Federal Court Issues Major AKS Decision on Bundled Discounts

Generally speaking, for AKS purposes, a “bundled discount” occurs where a price reduction on Product A is contingent on the buyer also purchasing Product B. For decades, the health care industry has wrestled with how best to protect bundled discounts under the AKS’s statutory discount exception¹ and regulatory discount safe harbor.²

For example, prior to 1999, it wasn’t entirely clear whether bundled discounts could be protected under the discount safe harbor. In a 1999 rulemaking, however, HHS-OIG amended the safe harbor to make clear that bundled discounts could qualify for protection under the safe harbor provided certain conditions were satisfied.³ Unfortunately, these conditions raised a number of critical questions, which remained largely unanswered over the ensuing 25 years.

That changed on September 26, 2024, when the US District Court for the District of Kansas ruled on cross motions for summary judgment in US ex. rel. Schroeder v. Hutchinson Regional Medical Center, et al — an FCA qui tam action predicated on the alleged exchange of unlawful bundled discounts in violation of the AKS.⁴ In its ruling, the district court confirmed two important points:

• First, the discount safe harbor does not impose onerous reporting or disclosure requirements on sellers or buyers when it comes to bundled discounts. Generally speaking, it is enough for the seller to inform the buyer (i) which products (i.e., type and quantity) are included in the bundle, and (ii) the total purchase price (i.e., the net price for the entire bundle after application of the discount). Sellers are not required to apportion the bundled discount across all of the products in the bundle.

• Second, the regulatory discount safe harbor and statutory discount exception provide separate and wholly independent grounds for protection under the AKS. As such, a bundled discount may qualify for protection under the statutory exception even if it does not quality for protection under the regulatory safe harbor (and vice versa).

Background

Assume Manufacturer makes Products A and B, each of which retails for $10. Assume further that Manufacturer offers to provide Hospital one unit of Product A at no charge if Hospital purchases five units of Product B for full price. Under these circumstances, Manufacturer has offered Hospital a “bundled discount” for AKS purposes, since the price reduction for Product A is contingent on the purchase of Product B.

In 1999, HHS-OIG amended the AKS regulations to make clear that bundled discounts are a “discount” within the meaning of the discount safe harbor, and thus eligible for protection, provided two conditions are met:

• Same Methodology Condition. Both products A and B must be “reimbursed by the same Federal health care program [FHCP] using the same methodology.”

• Full Disclosure Condition. The discount must be “fully disclosed to the [FHCP] and accurately reflected where appropriate, and as appropriate, to the reimbursement methodology.”

For purposes of this post, we will refer to these two conditions as the Bundled Discount Conditions.

If the Bundled Discount Conditions are satisfied, then the bundled discount qualifies as a “discount” eligible for protection under the safe harbor. Whether that discount will be protected under the safe harbor depends on whether the parties to the transaction meet their corresponding safe harbor obligations. These obligations vary depending on:

• whether the party receiving the discount (i.e., the “buyer”) is (i) a qualifying managed care organization (such as an HMO administering a Medicare cost plan), (ii) a cost reporter (such as a hospital), or (iii) a person or entity in whose name a claim is submitted (such as a physician); and

• whether the party offering the discount is a “seller” (i.e., the person that supplies the items at issue to the buyer) or an “offeror” (i.e., a person who is not the seller “but promotes the purchase of an item or service by a buyer”).

Because Schroeder addresses a bundled discount offered by a seller to a buyer that is a cost reporter, we will summarize the key requirements applicable to those particular parties.

• Seller Requirements
  
  • Invoice Requirement. The seller must “fully and accurately report” the discount “on the invoice, coupon or statement submitted to the buyer.”
    
  • Notice Requirement. The seller must (i) “inform the buyer in a manner that is reasonably calculated to give notice to the buyer of its obligations to report” the discount to the government and (ii) “refrain from doing anything that would impede the buyer from meeting its obligations.”

• Buyer Requirements
  
  • Same Good Requirement. The “discount must be earned based on purchases of that same good or service bought within a single fiscal year of the buyer.”
    
  • Reporting Requirement. The “buyer must fully and accurately report the discount in the applicable cost report.”

Finally, as noted above, in addition to the regulatory discount safe harbor created by HHS-OIG, there is a statutory exception for discounts created by Congress. Whereas the regulatory safe harbor is lengthy and complex—and includes numerous definitions, requirements, exclusions, etc.—the statutory exception is concise. It protects “a discount or other reduction in price” under an FHCP if “the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under [an FHCP].”

