AMARILLO, TX – Assume that (i) ABC Medical Equipment, Inc. (“ABC”) desires to enter into a subcontract agreement with XYZ Medical Equipment, Inc. (“XYZ”) and (ii) the two companies have similar, but not identical, owners. Further assume that ABC desires to enter into a joint venture with a hospital. This article addresses these two scenarios.
Subcontract Agreement Between ABC and XYZ
Assume that an oxygen patient comes to XYZ with insurance for which XYZ is out-of-network but for which ABC is in-network. When this occurs, XYZ can advise the patient that XYZ is out-of-network with the patient’s insurer and can tell the patient that XYZ’s affiliated company, ABC, is in-network. Assume that the patient chooses ABC as his supplier. On behalf of ABC, an XYZ employee (i) can deliver the oxygen to the patient, (ii) set up the oxygen, and (iii) educate the patient on how to use the oxygen.
An important issue to be addressed is the way money flows between ABC and XYZ. The federal anti-kickback statute (“federal AKS”) prohibits entities from giving/receiving anything of value in exchange for referrals of patients covered by a federal health care program (“FHCP”). Each state has an anti-kickback statute (“state AKS”) that is similar to the federal AKS. Some state AKSs apply only if the payor is the state Medicaid program. Other state AKSs apply if the payor is the state Medicaid program or a commercial insurer. And some state AKSs apply if the payor is the state Medicaid program, a commercial insurer, or a cash-pay patient.
ABC and XYZ can enter into a Subcontract Agreement in which ABC pays XYZ for its delivery, set-up, and patient education services. The compensation needs to be fair market value (“FMV”). The safest way for ABC to pay XYZ is for (i) the compensation to be fixed one year in advance (e.g., $60,000 over the next 12 months) or (ii) the compensation to be on an hourly basis. There should not be a formal or informal cross-referral arrangement between the two companies.
It is important that XYZ ensure patient choice. The patient may choose ABC because of the convenience, but the freedom of the patient to choose another supplier should be evident to the patient. Other important issues are:
- ABC is the supplier. As such, it must handle the intake, assessment and coordination of care. XYZ can collect documents, pertaining to a patient, and transmit them to ABC. Upon receipt of the documents, it is ABC’s responsibility to determine if the patient meets the insurer’s coverage requirements.
- The obligation of ABC to pay XYZ for its subcontract services cannot be connected to payment by the insurer to ABC. So, even if the insurer fails to pay ABC, ABC must nevertheless pay XYZ. In the eyes of the insurer, ABC (not XYZ) is the supplier. Therefore, in supplying the oxygen, ABC must have certain operational responsibilities and financial risk. Said another way, ABC must have “skin in the game.” If a customer (who has bought a product from ABC) has a subsequent problem with the product, the customer should call the supplier (ABC). ABC can then instruct XYZ to take care of the problem.
Joint Venture Between ABC and a Hospital
Assume that “St. Catherine’s” Hospital and ABC desire to set up and own “St. Catherine’s Medical Equipment, Inc.” (“SCME”). Assume that ownership will be 50-50, although the ownership percentages can be whatever the parties agree on.
Ideally, the joint venture (“JV”) will comply with the Small Investment Interest safe harbor to the federal AKS. However, because of the two 60-40 tests set out in the safe harbor, the parties will likely not be able to meet the safe harbor. Therefore, the JV will need to comply with the (i) OIG’s 1989 Special Fraud Alert (entitled “Joint Ventures”) and (ii) OIG’s April 2003 Special Advisory Bulletin (entitled “Contractual Joint Ventures”). Essentially, these two OIG guidances say that the JV cannot be a “sweetheart deal” for St. Catherine’s. Because St. Catherine’s will be referring patients to SCME, if the JV is a “sweetheart deal” for St. Catherine’s, the federal AKS is violated. For example, if the initial capitalization for the JV is $200,000, at the outset each party needs to invest $100,000. St. Catherine’s will be entitled to 50% of the profits of SCME regardless of how many or how few referrals that St. Catherine’s makes to SCME.
St. Catherine’s cannot be expected to make any referrals to SCME. Of course, if St. Catherine’s wants to refer to SCME, St. Catherine’s can do so. ABC is the “DME expert.” However, ABC cannot manage SCME on a turnkey basis. SCME must have a certain level of operational responsibilities and financial risk. ABC can provide some services to SCME, but SCME must pay FMV compensation to ABC for the services.
Alternatively, St. Catherine’s and ABC can elect not to form SCME, but rather, St. Catherine’s can purchase an equity interest (e.g., 20%) in ABC. Again, this cannot be a “sweetheart deal” for St. Catherine’s. For example, if ABC has a value of $1 million and if St. Catherine’s purchases a 20% interest in ABC, then St. Catherine’s must pay $200,000. St. Catherine’s will be entitled to 20% of the profits of ABC regardless of how many (or how few) referrals that St. Catherine’s sends to ABC. Let’s say that ABC goes into the auto parts and frozen yogurt lines businesses and these businesses fall under ABC’s Tax ID #. St. Catherine’s is entitled to 20% of those profits as well.
AAHOMECARE’S EDUCATIONAL WEBINAR
Legal Guidelines for Growing Your Retail Business
Presented by: Jeffrey S. Baird,Esq., Brown & Fortunato
Tuesday, May 18, 2021
1:30-2:30 p.m. CENTRAL TIME
“Leave it to Beaver” has been replaced by “Modern Family.” The old way of running a DME business no longer works. With stringent documentation requirements, lower reimbursement, and post-payment audits, Medicare fee-for-service should only be a component of the supplier’s total income stream. There are 78 million Baby Boomers retiring at the rate of 10,000 per day. Boomers are accustomed to paying for things out-of-pocket. And most Boomers want the “Cadillac” product – not the “Cavalier” product – so they can have an active lifestyle well into their 80s. The successful DME supplier will be focused on selling upgrades, utilizing ABNs, and selling “Cadillac” items for cash. These retail sales may take place in a store setting, through a kiosk, or over the Internet.
When selling products for cash, there are a number of requirements that the DME supplier must meet. This program will discuss these requirements, including the following:
- state licensure;
- selling Medicare-covered items at a discount off the Medicare allowable;
- obtaining a physician prescription; and
- collection and payment of sales and/or use tax;
- qualification as a “foreign” corporation;
- required notification to a Medicare beneficiary even thoughthe supplier does not have a PTAN;
- complying with federal and state telemarketing rules.
Lastly, this program will discuss the benefits of setting up a separate legal entity through which the retail business will be operated.
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. 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@example.com.