson & Johnson et al.
In late 2013, Johnson & Johnson, a New Jersey-based pharmaceutical manufacturer, entered into a civil settlement agreement with the Department of Justice in order to settle allegations of illegal kickbacks that were raised by relators under the False Claims Act. In particular, the relators alleged that Johnson & Johnson initiated a “kickbacks-for-switches” scheme wherein the manufacturer induced long-term care pharmacies to promote and switch patients from non-Johnson & Johnson drug products approved by the patient’s physician to Johnson & Johnson brand pharmaceuticals.

The relators further alleged that Johnson & Johnson and Omnicare, Inc., a supplier of pharmaceutical drugs to nursing homes, entered into written agreements under which Omnicare received rebates on the purchase price of select Johnson & Johnson drugs as long as the pharmacy’s purchases of selected drug products met a pre-determined market share amount as determined by a comparison to Omnicare’s purchases of similar drugs from the manufacturer’s competitors (i.e. a market share rebate agreement). In addition, Omnicare was required to successfully implement programs designed to shift market share in favor of Johnson & Johnson products; such programs included disease management initiatives, written correspondence to providers prescribing or dispensing medications, educating nursing home staff regarding Johnson & Johnson products, conducting clinical intervention programs through which Omnicare’s consulting pharmacists recommend specific products when appropriate, and placing Johnson & Johnson products on a selected formulary position.

Although Johnson & Johnson argued that payments to Omnicare fell within the safe harbor provision of the statutory discount exception of the federal Anti-Kickback Statute, the court disagreed.  In particular, the court reasoned that “[w]hile the raw amounts of the rebates may have been disclosed, the terms and conditions of their payment were not.” In particular, the court noted a lack of disclosure regarding the rebate qualification requirement of market share thresholds and successful implementation of required programs.

The government alleged that Omnicare, in response to the remuneration received from the manufacturer, initiated and participated in various “intervention” programs that serve to promote several Johnson & Johnson drug products.  For example, the pharmacy provided to its consulting pharmacists recommended oral and written statements to be used in encouraging physicians to prescribe Johnson & Johnson drugs. In addition, Omnicare created fax, mail, and telephone campaigns directed at physicians that encouraged the switching of patients to the manufacturer’s drugs. Lastly, Omnicare promoted the use of Physician Authorization Letters that, when signed by a physician, allowed a pharmacist to substitute a prescribed drug.

Thus, the government maintained that Johnson & Johnson’s payments of market share rebates, data-purchase agreements, grants, and educational funding constituted kickbacks to Omnicare were intended to induce the pharmacy and its pharmacists to promote the use of Johnson & Johnson drugs in its client nursing homes. As a result, the claims presented to federal health care programs by the pharmacy for those Johnson & Johnson drugs were allegedly false and fraudulent.

United States ex rel. Banigan et al. v. Organon USA Inc., et al.
Banigan is a federal qui tam case also involving discounts and other remuneration between a pharmaceutical manufacturer and long-term care pharmacies. Here, the relators allege that Organon, a pharmaceutical manufacturer of antidepressants, violated the federal Anti-Kickback Statute by engaging in a scheme to increase its product’s market share by switching as many long-term care patient prescriptions as possible from the competitors’ antidepressants to its brand. In particular, the relators stated that Organon offered illegal kickbacks to pharmacies in the form of both market share discounts pursuant to written purchasing agreements as well as other incentives, including research grants, sponsorship of annual meetings, data  purchase agreements, nominal-price transactions, and participation in corporate partnership programs.  Similar to Johnson & Johnson, Omnicare argued that the remuneration received did not constitute illegal kickbacks as all discounts and rebates were disclosed in accordance with the safe harbor provisions of the Anti-Kickback Statute.

Upon review, the court sided with the relators and found that the rebate or discount amounts were not properly disclosed as required by the federal safe harbor since the contracts did not disclose the complete terms and conditions of the rebate (i.e. that the payments either were made to induce or were in exchange for drug conversion and therapeutic interchange) and that the full terms and amounts of the discount were, instead, concealed in various collateral agreements entered into outside of the written contract. Furthermore, the court noted that “discounts,” as defined in the federal regulations, is an exhaustive definition and does not include collateral kickbacks or reductions in price that are not passed on to the health plan.

With regards to Omnicare’s affirmative actions in connection with the arrangement with Organon, the relators alleged that, similar to the pharmacy in Lisitza, Omnicare undertook certain actions to promote the use of the manufacturer’s products. Specifically, the allegations included Omnicare’s instructions to its pharmacy to convert to a specified Johnson & Johnson drug product as well as meetings between Omnicare and Organon concerning plans for or hopes to drive up market share.

The government further provided insight regarding its position on discounts that are linked to recommendations or purchases of certain products in its statement of interest in this case.  The United States distinguished ordinary price reductions from remuneration “for switching patients from one drug to another, and for other efforts to increase a drug’s utilization” by stating that the latter “do not qualify as protected price reductions simply because the payments are labeled as ‘rebates’ or ‘discounts’.” Rather, to determine the legality of an arrangement, the question should be “whether the reason for offering or accepting the ‘discount or other reduction in price’ was to induce referrals of or be reimbursed for federal health care business’.” Accordingly, the government argued that the arrangements in Banignon “were not mere price reductions because Organon allegedly condition the payments on Omnicare … not only purchasing its products, but also engaging in ‘therapeutic interchange programs’ or switching efforts to promote utilization of Organon’s drugs at the nursing facilities where Omnicare … filled prescription.  As such, the payments were not true price discounts, but rather were remuneration that Organon offered and paid to induce Omnicare … to recommend its products.” In its statement of interest, the government maintained that conversion requirements between a pharmacy and a manufacturer removed the arrangement from the scope of a rebate within the meaning of the safe harbor and placed the arrangement into illegal kickback considerations.

