Lab Scheme Recruits Hospitals To Bill as In-Network Providers

Federal, state laws implicated in hOpD and MSO arrangements

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CEO SUMMARY: Management companies using a new generation of potentially fraudulent schemes are targeting hospitals and health systems for arrangements that use questionable means to increase lab test volume and revenue. The management companies often use the term “hospital outpatient department (HOPD) billing model” to describe these arrangements. The scammers want the hospitals, as in-network providers, to bill for lab tests performed at their labs. Most often, these labs perform toxicology, pharmacogenomics, pain management, genetic, and specialty cardiology testing.

MOSTLY UNNOTICED, new and complex billing scams are spreading through the clinical lab industry and costing the Medicare program and private health insurers billions of dollars. Until now, this trend has not been reported widely either in the general or lab industry media.

In this latest generation of abuse, scammers are targeting hospitals and health systems that typically are in-network for the largest health insurers. Management companies engaged in these activities seek agreements with hospitals and health systems so that their associated physicians can refer lab tests to these facilities and then the hospitals and health systems can bill payers as in-network providers for toxicology, pain management, pharmacogenomics, molecular diagnostics, genetic, and specialty cardiology testing. The hospitals or health systems then will split the revenue with the management companies.

Healthcare attorneys familiar with these arrangements say they are the newest variation on pass-through billing schemes, long-recognized as possibly fraudulent under federal and state laws.

Using sophisticated arrangements, the management companies make it difficult for Medicare and private health insurers to recognize that these increased outpatient lab test claims may involve medically-unnecessary or clinically-worthless lab tests.

In an investigation into these schemes, THE DARK REPORT has learned that the management companies promoting this pass-through billing scheme have several commonalities. First, they are designed to defraud private health insurers and the Medicare program, and second, they involve sending inflated bills to patients to increase lab revenue. Third, many of the patients give blood or other specimens for lab tests that are not needed or have little or no clinical utility. Then, the patients are billed several hundreds to thousands of dollars for these tests.

Fourth, under most of these schemes, many of the management companies use inducements, kickbacks, or bribes to get physicians to order a substantial number of tests that are unnecessary, clinically inappropriate for patients, or have no clinical utility.

History shows that plenty of doctors are willing to participate in fraudulent schemes involving lab tests. In fact, these scams cannot exist unless physicians order large numbers of useless laboratory tests.

These new forms of abuse involve three separate levels of activity that could be illegal. First, physicians must be willing to order outpatient lab tests that are unneeded or clinically useless. Without such orders, this type of fraud cannot exist.

Second, the lab management company submits its lab claims to private health insurers and Medicare. If payers do not reimburse the companies for these outpatient lab test claims, the fraudulent scheme fails and the management companies go out of business.

$21,500 Test Bill For Patient

Third, the management companies recognize that payers will deny a substantial portion of their lab test claims. To generate revenue, the management companies bill patients for amounts ranging from hundreds to many thousands of dollars. THE DARK REPORT has reviewed one patient’s explanation of benefits that showed $21,500 for such lab testing.

To date, there is no evidence that the federal Department of Justice or state attorneys general have recognized these developments and started enforcement actions. Private insurers have filed several lawsuits accusing management companies, toxicology lab companies, and some hospitals of submitting fraudulent lab test claims. Some of these lawsuits were dismissed during pre-trial motions and others are ongoing.

In THE DARK REPORT’S investigation, we have found that these management companies use two arrangements to perpetuate this fraud on hospitals, health systems, clinical labs, and patients: management service organizations (MSOs) and hospital outpatient department (HOPD) billing models.

To be clear, THE DARK REPORT is not suggesting that every MSO or HOPD is committing fraud. But our investigation to date shows that these vehicles are increasingly being used in schemes that more than one payer has alleged are fraudulent, and that healthcare attorneys we have consulted believe may violate multiple state and federal laws.

The scammers may use MSOs to induce physicians to refer patient specimens to their participating laboratory companies, typically labs performing toxicology, pain management, pharmacogenomic, cardiology, and genetic tests.

Often, these MSOs are organized to allow physicians to refer to the MSO almost any type of medical service, such as radiology or imaging services, physical therapy, electrocardiograms, or lab tests.

In these arrangements, the MSOs send the patient referrals from participating physicians to their affiliated lab companies or other providers.

The MSOs also send money back to the referring physicians in a way that can trigger violations of federal and state laws.

