Moving the HME Industry Forward


Subcontracting Under Competitive Bidding

October 21, 2013

AMARILLO, TX – Competitive bidding is forcing a large number of HME suppliers to engage in subcontract arrangements. CMS announced the final rule for competitive bidding on April 10, 2007. In the final rule, CMS indicated 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: “[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.”

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;
• Coordination with the beneficiary and the practitioner to determine the time frame for delivery;
• Verification that beneficiaries receive items and services;
• 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
Let’s assume that the subcontractor is directly or indirectly referring (or arranging for the referral of) Medicare patients to the contract supplier. This is usually the case……normally, the subcontractor wants to “stay in the game” in order to maintain a relationship with its referral sources (e.g., physicians). Because the subcontractor is a “referral source” to the contract supplier, then the contract supplier must be careful how it pays the subcontractor.

The parties need to be mindful of the “one purpose” test, which has been handed down by courts. Under the “one purpose” test, if “one purpose” behind a payment to a referral source is to induce referrals, then the Medicare anti-kickback statute may be violated notwithstanding that (i) the primary purpose behind the payments is to pay for legitimate services (e.g., delivery, set-up, and patient instruction), (ii) the services by the referral source are substantive and actually rendered, and (iii) the compensation is the fair market value equivalent of the services rendered by the referral source. What all of this means is that the contract supplier cannot pay the subcontractor (that is a referral source) percentage compensation.

The safest way to compensate the subcontractor is to pay it a fixed annual fee (e.g., $240,000 over the next 12 months……or $20,000 per month). Fixed annual fee compensation is an important element of the Personal Services and Management Contracts safe harbor to the anti-kickback statute. Normally, fixed annual compensation is unrealistic. Therefore, many subcontract agreements state that the contract supplier will pay a set dollar amount for each type of service rendered by the subcontractor (e.g., $150 per set-up, $125 per maintenance call, etc.).

There is a risk that the government could assert that such a compensation arrangement violates the anti-kickback statute because the compensation paid to the subcontractor will vary based on the volume of business that the subcontractor directly or indirectly generates for the contract supplier.

If the subcontractor’s services are substantive and actually performed, and if the fixed fee per service is fair market value, then the risk is reduced that the government would make a kickback assertion. The contract supplier can also purchase inventory from the subcontractor. The purchase price per item must be fair market value. There can be a price list attached as a schedule to the subcontract agreement.

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