AMARILLO, TX – In today’s climate, profit margins are thin. DME suppliers must be innovative regarding the steps to take to reduce expenses. For example, inventory is a high-cost item. If a DME supplier purchases inventory, and if the inventory “sits on the shelf” for an inordinate period of time, the supplier’s profit margin (resulting from the sale/rental of the inventory) will be diminished. There are steps that a DME supplier can take to control the carrying cost of its inventory.

Fulfillment Arrangement
A fulfillment agreement contains the following provisions:

• The DME supplier agrees to purchase designated products from the manufacturer/distributor.
• The parties agree to a price list for the products. The prices can be renegotiated on a periodic basis.
• At the beginning, the manufacturer/distributor retains title and possession of the products. This means that at the outset of the agreement, the supplier is not out much money for the products.
• When the DME supplier generates a patient who wants to obtain a product, the supplier transmits the patient’s name/contact information to the manufacturer/distributor. It will be important for the parties to enter into a HIPAA-compliant BAA.
• The manufacturer/distributor (sometimes referred to as the “fulfillment house”) “picks, packs and ships” the product to the patient. In doing so, the manufacturer/distributor affixes the supplier’s label to the product.
• In addition to paying for the product in accordance with the price list, the supplier will pay the manufacturer/distributor for its fulfillment (“pick, pack and ship”) services. Such payment can be separate from the payment for the products…or the fulfillment compensation can be included in the price list.

A fulfillment arrangement results in the DME supplier (i) only having to pay for products when patients are ready to purchase/lease the products and (ii) not having to carry many products on the supplier’s shelves.

Lease Arrangement
Subject to the risk described below, as opposed to selling products to the DME supplier, the manufacturer/distributor may want to lease products to the supplier. Such a lease agreement can be as flexible as the parties decide. The obvious benefit to the supplier is the fact that it does not have to pay a great deal of money at one time to the manufacturer/distributor.

But the DME supplier needs to be aware of the issue of “title.” DMEPOS Supplier Standard # 4, 42 CFR 424.57(c)(4) states:

A supplier must fill orders from its own inventory or contract with other companies for the purchase of items necessary to fill orders. A supplier cannot contract with any entity that is currently excluded from the Medicare program, any state health care programs, or any other federal procurement or non-procurement programs.
(Emphasis added).

The phrases “from its own inventory” and “contracting … for the purchase of items necessary to fill the order” indicate that the supplier is to have title to the item being furnished. The NPE East, a Medicare contractor responsible for enforcing the Supplier Standards, appears to take this position when it states in an FAQ:

In conjunction with standard 4, ensure the inventory being delivered is inventory that has been purchased by you and is not owned by the company delivering the inventory directly to the beneficiary. You are required to maintain proof the inventory delivered was from inventory of your own and not from inventory owned by the delivering company. This may be documented by maintaining invoices.

Lease arrangements have been in existence for decades, particularly in the oxygen space. I am not aware of any enforcement actions (on the basis of Supplier Standard # 4) against such lease arrangements. And yet, Supplier Standard # 4, and the NPE East guidance, say what they say. And so if a DME supplier enters into a lease arrangement with a manufacturer/distributor, the supplier needs to be aware of Supplier Standard # 4 and NPE guidance.

An argument can be made that a capital lease, resulting in constructive title being transferred to the DME supplier at the end of the lease, complies with (or substantially complies with) Supplier Standard # 4. A capital lease can arise if the lessee has the obligation to purchase the product at the end of the lease term. As to whether or not a capital lease and constructive title are recognized in a state will be determined by state law.

Flexible Terms of Payment
The DME suppler can approach manufacturers/distributors about agreeing to flexible payment terms. If the manufacturer/distributor will give the supplier an extended period of time to pay for products, then carrying the inventory will be a reduced financial burden to the supplier.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, a law firm based in Texas with a national health care practice. He represents pharmacies, infusion companies, HME companies, manufacturers, 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].