by Jeffrey S. Baird, Esq.
AMARILLO, TX – Sleep labs conduct obstructive sleep apnea (“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”). With an HST, the patient uses an HST device in his/her home.
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 a CPAP for the patient.
This is where DME suppliers come in. The DME supplier will (i) provide the CPAP and disposables and (ii) bill the third-party payor (e.g., Medicare, commercial insurers).
It is not uncommon for a DME supplier and a sleep lab to work together in the provision of therapeutic equipment to patients who test positive for OSA. For example, the supplier and sleep lab may enter into a loan closet arrangement. Such an arrangement is 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.
In addition to handing the CPAP/disposables to the patient, a sleep lab employee can 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 education/set-up 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. This article focuses on one of the laws: the Medicare CPAP payment Prohibition.
Medicare CPAP Payment Prohibition
The Medicare 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.”).
Key Points
In reviewing the Prohibition, DME suppliers need to be aware of the following:
- There is case law suggesting that if a DME supplier submits a Medicare claim, in which such claim arises out of an arrangement that violates the Prohibition, the claim becomes a false claim under the federal False Claims Act (“FCA”). This becomes particularly relevant to DME suppliers in the context of whistleblower lawsuits. If a person (e.g., an employee of a DME supplier or sleep lab) becomes aware of an arrangement that violates the Prohibition, the person can become a “whistleblower” and sue the DME supplier under the FCA. The suit will be in the name of the whistleblower…and in the name of the United States.
- Assume that XYZ Medical Equipment, Inc. has a successful CPAP/supply business. Assume that XYZ has a healthy $1.5 million EBIDTA. Assume that XYZ is negotiating with ABC Private Equity for ABC to purchase the stock of XYZ at 5 x EBITDA. Assume that during due diligence, ABC determines that a big portion of XYZ’s gross revenue arises out of an arrangement that violates the Prohibition. ABC will either (i) walk away or (ii) substantially reduce XYZ’s EBITDA and insist that a large portion of the purchase price be held back until sometime after closing.
- A classic example of an arrangement that violates the Prohibition is as follows:
- XYZ has a “loan closet” arrangement with a sleep lab.
- A sleep lab employee spends about 45 minutes with each patient who chooses to go home with an XYZ CPAP. During that approximate 45 minute period, the sleep lab employee shows the patient how to (i) use the CPAP, (ii) clean the disposables and (iii) replace the disposables.
- XYZ compensates the sleep lab for the time spent by its employees in educating patients.
- The sleep tests conducted by the sleep lab are both (i) overnight attended polysomnographies and (ii) HSTs.
- The sleep lab refers to XYZ all patients who choose to obtain their CPAPs/disposables from the loan closet. These patients include Medicare patients.
- Because XYZ is compensating the sleep lab, the two entities are “affiliates” as defined by the Prohibition. Because XYZ’s affiliate (the sleep lab) is the “provider of the HST,” XYZ’s submission of claims to Medicare for patients qualified by the HSTs violates the Prohibition.
- Many hospitals own sleep labs. Some hospitals have expressed their opinion that the Prohibition does not apply to hospital-owned sleep labs. Their rationale is that because of the inherent compliance guardrails hospitals have in place, the Prohibition does not apply. Such an opinion is incorrect. CMS and the OIG have made it clear that the Prohibition applies to all sleep labs, regardless of their ownership.
- The Prohibition has nothing to do with the federal anti-kickback statute (“AKS”) and federal physician self-referral statute (“Stark”). If an arrangement complies with a safe harbor to the AKS…and complies with an exception to Stark…such compliance does not relieve the DME supplier from liability under the Prohibition.
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
Loan Closets, Employee Liaisons, and Other Arrangements with Referral Sources
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Noel Neil, ACU-Serve
Tuesday, November 10, 2026
1:30-2:30 p.m. CENTRAL TIME
In the non-health care world, businesses (e.g., auto parts stores) have very few restrictions regarding their relationships with referral sources. By contrast, the health care world is a totally different animal. Because a large portion of a DME supplier’s revenue is derived directly (or indirectly) from tax dollars, there are myriad federal and state laws designed to protect the tax dollars from fraud. Many of these laws focus on relationships health care providers have with physicians, hospitals, and other referral sources. This program will discuss such relationships between DME suppliers and referral sources. These arrangements include (i) loan closets (also known as consignment closets and stock and bill arrangements), (ii) employee liaisons, (iii) Medical Director Agreements, (iv) physician advisory boards, (v) preferred provider agreements, (vi) patient service agreements, (vii) marketing service arrangements, and (viii) subcontract agreements. The program will discuss how these relationships can be legally entered into…and pitfalls that need to be avoided.
Register for Loan Closets, Employee Liaisons, and Other Arrangements with Referral Sources on Tuesday, November 10, 2026, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. and Noel Neil.
WELLSKY WEBINAR
Competitive Bidding: How to Prepare and Submit Your Bid
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Cara C. Bachenheimer, Esq., Brown & Fortunato
Wednesday, November 11, 2026
12 p.m. CENTRAL TIME
The next round of the Centers for Medicare & Medicaid Services (CMS) competitive bidding is moving forward. For DME and HME suppliers considering a bid, now is the time to study the requirements, assess the opportunity, and prepare. Bidders must hold DME licenses across all 50 states and U.S. territories, and CMS is expected to award only four to eight contracts per product category — so the bar for a winning submission is high.
By the end of this webinar, participants will be able to:
- Identify the key steps involved in preparing and submitting a competitive bid
- Use AAHomecare’s Bid Calculator to support their bid submission
- Understand the licensing requirements bidders must meet across all 50 states and U.S. territories
Register for Competitive Bidding: Steps to Submit Your Bid on Wednesday, November 11, 2026, 12 p.m. CT, with Jeffrey S. Baird, Esq., and Cara C. Bachenheimer, Esq.
