Jeff Baird on Competitive Bidding Deals: Don’t Ignore the Legal Pitfalls

AMARILLO, Texas — “As an industry, we have gone down the
proverbial rabbit hole into Alice in Wonderland,” said health care
attorney Jeff Baird of Brown & Fortunato. “We are having to
deal with a program — competitive bidding — that
is so illogical it defies reason. Justifiably so, suppliers serving
the first nine CBAs are scrambling.

“Legitimate contract suppliers are entering into subcontract
agreements in order to fulfill their obligation under the
competitive bid contracts. Contract suppliers that should never
have been awarded a contract are likewise entering into subcontract
agreements, although their motivations are less noble. These
contract suppliers cannot fulfill their competitive bid contract
obligations; they need a subcontractor to do it for them.

“Then we have the legitimate suppliers that were not awarded
competitive bid contracts. In order to survive, they are taking one
of two approaches: They are becoming subcontractors or they are
attempting to purchase contract winners.”

In short, said Baird, “Competitive bidding is forcing a number
of suppliers into shotgun marriages. In their rush to enter into
arrangements, a number of suppliers are ignoring, or at least are
glossing over, the legal pitfalls pertaining to these
arrangements.”

Check out Baird’s answers to the following questions to make
sure you understand what those pitfalls might be.

Question: Can a contract supplier sell or transfer its
competitive bid contract?

Answer: No.

Question: ABC Medical was awarded a competitive bidding
contract for oxygen in Kansas City. However, ABC has no connection
with Kansas City. ABC does not have a physical location in Kansas
City and has no oxygen patients in Kansas City. XYZ Medical has
been an oxygen supplier in Kansas City for years. Unfortunately,
XYZ was not awarded a contract.

Can XYZ enter into a partial asset purchase agreement to
purchase ABC’s Kansas City oxygen business and then, in turn, ask
the CBIC to award an oxygen contract to XYZ for Kansas City? Would
the answer to the question be different if ABC has a small
connection with Kansas City (e.g., no physical location but some
oxygen patients)? Would the answer to the question be different if
ABC has a noticeable connection with Kansas City (e.g., multiple
oxygen patients and/or other DME patients and/or a physical
location)?

Answer: Although legal guidelines do not
expressly discuss 100 percent stock sales and 100 percent asset
sales, the guidelines indicate that these types of sales are
permitted. The guidelines are less clear regarding the partial sale
of assets, although the guidelines do not appear to prohibit
partial asset sales. Communications with the CBIC also indicate
that partial asset sales are not prohibited. However, as stated
above, the guidelines are clear that a competitive bidding
contract cannot be sold or transferred.

Whether a sale is a stock sale or an asset sale, the purchaser
cannot assume any of the seller’s obligations under the competitive
bidding contract (which the assumption will be in the form of a new
contract being issued to the purchaser) unless the purchaser is
approved by the CBIC. The terms of the sale will not initially be
disclosed to the CBIC nor to the NSC. However, if the CBIC asks for
the terms of the sale and concludes that the parties are, in
reality, attempting to transfer a competitive bidding contract
(under the guise of a partial asset sale), then the CBIC may be
inclined to take action against the buyer and/or the seller.

It is for this reason that when there is a partial sale of
assets, the parties need to strive for the transaction to include
as many hard assets as possible. In other words, it is important
that the transaction truly be a partial sale of assets and not a
subterfuge simply to transfer a competitive bidding contract.

This is new ground for all of us. All we have are the published
guidelines. To our knowledge, the CBIC has not made any decisions
regarding stock or asset sales, so we do not know how aggressive or
passive the CBIC will be. Looking at the “ABC-XYZ” example, if the
CBIC does not approve XYZ as a contract supplier and the asset sale
is terminated or rescinded, then there should be no adverse effect
on ABC and XYZ unless the CBIC asks for the specifics regarding the
proposed asset sale and concludes that the attempted asset sale was
simply a subterfuge to transfer the contract from ABC to XYZ.

If the CBIC does approve XYZ as a contract supplier, then there
should be no adverse effect on ABC unless: The CBIC determines that
the sale of ABC’s Kansas City oxygen business to XYZ will adversely
affect ABC’s ability to service Medicare beneficiaries under other
competitive bidding contracts awarded to ABC; or the CBIC requests
the specifics of the sale and determines that the sale is, in
reality, an attempt to transfer a competitive bidding contract. And
there should be no adverse effect on XYZ unless the CBIC requests
specifics of the sale and determines that the sale is, in reality,
an attempt to transfer a competitive bidding contract.

What do I mean by “adverse effect?” One example would be for the
CBIC to terminate all of the competitive bidding contracts awarded
to ABC. Another example would be for the CBIC not to approve XYZ as
being qualified to be awarded a competitive bidding contract in the
event that XYZ enters into a bona fide agreement to purchase the
stock or assets of a contract supplier.

The challenge is this: We just don’t know what the CBIC’s
approach will be. We have no track record with the CBIC. The
message is this: While it is OK for a non-contract supplier to
purchase 100 percent of the stock or assets from a contract
supplier, and while it appears to be acceptable for a non-contract
supplier to purchase some (but not all) of the assets of a contract
winner, the partial asset purchase must be legitimate (there need
to be “hard assets” involved). The partial asset purchase cannot be
a sham intended simply to transfer a competitive bidding
contract.

Question: Are there similar legal pitfalls when it comes
to subcontract agreements?

Answer: Yes. At the end of the day, 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 contained 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.

Most subcontractors will be suppliers that were not awarded a
competitive bidding contract and want to preserve their
relationship with referral sources. These subcontractors will end
up referring (or arranging for the referral of) Medicare
beneficiaries to the contract suppliers. Under the subcontract
agreement, the contract supplier will pay compensation to the
subcontractors for services other than referring patients.
Nevertheless, the parties will need to contend with the “one
purpose” test.

What the subcontract agreement cannot provide is percentage
compensation. In other words, the agreement cannot say that the
contract supplier will pay 75 percent of the payments (that the
contract supplier receives from Medicare) to the subcontractor. The
safest approach is for the contract supplier 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
(e.g., $75 per delivery, $125 per service call, etc.). The problem
with a fee schedule is that the money paid by the contract supplier
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 (e.g., the contract supplier purchases the inventory
from the manufacturer as opposed to purchasing the inventory from
the subcontractor and/or the subcontractor provides services to
patients of the contract supplier who are not referred by the
subcontractor).

Frankly, it angers me that I even have to discuss these kickback
problems. Competitive bidding is forcing suppliers into subcontract
agreements, and kickback issues are inherent in these types of
agreements. The emotional side of me wants to tell suppliers to
enter into whatever subcontract agreement suits them the best and
dare the government to question the subcontract agreement on a
kickback basis. However, my emotional side is quickly overpowered
by my legal side — and my legal side requires me to advise
suppliers of the potential kickback risks that are inherent with
subcontract agreements.

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Jeffrey S. Baird, Esq., is chairman of the Health Care Group
at Brown &
Fortunato, P.C., a law firm based in Amarillo, Texas. He
represents pharmacies, infusion companies, home medical equipment
companies and other health care providers throughout the United
States. Baird is Board Certified in Health Law by the Texas Board
of Legal Specialization. He can be reached at 806/345-6320 or
[email protected].