Background

The federal health care program anti-kickback statute, 42 U.S.C. § 1320a-7b(b) (AKS), in addition to prohibiting payments for patient referrals, prohibits one party (such as a manufacturer) from providing anything of value to another party (such as a hospital) if the "remuneration" is intended to "induce" the recipient to "order" or "purchase" an item or service that is reimbursable by Medicare, Medicaid or certain other federal programs.

The US Department of Health & Human Services Office of Inspector General (HHS-OIG)—the agency charged with enforcing the AKS—interprets the term "remuneration" broadly. For example, where a manufacturer's list price for Product A (which is covered by Medicare) is $100, and the manufacturer offers a hospital a 5 percent discount off of this list price, the discount implicates the AKS. Why? Because it is "remuneration" intended to "induce" the hospital to "purchase" Product A. Similarly, if the manufacturer offers the buyer a warranty for Product A, the warranty also would constitute "remuneration" intended to "induce" the hospital to "purchase" Product A and, as such, would implicate the AKS.

Because the AKS is so broad, Congress and HHS-OIG have developed dozens of statutory exceptions and regulatory safe harbors (collectively, safe harbors) to the statute's prohibitions. One of these protects off-invoice discounts of the type described above, provided the seller and buyer comply with certain disclosure and reporting obligations. Another protects product warranties (again, provided certain conditions are satisfied). In many cases, however, arrangements that (i) implicate the AKS but (ii) do not fit squarely into a safe harbor do not conflict with the AKS's principal policy objectives, which are to prevent overutilization, improper patient steering and unfair competition.

To address these situations, Congress created, and the HHS-OIG has implemented, an "advisory opinion" program under which parties may submit a proposed (or existing) arrangement to the HHS-OIG. If the agency concludes (i) that the arrangement will not implicate the AKS in the first instance; (ii) that the arrangement will implicate the AKS but qualifies for protection under a safe harbor; or (iii) as is most often the case, that the arrangement does implicate the law and cannot be safe-harbored but nevertheless poses a low risk of program abuse given the AKS's policy objectives, the agency will issue a favorable opinion.

If the HHS-OIG issues a favorable opinion, the opinion effectively acts as an "arrangement-specific" safe harbor. That is, if the parties implement the arrangement as described in their advisory opinion request, they will not be subject to sanctions by the HHS-OIG under the AKS. However, the opinion does not offer that same protection to any other parties who are not the subject of the opinion—even parties that enter into an arrangement identical to that addressed in the advisory opinion. That being said, the likelihood of the HHS-OIG initiating an enforcement action under such circumstances is quite low.

Advisory Opinion Request 17-03

Unlike the vast majority of products reimbursed by Medicare or Medicaid—such as wheelchairs, crutches, blood glucose monitors, nebulizers, oxygen equipment, and most brand and generic drugs—products that fall into the regenerative medicine category frequently require special storage and handling. Many skin substitutes and burn products, for example, are required to be stored within a precise temperature range. Other products are particularly sensitive to light or movement. In many cases, manufacturers would like to help buyers meet these special product storage and handling requirements but are prevented from doing so for fear that such "product support" or "wrap around" services might violate the AKS. Precisely such an arrangement was the subject of a recent HHS-OIG advisory opinion.

Proposed Arrangement

The requesting party in HHS-OIG Advisory Opinion 17-03 (AO 17-03), issued on August 25, 2017, is a manufacturer that sells biologics and other products to hospitals, clinics and physicians (Customers). Some of the products are "sensitive to temperature changes, direct sunlight, or movement, and may require reconstitution in a controlled environment" (Products). Under the proposed arrangement (Proposed Arrangement), subject to certain conditions and limitations, the manufacturer would replace, without charge, spoiled Products (Spoiled Products)—that is, Products that, following their purchase, had "spoiled or otherwise became unusable" for any one of the following reasons:

  1. The Product was "mishandled, dropped, or broken."
  2. The Product was "inappropriately stored or refrigerated, or was frozen."
  3. There was an "admixture error."
  4. The Product was "reconstituted but not administered due to an unforeseen patient condition or because the patient missed the appointment."

The Spoiled Product replacement program would be subject to the following conditions and limitations:

  1. The Customer would be required to submit documentation to the manufacturer detailing how the spoilage occurred.
  2. The Customer would be required to return the Spoiled Product to the manufacturer (e.g., a Spoiled Product would not be replaced if it had been administered to a patient). If the Spoiled Product was not returnable, the Customer would be required to attest to how the Product became unusable and include a photograph of the Spoiled Product, if available.
  3. The Customer would not be allowed to bill any patient or payer for the Spoiled Product and would be required to acknowledge this in writing.
  4. The manufacturer would only replace the Spoiled Product; it would not provide a credit for the Spoiled Product.
  5. The manufacturer would not replace the Spoiled Product if it had been provided to the Customer as a free sample (and not purchased from the manufacturer).
  6. With one exception, the program would only apply to single Product claims (i.e., it would not cover multi-unit losses). The only exception would be if the spoilage occurred due to refrigeration failure (e.g., if someone inadvertently left a refrigerator door open or set it to the wrong temperature), in which case the Customer would be allowed to claim a loss of no more than five Products.

