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Changes in Health Care Laws Allow Retailers to Expand the Scope of Rewards Programs

Rewards programs have become an increasingly popular and important way for businesses to attract new customers and retain their most profitable clientele.  In addition, these programs provide companies with a wealth of data related to consumer purchases that can be […]


Rewards programs have become an increasingly popular and important way for businesses to attract new customers and retain their most profitable clientele.  In addition, these programs provide companies with a wealth of data related to consumer purchases that can be used to forecast demand and create targeted marketing initiatives.

Typically, rewards programs consist of coupons or rebates given by a retailer to a customer after the customer surpasses specific spending thresholds.  Rewards are usually redeemable on future purchases at the retailer or one of the retailer’s business partners.

Prior to the Patient Protect and Affordable Care Act (“ACA”), retailers faced potential exposure if their programs rewarded customers for the dollars spent on items covered by federal health care programs.  Therefore, retailers generally excluded purchases of medical devices, medical supplies and prescription drugs covered by Medicare and Medicaid from their rewards programs. However, the ACA has created new regulations that directly affect the permissible scope of retailer rewards programs.  As a result, retailers that comply with the new regulations may be able to expand their programs to include purchases related to items covered by federal health care programs.

Changes in Health Care Regulations:

Civil Monetary Penalties

Section 1128A(a)(5) of the Social Security Act (“Act”) provides for the imposition of civil monetary penalties (“CMP”) against any person who offers or transfers remuneration to a Medicare or state health care program (including Medicaid) beneficiary that the benefactor knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of any item or service for which payment may be made, in whole or in part, by Medicare or a state health care program.  The Office of Inspector General (“OIG”) may also initiate administrative proceedings to exclude such party from the federal health care programs.  “Remuneration” includes the transfer of items or services for free or for less than fair market value.  The OIG has taken the position that incentives that are only nominal in value are not prohibited by the statute, and has interpreted “nominal in value” to mean no more than $10 per item or $50 in the aggregate on an annual basis.  Therefore, before the ACA, programs that offered significant rewards to customers based on their purchase of medical devices, medical supplies and prescription drugs covered by programs like Medicare would likely be in violation of the Act and be subject to CMP.

However, the ACA amended the definition of “remuneration” for purposes of CMP by adding a new exception for rewards offered by retailers.  Under the ACA, retailer rewards do not constitute “remuneration” for CMP purposes if they meet the following three criteria:

1)      The rewards consist of coupons, rebates or other rewards from a retailer;

2)      The rewards are offered or transferred on equal terms available to the general public, regardless of health insurance status; and

3)      The offer or transfer of the rewards is not tied to the provision of other items or services reimbursed in whole or in party by the Medicare or Medicaid programs.

Based on this exception, retail rewards programs should be able to avoid CMP as long as they are structured correctly.  If the retailer offers rewards in the form of coupons, rebates or other types of rewards based on a customer’s purchases, the first prong of the exception will likely be satisfied.  In order to satisfy the second prong, the rewards program must be offered on equal terms to all customers.  In other words, all customers of the retailer must be eligible to participate in the rewards program.  The final prong will likely create the most difficulty for retailers.  The rewards program cannot be tied to the provision of other items or services reimbursable in whole or in part by the Medicare or Medicaid programs.  Retailers will have to develop rewards programs that comply with this regulation for both “earning” and “redeeming” transactions.  Retailers should make it a priority to utilize the knowledge of an experienced business and health care attorney to develop a plan that enhances business objectives, satisfies federal regulations and avoids liability.

The Anti-Kickback Statute

The Anti-Kickback Statute (“AKS”) prohibits the payment or receipt of remuneration in return for referring individuals for items or services reimbursable by a federal health care program.  See Section 1128B(b) of the Act.  Under the AKS, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. The statute has been interpreted to cover any arrangement where one purpose of the remuneration is to obtain money for the referral of services or to induce further referrals.  Violation of the statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to five years, or both.  A violation of the AKS will also lead to an automatic exclusion from federal health care programs, including Medicare and Medicaid.

Unfortunately, the AKS does not have a exception to the definition of “remuneration” similar to the one that was created by the ACA for CMP.  However, the OIG recently released an Advisory Opinion related to the AKS and retailer rewards programs.  Although Advisory Opinions have limited application and authority, the OIG’s analysis and determinations are insightful.

The OIG was asked to evaluate a rewards program of a retailer that owned and operated thirteen supermarkets, most of which had in-store pharmacies.  The retailer’s rewards program permitted customers to earn gasoline discounts at a partnering gas station based on the amount customers spent on purchases in the retail supermarkets, including the cost-sharing amounts paid by customers on items covered by federal health care programs purchased at the in-store pharmacies.

After evaluating the retailer’s rewards program, the OIG found that the program posed a minimal risk of fraud and abuse.  The OIG noted that the retailer’s stores sold a broad range of groceries and other non-prescription items.  As such, the risk that the rewards program would steer beneficiaries to the retailer’s stores to purchase federally reimbursable items or services was low.  Customers were not required to purchase prescription items to earn rewards and there was no specific incentive for transferring prescriptions to the retailer’s pharmacies.  The OIG also determined that the rewards program would not likely lead to an overutilization or otherwise increase the costs to federal health care programs.  Any cost-sharing amounts counted towards a customer’s rewards would result from prescriptions already prescribed, and the rewards could not be used on future prescription purchases.  Ultimately, the OIG determined that it would not impose sanctions on the retailer in connection with the AKS.

Conclusion:

Based on the changes to the regulatory environment found in the ACA and recent insights from the OIG, retailers may be able to expand their rewards programs to include purchases related to items covered by federal health care programs.  However, retailers must engage in careful analysis and planning to ensure that their rewards programs do not violate health care regulations.  Retailers interested in expanding their rewards programs, or making sure their current rewards programs comply with health care regulations, should seek the advice of an experienced health care attorney and consider obtaining an Advisory Opinion from the OIG based on the specifics of the proposed program.

To find out more about the impact that the Affordable Care Act has on health care and your business, contact Health Care Department Chair Jonathan Raven at jraven@fraserlawfirm.com or 517.377.0816, or our Employee Benefits Department Co-Chair Elizabeth H. Latchana at elatchana@fraserlawfirm.com or 517.377.0826.