Group Purchasing and HME Providers: Analysis of Discounts, Rebates, and other

Issues of “Safe Harbor”

Introduction

The purpose of this paper is to analyze current concerns and issues involved in group purchasing organization (“GPO”) offers that include certain vendor discounts and rebates paid to HME provider members of the GPO.

Discounts, rebates, or other reductions in price may violate an anti-kickback statute designed to prevent inducement in the purchase of items or services payable by Medicare or Medicaid. As a result, some GPO members abstain from participation in various promotional programs sponsored by the GPO and/or the vendor(s).

This paper reviews these arrangements and cites OIG safe harbors, which suggests that many promotional programs are clearly permissible.

© 2003 VGM Management, Ltd.----------------------------------------This paper was authored by Mark J. Higley, Vice President – Development. The information reported should not be construed as legal advice, nor utilized to resolve legal problems.

Introduction, continued

The federal government's focus on fighting health care fraud and abuse is well known. The Office of Inspector General (OIG) has increased its enforcement efforts with the help of additional funds authorized by the Health Insurance Portability and Accountability Act (HIPAA). The OIG has particular interest in the area of kickbacks, which occur when one party offers money or some other form of inducement to another party in return for increased Medicare or Medicaid business. According to the Department of Justice, kickbacks corrupt the medical provider's decision-making process and encourage the provider to take actions that are not in the patient's best interest.

“Kickbacks” may take many forms. Common examples include providers paying for referrals or fees paid by a drug manufacturer to physicians for prescribing its drugs to Medicare or Medicaid patients. In the HME industry, alleged kickbacks have arisen in the context of vendor rebates paid directly to patients as part of a provider’s marketing program.

One of the more recent HME incidents involved blood glucose testing products. In June of 2000, the OIG released program memorandum (PM) OEI-03-98-00230 Blood Glucose Test Strips: Inappropriate Medicare Payments1 citing “improper marketing practices that could be in violation of the Medicare anti-kickback statute, 42 United States Code (U.S.C.) 1320a-7b(b)”. The PM text included “Medicare beneficiaries who utilize medical supplies on a repeated basis, such as blood glucose test strips, may be strongly influenced by marketing practices. Manufacturers’ rebates, special dealer sales, coupons, discounts, and similar financial inducements are all designed to sway consumer product choice”. While much of the PM focused on excessive utilization (e.g., excessive or non-requested deliveries) and advertising incentives which implied a waiver of copayment or deductible (e.g., “No Net Cost To You!”), the report also indicated that fifteen percent of beneficiaries reported receiving “incentives” from suppliers. Seven percent reported that they received incentives passed on directly from their HME supplier in the form of free monitors, discounts on test strips, or vendor rebates.

“Some inducements…may be in violation of the anti-kickback statute”, the report opined, though explicit examples of “instances of fraudulent or abusive practices” were not offered. In any case, on November 29, 2000, the DHHS released Transmittal B-00-69 (SUBJECT: Blood Glucose Test Strips - Marketing to Medicare Beneficiaries) which “explains marketing practices that could be in violation of the Medicare anti-kickback statute”. The PM emphasized compliance with the OIG Compliance Program Guidance for DMEPOS, and advised beneficiaries to report “any instances of fraud or abusive practices” to the DMERCs.

Further, the PM cited 42 U.S.C. 1320a-7a(a) (5), which “prohibits a person from offering or transferring remuneration”. While the section was clearly intended to indicate a waiver of coinsurance and deductible amounts, some HME providers interpreted the citation as a prohibition of participation in any vendor rebate programs. The PM text was arguably

1 See entire report in Appendix

chilling (“Suppliers should seek legal counsel if they have any questions or concerns…Any supplier…can be criminally prosecuted and excluded from participating in Federal health care programs”). As a result, counsel for many HMEs dissuaded provider participation in any future vendor rebate programs.

Various vendor promotional programs are common within group purchasing organizations (GPOs). Thousands of healthcare providers maintain membership in one or more GPOs, (sometimes known as cooperatives or buying groups). A GPO is an entity that contracts with health care providers (such as hospitals, nursing homes, home medical equipment and home health agencies) to achieve savings and efficiencies by aggregating purchasing volume and using group leverage to negotiate discounts with manufacturers, distributors and other vendors. Many GPO vendor agreements frequently offer their provider members specific discount and/or rebate programs. As a result of concern noted above regarding kickbacks and other potential violations, some GPO members abstain from participation in these various promotional programs sponsored by the GPO. Effectively, these providers have increased their cost of goods sold, while operating in a highly competitive industry2.

Unbeknownst to many of these providers, several years ago the OIG reconsidered its position of “excluding rebates to charge-based buyers or buyers that are reimbursed based on federal program fee schedules (such as HME) from safe harbor protection and allow(ed) extension of this protection to all types of providers”3.

This paper will detail these Anti-kickback Statutes, GPOs, and applicable OIG safe harbors, and suggest that most GPO promotional programs are clearly permissible.

The “Anti-kickback Statute”

Section 1128B(b) of the Social Security Act (the Act) (42 U.S.C. 1320a-7b(b)) “provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce the referral of business reimbursable under the Federal or State health care programs.

