You Make the Call: Is Replacing Spoiled Products for Free an Anti-Kickback Violation?

The following scenario comes right out of an August 25, 2017 OIG Advisory Opinion. See if you can guess how the OIG ruled.

SITUATION
A pharmaceutical company manufactures biologics prone to spoilage when exposed to sunlight, temperature changes, and other environmental conditions. The products are labelled and supplied with detailed storage and handling instructions. But the manufacturer also wants to replace products free of charge if they spoil or become unusable after physicians, clinics, and hospitals purchase them.

QUESTION
Does the proposed arrangement violate the anti-kickback laws?

OIG’s RESPONSE
No.

THE OIG’S REASONING
Offering free replacements to referral sources is the kind of remuneration that could trigger kickback liability, noted the OIG. There is a safe harbor for written warranties that allows for replacing defective or substandard products. But the proposed arrangement wouldn’t qualify for the safe harbor because the biologics would be replaced due to spoilage not because they were defective or substandard.

However, the OIG continued, the proposed arrangement would still be okay even without a safe harbor. The Advisory Opinion then cited four things about the arrangement that made it so low-risk from a kickback perspective:

1. Free Replacements Not Tied to Referrals
First, free replacement of the spoiled products would be restricted to specific unintentional and unplanned circumstances unconnected to money and which would serve the purpose of patient safety and quality of care. The availability of a free replacement would reduce the risk of a customer’s administering a potentially spoiled product to avoid financial loss, the OIG explained.

2. Low Risk of Overutilization
The proposed arrangement would pose little risk of increased costs or overutilization since it covers only the products that customers already bought and intended to use.

3. Low Volume
The proposed arrangement would cover only individual claims of spoiled products, not large losses. And the only remedy would be replacement of the same product that the customer had intended to use but for spoilage.

4. The Insurance Analogy
Finally, the OIG noted that the proposed arrangement would be something like an insurance policy, the cost of which the manufacturer would bundle into the price of the products.

The Advisory Opinion is a bit surprising given the OIG’s long standing aversion to offering freebies of any kind to referral sources. And while the arrangement involves a pharmaceutical company rather than a lab, the reasoning of the Advisory Opinion may apply equally to lab free replacement arrangements that serve the purpose of patient safety and meet the same transactional criteria listed in the opinion.