AMARILLO, TX – The DME industry, as we know it today, began in the 1970s. Because DME suppliers primarily serve the elderly, the industry has always been dependent on Medicare. Historically, the DME industry was a Medicare fee-for-service (“FFS”) industry. Suppliers would take care of their patients and bill Medicare FFS, also known as “traditional Medicare.” When a DME supplier would hear the term “managed care,” it would “roll its eyes” and say: “Managed care does not apply to me. I am a DME supplier, not a physician nor a hospital. And I don’t live in California.”

Well…this is all changing. Third party payors (“TPPs”), including Medicare, Medicaid and commercial insurers, are pushing away from FFS and are pushing toward quality care/patient outcome. TPPs recognize that FFS is inefficient and expensive. And there is little accountability. The provider/supplier is paid for the services/products it furnishes … regardless of the outcome. On the other hand, under the quality care/patient outcome model, reimbursement is tied to results. That is, is the patient getting better by using the services/products?

This is where managed care comes in. An important goal of managed care…if not the most important goal…is cost containment. How can the provider (hospital, physician, therapist, etc.) provide an acceptable level of patient care at a reduced cost? A managed care plan can focus solely on patients not covered by a federal health care program (“FHCP”). An example might be a 46 year old employee of an auto parts factory. The auto parts factory employees will be covered by a non-FHCP managed care plan owned by an insurance company (e.g., United Healthcare, Humana). The plan will, in turn, contract with hospitals, physicians, home health agencies, DME suppliers, etc. The money flows like this: (i) the auto parts factory and/or its employees pay the insurance company and (ii) the insurance company, in turn, pays the providers.

Now let’s switch gears and move into the FHCP space. In the Medicare space, there are Medicare Advantage Plans (“MAPs”) while in the Medicaid space, there are Medicaid Managed Care Plans (“MMCPs”). Approximately (i) 35% of all Medicare patients are covered by MAPs and (ii) 70% of all state Medicaid patients are covered by MMCPs. These percentages are increasing. A MAP and MMCP essentially operate the same way. The MAP, owned by an insurance company, contracts with CMS. Pursuant to the CMS contract, the MAP will (i) cover Medicare beneficiaries (“Medicare Covered Lives”) and (ii) contract with health care providers and suppliers to take care of the Medicare Covered Lives. The MAP receives the money that the patients are required to pay to Medicare and the MAP pays the provider/supplier. The concept is similar with an MMCP. The MMCP, owned by an insurance company, contracts with the state Medicaid program. Pursuant to the Medicaid contract, the MMCP will (i) cover Medicaid beneficiaries (“Medicaid Covered Lives”) and (ii) contract with health care providers and suppliers to take care of the Medicaid Covered Lives. The state Medicaid program pays the MMCP and the MMCP pays the provider/supplier. The MAP and MMCP contracts will collectively be referred to as “TPP Contracts” or “Plan Contracts.”

A challenge faced by many DME suppliers is that MAPs and MMCPs (collectively referred to as “Plans”) have “closed panels.” This means that the Plan tells the DME supplier: “We have enough DME suppliers on our provider/supplier panel. We don’t need you. Therefore, we will not sign a TPP Contract with you.” The end result for the DME supplier is that if a Medicare Covered Life or Medicaid Covered Life (collectively referred to as “patient”) wants to obtain a product from the DME supplier, and if the patient is covered by a TPP Contract for which the DME supplier is not on the panel, then the DME supplier must turn the patient away…unless, of course, the patient is willing to pay cash to the DME supplier without getting reimbursed by the Plan.

When this occurs, what are the DME supplier’s options?

Squeaky Wheel Gets the Grease
I am aware of scenarios in which a DME supplier simply wears the Plan down. That is, the supplier continually contacts the Plan until the Plan eventually relents…perhaps because a DME supplier drops off the Plan or the Plan determines that it needs additional DME suppliers.