2 “The home medical equipment industry is undergoing significant consolidation. It is a highly fragmented industry characterized by a large number of providers in every market. The consolidation process has been marked by a number of recent mergers and acquisitions by leading companies in the industry and by the continued acquisition of smaller regional companies by the major companies in the industry. Industry consolidation in home medical equipment is being driven by the need to achieve higher levels of efficiency in the delivery of healthcare products and services in the home setting to reduce the costs of such care. It is also being driven by the needs of the managed care community to contract for such services with companies that can provide broader geographic market coverage. “ (Apria Healthcare Group Inc. Annual Report)

3 "Clarifications" to the Discount Safe Harbor: 42 CFR Part 1001Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute; Final Rule

The types of remuneration covered specifically include kickbacks, bribes and rebates, whether made directly or indirectly, overtly or covertly, in cash or in kind. Effectively, the statute ascribes liability to both sides of an impermissible "kickback" transaction. The statute has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain money for the referral of services or to induce further referrals. In addition, prohibited conduct includes the payment of remuneration intended to induce the purchasing, leasing or ordering of any good, facility, service or item reimbursable by any Federal or State health care program.

Violation of the statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to five years or both. Conviction will also lead to automatic exclusion from Federal health care programs, including Medicare and Medicaid. The U.S. Department of Health and Human Services’ Office of Inspector General (“OIG”) may also initiate administrative proceedings to exclude persons from the Federal and State health care programs or to impose civil monetary penalties for fraud, kickbacks, and other prohibited activities under sections 1128(b)(7) and 1128A(a)(7) of the Act.4

Since the statute on its face is so broad, concern had been expressed that some relatively innocuous commercial arrangements were technically covered by the statute and therefore were subject to criminal prosecution. As a response to the above concern, section 14 of the Medicare and Medicaid Patient and Program Protection Act of 1987, Public Law 100-93, specifically required the development and promulgation of regulations, the so-called "safe harbor" provisions, designed to specify various payment and business practices which, although potentially capable of inducing referrals of business under the Federal and State health care programs, would not be treated as criminal offenses under the anti-kickback statute5

On July 29, 1991, OIG began publishing in the Federal Register a series of final regulations establishing "safe harbors" in various areas. These OIG safe harbor provisions have been developed to limit the reach of the statute somewhat by permitting certain non-abusive arrangements, while encouraging beneficial and innocuous arrangements. Safe harbor protection is afforded only to those arrangements that precisely meet all of the conditions set forth in the safe harbor. One safe harbor relevant to this discussion includes the GPO safe harbor6.

The GPO

All types of health care organizations use group purchasing. Nearly every hospital in the U.S. (approximately 96 to 98 percent) utilizes GPO contracts for their purchasing functions. Industry estimates are that hospitals across the United States use, on average, at least two and as many as four GPOs per facility. A growing portion of the long-term care, ambulatory care, home care, and physician practice markets are using group

4 United States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 (1985). 5 See Section 1128B(b)(3) of the Act; 42 C.F.R. § 1001.952.6 See 42 C.R.F. § 1001.952(j).

purchasing to help lower costs and improve efficiency7. Further, the federal government also provides group-purchasing services to various executive branch agencies.

GPOs offer economies of scale to the health care supply chain. By aggregating purchasing power GPOs help balance the negotiating equation between purchasers and vendors. On average, GPOs save providers between 10 to 15 percent off their purchasing costs. It is estimated that GPOs enable providers about $39 billion annually through lower product prices.

GPOs work to negotiate contracts with health care manufacturers, distributors and other suppliers. After a group purchasing contract is created, it is still up to the provider to decide which product is most appropriate make the most appropriate purchase. GPOs do not purchase (i.e., take title to) products; they negotiate contacts that providers may utilize when purchasing products.

GPOs vary greatly in size, type of ownership and the services they offer their members. There are more than 600 organizations in the United States that participate in some form of group purchasing. Hospitals and other health care providers are increasingly relying on GPOs to help manage the complex system of purchasing. Many GPOs offer providers e-commerce solutions to help manage their purchasing.

GPOs rely, in part, on fees paid by vendors to finance the services the GPOs offer health care providers. These administrative fees are generally based upon the purchase price that the health care provider pays for a product purchased through a GPO contract. The fee is paid when a GPO's provider-member utilizes a GPO contract. Seller-based fees and buying cooperatives are widely accepted competitive business models in many industries (agriculture, real estate, insurance and the U.S. Government).

GPO Safe Harbor

In 1986 Congress sanctioned the GPO model for health care programs by exempting supplier-paid administrative fees from Medicare/Medicaid anti-kickback statutes. The statutory exception and safe harbor regulation requires disclosure to members of the vendor fees paid to GPOs, but allows competition to determine the level of vendor fees.