THE SCHROEDER DECISION

Background

Schroeder concerned the sale and purchase of products used to treat peripheral artery disease; specifically, drug-coated balloons and plaque removal devices. Under the arrangement at issue, Medtronic, Inc. (Medtronic),⁵ a medical device company, offered the following bundled discount to Hutchinson Regional Medical Center (HRMC), a community hospital: if HRMC agreed to purchase a certain number of drug-coated balloons from Medtronic, Medtronic would provide a certain number of plaque removal devices to HRMC at no charge.

In terms of documenting the arrangement, Medtronic provided HRMC with an invoice listing the number of balloons HRMC purchased and the total charge for those balloons (Balloon Invoice). Medtronic also provided HRMC with an attachment to the Balloon Invoice listing the number and value of plaque removal devices being provided at no charge (No-Charge Attachment).

Thus, between the Balloon Invoice and the No-Charge Attachment, HRMC knew (i) all the products included in the bundle (i.e., the exact number and type of balloons and devices) and (ii) the total dollar amount HRMC had to pay Medtronic for these products (i.e., the dollar amount set forth in the Balloon Invoice).

The Balloon Invoice also included the following Price Transparency Notice:

The parties intend that all discounts and rebates, if any, earned by the Customer under this Agreement shall constitute discounts as that term is defined in the Discount Safe Harbor to the Anti-Kickback Statute . . . Customer agrees that it shall have the sole responsibility to properly allocate, disclose, and report all discounts and rebates earned under this Agreement to its respective state and federal payors in accordance with the requirements of all applicable state and federal laws and regulations.

For its part, HRMC reported the total dollar amount it paid for the balloons and devices in its annual Medicare cost report.

Following discovery, the plaintiff-relator (Relator) moved for summary judgment, arguing that the transaction documentation was insufficient to satisfy the requirements of either the discount safe harbor or exception. Medtronic and HRMC, in turn, filed cross-motions for summary judgment, arguing that their arrangement was protected by both the safe harbor and the exception.

Bundled Discount Conditions

In its ruling, the district court first addressed whether the parties’ bundled transaction qualified as a “discount” under the discount safe harbor. To make that determination, the court examined whether the transaction met the two Bundled Discount Conditions set forth above.

With respect to the Same Methodology Condition, the court had no trouble concluding FHCPs use the “same methodology” to reimburse HRMC for the devices and balloons. Medicare, for example, pays HRMC a fixed amount based on the patient’s DRG (for an inpatient procedure) or primary APC (for an outpatient procedure) and, in both cases, this fixed amount covers both the devices and balloons used in performing the procedure.⁶

With respect to the Full Disclosure Condition, Relator argued that the bundled discount was neither “fully disclosed” to Medicare nor “accurately reflected where appropriate, and as appropriate, to the reimbursement methodology.” Why? Let’s go back to our hypothetical: (i) Manufacturer makes Products A and B, each of which retails for $10; and (ii) Manufacturer offers to provide Hospital one unit of Product A at no charge if Hospital purchases five units of Product B for full price. Under these circumstances, Manufacturer could use two different invoicing approaches:  

• Total Cost Approach. Manufacturer’s invoice could document that Hospital is purchasing one unit of Product A and five units of Product B for a total of $50, without providing any guidance on how Hospital should or might allocate the $50 among the six items.

• Unit Apportionment Approach. Alternatively, Manufacturer’s invoice could spell out the per-unit prices for Products A and B, taking into account the bundled discount. For example, since Hospital received the six items at issue for $50 instead of $60, Manufacturer could apportion the $10 discount over all six items in the bundle. (Under one common apportionment methodology, this would result in a price for product A of $8.33 per unit and a price for product B of $8.33 per unit.⁷)

According to Relator, Medtronic used the Total Cost Approach but should have used the Unit Apportionment Approach, which had been approved by HHS-OIG in a 1999 advisory opinion. While the court agreed that apportioning a discount across all bundled products is “one possible means” to structure a bundled transaction, it cautioned that the advisory opinion (i) did not state that the Unit Apportionment Approach was the “singular acceptable approach” and (ii) in any event, was issued nine months before HHS-OIG created the Bundled Discount Conditions and, as such, could not constitute the agency’s interpretation of the Full Disclosure Condition.

Rather, based on a review of the plain language of the discount safe harbor and associated preamble guidance from HHS-OIG, the court concluded that “reporting costs is what counts—and nothing else.” The court noted, for example, that the relevant regulations do not “discuss unit-based pricing.” Rather, as reinforced by the regulatory language for buyers that are cost reporters, the regulations appear focused on the buyer’s costs. The court also noted that when HHS-OIG promulgated the Bundled Discount Conditions, it advised the industry not to concern itself with precisely “how or where to report . . . the fact that the price was due to a discount . . . [provided that] the actual purchase price accurately reflects the discount.”⁸ In short, the court found, “HRMC [had] fully . . . disclosed the discount and accurately reflected it” for purposes of the discount safe harbor because “the applicable cost report include[d] the actual purchase price.”

