The vendor discount dilemma

As those in the long-term care (LTC) industry understand, Medicare Part A covers care provided to nursing home residents for a specified period of time, typically the first 100 days of residence. During this time, Medicare provides a fixed per-diem rate to the facility, and this rate does not consider the actual costs of providing services to the resident. The facility also is responsible for paying for all services received by the resident, including various therapies, tests, needed medical equipment and room and meals costs. At least part of the rationale for this reimbursement structure is to incentivize the provider facility to negotiate with the vendor or supplier of services the lowest possible rate, thereby fitting its costs under the reimbursement capped rate.


There is a practice in the LTC industry whereby vendors and suppliers of services and products to facilities (the “providers”) offer discounts targeted at the residents covered under Medicare Part A. This discount obviously assists the provider in keeping its costs low and within its per-diem rate. In practice, these offered discounts typically are given in exchange for some measure of exclusivity to bill for services for facility residents covered under Medicare Part B.

This distinction is important because when the vendor or supplier bills Medicare Part B, it is able to bill Medicare directly at the current Medicare allowable rate, and it is not constrained by the per-diem limitations imposed on the Part A covered residents. This arrangement has been referred to as “swapping,” as the vendor or supplier “swaps” cut-rate services or products for Part A residents for the lucrative exclusivity of providing Part B resident services.


Discount arrangements between healthcare providers and vendors and suppliers have become an increasing focus of False Claims Act (FCA) cases that are brought based on violations of the Anti-Kickback Statute (AKS). Under the AKS, it is illegal to solicit or receive any remuneration in return for a referral for any item of service that may be paid for under a federal healthcare program.

The FCA provides liability for any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the federal government.”[i] If a claim submitted to the government is based on, or “tainted,” by a violation of the AKS, then it may be a false claim under the FCA. It is beyond the scope of this article to review the penalties for such violations; they are staggering.

The problem is that the government alleges that by discounting services and products provided to Medicare Part A recipients in exchange for billing access to Part B recipients, the discount is a kickback. In 2008, the Office of Inspector General (OIG), issued a document titled Supplemental Compliance Program Guidance for Nursing Facilities. It contained the following statement:

“…nursing facilities should not engage in “swapping” arrangements by accepting a low price from a supplier or provider on an item or service covered by the nursing facility’s Part A per diem payment in exchange for the nursing facility referring to the supplier or provider other federal healthcare program business, such as part B business excluded from consolidated billing, that the supplier or provider can bill directly to a federal healthcare program. Such “swapping” arrangements implicate the anti-kickback statute and are not protected by the discount safe harbor.”


The federal government and whistleblowers (known as “relators” when filing a qui tam or whistleblower suit) have aggressively sought enforcement. One such action, (United States ex rel. McDonough v. Symphony Diagnostic Services), turned on the definitions and calculations of what is a “discount.”

The U.S. District Court for the Southern District of Ohio rejected the vendor’s (Mobilx, a supplier of mobile imaging services to nursing homes) motion for dismissal of the relator’s amended complaint, finding factual instances where services provided to Part A residents were provided at far less than its costs, and instances where Mobilx did not pursue collection of its billables for Part A services from the facility, thereby resulting in essentially a “free service.”

Ruling on cross motions for summary judgment, however, the court delved into the issues related to the direct and indirect costs. The relator argued that the vendor, Mobilx, must use “fully loaded” costs in its calculations of charges for Part A services. The term fully loaded means that both variable and fixed expenses should be included as “costs related to providing the service and running company’s operations, including those costs allocated from regional or corporate headquarters.” Mobilx argued that its cost calculations included only direct costs of performing the service and some indirect costs; it did not include costs “attributed to overhead.” Thus, Mobilx successfully argued that the use of incremental costs in pricing its services to Part A recipients was appropriate.

The court ruled in favor of Mobilx, saying that the relator had failed to show that “fully loaded costs” were a requirement under the AKS. Further, without some point of comparison, low pricing is not sufficient to infer intent to offer a kickback.

Not all enforcement actions yield the same result. In another recent case involving Omnicare, a qui tam lawsuit was brought by an Omnicare employee in Ohio for $120 million, alleging a “swapping” arrangement whereby Omnicare was offering discounted or below-cost pharmaceutical services for the facility’s residents covered under Part A as an inducement for facilities to increase referrals to Omnicare of residents whose drugs were covered by Part D. Omnicare settled the suit for $120 million with the blessing of the U.S. Department of Justice.


What is the right deal? Unfortunately, there is no answer. The OIG consistently has stated that any link or connection between the price offered for services paid out of the provider’s pocket and subsequent referrals for federal program business billable by the supplier implicates the AKS. One measure providers may wish to consider is whether the discount offered by the vendor or supplier for Part A services makes good commercial sense standing alone, that is, without the Part B business. Federal authorities provide no clear guidance indicating how large a discount could be while still making sense standing alone.


Nursing homes and other LTC providers should review their existing vendor and supplier contract agreements to ensure that any negotiated discounts are not below cost. Ask: In the eyes of federal enforcement authorities, why would a business such as a vendor or supplier offer its services and products to us, the provider, at a price that is below their cost, if not to…what? Or in exchange for…what?

If the answer involves exchanging this discount for exclusive access to Part B or commercially insured residents, then the arrangement quite possibly is skating on thin legal ice. This will necessarily involve a detailed and frank discussion with the vendor or supplier, inquiring as to how it arrives at its offered pricing. Is the price for Part A “fully loaded” or “incremental?” Can the parties document that the negotiated pricing is fair market value? Would we get an offer like this if many other vendors or suppliers also had access to our Part B and commercially insured residents?

Lastly, be aware that the AKS and rules provide protections for certain types of discounted arrangements, subject to the arrangement meeting certain legal requirements. These are known as the statutory discount exception and the regulatory safe harbor, each of which protect discounts under a variety of circumstances. Courts have struggled with differentiating how these two protections work and which one would apply to any particular arrangement. Seek legal counsel before proceeding.

David E. Schweighoefer is a partner in the Health Care Practice Group of Brouse McDowell in Akron, Ohio, and a member of the American Health Lawyers Association. He specializes in regulatory and corporate compliance program development, patient rights, informed consent policies and procedure development. He may be reached at (330) 535-5711.

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