The GPO safe harbor provides protection for payments by a vendor of goods or services to a GPO (the "GPO fee"). For purposes of this safe harbor, a GPO is defined as an entity authorized to act as a purchasing agent for a group of individuals or entities who (i) are furnishing services for which payment may be made in whole or in part under Medicare or a State health care program and (ii) are neither wholly owned by the GPO nor subsidiaries of a parent corporation that wholly owns the GPO (either directly or through another wholly-owned entity). The GPO fee must be paid as part of an agreement to furnish goods or services to the group of individuals or entities for which the GPO is the authorized agent. The GPO must have a written agreement with each individual or entity

7 Health Industry Group Purchasing Association (HIGPA) Assessing the Value of Group Purchasing Organizations (Lewin Group, May 2003)

that will purchase items or services from the vendor. In addition, where the entity that receives the goods or services from the vendor is a health care provider of services, the GPO must disclose in writing to the entity at least annually, and to the Secretary upon request, the amount received from each vendor with respect to purchases made by or on behalf of the entity.8

Safe Harbor: Discounts

The anti-kickback statute contains an exception for discounts and other reductions in price obtained by providers, which are properly disclosed, and appropriately reflected in costs claimed or charges made to federal health care programs by the provider9. The 1991 safe harbor regulations implementing the exception defined the types of price concessions that qualified as "discounts," and required buyers and sellers to comply with discount disclosure and reporting mechanisms, which varied depending on the type of buyer involved, in order for an arrangement to be protected10. The 1991 safe harbors were subject to important limitations, however, such as the absence of protection for bundled sales arrangements and for rebate arrangements with charge-based buyers such as physicians, pharmacies, and DME suppliers. The discount safe harbor as "clarified" makes important structural changes in the safe harbor and contains a significant liberalization of prior restrictions, particularly relating to rebate arrangements and bundled sales. The OIG also repeats a familiar theme: a critical aspect of the safe harbor is that federal health care programs have the opportunity to realize the benefits of the discount.

The final rule also reiterates the OIG’s general view that the statutory exception for discounts does not offer broader protection than the discount safe harbor11. Nevertheless, the rule appropriately recognizes that, in an environment of fixed-rate payment methodologies and fee schedules, providers should have greater flexibility in contracting arrangements.

On November 19, 1999, the OIG published eight new safe harbor regulations to the Anti-Kickback Statute12. In addition, the OIG clarified six of the original eleven safe harbors.

8 See 42 C.F.R. §1001.952(j).9 See 42 U.S.C. §1320a-7b(b)(3)(A).10 See 42 C.F.R. § 1001.952(h).11 64 Fed. Reg. 63526-2712 See 42 C.F.R. § 1001.952

The following payment practices shall not be treated as a criminal offense under section 1128B of the Act and shall not serve as the basis for an exclusion:(a) Investment Interests.(b) Space Rental.(c) Equipment rental.(d) Personal services and management contracts.(e) Sale of practice.(f) Referral services.(g) Warranties.(h) Discounts.

The OIG also published two safe harbors as interim final rules, implementing the shared risk exception created by the Health Insurance Portability and Accountability Act.

The federal Anti-Kickback Statute prohibits the knowing payment of anything of value to influence the referral of federal healthcare business, including Medicare and Medicaid. The safe harbors immunize from criminal and civil penalties certain payment and business practices that are prohibited by the Anti-Kickback Statute. Falling outside a safe harbor does not mean an arrangement is necessarily illegal, but means that the arrangement will be evaluated based on a facts and circumstances analysis.

Safe Harbor and Discounts/Rebates

The new regulations regarding the safe harbor for discounts include separate requirements for buyers, sellers and offerors and provide protection to certain rebates. The safe harbors also distinguish among different types of buyers such that standards for “fee schedule” organizations (e.g., HME providers13) are different from those for entities that bill based on cost reports or through submission of claims for charges. Most significantly, charge based buyers may now accept both up-front discounts and rebates under the safe harbor provided the buyer maintains appropriate documentation of the discount and agrees to furnish such information upon request of the Secretary of HHS. The terms for any such rebates must be fixed at the time of sale and disclosed to the buyer. The OIG had previously proposed that charge based providers be required to disclose discounts on claims submitted to federal health care programs, but this requirement has been eliminated from the final regulations as the most common claim submission forms do not include fields for disclosure of discounts.

The regulations require sellers and offerors to provide cost-report and charge based buyers with notice that is "reasonably calculated" to alert buyers to their reporting obligations. The preamble comments clarify that a seller or offeror may be protected under the safe harbor regardless of whether the buyer fulfills its reporting obligations, so long as the seller or offeror satisfies any applicable standards for disclosure and notice to the buyer.

The OIG Commentary on Discounts14

13 HME providers are generally reimbursed by Medicare and private insurers via fee schedules. However, about 10 states have a cost-plus program in place for Medicaid reimbursement. In these instances, additional disclosure and documentation may be required.

14 Part V Department of Health and Human Services Office of Inspector General42 CFR Part 1001Medicare and State Health CarePrograms: Fraud and Abuse; Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute; Final Rule FridayNovember 19, 1999

On November 19, 1999, the OIG published its Summary of Proposed Clarifications under the Anti-Kickback statute in the Federal Register. Applicable sections of the text are copied below (underline/emphasis added by author).

