OIG Clears a Path for Manufacturer Patient Assistance Programs

Mark Fitzgerald
December 2005

Originally published by American Health Lawyers Association

On November 7, 2005, the Department of Health and Human Services Office of Inspector General (OIG) issued a Special Advisory Bulletin entitled “Patient Assistance Programs for Medicare Part D Enrollees” (Bulletin) that could provide a solution for the dilemma facing the Medicare “near poor” with the advent of the Part D benefit.¹ At issue is whether pharmaceutical companies will continue to provide prescription drug assistance to Medicare beneficiaries after Part D becomes effective. Prior guidance from CMS raised the specter of fraud and abuse enforcement action against pharmaceutical manufacturers that provide support to Part D enrollees.² The new Bulletin points the way to at least one cost-effective strategy for providing support to financially needy beneficiaries “outside Part D” that pharmaceutical companies could implement without significant compliance risk.

The Part D benefit creates a dilemma for the “near poor” who do not qualify for the low-income subsidy under Part D but still cannot afford the cost-sharing obligations required under Part D, particularly in the coverage gap known as the “donut hole” ($2,250–$5,100 of drug costs). Many of these patients—who often have income levels between 150% – 200% of the federal poverty level—have been relying on manufacturer patient assistance programs (manufacturer PAPs) to receive their prescription drugs. These patients will be seriously harmed if pharmaceutical manufacturers exclude them from participating in their PAPs once Part D goes into effect.

Today’s manufacturer PAPs fall generally into three categories: (1) financial support for charitable foundations that run PAPs independently of any manufacturer; (2) traditional PAPs involving the donation of free drugs to qualifying individuals; and (3) institutional PAPs through which manufacturers donate products to hospitals, clinics, and other institutions for use with their qualified patients. This article analyzes the impact of the OIG Bulletin on these three different PAP models.

I. Background

The new Medicare Part D prescription drug benefit has generated questions about whether manufacturer PAPs can provide assistance to Part D enrollees without violating federal fraud and abuse laws. On November 7, 2005, the OIG issued a Special Advisory Bulletin that addresses ways in which PAPs may implicate the anti-kickback statute.³

The anti-kickback statute is a criminal law that prohibits the knowing and willful offer, payment, solicitation, or receipt of remuneration in any form as an inducement or reward for the referral of business or the purchase of items or services payable by a federal healthcare program.⁴ The statute applies equally to both the offering party and the recipient of an illegal inducement.

A violation of the anti-kickback statute is a felony punishable by imprisonment. In addition, the OIG has administrative authority to impose civil monetary penalties and to exclude a party from participation in federal healthcare programs for violations of the anti-kickback statute.⁵ Because the statute requires proof of criminal intent to violate the law, the application of the statute in any particular case depends upon the facts and circumstances of the arrangement.

In the context of Medicare Part D, manufacturer PAPs can raise compliance risk because the assistance that the PAP provides to a Part D enrollee may constitute an illegal inducement for the enrollee to use a particular manufacturer’s drug, in violation of the anti-kickback statute. The OIG views subsidies from manufacturer PAPs that are tied to the use of a particular product as being squarely prohibited by the statute. The risks the OIG has identified are twofold: first, manufacturer PAPs potentially can increase Medicare costs by moving enrollees through the donut hole more quickly, thereby reaching catastrophic coverage, which is paid by Medicare substantially on a cost basis; and second, product-specific manufacturer PAPs can inappropriately steer patients to use particular branded drugs, even where cheaper generics or alternative treatments might be available.⁶

The OIG Bulletin emphasizes that manufacturer PAPs may provide assistance to uninsured patients. This category can be safely construed to include all patients who do not participate in federal healthcare programs, such as Medicare and Medicaid, because the statute’s reach is limited to those programs. More interestingly, the Bulletin also states that “existing [manufacturer] PAPs may continue to provide free or reduced price outpatient prescription drugs to Medicare beneficiaries who have not yet enrolled in Part D.”⁷ Manufacturer support for these categories of patients—uninsured, commercially insured, and individuals insured by Medicare but not enrolled in Part D—is not prohibited by the anti-kickback statute because their drug costs are not payable by Medicare or any other federal healthcare program.

II. Impact of the OIG Bulletin

There are numerous ways that a pharmaceutical company can provide assistance to low-income patients who cannot afford to pay for the company’s products. One model—sometimes referred to as a charity or foundation PAP—is designed so that patient assistance is provided by a charitable organization rather than a manufacturer. Two other more common models involve the donation of free drugs. For the traditional PAP, product donation is made directly to the patient. For the institutional PAP, the manufacturer donates drugs to a facility, typically a hospital or clinic, that serves a large number of indigent patients. Each of these models is addressed in the OIG Bulletin and analyzed below in light of OIG comments in the Bulletin. A fourth PAP model, whereby a “coalition” of manufacturers provides PAP assistance, is also discussed below.