Finally, under the Proposed Arrangement, the manufacturer would (i) have a written policy (Policy) setting forth all of the conditions a Customer would have to satisfy to qualify for a replacement Product, and (ii) notify potential Customers about the Policy before they purchase any Products.

In analyzing the Proposed Arrangement, the HHS-OIG first assumes (at least implicitly) that the Proposed Arrangement implicates the AKS (i.e., that at least one of its purposes is to induce potential Customers to purchase the Products at issue). The agency then concludes that the Proposed Arrangement would not qualify for protection under the only potentially applicable safe harbor, the warranty safe harbor, for at least two reasons. First, the warranty safe harbor requires that the products to be replaced under the warranty must be "defective or substandard." The Spoiled Products were neither at the time they were sold to the Customer and, as such, did not meet this requirement. Second, the safe harbor requires that the product to be replaced must fail to "meet the specifications set forth in the undertaking" but, again, under the Proposed Arrangement, if the Customer had followed the storage and handling requirements on the Product's label, "the Product would not have spoiled."

The agency next turns to the risk, if any, posed by the Proposed Arrangement and concludes that, for the following reasons, the Proposed Arrangement "poses a sufficiently low risk of fraud and abuse" under the AKS to warrant the issuance of a favorable opinion:

  1. The replacement of Spoiled Products "would be restricted to certain unintentional, unplanned circumstances."
  2. The replacement of Spoiled Products "could increase patient safety and quality of care." For example, in "cases of accidental spoilage (e.g., a vial that has been exposed to light or the wrong temperature), the availability of a replacement Product under the Proposed Arrangement decreases the risk that a Customer might administer a potentially spoiled Product to avoid financial loss."
  3. The Proposed Arrangement is unlikely to result in overutilization or increased costs because it "would apply only to Products that Customers already selected and intended to use but did not administer to a patient or bill to a patient or third-party payor." That is, "[i]f a Customer administered a Product to a patient, or billed a patient or payor, including a Federal health care program, for a Product, then a replacement Product would not be available under the Proposed Arrangement."
  4. The Proposed Arrangement "would cover only individual claims of Spoiled Products" and "not large losses." Moreover, "the only remedy would be replacement of the same Product that the Customer had intended to use had it not been spoiled." Thus, although the Proposed Arrangement "potentially could have some impact on competition," the "risk is acceptably low that a Customer would select Requestor’s Products over a competitor’s products on the basis that Requestor would replace a Product that was inadvertently spoiled."
  5. The Proposed Arrangement "would bear some similarity to an insurance policy, the cost of which Requestor certified would be bundled into the price of the Products. Just as an insured driver or homeowner is unlikely to act recklessly in reliance on a vehicle or homeowner’s insurance policy, we believe it is unlikely that the Proposed Arrangement would cause a Customer to change its behavior (e.g., a Customer would be unlikely to reduce costs currently expended to maintain an environment that should prevent spoilage)."
  6. "[T] he fact that a Customer would be required to complete an administrative process, including providing proof or an attestation of the spoilage and returning the Product or explaining why it can’t be returned, further reduces the risk that the Proposed Arrangement would unduly influence the purchase of Products, or be abused, by Customers."

Takeaways

The HHS-OIG's AO 17-03 decision benefits manufacturers of specialty regenerative medicine products in several ways. First, of course, to the extent that a manufacturer is able to "mirror" the arrangement at issue in AO 17-03, such an arrangement should pose a low risk under the AKS. Second, even if the arrangement at issue is not identical to that in AO 17-03, the opinion reflects a growing recognition on the part of the HHS-OIG that it often makes little sense to distinguish a "product" from items and services which, although physically separate from the product, are integrally related to the product and have no value independent of the product.

The HHS-OIG has struggled to find a doctrinal home for product support services, sometimes suggesting they are not "remuneration" at all (i.e., that they are, effectively, part of the underlying product offering) and other times simply concluding they are low risk. Either way, the result is the same: Where a manufacturer offers a buyer an item or service that is integrally related to the product at issue and has no value independent of that product, the offer may be deemed to pose a low risk of program abuse under the AKS (provided, of course, the arrangement will not result in overutilization, improper patient steering or unfair competition).

To be clear, all product support services arrangements should carefully be reviewed by legal counsel. But AO 17-03 provides additional doctrinal support for the proposition that even arrangements that do not fit squarely into a safe harbor may not necessarily pose a material risk under the AKS.