AMARILLO, TX – Over the past 25 years our firm has scrutinized multiple business arrangements proposed by manufacturers to DME suppliers. We have approved business models that were innovative but still cleared the regulatory hurdles of the federal anti-kickback statute (“AKS”) and applicable state laws.

But during these same 2 1/2 decades, we advised against other proposed business models that appeared too cozy, were too focused on the principle of “I’ll do this for you, and you’ll do that for me,” or were flat out too risky from a legal standpoint. The government is focused on those relationships between manufacturers and DME suppliers that cross the line into the kickback arena.

Within the bounds of the law, DME suppliers and manufacturers can enter into innovative co-marketing arrangements. These arrangements necessitate certain guardrails to ensure that the arrangement does not run afoul of the AKS.

The AKS makes it a felony to knowingly and willingly offer, pay, solicit, or receive any remuneration to induce a person or entity to refer an individual for the furnishing or arranging for the furnishing of any item or service reimbursable by a federal health care program or to induce such person to purchase or lease or recommend the purchase or lease of any item or service reimbursable by a federal health care program.

Because the AKS is so broad, the Office of Inspector General (“OIG”) has adopted “safe harbors” that provide immunity from the AKS if certain requirements are met. If an arrangement does not meet a safe harbor, it does not mean that the AKS is violated. Rather, it means that the arrangement needs to be carefully scrutinized under the wording of the AKS, court decisions, and published guidance. Two safe harbors are particularly relevant to arrangements between manufacturers and DME suppliers:

• Personal Services and Management Contracts Safe Harbor – This safe harbor permits payments to referral sources as long as a number of requirements are met. Two of the most important requirements are that (i) payments must be pursuant to a written agreement with a term of at least one year and (ii) the aggregate compensation must be set in advance (e.g., $60,000 over the next 12 months, or $5000 per month), be consistent with fair market value (“FMV”), and not be determined in a manner that takes into account the volume or value of any referrals or business generated between the parties.
• Discount Safe Harbor – On condition that certain requirements are met, this safe harbor permits discounts on items or services for which payment is made by a federal health care program. “Discount” refers to either (i) a reduction in the amount a buyer is charged for an item or service based on an arm’s length transaction or (ii) a rebate, which is an amount that is described in writing at the time of the purchase but is paid at a later date. The safe harbor specifically excludes the following from the definition of a discount: (i) cash payments or cash equivalents (except rebate checks); (ii) supplying one good or service without charge to induce the purchase of a different good or service, unless the goods and services are reimbursed by the same federal programs using the same methodology and the reduced charge is fully and appropriately disclosed to the federal programs; and (iii) other remuneration, in cash or in kind, not explicitly described by the safe harbor. The safe harbor establishes distinct disclosure obligations for the different types of entities in a discount arrangement: sellers (e.g., manufacturers), buyers (e.g., suppliers that purchase goods or services), and offerors (e.g., parties who serve as middlemen and arrange for discounts between buyers and sellers). The safe harbor’s obligations for buyers are further defined depending on whether the entity is (i) acting under a risk contract; (ii) reporting costs on a cost report; or (iii) submitting a claim or a request for payment for the discounted item or service and payment may be made, in whole or in part, under a federal health care programs. A DME supplier must comply with specific standards in order to invoke the protection of the discount safe harbor.

There are generally acceptable business arrangements that allow manufacturers and DME suppliers to work together:

• Cooperative Marketing Agreement – The manufacturer and DME supplier enter into an arrangement in which the manufacturer advertises (i) its products and (ii) the supplier’s ability to provide the products. The supplier pays the manufacturer for the supplier’s prorata share of the expenses of the advertisements.
• Discounts and Rebates Tied to Volume of Purchases – The manufacturer and supplier enter into an agreement in which the manufacturer provides discounts and rebates to the supplier that are tied only to the volume of the manufacturer’s products purchased by the supplier. The arrangement needs to meet all of the requirements of the Discount Safe Harbor.
• Referrals by the Manufacturer Not Tied to Purchases – The manufacturer advertises its products on television, in print media, and on its website. As a result, the prospective customers (“leads”) contact the manufacturer about the manufacturer’s products.  The manufacturer forwards the leads to DME suppliers.  In so doing the manufacturer does not require the suppliers to sell the manufacturer’s products to the leads.
• Payment by the Supplier of FMV Compensation to the Manufacturer for Services – The manufacturer provides a variety of services to the DME supplier. These services might include: (i) call center services in which the manufacturer calls the supplier’s customers (on behalf of the supplier) to determine if they need a refill of the supplier’s products; (ii) fulfillment services in which the manufacturer ships products (on behalf of the supplier) to the supplier’s customers; (iii) billing services in which the manufacturer submits claims to third party payors on behalf of the supplier; and (iv) consulting services in which the manufacturer provides expertise to the supplier on a number of matters. The supplier needs to pay FMV compensation to the manufacturer for the services. The arrangement needs to comply with, or substantially comply with, the Personal Services and Management Contracts Safe Harbor.

In contrast, there are arrangements between manufacturers and DME suppliers that the government may contend run afoul of the AKS. Examples include:

• Manufacturer provides qualified leads to the supplier in which the arrangement does not comply with (or substantially comply with) the Personal Services and Management Contracts safe harbor.
• Manufacturer provides services to a DME supplier for which the supplier does not pay FMV compensation.
• Manufacturer co-markets with a DME supplier and pays more than its prorata share for the advertising.

Sometimes the government sees sufficient suspect arrangements to warrant inquiry into them. When such inquiries arise, it is imperative that the DME supplier work with its counsel to demonstrate to the government that the supplier’s business was legitimately procured and that co-marketing arrangements were fairly borne by the manufacturer and the DME supplier.  The OIG Work Plan routinely indicates that the government is interested in any “schemes” related to DME.

In a highly-regulated industry, a DME supplier must be able to defend its business arrangements with manufacturers and demonstrate that its preference for any particular manufacturer results from superior product quality, support and/or patient preference … rather than from a suspect business arrangement. The fittest of DME suppliers can remain in an ultra-competitive race with other suppliers without committing fraud, but at times its performance may be called into question … in which case it is imperative that the manufacturer-DME provider relationship be legally appropriate.

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 protected].

Bradley W. Howard, JD, is chairman of the Labor and Employment Law Group and a health care attorney at Brown & Fortunato, PC, handling governmental investigations, business disputes, and litigation involving health care providers including pharmacies, DME companies, manufacturers, home health agencies, and hospitals. Mr. Howard is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6310 or [email protected].