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Kickbacks: Does OIG Green Light of Free Product Replacements Open Door for Lab Freebies?

The OIG’s aversion to offering freebies of any kind to referral sources is longstanding and well known. So the Aug. 25, 2017 Advisory Opinion clearing the way for a provider to replace spoiled products for free is a bit of an eyebrow raiser. And while the arrangement involves a pharmaceutical company rather than a lab, the reasoning of the Advisory Opinion may apply equally to lab arrangements involving free products or services.

THE PROPOSED ARRANGEMENT
A pharmaceutical company manufactures biologics prone to spoilage when exposed to sunlight, temperature changes and other sensitive environmental conditions. In addition to providing detailed storage and handling instructions, the manufacturer wants to replace products free of charge if they spoil or become unusable after physicians, clinics and hospitals purchase them.

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

THE OIG’s RESPONSE
No.

THE OIG’S REASONING
Offering free replacements to referral sources is the kind of remuneration that could trigger kickback liability, notes 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 because the biologics would be replaced due to spoilage rather than for being defective or substandard.

However, the OIG continues, the proposed arrangement would be okay even without a safe harbor because it poses low risk of fraud and abuse. The Advisory Opinion cites four things about the arrangement that make it so low-risk:

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

2. Low Risk of Overutilization
The proposed arrangement poses 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 bear be something like an insurance policy, the cost of which the manufacturer would bundle into the price of the products.

Takeaway: The same reasoning and factors underlying it could be applied equally to free services provided by labs to physicians, clinics, hospitals and other referral sources.

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