The Office of Inspector General (“OIG”) predicted in a 2003 Fraud Alert that it would issue favorable advisory opinions in the area of inducements to beneficiaries “only in situations involving conduct that is very close to an existing statutory and regulatory exception.” Nonetheless, on August 21, 2007, it issued an unexpectedly favorable opinion on an arrangement not even close to an existing exception.

The request for an advisory opinion was submitted by a company that operates membership warehouse clubs (“Warehouses”) that sell a wide range of merchandise. Many of these Warehouses have regional pharmacies and offer certain professional services, such as audiology and optometry. Individuals and businesses pay $50 each year to be able to purchase goods and services at the Warehouses. “Premium Members,” who pay an annual fee of $100, receive additional benefits.

One of the additional benefits is an annual reward of a percentage (specified as “less than 5%”) of the amount the Premium Member spent on purchases of most items. The maximum reward a Premium Member could receive is $500 per year. Rewards are calculated only on amounts paid by the Premium Member, not on amounts received from third parties, such as Medicare Part D.

The reward is provided in the form of a certificate mailed to the Premium Member with the annual membership renewal notice. Thus, receipt of the reward could be significantly delayed beyond payment of a qualifying expenditure. The reward certificate may be used for the purchase of all merchandise at the Warehouses except for a few excluded items. If the reward certificate is used to purchase an item costing less than the dollar value on the certificate, the Premium Member receives cash for the remaining dollar value.

The OIG concluded that the Arrangement presents a minimal risk of abuse, and therefore it would not seek to impose administrative sanctions. The OIG analyzed the Arrangement under both the Anti-Kickback Statute and the HIPAA-created civil monetary penalty (“CMP”) for providing an inducement to a beneficiary of a federal health care program in order to influence the selection of a particular provider of a covered item.

With respect to the CMP portion of the analysis, the OIG first asked whether the reward of a percentage of an amount that the Premium Member spent in a year on purchases, including the Part D Pharmaceutical Cost-Sharing Amount, constitutes “remuneration” to the Premium Member. It concluded that the reward, which potentially could range from $10 to $500, was “remuneration.”

The OIG next considered whether the Arrangement is likely to influence Premium Members to select the Warehouses as their providers of reimbursable services. The OIG concluded that that was unlikely because there was no direct tie between the annual reward and the purchase of covered prescription drugs. The annual reward does not depend on the purchase of federally payable items, and the reward formula does not vary based on the types of products purchased. The availability of the reward is not jeopardized by a Premium Member’s decision to obtain covered products elsewhere. The program’s “application to Medicare payable products appears incidental.”

The OIG also looked for indicia that the annual reward indirectly influences Premium Members to purchase reimbursable items at the Warehouses. It concluded that the reward is unlikely to drive beneficiaries’ business to the Warehouses because the availability of covered products at the Warehouses presents a relatively small opportunity for Premium Members to accrue the annual reward.

Finally, the fact that the reward is distributed once a year, two months after the end of the year, mitigates the influence that an instant discount at the time of sale could have on Premium Members’ decisions to choose the Warehouses as their provider of federally payable items or services.

The second half of the analysis dealt with the Anti-Kickback Statute. The OIG concluded that the Arrangement poses a minimal risk of abuse. It cited the following:

(1) The arrangement presents a low risk of steering beneficiaries to the Warehouses to purchase reimbursable items, because the beneficiaries need not buy any prescription drugs, Premium Members may obtain drugs elsewhere, and Premium Members were not obligated to use the reward for covered products.

(2) The Arrangement appears unlikely to encourage overutilization, because the relatively minimal, indirect annual discount on the beneficiary’s Cost-Sharing Amount did not discourage “prudent purchasing.” In addition, beneficiaries still have to pay 100% of the Cost-Sharing Amount up front and would not receive the discount until the next calendar year. Because the annual reward is based on overall purchases of a wide variety of goods, and is capped at $500 per year, the likelihood that the reward will increase costs is further reduced. In addition, the Arrangement does not suggest any inducement to prescribers.

(3) Because the Arrangement has been in place since 2000, before the existence of Medicare Part D, and the Arrangement does not target federal health care program beneficiaries, the Warehouses are not operating the Arrangement to induce beneficiaries to self-refer their federal program business to them.

(4) The annual reward more closely resembles an acrossthe- board price reduction than a kickback scheme, which presents an inducement that is “so diffuse” that it does not appear intended to encourage a particular buyer to purchase or order a particular covered good or service.

The OIG is correct on the Anti-Kickback analysis. The receipt of a Reward is so indirectly related to the purchase of federally covered items that it would be hard to conclude that the Warehouse was “knowingly and willfully” paying remuneration to any person to induce that person to purchase covered items.

The HIPAA prohibition on payment of inducements to beneficiaries, however, is not as dependent upon the intent element. HIPAA allows CMPs to be assessed for offering or transferring remuneration to any beneficiary that the offeror or transferor “knows or should know is likely to influence such individual to order or receive” covered items from a particular provider. The HIPAA regulation states that no proof of specific intent to defraud is required to determine whether a person “knows” or “should know” any fact or likelihood. Nevertheless, the OIG concluded that it was not probable that the Arrangement would influence beneficiaries to select the Warehouses as their provider of pharmaceuticals.

This Advisory Opinion reveals that the OIG is taking a refreshingly practical approach to the inducement prohibition. Instead of focusing solely on the literal language of the statute, it is considering the real “evil” behind the ban – the risk that federally reimbursed goods or services might be overly prescribed because of improper inducements. Surely no patient would urge a physician to write a prescription that could be filled at a Warehouse in order to obtain a higher reward from the Premium Member program. Hopefully more such positive opinions will be forthcoming.