The AO 25-11 requestor is a biopharmaceutical manufacturer that produces several vaccines reimbursed under different Medicare programs. Two of the vaccines are reimbursed under Medicare Part B, and one is reimbursed under Medicare Part D. Each vaccine competes with at least one similarly priced competitor product.

The requestor proposed four general categories of discount and rebate arrangements:

• Upfront discounts on a single vaccine, applied as a percentage reduction and known at the time of purchase
• Upfront discounts on a single vaccine, conditioned on meeting volume or market-share thresholds during a prior measurement period
• Bundled upfront discounts across multiple vaccines, also tied to purchase requirements
• Bundled rebates calculated retrospectively, with the initial purchase contract stating that the rebate terms, such as market share requirements, could be adjusted during the term after providing advance notice to the buyer

OIG concluded that each of the proposed arrangements would implicate the AKS because the discounts and rebates were offered in exchange for the buyer deciding to purchase the requestor’s products. Relying on the requestor’s certifications, OIG concluded that the seller obligations under the discount safe harbor would be satisfied and focused most of the opinion’s analysis on whether the arrangements met the safe harbor’s definitions of a “discount” or “rebate.” OIG determined that even where an arrangement failed to meet the safe harbor’s definitional requirements, it could still pose sufficiently low risk under the AKS based on its structure and safeguards.

Here are the main takeaways and observations from the opinion.

The good

This request presented OIG with the opportunity to confirm the uncontroversial conclusion that upfront discounts, such as a flat percentage off the list price and an additional price reduction for paying invoices promptly or reserving supplies in advance, meet the safe harbor discount definition. Upfront discounts with market share or volume requirements were also unsurprisingly deemed to meet the discount definition. Here, the buyer’s prior purchases of the products were used to calculate an upfront discount for future purchases over a certain time period until the eligibility for the discount level was recalculated.

OIG also stated that bundling products into an upfront discount or rebate with purchase requirements can meet the discount or rebate definition if products in the bundle are reimbursed under the same federal healthcare program methodology – and importantly considered the products reimbursed under Medicare Part B to qualify as reimbursed under the “same methodology.”

OIG applied an analysis similar to that used in AO 21-14 and discussed in the 1999 AKS safe harbor final rule preamble to the requestor’s bundles that included products reimbursed under different federal healthcare program methodologies. OIG concluded that these bundles would not meet the discount or rebate definition but posed low risk because the price reduction was calculated separately for each product and buyers earned discounts only by meeting thresholds for each product in the bundle. OIG reiterated its longstanding concern that mixed-methodology bundles can pose a risk of improperly shifting costs to federal programs by discounting one product or service to induce full-price purchases of another product or service.

Finally, OIG confirmed the safe harbor’s structure of imposing, and providing protection under, separate seller and buyer requirements. Whether the requestor (the seller) met the safe harbor depended on two things: whether the discount definition was met, and whether the seller met its reporting obligations to the different buyer types in the safe harbor. It did not depend on whether the buyer, in turn, met the buyer requirements under the safe harbor.

The unexpected

Under the discount safe harbor, a “rebate” is a type of discount where the “terms are fixed and disclosed in writing to the buyer at the time of the initial purchase to which the discount applies, but which is not given at the time of sale.” Since the requestor reserved the right to adjust the rebate terms post-sale in the rebate agreement (e.g., by increasing the discount or lowering the market share requirements), OIG concluded that in instances where the requestor adjusted the rebate terms, the rebate would not meet the safe harbor definition. Nonetheless, OIG concluded that the rebate posed low risk where the possibility of adjustment was disclosed in advance and adjustments were made to respond to competitive pressures. This reasoning reflects a pragmatic approach to changing market dynamics and places a priority on transparency and potential benefits to buyers and patients by fostering price competition.

The unanswered

AO 25-11 raises some interesting and not fully answered questions. First, OIG was silent on the analysis under the statutory exception for discounts that do not meet the regulatory safe harbor. This silence is curious in light of OIG’s statement in the preamble to the final rule revising the discount safe harbor to address certain pharmaceutical rebate practices that the statutory discount exception may protect discounting practices that do not meet the safe harbor (the effective date of these changes has been pushed out to January 1, 2032). 85 Fed. Reg. 76666, 76690-91 (Nov. 30, 2020). The two federal district courts that have considered whether the statutory discount exception is separate from the discount safe harbor concluded that it is. See United States v. Shaw, 106 F. Supp. 2d 103 (D. Mass. 2000); See United States ex. rel. Schroeder v. Hutchinson Regional Medical Center, Slip Copy 2024 WL 4298655 (D. Kan.); reconsideration denied sub nom United States ex rel. Schroeder v. Hutchinson Reg’l Med. Ctr., 777 F. Supp. 3d 1256 (D. Kan. 2025).

