On September 17, 2018, the Office of Inspector General (OIG) of the Department of Health and Human Services published a favorable Advisory Opinion allowing a manufacturer of surgical devices and wound care products to offer a warranty program to hospital customers covering three joint replacement products (“Proposed Arrangement”).

Under the Proposed Arrangement, the manufacturer would refund hospitals for the combined purchase price of three of its products if a patient who received them as part of a joint replacement surgery was readmitted to the hospital within 90 days following the surgery, due to a failure of any of the products to perform as expected (“Warranty Program”). The products include: (1) a total knee or hip implant, (2) a wound therapy system, and (3) an antimicrobial dressing (collectively, the “Product Suite”).

Participating hospitals would be required to enter into a written agreement with the manufacturer governing the Warranty Program, under which the hospital agreed to:

  1. fully report all Warranty Program refunds to Federal health care programs;
  2. provide information concerning the Warranty Program to the government upon request;
  3. certify that the performing physician would retain the authority to decide whether a specific medical device is medically necessary and clinically appropriate; and
  4. grant the manufacturer the right to audit a hospital’s eligibility for the Warranty Program.

The manufacturer certified that the invoice furnished to hospitals upon purchasing the Product Suite would include: (1) notification that the hospital must report any refunds through the Warranty Program to Federal health care programs in accordance with governing rules and (2) notification that the hospital must provide information regarding the Warranty Program to the U.S. Department of Health and Human Services upon request. The manufacturer also certified that participation in the Warranty Program would not require a patient, or the hospital, or any other providers or suppliers, to purchase products from the manufacturer after the patient is discharged.

For a hospital to qualify for the Warranty Program, a patient must have received each product in the Product Suite during the course of an inpatient joint replacement at the hospital. Additionally, the patient must also have been readmitted to the same hospital within 90 days following the surgery because of a surgical site infection or for a revision of the implant. Finally, each product must have been used consistently with the instructions and the hospital must certify that the readmission was a direct result of the failure of one or more of the products to perform as expected.

Upon satisfaction of the above requirements, the manufacturer would refund the hospital the aggregate purchase price for the products in the Product Suite. The refund would be issued regardless of how many of the products did not perform as expected, because payment for the products is bundled (i.e., the products are not independently reimbursable) within the MS-DRG payment under the Medicare Inpatient Prospective Payment System for the surgery.

After reviewing the Proposed Arrangement, the OIG determined that it implicates the Anti-Kickback Statute (AKS) because the manufacturer is offering hospital customers the warranty in exchange for purchasing products reimbursable by Federal health care programs. The OIG noted that there is a safe harbor under the AKS for certain warranties, but determined that the Proposed Arrangement could not be protected thereunder because the warranties safe harbor only covers warranties for “an item” and does not apply to bundled items, such as the Product Suite.

However, after a review of the facts and circumstances surrounding the Proposed Arrangement, the OIG concluded that it would not impose administrative sanctions on the manufacturer because the Proposed Arrangement presents a sufficiently low risk of fraud and abuse under the AKS. In support of its conclusion, the OIG cited a number of factors, including the following:

  • Hospitals’ inability to separately bill for each product within the Product Suite encourages hospitals to closely examine available products and select products that produce the best value and clinical outcomes for patients, which in turn reduces the risk of overutilization and inappropriate use of the products and diminishes concerns of increased costs to Medicare;
  • The manufacturer agreed to meet all obligations of a seller under the warranties safe harbor to the AKS;
  • Each hospital must certify that the physicians performing the joint replacement surgeries would remain responsible at all times for determining the medical necessity and clinical appropriateness of the Product Suite for a particular patient, which decreases the risk that the products will be used in a clinically inappropriate manner;
  • Patients and Federal health care programs may benefit if the Warranty Program works as intended to lower the occurrence of readmissions following joint replacement surgeries; and
  • The Warranty Program contains no exclusivity requirements, nor any quotas, minimums, or any other eligibility criteria tied to the volume or value of referrals, and hospitals would not be required to make any communications to physicians performing surgeries that implicate the Warranty Program.

As the OIG has emphasized, Advisory Opinions are issued only to the requestors of the opinion, and have no application to, and cannot be relied upon by, any individual or entity, nor may they be introduced into evidence by anyone other than the requestors to prove the individual or entity did not violate the anti-kickback statute, or any other law.

This post was co-authored by Alyssa Ferreone, legal intern at Robinson+Cole. Alyssa is not yet admitted to practice law.