Photo of Bexis

Today’s guest post is from Reed Smith‘s Micah Brown. He discusses a recent appellate decision that we think is counterproductive, in that it interprets the federal Anti-Kickback statute to preclude drug manufacturers from alleviating the high expense of breakthrough drugs that treat relatively rare medical conditions. As always our guest bloggers deserve 100% of the credit (and any blame) for what they have to say.


Illustrating the principle that hard cases make bad law, a panel of the Second Circuit in July unanimously upheld a Department of Health and Human Services Office of Inspector General (“OIG”) advisory opinion that a drug manufacturer’s plan to offer significant cost-sharing support for Medicare beneficiaries who use a life-saving, but expensive, drug was unlawful.  The Second Circuit agreed with the OIG that the manufacturer’s proposal could constitute prohibited remuneration under the Federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b (“AKS”).  Pfizer, Inc. v. United States HHS, 42 F.4th 67 (2d Cir. 2022).  The manufacturer sought to cover Medicare patients’ Part D cost-sharing obligations for the drug – which were estimated at approximately $13,000 per year – but the OIG said “no thanks,” and the Second Circuit has affirmed that outcome.

A little background is in order.  The drug at issue was an FDA-recognized breakthrough drug that treats a relatively rare, but invariably fatal, condition – transthyretin amyloid cardiomyopathy (“ATTR-CM”).  ATTR-CM is a progressive heart disease that causes protein fibrils to deposit in the left ventricle of the heart, eventually leading to heart failure.  ATTR-CM only affects about 150,000 Americans, who are mostly elderly.  Pfizer, 42 F.4th at 70.  The drug at issue is the only FDA-approved pharmaceutical treatment for ATTR-CM (although off-label use of other drugs, and organ transplant, are sometimes used as treatments).  Id.  Although the drug is not a “cure,” it does “slow[] the decline in quality of life, reduces hospitalization rates, and typically helps patients live longer.”  Id.  So far so good.

The problem is, as stated before, the drug is expensive; an annual course costs $225,000.  However, because most of the patients with this condition are elderly, they are eligible for Medicare, with Part D providing significant benefits for this treatment.  That being said, Medicare does not cover the entire cost of the drug.  Under the Part D benefit design, which currently includes five percent coinsurance for patient out-of-pocket costs in excess of $7,050 per year, the bottom line for the patient is around $13,000/year.  For Medicare beneficiaries with incomes under $19,140/year, further assistance (“Extra Help”) to cover these costs is available.  Id. at 71.  But for those who make more than that, the coinsurance cost of the drug alone can be prohibitive.

The manufacturer explained that even if it cut the price of the drug in half, “the Medicare co-pay would be approximately $8,000, which remains a significant financial barrier for many patients.”  Id.  And, citing research related to cancer drugs, the manufacturer asserted that “49% of cancer patients failed to refill their prescriptions when the out-of-pocket costs exceeded $2,000.”  Id.  So, we have a breakthrough drug that greatly ameliorates a debilitating disease, but also has a very high out of pocket cost.

The manufacturer proposed a solution:  a prescription drug co-pay support plan.  Under the proposal, the manufacturer would cover the $13,000 out-of-pocket cost, aside from a $35 monthly fee for which the patient would still be responsible.  Id.  Medicare’s per-patient cost would remain the same.  The manufacturer also agreed not to use this proposed program to solicit new patients – eligibility for the program would depend on a patient first being prescribed the drug.  Id.

The manufacturer’s proposed solution might seem like a win-win.  Patients would get affordable access to life-sustaining medicine for a relatively modest manufacturer subsidy.  However, the OIG has consistently viewed these types of programs risk as creating unlawful subsidies of patient cost-sharing obligations.  Although the OIG once took the position that a charity, unconnected to individual manufacturers, was likely not in violation of the AKS, it now believes that even such a charitable model is likely illegal where only a single drug is indicated to treat the disease state.

HHS reviewed the plan, and concluded that it could constitute prohibited remuneration under the AKS.  The manufacturer then filed suit in the Southern District of New York.  In so doing, the manufacturer sought an affirmative declaration that the proposed program was legal because the company lacked any “corrupt intent” for AKS purposes.  The OIG’s advisory opinion process, however, relies on information submitted by a requesting party and does not contemplate any independent investigation of intent.  Indeed, the specific opinion here – like all similar OIG advisory opinions – merely specified that the proposal could constitute prohibited remuneration “if the requisite intent were present.”  The manufacturer’s strategy carried some risk – a published appellate opinion would turn the OIG advisory opinion into a binding interpretation of the law.  This is ultimately what transpired.

