Observation Deck

Getting Stuck with the Bill

Is the surety bond a ball and chain for suppliers who go out of business?

• By Wayne Stanfield
• Sep 01, 2012

On Jan. 2, 2009, the Centers for Medicare & Medicaid Services (CMS) published a final rule titled, “Medicare Program: Surety Bond Requirement for Suppliers of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS)” in the Federal Register. This final rule implemented Section 4312(a) of the Balanced Budget Act of 1997. Non-exempt suppliers were required to obtain a $50,000 surety bond for each National Provider Identifier (NPI) by Oct. 2, 2009.

The surety bonds provided Medicare with a guarantee that the surety will — within 30 days of receiving written notice from CMS containing sufficient evidence to establish the surety’s liability under the bond of unpaid claims, civil monetary penalties (CMPs), or assessments — pay CMS a total of up to the full penal amount of the bond. Payments by the surety company are the full amount of any unpaid surety claim plus any interest and penalties assessed.

Suppliers must obtain and submit a surety bond to Medicare if they are to be in the Medicare DME business, but there are issues with the bond process that may have been overlooked. Despite having no choice in the matter, DME owners should be very aware of the implication of the bonds, especially in the current DME environment.

How Surety Bonds Function

Under normal business conditions, which haven’t prevailed in the DME industry for several decades, there would be little concern with surety bonds. Today, with competitive bidding entering its third phase, as well as the out of control audit frenzy, suppliers may be at risk without realizing how intrusive the surety bond could become.

Essentially a surety bond is like a bank account that only Medicare can draft. The surety company functions like the bank and manages the account. Whenever there is a claim filed against the account, the surety pays the claims and then bills the bonded company for the amount of the claim. In our industry’s case, the bonded company is the HME provider.

The fee providers pay each year is akin to a bank service charge to administer the account. Clearly, the more activity there is on a provider’s bond, the more costs the surety company incurs, meaning the premium cost will increase. Claims against bonds and changes is in financial status can also mean that the surety could refuse to renew your bond, or require a premium that is more than a struggling supplier can afford.

DME surety bonds cost on average about $450 per year, which is not a big expense for suppliers. This premium can and will go up based on the financial status of the business AND the owner, and the claims history against the bond. With Medicare filing claims against bonds for small overpayment due to administrative errors, bond companies will begin looking at the premiums more closely.

Unseen Danger

Perhaps more concerning to many suppliers is the fact that going out of business provides no protection against claims made by Medicare against surety bonds. The current rules require that the bond remains in force for two years after the cancellation or expiration date. It is also critical to remember that bonds require a personal guarantee from the business owner.

A supplier that is unable to continue in business due to the unsustainable competitive bidding fees, or the loss of referrals from winning only one contract, might have no option but to close. Since bankruptcy is the last resort for anyone, most suppliers in this position would wind down their business by transferring their patients to another supplier and selling the remaining assets to pay the bills. Since most payments from Medicare and insurance payers are 30 to 60 days in arrears, a supplier who is closing will have no choice but to work their accounts receivable for at least three of four months to collect the remaining money. As noted, Medicare can continue to make claims against the surety bond during this period and for two years after the bond expires.

Consider the scenario that even after the company has closed, has no assets, and no income, Medicare can file claims against the surety bond for audit findings and the surety will be required to pay and come after the owner. Because there are personal guarantees required for surety bonds, DME owners could be forced into bankruptcy long after their DME company closed. When the surety bond was implemented, everyone knew that it was designed solely to protect CMS from suppliers, but few realized that this protection could become the ball and chain that could destroy the financial future of the DME owner well beyond going out of business.

Surety bonding companies are like any other business they have to be profitable. They are essentially offering to guarantee the DME claims you send to Medicare and pay Medicare on demand because they deemed that you shouldn’t have the money. This puts the surety company between you and Medicare, but that doesn’t mean you are not liable. It just means that the surety company will be taking your house and anything else you own to settle their payments to Medicare on your behalf if you default.

This bond problem adds one more worry to the overwhelming pressure of simply being a small business owner in the world of DME. Many suppliers are beginning to realize that being in the DME industry is not worth the risk and are choosing to go in another direction. When you consider that there is no other industry that put so much pressure and so much risk on the owner, it makes you wonder why anyone would want to get into or remain in DME.

This article originally appeared in the September 2012 issue of HME Business.