Subcontract Agreement:Hot Button Issues In The Competitive Bid Arena

(April 2013)

CMS announced the final rule for competitive bidding on April 10, 2007.[ CMS, Competitive Bidding, 72 Fed. Reg. 17992 (Apr. 10, 2007).] In the final rule, CMS indicated that contract suppliers may subcontract with non-contract suppliers as long as the subcontractor has not been “excluded from the Medicare program, any State health program or any other government executive branch procurement or nonprocurement activity.”[ 72 Fed. Reg. 18049.] To demonstrate that subcontractors meet this requirement, among others, the contract supplier must disclose the subcontract and related information within 10 business days after the parties execute the contract. Failure to meet the disclosure requirements and other rules concerning subcontracts may result in termination of the competitive bid contract: “[CMS] might conclude that a contract supplier breached its contract if [CMS] discover[s] that the contract supplier did not fully comply with disclosure requirements . . . or falls out of compliance with the Medicare program requirements.”[ 72 Fed. Reg. 18049. ]

Responsibilities That Can Be Subcontracted

According to the CBIC, contract suppliers may subcontract for (1) the purchase of inventory, (2) the delivery and set-up of items, (3) patient and caregiver instruction, and (4) the repair of rented equipment.[ CBIC, “Subcontracting of DMEPOS Servs.” (Aug. 2012) http://www.dmecompetitivebid.com/Palmetto/Cbicrd1Recompete.Nsf/files/R1RC_Fact_Sheet_Subcontracting.pdf/$File/R1RC_Fact_Sheet_Subcontracting.pdf. ] To further clarify the services that a supplier may provide through a subcontract, CBIC directs suppliers to consult the DMEPOS Quality Standards.[ The Quality Standards are available at: available at https://www.cms.gov/MedicareProviderSupEnroll/Downloads/DMEPOSAccreditationStandards.pdf.] By comparing the Quality Standards to CBIC’s information on subcontracts, it is apparent that the contract supplier cannot delegate the following responsibilities to a subcontractor:

Intake and assessment;
Communications with prescribing practitioners to confirm orders and to recommend any necessary modifications to orders;
Coordination of care with physicians and other practitioners;
Coordination with the beneficiary and the practitioner to determine the time frame for delivery;
Verification that beneficiaries receive items and services;
Verification that the items (1) comply with the physician order and (2) meet the beneficiary’s needs;
Maintenance of documentation in the beneficiary’s file, including physician orders, certificates of medical necessity, DME information forms, proofs of delivery, the make and model of the item provided, verification that the beneficiary received training and instructions, and, for wheelchairs and power mobility equipment, documentation that positioning, seating, and specialty assistive technology have been evaluated;
Review and updates of beneficiaries’ records;
Ownership and responsibility of equipment;
Ensuring the safety of products; and
Investigation of any incident involving beneficiary safety.

Accreditation

Subcontractors that set up equipment and instruct beneficiaries must be accredited. By comparing CBIC’s information to the Quality Standards, it is apparent that subcontractors must be accredited before they:

Instruct beneficiaries and their caregivers on the features, set up, routine use, cleaning, and maintenance of equipment and on any infection control practices;
Adjust equipment to meet the needs of a beneficiary;
Ensure that the beneficiary’s home allows for safe and effective use of the item; and
Evaluate and document the positioning, seating, and special assistive technology of wheelchairs and power mobility devices.

On the other hand, a subcontractor may provide the following services without accreditation:

The sale of inventory to the supplier;
Delivery of items along with necessary contact information to beneficiaries;

Delivery of the supplier’s written and pictorial instructions to beneficiaries; and
Repair services for rental equipment.

