The US Department of Health and Human Services’ Office of Inspector General updated the warranty safe harbor to account for bundled product and service warranties to reflect realities of healthcare product sales, but rejects industry calls for broader protections.
The Anti-Kickback Statute (AKS) is a criminal statute that can also result in significant civil penalties and exclusion by HHS-Office of Inspector General (OIG). Consequently, the healthcare industry, including healthcare product manufacturers and buyers of their products, are greatly influenced by OIG’s interpretation of the AKS as well as the legal protections the agency affords to financial and other arrangements under the AKS safe harbors. Although compliance with safe harbors is voluntary, with the high stakes for noncompliance, many manufacturers and other vendors to healthcare buyers have long tried to structure their sales transactions to meet or come close to meeting applicable safe harbors (e.g., discount and warranty safe harbors). Effective in 2021, the OIG has “modernized” its warranty safe harbor and extended additional protections for increasingly commonplace warranty arrangements.
Included in its AKS Safe Harbor Final Rule (published in 85 Fed. Reg. 77684 (Dec. 2, 2020)), OIG added new safe harbors and amended certain existing safe harbors, including the longstanding safe harbor for warranties (42 C.F.R. § 1001.952(g)). In doing so, OIG revised the definition of “warranty” and provided new protection for bundled warranties involving one or more items and related services. These changes to the warranty safe harbor were largely anticipated following OIG’s October 17, 2019, proposed rule. While the expanded safe harbor will provide protection for warranties on the sale of one or more items and related services, OIG rejected a number of industry requests to expand further the proposed warranty safe harbor. In rejecting certain industry requests to apply a more flexible approach to its warranty safe harbor, OIG continued to caution that industry innovation and related warranties cannot always be protected at the expense of arrangements that risk overutilization and higher costs for federal healthcare programs or place undue limits on clinical choice related to products and services.
The warranty safe harbor is available to any type of entity, but is perhaps most applicable to medical product manufacturers (pharmaceutical, medical device, electronic health record) and a wide array of their related vendors. The existing warranty safe harbor had previously been narrowly tailored to protect warranties offered only for the sale of a single item (i.e., product). But within healthcare industry commercial sales, and quite similar to other industries, product manufacturers and service providers frequently bundle their product and service sales, often creating efficiencies for the benefit of their clients and consumers. OIG acknowledged that reality by protecting warranties for either a bundle of items or a bundle of items and service.
For the first time, the warranty safe harbor also will protect warranties on the sale of services, though only if those services are bundled with the sale of products. OIG determined that offering warranty protection to the sale of services alone would not offer sufficient protections from abuse, given service arrangement subjectivity, to justify safe harbor protection. OIG also pointed to the revised personal services and outcomes-based payment arrangement safe harbor to potentially protect those service arrangements. And in response to certain commenters’ concerns about limiting buyers’ choices through bundling, OIG also reinforced in its regulatory preamble that bundled arrangements should not be used to affect providers’ ongoing responsibilities to make clinical decisions in the best interests of their patients.
Notably, the expanded warranty safe harbor comes at a time when many manufacturers increasingly offer products with warranties related to the industry’s goals of improved health outcomes. In the industry’s major shift to value-based arrangements and corresponding reimbursement tied to value, those warranties are becoming more essential to the planning for and acceptance of value-based payments. OIG has confirmed that the warranties safe harbor’s protection could extend to arrangements conditioned on clinical outcomes guarantees, which could include warranties conditioned upon ‘‘value-based’’ outcomes that meet the safe harbor’s other requirements. 85 Fed. Reg. 77857.
OIG’s warranty safe harbor contains certain elements described in more detail below.
No Exclusive-Use or Minimum Purchase Requirements: The warranty safe harbor includes a safeguard that prohibits warranty arrangements conditioned on the exclusive use or minimum purchase of one or more items or services. OIG explained its view that this safeguard was necessary to protect against patient-steering that could compromise independent medical decisionmaking and potential anticompetitive effects. Commenters offered that exclusive use and minimum purchase requirements can enhance efficiency and cost savings and one noted a discount protected under that safe harbor may permit minimum purchase requirements. OIG acknowledged those points, but ultimately concluded that exclusivity and minimum purchase requirements tied to the offer of a warranty would risk potentially abusive steering practices that could result in, among other things, interference with clinical decisionmaking, overutilization or inappropriate utilization, or anticompetitive effects.