“…Because of expressed industry uncertainty over what obligations individuals or entities have to meet in order to receive protection under this safe harbor, we proposed clarifying the discount safe harbor…

- We are modifying our proposed definition of a ‘rebate’ to include any discount the terms of which are fixed at the time of the sale of the good or service and disclosed to the buyer, but which is not received at the time of the sale of the good or service. This modification will enable us to extend safe harbor protection to certain chargebased buyers and buyers reimbursed on the basis of fee schedules who obtain rebates.15 We are eliminating the requirement that charge-based buyers report discounts on claims submitted to the Federal programs; however, we are retaining the requirement that such buyers provide documentation of discounts to the Secretary upon request. “

Commenter/Response Section Applicable to Rebates16

On November 19, 1999, the OIG also published public comments in response to the proposed rule establishing the safe harbor provisions containing suggestions for the consideration and adoption of additional safe harbor provisions under 42 CFR 1001.952. Applicable sections of the text are copied below (underline/emphasis added by author).

“Comment: A number of commenters objected to our bar on safe harbor protection for rebates offered to chargebased providers. Our proposed definition of ‘‘rebate’’ defined a rebate as a discount not given at the time of sale. Under our proposed clarification, safe harbor protection would only be extended to charge-based providers for discounts made at the time of sale of a good or service. The commenters point out, for example, that the regulation precludes retail pharmacies and outpatient clinics from being eligible for price reductions on the same basis as hospitals (cost reporters) and other large purchasers (e.g., HMOs). Moreover, the commenters note that there may be situations in which adjustments to previous billings or other errors could result in a rebate. The commenters also maintain that where payment is based on the lesser of actual charges or a fee schedule amount, fee schedules could be adjusted to reflect the availability of volume discounting. The commenters argue that excluding rebates for chargebased providers lacks a statutory basis, since the statutory exception refers to a ‘‘reduction in price obtained by a provider,’’ without any reference to when the reduction must be obtained. The commenters further argue that there is no sound basis for not protecting delayed discounts to physicians, since we are not requiring physicians to reduce their charges for 15

? Federal Register / Vol. 64, No. 223 / Friday, November 19, 1999 / Rules and Regulations, p. 63517

16 Federal Register / Vol. 64, No. 223 / Friday, November 19, 1999 / Rules and Regulations, p. 63529

the amount of a discount, even where there is a separately claimed item. Thus, the commenters urge that rebates be covered so long as the amount is fully disclosed to the Federal health care programs and the other safe harbor conditions are satisfied.

Response: The most important aspect of the discount safe harbor is that the Federal health care programs share in the discount in proportion to the percentage the programs pay of the total cost. Congress intended only to protect discounts that could fairly benefit the Federal health care programs. It is our intention in these regulations to ensure that the only discounts protected are those where the Federal programs receive such benefit. Having considered the comments received about rebates, we have concluded that excluding safe harbor protection for all rebates to charge-based buyers or buyers that are reimbursed based on Federal program fee schedules is unnecessarily restrictive and may prevent the Federal health care programs from realizing indirect benefits that may accrue from rebates to charge-based providers. Accordingly, we are defining a ‘‘rebate’’ for purposes of the safe harbor as a discount, the terms of which are fixed at the time of the sale and disclosed to the buyer at the time of sale, but which is not given at the time of sale. ‘‘Terms’’ refers to the methodology that will be used to calculate the rebate (e.g., a percentage of sales or a fixed amount per item purchased during a given period of time). The terms of the rebate must be set at the time of the sale and disclosed to the buyer, even though the exact dollar amount of the rebate may not be known until the rebate is paid. In some circumstances, a rebate may be paid only after some number of successive purchases of particular goods or services; in such circumstances, the terms of the rebate must be fixed and disclosed to the buyer at the time of the first sale of a good or service to which the rebate applies. We are eliminating the safe harbor requirement that chargebased buyers (and sellers if submitting claims on behalf of charge-based buyers) disclose the amount of discounts on claims submitted to the Federal programs. We are retaining the existing requirement that buyers (and sellers submitting claims on their behalf) must provide information documenting the discount upon request of the Secretary.

Comment: One commenter objected to a ‘‘discount’’ for purposes of the safe harbor being limited to discounts offered to buyers who buy directly or through wholesalers or group purchasing organizations. This commenter urged that this limitation fails to accommodate new distribution arrangements, many of which contribute to purchasing economies. For example, hospitals, physicians or ambulatory surgical centers may buy items and services through HMOs or other brokering-type suppliers.

Response: In general, if a discount is negotiated with a bona fide seller of the item or service, including an entity that aggregates provider demand to obtain access to volume discounts, in accordance with an arms-length transaction, and if the discount otherwise meets all safe harbor requirements, we believe that the discount would come within the safe harbor definition of discount. However, there may be arrangements that do not fit the definition where access to a seller’s favorable discount rates is itself an inducement or reward for referrals, e.g., providing certain physician practices access to a hospital’s employee health benefits plan in order to reduce the physician’s employee insurance costs.”

