United States: OIG Gives The Green Light To Another Innovative Warranty

Last week, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) published Advisory Opinion No. 18-10, advising that the OIG would not pursue an enforcement action under the Anti-Kickback Statute (AKS) based on a warranty offered by the manufacturer of a suite of products used in joint replacement surgeries. Together with Advisory Opinion No. 17-03, issued last August, the new advisory opinion seems to signal that the OIG will not stand in the way of value-based pricing arrangements that offer clear benefits to both patients and the health care system. For manufacturers considering innovative warranties or similar outcomes-based arrangements, these opinions offer a window into the OIG's thinking about what factors distinguish acceptable from unacceptable arrangements. The advisory opinions also are consistent with statements from OIG leadership at the American Health Lawyers Association (AHLA) annual meeting in June and with the OIG's recent request for information (RFI) asking stakeholders how to protect value-based arrangements from enforcement under the AKS and other fraud and abuse laws, which we summarized here. Manufacturers exploring such arrangements should consider commenting on the RFI.

The latest OIG-approved warranty: Advisory Opinion 18-10

The requestor, a manufacturer of surgical devices and wound care products, proposed to refund hospitals for the aggregate purchase price of three of the manufacturer's products, offered and used together as a "product suite": a total knee or total hip implant, a wound therapy system, and an antimicrobial dressing. To qualify for the refund, the hospital must have purchased all three of the products, must have performed an inpatient joint replacement surgery on a patient who was subsequently readmitted to the hospital within 90 days due to a surgical site infection or for a revision of the implanted knee or hip system, and must have certified to the requestor that the patient's readmission resulted from the failure of one or more of the products to perform as expected.

The OIG concluded that the proposed arrangement did not satisfy the warranty safe harbor under the AKS because that safe harbor, by its terms, does not apply to bundled items. However, the OIG concluded that it would exercise enforcement discretion because the proposed arrangement contained safeguards that resulted in a sufficiently low risk of fraud and abuse.

Specifically, the OIG highlighted the following safeguards as the basis for its favorable opinion.

  • Products are not separately reimbursable. Medicare would reimburse the hospital for each product in the bundled suite through the pre-set diagnosis-related group (DRG) payment for the replacement surgery, and the patient would not be required to continue using any of the products after leaving the hospital. The hospital therefore would have no opportunity to bill separately for any product as a result of the warranty, which reduces the risk that the availability of the warranty will lead to overutilization or inappropriate use of any of the covered products.
  • Seller will comply with warranty safe harbor obligations. The requestor certified that it will meet all the obligations of a seller under the warranty safe harbor, including notifying the hospital that it must report any refund obtained through the warranty program. The requestor also expects hospitals to comply with the Medicare rules requiring reduced payment for procedures using replacement devices for which the hospital received a full credit. The OIG reasoned that these safeguards would reduce the risk of increased costs to the Medicare program.
  • Physician is responsible for assessing medical necessity and clinical appropriateness. Each hospital is required under the warranty program to certify that the 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, and the hospital is required to certify for each refund that the products were used in a manner consistent with each product's instructions and labeling. These safeguards reduce the risk that the warranty might result in the products being used in a clinically inappropriate or medically unnecessary manner.
  • May reduce patient readmissions; discernible connection between performance of product and clinical outcome. The requestor asserted that the products, used in combination, are designed to reduce the incidence of infection-related readmissions and required revisions. In the OIG's view, the manufacturer effectively warranted "that an undesirable result, namely, readmission after a joint replacement surgery, will not occur." The OIG acknowledged that "it may not be possible to state with medical certainty that a readmission due either to a surgical site infection or to a revision of the implanted knee or hip system was caused by one or more of the Products," but went on to state that the warranty was "reasonably related to the use of the Product Suite and that, in the absence of other obvious causes of an infection or required revision," a hospital could reasonably claim that the revision surgery resulted from the failure of the product suite to perform "as expected." The OIG concluded that, under these circumstances, it is "reluctant to chill innovative and potentially beneficial arrangements."
  • Hospitals have flexibility to shop around. The proposed arrangement does not require hospitals to recommend or require the use of the warranted products to physicians, nor does the arrangement include exclusivity provisions, quotas, minimums, or other eligibility criteria tied to the volume or value of referrals, meaning that hospitals have the flexibility to purchase and offer various joint replacement and wound care products and still take advantage of the warranty.

A growing trend: Advisory Opinion 17-03 and Advisory Opinion 01-08

Opinion 18-10 follows on last year's Advisory Opinion 17-03, which also approved a kind of warranty arrangement that permits tying pricing to overall performance. The requestor in Advisory Opinion 17-03 was a manufacturer of biologics that are sensitive to temperature changes, direct sunlight, or movement, and that require reconstitution in a controlled environment. Under the arrangement, the requestor would replace products if the products spoiled or otherwise became unusable after purchase, including products that are mishandled, dropped, or broken; are inappropriately stored, refrigerated, or frozen; experienced an admixture error; or were reconstituted but not administered due to an unforeseen patient condition or because the patient missed the appointment.

