Lawyers Provide Insights About Top Legal Concerns

Legal experts comment on laboratory industry’s top legal, compliance, and managed care issues

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CEO SUMMARY: After conducting the first-ever survey of the most important legal, compliance and managed care concerns for clinical labs and pathology groups, THE DARK REPORT asked leading lab industry attorneys who participated in the survey to say a few words about these topics. Here are useful nuggets of wisdom, advice, and insights about the specific concerns identified by the survey. Along with such new legal concerns as RAC audits and ACOs, the perennial issue of lab test sales and marketing compliance is addressed.

LAWYERS WHO PARTICIPATED in the survey of the laboratory industry’s top legal, compliance, and managed care issues were asked to provide clients and readers of THE DARK REPORT with some insights about each of the priorities identified by the survey. (See pages 3-4.)

Be Ready for RAC Audits

Legal issue number one is the Medicare RAC (recovery audit contractor) audit program. Patric Hooper, a partner in the firm of Hooper Lundy & Bookman, in Los Angeles, advised that laboratories facing allegations of overpayments should file a challenge. “That’s because RAC auditors often fail to support their allegations when labs challenge them,” he explained.

“Remember, RAC auditors get paid a percentage of the fines they impose on labs and other healthcare providers,” added Hooper. “This form of payment could create problems because it potentially could interfere with the auditor’s judgment. It gives them the incentive to identify a Medicare overcharge or undercharge that might not be there.

“With RAC auditors, as is true of any audit by a federal or state agency, the most important issue is to act quickly when a letter arrives from the auditor,” he emphasized. “This advice seems elementary but it is often ignored because these letters first go to a clerk or some other worker in your lab- oratory who may not recognize its importance. Make sure the letter gets to someone who is conscientious about responding to the letter.

“At this early stage, it’s best to get a lawyer involved to help the lab prepare an appropriate response,” he commented. “Sometimes labs don’t respond appropriately because that job gets pushed to lower-level staff.

“During this initial stage, it’s important to provide the RAC with all of the records that the lab has for that particular test and patient,” Hooper said. “The lab also should ensure that it collects all the progress notes or other medical records from the ordering physicians to support the case for why the lab performed that test on that patient.” (Contact Patric Hooper at 310-551-8165 or at phooper@health-law.com.)

Preparing for Age of ACOs

Accountable Care Organizations (ACO) are a new priority. Peter M. Kazon, a lawyer with Alston & Bird, LLP, in Washington, D.C., said clinical labs and pathology groups must be prepared to make appropriate decisions any time their lab organization is asked to participate in an ACO.

“A good starting point is for pathologists and laboratory administrators to review the proposed ACO rule that federal officials issued in April,” observed Kazon. “The point of an ACO is to build in quality indicators and then allow others to assess and pay for its delivery of quality healthcare.

“Only certain entities are eligible to form ACOs,” added Kazon. “Primarily these entities are hospitals and physician groups. Labs are not specifically mentioned as being eligible to establish an ACO. But if there is an ACO in the lab’s city, town, or region, then the labs could participate with those entities.

“In addition, few people recognize that—at least at this point—ACOs will not involve some kind of bundled payment system,” he explained. “All of the players in the ACO will continue to bill and get paid just as they would normally. Physicians will be paid under the physician fee schedule, hospitals under diagnosis-related groups, and labs under the clinical laboratory fee schedule.

“But at the end of each year, officials from the federal Centers for Medicare & Medicaid Services (CMS) will look at whether Medicare spent less money on each ACO patient than was spent in the previous year,” he said.

“For labs, the questions regarding ACOs relate to whether the hospitals in your market that are involved with forming ACOs have their own labs,” Kazon warned. “If they do, then the hospital lab is likely to participate in the ACO. Independent labs will want to meet with those providers developing the ACO to make their case for doing a better job than the incumbent hospital lab is doing.

