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Understanding using offshore subcontractors
by Jeffrey S. Baird

The term “subcontract” is a fairly simple term. A subcontract arises when one company (ABC, Inc.) pays another company (XYZ, Inc.) to perform services. This is the classic 1099 independent contractor arrangement. For example, if Vivian’s Nursing Home contracts with DEF Lawn Mowing Service to mow the grounds of Vivian’s, then DEF becomes a subcontractor of Vivian’s. More to the point, if a durable medical equipment (DME) supplier hires a billing company to submit claims for the supplier, then the billing company becomes a subcontractor of the DME supplier. 

Let us look at subcontracting in the context of Medicare Advantage (MA) and Medicaid Managed Care (MMC) contracts. I will collectively refer to these contracts as third-party payer (TPP) contracts. Approximately 50% of Medicare beneficiaries are covered by MA and approximately 70% of Medicaid patients are covered by MMC. This means that most DME suppliers must enter into multiple TPP contracts to have access to their customers. 

It is important for the DME supplier to review its TPP contracts to determine what the contracts say about subcontracting.

  • A TPP contract may say nothing about subcontracting, in which case the DME supplier is free to enter into subcontracts.
  • A TPP contract may say that the DME supplier can enter into subcontract agreements on the condition that the supplier gives advanced notice to the TPP.
  • A TPP contract may say that the DME supplier can enter into subcontract agreements on the condition that the TPP approves the subcontractors in advance.
  • A TPP contract may say that the DME supplier can enter into subcontract agreements on condition that not more than e.g., 20% of the supplier’s customers may be served by subcontractors.
  • A TPP contract may prohibit the DME supplier from entering into subcontracts.

The reason that the DME supplier needs to comply with the subcontracting provisions of the supplier’s TPP contracts is that the supplier wants to avoid the scenario in which it has submitted multiple claims to the TPP (and has been paid by the TPP for the claims) in violation of the contract. The DME supplier also needs to be aware that its TPP contracts likely incorporate “by reference” the TPP’s policies, procedures, claims manuals, etc. These will not be contained in the contract itself—but rather—will have to be accessed elsewhere.

Now let us narrow our focus to “offshore subcontractors.” Instead of the subcontractor being located somewhere like Des Moines, Iowa, the subcontractor will be located in, for example, Mumbai or Manila. Many U.S. businesses (both health care related and non-health care related) contract with offshore subcontractors for BPO, or business, process, outsource services. BPO services are sometimes referred to as “back office” services. The motivation for doing so is to reduce costs. 

As will be discussed, below, it is permissible for DME suppliers to use offshore subcontractors, but as is often the case, the “devil is in the details.”

Federal Guidelines

There are no federal laws that prohibit the use of offshore subcontractors. During enrollment and revalidation, or when there is a change in such an arrangement, the DME supplier may have to disclose the existence of offshore subcontractors.
In 2007 and 2008, the Centers for Medicare & Medicaid Services (CMS) issued several memoranda to Part C sponsors concerning the use of offshore subcontractors. According to the memoranda:

  • Sponsors are to report specific offshore subcontractor information and complete attestations regarding the protection of personal health information (PHI).
  • Sponsors may, in turn, pass these requirements on to network providers and suppliers.
State Guidelines

In 2010, CMS issued a memorandum to state Medicaid directors that prohibits state health plans from providing payments (for items and services) to a financial entity located offshore. This does not prohibit payment to outsourcing facilities located offshore that provide plan administration or call centers for enrollment or claims adjudication. On the other hand, this does prohibit a state plan from making payments to a provider’s/supplier’s bank that is located offshore. This also prohibits the state plan from paying offshore telemedicine companies and pharmacies.

In 2014, the Office of Inspector General (OIG) issued a memorandum report to CMS regarding the use of offshore subcontractors. The OIG issued a questionnaire to all state Medicaid programs regarding the use of offshore subcontractors. The questionnaire focused on protections the state Medicaid programs had in place for protection of PHI when using offshore subcontractors. Based on the memorandum, several state Medicaid programs prohibit the use of offshore subcontractors.

It is important for the DME supplier to review its contracts with TPPs, the provider manuals of the TPPs the supplier works with, and the payer policies of the TPPs the supplier works with. As discussed above, TPPs may 

  • Require the supplier to give advanced notice before contracting with an offshore subcontractor,
  • Require the supplier to obtain the permission of the TPP to contract with an offshore subcontractor
  • Prohibit the use of subcontractors, or 
  • Have no policy at all regarding offshore subcontractors.

Generally, there are no federal prohibitions on the use of offshore subcontractors with respect to Medicare programs. Medicare requires disclosure of subcontractors by certain providers during the enrollment process and at various times, such as revalidation and when there are changes to those arrangements. Conversely, federal law implemented restrictions on state Medicaid programs that prohibit the payment of offshore subcontractors or agents in certain circumstances, notably including telemedicine providers and pharmacies and payment to providers’ accounts if they are located offshore. Additionally, state Medicaid programs may contain some limitations and restrictions on the use of offshore subcontractors. These limitations vary by state.

TPPs may have their own rules and requirements pertaining to the use of offshore subcontractors. Those requirements are often contained in the payer/network agreement, provider manual, and/or payer policies. TPPs that administer MA and MMC plans likely will also have requirements to comport with governmental requirements and restrictions on offshore subcontractors for those specific plans.

Jeffrey S. Baird, Esq., is chairman of the Health Care Group at Brown & Fortunato, a law firm based in Texas with a national health care practice. He represents pharmacies, infusion companies, home medical equipmnet companies, manufacturers and other health care providers throughout the United States. Baird is a member of the HomeCare Editorial Advisory Board, is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or