AMARILLO, TX – An increasing number of patients are being diagnosed with obstructive sleep apnea (“OSA”). As a result, we are seeing an expansion of sleep labs, but such expansion is focused on home sleep tests (“HSTs”), as opposed to overnight attended polysomnographies. The push for HSTs is driven by economics. Simply speaking, HSTs are less expensive to administer, and are less intrusive, than attended overnight tests.
Sleep labs are closely tied to DME suppliers in the sense that if a patient tests positive for OSA, then he will need sleep therapy … normally in the form of a CPAP.
For purposes of this article, we will break down OSA patients into two categories: Medicare patients and commercial insurance patients. Medicare rules pertaining to HSTs and DME suppliers are stricter than rules published by commercial insurers. This article focuses on two areas of interest for sleep labs and DME suppliers: (i) the Medicare CPAP payment prohibition and (ii) joint ventures between sleep labs and DME suppliers.
Medicare CPAP Payment Prohibition
As noted above, the increased demand for CPAPs and disposables creates opportunities for DME suppliers. However, a word of caution must be noted: if the patient is covered by Medicare, the DME supplier can have no involvement with an HST.
Let’s make a distinction.
- Overnight Oxygen Qualification Test – A DME supplier can have some involvement with an overnight oxygen qualification test provided to a Medicare patient. The supplier can (i) own the oximeter, (ii) deliver the oximeter to the Medicare beneficiary’s home, (iii) pick up the oximeter the next morning, and (iv) transmit the raw data to the IDTF. If the physician orders oxygen for the beneficiary, and if the beneficiary chooses to obtain the concentrator from the DME supplier that served as courier for the oximeter, then the DME supplier can provide the concentrator to the beneficiary.
- HST – Logic would suggest that a DME supplier can have the same involvement with an HST and be able to provide the CPAP to the Medicare beneficiary. This is not the case. Assume that ABC Medical Equipment, Inc. owns HST devices. The beneficiary’s physician orders an HST for the beneficiary. At the physician’s request, ABC delivers the HST device to the beneficiary, assists the beneficiary with set-up and use of the HST device, retrieves the HST from the beneficiary the next morning, and transmits the test results to the physician. If the physician orders a CPAP for the beneficiary, and if the beneficiary elects to obtain the CPAP from ABC, then if ABC provides the CPAP it violates the Medicare CPAP payment prohibition.
The Medicare CPAP payment prohibition states as follows:
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.
It is important to understand how Medicare defines an “affiliate.” The definition of an “affiliate” for purposes of the prohibition is “a person or organization that is related to another person or organization through a compensation arrangement or ownership.” The term “compensation arrangement” is not defined in the section of the CMS regulations that the prohibition appears, but the same term is used in, and defined by, the Stark statute as “any arrangement involving any remuneration . . . .”
Medicare will not pay ABC for the CPAP if ABC is the “provider of the sleep test.” That term is defined as “the 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.” When promulgating this definition, CMS provided some clarity in the Final Rule when it stated the following:
We have defined a provider of sleep test as an individual or entity that directly or indirectly administers and/or interprets the test and/or furnishes the sleep test device. By indirect we mean that one or more intermediary actors are used to accomplish the sleep test to its end. For example, if a DME supplier contracted with a sleep test provider to furnish HST, that supplier would indirectly provide the HST. Directly providing the test means there are no intermediary actors—no intervening persons or entities between them.
In our example, because ABC furnishes the HST device to the beneficiary, there is a risk that ABC will be considered as the “provider” of the test. Because the physician will actually be the individual to submit claims for the sleep test, it can be argued that the physician (not ABC) is the direct provider of the HST. However, there is a risk that ABC will be considered an “indirect provider” of the HST because ABC is the entity that (i) delivers the HST device, (ii) assists the beneficiary through the set-up and education process, (iii) retrieves the HST device from the beneficiary, and (iv) transmits the data to the physician.
The safest course of action is for the DME supplier to have no involvement with the HST administered to a Medicare beneficiary.
Finally, let me make several additional points:
- This payment prohibition applies to Medicare fee-for-service (“FFS”) patients. As to whether or not there is a similar prohibition with commercial insurance patients (including Medicare Advantage patients), the supplier will need to examine the insurance contracts and the insurance company’s payment/coverage guidelines.
