The frequent press releases bringing news of government enforcement actions against DME suppliers are stark reminders that failure to comply with Medicare law, regulations and guidance can result in audits, overpayment actions, investigations, whistleblower suits under the False Claims Act, or even criminal prosecutions. DME suppliers are squarely in the government’s crosshairs and, therefore, need to keep abreast of new legal theories employed by the government to pursue its fraud enforcement agenda.

One such theory – the “sham entity” theory – has surfaced in two pending False Claims Act cases. The theory works this way: The US Department of Justice (DOJ) identifies a company – typically with the help of a whistleblower – that it believes is operating as an “illegitimate” DME supplier, created for the purpose of capturing Medicare reimbursement that may be unavailable to entities other than suppliers. DOJ then brings (or intervenes in) a False Claims Act case against the supplier, accusing the company of operating as a sham. To support this claim, DOJ relies on the supplier’s purported non-compliance with the 26 DME Supplier Standards, set forth in 42 CFR § 424.57(c).

The DME Supplier Standards are minimum operational standards applicable to all types of DME suppliers. For example, the standards mandate that suppliers maintain a physical facility on an appropriate site, maintain a primary business telephone listed in a local business directory, permit on-site inspections by CMS, honor warranties, have comprehensive liability insurance, and have a complaint resolution protocol to address beneficiary complaints. Given the nature of these requirements and the regulatory remedies available for non-compliance, it seems clear that they are general conditions of a supplier’s participation in the Medicare program rather than conditions of payment for particular items or services. As such, recent False Claims Act precedent would suggest that non-compliance with the DME Supplier Standards should not be actionable under the False Claims Act, as courts have held that conditions of participation are not conditions of payment.

Yet, two current cases demonstrate DOJ’s contrary view and its use of a supplier’s alleged failure to comply with the DME Supplier Standards as grounds for recovery under the False Claims Act. In United States ex rel. Jamison v. McKesson Corporation, et al., a case pending in federal court in the Northern District of Mississippi, DOJ intervened in a whistleblower suit and accused McKesson (and various related entities) of setting up a sham DME supply company as part of an improper business relationship with a nursing home operator. DOJ alleges McKesson directed the incorporation of a sham DME supplier to “capture” Medicare Part B reimbursement for the nursing home operator to which it was not entitled. According to DOJ, False Claims Act liability accrues, in part, because the supplier failed to fully comply with the DME Supplier Standards and was not functionally equipped to deliver DME supplies, items and services. Significantly, DOJ emphasized in court filings that “[t]he Supplier Standards go to the very heart of what it means to be a DME provider” and compliance with them constituted conditions for receiving Medicare payment.

In United States ex rel. Williams v. Renal Care Group, Inc., et al., ¹ a case pending in federal court in the Middle District of Tennessee, DOJ is proceeding against a home dialysis supplier based on a similar legal theory. In Williams, DOJ intervened in a whistleblower action and asserted that Renal Care Group, a dialysis corporation, used its subsidiary, a home dialysis supply company, to take advantage of higher reimbursement available to DME suppliers but not dialysis facilities. DOJ claims the supply company was not a “legitimate” DME supplier but a “sham” entity set up to game the reimbursement system. To support this claim, DOJ relies on the supplier’s purported non-compliance with specific DME Supplier Standards and asserts that compliance is a condition of Medicare payment.

Both of these cases are ongoing and the respective defendants have vigorously objected in court filings to DOJ’s assertions that the Supplier Standards are conditions of payment rather than conditions of participation (as well as raising a host of other defenses). So far neither district court has ruled on the issue.

Nevertheless, DOJ’s approach in these cases should serve as a warning to DME suppliers who may not be in full compliance with the 26 standards set forth in 42 CFR § 424.57(c). These two actions demonstrate that government enforcers and whistleblowers may pursue cases under the False Claims Act for purported non-compliance with the DME Supplier Standards. Consequently, DME suppliers may place themselves at significant risk by failing to comply with the DME Supplier Standards.

If you have questions about compliance with the DME Supplier Standards, application of the False Claims Act to DME suppliers or related issues, please contact the authors, Lisa Estrada and David Greenberg, any member of the Arent Fox Health Care Practice experienced in False Claims Act litigation and DME compliance issues or the Arent Fox attorney with who regularly handles your legal affairs.

¹ The authors are counsel to the defendants in the Williams action.