AMARILLO, TX – Running a DME operation is complicated. There are many moving parts. With reduced reimbursement, stringent documentation requirements, and competitive bidding re-entering the picture in approximately two years, profit margins for DME suppliers are tight. The DME supplier has no choice but to reduce expenses and improve efficiencies. This article will present ideas to reduce expenses and improve efficiencies . . . while remaining within legal parameters.

Centralized Intake Call Center

Assume that a supplier is organized as a legal entity with a single tax identification number (“Tax ID”) and with multiple locations. Assume that each location has its own PTAN. The various locations can route received telephone calls to a designated main location. Personnel at the main location can perform eligibility checks and verify a beneficiary’s qualifications for the equipment. Physicians can fax orders for equipment to a centralized fax number associated with the main location.

The issue of a centralized intake center, or call center, implicates the DMEPOS Quality Standards. A supplier is responsible for performing “intake and assessment.” The NSC has stated, in other context, that a supplier may not subcontract out or otherwise delegate to a third party its intake and assessment responsibilities. CMS and the NSC have not issued additional significant guidance regarding what constitutes “intake and assessment.”

Based on a review of the limited Medicare guidelines available and informal guidance from the NSC, one can reasonably conclude that locations sharing the same Tax ID # may centralize their intake operations at a single location if the following policies and procedures are implemented:

• Each separate location must maintain its own local telephone number.
• Calls to a location’s local telephone number must allow a beneficiary to speak with a live representative at that location, if so desired by the beneficiary.
• At the time of intake, the beneficiary will be assigned to the nearest supplier location, as determined by the beneficiary’s zip code.
• Intake personnel at the main location must advise the beneficiary that the aforementioned nearest supplier location will be his or her supplier with regards to the equipment.
• The location that dispenses the equipment, using its PTAN, must be the one that bills Medicare.
• Paperwork provided to the beneficiary from the entity must clearly indicate the particular location from which the equipment will be dispensed.
• The equipment being dispensed must come from the inventory of the location that sets up the beneficiary.
• If necessary, the beneficiary must go to the particular location that dispensed the equipment for any service or repair.

The above analysis is limited to the centralization of intake operations among locations that share the same Tax ID # under a single entity. In circumstances involving entities or locations with two or more distinct Tax ID #s, such entities or locations are considered to be separate suppliers. Accordingly, in order to reduce the risk of violating the Quality Standards, additional procedures should be implemented if establishing a centralized intake location for multiple legal entities.

In those situations, to the extent that the centralized intake location obtains eligibility information or other documentation regarding the beneficiary or the order (e.g., medical records), the centralized intake location must provide such documentation to the primary supplier prior to furnishing the equipment to the beneficiary. Upon receipt, the primary supplier must review the documentation and independently determine whether there is medical necessity for the item prior to authorizing the centralized intake location to furnish the equipment to the beneficiary.

“Hub and Spoke” Model

The hub and spoke model is a method to expand into new geographical areas without having to obtain new supplier numbers. Here is how the model works:

• ABC Medical Equipment, Inc. (“ABC”) is located in Dallas, TX; it has a supplier number attached to its Dallas location;
• ABC decides to expand into Denton, TX, but does not want to go through the expense and time to obtain a supplier number for a location in Denton;
• ABC opens a warehouse in Denton and hires a delivery driver to service the Denton area:
• the warehouse is not open to customers;
• the phone number published in the Denton phone book is a toll-free number that goes to the Dallas location;
• when a physician calls in an order, the call goes to Dallas; likewise, when a customer calls ABC, the call goes to Dallas;
• ABC’s employee handles the intake, assessment, and coordination of care; in short, the “point of sale” occurs in Dallas;
• the Dallas employee instructs the Denton delivery driver to pick up a piece of equipment from the warehouse and deliver it to the customer’s house; and
• if the customer has a piece of equipment that needs to be repaired, then the delivery driver drops a “loaner” off at the customer’s house, picks up the equipment to be repaired, has the equipment repaired, delivers the repaired equipment to the customer’s house, and picks up the “loaner.”

