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Digital Pathology Business Arrangements Bring Fraud and Kickback Worries

by | Feb 7, 2024 | Compliance Perspectives-lca, Enforcement-lca, Essential, Lab Industry Advisor

Healthcare attorneys explain three digital pathology models for laboratories to be aware of.

For decision-makers at diagnostic laboratories, digital pathology offers a chance to transition from glass slides to whole-slide imaging. There are unique compliance considerations for these projects, not only from the technology itself, but from possible business arrangements structured with the intent to make these endeavors work more smoothly.

In this article, healthcare lawyers outline three common digital pathology business arrangements and dig into potential fraud and kickback risks.

“We are seeing a number of creative and innovative financial structures that are emerging with the growth of digital pathology,” said Elizabeth Sullivan, chair of the national healthcare practice group at law firm McDonald Hopkins LLC. Laboratory leaders need to look at the types of federal and state fraud and abuse laws that these structures potentially implicate, Sullivan added.

Sullivan outlined these arrangements and the associated risks during “Digital Pathology: Regulatory and Business Considerations for Laboratories and Pathology Groups,” a presentation that was part of G2 Intelligence’s most recent Lab Institute virtual event.1 The session was presented by Sullivan, together with her healthcare partner Emily Johnson, and Patrick Walsh, a managing director in healthcare investment banking at Ziegler, and is available on demand for free to all G2 readers at www.g2intelligence.com/category/webinars/.

The three arrangements that were discussed are summarized below:

Business arrangement No. 1: Vendor contracts with lab and outside pathology group

Through digital pathology platforms, various entities—including labs, vendors, and pathology groups—have the opportunity to enter into business partnerships that can offer flexibility with cost sharing. Tread carefully with these arrangements, warned Johnson, a partner at McDonald Hopkins who also spoke at the Lab Institute session.

Description of the arrangement: A digital pathology vendor offers its services to physician groups with in-office laboratories. Specimens are sent from the physician office lab to a contracted slide production center to be accessioned, digitally imaged, and transmitted back to the physician office lab using the vendor’s platform. Meanwhile, a pathology group partners with the vendor to conduct professional component (PC) activities on behalf of the physician office from a remote location not in the physician office.

“The physician office lab gives access to the pathology group, who will assign a pathologist to log into the digital platform operated by the third-party digital pathology vendor,” Johnson said. “The pathologist will review the digital slide and render a professional interpretation.”

Reimbursement under this arrangement: Under this arrangement, the physician office lab most commonly bills for the PC performed by the pathology group and the technical component (TC) services rendered by the physician office and/or the digital pathology vendor. From there, the referring physician group with the physician office lab compensates the pathology group on a per specimen basis for the PC, Johnson noted.

In alternative models, the pathology group bills globally for the TC and PC. In this scenario, the pathology group either compensates the digital pathology vendor or the referring physician group with the physician office lab for performance of the TC, depending on which entity performs the TC, and digitization of the slides.

“If the pathology group is performing and billing globally for the TC and the PC, there are fewer compliance concerns because the pathology group is performing both components in house, so it makes sense that they would bill for those components,” Johnson said.

Analysis of the compliance risks: More complicated service setups can be troublesome, such as when one provider doesn’t perform both the TC and PC yet bills globally and then compensates the performing party—that may be perceived as driving business to the billing provider, Johnson said. In such scenarios, the pathology group may have more favorable contracts with commercial payers.

“There is always risk with purchased-services arrangements, and the government has indicated that they view them skeptically,” Johnson said.

She added that a September 2023 advisory opinion from the U.S. Department of Health and Human Services Office of Inspector General (OIG) was critical of this type of arrangement.2

In the advisory opinion, “the OIG hammered home the fact that they negatively view purchased services arrangements if such arrangements are perceived as not commercially reasonable and fair market value by enforcement agencies,” she noted. “So, I highly recommend you read the advisory opinion.”

There are further compliance risks if referring physicians are given some sort of minority ownership in the digital pathology vendor, an arrangement Johnson has seen before. That setup could trigger provisions under the following:

  • Stark Law, which generally prohibits physicians from making referrals to certain organizations with which the physicians have a financial relationship.
  • Anti-Kickback Statute, which bans incentives for referral of tests covered by Medicare or Medicaid.

“When there is an ownership interest by the physician group in a digital pathology vendor, there’s arguably an incentive to refer tests to the pathology group … because the referring physician has a financial relationship with the digital pathology vendor that the pathology group is contracted to use,” Johnson added.

Business arrangement No. 2: Digital pathology vendor directs business and identifies interpreting pathologists for client pathology group

In another type of arrangement, a pathologist that is affiliated with a digital pathology vendor makes the waters murkier with respect to compliance. It also brings up potential violations of the Eliminating Kickbacks in Recovery Act (EKRA).

Among other things, EKRA scrutinizes compensation packages that laboratories pay to individuals based on the value or volume of referrals they generate.3

Don’t rely on past COVID-19 allowances for remote reads

Labs should not rely on the Stark Law blanket waiver4 allowances regulators made during the COVID-19 public health emergency (PHE) that permitted in-office ancillary services—such as digital pathology—to be performed off site.

