Moving the HME Industry Forward


Beneficiary Inducement Statute – Applicability to DME Suppliers

August 17, 2015

AMARILLO, TX – It is a common business practice in the non-health care world for a retailer to offer free products and services to customer and prospective customers. For example, Jos. A. Banks will advertise:  “Buy one suit and get a second suit free.” Or Verizon will offer:  “Return home to Verizon and receive $300.” Or an auto dealership will advertise: “Purchase a new vehicle and get free oil changes for life.”

Unfortunately, health care providers exist in a parallel universe. If a DME supplier advertises “Buy an oxygen concentrator and we will give you a free walker,” then several laws will be broken. In short, what applies to the real world (the non-health care world) does not necessarily apply to health care.

This article presents a discussion of the beneficiary inducement statute and, to a lesser extent, the federal anti-kickback statute and the “substantially in excess” prohibition…and how these statutes apply to the provision of free products to Medicare beneficiaries.

Beneficiary Inducement Statute
Section 1128A(a)(5) of the Social Security Act (the “Statute”) provides for the imposition of civil monetary penalties (“CMPs”) against any person (including a legal entity) that offers or transfers remuneration to a Medicare or state health care program beneficiary that such person knows or should know is likely to influence the beneficiary to order or receive from a particular provider, practitioner, or supplier any item or service for which payment may be made, in whole or in part, by Medicare or a state health care program. Remuneration for purposes of the Statute includes the transfer of items or services for free or for other than fair market value.  

The preamble to the final CMP regulations states that “[i]ncentives that are not advertised or otherwise disclosed to a beneficiary before the beneficiary selects a provider for services do not come within the statutory proscription, and therefore need not qualify under any of the exceptions….” Thus, an argument may be made that to the extent that a DME supplier does not advertise and does not disclose to the beneficiary the offer of a free product until after the beneficiary has already agreed to purchase a Medicare covered item from the supplier, the free item will not constitute an “inducement.”

However, the DME supplier needs to be aware of the “word of mouth” discussion found in the OIG’s August 2002 Special Advisory Bulletin (“SAB”) that discusses the offering of gifts or services. In the SAB, the OIG provided a de minimis exception for gifts or free services to beneficiaries that do not exceed $10 per item or $50 in the aggregate annually. In addition, the OIG provided an interpretation of the inducement element of the prohibition. The OIG stated that an inducement may occur upon any offer of valuable goods or services as part of a marketing or promotional activity, “regardless of whether the marketing or promotional activity is active or passive.” The OIG explained that “even if a provider does not directly advertise or promote the availability of a benefit to beneficiaries, there may be indirect marketing or promotional efforts or informal channels of informational dissemination, such as “word of mouth” promotion by practitioners or patient support groups.”

Thus, to the extent that a beneficiary learns (through sources other than the supplier) of the supplier’s willingness to give a free product, and is then induced to purchase a Medicare-covered product in order to obtain the free product, there is a risk that the OIG will find an improper beneficiary inducement to have occurred.  

In Advisory Opinion 07-08, the OIG reviewed an arrangement in which a DME supplier proposed to offer in-home assessments with oximetry testing to beneficiaries at no charge. The test in question would not be covered by Medicare, but the OIG noted that the DME supplier also carried items and supplies that would be covered by Medicare. Upon review, the OIG determined that offers of non-covered items and services by a DME supplier would likely improperly influence beneficiaries to select a particular entity over another supplier for future covered items.

In particular, the OIG reasoned that items or services that are free to the beneficiary increases the likelihood that he or she would accept the offer; the provision of such item or service would then allow the supplier to form a relationship with the beneficiary. Importantly for inducement purposes, the OIG opined that it is “reasonable and probable that for future purchases the beneficiary would select a supplier with whom he or she is already familiar.” Thus, the OIG will likely take the position that by offering a free product, the DME supplier will build an ongoing relationship with the recipient that will then induce the recipient to obtain future covered items from the DME supplier.  

