Moving the HME Industry Forward


Hospital Consignment Arrangement and Chargeback Obligation

August 31, 2015

AMARILLO, TX – DME suppliers often enter into consignment arrangements with hospitals. When a consignment arrangement with a hospital works properly, the DME supplier places products in a “closet” at the hospital, a physician will order a product for a patient to take and use at home, hospital staff will pull the item out of the closet and give it to the patient, the patient is discharged, and the DME supplier will collect the appropriate documents and bill for the item. An important question is whether there should be a chargeback provision (i) for items that cannot be accounted for; (ii) for items dispensed with improper or insufficient paperwork or lack of medical necessity; or (iii) for instances where consigned items are used by the hospital for inpatient encounters.

Applicable Laws
In structuring a hospital consignment arrangement, it is important to comply with Medicare guidelines and avoid violating the federal anti-fraud laws.

Consignment Arrangements
A consignment arrangement is legally acceptable so long as the following requirements are met: (i) the consigned inventory is only for the convenience of the patient; (ii) the hospital cannot directly or indirectly profit from the consigned inventory; and (iii) the patient must be given the right to choose to purchase a product from the consigned inventory or from another DME supplier. Further, if the DME supplier pays rent for the consignment closet space, then the rental agreement must comply with the space rental safe harbor to the Medicare anti-kickback statute (“AKS”).

Medicare Anti-Kickback Statute
The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive remuneration (monetary or anything of value) to induce, or in return for, referrals of health care services or items paid for by a federal health care program. Civil monetary penalties and exclusion from the Medicare program may be imposed for violations.

The AKS provides penalties for individuals and/or entities on both sides of a prohibited transaction. Remuneration is interpreted broadly, and not only includes the typical kickback consisting of a cash payment, but can also include other, seemingly harmless, arrangements in which only one purpose of the arrangement is to generate referrals. A claim for items or services that results from a violation of the AKS also constitutes a false or fraudulent claim under the Federal False Claims Act (“FCA”). Persons involved in such violations do not need actual knowledge of the AKS or specific intent to commit a violation.

The OIG has stated that providing items or services that are normally the responsibility of the hospital or physician, implicates the AKS. Similarly, when items or services are provided that are not directly related to the underlying agreement, a strong inference arises that a benefit is being provided to induce or reward referrals. The AKS also prohibits inducements that may be given to beneficiaries in order to encourage them to order or purchase services from a particular provider or supplier. When examining arrangements, courts have demonstrated a willingness to examine the substance, and not merely the form, in order to determine whether the parties are engaging in prohibited activities.

False Claims Act
The FCA is a civil statute that prohibits the knowing submission of false or fraudulent claims. The FCA creates a civil penalty of between $5,500 and $11,000 per claim filed, plus treble damages sustained by the Government due to the false claim. As mentioned above, claims that include items or services resulting from a violation of the AKS constitute a false claim under the FCA.

The FCA also prohibits conspiring to submit false or fraudulent claims. This means that persons who conspire to commit any type of FCA violation, have themselves committed an FCA violation, even though they may not present any false claims or make any false statements. To violate the conspiracy section of the FCA there must be: (i) an agreement between at least two persons, (ii) to commit a violation of the FCA, and (iii) one co-conspirator must take an overt action in furtherance of committing that violation. The agreement between the co-conspirators can be formed based on a tacit or material understanding, which can be inferred from circumstantial evidence.

Medicare “48-Hour” Rule
The Medicare Claims Processing Manual allows a DME supplier to deliver durable medical equipment, prosthetics, and orthotics (but not supplies) to an inpatient up to two days before discharge, if certain conditions are met. This is commonly referred to as the “48-Hour” Rule. By definition, DME is covered by Part B only when intended for use in the home. One of the conditions that must be met under the 48-Hour Rule states that the reason the supplier furnishes the item cannot be for the purpose of eliminating the facility’s responsibility to provide an item that is medically necessary for the beneficiary’s use or treatment while the beneficiary is in the facility. Such items are included in the Diagnostic Related Group (DRG) or Prospective Payment System (PPS) rates. Items or services provided by an entity, other than the hospital, to an inpatient of a hospital or to a hospital outpatient during an encounter, are excluded from Medicare coverage, subject to certain exceptions.

