Moving the HME Industry Forward

General Healthcare

Distancing Ourselves from Medicare Fee for Service

June 27, 2016

AMARILLO, TX – Last Thursday, CMS published the July Fee Schedule Update for the DME Medicare program. These rates encompass the expansion of competitive bid rates to non-CBAs. The cuts range between 45-59% on common respiratory products, but reached 82% on TENS units and Enteral IV Poles.  Unless the industry receives legislative relief this week, these reimbursement rates will go into effect on July 1, 2016. These low rates serve as an additional “wake-up call” to the DME industry:  As much as possible, DME suppliers need to distance themselves from Medicare fee-for-service.

Competitive bidding (“CB”) has created a two-tier system. Those on the lower end of the socio-economic scale likely have no choice but to accept whatever it is that Medicare pays for. Those on the higher end of the socio-economic scale will be inclined to pay cash for “higher end” products (Cadillac vs. Cavalier.) Some DME suppliers will implement “economies of scale” that will allow the suppliers to succeed in the Medicare fee-for-service (“FFS”) arena. However, these suppliers will be the exception. Most DME suppliers can no longer build their business model on Medicare FFS. The successful supplier needs to go outside its comfort zone and look for new sources of business. There are 78 million “Baby Boomers.” They are retiring at the rate of 10,000 per day. While the 23 million of the “Greatest Generation” expected Medicare to pay for everything, Boomers understand that they will be required to pay out-of-pocket for a portion of their health care expenses…including DME. From a Boomer’s standpoint, the most important asset he has is time. Many 70 year old Boomers will not want to wait around for Medicare approval. Rather, the Boomers will simply pay cash and move on with their lives. Tangential evidence backs this up. A number of well-run DME suppliers were not awarded Round Two CB contracts.  These suppliers are noted for providing excellent service. When given a choice of switching to a CB supplier or staying with their existing supplier and paying cash, many patients have opted to stay with their existing supplier and pay cash. As the DME supplier moves away from Medicare FFS, it needs to adhere to certain legal guidelines.

Hospital Readmissions Reduction Program
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 for Medicare. The hospital desires to have some control over the patient post-discharge so as to reduce the risk of a premature readmission. The hospital may want to contract with the DME supplier to monitor/work with discharged patients so that they are not readmitted soon after being discharged. In entering into this type of arrangement, the supplier needs to be aware of the guidelines set out in the OIG’s Advisory Opinion No. 13-10. The AO suggests that under certain circumstances, the hospital needs to pay fair market value compensation for the DME supplier’s services.

Discounts to Cash Customers
A federal law states that a DME supplier is prohibited from charging Medicare substantially in excess of the company’s usual charges, unless there is good cause. The existing regulations do not give any clear guidance on what constitutes “substantially in excess” or “usual charges.” The most recently proposed rule contemplates the “usual charge” to be either the average or median of the supplier’s charges to payors other than Medicare (and some others). Under the proposed rule, a DME supplier’s usual charge should not be less than 83% of the Medicare fee schedule amount (i.e., up to a 17% discount from the Medicare fee schedule). There would be an exception for good cause, which would allow a supplier’s usual charges to be less than 83% of the Medicare fee schedule, if the supplier can prove unusual circumstances requiring additional time, effort or expense, or increased costs of serving Medicare beneficiaries. The proposed rule would include charges of affiliate companies into the calculation of a supplier’s usual charges. An affiliated company is any entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the DME supplier. The proposed rule explicitly excludes fees set by Medicare, State health care programs, and other Federal health care programs (except TRICARE). By implication, charges not specifically excluded will be included. CMS declined to promulgate the proposed rule into a final rule. Nevertheless, this proposed rule gives insight into CMS’ thinking.

State Sales Tax
When a DME supplier ships products into another state, the question is whether the supplier must collect sales tax in that state. The general rule is that a state cannot require a DME supplier to collect sales tax if the supplier (1) does not have a physical presence in the state and (2) does not have sufficient connections with the state to create a “substantial nexus.” Quill vs. N. Dakota, 504 U.S. 298, 311 (1992). Because of the general rule, many states have strengthened their efforts to establish that DME suppliers (shipping into these states) have a “substantial nexus” in their states. For example, a state may assert that a “substantial nexus” occurs when an out-of-state supplier has an employee…or a warehouse…in the state.

