OIG says Discount Safe Harbor protects some market share discounts, confirms scope of protection for bundled discounts in noteworthy advisory opinion

In Advisory Opinion 25-11 (the “Opinion”), OIG approved three market share discount variations, including bundles of products and rebates whose terms were modified during the contract’s term. In doing so, OIG interpreted key elements of the Discount Safe Harbor, such as what types of products can be included in a bundled discount under the “same methodology” requirement, and provided insight into the facts and circumstances that would cause a discount to present low risk even where that requirement is not met. OIG also opined on the Discount Safe Harbor’s application to market share rebates but left ambiguity in the precise outer boundaries of such discounts, presumably leaving OIG and the Department of Justice (DOJ) room to scrutinize arrangements that stray from the Opinion’s fact pattern.

Market share, bundles, and variable rebate terms

The requestor in the Opinion is a manufacturer of three vaccines, which the Opinion referred to as Vaccine A, Vaccine B, and Vaccine C. Vaccine A and Vaccine C are reimbursed under Medicare Part B, while Vaccine B is reimbursed under Medicare Part D. The requester sought OIG’s view on four discount variations involving the vaccines: (1) upfront discounts without a purchase requirement; (2) upfront discounts with a purchase requirement; (3) upfront bundled discounts with a purchase requirement; and (4) bundled rebates with a purchase requirement.

The purchase requirement in each relevant variation was a volume or market share target based on a prior measurement period, such as the previous quarter. The bundled variations, in turn, included products reimbursed under the same methodology—“bundles with Vaccine A and Vaccine C, both of which are reimbursed under Medicare Part B”—and products reimbursed under different methodologies—“a combination of Medicare Parts B and D.” Finally, the upfront discount or rebate in each bundled variation was a “specified percentage” reduction in price on all the products in the bundle, regardless of the methodology under which they were reimbursed.

As one example, the requestor proposed to make a “2 for 2” offer: “customers may receive a 2 percent incremental bundled Upfront Discount on purchases of Vaccine A and either Vaccine B or C if they achieve a specified market share for both Vaccine A and Vaccine B or C during a certain prior measurement period.”

The requestor certified that it met the obligations of a seller under the Discount Safe Harbor, and OIG had no trouble concluding that the upfront discount without a purchase requirement was safe harbored. The only question, then, was whether the discounts and rebates with purchase requirements met the Discount Safe Harbor’s definitions of a “discount” or “rebate.” OIG’s analysis of this question fell in three principal buckets:

• Facts: Incentivizing market share—but not “services.” For the first time in an advisory opinion, OIG concluded that the Discount Safe Harbor protects a discount or rebate contingent on achieving market share provided it does not “require, explicitly or implicitly, some level of services from the purchaser (e.g., marketing the products or switching patients from one product to another).” OIG observed that the requestor had implemented several operational safeguards in this respect, including “having contractual terms with customers clarifying that the Discounts are not contingent on any performance, switching, or conversion requirements.” OIG cautioned that if “any services were required to qualify for these Discounts, then we would come a different conclusion.”
• Facts: Bundles of mixed methodologies. The Discount Safe Harbor did not protect the bundled upfront discount or rebate because the products in the bundles would be reimbursed by Medicare under different methodologies—“a combination of Medicare Parts B and D.” Nonetheless, they posed a low risk of fraud and abuse for two reasons. First, the percentage reduction in price was clear and applied across the board to each product in the bundle, and thus “each Medicare reimbursement system (e.g., Medicare Parts B and Part D) benefits equally.” Second, the vaccines’ list prices were similar to those of competing vaccines, “which lowers the risk that these non-safe harbored bundled discounts serve to obfuscate the price of any Vaccine in the bundle to raise prices or maintain a higher list price.”
• Facts: A rebate with variable terms. The rebate variation posed a final wrinkle: in certain cases, the requestor adjusted the purchase requirement or rebate percentage during the term of the contract, such that those terms were not “fixed and disclosed in writing . . . at the time of initial purchase to which the discount applies,” as the Discount Safe Harbor requires. These mid-contract changes posed a low risk of fraud and abuse, OIG said, because (1) the agreement specified that the terms could change, and thus the customer was “aware before the time of initial purchase that adjustments may be made,” and (2) the changes were made “to meet competition,” by, for example, lowering the purchase requirement.

OIG giveth clarity, and OIG taketh away

While the Opinion tackles some longstanding issues under the Discount Safe Harbor, its practical impact may be more limited given the ambiguity it generates.

• Incentivizing market share—but not “services.” OIG’s acknowledgement that the Discount Safe Harbor can protect market share discounts is, indeed, a notable one given its longstanding opposition to incentives for health care providers to “switch” patient prescriptions and its view—expressed in draft guidance—that market share discounts may have the effect of “rewarding switching indirectly.” These concerns still pervade the Opinion, however, and drive uncertainty regarding what is permitted.

For one, it is not clear precisely how the requestor mitigated this risk. Its agreements specified that nothing in them was “intended to require the customer or its members or clinical staff . . . to promote any of Requestor’s products or otherwise to engage in switches or therapeutic conversions.” In its analysis, however, OIG seemingly reframed this factor in noting that the requestor “certified that it prohibits such services”—e.g., “marketing the products or switching patients from one product to another”—“in connection with the Arrangement.” It is thus unclear whether OIG is signaling that a market share discount agreement must affirmatively prohibit promotional or switching-type services or whether an agreement must merely not require such services as a condition of earning the discount. The answer is likely somewhere in between.

