AMARILLO, TX – Obstructive sleep apnea (“OSA”) is a chronic condition that affects adults of all ages. All signs point to a continued increase in the number of OSA patients.

Sleep labs conduct OSA tests on patients. These tests fall into two categories: (i) overnight attended polysomnographies (i.e., the patient spends the night at a “brick and mortar” facility) and (ii) home sleep tests (“HSTs”). The sleep lab will transmit the test data to a physician who specializes in sleep. The sleep physician will interpret the test data. If the interpretation indicates that the patient has OSA, the patient’s treating physician will likely order therapeutic treatment for the patient.

The DME supplier is instrumental in providing OSA therapy. The supplier will (i) provide the CPAP and disposables and (ii) bill the third-party payor (e.g., traditional Medicare, Medicare Advantage, and employer – sponsored group health insurance).

It is logical for a DME supplier and a sleep lab to work together in the provision of therapy to patients who test positive for OSA. For example, the supplier and sleep lab may enter into a loan closet arrangement, also known as a consignment or stock and bill arrangement. In such an arrangement, the DME supplier will store CPAPs and disposables at the sleep lab facility. If a patient tests positive for OSA, and if the treating physician orders a CPAP for the patient, and if the patient chooses to obtain a CPAP from the DME supplier that has inventory stored at the sleep lab facility, the sleep lab employee will pull the CPAP/disposables out of the “closet” and hand them to the patient.

The sleep lab employee will spend time with the patient showing him/her how to (i) use the CPAP, (ii) clean the disposables, and (iii) change out the disposables. The DME supplier may want to compensate the sleep lab for the education/set-up services. If the DME supplier is compensating the sleep lab for such services, and if at least some of the patients are covered by Medicare, the supplier needs to be aware of the federal laws governing such an arrangement.

Applicable Law

CPAP Payment Prohibition
The CPAP Payment Prohibition (“Prohibition”), 42 C.F.R. § 424.57, states: “No Medicare payment will be made to the supplier of a CPAP device if that supplier, or its affiliate, is directly or indirectly the provider of the sleep test used to diagnose the beneficiary with obstructive sleep apnea. This prohibition does not apply if the sleep test is an attended facility-based polysomnogram.” An “affiliate” is a “a person or organization that is related to another person or organization through a compensation arrangement or ownership.” A “provider of the sleep test” is an “individual or entity that directly or indirectly administers and/or interprets the sleep test and/or furnishes the sleep test device used to administer the sleep test.” Although the law is not entirely clear on this point, the safest course of action is to construe the Prohibition as being applicable to both traditional Medicare patients and Medicare Advantage patients.

The Prohibition’s purpose is to ensure that the CPAP device is medically necessary by preventing the CPAP supplier’s financial interest from creeping into the diagnosis and treatment. CMS explained that it “believe[d] that Medicare beneficiaries and the Medicare program are vulnerable if the provider of a diagnostic test has a financial interest in the outcome of the test itself. This creates the incentive to test more frequently or less frequently than is medically necessary and to interpret a test result with a bias that favors self-interest.” 73 Fed. Reg. 69856 (Nov. 19, 2008). In the final rule, CMS acknowledged that the Payment Prohibition was implemented to account for close cases. 73 Fed. Reg. 69857 (noting “that the provider of a sleep test will have a bias to interpret an inconclusive test as positive if that provider has a financial interest in the payment for the CPAP device.”).

Surprisingly, most DME suppliers are unaware of the Prohibition. It is a regulation that is not widely publicized. And yet, violation of the Prohibition has serious consequences. It is the position of the Department of Justice that if Medicare claims arise out an arrangement that violates the Prohibition, such claims are “false claims” as defined by the federal False Claims Act (“FCA”). The penalties under the FCA can be massive.

Whistleblower (qui tam) lawsuits are based on the FCA. There is a subset of attorneys who specialize in filing whistleblower lawsuits against health care providers, including DME suppliers. There are examples of whistleblower lawsuits against DME suppliers being based on violation of the Prohibition. That is, the qui tam attorney alleges that Medicare claims submitted by the supplier are “false” because they arise out of the violation of the Prohibition.

The message for the DME supplier that compensates a sleep lab for patient education and set-up services is that the supplier cannot accept any Medicare/Medicare Advantage patients from the sleep lab who received HSTs from the sleep lab. 

