AMARILLO, TX – The term “fair market value” (“FMV”) is a commonly used term. For example, what is the FMV of a house…or of a vehicle…or a frozen yogurt shop that is for sale…or the services of a lawn maintenance company? FMV is important in the health care space. If someone wants to purchase the stock…or the assets…of a DME supplier, what is the FMV of the stock/assets? More importantly, FMV can determine if an arrangement violates a federal and/or state fraud statute.

Value of a DME Supplier
Assume that John Smith owns 100% of ABC Medical Equipment, Inc. Assume that Smith intends to sell his stock certificate (showing his ownership in ABC) to Jim Brown. What is Smith’s stock worth?

A standard calculation of the value of Smith’s stock is a “multiple of ABC’s EBITDA.” EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” EBITDA is essentially the same thing as net profit. A common multiple is 3 to 5 times EBITDA. The multiple can be higher if the uniqueness of ABC justifies a greater multiple (e.g., 7 or 8).

The value of a DME supplier is affected by whether it has a legally compliant operation. For example, if all or a portion of ABC’s revenue is derived from arrangements that violate the federal anti-kickback statute (“AKS”)…or violate the federal physician self-referral statute (“Stark”)…or violate the Medicare CPAP Payment Prohibition…then the value of ABC is greatly reduced.

FMV and Fraud Laws
The AKS makes it a felony if a DME supplier gives anything of value to a person/entity in exchange for (i) the referral of patients covered by a federal health care program (“FHCP”), (ii) arranging for the referral of FHCP patients, or (iii) recommending the purchase of products/services payable by an FHCP.

The Office of Inspector General (“OIG”) has published a number of “safe harbors.” If an arrangement complies with a safe harbor, then the remuneration paid under the arrangement does not constitute illegal remuneration in violation of the AKS. If an arrangement does not comply with a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means that the arrangement needs to be carefully analyzed pursuant to the language of the AKS, court decisions, and other published guidance.

The Personal Services and Management Contracts (“PSMC”) states that remuneration to a referral source for services does not violate the AKS if a number of elements are met, including the following:

• The referral source’s services are substantive, not “made up.”
• The parties enter into a written agreement with a term of at least one year.
• The methodology for calculating the compensation to the referral source must be set one year in advance…and the compensation must be the FMV equivalent of the referral source’s services.
• Calculation of the compensation cannot take into account the anticipated volume of referrals from the referral source.

Example 1 – Medical Director Agreement (“MDA”)

• Jones refers FHCP patients to ABC.
• Jones becomes ABC’s Medical Director.
• In the community in which Dr. Jones resides, his time is worth $300 per hour.
• Jones agrees to work five hours per month as ABC’s Medical Director.
• ABC pays Dr. Jones exactly $18,000 per year…or $1500 per month…or 5 x $300 per hour each month.
• The compensation paid to Dr. Jones is FMV. Therefore, if other elements of the PSMC safe harbor are met, the MDA does not violate the AKS.
• Conversely, if ABC pays Dr. Jones $600 per hour ($3000 per month or $36,000 per year), then (i) such compensation is not FMV, (ii) the MDA does not comply with the PSMC safe harbor, and (iii) the arrangement violates the AKS.

Example 2 – Marketing Services Agreement (“MSA”)

• ABC enters into a 1099 independent contractor agreement with Bob Wilson. Wilson will be a marketing rep for ABC. Wilson will arrange for the referral of FHCP patients to ABC.
• Wilson commits to work 10 hours per week for ABC.
• The recognized FMV hour rate for marketing reps in the community that ABC serves is $20 per hour.
• If ABC pays percentage commissions to Wilson, then the arrangement violates the AKS because the compensation takes into account the anticipated volume or value of the referrals generated by Wilson.
• If ABC pays compensation to Wilson that is approximately $50 per hour, the arrangement violates the AKS because the compensation exceeds FMV.
• If ABC pays compensation to Wilson that equates to approximately $20 per hour, the FMV element of the PSMC safe harbor is met.

Example 3 – Consignment Arrangement with Sleep Lab

• ABC and XYZ Sleep Lab enter into a consignment arrangement in which ABC stores CPAPs at XYZ and XYZ conducts in-facility attended sleep tests on patients, including FHCP patients.
• A patient tests positive for OSA and the physician orders a CPAP for the patient.
• The patient elects to obtain a CPAP from ABC.
• On behalf of ABC, an XYZ employee pulls a CPAP out of the “closet” and hands it to the patient. Also on behalf of ABC, an XYZ employee spends about 45 minutes educating the patient on how to (i) use the CPAP and (ii) clean and change the disposables.
• ABC compensates XYZ for its services. Because XYZ refers FHCP patients to ABC, the arrangement needs to comply with the PSMC safe harbor. If ABC pays XYZ more than FMV for XYZ’s education/set-up services, then the FMV element of the safe harbor is not met.