United States ex rel Herman et al. v. Coloplast A/S et al.
Herman in an ongoing federal qui tam case concerning alleged kickback arrangements between suppliers and manufacturers of ostomy and continence care products.  In particular, the relators alleged that, while the written supply agreements entered into by the suppliers with the manufacturers reflected the financial aspects of the arrangement, the parties also engaged in campaigns not reflected in the written contracts whereby the manufacturers utilized various forms of remuneration to induce supplier partners to initiate patients on or to convert their patients from a competitor’s brand of ostomy or continence care products to the manufacturers’ products. In their complaint, the relators specifically alleged that the manufacturers offered suppliers the following remuneration in order to induce the order or utilization of certain brand products:  

• Rebates and Discounts
• Free samples
• Cash payments in exchange for commitments to engage in campaigns
• Cash payments to cover co-payments for newly converted beneficiaries
• Cash payments in the form of paid commissions and bonuses to Supplier sales staff
• Free marketing services, including making calls to patients on campaign lists, providing staffing for call centers, and television conversion campaigns

Of particular concern for the government were the arrangements that involved the use of either hard or soft conversion campaigns. Hard campaigns involved either the supplier or the manufacturer initiating the supplier’s patients on the manufacturer’s products or converting such patients from their chosen product to the manufacturer’s products without giving such patients a choice.  For example, patients may be falsely informed that another manufacturer’s products is no longer carried or otherwise unavailable. Patients may even be sent converted brands instead of their usual brand without prior notice.  Soft campaigns, on the other hand, involve either the supplier or the manufacturer contacting the patient and persuading them to begin on, or convert to, a manufacturer’s product. Other campaigns involved upselling or cross-selling the manufacturer’s products.

As the case currently stands, litigation has been stayed until September 19, 2015, in order to allow the parties to resolve the claims without litigation. Several suppliers have been voluntarily dismissed from the suit, and at least one supplier has reached an agreement in principal with the government to settle all claims assert in the litigation against the entity.

The cases above reflect the government’s position, and at least one court’s agreement, that satisfaction of a safe harbor at face value will not indemnify a questionable arrangement.  In particular, in Banigan, the court stated:

Nor is it the case, as defense argues, that [under the statutory discount exception] any discount, ‘properly disclosed and appropriately reflected’, is exempt from criminal liability.  What makes the activity illegal is not the label that someone attaches to the form of the transaction, even if the form may give rise to the rebuttable inference of illegality. The reason behind the transaction and the requisite state of mind underlying the criminal act are more significant than form and label.” (citing United States v. Shaw, 106 F. Supp.2d 103, 115-19 (D. Mass. 2000).  

Thus, while the discounts and rebates included in an Agreement can, on their face, potentially qualify for the discount safe harbor, on condition that the financial terms of the Agreement are fixed and disclosed in the contract, and to the extent that the contract or the discount would be provided upon request to the Secretary, the OIG or the Department of Justice may still decline to protect the arrangement on the assertion that such discounts or rebates were used to induce the DME supplier to switch its patient customers to a particular brand product

As a conservative matter, to the extent that the DME supplier seeks a manufacturer’s discount or rebate program in order to take full advantage of its current active growth stage, we note that the OIG has previously approved the use of a tiered rebate structure based solely on volume.  The implementation of such a structure would allow for greater discounts or rebates as the volume of product purchases increases, as may be the case in a growth stage. We believe that such an arrangement, if not based on or take into account the conversion of patients, can be structured to comply with the discount safe harbor reporting and fixed terms requirements so as to pose a lower risk of violating the federal Anti-Kickback Statute.

Jeff Baird will be presenting the following webinar:
AAHomecare’s Educational Webinar
Joint Ventures and Other Arrangements with Referral Sources
Presented by:  Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Thursday, September 10, 2015
2:30-4:00 p.m. EASTERN TIME
In the real world one business can enter into an arrangement with another business without worrying about pesky government regulations.  Unfortunately, DME suppliers are not in the real world……they are in an alternative universe known as “health care world.”  Unlike auto parts suppliers and widget manufacturers, DME suppliers must be careful in entering into arrangements with other providers.  This is because of federal and state anti-fraud statutes and regulations.  For example, the Medicare anti-kickback statute makes it a crime for a person/entity to receive compensation for referring (or arranging for the referral of) Medicare/Medicaid patients to a health care provider.  All states have anti-kickback statutes that are similar to the federal statute.  The federal Stark physician self-referral statute prohibits a physician from referring Medicare/Medicaid patients to a provider in which the physician has a compensation or ownership interest.  These are but two examples of the many anti-fraud laws that are on the books.  This program will discuss the relevant state and federal anti-fraud statutes and regulations that govern the types of arrangements that a DME supplier can enter into with another provider, such as a physician, home health agency or pharmacy.  The program will discuss the types of arrangements that are clearly legal, the types of arrangements that fall within the proverbial “gray area,” and the types of arrangements that must be clearly avoided.

Register for “Joint Ventures and Other Arrangements with Referral Sources” on Thursday, September 10, 2015, 2:30-4:00 pm ET, with Jeffrey S. Baird, of Brown & Fortunato, PC. Contact Ika Sukh at if you experience any difficulties registering.
Member: $99.00        
Non-Member: $129.00

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or