Attorney Explains 70/30 Rule, Pass-Through Bill Arrangements

Lab outreach billing strategies used by some rural hospitals need to meet compliance laws

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HOW THE LAB OUTREACH BUSINESSES of rural hospitals originate lab specimens and bill for lab tests is getting increased scrutiny. The reason for this rise in interest is that a growing number of rural hospitals are generating almost as much revenue from laboratory outreach testing as they get from all other inpatient services.

Most rural hospitals that have business contracts with third parties—including lab companies—to build their lab outreach revenues, rely on two billing and collections strategies. They are pass-through billing and an exception from the Medicare 70/30 shell lab rule.

To address any potential confusion about these strategies, THE DARK REPORT asked Jeffrey J. Sherrin of the law firm of O’Connell and Aronowitz, PC, in Albany, N.Y., to explain the legal implications of each one.

“Medicare’s 70/30 rule basically means that, if lab A refers out more than 30% of its testing, it cannot bill Medicare for work that it refers out,” he wrote via email. “Lab A can always bill Medicare for work that it does itself.

“What we generally mean when we use the term ‘pass-through billing’ is that when a specimen comes into Lab B, and Lab B does the testing, it cuts a deal with Lab A because Lab B is not in network,” Sherrin explained. “Lab A bills for the test as if it had done the work, gets paid for that test, and then shares the revenue with Lab B.

“In this case, Lab A never made a referral, so the 70/30 rule is not applicable,” he added.  “My understanding, therefore, is that the 70/30 rule has nothing to do with pass-through billing. If the hospital actually got the specimen and referred it out—such as it might with an inpatient specimen—that is not what is typically referred to as pass-through billing.”

Are Rural Hospitals Exempt?

Sherrin also addressed the issue of whether rural hospitals have an exemption under the 70/30 rule. “While federal law includes an exemption of rural hospital labs from the 70/30 shell lab rule, it is not an exemption from the risk that what we call ‘pass-through billing’ may be a false claim,” he wrote. “There has to be a true referral from the rural hospital lab to the reference lab.

“Another point to consider is that the 70/30 rule is for Medicare billing, but it does not apply to work for commercial health insurers,” explained Sherrin. “For lab test referrals made to commercial health insurers, and whether the 70/30 threshold is met, the rule limits only what the referring lab can bill to Medicare,” explained Sherrin. “Labs [and rural hospitals] using the pass-through billing practice may be attempting to circumvent the network contracts of commercial payers.

“When the testing lab is out-of-network, it wants to use the in-network and possibly rural hospital lab so that it can get paid, or perhaps get paid at a higher rate.

“In addition, it is unlikely that commercial payer contracts have 70/30 rules,” he said. “Rather, commercial payers usually say that a lab cannot refer out to another lab if the reference lab is not in network.”

Sherrin said the applicable law comes from 42 U.S.C.S. §13951 as follows:

“In the case of a bill or request for payment for a clinical diagnostic laboratory test for which payment may otherwise be made under this part [42 USCS §§ 1395j et seq.] on an assignment-related basis or under a provider agreement under section 1866 [42 USCS § 1395cc], payment may be made only to the person or entity which performed or supervised the performance of such test; except that—

(i) if a physician performed or supervised the performance of such test, payment may be made to another physician with whom he shares his practice.

(ii) in the case of a test performed at the request of a laboratory by another laboratory, payment may be made to the referring laboratory but only if—

(I)  the referring laboratory is located in, or is part of, a rural hospital,

(II)  the referring laboratory is wholly owned by the entity performing such test, the referring laboratory wholly owns the entity performing such test, or both the referring laboratory and the entity performing such test are wholly-owned by a third entity, or

(III) not more than 30% of the clinical diagnostic laboratory tests for which such referring laboratory (but not including a laboratory described in subclause (II))[,] receives requests for testing during the year in which the test is performed[,] are performed by another laboratory… ”

Health Insurers Seek End to Pass-Thru Lab Billing

IN RESPONSE TO INCREASED REPORTS that clinical laboratory companies were using pass-through billing, some of the nation’s largest health insurers have sought to end the practice.

In April, UnitedHealthcare and Anthem filed court documents in cases they have filed against lab testing companies that use pass-through-billing arrangements in ways the insurers charge are fraudulent.

On April 19, Blue Cross and Blue Shield of Georgia and 24 health insurers and other companies affiliated with Anthem filed suit against a lab company and others, saying the defendants engaged in a scheme to bill for laboratory services that were fraudulent. (See TDR May 7, 2018.)

On April 18, UnitedHealthcare Insurance filed a lawsuit against five individuals and three lab companies saying the defendants illegally induced requests for lab testing services and used financially-struggling rural hospitals as fronts to conceal the identity of the lab companies that actually performed the testing services.

Last year, Aetna said it would deny pass-through billing for most lab charges from a facility or a non-facility provider. The policy went into effect on October 1. “The provider that performs the tests must bill for these services,” Aetna said. “We’ll pay for pass-through billing during an inpatient hospital admission. We’ll also pay facilities for pass-through billing for members receiving outpatient services at the facility when the specimen collection occurs at the facility on the same day as other services.”

Contact Jeffrey Sherrin at 518-462-5601 or


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