Out of the (Loan) Closet

Loan closets, also known as consignment closets or stock-and-bill arrangements, allow a home care company to place on premises with a hospital, physician office, etc., DME or oxygen equipment and supplies for distribution to certain patients upon departure from the provider’s location.

Loan closets can be quite useful in many situations. Recent news events, however, emphasize that CMS and the OIG do scrutinize these relationships and will go after any loan closet arrangements that don’t meet their standards.

The first news event occurred in November 2008, when the OIG issued an Advisory Opinion that permitted two HME suppliers to place equipment in hospital supply closets and to have licensed personnel either onsite or on-call to train patients in the use of the equipment. This opinion supplemented an April 26, 2002, opinion that also allowed a closet arrangement onsite in hospitals, clinics and physician offices.

The second news event came on Aug. 7, 2009, when CMS issued Transmittal 297 to the DME MACs stating that consignment closets in the offices of a physician, nonphysician practitioner or other health care professional constituted in most situations a violation of the Supplier Standards. CMS’ theory seemed to be that loan closets constituted evidence there were multiple providers operating out of the same practice location. CMS characterized this directive as a technical clarification, not as a regulatory change, which would require public notice and time for comment.

Finally, on Sept. 1, CMS issued Transmittal 300, which rescinded Transmittal 297 without substantive comment.

These three news events tell us some important facts about loan closets. First, they will pass muster under the anti-fraud rules if they are structured and operated correctly. Second, CMS is wary of consignment closets when utilized outside of a hospital or long-term care facility, etc. Third, CMS’ wariness may suggest that many loan closets operate too sloppily or too aggressively, creating the danger of program abuse, patient confusion or fraud.

Let’s look at the loan closet arrangements that passed muster in the 2002 and 2008 Advisory Opinions. In both scenarios, the home care companies proposed placing an inventory of their equipment onsite at certain provider locations. In both cases, the equipment was to be distributed to patients who were bound for home, where the physicians had ordered the equipment for home use. Also, no remuneration was to be exchanged in connection with the arrangement. The closet would not be considered space to be leased to the home care company, and no rent would be paid.

Further, the loan closets were only used for patients who already had elected to obtain the equipment from the particular home care company. In other words, there is a specific sequence of events that is necessary for this sort of arrangement to withstand scrutiny:

1. The referral source/closet owner identifies the need for equipment or services from the supplier; then
2. The patient is informed of this need, and given clear choice as to supplier; the existence of the loan closet may be mentioned at this time; then
3. The patient makes his or her choice; then
4. The supplier is contacted, and necessary information is communicated to verify coverage and establish the supplier-patient relationship; if the supplier has arranged for onsite or on-call personnel, they may initiate contact with the patient at this time; then
5. If the patient chooses the supplier with the loan closet, the closet’s equipment may be utilized prior to the patient’s departure from the premises.

Depending on the nature of the loan equipment, the supplier may establish the closet equipment as belonging to the patient. Alternatively, the closet equipment may retain its status as a loaned item and then will be swapped out for new equipment at the time of the supplier’s initial in-person interaction with the patient.

CMS’ discomfort with some loan closets could arise because many providers/closet owners do not follow (and document) the sequence of events as carefully as they should.

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Neil Caesar is president of the Health Law Center (Neil B. Caesar Law Associates, PA), a national health law practice in Greenville, S.C. He also is a principal with Caesar Cohen Ltd., which offers compliance training, outsourcing and consulting and the author of the Home Care Compliance Answer Book. You can reach him at 864/676-9075 or [email protected].