Offshore Subcontracting

Increasingly, in order to reduce expenses, DME suppliers are contracting with offshore subcontractors. On July 23, 2007, CMS issued a letter to Medicare Part C and D plan sponsors addressing the performance of the plan sponsors’ activities outside of the United States. In the letter, CMS asked each plan sponsor to submit information about offshore subcontractors plus an attestation that the plan sponsor has taken steps to address the risks associated with sending “protected health information,” as defined by HIPAA (“PHI”), to foreign subcontractors. The letter directed plan sponsors to mail hard copies of the information and attestations to CMS.

On September 20, 2007, CMS issued another letter that addressed questions arising from the July 23 letter. In the September 20 letter, CMS stated that the subcontractor relationships the plan sponsors are required to disclose must include all downstream subcontractors. 42 C.F.R. 1001.952(t)(2)(i), (iii), and Medicare Managed Care Manual, Chapter 11, Section 10 define a “downstream contractor” as a party that enters into an agreement below the level of the agreement between the plan sponsor and a first tier subcontractor down to the level of the ultimate provider of health and/or administrative services. The September 20 letter further stated that “Medicare-related work” that triggers the reporting and attestation requirements includes claims processing and data entry.

On August 26, 2008, CMS issued a letter announcing the launch of the Offshore Subcontractor Data module in the Health Plan Management System website. This module allows plan sponsors to submit the required information and attestations electronically rather than by hard copy.

Based on CMS’s requirement that Medicare Part C and D plan sponsors gather and submit information about offshore subcontractors, we can conclude that CMS does not prohibit a DME supplier from using an offshore subcontractor. Because CMS issued its directive to plan sponsors to submit information and attestations to the Offshore Subcontractor Data Module, a downstream subcontractor is not directly required to submit information to the module. However, DME suppliers (that contract with offshore subcontractors) may be required by their network agreements to provide information and attestations to the Part C and D plans that those suppliers are in network with.

Employee Liaison

A DME supplier can designate an employee to be on the premises of a referral source such as a hospital, wound care center, or long term care facility. The employee may educate the facility staff regarding medical equipment (to be used in the home) and related services. The employee may also work with a patient, after a referral is made to the supplier (but before the patient is discharged), in order for there to be a smooth transition when the patient goes home. The employee liaison may not assume responsibilities that the referral source is required to fulfill. Doing so will save the referral source money, which will likely constitute a violation of the federal anti-kickback statute.

Separate Legal Entity for Retail Business

Assume that ABC Medical Equipment, Inc. has a PTAN and is located on Main Street. Assume that John Smith is the sole stockholder of ABC. Assume that Smith wants to push into the retail (cash) business. It is wise for Smith to set up a new corporation with its own Tax ID #, called “ABC Retail Sales, Inc.” ABC Retail will not have a PTAN. ABC Retail will be located on Elm Street. Or it can be located on Main Street next to ABC Medical, with ABC Medical being in Suite A and ABC Retail being in Suite B. The bottom line is that ABC Medical and ABC Retail should be be physically separated from each other. Each corporation will have its own employees, own bank account, etc. In short, each corporation will be operated as a distinct entity.

When a customer wants the Cadillac product and services, then he can pay cash for the product at ABC Retail. If a customer wants Medicare to pay for the product, then he can obtain the product from ABC Medical. ABC Retail will stock only “Cadillac” products. ABC Medical will stock a variety of products, including “Cavalier” products.

If a customer walks into ABC Retail and says that he wants Medicare to pay for the product, then ABC Retail can refer the customer to ABC Medical. Conversely, if a customer walks into ABC Medical, does not like the product selection, and is willing to pay cash for a higher end product, then ABC Medical can refer the customer to ABC Retail. Even though the two companies will have the same owner, the companies are nevertheless separate legal entities (each with its own Tax ID #). And so the relationship between the two companies needs to be the same as if they were not owned by the same person. Therefore, there can be no money going back and forth between the two companies that is tied to referrals. It will be important for ABC Medical and ABC Retail to truly operate as separate legal entities (e.g., no commingling of money). This way, someone suing one of the companies will not be able to “pierce the corporate veil” and sue the other company as well.

