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OIG Frowns On Proposed Lab Arrangement: Client Billing In The Crosshairs?

OIG Frowns On Proposed Lab Arrangement: Client Billing In The Crosshairs?

Health Care Law Note
(April 9, 2015)

In the face of declining reimbursement and the increasing reliance of payors on exclusive networks to control the delivery of health care and costs, laboratories that find themselves outside of those networks continue searching for ways to compete.

In Advisory Opinion 15-04, the OIG addresses one laboratory's proposal to provide all necessary laboratory services for its physician-practice clients (Clients), regardless of whether the patient's commercial health insurance requires use of a different laboratory pursuant to an Exclusive Plan. For patients enrolled in Exclusive Plans, the laboratory requesting the opinion (the Requestor) would not bill the Client, the patient, the Exclusive Plan, or any secondary payor. In other words, the Requestor would provide laboratory services to patients in Exclusive Plans for free.1

According to the Requestor, some of its Clients requested the proposed arrangement (the Proposed Arrangement) in order to work with a single laboratory "for ease of communication and consistency in the reporting of test results." Because different laboratories may report different reference ranges, working with only one laboratory would remove those inconsistencies. Further, different laboratories require different electronic interfaces between the laboratory and physician for the ordering of tests and reporting of results.

Missing from the description of the arrangement is any discussion of quality. That omission, in the age of Health Care Reform focusing on improved quality, is glaring. Physicians ordering laboratory services should seek laboratories that will provide their patients with the highest quality services at reasonable prices. The lack of a discussion of quality may indicate that the Requestor had no intention of entering the Proposed Arrangement, but in reality, was pursuing a negative opinion to use against a competitor.    

Analysis by the OIG

From the first sentence in its analysis, the OIG's negative view of the Proposed Arrangement is apparent. The OIG frames the issue as a quid pro quo arrangement involving Medicare and Medicaid referrals, stating, "[u]nder the Proposed Arrangement, the Requestor would provide free services to certain patients to secure all business, including Federal health care program business . . ." (Emphasis added.) 

Kickback Concerns

With regard to the Anti-Kickback Statute, the OIG found that although the Clients "would not receive direct payments under the Proposed Arrangement," other factors, "in combination, would amount to remuneration." Without elaborating, the OIG points to the "convenience of receiving all test results with consistent reference ranges" as potential remuneration, notwithstanding the commonly accepted notion that consistency in reporting of results often leads to improved efficiency and quality.

The OIG finds significant the Requestor's comment that "some electronic medical record system vendors charge physician practices a monthly maintenance fee in connection with the interface." From this, the OIG concludes that, by using a single laboratory the Clients might avoid costs associated with maintaining the other laboratory interfaces. This rationale is tenuous. Nonetheless, the OIG concludes its discussion of kickback concerns by broadly stating that, "the Requestor's proposed actions could result in inappropriate steering of patients, including Federal health care program beneficiaries."

Substantially In Excess Rule

The OIG also addresses its permissive exclusion authority under Medicare's "substantially in excess" rule. That rule prevents providers from charging Medicare and Medicaid substantially more than their usual charges to commercial payors. The OIG reiterated its prior position that "a provider need not even worry about [the substantially in excess rule], unless it is discounting close to half of its non-Medicare or non-Medicaid business." It is unclear whether the Requestor considered the impact of the "substantially in excess" rule. However, sophisticated laboratories engaged in discounting arrangements, such as "client billing," keep that rule in mind when structuring those arrangements. Even so, the OIG determines that it has "sufficient information to conclude that the Proposed Arrangement poses too high of a risk of violating that provision to grant it prospective immunity."

Client Billing Arrangements in Danger?

Despite the OIG's standard disclaimers in each of its advisory opinions, the ripple effects of Advisory Opinion 15-04 could extend beyond the facts and circumstances of the Proposed Arrangement and may signal a change in thinking at the OIG. Specifically, the OIG's statement that "the Requestor's proposed actions could result in inappropriate steering of patients, including Federal health care program beneficiaries," could indicate an emerging view at the OIG that would jeopardize most client billing arrangements.2

Advisory Opinion 99-13

Client billing (a/k/a account billing) arrangements were the subject of Advisory Opinion 99-13 and subsequent clarification by the OIG. In client billing arrangements, the laboratory does not bill the commercial payor directly; instead, the laboratory sells its services at discounted rates to the physician ordering the test. The ordering physician then bills the patient's insurance for those laboratory services, usually at a higher rate than the physician pays the laboratory. As a result, the referring physician profits on every referred specimen based on the difference between the laboratory's discounted charge and the amount the payor reimburses.

The Wall Street Journal published a revealing article that addresses client billing arrangements entitled, "How Some Doctors Turn a $79 Profit from a $30 Test."3 The article mentions a few legitimate reasons that a laboratory might sell its services to a referring physician for less than the full amount offered by commercial payors. For example, the laboratory does not incur the administrative expense of billing the commercial payors for the services. In addition, the laboratory receives payment from the ordering physician regardless of whether he or she receives payment. While these benefits have some financial value, the advantages they offer to a laboratory discounting its services are not unlimited.

In Advisory Opinion 99-13, the pathology laboratory proposed to offer discounts to referring physicians that were greater than the laboratory's cost savings "in order to match the prices of its competitors." Some of those discounts would be below the laboratory's cost of providing the services. Stated another way, the laboratory was proposing to lose money on certain commercial business in order to retain the Medicare business. The OIG initially concluded that the proposed arrangement might violate the Anti-Kickback Statute, stating that "[e]vidence that the discount is not commercially reasonable in the absence of other, non-discounted business is highly probative."  

McAnaney Letter

Within five months, however, in response to concerns that Advisory Opinion 99-13 prohibited laboratories from charging commercial payors anything less than Medicare rates, the OIG published a letter clarifying its stance on client billing. According to the April 26, 2000 letter from Kevin McAnaney, Chief of the Business Guidance Branch, in order to determine whether the Anti-Kickback Statute has been violated, the OIG would need "evidence to support a linkage between the discounts and the referral of non-discounted Federal health care program business."4

The OIG would first consider whether the referring physician's Medicare business was large enough, relative to the discounted commercial payor business, to infer a connection. Next, the OIG would consider the size of the discount as indicative of the parties' intent: "[p]ricing arrangements that couple the referral of Medicare business that is reimbursed above the provider's average fully loaded costs with charges for private business that are below the provider's average fully loaded costs merit close scrutiny."

Future of Client Billing Arrangements

To violate the Anti-Kickback Statute, a laboratory's discounts for commercial pay patients must link to the referral of Medicare business. Advisory Opinion 15-04 represents the continued evolution of the OIG's thinking about what constitutes such a link.5 In this recent opinion there were no direct payments, but the OIG found that link in the potential indirect benefits that might flow to the ordering physicians. Client billing arrangements are particularly troubling because the ordering physicians receive direct compensation that varies based on the volume and value of their referrals for laboratory services. As a result, laboratories and physicians should review existing client billing arrangements with competent health care regulatory counsel to discuss any increased liability exposure.   

1 The Requestor estimated that approximately seventy percent (70%) of its Clients have patients enrolled in Exclusive Plans. The Clients indicated that between ten percent (10%) and forty percent (40%) of their patients belonged to an Exclusive Plan.

2 Some states already prohibit or restrict client billing arrangements. See the College of American Pathologists' summary of states with such laws at

3 See,

4 See,

5 See, e.g., the OIG's Special Advisory Bulletin:  Contractual Joint Ventures at

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