Moving the HME Industry Forward


Contesting Sole Source Contracting and Reimbursement Cuts by Medicaid Managed Care Plans

Jeffrey S. Baird, JD and Pam F. Colbert, JD • February 3, 2018

AMARILLO, TX – Over the past 10 years, DME suppliers have focused their attention on the Medicare and Medicaid fee-for-service (“FFS”) programs. On the Medicare side, suppliers have had to deal with competitive bidding, aggressive auditors, reduced reimbursement, and stringent documentation requirements. On the Medicaid side, suppliers have focused on decreases in reimbursement and an increase in audits and investigations.

Now, there is another challenge…one that has “snuck up’ on the industry. And, frankly, this is a serious challenge with serious consequences. This challenge pertains to state Medicaid Managed Care Plans (“Plans”).

It is no secret that the rolls of state Medicaid programs are swelling. As a result, the cost of providing health care to Medicaid beneficiaries is increasing exponentially. Money for this health care coverage comes from the federal government and comes from each state. As is the case with every aspect of health care, money is tight. Simply speaking, many (if not most) states cannot afford the increasing number of Medicaid beneficiaries. This is the proverbial “irresistible force meeting the immovable object.”

To meet this financial challenge, many state Medicaid programs are contracting with insurance companies that sponsor Plans. The Plans compete with each other to sign up Medicaid beneficiaries. The state Medicaid programs pay the Plans on a per diem basis ($__ per beneficiary per month). In turn, the Plans contract with hospitals, physicians, pharmacies, DME suppliers and other health care providers. In so doing, the Plans negotiate a fee schedule with providers. The term “negotiate” is somewhat misleading. Normally, the Plans dictate to providers what the reimbursement will be. A goal of the Plan sponsor (the insurance company) is to generate a profit (i.e., the Plan will pay less money to the providers than what the state Medicaid program pays the Plan).

Sparsely populated states may have only two or three Plans. More populous states may have eight or more Plans. The upside to the state Medicaid program is that contracting with Plans injects a degree of “certainty” into the Medicaid program’s financial picture. That is, year-to-year, the Medicaid program has a good idea of what it will be spending. The Medicaid program will pay the Plans…and then let the Plans “sweat the details.”

And so how is this a challenge (read…problem) for DME suppliers? While a number of criticisms can justifiably be levied against Medicaid FFS programs (i.e., bureaucratic, inefficient), a Medicaid FFS program cannot be accused of trying to “turn a profit.” This is not the case with Plans. At the end of the day, the goal of the Plan is for (i) the inflow of money from the Medicaid program to be (ii) greater than the outflow of money to providers. Said another way, an important goal of each Plan is to generate a profit.

In order to generate a profit, Plans are motivated to ratchet down reimbursement to providers. There are three primary ways for Plans to do this:

  • A Plan will reduce reimbursement to an almost unstainable level and providers can “take it or leave it.”
  • A Plan will enter into a sole source contract with a DME supplier. The reimbursement to the sole source supplier will be low, but the supplier is willing to accept it because of the increased volume. In essence, the sole source supplier is granted a monopoly.
  • A goal of a Plan will be to end up in a sole source relationship, but will “back door” its way into such a relationship. The Plan will reduce reimbursement so much that DME suppliers drop out…leaving the Plan’s preferred supplier as the “last supplier standing.”

Plans will get away with these actions unless the state Medicaid programs intervene. There are two things that state Medicaid programs do not want to happen: First, they do care about their Medicaid beneficiaries; the state Medicaid programs do not want their beneficiaries to receive substandard care. Second, state Medicaid programs do not want to be embarrassed. The last thing that a state Medicaid program wants to see is a report by Anderson Cooper (CNN) or Sean Hannity (Fox) about harm being done to Medicaid beneficiaries.

Interestingly, some states that previously adopted the Medicaid Managed Care model are reassessing. Here are some examples:

