How to keep going if the worst happens
by Jeffrey S. Baird
December 27, 2011

Editor's note: A condensed version of this article appears in the January 2012 edition of HomeCare magazine.

Let us look at the worst case scenario. Despite diligent efforts to bid in one or more product categories, an HME provider is not awarded a competitive bid contract. That means the provider can’t bill Medicare for products covered by competitive bidding. There is no good way to paint this scenario in a positive light. As suggested in the old Charles Schwab commercial, despite putting lipstick on a pig, it is still a pig. Nevertheless, the losing bidder must “play the hand that has been dealt.” This article is about responsive steps that an HME provider can take if he or she is not awarded a competitive bid contract.

Continue as a ‘Grandfathered’ Provider

There is a “grandfathering” process for:
• oxygen equipment and supplies
• inexpensive or routinely-purchased items furnished on a rental basis
• items requiring frequent and substantial servicing
• capped rental items furnished on a rental basis

Only HME providers that began furnishing these grandfathered items before implementation of competitive bidding may be eligible to participate as a grandfathered supplier.

Beneficiaries may choose to continue renting an item from the grandfathered provider, on condition that the grandfathered provider is willing to continue furnishing the item under the same terms and prices as the provider who was awarded the contract. The beneficiary may choose to switch from a grandfathered provider to a contract provider at any time. If an HME provider chooses to be a grandfathered provider, then the provider must do so for all beneficiaries who request the services.

For items requiring frequent and substantial servicing and oxygen equipment, the grandfathered provider will be paid the bid payment amount. For capped rental items and inexpensive or routinely-purchased items, the grandfathered provider will be paid the lower of the actual charge or rental fee schedule amount. Grandfathering is also applicable to HME providers who lose contracts in a subsequent competitive bidding period.

Subcontract with a Contract Provider

This can be workable arrangement, but it is important that the parties avoid legal pitfalls. A subcontract agreement cannot violate the Medicare anti-kickback statute, which states that a health care provider cannot give anything of value to a person or entity in exchange for referring Medicare patients or in exchange for arranging for the referral of Medicare patients.

In addition, there is the “one purpose” test found in court decisions. This test provides that if “one purpose” behind payment to a referral source is to induce referrals, then the anti-kickback statute is violated even if the referral source provides legitimate non-referral services and the payment is the fair market value equivalent of the services.

A good example of subcontractor arrangement might involve a provider—who was not awarded a contract—who wants to preserve relationships with referral sources. The provider may seek to become a subcontractor for a provider who was awarded a contract. The subcontractor will end up referring—or arranging for the referral of—Medicare beneficiaries to the contract provider. Under the subcontract agreement, the contract provider will pay compensation to the subcontractor for services other than referring patients.

Nevertheless, the parties must contend with the “one purpose” test. That means the subcontract agreement cannot provide percentage compensation. In other words, the agreement cannot say that the contract provider will pay, for example, 75 percent of Medicare payments to the subcontractor. The safest approach is for the contract provider to pay a fixed annual fee to the subcontractor and for the annual fee to be the fair market value equivalent of the subcontractor’s services. Such a compensation arrangement is a key element of the Personal Services and Management Contracts safe harbor to the anti-kickback statute.

A middle ground approach—one that entails a kickback risk—is for the compensation to be on a fee schedule basis such as $75 per delivery or $125 per service call. The problem with a fee schedule is that the money paid by the contract provider varies based on the volume of business generated by the subcontractor. If the parties adopt this middle ground approach, then the risk can be reduced by other elements of the subcontract arrangement, such as the contract provider purchasing inventory from a manufacturer as opposed to purchasing the inventory from a subcontractor. Another way to reduce risk is for the subcontractor to provide services to patients of the contract provider who are not referred by the subcontractor.

Products and Services Not Subject to Competitive Bidding

Let us put things into prospective. Medicare is broke. The program will only be able to pay a small percentage of the total demand for HME. Speaking of demand, in the years ahead it will go through the roof. There are 78 million baby boomers, people born between 1946 and 1964. In general, boomers are:
• Retiring at the rate of 10,000 per day
• Will live to be 85 years old
• Have bodies that will start breaking down at age 70
• Expect to have a good quality of life until they die
• Will want to live at home.
• And will be willing to pay whatever is necessary to have a good quality of life

I call this the “irresistible force”—increased demand—meeting the “immovable object”—a broke Medicare. For HME providers, this means there is a huge, relatively untapped market for products and services not covered by Medicare. For example, an HME provider may install wheelchair lift systems in vans and other vehicles. Along the same vein, the provider may install wheelchair ramps outside and inside a home. The provider may install electronic seats and/or lift mechanisms that can move a person up or down stairs, or from room to room. An HME company may install hand railings, panic “pull cords” and similar types of home aids. A provider can remodel bathrooms and other portions of the home to make it more usable for an aging resident.

Cash Sales

Increasingly, HME providers are moving into the “cash and carry” market. That is, providers are striving to sell items to non-Medicare customers who want to pay cash. Because of the cost-savings resulting in not having to submit claims to Medicare, HME providers price cash products less than the Medicare allowable price for the same items. In so doing, however, it is important that the provider adhere to the HHS Office of Inspector General’s guidance addressing discounts to cash customers.

First, consider that prices set for cash sale of products could be viewed by the government as having a relationship to claims submitted to Medicare for the same products. It’s a legally unclear area, but worth exploring.

Consider that a provider is prohibited from charging Medicare “substantially in excess” of the provider’s “usual charges,” unless there is good cause. Generally, “unusual circumstances or medical complications requiring additional time, effort, expense” are considered good cause. But regulations do not give clear guidance on what constitutes “substantially in excess” or “usual charges.”

There have been some efforts by the OIG to define “substantially in excess” and “usual charges.” The most recently proposed rules contemplate the “usual charge” to be either the average or median of a provider’s charges to payers other than Medicare (and some others). Under those proposed rules, an HME provider’s usual charge should not be less than 83 percent of the Medicare fee schedule amount, or up to a 17 percent discount from the Medicare fee schedule. There would be an exception for good cause, which would allow a company’s usual charges to be less than 83 percent of the Medicare fee schedule, if the company can prove unusual circumstances requiring additional time, effort or expense, or increased costs of serving Medicare and Medicaid beneficiaries.

The proposed rules would include charges of affiliate companies into the calculation of a provider’s usual charges. An affiliated company is any entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the HME company. The proposed rules explicitly exclude fees set by Medicare, state health care programs, and other federal health care programs, except TriCare.  By implication, charges not specifically excluded will be included. However, CMS declined to promulgate the proposed rules into a final rule.

While no final rule has been handed down by the government, the Sept. 15, 2003, proposed rules that were later withdrawn give the clearest picture of how the government views selling Medicare-covered items for cash at a discount off the Medicare allowable price.

For more information, see these federal codes…
42 U.S.C. § 1320a-7(b)(6)(A); 42 CFR § 1001.701(a)(1)
42 CFR § 1001.701(c)(1)
42 CFR § 1001.701(a)

…and these Federal Register entries:
68 FR 53939 (Sept. 15, 2003)
72 FR 33430, 33432 (June 18, 2007) 

Long-Term Care Facilities

Most residents in long-term care facilities may receive HME reimbursed by Medicare Part B as if those patients were living in their own homes. For those long-term care facilities that are not paid a per diem rate for the patient’s care, HME providers may either bill Medicare directly for provision of the equipment, or, in some cases, facilities may choose to contract with the HME provider to provide the equipment directly to the facility, and the facility will then provide it as a benefit to residents.

HomeCare, January 2012