OIG Declines to Approve Lab’s Payment of Specimen Collection Fees to Hospitals

Firm Publication

On April 28, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services published Advisory Opinion 22-09, declining to approve a laboratory company’s proposal to pay hospitals a fair market value, per-patient-encounter fee to collect, process, and handle specimens.

OIG declined to approve the arrangement for two key reasons. First, in OIG’s view, lab services are particularly susceptible to the risk of steering under the federal Anti-Kickback Statute. Second, the “per-click” fee structure, even if consistent with fair market value, inherently reflects the volume or value of referrals or other business the hospital sends to the labs. Together, these dynamics created risk that the fees were intended to induce hospitals to steer business to the labs.

An extension of earlier guidance and enforcement actions from OIG and the U.S. Department of Justice (DOJ), Advisory Opinion 22-09 reiterates the government’s view of the steering risk of arrangements where labs provide referral sources compensation that varies with referrals to the lab. But it also demonstrates that when fees are directly tied to volume, fair market value may not be enough to overcome this risk.

The Arrangement

The requestor operates a network of clinical labs. Under the proposed arrangement, the lab company would enter contracts with participating hospitals to pay hospitals a per-patient-encounter fee to collect, process, and handle specimens that the hospitals send to the company’s labs. Specimens would be collected by phlebotomists employed or contracted by the hospitals. Fees would be paid only for patients who are not inpatients or registered outpatients of the hospital. The lab company, in turn, would bill the applicable third-party payor (including federal healthcare programs) for the testing.

The requestor proposed three key safeguards:

  • First, the contract would prohibit double-billing. Although Medicare permits the person who collects a specimen to bill a nominal specimen collection fee in certain circumstances, hospitals would not bill payors or patients for specimen collection when the lab already pays a collection fee.
  • Second, the arrangement would meet some—but not all—elements of the personal services and management contracts safe harbor. Fees would be consistent with fair market value. The arrangement would be set out in a signed writing, cover all services to be provided, and last for at least one year.
  • Third, the contract would prohibit the hospital from requiring referrals to the company’s labs and providing remuneration to physicians based on referrals to the company.

OIG’s Analysis

The arrangement implicates the federal Anti-Kickback Statute because it involves remuneration from a lab to hospitals, which are in a position to make referrals for, or otherwise arrange for the lab to furnish items and services payable by federal healthcare programs. Indeed, the per-patient-encounter fee provides a financial incentive for the hospital to make referrals to the lab company.

The arrangement would not fit within the safe harbor for personal services and management contracts because the per-patient-encounter fee takes into account the volume or value of referrals or other business generated. Because it would not fit a safe harbor, OIG evaluated the arrangement on the totality of the facts and circumstances. In OIG’s view, the arrangement warrants careful scrutiny for two reasons: lab services can be particularly susceptible to steering and the per-click fee structure inherently reflects the volume or value of referrals or other business generated.

Although the arrangement featured certain safeguards, they were inadequate for OIG to approve it. Fair market value fees and the prohibition against double-billing do not, in OIG’s words, “overcome” the per-encounter incentive to inappropriately steer business to the lab company. And even though hospitals would not require physicians to refer to any particular lab, hospitals would still have an incentive to encourage physicians to order lab services from the company.

Ultimately, in OIG’s view, the per-encounter fee and corresponding steering risk created too great a risk that the fee would be used to induce or reward referrals from hospitals to the lab company. In the circumstances, the arrangement presented more than a minimal risk of fraud and abuse under the Anti-Kickback Statute.

Takeaways

This marks another unfavorable advisory opinion for lab arrangements. But it goes a step further. Earlier opinions and guidance, including a 2014 Special Fraud Alert on laboratory payments to referring physicians, feature clear fraud and abuse risks that led to predictable outcomes: above fair market value payments, payment for services already paid for by a third party, and free services that relieve referral sources of expenses they would otherwise incur.

Here, though, the key safeguards—consistency with fair market value, the prohibition against double-billing, and certification that the hospitals would not require or compensate physicians for referrals—make Advisory Opinion 22-09 a closer call.

Indeed, OIG’s 1994 Special Fraud Alert contemplated that in certain circumstances, a lab company’s placement of a phlebotomist in a physician’s office could be okay under the Anti-Kickback Statute, so long as the phlebotomist does not perform additional tasks that are normally the responsibility of the physician’s office staff. Although a lab’s placement of a phlebotomist in a physician office differs from paying a hospital to collect specimens, the two arrangements are conceptually similar. In both, each time the physician sends a specimen to the lab, it receives a benefit: free onsite collection services by the placed phlebotomist or cash payments in the form of specimen collection fees. Yet OIG signaled its openness to the former while declining to protect the latter.

