A Key Question About the OIG’s Audit of Medical Device Warranty Credits

SpendMend Team

Written by: Alan J. Brander, abrander@spendmend.com 

Last week we ran a webinar in cooperation with our new partner, the Center for Improvement in Healthcare Quality (CIHQ).  The topic was centered around what can hospitals expect from the Office of Inspector General’s (OIG) extensive, country-wide audit of the Center for Medicare and Medicaid’s (CMS) Medical Device Warranty credit standard.  Our speakers included Traci Curtis of CIHQ,  Jennifer Penn of Providence Health Systems and myself, the author of this blog.

The event was well-attended by over 120 live viewers and after the presentation we opened the chat box for audience questions.  We received a fairly high number of thoughtful questions related to the topic, but what got our attention was that one single question was asked in different ways by about 15 different people.  It’s rare that over 10% of a webinar audience would ask the same question so we thought there must be something to this.  I am rephrasing the question today in this blog and I’ll offer an answer for any of our readers that might have the same question.

QUESTION:  What do you recommend as a hospital’s first step to determine that they are managing their medical device warranty tracking correctly and how can they determine that they’re in (or out of) compliance with the CMS’s requirements?

So… this is a great question and after working with about 100 different IDN’s on this exact project, my strong recommendation is that your first step should be a mock OIG audit.  I recommend that you take this measure to fully inspect how your procedures and processes are working.  This can be a complicated process and could require a considerable amount of staff time and attention to complete.  While I always encourage a hospital to develop its own in-house compliance monitoring. I understand (from my experience as a CNO and a head of O.R.) that few hospitals have free resources lying around to complete this initial assessment task.  To this end, SpendMend can help with this assessment at a little to no cost.  I’ll describe the procedure from our perspective.  While it is labor intensive and requires help from multiple sources – it will reveal  If your hospital is a risk and the steps are shockingly simple.

Author’s Note: If you are interested to learn about how you could do this internally with your own resources, I am happy to have that conversation with you as well.  Feel free to reach out on the topic any time.

When SpendMend is working with a hospital on an Mock OIG audit survey we first like to download all of the hospital’s explant procedures out of their electronic health record for the time we are reviewing.  SpendMend typically reviews 4 years the OIG may look back as far as 6 Years. We will then take that information and reach out the hospital’s vendors.  On the surface this can seem like a daunting task to solicit information from such a vast population of decentralized companies, but we use our experience as well as a well-developed contact library to ensure 100% compliance from targeted vendors.  Based on our communication with the vendors we will request two separate lists:

  1. A list containing information on every device that was sent to replace an- explanted device
  2. A second containing an accounting of every warranty credit that they have issued the hospital for any failed or recalled implanted medical device.

The hospital and vendor data are then compared, scrubbed and analyzed by our specialized audit team.  The results are then compared to our industry data base of manufactures warranties.

From this point, we will work with the hospital’s patient billing department to review of the UB-04’s for every one of those cases. The final report will provide a detailed list of cases where you should have either received a credit and did not or where you did not receive a credit.  If you did not receive a warranty credit, we will work on your behalf to secure monies owed you by the vendor. If the hospital did receive credit, we will apply CMS’s 50% rule which requires the hospital to return any credits they receive where the amount is greater > 50% of the device cost. The hospital is legally responsible to return those monies to the payor of the original procedure. Credits below this threshold may be kept by the hospital. Once we do that, we will be able to tell you exactly what your risk is, we can estimate what your potential fines could be and how much money you owe back to the CMS. Running a proactive review enables the hospital to self-report the findings and payments due to the CMS which is always better than the OIG finding it through an official audit.  Typically, the fines and penalties will always be higher if the OIG comes into an environment and discovers the hospital’s mismanagement of warranty credits with no evidence that hospital has taken their own measure to fix the problem on their own and those results are always reported and find there way to the local media.

Like I said, it’s a simple process but can be very labor intensive but we’ve gotten very good at it and have a team of industry experts who do this daily.  In most cases we charge little to nothing to perform the review and our hospital clients gain an invaluable insight into their procedures that could mean the difference between millions of dollars in fines.

Medical Device Warranty Credits & Regulatory Requirements…Is Your Hospital at Risk?

SpendMend Team

Written By: Alan J. Brander, CSO at SpendMend, abrander@spendmend.com

Medical Device warranty tracking and credit payments have become a focal point for the Centers for Medicare & Medicaid Services (CMS), as evidenced by several new requirements in past last ten years. Hospital compliance of those rules are being closely scrutinized by the Office of Inspector General (OIG) through the Office of Audit Services (OAS).

