Discounts? For spring? Groundbreaking

The requestor is a medical technology manufacturer and distributor of various ophthalmic products, including conventional and premium intraocular lenses (IOLs), disposable surgical supply packs (phaco packs), and a web-based software platform used in cataract surgery planning.

Proposed arrangement

The opinion explains that the phaco packs are not specific to any particular IOL, thus the choice of IOL and phaco pack are independent of one another. IOLs and phaco packs are sold to ambulatory surgery centers (ASCs), which bill Medicare and other payors for the facility fee associated with the cataract surgery. This facility fee includes reimbursement for the conventional IOL (or part of the premium IOL) and phaco pack used in the surgery, as well as the ASC’s other costs such as staff and equipment. The phaco packs and IOLs are not separately billable to Medicare.

The software is designed to assist ophthalmic surgeons with organizing and managing the patient and surgical information and thus is sold by the requestor to ophthalmologic surgical practices. OIG stated that the software is not separately billable to federal healthcare programs, is agnostic to the type of electronic health record system and diagnostic equipment used by the practice and ASC, and produces outputs that can be used to select any manufacturer’s IOL. The requestor charges a set-up fee and monthly fees for the software subscription.

Under the proposed arrangement, the requestor would offer ASCs upfront volume-based discounts or post-sale rebates on phaco packs and conventional IOLs if a surgical practice with at least one common direct owner purchased a software subscription. Neither the ASC nor the practice would receive a discount on the software subscription. The requestor would enter into separate written agreements with the ASC and the practice, respectively.

OIG reasoning

OIG determined that the arrangement would not qualify for the discount safe harbor because the discount on the ASC’s purchases would be conditioned on a purchase by a different party (i.e., it would fail the bundled discount test because of multiple purchasers). OIG also stated that the requirement that the practice purchase the software for the ASC to obtain the discounts on the products the ASC purchased would result in a requirement to perform a service to obtain the discount, which would also take the arrangement outside of the safe harbor’s discount definition.

Of course, meeting the discount safe harbor “does not end the analysis,” as OIG said. The facts and circumstances led OIG to conclude that the arrangement’s risks would be sufficiently low to issue a favorable opinion. OIG’s reasons were as follows:

• The risk of increased costs to federal healthcare programs or overutilization is low because of the reimbursement system’s structure. Cataract surgery is reimbursed through a fixed professional fee and facility fee structure. The products and the software are not separately reimbursable, and the software is not specifically contemplated in either the professional or the facility fee. Thus, program reimbursement amounts would not change based on the price paid for the products or, for that matter, the software.
• The risk of interference with clinical decision-making is low. The discounted products, the software, and the IOLs and phaco packs are not functionally tied to one another. The requestor certified to OIG that the software is manufacturer-agnostic, compatible with competitors’ diagnostic equipment and any brand of electronic health record system, and not designed to direct clinical decision-making or promote particular products. While the factual summary noted that the requestor certified that the software “does not include any marketing or any clinical decision support that would direct a provider to particular products,” OIG did not discuss that fact in its analysis. This suggests that it was not material to OIG’s conclusion and that software with those features may be eligible to be provided under a similar arrangement. OIG acknowledged that the surgeon owners of the practice may receive an indirect benefit from lower ASC costs due to the discount but said that costs are just one factor in a surgeon’s decision about what products to use. Because the software is an additional expense for the practice, OIG found that it would not act as a financial incentive that would distort clinical decision-making.
• The risk of steering or unfair competition is not “inappropriately high.” OIG assumed that practices and ASCs would behave as rational economic actors and make purchasing decisions based on various factors, including price, quality, and convenience. OIG also noted that the party that paid the full price (the practice) would be the referral source to the party that obtained the discount (the ASC). OIG specifically noted that its conclusion could have been different if the situation were reversed and the practice obtained the discount if the ASC purchased the full-priced product.

Analysis

OIG’s flexible and practical approach to analyzing a non-safe-harbored discount is notable for a couple of reasons.

First, permitting one buyer’s discount to be contingent on another buyer’s purchasing decision where the buyers have common ownership helpfully reflects the reality of the healthcare market today. For example, many physician practices own (or have ownership interests in) other entities, such as ASCs, in addition to many other complex healthcare organizations. OIG focused not on the identity of the buyer, but rather on whether the discount structure would impact federal healthcare program reimbursement, how dependent the relevant products were on one another, and whether the party that benefited from the discount was the referral source to the other party.

This last point is interesting to contemplate in the context of common ownership. Suppose the situation were reversed and the ASC (referral recipient) paid full price for the phaco packs and IOLs in exchange for the practice (referral source) obtaining a discount on the software. Because the physicians own the ASC, there is an existing and natural (and potentially safe-harbored) incentive to refer cases to the ASC. Does the ASC securing the practice’s software discount really tip the scale to create an inappropriately high risk of patient steering, as OIG seemed to imply it might? It would seem doubtful. In particular, the reimbursement safeguards OIG discussed would still be in place; the professional and facility fees would remain the same. Presumably, the ASC and practice would behave as rational economic actors in making their purchasing decisions. Higher ASC expenses would have a similar economic impact on the common owner as higher practice expenses.

Second, OIG continued the discussion about how services fit into the discount analysis from AO 25-11. Here, the service (the ASC securing the practice’s purchase of the software) fits into the apparent distinction OIG made in AO 25-11 between discount terms that may result in increased purchases and terms that require the buyer to take certain actions (securing the practice’s agreement to purchase the software).

Finally, we note that OIG repeated its statement from AO 25-11 that the discount safe harbor “interprets and expands upon” the discount statutory exception. As discussed in our previous client alert, OIG has made conflicting statements about this issue in the past, and courts have found that the statutory exception and regulatory safe harbor are separate. We anticipate that OIG likely will continue to take this position in future matters that could lead to other courts examining the issue.

Conclusion

OIG articulated a flexible and practical approach to analyzing non-safe-harbored discounts involving two different purchasers. The facts and circumstances are important to, and can change, the risk analysis. Entities should consider vetting ownership overlap, product linkage, and the relevant reimbursement structure when assessing similar bundled discounts and exploring whether they are fully utilizing the permitted flexibilities.

The McDermott difference

McDermott Will & Schulte has extensive experience counseling clients with respect to discount and rebate arrangements, as well as helping clients navigate enforcement actions related to discounting and AKS allegations. Please contact one of the authors or your regular McDermott lawyer for more information.