OIG Issues Favorable Advisory Opinion on Hospital’s Warranty Program for Joint Replacement Procedures

On September 15, 2021, the Office of Inspector General for the Department of Health and Human Services (OIG) issued a favorable Advisory Opinion regarding a hospital’s proposal to implement a program through which patients who experience complications after specific joint replacement procedures can receive free items and services to treat the complications.  The OIG likened the program to a warranty for joint replacement procedures.

The Proposed Arrangement

The requestor is a not-for-profit critical access hospital in a rural area with the nearest hospital more than 40 miles away.  The hospital proposes to offer a warranty program (the Warranty Program) to patients receiving specific joint replacement procedures – primary (i.e. the patients’ first) total knee, total hip, or partial knee arthroplasty procedures – performed by the hospital’s two employed orthopedic surgeons.  The Warranty Program is only applicable if a patient develops certain common complications (e.g., specific infections, loosening or dislocation of the prosthesis, and other mechanical complications of the prosthesis) resulting from the procedures and the patient meets certain clinical criteria developed in collaboration with the hospital’s orthopedic surgeons.

Under the Warranty Program, the hospital would not bill the patient or the patient’s insurer, including Federal health care programs, for certain items and services provided to treat complications that occur within 90 days of a qualifying joint replacement procedure.  The hospital would cover up to $50,000 in total charges, which the hospital certified would be sufficient to cover the total charges for the vast majority of cases.

The hospital would advertise and market the Warranty Program to current and prospective patients and referring physicians through newspapers, television commercials, the hospital’s website, and one-on-one discussions with prospective patients and referring providers.

Importantly, the hospital would defer to its employed orthopedic surgeons for all clinical decisions related to patients receiving the joint replacement procedures, and the hospital would implement a number of quality of care measures, including evidence-based standards of practice and protocols, a quality assurance and performance improvement program, and an interdisciplinary team to conduct monthly reviews of joint replacement procedures.

Analysis

The OIG noted that the Warranty Program would implicate both the federal Anti-Kickback Statute (AKS) and the Beneficiary Inducements CMP because the Warranty Program involves the offer and furnishing of free items and services to Federal health care program beneficiaries that could induce patients to select the hospital for joint replacement procedures or other items and services.  The Warranty Program would also involve remuneration to payors, including Medicare Advantage plans, in the form of up to $50,000 worth of items and services not billed to the applicable payor, and the remuneration could induce payors to refer beneficiaries to the hospital.

The OIG found that the Warranty Program would not satisfy the warranties safe harbor, which is only available to a “manufacturer or supplier” offering a warranty on an item(s) and related services if certain disclosure and reporting obligations are satisfied.  Here, of course, the hospital is not a “manufacturer or supplier.”

Nevertheless, the OIG concluded that the Warranty Program presents minimal risk under the AKS and chose not to exercise its enforcement discretion under the Beneficiary Inducements CMP for the following reasons:

• Designed to Financially Incentivize the Hospital to Improve Health Outcomes. The Warranty Program is designed to incentivize the hospital to reduce its financial exposure by attempting to prevent complications from the joint replacement procedures. The Warranty Program could result in decreased costs to Federal health care programs and beneficiaries since the hospital would not bill for items and services up to $50,000 in the event of a covered complication.
• No Financial Incentives that Might Skew Clinical Decision-Making. The OIG stated that warranty programs have the potential to influence physician judgment by providing incentives for “cherry picking” the healthiest patients and “lemon dropping” patients with more complicated and costly cases.  But the Warranty Program does not provide any such financial incentives.  The hospital’s orthopedic surgeons’ compensation would not be impacted in the event the hospital provides free items and services under the Warranty Program.  The surgeons would be compensated for providing the items and services in the same way they are paid for other services provided at the hospital. The hospital would also implement a number of quality of care measures to reduce the likelihood that the Warranty Program would result in diminished quality of care.
• Unlikely to Lead to Overutilization or Inappropriate Utilization. Patients would only be eligible for the joint replacement procedures based on the orthopedic surgeons’ independent medical judgment, and the hospitals' oversight protocols further reduce the risk of overutilization of the procedures.
• Low Risk of Inappropriate Steering Due to Potential Patients’ Limited Options of Health Care Providers.  The OIG noted that the Warranty Program could potentially steer patients to receive joint replacement procedures at the hospital over other health care providers, particularly because the hospital intends to market and advertise the Warranty Program to patients and referring physicians.  But the hospital serves a rural community with the nearest hospital more than 40 miles away.  Given the lack of competition for the hospital, the risk that the Warranty Program would steer patients to select the hospital is low.

Key Takeaways

Joint replacement procedures are the most common hospital inpatient surgery procedure for Medicare beneficiaries nationwide, and they accounted for almost $7 billion in Medicare expenditures in 2014. But complications from these procedures are not uncommon and often result in costly follow-up care.  This Advisory Opinion demonstrates one hospital’s proposal to address the widespread issue.

This Advisory Opinion is notable as it is one of the few Advisory Opinions that address the warranty safe harbor. (See our discussion of the other Advisory Opinion involving a warranty program for joint replacement products.)  However, the OIG’s succinct analysis of the warranty safe harbor merely confirmed that the safe harbor is not available for health care providers.

Ultimately, this Advisory Opinion may have limited utility for the majority of health care providers that might be interested in comparable warranty programs.  A crucial factor in the OIG’s determination that the Warranty Program presented a low risk of fraud and abuse is the fact that the hospital serves a rural community and does not have competitors within a 40-mile radius.  As with all Advisory Opinions, this Advisory Opinion is limited to its facts and is binding only with respect to the requesting party.  Health care providers in less rural areas with more competition would need to proceed with caution before adopting similar warranty programs by, for example, refraining from advertising and marketing such programs and/or implementing a consolidated program with all of its competitors.

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