Moving the HME Industry Forward


Legal Issues Related to Supplier Price Discounts

April 6, 2015

AMARILLO, TX – 42 U.S.C. §1320a-7(b)(6)(A) states, in relevant part:
The secretary may exclude the following individuals and entities from participation in any Federal health care program (as defined in section 1320a–7b (f) of this title): …

Any individual or entity that the Secretary determines—
A) has submitted or caused to be submitted bills or requests for payment … under subchapter XVIII of this chapter or a State health care program containing charges … for items or services furnished substantially in excess of such individual’s or entity’s usual charges … for such items or services, unless the Secretary finds there is good cause for such bills or requests containing such charges or costs.

To summarize, this means that a supplier is prohibited from charging Medicare or Medicaid substantially in excess of the company’s usual charges, unless there is good cause, and that a supplier that violates this prohibition is subject to exclusion from federal health care programs. This provision comes into play when a supplier wants to offer discounted prices to cash customers or accept discounted fees under contracts with third-party payors that are well below Medicare DMEPOS fee schedule amounts.

Unfortunately, the key terms “substantially in excess” and “usual charges” are not defined in the statute, and the current regulations, found at 42 C.F.R. §1001.701, do not provide any additional guidance about the meaning of these key terms. The Office of Inspector General (OIG) has provided guidance regarding the meaning of these terms on several occasions, but that guidance has not been consistent.

In the 1998 OIG Advisory Opinion 98-8, the OIG said that charging cash-and-carry customers 21% to 32% less than Medicare would violate the statute, and suggested that a “useful benchmark” was to compare the profit margins on a cash sale and a Medicare sale. The statute would not be violated if the profit margin on a Medicare sale was less than or equal to the margin on the cash sale.

In OIG Advisory Opinion 99-13 issued the following year, dealing with laboratory services, the OIG said that the test was whether “the charge to Medicare or Medicaid substantially exceeds the amount the laboratory most frequently charges or has contractually agreed to accept from non-Federal payors.” In 2000, the OIG’s Chief Counsel issued a guidance letter stating that the law could be violated if “a provider’s charge to Medicare is substantially in excess of its median non-Medicare/Medicaid charge.”

The most recent attempt to clarify the statute came in 2003, when the OIG issued a new set of proposed regulations (68 Fed. Reg. 53939 (Sept. 15, 2003)). In these proposed rules, a provider’s “usual charge” was defined as the either the average or the median of the provider’s charges for the same item or service during the previous year, excluding certain charges. (In the preamble to the proposed regulations, the OIG said that it had not decided whether the average or the median charge was the better measure of the “usual charge.”) Charges to be excluded from calculation of “usual charge” were (1) charges for services provided to uninsured patients free of charge or at a substantially reduced rate; (2) charges under capitated contracts; (3) charges under fee-for-service managed care contracts where the provider is at risk for more than 10% of its compensation; and (4) charges to Medicare, Medicaid and other federal health care programs, except TriCare. In other words, the “usual charge” would be the average or median of (i) charges to cash purchasers, (ii) negotiated rates under commercial indemnity and non-risk commercial managed care contracts, (iii) out-of-network payments from commercial payors, and (iv) charges to TriCare.

It is also important to know that the proposed rules specifically addressed the question of establishing a separate legal entity to handle the non-Medicare/Medicaid business. The proposed rule required that the charges of “any affiliated entities providing substantially the same items or services in the same or substantially the same markets” be included when calculating the usual charge of a provider. The term “affiliated entity” was defined as “any entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the provider.”

Under the proposed regulations, a supplier’s charge to Medicare or Medicaid would be considered “substantially in excess” of its usual charges if the fee schedule amount for an item (or the submitted charge if less than the fee schedule amount) was more than 120% of the supplier’s usual charge. Stated another way, the supplier would be considered to be in violation of the statute if its “usual charge” for an item was in excess of a 17% discount from the Medicare fee schedule. Remember, however, that the statute provides an exception for “good cause,” which could allow a supplier’s usual charges to be less than 83% of the Medicare fee schedule if the supplier can document its increased costs for additional time, effort or expense of serving Medicare beneficiaries. In June, 2007, the OIG withdrew the proposed rule. 72 FR 33430, 33432 (June 18, 2007).

Based on the above discussion, while there is no definitive guidance on when a supplier’s charge to Medicare/Medicaid will be viewed as “substantially in excess” of its “usual charge”, we believe that it is unlikely that the OIG will take action against a supplier whose charges to “cash and carry” customers, including those of affiliated entities, do not exceed a 17% discount off the Medicare fee schedule. If the supplier’s cash charges exceed a 17% discount off the Medicare fee schedule, then the supplier should have documentation that shows that such a discount is justified by the cost savings in not having to bill and collect from Medicare or Medicaid.

This material is provided for informational purposes only and is not legal advice. You should contact your own counsel to obtain legal advice with respect to any specific issue.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. Lisa K. Smith, JD, is an attorney with the Health Care Group at Brown & Fortunato PC. They represent pharmacies, HME companies, and other health care providers throughout the United States. Baird and Smith are Board Certified in Health Law by the Texas Board of Legal Specialization. Baird can be reached at (806) 345-6320 or Smith can be reached at (806) 345-6370 or