The HME business used to be fairly simple. There were not many HME providers, DMERCs did not exist, CMS (formerly HCFA) did not pay much money to HME providers, and the HME industry was barely regulated. How things have changed!

Over the past 15 years, the industry has exploded, the number of providers has increased exponentially, and reimbursement has grown in a breathtaking fashion. The DMERCs and the National Supplier Clearinghouse (NSC) have become more sophisticated, and the federal government has become proactive in regulating the industry.

These challenges are simply a by-product of a maturing industry that has become a permanent (and important) part of the nation’s health care system. Notwithstanding these challenges, it is an exciting time to be in the HME business.

Certainly, there is a maze of byzantine statutes and regulations that establish parameters within which the HME company (provider) must operate. However, within these parameters there are opportunities for providers to market products and services and enter into strategic alliances with other health care providers.

In an increasingly competitive market, it is important for HME companies to enter into business arrangements and implement these innovative marketing programs. However, to avoid governmental scrutiny, it is crucial that all business arrangements and marketing programs be established and implemented properly.

Legal Guidelines
The Medicare/Medicaid anti-kickback statute (42 USC § 1320a-7b): It is a felony for a person or entity to knowingly or willfully solicit or receive any remuneration in return for referring an individual for the furnishing or arranging for the furnishing of any item for which payment may be made under a federal health care program, or in return for purchasing, leasing, or arranging for or recommending the purchasing or leasing of any item for which payment may be made under federal health care programs. Likewise, it is a felony for a person or entity to knowingly or willfully offer or pay any remuneration to induce a person to refer a person for the furnishing, or arranging for the furnishing, of any item for which payment may be made under a federal health program, or the purchase or lease, or the recommendation of the purchase or lease, of any item for which payment may be made under a federal health care program. These prohibitions do not apply to amounts paid by employers to employees.

Beneficiary Inducement Statute (42 USC § 1320a-7a (a)): This statute imposes civil monetary penalties upon a person or entity that offers or gives remuneration to any Medicare beneficiary (or beneficiary under a state health care program) that the offeror knows, or should know, is likely to influence the recipient to order an item for which payment may be made under a federal or state health care program.

In the preamble to the regulations implementing this provision, the Office of Inspector General (OIG) stated that the statute does not prohibit the giving of incentives that are of “nominal value.” The OIG defines nominal value as no more than $10 per item or $50 in the aggregate to any one beneficiary on an annual basis. Nominal value is based on the retail purchase price of the item.

Anti-Solicitation Statute (42 USC § 1395m(a)(17)): A provider of a covered item may not contact a Medicare beneficiary by telephone regarding the furnishing of a covered item unless (i) the beneficiary has given written permission for the contact, or (ii) a provider has previously provided the covered item to the beneficiary and the provider is contacting the beneficiary regarding the covered item, or (iii) if the telephone contact is regarding the furnishing of the covered item other than an item already furnished to the beneficiary, and the provider has furnished at least one covered item to the beneficiary during the preceding 15 months.

Stark II Statute (42 USC § 1395nn): The “Stark II” provisions of the Omnibus Budget Reconciliation Act of 1993, as amended, provide that if a physician has a financial relationship with an entity providing “designated health services,” then the physician may not refer patients to the entity unless one of the statutory or regulatory exceptions applies. Designated health services include (i) DME, (ii) parenteral and enteral nutrients, (iii) prosthetics, orthotics, and prosthetic devices and supplies, and (iv) outpatient prescription drugs, among others.

Safe Harbors: Safe harbor regulations issued under the anti-kickback statute provide “bright line” tests defining arrangements that do not violate the statute. If a business arrangement clearly falls within a safe harbor, then it is not violative of the anti-kickback statute. If the arrangement does not clearly fall within a safe harbor, then it must be examined in light of the anti-kickback statute and related court decisions to determine if it violates the statute.

Of the various safe harbors, five are particularly pertinent to providers: small investment interest, space rental, equipment rental, personal services, and management contracts and employees.

OIG Advisory Opinions: A provider may submit to the OIG a request for an advisory opinion concerning a business arrangement that the provider has entered into or wishes to enter into. In response, the OIG will issue an advisory opinion concerning the likelihood that the arrangement will implicate the anti-kickback statute.

