OIG Advisory Opinion Warns Drug Company Its Proposal To Provide Drug For Free May Be Illegal

The Office of the Inspector General of the United States Department of Health and Human Services (“OIG”) issued an advisory opinion posted on November 16, 2018 that concluded that a drug company’s proposal to provide free product to hospitals for their use exclusively to treat inpatients who have been diagnosed with one particular condition could potentially generate prohibited remuneration under the anti-kickback statute and the OIG could potentially impose administrative sanctions on the drug company under sections 1128(b)(7) or 1128A(a)(7) of the Social Security Act (“Act”) in connection with the proposed arrangement.

The particular drug was initially approved by the FDA in 1952 and has been used for more than 60 years to help treat patients with serious and rare conditions. Currently there are 19 FDA-approved indications for the drug, which is an injectable drug that is frequently self-administered (or administered by a caregiver) and is dispensed through a specialty pharmacy. In some cases, however, the drug is administered to a patient during an inpatient hospital stay. In those instances, payment for the inpatient hospital stay would include payment for the drug (as well as room charges, diagnostic testing, nursing services, etc.) and the drug is not separately reimbursable in the inpatient setting.

One of the FDA-approved indications for the drug is treatment of a syndrome that is a form of epilepsy that may occur through the end of the second year of life (approximately 2,000 to 2,500 new cases are diagnosed each year in the United States). Various studies suggest improved long-term outcomes for patients who had a shorter lag time to treatment after the onset of symptoms (e.g., within one month of onset).

The syndrome currently can be treated with only two FDA-approved treatments, including another product manufactured by a different drug company. Typically, patients with the syndrome who are being treated with the drug receive twice-daily injections of the drug for two weeks, and then dosing is gradually tapered and discontinued over a subsequent two-week period. In the inpatient hospital setting, treating the syndrome with the drug typically requires a one- to five-day hospital stay.

The Proposed Arrangement

The drug company proposed to give free doses of the drug to hospitals for the hospitals to use exclusively for inpatients who are diagnosed with the syndrome and are prescribed a course of therapy with the drug. If the contents of the entire free vial have been administered to the patient before the patient has been discharged from the hospital, the drug company would provide a second free vial (or further subsequent vials) to the hospital for that patient. If the patient’s caregiver is unable to secure insurance coverage for the drug, then the patient would continue to receive the drug for free until either coverage is obtained or the therapy (including, as necessary for safe treatment termination, the two-week taper period) is complete. Participating hospitals, prescribers, and patient caregivers would be advised that receiving the free vial(s) is not contingent on any future obligation to purchase either the drug or any of the drug company’s other products.

So, What’s The Problem?

The anti-kickback statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a Federal health care program (Section 1128B(b) of the Act). Where remuneration is paid purposefully to induce or reward referrals of items or services payable by a Federal health care program, the anti-kickback statute is violated. By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction. For purposes of the anti-kickback statute, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. 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.

Some Disturbing Background Information

The drug’s list price has increased significantly in the past 15 years. Another drug company (which was subsequently purchased by the drug company requesting the OIG’s advisory opinion) purchased rights to the drug in 2001. The cost of one vial of the drug in 2001 was approximately $40. In 2007, the drug compnay raised the list price from $1,650 to over $23,000 per vial. The current list price is listed on the drug company’s website as $38,892 per vial. The net sales for the drug were more than ten times higher in 2017 than they were in 2008, whereas the number of patients diagnosed with the syndrome remains approximately the same from year to year. The market for the drug’s other indications—for which Federal health care programs may pay—appears to have expanded.

In January 2017, the drug company, without conceding to allegations against the other drug company that it acquired, agreed to pay $100 million to settle FTC charges that: “[W]hile benefitting from an existing monopoly over . . . [the Drug], . . . [Company B] illegally acquired the U.S. rights to develop a competing drug [by] outbidding several other companies that were seeking to acquire the rights to [the competing synthetic drug substance]. Those alternative bidders were interested in developing the drug and had plans to sell it at a significant discount to [the Drug’s] price, capturing a substantial amount of [Company B’s] business. . . . [Company B’s] acquisition of [the competing synthetic drug substance] stifled competition and eliminated the possibility that an alternative bidder would make the drug available in the U.S. market and compete with [the Drug].”

The FTC further charged that Company B’s acquisition preserved its monopoly, thereby allowing it to maintain extremely high prices for the drug. In other parts of the world including Europe and Canada, doctors treat patients with the syndrome with the competing synthetic drug substance, “which is available at a fraction of [the Drug’s] price in the United States.” The FTC’s order also required the drug company to grant a license to develop the competing synthetic drug substance to treat certain conditions, including the syndrome, to a licensee approved by the FTC.

Problems With The Proposed Arrangement

The OIG advisory opinion stated that giving the drug for free to hospitals for inpatients diagnosed with the syndrome could induce the hospitals to arrange for or recommend future purchases of the drug. The proposed arrangement therefore would implicate the anti-kickback statute.

The OIG stated that the proposed arrangement would relieve a hospital of a significant financial obligation that the hospital otherwise would incur if it were to acquire the drug when a physician prescribes it for a hospital inpatient.

The OIG stated that the proposed arrangement would not result in any savings for the Federal health care programs because the drug company would provide the drug for free only to hospitals to use only for inpatients diagnosed with the syndrome, and the amount a Federal health care program would reimburse a hospital for an inpatient stay would not be reduced even if the hospital received the drug for free. Consequently, no portion of the significant savings from which a hospital would benefit under the proposed arrangement would be passed on to the Federal health care programs. Furthermore, the drug company seeks to give the drug for free to hospitals for a narrowly defined subset of patients and to retain the higher price for all other patients who use the drug (for any of its indications) and all payors, including Federal health care programs.

The OIG warned that the proposed arrangement could function as a seeding arrangement because a hospital could influence or arrange for a physician to prescribe the drug for inpatients when the hospital receives the drug for free. Once patients are discharged, if their insurance covers the drug, then insurers (including Federal health care programs) and patients would be charged for the drug. Furthermore, giving the drug for free to this specific patient population in the inpatient setting facilitates the drug company’s high price for the drug’s other indications.

The OIG stated that the proposed arrangement could result in steering or unfair competition. Prescribers have various treatment options, including but not limited to the drug, to consider, and hospitals have a choice of which drugs to stock. It is possible that hospitals could influence prescribers to consider the drug as a first option, either directly or through formulary decisions, as a result of the proposed arrangement.

The OIG stated that patients who have insurance coverage for the drug would make future purchases of the drug in order to avoid potential adverse medical consequences. In essence, the receipt of the free vial would be contingent on future purchases of the drug for patients with insurance coverage for the drug.


“There’s no such thing as a free lunch.”

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This entry was posted on Saturday, December 8th, 2018 at 5:20 am. Both comments and pings are currently closed.

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