The result here may be seen as an extension of earlier guidance reflecting OIG’s concerns about steering risk in lab arrangements, particularly when remuneration from a lab reflects the volume or value of referrals or other business generated. The 2014 Special Fraud Alert highlighted the steering risk, noting that “the choice of laboratory, as well as the decision to order laboratory tests, typically is made or strongly influenced by the physician, with little or no input from patients.”

Collection fees and similar fee structures that reflect the volume or value of specimens sent to a lab amplify this risk. And prior advisory opinions have questioned the legitimacy of lab companies’ payments to referral sources that vary with the volume of referrals, even if the payments are small and made to facilitate care coordination.

For example, in Advisory Opinion 14-03, OIG declined to protect an arrangement where a lab would pay the $1 per-order fee charged by an electronic health record (EHR) vendor for transmitting orders to an in-network lab that would otherwise be borne by the physicians who ordered the test. To OIG, there appeared to be “no reason” for the lab to pay the per-order fees “other than to secure referrals.”

In fact, a host of enforcement actions have alleged violations of the Anti-Kickback Statute based on labs’ payments of collection fees and processing and handling fees. DOJ has targeted labs, intervening in and settling False Claims Act cases that featured similar allegations on top of other allegations. Likewise, OIG has targeted both labs and physician practices, resolving a host of similar allegations under the Civil Monetary Penalties Law, some of which involved labs targeted in DOJ enforcement actions.

Put together, Advisory Opinion 22-09, OIG’s earlier guidance, and recent enforcement actions signal the government’s view that an arrangement where a lab provides collection fees to a referral source carries risk under the Anti-Kickback Statute. Advisory Opinion 22-09 is, of course, an advisory opinion specific to the requesting party, not guidance of general application. And, strictly speaking, it means only that OIG was not convinced that the arrangement would clear the bar necessary for a positive advisory opinion—i.e., that it would pose no more than minimal risk of fraud and abuse under the Anti-Kickback Statute.

Also, many of the enforcement actions featured a laundry list of allegations (lack of medical necessity, sham arrangements, and the like) that were not at play in the advisory opinion. Still, Advisory Opinion 22-09 represents a noteworthy addition to the extensive body of guidance regarding arrangements between labs and potential referral sources.

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Firm Publication

On April 28, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services published Advisory Opinion 22-09, declining to approve a laboratory company’s proposal to pay hospitals a fair market value, per-patient-encounter fee to collect, process, and handle specimens.

OIG declined to approve the arrangement for two key reasons. First, in OIG’s view, lab services are particularly susceptible to the risk of steering under the federal Anti-Kickback Statute. Second, the “per-click” fee structure, even if consistent with fair market value, inherently reflects the volume or value of referrals or other business the hospital sends to the labs. Together, these dynamics created risk that the fees were intended to induce hospitals to steer business to the labs.

An extension of earlier guidance and enforcement actions from OIG and the U.S. Department of Justice (DOJ), Advisory Opinion 22-09 reiterates the government’s view of the steering risk of arrangements where labs provide referral sources compensation that varies with referrals to the lab. But it also demonstrates that when fees are directly tied to volume, fair market value may not be enough to overcome this risk.

The Arrangement

The requestor operates a network of clinical labs. Under the proposed arrangement, the lab company would enter contracts with participating hospitals to pay hospitals a per-patient-encounter fee to collect, process, and handle specimens that the hospitals send to the company’s labs. Specimens would be collected by phlebotomists employed or contracted by the hospitals. Fees would be paid only for patients who are not inpatients or registered outpatients of the hospital. The lab company, in turn, would bill the applicable third-party payor (including federal healthcare programs) for the testing.

The requestor proposed three key safeguards:

  • First, the contract would prohibit double-billing. Although Medicare permits the person who collects a specimen to bill a nominal specimen collection fee in certain circumstances, hospitals would not bill payors or patients for specimen collection when the lab already pays a collection fee.
  • Second, the arrangement would meet some—but not all—elements of the personal services and management contracts safe harbor. Fees would be consistent with fair market value. The arrangement would be set out in a signed writing, cover all services to be provided, and last for at least one year.
  • Third, the contract would prohibit the hospital from requiring referrals to the company’s labs and providing remuneration to physicians based on referrals to the company.

OIG’s Analysis

The arrangement implicates the federal Anti-Kickback Statute because it involves remuneration from a lab to hospitals, which are in a position to make referrals for, or otherwise arrange for the lab to furnish items and services payable by federal healthcare programs. Indeed, the per-patient-encounter fee provides a financial incentive for the hospital to make referrals to the lab company.

