Diabetic test strips are designed to be used only in meters from the same manufacturer, with the same brand names. Diabetic supply companies 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 company, then the company will need to provide a compatible meter to the customer. Normally, the company will desire not to charge the beneficiary for the meter.

If the manufacturer gives meters to a diabetic supply company free of charge, it is not appropriate for the company to bill the Medicare program for the meters. The fact that a company does not bill for meters that it receives for free does not mean that the company may not bill for meters that it purchases. However, the company should be careful not to give all of its 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 benefit of the discount, the risk of anti-kickback scrutiny is significantly increased.

Unless the decision to forgive is based on financial need, a diabetic supply company 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 company 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 anti-kickback statute, the 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.

The diabetic supply company may wish to place meters in physician's offices on a consignment basis. Physicians would provide meters to patients from the consigned inventory, and would provide billing information to the company. The company would bill for the meters and replenish the consigned inventory as necessary. The company 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.

This is commonly referred to as a "consignment closet" arrangement. 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 diabetic supply company of their choice. The company 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 company's marketing materials attached, in physician's 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 diabetic supply company contact them regarding the company'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 HME companies. 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 company intends to contact the patient by telephone, the patient's authorization must specifically authorize telephone contact.

In general, giving patients educational information about their medical conditions is far less likely to attract anti-kickback 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 diabetic supply company to anti-kickback or inducement risks. It should be kept within reasonable limits, however.

A diabetic supply company may wish to give patients a home-administered test kit that is not a Medicare-covered item. However, these kits must have a retail value of $10 or less. Note that the price that the diabetic supply company pays for the kits is not relevant for purposes of the inducement statute. It is the retail price that the beneficiary would pay to buy the item that determines whether the nominal value exception applies.

A diabetic supply company's employees may collect certain information from patients and provide that information to referring physicians. The question is whether the company 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 the company collects for its own treatment or payment purposes, or for purposes like quality improvement or case management, may be disclosed to physicians for their use for similar purposes without a business associate agreement. However, if the company is collecting information not for its own use, but only on behalf of the physician—or if the information is collected or disclosed for some purpose other than those listed above, then a business associate agreement would be required.

In June 2000, the Office of Inspector General (OIG) issued a report entitled Blood Glucose Test Strips: Marketing to Medicare Beneficiaries. 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 newspaper advertisements and other media, and (ii) "free" meters that are tied to the purchase of test strips.

Jeffrey S. Baird

Recently, diabetic supply companies have begun to openly advertise free meters. At first blush, such advertising would appear to violate 42 USC § 1320a-7a(a), commonly known as the Beneficiary Inducement Statute. 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 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.

Some companies that are openly advertising free meters most likely are offering the meters to the general public for $10 or less. For example, assume that ABC Diabetic Supply Company (ABC) advertises a free meter. It is likely that the ABC meter is being manufactured specifically for ABC under a private label contract. Further, the ABC meter cannot be found in any retail outlets. It is likely that ABC advertises its meter on its Web site and is willing to sell the meter to any person willing to pay the asking price, which is $10 or less. The retail price, then, for the ABC meter is established at $10 or less. ABC will sell the meter to any person who wishes to purchase it, regardless of whether the purchaser also buys diabetic test strips from ABC. It is irrelevant if the cost to ABC, of having the meter manufactured for it, exceeds $10. As noted above, the ABC meter cannot be found in a retail outlet, such as a national pharmacy chain, for $59.99. If this would occur, then ABC could not credibly argue that the retail price of its meter is $10 or less.

The risk that the government will allege that a free meter program, involving meters with retail prices in excess of $10, violates the anti-kickback and/or inducement statute is reduced if the program contains the following characteristics: (i) the diabetic supply company does not advertise free meters to the general public; (ii) the company 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 company inform the customer that they will receive a free meter that is compatible with the company'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.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based 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: .