EXIT STRATEGY: Building Your DMEPOS Business with the End in Mind

July 21, 2022 Firm News

A wise man once said, “How you do anything is how you do everything.” In that vein, the time to begin preparing for the potential sale of a DMEPOS provider’s business down the road begins well before the first claim for reimbursement is ever submitted. Once approached by an interested buyer, the time has long since passed for the business to self-audit for compliance; the damage will have likely been long done and the business forever tarnished. While not intended to be exhaustive, this article provides a high-level overview of some regulations to keep in mind when operating a Medicare Part B enrolled DMEPOS business that someone would ultimately want to purchase and provides insight into the transaction process in preparing for the sale.

Operating a Business Someone Will Want to Purchase 

[General Healthcare Laws Applicable to DMEPOS Providers]

  1. The Law – Stark (42 U.S.C. 1395nn)
  1. What it Says:

“Except as otherwise provided . . . if a physician (or an immediate family member of such physician) has a financial relationship with an entity . . . then the physician may not make a referral to the entity for the furnishing of designated health services.”

  1. What it Means:

This statute sets forth a prohibition on self-referrals. Under Federal Law, DME is part of the definition of designated health services; as such, physicians are prohibited from referring patients to any entity they have a financial relationship with unless an exception applies. Penalties for violations include civil monetary penalties and/or exclusion from participation in Federally funded healthcare programs.

  1. In Practice:

The Stark Law applies to DMEPOS providers if a referral source (or immediate family member of such referral source) has a financial interest in the entity that they refer the equipment and/or supplies to. As noted above, there are several exceptions to the Stark law, which should be carefully examined against a DMEPOS provider’s operations if a referring provider has a financial interest in the DMEPOS company.

  1. The Law – Federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(b))
  2. What it Says:

Whoever knowingly and willfully offers/pays or solicits/receives any remuneration in exchange for referring an individual to a person for the furnishing of any item or service for which payment maybe may be made in whole or in part under a federal healthcare program . . . shall be guilty of a felony and fined not more than $100k and/or imprisoned not more than 10 years.

  1. What it Means:

This statute sets forth restraints on financial relationships between referral sources and healthcare providers. It is a violation of Federal law for a referral source to receive anything of value from a DMEPOS provider – or for a DMEPOS provider to provide anything of value to a referral source – in exchange for referring business that is reimbursable by a Federally funded healthcare program (e.g., Medicare Part B for DME). Violations of this statute can result in felony criminal prosecution and/or civil monetary penalties.

  1. In Practice:

 This law applies to marketing relationships with any type of referral sources, whether it be with marketers or prescribing practitioners.

There are exceptions to this statute that DMEPOS providers need to closely analyze their marketing practices against to ensure compliance.

For example, bona fide W2 employees the DMEPOS provider are exempt from such referral compensation prohibitions under the Anti-Kickback Statute. Additionally, there are statutorily recognized business practices – known as Safe Harbors (such as the Personal Services and Management Contracts Safe Harbor) that are applicable to marketing relationships with independent contractors. All elements of an applicable Safe Harbor must be met to safeguard against prosecution and/or penalties.

Those providers that do not bill Federally funded healthcare programs need to be aware of more expansive state laws; while the Federal Anti-Kickback Statute only applies to Federally funded healthcare programs, many states have enacted their own versions of this law that are more expansive insofar as they apply to commercially insured and even cash-paying patients alike.

  1. The Law – Beneficiary Inducement Statute (42 U.S.C. §1320a-7a(a))
  2. What it Says:

Any person/entity that offers to or transfers anything of value to any individual eligible for federally funded healthcare benefits that is likely to influence that individual to order or receive from a particular provider . . . shall be subject to, in addition to other penalties, a penalty of not more than $20k per each line item, treble damages and exclusion.

  1. What it Means:

 This statute prohibits healthcare providers from offering anything of value to a Federally funded healthcare beneficiary for the purpose of incentivizing such individual to receive products/services from a healthcare provider.

  1. In Practice:

Patient inducements can present in many varieties. For example, providing free services or gifts, or waiver of patient financial responsibility (e.g., co-pays or deductibles).

Where there is a law, there is often an exception (as with the above referenced statutes); in certain circumstances, gifts of nominal value below specified monetary thresholds have been recognized to not constitute an inducement, and there are certain exemptions from the requirement to collect patient financial responsibility, such as in the event of a documented financial hardship.

