OIG Issues Favorable Advisory Opinion Involving Financial Risk Mitigation Arrangements for High-Cost Rare Disease Drug

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On June 20, 2024, the U.S. Department of Health and Human Services Office of Inspector General (“OIG”) posted Advisory Opinion 24-04, a favorable opinion analyzing a refund and discount program designed to alleviate the financial risks associated with the purchase of a high-cost drug in the rare disease space. The advisory opinion was issued at the request of the U.S. affiliate of an international pharmaceutical manufacturer (the “Manufacturer”) that provides supply chain support services, including facilitation of refund and discount programs.

The Drug

The proposed refund and discount arrangements involve a unique regenerative tissue-based therapy designed for immune reconstitution in pediatric patients diagnosed with a primary immunodeficiency disorder characterized by the congenital absence of the thymus. The lack of the thymus severely compromises the development of infection-fighting T cells and impedes the body’s ability to learn to fight infections. The condition is rare and diagnosed in approximately 24 of the 4 million annual births in the United States. The condition is initially identified during a required immunodeficiency screen conducted at birth and confirmed through subsequent laboratory testing. Without treatment, the condition is fatal, and most children die within the first three years of life.

Children born with this condition are often required to obtain frequent outpatient visits, significant diagnostic and monitoring testing, prolonged inpatient hospitalizations, diagnostic and surgical procedures, treatment and prophylactic medications, and home healthcare services. The palliative and support care services associated with the condition are estimated to cost approximately $1.8 to $3.9 million annually.

The drug is administered as a one-time therapy and is a potentially curative treatment for the condition. The estimated survival rate of a patient receiving treatment with the drug is approximately 77%. The drug attempts to rebuild the patient’s immune system by surgically implanting thymus tissue obtained from a donor. After removal, the donor thymus tissue is aseptically processed, cultured for 12 to 21 days, and surgically implanted into the thigh of the patient. The product is manufactured for a single administration and must be transported by foot to the treatment center for immediate implantation because the drug’s shelf-life is only three hours after manufacture. The short life cycle of the drug requires the manufacturing facility and treatment center to be located within close proximity to one another. Only one manufacturing facility and one treatment center are approved to administer the drug. Any product manufactured and not purchased by the treatment center is destroyed or used for research.

The drug’s wholesale acquisition cost (“WAC”) exceeds $2.7 million per treatment and is covered by commercial insurers and state Medicaid programs. Approximately half of patients receiving the drug are insured under a federal healthcare program, and all have obtained coverage. The patient’s insurer typically provides the treatment center with a written determination approving coverage before the drug is manufactured. However, the delay between the insurer’s preliminary coverage determination and the treatment center’s surgical implementation of the drug can be lengthy. During this period, the treatment center bears a significant financial risk if the insurer later denies coverage at the time the claim is submitted. The refund and discount arrangements are intended to eliminate the treatment center’s hesitancy in ordering the drug due to financial risk.

The Refund Program

The refund program is designed to mitigate some of the treatment center’s financial risk by waving, delaying, or refunding payment if the insurer changes its preliminary coverage determination. The refund program will run for three years and was initiated in approximately May 2022. Specifically, the refund program allows the Manufacturer to

1. waive or refund 100% of the purchase price to the treatment center if an insurer initially approves the treatment but later denies coverage; or
2. delay collecting the purchase price from the treatment center if an insurer’s reimbursement is delayed.

For a purchase to be eligible under the refund program, the treatment center must:

1. clinically approve the patient to receive the drug;
2. obtain written approval from the insurer authorizing coverage for the drug;
3. enter into a written agreement with the insurer outlining the terms and conditions for reimbursement for the drug, inpatient/outpatient hospital services, and provider services (pricing agreement);
4. comply with the insurer’s prior authorization and claim processing requirements;
5. agree to correct and resubmit any denied claims cause by a procedural or administrative error;
6. agree to at least one level of appeal if the insurer denies a clean claim;
7. report any waiver or refund obtained through the program to the insurer; and
8. provide all information related to a waiver or refund to a government official upon request.

