Device warranties often entitle providers to the full replacement of a device or a credit toward the device cost during a warranty period. When manufactures receive the warranty claim, they process it through their corrective and preventive action (CAPA) system (if necessary), evaluate the warranty claim, and then process the replacement or device credit. Although time frames for completing this process may be identified in the terms and conditions of the warranty, the process is not usually completed until many months after the medical procedure to remove and replace the original device.

Although device manufacturers may think of this process as a product warranty issue, hospital facilities that use and request credits or replacements for implantable devices in both inpatient and outpatient procedures are now under intense scrutiny from Medicare. When replacement devices are inserted during an inpatient or outpatient procedure, Medicare requires that the hospital report whether a credit is received or the manufacturer provides a warranty for 43 inpatient diagnosis related groups (DRGs) and 31 types of devices that fall within 21 outpatient ambulatory payment classifications (APCs). Medicare reduces its payment to the provider if the provider is entitled to full or partial credits from the manufacturer.

Three recent Office of Inspector General (OIG) audits (Cleveland Clinic, Lahey Clinic and the University of California) make clear that Medicare will reduce payment even if the provider did not actually receive the credits that were technically available. Some examples of devices implicated in this Medicare payment reduction are defibrillator leads, cardiac defibrillators, and pacemakers—whether replaced due to battery lifecycle issues, manufacturer recall, or normal replacement schedules. This essentially places the obligation on health care providers to actively seek the device credits available under warranties or risk large repayment obligations to Medicare. Specifically, Medicare's "prudent buyer principle" (based on the regulatory authority in 42 C.F.R. 413.9) states that "implicit in the intention that actual costs be paid to the extent they are reasonable is the expectation that the provider seeks to minimize its costs and that its actual costs do not exceed what a prudent and cost-conscious buyer pays for a given item or service."

Current practice dictates that first, the replacement procedure is completed, and then the claims are sent to Medicare and the device manufacturer simultaneously—in some cases by separate departments within the provider organization. The problem arises when the device credit takes a long time to be received from the manufacturer, resulting in a failure to update the Medicare claim appropriately. Providers across the U.S. are now taking active steps to implement compliance systems to track the requests for device credits and ensure accurate claims are made to Medicare.

Device manufacturers would be wise to recognize this significant payment restriction on providers and to assist in the device credit process by:

  • Expediting warranty and credit requests
  • Including reminders to providers to update reimbursement claims upon receipt of device credits
  • Maintaining clear communication lines with multiple departments within hospitals to increase the likelihood that credits received are adjusted properly

Device manufacturers who offer product warranties and device credits should actively embrace the Medicare payment process and work proactively with providers to streamline the device credit process to ensure that providers have the support needed to submit timely and accurate claims. This added service could give a device manufacturer an advantage in the marketplace.