OIG distinguished between exclusivity and “preferred” purchasing partners, noting the latter may be permissible under the warranty safe harbor. Id. at 77855. But extending safe harbor protection for warranty arrangements linked to exclusivity or minimum purchase requirements was a bridge too far for the ever-cautious OIG, which has a penchant for reading into the AKS a “level the competitive playing field” purpose.
No Commercial Reasonable Requirement: OIG declined to incorporate into the warranty safe harbor a “commercial reasonableness” standard – one which exists in several other safe harbors – primarily because of the limited scope of the remedy protected by the warranty safe harbor (that a seller may not pay 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 items and services subject to the warranty). Id. In this and other responses to comments, OIG highlighted that the warranty safe harbor protection only extends to the remuneration offered under the warranty’s remedies, and not to the sales arrangement related to the underlying products or services promoted to purchasers, including beneficiaries. Id. at 77851.
Same Program/Same Payment: The warranty safe harbor protects warranties that apply to one or more items and related services only if the federally reimbursable items and services subject to the warranty arrangement are reimbursed “by the same Federal health care program and in the same Federal health care program payment.” Multiple commenters objected to the limitation given that it could constrain innovation focused on programs that may extend beyond a single payor program (e.g., for care coordination) and because it is often the case products and services are reimbursed under different payment programs and payments. OIG held its ground, however, concerned with the potential for fraud and abuse, and noted that AKS protections for such innovative programs could potentially be found in other safe harbors, but that the warranty safe harbor will protect only a single arrangement with a single buyer and won’t extend to different care settings and the multiple buyers of items or services that may be reimbursed under different payment systems in a continuum of care. In an effort to clarify what it means by “in the same Federal health care program payment,” OIG noted that this did not mean that the items and services be only reimbursable by a single federal healthcare program payment. Id. at 77852. The “same program/same payment” requirement also does not prohibit the inclusion of non-federally reimbursable items or services in the bundle of items and services being warrantied. Id. at 77849.
Cap on Warranty Remuneration: With regard to the cap on the amount of the warranty remuneration (limited to any medical, surgical, or hospital expense incurred, capped at the cost of the warrantied items and services incurred by the buyer to acquire those items and services), various commenters argued that the cap would limit innovation and asked OIG to consider greater flexibility on that remuneration. Id. at 77583-84. OIG declined to expand the cap, noting it had already increased the remuneration that could be protected by expanding safe harbor protection to a bundle of items and services and expressing concerns vendors may pay excessive warranty liability payouts to induce the purchase of items and services reimbursed by federal healthcare programs.
Reporting the Warranty Price Reduction: As to reporting requirements under the warranty safe harbor 42 CFR § 1001.952(g)(1), OIG expressed a desire for some degree of flexibility. For instance, when the warranty relates to a bundle of items and services, one of which does not meet the warranty terms, OIG believes that in most cases the warranty amount should be reported proportionately to the cost of each bundled item or service, but provides flexibility for buyers to adopt different but reasonable allocation methodologies. Id. at 77856. Given the wide variety of federal healthcare program reporting requirements, OIG also recognizes that the reporting of warranty remuneration will vary in accordance with those programs. OIG also recognizes that failures that trigger a warranty’s terms may not occur for years after the original product/service sale, and consequently reporting such warranty remuneration would be required only after those triggering events.
Morgan Lewis has been analyzing and reviewing the recent CMS and OIG final rules on the Stark Law and AKS safe harbors. Be on the lookout for upcoming webinars and publications related to these long-awaited final regulations.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the authors or any of the following:
Michele L. Buenafe
Scott A. Memmott
Albert W. Shay
Howard J. Young
Jacob J. Harper
Gregory N. Etzel
B. Scott McBride
Mark B. Stein
W. Reece Hirsch