On November 13, 2018, the Department of Health and Human Services Office of Inspector General (OIG) issued Advisory Opinion No. 18-14 advising a drug company that its proposal to provide a drug to inpatients without charge could implicate the Anti-Kickback Statute and was not eligible for a favorable advisory opinion. The drug company proposed stocking its high-cost epilepsy drug at hospitals on a consignment basis to make the drug more accessible to providers and patients while offering the drug for free if payers refused to cover the cost. OIG concluded that the proposed arrangement lacked some of the safeguards against fraud and abuse of previously-approved arrangements under which manufacturers provided free drugs to patients.

Click here to read the full advisory opinion.

The drug company’s proposal concerns a drug that has long been indicated for a form of epilepsy that may occur through the end of the second year of life and is often diagnosed in an inpatient setting (Syndrome). The drug is one of only two FDA-approved treatments for the Syndrome, and it is not separately reimbursable by Medicaid in the inpatient setting. The drug often requires up to a five-day hospital stay, which can be longer because hospitals frequently do not stock the drug on-site. Once administered, the drug must be used for two weeks, with a required tapering-off period over the subsequent two weeks, whether the patient remains in the inpatient or outpatient setting. Terminating the drug treatment prematurely can lead to serious complications. The Syndrome population is small and stable, with only about 2,000-2,500 new cases diagnosed in the United States each year.

Hospitals are reluctant to stock the drug for many reasons, but particularly because the drug is very expensive and, during inpatient stays, private and public payers do not sufficiently reimburse hospitals for stays that include treatment with the drug.

Before submitting its proposal, the drug company considered significantly reducing the price of the drug for hospitals to incentivize its use, but the company chose not to do so because it would have a “devastating impact on Best Price” for the treatment under the Medicaid Drug Rebate Program. Instead, the drug company proposed to OIG to provide the drug for free to hospitals for inpatient use for one particular indication to treat the Syndrome. The drug would be stocked on a consignment basis so that it is readily accessible for providers to prescribe. The drug treatment would remain free for the patient unless and until insurance coverage is obtained (the drug is FDA-approved for 18 other indications).

The drug company requested an advisory opinion analysis of its proposed arrangement under the Anti-Kickback Statute. The drug company certified to OIG that its proposed arrangement would not be contingent on any future obligation to purchase the drug or other products from the company. Among other things, relevant parties would have to agree that the company’s free drug may not be resold, billed to a third-party payer, or submitted to Medicaid.

OIG examined the information submitted by the requestor as well as extensive publicly available information to provide context to its review of the proposed arrangement. OIG noted the following in particular:

• Although the drug is not new, the drug company has dramatically increased the price of the drug over the past 15 years;
• Although the market for the Syndrome is relatively small and stable, the market for the drug’s other indications has expanded in the past decade;
• The drug company entered a $100 million settlement with the Federal Trade Commission for acquiring a competitor and “preserv[ing] its monopoly” to “maintain extremely high prices” for the drug; and
• The drug is available at a “fraction” of the drug company’s price outside of the United States.

Giving weight to this “illuminat[ing]” public information, OIG concluded that the free drug may serve as remuneration to hospitals, which could serve as direct or indirect referral sources for the drug. OIG acknowledged that it previously had approved arrangements to give free outpatient drugs directly to patients based on certain safeguards and benefits to patients and federal healthcare programs. However, OIG concluded that the proposed arrangement presented more than a minimal risk of fraud and abuse, for the following reasons (among others):

• The proposed arrangement presented “steering” and unfair competition issues because the hospital’s employed physicians may be more likely to prescribe the drug if it is in stock, and the hospital may be more likely to place the drug on its formulary – adding to the likelihood the hospital would either arrange for or recommend purchases of the drug.
• The proposed arrangement could function as an improper “seeding” arrangement. With the drug stocked on consignment, the hospital could more easily arrange for the provider to prescribe the free drug to inpatients. Once discharged, if insurance covers the drug treatment, then insurers would be charged for it. This situation is exacerbated by the drug’s required tapering-off period:  patients would begin receiving a free drug treatment at the hospital, but would then be required to pay for the drug treatment for several days or weeks after discharge to avoid serious complications. The advisory opinion notes that the arrangement would essentially lock in patients’ use of the drug for weeks, causing the drug company’s claims that free drugs are “not contingent on future purchases” to “ring[] hollow.”
• The proposed arrangement would do little to create savings that could be passed on to federal healthcare programs. Indeed, providing the drug treatment for free at hospitals under this arrangement for a particular epilepsy patient – rather than simply lowering the cost of the drug overall – would only facilitate the company’s high price for the drug’s other indications in the market. Because the drug would only be free when there was no insurance coverage, the proposed arrangement would not benefit federal healthcare programs.

Based on all of the foregoing, the OIG declined to issue a favorable advisory opinion.