The reason for this focus is twofold:

  • The US Government is the largest single purchaser of implantable medical devices in the world.  Spending approximately $35B dollars per year. In the period between 2012 -2014, Medicare paid $30B for cardiac devices alone.
  • Recent audits show that hospitals have done a poor job of self-regulation and reporting. A NY Times article from May 4, 2017, quoted the Department of Health and Human Services (HHS) OIG audit report; a NY area hospital was required to repay $14M dollars due to overpayments. Audits like this have fueled CMS, which recently announced it plans to recoup $1 Billion in improper payments by 2020 through wide spread audits, according to a new rule that hit the federal register on November 1, 2018.  CMS has also stated that they intend to recoup a subsequent $381 Million in improper payments (at minimum) every year beyond their 2020 goal.

The last 10 years have seen a huge increase in surgically implanted devices designed to decrease morbidity, mortality, and improve patient lifestyle. These devices remain in the patient after the conclusion of the procedure for one or more of the following reasons: organ support (i.e. pacemakers), limb or joint replacement (i.e. hips, knees), or automation of monitoring and therapy delivery (neural stimulators or medication pumps). Many of these devices are high tech and may include batteries and computer chips which can fail, malfunction, or have early battery depletion. Even low-tech devices like hips or knees can fail or be recalled. Manufactures of these devices stand behind their product and provide either free replacement cost or partial money back.

The hospital is required to pursue either a no cost replacement or available credits if the device is under warranty. This is determined by returning the explanted device back to the manufacture for testing. The manufacturer then assesses the cause of the device failure then sends credits as applicable. The hospital is supposed to report the credits they receive and if the amount is greater > 50% of the device cost. The hospital is legally responsible to return those monies to the payor of the original procedure. This is known at the 50% Rule. A second rule, known as the Prudent Buyer Standard states that a hospital owes the warranty money to the payor, even if they do not send the explant for review or if they do not recover the funds.

Regardless of intention, failure to refund the payor for Medicare overpayments puts hospitals in violation of the False Claims Act and will prove an extremely costly mistake.  In 2019 the U.S. government increased the penalties to a per violation charge of $11,463 plus 3X the amount of the violation in question – to a maximum of $22,927 plus 3X the amount of the violation in question.  The determination of how and why a violation would trigger a minimum versus a maximum violation was not reported in the update.

To put this is more relatable terms, in a recent use case at a SpendMend client, a Southeastern regional healthcare system with only 1 location and 256 Beds incurred fines of nearly $2 Million.

This seems straight forward…right?  Let’s summarize, if an implantable device is recalled, malfunctions, or fails: send the device back to the manufacture.  The manufacturer will determine the cause of failure and issue a credit if the device qualifies. If the hospital receives a replacement or a credit, which they are to keep, unless it is equal or greater than 50% of the device cost. If the 50% Rule applies, then they must send those monies back to who paid for it. If hospitals do not follow these processes, they will be forced to pay significant penalties and fines.  The OIG is reporting that hospitals are not only failing to properly report, but also, they go so far as to say that hospitals lack the internal procedure and control to manage this process.

The complexity of the explant process, vendor return requirements, and the lag time of 3-6 months to get a determination, is the root cause of many of these errors. There are several hospital departments involved: clinical, pathology, supply chain, compliance, hospital finance, patient billing, and coding. Each has a part, but rarely does anyone own it. Manufactures have several hoops to go through as well as documentation you must provide before they to proceed with testing. The hospital gets a credit check several months after the device has been sent. The Patient Billing department has no idea a credit was received and rarely told to revise a bill and return a credit.

Here are some suggestions to decrease your risk.

  • Find a third-party firm that provides tracking and oversite. The tracking is only as good as your staff’s charting. The oversite and auditing are important to catch what is missed.
  • Globally, develop a system wide policy to guide which devices to return, and a procedure that clearly outlines each departments responsibility.
  • Define an owner or champion of the process.
  • Develop a report that provides a minimum data set to aid in returns. Consider putting a flag in the EMR when an eligible device is explanted. Make sure device description and serial number is a required field.  Do not let your Vendor reps retrieve and initiate the process, or if they do make sure there is a tracking sign off by supply chain to record the relevant data like patient name, encounter number and device serial number in the ERP system.
  • Make sure that the RMA and return kit is obtained from the vendor, accurately filled out and returned with in the 30 to 45-day window.
  • To aid in the return create a specific form and process, ideally managed by supply chain. With every return always ask for a product analysis and report to be returned to the hospital.
  • Consider OCR technology to scan and track credit memos. Make sure your policy and procedure include consistent notification of Patient Accounts of any credit > to 50%.