Moving the HME Industry Forward


Joint Ventures With Hospitals – Concrete Steps to Take

December 2, 2013

AMARILLO, TX – In light of competitive bidding, audits and recoupments, it is natural for the DME industry to feel that it is under siege. Under the heading of “misery loves company,” other health care sectors feel the same way.

Physicians and hospitals are being squeezed by Medicare, Medicaid, and commercial insurers. Pharmacies are facing aggressive audits by PBMs. And home health agencies have had a bullseye painted on them for years.

In short, all health care providers are under the gun. With The Greatest Generation dying at the rate of 1,500 per day, and with 78 million Baby Boomers retiring at the rate of 10,000 per day, it is expensive to keep all of us alive—and somebody has to pay to keep us alive. That somebody is “us.”

The bad news is that reimbursement is tight and it will continue to be tight well into the future. The good news is that demand for the what the DME industry has to offer will increase at a rapid clip for years to come. The successful DME supplier has no choice but to walk away from its comfort zone—be innovative and creative—and not afraid to fail. The owner of the DME cannot look to anyone (or anything) but himself/herself to be successful. No magical safety net will be thrown out for DME suppliers.

What does all of this have to do with the title of this article? Remember what I said about hospitals being squeezed. Hospitals, like DME suppliers, are looking for additional sources of revenue.

Hospitals are aware that when they discharge patients, the patients will obtain health care services and products from a number of ancillary health care providers: pharmacies, home health agencies, DME suppliers, PT clinics, etc. From the hospital’s perspective, this is “money that is flowing out the hospital’s doors.” The hospital would like to be able to recapture some of that money.

A way for the hospital to recapture some of this money is to partially own a DME company. This can be accomplished by the hospital entering into a joint venture with a DME supplier. A joint venture is nothing more than two or more people (or two or more companies) owning something together.

About 20 years ago, a number of hospital-DME supplier joint ventures were set up. For a number of reasons they did not work out, and most of them were dissolved. Well, I am now seeing hospitals aggressively reenter the DME joint venture market—and these joint ventures appear to be working. So how can a hospital and a DME supplier put together a joint venture?

Assume that ABC Medical Equipment Inc is local DME supplier. Assume that St. Mary’s Hospital is a local hospital that wants to get into the DME business. The two entities decide to form a joint venture. Such a joint venture can be structured in several different way. Here are some concrete steps that can be taken to set up one type of joint venture.

1) ABC will initially set up and own 100% of St. Mary’s Medical Equipment, Inc. (“SMME”).
2) SMME will rent space on St. Mary’s campus. SMME will pay fixed annual (fair market value) rent to St. Mary’s
3) SMME will obtain a surety bond.
4) SMME will obtain accreditation. There is a possibility that the accrediting organization that accredits ABC will immediately provisionally accredit SMME. Such provisional accreditation will be subject to a subsequent site visit
5) SMME will obtain required state licensure.
6) SMME will then apply for a Medicare Part B supplier number.
7) Until SMME receives its supplier number, it will provide DME only to commercial and cash patients. Medicare patients discharged from St. Mary’s, who are prescribed DME, can be referred to outside DME suppliers (including ABC).
8) When a supplier number is issued to SMME, then SMME will sell stock to St. Mary’s that will result in St. Mary’s owning an equity interest in SMME. The purchase price for the stock will be fair market value. For example, assume that St. Mary’s initially purchases a 5% ownership interest in SMME. Further assume that SMME is worth $100,000. St. Mary’s will need to pay $5000.
9) If St. Mary’s and ABC so agree, St. Mary’s can purchase subsequent equity interests in SMME (e.g., an additional 5% in 12 months, an additional 5% in 24 months, etc.). The price for each subsequent purchase will be fair market value.
10) SMME will need to have operational responsibilities and financial risk. For example, SMME will (i) own delivery vehicles, (ii) employ delivery drivers, (iii) purchase and maintain inventory, and (iv) employ patient/documentation intake personnel. ABC can provide some services to SMME such as billing services and after-hour emergency repair services; SMME will need to pay fair market value compensation to ABC for the services. ABC cannot manage SMME on a turnkey basis.
11) Assume that St. Mary’s owns 25% of SMME. Profit distribution to St. Mary’s will be based on 25% of net profits. St. Mary’s will have no obligation to refer patients to SMME. In the event that St. Mary’s does refer patients to SMME, then St. Mary’s will need to insure patient freedom of choice.

By setting up and operating SMME in the manner described above, then St. Mary’s and ABC will likely avoid problems under the Medicare anti-kickback statute, the OIG’s 1989 Special Fraud Alert entitled “Joint Ventures”, and the OIG’s 2003 Special Advisory Bulletin entitled “Contractual Joint Ventures.”

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

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.