November 3, 2023 | By Mary Kohler in Law360
The U.S. Department of Health and Human Services' Office of Inspector General recently opined on an anatomic pathology arrangement, Advisory Opinion 23-06.[1]
Are your eyelids feeling droopy? Hang on — it gets worse. The OIG explored the very unsexy-sounding technical component of lab testing, which involves processing specimens, e.g., thinly slicing tissues and preparing glass slides. A pathologist then interprets the slides.
Advisory Opinion 23-06 might look like a snooze. But it's not. The lab industry is highly competitive. And changing. As reimbursement tightens and regulation increases, tech is predictably disrupting things.
With this backdrop, a large national laboratory asked the OIG if it could pay a referring lab to process specimens — even though it can do the job cheaper and easier itself.
It's an unusual ask. But other labs are doing it, and the national lab feared losing federal program business by not agreeing. So, it wanted confirmation that the payment would not run afoul of the Anti-Kickback Statute, which carries significant penalties.[2]
Of course, the OIG rejected the national lab's request. But was the national lab sincere? Or did it just exploit the OIG's advisory opinion process for a competitive advantage?
Clinical Labs: The Players
Three players perform anatomic pathology. The chart shows their demographics by CMS classification.[3]
At the national level, a handful of large companies lead the independent labs. They process high volumes, and compete on quality, brand and price. They also have a lot of data, which makes them attractive to payors.
Locally and regionally, labs can be independent or hospital-based. These labs can be more nimble, but their testing capacity and expertise vary. They compete on quality and personalized service.
Many struggle and end up being acquired by larger labs. But others thrive as trustworthy, vital players in their communities. And the sophisticated labs of health systems and academic medical centers compete with large labs for complex testing. Many are growing.
Physician office labs far outnumber the others, and their capabilities can vary. They're typically small and serve their owners' practices. They refer a lot of work to other labs.
The Payor Conundrum
Physicians control lab choice. But payor coverage trumps all. Large labs offer broad capabilities, value and data. Their commercial payor relationships are extensive. And increasingly exclusive.
Smaller labs might lack crucial pieces of the equation. They commonly address gaps by purchasing services from another lab. But if they can't get into closed payor networks, they're stuck. So, they've started to split testing components for their commercially insured patients. Deals let them keep the processing piece while an in-network lab interprets the results and bills the insurer.
Advisory Opinion 23-06 says payors permit this. But it doesn't say whether the national lab fears other large labs allowing the practice, or local labs using these deals to worm their way back into closed networks. The image shows the permutations it proposed.
OIG: Here We Go Again
Labs have complex business arrangements and a troubled enforcement history. The OIG has issued several unfavorable advisory opinions,[4] and two special fraud alerts calling out suspect industry practices.[5]
Some arrangements involving one lab billing for another lab's work have been accused of gaming variable reimbursement systems. While sharing services is fine, problems can arise when a lower-paid lab runs all the testing, while a higher-paid lab submits the claims. It's called pass-through billing, and some states prohibit it.[6]
So, it's no surprise that the OIG took a dim view of a new lab arrangement.
No Commercially Reasonable Business Purpose
The OIG seems primarily concerned with out-of-network labs getting an opportunity to bill payors. It echoes the national lab's certifications that (1) it can do the work, (2) keeping it all in-house is more efficient and cost-effective, and (3) physicians currently choose anatomic pathology labs with payor contracts. So, why would a lab in this position give its business away unless, as the national lab predicts, it will lose federal program referrals if it doesn't play?
Worse, the national lab refused to certify a key OIG condition — that the arrangement wouldn't involve unnecessary services. Seeing no commercially reasonable business purpose, the OIG assumes the proposal involves a kickback.
Requesters don't usually undermine their own positions. Many withdraw before the OIG kills their arrangement with a negative opinion. But the national lab persevered.
Often, someone who asks about a competitor's arrangement wants to shut something down rather than compete with it. While community players are small, they're numerous. And their strong ties with referring providers can be challenging for a large lab to overcome. So, if the OIG's advisory opinion process allowed it to consider external input, would these players have offered a more compelling business rationale?
How Doctors Choose Labs
The OIG wants quality and patients' best interests to drive lab selection. And physicians do this naturally. At the local level, pathologists are known. The good ones are busy. If a referring physician questions findings, they call the pathologist. They discuss the patient and add context. These conversations affect diagnoses.
By contrast, a distant lab with an unknown pathologist can be a gamble. And navigating automated phone systems to reach the reading pathologist can be tricky.
Also, nearby hospital labs can be sophisticated. Many actively pursue cutting-edge work. Absent a payor problem, they're well-positioned to win it over a large-volume player.
So, are physicians choosing the national lab? Or are payors forcing it?
