Lab Marketing Strategy Triggers Legal Concerns

TennCare’s displeasure with this lab marketing gambit shows one risk

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CEO SUMMARY: That famous phrase “everyone wants something for nothing” does not describe TennCare Select’s reaction to the “free testing” that Quest Diagnostics is performing for its beneficiaries. TennCare provides a real-world example of how this strategy can put a laboratory at odds with an important payer in a region. An experienced healthcare attorney assesses other legal risks from the “free testing strategy.”

BECAUSE CERTAIN ASPECTS of the “spat” between Quest Diagnostics Incorporated and Blue Cross/Blue Shield of Tennessee’s (BCBS) TennCare Select program have become public, it provides a rare opportunity to evaluate the impact of the “free testing strategy” in the laboratory testing marketplace.

One attorney familiar with the Office of Investigator General’s (OIG) “Waiver of Charges to Managed Care Patients” fraud alert is Jane Pine Wood, a Partner at McDonald Hopkins, based in Cleveland, Ohio. Wood’s law firm maintains a national healthcare practice that includes clinical laboratory and anatomic pathology clients, as well as physician group practices. Wood has researched this topic to provide legal advice to a range of healthcare clients who represent both sides of such arrangements.

“Use of the ‘free testing’ strategy can potentially violate existing laws in several ways,” stated Wood. “The OIG’s December 1994 fraud alert establishes specific circumstances which must be met to avoid violating Medicare fraud and abuse statutes. However, the criteria lacks the type of detail needed to create an objective and clear-cut test that a lab can use to gauge individual situations.

Subjective Interpretation

“That subjectivity of interpretation is what opens the door for laboratories and providers willing to take a very loose compliance position,” she added. “It allows them to aggressively pursue business practices in the competitive marketplace that puts laboratories operating from a more conservative compliance policy at a competitive disadvantage.

“I see this effect of the ‘free testing’ policy in my legal practice. I hear from my laboratory and pathology clients regularly on this and other compliance issues, including client billing arrangements and ABNs (Advance Beneficiary Notices). They say ‘if I follow Medicare compliance policies in a strict fashion, my lab finds itself at a significant competitive disadvantage!’ I hear this theme repeatedly,” observed Wood. “What my lab and pathology clients want is simply a level playing field. Because of uneven compliance practices, it doesn’t exist.”

Wood notes that inappropriate use of the “Waiver of Charges to Managed Care Patients” strategy can create legal exposure for a laboratory in several ways. “First, criteria in the December 1994 OIG fraud alert states only that neither the referring physician nor the patient can receive remuneration as a result of this arrangement,” she said.

Compliance Checks

“This establishes one obvious compliance test to use in evaluating individual situations,” continued Wood. “That is to look at whether the physician and/or the patient receives remuneration because the test that was performed was never billed to the payer, the patient, or the physician,” stated Wood. “But remember that CMS and the OIG have not defined remuneration in specific ways that allow laboratories to create a more complete and objective compliance test.

Gauging Remuneration

“Obviously any financial reward paid to the physician for reduced utilization is covered by this fraud alert. Similarly, a co-pay, deductible, or out-of-pocket charge required of the patient that is waived by the laboratory is remuneration covered by the fraud alert,” she noted. “But what about other forms of remuneration? Is there remuneration because the physician’s office does not have to split samples? If the lab waiving charges has an agreement to maintain a phlebotomist in the office, but only so long as it gets all that physician’s lab testing referrals, can that be categorized as remuneration?

“Arguments can be made that these, and similar items, are forms of remuneration that the OIG wants considered with its fraud alert criteria,” added Wood. “After all, they do represent economic value to the referring physician.”

“To date, there has been no specific guidance by either CMS or the OIG regarding this point,” noted Wood. “Nor has there been an enforcement action that has come to public attention. Without that guidance, there are laboratories in the marketplace which stretch the intent of this particular fraud alert and gain competitive advantage over those labs which follow a conservative compliance policy.”

Wood then listed other legal issues which can come into play when a laboratory uses the “free testing” strategy, including: 1) anti-trust violations, 2) anti-discrimination language in managed care contracts between the laboratory and payers; and 3) most-favored nations (MFN) clauses in managed care contracts.

“Arguments can be made that these…are forms of remuneration that the OIG wants considered with its fraud alert criteria,”
added Wood.

“Anti-trust violations can come into play,” stated Wood. “As an example, most-favored nation clauses can become expensive to the lab doing ‘free testing’,” she continued. “If, for example, a payer like Aetna sees a lab- oratory doing free testing for Blue Cross patients, it certainly has the right to demand comparable pricing—free testing in this case—for its patients served by that laboratory.”