According to leading healthcare law firm Reed Smith, “the new protection for rebate arrangements with charge-based buyers should provide significant new flexibility for providers such as pharmaceutical and medical device manufacturers that sell their products to physicians, pharmacies, and DME suppliers.”17 And, Foley and Lardner commented, “Under today’s prevailing Medicare reimbursement methodologies (e.g., PPS and fee schedules), it generally does not matter how much or little providers pay for any particular equipment or supply purchased, because providers are paid based on the services they furnish to Medicare beneficiaries, without regard to their costs. One reimbursement methodology in which it does matter how much the provider spends on any particular item or another is cost-based reimbursement (another is when Medicare pays providers for purchased services). The OIG has recognized that the purchaser’s costs matter in the costbased reimbursement context, and this is where its concerns have traditionally, and rightly, been focused.18

Conclusion

All HME providers, regardless of size, should be concerned with potential anti-kickback and Stark violations. HME providers should be knowledgeable about, and compliant with, the anti-kickback statute, the Stark referral laws and other relevant Federal and State statutes or regulations.

The OIG recommends that provider’s written policies and procedures should specifically reference and take into account the OIG’s safe harbor regulations, which describe certain practices that are immune from criminal and administrative prosecution under the anti-kickback statute. Accordingly, this paper provides sourcing and citations of specific safe harbors and other issues applicable to the HME provider (and its GPO) that include vendor discounts and rebates.

HME providers should have policies and procedures in place with respect to compliance with applicable laws, and with all arrangements reviewed by counsel.

17 New “Safe Harbor” Regulations Under The Anti-kickback Statute, August 17 2000, Reed Smith (http://www.reedsmith.com/library/publicationPrint.cfm?itemid=3642))18 Law Watch, Foley and Lardner VOL. 02-27 AUG. 19, 2002

Appendix A- Detail of the Discount Safe Harbor19

As used in section 1128B of the Act, ``remuneration'' does not include a discount, as defined in paragraph (h)(3) of this section, on a good or service received by a buyer, which submits a claim or request for payment for the good or service for which payment may be made in whole or in part under Medicare or a State health care program, from a seller as long as the buyer complies with the applicable standards of paragraph (h)(1) of this section and the seller complies with the applicable standards of paragraph (h)(2) of this section:

(1) With respect to the following three categories of buyers, the buyer must comply with all of the applicable standards within each category--

(i) If the buyer is an entity, which reports its costs on a cost report required by the Department or a State agency, it must comply with all of the following four standards--

(A) The discount must be earned based on purchases of that same good or service bought within a single fiscal year of the buyer; (B) The buyer must claim the benefit of the discount in the fiscal year in which the discount is earned or the following year;(C) The buyer must fully and accurately report the discount in the applicable cost report; and(D) The buyer must provide, upon request by the Secretary or a State agency, information provided by the seller as specified in paragraph (h)(2)(ii) of this section.

(ii) If the buyer is an entity which is a health maintenance organization or competitive medical plan acting in accordance with a risk contract under section 1876(g) or 1903(m) of the Act, or under another State health care program, it need not report the discount except as otherwise may be required under the risk contract. (iii) If the buyer is not an entity described in paragraphs (h)(1)(i) or (h)(1)(ii) of this section, it must comply with all of the following three standards--

(A) The discount must be made at the time of the original sale of the good or service;(B) Where an item or service is separately claimed for payment with the Department or a State agency, the buyer must fully and accurately report the discount on that item or service; and(C) The buyer must provide, upon request by the Secretary or a State agency, information provided by the seller as specified in paragraph (h)(2)(ii)(A) of this section.

(2) With respect to either of the following two categories of buyers, the seller must comply with all of the applicable standards within each category--

(i) If the buyer is an entity described in paragraph (h)(1)(ii) of this section, the seller need not report the discount to the buyer for purposes of this provision.(ii) If the buyer is any other individual or entity, the seller must comply with either of the following two standards--

19 42 C.F.R. § 1001.952

(A) Where a discount is required to be reported to the Department or a State agency under paragraph (h)(1) of this section, the seller must fully and accurately report such discount on the invoice or statement submitted to the buyer, and inform the buyer of its obligations to report such discount; or(B) Where the value of the discount is not known at the time of sale, the seller must fully and accurately report the existence of a discount program on the invoice or statement submitted to the buyer, inform the buyer of its obligations under paragraph (h)(1) of this section and, when the value of the discount becomes known, provide the buyer with documentation of the calculation of the discount identifying the specific goods or services purchased to which the discount will be applied.

(3) For purposes of this paragraph, the term discount means a reduction in the amount a seller charges a buyer (who buys either directly or through a wholesaler or a group purchasing organization) for a good or service based on an arms length transaction. The term discount may include a rebate check, credit or coupon directly redeemable from the seller only to the extent that such reductions in price are attributable to the original good or service that was purchased or furnished. The term discount does not include--

(i) Cash payment;(ii) Furnishing one good or service without charge or at a reduced charge in exchange for any agreement to buy a different good or service;(iii) A reduction in price applicable to one payor but not to Medicare or a State health care program;(iv) A reduction in price offered to a beneficiary (such as a routine reduction or waiver of any coinsurance or deductible amount owed by a program beneficiary);(v) Warranties;(vi) Services provided in accordance with a personal or management services contract; or(vii) Other remuneration in cash or in kind not explicitly described in this paragraph.

