AMARILLO, TX – Approximately (i) 35% of all Medicare patients are covered by Medicare Advantage Plans (“MAPs”) and (ii) 70% of all state Medicaid patients are covered by Medicaid Managed Care Plans (“MMCPs”). These percentages are increasing. A MAP and MMCP essentially operate the same way. The MAP, owned by an insurance company, contracts with CMS. Pursuant to the CMS contract, the MAP will (i) cover Medicare beneficiaries (“Medicare Covered Lives”) and (ii) contract with health care providers and suppliers to take care of the Medicare Covered Lives. CMS pays the MAP and the MAP pays the provider/supplier.

The same concept is true with an MMCP. The MMCP, owned by an insurance company, contracts with the state Medicaid program. Pursuant to the Medicaid contract, the MMCP will (i) cover Medicaid beneficiaries (“Medicaid Covered Lives”) and (ii) contract with health care providers and suppliers to take care of the Medicaid Covered Lives. The state Medicaid program pays the MMCP and the MMCP pays the provider/supplier. The MAP and MMCP contracts will collectively be referred to as “Third Party Payer Contracts” or “TPP Contracts.”

A challenge faced by many DME suppliers is that MAPs and MMCPs (collectively referred to as “Plans”) have “closed panels.” This means that the Plan tells the DME supplier: “We have enough DME suppliers on our provider/supplier panel. We don’t need you. Therefore, we will not sign a TPP Contract with you.” The end result for the DME supplier is that if a Medicare Covered Life or Medicaid Covered Life (collectively referred to as “patient”) wants to obtain a product from the DME supplier, and if the patient is covered by a TPP Contract for which the DME supplier is not on the panel, then the DME supplier must turn the patient away…unless, of course, the patient is willing to pay cash to the DME supplier without getting reimbursed by the Plan.

As a “workaround,” the DME supplier may want to enter into an arrangement with another DME supplier to gain access to the other DME supplier’s TPP Contract. For example, the two suppliers may want to do the following:

• Supplier A is a party to TPP Contract 1. Supplier B is not a party to TPP Contract 1.
• When a patient under TPP Contract 1 wants to purchase a product from Supplier B, then Supplier B will take care of the patient.
• Supplier B will (i) handle intake, assessment and coordination of care (collectively referred to as “intake”), (ii) deliver and set up the equipment, and (iii) handle the subsequent maintenance and repairs.
• Supplier A will submit a claim under TPP Contract 1. Upon receipt of payment under TPP Contract 1, Supplier A will (i) pay a large percentage (e.g., 92%) to Supplier B and (ii) retain the balance.

The problem with this arrangement is that it likely violates the federal anti-kickback statute (“Federal AKS”), the federal False Claims Act (“Federal FCA”), and their state counterparts. Here are how the Federal AKS and Federal FCA may come into the picture:

• Federal AKS – This statute makes it a felony for (i) Supplier A to give anything of value in exchange for receiving the referral of a patient covered by a government health care program and (ii) Supplier B to receive anything of value in exchange for referring (or arranging for the referral of) a patient covered by a government health care program. In the eyes of the Plan, the “supplier” is Supplier A: it is the party to the TPP Contract and it is billing and collecting under the TPP Contract. The kickback issue arises because (i) Supplier B is referring or arranging for the referral of the patient to Supplier A and (ii) Supplier A is, in turn, remitting e.g., 92% of the payment to Supplier B.
• Federal FCA – This statute prohibits Supplier A from submitting “false claims”…and Supplier B cannot conspire (or collaborate) with Supplier A for the submission of false claims. When Supplier A submits a claim to the Plan, Supplier A is representing that it is the supplier…that it took care of the patient and, therefore, deserves to be paid. In fact, this is not the case. The true supplier is Supplier B; it is the entity that does all of the work. All Supplier A does is submit a claim under the TPP Contract. Hence, the claim submitted is a false claim. And Supplier B will have collaborated with Supplier A in the submission of the false claim.

