When CMS published its rules for competitive bidding, the
possibility that one supplier could subcontract its services to
another supplier in order to provide a collective bid became an
unexpectedly attractive opportunity. CMS' subcontracting rules
appear to be relatively flexible. They impose only a few barriers,
and even fewer hurdles to the subcontracting process.
This flexibility is in marked contrast to the final rules
concerning networks, which eliminated most of networks' advantages
while maintaining some significant risks. Because subcontracts
remain an attractive option for competitive bidding activities, it
is important to understand how you can establish safe and
profitable subcontracting relationships.
Let's start with the basics. A subcontract is an agreement
between two suppliers that establishes an ongoing relationship.
Under this relationship, one party (the subcontractor) agrees to
help the other party (the contractor) with certain products or
services tied to ongoing activities, in order to support the
contractor in achieving its goals or fulfilling its
In the context of competitive bidding, a subcontract is for use
by suppliers who wish to get involved in the competitive bidding
process but who will need assistance in order to service fully the
entire competitive bidding area.
Some of these suppliers may not qualify to form a network
because they do not fall under the definition of small supplier
(“a company which earns $3.5 million in gross revenues or
less”). Other suppliers may prefer a subcontract
relationship, regardless, because they wish to maintain more
control over their operations than a network would permit;
suppliers who become contractors in subcontracting arrangements
will have control over their subcontractors.
Follow the Rules
Under the competitive bidding rules, any supplier currently
enrolled in the Medicare program is eligible to serve as a
subcontractor to a supplier who wins a bid. The competitive bidding
rules require that a subcontractor must have “never been
excluded from the Medicare program, any state health program or any
other government executive branch procurement or non-procurement
activity.” A contractor is required in its bid to list all of
its subcontractors. Also, the contractor must disclose if any of
its subcontractors have been subject to any prior legal actions,
sanctions or revocations.
This rule has some interesting implications. There are many
legitimate suppliers who, at some point in their history, have had
issues with CMS or the National Supplier Clearinghouse that
resulted in their being threatened with a supplier number
revocation. These suppliers typically have gone through a
redetermination or reconsideration process, after which their
numbers were reinstated.
However, if there was any timeframe during which the revocation
remained in effect, then this competitive bidding rule will be
important. If a supplier had its number revoked on April 1, for
example, and after a hearing had its supplier number reinstated
effective to April 15, then that supplier would have had a two week
period during which its number was revoked. Consequently, this fact
would have to be disclosed in the bid.
Will these disclosures affect the likelihood of a contractor
being chosen for a bid if one of its subcontractors had revocation
problems in the past? The answer is uncertain. There are many, many
suppliers out there who have been in a fight with the NSC or CMS at
some point. There are many temporary revocations that are based on
a technical imperfection, and many others on the books simply
because there was a time gap in the dispute process that was not
fully imposed retroactively by a favorable ruling.
We may reasonably hope that CMS will focus on the reasons and
circumstances of a revocation, rather than the mere fact of a
revocation, when awarding bids. Otherwise, any supplier that has
ever had a revocation problem, even if momentary, may be
unattractive as a subcontractor.
CMS will allow a supplier to bid for a particular product
category in a particular market while still serving as a
subcontractor to another supplier for that same product category in
that same market. This may allow some suppliers to achieve a
substantial market share by serving both as supplier that wins a
bid and as a subcontractor to one or more other winning
Market share issues become important under antitrust law, as you
will see in the following section.
Follow the Laws
To understand those protections to include in a subcontract
arrangement, it is important to understand the laws that govern
health care subcontracts generally, and competitive bidding
subcontracts in particular. These include state contract laws,
federal and state antitrust laws, federal and state antifraud laws,
the Medicare supplier standards and certain reimbursement
State contract laws will likely have something to say about
subcontract agreements. Many states have specific rules for how
certain provisions must be worded or positioned in a contract. In
South Carolina, for example, the existence of an arbitration
provision must be noted in bold print on the first page of the
contract, even when it is discussed in detail later in the
Similarly, states may have specific rules about late fees, how
notice requirements should be handled or when one party may hold
another party responsible for attorneys' fees. Any subcontract that
works off of a template that is not state-specific should be
screened by an attorney who is able to identify the rules in the
particular state where the relationship will operate.
