The Office of Inspector General (OIG) continues to unearth widespread noncompliance by hospitals with requirements for reporting the receipt of medical device credits.  In a March 2018 report examining payments received by 210 hospitals for recalled cardiac medical devices, the OIG found that in each case, the hospitals did not comply with Medicare requirements for reporting manufacturer credits.[i]  According to the OIG, this noncompliance resulted in $4.4 million in overpayments that the hospitals must now return to Medicare before the expiration of the 60-day reporting and repayment period or the claims will be subject to False Claims Act liability.  Providing examples where the per-claim overpayment ranged from nearly $25,000 to more than $27,000, the OIG demonstrated that a hospital’s failure to report a credit on just one claim can have a huge adverse financial impact.[ii]

This is not the first time the OIG has highlighted its concern about medical device credits.  In fact, over the past two years, the OIG has issued five such reports on implanted medical device credit reporting.[iii]  One report estimated that from 2005 to 2014, services related to the replacement of recalled and prematurely-failed medical devices cost Medicare $1.5 billion.[iv]  The continued scrutiny and apparent widespread nature of this noncompliance should put hospitals on notice to correct the problem or risk substantial overpayment and False Claims Act liability.

What Reporting is Required?

In cases where a replacement of a medical device is required, manufacturers may–either through the recall or under the device’s existing warranty–issue a full or partial credit to cover the cost of the device, or provide a replacement without charge.  Federal regulations require Medicare to reduce payment to a hospital for its replacement of an implanted device if (1) the device is replaced without cost to the hospital, (2) the hospital receives full credit for the device cost, or (3) the hospital receives a credit equal to 50 percent or more of the device cost.[v]

Medicare does not cover items or services for which neither the beneficiary, nor anyone on his or her behalf, has an obligation to pay.[vi]  Further, Medicare payments to providers must be based on the reasonable cost of services,[vii] and absent clear evidence that higher costs are unavoidable, “the excess costs are not reimbursable.”[viii]  As a result, hospitals are required to reflect in their bills to Medicare a reduction in the cost of medical devices if a credit of 50 percent or more is available, whether or not the credit was actually received or pursued by the hospital.

Hospitals must use condition and value codes to modify claims when billing Medicare for services that involve the replacement of a device that was provided with a credit or at no cost to the hospital.[ix]  The condition codes—condition code 49 (product replacement within product lifecycle) or 50 (replacement for a known recall of a product)—signify the issue resulting in the replacement.[x]  Along with the selected condition code, if a credit of 50 percent or greater was received from the manufacturer for a replaced medical device, hospitals must use a value code (either FD, FB, or FC depending on when the service was performed and whether it was performed in the inpatient or outpatient setting).[xi]  The Centers for Medicare & Medicaid Services (CMS) then deducts the partial or full credit amount, reported in the amount for value code, from the final reimbursement.

Why is this Difficult?

Hospitals are responsible for pursuing and passing these credits on to Medicare.  Often, a breakdown in communications among the separate hospital departments and varying staff involved in identifying, tracking, and reporting medical device credits is the main reason for noncompliance.  The credit reporting process is further complicated by varying manufacturer device return authorization processes and different forms that require details in varying formats.  Credits often are received well after the device has been replaced and the billing department has submitted the claim for reimbursement.  Hospital staff submitting Medicare claims then must be made aware of credits that are at least 50 percent of the price the hospital paid for the replacement device.  As a result, in order to accurately capture and report these credits, hospitals must have overarching policies and procedures in place to be followed by hospital personnel responsible for contacting the manufacturer, tracking the availability of the credit, and determining whether an adjustment claim needs to be submitted to pass along the credit to Medicare.

