Consignment Closets: Are They Legal?
By Kathy Dodson, AOPA Government Affairs Department

AOPA members are often concerned about “consignment closet” arrangements between physicians and O&P suppliers. Some members argue that such arrangements are, in essence, kickback arrangements, while others are interested in trying to expand their delivery methods to accommodate their referring physicians and combat competition. In two recent advisory opinions, the Office of Inspector General (OIG) agreed that such arrangements are problematic.

What’s an advisory opinion?
The OIG offers advisory opinions to those who want an official judgment on the appropriateness of an existing or potential business arrangement. While each opinion specifically states that it applies only to the requestor’s situation, such opinions can provide valuable insight into OIG thinking on issues. 

In the two cases outlined here, the OIG was presented with two different scenarios, both involving a supplier who wished to place DME items and orthoses in a physician’s office. However, while one program applied only to non-federal patients, the other applied to both non-federal and federal patients (including Medicare beneficiaries). Examining the OIG’s advisory opinions on both clarifies what activities may or may not violate federal anti-kickback laws.

Federal vs. Non-Federal The term “federal patients” includes not only Medicare and Medicaid patients, but also patients from health care programs through the VA, Department of Defense, and other federal agencies. The term “non-federal patients” includes all patients outside of these programs

The first case
In the first case, a supplier wished to place certain DME items and orthoses for non-federal patients in a physician’s office. The written agreement contained four main components, three of which were pertinent to O&P:

1. The supplier would sell the DME items and orthoses to the physician under a prearranged fee schedule consistent with commercial practice. The physician would obtain his own supplier number and would bill the payers or patients directly. The physician would be allowed to bill the payers or patients more than he paid the supplier.

2. The supplier would provide the physician with a trained technician who would fit patients with DME items and orthoses, instruct patients in use and maintenance, monitor patient progress, obtain payer pre-certifications, and manage product inventory. The physician would pay the supplier a fixed monthly fee for the technician’s services.

3. The supplier would provide the physician with comprehensive coding, billing and collection services for the DME items and orthoses. The physician would pay the supplier a fixed monthly fee for these services.

Because this agreement would be for non-federal patients only, a federal program patient who needed DME items or orthoses would be asked to obtain them from a local DMEPOS supplier, which could be the supplier running the program.

The opinion
The OIG found fault with this arrangement because it offered the physician a lucrative opportunity to expand into providing DME and orthoses with little or no business risk while retaining a portion of the profits. Moreover, the supplier, a potential competitor of the physician, would be providing almost all of the key items and services.

Though the proposed program only applied to non-federal program patients, it was not immune from anti-kickback concerns, according to the OIG. The opinion stated that “such arrangements may violate the anti-kickback statute by disguising remuneration for federal referral through the payments of amounts purportedly related to non-federal business.” Conceivably, the physician might steer federal patients to the supplier and potentially secure more favorable pricing on the non-federal patients’ devices.

The second case
This case also involved a supplier who wanted to place certain DME items and orthoses in a physician’s office. These items would be available to all patients, including Medicare beneficiaries, and the supplier would remain the billing entity. Through a written agreement:

1. The supplier would rent storage space from the physician for a fixed monthly fee set at fair market value. The supplier would consign orthoses and DME items to the physician, retaining title until the items were sold to patients.

2. In return for the physician’s inventory management and other administrative services, the supplier would pay the physician a percentage of the revenue generated from sales to non-federal patients. The supplier would not pay the physician any money from revenue from sales to federal patients.

3. The supplier would provide the physician with a trained technician who would fit both federal and non-federal patients, instruct patients on using and maintaining the devices, monitor patient progress, obtain payer pre-certification and manage product inventory. The physician would pay the supplier a fixed monthly fee for these services.

The opinion
This variation also failed the OIG’s scrutiny. The arrangement appeared designed to link the physician with the supplier’s products and services. It raised some specific issues.

First, the total compensation was not set in advance, but depended on the volume and value of business generated. This is inherently problematic, and basing payments on non-federal revenue alone does not make the arrangement appropriate. The OIG stated, “It might be relatively easy for the [supplier] to manipulate the compensation arrangement, reward[ing] the generation of federal business by inflating the percentage portion of the non-federal revenues.”

Second, it appeared that some services provided by the technician overlapped services provided by the physician. Although the OIG tried to get further clarification from the supplier, it seemed that the supplier would pay the physician for inventory management and the physician would pay the supplier for similar services from the technician.

Finally, the OIG was uncomfortable with the rental arrangement, even though the supplier stated that it would be at fair market value. The OIG said, “We have a long-standing concern that such rents may exceed fair market value and may be disguised kickbacks to a physician/landlord for federal program referrals.”

How to Get the OIG’s Opinion For information on how to submit your proposed or existing arrangement to the OIG for review, visit http://oig.hhs.gov/fraud/advisoryopinions/aofaq.html. There is a fee based on the amount of legal work the OIG must do to respond. As this article shows, getting an opinion can be valuable. An unfavorable opinion from the OIG alerts you to what arrangements it would consider illegal. A favorable opinion (while not establishing precedent for other situations) should allow you to proceed with confidence.

Be wary
The opinion closed with a telling statement: “No apparent business rationale would appear to exist for a manufacturer or supplier to forge these ties to physician practices, apart from the potential for generating additional business.”

Are you interested in entering into some type of consignment venture? Be sure to have the provisions of the arrangement reviewed in detail by a health care attorney. Also, consider submitting the arrangement to the OIG for an opinion.

Kathy Dodson is the senior director of government affairs for the American Orthotic & Prosthetic Association (AOPA).

Questions? Call (571) 431-0810 or visit www.AOPAnet.org.