A hospital is responsible for furnishing medically necessary items to a beneficiary for the full duration of a beneficiary’s stay. A hospital is not allowed to delay furnishing or shift its costs for furnishing medically necessary items to a beneficiary, who is a resident in the facility, to Medicare Part B. The Medicare Claims Processing Manual further states, “[a] facility may not prematurely remove a medically necessary item from the beneficiary’s use or treatment on the basis that a supplier delivered a similar or identical item to the beneficiary for the purpose of fitting or training.” However, “beginning two days before the beneficiary’s discharge, a facility may take reasonable actions to . . . fit or train the beneficiary . . . include[ing] the substitution of the supplier-furnished item, in whole or in part, for the facility-furnished item during the beneficiary’s last two inpatient days provided the substitution is both reasonable and necessary for fitting or training . . . for subsequent use at the beneficiary’s home.”

Hospital “Chargeback” Obligation
• Absence of  chargeback provisions for unaccountable consigned items may implicate the AKS.

While there appears to be no OIG guidance directly addressing this issue, an argument can be made that consignment arrangements between DME suppliers and hospitals that lack a chargeback provision, holding the hospital financially responsible for items that are unaccounted for, implicates the AKS. One purpose of the lack of a chargeback provision may be interpreted as an offer of remuneration to induce or reward referrals. The remuneration offered to the hospital would be in the form of access to items without having to pay for them.

Because the underlying service being provided by the DME supplier in consignment arrangements is to patients, and not the hospital, and because these items have independent value to the hospital, it may not be difficult for the government to prove that access to these free items was furnished for no purpose other than to induce recommendation of the DME supplier. Further, providing access to free items is a violation of an OIG Advisory Opinion prohibiting a consignment arrangement from benefiting the hospital in any way. Accordingly, the lack of a chargeback provisions in a consignment arrangement will be suspect under the AKS because it creates an incentive for influencing patient referrals.

For this reason, DME suppliers and hospitals should consider adding a chargeback provision, thus making the hospital responsible for unaccounted items. Such a provision, if adhered to, may protect both parties from violating the AKS.

• Absence of chargeback provisions for claims denied due to lack of medical necessity or deficient paperwork may implicate the AKS.

Although there appears to be no OIG guidance directly addressing this issue, an argument can be made that a consignment arrangement that lacks a chargeback provision for claims denied due to lack of medical necessity or deficient paperwork implicates the AKS. Under the Medicare rules, in order for the DME supplier to be reimbursed, it must ensure that proper documentation is available and adequately supports the medical necessity of the DME items it bills for. This includes items dispensed at its location or by a staff member of a hospital under a consignment arrangement.

The fact that a hospital is lax in regards to properly documenting medical necessity for consigned items it dispenses, or knowingly dispensing items the patient lacks a medical need for, suggests that the items were dispensed for the purpose of inducing the beneficiary to obtain additional services from the hospital or physician. If so, such an act may violate the AKS. Further, if the hospital is consistently dispensing items to patients that lack medical necessity or giving the DME supplier deficient paperwork, and the DME supplier does not require the hospital to reimburse the DME supplier for such claims, it suggests that the DME supplier is giving the hospital free items in order to induce or reward referrals from the hospital.

To avoid potential AKS violations, the consignment arrangement should contain a chargeback provision for denied claims of consigned items which the hospital dispenses, if the claims are denied due to lack of medical necessity or deficient paperwork on the part of the hospital. This provision may help both parties avoid violating the AKS. By requiring payment from the hospital for these denied claims, the DME supplier is removing the possible remuneration that may have otherwise flowed to the hospital. Similarly, by paying for the items, the hospital is more likely to ensure physicians and staff personnel are dispensing consigned items properly.

• Not prohibiting the use of consigned items for hospital inpatients may result in conspiring to commit an FCA violation.

