Out of Warranty Program? How does this work?

If you bought your phone in the US, you are covered under the one year USA warranty. So, if you drop your phone and shatter your glass, you can get the front replaced for $199, or the back replaced for $29. If the phone is found to be defective and required replacement, they will replace the phone with a new or refurbished phone at no cost. That's the policy. Does this answer your question?

typically its a refurb phone but there is a chance you can get a new phone

you'll never know the difference between a refurb or a new phone. Refurbs have been thoroughy checked (actually checked more than a phone right off the assembly line), the screen and back usually replaced and your warranty remains in place.

It's actually a pretty good deal. The new price on the phone is 599/699. If you have a broken one to give them, Apple will replace it for $199. Seems way more than fair to me.

"Out-of-Warranty Service
If you own an iPhone that is ineligible for warranty service but is eligible for Out-of-Warranty (OOW) Service, Apple will service your iPhone for the Out-of-Warranty Service fee listed below.

iPhone 4 Out-of-Warranty Service
16GB & 32GB $199
iPhone 3GS Out-of-Warranty Service
8GB, 16GB & 32GB $199
iPhone 3G Out-of-Warranty Service
8GB & 16GB $199
Original iPhone Out-of-Warranty Service
4GB, 8GB & 16GB $199
A $6.95 shipping fee will be added if you arrange service online or by calling Apple Technical Support. All fees are in US dollars and are subject to local tax.

For example, an iPhone that has failed due to damage or liquid damage is eligible for Out-of-Warranty service. However, certain damage is ineligible for OOW service, including catastrophic damage, such as the device separating into multiple pieces, and inoperability caused by unauthorized modifications.

Apple reserves the right to determine whether or not your iPhone is eligible for Out-of-Warranty service. iPhones that are repaired or replaced have a 90-day limited hardware warranty or assume the remainder of your standard warranty or AppleCare Protection Plan for iPhone coverage, whichever is longer. Please see Apple's Repair Terms And Conditions for further details.
"

http://www.apple.com/support/iphone/service/faq/

FYI - I got an iPhone last March, shattered the glass last December, got an out of warranty replacement for $199. My phone could not be fixed easily so this was a good deal. Not sure whether phone received was new or refurbished, was told could be either. Thought I got a 1 year warranty on that phone, but turns out warranty is from original purchase, so I had only 3.5 months warranty on the replacement.
A few days ago, my battery stopped charging. Says it is charging, but charge remains in the red area. I happen to have AppleCare, purchased on my original phone, but without that, this new phone, with a dieing battery, less than a year old would not be covered. Granted I should not have broken the first phone, but having a "new or good as new" replacement go bad in less than a year with no warranty does not seem right. If the battery had died in less than 6 months, it would not have been covered.