For the healthcare industry, seeking to incentivize restocking of elective surgery supplies may lead to civil and criminal risk
Government-mandated business shutdowns in response to the coronavirus disease (COVID-19) pandemic have had many impacts on the healthcare industry. Among those impacts: states continue to enact prohibitions on all elective surgeries as part of their efforts to protect healthcare system capacity during local outbreaks. This has caused significant financial strain on all industry elements that rely on elective procedures for revenue. One specific outcome of those prohibitions is that numerous hospitals, physicians, offices and practices have unused, costly inventory, including pharmaceuticals, single-use medical devices and other surgical products that carry expiration dates.
In normal times, these products would be purchased based on typical, predictable patterns and would be used before they expired. But the unprecedented shutdown has resulted in many expired products remaining in providers’, distributors’ and physicians’ inventories, leading to significant financial losses. Where the products already have been paid for, they cannot be used and thus the cost of purchase cannot be recovered. Where payment was deferred, or was premised upon a rolling inventory, the manufacturer may have incurred distribution costs with no legitimate prospect for payment absent credits being issued or some action taken to extend expiration dates.
As a result, many businesses that manufacture and sell such products have created rebate, discount, replacement and other incentive programs to help reduce the financial hardship for their customers to obtain new, unexpired products as elective procedures resume. However, these discounts and incentive programs, while helpful to alleviate financial burdens within certain segments of the healthcare industry, may have unforeseen consequences under certain federal anti-bribery laws, including the federal Anti-Kickback Statute and the Civil Monetary Penalties Law. These consequences can carry both civil and criminal risk.
The Anti-Kickback Statute
The federal Anti-Kickback Statute (AKS) prohibits anyone from knowingly and willfully soliciting, offering, receiving or paying any form of remuneration to induce referrals for any items or services for which payment may be made by any federal healthcare program unless the transaction is structured to fit within a regulatory exception. See 42 U.S.C. § 1320a-7b(b). Certain courts have interpreted the law to cover any arrangement where “one purpose” of the remuneration is to induce referrals for or receipt of federal program business.
The penalties for violating the AKS are draconian. A violation can result in up to ten years in prison, a $100,000 criminal penalty, a $100,000 or greater civil penalty, treble damages and exclusion from participating in the Medicare or Medicaid programs. 42 U.S.C. §§ 1320a-7 & 1320a-7b(b)(2)(B); 42 C.F.R. §§ 1003.300 & 1003.310; 45 C.F.R. § 102.3. An AKS violation is also a violation of the federal False Claims Act. 42 U.S.C. § 1320a-7b(g); 31 U.S.C. § 3729. This potentially exposes violators to mandatory self-reports and repayments, additional civil penalties, treble damages and private qui tam lawsuits. See 31 U.S.C. §§ 3729 & 3730; 42 U.S.C. §§ 1320a-7a & 1320a-7k(d); 28 C.F.R. §§ 85.5 & 1003.200(a) & (b)(k). In addition to these federal statutes, state licensing laws often have their own anti-kickback prohibitions that could be implicated under the discount and incentive programs discussed above. Companies are encouraged to become aware of any state-specific anti-kickback laws in states where they sell their products.
The Civil Monetary Penalties Law
The federal Civil Monetary Penalties Law (CMPL) prohibits offering or providing inducements to a federal healthcare beneficiary that could influence the beneficiary to order or receive items or services payable by federal healthcare programs from a particular provider, practitioner or supplier. 42 U.S.C. § 1320a-7a(a)(5); 42 C.F.R. § 1003.100(a). Under the statute, “remuneration” is defined to include the “transfers of items or services for free or for other than fair market value.” 42 U.S.C. § 1320a-7a(i)(6). The statute also defines “inducement” as any offer of valuable goods and services as part of a marketing or promotional activity. This may apply regardless of whether the “promotion” is active and intentional, or not. Even word of mouth promotion amongst practitioners or patients potentially can satisfy the definition. In addition, the Office of Inspector General (OIG) considers the provision of free goods or services to existing customers who have an ongoing relationship with a provider as likely to influence those customers’ future purchases.
OIG commentary regarding exceptions to the AKS and CMPL
The OIG repeatedly has confirmed that offering free or discounted items or services to government program patients potentially implicates the AKS and/or CMPL unless the program is structured to fit within a statutory or regulatory exception, or unless certain safeguards are put in place to minimize program fraud and abuse. See, eg, OIG Special Advisory Bulletin, Offering Gifts and Other Inducements to Beneficiaries (8/02). One of the most recognized safe harbors to the AKS is “a discount or other reduction in price obtained by a provider of services or other entity under [Medicare or Medicaid] if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity.” See 42 C.F.R. 1001.952(h).