Having determined that Medtronic’s bundled discount qualified as a “discount” eligible for protection under the discount safe harbor, the court turned its attention to whether the safe harbor’s Seller and Buyer Requirements were met. The court prefaced this discussion by noting that HHS-OIG has taken the position that the discount safe harbor “protects a buyer and seller independently,” such that “if the seller, in good faith, meets its obligations under the safe harbor and the buyer does not meet its obligations due to no fault of the seller, the seller would receive safe harbor protection.”⁹ Adopting this approach, the court evaluated Medtronic and HRMC “independently” in determining whether each qualified for protection under the discount safe harbor.

Seller Analysis

Starting with Medtronic, the court examined whether Medtronic satisfied the safe harbor’s:

• Invoice Requirement, requiring Medtronic to “fully and accurately report” the discount at issue “on the invoice, coupon or statement” submitted to HRMC; and

• Notice Requirement, requiring Medtronic to “inform” HRMC “in a manner that is reasonably calculated to give notice” of its obligations to report the discount to the government, and “refrain from doing anything that would impede” HRMC from meeting its obligation.

With respect to the Invoice Requirement, Relator argued that Medtronic did not “fully and accurately report” the discount at issue for two reasons. First, Relator contended that the Balloon Invoice, as submitted to HRMC, was insufficient because it did not include the no-charge devices, which instead were reflected in a separate document (i.e., the No-Charge Attachment). Second, the No-Charge Attachment was “insufficient” because it “didn’t contain various details—such as serial number and lot numbers—necessary to track the transfer of these devices.”

The court was not convinced, observing, as an initial matter, that the plain language of the regulations allows for a seller to report its pricing on an “invoice,” “coupon,” or “statement,” without expressing any preference as to which of those three options is used. Moreover, the court reasoned, while an “invoice” is commonly associated with an itemized list with specified prices, the terms “statement” and “coupon” typically denote a “much less formal” document. Due to this “flexibility” in the regulatory standard, the court concluded that, taken together, Medtronic’s Balloon Invoice and No-Charge Attachment qualified as “full and accurate seller reporting,” such that no reasonable jury could find that the Invoice Requirement was not met.

With respect to the Notice Requirement, although Relator conceded that the substance of Medtronic’s Price Transparency Notice was sufficient, he quibbled with its placement. Specifically, Relator argued that the Notice Requirement was not met because while Medtronic’s Price Transparency Notice appeared in the Balloon Invoice, it was not included in each No-Charge Attachment.

The court was not persuaded by this “piece-of-paper” argument. In the court’s view, Relator was attempting “to impose more rigid requirements” than the relevant authorities demand. Given (i) the specificity of Medtronic’s Price Transparency Notice, which “even cite[d] the statute explicitly,” and (ii) the fact that every bundled transaction included a Balloon Invoice with the Price Transparency Notice, the court ruled that “no reasonable jury could find that Medtronic failed to apprise HRMC of its obligations” under the discount safe harbor.

In sum, because no reasonable jury could conclude that either Seller Requirement was not met, the court granted Medtronic’s motion for summary judgment.

Buyer Analysis

Next, the court considered whether HRMC satisfied the discount safe harbor’s Buyer Requirements. Although the court concluded that HRMC did not satisfy the Buyer Requirements—and hence did not qualify for safe harbor protection—it found that HRMC did satisfy the requirements of the statutory discount exception.

As noted above, the safe harbor’s Same Good Requirement provides that the buyer must earn the discount at issue “based on purchases of” the “same good or service” made “within a single fiscal year of the buyer.” Because a bundled discount arrangement necessarily includes multiple products, the court reasoned that “a reasonable jury could find that HRMC fail[ed]” to meet the Same Good Standard because HRMC did not earn the discounts at issue on purchases of the same good or service.¹⁰

The court then turned to the following two questions: (i) whether HRMC could qualify for protection under the statutory discount exception, and (ii) if so, whether HRMC did, in fact, satisfy the exception’s requirements.

As for the first question, Relator argued that the regulatory safe harbor “effectively interpret[s] the statutory exception,” such that “failing to satisfy the safe harbor provisions necessarily results in failing to satisfy the statutory exception.” HRMC disagreed, insisting that the exception and safe harbor are separate and distinct grounds of defense. The court sided with HRMC, noting, for example, that when Congress “permitted the promulgation of safe harbor regulations,” it explained “that any ‘practices specified in regulations . . . shall be in addition’ to those exempted under the statutory exception.”

Having established that HRMC could seek protection under the statutory discount exception as a matter of law, the court then turned to whether such protection was available under the facts at hand.

As noted above, the exception protects any discount as long as “the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under [an FHCP].”

