On September 17, 2018, the Office of Inspector General (“OIG”) issued Advisory Opinion No. 18-10 regarding a proposed arrangement in which a surgical device and wound care product manufacturer (“Manufacturer”) will offer its hospital customers (“Customer”) who purchase the following three products for use in a joint replacement surgery: (i) a total knee or hip implant; (ii) a wound therapy system; and (iii) an antimicrobial dressing (individually a “Product” and collectively the “Product Suite”), a full refund of the Customer’s cost for the Product Suite (“Warranty Program”) under certain conditions (“Proposed Arrangement”). The OIG concluded that although the Proposed Arrangement could potentially generate prohibited remuneration under the Federal Anti-Kickback Statute, 42 U.S.C. §1320a-7b(b) (“AKS”) if the requisite intent to induce or reward referrals of Federal health care program business is present, the OIG will not impose administrative sanctions on Manufacturer in connection with the Proposed Arrangement.

Under the Proposed Arrangement, when a Customer utilizes the Product Suite in a manner consistent with its instructions for use and other labeling for a patient’s total joint replacement surgery, and the patient is readmitted to the same Customer as an inpatient within 90 days following the surgery for either a surgical site infection or a revision of the implanted joint resulting from the failure of one of more of the Products to perform as expected as certified by the Customer, Manufacturer will refund the Customer the aggregate purchase price of the Product Suite. The Manufacturer’s underlying justification of the Warranty Program is that the Product Suite, when used as indicated, reduces the likelihood of a surgical site infection and/or required revision of the implanted joint.

The OIG determined that the Proposed Arrangement would not satisfy any AKS safe harbor, including the warranties safe harbor, which only applies to warranties of a single item and does not contain sufficient conditions to mitigate fraud and abuse risks of a warranty arrangement involving bundled items. Nevertheless, although the Proposed Arrangement will result in the Manufacturer offering Customers something of value in exchange for their purchase of the Product Suite, which is reimbursable by a Federal health care program, the OIG determined that it poses a sufficiently low risk of fraud and abuse for the following reasons:

  • Customers receive a bundled payment from Medicare for use of the Product Suite and none of the Products are individually reimbursable, which encourages due consideration in selecting available items for such procedures and potentially results in the best value and clinical outcome for their patients, thereby “…reducing the risk of overutilization and inappropriate use of the Products and diminishing concerns of increased costs to the Medicare program”;
  • While not meeting all elements of the AKS warranties safe harbor, Manufacturer certified that it will meet all obligations of a Seller thereunder, including reporting obligations on its invoice to Customers and alerting Customers to their reporting obligations under Federal health care programs which “…increas[es] the transparency of the program and diminish[es] the concern of increased costs to Federal health care programs”;
  • Customers are required to certify that surgeons are responsible for choosing the medically necessary and clinically appropriate devices for a particular patient and the Products are used in a manner consistent with their instructions for use and other labeling, which together “…decrease the risk that the Products would be used in a clinically inappropriate or medically unnecessary manner”;
  • Patients and Federal health care programs will benefit if the Warranty Program does in fact reduce the incidence of hospital readmissions due to either a surgical site infection or a revision of the implanted knee or hip system following joint replacement surgery and the OIG is “…reluctant to chill innovative and potentially beneficial arrangements”; and
  • The Warranty Program will not have any exclusivity requirements, quotas, minimums, or any other eligibility criteria tied to the volume or value of referrals. Customers participating in the Warranty Program also are not required to communicate specific information to the surgeons using the Product Suite or encourage or require use of the Product Suite, which allows for purchase flexibility of comparable products.

While this OIG Advisory Opinion may only be relied upon by the Manufacturer, it provides a blueprint for other manufacturers interested in offering warranty programs that include sufficient safeguards to protect against overutilization.

Posted by Robert A. Paster