Catfight in New York Over Lab Supplies Law

New inducement regs trigger maneuvering as labs try to maintain competitive position

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CEO SUMMARY: All labs serving physicians’ offices worry about the delicate balance between complying with laws governing inducement and protecting clients against competing labs who interpret those same laws more liberally. Recent events in New York state graphically demonstrate the compliance dilemma, particularly when regulators are shy about taking enforcement actions against offenders.

FINAL REGULATIONS for implementing the Stark Law became effective in January 2002. Among other things, these regulations provide more detailed guidelines on inducement issues specific to the business relationship between laboratories and their physician-clients.

The major impact of the newly-implemented regulations is that labs can now only provide physicians’ offices with supplies that are used solely for collecting, processing, storing, or transporting laboratory test specimens. Providing “dual use” supplies, such as gloves, band aids, gauze pads, and other common items, would put a laboratory in violation of the Stark Law.

Preparing For Compliance

This is not news to the laboratory industry, which has closely monitored the actions of federal regulators in crafting these new laws. In fact, at least two state laboratory trade associations, in California and New York, anticipated these guidelines and took efforts prior to January 1 to prepare laboratories for compliance with these new laws.

However, in New York state, laboratories found themselves embroiled in a catfight over when individual labs would begin compliance. Because it was expected that physicians would react negatively to the loss of supplies such as sterile gloves, speculums, and other items, labs were maneuvering to avoid losing business if their compliance was not matched by competing laboratories.

The fear was that labs first to comply would be at a competitive disadvantage. Their physician-clients, irate at losing supplies traditionally provided by clinical labs, might switch to a competing lab which was either delaying its compliance—or viewed the new regs with a more liberal interpretation.

There was another compliance factor in New York that intensified the situation. On December 26, 2001, revisions to the Laboratory Business Practices regulations and the Health Care Practitioner Referral regulations became law. These detailed new regulations described what lab activities would be considered inducement and addressed the specifics of how a lab may legally create a patient service center (PSC) in a physician’s office.

Supported By Lab Industry

These changes had been supported by the New York State Clinical Laboratory Association (NYSCLA). They were intended to eliminate ambiguities in the regulations and create a level playing field for all laboratories competing in the state.

The law took effect on December 26, 2001 and allowed a 60-day grace (until February 25, 2002) “in which equipment and supplies in the practitioners’ possession on December 26, 2001 must be returned by the practitioners; purchased by the practitioner at a price consistent with fair market value; or reclaimed by the laboratory.” There was a parallel 60-day grace period to bring PSCs into compliance or terminate their operation.

These new laws, both state and federal, represent a major change in the long-standing business practices between clinical laboratories and their physician-clients. There was justified trepidation among labs in New York that physicians would react most strongly to the loss of these types of supplies. Thus, laboratories first to comply with the law might find themselves singled out for criticism by some physicians.

Compliance Dilemma

In fact, the situation in New York state perfectly illustrates the “dual dilemma” that has constantly challenged laboratories over the last 15 years. First, is the lab properly complying with laws and regulations? Or can its business actions place it at risk of enforcement action?

Second, how does the lab maintain compliance and retain its client base when competing labs may not be complying—or take a liberal view of what compliance requires?

Not surprisingly, the implementation of new compliance requirements by labs in New York turned into a royal catfight. Whether intentional or not, decisions by Quest Diagnostics Incorporated as to when it would implement compliance made it a lightening rod in the developing controversy.

In January 2002, Quest Diagnostics issued a letter to its physicians announcing that it would begin complying with the new laws on March 15, 2002. (See sidebar at right.) Meanwhile, during the first eight weeks of 2002, executives from Quest’s Philadelphia area offices called lab competitors in New York. In general, the caller wanted to ask about how and when the lab intended to comply with the new laws, and to inform the lab that Quest Diagnostics would notify the New York State Department of Health (NYDH) about instances of non-compliance by competing laboratories.

Controversial Actions

Not surprisingly, these actions were viewed as controversial by competitors. On the surface, here was Quest Diagnostics picking its own implementation date—March 15—contrary to the specific directives of the Department of Health and also “threatening” to turn in labs which were not in compliance.

To defuse the growing controversy, NYDH had its Associate Director for Regulatory Affairs, Betty Kusel, speak in early March at a regularly-scheduled NYSCLA meeting. Kusel, in a testy mood, declared that the law clearly stated compliance was to have begun on December 26, 2002 and any labs not complying with this law would be subject to immediate enforcement action by NYDH. She also noted that NYDH had sent Quest Diagnostics a letter in February to note deficiencies in Quest’s compliance with the December 26 trigger date and request compliance with same.

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Labs Finally Get Serious

Following this meeting, most labs in New York began to seriously implement the new regulations. Consequently, it was only in recent weeks, on a wide scale, that the flow of lab supplies into physicians’ offices has begun to dry up. It is thus too early to gauge the true impact of these new laws, since only a small number of physicians have protested the loss of supplies with their laboratory or the NYDH.

For the collective lab industry, New York’s experience teaches an important lesson. A tenuous balance continues to exist. On one side are the pressures to run a tight compliance program. On the other side is the need for a lab to continually protect its clients from competing labs which may either blatantly violate the law or simply have a more liberal interpretation.

In numerous interviews with lab executives from New York, attorneys, and other involved parties, THE DARK REPORT believes it is likely Quest Diagnostics Incorporated was trying to take a lead role in implementing compliance by publicly declaring an implementation date (its January 2002 letter to physicians with a March 15 target), thus signaling its plans to other laboratories. This was followed by discreet contacts with competing labs to verify that industry-wide compliance would occur at or around that date.

No lab executive or pathologist would be surprised at the catfight which resulted as New York’s labs jockied to comply with the new law in such as way as to not anger their physician-clients.

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