Drug and Device Makers Suggest Anti-Kickback Safe Harbor Clarifications to Encourage Value-Based Health Care Arrangements

by Ropes & Gray LLP
Contact

Ropes & Gray LLP

In response to the annual solicitation by the Office of Inspector General (“OIG”) of the U.S. Department of Health and Human Services (“HHS”) for developing new, and modifying existing, safe harbors to the anti-kickback statute,1 drug and device makers, and related trade groups, have responded with proposals to provide additional clarity around value-based health care.

The letters suggest both modifications to existing safe harbors (particularly the warranty, discount, and personal services safe harbors) and development of new safe harbors geared directly toward value-based arrangements. Although in the past OIG rejected a proposed modification of the discount safe harbor that would have allowed explicitly for bundled sales of capital and disposable items at a single purchase price,2 the industry’s movement toward value-based health care may suggest that these proposals will receive more sympathetic treatment.

Warranty Safe Harbor

Under the current warranty safe harbor, manufacturers and suppliers can offer a payment under a warranty to cover replacement of their own faulty product, as long as the payment does not exceed “the cost of the item itself.”3 In addition, manufacturers can offer “competitive replacement agreements,” under which one manufacturer replaces another manufacturer’s defective item that was covered by a warranty. Both the buyer and seller must meet certain disclosure obligations.

In its letter, the Advanced Medical Technology Association (“AdvaMed”) proposes changes that (i) expressly would allow product sellers to warrant that their product will produce a clinical outcome, and (ii) would expand the expenses that may be reimbursed beyond just the cost of the product itself. AdvaMed’s letter suggests that greater clarity may be needed for an arrangement where a medical device company offers a bundle of items and services to a hospital for a fixed price to achieve a specific clinical outcome, and provides a warranty for that outcome by paying a rebate if the outcome is not achieved.

AdvaMed’s letter proposes a new “value-based warranties” safe harbor to provide greater clarity to new arrangements. The proposed safe harbor would incorporate many of the same disclosure obligations as the existing warranty safe harbor, but would make explicit that the arrangements covered under the safe harbor include not just items, but “value-based services.” In the alternative, AdvaMed proposes removing the limitation under the existing warranty safe harbor that the warranty may only pay for the cost of the item itself, to allow, for example, payment for follow-up care or clinical outcomes related to the original item.

Discount Safe Harbor

The current discount safe harbor4 protects discounts, defined as reductions in the amount a buyer is charged based on an arms’-length transaction. Certain items explicitly are not discounts, including cash payments, supplying one good without charge to induce purchase of another (except under certain circumstances), and services provided in accordance with a personal or management services contract. The safe harbor contains a number of disclosure requirements for different types of entities that might be involved in a discount arrangement.

Both the AdvaMed letter and a letter from the Pharmaceutical Research and Manufacturers of America (“PhRMA”) propose a new safe harbor based on the discount safe harbor that expressly would allow for (i) price adjustments based on achievement of a measurable clinical or cost outcome and (ii) services to be bundled with a product.

In the alternative, AdvaMed proposes modifying the discount safe harbor to protect value-based arrangements (defined as arrangements where there is a value-based price adjustment conditioned on, or calculated based on, one or more clinical and/or cost outcomes that are associated with the reimbursable items or services being sold) explicitly. PhRMA also suggests a number of additional clarifications to the existing discount safe harbor, such as broadening the definition of buyers from the three existing defined categories of buyers to include other potential buyers, such as payors; clarifying the disclosure requirements for each potential entity in a transaction (e.g., simplifying disclosure requirements, which currently are different for each category of buyer and clarifying whether a seller is responsible for ensuring that a buyer meets the disclosure obligations); and clarifying whether it is permissible for sellers to condition rebates on buyers’ performance of certain services (currently, the discount safe harbor states, without perfect clarity, that services provided in accordance with a personal or management services contract are not discounts).

Personal Services Safe Harbor

The personal services safe harbor5 currently protects personal or management services provided under certain terms, including a written agreement, duration of not less than one year, fair market compensation, and aggregate compensation set in advance.

AdvaMed’s letter points out the difficulty that the concept of “fair market value” creates for value-based arrangements, where a significant part of the value may be the outcome. The letter notes that the personal services safe harbor is ill-equipped to address services provided under a risk-based compensation model, where the compensation is tied to outcome and therefore the amount to be paid is not set in advance. Similarly, PhRMA notes that services may change as the buyer’s needs change during the arrangement. Both suggest revising the personal services safe harbor to address these issues.

Value-Based Payment Safe Harbor

Taking a more conceptual approach, a letter from a leading medical device company notes that innovative value transfer arrangements differ substantially from arrangements contemplated under existing safe harbors, because the value being exchanged by the parties may not be monetary. Instead, the value may be in kind, such as care coordination, data analytics, and other technology solutions, which do not fit neatly under traditional applications of the existing safe harbors. For example, it may be difficult to determine fair market value for newly established cost efficiency or patient outcomes goals, as well as who derives the benefit from the arrangement. The company proposed that a new safe harbor designed around innovative value transfer arrangements would better enable companies to partner with providers to create value-based healthcare programs. In developing this new safe harbor, the company suggests guiding principles of shared financial risk, transparency, and protection of clinician/patient choice.

Other Proposals

Managed Care. PhRMA suggests clarifying the circumstances under which a drug manufacturer that has a rebate agreement with a health plan or pharmacy benefit manager (“PBM”) qualifies for protection under one of the managed care safe harbors.6 For example, in the safe harbor for price reductions by contractors assuming “substantial financial risk” under managed care arrangements, PhRMA proposes additional text that payments based on clinical, cost, or utilization outcomes could be a payment methodology that puts a contractor at “substantial financial risk,” reasoning that this would encourage the types of risk-sharing arrangements designed to be protected under this safe harbor.

PBMs. A pharmaceutical company’s letter underscores the increasingly large role PBMs play in the healthcare system, and how they contribute to the efficient negotiation and administration of relationships between pharmaceutical manufacturers and health plans. The manufacturer proposes a new PBM safe harbor to ensure clarity in the relationship between pharmaceutical manufacturers and PBMs, particularly around PBM administrative fees. The new safe harbor would ensure that administrative fees are structured so that they do not improperly incentivize PBMs to refer certain items (through formulary inclusion or other controls) or reward higher priced drugs. Suggested principles include transparency; fair market value fees; fixed administrative fees, not percent of list price; separate negotiation of administrative fees and formulary decision-making; and separation from other PBM business lines. In the alternative, the manufacturer suggests modifying the group purchasing organization safe harbor to reference PBMs.

Adherence; Data Analytics. A pharmaceutical manufacturer also proposes new safe harbors to protect programs encouraging patient adherence to medication, and providing data and data analytics solutions.

Together, these letters demonstrate significant interest by the drug and device maker community in partnering with providers to support the shift from volume to value-based health care delivery, and underscore the important role that OIG can play in clarifying the landscape and promoting these arrangements. Industry will be watching closely to see whether OIG chooses to act on any of these proposals.


1 42 U.S.C. § 1320a-7b; 81 Fed. Reg. 95551 (December 28, 2016).

2 OIG Semiannual Report, App. G (April 1, 2004–September 30, 2004).

3 42 C.F.R. § 100.952(g).

4 42 C.F.R. § 100.952(h).

5 42 C.F.R. § 100.952(d).

6 42 C.F.R. § 100.952(m), (t), (u).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ropes & Gray LLP | Attorney Advertising

Written by:

Ropes & Gray LLP
Contact
more
less

Ropes & Gray LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.