Moving the HME Industry Forward

General Healthcare

Building a Referral Network

May 11, 2015

AMARILLO, TX – In the business world, “relationships are everything.” This is particularly true with the DME industry which is caught up in the “perfect storm” of competitive bidding, out-of-control audits, lower reimbursement and stringent documentation requirements. In order to generate business, the supplier needs to be innovative with its marketing and enter into healthy…and legal…relationships with referral sources. This article discusses the types of legal relationships that the DME supplier can enter into with referral sources.

Providing Gifts and “Other Things of Value” to Physicians
The DME supplier can provide gifts, entertainment, trips, meals, and similar items to a physician so long as the combined values of all of these items do not exceed $392 in a 12 month period.  The DME supplier can pay the physician for legitimate services so long as the arrangement complies with the Personal Services and Management Contracts safe harbor and the Personal Services exception to Stark.

Joint Venture With Hospital
Assume that ABC Medical Equipment, Inc. is a 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 different ways.  Here are some concrete steps that can be taken to set up one type of joint venture.

• ABC will initially set up and own 100% of St. Mary’s Medical Equipment, Inc. (“SMME”).
• SMME will obtain a surety bond, accreditation, state licensure, and a PTAN.
• When a PTAN 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.
• 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.
• 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.

Consignment Arrangement with Hospital Emergency Room
In a typical consignment arrangement with a hospital ER, (i) the DME supplier will place orthotic products (e.g., braces) in a “closet” in the hospital ER; (ii) the physician will order a product, such as a brace, for the patient to wear home … and utilize in the home; (iii) at the time of discharge, the hospital staff will pull the brace out of the consignment “closet” and place it on the patient; (iv) the patient will wear the brace home; and (v) the DME supplier will collect the required documents and bill for the brace.

42 CFR § 411.15(m)(1), the outpatient bundling regulation, provides that “any service furnished to an inpatient of a hospital or to a hospital outpatient  . . . during an encounter . . . by an entity other than the hospital” is excluded from Medicare coverage, subject to certain exceptions.  However, in an amendment to this regulation, CMS stated in the preamble to the Notice of Proposed Rulemaking the following:

Sometimes a hospital may furnish an item or services for which a patient will have a continuing need.  For example, a hospital may furnish a DME item such as a wheelchair…DME is defined under section 1861(n) of the Act as equipment used in the patient’s home or in another institution used as his home other than a hospital or skilled nursing facility (SNF).  By definition, DME is not something that is provided for use in the hospital setting.  Therefore, we do not believe that the DME benefit provides for any item or service that is expected to be used by the patient while in the hospital as an inpatient or outpatient…The covered Part B benefit for DME as described under section 1861(n) of the Act is intended for equipment used in the home, so a hospital that furnishes DME to its patients is not providing a hospital service to its patients, but is acting in the capacity of a supplier of DME, not a provider of hospital services.  For these reasons, we will not require bundling of DME for hospital patients.

Depending on the specific product dispensed, a credible argument may be made that (i) the outpatient facility patient will have a continuing need for the orthotic product once the patient returns home and (ii) it is permissible for the DME supplier to bill for an orthotic product dispensed to an outpatient facility patient.  This argument is further supported by Chapter 20, Section 110.3 of the Medicare Claims Processing Manual, which allows a DME supplier to deliver DME, prosthetics, and orthotics (but not supplies) to an inpatient up to two days before discharge if certain conditions are met.

Assisting Hospitals in Preventing Readmissions
Hospitals, like all other providers, are being squeezed by reimbursement cuts. Hospitals need to protect their revenue stream and cut costs.  One way to accomplish this is to prevent readmissions for diseases covered by the Hospital Readmissions Reduction Program (“HRRP”).  If a patient is readmitted after discharge within a certain period of time, for a particular disease, then the hospital can be subjected to future payment reductions from Medicare.  And so hospitals are beginning to contract with other providers to monitor/work with discharged patients so that they are not readmitted soon after being discharged.