The court saw no reason to treat the “properly disclose”/“appropriate reflect” phrasing in the exception any differently than the “fully disclose”/“accurately reflect” phrasing in the safe harbor. And consistent with its discussion of the latter (summarized above), the court concluded that “no reasonable jury could find that HRMC had failed to disclose properly or reflect appropriately the discount it received from Medtronic.”

This left only one remaining phrase— “in the costs claimed or charges made”—with which to grapple. HRMC argued that the use of the term “or” meant that HRMC may “solely report” its “costs claimed” (i.e., its “charges are irrelevant”). Relator complained that this reading “would allow HRMC to hide the existence and value of the free devices from the government.”

Once again, the court sided with HRMC, noting that HRMC’s interpretation was more consistent with the plain language of the statute and regulations (and HHS-OIG’s interpretation of the latter). For example, in the statute, “the disjunctive ‘or’ suggests either that an entity has a choice, or that ‘costs’ applies to one party and ‘charges’ applies to another.” Further, both the safe harbor regulations and HHS-OIG preamble guidance place an “an emphasis on costs for cost-reporting entities.” In sum, the court concluded, Relator’s focus on charges was a “red herring,” as “the statute, regulations, and HHS OIG guidance all indicate that when a cost-reporting entity accurately reflects its costs in its cost report, that’s enough.”

Because HRMC satisfied the statutory discount exception, the district court granted HRMC’s motion for summary judgment.

CONCLUSION

Schroeder is an important decision for at least two reasons.

First, since 1999, sellers have struggled with how much information to provide to buyers in order to ensure compliance with the discount safe harbor’s Full Disclosure Condition for bundled discounts. Schroeder tackles those questions, clarifying—at least in the case of bundled discounts offered by a seller to a cost reporter—that the Full Disclosure Condition is satisfied if (i) the seller provides the buyer with documentation that identifies all of the products covered by the transaction and the net price the buyer is paying for those products, and (ii) the buyer reports this net amount on its cost report. Neither the seller nor the buyer needs to apportion the net invoice price among the bundled products in order to secure safe harbor protection.

Second, since 2000, the industry has largely relied on a single district court case—United States v. Shaw, 106 F. Supp. 2d 103 (D. Mass. 2000)—for the proposition that the statutory discount exception and regulatory discount safe harbor provide independent bases of defense under the AKS. Schroeder provides additional, updated support for this proposition from a different federal circuit. Case law supporting this proposition is important as, over the years, HHS-OIG seems to have taken the opposite position, namely, that “the regulatory safe harbor includes all discounts Congress intended to protect under the statutory exception.”¹¹

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1. 42 U.S.C. § 1320a-7b(b)(3)(A). ↩︎
2. 42 C.F.R. § 1001.952(h). ↩︎
3. See 64 Fed. Reg. 63518, 63554 (Nov. 19, 1999). ↩︎
4. US ex. rel. Schroeder v. Hutchinson Regional Medical Center et. al., No. 17-2060-DDC-BGS (D. Kan. Sep. 26, 2024). ↩︎
5. To be more precise, the defendants included both Medtronic, Inc. and its affiliate, Covidien, LP. Over time, Medtronic, Inc. began making, using, selling and/or importing medical devices formerly sold by Covidien, LP. ↩︎
6. As such, this differed from the “cost shifting” arrangements that HHS-OIG had referenced in regulatory preamble as being potentially problematic (e.g., where one product in a bundle is reimbursed by Medicare on a reasonable cost basis and another product in the bundle is reimbursed by Medicare as part of a fixed fee schedule). See 64 Fed. Reg. at 63530. ↩︎
7. See, e.g., HHS-OIG Advisory Opinion No. 99-03. Based on the apportionment methodology in that advisory opinion, the per-unit price of product A would be equal to the following: $10 – [($50/$60) x ($10/5)]. The per-unit price of product B would be equal to the following: $10 – [($10/$60) x ($10/1)]. ↩︎
8. See 64 Fed. Reg. at 63527. ↩︎
9. See id. ↩︎
10. The court acknowledged that the literal language of the Same Good Requirement would appear to “lead to an irrational result,” since “the regulation’s literal language would never provide safe harbor for a cost-reporting buyer who engages in a bundled, different goods transaction” but “the same regulation protects that precise bundled, different good transaction.” The court ultimately concluded, however, that the literal reading of the regulatory language should control. Because the Same Good Requirement was limited to cost reporters, a literally reading of the regulation would not preclude other types of buyers from qualifying for protection under the discount safe harbor. Of course, this conclusion feels somewhat unsatisfying, as it begs the question of why HHS-OIG would include cost reporters as a category of buyers eligible for safe harbor protection but then include a buyer requirement that could never be satisfied. ↩︎
11. See 64 Fed. Reg. at 63527-28. ↩︎