Don’t Lose Sleep Over Sleep Testing

Obstructive sleep apnea (OSA) is a medical condition recognized by the medical community as affecting a wide swath of our society. OSA is not limited to the elderly. It affects adults of all ages. Commercial insurers and Medicare pay for sleep tests and equipment like CPAPs and supplies (masks, tubing and filters) that are used with CPAPs.

Sleep labs conduct OSA tests on patients. These tests fall into two categories: overnight attended polysomnographies (i.e., the patient spends the night at a facility) and home sleep tests (HSTs), where the patient uses an HST device in their home.
The sleep lab will transmit the test data to a physician who specializes in sleep. The sleep physician will interpret the test data, and if the interpretation indicates that the patient has OSA, the patient’s treating physician will likely order a CPAP for the patient.

This is where durable medical equipment (DME) suppliers come in. The DME supplier will provide the CPAP and disposables and  bill the third-party payor, whether that’s Medicare or a commercial insurer.

It is not uncommon for a DME supplier and a sleep lab to work together in the provision of therapeutic equipment to patients who test positive for OSA. For example, the supplier and sleep lab may enter into a loan closet arrangement. Such an arrangement is also known as a consignment or stock and bill arrangement. In such an arrangement, the DME supplier will store CPAPs and disposables at the sleep lab facility. If a patient tests positive for OSA, and if the treating physician orders a CPAP for the patient, and if the patient chooses to obtain a CPAP from the DME supplier that has inventory stored at the sleep lab facility, the sleep lab employee will pull the CPAP or disposables out of the “closet” and hand them to the patient.

In addition to handing the CPAP/disposables to the patient, a sleep lab employee can spend time showing the patient how to use the CPAP and clean and change out the disposables. The DME supplier may want to compensate the sleep lab for the education or set-up services. If the DME supplier is compensating the sleep lab for this, and if Medicare covers at least some of the patients, the supplier needs to be aware of the federal laws governing such an arrangement. This article focuses on one of the laws: the Medicare CPAP payment Prohibition.

Medicare CPAP Payment Prohibition

The Medicare CPAP Payment Prohibition (42 C.F.R. § 424.57) states: “No Medicare payment will be made to the supplier of a CPAP device if that supplier, or its affiliate, is directly or indirectly the provider of the sleep test used to diagnose the beneficiary with obstructive sleep apnea. This prohibition does not apply if the sleep test is an attended facility-based polysomnogram.”

A few definitions:

• An “affiliate” is a “person or organization that is related to another person or organization through a compensation arrangement or ownership.”
• A “provider of the sleep test” is an “individual or entity that directly or indirectly administers and/or interprets the sleep test and/or furnishes the sleep test device used to administer the sleep test.”
• Although the law is not entirely clear on this point, the safest course of action is to construe the prohibition as being applicable to both traditional Medicare patients and Medicare Advantage patients.

The prohibition’s purpose is to ensure that the CPAP device is medically necessary by preventing the CPAP supplier’s financial interest from creeping into the diagnosis and treatment. The Centers for Medicare & Medicaid Services explained that it believed “that Medicare beneficiaries and the Medicare program are vulnerable if the provider of a diagnostic test has a financial interest in the outcome of the test itself. This creates the incentive to test more frequently or less frequently than is medically necessary and to interpret a test result with a bias that favors self-interest.” In the final rule, CMS acknowledged that the payment prohibition was implemented to account for close cases.

Important Takeaways

The language of the prohibition leaves little room for interpretation. DME suppliers need to be aware of the following:

1.  Hospital exemption: Many hospitals own sleep labs. Some hospitals have expressed their opinion that the prohibition does not apply to hospital-owned sleep labs. Their rationale is that because of the inherent compliance guardrails hospitals have in place, the prohibition does not apply. Such an opinion is incorrect. CMS and the Office of the Inspector General have made it clear that the prohibition applies to all sleep labs, regardless of their ownership.

2.  Medicare claims: There is case law suggesting that if a DME supplier submits a Medicare claim, in which such claim arises out of an arrangement that violates the prohibition, the claim becomes a false claim under the federal False Claims Act (FCA). This becomes particularly relevant to DME suppliers in the context of whistleblower lawsuits. If a person (e.g., an employee of a DME supplier or sleep lab) becomes aware of an arrangement that violates the prohibition, the person can become a whistleblower and sue the DME supplier under the FCA. The suit will be in the name of the whistleblower… and in the name of the United States.

3.  Mergers & acquisitions: Assume that ABC Medical Equipment, Inc. has a successful CPAP and supply business and a healthy $2 million earnings before income, taxes, depreciation and amortization (EBITDA). ABC is negotiating with XYZ Private Equity for XYZ to purchase the stock of ABC at five times  EBITDA ($10 million). Assume that during due diligence, XYZ determines that a big portion of ABC’s gross revenue arises out of an arrangement that violates the prohibition. XYZ will either walk away or substantially reduce ABC’s EBITDA and insist that a large portion of the purchase price be held back until sometime after closing.

A classic example of an arrangement that violates the prohibition is as follows:

ABC has a “loan closet” arrangement with a sleep lab.

A sleep lab employee spends about 45 minutes with each patient who chooses to take home an ABC CPAP. During that 45-minute period, the sleep lab employee shows the patient how to use the CPAP and clean and replace the disposables.

ABC compensates the sleep lab for the time spent by its employees in educating patients.

The sleep tests conducted by the sleep lab are both overnight attended polysomnographies and HSTs.

The sleep lab refers ABC to all patients who choose to obtain their CPAPs or disposables from the loan closet. These patients include Medicare patients.

Because ABC is compensating the sleep lab, the two entities are “affiliates” as defined by the prohibition. Because ABC’s affiliate (the sleep lab) is the provider of the HST, ABC’s submission of claims to Medicare for patients qualified by the HSTs violates the prohibition.

The prohibition has nothing to do with the federal anti-kickback statute or the federal physician self-referral statute (also known as the Stark law). If an arrangement complies with a safe harbor to the anti-kickback statute and complies with an exception to Stark, such compliance does not relieve the DME supplier from liability under the prohibition.