Referrals are the lifeblood of HME providers, but federal and state statutes establish careful parameters around these relationships

Under the Medicare antikickback statute, it is a felony for a provider to knowingly or willfully offer or pay any remuneration to induce a person to refer a person for the furnishing or arranging for the furnishing of any item for which payment may be made under a federal health care program, or the purchase or lease or the recommendation of the purchase or lease of any item for which payment may be made under a federal health care program. The Stark physician self-referral statute provides that if a physician has a financial relationship with an entity providing designated health services, then the physician may not refer patients to the entity unless an exception is met. Designated health services include durable medical equipment. Two of the exceptions are (i) the noncash/noncash equivalent expenditure exception and (ii) the Personal Services exception. The noncash/noncash equivalent exception states that a provider can expend up to $380 per year on noncash/noncash equivalent items for a referring physician. The Personal Services exception is similar to the Personal Services and Management Contracts safe harbor to the antikickback statute. Among other requirements, the compensation to the physician (i) must be for legitimate (not “made up”) services, (ii) must be fixed one year in advance (e.g., $12,000 over the next 12 months), and (iii) must be fair market value. The beneficiary inducement statute imposes penalties upon a provider that offers or gives remuneration to any Medicare beneficiary that the offerer 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. This statute does not prohibit the giving of incentives that are of “nominal value.” The Office of Inspector General (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. All states have enacted statutes prohibiting kickbacks, fee splitting, patient brokering, or self-referrals. Some state statutes apply only when the payer is a state health care program, while other statutes apply regardless of the identity of the payer. Additionally, some states have physician self-referral statutes that are similar to Stark.

Building a Referral Network

Providing Gifts and “Other Things of Value” to Physicians—The DME supplier can provide gifts, entertainment, trips, meals and similar items to a physician so long as the combined values of all of these items do not exceed $380 in a 12-month period. The DME supplier can pay the physician for legitimate services so long as the arrangement complies with the Personal Services and Management Contracts safe harbor and the Personal Services exception to Stark. Joint Venture with a Hospital—Assume that ABC Medical Equipment Inc. is local DME supplier. Assume that St. Mary’s Hospital is a local hospital that wants to get into the DME business. The two entities decide to form a joint venture. Such a joint venture can be structured in different ways. Here are some concrete steps that can be taken to set up one type of joint venture.

  • ABC will initially set up and own 100 percent of St. Mary’s Medical Equipment, Inc. (“SMME”).
  • SMME will obtain a surety bond, accreditation, state licensure, and a PTAN.
  • When a PTAN is issued to SMME, then SMME will sell stock to St. Mary’s that will result in St. Mary’s owning an equity interest in SMME. The purchase price for the stock will be fair market value.
  • SMME will need to have operational responsibilities and financial risk. For example, SMME will (i) own delivery vehicles, (ii) employ delivery drivers, (iii) purchase and maintain inventory and (iv) employ patient/documentation intake personnel. ABC can provide some services to SMME such as billing services and after-hour emergency repair services; SMME will need to pay fair market value compensation to ABC for the services.
  • Assume that St. Mary’s owns 25 percent of SMME. Profit distribution to St. Mary’s will be based on 25 percent of net profits. St. Mary’s will have no obligation to refer patients to SMME. In the event that St. Mary’s does refer patients to SMME, then St. Mary’s will need to insure patient freedom of choice.

