Moving the HME Industry Forward

General Healthcare

Subcontracting – How to Properly Structure

December 8, 2014

AMARILLO, TX – Competitive bidding rules provide that contract suppliers may subcontract with non-contract suppliers as long as the subcontractor has not been “excluded from the Medicare program, any State health program or any other government executive branch procurement or nonprocurement activity.” To demonstrate that subcontractors meet this requirement, among others, the contract supplier must disclose the subcontract and related information within 10 business days after the parties execute the contract.

Failure to meet the disclosure requirements and other rules concerning subcontracts may result in termination of the competitive bid contract. According to the competitive bidding rules, “[CMS] might conclude that a contract supplier breached its contract if [CMS] discover[s] that the contract supplier did not fully comply with disclosure requirements . . . or falls out of compliance with the Medicare program requirements.”

This Part 1 discusses (i) the responsibilities that can be subcontracted, (ii) accreditation requirements, (iii) the provision of inventory and delivery of products, and avoiding kickback problems. Part 2 will discuss important provisions to be included in a subcontract agreement.

Responsibilities That Can Be Subcontracted
According to the CBIC, contract suppliers may subcontract for (1) the purchase of inventory, (2) the delivery and set-up of items, (3) patient and caregiver instruction, and (4) the repair of rented equipment. To further clarify the services that a supplier may provide through a subcontract, CBIC directs suppliers to consult the DMEPOS Quality Standards. By comparing the Quality Standards to CBIC’s information on subcontracts, it is apparent that the contract supplier cannot delegate the following responsibilities to a subcontractor:

• Intake and assessment;
• Communications with prescribing practitioners to confirm orders and to recommend any necessary modifications to orders;
• Coordination of care with physicians and other practitioners;
• Verification that the items (1) comply with the physician order and (2) meet the beneficiary’s needs;
• Maintenance of documentation in the beneficiary’s file, including physician orders, certificates of medical necessity, DME information forms, proofs of delivery, the make and model of the item provided, verification that the beneficiary received training and instructions, and, for wheelchairs and power mobility equipment, documentation that positioning, seating, and specialty assistive technology have been evaluated;
• Review and updates of beneficiaries’ records;
• Ownership and responsibility of equipment;
• Ensuring the safety of products; and
• Investigation of any incident involving beneficiary safety.

Subcontractors that set up equipment and instruct beneficiaries must be accredited. By comparing CBIC’s information to the Quality Standards, it is apparent that subcontractors must be accredited before they:

• Instruct beneficiaries and their caregivers on the features, set up, routine use, cleaning, and maintenance of equipment and on any infection control practices;
• Adjust equipment to meet the needs of a beneficiary;
• Ensure that the beneficiary’s home allows for safe and effective use of the item; and
• Evaluate and document the positioning, seating, and special assistive technology of wheelchairs and power mobility devices.

On the other hand, a subcontractor may provide the following services without accreditation:
• The sale of inventory to the supplier;
• Delivery of items along with necessary contact information to beneficiaries;
• Delivery of the supplier’s written and pictorial instructions to beneficiaries; and
• Repair services for rental equipment.

Provision of Inventory and Delivery of Products
The contract supplier may enter into a contract for both the purchase of inventory and the delivery of products. However, such an arrangement must be carefully structured to comply with guidance from the OIG, CBIC, and the NSC. Based on publications from these authorities, the subcontract should (1) base the purchase price for the inventory on the competitive bid fee schedule and (2) ensure that the contract supplier has title to the equipment before it is delivered to the patient.

To avoid complications with the Medicare anti-kickback statute when subcontracting for the purchase of inventory from a non-contract supplier, the maximum purchase price per unit should be the amount the contract supplier will receive under the competitive bidding program. If the contract supplier pays more than that amount, then the excess cash could qualify as a kickback designed to induce referrals from the subcontractor.

CBIC and the NSC have both indicated that the contract supplier must have title to the inventory before equipment is delivered to a beneficiary. The CBIC issued an FAQ indicating that contract suppliers “must have title to the equipment when the equipment is furnished to the beneficiary” and referring suppliers to the NSC for further guidance on the purchase of inventory. The NSC has issued the following statements concerning the purchase of inventory:

• “[C]ontracting out delivery services does not mean that another company can send inventory directly from their own inventory. It means that you . . . may contract with someone to deliver products from your inventory to the beneficiary.”
• “The bottom line is to ensure suppliers have either the inventory or a contract to purchase inventory to support the products and services they are going to provide to beneficiaries.”

Generally, the contract supplier should maintain at the subcontractor’s location a certain level of inventory owned by the contract supplier. For emergency situations, the contract supplier can also have a provision in the subcontract allowing for the “just-in-time” transfer of title from the subcontractor to the supplier when a beneficiary needs a particular item that is not in the contract supplier’s inventory.

Avoiding Kickback Problems
A subcontract agreement cannot violate the Medicare anti-kickback statute, which states that a health care provider cannot give anything of value to a person or entity in exchange for referring Medicare patients or in exchange for arranging for the referral of Medicare patients. In addition, there is the “one purpose” test contained in court decisions. This test provides that if “one purpose” behind payment to a referral source is to induce referrals, then the anti-kickback statute is violated even if the referral source provides legitimate non-referral services and the payment is the fair market value equivalent of the services. An example of a subcontractor arrangement is where a supplier (that was not awarded a competitive bid contract) and wants to preserve its relationship with referral sources, seeks to become a subcontractor for a CB winner (“contract supplier”).

The subcontractor will end up referring (or arranging for the referral of) Medicare beneficiaries to the contract supplier. Under the subcontract agreement, the contract supplier will pay compensation to the subcontractor for services other than referring patients. Nevertheless, the parties will need to contend with the “one purpose” test. What the subcontract agreement cannot provide is percentage compensation. In other words, the agreement cannot say that the contract supplier will pay 75% of the payments (that the contract supplier receives from Medicare) to the subcontractor. The safest approach is for the contract supplier to pay a fixed annual fee to the subcontractor and for the annual fee to be the fair market value equivalent of the subcontractor’s services. Such a compensation arrangement is a key element of the Personal Services and Management Contracts safe harbor to the anti-kickback statute.

A middle ground approach – one that entails a kickback risk – is for the compensation to be on a fee schedule basis (e.g., $75 per delivery, $125 per service call, etc.). The problem with a fee schedule is that the money paid by the contract supplier varies based on the volume of business generated by the subcontractor. If the parties adopt this middle ground approach, then the risk can be reduced by other elements of the subcontract arrangement (e.g., the contract supplier purchases the inventory from the manufacturer as opposed to purchasing the inventory from the subcontractor and/or the subcontractor provides services to patients of the contract supplier who are not referred by the subcontractor). Risk can further be reduced by obtaining a fair market value analysis, from an independent third party, of the compensation paid to the subcontractor.

Jeff Baird will be presenting the following webinar:
Oxygen: Restarting the 36 Months, Pre-Screens, Use of Concentrators and Other Hot Button Issues
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Thursday, Dec 18, 2014
2:30-4:00 p.m. EASTERN TIME
Sign up now for “Oxygen: Restarting the 36 Months, Pre-Screens, Use of Concentrators and Other Hot Button Issues” on Thursday, December 18, 2014, 2:30-4:00 pm ET, with Jeffrey S. Baird, 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, 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