In Advisory Opinion 99-3, dated March 16, 1999 and made public on March 23, 1999, the Office of Inspector General ("OIG") concluded that it would not subject to sanctions a bundled discount arrangement for therapeutic mattresses or a percentage compensation arrangement between the distributor of the mattresses and independent sales agents. The opinion is favorable to manufacturers and providers, and its reasoning may be applicable to variety of arrangements with the growing number of providers subject to prospective payment systems.

This memorandum summarizes the arrangement, the OIG's analysis, and the advisory opinion's effect on manufacturers, distributors, and providers.

1. THE PROPOSED ARRANGEMENT

The advisory opinion was requested on behalf of the distributor ("Distributor") of therapeutic mattresses that are used in the treatment and prevention of pressure ulcers. The proposed arrangement ("Arrangement) involved two types of therapeutic mattresses: a powered mattress used for aggressive wound healing, and a non-powered mattress used to complete a course of treatment for pressure ulcers. According to the opinion, one of the purposes of the Arrangement is to encourage the use of the non-powered mattress as a routine step-down

treatment to prevent the recurrence of pressure ulcers and thereby save costs and minimize risks to skilled nursing facilities ("SNFs") reimbursed under the new Medicare prospective payment system ("PPS").

The Distributor proposed to offer the mattresses to Medicare-participating SNFs under a special discounted pricing arrangement. Under the Arrangement, the Distributor would rent a powered mattress to a SNF for 30 days at a fixed sum applicable to all similarly situated SNFs. The powered mattress rental price would include the provision of a non-powered mattress at no additional charge. The Distributor would charge half the powered mattress rental rate for each additional 30 day period that the mattress was required. The total amount charged for the original and subsequent 30 day periods would be substantially lower than the Distributor's current charges for the mattresses when sold or rented separately for identical periods of time. On the invoices, the Distributor agreed to allocate the amount of the discount proportionately to the two mattress products, based on their fair market value.

The Distributor proposed to market the discounted mattresses to SNFs through independent durable medical equipment ("DME") suppliers who would serve as sales agents. Each DME sales agent would be paid 20% of collections received as a result of the agent's activities. (fn1) The sales agents would not market the mattresses to any SNFs with which the DME supplier had a financial relationship, and the Distributor would require the agents to inform customers of their obligation to report the discount arrangement. The Distributor's invoices would accurately reflect the discount and reiterate the buyer's obligation to report the discount on its Medicare and Medicaid cost reports.

The Distributor planned to market the mattresses primarily to SNFs reimbursed under PPS. It certified that neither mattress is reimbursable under Medicare Part B for nursing facility residents and that only three states currently provide separate reimbursement for such mattresses used in nursing facilities. The Distributor also certified that it sold no other products reimbursed under Medicare Part B and that all compensation under the Arrangement was consistent with fair market value.

II. LEGAL ANALYSIS

1. Pricing Arrangement

The federal anti-kickback statute prohibits individuals and entities from offering, paying, or receiving any remuneration to induce referrals for items or services reimbursable under Medicare or Medicaid. 42 U.S.C. § 1320a-7b(b). Nevertheless, under the anti-kickback discount safe harbor, prohibited remuneration does not include a "discount." The term "discount," however, is defined to exclude, among other things, a discount provided on one product in exchange for an agreement to purchase a different product (a "bundled discount arrangement"). Because the Arrangement involved a bundled discount arrangement, it did not qualify for safe harbor protection. Nevertheless, failure to comply with a safe harbor does not automatically render an arrangement illegal. The OIG stated that, in determining the legality of a bundled discount arrangement it would review the following factors: (i) the amount of the benefit that is reported and passed on to federal health care programs; (ii) whether the items are separately reimbursable; and (iii) the intent behind the arrangement.

For a number of reasons, the OIG determined that the Arrangement posed a minimal risk of fraud and abuse. First, the Distributor adopted a reasonable methodology to apportioning the discount between both two types of mattresses, and the Distributor made all reasonable efforts to assure that the discounts would be reported on SNF cost reports. (fn2) Second, because the mattresses would be marketed to SNFs reimbursed under PPS, the SNFs would have every incentive to control the cost and utilization of the mattresses. Finally, there was minimal risk that the mattress discount would be used to generate referrals for Medicare Part B services, since the mattresses are not separately reimbursable under Part B, and the Distributor does not market any other items or services that are reimbursed under Part B.

2. Use of Sales Agents

The proposed percentage compensation arrangement between the Distributor and the DME suppliers did not qualify for the anti-kickback safe harbor for personal services and management contracts because, among other things, the aggregate compensation could not be determined in advance. Despite its longstanding opposition to percentage compensation arrangements, the OIG determined that the compensation arrangement should not be subject to sanctions under the anti-kickback statute.

In determining the risk of fraud and abuse in an arrangement for marketing services, the OIG considers whether the arrangement incorporates any of the following "suspect characteristics":

• Compensation based on percentage of sales;
• Direct billing of a federal health care program by the seller for the item or service sold by the sales agent;
• Direct contact between the sales agent and federal health care program beneficiaries or referring physicians;
• The use of agents who are health care professionals or persons in a position to exert undue influence on purchasers or patients; and
• Marketing of items or services that are separately reimbursable by a federal health care program (e.g., items not included in the SNF PPS rate).

See also Advisory Opinion No. 98-10.

Although the sales agents would be paid on a percentage basis and the agents may contact referral sources, the OIG determined that the arrangement was acceptable. Of particular importance to the OIG was the fact that the mattresses were not separately reimbursed by a federal health care program (e.g., Medicare Part B). In addition, the OIG reasoned that the risk of overutilization and excessive program costs would be offset by the SNF's inability to seek separate reimbursement for the items in addition to the PPS rate. The OIG further noted that, although the sales agents would be marketing other items, they would have no financial incentive to "swap" the Part A mattress arrangement for other Part B business because the mattress pricing is fixed and payments are collected by the Distributor.

3. CONCLUSION

Although the OIG limited its opinion to the specific arrangement it addressed, the opinion nevertheless offers valuable guidance to manufacturers, distributors, and providers. The opinion is significant because it provides evidence of the OIG's recognition that arrangements which would be unacceptable in a fee-for-service environment may be acceptable in the prospective payment environment.

For bundled discount arrangements, the OIG will consider whether the item or service at issue is separately reimbursable by a federal health care program and whether the bundled discount is appropriately allocated to the items in the bundle and accurately reflected on the provider's cost report. In this regard, arrangements which do not result in any reimbursement distortions will have the lowest risks. For marketing services, the key inquiry will be whether the items are separately reimbursed by a federal health care program and whether there is any potential for "swapping" Medicare Part A business for Medicare Part B business.

Please do not hesitate to contact Joan Dailey (202-414-9418) or any member of the Reed Smith health care group with whom you work if you would like additional information, or if you would like a copy of the Advisory Opinion 99-3.

The contents of this memorandum are for informational purposes only and do not constitute legal advice.