AMARILLO, TX – In the past, manufacturers and DME suppliers had a relatively simple relationship: manufacturers sold products to suppliers and, in turn, suppliers paid the manufacturers. This was the classic “vendor/vendee” arrangement.
The relationship has changed. Manufacturers and DME suppliers understand that they need to work cooperatively in order to be successful. Said another way, manufacturers and DME suppliers recognize that they are “in this together.” As will be discussed below, there are multiple ways for manufacturers and DME suppliers to enter into cooperative arrangements. In doing so, the parties need to be careful that their arrangements do not violate the federal anti-kickback statute (“AKS”). Over the last several years, there have been a number of Department of Justice (“DOJ”) actions against arrangements between (i) equipment manufacturers and DME suppliers and (ii) pharmaceutical manufacturers and wholesalers/retailers. Most of these DOJ actions have arisen out of whistleblower (qui tam) lawsuits.
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 (“FHCP”) (e.g., Medicare, Medicare Advantage, Medicaid, Medicaid Managed Care, TRICARE), or to induce a person to purchase, lease, or recommend the purchase or lease of any item or service reimbursable by an FHCP.
A number of federal appellate courts have adopted the “one purpose” test that states that if one purpose of a payment is to induce referrals, then it violates the AKS regardless of whether the payment is fair market value for otherwise legitimate services rendered. The federal False Claims Act (“FCA”) states that any person or entity who knowingly presents to a federal 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 potential criminal liability and/or civil monetary penalties.
If a claim (submitted to an FHCP) arises out of a kickback arrangement, then the claim will be construed to be a “false claim” in violation of the FCA. 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. If an arrangement does not fit within a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means that the parties to the arrangement need to conduct a careful analysis in light of the language of the AKS, case law, and OIG guidance.
Two safe harbors are particularly relevant to arrangements between manufacturers and DME suppliers:
Discount Safe Harbor – This safe harbor is specific to arrangements between manufacturers and companies that purchase from the manufacturers. 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 an FHCP. The term “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 (i) is 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 an FHCP. 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.
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 methodology for calculating the compensation must be set in advance, the compensation must be consistent with fair market value, and the compensation must not be determined in a manner that takes into account the volume or value of any referrals or business generated between the parties.
Discounts and Rebates Tied to Volume of Purchases
The manufacturer and supplier can enter into an agreement in which the manufacturer provides properly-disclosed 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.
It is important that the manufacturer and DME supplier not engage in an arrangement in which the manufacturer provides additional benefits to the supplier. For example:
- The manufacturer cannot pay compensation to, or provide gifts to, the DME supplier’s sales reps in order to encourage them to promote the manufacturer’s products.
- Likewise, the manufacturer cannot provide anything of value to the supplier in exchange for the supplier converting customers (of a competing manufacturer) to the manufacturer’s products.
Even if the written contract between the manufacturer and DME supplier on its face complies with the Discount safe harbor, if the underlying facts (emails, payments of money, etc.) indicate an arrangement that is outside the safe harbor, then the arrangement will likely be construed as being violative of 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. If the suppliers (receiving the leads) are required to sell the manufacturer’s products, such a requirement will be construed as “something of value” flowing from the supplier to a referral source (the manufacturer) … hence, a violation of the AKS.
When the supplier receives a lead from the manufacturer, the supplier can only call the lead if the requirements of the telephone solicitation statute and Supplier Standard #11 are met. According to the statute/standard, the supplier can call the lead only if one of three requirements are met. When the lead is a prospective customer of the supplier (i.e., the supplier has not transacted business with the lead in the past), then the applicable requirement is for the lead to give his electronic or “blue ink” consent to be called by the supplier that receives the lead from the manufacturer. If before the manufacturer transmits the lead to the supplier, the manufacturer has not secured the required consent for the supplier to call the lead, then the supplier will have to reach out to the lead in another legally acceptable way.
The HIPAA Privacy Rule generally allows a “covered entity” to use or disclose an individual’s protected health information (“PHI”) only with the individual’s consent or in other limited circumstances. The question becomes: “If a manufacturer gathers patient information and shares it with a DME supplier, then does that violate HIPAA?” Normally, the answer is “no.” In most cases, the manufacturer will not meet the HIPAA definition of a “covered entity.” This is because the manufacturer is not selling directly to consumers and, therefore, is not engaged in the electronic transmittal of health information. This is the typical “B to B” model. On the other hand, if the manufacturer is also engaged in selling directly to consumers (“B to C”), then the manufacturer will likely be construed to be a covered entity, meaning that HIPAA will restrict what the manufacturer can do with the leads.
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 pro rata share of the expenses of the advertisements. If the supplier pays nothing for marketing services, or pays less than fair market value for these services, the manufacturer will be construed as providing “something of value” to the DME supplier … which, in turn, is recommending the purchase of products covered by federal health care program. This will violate the AKS.
Payment by the Supplier of Fair Market Value 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 pays fair market value compensation to the manufacturer for these services. If the supplier pays nothing for these services, or pays less than fair market value for these services, the manufacturer will be construed as providing “something of value” to the DME supplier … which, in turn, is recommending the purchase of products covered by federal health care program. This will violate the AKS.
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 firstname.lastname@example.org.
AAHOMECARE’S EDUCATIONAL WEBINAR
Offering Value-Added Services While Avoiding Prohibited Inducements
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato
Tuesday, August 16, 2022
1:30-2:30 p.m. CENTRAL TIME
The federal Stark physician self-referral statute (“Stark”), the federal anti-kickback statute (“AKS”), and the federal beneficiary inducement statute (“inducement statute”) came into existence when health care was primarily operating under a fee-for-service (“FFS”) model that did not encourage the provision of value-added services to patients, collaboration among providers, nor tie reimbursement to achieving certain metrics. The FFS model can be costly and inefficient. As a result, third party payors (including Medicare) are pushing health care delivery into a value-add/collaborative care/value-based model. To facilitate the shift of health care towards this new approach, CMS and the OIG modified Stark, the AKS, and the inducement statute with the goal of ensuring that these statutes do not unnecessarily impede the provision of value-added services, nor the transition to collaborative/value-based care. This program will discuss how a DME supplier can provide value-added services to patients with the twin goals of (i) providing preventative health care and (ii) lowering socio-economic barriers to receiving health care. The program will present examples of value-added services that are legally acceptable, and those that should be avoided. This program will further discuss proper … and improper … collaborative arrangements between a DME supplier on the one hand, and physicians, hospitals and other providers on the other hand.