Welcome to this week's edition of the Health Law Update. In this Issue:
- Capitol Hill Healthcare Update
- OIG Signs Up for Customer Loyalty Program
- Preparing for the New Partnership Audit Rules
- Hurricane Harvey Special Alert
- Events Calendar
Capitol Hill Healthcare Update
ACA Stabilization Effort Continues Amid Uncertain Senate Fate
The chairman of a Senate healthcare committee outlined a key test for stabilizing the Affordable Care Act’s (ACA) shaky individual marketplace: Both Republicans and Democrats will have to give a little.
That formula has been wildly unsuccessful not only this year but also in recent years as the two parties have been at loggerheads over the GOP’s efforts to repeal the ACA. But in the wake of Senate Republicans’ failed efforts this summer to replace the healthcare law, HELP Committee Chairman Lamar Alexander (R-Tenn.) said last week there is a bipartisan path forward. Read more >>
OIG Signs Up for Customer Loyalty Program
In Advisory Opinion 17-05, posted by the U.S. Department of Health and Human Services Office of Inspector General (OIG) on September 7, 2017, the OIG approved a pharmacy’s customer loyalty/discount program (Benefit Program). Under the arrangement, members of the Benefit Program pay a fixed annual fee for access to the following benefits:
- Discounts on generic drugs, other prescription drugs listed on the Benefit Program’s formulary, pet prescriptions, nebulizer devices and related supplies, blood glucose testing meters and related supplies, and immunizations paid for by members entirely out-of-pocket (i.e., products for which no insurer, including any federal healthcare program, would be billed).
- A 10 percent discount on any in-store clinic service when the member pays for the service entirely out-of-pocket (e.g., physicals, immunizations, and health screenings and testing, such as lipid panel testing).
- A 10 percent credit toward future eligible retail purchases of certain pharmacy-branded products, including over-the-counter medications that may be reimbursed by certain Medicare Advantage plans and in-store photo-finishing. Members cannot, however, redeem earned credits to purchase prescriptions, immunizations, clinic services, alcohol, gift cards, postage stamps, prepaid cards, milk products, or tobacco products, nor can they redeem earned credits for retail pharmacy or clinic cost-sharing amounts.
The OIG analyzed the Benefit Program under the Civil Monetary Penalties Law (CMPL), SSA §1128A(i)(6)(G) and 42 C.F.R. §1003.110, and the Anti-Kickback Statute. The arrangement, according to the OIG, would implicate both the Anti-Kickback Statute and the CMPL, because the discounted items and services and earned credits could induce a beneficiary to select the pharmacy for federally reimbursable items or services (e.g., pull-through).
The OIG, however, found that the Benefit Program met the requirements of the retailer rewards exception under CMPL, which permits rewards if:
- The items or services consist of coupons, rebates, or other rewards from a retailer,
- The items or services are offered or transferred on equal terms available to the general public, regardless of health insurance status, and
- The offer or transfer of the items or services is not tied to the provision of other items or services reimbursed in whole or in part by the Medicare or Medicaid programs.
With respect to the first requirement, the OIG found the pharmacy was a retailer “because it owns and operates retail pharmacies that sell items, including prescription drugs, non-prescription drugs, and a variety of other merchandise, directly to the public.” The OIG further concluded that the discounts constituted a “coupon” (“something authorizing a discount on merchandise or services”) and the earned credits constituted a rebate (“a return on part of a payment”).
While finding that the Benefits Program was available on equal terms to the general public, as anyone over the age of 18 could purchase a membership, regardless of health insurance status or plan, the OIG acknowledged that:
A de minimis amount of goods could be covered under certain Medicare Advantage plan supplemental benefits.
Drug purchases in the Part D donut hole could receive the discount.
The pharmacy had no mechanism to prevent members from submitting claims directly to third-party payers.
Nonetheless, the OIG concluded the Benefit Program was not tied to the provision of other items or services reimbursed in whole or in part by the Medicare or Medicaid programs and that the potential leakage was not sufficient to be problematic.
With respect to earning and redeeming the credits for future purchases, the OIG likewise found that they did not involve items or services reimbursed in whole or in part by the Medicare or Medicaid programs except in de minimis instances. However, the OIG noted that “if a Member could only earn or redeem, or could preferentially accumulate or use, credits based on the purchase of federally reimbursable items and services, [it] would reach a different conclusion.”
Under its anti-kickback analysis, the OIG concluded the Benefit Program posed a minimal risk of fraud and abuse as it did not:
“include any features to specifically steer beneficiaries to Requestor’s retail pharmacies or Clinics to purchase federally reimbursable items or services … and would not offer Members any direct incentive to transfer their prescriptions to, or fill them at, [the pharmacies], or to receive services at [the clinics].”
Interestingly, the OIG did not expressly comment on the general and indirect impact of the Benefit Program on purchases of reimbursable items. Finally, the OIG noted that the program would not reduce cost-sharing amounts and would be unlikely to result in overutilization.
