Moving the HME Industry Forward

General Healthcare

Working With Physicians in Rural Areas

February 8, 2016

AMARILLO, TX – The low Medicare reimbursement amounts, for competitive bidding (“CB”) items, are expanding to non-CBAs. Said another way, CB is finding its way to rural America. Rural DME suppliers are having to recalibrate their business models in order to serve their patients for less money. On many levels, this is a daunting challenge. The supplier may need to reduce its services.

The supplier may need to provide an increasing number of items on a non-assigned basis. And the supplier may need to enter into arrangements with physicians in order to meet the needs of the patients. When working with physicians, the DME supplier must be aware of the Medicare anti-kickback statute (“AKS”) and the federal Stark physician self-referral statute (“Stark”).

Medicare Anti-kickback Statute
The AKS prohibits a person/entity from knowingly and willfully soliciting, receiving, offering, or paying remuneration to another person/entity in exchange for referring or arranging for the referral of items or services that are reimbursable by federal health care programs. Remuneration includes anything of value, including non-monetary items, that is offered directly or indirectly, overtly or covertly.

Note that several courts have enumerated the “one purpose” test which states that if “one purpose” behind a payment to a referral source is to reward the referral source for referrals of government program patients, then the AKS is violated notwithstanding that the main purpose behind the payment is to pay for legitimate services. Due to the broad language of the AKS, the Office of Inspector General (“OIG”) has published a number of “safe harbors.”

If an arrangement falls within a safe harbor, then as a matter of law, the arrangement does not violate the AKS. If an arrangement does not fall within a safe harbor, then it does not mean that the arrangement violates the AKS – rather – it means that the arrangement must be carefully analyzed under the language of the AKS, court decisions, and other published guidance. For example, the OIG has published fraud alerts, advisory bulletins and advisory opinions. The AKS is a criminal statute: a guilty party can end up in prison.

On the other hand, Stark is a civil statute. A liable party can end up paying a great deal of money to the government. Stark states that a “physician may not make a referral to [an] entity for the furnishing of designated health services,” reimbursable by Medicare, Medicare Advantage, or Medicaid, if the “physician (or an immediate family member of such physician) has a financial relationship with [such] entity,” unless a Stark exception is met. To understand the scope of Stark’s prohibition against self-referrals, it is necessary to understand the definitions of various terms. “Referral” means “the request by a physician for, or ordering of…..any designated health service for which payment may be made under” Medicare, Medicare Advantage or Medicaid.

This is a very broad definition; it is not limited to a physician’s referral to a specific DME supplier. The “referral” provision requires that a physician only request an item or service or include it in a plan of care; it does not require that the physician directly send a patient to a particular entity or specifically indicate in a plan of care that the service must be provided by a particular entity. The direction or steering of a patient “to an entity” does not need to be in writing, nor does it have to be absolute; it need only be reasonably intended to result in the patient receiving a product or service from an entity.

Thus, for example, when a physician provides an order or prescription for designated health services (“DHS”) to a patient that ostensibly can be filled by any number of entities and then suggests or informs the patient that the order can be serviced by a particular entity, there would be a referral to that entity. Note that DHS are categorized into 10 distinct types of products and services, including DME.

Stark is a strict liability statute. Unless an arrangement that implicates Stark meets a specific exception to the statute, then the arrangement violates Stark, even if the parties acted in good faith when they entered into the arrangement.

In entering into an arrangement with a physician in a rural area, the DME suppliers needs to focus on two Stark exceptions: (i) the rural provider exception and (ii) the personal services exception. The rural provider exception states that an ownership interest by a physician in a rural provider/supplier is not considered a “financial relationship” under Stark. Rural providers/suppliers are defined as those that furnish at least 75% of the DHS they provide to residents of a “rural area.” Thus, whether this exception applies depends on whether at least 75% of the patients that the DME supplier services are located within a “rural area.” “Rural area” is defined as “an area that is not an urban areas as defined in 42 CFR 412.62(f)(1)(ii) which states that “the term urban area means a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA), as defined by the Executive Office of Management and Budget….” Therefore, any area that is not an MSA or an NECMA is considered to be a “rural area.” So long as no less than 75% of the DME that the supplier furnishes is to patients in a rural area, the rural provider exception applies to the supplier, regardless of where the supplier is located.

