The Health and Human Services (HHS) Office of Inspector General (OIG) issued a final rule that expands the extremely narrow warranties safe harbor to include bundled items and services. Consistent with other changes brought about by the Trump administration’s Regulatory Sprint to Coordinated Care, the intent of the revision is to facilitate more coordinated and value-based care. It will be published in the Federal Register on December 2, 2020 (the Final Rule).
A warranty is, to a certain extent, an inducement to purchase a particular item. The most common application of the warranty safe harbor is when a manufacturer of a medical device provides a warranty to a hospital, like a warranty on a pacemaker. If the pacemaker fails within the warranty period, and the manufacturer replaces the device, the buyer must report the value of the free item received from the manufacturer. Beyond the cost of the device, the safe harbor prohibits the manufacturer from paying any individual or entity (other than the beneficiary) for any medical, surgical or hospital expense incurred by the beneficiary.1
Prior to the Final Rule, the warranty safe harbor was extremely limited. The term “warranty” was defined to mean either “an agreement made in accordance with the provisions of 15 U.S.C. 2301(6) [the Magnuson-Moss Warranty Act (MMWA) which defines a “written warranty” for consumer products], or a manufacturer's or supplier's agreement to replace another manufacturer's or supplier's defective item (which is covered by an agreement made in accordance with this statutory provision), on terms equal to the agreement that it replaces.”2 As such, the warranties safe harbor was extremely narrow, and limited to replacing defective devices.
Bundled Items and Services
The new safe harbor allows a warranty to apply to multiple items that are typically bundled together, as well as services. The OIG provided an example of a drug manufacturer providing a warranty on the clinical effectiveness of a particular drug, contingent upon the patient receiving education on product administration and use through nurse support offered by the manufacturer.
The OIG noted that the safe harbor still only protects warranty remedies (i.e., offers and exchanges of value due to the terms of a warranty that otherwise meets the elements of the safe harbor having been met), but does not protect free or reduced-price items or services provided as part of, or ancillary to, a warranty if they have “independent value” to a buyer apart from determining whether the terms of the warranty have been met. A potential example of the latter discussed in the Final Rule is manufacturer-provided medication adherence services, which would have an independent value to a provider.
No Expansion to Service-Only Warranties
Although the OIG requested comments regarding whether safe harbor protection should be extended to services-only warranties, it ultimately chose not to extend such protection. OIG noted particular concern that determining whether the terms of a services-only warranty have been met is more subjective than with items-based warranties, and that services-only warranties could create inappropriate beneficiary inducements particularly if the warrantied results are not easy to achieve.
Due to the expansion of warranty arrangements covered under the safe harbor, additional conditions have been added to reduce the potential for inappropriate utilization, overutilization, cost-shifting or anticompetitive behavior that could arise in the context of bundled warranties.
The first condition provides that all items and services covered under a bundled warranty remedy must be reimbursed by the same federal health care program and in the same federal health care payment (e.g., the same MS-DRG payment or the same Medicaid managed care payment). In its proposed rule, OIG requested comments regarding whether the same goals could be accomplished by instead requiring that all items and services be reimbursed according to the same payment methodology — but not necessarily the same payment — in order to extend safe harbor protection to “population-based warranties” (i.e., warranties with regard to the performance of bundled items and services over a population). In declining to do so, the OIG noted concern that population-based warranties may pose risks of fraud and abuse, including inappropriate steering of patients to particular products that limits patient choice and the potential impact on providers’ clinical decision-making.
The second condition provides that sellers may not impose exclusive-use or minimum-purchase conditions on bundled warranties and still receive safe harbor protection. OIG reasoned that this condition safeguards against the potential anticompetitive effects of bundled warranties, in addition to inappropriate steering practices. OIG clarified, however, that “[t]he safe harbor does not prohibit exclusive-use or minimum-purchase provisions that are conditioned upon commercial terms unrelated to the offer of a warranty.”
Finally, the term “warranty” is now defined in the safe harbor, rather than by reference to the MMWA. The safe harbor’s definition replicates the structure of the definition of “written warranty” in the MMWA but broadens it to encompass warranties for a bundle of items and related services.
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