CMS requires that competitive bidding subcontracts must be
compliant with federal and state antitrust law. This is similar to
CMS' admonition for networks that “the network cannot be
anticompetitive.” Most state antitrust laws mirror the
federal antitrust rules substantially, so a rough understanding of
how the federal rules work should enable suppliers who are
considering subcontracts to appreciate the basic parameters.
One of CMS' concerns is that a subcontract relationship not be
anticompetitive by creating a team-up so big as to dominate the
local market. The feds have worried about anticompetitive
activities with health care collaborations for at least 20
Focusing particularly on competitive bidding, CMS set a rule for
networks that limits the allowed market share of any network to no
more than 20 percent of the Medicare market share for the relevant
product categories in which the network will participate.
Initially, information about a supplier's Medicare revenues will
be analyzed largely based on historic information, and the
aggregate market information is available from CMS or Palmetto GBA,
the Competitive Bidding Implementation Contractor. So, it should be
acceptable to use CMS' “20 percent rule” for networks
as a general guideline for a subcontracting relationship.
As mentioned earlier, CMS will allow a supplier to bid on
multiple product lines in the same market, as well as serve as a
subcontractor for one or more suppliers while still pursuing
competitive bids itself. Because of this flexibility, it is quite
possible that certain suppliers could bring a significant quantity
of market share to the subcontract negotiation table.
I would advise any contracting supplier to inquire about all the
Medicare relationships a potential subcontractor may have to verify
that the aggregate market share of all those relationships is not
sufficient to trigger antitrust concerns.
There is another form of anticompetitive behavior that affects
subcontracts called “price fixing.” In most cases,
price fixing is an automatic violation of federal antitrust law. It
is defined as an agreement among companies that has the purpose or
effect of raising, depressing or fixing prices. Market share or
market power are irrelevant factors in price fixing cases; if you
collaborate on prices with a competitor, you break the law.
There is every reason to expect that price fixing rules will
apply to competitive bidding subcontracts, despite CMS' current
focus only on the “20 percent” rule. Therefore,
subcontract relationships must comply with the price fixing
safeguards imposed on health care collaborations generally to
control the flow of pricing and cost information between the
Typically, this will require that neither party in a
subcontracting arrangement share its pricing information with the
other party. Rather, the parties should work out a fee for the
subcontractor's services in a manner that does not alert either
party to any aspect of the other party's charges to Medicare or to
any other payer. While I have seen little discussion about this
danger to date, I expect it will be a key factor for some
subcontracting relationships. Do not share price information!
Subcontracting arrangements must also satisfy all state and
federal anti-kickback and antifraud regulations. There has been no
discussion of this requirement in CMS' competitive bidding rules
for subcontracts. But the antifraud rules are enforced by the
Department of Justice and the HHS Office of Inspector General, and
CMS has no control over either of these enforcement entities.
Therefore, there is every reason to expect that all of the
antifraud and anti-abuse rules will apply to competitive bidding
subcontracting relationships just as they apply to subcontracting
arrangements outside of competitive bidding.
There are two keys to the antifraud rules as they apply to
subcontracts. First, none of the fees paid to a subcontractor
should be related to referrals from that subcontractor to the
contractor. The fee should not vary with the quantity or value of
any of the subcontractor's customers who come to the contractor as
part of the relationship.
A flat fee for each service, per piece of equipment, per hour or
by some other measurement is a far safer financial structure for a
subcontract relationship. Patient source should not affect the fee.
Similarly, a subcontracting agreement may not require the
subcontractor to send patients to the contractor as condition to
The second key antifraud protection is to ensure that the
subcontract is always demonstratively for a legitimate business
purpose. A competitive bidding subcontract, for example, will often
be necessary because of geographic issues. Perhaps a contractor
cannot service patients cost-effectively in the remote part of a
CBA and wishes to subcontract with one or more suppliers in that
area to ensure access to those patients under its competitive
Another appropriate use for a competitive bidding subcontract
might be because the contractor requires support from one or more
subcontractors, where they have access to or expertise with a
certain kind of product. It may be that a certain level of training
is required for certain pieces of equipment that the
subcontractor's personnel possess but the contractor's do not.
