The Office of Inspector General (OIG) recently approved a medical device manufacturer’s innovative proposed warranty program, under which the company would provide a refund to the hospital at which a patient underwent joint replacement surgery using the company’s knee or hip implant and related products, if the patient was readmitted within 90 days because of a surgical site infection or need for implant replacement surgery. Advisory Opinion No. 18-10 concluded that although the proposed arrangement did not meet the specific criteria of the warranty safe harbor to the Anti-Kickback Statute (AKS), it nonetheless posed an acceptably low risk of fraud and abuse.

This is the latest in a series of recent signals from OIG of its willingness to support innovative risk-sharing models and value-based arrangements, even when the strict requirements of a potentially applicable safe harbor are not technically met.

The warranty program

The warranty program related to a Product Suite consisting of (1) a total knee or total hip implant, (2) a wound therapy system, and (3) an antimicrobial dressing. The company proposed to give a refund to hospitals, in the amount of the aggregate purchase price of the Product Suite, if:

  • All three products were used together on the patient in a manner consistent with their instructions for use and other labeling.
  • The patient was readmitted within 90 days as an inpatient to the same hospital where the initial surgery was performed because of a subsequent surgical site infection or need for a surgical procedure to replace the implanted knee or hip system.
  • The readmission resulted from a failure of one of the three products to perform as expected (to which the hospital must certify).

The refund would include the full aggregate purchase price of all three products in the Product Suite, regardless of which, or how many, failed. The program also would not take into account the patient’s insurance status or, if covered, the particular third-party payor. The proposed warranty program included a variety of other features and safeguards, further discussed below with respect to OIG’s analysis.

OIG’s analysis

The warranty safe harbor does not apply to the proposed warranty program

The warranty safe harbor to the AKS, codified at 42 C.F.R. § 1001.952(g), permits refunds of the cost of warranted items, so long as certain requirements are satisfied by both the manufacturer (42 C.F.R. § 1001.952(g)(3)–(4)) and the buyer (42 C.F.R. § 1001.952(g)(1)–(2)). Those conditions require the full and accurate reporting of the price reduction at the time of the sale (or if the amount is not known at the time of the sale, the reporting of the existence of the program at the time of the sale and provision to the buyer of documentation at the time the price reduction becomes known), and the provision of notice to the buyer of additional reporting obligations potentially applicable to them.

However, OIG determined that the warranty safe harbor did not protect this proposed arrangement because it concluded that the safe harbor does not apply to bundled items. OIG stated that the safe harbor text referring to a payment under a warranty provided by a manufacturer or supplier of “an item” did not contemplate a bundle of items. OIG additionally contrasted the warranty safe harbor with the discount safe harbor, 42 C.F.R. § 1001.952(h), which permits discounts on bundled items when the goods or services are reimbursed by the same Federal health care program using same payment methodology and the discounts are disclosed to the program and reflected where and as appropriate to the reimbursement methodology. While OIG’s reading of the warranty safe harbor arguably applies limitations not clearly apparent from the safe harbor text, OIG concluded the warranty safe harbor does not apply to bundled items and therefore did not protect this arrangement.

The proposed warranty program nonetheless does not violate the AKS 

However, proposed arrangements that do not squarely fit into an existing safe harbor are not per se illegal. Rather, OIG evaluates such arrangements on a case-by-case basis based on the totality of the facts and circumstances. This is the analysis OIG undertook of the company’s proposed warranty program, ultimately concluding that the arrangement poses a sufficiently low risk of fraud and abuse under the AKS. OIG offered five reasons for this conclusion:

