You may be surprised to learn that agreements between DME suppliers and sleep laboratories are quite prevalent. However, in any relationship between DME suppliers and sleep labs, it is vital that both parties understand applicable Medicare regulations related to the qualification of patients for CPAP devices. There are also Medicare guidelines that govern the appropriate structure of relationships between DME suppliers and sleep labs.

MEDICARE GUIDELINES

As suppliers continue to add CPAP devices to their product mix, they may be tempted to explore joint venture opportunities with local physician groups or sleep laboratories. Be extremely cautious when entering into such agreements. Regulatory pitfalls can trip you up.

The coverage determination for CPAP devices states:

• For the purposes of this policy, polysomnographic studies must not be performed by a DME supplier. This prohibition does not extend to the results of studies conducted by hospitals certified to do such tests.

In 2002, the DMERCs adopted a medical policy for CPAP that was in place for only a short time that stated:

• For purposes of this policy, polysomnographic studies must not be performed by a DME supplier or any entity with a financial relationship to the DME supplier. A DME supplier or supplier with significant financial interest in such facilities would not be considered a qualified provider or supplier of these tests for purposes of this policy's coverage and guidelines. This prohibition does not extend to the results of studies conducted by hospitals certified to do such tests.

The change in policy eliminated the restriction on using polysomnographic studies performed by an entity with a financial relationship to DME suppliers. This change opens the door for DME employees or owners to invest in a sleep testing facility without preventing the DME supplier from providing CPAP devices to patients qualified by the lab.

Although this change in policy allows for financial relationships between DME suppliers and sleep labs, any such relationship could lead to concerns related to the federal anti-kickback statute or other federal and state laws regulating relationships between health care providers.

Clay Stribling

ANTI-KICKBACK LAW

The Medicare anti-kickback statute applies to:

1. Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind;
1. in return for referring an individual to a person for the furnishing—or the arranging for the furnishing—of any item or service for which payment may be made in whole or in part under a Federal health care program, or;
2. in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony.
2. Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, to any person to induce such person;
1. to refer an individual to a person for the furnishing—or the arranging for the furnishing—of any item or service for which payment may be made in whole or in part under a Federal health care program; or
2. to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony.

One common model involves payment by a DME supplier to a sleep lab in exchange for the sleep lab setting up patients on the DME supplier's products. Under this model, a DME company will place inventory in a sleep lab to be available for customers of the sleep lab who choose to receive products from the DME supplier. If a patient chooses the DME supplier to provide their products, an employee of the sleep lab will set up the patient on the DME supplier's product—and the DME supplier will bill the payor for the product.

In some instances, a DME supplier will ask a sleep lab to perform setups and will pay the lab on a "per patient" basis. Paying for such services on a "per patient" basis raises serious concerns under the anti-kickback statute.

If one purpose of the payment to the sleep lab is to induce referrals, then the parties are violating the anti-kickback statute. If there are multiple reasons why the DME company would pay the sleep lab for the setups, and even one purpose among them is to compensate the sleep lab for the referrals, then the arrangement is in violation of the statute.

A less risky way to structure relationships between sleep labs and DME entities would be to have the parties draft the agreement to comply with the Personal Services and Management Contracts Safe Harbor. Under this rule, remuneration does not include any payment made to an independent contractor if all of the following requirements are met:

(i) the agreement must be in writing and signed by the parties;

(ii) the agreement must specify the services to be provided;

(iii) if the agreement provides for services on a sporadic or part-time basis, then it must specify exactly the scheduled intervals, their precise length, and the exact charge for each interval;

(iv) the term of the agreement must be for not less than 1 year;

(v) the aggregate compensation to be paid must be set in advance, must be consistent with fair market value, and must not take into account any business generated between the parties;

(vi) the services performed must not involve a business arrangement that violates any state or federal law; and

(vii) the services contracted for do not exceed those reasonably necessary to accomplish the business purpose.

For an agreement to be consistent with the Personal Services and Management Contracts Safe Harbor, it is required that the aggregate compensation to be paid be set in advance and not vary during the term of the agreement. Stating that the parties pay a specific amount per patient setup is not acceptable for the purposes of this safe harbor. The safe harbor requires that the total compensation be set in advance. Therefore, the total compensation paid by one party to the other must be determined prior to the execution of the agreement.

Suppliers involved in relationships with sleep laboratories that are paying the labs an amount based on the number of patients set up may be setting themselves up for headaches. Although establishing a flat annual fee does not mean the parties have met all the requirements of the Personal Services and Management Contracts Safe Harbor, it does eliminate the incentive for the sleep lab to refer to the DME company since the sleep lab will receive the same compensation regardless of how many patients choose the DME supplier.

TESTING LOCALITY

For more information and articles on CPAP and sleep, see our free online archives. Additional articles can be found in February 2007, March 2007, April 2007, and May 2007 (also see Related Articles box below). For news items about CPAP and sleep, see the OSA Today archives at the bottom of the enewsletter page.

Current Program Safeguard Contractor coverage determinations are clear regarding the appropriate location for polysomnographic studies. The current policy states: For the purpose of this policy, polysomnographic studies must be performed in a facility-based sleep study laboratory, and not in the home or any mobile facility. These labs must be qualified providers of Medicare services and comply with all applicable state regulatory requirements.

CMS is currently reviewing its decision to limit the testing locality to sleep labs, and revisiting its decision on whether it should pay for home-based sleep studies. Many private insurance companies allow for home-based sleep testing, and apparently CMS has received significant inquiry regarding its decision to limit qualifying sleep tests to tests performed in sleep labs. A decision from CMS on this matter is expected in mid September of this year. Until CMS acts affirmatively to change its criteria for testing locations, DME companies should continue to verify that all tests performed on Medicare beneficiaries are performed in a qualified sleep lab.

EYEBALLS ON PITFALLS

Although CPAP devices are becoming more common, keep your eyes open to legal pitfalls involved with providing this product, and be careful about relationships with sleep labs and physician offices. Although the temptation to aggressively establish relationships between DME companies and sleep labs is strong, the penalties for violating the Medicare anti-kickback statute are severe. Become comfortable with the regulatory compliance requirements of any arrangement before approaching a sleep lab about a joint venture or cooperative relationship.

Clay Stribling, JD, is an attorney with the Health Care Group of Brown & Fortunato PC, an Amarillo, Tex-based law firm. Stribling represents durable medical equipment companies, pharmacies, and other health care providers throughout the United States and Puerto Rico. He can be reached via e-mail: , and through the Web: www.bf-law.com.