Upon meeting all refund program criteria, the treatment center is afforded additional time to pay the Manufacturer the total purchase price. Under the program, payment is due by the earlier of the following dates:

1. 18 months after the drug’s delivery; or
2. within 60 days of the insurer’s reimbursement.

The Manufacturer will waive the cost of the drug if the insurer denies coverage before the treatment center’s payment is due. The Manufacturer will issue a full refund of the purchase price of the drug if the insurer denies coverage after the treatment center makes payment. The treatment center must return any collected cost-sharing or copayment amount to the patient if the Manufacturer issues a waiver or refund. No refund or waiver is allowed if an insurer makes a partial payment to the treatment center.

The Manufacturer believes the likelihood that it will issue a waiver or refund under the program is exceedingly low because the treatment center obtains a written favorable coverage determination and enters into a pricing agreement with the insurer before ordering the drug. However, the Manufacturer created the refund program because an insurer may nonetheless reverse a preliminary coverage determination if:

1. the approval was based on an uncurable and material error; or
2. a commercial insurer approval was made without consideration to any applicable stop-loss or reinsurance plan requirements.

The Discount Program

The discount program is designed to provide the treatment center with price stability if the WAC increases after entering into the pricing agreement with the insurer. The discount becomes effective only if the WAC price on the delivery date is higher than the WAC price relied upon in the pricing agreement. The discount amount would equal the difference in the WAC amount on the two dates, ensuring the treatment center is not liable for the increased WAC.

To limit the likelihood of the need to invoke the discount program, the Manufacturer provides the treatment center with advanced notice (no less than 90 days) of any WAC increase. The notice is intended to allow the treatment center to use the future WAC price while negotiating the pricing agreement with the insurer. The discount is available equally to drugs covered by a commercial insurer or federal healthcare program. The treatment center is not entitled to a discount if the pricing agreement includes a provision requiring the insurer to cover subsequent increases in the WAC. The Manufacturer designed the program to meet the safe harbor requirements applicable to discounts.

The OIG’s Analysis

The OIG determined that the refund program could implicate the federal Anti-Kickback Statute (“AKS”) and the Civil Monetary Penalties Law beneficiary inducement prohibition (“Beneficiary Inducement CMP”). The refund program implicates the AKS because the manufacturer’s reimbursement guarantee could generate prohibited remuneration to:

1. the treatment center by removing the financial risk of an insurer’s nonpayment; and
2. the patient by eliminating their payment responsibility in the event of a coverage denial.

The refund program does not satisfy any existing AKS safe harbor.

The OIG concluded that the risk of fraud and abuse generated by the refund program was sufficiently low based on a combination of four reasons, including:

1. The scope and duration of the refund program were narrowly tailored and objectively reasonable to accomplish the stated purpose. In support, the OIG noted that the refund program is designed to serve a small patient universe (000006% of annual births), involves a one-time use, contains safeguards that minimize the likelihood that a refund or waiver is issued, and is short in duration (three years).
2. The refund program was unlikely to interfere with clinical decision-making because the drug has no available therapeutic alternatives. Similarly, the referring physician would not obtain any financial benefit from a waiver or refund under the program. Lastly, the absence of any marketing and promotion of the refund program would reduce the risks associated with patient requests for practitioners to prescribe the drug.
3. The refund program was unlikely to cause overutilization or misutilization of items or services because the drug is not mass-produced and is intended to benefit a small patient universe. The treatment center is also incentivized to properly administer the drug because it bears the financial risks of partial payments and nonpayment for the therapy’s ancillary costs beyond the drug’s price (e.g., inpatient hospital services, rehabilitation, etc.).
4. The refund program was unlikely to increase federal healthcare program expenditures because the treatment is potentially curative, may reduce or offset the cost of the palliative and supportive care provided to patients with the condition, and includes safeguards that promote transparency with regulators.