  • Texas – According to a recent Texas Tribune report, Texas House Speaker Joe Straus is calling on House members to investigate the Texas Health and Human Services Commission (“HHSC”) after a state audit report revealed mishandling a contract with an insurance company. The State Auditor’s Office released a 44 page report showing that HHSC allowed Superior HealthPlan to report $29.6 million in bonus and incentive payments paid to providers’ employees, even though those payments were not allowed under Superior’s contract with HHSC. In a news release, Straus said that the House Appropriations Committee or the General Investigating and Ethics Committee should look into HHSC’s practices for contract oversight as “taxpayers need to know that their money is being properly managed.” Straus further stated: “This audit highlights serious weaknesses in HHSC’s oversight of its own contracts. Taxpayers have a right to expect that the Commission will hold providers to contract requirements. Unfortunately, this isn’t the first example of HHSC failing to properly enforce requirements in taxpayer-funded contracts. This audit shows that there is a lot of room for improvement at HHSC.”
  • Kansas – Governor Sam Brownback and Lt. Governor Jell Colyer recently announced that they are halting, at least for the time being, plans to implement a new privatized Medicaid program, which they had been calling “KanCare 2.0.” The announcement came amid growing concern among lawmakers that there are still major issues with the first KanCare model, which was established as a pilot project in 2013 under a waiver from CMS. Both Republican and Democratic lawmakers have expressed serious concerns about moving forward with a new KanCare model, saying there are significant problems with the original model. One of the issues cited is a large backlog of eligibility applications that has prevented many people from signing up and has delayed payments to providers. Democratic Senator Laura Kelly (Topeka), who is a candidate for governor in 2018, and the ranking minority member on the Public Health and Welfare Committee, stated: “Since its inception, KanCare has been plagued with problems, most of which have not yet been resolved. The Joint Commission on Home and Community Based Services and KanCare Oversight still routinely hear complaints about many aspects of the KanCare system almost five years after it was implemented. That is unacceptable.”
  • Iowa – All six candidates for Governor (Democrats and Republicans) recently campaigned to (i) repeal the privately managed $5 billion Medicaid Managed Care system and (ii) replace it with a “state-run system offering quality, reliable services and paying Iowa providers on time.” One of the candidates said: “This privatization of Medicaid is a failure and the sooner they admit it and take this back into the successful government-run program…the better off we’re all going to be….”

Sole Source Contract

A Sole Source Contract is a contract for a product or service that can only be obtained from a designated supplier. Criticisms of Sole Source Contracts include:.

  • Diminishes competition
  • Promotes favoritism
  • Does not secure the best services and products at the best price
  • Denies beneficiaries’ choice
  • Increases risk of fraud, waste and abuse
  • Risk of inability to provide services and products to beneficiaries (drop ship will not work during hurricane recovery)

Contesting a Sole Source Contract

Centene is a large Managed Care Company. Per Centene’s 2018 Financial Guidance and Investor Day report of December 15, 2017, Centene’s total revenue (i) in 2001 was $327 million, (ii) in 2004 was $7 billion, (iii) in 2013 was $11 billion, and (iv) in 2017 will exceed $47.8 billion. Centene is in 29 states and has 14 million members. Centene’s Medicaid Managed Care Companies are given local names such as (i) Texas-SuperiorHealth; (ii) Ohio-Buckeye Community Health Plan; and (iii) Illinois-IlliniCare. In Illinois, IlliniCare recently cut reimbursement to DME suppliers by approximately 50%.

Centene’s Texas MCO, SuperiorHealth, announced it had entered a Sole Source Contract with Medline for the exclusive rights to four Texas Medicaid Plans, to the exclusion of other Texas DME suppliers:  STAR, STAR Health, STAR+PLUS and CHIP. SuperiorHealth’s Sole Source Contract with Medline excluded other Texas DME suppliers from providing 244 unique items.

Alliance Medical Supply (July 20, 2017) filed a Complaint against SuperiorHealth with Texas HHSC. The Complaint alleged that the awarding of the Sole Source Contract to Medline denied the beneficiary’s right to choose a DME supplier. The Complaint alleged:

  • Suppliers with long standing relationship with beneficiaries were excluded.
  • Suppliers that are conveniently located were excluded.
  • Suppliers that personally handle DME needs (i.e., Hurricane Harvey) were excluded.

The Complaint alleged that the Sole Source Contract gave benefits only to Medline.

  • Eliminated prior authorization requirement for Medline.
  • Gave Medline the authority to “pre-populate” physician order forms and send the form to the ordering physician for approval and signature

The Complaint further alleged that the Sole Source Contract (i) removed verification, compliance with coverage, and medical necessity documentation … that all other DME suppliers must provide, (ii) removed competition and (iii) increased risk of violation of the federal anti-kickback statute (physicians encouraged to refer to Medline vs. other suppliers) and fraud, waste and abuse (removed audit for billing for services not provided, upcoding and proof of medical necessity).

Texas HHSC responded by ruling:

  • There will be no exclusive supplier contracts; however, there may be a “preferred provider/supplier”
  • SuperiorHealth must provide a written “opt-out” for the patient for any reason … or for no reason
  • SuperiorHealth must provide 30 day notice of the Medline contract to beneficiaries

Steps That Suppliers Can Take To Contest a Plan’s Actions

  • File a complaint with the state Medicaid agency
  • Lobby state legislators, particularly those who have jurisdiction over the state Medicaid program
  • Hire a law firm to (i) assist in filing the complaint, (ii) assist with the lobbying efforts, and (iii) determine if litigation is feasible
  • Hire a lobbying firm to assist with lobbying state legislators
  • Hire a public relations firm to assist with circulating stories in newspapers, on television, on the radio, and in the social media.
  • Enlist the help of the state DME association
  • Enlist the involvement of patient advocacy groups
  • Spread the message through television, radio, newspaper and social media
  • Remember that state Medicaid programs are funded by both the federal government and the state government. Therefore, it is worthwhile to contact U.S. legislators (Senators and Representatives). It is also worthwhile to contact CMS.

