Device Companies and Value-Based Safe Harbors: Who Is Excluded, and From What?

A medical device value based safe harbor can protect a manufacturer’s exchange of digital health technology through a limited care-coordination arrangement. Manufacturers remain excluded from the broader risk-sharing protections and from the separate protection for outcomes-based payments they make. For someone inside a device company, the useful distinction is what the company gives the provider and what it expects back. A contract may promise better patient care while its purchase requirements tell a different story. The Department of Health and Human Services’ Office of Inspector General identifies the stakes: patients steered by financial incentives, unfair competition and higher costs to patients and government health programs.

A surgeon may choose the implant, the hospital buys it, and Medicare usually pays for the procedure with the device included. With consigned inventory, the manufacturer may retain ownership until use. The person choosing the product, the business receiving the benefit and the institution submitting the claim can sit at different points in the transaction.

What Are the Exceptions to the Anti-Kickback Statute?

Anti-Kickback Statute safe harbors protect specified arrangements, including personal services, discounts, warranties and value-based care, when their conditions are met. Each protects a particular exchange of value. The manufacturer’s identity, the benefit it supplies and the arrangement’s terms determine which protection is relevant.

The Inspector General’s final rule, effective January 19, 2021, created three value-based safe harbors. Care coordination requires no assumption of financial risk. The other two involve substantial downside financial risk or full financial risk. Those risk arrangements can protect both cash and benefits furnished in kind. Care coordination protects benefits supplied as goods or services, rather than cash.

A value-based enterprise brings together at least two participants to coordinate care, improve quality or control costs while preserving quality. Its governing document and oversight connect the participants to that shared purpose.

The arrangement identifies the patients and the activities meant to help them. A referral alone does not count as the activity. The enterprise’s paperwork should connect the promised benefit to identifiable patients and actual care.

Which Safe Harbors Exclude Device Manufacturers?

Device manufacturers have different eligibility under different protections. The safe-harbor regulation makes the distinctions explicit.

The outcomes-based-payment provision sits alongside the personal-services rules. It concerns payments for achieving specified quality or cost outcomes, or payment reductions when those outcomes are missed. Calling a manufacturer’s payment an outcomes bonus does not give it access to that protection. Ordinary personal-services arrangements have their own conditions, including payment methodology set in advance, fair market value and compensation independent of covered referral volume.

The manufacturer’s definition draws on the Open Payments definition of an applicable manufacturer engaged in producing or preparing covered devices or medical supplies. A medical device distributor or wholesaler that falls outside that manufacturer definition is separately excluded. The limited technology pathway also extends to certain sellers and renters of durable medical equipment, prosthetics, orthotics and supplies.

Physician-owned distributorships remain outside the limited technology pathway. For manufacturers, the rule specifically excludes those required to report physician or immediate-family ownership or investment interests for the preceding calendar year, or reasonably expecting that obligation in the current year.

For a company with several business lines, the final rule looks at the corporate entity’s predominant or core business. A department’s digital-health label does not settle that question. The entity signing the agreement and the business it actually conducts belong in the same picture.

Digital Health Technology Comes With Conditions on Product Choice

The limited technology pathway covers hardware, software or services that electronically capture, transmit, aggregate or analyze data for coordinating and managing care. Necessary connectivity services can qualify too. The final rule gives a concrete example: a device that monitors a patient’s range of motion after hospital discharge and sends data to physicians to help guide physical therapy.

That route has a sharp commercial boundary. The manufacturer cannot condition the exchange on the recipient’s exclusive use or minimum purchase of anything the manufacturer makes, distributes or sells. The restriction reaches beyond the donated technology. A requirement to buy the manufacturer’s other products belongs in the examination too.

The Inspector General explained the concern in its final rule: companies dependent on practitioner referrals could use these arrangements to tie clinicians to their products. The care benefit and the sales obligation therefore need to be read together. Software that helps coordinate care can also be valuable to the person making purchasing decisions.

What the Contract and Performance Records Show

The agreement and performance reviews should tell the same care story. The signed terms identify the patients, the benefit and the measures of improvement. Reviews show whether care improved and how the parties responded when it fell short. Purchase terms show whether continued access depended on continued business.

The recipient must contribute at least 15% of the supplier’s cost or the fair market value of the benefit. The valuation and payment records show whether the recipient actually bore the required share.

