INDUSTRY INFORMATION Examining the legal hurdles of

value-based contracts Quality can be diffi cult to defi ne, measure by Edward Correia


alue-based contracts are contracts in which the parties take into account the overall value of a product purchase to

the buyer, not just the initial price. For ex- ample, a contract may have terms regarding long-term costs and benefi ts, such as the effect of the purchase on inpatient infections, read- missions and staffi ng requirements. here are substantial benefi ts from these types of contracts because they can provide assurances to hospitals that the eventual price they pay refl ects the value they receive. Value-based contracts provide a way to take quality into account. very hospital wants to consider quality when it makes a purchase. ut quality is difficult to measure, and it may even be diffi cult to defi ne. A seller may claim to have clinical data that demonstrate its product will reduce inpatient infections or readmissions. owever, it can be diffi cult for buyers to make these complex value assess- ments. Past performance data might be scarce or of dubious validity. What data are available may be old or may not apply to the precise product that is being purchased. Value-based contracts attempt to solve this problem by ty- ing the eventual price to future performance. If they work, they create incentives for the seller to develop products that perform well and to provide guidance to the buyer about how the products should be used. At the same time, they create incentives for buyers to use the products in the most productive way. here are obvious challenges in negotiat- ing these contracts because they are more complex than a simple price negotiation. Legal and regulatory hurdles add to the chal- lenge. Sometimes these hurdles accomplish legitimate goals of protecting patients and reducing wasteful government expendi- tures. However, many of these regulatory constraints originated when the overriding concern of regulators was fraud and abuse, and few people were thinking about the idea of value-based contracts. As a result, legal barriers can bar contracts that are good for patients and effi ciency in the healthcare supply chain.

Healthcare supply chain executives, with the aid of legal counsel and perhaps other professionals, can usually work through the legal barriers. I’ll share possible ways of deal-


ing with them and also examine a review of some of these regulations being conducted by the Department of Health and Human Services (HHS).

Value-based contract examples A value-based contract can reward a seller for good product performance, punish a seller for bad product performance, or allocate the risk of poor outcomes between the buyer and seller. Below, I describe examples of value-based contracts that were the subject of Advisory pinions issued by S’s ffi ce of Inspector eneral (I). hey illustrate some of the legal hurdles these contracts can encounter. Warranty Program for Readmissions (Advisory Opinion 18-10). A seller of a suite of products used in joint replacement provided a war- ranty to hospitals to reimburse the hospital for the cost of three products if a patient was readmitted because of an infection or need for a surgical revision. he seller wanted to encourage the hospital to buy the bundle of products – the implant itself, a wound therapy system and an antimicrobial dressing. he seller’s expectation was that, by using the three products together, there would be a better outcome. utside the healthcare context, such a war- ranty would not raise any legal hurdles. But regulators have long worried that a benefi t offered by a seller to a provider might encour- age the provider to distort clinical decision- making, driving up the costs of care. hese kinds of harmful incentives are prohibited by the Anti-kickback Statute (AKS), which makes it a criminal offense to knowingly and willfully offer something of value to induce a purchase of a product or service reimbursed by Medicare or Medicaid.1

If that section was literally applied to all transactions, it would bar many effi cient and harmless efforts by a seller to make its product more attractive. After all, the central purpose of selling anything is to “induce” a purchase. In order to avoid the overly broad reach of the AKS as well as other statutory restric- tions, HHS has the authority to promulgate safe harbors for transactions that are unlikely to result in fraud and abuse.2

Unfortunately, these safe harbors do not apply to all catego- Source Guide 2020 • HEALTHCARE PURCHASING NEWS •

ries of contracts that are good for patients and the healthcare system, and, even if they might apply, the specifi c requirements of the safe harbor are often too narrow and rigid to be of benefi t.

In the above example, there is an existing “warranty safe harbor” recognied by I that might apply. However, the literal terms of the warranty safe harbor apply only to single products, not to a bundle of products. evertheless, I approved the arrange- ment for several reasons: 1) since Medicare reimbursed the hospital for the entire suite of products with a single payment, the hospital could not mix and match different products but had to choose the bundle of products that offered the best value; 2) because the terms of the warranty program were fully transparent, the hospital would have to report any savings to Medicare and could not receive excessive reimbursement; 3) the physicians had to certify that all the products in the suite were medically necessary, thus avoiding the risk of overutilization; 4) the arrangement offered the possibility of reducing infections and re- admissions; and 5) there were no exclusivity requirements.

Sharing savings with surgeons (Advisory Opinion 17-09). Neurosurgeons agreed to implement cost-savings measures in return for a share of the savings from the changes. he cost-savings measures included limiting the use of Bone Morphogenetic Protein to a target percentage of spine surgeries and to take steps to standardize certain devices and supplies. he I reviewed the arrangement as a possible violation of the AKS as well as the “Gainsharing CMP,” which prohibits hos- pitals from making payments to physicians to reduce services. he I approved the plan on the theory that the plan was unlikely to result in inducing referrals of patients to the hospital (the AKS concern) or reduce clinically necessary services provided to patients (the Gainsharing concern).

Replacing spoiled products (Advisory Opinion 17-03). his arrangement involved a pharmaceutical manufacturer promising to replace products that required special- ized handling and became unusable due to spoilage. he commitment applied even if the buyer was responsible. (here was an excep-

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