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Special Report: How to Avoid Problematic Lab Business Arrangements

by Glenn S. Demby | Jan 26, 2024 | Compliance Guidance-lca, Elite, Enforcement-lca, Lab Industry Advisor, Premium

When structuring business arrangements, addressing six key risk areas can help laboratories avoid major compliance issues.

Business partnerships can help labs expand their networks, add resources, and grow revenue, however, certain arrangements could expose them to kickback risks under key federal anti-fraud laws. Here are six risk areas related to problematic business arrangements and how laboratory leaders can avoid them:

Risk Area 1: Billing Company Contract Liability Risks

Labs may choose to outsource billing and coding to a third-party medical billing company. While this might be cost-effective, it can put labs at risk for liability under federal and state kickback laws to the extent the billing company charges fees based on a percentage of claims for which it bills and codes, rather than the fair market value of the services provided. While this principle makes sense for direct arrangements between labs and physicians and other referral sources, it doesn’t seem to pertain to an arrangement between labs and third-party billing companies who don’t generate any referrals. However, the Anti-Kickback Statute (AKS) defines “referrals” broadly as including arrangements not just directly referring but also “recommending and arranging for” services reimbursed by Medicare. The U.S. Department of Health and Human Services Office of Inspector General (OIG) interprets this language as including the provision of marketing services. And it may stretch things even more by interpreting billing and coding as marketing.

Even though arrangements paying volume-based percentage fees to third-party management companies for billing and marketing services are common in the lab industry, the OIG has historically taken a dim view of them. For example, in Advisory Opinion 2011-17, the OIG weighed in on a proposed arrangement under which physicians would pay 60 percent of their gross collections from allergy testing and immunotherapy services to a third-party company for a full array of laboratory management services, including billing and coding.¹

The parties contended that the fee was equal to fair market value, but the OIG didn’t agree. The AKS was implicated under the language that recommended and arranged for services, the OIG noted, reasoning that the management company’s provision of print materials to the physicians in their offices and use of management company personnel to review patient files and flag those who may be suitable for allergy testing constituted marketing.¹

The OIG also found that the arrangement didn’t qualify for the personal services and management contracts safe harbor (discussed further in G2 Intelligence’s November 2023 Special Report) because aggregate fees were based on the volume and value of business generated between the parties and not set in advance. Even though an arrangement that doesn’t qualify for safe harbor treatment can still be legal, OIG concluded that there weren’t adequate safeguards in place to allay the AKS concerns. Elements of the arrangement that the OIG cited as being problematic:¹

- the percentage fee wasn’t tied to the actual services the lab services management company provided, and

the use of the management company to review physicians’ charts and identify potential allergy testing patients created the risk of overutilization.

What to do

If possible, try to structure your arrangements to meet all seven criteria of the regulatory safe harbor for personal services and management contracts. Focus on three key criteria, including ensuring that the contract:

- sets the amount of total aggregate compensation in advance, rather than being based on a rate yielding a total amount that can’t be determined at the outset of the deal,

- bases total compensation on fair market value, and

doesn’t determine compensation in a way that takes into account the volume or value of Medicare referrals or business generated by the parties.

The other four criteria the arrangement must meet for the safe harbor to apply:

- it must be contained in a written agreement signed by both parties,

- the agreement must have a term of at least one year,

- the agreement must set out the exact services required to be performed, and

the arrangement must serve a commercially reasonable business purpose.

Risk Area 2: Specimen Processing Arrangements

Another practice that raises AKS and Stark Law red flags is lab payments to referring physicians for blood specimen collection, processing, and packaging services. One problem is that, historically, such services have been built into the physician’s reimbursement, e.g., via inclusion in Current Procedural Terminology (CPT) evaluation and management (E&M) codes.

The OIG guidance

Accordingly, the issue has been the subject of continual guidance through the years. In a 2005 Advisory Opinion², the OIG concluded that a lab’s payment to a physician customer of a fee of $3 to $6 per patient for collecting specimens from Medicare patients (using blood drawing supplies supplied at no charge by the lab), ran the risk of violating the AKS since it would confer obvious benefits to the referring physicians.