Accepted onto a Plan in a Limited Capacity
Assume that the DME supplier has developed a niche pertaining to products and/or services. Assume that suppliers currently on the Plan’s panel do not have this niche expertise. Perhaps the DME supplier can convince the Plan to allow the supplier onto the Plan in the limited capacity to provide the niche products/services. Once the Plan becomes accustomed to using the supplier for the niche products/services, then it may be easier for the supplier to convince the Plan to allow the supplier to provide the full array of products/services.

Enlist the Help of the Local Hospital and/or Physician Group
Assume that a local hospital or physician group, loyal to the DME supplier, is on the Plan’s panel. The DME supplier can ask the hospital/physician group to contact the Plan and lobby for the supplier to be included on the panel.

Purchase All or a Portion of the Stock of a DME Supplier That is On the Plan
Assume that ABC Medical Equipment, Inc. (owned by John Smith) is on the Plan. Assume that XYZ Medical Equipment, Inc. is not on the Plan.

• XYZ can purchase 100% of Smith’s stock in ABC, resulting in ABC becoming a wholly-owned subsidiary of XYZ. This does not mean that XYZ is on the Plan. Rather, it means that XYZ can refer Plan patients to its subsidiary (ABC). ABC’s profits flow upstream…thereby allowing XYZ to financially benefit from the products/services provided to Plan patients.
• XYZ can purchase e.g., 40% of Smith’s stock in ABC. XYZ can refer Plan patients to its affiliated company (ABC). As a 40% stockholder of ABC, XYZ will be entitled to 40% of any dividend distributions declared by ABC.

Subcontract Agreement
The DME supplier may desire to enter into the following type of arrangement with another DME supplier…which, as will be discussed below, is against the law:

• Supplier A is on the Plan’s provider/supplier panel. Supplier B is not on the panel.
• When a Plan patient wants to purchase a product from Supplier B, then Supplier B will take care of the patient.
• Supplier B will (i) handle intake, assessment and coordination of care (collectively referred to as “intake”), (ii) deliver and set up the equipment, and (iii) handle the subsequent maintenance and repairs.
• Supplier A will submit a claim to the Plan. Upon receipt of payment from the Plan, Supplier A will (i) pay a large percentage (e.g., 92%) to Supplier B and (ii) retain the balance.

The problem with this arrangement is that it violates the federal anti-kickback statute (“Federal AKS”), the federal False Claims Act (“Federal FCA”), and their state counterparts. Here are how the Federal AKS and Federal FCA come into the picture:

• Federal AKS – This statute makes it a felony for (i) Supplier A to give anything of value in exchange for receiving the referral of a patient covered by a government health care program and (ii) Supplier B to receive anything of value in exchange for referring (or arranging for the referral of) a patient covered by a government health care program. In the eyes of the Plan, the “supplier” is Supplier A: it is on the panel, it is billing the Plan, and it is collecting from the Plan. The kickback issue arises because (i) Supplier B is referring or arranging for the referral of the patient to Supplier A and (ii) Supplier A is, in return, remitting e.g., 92% of the payment to Supplier B.
• Federal FCA – This statute prohibits Supplier A from submitting “false claims” … and Supplier B cannot conspire (or collaborate) with Supplier A for the submission of false claims. When Supplier A submits a claim to the Plan, Supplier A is representing that it is the supplier…that it took care of the patient and, therefore, deserves to be paid. In fact, this is not the case. The true supplier is Supplier B; it is the entity that does all of the work. All Supplier A does is submit a claim to the Plan. Hence, the claim submitted is a false claim. And Supplier B will have collaborated with Supplier A in the submission of the false claim.

So now that we have talked about what Supplier A and Supplier B cannot do, let us talk about what they can do. If Supplier A and Supplier B desire to enter into a Subcontract Agreement, which can also be called a Patient Services Agreement (“PSA”), then here are the steps they should take:

