HME Retail Sales

The Legal Aspects of Retail Sales

Retail law expert Jeff Baird discusses what you should know about HME cash sales.

• By Joseph Duffy
• Aug 01, 2016

For many providers beleaguered by Medicare’s winnowing reimbursement and expanding cost and complexity when providing home medical equipment, retail sales are the light at the end of the tunnel. But like the saying goes, you want to make sure that light isn’t an oncoming train.

They key is to understand that, while free from frustrations typical of billing Medicare, retail is not entirely restriction-free. In fact there are a number of legal requirements related to retail sales, which providers must understand. Bearing that in mind, HME Business sat down with Jeffrey S. Baird, Esq., chairman of the Health Care Group at law firm Brown & Fortunato, P.C., to learn more.

Baird argues that retail is likely the future for many home medical equipment providers. For an industry that historically has generated the lion’s share of its revenues through Medicare funding, that’s a bold statement to make, but Baird says there are several converging factors have lead him to this conclusion:

• The demand for DME will increase exponentially. This is due to the fact that there are 78 million Baby Boomers who are retiring at the rate of 10,000 per day.
• Competitive bidding has created a two-tier system. Those on the lower end of the socio-economic scale will have no choice but to accept whatever Medicare pays for. These will be lower-quality products with few bells and whistles. Those on the higher end of the socio-economic scale will be willing to pay cash so as to obtain a high-quality product with bells and whistles.
• The mindset of typical Boomers is that psychologically and emotionally, they refuse to get old. Boomers don’t want to spend the last years of life playing shuffleboard in a retirement community in Arizona. Rather, until the day they die, Boomers want to be running triathlons and going to Rolling Stones concerts. Boomers will be willing to spend their children’s inheritance to purchase DME products and services that help maintain an active lifestyle.
• Medicare reimbursement is low and will continue to be low. It will be difficult to generate a profit off of what Medicare pays. The profit to the DME supplier will come from retail/cash sales.

With more and more HME providers are growing their cash sales to create revenue streams that support or even replace Medicare reimbursement, Baird detailed the legal aspects of retail sales they should know about.

HMEB: Why are the legalities of retail now so important?

Baird: The DME industry is young; it has been around since the mid ’70s. The industry grew up unregulated; frankly, no one on Capitol Hill, and no one with HCFA (now CMS), knew what DME suppliers did. The reason for this is obvious. While young, healthy people go to doctors, hospitals, and pharmacies, normally only the elderly use DME suppliers. Unless he has been taking care of Great Aunt Martha, neither the 28-year-old legislative staffer on Capitol Hill, nor his boss (Representative or Senator), nor the CMS regulator in Baltimore, will have ever had a need to step foot in a DME facility. Plus, the money spent by Medicare on DME has always been a very small percentage of the total Medicare expenditures. Because of the lack of knowledge of what the DME industry does, relatively few regulations were implemented for the industry. Because there were relatively few regulations in place, DME suppliers ‘did the best they could.’ Obviously, mistakes were made. And there was a small percentage of DME suppliers that engaged in fraudulent activities. These ‘fraudsters’ generated bad press (e.g., Operation Wheeler Dealer in Houston, the problems in South Florida, etc.). As the government is inclined to do, it overreacted. We now have the “Perfect Storm” of competitive bidding, out-of-control audits, low reimbursement, and stringent documentation requirements. Much of the government oversight is limited to the typical DME Medicare Fee-For-Service model (i.e., the DME supplier provides the product, takes assignment, and bills Medicare). Much of the retail/cash business model falls outside of this increased government oversight.

HMEB: Is the standard Medicare fee-for-service model unworkable?

Baird: There are several reasons why the standard Medicare FFS model is pretty much unworkable:

As a result of the ‘suicide bids’ resulting from competitive bidding, reimbursement is low.

If a DME supplier is heavily involved with competitive bidding, then its business model can be taken away in three years when the next round of competitive bidding comes up; there is no assurance that the supplier will be awarded a competitive bid contract for the next round. CMS/CBIC may disqualify the supplier’s bid for unsupportable reasons or the supplier may bid too high. The bottom line is that while the supplier may be ‘flying high’ in one round of competitive bidding, the proverbial rug can be yanked out from under the supplier for the next round. Banks are increasingly leery about lending working capital to DME suppliers whose business model may disappear overnight.

Audits are out-of-control. Possession is nine tenths of everything, The CMS contractors control (they “possess”) the supplier’s revenue. If a contractor concludes that the supplier must repay money, then the DME MAC can offset the recoupment amount from future payments to the supplier. If the supplier does not like what is going on, then it can appeal the recoupment; however, to be successful, the supplier must normally need to appeal to an ALJ.

Unfortunately, an ALJ will not consider the supplier’s appeal for several years. These problems do not exist under the retail/cash model.

HMEB: Can you discuss some of the more important laws that HME providers going into cash sales need to understand to grow a successful cash sales business?

Baird: There are several important laws that the DME supplier needs to understand:

There is a federal law that says that a supplier cannot charge Medicare substantially in excess of the supplier’s usual charges unless good cause is shown. I have not seen this statute enforced, but it is out there. Over the years, CMS and the OIG have attempted to clarify the terms ‘substantially in excess,’ ‘usual charges,’ and ‘good cause.’ The best clarification is set out in a proposed rule that came out in 2003, but was withdrawn in 2007. The proposed/withdrawn rule states that a DME supplier can provide a Medicarecovered item for cash at a discount off the Medicare allowable so long as the discount does not exceed 17 percent off the Medicare allowable — but if the supplier gives a discount greater than 17 percent, then if ever questioned about it, the supplier needs to produce evidence substantiating the greater than 17 percent discount.

