What Does the CMS Surety Bond Requirement Mean for O&P?

There has been considerable discussion on the OANDP-L listserv regarding the Centers for Medicare & Medicaid Services (CMS) final rule requiring "certain suppliers of durable medical equipment, prosthetics, orthotics, and supplies" to post a $50,000 surety bond. To learn more about the surety bond and its requirements, The O&P EDGE spoke with Don Foley and Jeff Michalenok of Cailor Fleming Insurance, Youngstown, Ohio.

They agreed that the surety bond requirement is something that the O&P profession should take seriously; however, they also advise O&P practitioners to hold off on purchasing a bond until CMS clarifies the requirements and the exemption language.

"I don't think anybody should go out and try to buy a [surety] bond now because the language is not ready," Foley said. "There is some talk that you might want to wait until summer to buy a bond because the requirements, the cost, and other things might change between now and then."

Michalenok added that the final wording would have to be set before summer because "the requirement for new businesses is May 4, 2009.... If something isn't done before then, no new businesses are going to be able to open because they're going to need the bond in order to set up shop and get provider numbers."

A number of O&P practitioners are asking for clarification about the exemption language. The language, as written in the CMS press release, is as follows:

"While this regulation requires most suppliers to obtain a surety bond, some companies or organizations that supply these items are exempt from the surety bond requirement, including certain physicians and non-physician practitioners, physical and occupational therapists, state-licensed orthotic and prosthetic personnel, and government-owned suppliers."

"The requirements look like there will be exemptions for licensure, and from what we heard yesterday, that is the intent of CMS, but the language talks about state-licensed orthotic and prosthetic personnel' being exempted, not companies," Foley said. "Nonetheless, logic tells me that they are going to exempt the companies from the states that have licensure, as long as they meet the other requirements of being solely owned by licensed O&P personnel and are only billing for orthotics and prosthetics."

While both Michalenok and Foley agreed that at this point, waiting until summer to purchase a bond is a good idea, Foley also recommended not waiting much past that.

"The process of getting a surety bond is extensive," Foley said. "You may need CPA-prepared financial statements going back three years for the business. You may need CPA-prepared financial statements for the owners of the business. You need these statements to indicate profitability and good cash flow with acceptable ratios and positive working capital. It's a complicated process, and the size of the facility may dictate the information that will be required by the bonding company. We recommend that you start this process 90 days prior to October 2, 2009."

Foley and Michalenok also said that it's important for practitioners to understand that a surety bond is not insurance .

"This is not insurance," Foley said. "O&P practitioners might think that the bond company will pay a claim, and that will be the end of it. This is not the case. If Medicare calls the bond, the O&P company will have to pay it back. They'll have to come up with the $50,000 if CMS calls the bond.

"The other big issue I see," Foley continued, "is right now it appears that CMS is requiring a bond for every NPI number. That means a bond for every satellite location, which could get to be a very heavy load. This is an area we'd like to see compromise on."

To illustrate his point, he asks what might happen to an O&P practice that has a main location and ten satellite offices, each with its own NPI number. "At $50,000 each, that would be $550,000 in bond exposure," Foley said. "The Surety & Fidelity Association of America (SFAA) is very concerned that if there is a call on the bond that CMS would want all of the bonds called, which would mean they would have an exposure of $550,000. That wasn't the original intent. So what the SFAA is trying to do is put a cap on this."

Another issue that Foley said remains to be worked out is what happens to the bond in the event that it is called. "Will the company need to get another bond, or will that bond remain in place?" he asked.

"Back about ten years ago, CMS tried to do this...and failed dismally because it couldn't get the bond language right, and the SFAA said the financial demand on the bond companies was far too punitive for them," Michalenok said. "The way the current requirements are written, it faces almost the same situation now, but they believe that they have worked some of that out.

"From what I understand," Michalenok continued, "a draft of a bond has been completed and submitted to CMS, and in the next 10 days to two weeks, CMS and the SFAA are going to sit down and hammer out the details to see if a bond form can be developed that is palatable to the bond companies."

O&P comprises only a small portion of the estimated 100,000 DMEPOS suppliers across the country; however, the potential fallout from the CMS rule is substantial. According to the American Association of Homecare (AAHomecare) January 2, 2009, blog posting, "In its analysis of the rule, CMS...estimates that as many as 25,188 DMEPOS providers will exit Medicare due to the combined costs of the surety bond and accreditation requirements."

CMS states that the "surety bond requirement is designed to limit the Medicare program risk from fraudulent equipment suppliers and help to ensure that only those suppliers who remain in the program furnish items to Medicare beneficiaries that are considered reasonable and necessary from legitimate DME suppliers." However, Michalenok said there might be another motivation as well.

"To me it looks like what CMS is doing is using this as a tool to...cut out and not have to deal with so many vendors because they are having such a hard time getting competitive bidding through."

The O&P EDGE and EDGE Direct will continue to provide updates on the surety bond requirement as they become available. For more information, visit www.oandp.com/edge/issues/articles/NEWS_2008-12-30_01.asp

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