To Charge or Not to Charge for Shrinkage
The Office of Inspector General ("OIG") recently published Advisory Opinion No. 17-03 reminding us that DMEPOS suppliers that have "consignment closet" arrangements with health care providers should bear in mind that failing to charge for products that are damaged, lost, or stolen after being delivered to the closet under the control of the provider may be treated as remuneration for purposes of the anti-kickback statute. The anti-kickback statute makes it a criminal offense to knowingly and willfully offer or give anything of value in order to induce or reward the purchase of any item for which payment may be made by a federal health care program, such as Medicare or Medicaid.
In Advisory Opinion No. 17-03, a company that makes and sells biologics asked the OIG to evaluate an arrangement whereby the company would replace, without charge, its products purchased by physicians, clinics, and hospitals through consignment closets if those products later spoiled or otherwise became unusable (e.g., because of damage due to mishandling). The OIG analyzed the proposed arrangement and determined that no safe harbor would apply. Therefore, if the requisite intent to induce referrals was also present, the practice would violate the anti-kickback statute. The OIG recognized, however, that the company in question required evidence from the customer that the product in question actually spoiled (e.g., photo, other documentation) and was not just lost, misplaced or used. This evidence safeguarded against the possibility that the customer otherwise benefited from the "spoilage." Thus, the OIG determined the risk of abuse was small.
In DMEPOS consignment arrangements, spoilage is not an issue. It would be hard to evidence that the customer did not lose, misplace, use or otherwise take advantage of the products in the consignment closet. Having a stated or implied policy of not charging the customer for any products that later become "lost or stolen" would likely violate the anti-kickback statute when the DMEPOS supplier or the provider, or both, understand "lost or stolen" to mean "given away for free." Suppliers entering into consignment arrangements should be careful to allocate the risk of loss to the party with possession or control to avoid the appearance of impropriety.