  1. The products are not separately reimbursable. Rather, under the Medicare Inpatient Prospective Payment System, they are reimbursed through one bundled Medicare severity diagnosis-related group (“MS-DRG”) payment for all the items and services a hospital furnishes in connection with an inpatient stay for joint replacement surgery. The program would not require the patient to continue using the company’s products (for example, wound therapy system or antimicrobial dressing) after discharge. The hospital’s inability to bill for each product individually reduces the risk of overutilization or inappropriate use of the products, thus diminishing OIG’s concerns that the warranty program would lead to increased costs to Medicare. OIG stated that the requester certified that Medicare Advantage plans also make bundled payments for inpatient joint replacement surgeries. While “in certain infrequent instances, some of the Products may be separately reimbursable under a state’s Medicaid program[,] Requestor stated that Medicaid represents a very small portion of Requestor’s business.”
  2. The company would still meet all the obligations of a seller under the warranty safe harbor, including reporting the existence of the warranty program fully and accurately on the invoice or statement at the time of purchase, reporting the refund amount when it becomes known, and informing the hospital of its reporting obligations with respect to the refund and the necessity of disclosing information related to the refund to the U.S. Department of Health and Human Services (“HHS”) upon request. Because the company would put hospitals on notice of their obligation to appropriately report any refund they obtained through the warranty program, the program has the result both of increasing transparency and diminishing the concern of increased costs to Federal health care programs.
  3. Physicians remain responsible for determining the medical necessity and clinical appropriateness of each of the three products for any particular patient. In fact, hospitals would be required to certify this fact as a condition of participation in the warranty program, in addition to a certification that the products were used in a manner consistent with instructions for use and other labeling. These requirements, OIG found, decreased the risk that the products would be used in a clinically inappropriate or medically unnecessary manner. 
  4. Both patients and Federal health care programs would likely benefit. The purpose of the warranty program is to reduce the incidence of readmissions following joint replacement surgery because of either a surgical site infection or a revision to the implanted hip or knee system. The hospital, which is in the best position to access information about the patient’s medical records and has medically trained professionals on staff, would be responsible for assessing whether the warranty program’s requirements would be satisfied with respect to any particular patient. The products, when used in combination, are designed to reduce the incidence of infection-related readmissions and revisions. OIG thus concluded that the warranty program was reasonably related to use of the Product Suite and that, in the absence of other contradictory information, a hospital could reasonably conclude that a subsequent infection or revision resulted from the failure of the Product Suite to perform as expected. Under these circumstances, OIG was “reluctant to chill innovative and potentially beneficial arrangements.”
  5. Hospitals retain flexibility to use other manufacturers’ products. The warranty program contained no exclusivity requirements, quotas, minimums, or other eligibility criteria related to the volume or value of referrals. Nor would hospitals be compelled to encourage or require physicians to use the company’s products. In short, the program would not (1) impede hospitals’ ability to make purchasing decisions that result in both the best value and the best clinical outcomes for their patients, or (2) require coercive communications from a hospital to physicians regarding the company’s products.

Based on these factors, even though it determined that the arrangement does not fit within the warranty safe harbor, OIG concluded that it nonetheless posed a sufficiently low risk of fraud and abuse under the AKS.

Key takeaways

OIG’s approval of this innovative warranty program draws further attention to value-based contracting, a hot topic of late. Because many pioneering risk-sharing models likely do not technically comply with the strict requirements of an AKS safe harbor, manufacturers and providers alike may be reluctant to wade into the gray area outside the safety of that protection. Now, however, OIG has blessed an innovative risk-sharing business model, providing at least some guidance as to how OIG would approach similar models. (Of course, OIG is careful to remind the public that only the requestor may rely on this particular Advisory Opinion, but these Advisory Opinions nonetheless provide a window into how the OIG is likely to analyze similar arrangements.) 

OIG’s approval of this warranty program is consistent with several other recent signals from OIG indicating its increasing interest in value-based arrangements, including last year’s Advisory Opinion 17-03, which approved a pharmaceutical manufacturer’s proposal to offer customers replacements for certain spoiled products that could no longer be administered to patients, as well as OIG’s August 27, 2018, Request For Information (RFI) seeking input from the public on how to foster arrangements that would promote care coordination and the delivery of value-based care. (See our prior coverage of this RFI here.) For several years now, industry groups such as the Advanced Medical Technology Manufacturers Association (“AdvaMed”), as well as multiple individual manufacturers and providers, have responded to the OIG’s annual safe harbor solicitation by requesting new or revised safe harbors to permit value-based or outcomes-based arrangements. Companies interested in value-based or risk-sharing models should strongly consider submitting comments in response to the RFI (comments are due by October 26, 2018).