How to Manage Liability Risks for Pass-Through Billing Arrangements

By Adam M. Walters

Walters Law, P.C.

Pass-through billing arrangements are those in which labs send a test specimen to an outside lab for testing and then bill the patient’s insurer for the test performed. Here’s a look at the potential liability risks and a strategy for managing them.

What Is Pass-Through Billing?

“Pass-through” billing, sometimes referred to as “client billing,” is an arrangement in which the lab that bills for a test is different from the lab that performs it. There are two common forms of pass-through billing arrangements:

Lab to Lab arrangements arise when an independent or hospital lab refers a test to an outside lab, called a reference lab, to perform and then bills the payor or patient as if it had performed the test itself. The reference lab then bills the ordering lab for the service.

Provider to Lab arrangements mirror lab to lab arrangements, the difference being that the ordering provider is a physician with an in-office lab. Example: A physician draws blood and sends the specimen to an outside lab for testing. The outside lab bills the physician and the physician bills the patient’s insurer for that expense, along with claims for the other components of the service.

The 7 Laws Pass-Through Billing Arrangements May Violate

While reference lab relationships are often appropriate, pass-through billing arrangements are seen as a way for labs or physicians to work around their lack of a contractual relationship with a payor, avoid scrutiny or recoup some of the financial benefits of in-office testing without actually operating a lab. Pass-through billing may also run afoul of a number of laws.

1. Medicare Reference Lab Billing Requirements

Medicare rules ban labs from billing under the Clinical Laboratory Fee Schedule for diagnostic tests performed by a reference lab unless one of the following criteria are met:

• The referring lab is located in or is part of a rural hospital;
• The referring lab and reference lab are under some form of common ownership, i.e., one wholly owns the other or both are owned by the same entity (42 U.S.C. § 1395l(h)(5)); or
• The referring lab doesn’t refer more than 30 percent of its lab tests out to a reference lab during the year (not counting referrals under the common ownership exception).

The rural hospital exception is subject to a caveat: If a patient is an in-patient or outpatient, as opposed to patient not-at-hospital (TOB 141), only the hospital may bill for the service. For a patient not-at-hospital (TOB 141) either the hospital or performing lab may bill for the service. The third exception, referred to as the Shell Lab Rule, is designed to prevent hospitals and independent labs from shopping for the most favorable reimbursement rate. If a large number of specimens are referred, the 30 percent limit may be eclipsed.

Strategic Pointer for Medicare Billing

When the referring lab that sends out and the reference lab that performs the test are in different Medicare Administrative Contractor (MAC) jurisdictions, they must comply with special rules determining which MAC has jurisdiction over the claims. For the referring lab to bill its own MAC, the carrier must have the performing lab’s certification and fee schedule allowance in-house. Otherwise, the referring lab must submit claims to the performing lab’s MAC.

2. Physician-Office Laboratories

The Medicare Anti-Markup Rule applies when a physician bills for lab tests performed by an outside lab. Specifically, it limits payment to the billing physician for the technical or professional component to whichever of the following amounts is lowest:

• The performing supplier (laboratory) net charge to the billing physician (or other supplier);
• The billing physician’s actual charge; or
• The fee schedule amount for the test that would have been allowed if the performing supplier had billed directly (42 C.F.R. 414.50(a)(1)).

The Anti Markup rule, however, only applies to laboratory test paid under the Medicare Physician Fee Schedule, e.g., anatomic pathology services. Medicare does not permit physician office laboratories to bill for referred test that are paid under the Medicare Clinical Fee Schedule. (Medicare Claims Processing Manual, Ch. 16, Sec. 50.1-.2, Rev. 10615, 03-09-21)

3. Anti-Kickback Statute

Hospital and independent lab pass-through billing arrangements may violate the federal Anti-Kickback Statute (AKS) ban on payment, receipt, offering or solicitation of remuneration in exchange for the referral of services or items reimbursed by Medicare or Medicaid (42 U.S.C. § 1320a-7b). For example, offering remuneration to the ordering providers to induce them to refer the testing to the lab in question would be considered a kickback.

4. Stark Law

Pass-through billing arrangements between physicians and outside labs bring the federal physician self-referral law, aka, Stark Law, into play (42 U.S.C. §1395nn) to the extent it includes referrals by the physician to a lab that will share a portion of the revenue received for performing the tests. Moreover, arrangements involving discounts would raise red flags under both the AKS, EKRA, and Stark Law.

5. Medicaid Billing Rules

While each state has its own rules on reference lab billing, most state Medicaid programs require the performing lab to bill for lab tests. Many states have statutory restrictions on pass-through billing and markup (although some of the restrictions only cover professional component services and not the technical component.)

6. Commercial Payor Billing Rules

In recent years, many commercial health insurance plans have developed specific rules limiting billing of referred lab test and there are now almost as many rules as there are health plans. In addition, private payors closely monitor reimbursement trends.

7. Billing and Coding Rules

Lab tests performed under pass-through arrangements must also be properly billed and coded. And that can be tricky. When the referring lab is billing for the referred test, it must use modifier -90 and list the CLIA number and address of the reference lab. If the parties are using a paper claim form for a split test, i.e., a test performed by both the referring and reference lab, they must submit separate claim forms for tests performed in-house and tests performed at the reference lab.

Compliance Strategies

There are a number of things your lab can do to ensure compliance and manage risks of liability for improper pass-through billing arrangements:

• Only bill for referred tests when the provider actually orders the test from the referring lab;
• If you’re the referring lab, only bill for tests that you have CLIA certification to perform;
• Referring labs should also have controls in place to ensure that reference labs don’t double bill;
• Both the referring and reference lab should have a written agreement in place that ensures compliance with the AKS, EKRA, Stark, False Claims Act and other federal and state laws.

About the Author

Adam Walters is a veteran healthcare attorney in Savannah, Georgia representing healthcare providers in business transactions, fraud and abuse compliance, government investigations, HIPAA, reimbursement disputes, employment issues, and licensing. His representative clients include clinical laboratories, dialysis centers, physicians, physician organizations, and telehealth providers. Prior to re-locating to Savannah, Adam practiced in the healthcare departments of multiple national law firms and was of-counsel at a health care boutique in Atlanta, Georgia. He is currently serving his second term as co-vice chair of publications for the American Health Law Association’s (AHLA’s) Physician Organizations Practice Group. He is also a member of the Georgia Academy of Healthcare Attorneys and Savannah Exchange Club.