"Can a supplier buy into the competitive bidding program? The short answer is yes, but the devil is in the details."Competitive bidding is nonsensical. The program is designed to set the DME industry up to fail. The program is designed to compel suppliers to submit “suicide bids” and to cannibalize themselves. Additionally, what bank wants to lend working capital to a DME supplier when the supplier’s business can be taken away in three years? Competitive bidding is like the State Bar of Texas telling all Texas attorneys that they have to submit a bid every three years in order to have their law licenses reissued. What bank would want to lend a law firm working capital knowing that in three years the firm’s attorneys might be selling Big Gulps at 7-Eleven? A frequently asked question is whether a supplier that was not awarded a Competitive Bidding (CB) contract can buy its way into the CB program. The short answer is yes, but as is often the case, the devil is in the details.
Asset Purchase
Assume that John Smith owns ABC Medical, Inc. (ABC), which was awarded a CB contract for three product categories in three CBAs. Bob Jones owns XYZ Medical, Inc. (XYZ), which was not awarded a CB contract, and still wants to play in the competitive bidding game. XYZ cannot buy ABC’s patients, and XYZ cannot buy ABC’s patient files. However, XYZ and ABC can enter into a bona fide Asset Purchase Agreement (APA) in which XYZ purchases hard assets from ABC (e.g., inventory) and, along with the asset purchase, ABC will transfer patient files to XYZ. Sixty days before closing, ABC will notify the CBIC that ABC will sell all its assets (related to the CB contract) to XYZ and that ABC intends for XYZ to take over ABC’s responsibilities under the CB contract. Thirty days before closing, ABC and XYZ will sign a novation agreement which states that, upon CIBC approval, XYZ agrees to assume ABC’s obligations under the CB contract. Thirty days before closing, XYZ must have all of its financials/ related documents into the CBIC. The financials/related documents must show that XYZ qualifies to be a contract supplier. If XYZ has previously submitted the financials/related documents to the CBIC (when XYZ submitted its own competitive bid), then XYZ does not need to submit them again. Closing will then occur. At closing, ABC will send a letter to its patients telling them that it has sold, for example, its CPAP supply business to XYZ. The letter will state that the patient has freedom of choice and that the patient may choose any supplier. The letter will tell the patient that if he/she does not wish to be serviced by XYZ, then the patient needs to let ABC know within 15 days. The letter will state that if the patient does not opt out within the 15-day period, then ABC will transfer his/her file to XYZ. The question then becomes: Can XYZ call the patients that are transferred to XYZ by ABC? The reason this question is relevant is because the telephone solicitation statute and Supplier Standard #11 state that XYZ cannot call a Medicare patient unless one of three exceptions are met. The first two exceptions apply if XYZ previously provided a Medicare-covered item to the patient. In this case, XYZ has not provided anything to the ABC patients. Therefore, the first two exceptions do not apply. The third exception states that XYZ can call the patient if the patient has given his/her written consent (blue ink or electronic) to be called by XYZ. The opt-out letter from ABC to the patients does not constitute written permission from the patients to be called by XYZ. The safest course of action is for ABC to request its patients to affirmatively and proactively give their written permission to be called by XYZ by calling XYZ, e-mailing XYZ or mailing a signed postcard to XYZ. XYZ can call the former ABC patients who have taken this affirmative action. XYZ can communicate with the other patients through the U.S. Postal Service. Shortly after closing, the CBIC will notify XYZ and ABC regarding whether the CBIC approves XYZ taking over the ABC CB contract. Assuming that XYZ’s financials/related documents are acceptable to the CBIC, then the CBIC should give its approval. Assuming that such approval is given, XYZ will take over ABC’s responsibilities under the CB contract. Note that ABC’s CB contract cannot be subdivided. XYZ either takes over all of ABC’s responsibilities in the three CBAs, or XYZ takes nothing over. Remember that the law prohibits the sale of patients and the sale of patient files. In fraud-and-abuse land, there is no such thing as a technical loophole; it is substance over form. (“If it looks like a duck and walks like a duck…” You can choose the metaphor.) This is a long way of saying that the APA—in which patient files are transferred to the purchaser—must be bona fide, and not a sham. In other words, the seller and purchaser cannot enter into a sham APA with the sole purpose of transferring patient files to the purchaser and transferring the seller’s CB contract to the purchaser. Let us look at three scenarios. First Scenario—ABC sells all of its assets (its entire business) to XYZ. All that is left of ABC is a corporation on paper with a lot of money in the bank (resulting