OIG Special Fraud Alerts and Special Advisory Bulletins: From time to time, the OIG publishes Special Fraud Alerts and Special Advisory Bulletins that discuss business arrangements that the OIG believes may be abusive, and educates the DME industry concerning fraudulent and/or abusive practices. The Alerts relevant to HME providers include joint venture arrangements; routine waiver of co-payments or deductibles under Medicare Part B; contractual joint ventures; rental of space in physician offices by persons or entities to which physicians refer; offering gifts and other inducements to beneficiaries; medical supplies to nursing facilities; and telemarketing.

States: At least 42 states have enacted statutes prohibiting kickback fee splitting, patient brokering, or self-referrals.

HMEs and Pharmacies
Joint Ventures: An HME company and a pharmacy can enter into a joint venture. It is rare that a joint venture will fit within the Small Investment Interest Safe Harbor because it is difficult to meet the “60-40” rule contained in the safe harbor. If this safe harbor is not met, then the government will examine the joint venture under the “one purpose” test. The basic inquiry under this test is whether one purpose of the venture is to induce referrals. In deciding whether to investigate a joint venture as being violative of the one purpose test, the government will look to see whether the arrangement complies with the guidelines of the Special Fraud Alert on joint venture arrangements and the Special Advisory Bulletin on contractual joint ventures.

Pharmacy Staffing Service Agreement (PSSA): Pursuant to a PSSA, a staffing services company (SSC) will provide a building that can house one or more smaller pharmacies owned by one or more HME companies. The HME company will obtain a state pharmacy license and a Medicare supplier number for the physical location of its new pharmacy. The SSC will provide specifically defined staffing services to the HME company’s pharmacy. The PSSA must adhere to the guidelines set out in the Special Advisory Bulletin on contractual joint ventures.

Operational Services: A pharmacy and HME company can offer operational services to each other. The company that receives the services must pay fair market value for the services, and, to reduce the risk of government scrutiny, it must fall within one of the safe harbors to the Medicare anti-kickback statute.

Cooperative Marketing Program: The expenses of such a program must be proportionately shared by the HME company and pharmacy.

Loan/Consignment Closet: An HME company may place inventory on the premises of a hospital. The arrangement must follow the guidelines that apply to a loan/consignment closet arrangement with a physician.

HMEs and Hospitals
Joint Venture: If the terms of the Small Investment Interest Safe Harbor cannot be met, then a joint venture between a hospital and HME company must comply with the Special Fraud Alert on joint venture arrangements and the Special Advisory Bulletin on contractual joint ventures.

Administrative Services Agreement (ASA): A hospital may desire to open an HME operation. In so doing, the hospital can contract with an existing HME company to provide administrative services. It is critical that the agreement comply with the guidance set out in the Special Advisory Bulletin on contractual joint ventures.

Operational Services: An HME company can offer services to a hospital and vice versa. The entity that receives the services must pay fair market value for the services, and, to reduce the risk of government scrutiny, the arrangement must fall within one of the safe harbors to the Medicare anti-kickback statute.

Cooperative Marketing Program: An HME company may enter into a cooperative marketing program with a hospital. The expenses of the program must be proportionately shared by the parties.

HMEs and Physicians
Medical Director Agreement: An HME company can enter into an independent contractor Medical Director Agreement (MDA) with a physician. The MDA must comply with the (i) Personal Services and Management Contracts Safe Harbor and (ii) the Personal Services exception to Stark II.

Joint Equity Arrangement in Rural Area: An HME company and a physician can jointly own an HME company if a substantial part (75%) of the business is provided to customers residing in a rural area. A “rural area” is any area outside a metropolitan statistical area.

Loan/Consignment Closet: An HME company may place inventory in the office of a physician. The inventory must be for the convenience only of the physician’s patients and the physician cannot financially benefit, directly or indirectly, from the inventory. It is important that the physician ensure patient choice.

Technically, the HME company can pay rent to the physician so long as the rental agreement complies with the Space Rental Safe Harbor to the Medicare/Medicaid anti-kickback statute. However, from a practical standpoint, because the physical space used by the placement of the inventory is so small, it is preferable for the HME company to pay no rent to the physician.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, an Amarillo, Tex-based law firm. He represents HME companies, pharmacies, 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 via e-mail: jbaird@bf-law.com.