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Retail Pharmacy: OIG Signals It’s Okay to Reward Again

October 04, 2017

OIG Advisory Opinion paves the way for expanded retailer reward programs.

The US Department of Health and Human Services Office of Inspector General (OIG) issued an advisory opinion on September 7 that provides important guidance to retail pharmacies that operate reward programs and how Medicare and Medicaid beneficiaries may be included in those programs. Advisory Opinion, No. 17-05, (the Opinion) clarifies the scope of the retailer rewards exception to the Beneficiary Inducement Civil Monetary Penalty Law (CMPL) and is welcome guidance for retailers struggling to make sense of and operationalize the OIG’s December 2016 final rule related to the CMPL’s retailer rewards exception.

The proposed rewards program (Program) consisted of three distinct benefits. Program members (Members), who previously did not include Federal health care program beneficiaries, first received discounts on certain products, including generic drugs, glucometers and glucose testing supplies, immunizations, and nebulizer treatments, for which the Members agreed to pay entirely out of pocket (i.e., cash pay). Next, Members received a 10% discount on services provided at the retail pharmacy’s affiliated urgent care clinic, again provided that the Member paid for the service entirely out of pocket. Finally, Members received a 10% credit toward future purchases by purchasing in-store photo finishing and certain pharmacy-branded products, which included over-the-counter medications. Credits could not be used to purchase prescriptions, immunizations, clinic services, and certain other items like alcohol, tobacco, milk products, and gift cards. The Program also included a guaranteed savings feature, which would result in a store credit if a Member did not receive store savings/credits within a Program year at least as much as the Program’s annual membership fee. Other than paying the membership fee and being at least 18 years old, there were no restrictions to join the Program.

The OIG examined the arrangement first under the CMPL and then under the Anti-Kickback Statute (AKS).

Under the current CMPL rule, rewards offered by retailers to Federal health care program beneficiaries are not considered “remuneration” if

  • the rewards consist of coupons, rebates, or other rewards from a retailer;
  • the rewards are offered or transferred on equal terms available to the general public, regardless of health insurance status; and
  • the offer or transfer of the rewards is not tied to the provision of other items or services reimbursed in whole or in part by the Medicare or Medicaid programs.

The OIG first confirmed that the requestor was indeed a retailer—that is, 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 then concluded that the discounts, earned credits and guaranteed savings feature are each permissible as they constitute “coupons” or “rebates.” The OIG similarly concluded that, because the eligibility criteria of the Program permitted equal membership opportunities to all customers over 18, regardless of health insurance status, this would satisfy the second prong of the retailer rewards exception. This is welcome news for many retailers, as it clarifies that even if rewards are limited to customers paying annual membership fees, the OIG nevertheless considers the rewards program as being offered to the general public for purposes of the retailer exception.

Finally, the OIG determined that the rewards at issue would not be tied to the provision of federally reimbursable items or services. The OIG took comfort in the fact that payment for services rendered through the Program would be made entirely out of pocket. The OIG’s Opinion also confirms that, even if an individual customer’s health plan covers certain services included in a rewards program, the OIG is likely to find the arrangement (with certain safeguards) permissible under the CMPL. That is, there is nothing improper about a beneficiary deciding to purchase a covered prescription or clinic service directly, even if the prescription or service was covered by Medicare and even if the beneficiary could theoretically seek reimbursement for the item or service through a pre-paid card or other Medicare Advantage plan feature. Although observing that the Program did not have an enforcement mechanism to ensure that Members did not themselves submit a reimbursement claim to their insurer, including Federal health care program plans like Medicare Advantage plans or Medicaid managed care organizations, the OIG recognized that direct claims submission by beneficiaries is unlikely to occur. Citing a “rational economic actor,” the OIG believed that a Member would only waive their insurance coverage if the Program cost of a prescription item or clinic service was less than their plan cost-sharing amount and, if that was the case, an insurer would not remit funds to a Member if he or she submitted a claim.

The OIG also concluded that although the Program implicated the AKS, it posed a “minimal risk of fraud and abuse” under that law and would not take action in connection with the arrangement. Specifically, the OIG focused on whether the Program included features to steer Members into the retailer’s pharmacies or urgent care clinics for federally reimbursable services. Because the Program did not require the purchase of any specific items covered by Federal health care programs and did not include any “direct” financial incentives for Members to transfer prescriptions or receive services at the retailer’s clinic, the OIG recognized that the Program would not “specifically steer” Federal health care program beneficiaries. The OIG observed that the Program “simply would allow . . . beneficiaries access to the Benefit Program’s discounts and rebates,” perhaps acknowledging the inequity that would arise if Medicare and Medicaid beneficiaries are foreclosed from receiving discount benefits offered to other members of the general public.

The OIG further examined the Program to determine whether it could lead to overutilization or otherwise increased costs to Federal health care programs. Importantly, and with perhaps far-reaching effect, the OIG recognized that customers filling prescriptions through the Program “already would have obtained a written order for the prescription from his or her physician.” Coupled with the fact that most scripts would not be paid for by a Federal health care program since they would be paid for out of pocket under the retailer reward program, the OIG felt confident that the federal fisc would not be adversely affected by the Program.

The Opinion provides some clarity for retailers and large chain drug stores, many of which have faced scrutiny by federal regulators and uncertainty for the conduct covered by the Opinion in the past. Indeed, the Opinion stands in stark contrast to several AKS and False Claims Act settlements retailers have entered into over the years involving their rewards and loyalty programs. With the 2016 Beneficiary Inducement CMPL final rule, as well as this guidance directly from the OIG, retailers are well positioned to permit Federal health care program beneficiaries to participate in their rewards programs as long as those programs have certain key safeguards:

  • Discounts can only be offered on items and services not reimbursed through a Federal health care program (with very limited exceptions, such as coverage of additional over-the-counter items offered by Medicare Advantage plans)
  • Rewards cannot be used on prescription drugs, immunizations and clinic services, regardless of how these items and services are paid for
  • Rewards (both earning and redeeming) cannot treat federally reimbursable items and services differently from non-reimbursable items and services
  • The rewards program’s terms should specify that rewards members are entirely responsible for all charges for discounted items and services obtained through the rewards program


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington DC
Al Shay
Eric Sitarchuk
Howard Young
Jake Harper