OIG issues two unfavorable decisions, cautions against some customer service fees paid by manufacturers

In AO 25-04, some of the requestor’s customers proposed to require it, “as a condition of doing business,” to pay a third-party vendor to screen the requestor for exclusion from federal health care programs. The vendor would charge the requestor fees “on a per-Customer basis.” Framing the proposal as one in which the requestor “would pay for a valuable service that its referral sources would otherwise cover,” OIG found that the proposal presented “anti-competitive risks and risks of inappropriate steering” because customers might choose to do business with requestor over manufacturers that could not, or would not, pay the fees.

In AO 25-08, the requestor sold certain products to customers that were not purchased as part of regular inventory, but were purchased in real time, such as when a surgeon was selecting the right size or component of a device to use during a surgery (referred to in the opinion as “bill-only items”). Some of the requestor’s customers used a third-party vendor’s portal to place orders for bill-only items. The customers’ use of the portal saved them administrative hassle (and potentially money), so they made the requestor also pay the vendor to access the portal—again as a “condition of doing business”—even though the requestor already had systems in place to receive orders for bill-only items. OIG found that the proposal presented the same risks as those in AO 25-04, noting that because the requestor would realize no “appreciable benefits” from using the vendor’s portal, its payments to the vendor “would appear to be for the purpose of accessing referrals” from its customers.

The Opinions are illuminating not because of the legal principle on which they’re based—OIG has for decades expressed concern with manufacturers providing free services to referral sources—but rather for OIG’s application of that principle to the facts.

Manufacturers might ask the following questions in considering a customer’s requirement to engage a third party for services as a condition of doing business:

• Does the service facilitate the customer’s own legal compliance obligations? A central premise of AO 25-04 was that the customers were responsible for screening and monitoring the requestor for exclusion from federal health care programs, and were therefore also responsible for paying the vendor to do so on their behalf. That was because the Social Security Act subjected providers, such as the customers, to civil monetary penalties for contracting with an excluded entity.

In other words, the requestor’s paying the vendor to screen and monitor the requestor would have relieved the customers “of a financial burden they otherwise would bear for exclusion screening and monitoring” to comply with the statute. AO 25-04 therefore reflects that the party with the legal obligation should pay for a service that facilitates compliance with that obligation.

• Does the service benefit the manufacturer, or only the customer? Even if a manufacturer is ostensibly paying for a service that it receives—such as access to the bill-only portal in AO 25-08—the service should deliver an “appreciable benefit” to the manufacturer. If the service benefits only the customer, OIG may conclude that it “does not serve a commercially reasonable purpose” for the manufacturer and that the manufacturer is, instead, effectively subsidizing part of a fee that the customer should pay.
• Is the manufacturer paying on a per-customer basis? If the responsibility for paying for a service is murky, manufacturers might consider adopting a consistent approach to evaluating customer requests based ideally on legitimate factors other than sales. OIG hinted in AO 25-04 that the result might have been different had the requestor not proposed to pay the fees “for each individual Customer.” Since the customers had conditioned their business on the requestor paying those fees, the decision to pay them on a “per-Customer basis” presumably reflected, in OIG’s view, a deliberate decision by the manufacturer to induce each customer’s business.

While taking a consistent approach with all customers is not necessarily a defense under the AKS, doing so may diffuse the intent to induce any particular customer’s business and insulate decisions from the thought processes that OIG has found problematic (e.g., running ROI to determine whether to pay fees associated with a customer).

OIG concluded both Opinions with the same caveat: “We acknowledge that there are myriad ways for parties to structure business arrangements to allocate responsibilities and that there may be different fact patterns that would result in OIG reaching a favorable conclusion.” And, indeed, the Opinions raise questions about circumstances in between their fact patterns. For example, how would OIG view a service associated not with a statutory responsibility but with an industry practice? What if a service benefits both the manufacturer and the customer? OIG’s caveat suggests that manufacturers and customers have latitude to navigate circumstances like these in commercially reasonable ways, though it remains to be seen whether AO 25-04 and AO 25-08 reflect the outer boundaries or merely examples of arrangements that OIG might scrutinize.

Authored by Ron Wisor, Eliza Andonova, and Laura Hunter.