A. Charity PAPs

The Bulletin makes clear that the OIG would prefer for manufacturers to support financially needy Part D enrollees by making charitable contributions to independent charities. Assistance provided by a charity that is unaffiliated with a pharmaceutical manufacturer will not normally implicate the anti-kickback statute.⁸ Moreover, the support provided by these charities to Part D enrollees will count towards each recipient’s out of pocket requirement for reaching catastrophic coverage, referred to as “true out of pocket expense” or “TrOOP.” The charity must be bona fide, however, meaning that it may not be controlled directly or indirectly by any pharmaceutical manufacturer. Consequently, a bona fide charity PAP may not be formed, funded, or controlled by a manufacturer or its affiliates, employees, or other agents, such as its wholesalers, distributors, or pharmacy benefit managers.⁹

A charity PAP must sever any links between manufacturer funding and patient support. For example, the charity cannot steer patients toward any particular manufacturer’s products or attribute assistance to any particular manufacturer. Also, the charity may not focus on such a narrow category of disease or illness that it might act as a conduit for manufacturers to provide funds to patients using their specific drugs. Lastly, the OIG is critical of manufacturers making product donations to charities because they “have the effect of creating a direct correlation between the donation and use of a particular donor’s product.”¹⁰ In essence, the OIG’s position is that a manufacturer may only make anonymous, cash donations to independent charities over which the manufacturer exerts no direct or indirect control.

B. Traditional PAPs

In the traditional PAP model, an individual applies for assistance by submitting an application to the sponsoring manufacturer and, if the application is accepted, the manufacturer donates free products to the individual. Use of this model with Medicare beneficiaries enrolled in Part D raises concerns under the federal anti-kickback law, according to the OIG Bulletin. As a starting point, the OIG emphasizes that a manufacturer may not make cash payments or product donations to subsidize cost-sharing obligations of Part D enrollees for the manufacturer’s product. The OIG views these types of subsidies as squarely prohibited by the anti-kickback statute. The OIG also believes that a traditional PAP runs a “heightened risk” of violating the anti-kickback statute if the PAP provides coverage (i.e., free drugs) only during the Part D coverage gap.

In the Bulletin, however, the OIG suggests a model that manufacturers can adopt for their traditional, individual-application model PAPs to assist Medicare Part D enrollees without violating the anti-kickback statute. A manufacturer PAP may provide free drugs to financially needy Medicare Part D enrollees if it is done entirely outside the Part D benefit and if safeguards are implemented to protect against the support counting towards a patient’s cost-sharing obligations. The safeguards that the OIG recommends for manufacturers are as follows:

Notify Part D plans that particular drugs are being provided to an enrollee outside of the Part D benefit, thereby ensuring that no payment is made by the Part D plan for the drug and no part of the cost of the subsidized drug is counted toward the enrollee’s cost-sharing obligation;
Make the assistance available to the patient for the whole Part D coverage year (or the remainder of the coverage year after the enrollee first begins receiving PAP assistance);
Cover periodic use of the drugs throughout the remainder of the coverage year (in cases where the enrollee’s need for the drug is not continuous);
Maintain accurate and contemporaneous records of subsidized drugs;
Award assistance to enrollees based on reasonable, uniform, and consistent measures of financial need, and without regard to the providers, practitioners, or suppliers used by the enrollee or the enrollee’s Part D plan; and
Comply with any applicable CMS guidance.

PAP assistance provided by manufacturers under this “outside Part D” model would not help an enrollee meet his or her TrOOP requirement for reaching catastrophic coverage because it would not count as a patient incurred cost. Thus, enrollees receiving PAP assistance under this model would only be able to count qualified expenses arising from their non-PAP drugs as TrOOP.

C. Institutional PAPs

Institutional PAPs provide free drugs in bulk volumes—typically on a monthly or quarterly basis—to hospitals, pharmacies, health centers, clinics, and other institutions to replace drugs dispensed to patients who meet established PAP criteria. Because the free drugs are donated to replace stock dispensed from the institutions’ own inventory, these programs are also sometimes called “bulk replacement PAPs.” Institutional PAPs have proven to be a very cost-effective way for pharmaceutical manufacturers and safety net providers to help meet the prescription drug needs of the uninsured poor. Their chief advantages over the traditional PAP model are that institutional PAPs make drugs immediately available to patients in need; eliminate waste that results in the traditional PAP model when a patient fails to pick up his or her prescription, or the prescription or dosage changes before the drugs arrive (these drugs are frequently discarded); reduce paperwork and shipping costs; and improve documentation and tracking capabilities.

