Reed Smith MEMORANDUM HEALTH CARE CLIENTS. DATE: July 26, RE: OIG Advisory Opinion 01-8 I. INTRODUCTION

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1 Reed Smith MEMORANDUM TO: HEALTH CARE CLIENTS DATE: July 26, 2001 RE: OIG Advisory Opinion 01-8 I. INTRODUCTION On July 10, 2001, the Office of Inspector General ( OIG ) of the Department of Health and Human Services ( HHS ) released Advisory Opinion 01-8 ( Advisory Opinion ), which addresses a comprehensive program that a therapeutic mattress manufacturer (the Company ) markets and sells to state-licensed nursing facilities to manage pressure ulcers (the Program ).1 The Program couples the purchase of the Company s therapeutic mattresses at a discounted price with the purchase of skin and wound care products and a program warranty. The Company asked the OIG whether the program would constitute grounds for the imposition of sanctions under the anti-kickback statute, specifically the exclusion authority at section 1128(b)(7) of the Social Security Act (the Act ) or the civil monetary penalty provision at section 1128A(a)(7) of the Act. Briefly, in an opinion that is generally favorable to manufacturers/suppliers and providers concerned with the management and treatment of residents pressure ulcers in the long-term care setting, the OIG concludes that, although the Program could potentially implicate the anti-kickback statute, the OIG will not impose administrative sanctions upon the Company because the arrangement, under the particular circumstances described in the advisory opinion, poses minimal risk of fraud or abuse. This opinion is noteworthy because it reaffirms the OIG s recognition, previously set forth in Advisory Opinion 99-3 (permitting the bundled sale of pressure ulcer products to skilled nursing facilities ( SNFs )) that the prospective payment system ( PPS ) environment provides effective cost and 1 The opinion is on the internet at: While posted on the internet on July 10, 2001, the opinion actually was dated July 3, K Street, N.W. Delaware Suite East Tower New Jersey Washington, D.C New York Pennsylvania Fax United Kingdom Virginia Washington, DC Reed Smith refers to Reed Smith LLP and related entities. r e e d s m i t h. c o m

2 utilization control incentives and thereby reduces traditional fraud and abuse risks, including in the context of bundled product and service programs. The OIG also comments approvingly upon the Program s positive impact on the quality of patient care. At the same time, however, the OIG s analysis of the bundled discount program is curious insofar as it ignores entirely a definitional change made to the discount safe harbor in 1999 that effectively extends safe harbor protection to certain bundled arrangements. This memorandum outlines the basic framework of the Program, the OIG analysis, and some of the implications and questions arising from the Advisory Opinion. II. OVERVIEW OF THE WOUND CARE PROGRAM A. The Company The Company, a wholly-owned subsidiary of an unnamed parent company, manufactures and/or sells therapeutic mattresses and other support surfaces and wound care products used for the treatment and prevention of pressure ulcers. B. The Three-Part Wound Care Program The Program offered by the Company to long-term care facilities ( Facilities ), including Medicare-certified SNFs, is a three-year contractual arrangement with three components: (i) the discounted sale of the Company s therapeutic mattresses and other support surfaces, together with limited replacement warranties; (ii) a prospectively-fixed, per resident/per diem payment for skin and wound care products; and (iii) a limited warranty (the Program Warranty ) for certain monetary liabilities incurred by the Facility resulting from the Program s failure to meet its objective of managing pressure ulcers. Provision of Mattresses/Limited Replacement Warranty -- The Program requires the Facility to pay a negotiated, fixed, discounted price per bed, in exchange for which the Facility receives: (i) a non-powered therapeutic mattress for each bed; (ii) a specified number of wheelchair cushions and therapy pads ( other support surfaces ) based upon the number of residents in the Facility; (iii) a sufficient quantity of advanced powered therapeutic mattresses to address residents wound care needs; and (iv) online access to a wound documentation system and a certified wound care specialist. Ownership of the non-powered mattresses and the other support surfaces is transferred from the Company to the participating Facility, while ownership of the powered mattresses remains with the Company. The non-powered mattresses and other support surfaces are subject to a 7-year and 3-year replacement warranty, respectively. The Company has certified that the aggregate payment for this component represents a fair market value payment. Per Diems for Skin/Wound Care Program -- This component of the Program requires a participating Facility to pay the Company a fixed, daily fee per resident in exchange for an extensive skin and wound care program that includes all non-prescription skin and wound care -2-

3 products necessary to meet the residents needs. The Company also furnishes Facilities with certain support services relating to skin and wound care, including protocols, in-service training, and continuing education for the Facility s staff related to wound care. The Company has certified that the capitation fee represents a fair market value payment based on its good faith projection of the amount of skin and wound care products and related services it will provide. Program Warranty -- The Company agrees to reimburse a participating Facility, on a per-incident basis, a capped dollar amount toward liability insurance deductibles actually paid during the contract term and resulting from judgments for skin or wound care deficiencies. To qualify for the Program Warranty, a participating Facility must comply with various Program obligations, objectives, and protocols, as set forth by the Program. The Program Warranty is, in essence, a limited performance guarantee offered by the Company. C. Applicable Medicare and Medicaid Reimbursement Context According to the OIG, the items and services provided under the Program generally are not separately reimbursable under Medicare Part A; instead, all costs incurred during a Part A stay (including costs for mattresses, other support surfaces, and skin and wound care products) are included in the SNF s per diem payment under the Medicare PPS. Likewise, although state Medicaid programs vary, the OIG noted that most state Medicaid programs use fixed per diem payments for nursing facility residential care and therefore would not reimburse Facilities separately for the majority of the Program s items and services. The OIG also concluded that, for residents not eligible for a Medicare Part A stay, Medicare Part B generally does not provide reimbursement for Program items or services, with the limited exception of certain wound care supplies. Moreover, under the facts presented, the Company certified that the Part B covered surgical wound supplies provided under the Program would represent substantially less than one percent of the Program s price. III. DISCUSSION OF OIG ANALYSIS The OIG conducts its anti-kickback analysis in two parts, considering the Program s pricing arrangements and its warranty component separately. In both cases, the OIG concludes that although safe harbor protection is not available, there is minimal fraud and abuse risk, so that the OIG would not take enforcement action against the Company. The OIG observes that the Program is a response to the advent of the SNF PPS, which has sparked a variety of innovative arrangements between ancillary suppliers and SNFs seeking to control and reduce their costs for PPS-covered items and services. Specifically, the Program is designed to address an obvious marketing problem facing the Company: how to convince Facility operators to buy the Company s therapeutic mattresses when the Facilities are being paid primarily on a fixed, allinclusive, per diem rate. To that end, the Program demonstrates to potential customers that the -3-