Pursuant to 42 C.F.R. 1001.952(h), a discount does not include (i) cash payment or cash equivalents (other than certain rebates); (ii) 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 healthcare program using the same methodology and the reduced charge is fully disclosed to the federal health care program and accurately reflected where appropriate, and as appropriate, to the reimbursement methodology; (iii) a reduction in price applicable to one payer but not to Medicare, Medicaid or other Federal healthcare programs; (iv) a routine reduction or waiver of any coinsurance or deductible amount owed by a program beneficiary; (v) warranties; (vi) services provided in accordance with a personal or management services contract; or (vii) other remuneration that is not a reduction in price for items or services.
The AKS would apply if “one purpose” of the free item or service is to induce referrals for such items or services. So long as there is no improper intent or influence, then arguably there is no violation. The OIG gave the following example in the CMPL context:
[the CMPL] only prohibits incentives that are likely to influence a beneficiary's choice of a provider for particular services. Such influence is only possible if the beneficiary knows about the incentive before making his or her choice. Thus, incentives that are not advertised or otherwise disclosed to a beneficiary before the beneficiary selects a provider for services do not come within the statutory proscription, and therefore need not qualify under any of the [CMPL] exceptions…. For example, discounted CPR courses or home visits offered to women who have delivered a child at a particular hospital are not prohibited … if the availability of the discounted CPR course or home visits is not made known to the mother until after she enters the hospital to deliver her child.
65 Fed. Reg. 24409. As noted above, according to the OIG, “the provision of free goods or services to existing customers who have an ongoing relationship with a provider [are] likely to influence those customers' future purchases.” Accordingly, such items could potentially implicate both the AKS and the CMPL. OIG, Offering Gifts and Other Inducements to Beneficiaries. Implication is not determinative. However, failure to see the potential implications and to avoid “stepping over the line” may result in potentially hefty consequences.
Practical considerations moving forward
Against this background, we strongly urge providers, physicians, pharmaceutical companies and medical device companies to be prudent as they make business choices regarding offering rebates and replacement inventory to their customers for expired products. Such programs may be considered a reasonable business decision with great benefits in terms of marketing, customer loyalty and helping physician practices and healthcare providers survive fiscally through the pandemic and its aftermath. But companies considering and designing such incentive programs in response to COVID-19 are encouraged to be mindful of potentially applicable laws in this arena so as not to violate federal (or state) law. Thus, unless and until the federal government offers specific guidance that relaxes these restrictions, some prudence is likely to be the order of the day. Guidance at the federal level may take time. Companies may have to suffer significant regulatory fines or courtroom consequences to drive legislative relief in response. To avoid becoming a target for agency oversight or a prosecutorial inquiry, companies that are looking to address electives inventory stockpile issues are urged to oversee the key elements of any proposed plan and to assess any conflicts with potential AKS, CMPL or other liability in mind.
Still, these incentives programs may be beneficial and could be structured to avoid or minimize liability. In this unprecedented climate, businesses that wish to adopt such programs are therefore encouraged to consider appropriate precautions, including but not limited to specific record keeping documenting the intent of any program the company initiates, in an effort to help mitigate risk and to avoid future liability.
Companies are also urged to consider tailoring the incentives program to fit the specific exceptions outlined above. Businesses are encouraged to work closely with their clients to document that the intent and purpose of the program is not for marketing, but rather for supplying safe inventory in response to the upheaval of COVID-19. Written documentation among the participants that clearly describes the purpose of the program may serve as valuable information down the line. Diligent record keeping and written documentation may also demonstrate the company’s contemporaneous intention to comply with the statutes and regulations, which potentially could serve as evidence of intent in any future action.
A cavalier approach to implementing incentive, rebate, replacement or discounting programs to customers carries a risk of significant administrative, civil and/or criminal penalties. That said, careful measures and mindfulness regarding what is and is not prohibited may help mitigate legal risk while allowing for business flexibility.
If you have any questions regarding these issues, please contact the author or your DLA Piper relationship attorney.
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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.
 See 42 U.S.C. § 1320a-7b(b).
 United States v. Kats, 871 F.2d 105 (9th Cir. 1989).
 See OIG Special Advisory Bulletin, Offering Gifts and Other Inducements to Beneficiaries (8/02), available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/SABGiftsandInducements.pdf . Violations of the CMPL may result in administrative penalties ranging from $5,000 to $100,000 or more per violation depending on the conduct involved. (42 U.S.C. § 1320a-7a; 42 C.F.R. part 1003; 45 C.F.R. § 102.3).
 Kats, 871 F.2d 105.