Appendix B- New “Safe Harbor” Regulations Under The Anti-kickback Statute20

I. INTRODUCTION

On November 19, 1999, the Office of Inspector General ("OIG") of the Department of Health and Human Services ("HHS") promulgated final regulations entitled "Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute," 64 Fed. Reg. 63518 (1999). These regulations created eight new safe harbor provisions, which protect arrangements from criminal prosecution and civil sanctions under the anti-kickback statute, 42 U.S.C. § 1320a-7b(b). This statute prohibits anyone from knowingly and willfully offering, paying, soliciting, or receiving remuneration in order to induce business reimbursable under federal or state health care programs.

The new safe harbors pertain to investments in underserved areas, sales of physician practices, practitioner recruitment, obstetrical malpractice insurance subsidies, investments in group practices, cooperative hospital service organizations, ambulatory surgical centers ("ASCs"), and referral agreements for specialty services. The first four of the new safe harbors address arrangements in underserved areas. In addition, the regulations clarified various provisions in the original safe harbors relating to large and small entity investment interests, space rental, equipment rental, personal services and management contracts, referral services and discounts. On the same day, the OIG also promulgated an interim final rule relating to two additional safe harbors for shared risk arrangements. (fn1) As a result, there are now a total of 23 safe harbors to the anti-kickback statute.

The new safe harbors were originally proposed in 1993. While many provisions were not changed, there have been several major modifications as well as considerable fine-tuning. Half of the new safe harbors protect various types of arrangements in underserved areas, although these areas are now defined more broadly to encompass certain urban, as well as rural, areas. However, the definition of underserved area appears to limit the types of practitioners who may qualify for safe harbor protection in certain cases.

The ASC safe harbor has been substantially enlarged, and now covers four types of ASC arrangements. By contrast, the group practice investment safe harbor has been narrowed to apply only to investments in the group practice itself, and will not protect a group’s investment in separate entities. The clarifications contained in the final rule are generally very similar to the language proposed earlier with one notable exception. The discount safe harbor now provides much greater protection for certain types of rebates and bundled discounts for charge-based or fee schedule providers and suppliers.

The OIG reiterates throughout the regulations that failure to qualify for a safe harbor does not mean that an arrangement is necessarily illegal. However, since many arrangements will not fully qualify for safe harbor protection and will need to be evaluated on an individualized basis, the preamble frequently suggests that parties seek advisory opinions.

20 Reed Smith (http://www.reedsmith.com/library/publicationView.cfm?itemid=3642)

This Memorandum provides a brief overview of the legislative and regulatory history of the safe harbors to the anti-kickback statute. It then discusses key aspects of the new safe harbors and clarifications to the existing safe harbors, as set forth in the final rule and accompanying preamble. In light of the complexity of the safe harbor regulations, this Memorandum is not intended to be a comprehensive analysis of all the regulatory provisions, and it cannot provide legal advice regarding the safe harbors’ application to any particular business arrangement. To facilitate review, this Memorandum focuses on selected issues that we believe will be of most interest to our clients, and describes some of the more significant changes that have been made in the safe harbors.

II. STATUTORY AND REGULATORY BACKGROUND

Because the statutory language prohibiting kickbacks is so broad, there has long been concern that innocuous commercial transactions could theoretically fall within its scope, and subject legitimate arrangements to criminal or other sanctions. In 1987, Congress amended the anti-kickback law to require the development of safe harbor regulations, which would specify certain business and payment practices that would not be treated as violations of the anti-kickback statute, even though they technically might not comply with its terms. The goal of the safe harbor provisions is to permit "certain non-abusive arrangements, while encouraging beneficial and innocuous arrangements."

In 1991, the OIG published the first final rulemaking that established safe harbors in ten broad areas: investment interests; space rental; equipment rental; personal services and management contracts; sales of practices; referral services; warranties; discounts; employees; and group purchasing organizations ("GPOs"). The OIG received numerous public comments on these regulations, including recommendations for additional safe harbors. In 1993, the OIG published a proposed rule requesting comments on the following seven new areas of safe harbor protection: investment interests in rural areas; ambulatory surgical centers; group practices; practitioner recruitment; obstetrical malpractice insurance subsidies; referral agreements for specialty services; and cooperative hospital service organizations. A modification to the existing safe harbor for sales of physician practices also was proposed at this time.

As the original safe harbors were implemented, the OIG became aware of a number of ambiguities that had created uncertainties for health care providers seeking to comply with the regulations. To clarify its intent, in 1994, the OIG published a notice of proposed rulemaking to modify the language of the original safe harbors. These proposed clarifications were not intended to change the safe harbors, but rather to make the regulatory language more precise in order to carry out its intended purposes.

The new safe harbor regulations finalize the safe harbors and clarifications proposed in 1993 and 1994. The preamble to the regulations contains comments generally applicable to interpretation of all the safe harbors as well as a summary of the new regulatory provisions and responses to the over 350 public comments received.

