Face Challenges Confidently

Competitive Bidding: More On Asset Purchases And Subcontracting

Wednesday, November 4th, 2015

(May 2013)


The competitive bidding program is not based in reality. It is forcing suppliers to “pound square pegs into round holes” and is forcing suppliers to enter “shotgun marriages.” However, I know that I am preaching to the choir.

Competitive bidding is forcing a large number of DME suppliers to engage in asset acquisitions and enter into subcontract arrangements. This article addresses the “hot button” issues pertaining to asset acquisitions and subcontracting.

Asset Purchases

The law is clear: XYZ, Inc. cannot “buy ABC’s patients” and XYZ cannot “buy ABC’s patient files.” However, XYZ and ABC can enter into a bona fide Asset Purchase Agreement (“APA”) in which XYZ purchases hard assets from ABC (e.g., inventory) and, along with the asset purchase, ABC will transfer patient files to XYZ. ABC will send a letter to its patients telling them that it has sold its e.g., CPAP supply business to XYZ. The letter will state that the patient has freedom of choice and that the patient may choose any supplier. The letter will tell the patient that if he/she does not wish to be serviced by XYZ, then the patient needs to let ABC know within 15 days. The letter will say that if the patient does not “opt out” within the 15 day period, then ABC will transfer his/her file to XYZ.

The question then becomes: Can XYZ call the patients that are transferred to XYZ by ABC? The reason I ask this question is because the telephone solicitation statute and Supplier Standard # 11 state that XYZ cannot call a Medicare patient unless one of three exceptions are met. The first two exceptions apply if XYZ previously provided a Medicare-covered item to the patient. In this case, XYZ has not provided anything to the ABC patients. Therefore, the first two exceptions do not apply. The third exception states that XYZ can call the patient if the patient has given his/her written consent (blue ink or electronic) to be called by XYZ. The “opt out” letter from ABC to the patients does not constitute “written permission” from the patients to be called by XYZ.

The safest course of action is for ABC to request its patients to affirmatively (and proactively) give their written permission to be called by XYZ by (i) calling XYZ, (ii) e-mailing XYZ, or (iii) mailing to XYZ a signed postcard. XYZ can call the former ABC patients who have taken this affirmative action. XYZ can communicate with the other patients through the U.S. Postal Service.

Now let’s talk about another issue that is equally as important. Remember what I said, above, about the law prohibiting the “sale of patients” and the “sale of patient files.” In fraud and abuse land, there is no such thing as a technical loophole; it is substance over form; “if it looks like a duck and walks like a duck……” You can choose the metaphor. This is a long way of saying that the APA (in which patient files are transferred to the purchaser) must be “bona fide,” and not a “sham.” In other words, the seller and purchaser cannot enter into a sham APA with the sole purpose of transferring patient files to the purchaser. Let us look at three scenarios.

First Scenario – ABC sells all of its assets (its entire business) to XYZ. All that is left of ABC is a corporation “on paper” with a lot of money in the bank (resulting from the purchase price paid by XYZ). As part of this total asset sale, ABC transfers all of its patient files (except for those patients who “opt out”) to XYZ. There is no question but that this is a bona fide asset purchase.

Second Scenario – ABC sells all of its assets pertaining to its CPAP supply business (Medicare and commercial) to XYZ and retains its other (non-CPAP supply) business. As part of this partial asset sale, ABC transfers all of its CPAP supply patient files (except for those patients who “opt out”) to XYZ. Assume there is a legitimate reason for ABC to get out of the CPAP supply business. This scenario has some risk that is not associated with the first scenario. Nevertheless, a credible argument can be made that this is a bona fide asset purchase.

Third Scenario – ABC sells all of its assets pertaining to the Medicare portion of its CPAP supply business to XYZ. ABC retains (i) the commercial portion of its CPAP supply business and (ii) its other (non-CPAP supply) business. As part of this partial asset sale, ABC transfers its Medicare CPAP supply patient files (except for those patients who “opt out”) to XYZ. There is a legitimate reason for ABC to get out of the Medicare CPAP supply business: ABC was not awarded a CB contract for CPAP supplies. There is a legitimate reason for ABC to stay in the commercial CPAP supply business: there is no silly government program prohibiting ABC from continuing in the commercial market. This scenario has risk that it not associated with the first and second scenarios. Nevertheless, a credible argument can be made that is a bona fide asset purchase.


A contract supplier cannot subcontract out “intake, assessment and coordination of care.” A contract supplier can subcontract out delivery, set-up, patient instruction, repair and maintenance. A contract supplier can purchase inventory from the subcontractor.

Let’s assume that the subcontractor is directly or indirectly referring (or arranging for the referral of) Medicare patients to the contract supplier. This is usually the case……normally, the subcontractor wants to “stay in the game” in order to maintain a relationship with its referral sources (e.g., physicians). Because the subcontractor is a “referral source” to the contract supplier, then the contract supplier must be careful how it pays the subcontractor. The parties need to be mindful of the “one purpose” test, which has been handed down by courts. Under the “one purpose” test, if “one purpose” behind a payment to a referral source is to induce referrals, then the Medicare anti-kickback statute may be violated notwithstanding that (i) the primary purpose behind the payments is to pay for legitimate services (e.g., delivery, set-up, and patient instruction), (ii) the services by the referral source are substantive and actually rendered, and (iii) the compensation is the fair market value equivalent of the services rendered by the referral source. What all of this means is that the contract supplier cannot pay the subcontractor (that is a referral source) percentage compensation.

The safest way to compensate the subcontractor is to pay it a fixed annual fee (e.g., $240,000 over the next 12 months……or $20,000 per month). Fixed annual fee compensation is an important element of the Personal Services and Management Contracts safe harbor to the anti-kickback statute. Normally, fixed annual compensation is unrealistic. Therefore, many subcontract agreements state that the contract supplier will pay a set dollar amount for each type of service rendered by the subcontractor (e.g., $150 per set-up, $125 per maintenance call, etc.). There is a risk that the government could assert that such a compensation arrangement violates the anti-kickback statute because the compensation paid to the subcontractor will vary based on the volume of business that the subcontractor directly or indirectly generates for the contract supplier. If the subcontractor’s services are substantive and actually performed, and if the fixed fee per service is fair market value, then the risk is reduced that the government would make a kickback assertion. The contract supplier can also purchase inventory from the subcontractor. The purchase price per item must be fair market value. There can be a price list attached as a schedule to the subcontract agreement.

This monograph is not intended to be legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only. The law pertaining to this monograph may have changed following the date of the monograph. The reader should consult his or her own attorney for legal advice concerning the contents of this monograph. Except where noted, attorneys are not certified by the Texas Board of Legal Specialization.

Prepared by:

Health Care Group
Brown & Fortunato
P.O. Box 9418
Amarillo, Texas 79105-9418
(806) 345-6300
(806) 345-6363 (fax)

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