  1. The Law – False Claims Act (31 U.S.C. § 3729)
  2. What is Says:

Anyone who knowingly presents a false or fraudulent claim for payment or approval is liable for a civil penalty of not less than $5,000 but not more than $10,000 plus damages for the amount in which the Government sustains as a result of that claim.

  1. What it Means:

This is a ‘catch all’ regulation, insofar as that, if any law or regulation is violated in the process leading up to claim submission, it can also be consideration a violation of the Federal False Claims Act. This law requires healthcare providers to ensure they refund the appropriate federally funded healthcare program in the event they are paid on claims they should not have been (due to non-compliance); failure to refund can result in penalties.

  1. In Practice:

The False Claims Act emphasizes the need for healthcare providers to regularly conduct internal audits to ensure that the claims submitted for reimbursement meet applicable payor requirements. If a claim is paid upon that should not have been, healthcare providers only have a finite amount of time to identify and refund such paid monies before the False Claims Act is violated.

[DMEPOS Specific Healthcare Laws]

In addition to having to navigate the regulatory landmines presented by healthcare laws that are applicable to all types of healthcare providers – such as the examples set forth above – DMEPOS providers have another set of Federal laws designed just for them. Enter the DMEPOS Supplier Standards!

  1. The Laws – DMEPOS Supplier Standards (42 C.F.R. 424.57(c))
  2. What they Say and Mean:

There are thirty (30) total DMEPOS Supplier Standards that Medicare Part B enrolled providers are required to abide by for purposes of obtaining and maintaining their Medicare billing privileges.

Some of these laws, such as DMEPOS Supplier Standard #1 (the requirement to comply with all applicable Federal and State licensing requirements and regulations) are extremely broad in scope; others such as DMEPOS Supplier Standard #11 (regarding restrictions on patient solicitation) are extremely specific.

  1. In Practice:

Claims submitted by DMEPOS providers to Medicare that do not comply with any of the DMEPOS Supplier Standards can be considered an improper claim that runs afoul of the False Claims Act (described above). Accordingly, DMEPOS providers need to be cognizant of the implications and requirements of each of the DMEPOS Supplier Standards to ensure the claims submitted to Medicare are complaint.

Preparing for the Sale

So, you have managed to walk the regulatory red-tape tightrope and have run a profitable business. You have begun to garner some attention, and there is a party interested in purchasing the fruits of your labor. Let’s discuss some ins and outs of the transaction process.

Non-Disclosure Agreements (“NDA”) – Enter into this agreement before delivering any business of financial information to the prospective buyer, and make sure the definition of ‘confidential’ encompasses what you need it to!

Letter of Intent (“LOI”) – This document sets forth a general outline of the terms and conditions that will ultimately wind up in the purchase agreement. After all, best to ensure the parties are on the ‘same page’ prior to expending the time, energy, and resources required to conduct due diligence and draft the ultimate transaction documents. The LOI will generally set forth: (i) the type of transaction (e.g., asset versus stock); (ii) the purchase price and terms (e.g., lump sum upon closing? Paid over time with a promissory note and security agreement?); (iii) the transition process; (iv) due-diligence period and procedure; and (v) whether there is a ‘no shop’ provision. Pay particular attention to which provisions of the LOI are binding versus non-binding.

Due Diligence – During this information exchange period, the prospective buyer will be provided access to certain financial, corporate and operational information (which should stay confidential pursuant to the NDA). This process should be completely transparent, as it allows the prospective buyer to access payor and regulatory compliance documentation to determine if they want to proceed with the transaction.

Purchase Agreement

The type of sale (i.e., asset versus stock) depends on the needs of the buyer.

In an asset transaction, “Company A” picks and chooses what it likes from “Company B” and plugs it into its existing operations. The liabilities of “Company B” will  not be assumed by the purchaser, and the separate entities can continue to exist.

In a stock transaction, “Company B” – the entire entity – is purchased, including the ‘good’, the ‘bad’, and the ‘ugly’; buyer assumes all liability (even from prior to the closing) and “Company B” continues to exist after the purchase.

The distinction is very important because for DMEPOS providers, Medicare billing numbers, accreditations, state DME licenses and commercial contracts will not transfer to the purchaser unless pursuant to a stock transaction.

The Purchase Agreement will set forth representations and warranties about how the business has been operated (which must be true!), along with the terms and conditions set forth in the LOI. Pay close attention to indemnification provisions (total amount and duration), as well as restrictive covenants (e.g., seller cannot own/operate a DME business within “X” miles for “Y” years).