Closet Cleaning Tips: The DMEPOS Standard Against Sharing Practice Location

Before considering arrangements involving the provision of durable medical equipment, prosthetics, orthotics, and supplies (“DMEPOS”) as part of their practice, healthcare providers must be mindful of not only the Stark Law and Anti-kickback Statute, but also of the CMS standards applicable to DMEPOS suppliers.[1] These standards are contained in 42 CFR § 424.57(c), and all Medicare DMEPOS suppliers must be in compliance with these standards in order to obtain and retain their billing privileges.

Over the years, physicians and suppliers have entered into traditional “consignment closets” or “stock-and-bill” arrangements. Under these arrangements, a DMEPOS supplier would maintain an inventory of DMEPOS (“in a closet”) at a practice location which is not owned by the supplier, but rather, owned by a physician or healthcare provider, for purposes of distribution to patients of the practice. Typically, such arrangements involve the rental of storage space for the inventory (they may also include the provision of personnel, by the suppliers, to do the fittings and perform training, education, and coordination of care services), but most importantly, the DMEPOS supplied to patients under these arrangements are billed by the suppliers.

The Rescinded Standard for Consignment ClosetsOn August 7, 2009, Centers for Medicare and Medicaid Services (“CMS”) issued a changed request 6528 (“CR6528”) to the Medicare Program Integrity Manual that significantly limited consignment closets or stock-and-bill arrangements, citing the lack of compliance with existing DMEPOS supplier standards. Pursuant to CR6528, consignment closet arrangements were prohibited unless: (1) title to the DMEPOS transfers to the physician/practitioner at the time the DMEPOS is furnished; (2) the DMEPOS is billed for by the physician/practitioner using his own DMEPOS billing number; (3) fitting or other services related to the DMEPOS are performed by individuals associated with the physician/practitioner and not by the DMEPOS supplier; and (4) beneficiaries are instructed to contact the physician/practitioner and not the DMEPOS supplier for problems or questions regarding the DMEPOS.

A month before its scheduled implementation date of March 1, 2010, however, on February 4, 2010, CMS issued a transmittal rescinding CR6528 “to consider other implementation dates.” Accordingly, there is no official prohibition on traditional consignment closet arrangements.

The Current DMEPOS Standard 29

Last year, CMS issued four new DMEPOS standards that became effective September 27, 2010.[2] Relevant to consignment closet arrangements, Standard 29[3] prohibits a supplier “from sharing a practice location[4] with any other Medicare supplier or provider.” CMS reasoned that legitimate suppliers would not share space with competitors, and if they do, then the practice often results in either poor service or fraud.

This prohibition is not applicable, in part, to practice locations where physicians, or physical or occupational therapists, furnish items to their own patients as part of their professional services. CMS explains that this exception to the space sharing prohibition was established for physicians that obtain their own DMEPOS supplier number and furnish DMEPOS from their office and to their patients. That is, the exception allows physicians to furnish DMEPOS to their own patients as part of their professional service, which would benefit the patients in terms of convenience and continuity of care.[5]

Although the proposed prohibition against traditional consignment closet arrangements (CR6528) was rescinded, DMEPOS Standard 29 accomplishes very similar goals, i.e., to prohibit consignment closets unless title to the DMEPOS transfers to the physician at the time it is furnished to the patient and the physician bills for the services. Essentially, Standard 29 prevents suppliers from providing DMEPOS and billing for the same at the physician’s practice location under the traditional consignment closets arrangement. In other words, Standard 29 would permit a true consignment closet arrangement, wherein a physician maintains an inventory of DMEPOS and bills patients or Medicare for the services. Physician only pays the supplier for the cost of DMEPOS if and when the DMEPOS is furnished.

CMS has neither officially banned consignment closet arrangements nor provided any opinion or guidance as to the applicability of Standard 29. It is not inaccurate to say that CMS has allowed traditional consignment closet arrangements, and continues to do so today. Nevertheless, healthcare providers would be well advised to consider the risks associated with entering into these types of arrangements in light of the new standards. CMS has already voiced its concerns regarding these arrangements through the now-rescinded CR6528, and it may be simply a matter of time before CMS will issue a formal opinion regarding consignment closet arrangements vis-à-vis Standard 29.

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[1] In 2008, the Office of Inspector General (“OIG”) approved an arrangement in which two DMEPOS suppliers proposed to have consignment closets on-site at hospitals to provide DMEPOS to discharged patients who elected to have the suppliers supply the prescribed DMEPOS. Although the OIG held that the arrangement did not violate the Anti-kickback Statute, the OIG advised that it expressed “no opinion as to whether the Suppliers are satisfying applicable CMS supplier standards with respect to the Proposed Arrangement.” OIG Advisory Opinion No. 08-20 (Nov. 19, 2008).

[2] These are new Standards 27 through 30. 42 CFR §§ 424.57(c)(27)-(30).

[3] 42 CFR § 424.57(c)(29).

Reprinted with permission.  All rights reserved.

[4] A practice location is where the suppliers operate the business and meet with customers.

[5] 75 FR 52642 (Aug. 27, 2010).