• Review the Plan Contract – The parties need to review Supplier A’s Plan Contract to determine if it addresses subcontract arrangements. The Plan Contract may say nothing about whether or not Supplier A can subcontract out its responsibilities to Supplier B. On the other end of the spectrum, the Plan Contract may prohibit Supplier A from subcontracting out its services. The Plan Contract may take the middle road and provide for one of the following: (i) Supplier A can subcontract out its services but must first notify the Plan regarding who the subcontractor will be; (ii) Supplier A can subcontract out not more than e.g., 20% of its products and services; (iii) Supplier A can subcontract out its products and services only if the Plan approves the subcontractor in advance; or (iv) Supplier A can only subcontract out specifically delineated products and services.
• Supplier A Must Retain a Level of Operational Responsibilities and Financial Risk – So that it can credibly assert that it is the “supplier,” Supplier A must have a level of operational responsibilities and financial risk. For example, Supplier A needs to handle the intake. This means that Supplier A must determine if the patient qualifies for coverage under the Plan Contract. Supplier B can gather information and documents and forward them to Supplier A…but it is Supplier A, not Supplier B, that must determine if the patient is to receive the product. If the patient later has a maintenance/repair need, then he needs to call Supplier A; Supplier A can, in turn, direct Supplier B to handle the repair/maintenance. Further, Supplier A will be obligated to pay Supplier B regardless of whether or not the Plan pays Supplier A. In other words, Supplier A’s obligation to pay Supplier B for its services is absolute.
• Inventory – Under the PSA, Supplier B will deliver the product to the patient “for and on behalf of Supplier A.” At the time of delivery, title to the product needs to be in Supplier A’s name. This can be accomplished in one of several ways: (i) Supplier A can purchase the inventory, take possession of it, and deliver it to Supplier B; (ii) Supplier A can purchase the inventory, not take possession of it, and direct the manufacturer to deliver the inventory (on behalf of Supplier A) to Supplier B; (iii) Supplier B can purchase the inventory; on a regular basis, Supplier A can purchase inventory from Supplier B and Supplier B can segregate Supplier A’s inventory in Supplier B’s warehouse; or (iv) Supplier B can purchase the inventory; when Supplier B is about to deliver the product to the patient’s home, then title will transfer to Supplier A and Supplier A will have the obligation to purchase the product from Supplier B.
• Supplier B’s Services – The PSA can provide that Supplier B’s services include the following: (i) deliver the product to the patient, educate the patient on how to use the product, and set the product up for the patient; (ii) obtain information and documents from the patient and his physician and transmit them to Supplier A so that Supplier A can conduct the intake; and (iii) at the direction of Supplier A, provide maintenance and repair services to the patient. The labels on the products delivered to the patients need to reflect Supplier A.
• Flow of Money – At the end of the day, Supplier B will be referring (or arranging for the referral of) patients to Supplier A…and Supplier A will be paying money to Supplier B. The most conservative course of action is as follows: (i) if Supplier A purchases inventory from Supplier B, then the purchase price must be fair market value (“FMV”) and must be pursuant to a price list attached to the PSA; and (ii) Supplier A pays fixed annual compensation (e.g., $48,000 over the next 12 months) to Supplier B in which such compensation is the FMV equivalent of Supplier B’s services. If fixed annual compensation is not feasible, then a less conservative course of action is as follows: (i) if Supplier A purchases inventory from Supplier B, then the purchase price must be FMV and must be pursuant to a price list attached to the PSA; and (ii) Supplier A pays a fixed fee per each unit of service provided by Supplier B, such compensation is the FMV equivalent of Supplier B’s services, and the compensation is set out in a fee schedule attached to the PSA. If the parties want to strengthen their position that the compensation paid to Supplier B is FMV, then the parties can order an FMV evaluation and report from an independent third party.

AAHomecare’s Retail Work Group

The Retail Work Group is a vibrant network of DME industry stakeholders (suppliers, manufacturers, consultants) that meets once a month via video conference during which (i) an expert guest will present a topic on an aspect of selling products at retail, and (ii) a question and answer period will follow. The next Retail Work Group video conference is scheduled for August 13, 2020, at 11:00 a.m. Central. Lisa Wells of Cure Medical will present “Social Media as a Sales Channel & Consumer Communications.” Participation in the Retail Work Group is free to AAHomecare members. For more information, contact Ashley Plauché Manager of Member & Public Relations, AAHomecare ([email protected]).

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].