The OIG next analyzed the proposed arrangement under Beneficiary Inducement CMP. The Beneficiary Inducement CMP is designed to prevent the distortion of the healthcare system that occurs when Medicare or Medicaid patients are influenced to select a particular provider or supplier for reasons other than quality or cost. While manufacturers are not typically subject to the Beneficiary Inducement CMP (because they are not providers, practitioners, or suppliers), a manufacturer may nonetheless implicate the prohibition where the arrangement includes remuneration that would induce the beneficiary to obtain an item or service from a particular provider, practitioner, or supplier.

The OIG analyzed the refund program under the Beneficiary Inducement CMP because the arrangement involves the transfer of indirect remuneration between the Manufacturer and beneficiary in the event of a waiver or refund. Despite the potential implication of the prohibition, the OIG concluded that the refund program would not violate the Beneficiary Inducement CMP for two reasons.

First, the potential remuneration would not influence the beneficiary’s provider selection because the treatment center is the only facility authorized to administer the drug. The absence of alternative providers negates the ability of the refund program to influence the selection process.

Second, the refund program was unlikely to influence the patient’s provider selection because the individual would only learn about the program after receiving the drug and the reversal of their insurer’s prior coverage determination, an event occurring after they had selected the provider.

The OIG next analyzed the proposed discount program under the AKS. Discount programs implicate the AKS because they involve remuneration in the form of a lowered price that a seller typically offers to induce a buyer to purchase an item or service. Here, the Manufacturer’s discount program involves remuneration in the form of a reduced purchase price to induce the treatment center to order the drug by removing the possibility of financial losses relating to subsequent increases in the WAC.

The AKS offers statutory and regulatory protections for discounts on items or services paid for by a federal healthcare program. The statutory exception protects “a discount or other reduction in price obtained by a provider of services or other entity under a federal health care program if the price reduction is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a federal health care program.”¹ The regulatory safe harbor provides a separate basis for exempting the discount arrangement from the reach of the AKS. Under the safe harbor regulation, a discount is defined as any reduction in the amount a buyer is charged for an item or service based on an arms-length transaction.² Discounts that satisfy the statutory exception or regulatory safe harbor do not involve prohibited remuneration and are not subject to prosecution or sanction under the statute.

The OIG concluded that the proposed discount program would be protected under the statutory exception and regulatory safe harbor. First, the price reduction in the arrangement meets the definition of a discount because it includes a price reduction that is not offered in the form of cash or cash equivalents and applies equally to government and commercially insured patients. Second, the discount program was designed to satisfy the safe harbor criteria applicable to offerors. The regulatory requirements for discounts differ slightly among sellers, offerors, and buyers, including distinctions applicable to cost or charged-based providers.

The offeror of a discount is defined as an individual or entity who is not a seller but promotes a buyer’s purchase of an item or service at a reduced price. An offeror is afforded regulatory safe harbor protection where the party:

1. informs the buyer in a manner that is reasonably calculated to give notice to the buyer of its obligations to report the discount; and
2. refrains from doing anything that would impede the buyer’s or seller’s ability to meet their disclosure or reporting obligations.

The OIG concluded that the discount program was entitled to safe harbor protection because the program included all notice and disclosure requirements specific to the offeror of a discount.

Takeaways

Advisory Opinion 24-04 builds upon prior OIG guidance addressing the risk profile and appropriate safeguards for manufacturer-sponsored free drug or patient assistance offerings under the AKS and Beneficiary Inducement CMP. While the totality of the guidance offers a valuable roadmap, it’s important to remember that the favorable opinion only applies to the specific facts presented.

Manufacturers or affiliates looking to implement a similar refund or discount program must exercise caution when establishing participation requirements. Any refund or discount program should be designed to include safeguards sufficient to withstand regulatory scrutiny, including consideration of:

1. the duration and scope of the program;
2. the influence on medical decision-making;
3. prescriber benefits;
4. potential increases in federal costs or expenditures;
5. utilization risks; and
6. seeding risks.

If you have questions about this advisory opinion or any similar arrangement, please contact AGG Healthcare partner David Blank or your regular AGG attorney.

 

[1] 42 U.S.C. § 1320a-7b(b)(3)(A).

[2] 42 C.F.R. § 1001.952(h).