As any provider or sleep lab owner can tell you, the market for sleep testing is becoming increasingly crowded and competitive. New sleep labs are being built in most large and midsize markets. Health care providers, including hospitals, physician practices, DME companies, and others are moving quickly to capture a piece of the ever-expanding sleep market. Given the increased number of players competing for a limited amount of reimbursement, companies will need to be increasingly creative in maintaining market shares.

Despite these factors influencing sleep labs to diversify and develop creative marketing expansion strategies, there are other issues that should cause sleep labs to think carefully before implementing any marketing or expansion plans. The Office of Inspector General (OIG) of the Department of Health and Human Services identified polysomnography as an area subject to increased scrutiny during fiscal year 2007. For this reason, sleep labs need to exercise caution in all aspects of their business to ensure that their operations do not violate federal or state guidelines.

Anti-Kickback Law

The Medicare anti-kickback statute provides in relevant part:

  1. Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind
    1. in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or
    2. in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony.
  2. Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person
    1. to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or
    2. to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program shall be guilty of a felony …

One common model in use throughout the sleep industry involves payment by a DME company to a sleep lab in exchange for the sleep lab setting up patients on the DME company’s products. Under this model, a DME company will place inventory in a sleep lab to be available for customers of the sleep lab who choose to receive products from the DME company. If a patient chooses the company to provide their products, an employee of the sleep lab will set up the patient on the DME company’s product and the company will bill the payor for the product.

In some instances, a DME company will ask a sleep lab to perform setups and will pay the lab on a “per patient” basis. Paying for such services on a “per patient” basis raises serious concerns under the anti-kickback statute. If one purpose of the payment to the sleep lab is to induce referrals, then the parties are violating the anti-kickback statute. If there are multiple reasons why the DME company would pay the sleep lab for the setups and even one purpose among them is to compensate the sleep lab for the referrals, then the arrangement is in violation of the statute.

One way to structure the relationship between the sleep lab and the DME company that is designed to lower the risk of enforcement for potential kickbacks is to have the parties draft the agreement to comply with the Personal Services and Management Contracts Safe Harbor.

Under the Personal Services and Management Contracts Safe Harbor, remuneration does not include any payment made to an independent contractor if all of the following requirements are met:

  1. the agreement must be in writing and signed by the parties;
  2. the agreement must specify the services to be provided;
  3. if the agreement provides for services on a sporadic or part-time basis, then it must specify exactly the scheduled intervals, their precise length, and the exact charge for each interval;
  4. the term of the agreement must be for not less than 1 year;
  5. the aggregate compensation to be paid must be set in advance, must be consistent with fair market value, and must not take into account any business generated between the parties;
  6. the services performed must not involve a business arrangement that violates any state or federal law; and
  7. the services contracted for do not exceed those reasonably necessary to accomplish the business purpose.

In order for an agreement to be consistent with the Personal Services and Management Contracts Safe Harbor, it is required that the aggregate compensation to be paid be set in advance and not vary during the term of the agreement. Stating that the parties pay a specific amount per patient setup is not acceptable for the purposes of this safe harbor. To comply with the safe harbor, the total compensation paid by one party to the other must be determined prior to the execution of the agreement.

Sleep labs that are involved in relationships with DME companies and are paid an amount based on the number of patients set up may be setting themselves up for potential headaches. Although establishing a flat annual fee does not mean the parties have met all the requirements of the Personal Services and Management Contracts Safe Harbor, it does eliminate the incentive for the sleep lab to refer to the DME company since the sleep lab will receive the same compensation regardless of how many patients choose the DME company.

Consignment Closet Arrangements

For many years, health care providers have received somewhat contradictory guidance concerning the validity of consignment closet arrangements. Under these arrangements, a DME company will leave equipment with a physician’s office, hospital, sleep lab, or other health care provider and that provider will distribute the equipment on behalf of the DME company. The provider will obtain signed documentation on behalf of the DME company, and the DME company will subsequently submit claims to the payors and follow up with the patient as appropriate.

The OIG issued an advisory opinion in 2002 that provided some guidance for health care providers regarding this issue. The advisory opinion described a proposed arrangement for placing oxygen in hospitals and physician’s offices on a consignment basis. Under the proposed arrangement, no rent would be paid by the DME company for the space provided. Based on the facts presented, the OIG concluded that the arrangement would not involve remuneration from the DME company to the referral sources, and therefore this arrangement would not violate the anti-kickback statute.

Another objection to consignment closet arrangements was raised by one of the DMERCs several years ago. The Region D DMERC took the position that consignment closet arrangements violate Medicare supplier standards.

The validity of the DMERC’s interpretation of the supplier standards is questionable at best. The standards in effect at the time did not require the provider to deliver all items of DME itself, but only to be “responsible for” delivery. After the most recent revisions, the supplier standards are even clearer. Under the current standards, a supplier “[m]ust be responsible for the delivery of Medicare covered items to beneficiaries and maintain proof of delivery. (The supplier must document that it or another qualified party has at an appropriate time provided beneficiaries with necessary information and instructions on how to use Medicare-covered items safely and effectively.)”

A final concern is that consignment closet arrangements must not interfere with patients’ freedom of choice of providers. The physician or hospital should have a procedure for offering the patient a choice of DME companies, and should not automatically direct referrals to the provider with the consignment closet.

Clay Stribling, Esq, is an attorney with the Health Care Group of Brown & Fortunato, PC, an Amarillo, Tex-based law firm. He represents durable medical equipment companies, sleep labs, pharmacies, and other health care providers throughout the United States and Puerto Rico. Stribling can be reached at (806) 345-6346 or