AMARILLO, TX – There are legitimate reasons why a DME supplier may want to pay a referral source, such as a physician, hospital, or long-term care (“LTC”) facility. For example, if a referral source provides substantive services for a DME supplier, then it makes sense for the supplier to pay fair market value (“FMV”) compensation to the referral source for the services.

However, the DME supplier needs to be careful. As discussed below, even if a supplier pays FMV compensation to a referral source for substantive services, the arrangement can run afoul of the federal anti-kickback statute (“AKS”). The key is for the arrangement to fit within (or substantially fit within) the Personal Services and Management Contracts and Outcomes-Based Payment Arrangements (“PSMC”) safe harbor to the AKS.

The AKS prohibits a DME supplier from paying (or offering to pay) or receiving (or asking to receive) anything of value in exchange for (i) the referral of a patient covered by a federal health care program (“FHCP”), (ii) arranging for the referral of an FHCP patient, or (iii) recommending the purchase of a product or service covered by an FHCP. A number of federal circuits have adopted the “one purpose” test. This states that if one purpose behind paying a party is to reward the party for referrals, the AKS is violated notwithstanding that the principal purpose behind the payments is to pay for legitimate services.

Because of the breadth of the AKS, the Office of Inspector General (“OIG”) has published a number of safe harbors. If an arrangement falls into a safe harbor, the compensation paid under the arrangement does not constitute illegal remuneration in violation of the AKS. If an arrangement does not fall into a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means the arrangement needs to be carefully examined in light of the language of the statute, court decisions, and other published guidance.

The PSMC safe harbor allows a DME supplier to pay a referral source for legitimate services…on condition that all of the elements of the safe harbor are met. Prior to January 1, 2021, it was difficult for a supplier to fully comply with the PSMC safe harbor. In particular, there were two elements of the safe harbor that were challenging. One was the requirement that the compensation be fixed one year in advance. The second was the requirement that if the payee renders services on a sporadic or part-time basis, the schedule of such services must be spelled out in the agreement.

Effective January 1, 2021, the PSMC safe harbor was modified in order to give providers/suppliers more flexibility in furnishing products and services to FHCP patients. The sporadic/part-time requirement was removed. More importantly, instead of requiring the parties to the arrangement to fix the compensation one year in advance, the modified version requires the parties to fix the methodology for calculating the compensation one year in advance. This opens up the possibility of the compensation being on an hourly basis or, perhaps, on a per unit of service basis.

The shift to “methodology of calculation” might cause a supplier to develop a false sense of security. A supplier might take the position that the compensation to a referral source for services can, without question, be on a “per patient” or “per encounter” basis. However, this is a slippery slope. There is a risk that compensation to a referral source on a “per” basis is tied to referrals from the referral source. For example, in United States of America, et al., ex rel. Dr. Kuo Chao v. Medtronic PLC, et.al., as part of a procedural ruling, the Court stated that even some FMV payments will qualify as illegal kickbacks, such as when the payor has considered the volume of reimbursable business between the parties in providing compensation and otherwise intends for the compensation to function as an inducement for more business. The Court stated that under the AKS, “neither a legitimate business purpose for the arrangement, nor an FMV payment, will legitimize a payment if there is also an illegal purpose (i.e., inducing Federal health care program business.)”

OIG Advisory Opinion

The OIG issued Advisory Opinion No. 22-09 in which it stated that a “per service” compensation would likely violate the AKS.

Proposed Arrangement
The party requesting the opinion (“Requestor”) operates a network of clinical laboratories. Under the Proposed Arrangement, the Requestor would enter into contracts with hospitals (the “Contract Hospitals”), pursuant to which the Requestor would pay the Contract Hospitals on a per-patient encounter basis to collect, process, and handle specimens (“Services”) that are then sent to the Requestor’s laboratories for testing. The Requestor would bill FHCPs for the testing.

