Consignment closets, 'stock and bill' arrangements still a viable option

January 25, 2012

In the age of heightened regulatory scrutiny, you may question whether consignment closet relationships are legal. If properly structured they can be especially beneficial to patients in need of expensive medical devices.

The DMEPOS, not the physician, bills the patients or the patients' insurance carriers (or other third-party payers) for the devices. In proper consignment closet models, patients should never be forced to obtain devices from the physician's office but are free to use the supplier of their choice.

This relationship between the DMEPOS and the physician can pass muster from a regulatory perspective as long as the arrangement complies with the Social Security Act (Stark laws) and the federal anti-kickback statute.

Stark laws, in a nutshell, prohibit a physician from referring a Medicare or Medicaid patient for designated health services to an entity in which the physician, or an immediate family member of the physician, has a financial relationship. DMEPOS are considered designated health services for purposes of the applicability of Stark laws. A financial relationship is one in which a physician has an ownership or investment interest, or a compensation arrangement.

Under current interpretations and application of Stark laws, services provided by the physician to the DMEPOS constitute a financial relationship between the physician and the DMEPOS. This type of arrangement can be an exception to Stark laws (the personal services exception) and be permissible if the following elements are incorporated into the arrangement:

As for the rental of the office space to store inventory, the prohibitions under Stark laws are excepted if these conditions are met:

From the perspective of the Stark laws, a consignment closet arrangement containing these elements likely will pass the scrutiny of federal regulators. Be aware, however, that even a slight deviation from the structure mentioned above may result in civil and criminal penalties.

The federal anti-kickback statute is a criminal statute that prohibits anyone from knowingly and willfully offering, paying, soliciting, or receiving any payment, directly or indirectly, overtly or covertly, in cash or in kind, in return for referring an individual to another person for furnishing, or arranging for the furnishing of, any item or service or the purchasing, leasing, ordering, or arranging of any good, facility, service, or item that may be paid for by a federal healthcare program. The government implemented numerous "safe harbors" that exempt from scrutiny an arrangement that meets all of the specified standards.