4 Company is willing to put its money at risk if its therapeutic mattresses do not perform as intended by reducing substantially the incidence of pressure ulcers. In general, and subject to the usual cautionary caveats regarding the need to avoid abuses, the OIG expresses an openness toward innovative arrangements in the PPS setting that can control costs and improve the quality of care. In conducting its analysis of the risks inherent in such an arrangement, the OIG assesses whether the Program implicates the anti-kickback statute, which makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by federal health care programs. As noted, the OIG considers the Program s pricing arrangement and the Program Warranty separately. 1. Pricing Arrangement Interestingly, the OIG concludes, as a threshold matter, that the pricing arrangement does not fit into the discount safe harbor because it bundles several distinct items and services. Specifically, the OIG notes that it has consistently stated that the provision of one item or service for free or at less than fair market value to induce the purchase of another item or service constitutes remuneration within the meaning of the anti-kickback statute and is not protected by the discount safe harbor. The OIG s statement, however, appears to disregard entirely the fact that, in November 1999, the discount safe harbor was revised to protect certain bundled discounts, as long as the items and services comprising the bundle are reimbursed under the same payment methodology and there is disclosure of the discount where appropriate, and as appropriate to the reimbursement methodology. 42 C.F.R (h)(5)(ii). One possible explanation may be that the OIG has adopted a highly restrictive view regarding what constitutes the same methodology for payment. In our view, however, a strong argument can be made that the SNF PPS constitutes the same methodology. Even if the OIG were to disagree, one would have expected the OIG to explain its position in that regard in the opinion, as part of its overall assessment of the Program s potential compliance with the discount safe harbor. Once determining that the discount safe harbor is not applicable, the OIG undertakes an assessment of whether the pricing arrangement, on the whole, poses a risk of fraud and abuse. The OIG concludes that several factors -- primarily the PPS reimbursement context and the absence of swapping -- indicate that the arrangement poses minimal risk of fraud or abuse. In particular, the OIG notes: (i) (ii) The Program covers all beds and all residents of a participating Facility and pricing is uniform, regardless of the resident s payor. Participating Facilities are reimbursed pursuant to a global, all-inclusive rate, either by Medicare Part A or state Medicaid programs, for the vast majority of the items and services included in the Program. -4-

5 (iii) (iv) No separate Part B reimbursement is available for the vast majority of the items and services provided under the Program; the OIG considers it highly unlikely that the limited opportunity to separately bill surgical wound supplies under Part B, under the facts presented, will significantly increase the risk of fraud and abuse. The Program is the only financial arrangement between the Company and the participating Facilities; thus, there is no risk of potential swapping of low Program prices for the Company s opportunity to provide unrelated items or services to the Facilities. 2. Program Warranty The warranty safe harbor applies, if certain conditions are met, to any undertaking in writing... to refund, repair, replace, or take other remedial action with respect to such product in the event that such product fails to meet the specifications set forth in the undertaking. In this case, the OIG adopts a reasonable and appropriately flexible position as to the scope of the warranty safe harbor by concluding that the product is the entire Program -- which is a combination of items (i.e., the support surfaces, skin and wound care products, and protocols) and some services (i.e., the wound specialist s advice and in-service training). The OIG suggests that while the Program would meet the warranty safe harbor if it included only products, because the arrangement has a service component, it does not technically qualify for safe harbor protection. Nevertheless, the OIG believes, appropriately, that the Program s items, especially its mattresses and other support surfaces, are the linchpin of the Program and the Program Warranty. The agency concludes that the fact that the Program Warranty covers a small service component, as well as items, does not significantly increase the risk of fraud and abuse. IV. CONCLUSION As in several previous advisory opinions, the OIG displays a willingness to signal its qualified approval of arrangements that it believes could technically implicate the statute, fall short of full safe harbor protection, yet evidence little potential for abuse while providing favorable cost savings and enhanced quality of care for patients. In this case, the OIG states that if the Program works as intended and reduces the incidence of pressure ulcers, patients and Federal health care programs will benefit. Moreover, the OIG points out that global payments are intended in many respects to encourage Facility operators to re-engineer the delivery of care to reduce costs and increase quality. Therefore, since the OIG has not identified any significant vulnerabilities to fraud or abuse under the Program, the agency is reluctant to chill innovative and potentially beneficial arrangements, and will not impose sanctions on the Company under the anti-kickback statute in connection with the Program. The OIG cautions, however, that it reserves the right to modify its opinion if it subsequently becomes aware of problems in connection with the arrangement. -5-

6 * * * * * Please contact Kevin R. Barry (202/ ) or any member of the Reed Smith Health Care group with whom you work if you would like additional information. The contents of this Memorandum are for informational purposes only, and do not constitute legal advice. -6-