Diabetic test strips are designed to be used only in meters with the same brand names. Diabetic test suppliers normally carry only one or a couple of brands of test strips.

If a new customer is using a meter that is not compatible with the strips furnished by the supplier, then the supplier will need to provide a compatible meter to the customer. Normally, the supplier will desire not to charge the beneficiary for the meter. The question that often arises is how safe—legally—is such a “free meter” program?

To Bill or Not to Bill Medicare
If the manufacturer gives meters to a supplier free of charge, it is not appropriate for the supplier to bill the Medicare program for the meters. Because manufacturers give away meters to promote the purchase of their test strips, acceptance of free meters by a supplier could be considered a violation of 42 USC §1320a-7b (the Medicare/Medicaid antikickback statute), unless the transaction meets the requirements of one of the safe harbors under that statute. The only potentially available safe harbor is the discount safe harbor.

In general, a “bundling” transaction, in which one item is received free or at a reduced charge with the purchase of a different item, can be brought within the protection of the discount safe harbor only if the Medicare program receives the benefit of the discount. If the supplier bills the Medicare program for the meter, then the Medicare program does not receive the benefit of the discount, and the transaction between the manufacturer and the supplier may be considered a violation of the antikickback statute.

What about billing for meters for which the supplier incurs a cost? The fact that a supplier does not bill for meters that he receives for free does not mean he may not bill for meters that he purchases. However, suppliers should be careful not to give all of their free meters to patients who are ineligible for Medicare reimbursement, while selling purchased meters to eligible Medicare beneficiaries. If the free meters are distributed in such a way that the Medicare program does not receive its fair share of the discount benefit, the risk of antikickback scrutiny is significantly increased.

Waiver of Co-payments
Unless the decision to forgive is based on an individual determination of financial need, suppliers cannot forgive the cost of a meter in the event the meter is provided to an individual covered under a Medicare HMO where there is no insurance coverage. A supplier that routinely provides items for free to individuals who are not eligible for reimbursement—but bills third-party payors for items provided to patients who have coverage—may incur liability under the antikickback statute, 42 USC §1320a-7a(a) (the “anti-inducement statute”), and state insurance fraud laws. An out-of-network charge is a form of co-payment. Like other co-payments and deductibles, this charge may not be waived routinely, but may be waived only upon a determination of financial need in each individual case.

Placing Meters in PhysicianS’ Offices
Suppliers may desire to place meters in physicians’ offices, to be given to patients free of charge. In general, the anti-inducement statute prohibits payment of remuneration to a Medicare beneficiary to induce the beneficiary to order Medicare-covered items or services. However, this prohibition does not apply to any remuneration that falls within one of the antikickback safe harbors.

An argument can be made that providing a free meter to a Medicare beneficiary falls within the discount safe harbor, provided the patient would otherwise be eligible for Medicare reimbursement for a meter, and provided the Medicare program is not billed for the meter. Giving meters to beneficiaries, therefore, would likely not violate the anti-inducement statute. Assuming that some of the patients who would receive free meters would be eligible for Medicare reimbursement and some would not, such a program is not entirely free of risk under either the antikickback statute and anti-inducement statutes.

It is not possible to quantify this risk with any degree of precision. However, if one assumes that most of the Medicare beneficiaries who will receive free meters will be beneficiaries who have not received a meter within the previous 5 years, then the risk is relatively low.

To reduce the risk of antikickback and anti-inducement scrutiny, the best approach would be to have no connection between the supplier’s marketing materials and the meters that are placed in physicians’ offices. It is important that the appearance not be given that the supplier is giving the meters to the physicians without charge, and that the physicians are giving the meters to the patients. The risk is significantly higher if it appears that the supplier is giving the free meters to a referral source rather than to the patients directly.