III. 1999 SAFE HARBOR REGULATIONS

A. General Comments

1. Relationship Between The Anti-Kickback Statute And The Stark Statute

The OIG acknowledges that the anti-kickback statute’s safe harbor standards are not necessarily the same as the requirements of the Stark statute prohibiting physician self-referrals, 42 U.S.C. § 1395nn, and claims that this variation results from Congressional intent and the fundamental difference between the two statutory schemes. Although both laws apply to physician self-referrals, the anti-kickback statute is a criminal law, which requires improper intent for a violation. The Stark law is a civil statute, and a transaction must fall entirely within an exception to be lawful, regardless of the parties’ intent. Therefore, even if an arrangement does not violate the Stark prohibitions, it may violate the anti-kickback statute if the requisite improper intent to induce referrals is present. 64 Fed. Reg. 63520.

2. Integrated Delivery Systems - Intra System Referrals

With regard to integrated delivery systems, the preamble reiterates the position taken in the 1991 regulations that the anti-kickback statute is not implicated when payments are made within a single corporate entity, e.g. from one division to another. However, despite requests, the OIG declines to provide a safe harbor at this time for integrated delivery systems or for arrangements between wholly owned entities. These arrangements could create improper financial incentives resulting in over-utilization and increased program costs, which could adversely affect quality of care and patient freedom of choice. According to the preamble, the risk is particularly high where the federal government is paying for services on a fee for service basis. As a potential area of such concern, the preamble gives the example of a hospital making referrals to a wholly owned home health agency ("HHA") (but does not address the fact that HHAs will be transitioning to a prospective payment system).

3. Transition Period

Several commenters asked the OIG to "grandfather" arrangements that had been structured in good faith reliance on the 1991 safe harbors but which no longer comply with these safe harbors as clarified. The OIG declines to grandfather these arrangements or to provide a formal transition period, noting that a reasonable time for restructuring may vary depending on the nature and complexity of the arrangement. However, the OIG agrees to use its discretion "to be fair to the parties" who reasonably believed they complied with one of the 1991 safe harbors, and are diligently working in good faith to restructure the arrangement, as necessary, in light of the new regulations.

4. Failure To Comply With A Safe Harbor Does Not Necessarily Make An Arrangement Illegal Or Suspect

At several points throughout the document, the preamble states that an arrangement does not have to comply with a safe harbor in order to be legal under the anti-kickback statute. Moreover, in response to several comments, the OIG emphasizes that an arrangement is not necessarily suspect because it does not comply with a safe harbor although it may be suspect under particular circumstances.

Appendix C- “Clarification of Existing Safe Harbors”21

Discount Arrangements

The discount safe harbor, which is probably the most complex and confusing of the 23 safe harbors, has been significantly modified in a number of respects to make it easier to use and broaden its application. This is welcome relief for those who struggle to apply this exception to the myriad of commercially common discounting arrangements. In recognition that some parties that offer discounts are intermediaries, and not, strictly speaking, buyers or sellers, the safe harbor has been expanded to include “offerors.” All parties to discount transactions (i.e., buyers, sellers and offerors) can now come within the safe harbor by meeting the separate requirements applicable to them.

One of the greatest concerns raised by the original safe harbor was that a seller’s ability to come within the safe attribution permitted. Safe harbor was contingent on the buyer’s compliance, which, of course, is not within the seller’s control. Now, a seller can satisfy the safe harbor, even if its buyers do not, so long as the seller, among other requirements, “informs the buyer in a manner reasonably calculated to give notice to the buyer” of the buyer’s reporting obligations under the safe harbor, and the seller does nothing “that would impede the buyer from meeting its obligations.” Another change from the original rule permits discounts to be offered to a beneficiary, if other requirements of the safe harbor are met. (Previously, discounts to beneficiaries were ineligible under the safe harbor.) Routine waivers of deductibles or coinsurance, however, are not protected. Another significant, beneficial change modifies the old rule’s prohibition on discounts offered on one good or service to induce the purchase of a different good or service. As modified, the rule permits mixing discounts on different goods and services so long as “the goods and services are reimbursed by the same Federal health care program using the same methodology and the reduced charge is fully disclosed to the Federal health care program and accurately reflected where appropriate, and as appropriate, to the reimbursement methodology….”

A number of other changes are of a more editorial variety, such as correcting a “technical error” from the original rule (these are generally referred to by those outside of the government as “typos”). Over all, the changes made to the discount safe harbor are among the more significant of the clarifications to the original safe harbors.

21 ©1999 Foley & Lardner. Reproduction with attribution

Appendix D - Blood Glucose Test Strips: Inappropriate Medicare Payments22

To assess the appropriateness of Medicare payments for blood glucose test strips by examining critical elements of this Part B benefit, including coverage requirements, supplier information and documentation, and beneficiary utilization.

