OIG: Medicare DME profits must not exceed retail

If you’re charging Medicare more for durable medical equipment than you charge retail customers for the same supplies, watch out. The feds can kick you out of the Medicare program if they find that your profit margin on Medicare sales is greater than on other sales, according to a new advisory opinion from the OIG.

The opinion (98-8), released on July 6, responds to a request from a "superstore" that sells "a wide selection of medical and health-related products to customers for use in their homes." Although the company doesn’t yet participate in Medicare, about 300 of the 3,000 products it sells are reimbursable as durable medical equipment (DME) under the Medicare program.

The company proposes to charge Medicare "an amount equal to the maximum reimbursement amount allowable under Medicare’s payment regulations," according to the opinion. The company admits that this amount will be higher than it charges retail customers — usually between 21% and 32% higher. It attempts to justify charging Medicare a higher rate by claiming that the cost of documentation, claims processing, delivery and distribution, and obtaining a DME surety bond cuts into the company’s profit margin.

The OIG can exclude individuals or organizations from participating in federal health care programs if it finds they have submitted bills "for items or services furnished substantially in excess of such individual’s or entity’s usual charges." However, the OIG can grant an exemption from this requirement given "good cause."

In the opinion, the agency contends that a 21% to 32% higher rate for Medicare sales is "substantially in excess" of the retail rate. Whether the increased cost of doing business with Medicare constitutes "good cause," however, remains an open question, because the company itself doesn’t know exactly what its costs will be.

According to the opinion: "A useful benchmark for determining whether the higher Medicare charge would meet the good cause’ exception is to compare the profit margin on the Medicare sale to the margin on the [retail] sale. So long as the profit margin for the Medicare sale is less than or equal to the [retail] sale, we think the good cause’ exception would be satisfied."