Two people look at a computer in an office
Understanding Supplier Standard No. 4 & other inventory hangups
by Jeffrey S. Baird

Inventory is expensive. If a durable medical equipment (DME) supplier purchases inventory, and if the inventory “sits on the shelf” for an inordinate period of time, the supplier’s profit margin (resulting from the sale or rental of the inventory) will be diminished. There are steps that a DME supplier can take to control the carrying cost of its inventory.

1. Flexible Terms of Payment

The DME supplier can approach manufacturers or distributors about agreeing to flexible payment terms. If the manufacturer/distributor will give the supplier an extended period of time to pay for products, then carrying the inventory will pose less of a financial burden to the supplier.

2. Fulfillment Arrangement

A standard fulfillment agreement contains the following provisions:

  • The DME supplier agrees to purchase designated products from the manufacturer/distributor. 

  • The parties agree to a price list for the products. The prices can be renegotiated on a periodic basis. 

  • At the beginning, the manufacturer/distributor retains title and possession of the products. This means that at the outset of the agreement, the supplier is not out much money 
    for the products. 

  • When the DME supplier generates a patient who wants to obtain a product, the supplier transmits the patient’s name and contact information to the manufacturer/distributor. It will be important for the parties to enter into a HIPAA-compliant business associates agreement, or BAA. 

  • The manufacturer/distributor (sometimes referred to as the “fulfillment house”) then “picks, packs and ships” the product to the patient. In doing so, the manufacturer/distributor affixes the supplier’s label to the product.

  • In addition to paying for the product in accordance with the price list, the supplier will pay the manufacturer/distributor for its fulfillment services. Such payment can be separate from the payment for the products, or the fulfillment compensation can be included in the price list.

A fulfillment arrangement means the DME supplier only has to pay for products when patients are ready to purchase or lease them and need not carry many products on their shelves.

3. Lease Arrangement

Subject to the risk described below, as opposed to selling products to the DME supplier, the manufacturer/distributor may want to lease products to the supplier. 

Such a lease agreement can be as flexible as the parties decide. The obvious benefit to the supplier is the fact that it does not have to pay a great deal of money at one time to the manufacturer/distributor.

But the DME supplier needs to be aware of the issue of “title.” Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Supplier Standard No. 4, 42 CFR 424.57(c)(4) states:

“Fills orders, fabricates [sic], or fits items from its own inventory or by contracting with other companies for the purchase of items necessary to fill the order. If it does, it must provide, upon request, copies of contracts or other documentation showing compliance with this standard. A supplier may not contract with any entity that is currently excluded from the Medicare program, any State health care programs, or from any other Federal Government Executive Branch procurement or non-procurement program or activity …”

The phrases “from its own inventory” and “contracting … for the purchase of items necessary to fill the order” indicate that the supplier is to have title to the item being furnished. The National Provider Enrollment (NPE) East, a Medicare contractor responsible for enforcing the supplier standards, appears to take this position when it states in a frequently asked questions section:

“In conjunction with standard four, ensure the inventory being delivered is inventory that has been purchased by you and is not owned by the company delivering the inventory directly to the beneficiary. You are required to maintain proof the inventory delivered was from inventory of your own and not from inventory owned by the delivering company. This may be documented by maintaining invoices.”

Lease arrangements have been in existence for decades, particularly in the oxygen space. I am not aware of any enforcement actions (on the basis of Supplier Standard No. 4) against such lease arrangements. 

And yet, Supplier Standard No. 4 and the NPE East guidance say what they say. So, if a DME supplier enters into a lease arrangement with a manufacturer/distributor, the supplier needs to be aware of Supplier Standard No. 4 and NPE guidance.

An argument can be made that a capital lease resulting in constructive title being transferred to the DME supplier complies with (or substantially complies with) Supplier Standard No. 4. A capital lease can arise if the lessee has the obligation to purchase the product at the end of the lease term. 

Whether or not a capital lease and constructive title are recognized in 
a state will be determined by state