Employees from a manufacturer of surgical devices and wound care products, a hospital, and a physician walk into a bar. The three individuals know that (a) patients will need joint replacement surgery, (b) the manufacturer will provide products, and (c) the hospital is on the hook for infections and other surgical revisions. What could go wrong?
The Anti-Kickback Statute is a Federal statute making it illegal to exchange money (or things of value) for referrals of healthcare business. This might not seem common in other industries, but when tax money is involved it typically is. For example, there is a widely known ban on higher education institutions paying recruiters bonuses for recruitment activities. Why the restraints? These laws help avoid conflicts and unnecessary services, simple as that. Which brings us back to the issue at hand.
The Arrangement
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 was in a similar predicament above. Specifically, the manufacturer proposed to offer hospital customers refunds on knee or hip implants, wound therapy systems, and dressings (the “Products”).
The Products could only be refunded in very limited circumstances. In this case, if there was a surgical site infection or the implant failed, and the patient was within the 90 days following the surgery, a refund could occur. The patient must have had the surgery at the same hospital in which the patient is then readmitted. Finally, all of the Products must be used consistent with the manufacturer instructions.
Background Information on Joint Replacements
Taking a pause, for a second, total joints represent over $7 billion dollars in cost to the Centers for Medicare & Medicaid Services (“CMS”) (see this excellent research paper on the facts outlined in this section). According to the research paper, they represent more Medicare expense than any other inpatient procedure. Now, CMS has also instituted comprehensive care for joint replacement programs to reduce cost.
The joint replacement program covers all services related to joint replacement performed at an anchor facility. The time period for each patient is 90 days from the discharge date and payment is based upon a target price. In other words, CMS will now pay one bundled payment to the hospital for all costs associated with the surgery. This payment is based, in part, on historical costs and location. If hospitals meet quality measures and spending is below the target price, a reconciliation payment can be made. If they do not, the hospital is required to cover the excessive costs over the target price. That last sentence is critically important. Hospitals are at risk for anything over target price.
What should not be shocking is that, according to the research paper, a great “opportunity for episode of care savings appears to be implant cost, which remains highly variable and accounts for between 13% and 60% of hospital reimbursements.” Hence, the proposal above.
Back to the Proposal
From a reimbursement perspective, the manufacturer noted that the Products themselves are not separately reimbursable. For example, you could not simply get an implant and have a single cost as it is already bundled under the inpatient stay. In addition, the manufacturer certified that this warranty would not require the hospital to use the Products. Finally, the manufacturer certified it would not pay any type of remuneration to the hospitals other than the possible refunds.
So what did the government say? The OIG stated it would not impose sanctions under the Anti-Kickback Statute. The reasons include (a) the Products are already bundled and not individually reimbursable, (b) this would be transparently known to customers, (c) the surgeons are responsible for choosing the products, (d) Federal health care programs will benefit if it reduces readmission, and (e) Product exclusivity is not required for hospital participation.
Warranty Safe Harbor
Now, the actual safe harbor for warranties requires the following:
- The buyer must fully and accurately report any price reduction of the item (including a free item), which was obtained as part of the warranty, in the applicable cost reporting mechanism or claim for payment filed with the Department or a State agency. This would be met under the arrangement.
- The manufacturer or supplier must comply with either of the following two standards -(i) The manufacturer or supplier must fully and accurately report the price reduction of the item (including a free item), which was obtained as part of the warranty, on the invoice or statement submitted to the buyer, and inform the buyer of its obligations under paragraphs (a)(1) and (a)(2) of this section. (ii) Where the amount of the price reduction is not known at the time of sale, the manufacturer or supplier must fully and accurately report the existence of a warranty on the invoice or statement, inform the buyer of its obligations under paragraphs (g)(1) and (g)(2) of this section, and, when the price reduction becomes known, provide the buyer with documentation of the calculation of the price reduction resulting from the warranty. This would likely be met.
- The manufacturer or supplier must not pay any remuneration to any individual (other than a beneficiary) or entity for any medical, surgical, or hospital expense incurred by a beneficiary other than for the cost of the item itself. This would likely be met.
OIG stated this did not apply because the Products include multiple items, not a single item. The Safe Harbor noted above applies to a single item. Interestingly, it is conceivable that the arrangement could have been fit within the safe harbor had it focused solely 0n the implant. In other words, had the manufacturer developed a warranty for implant specific issues, it likely could have been permissible.
Moving Forward and Strategic Legal Issues
OIG permitted this arrangement and it certainly is a low risk arrangement. With that being said, bundled payment programs create an interesting nuance. Hospitals charged with managing costs will leverage manufacturers to lower costs as a first step. In the case of joint replacement programs, the biggest opportunity might be with the supplies. In the future, if a hospital can continue to mandate complete replacement/refunds within the defined 90 day period, hospitals will be able to reduce risk.
As we move into the future of target pricing, hospitals can limit the downside risk of excess costs by simply removing them. This will mean hospitals can focus on manufacturers replacing faulty products, penalizing providers and surgical teams for not following manufacturer processes, and ultimately increasing participating party risk.
Finally, the most interesting aspect of this relates to the actual party requesting this deal: the manufacturer. All parties should be careful when managing these types of arrangements. On one hand, a manufacturer should have a duty to ensure the products work; however, the parties should ensure this discount is not to generate new business or to create exclusivity. Those two issues could certainly trip up all parties.