The technology must predominantly serve care coordination for the identified patients. Its actual use matters: software supplied for care coordination might instead serve patient recruitment, marketing or more than incidental billing work, uses the harbor excludes. We connect what the agreement promised to what the technology did and what the manufacturer expected in return.

Device Warranties Follow a Different Route

A device warranty can promise a specified level of performance, including a clinical outcome, under a separate safe harbor. The written promise and remedy matter: repair, replacement, refund or another specified response when the product fails to meet the agreed standard. Protection requires a warranty covering at least one item, though related services can be included.

The final rule expanded the warranty protection to bundles of items and related services. When a bundle includes federally reimbursable items and services, they must be paid by the same federal health care program in the same payment. The manufacturer cannot require exclusive use or minimum purchases as a condition of the warranty.

The remedy also has a limit. For payments to a provider or another entity, reimbursement of medical, surgical or hospital expenses is capped at the buyer’s original cost of the warrantied items and services, including any replacement items within that cap. A promise to cover a patient’s broader treatment costs raises a different question from replacing the failed device.

The Inspector General also distinguishes the warranty remedy from what the seller supplies to measure performance. The warranty harbor protects the remedy. It does not itself protect free testing, analytics or other services used to determine whether the promised outcome occurred. Those benefits need their own examination.

The Warranty Credit Has to Reach the Claim

The warranty conditions connect the manufacturer’s credit to government payment. The seller must accurately disclose the reduction, or disclose the warranty and later document the calculation when the amount becomes known. The buyer must accurately report the reduction through the applicable cost-reporting or payment mechanism.

Under Medicare’s payment rule for certain replaced devices, an inpatient payment reduction applies when a replacement costs the hospital nothing, the hospital receives full credit, or the credit reaches 50% of the device’s cost. The rule concerns designated hospital payment groups where implantation determines the payment classification.

That brings the inquiry out of contracting and into hospital billing. The warranty, returned-device record, credit memo, patient account and claim connect the manufacturer’s remedy to what Medicare paid. An unreported credit can leave Medicare paying more than the hospital is entitled to receive.

Is a Rebate a Kickback?

A rebate can be a kickback when it pays for federally covered business. The discount safe harbor has its own conditions, and the rebate’s terms and reporting matter. A price reduction tied to purchases and a warranty remedy triggered by failed performance raise different questions.

We work through those terms with the insider who knows the deal: what the company offered, which purchases it expected and how the reduction appeared in the buyer’s records.

Stark Exceptions Address a Different Relationship

The Stark Law, the physician self-referral law, addresses physician referrals for designated health services where the physician or an immediate family member has a financial relationship with the provider. The Anti-Kickback Statute reaches offers and payments intended to induce or reward federally covered business, including purchases and recommendations.

A Forensic Accountant’s Guide to the Most Potent Federal Laws Used Against Healthcare Fraud, published in the Journal of Forensic and Investigative Accounting in 2020, compares the two laws by who refers, what services are involved and whether intent must be established. Its distinction is useful in a device transaction: the physician’s financial relationship and the manufacturer’s inducement answer different questions about the same flow of business.

The Inspector General preserved that distinction when it adopted the value-based rules. A Stark exception does not supply an Anti-Kickback Statute safe harbor. We examine the benefit, the decision it was meant to influence and the resulting claims together.

When Payment Follows Product Use

Consulting records can expose whether a device payment followed work performed or implants used. In the government’s 2020 civil complaint concerning SpineFrontier, the alleged consulting arrangement paid surgeons each time they used the company’s products. The complaint states:

The government alleged that per-case formulas determined the submitted hours, without regard to time spent consulting or the usefulness of the feedback. Product use supplied the payment calculation. The allegations concerned surgeries billed to federal healthcare programs. Calling the payment consulting did not change what allegedly drove it: another implant used, another fee paid.

For an insider, the connection runs through the agreement, work actually performed, compensation calculation, product use and provider claim. For digital care arrangements, it includes the promised improvement and measured results. For warranties, it includes the remedy and its treatment in billing. We build the case around those connections and what the people approving the arrangement knew.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

When You Know What the Deal Required

If you work in device contracting, sales, compliance or hospital finance and know how a care benefit became a purchasing obligation, speak to one of our Whistleblower Experts about that deal. We connect the contract, product decisions and government claims to build your strongest medical device whistleblower case. We bring in medical device fraud whistleblower lawyers who know device kickback cases, and we stay beside you throughout the case.