Suppliers may wish to place meters in physicians’ offices on a consignment basis. Physicians would provide meters to patients from the consigned inventory and would provide billing information to suppliers. The supplier would bill for the meters and would replenish the consigned inventory as necessary. The supplier would make no payments to the physicians, and would not provide any free services or other benefits to the physicians in return for participating in this program. Arrangements like this, often referred to as “consignment closet” arrangements, have been the subject of a great deal of discussion, and considerable confusion, over the last few years.

Some of the major questions surrounding these arrangements were answered by the Office of Inspector General (OIG) in an advisory opinion issued in April 2002. In that advisory opinion, the OIG stated that a straightforward consignment closet arrangement in which a DME supplier placed portable oxygen equipment in hospitals and physicians’ offices, and made no payments to the hospitals or physicians in connection with the consignment arrangement, did not involve prohibited remuneration and would not subject the parties to sanctions under the antikickback statute. Provided that the physician receives no remuneration of any kind, a consignment program should not violate the antikickback statute.

It is important that patient freedom of choice be preserved; therefore, physicians should be advised to tell patients that they may receive meters and diabetic supplies from any supplier of their choice. Suppliers should prepare a list of diabetic test suppliers and distribute the list to physicians to be given to patients.

There is no prohibition against placing educational literature, with the supplier’s marketing materials attached, in physicians’ offices for distribution to patients. While the HIPAA privacy regulations contain significant restrictions on health care marketing activities, they do not prohibit a physician from giving patients information about treatment of their medical conditions, or suggesting or recommending providers or suppliers to patients.

It is proper for physicians to ask patients whether they would be willing to have the supplier contact them regarding the supplier’s products and services. However, this activity must be conducted in compliance not only with the HIPAA privacy regulations, but also with the specific Medicare rules dealing with telephone solicitation by DME suppliers. The physician would need to require the patient to sign an authorization that meets the requirements of the HIPAA privacy regulations. In addition, if the supplier intends to contact the patients by telephone, the patient’s authorization must specifically authorize telephone contact.

Provision of Educational Information
In general, giving patients educational information about their medical conditions is far less likely to attract antikickback scrutiny than giving them other unrelated items or services. If the educational information being provided is in the form of booklets, audio tapes, or video tapes of relatively small financial value, this practice is unlikely to expose the supplier to antikickback or anti-inducement risks. It should be kept within reasonable limits, however.

Provision of Test Kit
Suppliers may wish to give patients a home-administered test kit that is not a Medicare-covered item. Giving these kits to patients could be considered a violation of the anti-inducement statute if their retail value exceeds $10 each. The OIG has stated that giving items of “nominal value” to beneficiaries does not violate the anti-inducement statute, and has defined “nominal value” as a retail value not exceeding $10 per item, or $50 in the aggregate, to any beneficiary in any calendar year.

If the test kit’s retail value is more than $10, it does not fit within the nominal value exception. Furthermore, providing these kits without charge does not fit within the discount safe harbor because the kit is not a Medicare-covered item. Therefore, it is not recommended that suppliers give these kits to Medicare beneficiaries without charge. Note that the price suppliers pay for the kits is not relevant for purposes of the anti-inducement statute. It is the retail price that the beneficiaries would pay to buy the item themselves that determines whether the nominal value exception applies.

HIPAA Concerns
A supplier’s employees may collect certain information from patients and provide that information to the referring physicians. The question is whether the supplier will be required to enter into business associate agreements with these physicians.

The answer to this question depends on the purpose for which the information is collected and the purpose for which it is disclosed. Information that suppliers collect for their own treatment or payment purposes, or for purposes like quality improvement or case management, may be disclosed to physicians for use for similar purposes without a business associate agreement. However, if suppliers are collecting information not for their own use, but only on behalf of physicians—or if the information is collected or disclosed for some purpose other than those listed above—than a business associate agreement would be required. For example, if the physician needed the information for research or marketing purposes, the supplier could not disclose the information to the physician without a business associate agreement.

