Moving the HME Industry Forward

Legislative/Advocacy

Joint Venture With Hospital

June 26, 2017

AMARILLO, TX – A “joint venture” arises when two or more individuals own something together. For example, if my friend (Mark Higley) and I open a frozen yogurt stand called “Mark’s and Jeff’s Frozen Yogurt,” then a joint venture is created. The same holds true when St. Mary’s Hospital and ABC Medical Equipment, Inc. decide to create and operate a DME company called “St. Mary’s Medical Equipment, Inc.” (SMME”).

There are two primary reasons why St. Mary’s Hospital (“the Hospital”) would want to jointly own SMME with ABC:

• Under the Hospital Readmissions Reduction Program, if a Hospital patient is readmitted within a certain period of time, for a particular disease, then the Hospital can be subjected to future payment reductions from Medicare. From a financial standpoint, it is important to the Hospital that its discharged patients receive the post-discharge care necessary to prevent premature readmissions. SMME will work closely with the patient, his caregivers, and his physician with the goal of providing seamless “hands on” post-discharge care. Such care can include (i) insuring that the patient take his breathing treatments, (ii) insuring that the patient takes his medications, (iii) insuring that the patient sees his physician, and (iv) insuring that the patient eats and drinks plenty of fluids.

• If SMME is run efficiently, then it will likely generate a profit. The Hospital will be entitled to a percentage of the profits equal to the Hospital’s ownership interest in SMME.

In setting up and operating SMME, it will be critical that the Medicare anti-kickback statute (“AKS”) not be violated. Because the Hospital will be a referral source to SMME, it will be important that the arrangement not be a “sweetheart deal” for the Hospital. For example, if the Hospital owns 50% of SMME and if the initial capitalization is $200,000, then at the outset the Hospital will need to write a check for $100,000. Ideally, the joint venture will comply with the Small Investment Interest safe harbor to the AKS. If that is not possible, then the joint venture needs to comply with the (i) OIG’s 1989 Special Fraud Alert entitled “Joint Ventures” and (ii) OIG’s April 2003 Special Advisory Bulletin entitled “Contractual Joint Ventures.”

At the outset, the Hospital and ABC may want to execute a Joint Venture Agreement that contains a number of provisions, including the following:

Background
• Hospital is a tertiary care hospital that services __________ and the surrounding area and desires to partner with a supplier of high-quality integrated home medical equipment in order to provide home medical equipment services in the area served by Hospital.
• ABC (“Supplier”) has extensive experience and expertise in providing high-quality home medical equipment and supplies and desires to partner with a prominent provider of health care services in the market area served by Hospital.
• Hospital and Supplier wish to enter into a joint venture arrangement on the terms and conditions described in this Agreement in order to better meet the need for high-quality home medical equipment in the market area served by Hospital.

Formation and Nature of Joint Venture
• The joint venture between Hospital and Supplier will be in the form of a member-managed limited liability company to be formed under the _______ Limited Liability Company Act and will be known as “St. Mary’s Medical Equipment, LLC” (the “Company”). The Company will be duly qualified to conduct business in the State of _______ and hold all licenses and permits in _______ necessary to carry out its business operations.

• The Operating Agreement for the Company will be in the form attached as Exhibit A and will provide, among other things:

(i) that Hospital and Supplier (the “Members”) will be the sole members of the Company and that each of them will have a 50% interest in the profits, losses, and cash distributions of the Company with distributions of available cash to be made on a quarterly basis;

(ii) for the amount of capital contributions to be made by the Members and the terms and conditions upon which additional capital may be required from the Members;

(iii) for management of the Company by the Members, with each Member having an equal vote with respect to all matters to be determined by the Members, and for regularly scheduled meetings of the designated representatives of the Members; and

(iv) for restrictions on the ability of either member to sell or otherwise transfer its interest in the Company, including a right of first refusal for the other member.

Business of the Company
• The Company will operate a retail durable medical equipment business serving patients in the following _______ counties: ______________ (the “Service Area”), which will include sales and service.  The Company will not engage in any other business.

• The Company will be the exclusive vehicle through which either Hospital or Supplier will engage in the business of providing durable medical equipment on a retail basis to customers within the Service Area during the entire term of the Company and neither Hospital nor Supplier will directly or indirectly compete with the Company during such time.

• The Company will be operated independently of either of the Members. Among other things, the Company will be operated in a manner that respects the right of patients to acquire durable medical equipment and related services from providers of their choice. The Company will not require or request any referral source to enter into an exclusive referral arrangement or other arrangement that does not honor each patient’s right to choose his or her provider.

• The Company’s employed sales representatives will actively market the Company’s services to referral sources in the Company’s Service Area.

Space Rental
• Hospital will make up to _______ square feet of commercial space available to the Company at a site within the Service Area determined by the Hospital and the Company to be reasonably suitable for use as the Company’s offices and its customer service and equipment storage facility. The Company and Hospital will enter into a standard commercial lease agreement for this space in substantially the form attached as Exhibit B hereto (the “Lease”) having an initial term of not less than one year and providing for monthly rent and other terms that are at market for similar commercial space in the Service Area. Rental rates under such lease will be subject to adjustment not more often than annually.

