This Advisory

Opinion suggests

that simple

“consignment

closet”

arrangements will

not be viewed as

Anti-kickback

violations

by the OIG.

N U M B E R

FROM THE LATHAM & WATKINS HEALTH CARE PRACTICE GROUP BULLETIN NO. 199 MAY 29, 2002

199

”

“OIG Approves DME “Consignment Closet”On April 26 the Office of Inspector General

(OIG) of the U.S. Department of Health and

Human Services released an Advisory Opinion

permitting a so-called “consignment closet”

arrangement between a durable medical

equipment (DME) supplier (DME Supplier) and

various providers.1 The OIG closely scrutinizes

arrangements between sellers and potential

referral sources under the federal anti-kickback

statute. Here, however, the OIG found no

violation of the anti-kickback statute where

(i) a signed, written agreement between the

parties existed, (ii) no remuneration flowed

from DME Supplier to its potential referral

sources, and (iii) the arrangement preserved

patient freedom of choice. As such, the OIG

declined to impose civil monetary penalty or

exclusion sanctions on the parties.

Recommendations for Health

Care Entities

This Advisory Opinion suggests that simple

“consignment closet” arrangements will

not be viewed as Anti-kickback violations

by the OIG. The OIG’s brief analysis looked

only at whether remuneration was offered

by DME Supplier to its referral sources in

connection with the storage space/distribution

arrangement. Because of the absence of

remuneration and the existence of safeguards

to protect patient freedom of choice, the

OIG approved the arrangement.

We note that this Advisory Opinion does not

address “consignment closet” arrangements

where fair market value rent is charged.

Previous OIG communications, however,

have indicated that such arrangements may

be permissible in cases where space is

being rented for fair market value and other

conditions are met.2 We also note that the

OIG’s analysis does not explicitly address

the provider’s actions in the arrangement—

providing free rent and free notification services

to DME Supplier (e.g., such activities in certain

circumstances may be viewed as a “reverse

kickback”). Health care entities with existing

or proposed “consignment closet” arrange-

ments should consult with counsel to determine

if the terms of their arrangements deviate

from the simple model presented in this

Advisory Opinion, if a separate Advisory Opinion

should be sought, or if the arrangement should

be restructured to comply with the federal

anti-kickback statute or other pertinent law.

The “Consignment Closet”

Under the proposed arrangement, DME

Supplier will place an inventory of its portable

home oxygen equipment on site at certain

local hospitals, clinics and physician offices

(collectively, the “Distributors”), an arrange-

ment commonly known as a “consignment

closet.” DME Supplier will offer the proposed

arrangement to all hospitals within its service

area and also to clinics and physician offices

within its service area that refer patients to

DME Supplier for home oxygen systems. The

on site DME will be available for distribution

by Distributors to patients (i) who are bound

for home, (ii) whose physicians have ordered

portable oxygen equipment for home use,

BULLETIN NO. 199 MAY 29, 20022

CLIENT ALERT

and (iii) who have elected to obtain the equipment from

DME Supplier. DME Supplier has also certified to the

OIG that it will provide Distributors with a list of local

DME suppliers and encourage Distributors to provide the

list to patients to help preserve patient freedom of

choice. Once DME is distributed, Distributors will notify

DME Supplier, including providing patient’s name and

insurance information. DME Supplier will then bill the

patient and/or third party payor for the DME.

The proposed arrangement between DME Supplier and

each Distributor will be memorialized in a signed, written

agreement. DME Supplier has certified that it will not

pay the Distributors for use of the space to store the

DME (i.e., the “consignment closet”) and that no other

remuneration will flow from DME Supplier to Distributors

in connection with the proposed arrangement.

OIG Will Not Impose Sanctions

The broad language of the federal anti-kickback statute

prohibits any remuneration offered, paid, solicited or

received for the purpose of inducing or rewarding referrals

of items or services reimbursable under Federal health

care programs.3 Arrangements between sellers of items

or services and potential referral sources are subject to

heightened scrutiny to determine whether any remuner-

ation flows that is intended to induce or reward referrals.

Here, the OIG looked only to whether the DME Supplier

offered remuneration to Distributors with the intent,

in whole or in part, to induce or reward referrals and

concluded that because no remuneration flowed from

DME Supplier to Distributors in connection with the

proposed arrangement, no Anti-kickback violation

occurred. As noted above, the OIG’s analysis did not

address “consignment closet” arrangements where fair

market value rent is charged. The OIG has previously

indicated that such arrangements may be permissible

in cases where space is being rented for fair market

value and other conditions are met.4

Conclusion

Based on the absence of remuneration here, the OIG

concluded the proposed arrangement was not intended

to induce or reward referrals. As such, it declined to

impose civil monetary penalties or exclusion sanctions

on the parties.

1 Advisory Opinion 02-4, Office of Inspector General, U.S. Department

of Health and Human Services, dated April 19, 2002.

2 Special Fraud Alert, “Rental of Space in Physician Offices by Persons

or Entities to which Physicians Refer,” Office of Inspector General, U.S.

Department of Health and Human Services, dated February 23, 2000.

3 42 USC 1320a-7b(b).

4 Special Fraud Alert, “Rental of Space in Physician Offices by Persons

or Entities to which Physicians Refer,” Office of Inspector General, U.S.

Department of Health and Human Services, dated February 23, 2000.

If you have any

questions about

this Client Alert,

please contact any

of the attorneys

listed at the right.

Client Alert is published by Latham & Watkins as anews reporting service to clients and other friends.

The information contained in this publication shouldnot be construed as legal advice. Should furtheranalysis or explanation of the subject matter be

required, please contact the attorneys listed to theright or the attorney whom you normally consult.

© 2002 Latham & Watkins. All Rights Reserved.

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