In June 2014, the OIG issued its latest pronouncement on the topic in the form of a Special Fraud Alert³ addressing arrangements under which labs “pay physicians, either directly or indirectly (such as through an arrangement with a marketing or other agent) to collect, process, and package patients’ blood specimens (Specimen Processing Arrangements).” Specimen Processing Arrangements, the OIG explains, typically involve services such as “collecting the blood specimens, centrifuging the specimens, maintaining the specimens at a particular temperature, and packaging the specimens so they’re not damaged in transport.” According to the alert, the following characteristics are seen as evidence that the arrangement may be unlawful, including the fact that the payment:³

- Exceeds fair market value;

- Is calculated on a per-specimen, per-test, or per-patient method, or some other method that takes into account the value or volume of referrals;

- Is for services for which payment is also made by a third party, such as Medicare;

- Is made directly to the ordering physician rather than to the ordering physician’s group practice that employs the physician and that actually bears the cost of collecting and processing the specimen;

- Is offered on the condition that the physician order either a specified volume or type of test or test panel, especially if the panel includes duplicative tests, e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information, or tests that otherwise are not reasonable and necessary or reimbursable;

- Is offered on the condition of a certain number or type of test orders, especially where the tests are duplicative, not medically necessary, or not reimbursable; and/or

The physician is paid for services performed by someone placed in the office by the lab.

On its face, the alert seems to leave room for compliant arrangements that are structured to avoid the listed OIG red flags. But as a practical matter, crafting a compliant processing fee arrangement is just about impossible.

The OIG has also made it clear that its concerns aren’t abated by limiting the payment arrangement to non-federal healthcare program patients, indicating that the amount paid for the non-federal program patients could still serve as a financial incentive to refer federal healthcare program patients to the lab. There’s also a practical issue of completely screening out federal government patients due to incomplete or inaccurate patient coverage information. Although more of an issue under Stark due to the lack of an intent element, a pattern of federal healthcare patients being screened out may raise issues, especially when the safeguards to prevent such “carve out” are inadequate.³

The Stark issues

One problem with relying on the OIG pronouncements is that they cover only the AKS and not the Stark issues. To justify a processing fee under Stark, a lab would probably have to rely on the personal services exception. But to structure specimen collection as a personal fee would be extremely difficult, especially since it couldn’t be based on the volume or value of specimens processed. Theoretically, you could set an hourly personal service fee, but that would be highly dubious.

The cases

The dangers of believing that processing fees can be somehow structured as avoiding the AKS and Stark obstacles is borne out by the few court cases that have addressed the issue, including the Health Diagnostics Laboratory (HDL) and Singulex case and the more recent case of US ex rel. Riedel v. Boston Heart Diagnostics Corp. involving a lab’s payment of packaging fees.^4,5 While acknowledging that the $15 to $25 it paid physicians was well above the $3 Medicare draw fee, the lab contended it was fair market value. The fee wasn’t a draw fee, but a packaging fee covering the costs of not only collection, but also processing and shipping specimens to its facility for testing, it argued.⁵

But the court didn’t buy it, finding that the fees in this case were structured just like the ones the OIG rejected in the 2005 Advisory Opinion mentioned above. It also found credence in the whistleblower’s contention that the lab encouraged physicians to cover their tracks by breaking up their testing needs among multiple colluding labs. Result: The whistleblower would get a shot to prove his allegations at trial.⁵

What to do

Paying referring physicians processing fees is risky no matter how you structure the arrangement and attorneys caution against even trying it. A more legally sound alternative to help physicians manage the costs and hassles of specimen collection and processing (assuming your lab has the necessary resources):

- establish a collection station near the offices of your physician clients, and/or

place a phlebotomist or staff member compensated by your lab at fair market value within their facilities.

Risk Area 3: Telehealth Referral Arrangements

As its popularity and utilization grow, telehealth has become an increasing priority for federal enforcement. On July 20, 2022, the OIG issued a Special Fraud Alert, its first in nearly two years, to help labs and other providers steer clear of potentially suspect arrangements with telemedicine companies. While varying in design and operation, these schemes follow a common pattern under which telemedicine companies (or “telemeds”) pay kickbacks “to aggressively recruit and reward” providers to order or prescribe medically unnecessary items and services for “purported patients” solicited by the telemedicine company.⁶ In many cases, the provider has limited or even no interaction with purported patients. The telemed assures the provider that they don’t need to talk to the purported patient or review their medical record. Telemeds then sell the lab test order or prescription to third parties that fraudulently bill for the unnecessary items and services.

