AMARILLO, TX – Because DME suppliers primarily serve the elderly, suppliers are substantially dependent on being paid by traditional Medicare and by Medicare Advantage Plans. An avenue to decrease this dependence is for the DME supplier to focus on selling/leasing products at retail for cash. In doing so, the supplier will provide some products at prices greater than the Medicare allowable, These may be the “Cadillac” products whose costs (to the supplier) may be greater than the Medicare allowable.

Many Baby Boomers will be happy to pay out-of-pocket for Cadillac products. At the same time, the supplier may want to sell/lease other Medicare-covered products for an amount that is less than the Medicare allowable. This is where the supplier, if it is not careful, can find itself on a slippery slope.

As will be discussed below, there is a law that restricts how much a DME supplier can sell/lease a Medicare-covered product for an amount that is less than the Medicare allowable. This article will discuss that law and also discuss options for the supplier to provide Medicare-covered products for prices below the Medicare allowable…without incurring a great risk of violating the law.

OIG’s Exclusion Authority
If certain conditions are met, the OIG has the authority to exclude a DME supplier from participating in Medicare and Medicaid. Exclusion is mandated upon certain types of criminal convictions, including conviction based on the provision of Medicare or Medicaid services, any conviction for patient abuse, or felony conviction related to health care fraud or controlled substances.

In addition to mandatory exclusion, the OIG has broad powers of permissive (or discretionary) exclusion with an assortment of predicate actions that trigger this authority. Most types of permissive exclusions are derivative in nature, in that they require a prior administrative or judicial determination. For example, a conviction for financial misconduct or a misdemeanor (pertaining to controlled substances) are possible grounds for exclusion.

These grounds do not require the OIG to make its own determination about the underlying behavior. By contrast, non-derivative permissive exclusions require the OIG to make an independent investigative determination that an entity has engaged in one of the specified types of behavior. For example, an OIG determination that an entity has engaged in a kickback scheme, or failed to make statutorily required disclosures, may result in exclusion.

Statutory Authority to Exclude for Excessive Costs
Pursuant to 42 USC § 1320a-7(b)(6)(A), the OIG may permissively exclude an entity from participation upon a determination that the entity:

[H]as submitted or caused to be submitted bills or requests for payment (where such bills or requests are based on charges or cost) under title XVIII or a State health care program containing charges (or, in applicable cases, requests for payment of costs) for items or services furnished substantially in excess of such individual’s or entity’s usual charges (or, in applicable cases, substantially in excess of such individual’s or entity’s costs) for such items or services, unless the Secretary finds there is good cause for such bills or requests containing such charges or costs … [italics added].

The statute includes at least four terms that require clarification: (i) Which “items or services” are included? (ii) What does “substantially in excess” mean? (iii) What does “usual charge” mean? (iv) What is “good cause?”

Absence of Regulatory Guidance
The OIG has attempted on three separate occasions to clarify the statute. In 1990 it invited public comment on whether and how to define “substantially in excess of” and “usual charges or costs.” Submitted comments generally agreed that guidance would be helpful but disagreed over appropriate definitions.

A subsequent attempt to add clarifying regulations also failed. Most recently, in 2003, the OIG again attempted to define what kind of “excess” would trigger exclusion. This last attempt similarly ended in failure. Because the 2003 attempt is the most substantive attempt the OIG has made to interpret the statute, the proposed, but ultimately withdrawn, clarifying regulation is often cited for guidance.

2003 Guidance
The proposed guidance defined “substantially in excess” to cover scenarios where the entity charged the government greater than 120% of its “usual charge” for such item or service. This “120%” provision is sometimes referred to as the 17% rule, since a discount rate greater than 16 2/3% below the government price would trigger the prohibition.

Among “usual charges,” the proposed guidance included (i) amounts billed to cash patients (including only the amounts that the DME supplier makes a good faith effort to collect); (ii) amounts billed for patients covered by indemnity insurance with which the DME supplier has no contractual relationship; (iii) any fee-for-service rates the entity contractually agrees to accept from any payor, including any discounted fee-for-service rates negotiated with managed care plans (including Medicare Advantage and Medicaid Managed Care Plans); and (iv) rates offered to TRICARE. The guidance specifically excludes any rates set by Medicare or other state or federal health care programs (excluding TRICARE).

The OIG never settled on a method for calculating the usual charge. The OIG considered two separate methods: the “average” method and the “50th percentile” method. The average method just added up each separate charge for the item or service and divided the sum by the total number of discrete charges. The 50th percentile method used the median charge as the usual charge (and used the range between the two nearest charges where the number of charges is even and the two charges nearest the middle are not identical).

Lastly, the proposed rule offered guidance on what would qualify as “good cause” for exceeding the 120% threshold. In addition to the usual cases of unusual medical circumstances requiring increased cost of care, the OIG proposed an additional good cause exception based on “cases where the higher charge or cost submitted to Medicare or Medicaid is a result of increased costs associated with serving program beneficiaries.”

Practical Tips
From a practical standpoint, what does this mean for a DME supplier? Here are some tips:

• I am not aware of an enforcement action brought under the statute. However, this does mean that (i) one has been brought and I am just unaware of it and (ii) the OIG will not start enforcing the statute in the future.
• It is safe for a DME supplier to sell/lease Medicare-covered items at a price that is less than the Medicare allowable … but only if the discount is not greater than 17% off the Medicare allowable.
• If a DME supplier provides an item at a greater-than-17% off the Medicare allowable, but if the supplier can document its cost savings arising out of not having to work with Medicare regarding the item, then the risk of an enforcement action under the statute is low.
• If a DME supplier occasionally provides a certain item to customers at a greater-than-17% discount off the Medicare allowable, but such discounts do not appreciably affect the supplier’s “usual charge” for the item, then the risk of an enforcement action under the statute is low.
• If a DME supplier intends to start selling/leasing a large volume of different products at greater-than-17% discounts off the Medicare allowable, then the supplier should set up a separate legal entity to do so. The separate legal entity will have its own Tax ID # and will not have a PTAN. This separate legal entity will not be constrained by the 17% rule.

Jeffrey S. Baird, JD, 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. 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].