The Department of Justice (“DOJ”) recently announced a settlement with Cardinal Health, one of the “Big Three” wholesalers, resolving allegations that Cardinal offered kickbacks to incentivize dispensing practices to sign prime vendor agreements in return for upfront “prebates” and “signing bonuses,” effectively up-front credits for the future purchase of specialty pharmaceuticals. Notably, the alleged misconduct at issue is hardly novel: more than 20 years ago, OIG warned that such “advance contractual payments” are “obviously incentives to induce the purchase of items or services” and would not fall within the “discount safe harbor” to the Anti-Kickback Statute (AKS) “because they are made prior to any purchase and are not attributable to identifiable purchases of items or services.” Department of Health & Human Services, Office of Inspector General, Up-front Rebates (July 17, 2000). OIG further expressed concern that such payments “have the practical effects of ‘locking in’ the purchasers for an extended period of time, increasing the potential for overutilization and interfering with a purchaser’s normal cost/quality considerations in ordering specific goods or services.” Id.
Hence, this appears to be a tale as old as time: salesforce attempts to value-add backfire in highly regulated industry. Although Cardinal has now resolved the matter, liability remains for its clients who were privy to the contracts at issue because the law prohibits not only the payment of illicit remuneration, but also its receipt. See 42 U.S.C. § 1320a-7b(b); 42 U.S.C § 1320a-7a(a)(7). Cardinal’s $13 million settlement, however, is nominal, at best, given its potentially staggering liability based on the number of claims at issue and the company’s market capitalization. Accordingly, to the extent further enforcement directed at oncology, urology and other dispensing practices ensues, these participants have a relatively low benchmark to inform potential settlement or repayment negotiations. Further, while the DOJ’s settlement agreement with Cardinal references numerous entities that allegedly received kickbacks, no resolutions with those practices have been announced, to date.
Therefore, from both a wholesaler’s and practice’s perspective, this serves as a reminder that compliance monitoring directed at salesforce and contractual relationships should scope potential areas of “value-add” that are used to differentiate competitive offerings. In addition to the inducements at issue here, other favorable credit or payment terms should be vetted for compliance to applicable safe harbors or statutory exceptions. That much is obvious, but companies often struggle with salesforce compliance monitoring due to legacy businesses, unintegrated acquisitions, and non-compatible systems and software. Hence, it is all the more important to understand and define risk within relevant businesses at a granular, “owner” and “process” level. In this example, that would include identifying the employee or group of employees responsible for entering contractual price terms into a SaaS platform, and the process by which that data arrives in the back office. From the practice’s perspective, reliance often is placed on the counterparty’s compliance department but, as this example illustrates, those assumptions may be misplaced. In short, businesses are well-advised to supplement annual code-of-conduct compliance training with targeted training and education in focused, high-risk areas such as manufacturer/distributor relationships, interaction with healthcare professionals, and payor/PBM requirements. Finally, practices that may have contractual arrangements involving inducements similar to those offered by Cardinal should review those terms in relation to potential over-utilization of brand drugs, a touchstone for enforcement. Should you require assistance in any of these areas, Frier Levitt attorneys have extensive experience designing and implementing compliance programming and monitoring for participants throughout the health care delivery supply chain.
* Mr. Mahajan currently serves as Chair of Frier Levitt’s White Collar Defense & Government Investigations practice. He formerly served as an Assistant U.S. Attorney for the U.S. Department of Justice for nearly a decade, and as a top compliance executive for UnitedHealth Group and McKesson Corp., two of the largest healthcare companies in the world.
