Moving the HME Industry Forward


How Non-Contract Suppliers Can Enter the Competitive Bidding Arena

December 16, 2013

AMARILLO, TX – Competitive bidding is a deeply flawed program. Until we can eliminate or modify CB, we are stuck with it.  For those suppliers that are stuck without a CB contract, there are options for you.  Let’s assume that ABC Medical Equipment, Inc. is not awarded a CB contract. If ABC wants to participate in CB, then ABC has five options:

1) 100% Asset Purchase
2) Partial Asset Purchase
3) 100% Stock Purchase
4) Partial Stock Purchase
5) Subcontracting

100% Asset Purchase
Assume that XYZ Medical Equipment Inc is awarded a competitive bidding contract. XYZ cannot sell its CB contract to ABC. It can, however, sell 100% of its assets to ABC and ask the CBIC to transfer the CB contract to ABC.

For the purpose of this article let’s say that ABC and XYZ sign a letter of intent on January 1, 2014 for ABC to purchase 100% of XYZ’s assets. On January 1, 2014, XYZ will send a notice to the CBIC informing it of the pending sale and of the fact that ABC and XYZ will want ABC to take over XYZ’s CB contract.

On February 1, 2014, XYZ and ABC will sign an Asset Purchase Agreement, a Bill of Sale, and a Novation Agreement and will submit the Bill of Sale, the Novation Agreement, and a few other documents to the CBIC.  The Novation Agreement states that if the CBIC approves the transfer of the CB contract, then ABC will assume XYZ’s obligations under the CB contract as if ABC was the original party to the contract.

ABC will be required to send in documentation to the CBIC with the Bill of Sale and Novation Agreement that shows that ABC qualifies to be a contract supplier. If ABC previously submitted this documentation when it bid on the round covered by XYZ’s CB contract, but ABC’s bid was denied only because ABC bid too high, then ABC does not need to submit additional documentation. If, however, ABC submitted a bid for the round covered by XYZ’s CB contract, but ABC’s bid was disqualified, then ABC may need to submit documentation that cures the problems that led to the disqualification depending on what the problems were.

On or around March 1, 2014, the CBIC will notify ABC and XYZ whether or not the CBIC approves the transfer of the CB contract.  If the CBIC approves the transfer and signs off on the Novation Agreement, then XYZ’s PTAN will be removed from the CB contract and ABC’s PTAN will be added to the CB contract. Because the Bill of Sale will be executed before a CBIC decision is rendered, XYZ’s assets will have been transferred, and ABC will presumably have paid money for the assets.

This places XYZ in the unenviable position of transferring its assets before CBIC approval, and this places ABC in the unenviable position of paying money before CBIC approval. To protect XYZ, the Asset Purchase Agreement will be drafted to ensure that if the CBIC does not approve then the assets will go back to XYZ. In order to protect ABC, the purchase proceeds will be placed in escrow. If the CBIC approves, then the proceeds will be released from escrow to XYZ.  If the CBIC does not approve, then the proceeds will be released from escrow back to ABC.

The dates set out above are just examples. The rules state that XYZ must notify the CBIC of the sale at least 60 days before closing and the rules state that the parties must execute and submit the Novation Agreement at least 30 days before closing. There is a possibility that CBIC approval can be obtained in an expedited fashion.  For example, if XYZ notifies the CBIC of the sale on January 1, 2014, and the parties submit the Novation Agreement and Bill of Sale on January 8, 2014, then the CBIC may approve the transfer of the contract in mid-February. If the CBIC does approve, the effective date of the transfer of the contract should be made retroactive to the date of the Bill of Sale.

No matter what the situation is, the CB contract cannot be subdivided. If XYZ’s CB contract covers Phoenix and Salt Lake City and the product categories are oxygen (Phoenix) and beds (Salt Lake City), ABC cannot say: “I will take only that portion of the CB contract that covers oxygen in Phoenix.” ABC must take the whole contract or nothing at all.

Partial Asset Purchase
Instead of purchasing 100% of XYZ’s assets, ABC can purchase those assets of XYZ that are associated with XYZ’s CB contract.  XYZ will retain the balance of its assets and XYZ will continue to own and run its business that is not associated with the CB contract that ABC is taking over.

