The Department of Health and Human Services Office of the Inspector General (OIG) has issued Advisory Opinion No. 18-10 (Opinion) in response to a proposal by a surgical device and wound care product manufacturer (Manufacturer) to offer its hospital customers what is essentially a value-based purchasing arrangement. Although the OIG determined that the proposed arrangement does not meet the requirements of the warranties safe harbor, it concluded that it would not impose administrative sanctions as the Proposed Arrangement poses a low risk of fraud and abuse due to certain safeguards put in place by the Manufacturer. The Opinion serves as an example of the difficulty in trying to fit value-based arrangements in existing safe harbors.

The Proposed Arrangement

Under the proposed arrangement, the Manufacturer would offer hospital purchasers of its suite of three joint replacement products (each, a “Product” and collectively, the “Product Suite”) a warranty program covering the Product Suite (the "Proposed Arrangement”). Specifically, the Manufacturer would offer a refund to hospitals for the aggregate purchase price of the Product Suite if: (i) a patient had joint replacement surgery at a hospital as an inpatient and received the entire Product Suite; (ii) the patient is readmitted as an inpatient to the same hospital where the patient received the joint replacement surgery within 90 days following such surgery due to a surgical site infection or for a second surgery as a result of the failure of the hip or knee replacement; and (iii) each Product is used in accordance with applicable instructions and labeling, and the hospital certifies that the patient’s readmission resulted from the failure of one or more of the Products.

OIG Analysis

In its Opinion, the OIG concluded that the warranties safe harbor would not apply to the Proposed Arrangement due to the fact that the safe harbor only protects the warranties of one item and does not apply to warranty arrangements involving bundled items. However, the OIG determined that the Proposed Arrangement would pose a low risk of fraud and abuse under the anti-kickback statute due to the following mitigating factors and safeguards:

• None of the Products are separately reimbursable, and the Product Suite would be covered by a single Medicare payment to the hospital. As a result, the OIG believes that a hospital's inability to separately bill for each Product will lead to more careful examination and prudent purchasing of only the combination of items that have the best value and clinical outcomes. These factors mitigate the potential for utilization and inappropriate use.

• The Manufacturer certified that it would meet all of the obligations of a seller under the warranties safe harbor. Such requirements include: (i) reporting the existence of the warranty program on the invoice or statement it furnishes to hospitals upon the purchase of the Product Suite; (ii) providing the hospital with documentation of a refund calculation when any such refund amount becomes known; and (iii) notifying the hospital of its reporting obligations to Federal health care programs with regard to any refund. The OIG notes that by complying with such requirements, the Manufacturer would increase transparency of the proposed arrangement and diminish concerns about passing on additional costs to Federal health care programs.

• Each hospital will certify that the physicians performing the joint replacement surgeries will determine whether the Products are medically necessary and clinically appropriate. Moreover, any hospital seeking a refund under the Proposed Arrangement must certify that the Product Suite was used in accordance with each Product’s applicable instructions and/or labeling. As a consequence, the OIG concluded that there is a decreased risk that the Products will be used in a clinically inappropriate or medically unnecessary manner. 

• The Proposed Arrangement, if it works as intended, will reduce the frequency of readmissions following joint replacement surgeries due to site infections or revisions to the implanted knee or hip system. The OIG notes that it is “reluctant to chill innovation and potentially beneficial arrangements.”

• The Proposed Arrangement contains no exclusivity requirements, nor does it contain any quotas, minimums, or any other criteria tied to the volume of referrals. The Manufacturer also certified that participating hospitals would not encourage or require physicians performing surgeries to use the Products. As a result, the OIG believes that the Proposed Arrangement will not interfere with hospitals’ ability to make purchasing decisions based on best value and best clinical outcomes.

Takeaways

The Opinion is notable for a number of reasons. First, there few other instances where the OIG has opined on the warranty safe harbor, making this Opinion unique. Second, the OIG’s conclusion that the Proposed Arrangement's safeguards and other factors reduce the risk under the AKS can provide guidance to manufacturers that are looking to implement similar value-based programs. Third, and perhaps most importantly, the Opinion illustrates the trouble that the OIG has in fitting value-based arrangements into existing safe harbors. It is the perfect example of why, as we recently discussed, the OIG is seeking to identify ways in which it might modify or add new safe harbors to the AKS in order to foster value-based care. Those in this space should be mindful of this dynamism. We continue to follow these developments. Stay tuned.