“That [Stark Law flexibility] was closed at the end of the PHE,” said attorney Elizabeth Sullivan in a recent G2 Intelligence Lab Institute presentation. “That has signaled to us that from a government perspective, there’s an expectation that [a digital pathology] interpretation is going to be done within a centralized location or within the referring physician group practice’s office.”

The Stark Law offers exceptions to its prohibitions on physicians making referrals to entities with which the referring physicians (or family members) have financial relationships.

One of the exceptions, the in-office ancillary services exception, addresses services provided by physicians within the same group practice, as long as the services are provided in the same building as the referring physician or the practice offers services at another centralized location.

“That is where digital pathology becomes a bit of a challenge,” Sullivan said. “There are a few different schools of thought as to whether or not digital pathology would be considered by enforcement agencies to be in the same location with the group if the pathologist is sitting remote,” such as at home or a distant office.

Description of the arrangement: Under this setup, a pathology group engages a pathologist that is also affiliated with a digital pathology vendor owned by another pathology group. That pathologist works remotely at a location not affiliated with the pathology group and only reads cases associated with the vendor’s digital pathology platform. The vendor directs specimens to the pathology group from a referring physician with whom the vendor has a relationship.

“The engaged pathologist does not read from the pathology group’s locations,” Johnson said. “They sit remotely somewhere else: down the street, across the country, where have you.”

The pathology group processes slides and scans them using the vendor’s whole-slide imaging instruments.

Reimbursement under this arrangement: Cases with insurance claims that are out of network (OON) for the pathologist and pathology group affiliated with the digital pathology vendor are billed by the client pathology group, while in-network cases are performed and billed by the pathology group affiliated with the digital pathology vendor.

“For OON patients, at the end of each month in which services are rendered, the pathology group sends an invoice to the digital pathology company,” Johnson explained. “And the digital pathology vendor bills the patient or sends a facility bill to the referring physician group.”

Analysis of the compliance risks: This setup brings up concerns about kickbacks in return for a volume of referrals.

“The digital pathology vendor sources the specimens, and in that sense really functions as a sales and marketing agent if they are sourcing the business and basically selling it off in exchange for some sort of reimbursement,” Johnson said. “Immediately, I start to think of the Anti-Kickback Statute, as well as EKRA.”

The splitting of in-network and OON cases for reimbursement also should set off alarms, she added.

“The rationale for this whole setup is that the other pathology group that owns the digital pathology vendor doesn’t have access to these payer contracts that the billing pathology group has access to—or has less-than-favorable reimbursement rates for these specimens,” Johnson suggested. “So, in order to get paid or enhance the reimbursement that is possible, the pathology group that owns the digital pathology vendor sets up this arrangement to try and funnel the specimens through and get a larger piece of the pie.”

Entities that engage in this type of activity also run the risk of violating their payer contracts, she said.

Business arrangement No. 3: Lab files claims and keeps all reimbursement

Clinical laboratories that have the means to pursue digital pathology and assume the financial investment may be wise to choose this arrangement, which leaves them solely in charge of reimbursement.

Description of the arrangement: The vendor sets up the digital pathology platform for the lab, but there are no financial arrangements with other pathology groups. The platform is used solely in connection with the lab’s work.

“The actual pathology work—the TC and the PC—is kept in house,” Johnson said. “It’s not based on any arrangements with other groups sourcing the work.”

Reimbursement for this arrangement: Billing is simple under this setup, as the lab bills for the TC and PC. There is no split billing arrangement with any other pathology group.

“I refer to this as the golden arrangement because it presents the least risk,” Johnson noted. “That said, I understand that this is absolutely the most expensive arrangement.” That’s because the lab is shouldering the costs of the platform along with the reimbursement efforts without any help from partners.

Analysis of the compliance risks: This is the type of scenario that, from a compliance perspective, labs should strive for when it comes to digital pathology, Johnson said.

“I think it’s pretty clear this would be a clean setup,” she added. The lab “would just keep all of the reimbursement that it received … [It has] the lowest regulatory risk.”

Conclusion: Scrutinize digital pathology business models

In looking at the three digital pathology business arrangements outlined, a recurring theme is that loose agreements between entities are an avenue to potential compliance violations.

“As labs are focused on bringing up digital pathology and working with different players that are involved in various components of putting together digital pathology platforms, fraud and abuse [risks] aren’t necessarily top of mind,” Sullivan said.

As such, labs evaluating digital pathology technology should work closely with their attorneys and compliance experts to map out a business strategy that keeps their finances and standing among regulators safe.


  1. https://www.g2intelligence.com/digital-pathology-regulatory-and-business-considerations-for-laboratories-and-pathology-groups/
  2. https://oig.hhs.gov/documents/advisory-opinions/1131/AO-23-06.pdf
  3. https://www.g2intelligence.com/lab-sales-marketing-compliance-the-current-state-of-ekra/
  4. https://www.cms.gov/medicare/regulations-guidance/physician-self-referral/spotlight

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