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Recent Settlement with Florida Physician Practice Highlights Continuing Risks of Upfront “Rebates”

On October 3, 2022, the U.S. Attorney’s Office in Boston announced that a Florida physician practice, Southeast Florida Hematology and Oncology Group, P.A. (“SEFHOG”), had agreed to pay $130,000 to resolve allegations that, among other things, it took an upfront “transition rebate” from Cardinal Health, a large drug distributor, in exchange for agreeing to purchase 90 percent of its drugs from Cardinal. As we noted earlier this year, Cardinal previously agreed to pay over $13 million to resolve allegations that it violated the anti-kickback statute (“AKS”) by paying upfront discounts to physician practices.

This latest settlement with SEFHOG shows that the government is not just targeting the payers of illegal upfront rebates or discounts, but the recipients, too, even when the amounts at stake are relatively small. The settlement agreement with SEFHOG noted that Cardinal paid money to the practice “not in connection with specific purchases that SEFHOG made from Cardinal,” which meant that the money did not function as a transparent discount on the prices of any particular drugs. But the money achieved its intended purpose, since “SEFHOG then almost exclusively purchased pharmaceuticals from Cardinal Health, instead of Cardinal Health’s competitors.”

As we previously explained:

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).

In its settlements with Cardinal and SEFHOG, the government implicitly alleged that Cardinal’s upfront payments to physician practices did not fit within either the statutory discount exception or the regulatory discount safe harbor, because the payments were not associated with particular purchases and thus did not set prices that were transparent to the government entities that ultimately paid for the drugs. Instead, the practices pocketed the payments, Cardinal got the practices’ business, and government payers continued to pay for the drugs at reimbursement rates that did not reflect the money Cardinal was paying to the practices on the side.