AMARILLO, TX – Hospitals are looking for ways to reduce the number of “frequent flyers” (i.e. Medicare patient who is readmitted within 30 days following discharge). One way for a hospital to accomplish this is for it to work with a DME supplier. When a patient is discharged from the hospital with a physician’s order for DME, the DME supplier that furnishes the item to the patient will have the ability to remain in contact with the patient and/or his or her caregiver.

This will allow the DME supplier to communicate with the patient/caregiver regarding steps the patient should take to reduce the chance of having to be readmitted to the hospital. These steps include (i) taking medication as prescribed, (ii) seeing the patient’s physician as scheduled, (iii) using the DME as prescribed, and (iv) eating properly and remaining hydrated.

This article addresses the ways that a hospital and a DME supplier can work together. The article will refer to a fictitious (i) hospital as “Rocky Mountain Hospital” (or “RMH”) and (ii) DME supplier as “Wasatch Mountain Medical Equipment, Inc. (or “WMME”).

WMME Purchases Equity Interest in Existing DME Supplier Owned by RMH
Assume that RMH owns a subsidiary corporation (that has its own Tax ID #) called “Rocky Mountain Medical Equipment, Inc.” (or “RMME”). Assume that WMME purchases an equity interest (e.g., 70%) of RMME. As a result, (i) WMME will own 70% of RMME, (ii) RMH will owns 30% of RMME, and (iii) RMH will refer patients to RMME. The 70%-30% split is just an example. The ownership percentages can be whatever the parties agree on.

It is important that the arrangement not violate the federal anti-kickback statute (“AKS”). The AKS comes into play because (i) RMH will refer patients to RMME who are covered by a federal health care program (“FHCP”) and (ii) RMH will receive 30% of the profits of RMME.

• The AKS has a number of “safe harbors.” If an arrangement meets all of the requirements of a safe harbor, as a matter of law 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, applicable case law (i.e., court decisions), and guidance from the Office of Inspector General (“OIG”).
• Ideally, the arrangement will comply with the Small Investment Interest safe harbor to the AKS. However, it is unlikely that the arrangement will meet all of the elements of this safe harbor. This is because of the two “60-40 tests” contained in the safe harbor. These tests state that (i) not more than 40% of RMME’s business can come from referrals from one of the owners of RMME and (ii) not more than 40% of the owners of RMME can transact business with RMME.
• If the safe harbor cannot be met, RMH and WMME need to look at other OIG guidance. The parties need to follow the guidance set out in the OIG’s 1989 Special Fraud Alert (“SFA”) entitled “Joint Ventures.” Among other requirements:
• WMME must pay fair market value for its equity interest in RMME.
• After WMME purchases the 70%, if RMME needs future capital infusions, (i) WMME must pay 70% of the capital infusion and (ii) RMH must pay 30% of the capital infusion.
• RMH will receive 30% of RMME’s profits regardless of how many…or how few…patients RMH refers to RMME.
• RMH will have no obligation to refer patients to RMME.
• RMH cannot be required to disgorge its 30% interest because it does not send an “acceptable” number of patient referrals to RMME.
• RMH should insure patient choice. That is, when a patient is about to be discharged from RMH, RMH should explain to the patient that he/she has the right to choose his/her DME supplier.
• RMME should aggressively market to referral sources other than RMH. It is important that the percent of RMME’s business, resulting from patient referrals by RMH, declines as a result of RMME’s marketing efforts.
• WMME can provide services to RMME. These services can include (i) IT, (ii) HR, (iii) billing, and (iv) after hours delivery of, and repairs to, equipment. RMME must pay fair market value (“FMV”) compensation to WMME for its services. As WMME provides services to RMME, it is important that the parties comply with the guidance set out in the OIG’s April 2003 Special Advisory Bulletin (“SAB”) entitled “Contractual Joint Ventures.” Essentially, the SAB says that while WMME can provide services to RMME, WMME cannot run RMME on a turnkey basis. Notwithstanding WMME’s services, RMME must be an independent business with its own employees. RMME must have operational responsibilities and financial risk.

WMME and RMH Establish a New Legal Entity
As will be discussed below, because of the moratorium against issuing new Medicare Part B supplier numbers (“PTANs”), this arrangement is not feasible at this time.  

