The Department of Health and Human Services, Office of Inspector General (OIG) recently released an advisory opinion (Advisory Opinion 25-08) concluding that a  proposed arrangement between a medical device company and third-party software vendor could violate the Anti-Kickback Statute (AKS) if the requisite intent were present.

The proposed arrangement responded to customer requests that the medical device company use –– and pay licensing fees to access –– the vendor’s software to facilitate “bill-only item” transactions that occurred at the customer.

What are bill only items?

“Bill-only items” refer to products that are not stocked as part of a customer’s normal inventory; instead, they are purchased in “real time” near or during a medical procedure (usually, a surgical procedure). Usually, these items are purchased during the procedure itself because the surgical team is unable to determine the correct product size or component needed for a specific patient until they are in the operating room (e.g., surgical screws or orthopedic knee implants).

 Because these products need to be invoiced individually on an “as-needed” basis, many  medical device companies follow a separate accounts receivable process for these items. For example, the medical device company that requested this opinion described its standard process for invoicing bill-only items as follows: a surgeon selects and uses one or more bill-only items in surgery; a member of the customer’s staff records the items used; the customer generates a purchase order; the company generates an invoice based on the purchase order; and the customer pays the company for the invoiced items. No third-party vendor software is required for the company’s existing process.

Use of third-party billing software

However, some health care providers (i.e., the medical device company’s customers) have begun using third-party software to manage bill-only transactions. In the case of this advisory opinion, the third-party vendor involved in the proposed arrangement sells software (the “Bill-Only Portal”) to facilitate purchase approval, capture purchase data, and generate purchase orders for submission to the medical device company.

The vendor’s advertisements for its Bill-Only Portal “appear…to be geared exclusively toward” health care providers rather the device manufacturers and distributors. For example, the website for the third-party vendor highlights potential benefits to providers such as reoccurring annual savings for hospitals that use the Bill-Only Portal.

Despite the manufacturer’s “well-established accounts receivable processes and teams” designed to ensure timely receipt and payment of bill-only item invoices, some of its provider customers have requested or required, as a condition of doing business, that the medical device company use the vendor’s Bill-Only Portal to submit invoices for bill-only items in lieu of medical device company’s typical processes.

According to the requesting medical device company, when they objected to using the portal to submit invoices, one customer removed them as a preferred supplier for bill-only items and submitted its supply contract for bidding.

Under the proposed arrangement, the medical device company must pay annual licensing fees to the vendor for portal access. But because the annual licensing fee covers access on a per-person basis, the medical device company estimated it would pay around $1.2 million in annual licensing fees based on the possible 3,000 representatives that might need Bill-Only Portal access to submit an invoice in any given year. The medical device company explicitly certified that portal access would be “redundant to [the company’s] existing activities and operations” because it would still maintain its accounts receivable processes for its customers.

OIG’s Analysis

The AKS prohibits offering or receiving remuneration to induce referrals for items or services reimbursable by federal healthcare programs. The AKS personal services safe harbor protects payments for the provision of services contracted for when, among other requirements, the services do not exceed what is “reasonably necessary to accomplish the commercially reasonable business purpose of the services.” See 42 C.F.R. § 1001.952(d)(1)(vi).

OIG concluded that the proposed arrangement implicates the AKS and does not satisfy any safe harbor. OIG did acknowledge that a similar arrangement could be structured to qualify for protection under the personal services safe harbor, but only if it served a commercially reasonable business purpose.

Here, because the manufacturer had no need for software “redundant” to its existing practices, it could not certify that the vendor’s fees are commercially reasonable. This fact is critical; because the vendor’s software was not beneficial to the device company and the fees were not commercially reasonable, OIG therefore reasoned that the only benefit the medical device company might receive in exchange for paying annual licensing fees would be the retention (and potential expansion) of business from its provider customers. Thus, the proposed arrangement was not low risk enough to warrant a favorable opinion.  

With the requisite intent, the proposed arrangement’s potential cost savings to health care provider customers may constitute remuneration as a payment of “substantial fees” to retain and/or potentially expand business from these customers, and the element of redundancy disqualifies it from protection under the personal services safe harbor by preventing the manufacturer from certifying that these fees are “reasonably necessary” to accomplish a “commercially reasonable” business purpose.

OIG also expressed concern over potential anti-competitive risks and inappropriate interference with physician decision-making. OIG flagged that this arrangement creates the potential to steer customers away from medical device companies that are unable or unwilling to pay the annual licensing fees to use it. In reaching this conclusion, OIG points to evidence of one customer’s retaliatory response to the company’s refusal to pay the licensing fees to use the vendor’s software.

Though OIG notes that similar third-party arrangements could be structured to appropriately allocate financial responsibilities and receive a favorable opinion, the AKS risks raised by the proposed arrangement based on the facts at hand were not low enough to support a favorable conclusion here.

Key Takeaway

• Medical device companies and health care providers alike should be aware of potential for vendor software agreements to implicate AKS. To be clear, OIG seemed to openly acknowledge that these types of vendor arrangements may very well be appropriate and raise little to no AKS concern. However, in this particular instance, a confluence of factors led OIG to conclude that (a) no safe harbor applied, and (b) the arrangement created a significant risk of inappropriate steering and anti-competitive behavior. As both providers and device companies explore similar arrangements, care should be taken to evaluate whether the arrangement in question raises similar concerns.

Reed Smith will continue to monitor developments in federal fraud and abuse enforcement and OIG’s advisory opinions. If you have any questions about this advisory opinion or its implications, please contact the health care lawyers at Reed Smith.