Moving the HME Industry Forward

General Healthcare

Consignment Arrangements with Hospital ERs

September 22, 2014

AMARILLO, TX – In a typical consignment arrangement with a hospital ER, (i) the DME supplier will place orthotic product (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) the hospital staff will pull the brace out of the consignment “closet” and place it on the patient; (iv) the patient will be discharged from the ER and wear the brace home; and (v) the DME supplier will collect the required documents and bill for the brace. This article discusses the legal parameters governing these types of arrangements.

What the Law Says About Consignment Arrangements
A consignment arrangement is legally acceptable so long as the following requirements are met: (i) the consigned inventory is only for the convenience of the patient; (ii) the hospital cannot directly or indirectly make money off the consigned inventory (e.g., the hospital cannot use the consigned inventory for procedures); (iii) the patient must be given the right to choose to purchase a product from the consigned inventory or from another DME supplier; and (iv) if the DME supplier pays rent to the hospital, then the rental agreement must comply with the space rental safe harbor to the Medicare anti-kickback statute.

The safe harbor has a number of requirements, including the following: (i) the rental agreement must be for a term of at least one year; (ii) the rent must be fixed one year in advance; and (iii) the rent must be at fair market value.

DME Supplier Billing for an Orthotic Product Provided to an ER Patient
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.  

Orthotic products are neither expressly included nor excluded from the outpatient bundling regulation. The same is true with DME.  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.1

In contrast, orthotic products provided to hospital inpatients are expressly included in the Part A prospective payment system (PPS) rate and are not separately billable.

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. 2  This argument is further supported by Chapter 20, Section 110.3 of the Medicare Claims Processing Manual, which allows a DME supplier to deliver durable medical equipment, prosthetics, and orthotics (but not supplies) to an inpatient up to two days before discharge if certain conditions are met. This provision indicates that orthotics are products that are used in the home.

Orthotic products are billable under HCPCS codes that describe (i) prefabricated orthotic products furnished off-the-shelf (OTS) and (ii) items that require expertise in customizing the product to fit the individual patient.3  In the case of the latter, the HCPCS code includes the fitting, adjustment or other similar services. Since the DME supplier is not providing the fitting or adjustment, it should not bill under the customized orthotic HCPCS code; rather, it should bill under the OTS orthotic HCPCS code.

The Hospital Should Not Bill for Anything
The hospital cannot bill for the orthotic product because the supplier (seller) of the product is the DME supplier.  Further, the hospital cannot bill for fitting, adjustment or similar services (collectively referred to as “fitting services”).

The reason for this is two-fold. First, if the DME supplier provides an OTS product, then there are no fitting services associated with the product. Second, if the DME supplier provides a custom-fitted product, then the HCPCS code assigned to the product includes fitting services, meaning that the hospital cannot separately bill for the fitting services.

CMS explains that when hospital outpatient staff provide a prosthetic or orthotic device, and the HCPCS code that describes that device includes the fitting services, the hospital should not separately bill for the fitting services.4  There is no CMS guidance authorizing a hospital to bill for a visit or procedure HCPCS code for a product provided by a DME supplier.

Supplier Standards and Consignment Arrangements
Two supplier standards are applicable to consignment arrangements:  (1) suppliers must enroll each physical location in Medicare and (2) suppliers may not share practice locations with other suppliers or providers.5

Under the first standard, each physical location where a DME supplier meets with patients and sells/rents products to them, must enroll in Medicare.6  Warehouses and repair facilities are not subject to the enrollment requirement (i.e., the patient has no access to the warehouse and products are not sold at the repair facility).

Under the second standard, when a physical location is subject to the enrollment requirement, the DME supplier may not share that location with other suppliers or providers.7  Despite this prohibition, consignment arrangements are commonplace for suppliers.8  For example, National Government Services, a Medicare contractor, has published guidance regarding the use of consignment closets.9  Consignment arrangements are generally allowed because when a DME supplier places inventory at a hospital, the area where the inventory is placed does not constitute a physical location of the DME supplier (i.e., the supplier does not meet the patient at the hospital/physician office).

In 2009, CMS published a transmittal10 with the express purpose of prohibiting most consignment closet arrangements, but that transmittal was rescinded before it was scheduled to go into effect. CMS said that it was “rescinding this change request to consider other implementation dates,” but so far there has been no follow-up. It is possible, however, that at some point CMS will again issue instructions that restrict or prohibit consignment arrangements.

Rent that the DME Supplier May Pay the Hospital
If the DME supplier decides to pay rent to the hospital, the rent should be at fair market value, be fixed at least one year in advance, and not take into account, directly or indirectly, the volume or value of referrals or other business generated between the parties.11  The OIG discussed the payments for rent for consignment closets in physicians’ offices in a Special Fraud Alert, noting that such payments are inherently suspect.  The OIG observed that the following factors should be avoided when a DME supplier rents space from a physician:

1) rental amounts in excess of amounts paid for comparable property rented in arms-length transactions between persons not in a position to refer business;
2) rental amounts for subleases that exceed the rental amounts per square foot in the primary lease;
3) rental amounts that are subject to modification more often than annually;
4) rental amounts that vary with the number of patients or referrals;
5) rental arrangements that set a fixed rental fee per hour, but do not fix the number of hours or the schedule of usage in advance (i.e., “as needed” arrangements);
6) rental amounts that are only paid if there are a certain number of Federal health care program beneficiaries referred each month; and
7) rental amounts that are conditioned upon the supplier’s receipt of payments from a Federal health care program.

The guidelines set out in the Special Fraud Alert apply to rent paid to a hospital under a consignment arrangement.

Scenarios in Which the DME Supplier Cannot Bill
(e.g., Indigents, Lack of Proper Documentation)
The DME supplier (not the hospital) is the supplier.  The DME supplier bills and collects from Medicare.  The DME supplier is responsible to collect the documentation necessary to support its claim to Medicare.  Likewise, it is the DME supplier’s responsibility to collect co-payments.

The agreement between the DME supplier and the hospital should specify (i) the documents to be collected by the hospital before it dispenses an orthotic product (on behalf of the DME supplier) to the patient and (ii) the responsibility, if any, that the hospital has to the DME supplier in the event that a claim is not paid, or in the event that a previously-paid claim is recovered by a third-party payor because of deficient documentation.

It is the responsibility of the DME supplier to make reasonable efforts to collect co-payments.  If a patient asserts an inability to pay co-payment, then the DME supplier can waive the co-payment only if the patient discloses credible information to the supplier that supports such inability to pay.

Ensuring Patient Choice
When a Medicare patient is being discharged from a hospital, and the physician has ordered DME, the hospital must give the patient the opportunity to choose a DME supplier.12

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. He can be reached at (806) 345-6320 or