What if you don’t win a competitive bidding contract? The good news is that you have options.

Let's say that despite diligent efforts, you are not awarded a competitive bid contract—meaning you cannot bill Medicare in its competitive bid area (CBA) for products covered by competitive bidding. There is no good way to paint this scenario in a positive light. Nevertheless, losing bidders must play the hand they are dealt, and there are ways to make the best of a bad situation.

CONTINUE AS A GRANDFATHERED SUPPLIER

There will be a "grandfathering" process for oxygen equipment and supplies; inexpensive or routinely purchased items furnished on a rental basis; items requiring frequent and substantial servicing; and capped rental items. Only HME companies that began furnishing these grandfathered items prior to implementation of competitive bidding may be eligible as grandfathered suppliers.

Beneficiaries may choose to continue renting the item from the grandfathered supplier, provided the supplier is willing to continue furnishing the item under the same terms as the contract supplier—and at the same price as the contract supplier. Beneficiaries may switch from grandfathered suppliers to contract suppliers at any time. If an HME chooses to be a grandfathered supplier, it must do so for all beneficiaries who request the services.

For items requiring frequent and substantial servicing and oxygen equipment, grandfathered suppliers will be paid the bid payment amount. For capped rental items and inexpensive or routinely purchased items, grandfathered suppliers will be paid the lower of the actual charge, or rental fee schedule amount. Grandfathering is also applicable to HME companies that lose their contract status in a subsequent competitive bidding period.

SUBCONTRACT WITH A CONTRACT SUPPLIER

Many contract suppliers will need subcontractors to help them fulfill their responsibilities under the competitive bid contracts. For example, assume that ABC Medical Equipment is located on the east side of the Missouri River in Kansas City, and ABC does not have the capacity to serve patients on the west side of the river. Assume that ABC is awarded a competitive bid contract for all of the Kansas City CBA. Now assume that XYZ Medical Equipment is located on the west side of the Missouri River.

Now assume that XYZ is not awarded a contract. ABC and XYZ may enter into a subcontract agreement whereby ABC (winning provider) subcontracts to XYZ (losing provider) some of the responsibility to serve ABC's patients on the west side of the river. Under the agreement, ABC will place some of its inventory on the premises of XYZ.

If a patient living on the west side of the Missouri River calls ABC for equipment (or a physician refers a west-side patient to ABC), then ABC will notify XYZ of the west-side patient's needs. At the direction of ABC, XYZ will deliver the equipment out of ABC's inventory to the west-side patient. At the time of the delivery and setup, XYZ will obtain the necessary signatures from the west-side patient and will forward the documentation to ABC. ABC will bill the Medicare Administrative Contractor (MAC) for the equipment and will pay XYZ in accordance with the fee schedule set out in the agreement.

Denise Fletcher

The obligation of ABC to pay XYZ will be unconditional. That is, ABC will pay XYZ regardless of whether ABC receives payment from the MAC. In the event that the west-side patient needs equipment that is not contained in ABC's inventory on XYZ's premises, then XYZ will provide the equipment from its inventory and ABC will purchase the equipment from XYZ. This latter scenario will be the exception, not the rule.

In implementing the agreement, parties need to be careful. At the end of the day, ABC is the supplier. When ABC bills the MAC, it is representing that it has the operational responsibilities and financial risk for providing the product to the west-side patient.

If XYZ handles the west-side patient on a turnkey basis, then the April 2003 Special Advisory Bulletin (Contractual Joint Ventures) from the Office of Inspector General (OIG) may be violated. Equally as ominous, the government might take the position that ABC is, in fact, not the supplier and XYZ is, in fact, the supplier. After all, ABC submitted a claim to the MAC for a product that it did not provide. As a result, ABC submitted a false claim, and XYZ conspired to assist ABC in submitting a false claim. The bottom line is that in a subcontract arrangement, the contract supplier must have "skin in the game," which translates to operational responsibility and financial risk.

Jeffrey S. Baird

A subcontract arrangement can be entered into when a contract supplier can cover the entire CBA, but does not provide a particular product (such as liquid oxygen) in a product category (oxygen supplies and equipment). Suppose that an HME company (DEF Medical Equipment) is based in Cleveland and only does business in Cleveland. Suppose DEF wants to expand into Pittsburgh and Charlotte.

DEF can submit a bid for the Cleveland, Pittsburgh, and Charlotte CBAs. If DEF is awarded the contract, then it can serve Cleveland with its own personnel and serve Pittsburgh and Charlotte through subcontract arrangements. A losing bidder can serve as a subcontractor, while a company that does not submit a bid can serve as a subcontractor. A winning bidder can serve as a subcontractor for another winning bidder.