In 2013, the OIG published an advisory opinion (“AO No. 13-10”) that addresses the assistance that other providers can provide to a hospital in order to prevent readmissions.  Inasmuch as an increasing number of DME suppliers are entering into arrangements with hospitals to prevent readmissions, the AO provides valuable guidance.

In concluding that it would not impose sanctions, the OIG stated: (i) the arrangement was unlikely to lead to increased costs or overutilization of Federal reimbursement services; (ii) the services could save money for the Federal government by decreasing readmissions; (iii) the services were not separately reimbursable by the Federal government; (iv) the arrangement was unlikely to interfere with clinical decision-making; (v) the Applicant would implement safeguards to prevent the arrangement from being used to increase drug sales by the manufacturer; (vi) the arrangement was unlikely to result in inappropriate patient steering; and (vii) the hospital was compensating the Applicant for the services.

Medical Director Agreement
A DME supplier can enter into a Medical Director Agreement with a referring physician.  The arrangement will need to comply with the Personal Services and Management Contracts safe harbor and with the Personal Services exception to Stark.

Loan/Consignment Closet
A DME supplier may place inventory on the premises of the referral source.  The inventory must be for the convenience only of the referral source’s patients and the referral source cannot financially benefit, directly or indirectly, from the inventory.  It is important that the referral source ensure patient choice.

Employee Liaison
A DME supplier may designate an employee to be on the referral source premises for a certain number of hours each week.  The employee may educate the referral source staff regarding DME and related services.  The employee may work with a patient, after a referral is made to the DME supplier (but before the patient leaves the referral source’s premises), in order for there to be a smooth transition when the patient goes home.  The employee liaison may not assume responsibilities that the referral source is required to fulfill.

Promotional Items to Customers and Potential Customers
The DME supplier can offer an item of nominal value (i.e., retail value of not more than $10) to prospective customers covered by a government health care program.  Over a 12-month period, the supplier may not give items to any one prospective customer (covered by a government health care program) that have a combined retail value greater than $50.

Health Fairs, Luncheons, Kiosks, and Open Houses
The DME supplier can participate in local health fairs, can put on a short program during lunch at a senior citizens’ center, and can place a kiosk in a mall that promotes the supplier’s products and services.  When appropriate, the supplier can hold an open house.  During the open house, it is appropriate for the supplier to conduct a drawing in which the prize is something like an iPad.  Even though the iPad has a value in excess of $10, the chance of a person winning the iPad is very small.

Jeff Baird will be presenting the following webinar on May 14, 2015:
Webinar Sponsored by MAMES
Retail Sales: A Critical Component of the Successful DME Supplier
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Thursday, May 14, 2015
10:00-11:30 a.m. CENTRAL TIME
A DME supplier can no longer survive while being dependent on Medicare fee-for-service. With competitive bidding, stringent documentation requirements, lower reimbursement, post-payment audits, and the fact that Medicare is tightening its purse strings, Medicare fee-for-service should only be a component of the supplier’s total income stream. Baby Boomers are accustomed to paying for things out-of-pocket. The successful DME supplier will be focused on selling upgrades, utilizing ABNs, and selling items for cash. These retail sales may take place in a store setting, or they may take place over the internet. Even when Medicare is not the payer, there are a number of requirements that the DME supplier must meet. This program will discuss the federal and state requirements that the DME supplier must meet as it sells DME at retail. These requirements include state licensure, collection and payment of sales and/or use tax, qualification as a “foreign” corporation, obtaining a physician prescription, and complying with federal and state telemarketing rules. In addition, the program will discuss how the supplier can sell Medicare-covered items at a discount off the Medicare allowable.

Registration: For online registration please click here for “Retail Sales: A Critical Component of the Successful DME Supplier” on Thursday, May 14, 2015, 10:00-11:30 am CT, with Jeffrey S. Baird, of Brown & Fortunato, PC.  If you experience any difficulty registering you may email Rose Schafhauser at Space is limited to first 100 registrations.
MAMES Members: No charge        
Non-MAMES Members:  $15.00

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, 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