The current list of MSAs can be found on the U.S. Census Bureau website. A town might fall within a Micropolitan Statistical Area, which is defined as an urban cluster of at least 10,000 but less than 50,000 people. In regards to whether a Micropolitan Statistical Area could be considered a “rural area” under the definition of Stark, the Stark II, Phase III implementation final rule states: “Micropolitan Statistical Areas are not within MSAs; thus, for purposes of the physician self-referral rules, Micropolitan Statistical Areas are not considered urban and are, therefore, rural areas.

Ownership of Physician in DME Supplier
So long as the DME supplier satisfies the Stark “rural provider” exception, then a physician can have an ownership in the supplier and can refer Medicare, Medicare Advantage and Medicaid patients to the supplier. This satisfies Stark. But now let’s turn our attention back to the AKS. If the physician’s ownership in the supplier is not a legitimate business arrangement – but rather – is a sham designed for the DME supplier to pay money to the physician for referrals of government-program patients, then the AKS will be violated.

For the arrangement to be safe from the AKS, the preferable course of action is for the arrangement to meet the requirements of the Investment Interest safe harbor to the AKS. This states that for investments in small entities, “remuneration” does not include a return on the investment if a number of standards are met, including the following: (i) no more than 40% of the investment can be owned by persons who can generate business for or transact business with the entity, and (ii) no more than 40% of the gross revenue may come from business generate by investors. If this safe harbor cannot be met, then the arrangement needs to comply with the OIG guidance set out in the 1989 Special Fraud Alert entitled “Joint Ventures.” Among other requirements, (i) the physician must invest risk capital equal to his percentage ownership interest in the DME supplier; (ii) the profit distributions made to the physician must be based on his percentage ownership interest, and not on the number of the physician’s referrals; (iii) the physician cannot be required to give up his equity interest if he fails to provide an “acceptable” number of referral to the supplier; and (iv) the return on the physician’s investment cannot be disproportionately large.

Contractual Arrangement Between Physician and DME Supplier
Assume that a physician refers government-program patients to the DME supplier. Assume further that the physician and supplier enter into a contract in which the supplier pays the physician for services provided by the physician. Remember the “one purpose” test discussed above.

If “one purpose” behind the payments by the supplier to the physician is to reward the physician for referrals, then the contract violates the AKS notwithstanding that the primary purpose behind the payments is to pay the physician for legitimate services. In order to avoid violating the AKS, the arrangement will need to comply with a safe harbor to the AKS.  Because the physician has a “financial relationship” with the supplier, then the arrangement also violates Stark unless the arrangement meets a Stark exception.

The applicable safe harbor to the AKS is the Personal Services and Management Contracts safe harbor. Among other requirements, (i) there must be a written agreement with a term of at least one year; (ii) the physician must render legitimate services to the DME supplier; (iii) the compensation to the physician must be fixed one year in advance (e.g., $12,000 over the next 12 months, or $1000 per month); and (iv) the compensation must be the fair market value equivalent of the physician’s services. The Personal Services exception to Stark essentially says the same thing.

As one final example, a DME supplier can rent space to, or rent space from, a physician. If the physician is a referral source to the supplier, then the arrangement must comply with the (i) Space Rental safe harbor to the AKS and (ii) Space Rental exception to Stark. The safe harbor and Stark exception essentially say the same thing. Among other requirements, (i) the parties need to enter into a written lease with a term of at least one year; (ii) the rent must be fixed one year in advance (e.g., $36,000 over the next 12 months, or $3000 per month); and (iii) the rent must be fair market value.

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