The loyalty program considered in Advisory Opinion 17-05 differs from those in Advisory Opinions 12-05 and 12-14, involving supermarkets’ and pharmacies’ gas discount loyalty programs, which allowed customers to earn loyalty program discounts based upon their out-of-pocket expenses for co-payments and deductibles for prescriptions covered by Medicare and Medicaid. In those Advisory Opinions, the OIG stated that the “rewards … would not be tied to the provision of other items or services reimbursable in whole or in part by the Medicare or Medicaid programs” on the redemption side of the loyalty program.
On the earning side of the transaction, the OIG found “no tie to the provision of other items or services reimbursed in whole or in part by the Medicare or Medicaid programs.” Consequently, some of the limitations on earning rewards under the program considered in Advisory Opinion 17-05 may not have been necessary to obtain OIG approval.
Preparing for the New Partnership Audit Rules
The Bipartisan Budget Act of 2015 substantially changed audit-related rules impacting entities taxed as partnerships, including both state-law partnerships and many limited liability companies (LLCs). The most significant change is that any additional tax or penalties resulting from an audit of an entity taxed as a partnership generally will be assessed and collected at the entity level (as opposed to at the partner or member level). These new rules are effective for taxable years beginning on or after January 1, 2018. Proposed regulations addressing, among other things, some of the problem areas of these new rules were released in January 2017, but were almost immediately withdrawn as part of the Trump administration’s regulatory freeze. Updated proposed regulations were re-released mid-June 2017.
Now is the time for entities taxed as partnerships (i.e., partnerships and many LLCs) to evaluate the new rules and amend their governance documents to address the changes. Hospitals commonly utilize LLCs for affiliations and ancillary joint ventures and should consider their options under the new rules. The changes also impact many physician entities, including physician practice groups, real estate holding companies, and ambulatory surgical centers taxed as partnerships.
The following items, among others, should be considered in amending governance documents under these new rules:
Certain entities with 100 or fewer eligible partners/members may elect to opt out of the new partnership audit rules. An electing entity will be subject to the former rules under which the IRS conducts examinations at the entity level but applies pass-through treatment to calculate and assess liability at the partner/member level. This election, if available, must be made annually on the entity’s timely filed federal income tax return.
Payment of Tax Deficiencies
The amount of any tax deficiency, or the “imputed underpayment” plus interest and penalties, is computed under the new rules based on the highest tax rate applicable to individuals or corporations in the audit year (instead of the partners’/members’ actual marginal income tax rates). It is possible for the underpayment amount to be reduced, if there is a tax-exempt partner/member, among other situations. The payment of any additional amounts due generally is the responsibility of the entity unless the adjustment amount is “pushed out” to the entity’s partners/members. If the entity pays the additional tax due, it is recommended that governance documents provide for the adjusted year’s partners/members to bear their allocable share of such adjustment. This is so the partners/members of the entity at the time the payment is made do not have to bear the economic consequence of any adjustment amount because ownership of an entity may change from year to year.
Designating a Partnership Representative
Each entity subject to the new rules must designate a “partnership representative” with a substantial U.S. presence or the IRS will appoint one on its behalf. Unlike the “tax matters partner” under the former rules, the partnership representative does not need to be a partner/member of the entity taxed as a partnership, and can unilaterally bind current and former partners/members in a federal tax matter. The proposed regulations place additional restrictions on an entity’s ability to change the designation of its partnership representative. Accordingly, entities should consider clarification in their governance documents to address elements of these rules, such as fiduciary duties, specific grants of authority (or limitations thereon), and the rights of the entity to require the resignation of the partnership representative and to designate a successor.
Finally, while there has been progress at the federal level on the parameters of these new partnership audit rules, everyone should be mindful that most states have yet to determine how they will handle audits of entities taxed as partnerships given the new federal rules.
September 15, 2017
Cleveland Of Counsel Thomas S. Campanella will present “Evolution of Managed Care Network Designs That Drive Value and Outcomes Based Utilization” at the Managed Markets and Account Management Strategies Conference in Chicago, IL.
September 17, 2017
D.C. Partner Lee Rosebush and D.C. Of Counsel Frank Palumbo will present “Outsourcing Facilities: Developments and Challenges” on Legal Day at the National Association of Specialty Pharmacy Second Annual Specialty Pharmacy Law Conference held in Washington, D.C.
October 11, 2017
Houston Partner Lynn Sessions will present "HIPAA Issues in Disasters" at the 2017 Preparedness Coalition Symposium sponsored by the South East Texas Regional Advisory Council (SETRAC) in Galveston, TX.
November 2, 2017
Houston Partner Lynn Sessions will moderate “Medical: Is It BI or BI?” at the 2017 PLUS International Conference in Atlanta, GA.
November 6, 2017
Cleveland Of Counsel Thomas S. Campanella will present “Analyzing Positive Implications of Health Care Reform and New Payment Models on the Medical Device Value Proposition” at the Medtech Commercial Leaders Forum USA in Princeton, NJ.