Rural Hospital Group Says Lab Billing Model Is Legal

70/30 rule exemption governs billing, says President of National Alliance of Regional Hospitals

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CEO SUMMARY: In recent years, many rural hospitals have entered into agreements to expand their laboratory outreach businesses. In an interview, the president of the National Association of Rural Hospitals said rural hospitals often bill for lab outreach services under Medicare’s 70/30 shell rule. This rule, as modified by the Omnibus Budget Reconciliation Act of 1989, specifically allows rural hospitals to bill for outreach, the NARH executive explained.

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.

How outsized? Writing for Modern Healthcare, Tara Bannow 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, either 2016 or 2017.

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, Bannow wrote. The data came from an analysis by Modern Healthcare Metrics and the analytics firm Franklin Trust Ratings, she added.

“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,” Bannow reported.

Such 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 thousands of miles away from the hospital billing for these tests.

Pass-Through Billing

Critics point 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 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. NARH is in Tallahassee, Fla.

THE DARK REPORT sought to interview Jorge Perez, the Chairman of NARH and CEO of EmpowerHMS, a subsidiary of the Empower Group, of Miami, Fla.

EmpowerHMS, in Kansas City, Mo., acquires and manages rural and critical access hospitals. During a conference call for this interview, Murtha said Perez could not join the call. Instead, Murtha explained the association’s response to assertions that critics have made about the billing practices of some rural hospitals.

“The lab outreach business model for rural hospitals is a good fit because 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.” Murtha further noted, however, that rural hospitals are not limited in their use of reference labs because Medicare has what he called the 70/30 rule.

Missouri Company Acquires, Manages Rural Hospitals

IN FEBRUARY, THE EMPOWER GROUP of Miami, Fla., said it planned to continue to acquire and manage rural and critical access hospitals through its subsidiary EmpowerHMS of Kansas City, Mo.

In a press release, EmpowerHMS said it sought, “… to identify, assess, and take over operations of distressed hospitals across the United States in order to avert their closure. The current number in Empower’s network is nearing 20 and growing.” At the time, EmpowerHMS said it was a leader in the healthcare billing and coding industry.

In the announcement, EmpowerHMS quoted CEO Jorge Perez explaining the company’s model as follows: “We have expanded in numerous areas that were unheard of in a rural hospital setting. As an example, all our facilities have a three-day detox to attack the opioid crisis, we have a common cardiology program that is doing life-saving procedures, and we have lab programs that serve the local clinics and physicians’ offices.”

Health insurers, government officials, and competitors have challenged what EmpowerHMS calls its “disruptive innovation” for rural hospitals.

In the same release, EmpowerHMS quoted Dylan Gauldin, Empower’s general counsel, saying, “People are used to identifying rural hospitals with failure and don’t readily accept anything that veers from that path. However, the transparency and controls we have invested in go beyond all benchmarks.” To this comment, Perez added, “Without compliance, there is no sustainability.”

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.

“There were several reasons for this exemption, not the least of which is the fact that it costs money to start a lab outreach program,” explained Murtha. “To start lab outreach programs, hospitals needed up-front revenue to buy equipment for these programs.

“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.

“What’s troubling about how insurers act is that the administrators in rural hospitals know that these facilities are dying all over the country,” he said. “And they can’t save these hospitals without strong cash flow. The technology that’s necessary to run a hospital today, the licensure, and the premiums for liability insurance are just unbearable for rural hospitals. You just cannot make money on it.”

Rural Hospitals Struggle To Survive Financially

IT’S NO SECRET THAT RURAL HOSPITALS are struggling financially. 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.

Contact Michael Murtha at 352-222-0000 or


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