Moving the HME Industry Forward


Moving the Caretail Business Into a Separate Legal Entity

July 3, 2017

AMARILLO, TX – A number of factors are making the Medicare fee-for-service (“FFS”) model almost untenable: (i) competitive bidding (“CB”); (ii) applying the CB reimbursement rates to non-CBAs; (iii) aggressive audits; (iv) reimbursement cuts; and (v) stringent documentation requirements. To address this challenge, many DME suppliers are aggressively pushing into the retail/caretail market.

Separate Legal Entity
As the DME supplier expands its retail business it should consider moving the retail business into a separate legal entity. There are two fundamental reasons for this:

• Exposure to Audits – Assume that ABC Medical Equipment, Inc. is a Part B supplier. It 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, then it will also adversely affect the financial condition of the retail “division.” On the other hand, if ABC Retail is a separate legal entity, then generally speaking, any recoupment liability imposed against ABC Medical will not spill over to ABC Retail.

• Future Sale of Retail Business – If ABC Retail is a “division” of ABC Medical, and if John Smith (the owner of ABC Medical) desires in the future to sell his retail business, but retain his Part B Business, then Smith 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 Smith decides in the future to sell the retail business, then he has the option of engaging in either an asset sale or a stock sale. Additionally, if ABC Retail is a separate legal entity, then it can bring in additional investors.

Discounts to Cash Customers
The DME supplier may desire to sell Medicare-covered items for cash at a discount off the Medicare allowable. In so doing, the supplier needs to be aware of the statute that says that a provider/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 clear guidance on what constitutes “substantially in excess” or “usual charges.”

The most recently 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% of the Medicare fee schedule amount (i.e., up to a 17% 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% 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. CMS declined to promulgate the proposed rule into a final rule. Nevertheless, this proposed rule gives insight into CMS’ thinking.

Sales Tax
When a DME supplier ships products into another state, the question is whether the supplier must collect sales tax in that state. The general rule is that a state cannot require a DME supplier to collect sales tax if the supplier (1) does not have a physical presence in the state and (2) does not have sufficient connections with the state to create a “substantial nexus.” Quill vs. N. Dakota, 504 U.S. 298, 311 (1992). Because of the general rule, many states have strengthened their efforts to establish that DME suppliers (shipping into these states) have a “substantial nexus” in their states. A state may assert that a “substantial nexus” occurs when an out-of-state supplier has an employee … or a warehouse … in the state.

Sharing Space With a Non-Provider
A DME supplier may desire to lease some of its retail showroom space to a “lifestyle” company, that is not a health care provider, in which the lifestyle company offers products and services that will help the aging Baby Boomer enjoy the active lifestyle that he or she is accustomed to having.

Assume that ABC Medical Equipment, Inc. desires to lease a portion of its showroom to XYZ Senior Lifestyle, Inc. XYZ is not a Part B supplier; it sells items for cash. It will be important for ABC to retain at least 200 square feet and continue its Medicare Part B business operations in accordance with the Supplier Standards. When the NSC inspector comes on-site to inspect ABC, it will be important that ABC’s and XYZ’s spaces be configured so as to avoid any confusion on the inspector’s part.

For example, the two stores can be separated by seven foot high grid walls, and each store can have its own cash register, telephone line, and sales representatives. On the front of the building, the logo and hours of operation for each store will be displayed. The logo of each store will be displayed in the area of the showroom that is occupied by the applicable store.

Qualification as a “Foreign” Corporation
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.

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., Georgia, Tennessee, 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 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 “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:
1) Does the statute define how large the facility must be? Must the facility be 1000 square feet? 500 square feet? 200 square feet? 50 square feet?
2) Can the facility be as simple as subleasing e.g., 200 square feet from a pharmacy or grocery store?
3) Can the facility be a self-storage unit?
4) Is the facility required to be accredited as a DME supplier? Must the facility have a PTAN?
5) Can an out-of-state supplier lease e.g., 200 square feet in the same state… but then ship products from out-of-state directly to the residents (i.e., products do not physically come into … or go out of … the facility)?
6) Is the facility required to be open to the public for “X” hours per week?
7) Must there be a person in the facility for “
X” hours per week? If so, must the person be a W2 employee of the supplier or can the person be recognized by the post office?
8) Must the facility have an address that is recognized by the post office?
9) Must the facility have a telephone with a working telephone number?

Selling DME By a Supplier Without a PTAN
Certain disclaimers must be made when a supplier sells, without a PTAN, DME to a Medicare beneficiary.  42 U.S.C. §1395m(j)(4)(A) 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, then any expenses incurred for the DME will be the responsibility of the supplier. The beneficiary will have no financial responsibility for the expenses, and the supplier will refund any amounts collected from the beneficiary, unless before the DME was furnished, the beneficiary was informed that Medicare would not pay for the DME and the beneficiary agreed to pay for the item. Assume that a DME supplier, without a PTAN, desires to sell items for cash over the internet. The supplier’s web page should have the following in large bold type appear 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.

Use of Social Media
“Social media” is a way for people to communicate and interact online. Social media has been around since the dawn of the Internet, but in the last ten (10) years or so we’ve seen a surge in both the number and popularity of social media sites. The future of the DME industry is the servicing of the 78 million “Baby Boomers” who are retiring at the rate of 10,000 per day. Unlike their parents (the “Greatest Generation”) Boomers are comfortable using social media. The forward-thinking DME supplier will utilize social media to (i) advertise to prospective customers, (ii) stay in touch with existing customers, and (iii) monitor patient outcomes.

Internet Leads
When a DME supplier signs a lead generation agreement with a lead generation company (“LGC”), the supplier needs to be careful not to violate the Medicare anti-kickback statute. It is acceptable to purchase a lead; however, it is a violation of the anti-kickback statute to pay for referral. The line between the two can be blurry. It is acceptable for an LGC to obtain basic information from a lead (name, address and telephone number) and sell this “raw” lead to a DME supplier. The supplier can, in turn, pay the LGC on a per lead basis. If, however, the LGC obtains “qualifying” information on the lead (e.g., Medicare number, other insurance information, medical condition, physician’s name, products currently being used, etc.) and sells the qualified lead to the supplier which, in turn, pays for the lead on a per lead basis, then it is likely that the government will take the position that the supplier is not buying a lead, but is paying for a referral … which violates the anti-kickback statute.

HIPAA Restrictions on Marketing
The Health Insurance Portability and Accountability Act (“HIPAA”) requires “covered entities” to obtain a valid authorization from individuals before using or disclosing protected health information (“PHI”) to market a product or service to them. HIPAA broadly defines “use” of PHI to include the sharing, employment, application, utilization, examination, or analysis of such information. 42 CFR § 160.103. The new HIPAA definition of marketing states what is not marketing:

• Marketing does not include a communication made: … [f]or the following treatment and health care operations purposes, except where the covered entity receives financial remuneration in exchange for making the communication[,] …
• to describe a health-related product or service (or payment for such product or service) that is provided by, or included in a plan of benefits of, the covered entity making the communication.

Promotional Items
The DME supplier can offer an item of nominal value (i.e., retail value of not more than $15) to customers/prospective customers covered by a government health care program. Over a 12-month period, the DME supplier may not give items to any one customer that have a combined retail value greater than $75.

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