CMS does not require that a subcontractor be accredited. In fact, CMS does not require that a subcontractor even have a Medicare supplier number. However, the contract supplier must be accredited, and its accrediting organization will likely require that the contract supplier ensure that a subcontractor follow the same quality standards that the accrediting organization imposes on the contract supplier. Competitive bid contracts have 3-year terms. During the course of the term, contract suppliers can terminate their relationships with subcontractors and replace them with new subcontractors.

Clay Stribling

BEYOND SUBCONTRACTING

• Items not governed by competitive bidding: The competitive bidding program covers only defined product categories, featuring enumerated items. Suppliers may sell products not covered in the competitive bidding program's product categories—without going through the bidding process.
• Cash sales: There are approximately 70 million Baby Boomers, most of whom have savings and retirement accounts. Many Baby Boomers are accustomed to "paying their way" and recognize the potential future unreliability of the Medicare and Social Security programs. These Boomers may be inclined to simply purchase medical equipment rather than expend the time to obtain Medicare qualification.

Innovative HME companies are focusing on the cash market. Some are building impressive showroom floors. Others are promoting and selling items through Web sites. This is the wave of the future.

Due to the cost savings of not having to submit claims to Medicare, HME companies can sell cash products for less than the Medicare allowable. In so doing, it is important that the company adhere to OIG guidance on discounts to cash customers.

Lisa Smith

Remember that an HME company is prohibited from charging Medicare substantially in excess of the company's usual charges, unless there is good cause. See 42 USC § 1320a-7(b)(6)(A); 42 CFR § 1001.701(a)(1). The current regulations do not give any guidance on what constitutes "substantially in excess" or "usual charges." "[U]nusual circumstances or medical complications requiring additional time, effort, expense" would be considered good cause—42 CFR § 1001.701(c)(1). An HME company that violates this prohibition is subject to exclusion from federal health care programs—42 CFR § 1001.701(a).

While there have been efforts by the OIG to define "substantially in excess" and "usual charges," no final rule has been issued. In a 1998 advisory opinion, the OIG said that charging Medicare 21% to 32% more than cash-and-carry customers would likely violate the statute, and suggested a "useful benchmark" was to compare the profit margins on a cash sale and a Medicare sale—see OIG Advisory Opinion No. 98-8 (July 6, 1998) (Opinion 98-8).

According to the OIG, the statute would not be violated if the profit margin on a Medicare sale was less than or equal to the margin on the cash sale. In another advisory opinion the following year dealing with laboratory services, the OIG said that the test was whether "the charge to Medicare or Medicaid substantially exceeds the amount the laboratory most frequently charges or has contractually agreed to accept from non-Federal payors"—see OIG Advisory Opinion No. 99-13 (November 30, 1999).

Timothy Webster

In a 2000 guidance letter, the OIG's chief counsel said the law could be violated if "a provider's charge to Medicare is substantially in excess of its median non-Medicare/ Medicaid charge" (see Letter to American Ambulance Association, April 20, 2000).

The most recently proposed rules contemplate the "usual charge" to be either the average or median of the supplier's charges to payors other than Medicare and some others (see generally 68 FR 53939 [September 15, 2003]). Under these proposed rules, an HME company's usual charge should not be less than 83% of the Medicare fee schedule amount (up to a 17% discount from the Medicare fee schedule). There would be an exception for good cause, which would allow an HME company's usual charges to be less than 83% of the Medicare fee schedule, if the company can prove unusual circumstances requiring additional time, effort, or expense—or increased costs of serving Medicare/Medicaid beneficiaries.

The proposed rules would include charges of affiliate companies into the calculation of an HME company's usual charges. An affiliated company is any entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the HME company. The proposed rules explicitly exclude fees set by Medicare, state health care programs, and other federal health care programs (except TriCare). By implication, charges not specifically excluded will be included. CMS recently declined to promulgate the proposed rules into a final rule (see 72 FR 33430, 33432 [June 18, 2007]).

Phuong D. Nguyen

Based on the above discussion, there is no bright line rule (such as a 17% discount) when a discount will require a showing of good cause. It is reasonable to infer, however, that a relatively large differential between Medicare and non-Medicare prices will more readily be viewed as "substantially in excess."