An incremental need for additional personnel may also justify a
subcontracting relationship. A company may have more than one
reason for having a subcontract, and some may choose more than one
The importance of this legitimate business purpose cannot be
overstated. It is likely that many suppliers will evaluate a
subcontracting opportunity from the perspective of “you give
me a subcontract — I will give you my business if I don't get
the bid.” That reasoning, from an antifraud perspective,
probably would lead to federal scrutiny and trouble.
“Quid pro quo” is not a legitimate reason for a
subcontract, and may not have any bearing on the negotiated fees
for the subcontract relationship. Fees must be based entirely on
fair market value. A fair subcontracting fee may be based on an
assessment of the contractor's costs, plus a reasonable profit for
the subcontractor. Or, such fees may be based on what are
comparable fees for similar subcontract relationships in the
In all circumstances, the subcontract fees must be less than
what it would cost the contractor to provide the services itself.
Otherwise, it is clear that the subcontract is being offered in
order to garner referrals or other benefits.
The requirement that there be a legitimate business purpose for
the subcontract relationship, as well as the general need to avoid
problems under the antifraud rules, limits the quantity of
subcontractors a contractor may safely engage.
It is hard to fathom a circumstance in which a contractor would
need to have a large quantity of subcontracts in order to
compensate for geographic inaccessibility. There just are not that
many different remote areas where the contractor is unable to
provide services at a reasonable cost. It is similarly hard to
imagine a contractor requiring a large quantity of subcontracts for
product line support or for incremental personnel needs.
If suppliers in a particular market find a need to have more
than a few suppliers band together in a subcontract relationship
for purposes of competitive bidding, then they should explore the
network option rather than trying to cram too many subcontracts
into the competitive bid.
A large quantity of subcontracting relationships will trigger
the antifraud rules because they suggest that the primary purpose
for the relationship is to allow the subcontractor to get paid for
referrals it makes to the contractor.
Your Brother's Keeper
The Medicare supplier standards also affect subcontracting
relationships. A contractor will always be responsible for the
behavior of its subcontractors when operating under the
This means subcontractors must comply with all of the supplier
standards and other rules that affect the contractor in its
Medicare obligations, whether under competitive bidding or in
general. Insurance requirements, physical office requirements,
hours of operation and all of the other supplier standards will
still pertain to the subcontractor.
(As an aside, note that a subcontractor does not currently have
to be accredited in order to participate in a subcontract
relationship for competitive bidding. Of course, the contractor
does have to be accredited to participate.)
Finally, the subcontract must be evaluated from the perspective
of the Medicare reimbursement requirements. Contractors are
ultimately responsible for billing and collecting, for
documentation (justification for medical necessity, accurate
completion of CMNs and other forms) and for all of the other
requirements necessary to be reimbursed for clean claims.
A subcontractor who does not maintain sufficient billing
accuracy or sufficient medical records to withstand a Medicare
audit may certainly incur some legal obligations to pay damages to
the contractor, if their contract allows such damages. However,
that will not protect the contractor from Medicare's wrath.
In other words, a contractor must be its “brother's
keeper.” A subcontract relationship will only be as strong as
the subcontractor's compliance with the rules.
I have created hundreds of health care subcontracts over the
years. Many of them fail. Most of these failures occur because the
subcontracting parties provide insufficient attention to nurturing
the relationship and allowing it to add value for both
But operated correctly, a subcontract is a wonderful tool for
expanding your market share and profitability, both with
competitive bidding and in general.
Neil B. Caesar is president of the Health Law Center (Neil B.
Caesar Law Associates, PA), a national health law practice in
Greenville, S.C., focusing on business opportunities and regulatory
issues for health care providers. He is also a principal with
Caesar Cohen Ltd., which offers compliance training, outsourcing
and consulting, and author of the Home Care Compliance Answer
Book series. Caesar may be reached by phone at 864/676-9075 or
email at firstname.lastname@example.org.