Although there appears to be no OIG guidance directly addressing this particular issue, an argument can be made that not prohibiting, or not requiring reimbursement for, the use of consigned items for hospital inpatient encounters may result in a violation of the FCA. When a hospital provides a consigned item to an inpatient, not pursuant to the “48-Hour” Rule, the item is not reimbursable by Medicare Part B because the item is not intended for use in the home. Therefore, the DME supplier will not be allowed to submit a claim for the item.

Further, the hospital is reimbursed for items and services provided to inpatients based on the DRG or PPS rate. By using, and not paying for, a consigned item for the inpatient encounter, the hospital is able to shift its actual costs to the DME supplier. Submitting a Part A claim for services, some of which were actually provided by another entity, likely constitutes a violation of the FCA on the part of the hospital.

If it is determined that these types of hospital claims constitute a violation of the FCA, both the DME supplier and the hospital may be found to have conspired to commit an FCA violation, even before any claim is submitted. Conspiracy to commit an FCA violation requires, (i) the formation of an agreement between two or more parties, (ii) to commit an act that results in the violation of the FCA, and (iii) one co-conspirator takes an overt action in furtherance of the conspiracy. Here, the formation of the consignment agreement that does not prohibit the hospital from using the products on inpatients could constitute the agreement between the co-conspirators.

The consignment agreement is completely silent on the matter, but an agreement may be implied from circumstantial evidence. Knowledge of the intended or actual use of the consigned items by the hospital for inpatient encounters, coupled with the lack of a prohibition on the part of the DME supplier, may be enough for a court to infer a conspiracy to commit an FCA violation. If it can be shown that the hospital staff or physician retrieved the item from the closet and it was used on a hospital inpatient outside the “48-hour” Rule, this would constitute an overt act in furtherance of the conspiracy.

To avoid violating the FCA by potentially conspiring to commit an FCA violation, the DME supplier and the hospital should state in the agreement that consignment items will not be used by the hospital for inpatient encounters, unless the DME supplier is reimbursed for the items or the items are provided in accordance to the 48-Hour Rule. Adherence by both parties to this provision would remove the cost shifting ability of the hospital and reduce the chances of an FCA violation.

Last week’s article entitled CMS Limits Scope of Review on Redetermination and Reconsideration contained an error. The article stated that the “redetermination review is conducted by an employee of the ZPIC, RAC or DME MAC who did not partake in the initial determination.” While a redetermination is conducted by an employee who was not involved in the original determination, redeterminations are handled by a fiscal intermediary (FI), carrier, or Medicare Administrative Contractor (MAC). In the case of durable medical equipment, the DME MAC is responsible for conducting redetermination appeals. ZPICs and RACs do not conduct redetermination appeals.

Jeff Baird will be presenting the following webinar:
AAHomecare’s Educational Webinar
Joint Ventures and Other Arrangements with Referral Sources
Presented by:  Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Thursday, September 10, 2015
2:30-4:00 p.m. EASTERN TIME
In the real world one business can enter into an arrangement with another business without worrying about pesky government regulations.  Unfortunately, DME suppliers are not in the real world……they are in an alternative universe known as “health care world.”  Unlike auto parts suppliers and widget manufacturers, DME suppliers must be careful in entering into arrangements with other providers.  This is because of federal and state anti-fraud statutes and regulations.  For example, the Medicare anti-kickback statute makes it a crime for a person/entity to receive compensation for referring (or arranging for the referral of) Medicare/Medicaid patients to a health care provider.  All states have anti-kickback statutes that are similar to the federal statute.  The federal Stark physician self-referral statute prohibits a physician from referring Medicare/Medicaid patients to a provider in which the physician has a compensation or ownership interest.  These are but two examples of the many anti-fraud laws that are on the books.  This program will discuss the relevant state and federal anti-fraud statutes and regulations that govern the types of arrangements that a DME supplier can enter into with another provider, such as a physician, home health agency or pharmacy.  The program will discuss the types of arrangements that are clearly legal, the types of arrangements that fall within the proverbial “gray area,” and the types of arrangements that must be clearly avoided.

Register for “Joint Ventures and Other Arrangements with Referral Sources” on Thursday, September 10, 2015, 2:30-4:00 pm ET, with Jeffrey S. Baird, of Brown & Fortunato, PC. Contact Ika Sukh at to register.

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