AMARILLO, TX – The demand for DME will continue to increase well into the future. This is due to a number of factors, including (i) the aging of the U.S. population…coupled with the increase in chronic medical conditions and (ii) the cost savings of patients being treated in the home as opposed to being treated in hospitals and other facilities.

In meeting this demand, DME suppliers face a number of challenges, including the following:

• Under the Trump II administration, CMS appears to be focused on reducing the number of DME suppliers…and reducing reimbursement to suppliers.
• The movement of (i) traditional Medicare beneficiaries to Medicare Advantage Plans (“MAPs”) and (ii) Medicaid patients to Medicaid Managed Care Plans (“MMCPs”).
• The unrealistic reimbursement offered by many MAPs and MMCPs.

To compete in this environment, DME suppliers need to be creative and “think outside the box.” This includes expansion and diversification. This article addresses expansion and diversification through acquisitions, joint ventures and subcontracting.

Acquisitions Outside of Competitive Bidding
In a stock acquisition, the purchaser buys the stock of a corporation or the membership interest of a limited liability company (“LLC”). The purchaser can buy 100%…or less than 100%…of the stock/membership interest. As a general rule, the purchaser does not assume the liabilities of the acquired company. However, following the closing, the acquired company’s liabilities remain with it. As a general rule, the acquired company’s PTAN, Medicaid provider number, accreditation, surety bond, state DME licenses, and commercial insurance contracts remain intact. Change of ownership (“CHOW”) notices will need to be given to governmental agencies/contractors, commercial insurers, and others.

In an asset acquisition, the purchaser (usually an existing corporation/LLC) purchases the assets of a DME supplier. As a general rule, The purchaser does not assume the liabilities of the selling company. The selling company’s Tax ID #, PTAN, Medicaid provider number, state DME license, surety bond, accreditation, and commercial insurance contracts do not transfer to the purchaser. The purchaser will need to secure these numbers, contracts, licenses, etc., on its own.

Acquisitions Within Competitive Bidding
An unsuccessful bidder can purchase 100% of the stock/membership interest of a successful bidder. The acquiring company can refer competitive bid patients to its new subsidiary. If the current competitive bidding program (“Current CBP”) follows the guidelines of the previous CBP (“Previous CBP”), the acquired company can ask CMS to add its parent company to the acquired company’s competitive bid contract.

An unsuccessful bidder can purchase 5% or more of a successful bidder. If the Current CBP follows the guidelines of the Previous CBP, the successful bidder can ask CMS to add the unsuccessful bidder to the successful bidder’s competitive bid contract. The 5% or more owner of the successful bidder can bill CMS directly for products it provides to patients covered by the competitive bid contract. The 5% or more owner does not have to “bill through” the successful bidder.

Joint Ventures
A joint venture occurs when two or more people or entities own something together. The following are examples:

• An independent DME supplier and a local hospital can form, and jointly own, a new legal entity (“Newco”). Newco will become a DME supplier. The hospital can refer patients to Newco. This type of joint venture needs to comply with (i) the OIG’s 1989 Special Fraud Alert (“Joint Ventures”) and (ii) the OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”).
• An independent DME supplier can purchase an equity interest in an existing DME supplier that is a separate legal entity owned by a hospital. The hospital can continue to refer to the supplier. The above-mentioned OIG guidance needs to be followed.
• An independent DME supplier and a long-term care (“LTC”) facility can form, and jointly own, a new legal entity (“Newco”). Newco will become a DME supplier. The LTC facility can refer patients to Newco. The above-mentioned OIG guidance needs to be followed.

Subcontracting Outside Competitive Bidding
Approximately 54% of Medicare beneficiaries are covered by MAPs and over 70% of Medicaid beneficiaries are covered by MMCPs. These plans offer managed care contracts (“MCCs”) to DME suppliers. A growing problem is for plans to decline to offer an MCC to a supplier because the “DME panel is closed.” The DME supplier that is not offered the MCC (“non-MCC supplier”) needs to find a way to take care of its patients covered by the plan. Equally as important, the non-MCC supplier needs to keep its referring physicians happy. The Physicians expect “one stop shopping.”

The non-MCC supplier can enter into a Subcontract Agreement (“SA”) with a DME supplier that does have the MCC (“MCC supplier”). The non-MCC supplier will refer the MCC patients to the MCC supplier. The MCC supplier will conduct intake, assessment, and coordination of care.

At the MCC supplier’s direction, the non-MCC supplier will (i) deliver the products to the MCC patients and (ii) provide education and training. The MCC supplier will pay (i) commercially reasonable prices to the non-MCC supplier for the products and (ii) fair market value compensation to the non-MCC supplier for its services.

The SA needs to comply with, or substantially comply with, the Personal Services and Management Contracts safe harbor to the federal anti-kickback statute. Before entering into the SA, the MCC supplier needs to review its MCC to determine if there is a provision that addresses subcontracting. The MCC will likely say that the MCC supplier must notify the insurer in advance before the MCC supplier enters into an SA.

Subcontracting Within Competitive Bidding
Subcontracting within competitive bidding is essentially the same as subcontracting outside of competitive bidding…with the following exception: If the Current CBP follows the guidelines of the Previous CBP, the successful bidder will need to notify CMS of the subcontract arrangement. 

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].