CMS and its contractors have had a hard time identifying noncompliance with the credit reporting requirements.  Unless a hospital reports the appropriate condition, value, and modifier codes on the claim, contractors processing the claim have no way of knowing that a device was subject to a recall or under warranty.  One solution the OIG has proposed is to require that Medicare claim forms include Unique Device Identifier (UDI) information, which would enable CMS to identify claims for which a specific device was billed.[xii]  While this proposal has received support from CMS and the Food and Drug Administration, Medicare claim forms have yet to be revised to include the UDI.[xiii]

What to Do.

With continuing attention to this issue from the OIG, it is likely that CMS and its contractors will increase efforts to identify and recover overpayments caused by medical device credits through the Comprehensive Error Rate Testing (CERT) program, contractor overpayment and fraud audits, and other means.  To avoid liability, hospitals should conduct an audit of high risk claims (including cardiac, cochlear, and neuro devices) and evaluate their existing processes to ensure that credits are pursued and claims are appropriately adjusted.  Every hospital should have an Explant Policy in place that requires:

• Staff to document the type of device and explant reason in the medical record.
• Physicians not to discard explanted devices subject to credits or no-cost replacement.
• Return to the manufacturer of all explanted devices replaced due to recall or advisory notice or suspected failure or malfunction (including suspected early battery depletion).
• Pursuit of warranty credits based upon Medicare and other payer requirements.
• Consideration of all devices related to the required procedural codes and maintenance of a comprehensive list of reduced or no-cost replacements.

In addition to a robust Explant Policy, hospitals should develop a reconciliation process to close all explant device returns as approved or denied, and a process to notify the billing department of all credits of 50 percent or more.  The billing department should flag claims related to the replacement devices for review and follow up so that timely adjustments can be made to previously-submitted claims.  

Hospitals that fail to take action may find themselves among the subjects of a future OIG or CMS study on this issue.  Prompt attention to these requirements may help them limit their vulnerability to large overpayment demands and False Claims Act liability.

[i] OIG, “Hospitals Did Not Comply With Medicare Requirements for Reporting Certain Cardiac Device Credits”,

A-05-16-00059 (March 2018).

[ii] Id.

[iii] See e.g., OIG, “Shortcomings of Device Claims Data Complicate and Potentially Increase Medicare Costs for Recalled and Prematurely Failed Devices”, A-01-15-00504, (September 2017); OIG, “Hospitals Did Not Always Comply With Medicare Requirements for Reporting Cochlear Devices Replaced Without Cost”, A-01-14-00508 (November 2016); OIG, “Review of Tufts Medical Center Claims That Included Medical Device Replacements” A-01-15-00503, (April 2016); and OIG, “The Medicare Contractors for Jurisdiction E Overpaid Claims for Replaced Cardiac Medical Devices When Hospitals Had Not Reported Manufacturer Credits”, A-09-15-02029, (March 2016).

[iv] OIG, “Shortcomings of Device Claims Data Complicate and Potentially Increase Medicare Costs for Recalled and Prematurely Failed Devices”, A-01-15-00504, (September 2017)

[v] 42 C.F.R. §§ 412.89 and 419.45.

[vi] 42 U.S.C. § 1395y(a)(2).

[vii] 42 C.F.R. § 413.9.

[viii] OIG, “Hospitals Did Not Comply With Medicare Requirements for Reporting Certain Cardiac Device Credits”, A-05-16-00059 (March 2018).

[ix] CMS Medicare Claims Processing Manual, Pub. No. 100-04.

[x] Id.

[xi] Id., Chapter 3,§ 100.8

[xii] OIG, “Hospitals Did Not Comply With Medicare Requirements for Reporting Certain Cardiac Device Credits”,

A-05-16-00059 (March 2018).

[xiii] FDA and CMS, “Joint letter to the Chair of the Accredited Standards Committee X12 addressing UDI on claims”(July 13, 2016); available at: https://pascrell.house.gov/sites/pascrell.house.gov/files/wysiwyg_uploaded/LETTER_FDA%20CMS%20Beatty%20Letter%20on%20UDI%20in%20Claims%207.13.16.pdf.