It would be hard to reconcile an affirmative-prohibition requirement with OIG’s own recognition of the “practical effect” of market share discounts—that customers may “choose to stock and provide [a manufacturer’s vaccines] over a competitor’s vaccines.” That is, OIG seems to recognize that a market share discount may encourage some degree of switching and that this effect is distinguishable from a requirement to perform such activities, such as “implementing utilization management techniques or other actions that would impede use of a competing product.”

The question, then, is when does a market share discount “require, explicitly or implicitly, some level of services from the purchaser”? At a minimum, the Opinion leaves room for OIG to argue that a market share target may effectively require “some level of services” from the purchaser for one reason or another. The Opinion therefore suggests two best practices for transacting market share discounts:

• The agreement should state—as the requestor’s agreements apparently did—that the discount does not by its terms require any performance, switching, or conversion activities.
• The arrangement should not effectively require such activities. The Opinion leaves the circumstances that might trigger this scrutiny open-ended, but it reflects that, at a minimum, the manufacturer should not “require exclusivity” or “take other actions to impede the sale of competing vaccines” or prevent the purchaser from making “stocking decisions based on factors that are not in the best interest of patients.” Additional safeguards may include, for example, setting targets that are reasonably achievable in the course of the purchaser’s usual supply chain decision-making and delivery of patient care.

• Bundles of mixed methodologies. OIG’s conclusion that the phrase “same reimbursement methodology” can be interpreted to mean each of Medicare’s various parts is also notable, though it has arguably been signaling that interpretation for some time—see, for example, OIG’s analysis in Advisory Opinion 21-14, in which it indicated that Medicare Physician Fee Schedule services “would all be services reimbursed under the same payment methodology, Medicare Part B.” The phrase does not refer to a narrower reimbursement concept, such as a DRG payment, as OIG once suggested. Likewise, its conclusion that one way to mitigate the risk of a bundle across methodologies is to discount each product in the bundle by an equal percentage is consistent with its previous advice that federal health care programs should share proportionately in the amount of any discount, as it explained in Advisory Opinion 21-14. The Opinion therefore confirms a pathway for manufacturers to bundle across methodologies.

OIG’s conclusion that Medicare Parts B and D each operate under unified reimbursement methodologies further suggests that bundled discounts for drugs (and presumably other covered items and services) within those methodologies are protected by the Discount Safe Harbor even if the discounts vary across products or one or more drugs in the bundle is priced significantly higher than competitors. In other words, the risk mitigating factors OIG identifies for cross methodology bundles are not requirements of the Discount Safe Harbor and therefore appear irrelevant when all bundled products are reimbursed under the same methodology. This seemingly broad discretion to bundle together various products or services as long as they’re all covered by the same part of Medicare is a significant development in a safe harbor concept that has long been unclear, though such bundles remain subject to applicable antitrust laws.

• A rebate with variable terms. Finally, OIG’s conclusion that a manufacturer may adjust a rebate’s terms mid contract at sufficiently low risk is another apparent advisory opinion first. Like OIG’s analysis of market share discounts, however, the scope of its conclusion is somewhat murky. The Opinion highlights one example of an acceptable mid-contract change—lowering the purchase requirement “to meet competition,” which OIG observes may cause the purchaser to continue buying from the manufacturer and its competitors, rather than buying relatively more from the manufacturer “to meet pre-set volume or market share requirements,” and may in turn “increase patient choice.” The Opinion does not make clear whether this is merely an example of an acceptable change, or the only acceptable change. For example, the Opinion does not specifically address the other adjustment identified in the factual recitation—increasing the discount offered—which arguably could incentive a purchaser to choose the manufacturer’s products over competitors.

In any event, considering OIG’s focus earlier in the Opinion on discounts that may distort prices, a fair reading of its conclusion suggests a best practice: a mid-contract change to rebate terms may be acceptable provided the expectation of that possibility is fixed in the agreement—i.e., “the agreement specifies that there may be changes”—and provided the change is both consistent with that expectation, commercially reasonable, and appropriately disclosed and accounted for by both parties. The parties might consider, for example, specifying in the agreement not only that there may be changes but also the types of changes they may consider. A manufacturer that contemplates increasing the rebate percentage, for example, might ensure that any increase is within the range of what it and the market considers “normal,” thus mitigating the risk of adversely affecting competition or scrutiny that the increase is effectively a kickback—especially since the rebate would not be safe harbored in this scenario.

The Opinion is an interesting one that cuts in different ways. It confirms that the Discount Safe Harbor can protect market share discounts, that “same reimbursement methodology” means each of Medicare’s various parts, and that some adjustments of rebate terms mid contract may be low risk. But it also leaves important details unresolved, particularly around the boundaries of and guardrails for market share discount terms, the extent to which discounts across reimbursement methodologies would be considered low risk, and the types of permissible mid-contract changes to rebate terms. As a result, while manufacturers now have a clearer pathway for structuring discount and rebate arrangements, they must remain vigilant in drafting agreements and implementing safeguards to mitigate the risk of regulatory scrutiny.

Authored by Ron Wisor, Tom Beimers, Eliza Andonova, Laura Hunter, and Mike Dohmann.