Arguments That Suppliers Can Make in Contesting a Plan’s Actions

  • The Plan’s actions result in inadequate patient care
  • Proliferation of patient complaints
  • Lack of patient choice
  • Inadequate number and types of suppliers … and lack of geographical diversity among suppliers
  • Failure by the Plan to pay for services and/or actions by the Plan to “slow pay” for services
  • Risk of fraud, waste and abuse
  • Risk to Medicaid funds, specifically, the sicker the beneficiaries are (because of lack of services), then the higher the risk that they will end up in the hospital ER
  • Risk to Medicaid beneficiaries – Their health will deteriorate if they do not receive adequate products/services.

Contract Between Supplier and MCO

All contracts between suppliers and MCOs allow the MCO to amend the contract by giving advanced notice to the supplier. Here is typical language: “This Agreement and any Attachments may also be amended by HMO furnishing Provider with any proposed amendments. Unless Provider objects in writing to such amendment during the thirty (30) day notice, Provider shall be deemed to have accepted the amendment.”

All contracts between suppliers and MCOs have “dispute resolution” provisions. For example, the contract may set forth both informal and formal resolution processes for disputes “arising with respect to the performance or interpretation of this Agreement.” The informal process may first require an exhaustion of the processes set forth in the MCO’s Provider Manual. The Provider Manual may establish a provider complaint process that “allows for a provider to dispute the policies, procedures, or any aspect of the administrative function”… of the MCO. In our example, if the dispute remains unresolved after 60 days, either the supplier or the MCO may submit the matter to arbitration.

Communications With Covered Persons

Let us assume that in the supplier’s state, there are eight MCOs and the supplier is on the panels for all eight MCOs. Assume that ABC MCO notifies the supplier of a large rate reduction. The supplier may desire to terminate its contract with ABC MCO and (i) try to move the supplier’s ABC MCO patients to XYZ MCO and (ii) advertise to the general Medicaid population that they should use XYZ MCO, rather than ABC MCO. In communicating with covered persons, the supplier needs to be mindful of the restrictions placed on the supplier. For example, the Ancillary Services Provider Agreement (“Provider Agreement”) between the supplier and ABC MCO may require the supplier to “obtain Payor’s and HMO’s approval for Covered Person communications …” The Provider Agreement might contain the following provision: “Provider shall not conduct marketing activities unless expressly approved in writing and only after all training and credentialing required under the applicable State Contract …”

In a contract between an MCO and the state Medicaid program (“State Contract”), “marketing” may be defined to mean “any written or oral communication from [MCO] or its representative that can reasonably be interpreted as intended to influence a Participant to enroll, not to enroll, or to disenroll from a health care delivery system.” Even though the definition set out in the preceding sentence does not specifically apply to actions by suppliers, the definition may be construed to be applicable to the definition of “marketing” set out in the Provider Agreement. As such, there is a risk that a communication by a supplier notifying patients that the supplier has terminated its contract with the MCO, and providing patients with a list of MCOs with which the supplier remains in network may be viewed as a marketing activity … as it may influence the recipient to enroll with a particular plan.

Separate and apart from the supplier’s contractual obligations, guidance regarding communications with patients will likely be set out in the Medicaid program’s Managed Care Manual for Medicaid Providers (“Manual”). The Manual may set out a process for suppliers to “educate” their patients about their choices between the different MCO plans. For example, the Manual may state that “[I]f a Provider chooses to educate [its] patient … [the Provider and its staff] must ensure that the patient is aware of all plan choices and use materials approved by the Department for this education.” It is not uncommon for the state Medicaid program to publish a flyer/template for suppliers to utilize when communicating with their patients. The template may require the supplier to identify all health plans with which it is contracted and also direct the patient to the Medicaid program’s Participant Enrollment Services in order to learn more about MCO plan choice.

The state Medicaid program may give the supplier the option to include a preferential statement regarding a certain MCO plan in the flyer/letter if the preference is a benefit to the patient, and not just a benefit to the supplier. If the supplier is given such an option, then it is likely that the flyer/letter must be submitted for approval by the preferred MCO and the state Medicaid program. The Medicaid program will likely instruct suppliers not to include any false or disparaging statements regarding MCO plans.

The Manual may prohibit the supplier from contacting patients by telephone to (i) inform them that the supplier has terminated its agreement with ABC MCO and (ii) suggest that the patient switch out of the ABC MCO plan. For example, the Health Plan Outreach Guidelines in a state may prohibit “face-to-face outreach by the Health Plan directed at participants or potential enrollees, including direct or indirect door-to-door contact, telephone contact, or other cold-call activities …” While the above language applies to telephone calls by the MCO, the state Medicaid program may apply the restrictions to suppliers.

