Avoiding Legal Pitfalls of HME Referrals

The lifeblood of any successful business is innovative marketing and building referral networks. However, unlike non-healthcare industries, the federal government has set out a number of restrictive guidelines that HME companies must follow.

Under the Medicare anti-kickback statute (42 U.S.C. § 1320a-7b), 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 beneficiary inducement statute (42 U.S.C. § 1320a-7a (a)), imposes civil monetary penalties upon a provider that offers or gives remuneration to any Medicare beneficiary 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. This statute does not prohibit the giving of incentives that are of “nominal value.” The OIG defines nominal value as no more than $10.00 per item or $50.00 in the aggregate to any one beneficiary on an annual basis. Nominal value is based on the retail purchase price of the item.

Under the telephone solicitation statute (42 U.S.C. § 1395m(a)(17)), a DME supplier may not contact a Medicare beneficiary by telephone regarding the furnishing of a covered item unless: 1) the beneficiary has given written permission for the contact; 2) a supplier has previously provided the covered item to the beneficiary and the supplier is contacting the beneficiary regarding the covered item, or; 3) if the telephone contact is regarding the furnishing of the covered item other than an item already furnished to the beneficiary, the supplier has furnished at least one covered item to the beneficiary during the preceding 15 months.

The Stark physician self-referral statute (42 U.S.C. § 1395nn)) provides that if a physician has a financial relationship with an entity providing designated health services (“DHS”), then the physician may not refer patients to the entity unless one of the statutory or regulatory exceptions applies. Designated health services include: 1) durable medical equipment; 2) parenteral and enteral nutrients; 3) prosthetics, orthotics and prosthetic devices and supplies, and; 4) outpatient prescription drugs, among others.

Safe harbor regulations issued under the anti-kickback statute provide “bright line” tests defining arrangements that do not violate the statute. If a business arrangement clearly falls within a safe harbor, then it is not violative of the anti-kickback statute. If the arrangement does not clearly fall within a safe harbor, then it must be examined in light of the anti-kickback statute and related court decisions to determine if it violates the statute.

A provider may submit to the OIG a request for an advisory opinion concerning a business arrangement that the provider has entered into or wishes to enter into in the future. In response, the OIG will issue an advisory opinion concerning whether or not there is likelihood that the arrangement will implicate the anti-kickback statute.

The OIG publishes Special Fraud Alerts and Special Advisory Bulletins that discuss business arrangements that the OIG believes may be abusive, and educate providers concerning fraudulent and/or abusive practices.

All states have enacted statutes prohibiting kickbacks, fee splitting, patient brokering, or self-referrals. Some state statutes apply only when the payor is a state health care program, while other statutes apply regardless of the identity of the payor.

Arrangements with Referral Sources

Preferred Provider Agreement (“PPA”): Pursuant to a PPA, the referral source (e.g., hospital or physician) must follow procedures to insure patient choice. If a patient expresses no preference for a DME company, then the referral source can recommend ABC Medical Equipment, Inc. (“ABC”), on the basis of the quality and timeliness of ABC’s services. The PPA is a simple document and allows either party to terminate it upon 30 days’ prior written notice.

Referral Source Leases Physical Space to ABC: ABC can establish a location on property owned by the referral source. ABC would enter into a lease agreement with the referral source that would comply with the Space Rental safe harbor to the Medicare anti-kickback statute. Among the other requirements, the lease payments would be fixed one year in advance and would not take into account any referrals from the referral source to ABC.

Medical Director Agreement: ABC can enter into a Medical Director Agreement with a referring physician (independent contractor). The arrangement will need to comply with the Personal Services and Management Contracts safe harbor to the Medicare anti-kickback statute, and with the Personal Services exception to Stark.

Joint Venture: As an example, a hospital and ABC would jointly own a DME operation (separate and apart from ABC’s operation) that would serve patients discharged from the hospital (subject, of course, to their right to choose a DME provider) as well as patients within the community. In structuring a joint venture with a referral source such as the hospital, it is critical that the joint venture not merely be a subterfuge to funnel remuneration to the referral source. If the joint venture is merely a vehicle to pay remuneration to the hospital, then the Medicare anti-kickback statute would be violated.

The safest way to structure a joint venture is to fit it within the Small Investment Interest safe harbor to the anti-kickback statute. Unfortunately, it is rare for a joint venture to meet the strict terms of this safe harbor and ABC and the hospital would likely be unable to do so. Therefore, in order to minimize the risk of governmental action against the joint venture, the terms of the OIG’s 1989 Special Fraud Alert must be met.

Purchase of Equity Interest in ABC: The referral source may purchase a minority equity interest in ABC. In doing so, the referral source will pay fair market value to ABC for the interest. The referral source will be entitled to receive profit distribution in accordance with its percentage ownership interest. If the referral source is a physician, then the parties will need to engage in a Stark analysis.

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 medical equipment (to be used in the home) and related services. The employee may also 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. Doing so will save the referral source money, which will likely constitute a violation of the anti-kickback statute.

Use of Employees: It is acceptable for an HME company to pay commissions, bonuses and other production-based compensation to bona fide full-time and part-time employees who market the company’s products and services. There is a specific exception to the Medicare anti-kickback statute for payments to bona fide employees.

If an HME company pays commissions, bonuses and other production-based compensation to an independent contractor to market to Medicare/Medicaid patients, then the Medicare anti-kickback statute will likely be violated.

Assume that the independent contractor wishes to market only to commercial/cash-paying patients and be paid on a commission basis. This is acceptable unless applicable state law says otherwise.

Use of Independent Contractors: As discussed above, an HME company cannot pay commissions, bonuses or other production-based payments to independent contractors for marketing to Medicare/Medicaid patients.

Approaching Referral Sources: It is acceptable for the HME company to call on physicians, hospital discharge planners, home health agencies, and other referral sources in order to market the company’s products and services. Under federal law, the HME company cannot directly or indirectly give something of value to the referral sources for referrals. Stark allows an HME company to furnish non-cash items (such as meals) to a physician so long as the cost of the meals, in the aggregate, does not exceed $373 over 12 months. Assume that the referral source will refer only commercial/cash-paying customers to the HME company. As to whether the HME company can give anything of value to the referral source will be determined by state law.

Mail-Outs: On condition that the HME company secures a mailing list in such a way that HIPAA is not violated (e.g., the list comes from a non-covered entity), then the company can mail out promotional literature to the individuals on the list.

Promotional Items to Customers and Potential Customers: The HME company 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 HME company 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. As to whether the HME company can offer items to commercial/cash-paying customers and, if so, the value of the items depends on the applicable state statutes.

Health Fairs, Luncheons, Kiosks and Open Houses: The HME company can participate in local health fairs. Similarly, the company can put on a short program during lunch at a senior citizens’ center, at which time the company can distribute promotional literature. The HME company can place a kiosk in a mall that promotes the company’s products and services. When appropriate (e.g., opening a new location), the HME company can hold an open house. During the open house, it is appropriate for the HME company to conduct a drawing in which the prize is something like an iPad. Even though the iPad has a value in excess of $10, the chance of a person winning the iPad is very small. In other words, the “chance” of winning the iPad is well below $10.