Outside of competitive bidding, if the supplier sells a Medicare-covered item for cash to a Medicare beneficiary, then the supplier (if asked by the beneficiary) must file a claim with Medicare on behalf of the beneficiary.

If the supplier is not a competitive bid supplier, but sells a competitive bid item for cash to a Medicare beneficiary residing in a CBA, then the supplier needs to have the patient execute an ABN that confirms that the beneficiary will not get reimbursed by Medicare for the item.

The supplier needs to obtain the necessary state licensure to sell the DME items. The licenses need to be obtained in the state in which the DME supplier is located and the states in which the customers reside.

The supplier needs to determine if it has sales tax obligations in the states in which the cash customers reside.

The supplier needs to be aware of the anti-fraud laws in the state in which the DME supplier is located and in the states in which the cash customers reside.

The supplier needs to be aware that a number of states have statutes that say that suppliers cannot charge state Medicaid programs more than the supplier’s usual charges.

HMEB: Talk about the importance of healthcare cooperation and collaboration as it pertains to retail.

Baird: Historically, health care providers (hospitals, doctors, therapists, DME suppliers, etc.) have operated in “silos.” Essentially, one provider did not know what the other providers were doing. This has proven to be expensive and inefficient. Third-party payers are now pushing healthcare providers to engage in a collaborative care model in which the providers are collectively responsible for positive patient outcomes. Under this collaborative care model, reimbursement is tied to the degree of cooperation among the providers and the outcome of the treatment of the patient.

HMEB: What do HME providers need to know about joint ventures collaborations with hospitals?

Baird: Hospitals are struggling to produce a positive bottom line. Not only are hospitals attempting to generate increased revenue, but they are also attempting to control costs. Under Medicare’s hospital patient readmission reduction program, if patients are readmitted soon after discharge for a particular illness (e.g., CHF, COPD), then future reimbursement from Medicare will be adversely affected. And so hospitals desire to have a hand in patients’ post-discharge care so as to prevent the readmissions. One way for hospitals to do this is to own 100 percent of a DME operation. Another way is to have an ownership interest in a DME operation. And still another way is for the hospital to enter into a collaborative care agreement with an unrelated DME supplier in which, subject to patient choice, the hospital designates the unrelated DME supplier as the hospital’s “preferred provider.” In return, the DME supplier commits to provide a high level of services to the discharged patients and to provide outcomes reports to the hospital.

HMEB: What do HME providers need to know about sales tax?

Baird: The sales tax issue generally arises when a DME supplier is selling DME across state lines. There is a U.S. Supreme Court decision that says that if a business has no connection (or ‘nexus’) with a state other than shipping products into the state, then the supplier has no sales tax obligation in that state. On the other hand, if the DME supplier has a ‘nexus’ in that state, then the supplier will have sales tax obligations. A “nexus” can be created when, for example, the supplier has a physical location in the state, or a W2 employee in the state, or a 1099 independent contractor sales rep in the state. Even if the DME supplier is comfortable that it does not have a ‘nexus’ with a state and, therefore, has no sales tax obligation, the state’s Department of Revenue may disagree and may attempt to impose sales obligation on the supplier. At that point, the supplier will need to decide whether to fight with the state or simply pay the tax.

HMEB: Can an HME provider co-locate with another provider?

Baird: No. If a DME supplier is located next to another provider, then in order to comply with the supplier standards, a number of conditions must be met, including the following:

• The post office must assign a separate address (e.g., Suite B) to the DME supplier.
• The DME supplier must be physically separated from the other provider.
• There must be separate ingress and egress for the public.
• Proper signage must be posted.

HMEB: What are microsites and what should HME providers know about them?

Baird: A microsite is akin to a kiosk. A microsite can be in a mall, or in the lobby of a hospital, or in the lobby of a physician’s office building, or in a grocery store, or at a similar type of location. The microsite may or may not be manned by a live person. At the microsite, the prospective customer can learn about what the DME supplier has to offer. At the microsite, the prospective customer may be able to order a product. In creating a microsite, the DME supplier needs to be careful not to create an arrangement in which the NSC determines that the microsite must have a PTAN issued to it.

HMEB: What about sharing space with a nonprovider? Is that legal?

Baird: Yes. It would be wise for the arrangement to be configured so that an NSC inspector, or an accreditation surveyor, is not confused regarding who the DME supplier is and who the non-provider is.

HMEB: Can HME providers charge cash customers less than what is billed to state Medicaid?

Baird: If the DME supplier is in a state in which there is a statute that says that a supplier may not bill the state Medicaid program more than the supplier’s usual charges, then it is acceptable for the supplier to occasionally sell cash items at a discount off the Medicaid allowable — so long as the discounted sales do not appreciably affect the supplier’s ‘usual charges.’

HMEB: What do HME providers need to know about telemedicine in cash sales across state lines?

Baird: Medicare will not pay physicians for telehealth encounters except in limited circumstances. As to what constitutes a proper telehealth patientphysician encounter is governed by state law. Some state laws allow for an audio only (e.g., telephone) encounter. Other states require both an audio and a visual (e.g., Skype) encounter. The physician providing the telehealth encounter must be licensed in the state in which the patient resides and whether the telehealth encounter is proper is governed by the law in the state in which the patient resides. On a separate matter, the DME supplier needs to avoid a telehealth arrangement in which the supplier directly or indirectly funds the payment by the telehealth company to the physician who has the telehealth encounter with the patient and writes the order for the DME (in which the order ultimately goes to the DME supplier). Such an arrangement likely violates the Medicare anti-kickback statute.

This article originally appeared in the August 2016 issue of HME Business.