On November 16, 2018, the U.S. Department of Health and Human Services Office of Inspector General (“OIG”) issued Advisory Opinion No. 18-14 regarding a proposed free drug program (“Proposed Arrangement”). Under the Proposed Arrangement, a pharmaceutical manufacturer (“Manufacturer”) will give free drug product (“Drug”) to hospitals for inpatient use to treat children diagnosed with a rare but serious medical condition (“Syndrome”). These patients may include children who are Federal health care program beneficiaries. Following discharge of a patient, Manufacturer would continue to provide the Drug for free to patients who are unable to secure insurance coverage, but will charge those patients that have insurance coverage for the Drug. The OIG concluded that the Proposed Arrangement could potentially generate prohibited remuneration under the Federal Anti-Kickback Statute, 42 U.S.C. §1320a-7b(b) (“AKS”) if the requisite intent to induce or reward referrals of Federal health care program business is present, and that the OIG could potentially impose civil monetary penalties and/or exclusion sanctions on Manufacturer for violations of the AKS.

While the OIG has previously approved arrangements in which a drug manufacturer provides free outpatient drugs to patients, it found that the Proposed Arrangement differs from those arrangements in a number of material ways. In analyzing the Proposed Arrangement, OIG examined not only the facts provided and certified by Manufacturer, but also, in an atypical fashion, considered “relevant and material facts that might bear on the risks of a particular arrangement”, which it determined could not be ignored “simply because [Manufacturer did] not present them to us in its advisory opinion request.” The additional facts included:

  • The Drug’s list price, which increased from approximately $40 a vial in 2001 to its current list price of $38,892, while the number of individuals diagnosed with the Syndrome remained essentially unchanged;
  • The Drug has been the standard of care for the Syndrome for many years, long before Manufacturer acquired it and substantially raised the price; and
  • An FTC fine of $100 million that Manufacturer agreed to pay in January 2017 for the acts of the company that owned the Drug prior to Manufacturer’s purchase in 2014. As part of the FTC settlement, Manufacturer agreed to grant a license to develop a competing drug for indications including the Syndrome, which will likely be sold at a much lower cost than the Drug.

Considering all of the relevant facts, the OIG concluded that the Proposed Arrangement would present more than a minimal risk of fraud and abuse under the AKS for the following reasons:

  • The Proposed Arrangement relieves hospitals of paying the high cost of the drug and encourages it to keep stock of the Drug to further ensure that it is prescribed and administered when a patient is diagnosed with the Syndrome;
  • Treatment of a patient diagnosed with the Syndrome is reimbursed by Federal health care programs as a bundled payment when used inpatient, and as such, provides a benefit to the hospital;
  • The Proposed Arrangement could function as a seeding arrangement since it is provided for free in an inpatient setting and the Drug cannot be abruptly stopped upon discharge, thereby nearly ensuring that Manufacturer will be paid for the cost of the Drug for patients who have insurance coverage, including Federal health care program beneficiaries;
  • Manufacturer will not offer a discounted price on the Drug for treatment of the Syndrome because of the effect it would have on the Drug’s Best Price;
  • The Proposed Arrangement could result in steering or unfair competition because hospitals may be influenced to encourage prescribers to use the Drug, either directly or through formulary decisions;
  • Providing the Drug to hospitals for free is not required to ensure that the Drug is stocked and immediately available for treatment in patients diagnosed with the Syndrome. Rather, a consignment arrangement whereby a hospital only pays for the Drug if it is used, and is not liable for the cost of the Drug if it is unused and expired, it not only permissible, but obfuscates Manufacturer’s justification that the Drug must be provided for free to ensure prompt use; and
  • Manufacturer’s certification that providing the Drug for free is not contingent on future purchases “rings hollow” because treatment of the Syndrome with the Drug cannot be discontinued without potential adverse consequences to a patient’s health. Therefore, receipt of the free vial would be contingent on future purchases of the Drug for patients with insurance coverage for the Drug, including Federal health care program beneficiaries.

While this Advisory Opinion is only applicable to Manufacturer,  the OIG provided some guidance in a footnote regarding how a similar arrangement may be permissible. In that note, the OIG stated that if Manufacturer, “had presented facts that included giving the Drug for free to patients and payors for the full course of treatment of the Syndrome, the outcome of this opinion could have been different, even if treatment began in the inpatient setting.”

Posted by Robert A. Paster