When CMS published its rules for competitive bidding, the possibility that one supplier could subcontract its services to another supplier in order to provide a collective bid became an unexpectedly attractive opportunity. CMS' subcontracting rules appear to be relatively flexible. They impose only a few barriers, and even fewer hurdles to the subcontracting process.

This flexibility is in marked contrast to the final rules concerning networks, which eliminated most of networks' advantages while maintaining some significant risks. Because subcontracts remain an attractive option for competitive bidding activities, it is important to understand how you can establish safe and profitable subcontracting relationships.

Let's start with the basics. A subcontract is an agreement between two suppliers that establishes an ongoing relationship. Under this relationship, one party (the subcontractor) agrees to help the other party (the contractor) with certain products or services tied to ongoing activities, in order to support the contractor in achieving its goals or fulfilling its obligations.

In the context of competitive bidding, a subcontract is for use by suppliers who wish to get involved in the competitive bidding process but who will need assistance in order to service fully the entire competitive bidding area.

Some of these suppliers may not qualify to form a network because they do not fall under the definition of small supplier (“a company which earns $3.5 million in gross revenues or less”). Other suppliers may prefer a subcontract relationship, regardless, because they wish to maintain more control over their operations than a network would permit; suppliers who become contractors in subcontracting arrangements will have control over their subcontractors.

Follow the Rules

Under the competitive bidding rules, any supplier currently enrolled in the Medicare program is eligible to serve as a subcontractor to a supplier who wins a bid. The competitive bidding rules require that a subcontractor must have “never been excluded from the Medicare program, any state health program or any other government executive branch procurement or non-procurement activity.” A contractor is required in its bid to list all of its subcontractors. Also, the contractor must disclose if any of its subcontractors have been subject to any prior legal actions, sanctions or revocations.

This rule has some interesting implications. There are many legitimate suppliers who, at some point in their history, have had issues with CMS or the National Supplier Clearinghouse that resulted in their being threatened with a supplier number revocation. These suppliers typically have gone through a redetermination or reconsideration process, after which their numbers were reinstated.

However, if there was any timeframe during which the revocation remained in effect, then this competitive bidding rule will be important. If a supplier had its number revoked on April 1, for example, and after a hearing had its supplier number reinstated effective to April 15, then that supplier would have had a two week period during which its number was revoked. Consequently, this fact would have to be disclosed in the bid.

Will these disclosures affect the likelihood of a contractor being chosen for a bid if one of its subcontractors had revocation problems in the past? The answer is uncertain. There are many, many suppliers out there who have been in a fight with the NSC or CMS at some point. There are many temporary revocations that are based on a technical imperfection, and many others on the books simply because there was a time gap in the dispute process that was not fully imposed retroactively by a favorable ruling.

We may reasonably hope that CMS will focus on the reasons and circumstances of a revocation, rather than the mere fact of a revocation, when awarding bids. Otherwise, any supplier that has ever had a revocation problem, even if momentary, may be unattractive as a subcontractor.

CMS will allow a supplier to bid for a particular product category in a particular market while still serving as a subcontractor to another supplier for that same product category in that same market. This may allow some suppliers to achieve a substantial market share by serving both as supplier that wins a bid and as a subcontractor to one or more other winning suppliers.

Market share issues become important under antitrust law, as you will see in the following section.

Follow the Laws

To understand those protections to include in a subcontract arrangement, it is important to understand the laws that govern health care subcontracts generally, and competitive bidding subcontracts in particular. These include state contract laws, federal and state antitrust laws, federal and state antifraud laws, the Medicare supplier standards and certain reimbursement requirements.

State contract laws will likely have something to say about subcontract agreements. Many states have specific rules for how certain provisions must be worded or positioned in a contract. In South Carolina, for example, the existence of an arbitration provision must be noted in bold print on the first page of the contract, even when it is discussed in detail later in the document.

Similarly, states may have specific rules about late fees, how notice requirements should be handled or when one party may hold another party responsible for attorneys' fees. Any subcontract that works off of a template that is not state-specific should be screened by an attorney who is able to identify the rules in the particular state where the relationship will operate.

CMS requires that competitive bidding subcontracts must be compliant with federal and state antitrust law. This is similar to CMS' admonition for networks that “the network cannot be anticompetitive.” Most state antitrust laws mirror the federal antitrust rules substantially, so a rough understanding of how the federal rules work should enable suppliers who are considering subcontracts to appreciate the basic parameters.

Anticompetitive Behavior

One of CMS' concerns is that a subcontract relationship not be anticompetitive by creating a team-up so big as to dominate the local market. The feds have worried about anticompetitive activities with health care collaborations for at least 20 years.

Focusing particularly on competitive bidding, CMS set a rule for networks that limits the allowed market share of any network to no more than 20 percent of the Medicare market share for the relevant product categories in which the network will participate.

Initially, information about a supplier's Medicare revenues will be analyzed largely based on historic information, and the aggregate market information is available from CMS or Palmetto GBA, the Competitive Bidding Implementation Contractor. So, it should be acceptable to use CMS' “20 percent rule” for networks as a general guideline for a subcontracting relationship.

As mentioned earlier, CMS will allow a supplier to bid on multiple product lines in the same market, as well as serve as a subcontractor for one or more suppliers while still pursuing competitive bids itself. Because of this flexibility, it is quite possible that certain suppliers could bring a significant quantity of market share to the subcontract negotiation table.

I would advise any contracting supplier to inquire about all the Medicare relationships a potential subcontractor may have to verify that the aggregate market share of all those relationships is not sufficient to trigger antitrust concerns.

There is another form of anticompetitive behavior that affects subcontracts called “price fixing.” In most cases, price fixing is an automatic violation of federal antitrust law. It is defined as an agreement among companies that has the purpose or effect of raising, depressing or fixing prices. Market share or market power are irrelevant factors in price fixing cases; if you collaborate on prices with a competitor, you break the law.

There is every reason to expect that price fixing rules will apply to competitive bidding subcontracts, despite CMS' current focus only on the “20 percent” rule. Therefore, subcontract relationships must comply with the price fixing safeguards imposed on health care collaborations generally to control the flow of pricing and cost information between the parties.

Typically, this will require that neither party in a subcontracting arrangement share its pricing information with the other party. Rather, the parties should work out a fee for the subcontractor's services in a manner that does not alert either party to any aspect of the other party's charges to Medicare or to any other payer. While I have seen little discussion about this danger to date, I expect it will be a key factor for some subcontracting relationships. Do not share price information!