US Defeated At Trial On “Below Cost Discounting” Claims

One theory of FCA liability that we are seeing with increasing frequency in the healthcare context is that suppliers have offered discounted bids for goods or services that are “below cost” in an effort to “pull through,” or induce the purchasing entity to refer, more lucrative business that is reimbursable by federal healthcare programs. The offering of such discounts is alleged to constitute unlawful remuneration under the Anti-Kickback Statute. Plaintiffs claim to find support for these claims in advisory opinions and other sub-regulatory guidance issued by the Department of Health & Human Services suggesting that discounts that are below cost or below fair market value (which may or may not be below cost) implicate the AKS. Until recently, there has been relatively little judicial guidance on important issues raised by this theory, such as whether cost or fair market value is the appropriate benchmark for evaluating prices, and what measure of cost is potentially relevant. But in a case with potentially far-reaching implications, a federal judge recently entered judgment against the United States on the theory that the provision of discounts that were “below cost” or for less than fair market value violated the Anti-Kickback Statute.

The case arose out of the negotiation of contracts for durable medical equipment (DME) and related contract billing services between DME providers (the “McKesson defendants”) and CSMS, an institutional provider whose facilities included a nursing home for which DME services were being bid. The government alleged that CSMS sought to induce the McKesson defendants to offer contract billing services for DME “below fair market value, below actual costs, or at a discounted price” by “dangling” the prospect of McKesson receiving other, more lucrative business in exchange. Following a 14-day bench trial, Judge Sharion Aycock of the U.S. District Court for the Northern District of Mississippi entered judgment for the defendants, finding that the United States failed to prove either a violation of the Anti-Kickback Statute or the False Claims Act, finding that the Government failed to prove either the remuneration or intent elements of the predicate AKS violation.

The Court began its analysis by noting that “[i]n the context of the AKS, courts use ‘fair market value’ as the gauge of value when assessing the remuneration element of the offense.” However, the Court noted, the Government did not define fair market value, and therefore failed to identify a reliable benchmark against which the court could determine whether the discounts constituted “remuneration” under the AKS. Moreover, the defendants presented evidence that their contract bids were not the lowest bids, and were not unreasonable when viewed alongside the other bids. The fact that one competitor’s bid was three times higher than defendants’ was not significant, the Court concluded, in light of the absence of any evidence that the bidding process was not competitive or was tainted in some way.

Having found that the McKesson defendants’ bids were consistent with fair market value, the Court then considered and rejected the Government’s claim that defendants priced their services “below cost.” The court agreed with the defendants that the use of models of incremental cost – “costs expected to increase solely because of that business” — to project profitability, was appropriate, rather than alternative measures of cost (e.g. including some fixed costs) advanced by the Government. The court noted that defendants had prepared almost 50 profitability models over the years, and that none of them projected that incremental costs would exceed incremental expenses. While the Government argued that incremental cost was not the appropriate measure, it “failed to present evidence that such analysis was either illegal under the AKS or improper under standard accounting principles,” noting testimony that “incremental cost analysis is a well-accepted method of analyzing opportunities and profitability.”

The significance of this opinion cannot be overstated, as it strongly supports defense arguments in “below cost discount” cases that (a) fair market value, not “cost,” is the appropriate benchmark for evaluating whether a discount constitutes unlawful remuneration, and (b) if cost is relevant at all, it is appropriate to evaluate profitability using incremental cost, rather than total cost, “direct cost,” or other measures of cost that are advanced by plaintiffs in order to try to characterize a supplier’s bid as below cost.

A copy of the Court’s opinion can be accessed here.