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OIG issues unfavorable advisory opinion on laboratory/physician practice arrangement

April 2015

By Mary M. Bearden and Alliso n Shelton, Brown & Fortunato, P.C.


On March 18, 2015, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued Advisory Opinion No. 15-04 regarding a proposed arrangement between a multiregional laboratory and certain physician practices. The advisory opinion was requested by the multi-regional laboratory (Laboratory). In reviewing all of the facts presented by the Laboratory, the OIG concluded that the Laboratory would be providing remuneration to the physician practices in return for referrals and the
proposed arrangement had the potential to violate the federal anti-kickback statute. Notably, the OIG also stated that the arrangement had the potential to trigger its permissive exclusion authority for charging federal health care programs “substantially
in excess” of its normal charges.


The Laboratory proposed to enter into agreements with certain physician practices through which the Laboratory would provide all laboratory services for all the patients in the physician practices, regardless of insurance coverage. Under these agreements, the practices would certify that neither they nor the physicians individually would receive any payment or incentive for participating in the arrangement. The Laboratory also certified to the OIG that the only service or item it would provide to the physician practices
would be a limited-use interface for the purpose of specifically transmitting test results between the physician practices and the Laboratory. The Laboratory stated that this arrangement was desirable for the physician practices because it would relieve them of the burden of maintaining several similar limited-use interfaces with other laboratories and reconciling the different test reports received from the various laboratories currently being used.


Such an arrangement would typically require the Laboratory to bill all covered services to the patients’ respective insurance carriers.
However, approximately 70 percent of the Laboratory’s current physician practice client-base had at least some patients who were members of “Exclusive Plans” (meaning that their insurance carrier required them to use a preferred laboratory). Of the 70 percent of physician practices, each practice stated that between 10 and 40 percent of its patient base belonged to an Exclusive Plan. In the event that the Laboratory was not the preferred laboratory of a patient’s Exclusive Plan, the Laboratory would waive all fees associated with that patient’s tests. In other words, the Laboratory would not bill the patient, the physician practice, or the patient’s insurance company for the test. On the other hand, if a patient did not belong to an Exclusive Plan or otherwise had billable insurance (including federal health care program coverage), the Laboratory would bill that patient’s insurance carrier based on fee schedules and contracted rates.


In its advisory opinion, the OIG analyzed the risk of this proposed arrangement violating the anti-kickback statute. The antikickback
statute is violated when a person knowingly and willfully offers, pays, solicits, or receives remuneration in exchange for the referral of any items or services that are reimbursable by a federal health care program (e.g., Medicare, Medicaid, Tricare, etc.). Remuneration includes anything of value, in cash or in kind, that is received overtly or covertly.


In order for a person to violate the antikickback statute, he or she must intend to provide or receive remuneration in exchange for referrals. Furthermore, the OIG has stated that the person’s intent does not have to be sole or main purpose for the arrangement. As long as “one purpose” of the arrangement is to exchange remuneration for referrals, the anti-kickback statute would be violated. A violation of the anti-kickback statute could potentially result in criminal fines of up to $25,000, imprisonment for up to five years, civil monetary penalties up to $50,000 per violation, and exclusion from federal health care programs.


The OIG has long established that where, for example, Entity A provides free or below market value items or services to Entity B, and Entity B is in the position to make referrals to Entity A, the arrangement is automatically suspect and must be carefully reviewed. In its analysis, the OIG stated that although the physician practices (and the physicians) would not receive a direct monetary benefit from the arrangement
(e.g., in the form of payment from the Laboratory or services that it may bill), the physician practices would potentially receive a benefit in the form of increased administrative efficiencies and potential monetary savings from not having to maintain several limited-use interfaces with different laboratories. The OIG reasoned that by not charging certain patients for their tests, the Laboratory would be providing an incentive to the physician practices to work solely with the Laboratory. Furthermore, the Laboratory could be providing remuneration (i.e., efficiency and monetary savings) in exchange for the physician practices to refer all patients to the Laboratory for laboratory services.


Moreover, the Laboratory did not provide the OIG with any evidence that the arrangement would improve quality or patient safety, or that it had any other safeguards in place to reduce the risk of inappropriate patient steering. Thus, the OIG concluded that the proposed  arrangement could result in a violation of the anti-kickback statute. The OIG has the authority to exclude individuals and entities from federal health care programs under certain circumstances. Its authority is divided into “mandatory” and “permissive” authority. Under its
permissive authority, the OIG may exclude an individual or entity from federal health care programs if the OIG determines that the individual or entity has, without good cause, charged federal health care programs “substantially in excess” of its normal charges.


This particular authority has only been addressed by the OIG a handful of times through advisory opinions and other guidance.   Unfortunately, the OIG has not defined the terms “substantially in excess” or “usual charges.” However, in previous guidance, the OIG has stated that this particular provision would only be invoked in situations in which a provider is discounting close to 50 percent of its non-
Medicare and/or non-Medicaid business. The OIG determined that this threshold could be met here. The Laboratory would be providing free laboratory services to potentially 70 percent of the physician practices, within which 10 to 40 percent of the patients would benefit. This
arrangement would, effectively, create a two-tier pricing structure, where patients of Exclusive Plans were receiving free services while other patients (including Medicare and Medicaid patients) would be charged the contracted rate. The OIG noted that this analysis would not apply to providers that were giving discounts to uninsured or underinsured patients and also stated that this exception does not apply here because the Laboratory would be providing discounts regardless of financial need.


The OIG stopped short of stating that this arrangement was a definite violation of the substantially in excess provision because it had not reviewed each of the physician practices to determine exactly how many patients would be affected. Because of the potentially high number of patients that could benefit from the discount, however, the OIG stated that this arrangement would pose a high risk of violating the provision.


The most interesting aspect of this advisory opinion is the way the OIG defines “kickback.” Generally, the term “kickback” invokes an image of a quid pro quo – you give me referrals, and I’ll give you money (or free services or items). The kickback here is defined in terms of potential reduced administrative and financial burdens. This implies that the OIG is willing to find kickback concerns where the “cost of doing
business” is affected by the arrangement. Now, it appears that when a laboratory, clinic, or other health care provider wishes to enter into an arrangement with another entity, it must review any administrative or other efficiencies gained from the arrangement for kickback concerns. However, the OIG seemed to imply that had the Laboratory provided evidence that the arrangement would improve patient quality
or safety, or had it provided other safeguards to lessen the risk under the statute, the OIG may have viewed the arrangement in a more
favorable light.


Administrative efficiency and business savings are essential to any successful business, and the burden of complying with all of these  regulations rests with the provider. When a provider seeks to improve the efficiency of its business, the provider should seek legal counsel to examine the arrangement for potential kickback concerns.