By Colleen Byrom and Beth Anne Jackson, Brown and Fortunato
Compensation and referral arrangements among healthcare providers, hospitals, and laboratories have been a subject of scrutiny for many years, especially when the referral of federal healthcare beneficiaries is involved. Earlier this year, the United States Department of Justice (“DOJ”) intervened in a whistleblower lawsuit against laboratory executives, a hospital executive, and several marketers and healthcare providers, alleging violations of the False Claims Act, Anti-Kickback Statute, and Stark Law.
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The federal Anti-kickback Statute (“AKS”) prohibits the knowing or willful offer, payment, solicitation, or receipt of remuneration to induce a person or entity to refer an individual for the furnishing of, or arranging for the furnishing of, any item or service reimbursable by a federal health care program including, but not limited to, Medicare or Medicaid. The Stark Law states that if a physician (or an immediate family member) has a financial relationship with a health care provider, then the physician cannot refer a Medicare or Medicaid patient to that provider for designated health services (“DHS”) unless a Stark exception is met. Importantly, DHS includes clinical laboratory services.
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As the DOJ’s complaint notes, the government scrutinizes compensation arrangements between laboratories and referring physicians because such arrangements have been the subject of abuse. Specifically, the government’s concern is that laboratories providing something of value to physicians “may induce physicians to order tests from a laboratory that provides them with remuneration, rather than the laboratory that provides the best, most clinically appropriate service.” Such remuneration may also induce a physician to order medically unnecessary tests.
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The DOJ alleges that two laboratories, True Health Diagnostics, LLC (“THD”) and Boston Heart Diagnostics Corporation (“BHD”), and its executives conspired with small Texas hospitals and healthcare providers to pay kickbacks to the healthcare providers to induce them to refer laboratory tests to THD and BHD.
One of the hospitals involved is Rockdale Hospital dba Little River Healthcare (“LRH”), a small critical access hospital located in Rockdale, Texas (a rural community with a population under 6,000). Under the Medicare program, critical access hospitals receive higher reimbursement rates for certain services to better ensure access to care for patients in rural communities. For example, the Medicare reimbursement rate for outpatient clinical diagnostic laboratory services is “101 percent of the reasonable costs to the critical access hospital.”
The DOJ’s complaint alleges that LRH’s executives agreed to bill federal health care programs for laboratory testing performed by BHD and THD. LRH’s executives also launched a large-scale recruiting campaign targeting healthcare providers across Texas to refer patients to LRH for laboratory testing. Most, if not all, of the recruited providers “had no admitting privileges at LRH, never practiced at LRH, had never referred to LRH . . . and had never even visited LRH’s Rockdale hospital.” Furthermore, most of the beneficiaries lived over 100 miles away from LRH and were neither an inpatient nor an outpatient of LRH.
The DOJ further alleges that LRH recruited health care providers through sham “investments” in various Management Service Organizations (“MSO”). LRH paid several recruiters volume-based commissions to induce healthcare providers to refer laboratory services to LRH. The recruiters then created and operated various MSOs in which the healthcare providers could invest. In order to participate in the MSO, the healthcare providers would agree to send referrals to LRH for toxicology and blood testing. However, the payments made to the health care providers were not based upon true returns from the health care providers’ investments; rather, the payments were based upon the profits received from health care providers’ individual referrals.
The DOJ’s complaint also notes that the referrals LRH received were often not for reasonable and necessary services and that LRH falsely billed such services as hospital outpatient services.
The government’s original case is still pending, but since June 28, 2022, at least 33 doctors involved in the laboratory referral scheme have settled with the government. Due to the complexity of the arrangement and the number of individuals involved, this is likely not the last of the settlements to come through.
In light of this DOJ investigation, what should a hospital or a physician do if it is considering a compensation arrangement with a laboratory? In short, the hospital or physician must analyze the arrangement to ensure that there are no improper referrals or payments between the parties. Because such arrangements can appear legitimate on the surface, the hospital/physician should work closely with an experienced healthcare regulatory attorney to review the arrangement to help determine whether it complies with the AKS and the Stark Law.