Billing Medicaid
Billing and collecting from state Medicaid programs is more expensive and time consuming for a DME supplier than collecting from a cash-paying customer. It is logical for suppliers to desire to charge a cash-paying customer less than what the supplier bills Medicaid. The question thus arises: Is it permissible for the supplier to do so? Most state Medicaid programs require the supplier to bill the Medicaid program its usual and customary price.

Registering as a Foreign Corporation
The requirement to register or “qualify” as a foreign corporation generally hinges on whether an entity is “doing business” in a state according to that state’s foreign corporation statute.  Most states do not statutorily define what constitutes “doing business” in the state; instead, the statute sets forth a non-exhaustive list of activities that do not constitute “doing business” in the state and “interstate commerce” is frequently listed as one of the exceptions. In most states, solely (1) obtaining a DME license, and (2) shipping products into the state will not result in the supplier being required to qualify as a foreign corporation in the state. Note that qualification as a foreign corporation will subject the DME supplier to potential state business income taxation in some states. If a DME supplier does decide to qualify as a “foreign corporation” in another state, the qualification process typically involves filing fees and an application for foreign corporation qualification with the secretary of state’s office, maintaining a registered office and/or registered agent in the state and filing an annual report.  Most states will not allow an entity to qualify and conduct business in the state under a name that is not distinguishable from a name already on file in that state. The requirements for withdrawing registration as a foreign corporation are generally more onerous than the initial application to qualify as a foreign corporation.  Certain states require detailed financial information and most require clearance from other state agencies in order to withdraw.  All states require the withdrawing entity to certify, under penalty of perjury, that it is no longer conducting business in the state, and surrender its authority to conduct business in the state. Doing business in another state may result in the DME supplier owing certain types of taxes to that state. Because the state tax laws frequently use criteria that differ from the state foreign corporation statute, these taxes may be owed even if the business is not otherwise required to register as a foreign corporation.

Sham Telehealth Arrangements
A growing segment of the DME industry involves the sale of back, knee and ankle braces. DME suppliers are aggressively marketing braces and it is not uncommon for a supplier to mail braces to Medicare patients residing in multiple states. When a DME supplier is marketing to patients in multiple states, the supplier often runs into a “bottleneck.” This involves the patient’s local physician. A patient may desire to purchase a brace from the out-of-state DME supplier but it is too inconvenient for the patient to drive to his physician’s office. Or if the patient is seen by his local physician, the physician may decide that the patient does not need a brace and so the physician refuses to sign an order. Or even if the physician does sign an order, he may be hesitant to send the order to an out-of-state DME supplier. In order to address this challenge, we are witnessing some DME suppliers enter into arrangements that will get them into trouble. This has to do with “telehealth” companies. A typical telehealth company has contracts with many physicians who practice in multiple states. The telehealth company contracts with, and is paid by (i) self-funded employers that pay a membership fee for their employees, (ii) health plans, and (iii) patients who pay a per visit fee. Where a DME supplier will find itself in trouble is when it aligns itself with a telehealth company that is not paid by employers, health plans and patients – but rather – is directly or indirectly paid by the DME supplier. Here is an example: DME supplier purchases leads from a marketing company…the marketing company sends the leads to the telehealth company…the telehealth company contacts the leads and schedules audio or audio/visual encounters with physicians contracted with the telehealth company…the physicians sign orders for braces…the telehealth company sends the orders to the DME supplier…the marketing company pays compensation to the telehealth company for its services in contacting the leads and setting up the physician appointments…the telehealth company pays the physicians for their patient encounters…the DME supplier mails the brace to the patient…the DME supplier bills (and gets paid by) Medicare. There can be a number of permutations to this example, but you get the picture. Stripping everything away, the DME supplier is paying the ordering physician. To the extent that a DME supplier directly or indirectly pays money to a telehealth physician, who in turn writes an order for braces that will be dispensed by the DME supplier and reimbursed by a federal health care program, the arrangement will likely be viewed as remuneration for a referral (or remuneration for “arranging for” a referral).