After the district court granted summary judgment to HHS, Pfizer Inc. v. United States HHS, No. 1:20-cv-4920 (MKV), 2021 U.S. Dist. LEXIS 189381 (S.D.N.Y. Sept. 30, 2021), the manufacturer appealed to the Second Circuit.

The case turned on the AKS, which states in relevant part that:

Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person to … purchase … any good, service, or item for which payment may be made in whole or in part under a Federal health care program … shall be guilty of a felony.

42 U.S.C. § 1320a-7b(b)(2).  Congress initially passed the AKS in 1972 and amended it in 1977.

On appeal, the manufacturer made three textual arguments that the statute requires a corrupt intent.  These arguments were certainly consistent with the government’s historic emphasis that the statute is intent-based, and prior OIG guidance to manufacturers that the “greatest risk[s]” of skewing medical decision-making or undermining clinical drug formularies, arise when an arrangement or practice increases costs to federal health care programs, creates a risk of overutilization, or interference with patient safety or quality of care (none of which appears to be present in this case).

First, the manufacturer argued that the phrase “any remuneration … to induce” indicates that the statute requires a corrupt quid pro quo.  Side-stepping the issue of whether the statute requires any quid pro quo at all, the court determined that the statute does not require corruption.  The court reasoned that, initially, the statute had required a corrupt intent (citing United States v. Zacher, 586 F.2d 912 (2d Cir. 1978)) but that the 1977 amendment had added the phrase “any remuneration.”  This key phrase, according to the court, altered the statute’s original anti-corruption focus.  Any transfer of money, even cost-sharing support to ensure that patients with a progressive and fatal disease can get the only FDA-approved medicine available, may be illegal.

The manufacturer further argued that the parenthetical wording of the statute – “any remuneration (including any kickback, bribe, or rebate)” indicates that the statute is aimed at corrupt activity, such as, offering kickbacks, bribes, or corrupt rebates.  Not so, said the court.  Quoting the Supreme Court in Burgess v. United States, 553 U.S. 124, 131 n.3 (2008), the court explained that “the word ‘includes,’ when used in a statute, ‘is usually a term of enlargement, and not of limitation.’”  Pfizer, Inc., 42 F.4th at 76.  The court rejected the manufacturer’s argument that two canons of construction, ejusdem generis and noscitur a sociis, would place the outlawed conduct in its proper context.  According to the court, kickbacks, bribes, and rebates are simply examples of the type of remuneration that the statute outlaws, and the statute is not limited to merely outlawing corrupt payments, but any payments, for any reason.

The manufacturer finally argued that the “willful” element of the statute means that the statute requires a “bad purpose.”  Citing to the Congressional report, the court determined that “willful” in this case essentially means “knowing.”  “In other words, the AKS does not apply to those who are unaware that such payments are prohibited by law and accidentally violate the statute.”  Pfizer, Inc. 42 F.4th at 77.  In short, no requirement of corrupt intent.  But the fact that the manufacturer sought an advisory opinion, by itself, would seem to undercut any unawareness argument.

The manufacturer also made several non-textual arguments, the most significant of which was a policy argument against DHS’ position and the decision of the district court to apply the AKS in such a way as to criminalize “beneficial activity.”  Id. at 79.  Again, the Second Circuit disagreed.  The manufacturer argued that this expansive reading of the AKS would potentially criminalize all manner of charitable activity, including familial support.  The court rejected that argument, explaining that concerned family members likely would not meet the willfulness requirement, because they would not know they were violating the law, and thus would not be in violation.  Since a charitable family member would not be criminally charged under the AKS, there is no absurd result in HHS essentially criminalizing Pfizer’s attempts to offer needy patients support for an expensive, yet vital medication. 

In its analysis, however, the Second Circuit did not consider the recent decision of the Supreme Court in Xiulu Ruan v. United States, 142 S. Ct. 2370 (2022), which the Blog recently wrote about here.  In Ruan, the Supreme Court examined the case of two doctors who were convicted of violating the Controlled Substances Act (“CSA”), 21 U.S.C. § 841.  Similar to the AKS, the CSA has a “knowing” element.  The relevant language in the CSA forbids “except as authorized … knowingly or intentionally – (1) to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance; or (2) to create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance.” 

