So You Want to Subcontract?

When CMS published its rules for competitive bidding, the possibility that one supplier could subcontract its services to another supplier in order to

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

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