Antifraud Regs

Subcontracting arrangements must also satisfy all state and federal anti-kickback and antifraud regulations. There has been no discussion of this requirement in CMS' competitive bidding rules for subcontracts. But the antifraud rules are enforced by the Department of Justice and the HHS Office of Inspector General, and CMS has no control over either of these enforcement entities. Therefore, there is every reason to expect that all of the antifraud and anti-abuse rules will apply to competitive bidding subcontracting relationships just as they apply to subcontracting arrangements outside of competitive bidding.

There are two keys to the antifraud rules as they apply to subcontracts. First, none of the fees paid to a subcontractor should be related to referrals from that subcontractor to the contractor. The fee should not vary with the quantity or value of any of the subcontractor's customers who come to the contractor as part of the relationship.

A flat fee for each service, per piece of equipment, per hour or by some other measurement is a far safer financial structure for a subcontract relationship. Patient source should not affect the fee. Similarly, a subcontracting agreement may not require the subcontractor to send patients to the contractor as condition to the relationship.

The second key antifraud protection is to ensure that the subcontract is always demonstratively for a legitimate business purpose. A competitive bidding subcontract, for example, will often be necessary because of geographic issues. Perhaps a contractor cannot service patients cost-effectively in the remote part of a CBA and wishes to subcontract with one or more suppliers in that area to ensure access to those patients under its competitive bidding obligations.

Another appropriate use for a competitive bidding subcontract might be because the contractor requires support from one or more subcontractors, where they have access to or expertise with a certain kind of product. It may be that a certain level of training is required for certain pieces of equipment that the subcontractor's personnel possess but the contractor's do not.

An incremental need for additional personnel may also justify a subcontracting relationship. A company may have more than one reason for having a subcontract, and some may choose more than one option.

The importance of this legitimate business purpose cannot be overstated. It is likely that many suppliers will evaluate a subcontracting opportunity from the perspective of “you give me a subcontract — I will give you my business if I don't get the bid.” That reasoning, from an antifraud perspective, probably would lead to federal scrutiny and trouble.

“Quid pro quo” is not a legitimate reason for a subcontract, and may not have any bearing on the negotiated fees for the subcontract relationship. Fees must be based entirely on fair market value. A fair subcontracting fee may be based on an assessment of the contractor's costs, plus a reasonable profit for the subcontractor. Or, such fees may be based on what are comparable fees for similar subcontract relationships in the area.

In all circumstances, the subcontract fees must be less than what it would cost the contractor to provide the services itself. Otherwise, it is clear that the subcontract is being offered in order to garner referrals or other benefits.

The requirement that there be a legitimate business purpose for the subcontract relationship, as well as the general need to avoid problems under the antifraud rules, limits the quantity of subcontractors a contractor may safely engage.

It is hard to fathom a circumstance in which a contractor would need to have a large quantity of subcontracts in order to compensate for geographic inaccessibility. There just are not that many different remote areas where the contractor is unable to provide services at a reasonable cost. It is similarly hard to imagine a contractor requiring a large quantity of subcontracts for product line support or for incremental personnel needs.

If suppliers in a particular market find a need to have more than a few suppliers band together in a subcontract relationship for purposes of competitive bidding, then they should explore the network option rather than trying to cram too many subcontracts into the competitive bid.

A large quantity of subcontracting relationships will trigger the antifraud rules because they suggest that the primary purpose for the relationship is to allow the subcontractor to get paid for referrals it makes to the contractor.

Your Brother's Keeper

The Medicare supplier standards also affect subcontracting relationships. A contractor will always be responsible for the behavior of its subcontractors when operating under the subcontracting agreement.

This means subcontractors must comply with all of the supplier standards and other rules that affect the contractor in its Medicare obligations, whether under competitive bidding or in general. Insurance requirements, physical office requirements, hours of operation and all of the other supplier standards will still pertain to the subcontractor.

(As an aside, note that a subcontractor does not currently have to be accredited in order to participate in a subcontract relationship for competitive bidding. Of course, the contractor does have to be accredited to participate.)

Finally, the subcontract must be evaluated from the perspective of the Medicare reimbursement requirements. Contractors are ultimately responsible for billing and collecting, for documentation (justification for medical necessity, accurate completion of CMNs and other forms) and for all of the other requirements necessary to be reimbursed for clean claims.

A subcontractor who does not maintain sufficient billing accuracy or sufficient medical records to withstand a Medicare audit may certainly incur some legal obligations to pay damages to the contractor, if their contract allows such damages. However, that will not protect the contractor from Medicare's wrath.

In other words, a contractor must be its “brother's keeper.” A subcontract relationship will only be as strong as the subcontractor's compliance with the rules.

I have created hundreds of health care subcontracts over the years. Many of them fail. Most of these failures occur because the subcontracting parties provide insufficient attention to nurturing the relationship and allowing it to add value for both participants.

But operated correctly, a subcontract is a wonderful tool for expanding your market share and profitability, both with competitive bidding and in general.

