AMARILLO, TX – Under a typical Medical Director arrangement, a physician will provide services to the DME supplier for which the supplier will compensate the physician. If the physician does not directly/indirectly refer patients to the supplier who are covered by a federal health care program (“FHCP”), there is not an issue under the federal anti-kickback statute (“federal AKS”) and federal physician self-referral statute (“Stark”). On the other hand, if the physician does refer FHCP patients to the supplier, it is important that the arrangement not violate these two federal statutes.

The federal AKS states that a DME supplier cannot give “anything of value” to a person/entity in exchange for the person/entity (i) referring FHCP patients to the supplier, (ii) arranging for the referral of FHCP patients to the supplier, or (iii) recommending the purchase of a service/product reimbursable by an FHCP. The federal AKS is a criminal statute. Because of the breadth of the statute, the Office of Inspector General (“OIG”) has published a number of “safe harbors.” If an arrangement complies with a safe harbor, then as a matter of law the federal AKS is not violated. If an arrangement does not comply with a safe harbor, it does not mean that the arrangement violates the federal AKS. Rather, it means that the parties to the arrangement need to carefully analyze the arrangement in light of the language of the federal AKS, court decisions, and OIG guidance.

The safe harbor applicable to a Medical Director Agreement (“MDA”) is the Personal Services and Management Contracts (“PSMC”) safe harbor. It contains a number of elements, including the following:

• The MDA must be in writing and have a term of at least one year.
• The Medical Director must provide legitimate services, not “made up” services.
• The methodology for calculating the compensation to the Medical Director must be set one year in advance.
• The compensation cannot take into account the anticipated number of referrals to the supplier from the Medical Director.
• The compensation must be the fair market value equivalent of the Medical Director’s services.

Stark states that if a physician has a financial relationship with a DME supplier, the physician cannot refer Medicare or Medicaid patients to the supplier unless one of the exceptions to Stark is met. A “financial relationship” includes (i) the DME supplier compensating the physician for services and (ii) the physician having an ownership interest in the supplier. The applicable Stark exception for an MDA is the Personal Services (“PS”) exception. Its requirements are similar to the PSMC safe harbor to the federal AKS.

Every state has an anti-kickback statute (“state AKS”) that is similar to the federal AKS. Most states have a physician self-referral statute that is similar to Stark (“Mini Stark”). A number of state AKSs incorporate the federal safe harbors. Mini Starks normally have their own exceptions that are similar to Stark exceptions.

• If an MDA complies with the PSMC safe harbor, it is likely that the MDA will not violate the state AKS…even if the state AKS has not incorporated the federal safe harbors. The DME supplier’s attorney will need to confirm this.
• If an MDA complies with a Stark exception, it is likely that the MDA will not violate a Mini Stark…even if the Mini Stark does not have a similar exception. The DME supplier’s attorney will need to confirm this.

With the above guidelines in mind, here is how a DME supplier can enter into a legally compliant MDA with a physician.

• The first question the supplier must ask is whether it really needs a Medical Director. If the answer is “no,” it likely means that the Medical Director’s services will be “made up.” This, in turn, will take the arrangement outside of the PSMC safe harbor and PS exception.
• The physician and DME supplier will sign an MDA with a term of at least one year. The MDA will list the services the Medical Director will provide.
• The methodology for compensating the Medical Director will be fixed one year in advance. For example, assume that the physician’s time is worth $300 per hour. Assume that the physician, in his capacity as a Medical Director, will expend five hours per month on behalf of the DME supplier. The MDA will say that the supplier will pay the Medical Director exactly $1500 per month, or $18,000 per year.
• An alternative way to pay the physician is by the hour. The physician will submit monthly time reports to the supplier that (i) set out the hours the physician expended during the month and (ii) describe the services the physician provided during the month.
• Another alternative, that can be riskier from a compliance standpoint, is for the DME supplier to pay the Medical Director a fixed dollar amount for each type of service rendered during the month. If the parties use this compensation methodology, they need to be careful. It is important that the compensation not be tied to the number of referrals from the Medical Director to the DME supplier. For obvious reasons, the supplier cannot pay percentage compensation to the Medical Director.

A rule that all DME suppliers should follow is this: “If your brain tells you one thing, and if your stomach tells you something else, ignore your brain and trust your stomach.” Our brain can convince us that a legally noncompliant action is permissible. However, our stomach never lies. An example of this rule is the following:

• A DME supplier has one location and 18 employees. The supplier enters into an MDA with “Dr. Jones.” The supplier likes the MDA so much that it wants to enter into the same MDA with “Dr. Brown” and “Dr. Johnson.”
• The supplier’s brain tells it that as long as the MDAs comply with the PSMC safe harbor and PS exception, the MDAs are legally compliant.
• However, the supplier’s stomach tells it that the supplier only needs one Medical Director…and that the other two MDAs are merely subterfuges designed to funnel money to referral sources. Because the latter two MDAs are unnecessary, they will fall outside the PSMC safe harbor and PS exception.

One more thing: No matter how you look at a Medical Director arrangement, the compensation to the Medical Director needs to be modest. Normally, the Medical Director will have his own practice and, therefore, will have limited time to serve as a Medical Director for the DME supplier. If the compensation is not modest, it can be construed to be rewarding the Medical Director for referrals.

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. 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].

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