Second, OIG was particularly concerned about so-called “services” required to obtain a discount but left some ambiguity as to what qualifies as a requirement. The basis for this concern is rooted in the safe harbor discount definition. The safe harbor defines a discount as a “reduction in the amount a buyer . . . is charged for an item or service” and excludes “services provided in accordance with a personal or management services contract” from the discount definition. This framework reflects that the underlying AKS analysis tracks the flow of remuneration (the discount) from the seller to the buyer because discounts intrinsically induce the buyer’s purchases. Thus, this provision is typically understood to mean that services that the seller provides to the buyer (another form of remuneration besides the price reduction) do not qualify as a “discount” on the buyer’s purchases, because otherwise such services could create a “hidden discount” on the goods or services the buyer purchases.

In AO 25-11, OIG flipped the remunerative flow with its concern about the seller “requiring” the buyer to perform services for the seller, such as marketing or promoting the products or switching patients to the seller’s products. The opinion contains three separate warning statements that OIG’s conclusion would be different if “any services were required to qualify for the discounts.” OIG expressed an awareness that discounts based on market share or volume “often require, explicitly or implicitly, some level of services from the purchaser, (e.g., marketing the products or switching patients from one product to another).” At the same time, OIG acknowledged that the “practical effect” of discounts based on market share, preferred status, or volume is that purchasers may choose to stock those products over others. Indeed, some of the requestor’s agreements required the buyer to designate its product as “preferred” to obtain the discount.

AO 25-11 appears to draw a distinction between discount terms that may reward or result in greater purchases, such as the preferred designation, and discount terms that require the buyer to promote or switch patients to the seller’s products. The former scenario preserves the buyer’s ability to independently decide through its own formulary and other product standardization processes to designate certain products as preferred or to encourage providers to use products that cost the organization less and still meet patient needs. In other words, in OIG’s view, once the arrangement requires the buyer to provide services, the discount remuneration ceases to function as a true price reduction and instead becomes compensation for services, placing the arrangement outside the safe harbor and creating AKS risk. While OIG did not say that an exclusivity requirement is per se problematic, OIG did not articulate a standard for when market-share incentives effectively become an exclusivity requirement. OIG also did not expressly articulate why the buyer would consider exclusivity a “service” and not simply a term to obtain larger discounts that would meet the discount safe harbor (and exception). Exclusivity provisions may be subject to more scrutiny in the future.

Third, OIG did not offer a full framework for the facts and circumstances analysis of permissible competitive adjustments to rebate terms. AO 25-11 notes that the requestor’s agreement said that it may increase the discount offered or lower market share requirements for particular tiers during the contract term after providing advance notice to the buyer. The opinion appears to approve rebate term changes that apply to purchases made either before or after the term change. The flexibility in adjusting rebate terms during a contract period without needing to terminate and re-enter a contract should ease compliance burdens.

Conclusion

Taken together, AO 25-11 confirms many common discounting practices as qualifying for the safe harbor, which should provide some comfort to sellers and buyers alike. Upfront discounts, purchase requirements, and bundled discounts that apply proportionally across products generally can be structured to meet the safe harbor. Rebate arrangements have newfound flexibility to adjust terms if potential adjustments are disclosed at the time of the initial sale.

That said, the unanswered questions indicate that discounting practices and agreements require careful analysis. Bundled discounts involving mixed reimbursement methodologies remain subject to case-specific analysis. What constitutes a “service” from the buyer and how to address exclusivity provisions are also issues to closely examine. Sellers should appropriately train sales and business personnel on the compliance considerations and maintain an appropriate contracting process for discounting.

The McDermott difference

McDermott Will & Schulte has extensive experience counseling clients with respect to discount and rebate arrangements, as well as helping clients navigate enforcement actions related to discounting and AKS allegations. Please contact one of the authors or your regular McDermott lawyer for more information.