“Being part of an ACO is a good role for labs because so much of what ACOs do will be data driven,” he added. “This is an opportunity for labs because labs have data to help physicians and hospitals monitor and track patients and take care of them from a preventive care standpoint before costs get too high.” (Contact Peter M. Kazon at 202-239-3334 or peter.kazon@alston.com.)

Incentives for EHR Adoption

The next legal priority identified in the survey is the adoption of EHR (electronic health record systems) by hospitals and physicians. There are donor requirements and meaningful use criteria that participating providers must meet.

Rick L. Hindmand, an attorney with McDonald Hopkins in Chicago, Illinois, advised that labs must take specific steps to ensure that they comply with the rules governing incentives for electronic health record systems.

“Sometimes a physician group may approach a clinical lab about the possibility of having that lab provide financial assistance for the group to buy the EHR software and the hardware systems needed to run that software,” warned Hindmand. “In that situation, the laboratory should be very careful about how it responds to such a request. Federal rules prohibit inducement to send test volume from that physician group to the laboratory in return for this financial assistance.

“The principal concern in these cases would be the Stark Law, which applies to Medicare, and the Anti-kickback Statute, which applies to Medicare, Medicaid, and other federal healthcare programs,” he said. “In some cases, the lab can reimburse 85% of the cost of the EHR and the physician group would pay the remaining 15%.

“This arrangement needs to be set forth in writing and carefully structured to satisfy both the Stark Law exception and the anti- kickback safe harbor for donations of EHR software, information technology and training,” said Hindmand. “These standards will not be satisfied if the physician group makes the donation a condition for doing business with the lab, or if eligibility for the donation is determined based on the volume or value of referrals or other business generated between the parties.

“In addition, the lab must ensure that the system meets the requirements for meaningful use (MU),” Hindmand stated. “Physicians who want to get additional Medicare or Medicaid reimbursement for installing EHR systems must meet these specific MU rules.” (Contact Rick L. Hindmand at 312-280-0111, x 3215, or rhindmand@mcdonaldhopkins.com.)

Molecular Test Cover

Big changes are ahead for molecular test coverage and reimbursement, another priority issue identified by THE DARK REPORT’S survey. “When laboratories that are out-of-network submit claims for molecular and genetic tests, the laboratories face certain customer service and com- pliance issues stemming from the out-of-network balances owed by the patients,” noted Jane Pine Wood, an attorney with McDonald Hopkins.

“This is a recurrent problem when an out-of-network lab submits a claim for expensive molecular and genetic testing to the health insurance plan,” she said. “Often the payer prefers that the tests be performed by one of the major national labs because the national labs have preferred arrangements with that payer.

“In these instances, how the out-of- network laboratory handles any patient co- pays or deductibles can trigger compliance concerns,” continued Wood. “Take the example of the patient who has very high-end testing ordered by a physician. If the lab is in-network, the patient’s regular coverage might have a $200 deductible and 20% coinsurance. But if the lab that performs these test is out-of-network, the patient might have a $1,000 deductible and a 40% coinsurance for a $2,000 test.

“That is a big dollar difference for the patient,” emphasized Wood. “In this case, the patient may not be able to afford to pay that bill. It is also a situation where the out- of-network lab may be inclined to waive those charges, but doing so is tricky because of the legal issues involved.

“In this instance, the lab should at least treat the patient as if he or she were in-network, but I cannot guarantee that doing so is 100% compliant with the law,” said Wood. “It is also important to note that patient balances should never be waived for beneficiaries of government health plans, except for cases of financial hardship.”

Wood explained how, from a claims submission standpoint, that policy can be problematic for the lab that does the test. “Let’s assume that the patient has a 20% in- network coinsurance and a 40% out-of- network coinsurance” she stated. “The laboratory is out-of-network and it bills $100 to the payer for a $100 test.

“Such a scenario opens up a compliance risk for the laboratory,” she added. “Let me explain. If this laboratory had agreed in advance to treat the patient as in-network, it then bills the payer for the in-network price of $100.

