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 jbaird@bf-law.com.
