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Cardinal Health’s $13 Million Settlement with DOJ Illustrates Perils of “Upfront Discounts”

Today, the Boston U.S. Attorney’s Office announced that Cardinal Health (Cardinal), one of the nation’s largest drug wholesalers, has agreed to pay $13,125,000 to resolve allegations that its specialty drug distribution unit paid kickbacks to certain medical practices by giving them “upfront discounts” that were not associated with specific sales and thus did not function as discounts at all.

According to the settlement agreement, Cardinal allegedly attempted to induce physician practices to purchase their drugs from Cardinal by paying the practices in advance of any actual purchases from Cardinal. As a result, the government alleged, the payments either were not attributable to identifiable sales of pharmaceutical products or reflected rebates that the customers did not actually earn. The government asserted that, under these circumstances, the payments did not fit within either statutory discount exception or the regulatory discount safe harbor to the anti-kickback statute (“AKS”). Notably, in the settlement agreement, Cardinal acknowledged the facts on which the government based its allegations.

The AKS, 42 U.S.C. § 1320a-7b(b), prohibits, among other things, the payment of remuneration to induce the purchase of products reimbursed by federal healthcare programs. The AKS contains an exception for “a discount or other reduction in price obtained by a provider . . . if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a Federal health care program.” 42 U.S.C. § 1320a-7b(b)(3). Likewise, the Department of Health and Human Services Office of the Inspector General (“HHS-OIG”) has promulgated a regulatory safe harbor to the AKS for “discounts” that are “taken off the buyer’s purchase price.” 42 C.F.R. § 1001.952(h)(2). These carve-outs from the AKS serve to encourage discounts, but only so long as the discounts are associated with specific items or services and thus enable the government to understand the true purchase price and to set reimbursement rates accordingly. See, e.g., United States v. Shaw, 106 F. Supp. 2d 103, 115 (D. Mass. 2000) (“[O]ne essential component of this [AKS] exception is that the federal or state health program share in and benefit from the reduced cost of the services or goods that are being provided at a discount or other reduced price. . . . The only way to pass on those benefits, however, is if Medicare and Medicaid are made aware of the competitively low costs so that the federal or state system reimburses the provider the percentage of only the reduced price.”).

In an advisory letter dated July 17, 2000, HHS-OIG opined on the propriety of contracts providing for “up-front rebates,” where there is no provision “for any refund to the Seller upon failure of the Purchasers to satisfy any minimum purchase requirements and [the contracts could] establish an exclusive purchasing relationship between the parties.” The agency warned that such payments “raise issues under the anti-kickback statute, because the payments (i.e., remuneration) are obviously incentives to induce the purchase of items or services,” and that the payments would not be covered by the discount safe harbor “because they are made prior to any purchase and are not attributable to identifiable purchases of items or services.” Id. In other words, a seller’s up-front payment that is not attributable to particular sales does not function as a “discount or other reduction in price,” and thus implicates the AKS.

Notably, in 2011, Cardinal itself had entered into a settlement agreement resolving separate allegations that it violated the AKS by paying a pharmacy a $440,000 upfront “conversion incentive” to switch distributors from McKesson to Cardinal. Thus, Cardinal was well aware that such upfront payments may constitute illegal kickbacks if they do not function as true discounts that reduce the price on specific items or services in a transparent manner.

The latest Cardinal settlement serves as yet another warning that suppliers of goods or services reimbursed by federal health care programs cannot seek to obtain new customers with the lure of upfront “discounts” or signing bonuses that are not attributable to specific purchases and thus are not transparent to the government agencies that set reimbursement rates.