AMARILLO, TX – A “loan closet” is the same thing as a “consignment closet” and a “stock and bill” arrangement. A DME supplier can enter into a loan closet arrangement with a hospital, physician’s office, nursing home, skilled nursing facility (“SNF”), wound care center or other type of facility. This article will focus on a loan closet at a hospital.

The concept of a loan closet is simple:

• The DME supplier will store products at the hospital.
• When a patient is about to be discharged, if his/her physician has ordered a product for the patient to use in the home, and if the product is included in the group of products stored by the supplier at the hospital, then if the patient elects to obtain the product from the DME supplier, the hospital employee will pull the product from the “closet” and send it home with the patient.
• At the time that the hospital employee hands the product to the patient, the employee will collect the necessary documentation for the DME supplier to (i) decide if the patient qualifies for third-party coverage and if so, (ii) to submit a claim to the third-party payor.
• The hospital needs to understand that it cannot use the DME supplier’s products on Part A patients. Doing so will save the hospital money. This will constitute “something of value” from the DME supplier to a referral source. This, in turn, will violate the federal anti-kickback statute.
• It is also important that the hospital understands that if a product goes missing from the “closet,” or is somehow damaged, or if the hospital employee places the product with a discharged patient without collecting the necessary documentation, then the hospital is obligated to pay the DME supplier for the product.

A written agreement is not legally required for a DME supplier and a hospital to enter into a loan closet arrangement, but it is wise for the parties to enter into such an agreement. Doing so will memorialize each party’s rights and obligations…and will make it clear that (i) the consigned products are only for the convenience of the patients and (ii) the hospital will not directly/indirectly make money from the consigned products. The written agreement can be called an Equipment Placement Agreement…or Loan Closet Agreement…or Stock and Bill Agreement…or Product Consignment Agreement. Whatever it is called, it will need to contain provisions that protect both the hospital and the DME supplier.

One of the most important provisions in the written agreement is the one that imposes on the hospital the obligation to pay the supplier for a product that (i) goes missing, (ii) is damaged, or (iii) is given to a patient without the hospital collecting the necessary documentation. Here is the language for such a provision:

If any Product is missing from the Storage Room for which Hospital has not provided documentation to DME Supplier as provided in Article ____, or if any Product is damaged, or if any Product is used on a Hospital patient in such a way that the Product falls under Part A of the Medicare program or falls under Hospital reimbursement by any other third-party payor, or if DME Supplier cannot submit a claim for third-party reimbursement because of inadequate or incomplete documentation obtained by Hospital and transmitted to DME Supplier, or if a claim submitted by DME Supplier is denied because of inadequate or incomplete documentation obtained by Hospital and transmitted to DME Supplier, then Hospital will pay DME Supplier for such Product at DME Supplier’s cost. Such payment will be made by Hospital within 90 days from date of the invoice. Hospital’s obligation under this section will survive expiration or termination of this Agreement.

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].