Moving the HME Industry Forward

General Healthcare

Buying Into Competitive Bidding

May 30, 2016

AMARILLO, TX – The Law dictates that patients cannot be sold. Patient files cannot be sold. Doing so will likely implicate the Medicare anti-kickback statute. On the other hand, a DME supplier can enter into a bona fide asset sale in which (A) it sells hard assets and (B) transfers patient files to the purchaser. In addition, a DME supplier can enter into a bona fide stock sale.

Competitive Bidding
The DME industry, in its present form, has been around for about 40 years. The industry grew up relatively unregulated. For several decades, the DME industry was the “Wild, Wild West.” There were no educational requirements for an owner of a DME supplier. A supplier could easily obtain a PTAN. Medicare paid well for DME. There were no post-payment audits to speak of.

Because of high reimbursement and scant government oversight, a number of “fraudsters” came into the DME market, resulting in bad press for the industry. And so the government jumped in to “get its arms around” the DME industry. The government did this by implementing aggressive post-payment audits, prepayment reviews, stringent documentation requirements, lower reimbursement, and competitive bidding (“CB”).

The goals of CB are to (A) reduce the number of DME suppliers and (B) reduce reimbursement. Unfortunately for the industry, the CB program has been successful in meeting these twin goals. Thousands of “Moms and Pops” have closed their doors and reimbursement has been drastically reduced. If a DME supplier is not awarded a CB contract, then it can “buy into” CB. The balance of this article discusses how this can be accomplished.

100% Asset Sale
Assume that ABC Medical Equipment, Inc. is awarded a CB contract for three CBAs. Assume that XYZ Medical Equipment, Inc. is not awarded a CB contract. ABC sells 100% of its assets to XYZ. Pursuant to the novation process, ABC and XYZ ask the CBIC to transfer the CB contract from ABC to XYZ. Assuming that XYZ meets the requirements to be a CB supplier, then the CBIC will transfer the CB contract.

Partial Asset Sale
ABC has a successful commercial insurance, retail, and Medicaid business. The CB contract awarded to ABC affects only a small portion of ABC’s overall business. ABC sells its assets (that relate to its CB contract) to XYZ. ABC retains its assets that relate to commercial insurance, retail and Medicaid. Pursuant to the novation process, ABC and XYZ ask the CBIC to transfer the CB contract from ABC to XYZ. Assuming that XYZ meets the requirements to be a CB supplier, then the CBIC will transfer the CB contract.

Carve Out
In the first two scenarios, above, the complete contract is transferred to XYZ, meaning that ABC is out of CB. A “carve out” arrangement is the same as a partial asset sale except that instead of the total CB contract being transferred to XYZ, a portion of the contract is retained by ABC and a portion is transferred to XYZ. The “carve out” arrangement went into effect with Round Two Recompete. See the recent Medtrade Monday articles I wrote on “carve outs.” In determining whether or not to approve a “carve out,” the CBIC will look at a number of factors. The CBIC has a great deal of discretion in deciding whether or not to approve a “carve out.”

Challenges with Asset Sales
Let’s look at a 100% asset sale. The following discussion pertaining to the 100% asset sale applies to the partial asset sale and the carve out.

Assume that on 2/1, ABC and XYZ reach a verbal agreement for ABC to sell its assets to XYZ. The parties sign a letter of intent on 2/1. On 2/1, ABC notifies CMS that ABC (i) intends to sell its assets to XYZ and (ii) intends to ask the CBIC to transfer the CB contract to XYZ. For purposes of this discussion, I will ignore the 60 day notice requirement to the CBIC.

On 2/8, (A) ABC and XYZ sign an Asset Purchase Agreement; (B) ABC signs a Bill of Sale; (C) XYZ pays the purchase price to ABC; and (D) ABC and XYZ sign a Novation Agreement. The Novation Agreement has places for three signatures: for ABC, for XYZ, and for CMS. The Novation Agreement says that if CMS signs the Novation Agreement, then XYZ will take over ABC’s responsibilities under the CB contract. ABC and XYZ submit the Bill of Sale and Novation Agreement to the CBIC. Within 30 days thereafter, the CBIC will let the parties know if CMS will sign the Novation Agreement.

