Moving the HME Industry Forward


Lease and Sale Terms to Avoid Violation of Federal Anti-Fraud Laws

December 22, 2014

AMARILLO, TX – Under the federal anti-kickback statute, DME suppliers may not “knowingly and willfully offer or pay any remuneration…to any person to induce such person…to refer” business reimbursable by a federal health care program, such as Medicare, Medicaid, TRICARE, and other federally funded programs.

Due to the broad language of the anti-kickback statute, the Office of Inspector General has developed “safe harbor” regulations that protect arrangements that might otherwise violate the statute. The equipment rental safe harbor is pertinent to the lease of a HST device to a physician. To receive immunity under this safe harbor, a lease for a HST device between a DME supplier and a physician must satisfy the following requirements:

1) The lease agreement is set out in writing and signed by the parties.
2) The lease covers all of the equipment leased between the parties for the term of the lease and specifies the equipment covered by the lease.
3) If the lease is intended to provide the lessee with use of the equipment for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length, and the exact rent for such interval.
4) The term of the lease is for not less than one year.
5) The aggregate rental charge is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or all other Federal health care programs.
6) The aggregate equipment rental does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental. Note that . . . the term fair market value means . . . the value of the equipment when obtained from a manufacturer or professional distributor, but shall not be adjusted to reflect the additional value one party (either the prospective lessee or lessor) would attribute to the equipment as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid or other [f]ederal health care programs.

The federal Stark physician self-referral law provides that if a physician has a financial relationship with an entity providing designated health services, including DME, then the physician may not refer patients to the entity for designated health services unless one of the statutory or regulatory exceptions applies. An exception for equipment rentals exempts leases that comply with 42 U.S.C. § 1395nn(e)(B) from the Stark Law’s referral prohibition. The requirements of this exception are similar to the equipment rental safe harbor of the anti-kickback statute. Therefore, as long as the requirements of the safe harbor are met, the requirements of the Stark Law exception will be satisfied.

The anti-kickback safe harbors do not include an exception for the sale of items.  However, an exception to the Stark Law is available for arrangements involving the sale of items from an entity to a physician. To qualify for this exception, the sale agreement should (i) be in writing and signed by both parties; (ii) identify the items subject to the sale; (iii) specify the time-frame for the arrangement; and (iv) set the purchase price in advance at fair market value and without regard to the volume or value of referrals.

Furthermore, the arrangement must be commercially reasonable and must not violate the federal anti-kickback statute. In the context of the sale of a HST device from a DME supplier to a physician, a purchase price that is lower than the price the DME supplier paid for the test could be viewed under the anti-kickback statute as remuneration designed to induce referrals.

Even if a DME supplier is not enrolled in Medicare, these laws may apply. If the DME supplier bills any federal health care program, such as Medicaid or TRICARE, then the supplier’s arrangement with a physician for the lease or purchase of HST devices should be designed to avoid violation of the federal anti-fraud laws. In other words, the lease should comply with the equipment rental safe harbor to the anti-kickback statute and the sale of the HST should be structured in accordance with the Stark Law exception.

Supplier Standards will Prohibit Payment for CPAPs
Under the Supplier Standards, Medicare will not cover a CPAP furnished by a DME supplier that leased or sold the HST device used to diagnose the beneficiary:  “No Medicare payment will be made to the supplier of a CPAP device if that supplier, or its affiliate, is directly or indirectly the provider of the [home] sleep test used to diagnose the beneficiary with obstructive sleep apnea.”  By adopting this rule, CMS established “a specific payment prohibition that would not allow the supplier to receive Medicare payment for a CPAP device if that supplier or its affiliate . . . is directly or indirectly related to the provider of the sleep test that would be used to diagnose the beneficiary with OSA.”

“Affiliate means a person or organization that is related to another person or organization through a compensation arrangement or ownership.”  Therefore, if a DME supplier leases or sells the HST device to the provider of the sleep test, then the provider is an affiliate of the DME supplier. As a result, Medicare will not cover a CPAP furnished by the DME supplier to a beneficiary diagnosed on the HST device.  

The payment prohibition under the Supplier Standards will not apply to a DME supplier that furnishes items other than a CPAP to a Medicare beneficiary who received a HST device sold or leased by the DME supplier. The payment prohibition specifically prevents payment for CPAPs only.  Therefore, the prohibition will not apply to claims for other equipment and supplies.  

If the DME supplier furnishes a CPAP to a beneficiary diagnosed on a HST device leased or sold by the DME supplier, then the payment prohibition listed in the Supplier Standards will apply, and Medicare will not cover the cost of the CPAP. Therefore, the DME supplier should inform the beneficiary that Medicare will not cover the cost of the CPAP unless the beneficiary obtains the equipment from another supplier.

If despite this information, the beneficiary chooses to obtain the equipment from the DME supplier that sold or leased the HST device, then the DME supplier may sell the CPAP to the beneficiary for cash. In this instance, it would be wise for the DME supplier to obtain a signed statement from the beneficiary in which the beneficiary agrees to purchase the CPAP from the DME supplier without filing a claim with Medicare and acknowledges that (i) Medicare will not pay for the CPAP furnished by the DME supplier, and (ii) Medicare will pay for the CPAP furnished by another DME supplier.

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, and can be reached at (806) 345-6320 or