from the purchase price paid by XYZ). As part of this total asset sale, ABC transfers all of its patient files (except for those patients who opt out) to XYZ and the CBIC transfers ABC’s CB contract to XYZ. This is a bona fide asset purchase. Second Scenario—Assume that ABC’s CB contract covers oxygen, CPAPs and bent metal. ABC sells to XYZ all of ABC’s assets pertaining to its oxygen/CPAP/bent metal business (Medicare and commercial) and retains its other business (Medicare and commercial). As part of this partial asset sale, ABC transfers its entire oxygen/CPAP/bent metal patient files (except for those patients who opt out) to XYZ and the CBIC transfers ABC’s CB contract to XYZ. Assume there is a legitimate reason for ABC to get out of the oxygen/CPAP/bent metal business. This scenario has some risk that is not associated with the first scenario. Nevertheless, a credible argument can be made that this is a bona fide asset purchase. Third Scenario—ABC sells all of its assets pertaining to the Medicare portion of its oxygen/CPAP/bent metal business to XYZ. ABC retains the commercial portion of its oxygen/CPAP/bent metal business and its other (non-oxygen/CPAP/bent metal) business. As part of this partial asset sale, ABC transfers its Medicare oxygen/CPAP/bent metal patient files (except for those patients who opt out) to XYZ and the CBIC transfers ABC’s CB contract to XYZ. Assume there is a legitimate reason for ABC to get out of the Medicare oxygen/CPAP/bent metal business. Assume there is a legitimate reason for ABC to stay in the commercial oxygen/CPAP/bent metal business. This scenario has risk that is not associated with the first and second scenarios. Nevertheless, a credible argument can be made that it is a bona fide asset purchase. In an asset purchase, XYZ does not inherit any of ABC’s liabilities unless XYZ specifically decides to assume a particular liability (e.g., copier lease). That is the upside. The downside is that ABC cannot transfer its PTAN, Medicaid provider number, accreditation and state licenses to XYZ nor (as a general rule) can ABC transfer contracts to XYZ. Specifically: Assume that XYZ will take over ABC’s physical location on Main Street. ABC’s Part B supplier number cannot be transferred to XYZ. Before it can apply for a Part B supplier number, XYZ will need to secure accreditation for the Main Street location, will need to obtain a surety bond for the Main Street location and (if the state has DME licensure requirements) secure state DME licensure. Assume that at closing, XYZ has secured accreditation, a surety bond and state DME licensure (if required), then at closing XYZ can submit an 855S to the NSC. Between closing and until XYZ receives its supplier number, XYZ will be able to accumulate the Medicare claims and send them through all at once when the supplier number is issued to XYZ. If XYZ intends to bill state Medicaid, then XYZ will need to obtain its own Medicaid provider number. It is unlikely that the state will allow XYZ to bill Medicaid under ABC’s provider number until XYZ obtains its own provider number. Let us say that XYZ secures its Medicaid provider number 60 days after closing. It is likely that the state will allow XYZ to accumulate the Medicaid claims between closing and the date it receives its Medicaid provider number and then send all of the claims through at once upon receipt of the provider number. Let us talk about PBM contracts, HMO contracts, managed care contracts and other types of commercial insurance contracts. Normally, these cannot be assigned by ABC to XYZ without the payer’s consent. If it is important for XYZ to obtain specific ABC third-party contracts, then before closing occurs XYZ needs to talk to the payers and determine if (at closing) they will either approve the assignment of the contract from ABC to XYZ or issue a new contract to XYZ.
Stock Purchase
In a stock purchase, Smith is the seller. He sells his stock in ABC to either Jones, individually, or to XYZ. Assume that Jones will purchase the stock. Essentially, this means that Smith hands his stock certificate over to Jones. ABC remains an ongoing entity. It should retain its accreditation, surety bond, Part B supplier number, Medicaid provider number, state licensure, CB contract and (normally) its third-party contracts. The only difference is that Smith is “out,” and Jones is “in,” as the owner of ABC. Instead of applying for new numbers and licenses, etc., ABC will file change of ownership (CHOW) notifications with the various governmental agencies. There will be no break in billing. In other words, ABC will not have to accumulate Medicare and Medicaid claims and send them through all at once sometime in the future. Whatever debts and known liabilities that ABC had before closing will remain with ABC after closing. Whatever unknown liabilities that ABC had at closing will remain with ABC after closing. Liability for any fraud committed by ABC before closing should not flow upstream to Jones, individually. However, pre-closing fraud may diminish the value of ABC, meaning that Jones may have paid too much for ABC. If ABC commits fraud after closing, then liability for the fraud may be imposed upstream on Jones.
