Provider Strategy

Subcontracting with Another Supplier

When it comes to MAPs and MMCPs, what's allowed and what's not allowed for subcontracting arrangements?

Today, approximately 35 percent of Medicare patients are covered by Medicare Advantage Plans (MAPs) and approximately 70 percent of state Medicaid patients are covered by Medicaid Managed Care Plans (MMCPs).

A challenge faced by many DME provider is that MAPs and MMCPs (referred to as “plans”) have “closed panels.” This means the plan concludes that it has a sufficient number of DME suppliers to serve the Plan’s enrollees (“covered lives”) and, therefore, does not let any additional suppliers serve the Plan’s enrollees.

Let us assume that ABC Medical Equipment (ABC) is not allowed on Plan A. As a “workaround,” ABC may want to enter into a subcontract agreement (SA) with XYZ Medical Equipment (XYZ) ... that is a contracted supplier under Plan A. Entering the SA will allow ABC to indirectly gain access to Plan A. However, in entering into a SA, here is what ABC and XYZ cannot do:

  • When a Plan A patient wants to purchase a product from ABC, then ABC will take care of the patient.
  • ABC will (i) handle intake, assessment and coordination of care, (ii) deliver and set up the equipment, and (iii) handle the subsequent maintenance and repairs.
  • XYZ will submit a claim to Plan A. Upon receipt of payment from Plan A, XYZ will (i) pay a large percentage (e.g., 92 percent) to ABC and (ii) retain the balance.

The problem with this arrangement is that it likely violates the federal antikickback statute (Federal AKS), the federal False Claims Act (Federal FCA), and their state counterparts. Here are how the Federal AKS and Federal FCA may come into the picture:

  • Federal AKS – This statute makes it a felony for (i) XYZ to give anything of value in exchange for receiving the referral of a patient covered by a government health care program and (ii) ABC to receive anything of value in exchange for referring (or arranging for the referral of) a patient covered by a government health care program. The kickback issue arises because (i) ABC is referring or arranging for the referral of the patient to XYZ and (ii) XYZ is, in turn, remitting e.g., 92 percent of the payment to ABC.
  • Federal FCA – This statute prohibits (i) XYZ from submitting “false claims” and (ii) ABC from conspiring (or collaborating) with XYZ for the submission of false claims. When XYZ submits a claim to Plan A, XYZ is representing that it is the supplier…that it took care of the patient and, therefore, deserves to be paid. In fact, this is not the case. The true supplier is ABC; it is the entity that does all of the work. All XYZ does is submit a claim to Plan A. Hence, the claim submitted is a false claim.

We’ve covered what ABC and XYZ can’t do; let’s discuss what they can do. If ABC and XYZ want to enter into a proper SA, here are the steps they should take:

  • Review the Plan A Contract - The parties need to review XYZ’s Plan A contract to determine if it addresses subcontract arrangements. If the Plan A contract allows a subcontract arrangement, then in order to avoid problems under the Federal AKS and Federal FCA, the SA should be structured as set out hereafter. On the other end of the spectrum, the Plan A contract may prohibit XYZ from subcontracting out its services. Or the contract may take the middle road and provide for one of the following: (i) XYZ can subcontract out its services but must first notify Plan A of the identity of the subcontractor; (ii) XYZ can subcontract out not more than e.g., 20 percent of its services; (iii) XYZ can subcontract out its services only if Plan A approves the subcontractor in advance; or (iv) XYZ can only subcontract out specifically delineated services.
  • XYZ Must Retain a Level of Operational Responsibilities and Financial Risk – So that it can credibly assert that it is the “supplier,” XYZ must have a level of operational responsibilities and financial risk. For example, XYZ needs to handle the intake. This means that XYZ must determine if the patient qualifies for coverage under Plan A. ABC can gather information and documents and forward them to XYZ...but it is XYZ, not ABC, that must determine if the patient is to receive the product. If the patient later has a maintenance/repair need, then he needs to call XYZ; XYZ can, in turn, direct ABC to handle the repair/maintenance. Further, XYZ will be obligated to pay ABC regardless of whether or not Plan A pays XYZ. In other words, XYZ’s obligation to pay ABC for its services is absolute.
  • Inventory – Under the SA, ABC will deliver the product to the patient “for and on behalf of XYZ.” At the time of delivery, title to the product needs to be in XYZ’s name. This can be accomplished in one of several ways: (i) XYZ can purchase the inventory, take possession of it, and deliver it to ABC; (ii) XYZ can purchase the inventory, not take possession of it, and direct the manufacturer to deliver the inventory to ABC; (iii) ABC can purchase the inventory; on a regular basis, XYZ can purchase inventory from ABC, and ABC can segregate XYZ’s inventory in ABC’s warehouse; or (iv) ABC can purchase the inventory; when ABC is about to deliver the product to the patient’s home, then title will transfer to XYZ; and XYZ will have the obligation to purchase the product from ABC.
  • ABC’s Services – The SA can provide that ABC’s services include the following: (i) deliver the product to the patient, educate the patient on how to use the product, and set the product up for the patient; (ii) obtain information and documents from the patient and his physician and transmit them to XYZ so that XYZ can conduct the intake; and (iii) at the direction of XYZ, provide maintenance and repair services to the patient.
  • Flow of Money – The most conservative course of action is as follows: (i) if XYZ purchases inventory from ABC, then the price must be fair market value (“FMV”) and must be pursuant to a price list attached to the SA, and (ii) XYZ pays fixed annual compensation (e.g., $48,000 over the next 12 months) to ABC in which such compensation is the FMV equivalent of ABC’s services. If fixed annual compensation is not feasible, then a less conservative course of action is as follows: (i) if XYZ purchases inventory from ABC, then the purchase price must be FMV and must be pursuant to a price list attached to the SA, and (ii) XYZ pays a fixed fee per each unit of service provided by ABC; such compensation must be the FMV equivalent of ABC’s services, and the compensation must be set out in a fee schedule attached to the SA. If the parties want to strengthen their position that the compensation paid to ABC is FMV, then the parties can order an FMV evaluation and report from an independent third party.

This article originally appeared in the November/December 2019 issue of HME Business.

About the Author

Jeffrey S. Baird, Esq., is Chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or


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