CMS Narrows Consignment Closet Arrangements

October 22, 2009

Certain Medicare-enrolled suppliers of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) maintain inventory at a practice location which is not owned by the enrolled DMEPOS supplier, but is instead owned by a Medicare-enrolled physician, non-physician practitioner or other healthcare professional. The DMEPOS is distributed by the physician to Medicare beneficiaries as needed and billed to the DME regional carriers by the DMEPOS supplier. The Centers for Medicare & Medicaid Services (CMS) promulgated Transmittal 297, effective on Sept. 8, 2009 and implemented as of March 1, 2010, to address this type of arrangement, called a “consignment closet” or “stock and bill” arrangement.

Proponents of consignment closet arrangements assert that these arrangements fill a critical role in providing care to Medicare beneficiaries. These arrangements:

  • eliminate any gap between diagnosis and treatment that can lead to additional health problems;
  • lower costs to the Medicare program by permitting uninterrupted treatment, decreasing negative outcomes, and reducing emergency room visits; and
  • permit physician instruction for the proper fitting and use of DME.

DMEPOS suppliers must meet certain supplier standards set forth at 42 CFR 424.57(c) and must now obtain accreditation of every location at which DMEPOS is provided. Because most consignment closets do not meet each of the supplier standards, CMS must approve permissible consignment closet arrangements.

I. Transmittal 297 and Applicable Law

Transmittal 297 presents a scenario by which a Medicare-enrolled physician may maintain a consignment closet to provide DMEPOS to his or her patients who are Medicare beneficiaries (Transmittal 297 does not apply to commercial patients or to Medicaid beneficiaries). Transmittal 297 requires all of the following:

  1. The title to the DMEPOS must be transferred to the physician at the time the DMEPOS is furnished to the beneficiary.
  2. The physician must bill for the DMEPOS using his or her own enrolled DMEPOS billing number.
  3. All services provided to a Medicare beneficiary concerning fitting or use of the DMEPOS must be performed by individuals paid by the physician and not by any other DMEPOS supplier.
  4. The beneficiary must be advised to contact the physician with any questions, rather than the DMEPOS supplier that provided the DMEPOS to the physician.

Transmittal 297 also provides that two or more enrolled DMEPOS suppliers shall not be enrolled or located at the same practice location. Each enrolled DMEPOS supplier must have a separate entrance and separate post office address, as recognized by the United States Postal Service. This is a new requirement for DMEPOS suppliers. In January 2008, CMS proposed additional DMEPOS supplier standards that would prohibit supplier space-sharing, but these proposed supplier standards have not been finalized. In its proposal, CMS requested comments on an exception to the space-sharing limitation:

[W]e are soliciting comments on whether we should establish an exception to this space sharing proposal for physicians and non-physician practitioners and the circumstances which warrant an exception. 73 Fed. Reg. 4508 (January 25, 2008).

Physicians that provide DMEPOS to Medicare beneficiaries are bound by several laws and requirements, notably the Anti-Kickback Statute and the Stark Law. The Anti-Kickback Statute prohibits the payment, solicitation or receipt of any remuneration to induce the lease, purchase or order of any item or service covered by the Medicare and Medicaid programs (such as DME). The Stark Law prohibits a physician from referring patients to an entity for “designated health services” (including DME) reimbursable by Medicare or Medicaid if the physician has a financial relationship (such as an investment interest) with the entity, unless an exception exists.

II. The Stark Law Narrows the Practical Effect of Transmittal 297

Transmittal 297 requires that the DMEPOS be transferred to the physician and then provided to the beneficiary by the physician and billed by the physician. However, because DME is included among the “designated health services” restricted by the Stark Law, the physician cannot legally provide the DMEPOS to the beneficiary unless a Stark Law exception is met. The applicable exception—the in-office ancillary services exception—is written very narrowly with respect to DME. A physician cannot rely on the in-office ancillary services exception for the provision of DME, with the exception of canes, crutches, walkers, foldable wheelchairs, and blood glucose monitors. All other DMEPOS other than these items are restricted by the Stark Law, and a physician supplier may not provide them to his or her own patients and bill the Medicare program.

Although Transmittal 297 provides an exception to the prohibition on consignment closet arrangements, the exception is voided by the Stark Law prohibitions for all DME except canes, crutches, walkers, foldable wheelchairs, and blood glucose monitors provided pursuant to the in-office ancillary services exception to the Stark Law. In short, Transmittal 297 does not provide an effective exception to consignment closet arrangement for most types of DMEPOS.

Physicians and DMEPOS suppliers should carefully examine the implications of Transmittal 297 on their Medicare business, as well as the effect of Transmittal 297 on other laws regulating the activities of physicians and DME suppliers.