So now that we have talked about what Supplier A and Supplier B cannot do, let us talk about what they can do. If Supplier A and Supplier B desire to enter into a Subcontract Agreement (“SA”), then here are the steps they should take:

• Review the TPP Contract – The parties need to review Supplier A’s TPP Contract to determine if it addresses subcontract arrangements. The TPP Contract may say nothing about whether or not Supplier A can subcontract out its responsibilities to Supplier B. If the TPP Contract is silent, then in order to avoid problems under the Federal AKS and Federal FCA, the SA should be structured as set out hereafter. On the other end of the spectrum, the TPP Contract may prohibit Supplier A from subcontracting out its services. The TPP Contract may very well take the middle road and provide for one of the following: (i) Supplier A can subcontract out its services but must first notify the Plan of who the subcontractor will be; (ii) Supplier A can subcontract out not more than e.g., 20% of its services; (iii) Supplier A can subcontract out its services only if the Plan approves the subcontractor in advance; or (iv) Supplier A can only subcontract out specifically delineated services.
• Supplier A Must Retain a Level of Operational Responsibilities and Financial Risk – So that it can credibly assert that it is the “supplier,” Supplier A must have a level of operational responsibilities and financial risk. For example, Supplier A needs to handle the intake. This means that Supplier A must determine if the patient qualifies for coverage under the TPP Contract. Supplier B can gather information and documents and forward them to Supplier A…but it is Supplier A, not Supplier B, that must determine if the patient is to receive the product. If the patient later has a maintenance/repair need, then he needs to call Supplier A; Supplier A can, in turn, direct Supplier B to handle the repair/maintenance. Further, Supplier A will be obligated to pay Supplier B regardless of whether or not the Plan pays Supplier A. In other words, Supplier A’s obligation to pay Supplier B for its services is absolute.
• Inventory – Under the SA, Supplier B will deliver the product to the patient “for and on behalf of Supplier A.” At the time of delivery, title to the product needs to be in Supplier A’s name. This can be accomplished in one of several ways: (i) Supplier A can purchase the inventory, take possession of it, and deliver it to Supplier B; (ii) Supplier A can purchase the inventory, not take possession of it, and direct the manufacturer to deliver the inventory (on behalf of Supplier A) to Supplier B; (iii) Supplier B can purchase the inventory; on a regular basis, Supplier A can purchase inventory from Supplier B and Supplier B can segregate Supplier A’s inventory in Supplier B’s warehouse; or (iv) Supplier B can purchase the inventory; when Supplier B is about to deliver the product to the patient’s home, then title will transfer to Supplier A and Supplier A will have the obligation to purchase the product from Supplier B.
• Supplier B’s Services – The SA can provide that Supplier B’s services include the following: (i) deliver the product to the patient, educate the patient on how to use the product, and set the product up for the patient; (ii) obtain information and documents from the patient and his physician and transmit them to Supplier A so that Supplier A can conduct the intake; and (iii) at the direction of Supplier A, provide maintenance and repair services to the patient. The labels on the products delivered to the patients need to reflect Supplier A.
• Flow of Money – At the end of the day, Supplier B will be referring (or arranging for the referral of) patients to Supplier A…and Supplier A will be paying money to Supplier B. The most conservative course of action is as follows: (i) if Supplier A purchases inventory from Supplier B, then the purchase price must be fair market value (“FMV”) and must be pursuant to a price list attached to the SA; and (ii) Supplier A pays fixed annual compensation (e.g., $48,000 over the next 12 months) to Supplier B in which such compensation is the FMV equivalent of Supplier B’s services. If fixed annual compensation is not feasible, then a less conservative course of action is as follows: (i) if Supplier A purchases inventory from Supplier B, then the purchase price must be FMV and must be pursuant to a price list attached to the SA; and (ii) Supplier A pays a fixed fee per each unit of service provided by Supplier B, such compensation is the FMV equivalent of Supplier B’s services, and the compensation is set out in a fee schedule attached to the SA. If the parties want to strengthen their position that the compensation paid to Supplier B is FMV, then the parties can order an FMV evaluation and report from an independent third party.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or [email protected].