Inventory and Equipment
• The Company will acquire and maintain a reasonable level of inventory of equipment, spare parts, and other items needed for the conduct of its business operations in the Service Area. Supplier will be responsible for acquiring all necessary inventory on behalf of the Company and will provide all such inventory items to the Company at fair market value.  All items of inventory acquired for the Company will be the exclusive property of the Company, will not be subject to any security interest, lien, or other encumbrance affecting Supplier and will not be used by Supplier to service customers outside of the Service Area.

• The Company will be authorized to acquire such business equipment, vehicles, and other tangible assets as the Members determine are reasonably necessary to carry out the Company’s business operations. All such tangible business assets will be acquired (either by purchase or by lease) by the Company in its own name and will be the exclusive property of the Company, will not be subject to any security interest, lien, or other encumbrance affecting Supplier or Hospital and will not be used by either of them or their respective affiliates for any purpose other than to carry out the business of the Company. In the event the Company acquires any such tangible business assets from either Supplier or Hospital, the price paid by the Company will the fair market value of such asset.

Operational and Administrative Support
• The Company’s employees will include, but not be limited to one or more intake personnel, one or more sales representatives, one or more customer service representatives, one or more delivery technicians, one or more office or clerical employees and such other personnel as the Members determine from time to time.

• The Company will engage Supplier to provide administrative support services pursuant to an Administrative Services Agreement in the form attached hereto as Exhibit C.

• The Company will engage Supplier to provide billing, accounts receivable management, and collection services for the Company pursuant to a Billing Administration and Accounts Receivable Management Agreement in the form attached hereto as Exhibit D.

Termination of Joint Venture
• The Company will be dissolved and its assets will be distributed in accordance with the provisions of the Operating Agreement and applicable law.

• All items constituting the Company’s inventory of durable medical equipment, spare parts and similar items acquired by the Company from Supplier pursuant to Section __ hereof will be reacquired by Supplier from the Company. Supplier will purchase such inventory items for an amount equal to the Company’s actual cost of such items, which will be payable in cash or, if the Members agree, will be credited against any distribution that would payable to Supplier in connection with the final distribution of Company assets.

• The Lease described in Section __ hereof, the Administrative Services Agreement described in Section __ hereof, the Billing and Accounts Receivable Management Agreement described in Section __ hereof, and each other agreement, if any, entered into between the Members relating to the Company or between either Member and the Company, will terminate; provided, however, that each Member agrees that it will continue to perform its obligations to the Company under any such agreement for a reasonable period of time after the termination of this Agreement in order to allow the Company to carry out an orderly winding down of its business operations.

• Following termination of this Agreement, either party on its own (not as partner, stockholder, other type of equity owner with another person or entity) may provide durable medical equipment and supplies and related services for the Service Area.

• Notwithstanding the foregoing, for two years after the termination of this Agreement or the cessation of the Company’s business, neither party will enter into a joint venture or similar shared equity arrangement to provide durable medical equipment and supplies and related services in the Service Area without first offering the other party the opportunity to participate in the venture on terms no less favorable than the terms of any proposed arrangement with another party.

Todd Moody will be presenting the following webinar:
Webinar sponsored by Mediware Information Systems, Inc.
Accountable Care Organizations: What They Mean to DME Suppliers
Presented by: Todd A. Moody, Esq., Brown & Fortunato, P.C.
Tuesday, June 27, 2017
1:00 p.m. CENTRAL TIME
The Cleveland Clinic is a team approach model that many point to when they talk about the future of health care delivery. Under this model, health care providers (hospitals, physicians, therapists, and others) work collaboratively to diagnose the problem, heal the patient, and keep the patient healthy. Instead of working separately in “silos,” the providers make joint decisions. Among other benefits, this results in the reduction of unnecessary tests. The goals of the ACO mirror this approach by requiring providers to take “ownership” over a patient base and provide health care in a cost-effective way, without unnecessary tests, and through a team approach. In order to maintain efficiency, ACOs will limit the number of providers that can participate. The DME supplier will want to be part of the ACO, rather than “being on the outside looking in.” This program will discuss what an ACO is, how it is formed, and the role the DME supplier can take in the implementation of the ACO model.

This presentation will help attendees:
• Understand how an ACO is defined under the Affordable Care Act.
• Learn how an ACO is organized and who can be its owners.
• Understand how a DME supplier can provide services to ACO covered lives.

Sign up now for “Accountable Care Organizations:  What They Mean to DME Suppliers” on Tuesday, June 27, 2017, 1:00 pm CT, with Todd A. Moody, Esq., of  Brown & Fortunato, PC.

Contact Kolby Wegener at Kolby.Wegener@mediware.com if you experience any difficulties registering.
This webinar is free for attendees.

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 jbaird@bf-law.com.