According to the OIG, these schemes potentially violate a number of federal laws, including the AKS ban on knowingly and willfully soliciting or receiving (or offering or paying) any remuneration in return for or to induce referrals for, or orders of, items or services reimbursable by Medicare or other federal healthcare programs. Both sides of the telehealth kickback transaction face AKS liability, the OIG warns. Provider arrangements with telemeds that involve kickbacks can also lead to exclusions, civil monetary penalties (CMPs), treble damages under the False Claims Act (FCA) and criminal penalties.⁶

What to do

For lab managers seeking to keep their lab compliant, the most significant takeaway from the Special Fraud Alert are the six red flags suggesting that a provider arrangement with a telemed presents a “heightened risk of fraud and abuse.” Specifically, the OIG says labs should be on the lookout for the following “suspect characteristics” before entering into arrangements with telemeds:⁶

- the purported patients for whom the provider orders lab tests (or other items or services) were identified or recruited by the telemed telemarketing company, sales agent, recruiter, call center, health fair, and/or through internet, television, or social media advertising for free or low out-of-pocket cost items or services;

- the provider doesn’t have sufficient contact with or information from the purported patient to make a meaningful assessment of whether the ordered tests (or other items or services) are medically necessary;

- the telemed compensates the provider based on the volume of lab tests (or other items or services), which the telemed may describe to the provider as compensation based on the number of purported medical records the provider reviewed;

- the telemed only provides items and services to federal healthcare program beneficiaries and doesn’t accept insurance from any other payer;

- the telemed says it only provides items and services to individuals who aren’t federal healthcare program beneficiaries, but may in fact bill federal healthcare programs; and/or

the telemed only provides one product or class of products, e.g., genetic testing, durable medical equipment, diabetic supplies, or various prescription creams, potentially restricting the provider’s treating options to predetermined courses of treatment.

Any one of the above should be enough to raise your compliance antennae; the more red flags, the more suspicious the arrangement should be.

Risk Area 4: Reduced Price and Discount Arrangements

Labs that offer discounts of any kind to referring physicians run the risk of AKS and Stark liability to the extent that discounts and price reductions are a form of illegal “remuneration” the laws prohibit. However, OIG Advisory Opinion No. 21-06 (June 29, 2021) gives the greenlight for a durable medical equipment (DME) manufacturer to provide reduced prices to hospitals that agree to carry out duties the manufacturer usually compensates third parties to provide.⁷ And while the proposed arrangement doesn’t involve lab services, the advisory opinion may have implications for labs.

The proposed arrangement involved a DME manufacturer that sells its spinal implants and devices via a traditional distribution system, including deployment of sales representatives and/or distributors (also known as “intermediaries”).⁷ The intermediaries typically perform extra services before, during, and after surgeries in which the manufacturer’s products are used, e.g., with regard to training. The manufacturer pays the intermediaries for performing these services and factors the compensation into the prices it charges hospitals for the products.

But under the proposed arrangement, the hospitals would buy the product directly from the manufacturer with no involvement by intermediaries. As part of the deal, the hospitals would perform the services normally carried out by the intermediaries. So, the manufacturer wanted to know if it would be okay to reduce the price of the products to account for the value of these services.

The OIG gave the all-clear. This wasn’t really a discount, the agency reasoned. “Rather than bestowing something of value, the reduction in price simply would reflect the reduction in services the [p]articipating [h]ospital would be purchasing.” Because the price reduction doesn’t constitute remuneration, the arrangement wouldn’t violate the AKS, the OIG concluded.⁷

A 2022 federal whistleblower lawsuit by a former sales executive accusing Labcorp of providing kickbacks also offers new insight as to whether discounts constitute illegal “remuneration” under the AKS. The whistleblower accused Labcorp of offering discounted lab testing rates to private insurance companies. The reason the relator could bring a qui tam suit was that Labcorp then allegedly violated the FCA by charging Medicare and Medicaid programs prices “substantially in excess” of those private insurance rates. The scheme also illegally influenced in-network doctors to refer their Medicare and Medicaid patients to generate “pull-through” business for Labcorp, the whistleblower claimed.⁸

The case dragged on for over a decade with Labcorp getting most of the claims dismissed. In February 2022, Labcorp asked the New York federal court to dismiss the remaining claims, and that’s just what the court did. The whistleblowers didn’t have a valid AKS claim, the court reasoned, because the law’s ban on offering “remuneration” to “induce” a referral doesn’t apply to “a discount…obtained by a provider,” so long as the “reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity” (AKS, Section 1320a-7b(b)(2)).⁹ The alleged facts, which were much like the previous version of the complaint that the court dismissed, “could just as easily support an inference of legitimate business…agreement under which LabCorp secures exclusivity agreements in exchange for discounted prices, or directly or indirectly recommends that doctors send all their business to LabCorp absent inducement by remuneration,” the court concluded [United States v. Lab’y Corp. of Am. Holdings, 2022 U.S. Dist. LEXIS 155337, 2022 WL 3718265].⁸

