AMARILLO, TX – Medicare came into existence in 1965. The first generation it took care of was “The Greatest Generation”—the World War II folks. The DME industry came into existence in the mid to late 70s. Understandably, the 23 million of the Greatest Generation believed that Medicare should pay for all or most of their health care needs including DME.

“Back in the day,” the DME supplier’s business model was relatively simple. The supplier would receive a physician’s order and would hand the product to the Medicare beneficiary. The biggest challenge for the supplier was to learn how to properly bill Medicare. Reimbursement was high, audits were practically nonexistent, and competitive bidding was not even a concept. Well, that was then and this is now.

The customers have changed and the DME suppliers have changed. The Greatest Generation is pretty much gone. It has been replaced by 78 million Baby Boomers who are retiring at the rate of 10,000 per day. Unlike earlier generations, Boomers are going to live well into their 80s. Unlike earlier generations, Boomers understand that they have to pay cash for at least some of their medical care. Boomers want to live active lives until the very end. Many Boomers are willing to pay cash for the Cadillac product as opposed to having Medicare pay for the Cavalier product.

Unlike in past decades, today’s DME suppliers are facing (i) reduced reimbursement, (ii) stringent documentation requirements, (iii) aggressive audits, and (iv) competitive bidding. Suppliers can no longer rely on the old business model. Said another way, suppliers cannot base their success on receiving physician orders and knowing how to bill Medicare. Suppliers must be innovative in their marketing. They must market to referral sources and to the patients themselves and their caregivers. Suppliers must lessen their dependence on Medicare fee-for-service (“FFS”). An important way to do this is to focus on selling products for cash.

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 Medical. Although it is not legally required, it makes good business sense for Smith to set up a new corporation, “ABC Retail Sales, Inc.” with its own tax identification number.

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. 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, he can pay cash for the product at ABC Retail. If a customer wants Medicare to pay for the product, 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, 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, ABC Medical can refer the customer to ABC Retail. Even though the two companies will have the same owner (John Smith), the companies are, nevertheless, separate legal entities (each with its own tax identification number). 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, 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, the employee may want the customer to sign aN Advance Beneficiary Notice of Noncoverage (“ABN”).

Alternatively, ABC Retail may want to make the calculated decision that having suspected Medicare customers sign an ABN will have a “chilling” effect on the retail experience for the customer. Therefore, ABC Retail might decide not to require a suspected Medicare customer to sign an ABN; and in those few instances when a Medicare customer subsequently complains that he was unaware that Medicare would not reimburse him, ABC Retail will reimburse the customer. From a practical standpoint, this will not occur very often. 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 appear in large, bold type 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 three fundamental reasons behind setting up ABC Retail as a separate legal entity: (1) 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, it will also adversely affect the financial condition of the retail “division.” On the other hand, if ABC Retail is a separate legal entity, generally speaking, any recoupment liability imposed against ABC Medical will not spill over to ABC Retail. (2) Future Sale of Retail Business – If ABC Retail is a “division” of ABC Medical and if in the future John Smith desires to sell his retail business but retain his Part B Business, he 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 in the future Smith decides to sell the retail business, he has the option of engaging in either an asset sale or a stock sale. (3) Bringing in Investors – If the retail business is successful and needs to bring in additional investment capital in order to expand, it can do so if the retail business is in a separate legal entity.

Cash Prices That Can Be Charged
If a DME supplier does not have a PTAN, there are no restrictions on the prices the supplier sets for Medicare covered and non-covered items. If a DME supplier has a PTAN, there are no restrictions on the prices that the supplier sets for items not covered by Medicare. If the supplier is non-participating and provides a covered item on a non-assigned basis, the supplier can, without limitation, charge more than the Medicare allowable.

Assume that the supplier is non-participating, provides a covered item on a non-assigned basis, and desires to charge less than the Medicare allowable. There is a federal statute that says that a DME supplier is prohibited from charging Medicare substantially in excess of the company’s usual charges unless there is good cause. The current regulations do not give any guidance on what constitutes “substantially in excess,” “usual charges,” or “good cause.”