BACKGROUND

Medicare covers home blood glucose monitors and test strips for beneficiaries who must periodically test their blood sugar levels as part of their diabetes management, regardless of insulin usage. Prior to July 1, 1998, Medicare coverage was restricted to beneficiaries with insulin-treated diabetes. Insulin-treated diabetics usually test their blood glucose levels one or more times a day. Medicare allowances for test strips more than doubled between 1994 and 1997, increasing from about $102 million in 1994 to $220 million in 1997. Allowances exceeded $314 million in 1998.

Suppliers of blood glucose test strips submit claims to the Durable Medical Equipment Regional Carriers (DMERCs) for processing and payment. The supplier must have an order from the beneficiary’s physician verifying medical need for blood glucose test strips. Suppliers signify that they have sufficient documentation to establish Medicare coverage of supplies for insulin-treated beneficiaries by appending a ZX modifier to procedure codes representing the supplies furnished.

For this inspection, we collected data from a sample of Medicare beneficiaries with paid claims for blood glucose test strips in 1997 and the medical equipment suppliers who provided the supplies.

FINDINGS

Medicare allowed $79 million for blood glucose test strips with missing or flawed documentation. $33 million in test strip claims had insufficient documentation to support eligibility. An additional $46 million in claims had incomplete orders or no supplier delivery records.

Blood Glucose Test Strips 1 OEI-03-98-00230

Irregular billing cycles make review of test strip claims difficult. Such irregular cycles can make it difficult for DMERCs to identify overlapping claims, claims without correct supporting documentation, and claims containing excessive amounts of test strips.

RECOMMENDATIONS To address the vulnerabilities identified in this report, we recommend that the Health Care Financing Administration:

22 Department of Health and Human Services OFFICE OF INSPECTOR GENERAL JUNE GIBBS BROWN, Inspector General. JUNE 2000 OEI-03-98-00230 EXEC27

Alert suppliers of the importance of properly completed documentation to support their claims for test strips. This effort should encompass physicians’ orders as well as supplier delivery documentation and documentation to support the medical necessity of quantities of test strips greater than 100 per month. In addition, the use and meaning of ZX modifiers should be emphasized. Further, HCFA should periodically review documentation to ensure that it exists and is accurate.

Require suppliers to indicate actual and accurate “start” and “end” dates on claim forms. This action would make it easier for DMERCs to determine the existence of aberrant or potential problems, such as overlapping claims or whether documentation is needed to support more than 100 test strips a month.

Promote supplier concurrence and cooperation with the Office of Inspector General’s recently issued document entitled, Compliance Program Guidance for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry. Suppliers should be encouraged to establish and adhere to the voluntary compliance program to ensure that their operations meet the standards promulgated by the Office of Inspector General along with national health care organizations.

Advise beneficiaries, as part of its outreach service, to report any instances of fraudulent or abusive practices (such as receiving excessive or unrequested deliveries of test strips) involving their home blood glucose monitors, test strips, or related supplies to their DMERCs.

Appendix E- Blood Glucose Test Strips - Marketing to Medicare Beneficiaries23

This Program Memorandum (PM) explains marketing practices that could be in violation of the Medicare anti-kickback statute, 42 United States Code (U.S.C.) 1320a-7b(b).

Share this information with suppliers of blood glucose strips in your next scheduled bulletin. Emphasize compliance with the Medicare anti-kickback statute and the Office of Inspector General’s Compliance Program Guidance for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry.

Marketing practices may influence Medicare beneficiaries who utilize medical supplies, such as blood glucose strips, on a repeated basis. Beneficiaries are advised to report any instances of fraudulent or abusive practices, such as misleading advertising and excessive or non-requested deliveries of test strips, to their Durable Medical Equipment Regional Carriers. Remind suppliers that beneficiaries must specifically request refills of supplies before they are dispensed.

Advertising incentives that indicate or imply a routine waiver of coinsurance or deductibles could be in violation of 42 U.S.C. 1320a-7b(b). Routine waivers of coinsurance or deductibles are unlawful because they could result in (1) false claims, (2) violation of the anti-kickback statute, and/or (3) excessive utilization of items and services paid for by Medicare.

In addition, 42 U.S.C. 1320a-7a(a) (5) prohibits a person from offering or transferring remuneration. Remuneration is a waiver of coinsurance and deductible amounts with exceptions for certain financial hardship waivers that are not prohibited.

Suppliers should seek legal counsel if they have any questions or concerns regarding waivers of deductibles and/or coinsurance of the propriety of marketing or advertising material. Any supplier who routinely waives co-payments or deductibles can be criminally prosecuted and excluded from participating in Federal health care programs.

The effective date for this PM is December 1, 2000.The implementation date for this PM is March 1, 2001. These instructions should be implemented within your current operating budget. This PM may be discarded after December 1, 2001. The contact person for this PM is Kimberly Pugh, (410) 786-9212. HCFA-Pub. 60B

23 Program Memorandum Human Services (DHHS) Carriers HEALTH CARE FINANCING ADMINISTRATION (HCFA) Transmittal B-00-69 Date: NOVEMBER 29, 2000 CHANGE REQUEST 1336 SUBJECT: Blood Glucose Test Strips - Marketing to Medicare Beneficiaries