DME Supplier Has No PTAN
Certain disclaimers must be made when a supplier sells, without a PTAN, DME to a Medicare beneficiary.  42 U.S.C. §1395m(j)(4)(A) states that if a supplier furnishes DME to a Medicare beneficiary, for which no payment may be made because the supplier does not have a Medicare supplier number, then any expenses incurred for the DME will be the responsibility of the supplier. The beneficiary will have no financial responsibility for the expenses, and the supplier will refund any amounts collected from the beneficiary, unless before the DME was furnished, the beneficiary was informed that Medicare would not pay for the DME and the beneficiary agreed to pay for the item. Assume that a DME supplier, without a PTAN, desires to sell items for cash over the internet. The supplier’s web page should have the following in large bold type appear as soon as the customer clicks on a link to view DME….as well as immediately prior to check-out:

Notice to Medicare Beneficiaries. Medicare will pay for medical equipment and supplies only if a supplier has a Medicare supplier number. We do not have a Medicare supplier number. Medicare will not pay for any medical equipment and supplies we sell or rent to you. You will be personally and fully responsible for payment.

Social Media
“Social media” is a way for people to communicate and interact online. Social media has been around since the dawn of the Internet, but in the last 10 years or so we have seen a surge in both the number and popularity of social media sites. The future of the DME industry is the servicing of the Boomers. Unlike their parents, Boomers are comfortable using social media. The forward-thinking DME supplier will utilize social media to (i) advertise to prospective customers, (ii) stay in touch with existing customers, and (iii) monitor patient outcomes.

Avoiding Discrimination
Assume that XYZ Medical Equipment, Inc. (“XYZ”) is enrolled in Medicare as a non-participating supplier.  As such, XYZ may choose either to accept or not accept assignment on Medicare claims on a claim-by-claim basis.  If XYZ accepts assignment, it may not charge the beneficiary more than the Medicare fee schedule amount.  Under the Affordable Care Act, beginning January 1, 2016, CMS must use the competitive bidding (“CB”) program pricing information to reduce DME fee schedule amounts for DME beneficiaries located outside of CBAs.  Because of the reduction in reimbursement rates, XYZ may want to consider alternative business models.

The Age Discrimination Act of 1975 generally prohibits age discrimination under any program receiving Federal financial assistance.  Additionally, CMS has a specific anti-discrimination rule which states that CMS may terminate the agreement with any provider if CMS finds that the provider “places restriction on the persons it will accept for treatment and it fails either to exempt Medicare beneficiaries from those restrictions or apply them to Medicare beneficiaries the same as to all other persons seeking care.”  Although the CMS anti-discrimination rule appears to only apply to “providers,” it is wise for “suppliers” to also adhere to its requirements.

Business Model No. 1
XYZ may desire to continue to offer the same products that it currently offers.  For example, assume that XYZ currently offers products A, B, C, D, E, and F and accepts assignment from all payors, including Medicare, on items A through F.  XYZ may desire to no longer accept Medicare assignment on products A, B, and C, but will continue to accept assignment from all non-Medicare payors for these items.  XYZ may desire to continue to accept assignment from all payors, including Medicare, on items D, E, and F.  Although XYZ will no longer accept Medicare assignment for items A, B, and C, it must still submit non-assigned claims on behalf of the Medicare beneficiary for these “cash pay” items.  

Under this approach, the only criteria for determining when assignment for items A, B, and C will be accepted is based on the beneficiary’s payor.  If the payor is Medicare, then XYZ will require that the beneficiary pay cash for items A, B, or C and will submit a non-assigned claim on the beneficiary’s behalf.  If the payor is not Medicare, then XYZ will accept assignment for items A, B, or C from the payor.  Structured in this manner, this approach poses significant risk of being found to discriminate against Medicare beneficiaries since the decision is based solely on the fact that Medicare is the payor.  Therefore, it is unwise for XYZ to pursue this approach.

