November 27, 2018

OIG Considers Drug Pricing History in an Unfavorable Advisory Opinion on Free Drugs

Holland & Knight Healthcare Blog
Jeffrey W. Mittleman | Andrew I. Namkung


  • The OIG issued an unfavorable advisory opinion on a proposed program by which a marketer would provide free drugs to hospitals to utilize in an inpatient setting to treat infantile epilepsy.
  • Contrary to the typical advisory opinion process, the OIG appears to have relied, in part, on publicly available information about the requestor and its history of drug pricing that the requestor never submitted in reaching this unfavorable conclusion.
  • Given the role that the history of the specific requestor appears to have had the OIG's analysis, it is not clear how the OIG will view future similar arrangements involving the provision of free drugs.

In remarkable fashion, the U.S. Department of Health and Human Services Office of the Inspector General (OIG) posted Advisory Opinion 18-14 on Nov. 16, 2018, an unfavorable opinion on a proposal to provide a free specialty drug to hospitals for use in the inpatient setting. Specifically, the requestor is a marketer of a particular drug that is one of two currently FDA-approved drugs that can treat a particular form of infantile epilepsy syndrome. Due to the nature of this condition, initial treatment must, and typically does, begin in an inpatient hospital setting, then continued and tapered after the patient has been discharged. According to the requestor, many hospitals often refuse or are unable to stock the drug for a variety of reasons, including inventory risk and the fact that government programs and other insurers do not separately reimburse for the drug when administered in the inpatient setting. This often delays a patient's access to the drug, which may have adverse consequences.

Under the proposed arrangement, the requestor would give free doses of the drug on a consignment basis to hospitals to treat the syndrome. This would allow the hospital to initiate inpatient therapy using the free drug. The patient would continue to receive the drug for free until the patient is able to secure insurance coverage for the drug. The provision of the free drug would only cease either when insurance coverage is obtained or the therapy is complete. In a curious statement, the requestor allegedly noted that while it considered significantly reducing the drug's prices, it could not offer such a reduction "without a devastating impact on [Medicaid] Best Price."1

In a striking deviation from the traditional advisory opinion process, the OIG proceeded with the advisory opinion by first providing a lengthy discussion of "additional publicly available background information" regarding the particular requestor and the drug, before actually conducting the typical analysis under the federal Anti-Kickback Statute (AKS). The OIG noted that "[t]ypically, we examine only those facts provided to us and certified by a requestor when analyzing a particular arrangement. However, if we are aware of additional relevant and material facts that might bear on the risks of a particular arrangement, we cannot ignore those facts simply because a requestor does not present them to us in its advisory opinion request."

The OIG then spent a substantial portion of the advisory opinion highlighting various publicly available information on the requestor and the drug, including the fact that the price of the drug has increased by 1,300% from 2001 to 2007,2 the drug existed and was being used to treat the syndrome prior to the requestor's purchase of the drug, and the requestor recently agreed to pay $100 million to settle FTC charges that the requestor violated the antitrust laws to, in part, maintain high prices for the drug.

Noting that "we cannot analyze the Proposed Arrangement in a vacuum," the OIG stated that the proposed arrangement would present more than a minimal risk for fraud and abuse under the AKS because the free drug would be remuneration that the requestor would provide to hospitals, which could serve as referral sources for the drug. Specifically, the OIG highlighted the following factors:

  • The free drug would relieve a hospital of significant financial obligation that the hospital would otherwise incur. The OIG noted that "[g]iven that the drug has been used to treat the syndrome for decades, it is likely that the substantial price increases for the drug [by the requestor] factor into hospitals' reluctance to stock it."
  • The free drug would not result in any savings for federal health care programs given that the drug is not separately reimbursable in an inpatient setting; no portion of the significant savings by the hospital would be passed on to the federal health care programs.
  • The free drug could function as a "seeding arrangement," because after the patients are discharged, if their insurance provides coverage, then insurers (including federal health care programs) and patients would be charged for the drug. The OIG also noted here that based on the requestor's comments regarding Medicaid Best Price, "rather than reducing the price of the drug for patients with the syndrome, the requestor 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 and all payers, including federal health care programs."
  • The free drug could result in steering or unfair competition. Citing the requestor's recent FTC settlement, the OIG stated that hospitals and prescribers have a choice of which drugs, including but not limited to this drug, to prescribe and stock to treat the syndrome, and that the proposed arrangement would influence hospitals and prescribers to consider the drug as a first option.
  • The OIG noted that the requestor has an option of using a consignment system without providing the drug for free. The requestor could require a purchase only if the hospital actually used the drug, allowing the hospital to have immediate access to the drug without bearing the financial risk of buying the drug and having it go unused. Conversely, the OIG noted in a footnote that if the proposed arrangement involved the provision of the free drug during the full course of treatment, the outcome of the opinion could have been different.
  • Based on the nature of the condition, as certified by the requestor, this drug cannot be discontinued without potential adverse consequences to a patient's health, and thereby in essence, making the receipt of the free vial contingent on future purchases of the drug for patients with insurance coverage.

In this advisory opinion, the OIG unequivocally considered, in part, publicly available information that the requestor never certified or submitted. Given the OIG's apparent views on the requestor's history regarding the drug's pricing, it is unclear how similar arrangements involving the provision of free drugs would be viewed by the OIG absent the "additional publicly available background information" explained above. It is noteworthy that, based on the OIG's comments, it may have reached a different conclusion if the requestor was offering a consignment arrangement that would not be free to the hospitals, or if the requestor was offering the free drug during the full course of treatment. It is also not clear to what extent the requestor's implicit acknowledgment of its inability to give Medicaid a lower "Best Price" for the drug had an impact on the OIG's conclusions. At the very least, it appears that an advisory opinion requestor's background and role in drug pricing may materially impact the OIG's analysis of whether an arrangement may implicate, and pose more than a minimal risk of fraud and abuse under, the AKS.


1 In short, under the Medicaid drug Rebate Program, manufacturers are required to give Medicaid programs the "best price" given to any other purchaser through rebates.

2 The requestor acquired the rights to the drug in 2014 and according to the OIG prices have continued to increase since 2007.

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