OIG Releases Opinion On AP Lab Condominiums

Specific on key points, OIG’s guidance alters compliance risk for AP lab condo owners

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CEO SUMMARY: In responding to a request for an advisory opinion, the Office of the Inspector General (OIG) issued an advisory opinion which declares that anatomic pathology (AP) lab condominiums “could potentially generate prohibited remuneration under the anti-kickback statute.” It also voices concerns about how the operation of such AP laboratory condos could violate the Stark Law.

JUST TWO WEEKS AGO, the Office of the Inspector General (OIG) released a new advisory opinion which reshapes compliance policies that affect the operations of clinical laboratories and anatomic pathology (AP) group practices.

The OIG advisory opinion was posted on Friday, December 17, 2004. It deals with the essential elements of the “anatomic pathology laboratory condominium” business model. In this- arrangement, a promoter puts a number of fully-equipped pathology laboratories in separate rooms in a single building. A pathologist and histotechnologist go from room to room during the day to perform the work on behalf of each lab’s owners. (See TDRs, July 19 and August 9, 2004.)

In the advisory opinion, numbered 04-17, the OIG stated that the AP laboratory condominium scheme “could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions on [name redacted] under sections of the Act.”

The advisory opinion also called attention to how the AP laboratory condominium arrangement “raises potential issues under the Stark Law.” The OIG noted, in a footnote, that such arrangements would be “impossible to monitor” for compliance and “therefore would be prone to substantial abuse, including, without limitation, the risk of inappropriate utilization and improper claims.”

Despite the quiet Christmas season, it didn’t take long for news that the OIG had posted this opinion letter to catch the full attention of law firms across the country which advise laboratories, pathology groups, and specialist physicians who own AP laboratory condominiums. These are the lawyers who have been asked to pro- vide opinions as to whether anatomic pathology laboratory condominium schemes meet federal and state compliance regulations and statutes.

Lab Company’s Request

OIG Advisory Opinion 04-17 is a redacted version of the letter sent to In-Practice Pathology Group, Inc., a wholly-owned subsidiary of CBLPath Holdings Corporation (also the parent company of the AP specialty lab, CBLPath, Inc.) In January 2004, CBLPath, based in Ocala, Florida, requested an advisory opinion from the OIG on its proposed plan to offer anatomic pathology laboratory condominiums and services to specialist physician groups.

“We requested the OIG advisory opinion in response to developments in the marketplace,” stated William W. Curtis, Chairman and CEO of CBLPath. “Particularly within the medical specialties of urology, gastroenterology, and dermatology, there was rising interest in these types of pathology lab arrangements.

Assessing Compliance Risk

“That caused us to look at the form and shape of AP laboratory condominium business models already in operation,” he continued. “It was our assessment that the circumstances of these business arrangements between the lab condo promoter and participating specialist medical groups was more aggressive than was intended by the Stark Law exception.

“Frankly, it was a level of compliance risk and legal uncertainty CBLPath was not ready to take,” declared Curtis. “That is why we requested an advisory opinion by the OIG. CBLPath developed what we considered to be a conservative version of the AP laboratory condo business model.

“We wanted to minimize or eliminate the ‘Catch 22’ that so often surrounds laboratory compliance issues,” he said. “It was our view that, if the OIG blessed our AP lab condo model, we would then offer it to a narrow band of the largest specialist groups—those which have the scale of specimen referrals to truly and fully meet the intent of the Stark Law.

“Alternatively, if the OIG did not approve the business model of the AP laboratory condo, then its advisory opinion would put us in a position to offer specific guidance to physicians interested in these types of arrangements. In either case, the OIG’s advisory opinion would level the competitive playing field and further define the compliance risk triggered by these types of laboratory business models,” observed Curtis.

Looking For More Detail

“We were also hopeful that the OIG’s advisory opinion might offer specific details about ‘do’s and don’ts’,” Curtis said. “As an example, in their advisory opinion, the OIG considered it problematic that CBLPath was also in a position to directly compete for the AP services.”

Did CBLPath get the OIG advisory opinion it hoped would create a level playing field? “The OIG certainly weighed in with a clear ‘no’ on the anti-kickback component of an AP laboratory condominium arrangement,” noted Curtis. “Another major red flag is the footnote referencing its concerns about violations of the Stark Law.

“This opinion obviously has direct implications to our proposed business model for AP laboratory condo arrangements,” Curtis observed. “But I think the OIG’s advisory opinion triggers broader implications in situations where non-pathologist physicians want to share in the revenues from pathology services generated by their patient referrals,” explained Curtis.

“There is plenty of evidence that the OIG is looking at the entire range of ancillary services—not just pathology—and is finding that the Stark Law exception encourages the very abuses that the Stark Law was designed to prevent,” said Curtis. “We certainly got this message during our interaction with the OIG.”

CBLPath’s Attorney Discusses Key Issues in OIG’s Advisory Opinion

IN THE VIEW OF THOMAS BARTRUM, the release of Advisory Opinion 04-17 by the Office of Inspector General is consistent with earlier compliance guidance on contractual joint ventures between physician groups and other providers.

