2022 HME Business Handbook: Legal

How To Work With Physicians and Other Referral Sources

LegalThe lifeblood of the durable medical equipment supplier business is a predictable stream of referrals from physicians and other referral sources such as hospitals and long term-care facilities.

It is acceptable for the supplier to enter into arrangements with referral sources that result in referrals. For example, the supplier may enter into a Medical Director Agreement with a referring physician.

Another example is a joint venture in which a DME entity is jointly owned by a hospital and a DME supplier. In entering into these types of arrangements, the supplier cannot run afoul of the federal and state laws that prohibit kickbacks, inducements and self-referrals.

It is important for the DME supplier to (i) know what the applicable federal and state laws are regarding arrangements with referral sources and (ii) structure such arrangements to comply with the laws.

It is equally important for the DME supplier business to know which types of arrangements to avoid.


DME suppliers mostly serve the elderly. This means that Medicare is the primary source of payment for DME. If the supplier takes assignment, Medicare will pay the supplier directly. If the supplier provides the product on a non-assigned basis, (i) the Medicare beneficiary pays the supplier (ii) the supplier submits a claim to Medicare on behalf of the beneficiary, and (iii) Medicare reimburses the beneficiary for 80 percent of the Medicare allowable.


How do Medicare beneficiaries know to select one DME supplier over another? One way is for the supplier to market directly to the general public, or to a targeted population, in order to create brand awareness.

Another way is for the DME supplier to develop relationships with physicians and other referral sources that result in referrals of beneficiaries to the supplier.

In entering into arrangements with referral sources, the DME supplier needs to be aware of the federal and state laws that govern such arrangements.


The federal anti-kickback statute (AKS) is a criminal statute. It prohibits the DME supplier from offering “anything of value” to a referral source in exchange for (i) the referral of (or arranging for the referral of) a patient covered by a federal health care program (FHCP) or (ii) the recommendation of the purchase of a product covered by an FHCP. The Office of Inspector General (OIG) has published a number of “safe harbors.”

If an arrangement complies with a safe harbor, the compensation (or anything of value) between the parties does not constitute illegal remuneration under the federal AKS. If an arrangement does not comply with a safe harbor, it does not mean that the arrangement violates the federal AKS. Rather, it means that a careful analysis of the arrangement needs to be performed in light of the language of the statute, court decisions, and other published guidance.


The federal physician self-referral statute (“Stark”) is a civil statute. If a physician or immediate family member has a financial relationship (ownership or compensation) with a DME supplier, the physician cannot refer Medicare/Medicaid patients to the supplier, unless the arrangement fits within a Stark exception.


In addition to the federal statutes, it is important that the supplier’s relationship with the referral source complies with applicable state statutes. Each state has an anti-kickback statute (state AKS) that is similar to the federal AKS.

Some state AKSs apply only if the payor is the state Medicaid program. Other state statutes apply if the payor is a commercial insurer, or even a cash-pay patient.


  • It is legally acceptable for a DME supplier to enter into arrangements with physicians and other referral sources that result in referrals to the supplier.
  • In entering into such arrangements, it is important that the supplier and the referral source comply with the federal AKS, Stark, and their state counterparts.
  • In particular, the arrangement needs to (i) comply with, or substantially comply with, a safe harbor to the federal AKS, (ii) comply with a Stark exception, and (iii) comply with safe harbors/exceptions to the applicable state laws.


This article originally appeared in the May/Jun 2022 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 HME companies, pharmacies, infusion 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 jbaird@bf-law.com.

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