The OIG concluded that the arrangement did not meet the warranty safe harbor, because the warranty would not apply to products that are defective or substandard at the time of sale. However, the OIG concluded that the proposed arrangement nevertheless posed a sufficiently low risk of fraud and abuse under the AKS because

  • the replacement was restricted to unintentional and unplanned circumstances and could increase patient safety and quality of care by decreasing the risk that a customer might administer a potentially spoiled product to avoid financial loss;
  • the replacement would only be available for products that customers had already selected and intended to use, reducing the risk that the proposed arrangement would lead to increased costs or overutilization;
  • the proposed arrangement allowed only the replacement of the same product that the customer had intended to use, thus reducing the risk that the customer would be incentivized to pick the requestor's product over a competitor; and
  • the proposed arrangement resembled an insurance policy in that a customer was unlikely to recklessly allow spoilage simply because the warranty arrangement was available, particularly because the customer would be required to complete an administrative process providing proof of the spoilage.

Opinion 18-10 also echoes and reinforces an older OIG advisory opinion, Advisory Opinion 01-08, which approved a proposal by a manufacturer of therapeutic mattresses to reimburse nursing facilities for a portion of deductibles owed under their liability insurance policies as a result of claims made by residents related to skin or wound care deficiencies. As the OIG characterized that arrangement, "the Program is designed to show potential customers that the Company is willing to put its money at risk if its therapeutic mattresses do not perform as intended by reducing substantially the incidence of pressure ulcers." The OIG concluded that the warranty very nearly met the terms of the warranty safe harbor, that the warranty would produce benefits for patients and federal programs if it worked as intended, and lacked "any identifiable opportunity for abuse."

Looking beyond the usual factors

These advisory opinions seem to indicate that the OIG is willing to consider a broader approach to certain innovative manufacturer arrangements, looking beyond the safe harbors and even beyond the usual factors that the OIG typically considers when weighing a non-safe-harbored arrangement. Although the opinions address those usual factors (including the risk of overutilization, increased program costs, and ensuring patient and provider choice), the opinions also emphasize the following considerations.

" The arrangement offers the potential for a clinical benefit to patients. In Advisory Opinion 18-10, the OIG suggested that the warranty program might improve the outcomes of patient surgeries. In Advisory Opinion 17-03, the OIG highlighted the reduced likelihood that patients would receive spoiled drug product. In Advisory Opinion 01-08, the OIG suggested the warranty could reduce the incidence of pressure ulcers, thereby improving patient well-being and avoiding significant treatment costs.

  • "There is a reasonable connection between the manufacturer's offer and the clinical benefit. In Opinion 18-10, the OIG appears to have reasoned that the warranty offer would encourage hospitals to choose a product suite that, as warranted by the manufacturer, will reduce infections and revisions: "[I]f the proposed Warranty Program works as intended and reduces the incidence of readmissions following joint replacement surgery due either to a surgical site infection or to a revision of the implanted knee or hip system, patients and Federal health care programs would benefit." (Opinion 01-08 used nearly identical language.) In Advisory Opinion 17-03, the manufacturer's offer to replace spoiled product removed the financial incentive for providers to use the spoiled product.
  • There is a benefit to warranties based on clinical outcomes. The OIG appears to be open to allowing warranties or similar offers even when the loss warranted against is not clearly the result of a defect in the design or construction of the product.

    • In Advisory Opinion 18-10, the OIG was willing to approve a warranty relying on the hospital's assertion that the patient's readmission was because the product failed to work "as expected" to reduce infections and revisions. This gets closer to an outcomes-based arrangement or a performance guarantee, i.e., a replacement offer that turns on clinical outcomes rather than a clear product malfunction, though it does not quite endorse such an arrangement. However, the OIG's reasoning in Advisory Opinion 18-10 continues to rely on the assumption that a hospital could reasonably connect the patient's readmission to the failure of the product to prevent the infection or revision, and not to "other obvious causes of an infection or required revision."
    • In Advisory Opinion 17-03, the offer of replacement product would be available even if the spoilage was not the fault of the manufacturer, thus shifting the focus of the arrangement from a defect to a sharing of performance risks.
    • In Advisory Opinion 01-08, the manufacturer stood behind its claim that the product would reduce pressure ulcers by agreeing to offset some cost of medical treatment if the product did not perform as promised.

The OIG's inclination to approve certain innovative arrangements soon may extend beyond the type of warranty arrangements addressed in these advisory opinions. The agency recently released an RFI requesting input on new AKS safe harbors and other new paths to compliance for value-based arrangements, which could be another important step toward a more permissive approach toward such arrangements in the future. Although it is too soon to tell what regulatory changes the OIG may propose or finalize in the future, the agency continues to signal its willingness to allow more flexibility for certain innovative arrangements that benefit patients and the Medicare program and offer adequate safeguards against abuse. Indeed, speaking at the AHLA annual meeting, Rob DeConti, assistant inspector general for legal affairs, pointed to the OIG's advisory opinions as evidence that the agency did not intend to be an obstacle to reasonably calibrated risk-sharing arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions