October 28, 2009

Instruction Letter for Letter of Intent

Dear Purchaser:

Attached is a Microsoft Word Template for a Letter of Intent that has been createdspecifically to address CMS’s particular rules and requirements for HME competitive bidding. ThisTemplate is for use by medical equipment suppliers who wish to get involved in the competitivebidding process, but who will need assistance in order to supply fully the entire Competitive BiddingArea (“CBA”). These suppliers either prefer not to form a network or cannot qualify to form anetwork, because they do not fall under the definition of a small supplier (“a company which earns$3.5 million in gross revenue or less”) or because they prefer maintaining complete control over theiroperations. Suppliers who prefer to pursue subcontracting arrangements will have direct control overtheir subcontractors. Suppliers who enter into a subcontracting arrangement can also compete forthe “Bid” and may serve as both a subcontractor and a contractor if they win the bid.

1. Reasons for Subcontracting.

In order to comply with federal and state health care and antitrust laws, rules and regulations,including but not limited to the Federal Anti-Kickback Statute (42 U.S.C. §§1320a-7b), a suppliershould not enter into a subcontract without being able to provide a legitimate business purpose.When it comes time to draft the subcontract, you will need to choose from one or more justificationsfor the subcontract: (1) product line support; (2) geographic access support; and/or (3) personnelsupport.

The product line support option is for those suppliers who can deliver product to the entiregeographic area of the CBA, but may not be able to supply the amount of product to cover all of itscustomers needs. This option would also apply if the Subcontractor has special vendor relationshipsthat affect the cost or selection of equipment or supplies. The geographic access support option isfor suppliers who do not have the capacity to deliver items throughout the entire CBA. Thepersonnel support option is for suppliers who do not have the administrative personnel to handle thevolume of business in the CBA. A supplier may have more than one reason for having a subcontractand some may choose more than one option.

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2. Purpose of Letter of Intent.

This Letter of Intent has been crafted, so that a potential Contractor and Subcontractorcan quickly enter into a basic agreement, and then they can finalize the details through a moreformal subcontracting agreement. A Letter of Intent is typically the first step in an agreement,and its purpose is to encompass the basic terms of a deal clearly and efficiently. A Letter ofIntent should satisfy CMS’s request for information regarding subcontractors at the time of thebid.

3. Options.

The Letter of Intent Template contains a few optional provisions which are highlighted inbold and indented. If a Contractor does not wish to utilize the option, that provision or sentenceshould be deleted. Per the instruction on the top of the Letter of Intent, the Letter of Intentshould be copied onto the Contractor’s Letterhead. Also, some of the options are dependent onhow much client contact the contractor envisions for the subcontractor.

Be sure to remove the instructional text for the final version. Also fix the italicized andemboldened text once you have chosen your textual options.

4. Details.

The Letter of Intent should be copied onto Contractor’s Letterhead prior to distribution.

The following Paragraphs of the Letters of Intent are described briefly below:

Paragraph 1: The Contractor will need to fill out the name of the product category beingbid upon and the name of the Competitive Bidding Area. In addition, “Exhibit A” should becompleted so as to list all products and services included in the product category.

Paragraph 2: The Contractor should choose either the product line support, geographicaccess support or personnel support option depending on the reason for his subcontractingagreement. A Contractor may choose more than one option.

Paragraph 3: In this Paragraph the Subcontractor must warrant that it meets all of thepreconditions required by CMS for participation as a Medicare supplier. Also, this paragraphallows the Contractor to require the Subcontractor to provide immediately upon request allevidence of compliance, including proof of accreditation, etc. The Subcontractor also mustnotify the Contractor immediately of any status changes. Accreditation will be required unlessthe Subcontractor falls into a statutory exception or unless the Subcontractor’s role is limited to

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purchasing inventory, repairing rented equipment or delivery of items via FedEx, UPS, etc. Also, a surety bond will be required only if the Subcontractor is enrolled in the Medicareprogram as a DMEPOS supplier.

Paragraph 4: In Option 2, Subcontractor will be required to warrant and represent that ithas never been excluded from the Medicare program, any state health program, or any othergovernment executive procurement or nonprocurement activity. Option 1 is a more broadrepresentation that Subcontractor has never had legal action taken against it, nor has it beensubject to any sanctions. Ideally all Subcontractors would agree to Option 1.