The arrangement would not fit within the safe harbor for personal services and management contracts because the per-patient-encounter fee takes into account the volume or value of referrals or other business generated. Because it would not fit a safe harbor, OIG evaluated the arrangement on the totality of the facts and circumstances. In OIG’s view, the arrangement warrants careful scrutiny for two reasons: lab services can be particularly susceptible to steering and the per-click fee structure inherently reflects the volume or value of referrals or other business generated.

Although the arrangement featured certain safeguards, they were inadequate for OIG to approve it. Fair market value fees and the prohibition against double-billing do not, in OIG’s words, “overcome” the per-encounter incentive to inappropriately steer business to the lab company. And even though hospitals would not require physicians to refer to any particular lab, hospitals would still have an incentive to encourage physicians to order lab services from the company.

Ultimately, in OIG’s view, the per-encounter fee and corresponding steering risk created too great a risk that the fee would be used to induce or reward referrals from hospitals to the lab company. In the circumstances, the arrangement presented more than a minimal risk of fraud and abuse under the Anti-Kickback Statute.

Takeaways

This marks another unfavorable advisory opinion for lab arrangements. But it goes a step further. Earlier opinions and guidance, including a 2014 Special Fraud Alert on laboratory payments to referring physicians, feature clear fraud and abuse risks that led to predictable outcomes: above fair market value payments, payment for services already paid for by a third party, and free services that relieve referral sources of expenses they would otherwise incur.

Here, though, the key safeguards—consistency with fair market value, the prohibition against double-billing, and certification that the hospitals would not require or compensate physicians for referrals—make Advisory Opinion 22-09 a closer call.

Indeed, OIG’s 1994 Special Fraud Alert contemplated that in certain circumstances, a lab company’s placement of a phlebotomist in a physician’s office could be okay under the Anti-Kickback Statute, so long as the phlebotomist does not perform additional tasks that are normally the responsibility of the physician’s office staff. Although a lab’s placement of a phlebotomist in a physician office differs from paying a hospital to collect specimens, the two arrangements are conceptually similar. In both, each time the physician sends a specimen to the lab, it receives a benefit: free onsite collection services by the placed phlebotomist or cash payments in the form of specimen collection fees. Yet OIG signaled its openness to the former while declining to protect the latter.

The result here may be seen as an extension of earlier guidance reflecting OIG’s concerns about steering risk in lab arrangements, particularly when remuneration from a lab reflects the volume or value of referrals or other business generated. The 2014 Special Fraud Alert highlighted the steering risk, noting that “the choice of laboratory, as well as the decision to order laboratory tests, typically is made or strongly influenced by the physician, with little or no input from patients.”

Collection fees and similar fee structures that reflect the volume or value of specimens sent to a lab amplify this risk. And prior advisory opinions have questioned the legitimacy of lab companies’ payments to referral sources that vary with the volume of referrals, even if the payments are small and made to facilitate care coordination.

For example, in Advisory Opinion 14-03, OIG declined to protect an arrangement where a lab would pay the $1 per-order fee charged by an electronic health record (EHR) vendor for transmitting orders to an in-network lab that would otherwise be borne by the physicians who ordered the test. To OIG, there appeared to be “no reason” for the lab to pay the per-order fees “other than to secure referrals.”

In fact, a host of enforcement actions have alleged violations of the Anti-Kickback Statute based on labs’ payments of collection fees and processing and handling fees. DOJ has targeted labs, intervening in and settling False Claims Act cases that featured similar allegations on top of other allegations. Likewise, OIG has targeted both labs and physician practices, resolving a host of similar allegations under the Civil Monetary Penalties Law, some of which involved labs targeted in DOJ enforcement actions.

Put together, Advisory Opinion 22-09, OIG’s earlier guidance, and recent enforcement actions signal the government’s view that an arrangement where a lab provides collection fees to a referral source carries risk under the Anti-Kickback Statute. Advisory Opinion 22-09 is, of course, an advisory opinion specific to the requesting party, not guidance of general application. And, strictly speaking, it means only that OIG was not convinced that the arrangement would clear the bar necessary for a positive advisory opinion—i.e., that it would pose no more than minimal risk of fraud and abuse under the Anti-Kickback Statute.

Also, many of the enforcement actions featured a laundry list of allegations (lack of medical necessity, sham arrangements, and the like) that were not at play in the advisory opinion. Still, Advisory Opinion 22-09 represents a noteworthy addition to the extensive body of guidance regarding arrangements between labs and potential referral sources.

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