The Space Rental safe harbor states that if a provider/supplier rents space from/to a referral source, the arrangement will not violate the AKS if a number of elements are met, including the following:

• The parties must sign a Space Rental Agreement with a term of at least one year.
• The rent must be fixed one year in advance and must be FMV.
• The rent cannot take into consideration the anticipated volume or value of referrals from the referral source.

Example – Space Rental Agreement With Referring Physician

• Jones is a referral source to ABC. Dr. Jones owns a 20,000 square foot building.
• Jones rents 2000 square feet of the building to ABC. ABC will use the space as another location.
• If ABC pays percentage rent to Dr. Jones, the arrangement will violate the AKS because it will take into account the anticipated volume or value of referrals from Dr. Jones.
• If the average rent in the area where Dr. Jones’ building is located is $18 per square foot, but if ABC pays Dr. Jones $28 per square foot, then the Space Rental safe harbor is not met…and the arrangement violates the AKS.
• Conversely, if ABC pays approximately $18 per square foot to Dr. Jones, the FMV element of the safe harbor is met.

Assume that Dr. Jones owns an orthopedic product business in which Dr. Jones sells orthopedic products out of his office. Assume that Dr. Jones’ ownership of the orthopedic product business complies with the in-office ancillary services exception to Stark. Assume that ABC serves the same community as Dr. Jones. Assume that ABC purchases Dr. Jones’ orthopedic product business…and after the purchase, ABC hopes that Dr. Jones will refer his patients (who need orthopedic products) to ABC.

If ABC pays more than FMV for Dr. Jones’ orthopedic product business, the excess will be considered as remuneration in exchange for future referrals from Dr. Jones. This, in turn, will result in the transaction violating the AKS. Conversely, if ABC pays an FMV price for Dr. Jones’ orthopedic product business, that element of the transaction will not violate the AKS.

Calculation of FMV
Look at the ABC/XYZ consignment arrangement.           One way for ABC and XYZ to calculate FMV is for XYZ to calculate the time its employees will spend providing the education/set-up services for ABC. XYZ will convert the time into a percentage of the XYZ employees’ time to provide the education/set-up services. XYZ will multiple the costs of the employees (to XYZ) by the percentage. ABC and XYZ will be able to credibly argue that the resulting dollar amount is the FMV equivalent of the services provided by the XYZ employees.

Another way for ABC and XYZ to calculate FMV is for ABC to determine what its costs will be to send employees to the XYZ facility…or to the patients’ homes…to provide the education/set-up services.

A third way for ABC and XYZ to calculate FMV is to review what others in the marketplace are paying for the same types of services.

If the parties to an arrangement desire to be conservative and give themselves the best argument possible that the compensation is FMV, the parties can hire a valuation company to perform an independent analysis and come up with an FMV dollar amount. The balance of the slides discuss how a valuation company analyzes an arrangement and reaches a valuation decision.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Texas with a national health care practice. He represents pharmacies, infusion companies, HME companies, manufacturers, 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 [email protected].

AAHOMECARE’S EDUCATIONAL WEBINAR

Hub and Spoke, Centralized Intake, and Other Steps to Achieve Efficiencies

Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Wayne van Halem, The van Halem Group

March 24, 2026

1:30-2:30 p.m. CENTRAL TIME
The demand for DME is projected to grow steadily for years to come. This increase is driven by two major trends:

1. The aging U.S. population and the rise in chronic medical conditions
2. The cost savings associated with treating patients in the home rather than in hospitals or other facilities

As this demand grows, DME suppliers must navigate two significant challenges, CMS’s apparent goal of reducing the number of DME suppliers and ongoing decreases in third‑party reimbursement. To remain competitive, suppliers must adopt “economies of scale” that enable them to serve patients efficiently and cost‑effectively.

This webinar will walk through practical, real‑world strategies suppliers are using to streamline operations. Topics will include:

• Centralized Intake: How a supplier with multiple PTANs can consolidate intake into a single office
• The Hub‑and‑Spoke Model: A structure that supports geographic expansion without the cost and complexity of obtaining additional PTANs
• Use of Offshore Subcontractors: What suppliers must do to compliantly engage offshore partners and reduce expenses

Additional examples will highlight how suppliers can deliver high‑quality products and services while maintaining a sustainable cost structure.

Register for Hub and Spoke, Centralized Intake, and Other Steps to Achieve Efficiencies on Tuesday, March 24, 2026, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. and Wayne van Halem.