On Oct. 20, 2023, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued unfavorable Advisory Opinion 23-08 (AO 23-08), continuing its long-held position that the provision of value-added items and services implicates fraud and abuse laws, including the Federal Anti-Kickback Statute (AKS) and the Beneficiary Inducement Civil Monetary Penalty (CMP) law. Manufacturers, distributors, and other life sciences companies that seek to improve outcomes through the provision of value-added items and services to their customers continue to face challenges in developing compliant models.
The OIG historically has carefully scrutinized value-added arrangements, often taking the position that value-added items and services that have a value separate and apart from the purchased product raise fraud and abuse concerns because they have independent value to the customer and may induce or reward the customer for purchasing products reimbursable by federal healthcare programs. The OIG has a mixed history of approving value-added arrangements through the advisory opinion process. At the end of 2020, when it adopted the value-based enterprise safe harbors to the AKS to protect certain value-based arrangements, the OIG declined to provide protection for most value-added items and services provided by medical device and pharmaceutical companies. Accordingly, life sciences companies should exercise caution in providing value-added items or services to their customers and consult with legal counsel to minimize related risk under applicable fraud and abuse laws.
Advisory Opinion 23-08
In AO 23-08, a Medicare-enrolled durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) supplier that manufactures and distributes cochlear implants and external sound processors (the Manufacturer) proposed providing patients with a free hearing aid when purchasing a cochlear implant for use in a bimodal hearing bundle (i.e., where a patient requires a hearing aid in one ear and a cochlear implant and sound processor in the other ear). Under the proposed arrangement, the Manufacturer would determine eligibility for the free hearing aid by confirming that the patient (i) meets the Medicare coverage requirements for the cochlear implant, and (ii) has moderate-to-severe hearing loss in the other ear, as determined by the patient’s healthcare provider. In the alternative, the Manufacturer proposed only providing the free hearing aid to patients with income at or below 300% of the Federal Poverty Level.
Under the proposed arrangement, a hospital or ambulatory surgery center would purchase a cochlear implant and sound processor from the Manufacturer, and if the patient satisfied the criteria, the Manufacturer would provide the hearing aid at no additional cost. The hearing aid would be manufactured by a third party and would cost approximately $1,180 to $2,240. To participate in the program, the customer would agree not to bill the hearing aid to federal healthcare programs, and patients and audiologists would be advised not to seek insurance reimbursement for the hearing aid.
The OIG determined that the proposed arrangement could inappropriately steer patients to receive the requestor’s cochlear implant over another company’s implant and generate prohibited remuneration under the AKS and the Beneficiary Inducement CMP law. The AKS is a criminal law, which prohibits the “knowing and willful” provision of something of value to induce or reward patient referrals or the purchase or use of items or services reimbursable by a federal healthcare program. The OIG has adopted regulatory safe harbors to the AKS, which protect arrangements that fully comply with the requirements of the safe harbors. However, as the AKS is an intent-based statute, noncompliance with a safe harbor is not tantamount to violating the AKS.
The CMP law prohibits, among other conduct, providing something of value to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary to order or receive an item or service reimbursable by Medicare or Medicaid from a particular provider, practitioner, or supplier. There also are regulatory exceptions to the CMP laws, primarily in the form of exceptions to the definition of remuneration.
The OIG analyzed the proposal for potential compliance with the safe harbor to the AKS for arrangements for patient engagement and support to improve quality, health outcomes, and efficiency (the Patient Engagement Safe Harbor). However, the OIG determined that the Patient Engagement Safe Harbor could not protect the proposed arrangement because the value of the hearing aid exceeded the current $570 limit for the Patient Engagement Safe Harbor. While not addressed by the OIG, DMEPOS suppliers are precluded from protection under the Patient Engagement Safe Harbor, unless they primarily provide services, and medical device manufacturers also are excluded from protection under the safe harbor, except for the provision of digital health technology.
The OIG also analyzed the proposal for potential compliance with the exception to the Beneficiary Inducement CMP law for remuneration that promotes access to care and poses a low risk of harm to patients and federal healthcare programs. However, the OIG concluded the exception was not applicable because the hearing aid would not improve a beneficiary’s ability to obtain items and services payable by Medicare and Medicaid because hearing aids are not generally covered by Medicare and the hearing aid was not required for the implant to function properly. In addition, the OIG analyzed the proposal for potential compliance with the Beneficiary Inducement CMP law exception to the definition of remuneration for items or services provided for free or at less than fair market value to a person in financial need. However, the OIG concluded that this exception also was not applicable because the free hearing aid was tied to the purchase of the cochlear implant, and the exception requires that the free item is not tied to the provision of a reimbursable item or service.
