In an advisory opinion released June 30th, the U.S. Department of Health and Human Services Office of Inspector General (OIG) confirmed that it would not seek to impose monetary sanctions on a medical device manufacturer for its efforts to reimburse purchasers of its device for accidental needle stick injuries caused by a failure of the device’s safety mechanism.

According to the OIG, the manufacturer’s plan fits under the federal Anti-Kickback Statute’s regulatory safe harbor for warranties and does not generate prohibited remuneration under that statute, despite the offer to pay purchasers for failure of the device which might induce purchasers to choose the manufacturer’s product.

Manufacturer offers payment for failure

The facts of the opinion are relatively simple. The manufacturer has a device that pharmacies, hospitals, clinics and laboratories can use to administer injections. For the safety of the users of the device, it includes a mechanism designed to protect them from accidental needle contact that could result in a needle stick injury.

According to the opinion letter, a needle stick injury could result in substantial costs for the purchaser of the device including, but not limited to, retraining staff, staff absence and replacement, counseling for injured workers and other legal consequences.

To help purchasers of the device defray these costs, the manufacturer offers to reimburse a purchaser for actual costs incurred as a result of a failure of the safety device that results in a needle stick injury. The reimbursement cannot exceed $2,500, must reflect the actual costs incurred and cannot be incurred as a result of user error but only due to failure of the safety mechanism. Additionally, the reimbursement can only be paid to the purchaser and the offer expires one year after the date of purchase of the device.

Finally, the payment under the arrangement is not conditioned on exclusive use of or minimum purchase of the device.

Safe harbor for warranties

Since payment to purchasers could be seen as a kickback to induce the purchase of a particular device, this arrangement implicates the Anti-Kickback Statute. However, the OIG found that the arrangement met the elements required for protection under the regulatory safe harbor for warranties.

The warranties safe harbor, set forth at 42 C.F.R. § 1001.952(g), protects remuneration under a warranty provided by a manufacturer or supplier to a purchaser. A “warranty” includes a written statement or promise from the manufacturer to the purchaser about the quality of the workmanship in the product and a promise that such quality is defect free and will meet a specified level of performance over a specified period of time.

The safe harbor includes elements that both the purchaser and the manufacturer must comply with in order to qualify. Those elements are as follows:

• The buyer must report any price reduction that was obtained as a part of the warranty to the relevant state or federal authorities.
• The manufacturer must also comply with price reduction notification requirements.
• The manufacturer must not pay for any medical, surgical or hospital expense incurred by a Federal health care program enrollee.
• Any warranty on multiple items or related services that are reimbursable by a Federal health care program must be reimbursed by the same Federal program and in the same payment.
• A manufacturer may not condition its warranty on a buyer’s exclusive use of or minimum purchase of the device.

The OIG found that the manufacturer’s reimbursement for needle stick injuries attributable to its device constitutes a warranty and satisfies all of the elements of the safe harbor. Specifically, it was a limited time program based on failure in the quality of the device, and the program only implicated a single device and did not involve the payment for any medical, surgical or hospital expenses incurred by a Federal health care program enrollee.

Key Takeaways

Although the OIG’s advisory opinion is only applicable to this particular manufacturer and its warranty program, it is instructive for other manufacturers seeking to make a similar arrangement. There are several considerations for an entity seeking the same treatment.

• The warranty must be limited in time and only reflect payment for a failure or defect in the device.
• The warranty cannot pay for the medical, surgical or hospital expenses incurred by a Federal health care program employee.
• The warranty cannot be conditioned on exclusive use or purchasing of the device.
• The warranty should reimburse purchasers only for costs incurred as a result of the device’s failure; anything above and beyond that might disqualify the arrangement for safe harbor protection.

Reed Smith will continue to track developments with regard to OIG enforcement of health care fraud and abuse laws. If you have any questions about this opinion or have an arrangement that you would like to seek an advisory opinion on, please do not hesitate to reach out to the authors of this post or your health care attorneys at Reed Smith.