Moving the HME Industry Forward


Recognizing and Avoiding Fraud Landmines – Part Two

Jeffrey S. Baird, JD • May 20, 2018

AMARILLO, TX – DME suppliers operate in a highly regulated environment. They must comply with (i) federal anti-fraud laws, (ii) state anti-fraud laws, (iii) supplier standards, (iv) accreditation requirements, and (v) guidance from Medicare, Medicaid and commercial insurers. If a DME supplier is doing something it should not be doing, then “someone knows about it.” That “someone” can be an employee, a competitor, a referral source, or a government agency/contractor.

If a DME supplier violates one or more of the federal anti-fraud laws, then it can (i) have potential criminal liability, (ii) potential civil liability, and (iii) be subject to payment supervision and PTAN revocation. The risks are too high for the supplier to be cavalier regarding compliance with anti-fraud laws. It is important that on a day-to-day basis, the supplier (i) be aware of the applicable federal and state anti-fraud laws and (ii) be aware of whether it is in compliance with the laws.

Part I summarized federal and state anti-fraud laws. Parts II – V discuss specific fraud landmines to avoid.

W2 Employee vs. 1099 Independent Contractor

The Office of Inspector General (“OIG”) has repeatedly expressed concern about percentage-based compensation arrangements involving 1099 independent contractor sales agents. In Advisory Opinion No. 06-02, the OIG stated that “[p]ercentage compensation arrangements are inherently problematic under the Anti-Kickback Statute, because they relate to the volume or value of business generated between the parties.” A number of courts have held that marketing arrangements (involving 1099 independent contractors) are illegal under the federal anti-kickback statute (“AKS”) and are, therefore, unenforceable. In recent years, there have been a number of enforcement actions against arrangements involving commission payments to 1099 independent contractors. Additionally, the OIG has taken the position that even when an arrangement will only focus on commercial patients and “carve out” beneficiaries of federally-funded health care programs, the arrangement will still likely violate the AKS. On the other hand, there are both an exception and a safe harbor to the AKS that state that it is acceptable to pay percentage-based compensation to marketing reps who are bona fide W2 employees of the DME supplier.

Utilization of a Marketing Company

In the real world, it is common for a business to “outsource” marketing to a marketing company. Unfortunately, what works in the real world often does not work in the DME universe. An example of this has to do with marketing companies. If a marketing company generates patients for a supplier, when at least some of the patients are covered by a government health care program, then the supplier cannot pay commissions to the marketing company. Doing so will violate the AKS. The OIG has adopted safe harbors that provide immunity for arrangements that satisfy certain requirements. The employee safe harbor permits an employer to pay an employee in whatever manner the employer chooses in exchange for the employee assisting in the solicitation of federal health care program business, as long as there is a bona fide employer-employee relationship. Note that only a human being can be an employee; an “it” such as a marketing company cannot be an employee. The only way that a 1099 independent contractor can be paid for marketing or promoting Medicare-covered items or services is if the arrangement complies with, or substantially complies with, the Personal Services and Management Contracts safe harbor (“PSMC Safe Harbor”). This safe harbor permits payments to referral sources as long as a number of requirements are met. Two of the requirements are that (i) payments must be pursuant to a written agreement with a term of at least one year, and (ii) the aggregate compensation paid to the independent contractor must be set in advance (e.g., $24,000 over the next 12 months), be consistent with fair market value, and not be determined in a manner that takes into account the volume or value of any referrals or business generated between the parties.

Gifts to Physicians

A physician is a referral source to the supplier. The physician refers patients who are covered by a government health care program, who are covered by commercial insurance, or desire to pay cash. If a supplier pays money to a physician for services, or provides meals, gifts and entertainment to a physician, or subsidizes a trip that the physician will take, then both the supplier and the physician need to comply with the federal and state laws that govern these arrangements.

While Stark, pursuant to the Non-Monetary Compensation Exception (“NMC Exception”), allows a supplier to spend up to $407 in 2018 for non-cash/non-cash equivalent items for a physician, the AKS does not include a similar exception. Nevertheless, if the Stark exception is met, it is unlikely that the government will take the position that the non-cash/non-cash equivalent items provided by the supplier to the physician violate the AKS. In addition to complying with Stark and the AKS, the supplier and the physician also need to comply with applicable state law. Even though the supplier and the physician will need to confirm this, it is likely that compliance with NMC Exception will avoid liability under state law. And so the bottom line is that a supplier can provide gifts, entertainment, trips, meals, and similar items to a physician so long as the combined value of all of these items do not exceed $407 in 2018. For example, if a supplier wants a physician to accompany the supplier on a trip to a continuing education conference, then the supplier can safely subsidize up to $407 (in 2018) of the physician’s trip expenses. The amount of the trip subsidy will be affected by other expenditures the supplier has made on behalf of the physician during the same calendar year. Separate from furnishing gifts and entertainment, and subsidizing trips, the supplier can pay the physician for legitimate services. For example, if the supplier has a legitimate need for a Medical Director, then the supplier and physician can enter into a Medical Director Agreement that complies with both the PSMC Safe Harbor to the AKS and the personal services exception to Stark. Another legitimate way for money to exchange hands between a supplier and a physician is for the physician to rent space to the supplier or vice versa. The rental arrangement needs to comply with the Space Rental safe harbor to the AKS. 

Working With Physicians in Rural Areas

In entering into an arrangement with a physician in a rural area, the supplier needs to focus on the rural provider exception. The rural provider exception states that an ownership interest by a physician in a rural provider is not considered a “financial relationship” under Stark. Rural providers are defined as those that furnish at least 75% of the designated health services (“DHS”) they provide to residents of a “rural area.” Thus, whether this exception applies depends on whether at least 75% of the patients that the supplier services are located within a “rural area.” “Rural area” is defined as “an area that is not an urban areas as defined in 42 CFR 412.62(f)(1)(ii) which states that “the term urban area means a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA), as defined by the Executive Office of Management and Budget …” Therefore, any area that is not an MSA or a NECMA is considered to be a “rural area.” So long as no less than 75% of the products that the supplier furnishes is to patients in a rural area, the rural provider exception applies to the supplier, regardless of where the supplier is located. The current list of MSAs can be found on the U.S. Census Bureau website. A town might fall within a Micropolitan Statistical Area, which is defined as an urban cluster of at least 10,000 but less than 50,000 people.  In regards to whether a Micropolitan Statistical Area could be considered a “rural area” under the definition of Stark, the Stark II, Phase III implementation final rule states: “Micropolitan Statistical Areas are not within MSAs; thus, for purposes of the physician self-referral rules, Micropolitan Statistical Areas are not considered urban and are, therefore, rural areas.” So long as the supplier satisfies the Stark “rural provider” exception, then a physician can have an ownership in the supplier and can refer Medicare, Medicare Advantage and Medicaid, and Medicaid Managed Care patients to the supplier.

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