As an alternative, XYZ can create a policy that bases the acceptance of assignment decision on the expected amount of reimbursement for the particular item, not who the payor is.  For example, XYZ’s policy for accepting assignment on item A may require a minimum reimbursement rate of $100, otherwise, the item will be treated as a “cash pay” item, regardless of the payor.  Because the policy is being applied to Medicare beneficiaries the same as to all other persons seeking care, this model does not discriminate against Medicare patients.

Business Model No. 2
XYZ can reduce the range of items it offers, regardless of payor.  In other words, XYZ will no longer offer items A, B, and C to any patient, but will continue to offer items D, E, and F and accept assignment as usual.  Because this model treats Medicare beneficiaries the same as non-Medicare beneficiaries, this model does not pose any risk of discrimination against Medicare patients.  

Business Model No. 3
XYZ can continue to offer the same products that are currently offered, but would only accept assignment on specific items regardless of payor.  For instance, items A, B, and C would be assignment items, regardless of payor, and the remaining items, items D, E, and F, would be “cash pay” items, regardless of payor.  This model treats Medicare and non-Medicare beneficiaries the same and, therefore, does not pose a risk of discrimination against Medicare patients.  It is important to note again that if XYZ does not accept assignment for certain items it supplies to Medicare beneficiaries, it must still submit non-assigned claims for reimbursement on behalf of those patients as a non-participating supplier.  Commercial payor provider agreements may also require that a claim be submitted even if assignment is not accepted.

Other Issues
Although XYZ, as a non-participating supplier, can decide whether or not to accept assignment, it cannot discriminate against Medicare beneficiaries and treat them differently than patients of other payors.   If XYZ changes its practices on accepting assignment or decides to reduce the items it offers, beneficiaries should be given at least 30 days advance notice of such changes, along with the options available to them under the new policies.  

If assignment will no longer be accepted going forward for items that patients currently use, they should be given the options of switching to another item that XYZ does accept assignment for, paying cash for their current item on a non-assigned basis going forward, or finding another supplier that accepts assignment for their current item.  If items currently offered will no longer be available, XYZ should give beneficiaries the options of switching to another product.  If the patient refuses to switch to another item, the patient will have to find another supplier that carries their current item.  

Additionally, if a patient’s order specifies a particular brand or feature of an item, a new order may need to be obtained before XYZ will be able to supply the patient with a different item.  In such instance, the patient may be required to see his physician again to obtain a new prescription.

Streamlining Operations
The Affordable Care Act requires that, effective January 1, 2016, CMS use competitive bid program pricing information to reduce DME fee schedule amounts for DME suppliers outside of competitive bid areas. CMS began implementing the new DME reimbursement rates over a six month period beginning January 1, 2016. As a result of the reduced reimbursement rates, DME suppliers are examining ways to streamline their business model so as to be able to generate a profit. Here are three ways that the DME supplier can streamline its model.

Providing Limited Array of Products
The supplier can provide DME products and services that present a higher margin of profit and discontinue providing DME products and services that are unprofitable. The supplier has the right to select which products it will supply to Medicare beneficiaries. However, the supplier is not permitted to discriminate against Medicare patients in favor of commercial patients. CMS can terminate a DME supplier’s PTAN for a number of  reasons, including if the supplier “places restrictions on the persons it will accept for treatment and it fails either to exempt Medicare beneficiaries from those restrictions or to apply them to Medicare beneficiaries the same as to all other persons seeking care.” 42 C.F.R. 489.53. Under this regulation, the DME supplier cannot decide to provide certain products to commercial beneficiaries and deny the same to Medicare beneficiaries. Likewise, (i) if the supplier decides not to accept Medicare beneficiaries from Referral Source A, then the supplier cannot accept commercial insurance or cash patients from Referral Source A, and (ii) if the supplier decides not to accept Medicare beneficiaries unless they have Supplemental Insurance A, then the supplier cannot accept commercial insurance or cash patients unless they have Supplemental Insurance A. It does not appear that this restriction applies to Medicare Advantage. Lastly, the supplier cannot discontinue current Medicare fee-for-service (“FFS”) rental items, including, but not limited to, oxygen, wheelchairs, or medical beds.  

