Hospital Arrangements with Suppliers Pose Risks

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Marketing to potential customers is a "must" strategy if a company is to survive. Some of the best customers for O&P facilities are the hospitals and the hospital's patients that are in a facility's market. Hospitals have both inpatients and outpatients who require orthotic and/or prosthetic devices and services. In an effort to better serve patients requiring O&P devices and services, some hospitals have entered into arrangements with companies that help the hospital and its patients obtain necessary O&P services from suppliers. These arrangements can serve a very beneficial purpose to the hospital and its patients and serve as a great marketing tool for the company, but it also could potentially put the hospital and the company at risk under the federal anti-kickback law.

Under the anti-kickback law, it is illegal to offer or accept any remuneration in return for the recommendation or referral of an item or service paid by a governmental payer. Remuneration includes anything of value such as discounts, contracts, gifts, and services, which are provided at less than fair market value, or take into account the volume of referrals made. A number of "safe harbors" help to limit the prohibitions created by the anti-kickback law by addressing situations that create little chance of abuse or over-utilization. For example, payment of reasonable compensation to an employee is permitted even though the employee may make referrals to the employer. Another safe harbor and the one that could apply to this arrangement relates to personal service contracts. To meet this safe harbor, the contract must be in writing, have a term of at least one year, and payment must be fixed in advance and be at fair market value without regard to the value of referrals made between the participants. An arrangement between a hospital and a company to handle the hospital's referrals is lawful so long as either no referrals are made to any company with which the referring company has a financial interest, or the arrangement meets all of the personal services safe harbor criteria or another safe harbor. The hospital should pay the contractor fair market value for the services being provided.

It is not advisable for a company to provide services to the hospital on a per-referral, discounted, or free basis and then refer a Medicare patient to itself. Doing so would be tantamount to the company paying a kickback to the hospital in return for the hospital's O&P referrals. While it may be permissible for a hospital to choose the O&P supplier of its choice to purchase devices included in the Part A hospital payment from Medicare, it is not good practice for a hospital to do so when the patient or the patient's physician requests a different supplier for good reason.

While a hospital can purchase from the vendor of its choice, the hospital should not choose a vendor that is giving the hospital a necessary service free of charge in return for referrals. When payment is to be made under Medicare Part B because the device is only to be used by the patient after discharge, Medicare regulations make it clear that the patient has the right to choose the supplier. Medicare's discharge planning requirements say that the patient may choose the supplier of his or her choice except when a Medicare Advantage Plan is involved. Hospital discharge planners and clinical staff understandably like the idea of calling just one number and having someone else make all the arrangements for the O&P services and devices patients will need when they go home.

As for O&P and other companies, having a hospital give it the authority to handle the arrangements for all of the hospital's O&P device and service needs is well worth its cost of making the arrangements for the hospital so long as there are no restrictions on being able to send the referral to its own facility. Therein lies the problem. If a company wants to offer referral service to hospitals, it is important that either referrals not be made to any facility with which the company has an ownership, investment, or compensation interest, or the referral meets safe harbor requirements. At the very least, the hospital should pay fair market value for the service being provided, as determined by an independent appraisal consultant.

It also must be understood that Medicare patients have the right to choose the providers and suppliers of their choice. The hospital may not steer referrals either to its own affiliate or to another company when a patient requests a particular supplier, especially when the hospital is receiving something of value from the company receiving the referral. Sanctions under the anti-kickback law are severe, so compliance should be a priority.

John Latsko is a partner in the health law practice of Schottenstein, Zox & Dunn, Columbus, Ohio. He can be contacted at 614.462.2329;

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