Moving the HME Industry Forward


Caretailing and Baby Boomers

October 5, 2015

AMARILLO, TX – A number of factors are making the Medicare fee-for-service (FFS) model almost untenable: competitive bidding; the application of competitive bidding reimbursement rates to non-CBAs; aggressive audits; reimbursement cuts; and stringent documentation requirements.

Competitive bidding is creating a two-tier system. Those on the lower end of the socio-economic scale will 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 FFS arena. However, these suppliers will be the exception. Many DME suppliers can no longer build their business model on Medicare FFS. The innovative supplier needs to go outside its comfort zone and look for new sources of income. In particular, the DME supplier needs to look to the cash sales market (aka “Caretailing”).

There are 78 million “Baby Boomers”—people born between 1946 and 1964. Boomers are retiring at the rate of 10,000 per day. While the 23 million of the “Greatest Generation” expected Medicare to pay for all of their health care, Boomers understand that they will be required to pay out-of-pocket for a portion of their health care, 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, they will simply pay cash and move on with their lives.

Tangential evidence backs this up. A number of well-run DME suppliers have not been awarded competitive bid contracts. These suppliers are noted for supplying excellent services. When given a choice of switching to a competitive bidding supplier, or staying with their existing supplier and paying cash, many patients have opted to stay with their existing supplier and paying cash.

Provisions of Discounts to Cash Customers
Because of the cost-savings resulting in in not having to submit claims to Medicare, suppliers often price Medicare-covered products, that are sold for cash, at less than the Medicare allowable for the item. In so doing, it is important that the supplier adhere to OIG and CMS guidance addressing discounts for cash customers.

A DME supplier is prohibited from charging Medicare substantially in excess of the supplier’s usual charges, unless there is good cause shown. See 42 U.S.C. § 1320a-7(b)(6)(A); 42 CFR §   1001.701(a)(1).

The current regulations do not give any clear guidance on what constitutes “substantially in excess” or “usual charges.” “[U]nusual circumstances or medical complications requiring additional time, effort, expense” would be considered “good cause.” 42 CFR § 1001.701(c)(1). A DME supplier that violates this statutory prohibition is subject to exclusion from federal health care programs. 42 CFR § 1001.701(a).

The OIG and CMS have given us some guidance regarding the definition of “substantially in excess” and “usual charges.” In a 1998 advisory opinion, the OIG said that charging Medicare 21% to 32% more than cash-and-carry customers would likely violate the statute, and suggested that a “useful benchmark” was to compare the profit margins on a cash sale and a Medicare sale. OIG Advisory Opinion No. 98-8 (July 6, 1998) (“Opinion 98-8”).

According to the OIG, the statute would not be violated if the profit margin on a Medicare sale was less than or equal to the margin on the cash sale. In another advisory opinion the following year, dealing with laboratory services, the OIG said that the test was whether “the charge to Medicare or Medicaid substantially exceeds the amount the laboratory most frequently charges or has contractually agreed to accept from non-federal payers. OIG Advisory Opinion No. 99-13 (Nov. 30, 1999).

In a guidance letter issued in 2000, the OIG’s chief counsel said that the law could be violated if “a provider’s charge to Medicare is substantially in excess of its median non-Medicare/Medicaid charge.” Letter to American Ambulance Ass’n (April 20, 2000).

The most recently proposed CMS rule contemplated the “usual charge” to be either the average or median of the supplier’s charges to payers other than Medicare (and some others). See generally 68 FR 53939 (Sept. 15, 2003). Under this proposed rule, a 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 and Medicaid beneficiaries.

The proposed CMS rule would include charges of affiliated 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 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. 72 FR 33430, 33432 (June 18, 2007).

At the end of the day, there is no “bright line” rule when a discount will require a showing of good cause. It is reasonable to infer, however, that a relatively large differential between Medicare and non-Medicare prices will more readily be viewed as “substantially in excess.” There is also no clear guidance on what would constitute “good cause.” In Opinion 98-8, the suppliers justified the price differential by stating that furnishing Medicare beneficiaries involved significant additional costs: documentation requirements, claims processing, and delivery and distribution.

The OIG responded that the supplier’s charges to Medicare for some products would be substantially in excess of its usual charges. While the OIG agreed that the additional costs incurred by the suppliers “solely attributable to complying with Medicare requirements may constitute good cause,” there was insufficient information for the OIG to determine “whether [the suppliers’] proposed fee structure is sufficiently related to its anticipated additional costs attributable to Medicare….” This suggests that the OIG will examine a supplier’s financials if the supplier asserts cost savings to justify its discount to other customers.

Another issue is whether the entity operating the supplier can be organized or structured to insulate affiliated companies from liability under the substantially in excess regulations. Opinion 98-8 involved parent and subsidiary suppliers. Only the subsidiary intended on becoming a Medicare supplier and furnishing DME to Medicare beneficiaries; the parent intended on continuing to serve only non-Medicare customers.

Nevertheless, the OIG made it clear that the parent’s prices would be considered in its analysis. The proposed CMS rule also indicated that CMS considers the prices of affiliated companies in its analysis. While the guidance discussed is not binding law, the OIG and CMS have been consistent in their treatment of affiliated organizations.

Jeff Baird will be presenting the following webinar:
AAHomecare’s Educational Webinar
Buying and Selling a DME Supplier
Presented by:  Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Thursday, October 15, 2015
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.

Register for “Buying and Selling a DME Supplier” on Thursday, October 15, 2015, 2:30-4:00 pm ET, with Jeffrey S. Baird, of Brown & Fortunato, PC. Please contact Ika Sukh at if you experience any difficulties registering.

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. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or