What to do

Recognize the dangers of price reductions and try to structure the arrangement to meet the AKS safe harbor for discounts, i.e., reductions in the amount a buyer is charged for an item or service based on an arm’s-length transaction, provided that the arrangement meets strict conditions, including:¹⁰

- the seller must make the discount at the time of the sale of the item or service;

- if the discount is in the form of a rebate, the rebate terms must be fixed and disclosed by the seller in writing to the buyer at the time of the initial sale; and

the buyer must provide, “upon request by the Secretary or a State agency” an “invoice, coupon, or statement” from the seller that “fully and accurately” reports the discount.¹⁰

Risk Area 5: Exclusive Referral Arrangements

Some physician practices find it desirable to use a single lab to handle all their testing needs. Result: The lab agrees to provide all lab services the practice requires on an exclusive basis. Although these exclusive arrangements maximize coordination and communication between the lab and the practice, they also raise kickback concerns, especially if the lab agrees to waive or discount the fees it charges the practice’s patients.

The OIG sounded the warning on exclusives in a March 2015 Advisory Opinion.¹¹ The lab in that case wanted to make deals with physician practices to provide all lab services for the practices’ patients. The lab would also waive all fees for practice patients enrolled in insurance plans requiring the patients to use a different lab. The primary motivation of the physicians was not monetary but convenience. They would only have to deal with one lab and receive test results with consistent reference ranges. Although the practices would get access to the lab’s limited-use interface for purposes of communicating with the lab, they would also have to pay their fair share of the laboratory information system (LIS) vendor’s maintenance fees.

The OIG hated the idea. Following a line of reasoning that was surprising to many in the lab industry, the OIG said that the “convenience” and “efficiency” physicians would gain from the arrangement could potentially generate illegal remuneration under the AKS by “reducing administrative and possibly financial burdens associated with using multiple laboratories.” Of course, by this logic, it could be argued that just about anything a lab does to make the delivery of lab services to physicians more convenient and efficient constitutes illegal remuneration.

The OIG was also unhappy with the interface arrangement, citing potential kickback concerns in enabling the physicians to avoid having to pay the monthly electronic health record (EHR) maintenance fees they would have incurred if they had to deal with other labs outside the exclusive agreement.

Risk Area 6: Gainsharing Arrangements

AKS violations are about increasing referrals. The yin to the AKS yang is the so-called Gainsharing Civil Monetary Penalty provisions¹² that ban hospitals from paying physicians, directly or indirectly, to reduce or limit medically necessary services to Medicare or Medicaid beneficiaries. However, a 2017 OIG Advisory Opinion leaves the door open to such arrangements provided that proper safeguards are in place.¹³

The situation arose after a consulting firm found that a hospital client could cut costs by making 34 changes to its operating room procedures for spinal fusion surgeries. The recommendations fell into two broad categories, including getting neurosurgeons to agree to 1) use bone morphogenetic protein only on an as-needed basis for surgeries on three specific regions of the spine; and 2) use standardized devices and supplies for spinal fusion surgeries. To implement the recommendations, the firm proposed a three-year arrangement among itself as administrator, the hospital, and the neurosurgeons’ medical group under which the hospital would pay the neurosurgeons a share of the cost savings achieved as a result of the changes they planned to make in selecting and using products during spinal fusion surgeries. The OIG said the arrangement would be okay under the AKS as long as the proposed safeguards were implemented:

- Distributing payments to neurosurgeons on a per capita basis to reduce the risk of incentivizing any individual neurosurgeon to generate disproportionate cost savings.

- Capping potential savings based on the number of spinal fusion surgeries performed by the neurosurgeons on Medicare/Medicaid patients in a designated base year.

- Certification that aggregate payments to the group wouldn’t exceed 50 percent of the projected cost savings at the start of the arrangement.

Program committee review to verify historically consistent selection of patients for the surgeries covered by the arrangement in terms of age, severity, and payer.

What to do

Although the arrangement addressed in the Advisory Opinion involved spinal surgery, the principles also apply to arrangements involving physicians and labs—both hospital-based and freestanding.

Bottom line: Cost-reduction arrangements in which providers pay referring physicians a portion of savings yielded as a result of accepting changes to medical procedures raise significant liability concerns under AKS and gainsharing laws. Therefore, such arrangements shouldn’t be undertaken unless strict and effective safeguards are in place to monitor and prevent abuses.

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