Proposed Laboratory Arrangement Draws Heightened Scrutiny from the OIG
Client Alert
On September 25, 2023, the Office of Inspector General for the U.S. Department of Health and Human Services (OIG) issued Advisory Opinion 23-06 (AO). The Opinion involved a proposed arrangement between an independent laboratory and other physician laboratories for the purchase of the technical component of anatomic pathology services.
The Arrangement at Issue
The proposed arrangement specifically involved an anatomic pathology laboratory operator (“Requestor”) that entered into agreements with third-party laboratories, including laboratories that were owned by and/or employed physicians (“physician laboratories”).
Importantly, reimbursement for anatomic pathology laboratory services involves two distinct components: a “technical” component, involving the physical preparation of the specimen for pathologist review, and a “professional” component, involving analysis of the slide by the pathologist. Under the arrangement, the physician laboratory completed the technical component of the anatomic pathology service and then referred the prepared specimen to the Requestor for completion of the professional component. Once both components were finished, the Requestor billed commercial payors for both components as an in-network provider and paid the referring physician laboratory a fair market value, per-specimen fee for the technical component of the anatomic pathology service.
The OIG’s Conclusion
The OIG ultimately concluded that the arrangement at issue, if it was entered into with the requisite intent, would implicate the Federal Anti-Kickback Statute (AKS) and constitute grounds for sanctions. Notably, the proposed arrangement did not satisfy any safe harbor, including the safe harbor for personal services and management contracts. In reaching this conclusion, the OIG highlighted that 1) the arrangement allowed the Requestor to pay the physician laboratory for services that they would otherwise not be able to bill for due to their out-of-network status and 2) if the Requestor did not enter into the arrangement, it would lose out on a significant volume of referrals, including federal health care program business, from physician laboratories.
What this Opinion Means for Labs Moving Forward
This Opinion is noteworthy because the OIG opined that the proposed arrangement lacked commercial reasonableness. Even though the physician laboratory was paid fair market value for the technical component of the services under the proposed arrangement, the Requestor had the ability to perform both components and would save money and time doing so rather than paying a third party to perform the technical component. Thus, the proposed arrangement was not commercially reasonable.
Additionally, the OIG reiterated its skepticism toward arrangements that “carve out” federal health care program business in the Opinion. Historically, the OIG has been skeptical of carve out arrangements because they potentially “disguise remuneration for Federal health care program business through the payment of amounts purportedly related to non-Federal health care program business.”
Lastly, the Opinion cautioned that, absent an applicable safe harbor, proposed arrangements must be evaluated under the AKS on a case-by-case basis by examining the totality of the circumstances to determine whether a “nexus” exists between the proposed arrangement and referrals for services reimbursable by Federal healthcare programs. Per the OIG, a nexus likely existed between the proposed arrangement at issue and referrals for services reimbursable by Federal healthcare programs for two important reasons. First, there was no commercially reasonable purpose for the arrangement for the Requestor. Second, the Requestor, because of this arrangement, would probably receive more referrals of Federal healthcare program business from physician laboratories.
Moving forward, all laboratories should exercise caution if they intend to enter into arrangements resembling the one at issue in this Opinion. In-network independent laboratories that can perform both components effectively should perform both the technical and professional components. Relatedly, out-of-network physician laboratories should not enter into arrangements where they are paid for anatomic pathology services that they are unable to independently bill for.
If you have questions about this Advisory Opinion, or third-party laboratory arrangements, please contact BMD Vice President and Healthcare Attorney Amanda Waesch at alwaesch@bmdllc.com.