Moving the HME Industry Forward

General Healthcare

Buying on to a Competitive Bid Contract – A Refresher

January 30, 2017

AMARILLO, TX – The DME industry feels like it is caught in the old Bill Murray movie “Groundhog Day.” Every couple of years, suppliers have to submit bids and then wait to see if they are selected for the next round of competitive bidding. And then out of a scene from the “Wizard of Oz,” the bids go behind a large curtain and CMS eventually tells the bidders if they “won,” lost because they bid too high, or were disqualified for one or more reasons. Often the disqualification is because the bidder’s financials did not meet CMS’ financial standard.

Unfortunately, CMS does not tell us what the financial standards are. Reminiscent of one of the last scenes of the “Wizard of Oz,” CMS comes out from behind the curtain and tells the disqualified bidder: “You’re out because we do not like your financials … but we are not going to tell you why we do not like your financials.”

There is optimism that with Dr. Price as the new HHS Secretary, we will see substantive reforms to competitive bidding. Until that happens, we are stuck with competitive bidding “as is.”

Assume that ABC Medical Equipment, Inc. (“ABC”) submits a bid but is not awarded a contract. Assume that XYZ Medical Equipment, Inc. is awarded a contract. ABC can “buy onto” XYZ’s contract by establishing a common ownership relationship with XYZ. This can be accomplished by ABC purchasing 5% or more of XYZ’s stock, or vice versa. For purposes of this article, assume that ABC purchases 5% of XYZ.

• The parties will sign a Stock Purchase Agreement (“SPA”) and a separate Stockholder’s Agreement (“SA”). The SPA provides for the sale of 5% of XYZ stock to ABC. The SA sets out the rights and obligations of the stockholders of XYZ.

• XYZ will update its 855S to show that ABC is a 5% stockholder.

• The NSC will update its records to reflect the common ownership between XYZ and ABC. We have seen this take about three weeks.

• XYZ will submit a supplier location update form to the CBIC in which XYZ will ask the CBIC to add ABC to XYZ’s competitive bid (“CB”) contract. In so doing, XYZ can ask the CBIC to add ABC to the entire CB contract. Alternatively, XYZ can ask that ABC’s addition be limited to a specific CBA/product category combination.

• Assuming that the CBIC approves XYZ’s request, then the CBIC will add ABC to XYZ’s CB contract. We have seen this take two to three weeks.

Here are the important issues:
• ABC needs to check to make sure that PECOS is updated. There have been situations in which the NSC did not timely update PECOS.
• Before XYZ submits the supplier location update form, ABC needs to have all of its licenses in place for the CBAs that ABC will serve under XYZ’s contract.

• The 5% transaction needs to be bona fide (i.e., it needs to be commercially reasonable). It cannot be a “sham.” For example, the purchase price that ABC pays for XYZ’s stock needs to be based on the value of XYZ at the time of the stock purchase. The SPA may have “put” and “call” provisions. If XYZ buys back the stock (e.g., XYZ exercises its “call” or ABC exercises its “put”), then the price needs to be based on the value of XYZ at the time of the repurchase. While ABC is a 5% stockholder of XYZ, it is entitled to 5% of the dividends distributed by XYZ.

• While on XYZ’s CB contract, ABC will “do its own thing:” it will market for patients, take care of patients, and bill and collect under its own PTAN. ABC will not “work through” XYZ. If XYZ gets hit with a recoupment or a government investigation, then unless ABC collaborated with XYZ in actions that resulted in the recoupment/investigation, ABC will not be liable for the recoupment/investigation. If ABC gets hit with a recoupment or a government investigation, then unless XYZ collaborated with ABC in actions that resulted in the recoupment/investigation, XYZ will not be liable for the recoupment/investigation.

• If XYZ ends up having an adverse event with CMS (billing privileges are suspended, XYZ fails to repay money to CMS, etc.), then ABC may be required to disclose its relationship with XYZ to CMS … which may have an effect on ABC’s PTAN. If ABC ends up having an adverse event with CMS (billing privileges are suspended, ABC fails to repay money to CMS, etc.), then XYZ may be required to disclose its relationship with ABC to CMS … which may have an effect on XYZ’s PTAN.

• Assume that the date to submit bids for Round 1 2019 is 3/1/18. If XYZ and ABC have a common ownership relationship on that date, and if both companies want to submit a bid for the same CBA/product category, then only one of the companies can submit a bid for that CBA/product category (the other company will “ride the bidder’s coattails”). If one company submits a bid for both companies, and if one of the company’s financials are deficient, then the whole bid will be disqualified.

• If the common ownership relationship ends before the Round expires, then ABC will be off XYZ’s CB contract.

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 jbaird@bf-law.com.