Moving the HME Industry Forward


Consignment Arrangement with Hospital – Key Contract Provisions

January 2, 2017

AMARILLO, TX – It is common for a DME supplier to enter into a consignment arrangement with a hospital. This is also referred to as a “loan closet” or “stock and bill” arrangement. Under a typical consignment arrangement, the following occurs: (i) the supplier (“ABC Medical Equipment, Inc.” or “ABC”) stores inventory (e.g., braces, nebulizers) at the hospital; (ii) when a patient is about to be discharged, and if the patient chooses ABC to provide the post-discharge DME, then the hospital employee will pull the item out of the “consignment closet” and deliver the product to the patient; and (iii) ABC follows up with the patient after he goes home.

In structuring a consignment arrangement, certain legal principles need to be followed:
• If ABC pays rent to the hospital for space in which ABC’s inventory will be stored, then the rental arrangement needs to comply with the Space Rental safe harbor to the Medicare anti-kickback statute (“AKS”). Among other requirements, there must be a written agreement with a term of at least one year, the rent must be fixed one year in advance, and the rent must be fair market value.

• The hospital cannot use ABC’s inventory for inpatient treatment. If it does so, then ABC will be saving the hospital money (i.e., the hospital does not have to purchase the equipment to provide inpatient treatment). This cost-saving will constitute “something of value” from ABC to a referral source (the hospital)…….hence, a violation of the AKS.

• If any portion of the consigned inventory “disappears” without the hospital being able to account for it, then the hospital needs to pay ABC for the missing inventory.

• If ABC places an employee liaison at the hospital, then the liaison cannot perform duties that a hospital employee would normally have to perform. Doing so will save the hospital money. As discussed above, this cost-saving will constitute “something of value” from a ABC to the hospital, resulting in a violation of the AKS.

• The hospital should insure patient choice. That is, before the hospital recommends ABC to the patient, the hospital employee should ask the patient if he has a preference for a DME supplier. If the patient does express a preference, then the patient’s wishes should be followed.

• Except for a rental agreement (in which ABC rents space from the hospital), the law does not require a written agreement memorializing the consignment arrangement. Having said this, it is wise for ABC and the hospital to execute an Equipment Placement Agreement (“EPA”) that sets out each party’s rights and responsibilities arising out of the consignment arrangement.

The following are important provisions to include in the EPA:
• Preferred Provider – Hospital appoints Supplier as its Preferred Provider for furnishing Services on a post-discharge basis to Patients who elect to receive such Services from Supplier, and Supplier accepts such appointment. Hospital’s appointment, and Supplier’s acceptance, are conditioned on the continued performance by each Party of their respective duties, and other terms and conditions, as set forth herein.

• Placement of Inventory – Supplier will deliver to Hospital’s premises the DME listed on Exhibit A (the “Inventory”). Supplier will replace items distributed from the inventory from time to time. Supplier may increase, decrease or change the quantity or kinds of DME in the Inventory as Supplier deems appropriate, taking into account Hospital’s preferences and usage patterns. Hospital will provide suitable storage space for the Inventory at Hospital’s premises and will permit Supplier access to such storage space for purposes of (i) verifying and replacing inventory and (ii) carrying out the purposes of this Agreement.

• Ownership of Inventory – Title to the Inventory will remain with Supplier and Hospital will have no ownership interest in the Inventory.

• Distribution of Inventory – If the Patient chooses to obtain an item from the Inventory (“Inventory Item”), Hospital will provide the Inventory Item to the Patient. Hospital will notify Supplier of the provision of the Inventory Item to the Patient and will provide the Patient’s name and insurance or other third party reimbursement source information to Supplier, together with a written order and such other documentation as Supplier may request for the purpose of billing for the Inventory Item. Hospital will not distribute an Inventory Item to any person other than to a Patient, parent or guardian who has chosen to receive an Inventory Item from Supplier. Hospital will not use an Inventory Item to provide any service at Hospital’s premises, or make any other use of the Inventory Item or permit any other person to make any other use of the Inventory Item, other than as expressly set forth in this Agreement. Supplier may verify the Inventory Item from time to time as Supplier deems necessary.

• Chargeback – If Supplier determines that any Inventory Items are missing from the Inventory for which Hospital has not provided billing information as provided in this section, or if any Inventory Item is lost or damaged, or if any Inventory Item is used on a Hospital patient in such a way that the Inventory Item falls under Part A of the Medicare program or falls under hospital reimbursement by any other third party payer, or if Supplier determines that it cannot submit a claim for third party reimbursement because of inadequate or incomplete documentation obtained by Hospital and transmitted to Supplier, or if a claim (submitted by Supplier) is denied because of inadequate or incomplete documentation obtained by Hospital and transmitted to Supplier, or if an inventory item is delivered to a Hospital patient who is not covered by a government health care program or commercial insurance, then Hospital will pay Supplier for such Inventory Item at its regular retail price.  Hospital’s obligations under this section will survive expiration or termination of this Agreement.

• Billing – Supplier will only bill and collect from government health care programs and commercial insurers for Inventory Items distributed from the Inventory by Hospital.  Hospital will cooperate as requested by Supplier in obtaining and providing documentation required to support claims for payment for such Inventory Items.

