Rural Hospital Spokesman: Hospital Lab Outreach Programs Are Legal

Calls phrase ‘pass-through billing’ a ‘mischaracterization’ of hospital outreach programs

CEO SUMMARY: As the debate grows more heated, supporters of hospital outpatient department (HOPD) billing schemes have ramped up their defense of the practice. The president of the National Association of Rural Hospitals tells THE DARK REPORT that rural hospitals are permitted to bill for hospital lab outreach program services under Medicare’s 70/30 shell rule. In a related article of critical importance to any administrator considering taking part in such a scheme, a healthcare lawyer explains how this works – and how it doesn’t.

ACROSS THE NATION, health insurers and government regulators now recognize that many rural hospitals are using clinical laboratory tests to generate outsized streams of new revenue.

Modern Healthcare reported last month that an analysis of Medicare data showed 21 hospitals had outpatient lab charges that exceeded 30% of the hospital’s total annual charges in their most recent reports.

In some cases, lab charges—billed mostly to private insurers but also to government payers—accounted for more than 80% of hospitals’ total charges in a single year

“For comparison, the average outpatient lab-to-total charges ratio among all of the nearly 5,000 hospitals that filed cost reports was less than 9% in 2016 and about 12% so far for 2017,” Modern Healthcare reported.

Such laboratory billing numbers are the result of the desperate financial situation of many rural hospitals. These small hospitals—faced with the choice of bankruptcy or closure—have signed agreements with promoters of strategies that use rural hospitals as in-network providers to bill for large volumes of lab tests from patients who typically live hundreds, or even thousands, of miles away from the hospital billing for these tests.

A Gross Mischaracterization’

Critics consider this to be medical billing fraud, pointing out that these arrangements can violate both state and federal laws, as well as the managed care contracts that rural hospitals have with health insurers. One common element in these arrangements is the practice known as pass-through billing.

Using this practice, a hospital would submit bills for lab tests that were performed in laboratories located outside of the hospital’s facilities. The question for many clinical lab directors is whether pass-through billing as part of a hospital lab outreach program is legal.  (See TDRs, Oct. 30, 2017, and Jan. 22, 2018.)

Michael Murtha, President of the National Alliance of Rural Hospitals (NARH), an organization founded in 2016, said that members of NARH are not using pass-through billing. And, he said, the billing practices these hospitals use are definitely legal. The strategy that hospitals in the NARH use is called a “lab outreach business model,” Murtha added.

“The historic business model for rural hospitals is doomed to fail,” explained Murtha. “Our members continue to invest in the technology and personnel to do as much of the testing on-site as possible,” he added. “We strongly object to referring to these programs as ‘pass-through billing’ or ‘shell labs.’

“Those terms are a gross mischaracterization. But, a high volume use of off-site reference labs can lead to just such characterizations.”

Federal Law Exemption

Murtha explained: “The 70/30 rule says that if you have a lab outreach program, you have to do 70% of your testing onsite, and you can refer out 30% to other labs. But the federal Omnibus Budget Reconciliation Act of 1989 exempted rural hospitals from Medicare’s 70/30 payment rule for lab outreach.”

Under the reasoning at the time, Congress sought to prevent outright fraud as a result of sending a great volume of testing to other labs, Murtha explained. “They did that because there were labs funneling tests through third-party labs while saying they were doing lab outreach work,” he said.

“In response to this development, Medicare and Medicaid added the 70/30 rule so that they could exempt some individuals and labs from that 70/30 rule,” he continued. “Among those entities that were specifically exempt were rural hospitals.

“At the time, some government officials explained the rule and the exemption,” he said. “After hearing these explanations, some folks decided to do lab outreach in rural hospitals because these hospitals have the facilities and the insurance contracts, and are licensed to do this work. They saw the 70/30 exemption of rural hospital as a way to keep the community hospital afloat and build some revenue. Otherwise, these hospitals would need to close.

Challenge From Payers

“When this trend started happening, some critics of this business model—such as health insurance companies—said ‘we’re not thrilled with it,’” Murtha added. “That’s fine. They don’t have to be thrilled with it. They can renegotiate their contracts and require rural hospitals to do this lab testing in a different way.”

Health insurers were critical because they were paying for such testing, Murtha said. Rather than negotiate with these hospitals, health insurers decided it would be better to simply put them out of business, he added. “Instead of renegotiating contracts, health insurers said they would preclude hospitals from doing this testing and billing in this way,” explained Murtha. “They said, ‘We’re going to crush you.’ And they did so by filing lawsuits.

“Insurance companies make a lot of money and they like to make certain that they have control over their networks,” he added. “Rather than renegotiating existing managed care contracts, they all file lawsuits and that’s what some of our member hospitals are going through right now.

Rural Hospitals Struggle To Survive

Since 2010, more than 80 such hospitals have closed and almost 673 rural hospitals could close in the coming years, according to a report last year from the National Rural Health Association in Leawood, Kan. Those 673 facilities represent about one third of the number of hospitals serving rural areas, NRHA said. NRHA is not affiliated with the National Alliance of Rural Hospitals.

“Continued cuts to hospital payments have taken their toll, forcing closures, creating medical deserts across rural America, and leaving many of our nation’s most vulnerable populations without timely access to care,” NRHA said last year.

For struggling rural hospitals, some business professionals running clinical laboratories have a solution to their financial troubles. By increasing the volume of clinical laboratory testing they do, these hospitals could boost revenue significantly, these laboratory operators contend.

Insurers have questioned these solutions, saying that hospitals enter into these agreements to bill for an increased number of lab tests, many of which are not performed in the hospitals’ labs. Insurers recognize that rural and other hospitals have higher operating costs and so pay more for these tests than they pay for the same tests run at independent clinical laboratories. Sometimes, these hospitals bill insurers for patients’ lab tests when those patients have no connection to the hospitals.

Does your hospital engage in the new hospital lab outreach program billing model, and if so, how concerned are you that it might be illegal? Please share your thoughts with us in the comments below.


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