Rights as a Non-Participating Provider
As a non-participating provider, on a patient-by-patient basis, the DME supplier can decide whether or not it will (i) take assignment from a Medicare beneficiary or (ii) require the Medicare beneficiary to pay cash. As stated previously, the supplier may not discriminate against Medicare beneficiaries, but as a non-participating provider, the supplier has considerable flexibility to ensure that it receives sufficient reimbursement. The DME supplier’s decision to accept assignment can be based on a number of factors, including, but not limited to, (i) the reimbursement rate of a particular product requested, (ii) the patient’s secondary or supplemental insurance, (iii) the referral source, (iv) the success, or lack thereof, that the supplier has had in obtaining reimbursement for that product, and (v) the risk that the product will be subjected to a post-payment audit.

“Hub and Spoke” Model
The Hub and Spoke Model requires a central processing, billing, and shipping center for all DME products and services offered by the spokes. The DME supplier’s headquarters would act as its central hub and its multiple locations would act as the spokes. The benefit to this model is that it streamlines certain services under one roof, effectively reducing the supplier’s costs related to decentralized services.

There are several roles that the spokes can play, but the level of involvement the spokes take on will ultimately determine the potential savings found by this model. For example, any DME supplier location where a Medicare beneficiary reasonably believes he/she can purchase and service DME must be enrolled as a Medicare supplier location. Supplier location enrollment and compliance with DME supplier standards can increase the spoke’s compliance costs.

Some DME suppliers will operate a “showroom” at the spoke’s location. A showroom is an open floor store that physically presents the equipment that is sold by the hub. When a potential patient expresses an interest in a piece of equipment, the showroom employee educates the patient about the product and connects the patient with the hub to purchase, deliver, and service the equipment. As long as the spoke ensures that the patient is aware that the spoke (i) does not furnish the products and (ii) is not a DME supplier, then the spoke is not required to be accredited or maintain a Medicare supplier number. Therefore, this model may substantially decrease the spoke’s compliance overhead, and if crafted properly, may only slightly increase the hub’s overhead resulting in increased profit. It should be noted, however, that if the spokes do not maintain a Medicare supplier number, then it is likely that those spokes would not be able to service Medicare Advantage or Medicaid beneficiaries either.

Cooperative Marketing
A DME supplier and another provider (e.g., pharmacy) may enter into a cooperative marketing program.  The costs and expenses of the program should be proportionately shared by the DME supplier and other provider.

Loan Closet
A DME supplier may place inventory in a hospital or physician office.  The inventory must be for the convenience only of the hospital’s/physician’s patients and the hospital/physician cannot financially benefit, directly or indirectly, from the inventory. If a DME supplier pays rent for a space in which the consigned inventory is placed, then the arrangement should comply with the Space Rental safe harbor.

Preferred Provider Agreement
The DME supplier can enter into a Preferred Provider Agreement with a hospital whereby, subject to patient choice, the hospital will recommend the DME supplier to its patients who are about to be discharged.

Employee Liaison
A DME supplier may designate an employee to be on a facility’s premises for a certain number of hours each week. The employee may educate the facility staff regarding medical equipment (to be used in the home) and related services. The employee liaison may not assume responsibilities that the facility is required to fulfill. Doing so will save the facility money, which will likely constitute a violation of the Medicare anti-kickback statute.

Subcontract Agreement
XYZ and ABC can enter into a Subcontract Agreement. Under the SA, XYZ will be the “Contractor” and ABC will be the “Subcontractor.” Within 10 days of executing the SA, XYZ must notify the CBIC of the subcontract arrangement. XYZ must handle the intake, assessment and coordinate of care. ABC can handle delivery, set-up, patient education, and maintenance and repair. The referrals from physicians should go directly to XYZ as opposed to “going through ABC.” Assume that ABC influences its referral sources (e.g., physicians) to send their orders to XYZ. This influence may be construed as ABC “arranging for the referral of” Medicare CB patients to XYZ. In order to avoid problems under the Medicare anti-kickback statute, the parties must be careful regarding how XYZ pays ABC for ABC’s services. The safest way for XYZ to pay ABC is for XYZ to pay a fixed annual fee that is the fair market value equivalent for ABC’s services (e.g., $48,000 over the next 12 months). A less safe payment method (but on that should result in low risk) is if (i) the compensation is a fixed amount per item of service, (ii) the parties secure a FMV analysis of the compensation from an independent third party, and (iii) ABC performs subcontract services for all customers of XYZ (not just for those customers who are referred to XYZ as result of ABC’s influence).