Billing In-Network Rates

The management companies use HOPDs to lure hospitals and health systems into agreements for lab testing and billing and collections arrangements. The management companies enlist in-network hospitals or health systems to bill health insurers at in-network rates.

The management companies solicit lab administrators of hospitals and health systems about entering into HOPD agreements so that the hospital can bill health insurers for the management companies’ lab tests. The management companies want hospitals and health systems to agree to the following:

• Accept lab specimens from the management companies’ associated physicians.

• Accession these specimens and perform the routine tests, using their automated chemistry analyzers and other equipment while referring other lab specimens to the management companies.

• Bill for all lab tests using their provider numbers and in-network managed care contract rates, regardless of whether it was the hospital lab or the management company that performed the test.

Oversight of Sales Reps

Typically, the management company does the sales and marketing to referring physicians. That means the hospital or health system has little control or oversight into whether the management companies’ sales representatives comply with state and federal laws, particularly the anti-kickback statute.

The HOPD agreements reviewed to date mention that these arrangements comply with state and federal laws and regulations. The management companies also offer legal opinions to the hospital and health system administrators that explain how the proposed agreements comply with existing law.

As part of its investigation into the use of these HOPDs and MSOs to defraud private and public payers, THE DARK REPORT interviewed attorneys who recognized that the HOPD scheme—which requires the hospital to submit claims to payers for lab tests the management company performs—is a variant of a fraud scheme known as pass-through billing.

Five Types Of Federal Law

The attorneys identified five types of federal or state laws that these HOPD agreements could violate, including:

  • The False Claims Act.
  • The Anti-Kickback Statute (if the hospital or laboratory might be receiving referrals in return for remuneration that reflects the volume and value of referrals. There is no safe harbor if the hospital and the management company are doing a percentage split.)
  • The Stark Law (if the hospital or laboratory is physician owned.)
  • The shell lab rule.
  • Laws in certain states that cover such activities as fee-splitting, anti-kickback, fraud and abuse, as well as anti-markup.

HOPD Agreements

Private health insurers have targeted HOPD agreements involving a hospital and a management company for civil actions in state courts. When a hospital has managed care contracts, several prohibitions may be part of these contracts. They include:

  • Exclusivity of services by payer-credentialed healthcare entities.
  • Anti-assignment language.
  • Limitations on billing for referred services.

There are multiple ways that these HOPD arrangements involving management companies, hospitals, or health systems can violate federal and state laws. Similarly, the hospital’s participation in these lab test outreach schemes can put its contracts with health insurers at risk for multiple reasons. One example is the lawsuit filed by Blue Cross Blue Shield of Mississippi against Sharkey-Issaquena Community Hospital and four toxicology lab companies.

Rural, Smaller Hospitals

Another lawsuit that garnered national headlines and alleges fraud involving lab tests is United Healthcare Services Inc. and UnitedHealthcare Insurance Company vs. Next Health LLC, United Toxicology LLC, Medicus Laboratories LLC, US Toxicology LLC, American Laboratories Group LLC, Erik Bugen and Kirk Zajac.

Filed on Jan. 26, 2017, the insurer describes the fraud as involving $100 million. In court documents, UnitedHealth claims that, between 2011 and mid-2016, Next Health and subsidiaries submitted false claims and engaged in false and fraudulent conduct.

UnitedHealth alleges that, Next Health et al relied on kickbacks to generate test requests; Next Health et al performed unauthorized testing services; Next Health et al had standing orders for “custom” profiles and confirmation testing; Next Health et al billed for services performed by another provider; and, Next Health et al waived all patient responsibility.

Many Hospitals Approached

How common are these HOPD arrangements between management companies and hospitals? Many pathologists and lab administrators working in hospitals and health systems tell THE DARK REPORT that sales representatives have approached their institutions to pitch these schemes. Additional evidence of the prevalence of these schemes comes from recent lab conferences. When asked if hospitals have been approached about entering into an HOPD agreements, many hospital lab officials have raised their hands.

THE DARK REPORT predicts that these new forms of fraud involving laboratory testing will reach into the multiple billion dollar range and could dwarf the $2 billion the federal government collected from labs in the 1990s as a result of its LabScam investigations.