Provision Of Inventory And Delivery Of Products

The contract supplier may enter into a contract for both the purchase of inventory and the delivery of products. However, such an arrangement must be carefully structured to comply with guidance from the OIG,[ See OIG Adv. Bulletin, “Contractual Joint Ventures” 68 Fed. Reg. 23148 (Apr. 30,2003).] CBIC, and the NSC. Based on publications from these authorities, the subcontract should (1) base the purchase price for the inventory on the competitive bid fee schedule and (2) ensure that the contract supplier has title to the equipment before it is delivered to the patient.

To avoid complications with the Medicare anti-kickback statute when subcontracting for the purchase of inventory from a non-contract supplier, the maximum purchase price per unit should be the amount the contract supplier will receive under the competitive bidding program. If the contract supplier pays more than that amount, then the excess cash could qualify as a kickback designed to induce referrals from the subcontractor.

CBIC and the NSC have both indicated that the contract supplier must have title to the inventory before equipment is delivered to a beneficiary. The CBIC issued an FAQ indicating that contract suppliers “must have title to the equipment when the equipment is furnished to the beneficiary” and referring suppliers to the NSC for further guidance on the purchase of inventory.[ CBIC, “Contract Suppliers: Subcontracting FAQs,” (responding to the question: “What are the requirements regarding subcontracting for inventory under the supplier standards? Does the supplier have to have title to the equipment?”) available through this link: CBIC FAQs. ] The NSC has issued the following statements concerning the purchase of inventory:

“[C]ontracting out delivery services does not mean that another company can send inventory directly from their own inventory. It means that you . . . may contract with someone to deliver products from your inventory to the beneficiary.”[ NSC, Supplier Standards “Standard 12-May I contract delivery and instruction services?” available through this link: NSC Standard 12.]
“The bottom line is to ensure suppliers have either the inventory or a contract to purchase inventory to support the products and services they are going to provide to beneficiaries.”[ NSC, “What is considered an acceptable contract with regard to the purchase of inventory?” available through this link: NSC FAQ.]

Generally, the contract supplier should maintain at the subcontractor’s location a certain level of inventory owned by the contract supplier. For emergency situations, the contract supplier can also have a provision in the subcontract allowing for the “just-in-time” transfer of title from the subcontractor to the supplier when a beneficiary needs a particular item that is not in the contract supplier’s inventory.[ Obviously, this arrangement is risky because it slides through a loophole in the NSC’s guidance. Note, however, that CMS has accepted these just-in-time transfers in the past. See CMS, Transmittal 300 CR 6528 (Sept. 1, 2009) (rescinded).]

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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CMS, Competitive Bidding, 72 Fed. Reg. 17992 (Apr. 10, 2007).
72 Fed. Reg. 18049.
72 Fed. Reg. 18049.
CBIC, “Subcontracting of DMEPOS Servs.” (Aug. 2012) http://www.dmecompetitivebid.com/Palmetto/Cbicrd1Recompete.Nsf/files/R1RC_Fact_Sheet_Subcontracting.pdf/$File/R1RC_Fact_Sheet_Subcontracting.pdf.
The Quality Standards are available at: available at https://www.cms.gov/MedicareProviderSupEnroll/Downloads/DMEPOSAccreditationStandards.pdf.
See OIG Adv. Bulletin, “Contractual Joint Ventures” 68 Fed. Reg. 23148 (Apr. 30,2003).
CBIC, “Contract Suppliers: Subcontracting FAQs,” (responding to the question: “What are the requirements regarding subcontracting for inventory under the supplier standards? Does the supplier have to have title to the equipment?”) available through this link: CBIC FAQs.
NSC, Supplier Standards “Standard 12-May I contract delivery and instruction services?” available through this link: NSC Standard 12.
NSC, “What is considered an acceptable contract with regard to the purchase of inventory?” available through this link: NSC FAQ.
Obviously, this arrangement is risky because it slides through a loophole in the NSC’s guidance. Note, however, that CMS has accepted these just-in-time transfers in the past. See CMS, Transmittal 300 CR 6528 (Sept. 1, 2009) (rescinded).