This places ABC and XYZ in a tough position. Closing will have occurred on 2/8. At closing, ABC will have transferred title to assets and XYZ will have paid money. But the parties will not know for several weeks as to whether or not CMS will approve the transfer of the CB contract……and XYZ will not want to pay money to ABC unless XYZ ends up with the CB contract. A solution is (A) for XYZ to place the purchase price in escrow and (B) for the parties to have the right of rescission in the event that CMS does not approve the transfer of the CB contract.

100% Stock Sale
Assume that John Smith is the sole stockholder of ABC. Smith sells his stock to XYZ, resulting in ABC being the wholly-owned subsidiary corporation of XYZ. CMS approval is not required for this. ABC needs to (A) updates its 855S with the NSC and (B) submit change of ownership (“CHOW”) notifications to its accrediting organization and to appropriate state agencies.

Partial Stock Sale
ABC can purchase 5% or more of XYZ and/or vice versa. When this occurs, in the eyes of CMS, ABC and XYZ are “commonly owned.” Here is how this works:

• ABC and XYZ sign a Stock Purchase Agreement in which, for example, XYZ purchases 5% of ABC. Assume this occurs on 6/1.
• Assume that on 6/1, ABC updates its 855S that shows XYZ as a 5% stockholder of ABC.
• Assume that on 6/21, the NSC’s records reflect the common ownership. Assume that on 6/21, ABC submits a Supplier Location Update Form to the CBIC in which ABC asks that XYZ be added to ABC’s CB contract. The request can be for XYZ to be added to all CBAs/product categories……or e.g., just to one CBA/one product category. Assume that on 7/15, the CBIC lets the parties know if CMS approves the request.
• ABC and XYZ are in the same quandary as set out, above, under “Challenges with Asset Sales.” That is, the parties will not know until after closing whether or not CMS will approve adding XYZ to ABC’s CB contract. The solution is the same: payment of the purchase price into escrow and a right of rescission.
• There is another issue that is not found with asset sales. When the CB “round” comes up for rebid, then because ABC and XYZ are commonly owned, if the two companies want to submit a bid in the next round for the same CBA/product category, then only one of the companies can bid (it will do so on behalf of both companies).
• CMS has issued no guidance on what a 5% transaction should look like. All that CMS says is that if two companies have a 5% (or more) arrangement, then the companies are “commonly owned” and the contract supplier can ask CMS to add the non-contract supplier to the contract supplier’s CB contract. A 5% transaction needs to be commercially reasonable…..and not a “sham.”
• Whether a common ownership transaction is commercially reasonable will be based on general corporate law principles applicable to any acquisition of stock (e.g., Bob’s Frozen Yogurt, Inc. purchases 5% of Jim’s Frozen Yogurt, Inc.).
• One other point: Once the common ownership relationship is established between ABC and XYZ, then barring something unforeseen, (i) ABC is not liable for XYZ’s obligations and (ii) XYZ is not liable for ABC’s obligations. For example, if ABC gets hit with a $1 million recoupment action by CMS, barring something unforeseen, XYZ is not liable for any of the recoupment.

Lisa Smith will be presenting the following webinar.
Oxygen: When do the 36 Months Start Over?
Presented by: Lisa K. Smith, Esq., Brown & Fortunato, P.C.
Monday, June 6, 2016
2:30-4:00 p.m. EASTERN TIME
When a DME supplier provides an oxygen concentrator to a Medicare beneficiary, Medicare will pay the supplier for the first 36 months and then the supplier will be obligated to service the beneficiary’s oxygen needs, for very little compensation, for the next 24 months. Occasions may arise when the beneficiary’s continuous use of the concentrator is interrupted. This interruption may be caused by one of the following: (i) the concentrator is lost, stolen, or damaged beyond repair; (ii) there is an extended break in need of greater than 60 days; (iii) the supplier sells its assets to another supplier; (iv) the supplier goes out of business; (v) the supplier files bankruptcy; or (vi) the beneficiary relocates outside the supplier’s service area. When one of these events occurs, and afterwards the beneficiary subsequently starts using a concentrator provided by the initial supplier or a concentrator provided by a new supplier, the question becomes: Can the 36 month rental period start over?

Register for Oxygen: When do the 36 Months Start Over? on Monday, June 6, 2016, 2:30-4:00 pm ET, with Lisa K. Smith, Esq., of  Brown & Fortunato, PC.
Contact Ika Sukh at if you experience any difficulties registering.

FEES: Member: $99.00    
Non-Member: $129.00

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, infusion companies, HME companies and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or