maze to target
Legal issues to consider long before you make your exit
by Michael Silverman

A wise man once said, “How you do anything is how you do everything.” In that vein, the time to begin preparing for the potential sale of a durable medical equipment (DME) business begins well before the first claim for reimbursement is ever submitted. Once you are approached by an interested buyer, the time has long passed for your business to self-audit for compliance; the damage will have likely been long done and the business forever tarnished.

While not intended to be exhaustive, this article provides a high-level overview of some regulations to keep in mind when operating a Medicare Part B-enrolled DME business that someone would ultimately want to purchase—and provides insight into the transaction process in preparing for sale.   

General Health Care Laws Applicable to DME Providers

» The Stark Law (42 U.S.C. 1395nn)

This statute prohibits self-referrals. Under federal law, DME is part of the definition of designated health services; as such, physicians are barred from referring patients to any entity they have a financial relationship with unless an exception applies. Penalties include civil monetary fines and/or exclusion from participation in federally funded health care programs.

The Stark Law applies to DME providers if a referral source (or immediate family member of such referral source) has a financial interest in the entity that they refer the equipment and/or supplies to. There are several exceptions to the Stark law, which should be carefully examined against a DME provider’s operations if a referring provider has a financial interest in the DME company.

» The Federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(b))

This statute sets forth restraints on financial relationships between referral sources and health care providers. It is a violation of federal law for a referral source to receive anything of value from a DME provider—or for a DME provider to provide anything of value to a referral source—in exchange for referring business that is reimbursable by a federally funded health care program (e.g., Medicare Part B for DME). Violations of this statute can result in felony criminal prosecution and/or civil monetary penalties.

This law applies to marketing relationships with any type of referral sources, whether it be with marketers or prescribing practitioners. There are exceptions to this statute that DME providers need to analyze their marketing practices against to ensure they are in compliance.

For example, bona fide W2 employees of the DME provider are exempt from such referral compensation prohibitions under the Anti-Kickback Statute. Additionally, there are statutorily recognized business practices known as safe harbors (such as the Personal Services and Management Contracts Safe Harbor) that are applicable to marketing relationships with independent contractors. All elements of an applicable safe harbor must be met to safeguard against prosecution and/or penalties.

Those providers that do not bill federally funded health care programs need to be aware of state laws. While the Federal Anti-Kickback Statute only applies to federally funded health care programs, many states have enacted their own versions of this law that are more expansive because they include commercially insured and even cash-paying patients.

 » The Beneficiary Inducement Statute (42 U.S.C. §1320a-7a(a))

This statute prohibits health care providers from offering anything of value to a federally funded health care beneficiary for the purpose of incentivizing the individual to receive products or services from a health care provider. Patient inducements can appear in many forms, including providing free services or gifts or a waiver of patient financial responsibility (e.g., copays or deductibles).

Where there is a law, there is often an exception: In certain circumstances, gifts of nominal value below specified thresholds do not constitute an inducement, and there are certain exemptions from the requirement to collect patient financial responsibility, such as in the event of a documented financial hardship.

 » The False Claims Act (31 U.S.C. § 3729)

This is a “catch-all” regulation, because if any law or regulation is violated in the process leading up to claim submission, it can also be consideration a violation of the federal False Claims Act. This law requires health care providers to ensure they refund the appropriate federally funded health care program if they are paid on claims they should not have been (due to noncompliance). Failure to refund can result in penalties.

The False Claims Act emphasizes the need for health care providers to regularly conduct internal audits to ensure that the claims submitted for reimbursement meet applicable payer requirements. If a claim is paid that should not have been, health care providers have a finite amount of time to identify and refund such paid monies before the False Claims Act is violated.

DMEPOS-Specific Health Care Laws

In addition to having to navigate the regulatory landmines presented by health care laws that are applicable to all types of health care providers, DME providers have another set of federal laws designed just for them. It’s time to consider the durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) Supplier Standards.

» The DMEPOS Supplier Standards (42 C.F.R. 424.57(c))

There are 30 total DMEPOS Supplier Standards that Medicare Part B-enrolled providers are required to abide by for purposes of obtaining and maintaining their Medicare billing privileges.

Some of these laws, such as DMEPOS Supplier Standard No. 1, the requirement to comply with all applicable federal and state licensing requirements and regulations, are extremely broad in scope; others, such as Standard No. 11 regarding restrictions on patient solicitation, are extremely specific.

Claims submitted by DME providers to Medicare that do not comply with any of the DMEPOS Supplier Standards can be considered improper claims that run afoul of the False Claims Act. Accordingly, DME providers need to be cognizant of the implications and requirements of each of the DMEPOS Supplier Standards to ensure all of the claims they submit to Medicare are compliant.

Preparing to Sell

You have managed to walk the regulatory red tape tightrope and have run a profitable business. You have begun to garner some attention, and there is a party interested in purchasing your business. Let’s discuss some of the ins and outs of the transaction process that you may encounter as you move forward.

» Nondisclosure Agreements (NDAs)

Enter into this agreement before delivering any business or financial information to the prospective buyer, and make sure the definition of “confidential” encompasses what you need it to.

» Letter of Intent (LOI)
This document sets forth a general outline of the terms and conditions that will ultimately wind up in the purchase agreement. After all, it’s best to ensure the parties are on the same page before expending the time, energy and resources required to conduct due diligence and draft the ultimate transaction documents. The LOI will generally set forth:

  • the type of transaction (e.g., asset versus stock);
  • the purchase price and terms (e.g., lump sum upon closing?);
  • the transition process;
  • due diligence period and procedure; and
  • whether there is a ‘no shop’ provision.

Pay particular attention to which provisions of the LOI are binding versus nonbinding.

» Due Diligence
During this information exchange period, the prospective buyer will be provided access to certain financial, corporate and operational information (which should stay confidential pursuant to the NDA). This process should be completely transparent, as it allows the prospective buyer to access payer and regulatory compliance documentation to determine if they want to proceed with the transaction.

» Purchase Agreement
The type of sale (i.e., asset versus stock) depends on the needs of the buyer.

In an asset transaction, Company A picks and chooses what it likes from Company B and plugs it into its existing operations. The liabilities of Company B will not be assumed by the purchaser, and the separate entities can continue to exist or Company B can be dissolved.

In a stock transaction, Company B—the entire entity—is purchased, including the good, the bad and the ugly. The buyer assumes all liability (even from prior to the closing) and Company B continues to exist after the purchase.

The distinction is very important because for DME providers, Medicare billing numbers, accreditations, state licenses and commercial contracts will not transfer to the purchaser unless they are pursuant to a stock transaction.

The purchase agreement will set forth representations and warranties about how the business has been operated (which must be true!), along with the terms and conditions set forth in the LOI. Pay close attention to indemnification provisions (total amount and duration), as well as restrictive covenants (e.g., the seller cannot own or operate a DME business within “X” miles for “Y” years).

Michael Silverman, JD, CDME, is an attorney with the Florida Healthcare Law Firm whose previous experience as in-house counsel to one of the nation’s largest DMEPOS providers allows him to provide his clients with both expert legal and practical business insights. He can be reached at