Centralized Intake
In today’s environment, the DME supplier has no choice but to streamline its operation. One way to accomplish this is for the supplier to centralize its intake operations. Let’s look at a supplier that is organized as a legal entity with a single tax identification number (“Tax ID”) and with multiple locations. Assume that each location has its own PTAN. The various locations route received telephone calls to a designated main location. Personnel at the main location perform eligibility checks and verify a beneficiary’s qualifications for the equipment. Physicians fax orders for equipment to a centralized fax number associated with the main location. The issue of a centralized intake center, or call center, implicates the DMEPOS Quality Standards. With regard to the Quality Standards, a supplier is responsible for performing “intake and assessment.” The NSC has stated, in other context, that a supplier may not subcontract out or otherwise delegate to a third party its intake and assessment responsibilities. Unfortunately, neither CMS nor the NSC has issued additional significant guidance regarding what constitutes “intake and assessment.” Based on a review of the limited Medicare guidelines available and informal guidance from the NSC, locations sharing the same Tax ID are likely to be considered the same supplier and, therefore, may centralize their intake operations at a single location if the following policies and/or procedures are implemented:

• Each separate location must maintain its own local telephone number.
• Calls to a location’s local telephone number must allow a beneficiary to speak with a live representative at that location, if so desired by the beneficiary.  
• At the time of intake, the beneficiary will be assigned to the nearest supplier location, as determined by the beneficiary’s zip code.
• Intake personnel at the centralized call center or the main location must advise the beneficiary that the aforementioned nearest supplier location will be his or her supplier with regards to the equipment.    
• The location that dispenses the equipment must be the one that bills Medicare for the item using its PTAN.
• Paperwork provided to the beneficiary from the entity must clearly indicate the particular location from which the equipment will be dispensed.
• The equipment being dispensed must come from the inventory of the location that sets up the beneficiary.

If necessary, the beneficiary must go to the particular location that dispensed the equipment for any service or repair. The analysis is limited to the centralization of intake operations among locations that share the same Tax ID under a single entity. In circumstances involving entities or locations with two or more distinct Tax IDs, such entities or locations are considered to be separate suppliers. Accordingly, in order to reduce the risk of violating the Quality Standards, additional procedures should be implemented if establishing a centralized intake or call center for multiple legal entities. In those situations, in addition to the above provisions, to the extent that the centralized intake or call center obtains or collects eligibility information or other documentation regarding the beneficiary or the order (e.g., medical records), the centralized call center must provide such documentation to the primary supplier prior to furnishing the equipment to the beneficiary. Upon receipt, the primary supplier must review the documentation and independently determine whether there is medical necessity for the item prior to authorizing the centralized call center to furnish the equipment to the beneficiary.  

Jeff Baird will be presenting the following webinar:
Buying and Selling a DME Supplier
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Tuesday, July 12, 2016
2:30-4:00 p.m. EASTERN TIME
When a person intends to buy…or sell…a DME supplier, there are a number of documentation and regulatory issues that must be addressed.  First, the seller must take a number of steps to make itself more “attractive.”  The buyer and seller need to decide whether the transaction will be an “asset” sale or a “stock” sale.  The parties will need to engage in the normal transactional steps: mutual nondisclosure agreement, letter of intent, stock purchase agreement/asset purchase agreement, and other closing documents.  The buyer will need to engage in three types of due diligence: financial, corporate and regulatory.  And the parties will need to meet a number of regulatory requirements such as submitting change of ownership notifications.  This program will discuss all of these (and other) issues associated with the purchase and sale of a supplier.

Contact Ika Sukh at for registration information.

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