The clearest guidance comes from a 2003 proposed rule that was not subsequently implemented. This proposed rule contemplates the “usual charge” to be either the average or median of the supplier’s charges to payors other than Medicare and some others. Under the proposed rule, a DME supplier’s usual charge should not be less than 83 percent of the Medicare fee schedule amount (i.e., up to a 17 percent discount from the Medicare fee schedule). There would be an exception for good cause which would allow a supplier’s usual charges to be less than 83 percent of the Medicare fee schedule if the supplier can prove unusual circumstances requiring additional time, effort, or expense or increased costs of serving Medicare beneficiaries. The proposed rule would include charges of affiliate companies into the calculation of a supplier’s usual charges. An affiliated company is any entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the DME supplier. The proposed rule explicitly excludes fees set by Medicare, state health care programs, and other federal health care programs except TRICARE. By implication, charges not specifically excluded will be included.

Charging Cash Customer Less Than What is Billed to State Medicaid
Billing and collecting from state Medicaid programs is more expensive and time consuming for a DME supplier than collecting from a cash-paying customer. It is logical for suppliers to desire to charge a cash-paying customer less than what the supplier bills Medicaid. The question thus arises: Is it permissible for the supplier to do so? Most state Medicaid programs require the supplier to bill the Medicaid program its usual price.

Qualification as a “Foreign” Corporation
If the DME supplier decides to sell products for cash to residents of other states, the supplier may need to qualify as an out-of-state or “foreign” corporation in those states. The requirement to register or qualify as a foreign corporation generally hinges on whether an entity is doing business in a state according to that state’s foreign corporation statute. Most states do not statutorily define what constitutes doing business in the state. Instead, the statute sets forth a non-exhaustive list of activities that do not constitute doing business in the state; and interstate commerce is frequently listed as one of the exceptions. In most states, solely (1) obtaining a DME license and (2) shipping products into the state will not result in the supplier being required to qualify as a foreign corporation in the state.

Note that qualification as a foreign corporation will subject the DME supplier to potential state business income taxation in some states. If a DME supplier decides to qualify as a foreign corporation in another state, the qualification process typically involves filing fees and an application for foreign corporation qualification with the secretary of state’s office, maintaining a registered office and/or registered agent in the state, and filing annual reports. Most states will not allow an entity to qualify and conduct business in the state under a name that is not distinguishable from a name already on file in that state.

The requirements for withdrawing registration as a foreign corporation are generally more onerous than the initial application to qualify as a foreign corporation. Certain states require detailed financial information and most require clearance from other state agencies in order to withdraw. All states require the withdrawing entity to certify, under penalty of perjury, that it is no longer conducting business in the state and surrender its authority to conduct business in the state. Doing business in another state may result in the DME supplier owing certain types of taxes to that state. Because the state tax laws frequently use criteria that differ from the state foreign corporation statute, these taxes may be owed even if the business is not otherwise required to register as a foreign corporation.

State “Brick and Mortar” Laws
Most states require a DME supplier to have some type of license. This requirement is imposed on the supplier located within the state as well as the out-of-state supplier shipping into the state. A few states (e.g., Tennessee, Georgia, and Colorado) require the DME supplier to have a brick and mortar presence in the state before a license will be issued to the supplier.

It is likely that other states will adopt brick and mortar requirements as a precondition to receive a DME license. If the supplier intends to sell products to residents of one of these states, it is important that the supplier carefully read the statutory language. Each state’s brick and mortar statute will have nuances that will likely not be found in other state brick and mortar statutes.

Examples of such nuances are: Does the statute define how large the facility must be? Must the facility be 1,000 square feet? 500 square feet? 200 square feet? 50 square feet? Can the facility be as simple as subleasing e.g., 200 square feet from a pharmacy or grocery store? Can the facility be a self-storage unit? Is the facility required to be accredited as a DME supplier? Must the facility have a PTAN? Can an out-of-state supplier lease e.g., 200 square feet in the state but ship products from out-of-state directly to the residents (i.e., products do not physically come into or go out of the facility)? Is the facility required to be open to the public for X hours per week? Must there be a person in the facility for X hours per week? If so, must the person be a W-2 employee of the supplier? Must the facility have an address that is recognized by the post office? Must the facility have a telephone with a working telephone number?

Competing with Amazon: Fulfillment Arrangement with Distributor
Amazon will ship the product to the customer’s door. Even though Amazon may advertise free shipping, in reality shipping is not free. The shipping cost is built into the cost of the product. The cost of the product for Amazon is likely lower than what the customer can buy the same product for from a local supplier. However, the cost is often not that much lower. And that is pretty much it. The sum total of the benefits of buying from Amazon is the (1) delivery to the door and (2) the lower cost.