“The payer reimburses the out-of- network lab at $60 (with the patient making up the 40% difference with his/her co-pay),” said Wood. “But this lab will only bill the patient for $20, which is the in-network deductible that was agreed to in advance.

“However, this gives the lab a total reimbursement of $80,” she noted. “In this instance, the payer could argue that the lab submitted a false claim of $100, when it really should have been $80, because that’s all the lab expected to receive.

“In daily practice, payers do not often get upset about this unless: a) it has contracted with a preferred laboratory for lower rates; or b) the out-of-network laboratory is proactively advertising its waiver policy. But this example shows why labs still need to be careful about billing in these situations,” she added. (Contact Jane Pine Wood at 508-385-5227 or jwood@mcdonaldhopkins.com.)

Lab-Developed Tests (LDT)

Another priority issue of concern to clinical laboratories and pathology groups involves laboratory-developed tests (LDT). Hope S. Foster, a lawyer with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo LLP, in Washington, D.C., explained that the FDA has announced that it will exercise more regulatory authority over LDTs very soon.

“For many years, the FDA has had the authority under the Device Amendment to regulate the use of LDTs,” said Foster. “But the FDA has exercised its discretion not to do so. Thus, while labs have been subject to the validation requirements of CLIA, their LDTs have not been subject to FDA clearance or regulation.

“The entire lab industry is closely watching how the FDA answers two questions,” she stated. “First, what is an LDT? Second, how will labs be allowed to market, promote, and bill for LDTs?

“The lab industry is closely watching what the FDA does with regard to LDTs because so many tests that labs perform are LDTs, and they have been an important vehicle for advancement and innovation,” Foster said, adding that “the general feeling is that the FDA is likely to transition into regulating LDTs, starting with those that test for disease states that carry the greatest risks for patients, such as cancer and other potentially life-threatening illnesses.

“For labs, this means they should absolutely follow the CLIA validation rules because, if they are out of compliance with CLIA, they could have a major regulatory problem,” she said. “Also, laboratories need to ensure that when they market an LDT, they do so in conformance with the actual clinical performance of that test.”

In the meantime, until it is clear what the FDA will do, “labs should absolutely follow the CLIA validation rules because, if they are out of compliance with CLIA, they could have a major regulatory problem,” she said. “Also, laboratories should be sure that they understand which tests are actually LDTs and which are not, because tests that do not qualify as LDTs do require FDA clearance. Finally, labs should get legal advice with regard to how they market and bill for these tests.” (Contact Hope Foster at 202-661-8758 or HSFoster@mintz.com.)

Boosting Lab-Test Sales

It will be no surprise to most pathologists and clinical laboratory administrators that THE DARK REPORT’S survey of lab industry attorneys identified legal and compliance issues involving the sales and marketing of laboratory tests as a priority concern.

“When it comes to how labs market and sell lab tests, there is a large body of law and many regulations that govern this activity,” stated Richard S. Cooper, attorney and Manager of the National Healthcare Practice Group at McDonald Hopkins. “Labs run at great risk if they do not understand the appropriate federal and state laws that apply to how a clinical lab or pathology group can market and sell lab tests to providers.

“I recommend that every laboratory, with the help of its legal counsel, develop formal guidelines for sales and marketing activities; conduct and document education of personnel on such guidelines; and do an ongoing review of its sales and marketing practices against any new laws, regulations, or regulatory guidance,” urged Cooper. “Laboratory test sales and marketing is full of legal pitfalls and regulatory landmines for the unaware laboratory. That is why regular due diligence should be a baseline for compliance.” (Contact Rick Cooper at 216-348-5438 or rcooper@mcdonaldhopkins.com.)

Special Report Coming Soon

THE DARK REPORT is working with these six attorneys to produce a Special Report of the Top Lab Industry Legal, Compliance, and Managed Care Issues for 2011 and 2012. (See the list on page 4.)

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