That CAN’T Be Right: Court Says Labs Must Independently Verify Medical Necessity of M.D. Ordered Tests

Based on the enforcement track record, if your lab ever gets charged with falsely billing Medicare for lab tests, failure to document the medical necessity of the ordered tests will be the reason. Medical necessity is a shared burden between labs and ordering physicians:

• The physician determines whether the test is medically necessary for the patient; and
• The lab certifies that the tests it bills actually are medically necessary.

Thus, while labs are on the hook if the tests turn out not to meet medically necessary criteria, they’re allowed to rely on the fact that the physician ordered the tests as proof of necessity.

At least that is how it works under current rules. However, a new federal court case challenges that common understanding by requiring labs to independently verify the medical necessity of ordered tests. Here’s a look at the case and why it’s so scary.

What Happened  

The case began as a whistleblower suit filed by a former United Healthcare medical director claiming that Boston Heart Diagnostics routinely billed Medicare for tests that were medically unnecessary for certain diagnostic codes. Boston Heart noted that all of the tests were properly ordered by the treating physicians and that it’s up to physicians to determine whether those tests were necessary. So it asked the court to dismiss the complaint.

What the Court Decided

The D.C. District Court ruled that the medical director had a valid whistleblower claim and deserved the chance to prove it in court. Having billed Medicare for the tests, Boston Heart had an obligation to provide independent verification of their medical necessity, according to the court. The fact that the ordering physicians’ medical necessity determination conflicted with the diagnostic codes provided should have raised a red flag and led Boston Heart to make its own inquiry, the court reasoned [U.S. ex rel. Groat v. Boston Heart Diagnostics Corp.].

The ruling cites a California case (called Garcia v. Sibelius) stating that Medicare regulations “place the burden of establishing the medical necessity of diagnostic tests on the entity submitting the claim.” But, as attorneys have noted, the comparison is apples and oranges because unlike in Groat where the lab billed for the tests, the ordering physician was the billing entity in Garcia .

What It May Mean

Attorneys have criticized the Groat ruling. “The court fails to recognize that treating physicians—who have the most complete picture of an individual patient’s needs and medical conditions—are in the best position to make determinations of medical necessity,” according to an attorney with the leading law firm Jones Day. “Lab employees, by contrast, often do not even have occasion to interact with the patient in person,” the attorney adds. Requiring lab employees to independently evaluate medical necessity would be not only unrealistic but potentially illegal under state licensing rules and practice-of-medicine restrictions.

Takeaway: Getting physicians to document medical necessity is hard enough. The Groat case is scary because it’s saying that labs could no longer simply rely on physicians to verify that ordered tests are medically necessary. They’d also have to do their own independent assessment to ensure those tests are medically necessary for the patient.

The good news is that Boston Heart has already appealed the ruling. And if the attorneys are right, Boston Heart will win the appeal. Of course, if the attorneys are wrong, labs (at least the ones in the D.C. Circuit where the Groat appeal will be decided) will have a significant new billing burden to contend with.