Legal Perspective: Selling Funded Products Using Turnkey Services

HME legal expert Jeffrey Baird helps providers address key considerations when it comes to outsourcing.

To learn about any legal issues HME providers should understand when using a fulfillment turnkey service, HME Business magazine turned to Jeffrey Baird, Esq., chairman of the Health Care Group at law firm Brown& Fortunato, P.C.

HME Business: Are HME providers allowed to sell funded products using a turnkey service?

Baird: Yes. This arrangement is commonly referred to as a “fulfillment” arrangement. It operates as follows: First, the DME supplier will generate customers through its marketing program. Second, the DME supplier will handle the “intake, assessment and coordination of care.” This means that the supplier will secure the physician’s order and will determine if the medical necessity criteria is met. Third, if the supplier determines that the medical necessity criteria is met, then it will direct the “fulfillment house” (e.g., McKesson) to ship the product to the customer. Fourth, in shipping the product to the customer, the fulfillment house will affix the DME supplier’s label to the shipping package. Fifth, the supplier will bill and collect from the third-party payer. Sixth, the supplier will pay the fulfillment house for the inventory and for labeling, packing and shipping. And seventh, if the customer has follow-up questions, he or she will contact the supplier.

Are there any legal concerns a provider should consider when using such a system?

Let’s focus on Medicare. Medicare requires the DME supplier to handle the “intake, assessment and coordination of care.” The fulfillment house cannot handle this function for the supplier. The supplier and the fulfillment house should enter into a written agreement that sets out each party’s rights and obligations and contains a HIPAA-compliant Business Associate Addendum.

Anything else providers should know about using turnkey services?

Yes. Let’s focus on Medicare again. While the fulfillment house can provide turnkey “pack, label, and ship” services, the fulfillment house cannot run the DME operation’s overall business on a turnkey basis. Doing so would violate the OIG’s April 2003 Special Advisory Bulletin, entitled ‘Contractual Joint Ventures.’ From the OIG’s standpoint, if the DME supplier is going to bill Medicare for products, then the DME supplier must have operational responsibilities and financial risk. Says another way, the supplier must have “skin in the game.” When the supplier submits a claim to Medicare, the supplier is representing that it (the supplier) is truly the supplier of the product. If the fulfillment house is running all of the supplier’s operations on a turnkey basis, then such representation is false, hence, a violation of the federal False Claims Act. The fulfillment house can provide services that are in addition to ‘pack, label and ship,’ but such additional services cannot amount to the fulfillment house running the supplier’s entire operation on a turnkey basis.

One more thing: The safe course of action is for the fulfillment house not to provide any marketing services for the supplier. If the supplier is generating customers for the supplier, and if the supplier is paying for the products (and for the “packing, labeling and shipping”) on a per-product basis, then the compensation paid by the supplier to the fulfillment house will vary based on the customers generated by the fulfillment house to the supplier. This will implicate the Medicare anti-kickback statute (AKS). I am not saying that the fulfillment house cannot provide marketing services to the supplier; however, if it does so, then the arrangement needs to be carefully structured in order to avoid violating the AKS.

This article originally appeared in the September 2017 issue of HME Business.

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