The Requestor certified that (i) the Proposed Arrangement would be set out in a writing signed by the parties, cover all of the services to be provided, and be for a term of at least one year; (ii) the Services would not exceed those that are reasonably necessary to accomplish the commercially reasonable business purpose of the Proposed Arrangement; (iii) the per-patient encounter compensation rate would be FMV; (iv) Contract Hospitals would not separately bill payors or patients for the Services; and (v) none of the Contract Hospital’s employed physicians, contracted physicians, or affiliated practices would be required or directed to refer to Requestor nor receive any remuneration from the Contract Hospital for referrals to the Requestor.

OIG’s Opinion
The OIG determined that the Proposed Arrangement would implicate the AKS because it would involve remuneration from a laboratory to a party that is in a position to make referrals to the laboratory paid for, in whole or in part, by an FHCP. Where an individual presents to a Contract Hospital without a laboratory specified on the order, the Contract Hospital could refer specimens from that individual to the Requestor for reimbursable testing. Because of the per-patient encounter fees paid by the Requestor for the Services, Contract Hospitals have a financial incentive to direct specimens to the Requestor. The Proposed Arrangement would not be protected by the PSMC safe harbor because the per-patient encounter compensation methodology would take into account the volume or value of referrals or other business generated for which payment may be made in whole or in part under an FHCP.

The Proposed Arrangement warrants careful scrutiny because: (i) laboratory services may be particularly susceptible to the risk of steering; and (ii) the Proposed Arrangement would involve a “per-click” fee structure that generally is inherently reflective of the volume or value of referrals or business otherwise generated between the parties. Here, the per-patient encounter fee could induce Contract Hospitals to refer specimens to the Requestor for testing. While the Requestor certified that the compensation it would pay Contract Hospitals for the Services would be consistent with FMV and that the Contract Hospitals would be prohibited from separately billing payors or patients for the Services performed, these safeguards do not overcome the risk of inappropriate steering to the Requestor given the financial incentive inherent in a per-patient encounter compensation methodology.

While the Requestor certified that the Contract Hospitals would be required to represent that none of their employed physicians, contracted physicians, and affiliated practices would be required to refer, or directed to refer, to the Requestor, this safeguard does not sufficiently mitigate the risk of inappropriate steering. Contract Hospitals have an incentive to encourage their employed physicians, contracted physicians, and affiliated practices to order laboratory services from the Requestor.

Applicability to Suppliers
The Medtronic PLC ruling and the OIG Advisory Opinion provide guidance to DME suppliers. Assume that a referring physician serves as a Medical Director for a supplier. While a credible argument can be made that fixed annual compensation (e.g., $6000 over the next 12 months) or hourly compensation (e.g., $300 per hour) is appropriate under the PSMC safe harbor, assuming it is FMV, there is a risk that such an argument cannot be made for compensation that is a fixed dollar amount per patient chart review. The January 1, 2021 modification to the PSMC safe harbor is helpful. But it does not allow parties to enter into an arrangement that common sense dictates is a kickback.

Jeffrey S. Baird, Esq., is chairman of the Health Care Group at Brown & Fortunato, 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].

AAHOMECARE’S EDUCATIONAL WEBINAR

Buying and Selling a DME Supplier: Steps to Succeed

Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Tom A. Knapp, Esq., Brown & Fortunato

Tuesday, July 25, 2023

1:30-2:30 p.m. CENTRAL TIME
When a person/entity intends to buy … or sell … a DME supplier, there are a number of documentation and regulatory issues that must be addressed. The seller must take a number of steps to make itself more attractive. The buyer and seller need to decide whether the transaction will be an asset or stock sale. The parties will need to engage in multiple transactional steps: mutual nondisclosure agreement, letter of intent, stock purchase agreement/asset purchase agreement, and other closing documents. The buyer will need to engage in three types of due diligence: financial, corporate and regulatory. And the parties will need to meet a number of regulatory requirements such as submitting change of ownership notifications. This program will discuss all of these (and other) issues associated with the purchase and sale of a DME supplier.

Register for Buying and Selling a DME Supplier: Steps to Succeed on Tuesday, July 25, 2023, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq., and Tom A. Knapp, Esq., of  Brown & Fortunato.

Members:  $99
Non-Members:  $129