Strategic Alliance: Working With Your Local Hospital

(May 2013)

The DME industry justifiably feels like it is under siege. The industry, in its present form, has been around for about 35 years. Compare this to physicians, pharmacists and hospitals that have been around for thousands of years. The DME industry grew up unregulated. HCFA (now CMS) barely knew that we existed. The decision makers in Baltimore (CMS) and on Capitol Hill were not familiar with the DME industry. Why? The answer is fairly simple. Most of the decision makers are relatively young (think of the legislative staffers on Capitol Hill) and, as a general rule, young people do not need DME…….as a general rule, the elderly need DME. And so while a legislative staffer, or a CMS employee, is quite familiar with a hospital, or a physician, or a pharmacy, as a general rule there is no reason for such a decision maker to set foot in a DME company.

It is as if about seven years ago, the decisions makers in Baltimore and Washington, D.C. woke up one morning and said: “Wait a minute. What is this DME industry and why are we paying these people money?” As the government normally does, it overreacted. Now we as an industry are facing a “perfect storm” of government intrusion, the lynchpin of which is the ill-conceived competitive bidding program.

The DME industry is being pushed outside of its comfort zone. The days of “Leave it to Beaver” are gone. We are now in the era of “Modern Family.” Human nature is such that any change is traumatic. DME companies are having to rethink everything: “How can I be successful as a competitive bidding contract supplier?” “How can I be successful if I was not awarded a competitive bidding contract?” This is not fun……but it is reality. And so the successful DME company must rethink everything; it must truly “think outside of the box.” Keep in mind, however, that countering these challenges is the fact that the demand for DME is increasing exponentially. With 78 million “baby boomers” retiring at the rate of 10,000 per day, there are all kinds of opportunities out there for the innovative DME company. This article discusses one such opportunity: working with your local hospital.

It is important not to lose sight of the big picture. While we think we are under siege, hospitals, physicians and other health care providers also feel besieged. Everybody is feeling the financial pinch. So let’s talk about your community hospital. It is feeling the financial pinch. Medicare, Medicaid, and commercial insurers are squeezing them. Hospitals are being hit with audits and recoupment demands. Hospitals, like DME companies, are looking for other sources of revenue. And so how can a DME company work with its local hospital in such a way that both entities benefit financially? Here are some ideas.

Assume that St. Mary’s Hospital (“SMH”), a non-profit entity, owns St. Mary’s Medical Equipment, Inc. (“SMME”), a for-profit subsidiary. Because SMH is in the “hospital business,” and not the “DME business,” SMME is losing money. ABC Medical, Inc. is a successful local DME company. ABC and SMH want to set up some type of arrangement. What are their options?

ABC can purchase 100% of the stock of SMME so that SMME becomes a wholly-owned subsidiary of ABC. SMME will continue to operate as a “going concern” with the same PTAN, licenses, accreditation, etc. The only difference is that SMME now has a new owner. SMME will need to file some change of ownership (“CHOW”) notifications. Other than that, it is business as usual. SMME (now owned by ABC) can rent space from SMH. The lease agreement will need to comply with the Space Rental safe harbor to the Medicare anti-kickback statute (fixed annual, fair market value rent, etc.). SMH can refer its patients to SMME (now owned by ABC). It is advisable for SMH to insure patient choice.

ABC can purchase an equity interest (but less than 100%) of SMME. ABC can purchase 75%…..or 25%…..it doesn’t really matter. For purposes of this illustration, assume that ABC purchases 50% of the issued and outstanding stock of SMME. ABC will be entitled to 50% of any profit distributions. The same guidelines, discussed in the previous paragraph, apply here. In addition, ABC can provide services to SMME for which SMME will pay ABC. However, SMME will need to retain financial risk and some operational responsibilities. In other words, SMME (as a Part B supplier that is billing Medicare) must have “skin in the game.” The OIG has made it clear that ABC cannot operate SMME on a turnkey basis.

SMH can continue to own 100% of SMME but ABC can provide services to SMME (for which SMME will pay ABC). So long as ABC is not directly or indirectly generating business for SMME, then SMME can pay percentage compensation to ABC. On the other hand, if ABC is generating business for SMME, then the compensation cannot be on a percentage basis. As discussed above, ABC cannot run SMME on a turnkey basis. SMME must have financial risk and some operational responsibilities (again, “skin in the game”).

Now let’s change the facts and assume that SMH does not own a DME operation. Assume that ABC and SMH want to enter into some type of business arrangement. What are their options?

ABC can set up a new location on the SMH campus. The new location will be 100% owned by ABC. ABC will need to obtain accreditation, licensure, a PTAN, etc. for the new location. ABC can pay rent to SMH. The lease agreement will need to comply with the Space Rental safe harbor to the Medicare anti-kickback statute (e.g., fixed annual rent that is fair market value).

ABC can place an employee liaison on the SMH premises. The liaison can transition discharged patients (who have elected to use ABC) to ABC. It is important that the liaison not assume responsibilities that SMH would normally have to pay for. Doing so would save SMH money which, in turn, would constitute “value” to a referral source. This, in turn, would violate the Medicare anti-kickback statute. ABC can rent an office, on the hospital premises, for the liaison to use. The lease agreement would need to comply with the Space Rental safe harbor.

ABC can set up a loan closet arrangement with the hospital. With such an arrangement, ABC will place inventory at the hospital. If a discharged patient elects to use ABC, then SMH will remove an item from the loan closet and send it home with the patient. At that point, ABC will assume responsibility for the patient. ABC can pay rent to SMH for the loan closet but the amount of rent will be so small (e.g., $16 per month) that it is not worth paying rent.

SMH can purchase an equity interest in ABC. SMH will be entitled to dividend distributions in accordance with the hospital’s percentage ownership interest in ABC.

SMH and ABC can form a joint venture. A joint venture is simply an arrangement in which two or more entities own something together. For example, SMH and ABC can form SMME. The ownership interests can be split however the parties decide: 50-50, 60-40, 70-30, etc. SMME will need to become accredited, obtain a surety bond, obtain licensure, obtain a PTAN, etc. SMME can rent space from SMH; the lease agreement will need to comply with the Space Rental safe harbor. The hospital should insure patient choice. If the patient does not express a preference for a DME company, then the hospital can refer the patient to SMME. ABC can provide services to SMME. However, as discussed above, ABC cannot run SMME on a turnkey basis. Establishing the joint venture cannot be a “sweetheart deal” for the hospital. Remember that the hospital is a referral source to SMME. For example, if it will take $200,000 to get SMME up and running, and if the hospital will be a 50% stockholder in SMME, then at the beginning the hospital will need to cut a check for $100,000. If SMME needs capital contributions in the future, then the hospital will be responsible for 50% of the capital contributions. The hospital will have no obligation to refer patients to SMME. After setting up the joint venture, then if it chooses to do so, the hospital can refer all of its patients to the competitor across the street. If the ownership is split 50-50, then the hospital will be entitled to 50% of any dividend distribution, regardless of whether the hospital makes a million referrals……or zero referrals…….to SMME.

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)
www.bf-law.com

© Brown & Fortunato

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