ABC Retail needs to be aware of 42 U.S.C. 1395m(j)(4)(A), which states that if a supplier furnishes DME to a Medicare beneficiary, for which no payment may be made because the supplier does not have a Medicare supplier number, then any expenses incurred for the DME will be the responsibility of the supplier. This means that the ABC Retail customer will have no financial responsibility for the product, and ABC Retail will be required to refund the customer, unless before the product was furnished, (i) the customer was informed that Medicare would not reimburse the customer for the product and (ii) the customer agreed to pay cash knowing that he would not be reimbursed. In order to meet this requirement, when a customer walks into ABC Retail and if the employee suspects that the customer is covered by Medicare, then the employee may want the customer to sign an ABN. ABC Retail should also post signs that are conspicuous to the public, that say that ABC Retail is not a Medicare supplier.

Now let us assume that ABC Retail desires to sell items for cash over the internet. ABC Retail’s web page should have the following in large bold type appear as soon as the customer clicks on a link to view DME, as well as immediately prior to check-out:

• Notice to Medicare Beneficiaries. Medicare will pay for medical equipment and supplies only if a supplier has a Medicare supplier number. We do not have a Medicare supplier number. Medicare will not pay for any medical equipment and supplies we sell or rent to you. You will be personally and fully responsible for payment.

There are two fundamental reasons behind setting up ABC Retail as a separate legal entity:

• Exposure to Audits – ABC Medical is at risk for recoupment liability in the event of an aggressive audit. If ABC Retail is only a “division” or “DBA” of ABC Medical, and if ABC Medical does get hit with a large recoupment, then it will also adversely affect the financial condition of the retail “division.” On the other hand, if ABC Retail is a separate legal entity, then generally speaking, any recoupment liability imposed against ABC Medical will not spill over to ABC Retail.
• Future Sale of Retail Business – If ABC Retail is a “division” of ABC Medical, and if Smith desires in the future to sell his retail business, but retain his Part B Business, then Smith has no choice but to have ABC Medical enter into an asset sale of its retail business. Smith will not have the option of selling his stock in ABC Medical. On the other hand, if ABC Retail is a separate legal entity, and if Smith decides in the future to sell the retail business, then he has the option of engaging in either an asset sale or a stock Additionally, if ABC Retail is a separate legal entity, then it can bring in additional investors.

Using Another Supplier’s Third Party Payer Contract

Approximately (i) 35% of all Medicare patients are covered by Medicare Advantage Plans (“MAPs”) and (ii) 70% of all state Medicaid patients are covered by Medicaid Managed Care Plans (“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. CMS pays the MAP and the MAP pays the provider/supplier.

The same concept is true 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 “Third Party Payer Contracts” or “TPP 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.

As a “workaround,” the DME supplier may want to enter into an arrangement with another DME supplier to gain access to the other DME supplier’s TPP Contract. For example, the two suppliers may want to do the following:

• Supplier A is a party to a TPP Contract. Supplier B is not a party to the TPP Contract.
• When a patient under the TPP Contract 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 under the TPP Contract. Upon receipt of payment under the TPP Contract, 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 likely 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 may 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 the party to the TPP Contract and it is billing and collecting under the TPP Contract. 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 turn, 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 under the TPP Contract. 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 (“SA”), then here are the steps they should take:

• Review the TPP Contract – The parties need to review Supplier A’s TPP Contract to determine if it addresses subcontract arrangements. The TPP Contract may say nothing about whether or not Supplier A can subcontract out its responsibilities to Supplier B. If the TPP Contract is silent, then in order to avoid problems under the Federal AKS and Federal FCA, the SA should be structured as set out hereafter. On the other end of the spectrum, the TPP Contract may prohibit Supplier A from subcontracting out its services. The TPP Contract may very well 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 of who the subcontractor will be; (ii) Supplier A can subcontract out not more than e.g., 20% of its services; (iii) Supplier A can subcontract out its services only if the Plan approves the subcontractor in advance; or (iv) Supplier A can only subcontract out specifically delineated 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 TPP 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
• Inventory – Under the SA, 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 SA 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 SA; 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 SA; 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 SA. 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.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies 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 [email protected].