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Part I in this article series covered the history and background of surety bonds, and how they have come to play a significant role in combatting Medicare and Medicaid fraud since the late 1990s. These bonds are provided to assure that the principal, which typically is engaged in a particular business, fulfills its obligations imposed by governing statutes or applicable regulations. The federal government and many states impose obligations to provide surety bonds on certain providers of health care goods and services.

Surety Bonds for DMEPOS Providers and Pharmacies

Another context in which surety bonds may be required is for the providers of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS). In order to enroll in the Medicare billing processes, a DMEPOS supplier must post a surety bond. The requirement to post these bonds was referenced in the January 2, 2009 posting of the final rule entitled “Medicare Program: Surety Bond Requirement for Suppliers of Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS).” Under § 4312(b) of the Balance Budget Act of 1997, suppliers of DMEPOS were required to post a surety bond in an amount not less than $50,000. The suppliers of DMEPOS who are properly registered must obtain a bond for each National Provider Identifier (NPI) and provide this information to the National Supplier Clearinghouse (NSC). A DMEPOS supplier bond must be obtained for each practice location. For example, an organization that operates as a DMEPOS supplier with ten (10) locations would be required to secure surety bonds totaling $500,000.

Pharmacies can also be enrolled as DMEPOS suppliers through the NSC. Pharmacies which bill for certain non-accredited products, including Epoetin, amino suppressive drugs, infusion drugs, nebulizer drugs, or oral anti-cancer drugs are also required to post a surety bond. Pharmacies that continue to participate in the Medicare programs as a DMEPOS supplier are required to post surety bonds. Sanctions are imposed for the failure to post the required surety bond. A supplier that has not provided the required surety bond for any length of time would be deemed “non-compliant.” Once found to be non-compliant, Medicare billing privileges would be revoked for a period of time during which the supplier is and remains in non-compliance. The DMEPOS supplier would remain liable for items or services provided during any gap in compliance. If a gap in the bonding requirement remains, certain penalties can be imposed. For example, a supplier with one adverse legal action against them in 10 years preceding may be deemed a “high risk.” For each such occurrence, the penal sum of the bond would increase at a rate of $50,000 per occurrence. Adverse actions would include the following:

  1. A Medicare imposed revocation of any Medicare billing privilege;
  2. Revocation or suspension of a license to provide health care by any state licensing authority;
  3. Revocation or suspension of a license by any accreditation organization;
  4. Conviction of a federal or state felony offense; or
  5. Exclusion or disbarment from participation in a federal or state health care program.

Under the terms of some surety bonds, the surety would be liable for unpaid claims, civil money penalties and assessments that occurred during the period of the bonds or any rider that supplements the bond. The total liability of the surety, is capped at the amount of the penal sum of the bond.

In September 2011, Donald M. Berwick, M.D., Administrator of the Centers for Medicare and Medicaid Services, received a report from Stuart Wright, Deputy Inspector General for Evaluation and Inspections regarding the use of surety bonds to recover overpayments made to suppliers of DMEPOS. In the report, Mr. Wright noted:

“We found that CMS does not have finalized procedures for recovering DMEPOS overpayments through surety bonds. In addition, as of July 2011, no overpayments had been recovered through surety bonds since October 2, 2009, the date the surety bond requirement became effective for all suppliers. A full report, to be issued at a later date, will provide additional information on the number of DMEPOS suppliers that received overpayments, the amount of unrecovered overpayments, and the extent to which DMEPOS overpayments would have been recovered if CMS had sought collection through surety bonds.”

In his report, Mr. Wright noted that Medicare’s standards were “too weak” to effectively screen DMEPOS suppliers to enroll in the program. Mr. Wright further noted that the Office of the Inspector General had conducted site visits in Florida, observing that “nearly half” of the suppliers were not in compliance with basic supplier standards. The report also documented how the enrollment process for accredited suppliers had been changed in 2011 to require the use of surety bonds. In general, the report noted that “a surety bond enabled CMS to recover overpayments when other methods of collection are unsuccessful.”

Pharmaceutical Dealer/Supplier Bonds

Another type of bond that may be required is a Pharmaceutical Dealer/Supplier Bond. These bonds are required for entities that are engaged in the wholesale distribution of prescription drugs. This would include companies that repackage or distribute drugs under private labels, manufactures drugs, provides warehouse services, or retail pharmacies that provides wholesale distribution services. Many states require that wholesale distributors obtain a pharmaceutical wholesale dealer surety bond to insure that the providers fully comply with state and federal laws regarding their operation. While the penal sum varies from state to state, many bonds must be at the level of $100,000. Arizona is one state that requires the posting of a Pharmaceutical Wholesaler Surety Bond. Under the Arizona Statute, the bond is required to guarantee compliance with the requirements of and payment of any penalties, fees and costs imposed by the Arizona State Board of Pharmacy.

California is another state that requires the posting of a Pharmaceutical Wholesaler Surety Bond. These are required under § 4162 and § 4162.5 of the Business and Professional Code of California that requires an applicant seeking to perform as a Pharmacy Wholesaler to post a bond with the California State Board of Pharmacy.

Sample Requirements by State


Indiana is a state that requires the posting of surety bonds for Medicaid transportation service providers. The bond insures that the transportation providers will comply with Indiana Code Section 12-15-11. The bond would guarantee that Medicaid recipients will be protected if the provider violates a law that causes damage to the service recipient. The recipients may file claims against the surety bond for reimbursement if they sustain damage as a result of the transportation provider’s negligence. A transportation provider in Indiana is required to enroll with the Indiana Health Coverage Programs (the IHCP), and the application process requires the posting of the bond.


Texas requires the posting of a Medicaid bond. In Texas, Medicaid providers are obligated to obtain a Texas Medicaid bond in order to operate legally within the state. The requirements are set forth in Texas Administrative Code, Title 1, Part 15, Chapter 352, Rule § 352.15. The terms of the bond provide that the provider will operate lawfully and will not commit lawful fraud against the state as the payer for the services.


Ohio requires the posting of a surety bond under certain circumstances. Ohio Revised Code § 1751.271 and Ohio Revised Code § 5111.17 outline the requirements for the posting of a performance bond by a Health Insuring Corporation to pay claims of contractual providers for covered health care services provided to Medicaid recipients. The language of the bond reads as follows:

“If the principal shall well and truly pay claims of contracted providers for covered health care services provided to Medicaid recipients, then this obligation shall be void; otherwise to remain in full force and effect.”

While appearing antiquated, this wording is the standard language contained in a surety bond. Under the bond, the principal is required to fulfill its contractual obligations, and if the principal fails to do so, the surety may be obligated to perform.


As discussed above, surety bonds can be required at different stages and for different entities providing some form of health care services. For more information on how surety bonds operate in general or how a specific surety bond may apply to claimants, principals or sureties, please contact any member of Frost Brown Todd’s Health Care Industry Team or the author of this article, David C. Olson (, 513.651.6905.)

See the first part of the series here: The Use of Surety Bonds in Health Care – Part I

View the original article in its entirety as a Frost Brown Todd Legal Update: The Use of Surety Bonds in Health Care.