As a means of helping Medicare Part D enrollees meet their cost-sharing obligations, however, institutional PAPs are problematic. The OIG believes that institutional PAPs create the same heightened risk of violating the anti-kickback statute as traditional PAPs because they create an incentive for a safety net provider to steer Part D enrollees towards the sponsoring manufacturer’s products.

In addition, institutional PAPs can create a compliance risk if participation in the PAP is either offered as an inducement for a safety net provider (typically a DSH hospital) to include a manufacturer’s products in the provider’s formulary or a safety net provider solicits a manufacturer to offer an institutional PAP in return for listing the manufacturer’s drug(s) in the provider’s formulary.

In evaluating a bulk replacement PAP, the OIG states that it will look to whether the PAP has safeguards to prevent (1) improper patient steering based on financial incentives, (2) increased cost to federal healthcare programs, and (3) improper charges to federal healthcare programs (e.g., by allowing free drugs to be credited toward a patient’s TrOOP). Hospitals must also protect against the appearance that the inclusion of a manufacturer’s products on the hospital’s formulary is conditioned on the manufacturer’s offering of an institutional PAP.

Assuming that appropriate safeguards are in place with respect to formulary decisionmaking, institutional PAPs are unlikely to encounter a compliance risk when serving uninsured patients and other individuals who are not beneficiaries of a federal healthcare program because the anti-kickback statute applies only with respect to federal healthcare program business.

Institutional PAPs may not, however, take advantage of the “outside of Part D” model suggested by the OIG because it appears that they cannot meet criterion (5) of that model, which requires, in part, that the manufacturer award assistance without regard to the providers or suppliers used by the enrollee. Institutional PAPs are designed for pharmaceutical manufacturers to work collaboratively with designated safety net providers to assist their uninsured patients. Thus, absent a favorable advisory opinion by the OIG, or unless the OIG issues a clarification of its position, it would not be prudent for institutional PAPs to provide assistance to Part D enrollees, even outside the Part D benefit.

We note, however, that criterion (5) is designed to protect against inappropriate patient steering. Many hospitals participating in institutional PAPs have adopted safeguards to protect against the PAP becoming an inducement for a patient to select the particular hospital for care. These safeguards include:

A ban on advertising the availability of the institutional PAP;
Informing the patient of the availability of the PAP only after he or she has visited an attending physician and been prescribed the drug;
Nondiscrimination in accepting patients into the PAP (except for appropriate financial need criteria); and
Advising the patient that participation in the PAP is not conditioned upon the use of the hospital for any other service.

A safety net provider participating in an institutional PAP that has adopted these types of safeguards may wish to seek an advisory opinion from the OIG authorizing it to extend support to Medicare Part D enrollees outside the Part D benefit. Institutional PAPs remain perhaps the most efficient model for manufacturers and safety net providers jointly to support financially needy Part D enrollees who do not qualify for the Part D subsidy. Many safety net providers participating in institutional PAPs already have the resources in place to meet the record keeping requirements of the “outside Part D” model. The provider institutions could also assume the administrative burden of identifying affected Part D plans and providing appropriate notice to assure that PAP assistance does not count towards an enrollee’s TrOOP.

D. Coalition Model PAPs

A “coalition model” PAP is one in which several manufacturers jointly assist Part D enrollees with their cost-sharing obligations. The OIG addresses the coalition model briefly in the Bulletin. This model appears to be in the “concept” stage of development. To reduce the risk of violating the anti-kickback statute, the OIG recommends that coalition model PAPs avoid any incentives that might encourage an enrollee to favor a particular drug, supplier, provider, practitioner, or Part D plan. Risk can be further reduced if the PAP includes a large number of competing manufacturers, including manufacturers that offer both branded and generic drugs. Participating manufacturers should offer subsidies for all drugs covered by any Part D plan formulary. The Bulletin also notes that a coalition model PAP can reduce its risk by creating incentives for enrollees to choose equally effective, lower cost drugs, for example, by requiring the enrollee to pay a portion of the cost of drugs.

III. The Future of Manufacturer PAPs

The OIG Bulletin indicates that, although certain uses of manufacturer PAPs create a risk of violating the federal anti-kickback statute, other uses present little to no risk. In particular, with respect to Medicare beneficiaries, manufacturers have the following options:

Continue to provide free drugs to Medicare beneficiaries who do not enroll in Part D;
Provide financial support to bona fide charities for their use in administering independent PAPs for Part D enrollees; and
Provide free drugs to financially needy Medicare Part D enrollees outside the Part D benefit (i.e., no credit towards TrOOP and no further payment by the PDP for the balance of the calendar year).