Cost-Effectiveness of Larger Labs
Advisory Opinion 23-06 doesn't say why the national lab is more efficient. Maybe it's obvious. Scale begets process. But size begets bureaucracy. And large labs' Amazon-like logistics operations are costly. Small labs might argue they're leaner without the transportation costs.
Also, digital processing is changing everything. Electronic images make slides obsolete. Moving forward, processing tissues locally might make more sense than flying them around the country.
Pragmatically, large payor contracts increasingly require lab claims to include diagnosis codes. In a contained system, the information is readily available. But large labs can struggle to obtain it from an ordering provider. This backend hassle suggests less — not more — efficiency.
So, maybe it's cheaper and easier for the national lab to do it all. But it doesn't seem like a given.
Considering Carveouts
The proposal doesn't involve federal program patients. So, the OIG repeats its familiar criticism of carveouts designed to avoid the Anti-Kickback Statute. And again, the national lab makes matters worse by certifying the proposal would likely result in federal program referrals.
Once that bell is rung, the OIG can never approve. It concludes the proposal could result in patient steering and unfair competition by favoring those who are willing to do the split.
But is this really an AKS workaround?
The proposal doesn't exclude federal program patients — it only includes patients in restrictive networks. The testing split also doesn't involve others in the payor mix, like cash patients or those with open networks. These labs don't fear implicating the AKS; they have a painful leverage issue on the commercial side.
And the issue is growing. When payors cull networks, behemoths win. Small players get shut out. Through this lens, the national lab's unfair competition claim starts to feel a bit like Goliath crying foul on David.
Once Bitten
Advisory Opinion 23-06 hinges on the national lab's unusual certifications, which seem to condemn the practice more than support it. And it's not hard to imagine another player establishing commercial reasonableness without shooting itself in the foot. But would it get a yes from the OIG?
Without more structure, routinely splitting the testing components is still a workaround. And it might have broad — and unforeseeable — consequences. As the pass-through billing experience shows, acceptable arrangements can be abused in the wrong hands. And the OIG has seen other things go south.
Several years ago, the OIG issued a series of favorable advisory opinions on patient assistance programs. Later, it had to rescind them when kickback allegations surfaced. It's possible that the OIG sees the potential for mischief at the fringes and wouldn't issue an opinion that might open the door.
But Advisory Opinion 23-06 might inadvertently serve the national lab's competitive agenda by sowing seeds of discomfort among its rivals. That can be a powerful addition to a market leader's already-competitive toolkit. And move us one step closer to payors — rather than doctors — controlling lab choice.
What's Next
Do we need 141,584 clinical labs? Perhaps not. Further consolidation seems inevitable. While payors are restricting networks, they're also squeezing reimbursement. And one day after the OIG posted Advisory Opinion 23-06, the U.S. Food and Drug Administration announced its plans to regulate lab-developed tests. Cost and compliance burdens will surely follow. Both forces will no doubt thin the herd.
Those assessing the impacts can take comfort that despite the OIG's stance, Advisory Opinion 23-06 also says little new. And advisory opinions are meant only for the parties who request them. Every situation is different. And there may be opportunities for compliance to manage the risk.
But for now, the takeaway remains the same — lawyers and clients must scrutinize arrangements and heed the OIG's continued warnings that fair market value assurances alone are not enough. Legitimate need is often the analytic linchpin. The keys to ensuring you have it are (1) pressure-testing business purposes, (2) setting ground rules, and (3) driving compliant execution on the back end.
Feeling less sleepy now?
[1] OIG Advisory Opinion No. 23-06, Dept. of Health and Human Services, Office of Inspector General (Sep. 25, 2023).
[2] 42 U.S.C. § 1320a-7b(b).
[3] CLIA Stats (cms.gov), (accessed Oct. 17, 2023).
[4] See e.g., OIG Advisory Opinion No. 22-09 (Apr. 25, 2022), OIG Advisory Opinion No. 16-12 (Nov. 28, 2016), OIG Advisory Opinion No. 15-04 (Mar. 18, 2015) and OIG Advisory Opinion No. 14-03 (Apr. 1, 2014).
[5] See, How Does the Anti-Kickback Statute Relate to Arrangements for the Provision of Clinical Lab Service?, OIG (Dec. 2, 1994), and Special Fraud Alert: Laboratory Payments to Referring Physicians, OIG (Jun. 25, 2014).
[6] Lab billing is beyond scope. This article provides a good overview. Don't Forget about the States! Understanding the Maze of State Billing Laws for Physicians and Laboratories Providing Anatomic Pathology Services, Goodwinlaw.com (accessed Oct 31, 2023).
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Mary Kohler is the founder and principal at Kohler Health Law PC. The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
© Kohler Health Law, PC, 2023.
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