II Federal Anti-Kickback Statute
The federal Anti-Kickback Statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration (include any kickback, bribe or rebate), directly or indirectly, to induce or reward referrals of items or services reimbursable by a federal health care program. The statute ascribes culpability and criminal liability to parties on both sides of an impermissible kickback transaction. Furthermore, many courts have adopted the “one purpose test,” which asserts that if one purpose of a payment is to induce referrals, the Anti-Kickback Statute is violated, notwithstanding any primary legitimate business purpose or fair market value.  

Due to the broad language of the Anti-Kickback Statute, the OIG has adopted safe harbor regulations to protect arrangements that may otherwise violate the statute. Strict compliance with the requirements of a safe harbor will immunize an arrangement from liability under the federal Anti-Kickback Statute. However, safe harbor protection is only available for those arrangements that precisely meet all of the conditions set forth in the safe harbor. Arrangements that do not fit within safe harbors are evaluated on a case-by-case basis based on the totality of the circumstances.  

On August 5, 2015, the OIG issued Advisory Opinion 15-11. The Advisory Opinion concerned a program operated by a drug promotor and a pharmacy to dispense thirty-day initial, and possibly a free refill, of a particular drug to qualified patients who experienced a delay in insurance coverage determination for that drug.     

Upon review of the arrangement, the OIG found that the arrangement posed a low risk for an improper kickback and, therefore, declined to pursue administrative sanctions against involved entities. In reaching its decision, the OIG favorably cited the following safeguards: (1) the limited risk of overutilization; (2) the lack of a “seeding program” that would induce a patient onto that particular item or to obtain subsequent supplies billable to federal health care plans; (3) the lack of a financial benefit to be received by the prescriber; (4) the unlikelihood that a beneficiary would be induced to obtain federally payable prescriptions from the pharmacy; and (5) no cost would be incurred by the federal health care programs.  

III “Substantially in Excess” Prohibition
Section 1128(b)(6)(A) of the Social Security Act permits the OIG to exclude individuals or entities from participation in federal health care programs for the submission of claims for payment that contain charges “substantially in excess of such individual’s or entity’s usual charges…for such items or services, unless…there is good cause….” The OIG has attempted to issue definitive guidance regarding “substantially in excess” and “usual charges.” However, to date, such guidance has not been finalized.

In 2003, the OIG proposed regulations defining “usual charges” to mean either the provider’s average or median charge, with certain exclusions (such as charges billed to Medicare/Medicaid/uninsured patients), for the same item or service during the previous year. In the proposal, “substantially in excess” would occur when a provider’s charge to Medicare (or the fee schedule amount, if lower) is 120% greater than the provider’s “usual charges” (which equates to a discount greater than 17% from the Medicare fee schedule). Lastly, “good cause” would include unusual circumstances or medical complications requiring additional time, effort or expense, increased costs associated with serving Medicare or Medicaid beneficiaries. However, the OIG subsequently withdrew the proposed rule. Accordingly, there is no clear consistent guidance on what constitutes “substantially in excess” of “usual charges.”

If a DME supplier bills Medicare for the sale of a covered item, but also gives the same item away for free, then depending on the number of patients who receive the free product, the supplier runs the risk of skewing its calculations of “usual charges.”   

Jeff Baird will be presenting the following webinar:
AAHomecare’s Educational Webinar
Use of Social Media: What You Need to Know and Do
Presented by:  Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Tuesday, August 25, 2015
2:30-4:00 p.m. EASTERN TIME

The use of social media is growing at exponential rates and can be very beneficial for a company’s advertising and promotion. This area is in a constant state of evolution, and if you are not paying attention, your practices may quickly become outdated or, worse, unlawful. Understand the law and the nuances in developing policies because it is no simple task. You need to get it right; it must match your culture, comply with the law and be effectively communicated to your staff.

Click Here to Register for “Use of Social Media: What You Need to Know and Do” on Tuesday, August 25, 2015, 2:30-4:00 pm ET, with Jeffrey S. Baird, of Brown & Fortunato, PC. Contact Ika Sukh at if you experience any difficulties registering.

Member: $99        
Non-Member: $129

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