- If a supplier determines that it has violated the payment prohibition, then the supplier needs to refund the money it has been paid for the CPAPs and the disposables.
- Where the payment prohibition can come into play for the DME supplier is when it is about to sell. In conducting due diligence, if the buyer determines that the payment prohibition has been violated, then it is likely that (i) the purchase price will be lowered or the (ii) the buyer will walk away.
Joint Ventures Between DME Suppliers and Sleep Labs
A joint venture (“JV”) arises when two or more parties own something together. For example, it is not uncommon for a DME supplier (“ABC Medical Equipment”) and a sleep lab (“XYZ Sleep Lab”) to set up a JV (“DEF Sleep Equipment and Supplies”) that sells CPAPs and disposables to patients diagnosed with OSA.
In setting up DEF, the two owners must be mindful of the federal anti-kickback statute (“AKS”). Assume that XYZ refers OSA patients to DEF, some of whom are covered by a federal health care program (“FHCP”). If the JV is a “sweetheart deal” for XYZ, then that means that XYZ is “receiving something of value” in exchange for referrals of FHCP patients to DEF … hence, a kickback. The question arises: What constitutes a “sweetheart deal?” One example pertains to the initial capital investment. Let us assume that ABC and XYZ own DEF on a 50-50 basis. Let us further assume that the initial capital investment to get DEF up and running is $200,000. For the initial capital investment to be legitimate, then at the outset each party needs to contribute $100,000. Where the JV can run afoul of the AKS is if one of the following occurs: (i) XYZ invests less than $100,000; (ii) XYZ invests $100,000; however, XYZ does not write a check at the outset … rather, the $100,000 is deducted from XYZ’s future share of the profits; or (iii) ABC lends the $100,000 to XYZ.
In conducting an analysis under the AKS, we need to first consider whether the JV complies with the Small Investment Interest safe harbor to the AKS. Assuming that DEF cannot meet the two 60-40 tests of the safe harbor, then the safe harbor cannot be met. And so we then need to determine if the JV complies with the (i) OIG’s 1989 Special Fraud Alert (“Joint Ventures”) and (ii) OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”). The key requirements of the Special Fraud Alert and Special Advisory Bulletin are the following:
- ABC and XYZ must each put up the initial investment in accordance with each party’s percentage ownership interest in DEF.
- If future capital contributions are necessary, then each owner must pay its prorata share of the capital contribution.
- XYZ will have no obligation, express or implied, to refer to DEF.
- XYZ cannot be forced to relinquish its ownership interest in DEF if XYZ does not send a certain number of referrals to DEF.
- The number of referrals from XYZ to DEF cannot be tracked.
- XYZ will ensure patient choice. That is, OSA patients will have the right to select any DME supplier for their CPAPs/supplies.
- Profit distributions to ABC and XYZ will be based solely on each party’s percentage ownership interest in ABC. For example, if XYZ owns 50% of DEF, and if all of XYZ’s referrals go to a supplier other than DEF, then XYZ is still entitled to receive 50% of any profits distributed by DEF.
- Either ABC or XYZ has the right to sell its equity interest in DEF to another party. However, such a sale can be subject to a “right of first refusal” owned by the non-selling party.
- DEF needs to have operational responsibilities and financial risk. Said another way, DEF must have “skin in the game.” DEF cannot be run on a turnkey basis by ABC. For example, DEF must have its own employees and DEF must have inventory and equipment. ABC and/or XYZ can provide some services to DEF. Such services must be memorialized in a written agreement and DEF must pay fair market value compensation for the services.
- DEF needs to actively market to the community. DEF needs to strive to lessen its dependence on referrals from XYZ.
If a JV (between a DME supplier and sleep lab) is structured to comply with the preceding 10 bullets, then the risk is low that a governmental enforcement agency will assert that the joint venture violates the AKS.
Now let us change direction and talk about another issue. This pertains to the federal physician self-referral statute (“Stark”). If XYZ is owned by physicians, then unless the Stark rural provider exception is met, Stark prohibits XYZ and the physicians from referring Medicare and Medicaid patients to DEF.
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 firstname.lastname@example.org.