Provider Strategy

Working Cooperatively with a Manufacturer

Providers and manufacturers must take care to understand the laws governing how they work with one another.

• By Cara C. Bachenheimer
• Oct 11, 2022

There are many ways for manufacturers and DME suppliers to enter into cooperative arrangements, but the parties must ensure their arrangements do not violate the federal anti-kickback statute (AKS). 

Governing Law and Safe Harbors

The AKS makes it a felony to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce a person or entity to refer an individual for the furnishing or arranging for the furnishing of any item or service reimbursable by a federal health care program (FHCP), or to induce a person to purchase, lease, or recommend the purchase or lease of any item or service reimbursable by an FHCP. Because of the AKS’s breadth, the Office of Inspector General (OIG) has adopted “safe harbors” that provide immunity from the AKS if certain requirements are met. Two safe harbors are particularly relevant to arrangements between manufacturers and DME suppliers:

1. Discount Safe Harbor – On condition that certain requirements are met, this safe harbor permits discounts on items or services for which the federal government may pay, either fully or in part, under an FHCP. The term “discount” refers to either (i) a reduction in the amount a buyer is charged for an item or service based on an arm’s length transaction or (ii) a rebate, which is an amount that is described in writing at the time of the purchase but is paid at a later date.

A DME supplier must comply with specific standards to invoke the safe harbor’s protection. First, the “discount must be made at the time of the sale of the good or service or the terms of the rebate must be fixed and disclosed in writing to the buyer at the time of the initial sale of the good or service.” Second, the buyer must provide, “upon request by the Secretary or a State agency” an “invoice, coupon or statement” from the seller that “fully and accurately” reports such discount.

2. Personal Services and Management Contracts Safe Harbor – This safe harbor permits payments to referral sources as long as a number of requirements are met, including the following: (i) payments must be pursuant to a written agreement with a term of at least one year and (ii) the methodology for calculating the compensation must be set in advance, the compensation must be consistent with fair market value, and the compensation must not be determined in a manner that takes into account the volume or value of any referrals or business generated between the parties.

Types of Cooperative Arrangements

Discounts and Rebates Tied to Volume of Purchases – Both parties can enter into an agreement in which the manufacturer provides properly-disclosed discounts and rebates to the supplier that are tied to the volume of the manufacturer’s products purchased by the supplier.

It is important that the manufacturer and DME supplier not engage in an arrangement in which the manufacturer provides additional benefits to the supplier. For example:

Referrals by the Manufacturer Not Tied to Purchases – The manufacturer advertises its products on television, in print media, and on its website. As a result, the prospective customers (leads) contact the manufacturer about the manufacturer’s products. The manufacturer forwards the leads to DME suppliers. The manufacturer does not require suppliers to sell the manufacturer’s products to the leads. If the suppliers (receiving the leads) are required to sell the manufacturer’s products, such a requirement will be construed as “something of value” flowing from the supplier to a referral source.

When the supplier receives a lead from the manufacturer, the supplier can only call the lead if the requirements of the telephone solicitation statute and Supplier Standard #11 are met.

HIPAA is another consideration. The HIPAA Privacy Rule generally allows a “covered entity” to use or disclose an individual’s protected health information (PHI) only with the individual’s consent or in other limited circumstances. When a manufacturer only sells to DME suppliers (B to B), the manufacturer will not meet the HIPAA definition of a “covered entity.” On the other hand, if the manufacturer is also engaged in selling directly to consumers (B to C), the manufacturer will likely be construed to be a covered entity, meaning that HIPAA will restrict what the manufacturer can do with the leads.

Cooperative Marketing Agreement – The manufacturer and DME supplier enter into an arrangement in which the manufacturer advertises (i) its products and (ii) the supplier’s ability to provide the products. The supplier pays the manufacturer for the supplier’s pro rata share of the expenses of the advertisements. If the supplier pays nothing for marketing services, or pays less than fair market value for these services, the manufacturer will be construed as providing “something of value” to the DME supplier, which, in turn, is recommending the purchase of products covered by an FHCP.

Payment by the Supplier of Fair Market Value Compensation to the Manufacturer for Services – The manufacturer provides a variety of services to the DME supplier. These might include call center, billing, consulting and fulfillment services. The supplier pays fair market value compensation to the manufacturer for these services. If the supplier pays nothing for these services, or pays less than fair market value for these services, the manufacturer will be construed as providing “something of value” to the DME supplier, which, in turn, is recommending the purchase of products covered by an FHCP.