Avoiding Anti-Inducement or Antikickback Scrutiny

As mentioned earlier, providing free meters to patients, and particularly to Medicare beneficiaries, raises the question of whether the practice violates the antikickback statute and/or the anti-inducement statute. The antikickback statute provides criminal penalties for any person who solicits, receives, offers, or pays any remuneration to a person to induce that person to refer an individual for an item or service that may be paid for by Medicare, Medicaid, or another federal health care program—or to purchase, lease, order, arrange for, or recommend purchasing, leasing, or ordering any such item or service—subject to certain specified exceptions. Related provisions of the antikickback statute provide for civil monetary penalties and exclusion from federal health care programs for any person or entity that commits an act prohibited under the statute.

As interpreted in court decisions, the antikickback statute is extremely broad, and encompasses not just outright bribes and kickbacks, but many marketing and promotional activities as well. Because the statute is interpreted and applied so broadly, it is often not possible to say with certainty whether a particular marketing practice does or does not violate the statute. It is necessary instead to analyze these practices in terms of degrees of risk. If structured conservatively, the risk that diabetic suppliers (those that provide free meters) will incur sanctions under the antikickback statute should be low. The anti-inducement statute imposes civil money penalties for offering any remuneration to a Medicare beneficiary that is likely to influence the beneficiary to order or receive a Medicare-covered item or service from a particular provider, practitioner, or supplier.

In June 2000, the OIG issued a report entitled “Blood Glucose Test Strips: Marketing to Medicare Beneficiaries.” One of the principal findings of the study was that “Diabetic supply advertisements offer inducements and can be misleading.” Coinsurance information in diabetic supply advertisements can be misleading and we found that suppliers did not always collect coinsurance from beneficiaries. Diabetic supply advertisements also offer inducements, and beneficiaries reported receiving incentives such as free monitors.

The section of the report dealing with inducements reads in part as follows: Fifteen percent of beneficiaries reported receiving incentives from suppliers. The incentive most often cited by beneficiaries was a free monitor.

We found that advertisements in newspapers and periodicals, leaflets and flyers located in pharmacies, and coupons and discount offers concentrated on putting monitors into the hands of diabetic patients. Since test strips are designed to be used only in monitors with the same brand names, these inducements obviously were crafted to generate sales of those test strips.

Some inducements involving monitors may be in violation of the antikickback statute. A typical inducement relating to a test-strip purchase requires the customer to buy 100 test strips. The monitor would then be “free.” Other inducements involve a combination rebate-trade-in typically ranging from $35 to $85 depending on the type and quality of the monitor being offered. Often, a range of monitors is offered in the inducement. With the trade-in along with the rebate, the monitor would then be “free” to the customer.

Other advertisements relating to monitors included coupon offers, “free” monitors with purchase of 50 test strips, and a “free monitor, up to $50.” We also encountered an advertisement for a “diabetic care seminar,” which featured “free” attendance at the seminar along with a “free monitor” with a purchase of 50 test strips.

Although the report includes recommendations concerning the other practices discussed in the report (waiver of co-payments, auto-shipping, and misleading advertising), there are no recommendations regarding free meters. The OIG’s position on free meters is, therefore, left ambiguous. It appears, however, that to the extent that the OIG is concerned about the practice of distributing free meters, its greatest focus is on (i) free meter programs that are advertised to the public through newspapers and other media, and (ii) “free” meters that are tied to the purchase of test strips.

The risk that the government will allege that a free meter program violates the antikickback and/or anti-inducement statute is reduced if the program contains the following characteristics: (i) the diabetic supplier does not advertise free meters to the general public; (ii) the supplier does not inform a potential customer that if they become a customer, then they will receive a free meter; and (iii) only after the person elects to become a customer will the supplier inform the customer that they will receive a free meter that is compatible with the supplier’s test strips. Lastly, providing a free item such as a meter, which is essential to maintenance of a diabetic patient’s health, should be considered less objectionable than providing a free item that has no relation to maintaining the patient’s health. DP

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.