If the Amazon product needs to be assembled, it is up to the customer to assemble it. If the customer needs to be educated on how to use the Amazon product, such education will be in the form of (1) the customer reading instructions from the seller and/or (2) talking to a person over the phone. If the customer purchases the product from Amazon and the product does not work properly or does not work at all or needs to be repaired, the customer will need to resolve the problem long distance with the seller.

In order to compete with Amazon, the local DME supplier can enter into a fulfillment arrangement with a distributor of products. It will be important for the distributor to have a large selection of products. The distributor’s products will be described on the supplier’s website. While the customer can review the Amazon website and observe a wide selection of products, the same customer, likewise, can review the local supplier’s website and observe a wide selection of products.

When the customer orders a product from the supplier, the supplier will direct the distributor to ship the product to the customer so that it is received within 24 to 48 hours. The label on the product and/or on the shipping package will reflect the supplier’s name. By working with a distributor in a fulfillment arrangement, the supplier does not have to incur the cost of carrying large quantities of inventory.

Now, this is where competing with Amazon becomes interesting. The local supplier can advertise that on the same day that the customer receives the product, a supplier employee will go to the customer’s house and (1) set the product up and (2) educate the customer on how to use the product. Amazon cannot offer this service. The local supplier can advertise that if the product subsequently needs to be repaired, the supplier will pick the product up from the customer and allow the customer to use a loaner. After the supplier repairs the product, the supplier will return the product to the customer and pick up the loaner. Amazon cannot offer this service.

The local supplier can advertise that if the product needs to be replaced, the supplier can provide a loaner until the distributor ships the new product to the customer. Amazon cannot offer this service. If the distributor has a large number and variety of products, the cost of the product will likely not be much more than what the customer can purchase the product for from Amazon. When the customer purchases a product from Amazon, the customer pays cash. If the product is reimbursable by Medicare, it is likely that the customer will need to file a claim with Medicare for reimbursement.

It is unlikely that the seller (of the product through Amazon) will submit a claim to Medicare on behalf of the customer. There are several reasons for this: (1) the seller may not have obtained a physician’s order, (2) the seller may not have obtained other Medicare-required documentation, (3) the seller may not be licensed in the state where the customer resides, and/or (4) the seller may not even have a PTAN. On the other hand, the local supplier will treat the customer (who receives the product from the distributor) the same way that the supplier treats a customer who walks into the supplier’s facility. The supplier will collect the physician’s order, will collect other Medicare required documentation, will take an assignment of benefits from the customer, will bill and collect from Medicare, and will only expect the customer to pay the required copayment. If the local supplier is non-participating, it can ask the customer to pay cash to the supplier. In turn, the supplier can submit a claim on behalf of the customer to Medicare for reimbursement directly to the customer.

When a supplier executes a fulfillment agreement with a distributor, the agreement should include the following key provisions: Title to the products, shipped by the distributor to the customers, will be in the supplier’s name. Labeling on the product and/or the package will reflect the supplier’s name and address. The supplier will be obligated to pay the distributor for the product regardless of whether or not the supplier is paid for the product. The product will be delivered to the customer within a set period of time (e.g., within 24 hours or 48 hours). The distributor will obtain written proof of delivery that, in the supplier’s opinion, will suffice to meet third-party payor requirements. The agreement will include a HIPAA-compliant business associate agreement.

In promoting the fulfillment model to customers, the supplier must be careful not to violate the federal beneficiary inducement statute. This statute prohibits a supplier from offering anything of value to a federal health care program (“FHP”) patient that the supplier knows, or should know, will induce the patient to purchase an FHP-covered product from the supplier. There is, however, the “nominal value” exception to the inducement statute. This exception states that the supplier can offer a non-monetary gift to an FHP patient if the gift has a retail value of $15 or less. And, the supplier can offer multiple gifts to an FHP patient so long as all of the gifts, combined, do not have a retail value in excess of $75 during a 12-month period.

If the supplier will take assignment from Medicare or other third-party payor, the supplier must make a reasonable effort to collect the copayment. The supplier can waive the copayment only if the patient establishes a financial inability to pay. The supplier cannot advertise the existence of a copayment waiver policy based on an inability to pay. Assume that the supplier is non-participating and that the supplier requires the customer to pay cash for the product. If the customer is a Medicare beneficiary, the supplier will be required to submit a claim for reimbursement to Medicare on the customer’s behalf.