In contrast to the Second Circuit’s decision in Pfizer, in which the court declined to examine statutory text outside of the relevant portion to contextualize the relevant passages, the Supreme Court in Ruan determined that the “except as authorized” language modified the “knowingly or intentionally” mens rea element of the CSA.  The Court based this conclusion on logic might have been instructive to the Second Circuit in Pfizer.

First, as a general matter, our criminal law seeks to punish the vicious will.  With few exceptions, wrongdoing must be conscious to be criminal. Indeed, we have said that consciousness of wrongdoing is a principle as universal and persistent in mature systems of [criminal] law as belief in freedom of the human will and a consequent ability and duty of the normal individual to choose between good and evil.

Ruan, 142 S. Ct. at 2376-77 (second alteration in original) (emphasis added) (citations and internal quotation marks omitted).  Additionally, the Court was more concerned than the Second Circuit that applying the mens rea element strictly “would … criminalize a broad range of apparently innocent conduct.”  Id. at 2378 (alteration in original) (citation omitted).

Regardless of whether the manufacturer’s proposal was “apparently innocent conduct” that lacks any “vicious will,” the Pfizer court found that the AKS does not allow an exception in a case such as this, and ruled in favor of the OIG.  This result, however, does clarify a few areas.  First, the matter underscores the extreme sensitivity of the OIG to prescription drug pricing issues, as the proposed program effectively would remove potential disincentives to manufacturer price increases.  Second, the AKS’s “knowing and willful” requirement continues to produce a variety of judicial interpretations.  Third, from a defense perspective, it is critical to consider the procedural setting in which such “intent” decisions are issued (here, a declaratory judgment action seeking a finding of “good” intent) when considering those scienter formulations.  Cf, United States ex rel. Nicholson v. Medcom Carolinas, Inc., 42 F.4th 185 (4th Cir. 2022) (presuming that commission based compensation violates the AKS, while affirming dismissal for failure to plead fraud with the requisite particularity); United States v. Mallory, 988 F.3d 730, 738 (4th Cir. 2021) (rejecting argument that commission-based compensation is per se legal under the AKS).  Defendants in actual litigation may fare better.

Finally, the decision highlights a current conundrum with respect to modern drug development.  As manufacturers increasingly bring to market products indicated for smaller breakthrough populations, the ability to amortize development costs and price the products affordably in light of government and commercial insurance benefit designs is becoming more challenging.  That dynamic likely motivated the manufacturer here, and the OIG in its response to the manufacturer.

The manufacturer here is not, and will not, be the only one to face these challenges. As reported by CNN, another manufacturer has developed a breakthrough drug designed to treat amyotrophic lateral sclerosis, more commonly known as ALS or Lou Gehrig’s Disease.  This condition affects an even smaller population than ATTR-CM, and this new treatment, recently approved by the FDA, is expected to have a list price of $158,000 per year.  The manufacturer is already anticipating “provid[ing] financial assistance … for uninsured and underinsured people who meet certain criteria.”  Just this month, however, in another advisory opinion, the OIG reiterated the principle that manufacturer specific funding is suspect under the anti-kickback statute in a negative advisory opinion relating to an oncology drug cost sharing support program.  Given the result in Pfizer and OIG guidance related to the AKS, manufacturers will have to carefully structure any cost-sharing programs to avoid running afoul of the AKS and attendant OIG guidance.

Ultimately, the law as it stands makes it a violation of an anti-corruption statute for a drug manufacturer to cover the copay of Medicare beneficiaries in order to make a life-saving drug more affordable. The tension here between a regulatory regime designed to both improve the quality of patient care while protecting the taxpayers from excessive costs is reminiscent of Oliver Twist:  If the law supposes that, the law is an ass.

But there may be a light at the end of the tunnel for the beneficiaries, if not the manufacturers.  As part of the recent Inflation Reduction Act (“IRA”), Congress enacted significant Medicare Part D benefit design reforms.  Under those reforms, effective in 2024, Medicare Part D beneficiaries’ overall Part D cost sharing will be capped at $2,000 per year.  Although this does not “cure” the legal issue here, it will “treat” the practical issue by significantly reducing out of pocket costs for Part D beneficiaries.