Moving the HME Industry Forward


Manufacturers and DME Suppliers Working Together

July 10, 2017

AMARILLO, TX – DME suppliers and manufacturers are dependent on each other for success. Manufacturers need financially stable suppliers to purchase their products. Suppliers need their manufacturers to (i) provide quality products and (ii) offer reasonable credit terms. As they work together, manufacturers and DME suppliers need to avoid implicating the Medicare anti-kickback statute (“AKS”) and the federal False Claims Act (“FCA”).

Applicable Law
The AKS makes it a felony to knowingly and willfully 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 (e.g., Medicare, Medicare Advantage, Medicaid, Medicaid Managed Care, TRICARE), 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. A number of courts have adopted the “one purpose” test: if one purpose of a payment is to induce referrals, then the AKS is violated regardless of whether the payment is fair market value for otherwise legitimate services rendered.

The FCA states that any person or entity who knowingly presents to a federal health health care program a fraudulent claim for payment, or knowingly uses a false record or statement to obtain payment from a federal program, is subject to civil monetary penalties.

Because of the breadth of the AKS, the Office of Inspector General (“OIG”) has adopted “safe harbors” that provide immunity from the AKS if certain requirements are met. 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, 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 the federal government may pay, either fully or in part, under Medicare, Medicaid, or another 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) reports costs on a cost report; or (iii) submits a claim or a request for payment for the discounted item or service and payment may be made, in whole or in part, under Medicare, Medicaid, or other federal health care programs. A DME supplier must comply with specific standards in order to invoke the protection of the discount safe harbor. First, the “discount must be made at the time of the sale of the good or service or the terms of the rebate must be fixed and disclosed in writing to the buyer at the time of the initial sale of the good or service.” Second, the buyer must provide, “upon request by the Secretary or a State agency” an “invoice, coupon or statement” from the seller that “fully and accurately” reports such discount.

Examples of Acceptable Arrangements
Cooperative Marketing Agreement – The manufacturer and DME supplier enter into an arrangement in which the manufacturer advertises its products and the supplier’s ability to provide the products. The supplier pays the manufacturer for the supplier’s prorate 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 complies with the Discount Safe Harbor to the AKS.

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 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 arrangement complies with, or substantially complies with, the Personal Services and Management Contracts Safe Harbor to the AKS.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or