Unfortunately, options one and two are likely to be unworkable. Pharmaceutical manufacturers will be reluctant to accept Medicare beneficiaries who do not enroll in Part D into a PAP for several reasons. Most manufacturer PAPs are drug-specific and are unlikely to cover all of a patient’s drug needs. Moreover, the decision not to enroll in Part D has long-term financial consequences for the beneficiary due to the late enrollment penalty.¹¹ While a decision not to enroll in Part D might be beneficial in the short term because of the availability of a PAP, the patient will be faced with a substantial penalty if the patient’s drug needs change or the PAP is terminated by the manufacturer. Manufacturers will not want to encourage patients to take these risks.

Option two—financial support to an independent charity—is equally unattractive to manufacturers. The charitable foundation model provides supporting manufacturers with the least amount of recognition and good will for their charitable work. It is also much more expensive, as it requires cash rather than product donations, and the development and oversight of a foundation bureaucracy to administer the programs. Industry sources point out that few foundation model PAPs exist today and those that do exist lack the capacity to assume the volume of free drugs being processed by company-run programs. In 2004, traditional and institutional PAPs reportedly filled approximately 22 million prescriptions with free drugs having a wholesale value of $4.1 billion.¹² Therefore, notwithstanding the OIG’s clear preference for the charitable foundation model PAP, it seems highly unlikely that it will be successful on a large scale.

Consequently, it becomes critically important that CMS and OIG work together to make option three –providing support outside the Part D benefit—viable. The OIG Bulletin places a potentially significant burden on manufacturers seeking to implement this option by requiring them to identify and notify the appropriate Part D plan for each PAP participant and insure that the PAP support is not credited towards the enrollee’s cost-sharing obligations. Manufacturers will be concerned about being able to identify the correct Part D plan to be notified, and the administrative burden of coordinating their PAP support with the so-called “TrOOP Facilitator,” which monitors enrollee expenditures toward their cost-sharing obligations and eligibility for catastrophic coverage. The Bulletin also excludes safety net providers from helping with these burdens through institutional PAPs. If these problems can be resolved, so that manufacturers can be reasonably certain as to their compliance with the OIG Bulletin requirements, then the OIG’s “outside Part D” option may prove to be a workable solution.

IV. Conclusion

In summary, the OIG Bulletin clarifies the ground rules for manufacturer PAPs (both traditional and institutional) with respect to Medicare Part D. Manufacturer PAPs may provide support to Part D enrollees who reach the donut hole only by serving those patients outside of the Part D program. None of the manufacturer-provided support can count towards TrOOP, and the PAP has to notify affected Part D plans to insure that no additional payment is made by a Part D plan for any drugs provided through a PAP. It remains to be seen whether CMS can develop mechanisms to allow manufacturers to comply with the OIG’s notice and record keeping requirements with relative certainty and administrative ease. The stakes are high for all involved, particularly financially needy PAP participants who are now faced with losing access to their prescription drugs because of the new Part D benefit, which they cannot afford. CMS, the OIG, the pharmaceutical industry, and the provider community need to work together to solve this problem.

¹ “Patient Assistance Programs for Medicare Part D Enrollees,” available at http://www.oig.hhs.gov/fraud/docs/alertsandbulletins/
2005/PAPAdvisoryBlletinFinal-Final.pdf.
² “Part D Coordination of Benefits Guidance” at 25, available at http://www.cms.hhs.gov/pdps/cobguidancefinal.pdf.
³ “Patient Assistance Programs for Medicare Part D Enrollees,” available at http://www.oig.hhs.gov/fraud/docs/alertsandbulletins/
2005/PAPAdvisoryBlletinFinal-Final.pdf.
⁴ 42 U.S.C. § 1320a-7b(b).
⁵ 42 U.S.C. § 1320a-7a(a)(7) and 7(b)(7).; 42 C.F.R. §§ 1003.102 and .105.
⁶ The significance of this second concern is questionable given that a Part D enrollee’s choice is already limited by the formulary of his or her Part D plan.
⁷ OIG Bulletin at 3.
⁸ OIG Bulletin at 9.
⁹ OIG Bulletin at 2, n.3.
¹⁰ OIG Bulletin at 9.
¹¹ The penalty for 2006 and 2007 is set at 1% of the base beneficiary premium for each uncovered month. 42 C.F.R, § 423.286(d)(3).
¹² Pharmaceutical Research and Manufacturers of America (PhRMA), Partnership for Patient Assistance, Fact Sheet; available at https://www.pparx.org/help_uninsured.php.

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