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OIG Issues Unfavorable Advisory Opinion Regarding an Exclusive Provider Arrangement Between Medical Equipment Supplier and SNF

On July 28, 2011, the U.S. Department of Health and Human Services, Office of Inspector General (OIG) issued an unfavorable advisory opinion regarding two proposals by a supplier of medical supplies, equipment and related services (Supplier) seeking to enter into a contract with a county-operated skilled nursing facility (SNF) to provide such items and services.

Supplier provides medical supplies and equipment to SNFs along with providing related services (e.g. emergency delivery of medical supplies, inventory control and customized packaging). Supplier bills Medicare directly for supplies and equipment covered by Medicare Part B (covered items). For items not covered by Medicare (non-covered items), Supplier bills the SNFs directly and includes a markup which covers the costs of related services, overhead and profit. Supplier acknowledged that the amount paid by Medicare Part B for the covered items is enough to cover the costs related to the services provided to the SNF in connection with the non-covered items.

The SNF solicited bids from suppliers to be the exclusive supplier of covered items and related services to the SNF. The SNF also required all bids to include pricing for the non-covered items and related services. The SNF proposed to purchase the non-covered items at its option. Supplier was one of the bidders and the OIG analyzed two proposed arrangements that Supplier sought to use in the bidding process.

Proposed Arrangement A

Under Proposed Arrangement A, Supplier would submit a bid to: (1) be the exclusive supplier of covered items of SNF, (2) provide non-covered items at the price listed in its bid if the SNF opts to exercise that option, and (3) provide related services for the covered and non-covered items purchased by SNF. In regards to the non-covered items, Supplier proposed to offer the items and related services to the SNF at a price below Supplier’s costs of furnishing the items. Supplier offered below-cost pricing because it believed that the SNF would not select its bid to be the exclusive provider of covered items otherwise. However, Supplier would not be bound by the prices listed in the bid if its bid was not selected. Moreover, Supplier had stated that the Medicare Part B payments it would receive supplying the SNF with covered items would offset any losses accrued from offering the non-covered items at below-cost.

The OIG began its analysis by stating, “if any direct or indirect link exists between a price offered by a supplier or provider to a nursing facility for items or services that the nursing facility pays for out-of-pocket and referrals of federal business for which the supplier or provider can bill a federal healthcare program, the anti-kickback statute is implicated.” The OIG found that a nexus may exists between the below-cost pricing of non-covered items and related services offered to the SNF and referrals of other Federal health care program business for three reasons: (1) the SNF is in a position to direct business to the Supplier for covered items when the SNF is not the entity paying for the items, (2) a link between covered items and non-covered items is inferred because they are included in the SNF’s single request for proposals, and (3) both Supplier and the SNF have obvious motives for contracting for non-covered items at below-cost (e.g. Supplier to secure business as exclusive supplier to SNF and for SNF to minimize out-of-pocket costs).

Proposed Arrangement B

Proposed Arrangement B was exactly the same proposal as Arrangement A, except that Supplier’s owners would form a new company and submit a joint bid to the SNF, whereby one company provides the covered items and the other provides the non-covered items.

The OIG found that the same risks created by Arrangement A existed in Arrangement B. This arrangement created a means for the Supplier and SNF to swap the below-cost rates on non-covered items for which the supplier bears the business risk in exchange for the profitable non-discounted covered items, from which Supplier can recoup any losses occurring from the below-cost pricing of the non-covered items furnished to the SNF. Despite the fact that the non-covered items would now be provided by the new company, the OIG stated that, “it is the substance, not the form, of an arrangement that governs under the anti-kickback statute.”

For more information on compliance with the anti-kickback statute, medical supply contracts or other Medicare or health care regulations, please contact a Wachler & Associates attorney at 248-544-0888.

OIG Advisory Opinion 11-11: http://oig.hhs.gov/fraud/docs/advisoryopinions/2011/AdvOpn11-11.pdf