Consummate Acquisition
ABC and Jones/XYZ need to sign a Mutual Nondisclosure Agreement. This states that ABC will disclose confidential information to Jones/XYZ and that Jones/XYZ will keep the information confidential. ABC will give to Jones/XYZ its bank statements, tax returns and financial statements so that Jones/XYZ can determine the financial condition of ABC. Based on the information provided by ABC, Jones and ABC will agree on a purchase price. Jones/XYZ and ABC will sign a letter of intent (LOI). It will be detailed and will set out the terms of the deal. However, the LOI will not be binding. Jones/XYZ will conduct due diligence. There are three types of due diligence. The first type is financial due diligence. This is when Jones/XYZ and Jones’s CPA review the financials of ABC and make sure that they are comfortable with the financial condition of ABC. The second type is corporate due diligence. This is when the law firm for Jones/XYZ confirms that ABC is a corporation in good standing, ABC’s minute book is up-to-date and there are no liens against ABC’s assets. The third type is regulatory due diligence. This is where the law firm for Jones/XYZ (i) confirms that ABC has an active/unencumbered Medicare Part B supplier number, Medicaid provider number and state licensure; confirms that ABC is fully accredited; confirms that ABC has an active surety bond; confirms that ABC has all other required permits, numbers, certificates, etc.; reviews patient files to determine if they are proper and complete and determines if there is any pending or threatened litigation, government investigations or third-party payer audits. Assuming that Jones/XYZ is satisfied with the results of the due diligence, then closing will occur. It is at closing that Smith hands over to Jones/XYZ the keys to the store. It is at closing that Jones/XYZ pays all or a portion of the purchase price to Smith/ABC. If this is an asset purchase, then XYZ will have been created and XYZ will be the purchaser. If this is a stock purchase, then Jones (individually) will likely be the purchaser. Prior to and after closing, Jones will need to take those steps regarding obtaining new numbers/licenses, etc. (asset purchase) or filing CHOWs (stock purchase). If I am representing the purchaser, then my preference will be for about 75 percent of the purchase price to be paid at closing, with the balance to be paid sometime after closing. This way, there will be a pool of money for the purchaser to offset against in the event that the purchaser discovers (after closing) that Smith/ABC has breached the reps and warranties contained in the APA (or Stock Purchase Agreement). On the other hand, if I am representing the seller, then my preference will be for as much of the purchase price as possible to be paid at closing.
Common Ownership Link
There is a process that enables a contract supplier to add the PTANs of another supplier to a CB contract through the establishment of a common-ownership link between the two. The common ownership rule is possible as a result of three aspects of the competitive bidding program. First, the program regulations require all suppliers sharing a 5 percent or greater common-ownership interest to submit a single, joint bid on any overlapping CBA/product category combinations. Second, if CMS awards a contract pursuant to a joint bid submission, CMS issues a single contract that includes a listing of the PTANs of all of the commonly-owned suppliers included in the bid submission. While the top of such a contract would show only the name of the primary supplier that registered to submit the bid, each supplier entity that has a PTAN listed in Exhibit B of the contract is considered a “contract supplier.” Third, a contract supplier is permitted to request that CMS add or remove locations to or from its contract at any time. Based on the interaction of these three aspects of the program, the question is whether a contract supplier can add the PTAN(s) of a commonly-owned supplier if the common-ownership link between the two was established after the time that the contract at issue was awarded. Unpublished CBIC guidance states that “a [contract] supplier may add additional locations as long as the locations are for the same product category/CBA for which the supplier was awarded a contract. . . . [and] the contract supplier may only add locations including those of a commonly owned company if the locations (identified by PTANs) are not on another contract for the same CBA/product category combination and they meet all of the competitive bidding program requirements.” In other words, a contract supplier can only add a commonly owned supplier’s PTAN to a CBA/product category combination that is included on the CB contract, and the contract supplier cannot add a commonly-owned supplier’s PTAN to a CBA/product category combination if that PTAN is already on another contract for the same CBA product category combination. Note that the supplier requesting to add another supplier’s PTAN(s) to a contract does not have to request to add the PTAN(s) to every CBA/product category combination on the contract—it may specify the CBA/product category combinations to which the PTAN(s) should be added. It is the author’s opinion that it does not matter whether the supplier with the CB contract purchases 5 percent (or more) of the non-contract supplier or vice versa. It appears that so long as a common-ownership link is established and reported to the NSC on the 855S of the supplier that sells 5 percent or more of its stock, the issue of which supplier acquires the stock of the other should not matter. Based on the preceding analysis, the following steps provide an outline of what should occur for a contract supplier to add another supplier’s PTAN(s) to a CB contract using the common ownership link. A 5 percent or greater common-ownership link must be established between the supplier with the contract and the supplier that desires to have its PTAN(s) added to the contract. This transaction must actually be consummated so that the supplier selling its interests can, in good faith, submit an updated 855S reporting the new ownership information. The transaction can be structured in a way to protect the parties in the event that CMS does not approve the addition of the PTAN(s) to the contract. But the transaction must be consummated.
- The supplier that sold its 5 percent or greater ownership interest submits an 855S to the NSC reporting the new ownership information. This creates a verifiable record of the common-ownership interest for the CBIC to confirm. Processing by the NSC normally takes 2-4 weeks.
- Once the 855S has been fully processed, and the common-ownership link is on record with the NSC, the supplier with the contract submits a Contract Supplier Location Update Form to the CBIC, requesting to add the other supplier’s PTAN(s) to specified CBA/product category combinations. In addition, any documentation needed to show that the supplier to be added satisfies all of the CB program requirements (e.g., licensure, accreditation, financial documents), and that has not already been submitted to the CBIC, must be included. Processing by the CBIC normally takes two to four weeks.
- The CBIC will process the request, and the effective date for the addition of the PTAN(s) will be the date that the CBIC approves the request and provides notification to the parties.