It is interesting to note that the OIG did not analyze the free hearing aid under the statutory discount exception or the discount safe harbor to the AKS (the Discount Safe Harbor). Discounts in the form of buy one get another product for free may be permissible under the Discount Safe Harbor in certain circumstances. Specifically, under the Discount Safe Harbor, a product or service may be provided for free or at a reduced charge to induce the purchase of another good or service if they are reimbursed by the same federal healthcare program using the same methodology and the reduced charge is fully disclosed to the federal healthcare program and accurately reflected to the reimbursement methodology. As hearing aids generally are not covered by Medicare, the free hearing aid could not fully comply with the Discount Safe Harbor. However, the OIG failed to consider the applicability of the Discount Safe Harbor to the proposed arrangement.
Under the statutory discount exception, a discount or other reduction in price obtained by a provider of services or other entity under federal healthcare programs does not violate the AKS if the reduction in price is properly disclosed and appropriately reflected in costs claimed or charges made to a federal healthcare program. It is unclear why the OIG did not analyze the proposed arrangement under the Discount Safe Harbor and statutory discount exception as a product bundle. Product bundles are relatively common in the life sciences industry, and the OIG’s decision to analyze the proposed arrangement under an AKS safe harbor that is largely inapplicable to medical device and pharmaceutical companies is perplexing.
Application and Takeaways
The OIG has yet to provide clear guidance regarding the scope of permissible value-added items and services that may be provided by life sciences companies, as it has largely excluded medical device and pharmaceutical companies from protection under the value-based safe harbors adopted in 2020. Instead, the OIG has indicated that manufacturers should utilize the advisory opinion process to determine whether an arrangement is permissible. However, as reflected in this advisory opinion and the mixed history of OIG advisory opinions, the OIG remains skeptical of the life sciences industry, and, accordingly, manufacturers should exercise caution in developing value-added and value-based models for their customers.
Set forth below are three key takeaways from AO 23-08:
- Medical device, pharmaceutical, and other life sciences companies should carefully consider AO 23-08 and consult with legal counsel regarding related OIG and U.S. Department of Justice guidance and regulations when developing value-based models and providing value-added items or services.
- The federal government will not hesitate to scrutinize value-based arrangements that aim to benefit patients and improve outcomes, particularly if they may result in patient steering or over utilization.
- Tying value-added items or services to the use of an item or service that is reimbursable by federal healthcare programs presents risk under fraud and abuse laws, and the qualification of such arrangements for protection under applicable exceptions and safe harbors requires careful analysis in light of the OIG’s continued skepticism of the life sciences industry.
McGuireWoods’ cross-functional team of life sciences attorneys assists clients with addressing compliance, regulatory, transactional, and litigation matters and navigating the evolving landscape of life sciences laws and regulations. For assistance developing compliant sales models, including providing value-added and value-based items and services, please contact one of the authors of this article.
 42 U.S.C. 1320a–7b(b).
 42 U.S.C. 1320a–7a(a)(5).
 See, e.g., OIGAdvisory Opinion No. 00-10 (accessible at https://oig.hhs.gov/documents/advisory-opinions/418/AO-00-10.pdf); OIG Advisory Opinion No. 06-02 (accessible at https://oig.hhs.gov/documents/advisory-opinions/505/AO-06-02.pdf); OIG Advisory Opinion No. 06-16 (accessible at https://oig.hhs.gov/documents/advisory-opinions/519/AO-06-16.pdf); OIG Advisory Opinion No. 11-07 (accessible at https://oig.hhs.gov/documents/advisory-opinions/621/AO-11-07.pdf); OIG Advisory Opinion No. 19-02 (accessible at https://oig.hhs.gov/documents/advisory-opinions/759/AO-19-02.pdf); and OIG Advisory Opinion No. 21-12 (accessible at https://oig.hhs.gov/documents/advisory-opinions/983/AO-21-12.pdf).
 See the definition of Remuneration at 42 CFR 1003.110.
 42 CFR 1001.952(hh)
 See the definition of Remuneration, Section (6) at 42 CFR 1003.110.
 See the definition of Remuneration, Section (8) at 42 CFR 1003.110.
 42 U.S.C. 1320a-7b(b)(3)(A).
 42 CFR 1001.952(h).
 While OIG advisory opinions are helpful to understand the government’s current thinking on a topic, they cannot be used as a legal defense or otherwise relied upon by anyone other than the requestor.