As noted above, a CB contract cannot be subdivided.  XYZ cannot transfer to ABC that portion of XYZ’s CB contract associated with Phoenix and retain that portion of the contract associated with Salt Lake City.  All other requirements, pertaining to a 100% asset purchase, remain the same for a partial asset purchase.

100% Stock Purchase
Let’s assume that John Smith is the sole stockholder of XYZ.  Smith sells all of his stock to ABC.  As a result, XYZ (a contract supplier) becomes a wholly-owned subsidiary corporation of ABC (a non-contract supplier).  This does not mean that ABC can “bill its Medicare CB patients through its subsidiary, XYZ.”  Even though ABC owns XYZ, they are still separate entities (with different tax ID numbers).  However, subject to patient choice, ABC can refer its Medicare CB patients to XYZ.  Because ABC and XYZ will be “commonly owned,” XYZ can ask the CBIC to add ABC’s PTAN to XYZ’s CB contract.

Because this is a stock purchase and not an asset purchase, the “60 day notice” does not have to be given to the CBIC.  A Novation Agreement is not required.  XYZ will need to update its 855S with the NSC to show that ABC is XYZ’s new owner.  After the 855S is processed, XYZ will need to submit the Contract Supplier Location Update Form to the CBIC to have ABC’s PTAN added to the CB contract.

Partial Stock Purchase
If ABC purchases 5% or more of XYZ’s stock, or vice versa, then under CB rules, ABC and XYZ will be “commonly owned.”

Assume that ABC purchases exactly 10% of XYZ’s stock.  XYZ will update its 855S to show that ABC is a 10% owner of XYZ.  Once the NSC records reflect that ABC is a 10% stockholder of XYZ, then XYZ will ask the CBIC to add ABC’s PTAN to XYZ’s CB contract. This is accomplished by XYZ filing a Contract Supplier Location Update Form with the CBIC.  

XYZ can request that ABC’s PTAN be added to a specific CBA/product category combination.  For example, XYZ can ask that ABC’s PTAN be added only to that portion of the CB contract associated with the Phoenix CBA/oxygen product category. If the CBIC grants XYZ’s request and adds ABC’s PTAN to XYZ’s CB contract, ABC will be able to bill and collect under its own PTAN.  ABC will not have to “bill through” XYZ.

In the future, if ABC and XYZ desire to bid for the same product category in the same CBA, then they will have to submit one bid for both companies.  This is because they are “commonly owned.”

Before entering into this type of transaction, the parties need to consult health care attorneys to advise them of their rights, responsibilities and risks associated with this type of transaction.

XYZ and ABC can enter into a Subcontract Agreement (“SA”).  Under the SA, XYZ will be the “Contractor” and ABC will be the “Subcontractor.”  Within 10 days of executing the SA, XYZ must notify the CBIC of the subcontract arrangement. When it comes to responsibilities of the parties, XYZ must handle the intake, assessment and coordination of care.  ABC can handle delivery, set-up, patient education, and maintenance and repair.  Any referrals from physicians must go directly to XYZ as opposed to “going through ABC.”

Let’s assume that ABC influences its referral sources (e.g., physicians) to send their orders to XYZ.  This influence may be construed as ABC “arranging for the referral of” Medicare CB patients to XYZ.  In order to avoid problems under the Medicare anti-kickback statute, the parties need to be careful regarding how XYZ pays ABC for ABC’s services.  The safest way for XYZ to pay ABC is for XYZ to pay a fixed annual fee that is the fair market value equivalent for ABC’s services (e.g., $48,000 over the next 12 months).  A less safe payment method (but one that should not be high risk) is if (i) the compensation is a fixed amount per item of service, (ii) the parties secure a fair market value analysis of the compensation from an independent third party, and (iii) ABC performs subcontract services for all customers of XYZ (not just for those customers who are referred to XYZ as a result of ABC’s influence).

While these options may not all work for, or be available to, every non-contract supplier, the options are there, and they can provide some relief to those on the outside looking in.

Baird will be presenting at Medtrade Spring 2014 in Las Vegas, where he will share his expertise, advice, and ideas. CLICK HERE to register for Medtrade Spring, held from March 10-12, 2014, at the Mandalay Bay Convention Center, Las Vegas. Early bird rates end on December 31, 2013.

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