There is also no clear guidance on what would constitute good cause. In Opinion 98-8, the suppliers justified the price differential by stating that furnishing Medicare beneficiaries involved significant additional costs: documentation requirements, claims processing, and delivery and distribution. The OIG responded that the supplier's charges to Medicare for some products would be substantially in excess of its usual charges. While the OIG agreed that the additional costs incurred by the suppliers "solely attributable to complying with Medicare requirements may constitute 'good cause,' there was insufficient information for the OIG to determine whether [the supplier's] proposed fee structure is sufficiently related to its anticipated additional costs attributable to Medicare ...." This suggests that the OIG will scrutinize an HME company's financials closely if the company asserted cost savings to justify its discount to other customers. Therefore, an HME company that intends on relying on costs savings to show good cause should anticipate such scrutiny.

Another issue is whether the entity operating the retail business can be organized or structured to insulate affiliated companies from liability under the "substantially in excess" regulations. Opinion 98-8 involved parent and subsidiary suppliers. The subsidiary intended on becoming a Medicare supplier and furnishing DME to Medicare beneficiaries; the parent intended on continuing to serve only non-Medicare customers. Nevertheless, the OIG made it clear that the parent's prices would be considered in its analysis.

The proposed rule also indicated that CMS considers the prices of affiliate companies in its analysis. While the guidance discussed is not binding law, the OIG and CMS have been consistent in their treatment of affiliate organizations. Consequently, it is unlikely that an HME company may insulate itself by forming a separate legal entity to operate the retail business.

LONG-TERM CARE FACILITIES

For more information and articles from Brown & Fortunato attorneys, go to the HME Today archives. Archived articles can be found in issues from August 2007, July 2007, June 2007, May 2007, and February 2007.

Most residents in long-term care facilities may receive DME reimbursed by Medicare Part B as if those patients were residents of their own homes. For those long-term care facilities that are not paid a per diem rate for the patient's care, HME companies may bill Medicare directly for provision of the equipment, or, in some cases, facilities may choose to contract with the HME company to provide the equipment directly to the facility, and the facility will then provide it as a benefit to its residents.

HOSPICES

The hospice benefit paid to the HME company includes the equipment and products used to service the beneficiary. HME companies are not entitled to receive reimbursement from Medicare for equipment provided to hospice patients. Hospices, however, may purchase this equipment directly from HME companies. The HME company should approach hospice providers to inquire about their source of medical equipment and to determine if the hospice is a potential purchaser of equipment or supplies.

VETERANS AFFAIRS FACILITIES

The VA is a large purchaser of DME and routinely sends out requests for proposals asking that HME companies submit a bid to different VA regions or facilities that service patients. An overview of the VA bid process is available online at www.va.gov/osdbu/library/factsheet/_smoothprocess. More detailed information on the claim submission process and the regions involved is available online at www1.va.gov/oamm/index.htm.

STATE PRISON SYSTEMS

Many state prison systems require DME or pharmaceuticals for prisoners. Many states have moved toward having specific prison facilities designated as "medical detention centers." HME companies interested in determining whether the department of corrections in their state contracts independently with HME companies for this service should visit www.corrections.com/links/viewlinks.asp?cat=30 for links to specific state boards of correction or prison systems and collect information regarding the appropriate contact person at the state level.

RESORT HOTELS AND CASINOS

Many large resort hotels have begun providing wheelchairs, scooters, and other medical equipment to guests. HME companies that are located in a marketplace with large hotels and casinos should contact the hotels directly to determine if there is a contracting process, and how companies may participate.

AIRPORTS

Airports are frequent purchasers of wheelchairs and other medical equipment for use by customers. Many of these pieces of equipment are provided by local HME companies. Companies wishing to obtain more information should contact the airport facilities manager to discuss the contracting process.

EXPAND INTO AREAS OUTSIDE CBAS

An HME company can open up one or more locations outside a CBA and concentrate on servicing customers in the outlying areas.

SELL THE BUSINESS

An unsuccessful bidder may decide to sell its business to a successful bidder. This can be an asset or stock sale. A common purchase price calculation is four to five times EBITDA (earnings before interest, taxes, depreciation, and amortization). Often the purchaser will employ the owner and key employees of the seller, incentivizing them to grow the acquired business.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm in Amarillo, Tex. He represents HME companies, pharmacies, infusion 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 via e-mail: . Also from the B&F health care group and contributing authors: Denise M. Fletcher, JD; Phuong D. Nguyen, JD; Lisa K. Smith, JD; Clay Stribling, JD; and Timothy L. Webster, JD.