It is clear in the commentary to the Competitive Bidding Rules that a subcontractor orcontractor who has been excluded from Medicare will not be eligible, but the mere existence of aformer legal action or sanction does not automatically exclude a subcontractor. But 42 C.F.R.§ 414.414 requires all bidders to disclose any legal actions or sanctions by government agenciesagainst themselves or their subcontractors.

If a Subcontractor cannot choose Option 1, a Contractor should fully examine the reasonswhy Subcontractor was investigated in the past and assess whether Contractor feels comfortableentering into a business relationship with Subcontractor. Contractor should also be aware thatdepending on the nature of Subcontractor’s prior conduct which led to legal actions, CMS mayhave an unfavorable view of Subcontractor unfavorably and therefore be biased againstContractor’s bid.

Paragraph 5: Subcontractor agrees to cooperate fully in the Competitive Bidding process.At this time the rules regarding subcontractors have not been clarified. With few exceptions, weremain uncertain as to what type of documentation CMS will be looking for from Subcontractors,which is why it is important that a Subcontractor agrees to cooperate fully.

Paragraph 7: A Contractor may choose to have the Subcontractor provide claimssubmissions for the Contractor, maintenance and repair, warehousing, and clinical support alongwith delivery, set-up and instruction. A Contractor may choose one or all of those additionalservices. Note that the CBIC does not allow “clinical support” to include coordination of care withphysicians; that remains the Contractor’s responsibility. Similarly, the CBIC does not allow asupplier to subcontract for (i) intake and assessment, (ii) claims submissions on behalf ofbeneficiaries; (iii) equipment ownership or responsibility; or (iv) ensuring product safety.

Paragraph 9: Contractor must fill out “Exhibit B” for the fee schedule.

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Paragraph 10: The term of the Agreement will be for no more than three (3) years, whichis the term of the bid. Contractor may add the option of terminating the Agreement after ninety (90)days written notice.

Contractor may want to consider adding an option whereby Contractor can terminate theAgreement immediately even if Contractor wins the Bid.

Paragraph 11: If Contractor fails to win the bid, the Letter of Intent is no longer valid.

Paragraph 12: Subcontractor agrees to indemnify the other party in the event that a law suitarises as a result of Subcontractor’s negligence. Contractor can add a reciprocal indemnificationprovision with the caveat that it will not indemnify Subcontractor for any damages associated withContractor’s loss of the Bid.

Paragraph 13: Subcontractor is required to provide Contractor with proof of insurance. Contractor may add the optional statement which requires Contractor to provide proof ofinsurance to Subcontractor. Insurance limits must be set in an amount that either equals orexceeds the requirements for durable medical equipment suppliers. Presently, Medicare supplierstandard 10 requires suppliers to maintain comprehensive liability insurance of $300,000.00 thatcovers a supplier’s place of business, all of its employees and customers. In addition, a suppliermust maintain product liability insurance if it manufactures any products. In the Letter of IntentTemplate, the requirements have been set at $1,000,000.00; however, these limits can beadjusted.

Contractors are advised to require subcontractors to maintain an amount equal to or greaterthan the insurance they carry.

Paragraph 14: Subcontractor will enter into a non-compete with Contractor. This sectionis optional and Contractors should be prepared for some Subcontractors to refuse to enter into a non-compete. Under the current rules a supplier can be both a subcontractor and a contractor, sosubcontractors may not want to limit themselves since there is a possibility that both Contractor andSubcontractor could win the bid. Evaluate the competition risks carefully.

5. Notice to CBIC.

Note that each bid winner must notify the CBIC about each subcontracting arrangementwithin ten (10) days of signing a contract with CMS, and must disclose whether each subcontractorsatisfies the requirements set forth in Regulation 414.422. These requirements (accreditation, etc.)are identified are on Pages 2-3 of this letter, when discussing Paragraphs 3 and 4 of the Template.

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6. Not Legal Documents.

The Letter of Intent Template is not a legal document and should not be used withoutconsulting an attorney. Our presentation of this Letter of Intent Template and your acceptance ofthe Template does not establish an attorney-client relationship.

This Template is based on an analysis of CMS rules and regulations governing CompetitiveBidding as of January 16, 2009. This Template should be modified by a health law attorney in orderto accommodate your particular needs. You may engage the Health Law Center for advice or youmay engage any other competent health care attorney.

Please be advised that all sales are final.

If you wish to engage the Health Law Center’s services, please feel free to call us at (864)676-9075, or e-mail or write us at the addresses listed above.

Very truly yours,THE HEALTH LAW CENTERNeil B. Caesar Law Associates, PA

Neil B. Caesar

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