In a ruling that could, if adopted by other courts, expose all pharmaceutical discount and rebate arrangements to anti-kickback liability, on August 23, 2016, Judge Rya Zobel in the United States District Court for the District of Massachusetts denied Omnicare, Inc.’s motion for summary judgment in United States ex rel. Banigan v. Organon USA, Inc., et al. (Case 1:07-cv-12153-RWZ). The ruling in this qui tam action is at odds with long-standing Department of Health and Human Services Office of Inspector General (OIG) interpretation of the Discount Safe Harbor requirements and seemingly would make virtually all discount or rebate arrangements a per se violation of the Anti-Kickback Statute (AKS). Of note, while the case was brought on behalf of the United States and 28 states, all have declined to intervene in the case.

In their complaint, the relators allege that Omnicare, a long-term care pharmacy provider, violated the AKS by soliciting and/or receiving kickbacks from drug manufacturer Organon for prescriptions of their drug, Remeron, and, in turn, violated the False Claims Act (FCA) by submitting claims for Remeron tainted by those kickbacks to Medicaid for reimbursement. According to the relators, Omnicare purchased Remeron through membership in several group purchasing organizations (GPOs) and also had a direct purchase agreement with Organon; Omnicare allegedly received volume-based discounts on such purchases pursuant to those agreements.

In a motion for summary judgment, Omnicare argued that the discounts it received on Remeron purchases pursuant to the GPO and direct purchase agreements were safe harbored under both the AKS statutory discount exemption and the regulatory safe harbor for discounts. Pursuant to the statutory exemption, the AKS does 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.” 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.”

While Omnicare (and, in its ruling, the Court) address the statutory exemption and regulatory discount safe harbor as two distinct exceptions to the AKS, OIG has long interpreted the statutory discount exemption as being no more expansive in its ability to safe harbor discount or rebate arrangements than the Regulatory Discount Safe Harbor in the preamble to the 1991 final rule originally establishing the regulatory safe harbor. See 56 Fed. Reg. 35,952, 35,979 (Jul. 29, 1991) and 64 Fed. Reg. 63,504, 63,528 (Nov. 19, 1999).

In denying Omnicare’s motion for summary judgment, Judge Zobel found that Omnicare could not satisfy the second element of either the statutory discount 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 pharmacies are reimbursed by state Medicaid programs according to fee schedules that rely on pricing benchmarks like Average Wholesale Price (AWP), Wholesale Acquisition Cost (WAC), the National Average Drug Acquisition Cost (NADAC) or other actual acquisition cost-based surveys and that they do not submit costs in their claims to state Medicaid programs for reimbursement. It also ignores the fact that the OIG removed the requirement that charge-based providers disclose the amount of discounts on claims submitted to federal programs and that the OIG interprets the statutory discount exemption and regulatory safe harbor as one and the same.

In addition, 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.” In other words, Omnicare could not satisfy the second element of the regulatory safe harbor because it did not disclose the discounts to the Department of Health and Human Services or a state Medicaid agency, despite the fact that Omnicare never received any such request from either agency; an interpretation that essentially strikes the words “upon request” out of the second element of the regulatory safe harbor.

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.

To say the least, Judge Zobel’s interpretation of the statutory discount exemption and regulatory discount safe harbor to the AKS is certainly curious. As noted above, it is inconsistent with the OIG’s long-standing interpretations of the safe harbor. If Judge Zobel’s interpretation was to gain traction, many common discount and rebate arrangements that rely on the protection of the discount safe harbor could suddenly be exposed to AKS liability. Since discounts and rebates are by design intended to induce the purchase of products or services, if not safe harbored, the intent requirement of the AKS would be satisfied and such arrangements would essentially be per se violations of the AKS. This is at odds with Congress’s intent in creating the statutory discount exemption to the AKS in 1977. In the House Report on the bill supporting the 1977 amendments to the AKS that created the statutory discount exemption, it was stated that discounts are a “good business practice which result in savings to Medicare and Medicaid program costs.”