• Post Discharge Services for Hospital Patients – For any Patients who choose to obtain Services from Supplier pursuant to a physician’s order following discharge from Hospital, Supplier will furnish Services to Patients for use in their residences post-discharge in accordance with the following:
  – Inventory.  Supplier will maintain an inventory of DME, suitable in terms of variety and amount, to allow the Supplier to render Services to Patients.
  – Availability.  Supplier will use commercially reasonable efforts to provide Services to Patients within the time frame specified by Hospital.
  – Delivery.  Supplier will deliver Services to Patient’s residence, or elsewhere, as mutually agreed to by Hospital and Supplier.
  – Set-Up and Training.  Supplier will set up, install and/or render Services as appropriate and in accordance with Supplier’s usual protocols and train Patients and/or family caregivers in the proper utilization of Services.
  – Service and Maintenance.  Supplier will service and maintain DME provided on a rental basis in accordance with Supplier’s usual protocols and the rules of applicable third-party payers, and, as necessary, replace rental DME that fails beyond repair due to normal use or manufacturer’s defects.  With respect to DME purchased by Patients, Supplier may charge the purchaser its usual and customary fees for service, maintenance and replacement in accordance with the rules of applicable third-party payers.
  – 24-Hour Availability.  Supplier will be available by telephone to Hospital and Patients 24-hours per day, seven-days-per-week to address any questions regarding the Services.
  – Retrieval.  Supplier will retrieve and disinfect rental DME upon notification that it is no longer needed.
  – Complaints.  Supplier will promptly address any Patient or caregiver complaints or concerns and coordinate its response with Hospital as appropriate.
  – Returns.  Supplier will accept returns of any substandard or unsuitable DME.
  – Hospital Staff Education.  Supplier will educate Hospital’s staff regarding the Services.
  – Patient Education.  Both prior and subsequent to the Patient’s discharge from Hospital, Supplier will educate the Patient (and/or the Patient’s caregiver) regarding the proper way to utilize the Services.
  – Compliance Monitoring.  Following discharge, Supplier will monitor the Patient’s compliance with the proper utilization of the Services and upon the request of Hospital or the Patient’s treating physician.  Supplier will submit compliance reports to the Hospital and/or treating physician.
  – Hospital Liaison.  Supplier may, at its discretion, assign an employee to serve as its Hospital Liaison (“Liaison”).  THE LIAISON WILL NOT PERFORM ANY SERVICES THAT THE HOSPITAL IS OBLIGATED TO PERFORM AND WILL NOT HAVE ACCESS TO A PATIENT’S MEDICAL RECORDS UNLESS THE PATIENT SELECTS SUPPLIER TO BE ITS DME SUPPLIER. Among other duties, the Liaison will (i) educate the Hospital staff regarding how to properly use DME; (ii) be available to answer questions posed by Hospital staff; and, (iii) resolve concerns expressed by Hospital staff.
  – Regulatory Compliance – Supplier will maintain a written regulatory compliance plan, and an active internal compliance program under the direction of a designated compliance officer, to ensure Supplier does not knowingly fail to comply with the service and billing requirements established by Medicare, Medicaid, and other third-party payers.
  – Notice of Supplier Services and Patient Choice – Hospital will inform Patients of the Services offered by Supplier and the benefits of utilizing Supplier for the Services.  Hospital also will inform Patients of their right to select any other DME supplier for products and services.

• Intake – For each Patient who chooses to receive Services from Supplier, Hospital will provide Supplier with complete and accurate intake information and such other information that is necessary for Supplier to provide Services to Patients, including the Patient’s identifying and clinical information, the Services ordered, the name of the ordering physician, the expected delivery date, and insurance and other third party billing information. If required for any Patient, Hospital will coordinate the provision of Services with any home care nurses, aides, therapists, or other caregivers involved in such Patient’s home care.  For each Patient who chooses to receive Services from Supplier, Hospital will deliver each of the following to the Patient at the time each item of DME is delivered to the Patient:
 – A copy of the Medicare DME supplier standards in accordance with 42 CFR section 424.57 (c)(16), but only in the extent that Supplier will delivery such document to Hospital.
 – A copy of the instruction on the proper use of the items of DME in accordance with 42 CFR section 424.57 (c)(12), but only to the extent that Supplier will deliver such document to Hospital.
 – Promptly after delivery of any item of DME to a Patient as described above, Hospital agrees to send to supplier documents which demonstrate that Hospital delivered the documents to the Patient as required by this section.

• Preferred Provider Status – Hospital agrees to identify Supplier as Hospital’s Preferred Provider of Services.  In particular, Hospital will make such information known to its employees, medical staff, and patients, PROVIDED, however, that nothing herein will be construed as compromising a patient’s right to select his or her supplier of choice.
• No Referrals Required – In entering into this Agreement, the parties do not intend to induce the referral of Patients by Hospital to Supplier.  The parties acknowledge that there is no requirement under this Agreement or any other agreement between Hospital and Supplier or their respective affiliates that any patients be referred to the other.  In connection with their respective duties hereunder, neither Party will pay the other any remuneration, directly or indirectly, overtly or covertly, in cash or in kind.  At its sole cost and expense, each Party will provide such staff space and other resources as are necessary or appropriate to achieve the purposes of this Agreement.  The Parties further acknowledge that the relationship established hereby is for the convenience of Patients who select Supplier to furnish their Services.

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