OIG Approves Dental Supplies Distributor’s Plan to Expand Loyalty Program

The Department of Health and Human Services, Office of Inspector General (“OIG”) recently released a favorable advisory opinion, OIG Advisory Opinion No. 24-10 (the “Opinion”) to a dental supplies distributor (the “Requestor” or the “Distributor”) that serves office-based dental practitioners by offering dental and laboratory supplies, equipment and technology, repair services, and business support services. In the Opinion, OIG analyzes the Distributor’s plan to expand its existing customer loyalty program (the “Loyalty Program Expansion”). The Distributor inquired whether the expanded loyalty program would constitute grounds for sanctions under the exclusion authority at section 1128(b)(7) of the Social Security Act (the “Act”) or the civil monetary penalty provision at section 1128A(a)(7) of the Act, as those sections relate to the commission of acts described in section 1128B(b) of the Act (the “federal Anti-Kickback Statute” or “AKS”).

OIG concluded that while the Loyalty Plan Expansion would generate prohibited remuneration if the requisite intent were present, OIG would not impose administrative sanctions.

The Advisory Opinion

The Opinion Requestor is a medical and dental supplies distributor with a division that serves office-based dental practitioners by offering dental and laboratory supplies, equipment and technology, repair services, and business support services. Through its existing loyalty program, member customers earn points on purchases that they can redeem to reduce the price paid for other items or services. Members are also assigned to a tiered membership level based on their annual spending (or via a paid membership), providing access to guaranteed repair and customer service response times, extended labor warranties, and other defined benefits.

With the Loyalty Program Expansion, the Distributor would expand the existing customer loyalty program beyond its dental division, allowing members to earn unlimited points for purchases from certain additional Distributor subsidiaries. Based on their membership tier, members could earn points (each worth $0.005) on purchases of thousands of dental-related products and services, some of which are reimbursable by federal healthcare programs. Points awarded would not vary based on federal health plan coverage and would expire within roughly 24 months. Members would be limited to redeeming points up to 50% of the purchase price of eligible dental products or services. Some of these, too, are federally reimbursable, but the Distributor certified that it would not direct members to redeem points for any specific item or service. The points would not be redeemable for cash, would have no value if not redeemed, and would be non-transferable. Membership tiers would be based on a member’s spending in the prior 12 months, with tier requirements and benefit levels set in advance. Members advancing to the “silver” tier (i.e., having spent $15,000 or more during the lookback period) could also receive discounts on in-office hourly service labor rates, one discounted educational event related to the Distributor’s products, and other defined benefits. The Distributor would provide notice to members of the tiered membership and points programs via marketing materials, membership agreements, point balance notifications, and other means.

OIG observed that both the tiered membership and points programs would result in remuneration streams implicating the AKS. It noted that there are statutory exceptions and safe harbor regulations that specify certain practices that are not treated as an AKS offense. But an arrangement must fit squarely into the exception or safe harbor to be protected. OIG determined that though the discount safe harbor was potentially applicable, the Loyalty Program Expansion did not meet its requirements because both remuneration streams included “other renumeration” not explicitly described in the regulation. OIG warned that discount programs that do not meet this safe harbor are typically high risk and suspect under the AKS but concluded that the Loyalty Program Expansion posed a sufficiently low risk of fraud and abuse for the following reasons.

First, steering risks were mitigated by: (1) the low dollar value of each point earned; (2) the uniformity of the awarding or redeeming of points among the eligible products or services (regardless of federal reimbursement eligibility); (3) ensuring that the points program would not steer members toward buying from the Distributor’s non-dental product lines; and (4) structuring tiered membership benefits to resemble support services for the Distributor’s products and services, as opposed to benefits that encouraged improper spending such as entertainment tickets, personal electronics, or vacation travel.

Second, the limitation that points redeemed would cover at most 50% of the purchase price of items or services eligible for the discount means that the points program would not allow for the provision of free items or services, a practice that creates substantial risk under the AKS.

Third, overutilization risks were mitigated by points program terms restricting points redemption to the purchase of eligible items and services — among other things, the points would have no value outside of the Distributor’s points program, could not be redeemed for cash, and could not be transferred. This risk was also mitigated by the tiered benefits structure because OIG found it unlikely that members would be incentivized to stockpile qualifying purchases only to earn tiered benefits that relate to support for those purchases.

Finally, the design of the tiered benefits would reduce the risk that they could be abused to selectively reward particular members or types of purchases.

Analysis

OIG’s acceptance of this Distributor’s plan to expand its loyalty program reflects its longstanding position that providing free or below-market items or service in exchange for purchases of federally reimbursable items and services creates substantial risk under the AKS. OIG recently emphasized this concern in its Industry Segment-Specific Compliance Program Guidance for Skilled Nursing Facilities and Nursing Facilities (“Guidance”), which it referenced in this Opinion. Per OIG, there is a substantial risk that such goods or service may be used as a vehicle to disguise an unlawful payment to induce or reward referrals of federal healthcare program business. But OIG posits that most discount arrangements can be structured to meet the AKS discounts safe harbor. To qualify, the discount must be a reduction in the amount the buyer is charged for an item or service based on an arm’s length transaction and must be fully and accurately reflected on cost reports or claims filed with a federal healthcare program (among other requirements).

This Advisory Opinion (and the referenced Guidance) provide useful guidance for entities seeking to implement loyalty programs for their customers. Though OIG issued a favorable Opinion to this Requestor, it is important to recall that it cannot be relied upon by any other person. Vendors should work with experienced counsel when considering implementing or expanding loyalty programs to ensure that appropriate safeguards are in place to avoid penalties under the AKS. For more information on OIG Advisory Opinion No. 24-10 or other issues addressed herein, please contact AGG Healthcare attorney Lisa Churvis.