HHS-OIG Approves Provision of Zero-Interest Financing to Medical Device Customers

In Short

The Situation: The practice of manufacturers making available to customers favorable and even zero-interest financing for significant purchases of medical devices is understood to be common and often expected by customers managing cash flows in capital-intensive businesses, particularly where reimbursement for items may be delayed. In a recent advisory opinion, Department of Health and Human Services Office of Inspector General ("HHS-OIG") addressed whether such arrangements may violate the Anti-Kickback Statute. 

The Result: HHS-OIG approved a zero-interest financing arrangement among a medical device manufacturer, third-party lenders, and durable medical equipment ("DME") supplier customers for the purchase of the manufacturer's durable medical equipment. HHS-OIG found that although the zero-interest loan constitutes remuneration to the customer, it nonetheless poses a low risk of fraud and abuse due to a number of safeguards.

Looking Ahead: The opinion reiterates HHS-OIG's position on the broad definition of remuneration and warns that HHS-OIG considers the facilitation of zero-interest financing by manufacturers to constitute remuneration that implicates the Anti-Kickback Statute. At the same time, the opinion signals a willingness by the agency to accept commonly used financing arrangements that carry a low risk of inducing the overutilization of federally reimbursed medical products and favorably impact competition between smaller and larger suppliers of medical equipment.

On June 23, 2022, HHS-OIG issued Advisory Opinion No. 22-13, approving a financing arrangement between a DME manufacturer and two third-party financial institutions ("Lenders") to provide zero-interest loans to qualifying DME supplier customers. Although the agency took the position the financing arrangement provides remuneration under the federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(b)), HHS-OIG said it would not impose sanctions because the arrangement poses a low risk of fraud and abuse.

Proposed Arrangement

Under the arrangement, the manufacturer has entered into agreements with two wholly independent third-party financial institutions to make zero-interest financing available to customers that meet general credit requirements and other terms and conditions imposed by the Lenders. Either before or after a customer's payment is due to the manufacturer, the customer may contact or be contacted by the manufacturer's credit and collections personnel to discuss payment. If the customer at that time cannot or prefers not to (e.g., for cash flow management) pay the amount it owes, it may request the opportunity to seek zero-interest financing from a Lender.

It is also possible that the manufacture's credit and collections department may offer this potential option to the customer. To qualify for the referral to the Lender, the customer must be in good standing with the manufacturer and owe the manufacturer at least $10,000. Independently of the manufacturer, the Lender performs its own evaluation of the customer's creditworthiness. If the Lender approves the financing, the customer is required to make payments to the Lender in monthly installments, typically over 12 months. Upon approving the financing, the Lender remits to the manufacturer the total invoiced amount, less a negotiated financing charge. While the Lender maintains the exclusive right to enforce the customer's payment obligations, the risk of defaults by customers is allocated between the Lender and the manufacturer according to a "loss pool" structure. Under this loss pool structure, the Lender bears the first layer of liability from customer defaults up to a specified threshold, then the manufacturer is responsible for defaults between that point and up to another specified threshold, and the Lender is then responsible for any further defaults.

The Analysis

The federal Anti-Kickback Statute prohibits anyone from knowingly and willfully offering or accepting any remuneration to induce, or in exchange for, the order or purchase of any item reimbursable by a federal health care program. Because certain customers under the arrangement dispense the purchased equipment to federal health care program beneficiaries and submit claims to federal health care programs for that equipment, HHS-OIG asserted that the zero-interest financing provided to those customers constitutes a financial benefit and thus remuneration under the statute which, if the requisite intent is present, can trigger liability.

Nevertheless, HHS-OIG determined that it would not impose sanctions because the manufacturer's facilitation of zero-interest financing poses a low risk of fraud and abuse due to the following safeguards:

  • Customers would not receive a discount from the manufacturer under the financing arrangement—they simply pay the total purchase amount over a longer period of time.
  • The third-party Lenders' independence and assumption of the majority of the financial risk, notwithstanding the loss pool structure, reduces the risk of the manufacturer offering or forgiving loans to secure future referrals.
  • The financing charge is the product of independent, arm's-length negotiations between the manufacturer and the third-party Lender to compensate the lender for administering the loan. Since the Lenders are not health care providers or suppliers, they are not in a position to refer federally reimbursed business to the manufacturer. 
  • The equipment is reimbursed on a fee schedule, regardless of the amount paid by the customer.
  • The customers do not prescribe the equipment, thus reducing the risk of overutilization. 
  • The arrangement may favorably impact the competitiveness of smaller suppliers who may not otherwise have access to financing opportunities. 
  • The shared financial risk limits the manufacturer's incentive to initiate zero-interest financing on the customer's behalf and also limits the lender's incentive to approve such requests from customers who may be unlikely to pay their obligations.
  • The manufacturer does not advertise or guarantee the zero-interest loan; its sales representatives may not offer the financing; and its sales representatives' commissions are reduced if a customer receives zero-interest financing.

Two Key Takeaways

  1. This advisory opinion underscores the fact that HHS-OIG interprets "remuneration" very broadly, including even the offer of interest-free financing to customers of medical devices.
  2. Manufacturers of DME and other medical devices that offer or facilitate zero- or reduced-interest financing for their customers should examine their existing financing arrangements to ensure that their safeguards align with HHS-OIG’s expectations.
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