Bartrum is an attorney for Waller Lansden, based in Nashville, Tennessee. While he was at Baker Donelson, he was part of the CBLPath, Inc. legal team which drafted the request for an advisory opinion on CBLPath’s anatomic pathology (AP) laboratory condominium business model. He participated in conversations with the OIG as the government agency developed its response, which it published on December 17, 2004 as OIG Advisory Opinion 04-17.

“It was clear, from the start, that the OIG was uneasy with the concept of AP laboratory condominiums,” noted Bartrum. “We pointed out that, since a physician group could build its own in-house pathology laboratory, hire its own pathologist and directly bill for these services, the AP laboratory condo was simply a variant of an established practice. However, that didn’t seem to catch the attention of the OIG.

Senator Grassley’s Impact

“The agency seemed to have a strong sense of purpose,” continued Bartrum. “The letter sent to the OIG by Senator Charles Grassley asking them to investigate these AP lab condo schemes had an impact. It allowed us to have high-level talks with OIG officials. They wanted to understand the market context that caused us to ask for an opinion. It also seemed to be a high priority to deliver an answer to the questions raised in our request.

“If there is any single ‘walk-away message’ I got from Advisory Opinion 04-17, it’s that the OIG has a definite problem anytime an existing provider allows a referring physician to capture revenue that historically went somewhere else,” stated Bartrum. “This recent opinion ties back to the OIG’s Special Advisory Bulletin on “Contractual Joint Ventures,” dated April 30, 2003. This point pertains to the AP lab condo concept, which effectively allows the referring physician to capture revenue that formerly went to a pathology group or laboratory.”

Bartrum believes the OIG will have more to say on this issue. “The OIG work plan tends to be a road map for issues which the government considers to be a priority,” he said. “I think it is noteworthy that the OIG added a pathology services study to its 2005 work plan.” (See TDR, November 1, 2004.)

Stark Law Exposure

“I also think it is noteworthy that the OIG took pains to state, in Advisory Opinion 04-17, that the Centers for Medicare and Medicaid Services (CMS) is responsible for guidance on the Stark Law and how it relates to these AP lab condos,” added Bartrum. “Because of our discomfort with the content of this Advisory Opinion, we have initiated discussions with CMS as to how broadly we can be comfortable with the in-office exception. This may take a while, because CMS has always been measured and deliberate in its public pronouncements involving the Stark Law.”

Bartrum also had a fascinating side observation about the downstream impact of the OIG’s advisory opinion. “Typically, the more the government focuses on a compliance topic, the more likely it is to give employees discomfort that they may be breaking the law,” he said. “Thus, OIG and CMS opinions and comments about AP lab condos tends to put this topic in the compliance spotlight that attracts the notice of potential whistleblowers. It may be two or three years before some whistleblower law- suits appear, but it does represent one more risk to implementing this business model.”

Evolving Legal Concepts

“Moreover, we think the OIG may be signaling an interest in reconsidering the topic of client billing between a laboratory and the referring physician,” continued Curtis. “We see an evolution in legal concepts that effect the situation where a physician marks up a clinical service—like a laboratory test—without adding value. The mark-up is directly connected to his/her ability to refer the patient to the lab which performs the test.

“If you read the OIG’s advisory opinion, where it discusses these elements of our proposed AP laboratory condo arrangement and you take out the word ‘lab’ and substitute ‘ancillary service,’ the OIG’s language could apply to the larger topic of client billing. This advisory opinion may be a signal that the OIG is becoming increasingly uncomfortable with any type of ancillary service arrangement.”

Compliance concepts do evolve over time. The lab industry saw this happen with the definition of “inducement” during the 1990s, which eventually affected how things as simple as how lab test requisition forms were arranged and printed. The direct statements in Advisory Opinion 04-17 represent further steps in the OIG’s thinking about AP laboratory condos and self-referral concerns.

LabCorp’s Brad Smith Assesses OIG Opinion

FOR ONE LAWYER with long and detailed experience in Medicare compliance at the highest levels, there was little ambiguity in the Office of the Inspector General’s (OIG) Advisory Opinion 04-17, dealing with anatomic pathology (AP) condominium laboratory arrangements.

“Often these opinion letters are nuanced and take some effort to interpret,” said Brad Smith, Executive Vice President and Chief Legal Officer at Laboratory Corporation of America. “However, this advisory opinion is strongly-worded on the key issues and there is no lack of clarity on the essential points.

“That is true of the anti-kickback exposure of these arrangements,” he continued. “The reference to the potential of these schemes to violate the Stark Law was also very direct. No matter how you might want to sugar-coat this opinion, it is definitive on a variety of core issues.

“I think most individuals managing clinical laboratories would recognize the same type of scheme—operating an off-site, even out-of-state clinical lab ‘owned’ by a physician group referring the specimens—to be in violation of a number of compliance requirements. That’s because, on the clinical side, there is a clear sense of compliance do’s and don’ts,” observed Smith.

“The anatomic pathology laboratory con- dominium scheme is in such deep conflict with those compliance norms that it is difficult to understand the mindset that allows physician groups, promoters, and pathologists to consider that this type of contractual joint venture meets both the form and the intent of the law,” offered Smith. “The OIG’s direct statements on the key issues in its advisory must be read in context with the inclination of some individuals to adopt a loose interpretation of compliance regulations. These individuals are willing to push compliance boundaries and hope that enforcement action is never taken.”

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