Consignment Arrangement with a Hospital Emergency Room—In a typical consignment arrangement with a hospital ER, (i) the DME supplier will place orthotic products (e.g., braces) in a “closet” in the hospital ER; (ii) the physician will order a product, such as a brace, for the patient to wear home … and utilize in the home; (iii) at the time of discharge, the hospital staff will pull the brace out of the consignment “closet” and place it on the patient; (iv) the patient will wear the brace home; and (v) the DME supplier will collect the required documents and bill for the brace. 42 CFR § 411.15(m)(1), the outpatient bundling regulation, provides that “any service furnished to an inpatient of a hospital or to a hospital outpatient . . . during an encounter . . . by an entity other than the hospital” is excluded from Medicare coverage, subject to certain exceptions. However, in an amendment to this regulation, CMS stated in the preamble to the Notice of Proposed Rulemaking the following: Sometimes a hospital may furnish an item or services for which a patient will have a continuing need. For example, a hospital may furnish a DME item such as a wheelchair…DME is defined under section 1861(n) of the Act as equipment used in the patient’s home or in another institution used as his home other than a hospital or skilled nursing facility (SNF). By definition, DME is not something that is provided for use in the hospital setting. Therefore, we do not believe that the DME benefit provides for any item or service that is expected to be used by the patient while in the hospital as an inpatient or outpatient…The covered Part B benefit for DME as described under section 1861(n) of the Act is intended for equipment used in the home, so a hospital that furnishes DME to its patients is not providing a hospital service to its patients, but is acting in the capacity of a supplier of DME, not a provider of hospital services. For these reasons, we will not require bundling of DME for hospital patients. Depending on the specific product dispensed, a credible argument may be made that (i) the outpatient facility patient will have a continuing need for the orthotic product once the patient returns home and (ii) it is permissible for the DME supplier to bill for an orthotic product dispensed to an outpatient facility patient. This argument is further supported by Chapter 20, Section 110.3 of the Medicare Claims Processing Manual, which allows a DME supplier to deliver DME, prosthetics and orthotics (but not supplies) to an inpatient up to two days before discharge if certain conditions are met. Assisting Hospitals in Preventing Readmissions—Hospitals, like all other providers, are being squeezed by reimbursement cuts. Hospitals need to protect their revenue stream and cut costs. One way to accomplish this is to prevent readmissions for diseases covered by the Hospital Readmissions Reduction Program (HRRP). If a patient is readmitted after discharge within a certain period of time, for a particular disease, then the hospital can be subjected to future payment reductions from Medicare. So hospitals are beginning to contract with other providers to monitor/work with discharged patients so that they are not readmitted soon after being discharged. In 2013, the OIG published an advisory opinion (AO No. 13-10) that addresses the assistance that other providers can offer to a hospital in order to prevent readmissions. As an increasing number of DME suppliers enter into arrangements with hospitals to prevent readmissions, the AO provides valuable guidance. In concluding that it would not impose sanctions, the OIG stated: (i) the arrangement was unlikely to lead to increased costs or overutilization of Federal reimbursement serves; (ii) the services could save money for the Federal government by decreasing readmissions; (iii) the services were not separately reimbursable by the Federal government; (iv) the arrangement was unlikely to interfere with clinical decision-making; (v) the Applicant would implement safeguards to prevent the arrangement from being used to increase drug sales by the manufacturer; (vi) the arrangement was unlikely to result in inappropriate patient steering; and (vii) the hospital was compensating the Applicant for the services. Medical Director Agreement—ABC can enter into a Medical Director Agreement with a referring physician. The arrangement will need to comply with the Personal Services and Management Contracts safe harbor and with the Personal Services exception to Stark. Loan/Consignment Closet—ABC may place inventory on the premises of the referral source. The inventory must be for the convenience only of the referral source’s patients and the referral source cannot financially benefit, directly or indirectly, from the inventory. It is important that the referral source ensure patient choice. Employee Liaison—ABC may designate an employee to be on the referral-source premises for a certain number of hours each week. The employee may educate the referral-source staff regarding DME and related services. The employee may work with a patient, after a referral is made to ABC (but before the patient leaves the referral source’s premises), in order for there to be a smooth transition when the patient goes home. The employee liaison may not assume responsibilities that the referral source is required to fulfill. Promotional Items to Customers and Potential Customers—The DME supplier can offer an item of nominal value (i.e., retail value of not more than $10) to prospective customers covered by a government health care program. Over a 12-month period, the supplier may not give items to any one prospective customer (covered by a government health care program) that have a combined retail value greater than $50. Health Fairs, Luncheons, Kiosks, and Open Houses—The DME supplier can participate in local health fairs, can put on a short program during lunch at a senior citizens’ center and can place a kiosk in a mall that promotes the supplier’s products and services. When appropriate, the supplier can hold an open house. During the open house, it is appropriate for the supplier to conduct a drawing in which the prize is something like an iPad. Even though the iPad has a value in excess of $10, a person’s chance of winning is very small.