In promoting the fulfillment model to physicians, the supplier needs to be careful not to violate the federal anti-kickback statute (“AKS”) and the federal Stark physician self-referral statute (“Stark”). The AKS prohibits a supplier from offering anything of value to a physician in exchange for (1) referring an FHP patient, (2) arranging for the referral of an FHP patient, or (3) recommending the purchase of a product or service that is covered by an FHP. The AKS has a number of safe harbors. A safe harbor is a hypothetical fact scenario such that if an arrangement falls within it, as a matter of law, the AKS is not violated. If an arrangement does not fall within a safe harbor, it does not mean that the AKS is violated; rather, it means that the arrangement needs to be carefully analyzed in light of the language of the AKS, published Office of Inspector General guidance, and court decisions. Stark states that if a supplier and a physician have an ownership or compensation relationship, then the physician cannot refer Medicare/Medicaid patients to the supplier. While the AKS does not have safe harbors, it does have a number of exceptions. One exception is the non-monetary compensation exception which allows a supplier to spend up to a certain amount each year on non-monetary gifts for physicians. In 2021, the amount is $429. This exception does not apply to the physician’s staff. A safe way to promote the fulfillment/home delivery model to referring physicians is for the supplier to sponsor an educational lunch for the physician and his/her staff. The risk is low that a governmental agency will assert that such a lunch violates the AKS. And the physician’s portion of the lunch should be around $10—well below the $429 limit.

AAHOMECARE’S EDUCATIONAL WEBINAR

Collaborative Arrangements with Hospitals, Pharmacies, Home Health Agencies, and Other Referral Sources

Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Kelly T. Custer, Esq., Brown & Fortunato

Tuesday, June 1, 2021

1:30-2:30 p.m. CENTRAL TIME
The lifeblood of the successful DME supplier is to develop relationships with physicians, hospitals, long term care facilities, home health agencies, pharmacies, and other providers to ensure a steady stream of referrals. There are innovative arrangements that, if structured properly, are legally acceptable. Examples include a Medical Director Agreement with a physician, loan closet with a hospital, preferred provider agreement with a long-term care facility and/or a hospital, joint venture with a hospital, and sponsoring a physician to present education programs. In structuring such an arrangement, DME suppliers need to be careful to avoid the federal anti-kickback statute, the federal physician self-referral statute (“Stark”), and other federal and state anti-fraud laws. This webinar will (i) discuss the applicable legal guidance, (ii) give examples of legally acceptable arrangements with referral sources, and (iii) give examples of arrangements that need to be avoided.

Register for Collaborative Arrangements with Hospitals, Pharmacies, Home Health Agencies and Other Referral Sources on Tuesday, June 1, 2021, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. and Kelly T. Custer, Esq. of Brown & Fortunato.

Members: $99
Non-Members: $129

Hosted by AAHomecare, Brown & Fortunato, and McKesson (Speak with your McKesson Rep for a Discount Code)

Perils of the “Gray Market”: Reselling to Providers and Second Tier Wholesalers

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

Tuesday, June 15, 2021

1:30-2:30 p.m. CENTRAL TIME

The standard distribution channel is for the DME supplier to purchase products from the manufacturer or the wholesaler…and then resell the products to consumers. In purchasing from the manufacturer/wholesaler, the supplier will normally agree to sell the products only to the end user (i.e., the consumer). In return for this commitment, the manufacturer/wholesaler will offer special pricing to the supplier.

Unfortunately, it is not uncommon for suppliers to sell these restricted products on the “gray market” – that is – suppliers will resell the products to medical clinics, home health agencies, long term care facilities that, in turn, provide the products to their patients. Alternatively, the DME supplier will resell the restricted products to second tier wholesalers that operate in the gray market.

By diverting products from the normal distribution channel into the gray market, DME suppliers are opening themselves up to liability from different sources. The manufacturer/wholesaler can (i) terminate its relationship with the supplier and/or (ii) sue the supplier for breach of contract and possibly under a tort theory such as fraud in the inducement. In addition, there have been a number of federal criminal cases brought against DME suppliers and pharmacies that have diverted products into the gray market.

This program will discuss the restrictions that DME suppliers normally agree to when they purchase products from manufacturers and wholesalers. The program will then describe the gray market and the legal risks to suppliers that operate in the gray market. Lastly, the program will discuss the compliance steps that DME suppliers can take to steer clear of the legal pitfalls associated with the gray market.

Register for Perils of the “Gray Market”: Reselling to Providers and Second Tier Wholesalers on Tuesday, June 15, 2021, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. of Brown & Fortunato.

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].