DME Joint Ventures and Referral Businesses: When a Supplier Does the Work for the Referrer

DME contractual joint venture kickbacks can hide in the profit a referral source keeps when an established supplier runs its new durable medical equipment business. The referrer brings the patients. The supplier brings the inventory, employees and billing operation. The new business bills for the equipment and leaves the referrer a share of the proceeds. For someone inside that business, the revealing gap is between the name on the claim and the people doing the work.

The Department of Health and Human Services Office of Inspector General described this structure in its April 2003 bulletin on contractual joint ventures. Its concern was a provider contracting out substantially an entire new business to a supplier that could otherwise serve those patients itself, then receiving the profits as payment for referrals. The supplier gives up some of the margin to secure access to the patients.

How a Referring Clinic Profits From an Outsourced DME Joint Venture

A referring clinic profits from an outsourced DME joint venture by billing for its patients’ equipment and keeping what remains after paying the supplier that runs the operation. In the suspect model the Inspector General described, the clinic’s principal contribution is its existing patient base, with little investment in staff, capital or operations.

The bulletin’s hospital example makes the arrangement tangible. A hospital establishes a subsidiary to provide durable medical equipment. An existing equipment company contracts to run that subsidiary and supply its inventory. That company already provides comparable services and bills for them in its own name. The hospital has entered the equipment business with another supplier’s operation behind it.

The bulletin also puts an equipment company on the referring side. A supplier that sells nebulizers forms a mail-order pharmacy for nebulizer drugs. An existing pharmacy runs it, provides the personnel, equipment and space, and supplies all its drug inventory. The equipment supplier brings its patients into a new business that the pharmacy operates.

The parties can share the business and its profits through contracts alone. They do not need a jointly owned company.

The operating details make that visible. The supplier may provide management, billing, equipment, staff, office space and training. The owner bills insurers and patients in its own name. The owner’s financial risk can be small because it controls the referrals that feed the business. Exclusivity terms may keep the supplier from serving those patients directly or limit the new business to the owner’s patients.

The patient base can also explain how the venture avoids the work of finding customers. In the bulletin’s suspect model, the new business predominantly serves patients the owner already controls or influences and makes few efforts to reach anyone else. The supplier may have little marketing to do because the owner brings substantially all the business.

The owner’s influence can reach beyond signing an equipment order. The bulletin includes arranging for or recommending goods and services: a hospital can generate business for a supplier even when a physician must sign the individual orders. That makes the referral relationship visible in more than the prescribing signature.

A fixed management fee captures only part of the money. The Inspector General described arrangements in which other payments rise with the goods and services supplied, while the owner’s remaining profit rises with its referrals. The management invoice can stay the same while the economics of the whole arrangement change with patient volume.

That fits the commercial pressure in this industry. Inogen explains in its annual filing that respiratory providers compete primarily on product features and service because payers establish reimbursement. Equipment categories can generate a purchase payment, rental payments or recurring supply orders. A referral relationship can bring business well beyond the first delivery.

Can a Doctor’s Office Get a Kickback for Referrals?

Yes. A doctor’s office can receive a referral kickback through something of value, including services or a profit opportunity. The Inspector General’s bulletin described knowing and willful payments to induce federal health care referrals as prohibited under the Anti-Kickback Statute. Kickbacks can steer medical decisions toward the referral payment and shut out honest suppliers unwilling to buy business.

In the contractual joint-venture model, the benefit can be the opportunity to bill for work an established supplier performs. The referral source keeps a margin on business the supplier could have billed directly. The return appears in the new business’s profit account.

What Is Acceptable Under the Anti-Kickback Statute?

That depends on the actual work, payments and referral relationship, which we assess with whistleblower lawyers who know durable medical equipment arrangements. A contract’s title gives us a starting point for that conversation, not its answer.

The Inspector General’s bulletin addressed attempts to divide the same business into management, vendor and staffing contracts and claim protection for each. Its concern included the profit opportunity flowing back to the owner, beyond payments for particular services.

Discounts can move the profit too. The bulletin described suppliers selling items and services to a venture at reduced prices to share profits with referring owners. The benefit can sit in the inventory price as well as the management fee. We examine the complete arrangement with you, including who operates it, who bears the business risk and what each party receives.

Free Services Can Buy Durable Medical Equipment Business

A service can itself be the payment for durable medical equipment business. ResMed’s 2020 civil settlement resolved allegations involving free call-center and patient-outreach services that helped durable medical equipment companies order sleep-apnea resupplies. A separate whistleblower complaint against Respironics alleged that it gave suppliers valuable prescribing data to help them target physicians for sales and induce recommendations of its products.

Harborside and HHC Nutrition’s Alleged Sham Provider Arrangement

Harborside Healthcare and HHC Nutrition Services agreed to pay $1.375 million and forgo $498,000 in unbilled Medicare equipment claims in an October 2009 False Claims Act settlement over alleged kickbacks and assistance through a sham durable medical equipment provider. The government described HHC Nutrition Services, the company settling alongside Harborside, as the sham equipment provider.

The Justice Department alleged that McKesson and MediNet supplied the kickbacks and assistance, and Harborside bought its durable medical equipment from McKesson in return. The equipment purchases included non-enteral supplies.

The government alleged that this exchange violated both the Anti-Kickback Statute and the False Claims Act. The settlement addressed the payment and the unbilled claims separately: Harborside would pay the government and give up equipment claims it had not yet submitted to Medicare.

A whistleblower’s qui tam suit started the case.

This is the commercial question behind a nominal supplier: what did the business contribute, what help did it receive, and what purchasing or referral decision came back in exchange? The services and the purchasing records show both sides of the alleged exchange.

Other Ways to Trade the Referral Business

The government alleged reciprocal sleep-clinic referrals at Pacific Pulmonary Services and purchases of completed prescriptions at AZ Diabetic Supply. The Inspector General also described a West Virginia settlement over allegations that a supplier billed for an excluded provider’s braces and split the reimbursement.

What Evidence Is Needed to Report Medicare Fraud?

For a referral business, the useful evidence connects the agreement, the work, the benefit and the resulting claims. Management and staffing contracts describe the promised operation. Inventory, delivery and billing records show who carried it out. The payment formula and distributions show where the proceeds went.

An office manager may know which company’s employees ran the operation. Billing staff may see the supplier named on claims and the instructions behind them. Sales and patient-outreach staff may see the referrals, product targets and promised benefits. We connect those perspectives with the contracts and transactions.

We work with you to connect those records to the claims: the contract fee to the actual payments, the free service to the product purchases, and the nominal supplier’s profit to the work another company performed.

A Whistleblower Case Over DME Kickbacks

Claims arising from kickbacks can create False Claims Act liability, as the Justice Department explained in the ResMed settlement. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

When You Know Who Does the Work

If you know how a clinic, hospital or supplier earns money from patients sent into an outsourced durable medical equipment business, speak with our whistleblower experts about the arrangement. We work with you to expose the connection between the referral return and the claims, and build your strongest whistleblower case around the decisions inside the business. We bring in healthcare whistleblower lawyers who know equipment billing and referral arrangements, and stay beside you throughout the case.