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November 30, 2022

Government Relations 101: Can Free Delivery Be Considered an Impermissible Inducement?

This blog is the fourth in a series about interacting with government regulators and is intended to help our clients understand and manage contact and outreach from government regulators, law enforcement, or both.

The Set Up

You own a health care business—a pharmacy in this scenario—and you’ve recently moved into the mail-order business. On flyers, to walk-in customers, and on your website you offer free, expedited overnight mail delivery on all products regardless of location and cost. Have you done wrong?

The Law

The short answer is maybe. Inducements are impermissible. An inducement is any offer or reward that affects patient choice. They are prohibited by rule, regulation, state law, federal law, and by contract. In New York State, all enrolled Medicaid providers are prohibited from “offering or paying either directly or indirectly any payment (including any kickback, bribe, referral fee, rebate, or discount), whether in cash or in kind, in return for referring a client to a person for any medical care, services, or supplies for which payment is claimed under the program.”i  The prohibition applies whether a government-funded program is the immediate payor (fee-for-service) or the final payor (a Medicaid-funded managed care plan or Medicare Advantage Plan). Government money is government money regardless of its path to the eventual payee. Determining the difference can be tricky.ii  

Violations may constitute “an unacceptable practice” subjecting the provider to sanctions, including exclusion.iii  Inducements within the context of the New York State Medicaid program are also criminal and routinely prosecuted.iv  On the federal level, the Anti-Kickback Statue (AKS)  and the Civil Monetary Penalties Law (CMPL)  similarly prohibit inducements and have far-ranging penalties for violations. For providers who process claims through third-party vendors, those contracts, particularly contracts with pharmacy benefit managers (PBMs), often expressly prohibit the use of inducements to secure patients as well as mandating compliance with all rules and regulations of all government-funded health care programs.

From the above provisions, all gifts, rewards, optional services, and promotional items would appear to be impermissible inducements. However, that’s not the case. PBM contracts, for example, often expressly permit patient inducements so long as they are under $15 in value ($75 annually).vii The AKS and CMPL also have exceptions, and HHS-OIG has issued specific guidance regarding promotional items.viii  Within the New York State Medicaid program, the provider manual for pharmacy, for example, expressly permits the local delivery of medication as an optional pharmaceutical service, even though it’s clearly a benefit to patients beyond the simple dispensing of medication. Local delivery of prescription medication, over-the-counter medication, medical supplies, and durable medical equipment is expressly permitted so long as “best practices” are maintained. Best practices, among other things, include tracking and securing a delivery signature, maintaining privacy, and adhering to special provisions related to controlled substances. Coupons are another form of discount or promotion that may be construed as an inducement but are also permissible in certain circumstances and widely available in certain fields. 

So when does a service, gift, or promotional item cross the line between being permissive and impermissible? The tension arises from freedom-of-choice provisions. Within the New York State Medicaid program, a patient is expressly “free to choose from among qualified facilities, practitioners, and other providers of services who participate in the Medicaid Program.ix  Similar rights underlie both the AKS and CMPL. From a regulator’s perspective, patient care, access to services, patient freedom of choice, and preventing overutilization of services trumps any business concerns a provider may have, including the need to maintain and secure patient populations, to ward off the sharp practices of competitors, or both. Regardless what your competitors are doing, to the extent an inducement is permitted, the practice will be tolerated by regulators so long as it does not influence patient choice and lead to the overutilization of services.x  Put otherwise, any gift, reward, optional service, or promotional item cannot induce a patient to make a choice they would not otherwise make, be it in accessing a service or in how often they access one. So, in the scenario presented in this blog, overnight or express mail delivery to the extent it convinces, or might be viewed as convincing, a patient to select one provider over another runs the risk of violating various rules, regulations, laws, or all three as an impermissible inducement.

Our Advice

Our advice is to exercise restraint and seek legal advice. Offers to customers, to the extent they are offered to all customers, are modest in terms of cost (less than $15), are not cash payments, are not advertised, and are focused on maintaining the goodwill of current customers or serve a medical goal rather than securing new patients, will likely escape the attention of most government regulators.  That’s by no means advice or a promise. Each situation is unique. To the extent any one of these components is skewed, individually or collectively, towards solicitation rather than simply being solicitous of your current customers, they then run the risk of being considered an inducement and a violation of state law, federal law, or both. 

Your intent may be innocent, but regulators will, at least initially, only examine your conduct, as opposed to your thoughts, prior to commencing an audit or an investigation. They will assess your conduct against what’s generally permissible under the law or often against what they consider permissible. What’s permissible, what’s reasonable is, of course, the rub and varies under the circumstances and in the eyes of the individual regulator.

So, in the above example, offering free delivery to all mail-order patients, but offering expedited, overnight delivery only to new mail-order patients (without there being a medical need for overnight delivery) looks like, and may be viewed by regulators as, more of an inducement than an innocuous act of customer relations. Advertising this special service for new customers will reinforce this conclusion and alone might launch an audit or an investigation and result in significant costs to your business regardless your intent. Advertising a promotion is a factor noted in regulatory guidance as being especially troubling.xii  Even offering free expedited or overnight delivery to all your mail order patients might be considered impermissible under some circumstances if the practice differs from industry norms, express regulations, is not medically required, or the cost of doing so is not de minimis or exceeds the cost of the delivered item. In each of these scenarios, the cost of the benefit is disproportionate to the value of the underlying transaction and could be viewed as the byproduct of an ulterior motive, namely, to secure new patients, since it is assumed most people will not act against their own financial interests without one. Of course, the hope and expectation is that regulators will apply the rule of reason and any promotional offer will be evaluated pragmatically and not hypertechnically, as is often the case.

Nonetheless, it is best to be very cautious. You should seek legal advice prior to commencing a new customer relations initiative. Doing so will provide you with an independent assessment of the legality of what you’re contemplating and will show, should it ever become an issue, your efforts to remain compliant with the law.

If you have any questions regarding the content of this blog, please contact Chris Shaw, partner, at, or another member of the firm’s Health Care Controversies or Health & Human Services Providers Teams.

i18 NYCRR § 515.2(5)(iii).
iiMany government-funded insurers also operate private insurance plans under the same front-facing corporate name as their government-funded plans. While the government-funded plan is likely incorporated as a separate legal entity, it nonetheless does business under a name similar, if not the same, as the insurer’s privately funded plan.
iii18 NYCRR § 515.5.
ivIn New York State, see NYS Social Services Law § 366-b.
v42 USC § 1320-7b(b).
vi42 USC § 1320a-7a(i)(6).
viiTo the extent any contract provision runs contrary to state law, state law would govern.
viiiSee HHS-OIG, Special Advisory Bulletin, Offering Gifts and Other Inducements to Beneficiaries, August, 2002.
ixNew York State Medicaid Program, Information for all Providers, General Policy Manual at p. 8.
xSee, for example, HHS-OIG, Special Advisory Bulletin, Offering Gifts and Other Inducements to Beneficiaries, August 2002 at p. 4. In referencing HIPPA, the advisory notes that HIPPA “bars the offering of remuneration to Medicare or Medicaid beneficiaries where the person offering the remuneration knows or should know that the remuneration is likely to influence the beneficiary to order or receive items or services from a particular provider.”
xiId. at p. 3 (noting that the federal definition of remuneration excludes “incentives to promote the delivery of preventive care).
xiiId at p. 4. (“The “inducement” element of the offense is met by any offer of valuable (i.e., not inexpensive) goods and services as part of a marketing or promotional activity regardless of whether the marketing or promotional activity is active or passive.”)

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