AMARILLO, TX – A “loan closet” is also known as a “stock and bill”…which is also known as a “consignment closet.” A DME supplier can set up a loan closet arrangement at a hospital, clinic, or physician’s office (“Facility”).  In a typical loan closet arrangement: (i) the DME supplier places inventory at the Facility (e.g., in a “closet”); (ii) when a physician orders DME for a patient, the Facility will ask the patient if he/she has a preference for a DME supplier; (iii) if the patient does not express a preference, the Facility can refer the patient to the supplier with which the Facility has the loan closet arrangement; (iv) if the patient chooses the supplier that has the closet at the Facility, a Facility employee will pull the item out of the “closet” and hand it to the patient; (v) the Facility employee will collect the documentation that the supplier needs in order to conduct intake, assessment and coordination of care (collectively referred to as “intake”); and (vi) if the supplier determines that the patient qualifies for coverage for the product, the supplier will accept the patient and bill the third party payor (“TPP”) for the product.

There is no federal law that prohibits loan closet arrangements between DME suppliers and Facilities. Thus, loan closets are common in the DME industry. When establishing loan closets, suppliers must ensure that the arrangement operates in a manner that is consistent with applicable laws, including the DME Supplier Standards.

Properly Established Loan Closet is Not a DME Supplier “Location”
According to the National Supplier Clearinghouse (“NSC”), a DME supplier must have a PTAN at each location at which a Medicare beneficiary can reasonably expect to obtain a product from the supplier. Here are two examples:

• ABC Medical Equipment, Inc. rents a room in a strip mall where ABC (i) provides CPAP education and fitting services and (ii) provides CPAP disposables. A beneficiary will reasonably conclude that this rented space is an ABC “location” …thereby requiring a PTAN to be issued to the rented space.
• ABC has a PTAN in its Dallas facility, ABC has a warehouse in Abilene. ABC stores equipment in the warehouse. Delivery drivers pick up equipment from the warehouse and deliver the equipment to homes of beneficiaries. The warehouse is not open to the public. A beneficiary cannot reasonably conclude that the warehouse is an ABC “location” requiring a PTAN.

Now let’s turn our attention to a loan closet established at a Facility, such as a hospital. While there is no bright-line rule, the NSC typically views the specific facts and circumstances of each loan closet. As discussed above, the NSC focuses on whether or not a Medicare beneficiary can reasonably expect to receive products and/or services from the DME supplier in the Facility in which the DME supplier maintains a loan closet. Let us look at a loan closet arrangement with a hospital. Although a Medicare beneficiary may receive items from the closet that are retrieved from the closet by a member of the hospital’s staff, there is not a reasonable expectation that the beneficiary will return to the hospital to receive services or additional DME items from a representative of the DME supplier. If the beneficiary is unaware of the loan closet and the closet is not held out to the public as a place where beneficiaries may obtain DME, the arrangement is more akin to a warehouse and is not required to be enrolled with Medicare.

Importance of Written Agreement
There is no legal requirement that a loan closet arrangement be in writing. Nevertheless, it is wise for such an arrangement to be memorialized in a written agreement. Such an agreement can be called “Consignment Closet Agreement,” “Loan Closet Agreement,” “Stock and Bill Agreement,” or “Equipment Placement Agreement.” For the balance of this article, I will refer to the agreement as an Equipment Placement Agreement or “EPA.”

An EPA will address the most important aspects of the loan closet. These are:

• Title to the DME – The EPA will confirm that title to the DME will remain with the DME supplier until the product is delivered to the patient.
• Replacement of DME – The EPA will give the DME supplier the right to enter the Facility and replenish the loan closet as needed.
• Missing or Damaged DME – If an item goes missing from the closet (i.e., it has not been placed with a patient), or if an item in the closet is damaged, the EPA will impose on the Facility the obligation to pay the DME supplier for the missing or damaged item.
• Collection and Transmittal of Documents – When a Facility employee pulls an item out of the closet and delivers it to a patient, then the Facility is obligated to collect (and transmit to the DME supplier) documents necessary for the supplier to (i) conduct intake, (ii) take over responsibility for the patient, and (iii) submit a claim to the third party payor (“TPP”). If after reviewing the documentation provided by the Facility, the supplier determines that the patient does not meet coverage requirements (and, therefore, the supplier cannot bill the TPP), the Facility will be obligated to pay the supplier for the product.
• Employee Liaison – If the DME supplier places an employee liaison in the Facility, the EPA will state that the liaison cannot perform any services that the Facility is obligated to perform. Doing so will result in the supplier saving the Facility money…which is “something of value” to a referral source…which is a violation of the federal anti-kickback statute.
• Preferred Provider Status/Patient Choice – If the parties so choose, the EPA can state that the Facility designates the DME supplier as the Facility’s “preferred DME provider.” The EPA will state that if the physician orders DME for a patient, the Facility employee will ask the patient if he/she has a particular preference for a DME supplier. If the patient does not designate a preference, the EPA will provide that the Facility can suggest to the patient that he/she choose the DME supplier that is the party to the EPA.
• No Referrals – The EPA will state that the Facility will have no obligation to make referrals to the DME supplier … and vice versa.

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].