Originally published in Houston Medical Times - October  2018.

The U.S. Department of Health and Human Services, Office of Inspector General (“OIG”) recently released Advisory Opinion 18-10, which approved a proposed arrangement involving a manufacturer of medical devices and wound care products to offer its hospital customers a refund for the aggregate purchase of three of the Requestor’s products (the “Warranty Program”).  

In order to qualify for a refund under the Warranty Program, the following conditions had to be met:

• A patient must have had joint replacement surgery, as an inpatient, at the hospital and must have received each of the following three products: (i) a total knee or total hip implant, (ii) a wound therapy system, and (iii) an antimicrobial dressing (collectively, the “Product Suite”).
• A patient who received the Product Suite must have been readmitted to the same hospital where the joint replacement surgery was performed, as an inpatient, within 90 days following the joint replacement surgery due to a surgical site infection or for a revision of the implanted knee or hip system.
• Each product must have been used in a manner consistent with its labeling, and the patient’s readmission must have resulted from the failure of one or more of the products to perform as expected.

    When the requirements are met, the Requestor would refund the hospital its aggregate purchase for all three Products in the Product Suite, regardless of which or how many products actually failed to perform as expected.  The refund would be provided without regard to the patient’s insurance status and without regard to the third-party payor that covered the patient’s joint replacement surgery.

    The Requestor certified that the three products in the Product Suite are not separately reimbursable but rather covered by one Medicare payment to the hospital.  An agreement would be executed between the manufacturer and the hospital requiring the hospital to, among other things, certify that physicians performing surgeries at the hospital would, at all times, remain responsible for determining whether a specific medical device, including each of the three products in the Product Suite, is medically necessary and clinically appropriate for a particular patient.  It would not require the hospital to purchase any subsequent products after discharge.

The OIG analyzed the Warranty Program and determined that it implicates the anti-kickback statute because it offers the hospital customers something of value in exchange for the purchase of the Product Suite.  The OIG then concluded that the Warranty Program did not qualify for protection under the warranties safe harbor because the warranties safe harbor only applies to one item, not bundled items. Although the OIG expressed concern that a “warranty arrangement involving a bundle of items that were separately reimbursable could result in overutilization . . . and could unnecessarily increase costs”, it concluded that the Warranty Program at issue would not generate prohibited remuneration under the anti-kickback statute.

In reaching its decision, the OIG determined that the bundled rebates posed a significantly low risk of fraud and abuse under the anti-kickback statute because:

    1.    The three products in the Product Suite would not be separately reimbursable and would be covered by one Medicare payment to the hospital,

    2.    The Requestor would report the existence of the Warranty Program fully and accurately on the hospital’s invoice, including the hospital’s requirement to report any refund it obtained to Federal health care programs, and would provide the hospital with documentation of the refund calculation,

    3.    Physicians performing joint replacement surgeries at the hospital would remain responsible for determining whether a specific medical device is medically necessary and clinically appropriate for a particular patient,

    4.    Patients, and the Federal health care program, could benefit from reduced incidence of readmissions following joint replacement surgery, if the proposed Warranty Program works as intended, and

    5.    The Warranty Program would not contain an exclusivity provision and would not include any quotas, minimums or other eligibility criteria tied to the volume or value of referrals.