HHS-OIG Issues Favorable Opinion on Pharmaceutical Spoilage Replacement Program

August 30, 2017

On Aug. 25, 2017, the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) published a favorable advisory opinion regarding a pharmaceutical manufacturer’s proposed replacement program for spoiled products. The requestor of this advisory opinion manufactures biologics and other products, which, according to the opinion, are “sensitive to temperature changes, direct sunlight, or movement, and may require reconstitution in a controlled environment[.]” 

The program permits replacement when a customer — such as a hospital, clinic or physician practice — unintentionally mishandles a product in such a manner that the product becomes spoiled and cannot be administered to a patient for quality and safety reasons. The program contains numerous safeguards. These include a replacement-only policy, meaning the customer cannot receive credit toward future purchases. The program is designed as a single-unit replacement policy with a five-unit cap in multi-unit loss situations. The program applies only to purchased products (i.e., it does not apply to samples). Moreover, in addition to attesting to the circumstances of the loss, the customer is required to return the spoiled product or, if unable to do so (e.g., due to a broken vial), include a photograph of the spoiled product. Finally, replacement is not available if an insurer or patient is billed for the product. 

Because the program replaces products that are rendered defective or substandard by the customer rather than the manufacturer, the OIG concluded the program does not meet the warranty safe harbor, 42 C.F.R. § 1001.952(g), of the anti-kickback statute. Nevertheless, the OIG found that the numerous safeguards rendered the program sufficiently low-risk under the anti-kickback statute.

In addition to the usual description of safeguards contained in the proposed arrangement under review, the OIG specifically called attention to the following facts in this matter:

  1. The program covers only unintentional, accidental spoilage.
  2. The program promotes quality and patient safety.
  3. The program is unlikely to increase utilization or costs because it covers purchased products that are intended for patient use and that have yet to be billed to an insurer or patient.
  4. The program is limited in volume, replacing only the lost product unit.
  5. The existence of the program is unlikely to change customers’ behavior (i.e., a customer would not spoil a product simply to obtain a replacement unit).
  6. The customer must attest to the circumstances by which the product was spoiled and return the product. 

While this advisory opinion provides only the requestor with actual protection under the anti-kickback statute, it may also provide useful guidance to the fraud and abuse analysis of similar product replacement programs. The full text of the opinion is available on the OIG’s website. For more information, please contact the authors.