In the case of Quest Diagnostics and its use of “free testing” for patients covered by TennCare Select, Wood noted that the legal issues can become more complex. “For example, before entering an agreement to allow Quest Diagnostics to test and not bill for TennCare Select patients, do both Quest Diagnostics and the physician review his/her TennCare contract to identify possible areas of remuneration that would cause that relationship to violate the criteria set forth by the OIG fraud alert?” asked Wood.

“This lack of effective enforcement or compliance
guidance is what causes many of our laboratory and pathology clients to tell me ‘we just want a level playing field.”

“In our healthcare practice at McDonald Hopkins, we often see physician-provider contracts with remuneration clauses that would cause a compliance concern if that physician entered into a “free testing’ agreement with a laboratory.”

Wood also had some observations about the language in the August 28, 2003 letter Quest Diagnostics sent to Tennessee physicians to clarify its status as a laboratory provider for the TennCare Select program. “As I understand the situation, TennCare was asking Quest Diagnostics to be clear with physicians about its status as a contract provider for “included testing” and “excluded testing.”

“A careful reading of this letter indicates that nothing stated was false. But was it misleading? Some would argue that it is, particularly because there is no specific statement that it—Quest Diagnostics Incorporated—is a non-provider for ‘included testing’,” observed Wood.

“It is situations similar to these that strike to the heart of the ‘uneven’ compliance problem that exists within the laboratory industry. If a lab company wants to be honest and forthright, their public and private communications are invariably clear and transparent.

“That is not the case when a lab company wants to push the compliance boundary” she added. “In our law practice, clients bring us correspondence and written materials distributed by competitors with aggressive compliance policies. In such situations, these materials use misrepresentation and carefully-crafted ambiguity as one way to push the limits of compliance. That philosophy permeates their documentation, marketing materials, and sales presentations.”

Feds Need To Change

Without a substantial change in the philosophy of federal healthcare regulators, Wood sees little improvement in today’s uneven Medicare compliance status quo. “Federal enforcement of Medicare and Medicaid fraud compliance tends to be hands-off, unless violations are obviously egregious,” stated Wood. “Thus, when laboratories complain, it seems like no one is listening. It also causes laboratories to stop communicating with federal regulators about practices they see in the marketplace which they consider to be in violation of compliance statutes.”

“This lack of effective enforcement or compliance guidance is what causes many of our laboratory and pathology clients to tell me ‘we just want a level playing field’,” observed Wood. “In general, laboratories or pathology group practices which are owned by pathologists operate with a strong professional philosophy of doing right by the patient. It’s probably an ethic rooted in their training and choice of medicine as a career. But this philosophy of ‘doing right’ also guides their compliance programs, which tend to be conservative and straightforward.

“Unlike medical professional groups, public companies are organized around different business objectives,” continued Wood. “These create different tensions when it comes time to establish compliance programs that may constrain growth or affect profitability.

Compliance Track Record

“Probably the best example of this dichotomy between public healthcare companies and professional medical enterprises is the hospital industry,” offered Wood. “Some for-profit hospital corporations have a much different compliance track record than not-for-profit hospitals. The organizational mission of each explains part of this difference.”

The range of legal issues which can come into play when a laboratory decides to use the “Waiver of Charges to Managed Care Patients” strategy is extensive. In reviewing these issues, Wood has demonstrated that there can be significant risk attached to this strategy.

Uneven Compliance

Wood has also highlighted the problem of uneven compliance. Without more specific and objective guidelines from federal regulators, and in the absence of any high-profile disciplinary action against laboratories which push the Medicare compliance boundary, this uneven playing field will continue.

Maybe one way to change this situation would be for more laboratories and pathology groups to actively call the attention of federal regulators to situations where non-compliant practices may be occurring. At a minimum, that would regularly remind regulators that existing guidelines lack detail and objectivity. At a maximum, it might actually stir useful enforcement action and create the level compliance playing field that most laboratory managers and
pathologists say they prefer.

“Free Testing” Can Affect Usual Charge Calculations

ONE CONSEQUENCE from using “free testing” is the effect it may have on a laboratory’s calculation of “usual and customary” charges under recently-proposed Medicare rules.

“The new formula for determining customary charges requires a laboratory to include the prices it offers to managed care Medicare and Medicaid programs,” stated Jane Pine Wood, Attorney and Partner at McDonald Hopkins.

“The situation in Tennessee where Quest Diagnostics is waiving charges for testing it does on TennCare Select patients illustrates this principle,” she said. “Our reading of the proposed new rules indicates that we would advise our laboratory clients to include the ‘free testing’ specimens into the calculation in situations that have characteristics similar to the Quest–TennCare situation.

“Because such testing is done at no charge, it will have a definite impact on the final calculation of ‘customary and usual charges’ that the proposed guidelines require of laboratories,” observed Wood. “Further, it also represents another negative consequence that results when a laboratory uses this ‘free testing’ strategy in the marketplace.”


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