Assume that RMME does not exist. RMH and WMME will establish a new legal entity (“Newco”) that has its own Tax ID #. Assume that the ownership breakdown is 70% (WMME) and 30% (RMH). [As previously noted, the ownership breakdown can be whatever the parties decide.].

• Newco will (i) obtain state DME licensure, (ii) obtain a surety bond, (iii) obtain accreditation…and (iv) if the moratorium did not exist, Newco would obtain a PTAN. Following obtaining a PTAN, WMME would obtain a Medicaid provider number. Similar to a PTAN, a Medicaid provider number allows Newco to bill the state Medicaid program.
• Newco will obtain commercial insurance contracts, including Medicare Advantage contracts and Medicaid Managed Care contracts. For the purposes of this article, the insurers will be referred to as “third-party payors” (or “TPPs”). Most TPPs will not offer a contract unless the DME supplier has a PTAN. Because of the moratorium, Newco will not be able to obtain a PTAN.
• If the moratorium is lifted and WMME and RMH proceed with establishing Newco, the above discussion (pertaining to WMME purchasing an equity interest in RMME) applies. The arrangement needs to be set up in a way that results in low risk of violating the AKS.
• For as long as the moratorium remains in place, one way that Newco can secure a PTAN is for it to purchase the equity (stock purchase) of a DME supplier (“XYZ Medical Equipment, Inc.” or “XYZ”). As a general rule, the moratorium does not apply to stock purchases. For example, if Newco purchases 100% of the stock of XYZ, XYZ’s PTAN will remain place with XYZ after the stock acquisition. Having said this, it will be important for Newco to be aware of the recently published “36 Month Rule.” XYZ will have to obtain a new PTAN if (i) it has been in existence for less than 36 months or (ii) if it has been in existence for more than 36 months, there has been a change in majority ownership within the preceding 36 months.

RMH Purchases an Equity Interest in WMME
Assume that RMME does not exist. RMH can purchase an equity interest (e.g., 30%) in WMME. The above discussion (pertaining to WMME purchasing an equity interest in RMME) applies. Safeguards must be implemented to reduce the risk of violating the AKS.

WMME Leases Space at the RMH Facility
As will be discussed below, because of the moratorium, this arrangement is likely not feasible.

• WMME can lease space from RMH and set up a DME operation in the leased space.
• Because WMME will pay money (rent) to a referral source (RMH), the AKS is implicated.
• To avoid violating the AKS, the lease arrangement needs to comply with the Space Rental safe harbor to the AKS. Among other requirements, (i) the parties need to sign a written lease agreement with a term of at least one year, (ii) the rent must be calculated one year in advance, and (iii) the rent must be FMV.
• In order for WMME to have a DME operation in the leased space, WMME must obtain a PTAN for the space. Because of the moratorium, WMME will be unable to do so.

WMME Manages RMME
Assume that (i) RMH owns 100% of RMME and (ii) WMME does not purchase an equity interest in RMME. WMME and RMH can enter into a Management Services Agreement in which WMME provides a number of services to RMME. To comply with the SAB, while WMME can provide multiple services to RMME, RMME must have operational responsibilities and financial risk. WMME cannot run RMME on a turnkey basis.

Loan Closet
A loan closet is also known as a “consignment arrangement” and a “stock and bill” arrangement. WMME or RMME will enter into a written Equipment Placement Agreement (“EPA”) with RMH. Pursuant to the EPA:

• WMME/RMME will store products at RMH.
• When a patient is about to be discharged…and if the physician has prescribed DME for the patient…the RMH employee will pull the DME out of the “closet” and send the patient home with the DME.
• RMH will collect the documentation showing the physician’s order and proof of delivery. RMH will transmit the documentation to WMME/RMME.
• WMME/RMME will undertake its normal intake process. If WMME/RMME determines that the patient qualifies for TPP coverage, WMME/RMME will (i) take over service of the patient and (ii) bill the TPP for the item that the patient took home with him/her from the hospital.

Preferred Provider Agreement (“PPA”)
WMME and RMH will execute a PPA. It will state that subject to patient choice, when a patient is about to be discharged with a physician’s order for DME, RMH will recommend to the patient that he/she select WMME.

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].