December 6, 2018

QUESTION:        A certain medication has gotten to be so expensive that our hospital has decided to stop stocking it.  As a result, we will not be able to treat certain patients.  The drug company that manufactures this medication has offered to provide the medication to the hospital FREE of charge, although it is our understanding that insurance will cover the drug after the patient is discharged.  This seems to us like a win-win.  Surely the government cannot object to such an arrangement.  Is this legal?


ANSWER:            Unfortunately, the Office of Inspector General cares a great deal about an arrangement such as the one that you have described and has recently opined that under certain circumstances a manufacturer providing an expensive drug free of charge to a hospital could violate the Medicare Anti-Kickback Statute.

The Anti-Kickback Statute prohibits any form of remuneration, in cash or in kind, that is provided with the intent to induce the referral of business that is paid for in whole or in part by a federal health program such as Medicare or Medicaid.  The free drug is remuneration under the law.  In OIG Advisory Opinion 18-14 (posted Nov. 16, 2018), the OIG opined that under the circumstances presented, the free drug could constitute an unlawful inducement and prohibited the arrangement.

Why?  The drug at issue had multiple uses, one of which was to treat a particular syndrome.  Once started, the drug had to be tapered or the patient would suffer serious side effects.  Most insurance, including the Medicare program, will pay for the drug on an outpatient basis.  However, when provided to a hospital inpatient, the cost of the drug was included in the hospital’s DRG payment.  At the current price of $38,892 per vial, many hospitals have decided that they could not afford to stock the medication.

The drug manufacturer’s response was to offer to provide the medication to hospitals free of charge while the patient was an inpatient.  Because the medication was covered on an outpatient basis, the drug company could be paid for the medication following discharge.  However, if the patient’s insurance would not cover the medication on an outpatient basis, the manufacturer would continue to provide the medication free of charge until either insurance coverage is obtained or the patient is tapered off of the medication.

Why did the OIG object to such a program when in the past the OIG has approved several arrangements in which drug manufacturers provided free medication to financially needy outpatients?  In order to answer that question, you need to examine how the OIG viewed this particular arrangement.

Typically, the OIG limits its review in an Advisory Opinion to the facts that are submitted by the entity requesting the opinion.  However, in this opinion, the OIG took the unusual step of considering publicly available information.  The OIG noted that the drug at issue was not new and that at one time it cost only $40.  The OIG also noted that at its current price of $38,892 per vial, the drug “has the highest total annual spending per use and the highest price per unit among drugs that CMS examines that met certain criteria.”  The OIG also considered the fact that the drug manufacturer had entered into a $100 million settlement with the FTC of an antitrust claim that was alleged to stifle competition for this medication.

The OIG also considered the fact that insurance, including Medicare, covered the drug on an outpatient basis.  Also important to the OIG was the fact that the program did not consider the financial need of the recipient.  The manufacturer only provided the drug at no cost on an outpatient basis if the patient had no insurance coverage for the medication and then only until insurance coverage could be obtained or the patient could be safely tapered off of the drug.

This led the OIG to conclude that providing the medication for free to hospitals “could function as a seeding arrangement.”  The OIG noted that the full course of treatment typically extended beyond the patient’s hospital stay.  Factors such as the length of the treatment, the fact that alternatives to the medication exist, and the need to taper the medication in order for the drug to be discontinued led the OIG to conclude that the manufacturer’s intent appeared to the OIG to be to induce hospitals to start patients on this medication while an inpatient, so that the manufacturer would eventually be paid for the drug after the patient was discharged.  The OIG was also concerned that providing the medication free to hospitals would steer patients to this medication as opposed to other medications that could be used to treat the syndrome.

These facts caused the OIG to determine that such an arrangement could violate the Medicare Anti-Kickback Statute and, as a result, the OIG would not approve the proposed arrangement.

If you want practical examples as to what is and what is not permitted by the federal fraud and abuse laws, join Henry and Dan in New Orleans from April 11 to 13 for the Physician-Hospital Contracts Clinic.