Current HOPD Scheme is Classic ‘Pass-Through’ Billing Arrangement Involving Hospital, Lab Firm

A New Form of Possible Lab Test Abuse: Hospital Outpatient Diagnostics (HOPD)

DIFFERENT FORMS OF HEALTHCARE FRAUD AND ABUSE involving “pass-through billing” arrangements have been around for decades. What is new today is the scheme that some scammers present as an HOPD agreement—hospital outpatient diagnostics—whereby the hospital bills for outreach lab tests performed by the lab management company’s lab facility.

For a lab management company, the HOPD scheme is a way to have the hospital use its NPI number and its managed care contracts to bill for lab tests performed in its lab. Attorneys familiar with healthcare law point out that such HOPD schemes have the potential to violate a number of federal and state laws, as well as to be violations of the hospital’s contracts with health insurers.

There is another important element to the HOPD scheme that is required for the lab management company to produce revenue. It must originate a substantial volume of lab test orders. To do this, many of the lab management companies are developing clever ways to induce the physicians to order lab tests. One way is the use of medical service organizations (MSOs). In some versions of the MSO, physicians hold ownership shares and are paid remuneration (such as profit-sharing, dividends, etc.) proportional to the volume of lab test specimens they referred to the MSO. This has the potential to violate anti-kickback and Stark referral laws.

Mississippi Blue’s Lawsuit Describes Hospital Lab ‘Pass-Through’ Scheme with Toxicology Labs

ONE HEALTH INSURER THAT HAS SUED an alleged fraudulent HOPD arrangement is Blue Cross Blue Shield of Mississippi. In a case filed May 4 in the U.S. District Court for the Southern District of Mississippi, BCBS named as defendants a small community hospital and four toxicology laboratories, among others. (See TDR, June 5, 2017.)

At the time, TDR said the case could mark a turning point in payers’ willingness to take legal action against entities that submit lab test claims based on potentially fraudulent business arrangements.

Hospital, Tox Labs Sued

In the lawsuit, BCBS named as defendants Sharkey-Issaquena Community Hospital, a 29-bed hospital in Rolling Fork, Miss., a town with a population of 2,500. The other defendants were: Sun Clinical Laboratory, Mission Toxicology Management Company, Mission Toxicology, Mission Toxicology II, and 10 unnamed “John Does.”

In court documents, BCBS charged the hospital and the labs with breach of contract, fraud, civil conspiracy, negligent misrepresentation, and unjust enrichment. The lawsuit said that, “between February and May 2017, the hospital submitted to the insurer claims totaling in excess of $33.8 million. Of that, Blue Cross has paid out more than $9.8 million. Claims submitted, but which the plaintiff contends are misrepresented, thus not covered, amount to over $24 million.

The suit alleged that, “since February 2017, claims were submitted to Blue Cross for payment for laboratory services that: 1) purported to have been performed at and by the hospital; 2) were not ordered by a licensed health professional with appropriate staff privileges at the hospital; and, 3) were not performed at the hospital in Rolling Fork, Miss.”

According to the lawsuit, in January 1995, BCBS contracted with the hospital to provide “hospital services which are medically necessary when such services are ordered by a licensed physician or other licensed health professional who has appropriate staff privileges at [the] hospital.” In the lawsuit, BCBS alleged that the physicians who submitted lab tests to the community hospital were not affiliated with the hospital.

At the core of this lawsuit is the allegation of “pass-through billing,” whereby the hospital—although it did not perform the outreach lab tests that were run in laboratories of the other defendants—billed BCBS of Mississippi for all the lab tests.

Rural, Smaller Hospitals

In the court documents, Blue Cross described how its initial investigation revealed that, under the “arrangement” between the hospital and Sun and the Mission companies, orders for laboratory services were submitted to Sun Clinical Laboratory, Hermann Drive Surgical Hospital, Houston, TX, CLIA #45D2027576 and Mission Toxicology, 2145 NW Military Hwy #102, San Antonio, TX, CLIA #45D2071649.

The court documents further stated that the lab test results were submitted to the providers who ordered the tests on forms with Mission Toxicology or Sun Clinical Laboratory logos—but with the hospital’s CLIA number and Mississippi address and with a Texas phone number.

Defendants have filed a motion to dismiss the BlueCross complaint and that motion is still being briefed.

As described in the lawsuit, this is one way that the lab management companies use the HOPD agreement so that the hospital’s NPI number and managed care contracts are used to bill payers as an in-network provider for lab tests that were performed at the lab management company’s facilities.


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