Neil B. Caesar is president of the Health Law Center (Neil B. Caesar Law Associates, PA), a national health law practice in Greenville, S.C., focusing on business opportunities and regulatory issues for health care providers. He is also a principal with Caesar Cohen Ltd., which offers compliance training, outsourcing and consulting, and author of the Home Care Compliance Answer Book series. Caesar may be reached by phone at 864/676-9075 or email at ncaesar@healthlawcenter.com.

Materials in this article have been prepared by the Health Law Center for general informational purposes only. This information does not constitute legal advice. You should not act, or refrain from acting, based upon any information in this presentation. Neither our presentation of such information nor your receipt of it creates nor will create an attorney-client relationship.

Contract Suggestions

The rules require a supplier that wishes to pursue a subcontracting arrangement to have in place, prior to its bid, either a subcontract document or a letter of intent indicating the supplier's plan for entering into a subcontract upon winning the bid. So it makes sense to have a smart subcontract document ready to launch as soon as bids are announced. The various legal and reimbursement rules discussed in the accompanying article lead to certain recommendations I would include in any subcontract agreement. Most of the following drafting suggestions would apply to all subcontract relationships, even those outside of competitive bidding:

• The agreement should make clear the legitimate business purposes for which it was created: product line support, personnel support, geographic access support, etc.

• The agreement should specify the services to be provided by the subcontractor (order taking, warehousing, clinical support, product supply, etc.).

• If the subcontractor will be handling any initial customer contact, the agreement should obligate the subcontractor to utilize employees who are trained and experienced with those duties.

• The agreement should make clear that the subcontractor is obligated to comply with the contractor's policies and procedures, including but not limited to standards of personnel qualification, the quality of service to be provided and supplying requested information that the contractor deems necessary to fulfill his obligations.

• If the subcontractor will have significant customer contact, the agreement may want to identify a particular subcontractor representative to supervise operations, such as a branch manager.

• The agreement should obligate the subcontractor to comply with any internal or external audits, as reasonably required by the contractor, or pursuant to a payer demand.

• The agreement should obligate the subcontractor to establish some means of easily identifying employees with customer contact as being representatives of the contractor.

• The agreement should have the subcontractor to warrant that none of its personnel, owners, etc., are subject to any legal actions, sanctions or revocations from the Medicare program or any other government reimbursement program. If there are any such problems, they should be identified and evaluated.

• Many contractors will want their subcontractors to promise not to compete with them, at least for government business. Remember, the competitive bidding rules do allow a subcontractor also to bid as a supplier, even for the same product category and in the same CBA that the subcontract covers. Therefore, a contractor may wish to limit its relationships to those suppliers who promise not to compete for Medicare business.

Similarly, a contractor may want to preclude a subcontractor from competing after the termination of the relationship for some period of time (say, a year or two). This would prevent a subcontractor from “learning the ropes” by observing the contractor during the first contract period and then submitting a competing bid during the renewal process.

• The contractor will want the subcontractor to provide certain information on a regular basis. Examples include a listing of revenues generated, collections received, outstanding receivables by customer and payer source, etc.

• The parties should agree to keep all fees confidential, as well as any other financial information learned during the course of the relationship. The fees should be clearly listed in the agreement, perhaps as part of an exhibit to the document, so that it may be periodically revised. I would not recommend that any fee renegotiations be retroactive, so as to avoid the suggestion that the retroactive fee adjustments are actually disguised rewards for referrals. I would also recommend that fees not be adjusted prospectively too frequently, so as to avoid the suggestion that they reward referrals pursuant to ongoing tracking. Suppliers should consider not changing the subcontracting fee agreement for at least a year.

• The agreement should set forth when fee invoices must be submitted by the subcontractor and when the subcontractor will be paid.

• The agreement should set forth both parties' insurance obligations.

• The parties may want to provide for indemnification against substandard performance. This would obligate one party to indemnify the other party when it provides services under the contract in a substandard manner. Sometimes, this provision requires indemnification for any problems, and sometimes they are limited to negligent performance, reckless performance or intentional malfeasance.

• The agreement should identify its duration. I recommend that any agreement that ends in less than a year should not be renewed in revised form for some period of time. This is to prevent the suspicion that the renewed agreement (with different terms) is a disguised way to reward previous or expected referrals.

• The agreement should make clear when and how it may be terminated. What constitutes a breach of contract should be specified. Also, consider allowing the breaching party to fix the problem within a certain timeframe in order to avoid termination.

• The parties will probably want to keep the terms of the agreement, as well as any information learned during the course of the agreement, confidential from third parties (other than the government, which will have the right to see this material). The scope of the confidentiality requirement and its duration should be clearly specified.

• The agreement may also seek to preclude the parties from stealing each other's personnel, referral sources, etc.

• The agreement may want to provide for fights to be settled by arbitration, mediation or some other form of alternative dispute resolution. If so, be sure to check whether your state requires this type of provision to be worded a particular way or flagged in some manner.