Materials in this article have been prepared by the Health
Law Center for general informational purposes only. This
information does not constitute legal advice. You should not act,
or refrain from acting, based upon any information in this
presentation. Neither our presentation of such information nor your
receipt of it creates nor will create an attorney-client
The rules require a supplier that wishes to pursue a
subcontracting arrangement to have in place, prior to its bid,
either a subcontract document or a letter of intent indicating the
supplier's plan for entering into a subcontract upon winning the
bid. So it makes sense to have a smart subcontract document ready
to launch as soon as bids are announced. The various legal and
reimbursement rules discussed in the accompanying article lead to
certain recommendations I would include in any subcontract
agreement. Most of the following drafting suggestions would apply
to all subcontract relationships, even those outside of competitive
The agreement should make clear the legitimate business purposes
for which it was created: product line support, personnel support,
geographic access support, etc.
The agreement should specify the services to be provided by the
subcontractor (order taking, warehousing, clinical support, product
If the subcontractor will be handling any initial customer
contact, the agreement should obligate the subcontractor to utilize
employees who are trained and experienced with those duties.
The agreement should make clear that the subcontractor is
obligated to comply with the contractor's policies and procedures,
including but not limited to standards of personnel qualification,
the quality of service to be provided and supplying requested
information that the contractor deems necessary to fulfill his
If the subcontractor will have significant customer contact, the
agreement may want to identify a particular subcontractor
representative to supervise operations, such as a branch
The agreement should obligate the subcontractor to comply with
any internal or external audits, as reasonably required by the
contractor, or pursuant to a payer demand.
The agreement should obligate the subcontractor to establish
some means of easily identifying employees with customer contact as
being representatives of the contractor.
The agreement should have the subcontractor to warrant that none
of its personnel, owners, etc., are subject to any legal actions,
sanctions or revocations from the Medicare program or any other
government reimbursement program. If there are any such problems,
they should be identified and evaluated.
Many contractors will want their subcontractors to promise not
to compete with them, at least for government business. Remember,
the competitive bidding rules do allow a subcontractor also to bid
as a supplier, even for the same product category and in the same
CBA that the subcontract covers. Therefore, a contractor may wish
to limit its relationships to those suppliers who promise not to
compete for Medicare business.
Similarly, a contractor may want to preclude a subcontractor
from competing after the termination of the relationship for some
period of time (say, a year or two). This would prevent a
subcontractor from “learning the ropes” by observing
the contractor during the first contract period and then submitting
a competing bid during the renewal process.
The contractor will want the subcontractor to provide certain
information on a regular basis. Examples include a listing of
revenues generated, collections received, outstanding receivables
by customer and payer source, etc.
The parties should agree to keep all fees confidential, as well
as any other financial information learned during the course of the
relationship. The fees should be clearly listed in the agreement,
perhaps as part of an exhibit to the document, so that it may be
periodically revised. I would not recommend that any fee
renegotiations be retroactive, so as to avoid the suggestion that
the retroactive fee adjustments are actually disguised rewards for
referrals. I would also recommend that fees not be adjusted
prospectively too frequently, so as to avoid the suggestion that
they reward referrals pursuant to ongoing tracking. Suppliers
should consider not changing the subcontracting fee agreement for
at least a year.
The agreement should set forth when fee invoices must be
submitted by the subcontractor and when the subcontractor will be
The agreement should set forth both parties' insurance
The parties may want to provide for indemnification against
substandard performance. This would obligate one party to indemnify
the other party when it provides services under the contract in a
substandard manner. Sometimes, this provision requires
indemnification for any problems, and sometimes they are limited to
negligent performance, reckless performance or intentional
The agreement should identify its duration. I recommend that any
agreement that ends in less than a year should not be renewed in
revised form for some period of time. This is to prevent the
suspicion that the renewed agreement (with different terms) is a
disguised way to reward previous or expected referrals.
The agreement should make clear when and how it may be
terminated. What constitutes a breach of contract should be
specified. Also, consider allowing the breaching party to fix the
problem within a certain timeframe in order to avoid
The parties will probably want to keep the terms of the
agreement, as well as any information learned during the course of
the agreement, confidential from third parties (other than the
government, which will have the right to see this material). The
scope of the confidentiality requirement and its duration should be
The agreement may also seek to preclude the parties from
stealing each other's personnel, referral sources, etc.
The agreement may want to provide for fights to be settled by
arbitration, mediation or some other form of alternative dispute
resolution. If so, be sure to check whether your state requires
this type of provision to be worded a particular way or flagged in