United States: HHS-OIG Issues Unfavorable Advisory Opinion on Physician Royalty Arrangements with Device Company

In brief

On May 18, 2026, the U.S. Department of Health and Human Services Office of Inspector General (“OIG”) released an unfavorable Advisory Opinion No. 26-10 (“AO 26-10”) addressing an arrangement proposed by an orthopedic medical technology company (the “Company”) that would compensate physician consultants (“HCPs”) through a percentage-of-sales royalty covering broad product lines (the “Arrangement”)¹.  OIG concluded that, while consulting and royalty arrangements are common in the medical device industry, this Arrangement presents a heightened risk of being considered a payment-for-referrals scheme prohibited under the federal Anti-Kickback Statute (“AKS”) if the requisite intent were present.

In more detail

According to AO 26-10, the Company proposed entering into written agreements with certain HCPs under which the HCPs would provide various services across a broad product line, including training, teaching, product feedback, design input, and other strategic or clinical support, with two specific requirements: (i) a minimum annual hours commitment; and (ii) a “satisfactory” performance evaluation based on the HCP’s attendance and quality of contributions made to the product line. Instead of paying all HCPs hourly compensation, the Company proposed a two-track model:

• HCPs who fail to meet the hours and performance thresholds would be paid a pre-determined, fair market value (“FMV”) hourly rate for documented services.

• HCPs who meet the thresholds would receive quarterly royalty payments calculated as a specified percentage of sales for all products sold within an applicable product line. Notably, an HCP would be royalty-eligible as long as the thresholds are met, regardless of whether the HCP had provided services in furtherance of the development of one or more products in the product line.

The Company sought to mitigate AKS risk by excluding certain sales from the royalty calculation, such as sales of products used in procedures performed by the HCP or at health care facilities affiliated with or owned by the relevant HCP.  However, OIG determined that the Arrangement may still incentivize HCP loyalty and advocacy for the Company’s products.  In particular, given the HCPs’ training and educational roles under this Arrangement, OIG found that the royalty structure could motivate HCPs to influence prescribing or purchasing decisions by other providers and, in turn, generate additional revenue for the Company.  Because such additional revenue would be included in the royalty base, OIG concluded that the compensation methodology remains tied to the volume or value of federally reimbursable business.

In addition to the risk of skewed clinical decision-making, OIG characterized the Arrangement as presenting “a host of other risks,” including patient steering, unfair competition, inappropriate utilization, and increased costs to federal healthcare programs. These risks led OIG to conclude that there is a heightened risk that HCPs would be incentivized to utilize, and steer other providers to utilize, the Company’s products for financial gain through royalties (even when a competitor’s products may be more clinically appropriate), such that the Arrangement would function as a prohibited payment‑for‑referrals scheme under the AKS.

Conclusion

This advisory opinion underscores OIG’s longstanding view that physician consulting services can be legitimate and beneficial if structured in a way that either satisfies a safe harbor or otherwise presents a low risk of fraud and abuse. However, compensation structures that resemble sales-based rewards, particularly those untethered to HCPs’ direct contributions to product development, can create substantial AKS risk. This scrutiny has appeared consistently across multiple OIG guidance documents and initiatives, which emphasize that compensation arrangements can create significant AKS liability if even one purpose of the arrangement is to induce or reward referrals for federally reimbursable items or services.²

Device companies planning or maintaining HCP royalty programs should treat AO 26-10 as a reminder to carefully evaluate their existing or proposed HCP compensation structures and controls and consider the following strategies, as applicable:

• Avoid links to sales or purchasing influence. HCP compensation should not be tied (whether directly or indirectly) to sales volume or other market-performance metrics that the HCP can influence.

• Ensure a nexus between royalties and contributions. If true royalties are warranted, companies should (i) ensure a clear nexus between the HCP’s inventorship or intellectual property contribution and the royalty base; and (ii) align royalty payments with clearly-defined innovations or identifiable contributions (e.g., patented technology, design improvement, or innovation tied to specific products).

• Implement robust governance safeguards. Companies should (i) implement and document a clear, bona fide business need for HCP engagement; (ii) impose a cap on the total number of HCP consultants; (iii) maintain contemporaneous records tracking hours worked and services actually performed; and (iv) establish payment controls to ensure compensation ceases when the services end.

• Reassess existing arrangements. Companies with legacy royalty or product-line consulting models should review whether compensation could be viewed as rewarding utilization and consider remediation.

Although OIG advisory opinions are binding only on the requestor and apply solely to the specific facts presented, AO 26-10 offers important guidance for industry stakeholders considering consulting and royalty arrangements with HCPs. Our team at Baker McKenzie is available to provide guidance and support as you advance these strategies. Please do not hesitate to contact us for further information or assistance.

1. HHS-OIG Advisory Opinion 26-10 (May 18, 2026), available at https://oig.hhs.gov/documents/advisory-opinions/11665/AO-26-10.pdf ↩︎
2. See, e.g., United States v. Nagelvoort, 856 F.3d 1117 (7th Cir. 2017); United States v. McClatchey, 217 F.3d 823 (10th Cir. 2000); United States v. Davis, 132 F.3d 1092 (5th Cir. 1998); United States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. Greber, 760 F.2d 68 (3d Cir. 1985); see also HHS-OIG Fraud Alert: Physician Compensation Arrangements
   May Result in Significant Liability (June 9, 2015), available at https://oig.hhs.gov/documents/other-guidance/903/Fraud_Alert_Physician_Compensation_06092015.pdf. ↩︎