Federal Anti-Kickback Statute
42 U.S.C. § 1320a-7b, commonly known as the federal anti-kickback statute (“AKS”), states that it is a felony for a person or entity to knowingly or willfully offer, pay, solicit or receive any remuneration to induce a person/entity to refer a person for the furnishing or arranging for the furnishing of any item for which payment may be made under a federal health care program (“FHCP”), or the purchase or lease or the recommendation of the purchase or lease of any item for which payment may be made under a FHCP.

AKS Safe Harbors
Because of the breadth of the AKS, the Office of Inspector General (“OIG”) has published a number of “safe harbors.” If an arrangement meets all of the elements of a safe harbor, the arrangement does not violate the AKS. If an arrangement does not meet all of the elements of a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means that the arrangement must be carefully analyzed in light of the wording of the AKS, court decisions, and other published guidance.

When working with a sleep lab, an important safe harbor is the Personal Services and Management Contracts and Outcomes-Based Payment Arrangements (“PSMC”) safe harbor. It states that illegal remuneration (as defined by the AKS) does not include payment made to an independent contractor as long as a number of standards are met, including the following: (i) the agreement must be in writing and signed by the parties; (ii) the agreement must specify the services to be provided; (iii) the term of the agreement is not less than one year; (iv) the methodology for determining the compensation must be set in advance, be consistent with fair market value (“FMV”) in arm’s-length transactions, and must not take into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under a FHCP; (v) the services performed must not involve a business arrangement that violates any state or federal law; and (vi) the aggregate services contracted for do not exceed those that are reasonably necessary to accomplish the commercially reasonable business purpose of the agreement.

Federal Physician Self-Referral Statute
42 U.S.C.S. § 1395nn, commonly known as the federal physician self-referral statute (“Stark”), is a civil statute. It states that a physician cannot refer a Medicare/Medicaid patient to an entity for designated health services (“DHS”), in which the physician has a financial relationship (ownership or compensation) with the entity, unless an exception applies. One of the Stark exceptions is entitled the “Personal Services” (“PS”) exception. It is similar to the PSMC safe harbor to the AKS. Stark becomes relevant to an arrangement between a DME supplier and a sleep lab when the sleep lab is owned by a physician who refers Medicare/Medicaid patients to the sleep lab for sleep tests.

False Claims Act
31 U.S.C. § 3729, commonly known as the federal False Claims Act (“FCA”) provides that any person/entity that knowingly submits, or causes to submit, false claims to the government is liable for three times the government’s damages plus a penalty. It is the position of the Department of Justice (“DOJ”) that if a Medicare claim arises out of a kickback arrangement, or arises from violating the Prohibition, then the claim is a false claim.

Jeffrey S. Baird, JD, is Chairman of the Health Care Group at Brown & Fortunato, PC, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers and other health care providers throughout the United States. Mr. 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].

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AAHOMECARE’S EDUCATIONAL WEBINAR

How Compliance Issues Affect a Company’s Valuation

Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Wayne van Halem, The van Halem Group

Tuesday, April 22, 2025

1:30-2:30 p.m. CENTRAL TIME
Every DME supplier must have a functioning compliance program. Such a program serves three functions. First, the compliance program establishes guardrails that, if followed, will result in the avoidance of serious legal problems. In a sense, the compliance officer is the “canary in the mine shaft.” He/she does not need to be an expert on compliance matters…but needs to know enough to recognize a potential problem. Second, if a problem does arise, a compliance program should be able to solve the problem before it turns into a recoupment, whistleblower action or government investigation. Third…and this is the focus of this program…a functioning compliance program will help the DME supplier maintain an accurate valuation. If a supplier wants to sell, or if it wants to secure a bank loan, the most important question is: “What is the DME supplier worth?” For example, a standard formulation for calculating a purchase price for a supplier is “3 to 5 x EBITDA.” EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” Essentially, EBITDA is the DME supplier’s net profit. While the 3 to 5 x EBITDA is standard, the multiple can be higher (e.g., 7 to 8 x EBITDA) if the supplier is unique enough…and successful enough…to justify the higher multiple. If the DME supplier’s EBITDA is built on a false pretense (e.g., a business model that is not legally compliant), in a sale the EBITDA will be discounted…meaning that the seller will receive less than what it anticipated. Or the purchaser may simply walk away. This program will discuss (i) how a compliance program can be drafted and (ii) how a compliance program can be implemented in order to achieve three goals discussed above – and especially the goal of maintaining the supplier’s valuation.

Register for How Compliance Issues Affect a Company’s Valuation on Tuesday, April 22, 2025, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. and Wayne van Halem.

Member Benefit
Non-Members: $129