Ad Directed to Patients

Assume that a supplier terminates its contact with ABC MCO and desires to direct its patients to XYZ MCO. Assume that the supplier desires to run ads that inform patients of the termination and the desire by the supplier that the patients switch MCO plans. The supplier needs to carefully word such an ad. The ad cannot be misleading. For example, if the ad says that ABC MCO is reducing patient choice, then such a statement may be misleading. ABC MCO might argue that the supplier can remain in network with ABC MCO so long as the supplier is willing to accept the lower reimbursement. In addition, the supplier may be required to obtain approval of the ad by the state Medicaid program and ABC MCO. The Manual may require the supplier to use materials (intended to educate patients) that have received the prior approval by the state Medicaid program. Lastly, it is important that the ad not be looked at as “tortious interference” with ABC MCO’s business.

A properly-worded ad might say something like the following: “You have a choice in your Medicaid Managed Care plan. If you have respiratory problems, diabetes, or use oxygen, please make sure that your provider of choice for medical equipment and supplies is in-network with the Medicaid Managed Care plan you choose.” By broadly stating facts not specifically identifying ABC MCO, this language should eliminate the risk of ABC MCO objecting to the ad on the grounds that it is misleading or defamatory. In addition, as the ad does not specifically identify ABC MCO and is not specifically targeted to ABC MCO members, it significantly reduces the risk of a tortious interference claim. Preferably, the ad will be placed by the state DME association and not the supplier. In doing so, it will be difficult for ABC MCO to assert a breach of contract because the contractual restrictions are between ABC MCO and the supplier…not between ABC MCO and the DME association.

Letter to Patients

Assume that DEF Supplier will terminate its contract with ABC MCO because DEF cannot accept ABC MCO’s reimbursement cuts.  A properly worded letter from DEF to its ABC MCO patients might say something like the following:

  • “The purpose of this letter is to inform you of an upcoming change in the provision of our products and services. On [date], we will no longer be contracted with ABC MCO and will not be able to continue to service your durable medical equipment or medical supply needs under the ABC MCO plan.”
  • “The [name of state] Medicaid program requires most individuals with a Medicaid card to pick a health plan for their care coordination services. The health plan you pick will provide you with all of your health care needs and help coordinate your care.”
  • “The health plans you may be required to pick go by the following names: (i) _____ and (ii) _____.”
  • “DEF provides health care to the following population: (i) Family Health Plans; (ii) Seniors and Persons with Disabilities; and (iii) ACA Adults.”
  • “DEF also contracts with the following Health Plans to provide services to our patients: (i) Health Plan 1; (ii) Health Plan 2; (iii) Health Plan 3; (iv) Health Plan 4; (v) Health Plan 5; (vi) Health Plan 6; and (vii) Health Plan 7.”


Jeff Baird will be presenting the following webinar:


Aggressively Moving Into the Retail Market

Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.

Thursday, February 15, 2018

2:30-3:30 p.m. EASTERN TIME

A DME supplier can no longer survive while being dependent on Medicare fee-for-service. With competitive bidding, stringent documentation requirements, lower reimbursement, post-payment audits, and the fact that Medicare is tightening its purse strings, Medicare fee-for-service should only be a component of the supplier’s total income stream. There are 78 million Baby Boomers (people born between 1946 and 1964); they are retiring at the rate of 10,000 per day. Boomers are accustomed to paying for things out-of-pocket. And most Boomers want the “Cadillac” product – not the “Cavalier” product – so they can have an active lifestyle well into their 80s. The successful DME supplier will be focused on selling upgrades, utilizing ABNs, and selling “Cadillac” items for cash. These retail sales may take place in a store setting, through a kiosk, or over the internet. Even when Medicare is not the payor, there are a number of requirements that the DME supplier must meet. This program will discuss the federal and state requirements that the DME supplier must meet as it sells DME at retail. These requirements include (i) required notification to a Medicare beneficiary even though the supplier does not have a PTAN; (ii) selling Medicare-covered items at a discount off the Medicare allowable; (iii) state licensure; (iv) collection and payment of sales and/or use tax; (v) qualification as a “foreign” corporation; (vi) obtaining a physician prescription; and (vii) complying with federal and state telemarketing rules.

Register for Aggressively Moving Into the Retail Market on Thursday, February 15, 2018, 2:30-3:30 pm ET, with Jeffrey S. Baird, Esq., of  Brown & Fortunato, PC.

FEES:  Member: $99.00

Non-Member: $129.00

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. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or

Pam F. Colbert, JD, is an attorney with the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. She represents pharmacies, HME companies, and other health care providers throughout the United States. Ms. Colbert can be reached at (806) 345-6378 or