Attorney Says Labs Face Increased Legal Liability

New lab test referral arrangements and innovative pricing practices can be problematic

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CEO SUMMARY: For many reasons, including cuts to lab test prices that health insurers pay, narrow networks, and more competition for lab test referrals, a significant number of lab companies are seeking ways to increase market share. These methods include the use of new laboratory test arrangements and innovative strategies for pricing lab tests. But an experienced lab industry attorney says that both of these areas can create problems for unwary laboratories.

CLINICAL LABORATORIES face increased risk of rigorous payer audits, legal actions, and more rigorous federal and state regulatory enforcement.

As clinical labs have taken on increased risks, so too have health insurers exerted more scrutiny over lab operations. Most labs are familiar with the pitfalls of developing new test offerings, expanding test menus, or entering new markets. As competition increases and payers shrink networks and reduce lab test prices, however, labs must consider how to reduce the effect of aggressive healthcare reforms and payment structures.

If improperly implemented, popular approaches—such as laboratory referral programs and pricing policies—can create added risk for labs. In a recent webinar for THE DARK REPORT, attorney Jeffrey Sherrin President of the O’Connell & Aronowitz law firm in Albany, N.Y., addressed the considerations laboratory directors must keep in mind to limit risk and reduce the chance of payer audits and legal action.

Sherrin’s experience spans nearly 35 years representing laboratories and other providers across the country on matters related to fraud, investigations, audits, false claims, and regulatory compliance.

Serious Liability Issues

“In response to all of these financial, payer, and compliance pressures, labs are using a variety of approaches,” said Sherrin. “Some approaches are not problematic, such as developing new test offerings. But I want to talk about two that are common and that can be fine, but also present the potential for serious liability issues if not done properly, and which therefore have to be part of every lab’s compliance program.

“One approach that can be problematic is the new laboratory test referral arrangements popping up in most states,” he noted. “The other issue is the new test pricing policies used by some labs.

“Before going further, I want to point out that there are a variety of federal and state laws that can be implicated, depending on how a laboratory company conducts business,” emphasized Sherrin.

“These include:

  • “The federal Anti-Kickback Statute, which bars payment for referrals;
  • “The federal Stark Law, which forbids physicians from referring to an entity with which they have a financial interest; and,
  • “The federal False Claims Act, which generally involves the making of any false statements in the submission of claims.

“Of these statutes, the key tool the government uses is the federal False Claims Act,” stated Sherrin. “There are a variety of acts that can trigger a false claim, such as billing for tests that weren’t ordered or performed, miscoding or up-coding, violations of regulations, and Anti-Kickback Statute violations.

“Next, labs must be concerned about state laws,” he noted. “Many states have fee-splitting laws and their versions of anti-kickback laws. There are also many states with laws addressing fraud and abuse, anti-markup, and direct billing—all of which relate to the questions of whom the lab can bill and how much they can bill. Can you bill the physician? Can you bill an intermediary, or may you only bill the payer?”

Issue of Medical Necessity

At this point, Sherrin wanted to call attention to a new issue associated with allegations of false claims. “There is a growing storm over the lack of medical necessity that is now being used as the basis for alleging submission of false claims,” he explained.

“There are currently federal court cases in which the sum and substance of the allegations are that labs have an independent obligation to assure the medical necessity of the tests for which they bill,” said Sherrin. “Some payers have been contending that billing for tests that are not medically necessary constitutes a false claim, irrespective of the lab’s reliance upon the referring physician’s medical determination. That’s triggering quite a firestorm and cases are being litigated now over those issues.”

Three types of referral arrangements are particularly prone to liability and fraud concerns, Sherrin said.

These are:

• Billing pass-through agreements,
• Participation in referral networks, and,
• Laboratory management services arrangements.

Three Types of Agreements

“These are probably the three [types of agreements] of which we currently see the most,” said Sherrin. “To be certain that such agreements are in compliance, all participants must carefully vet them with respect to federal and state laws. It is equally true that these agreements must be vetted against the lab’s contracts with payers.

“Don’t overlook the requirements in the contracts your lab has with health insurers,” he continued. “In looking at the transactions and pricing policies covered in your lab’s payer contracts, you need to be familiar with what the limitations are on referring out and billing for referenced tests.

“Typically, payer contracts have provisions such that, if your lab will not perform testing, those tests your lab refers out must go to another in-network lab,” said Sherrin. “Payer contracts also frequently have anti-assignment language, which says essentially that you can’t assign your rights or obligations under the contract to anybody else. There will typically also be limitations on billing for referred services as to who can bill the payer.”

Pass-Through Billing

Sherrin discussed the three new types of referral arrangements he identified earlier. “The first is a billing pass-through agreement. It gives rise to potential false claims if there is a misrepresentation as to which lab performed the test, or whether the performing lab was in-network or not,” he said.

“Take the example of a billing pass-through agreement where laboratory A is out of network and laboratory B is in network,” stated Sherrin. “Lab A performs the test but has an agreement whereby lab B bills the test to the payer as if it were done by B, an in-network lab. Then, laboratory A and laboratory B—by some formula arrangement—share the reimbursement received from the payer.

“This arrangement will give rise to potential false claims if there’s a misrepresentation as to which lab performed the test, or whether the performing lab was in net- work or not,” he added. “Also, a payment arrangement involving fee-splitting may trigger anti-kickback concerns. The amount of the payment or the method of payment can also cause anti-kickback concerns.”

Referral Network Model

The second type of referral arrangement seen more frequently is the referral network model. “I describe this model as a sponsoring organization, which is not a clinical laboratory, that creates a network whereby the members of that network can refer to other members of that network for tests that either they don’t do or for which they are not in-network and thus for which they will not be paid.

“If not properly set up, these arrangements can be problematic,” said Sherrin. “While they can also very easily be set up legally, payments to intermediary parties (such as third-party or contract sales representatives) are prone to added scrutiny from payers and regulatory bodies.

“Again, there’s nothing necessarily wrong with that,” he noted. “The problems usually arise with respect to how the intermediary is paid. Sponsoring organizations of these referral networks can be considered to be arranging or making referrals, such that payments your laboratory makes to those organizations can be considered a payment for a referral.

“Now, it may not be an illegal payment for referral, but it implicates the statute and creates governmental oversight,” stated Sherrin. “Problems arise—particularly if the payment to the sponsoring organization is made on a percentage basis—such that your arrangement may trigger compliance issues with fee-splitting statutes or similar government regulations.

“Another consideration is whether or not the payment is in excess of what a fair market value rate would be for the actual linking service that the sponsoring organization performs,” he added. “Any payment in excess of what might be a fair market value for that service can be considered an excessive payment and therefore payment for the referrals.”

Lab Management Services

This same concern arises with the third arrangement structure Sherrin addressed—laboratory management services. “While common in the laboratory market, the methods by which payments are determined might leave labs susceptible to anti-kickback considerations,” he added. “Labs should ask these three questions when considering a laboratory management service arrangement:

• “Are you paying it on a fair market value amount determined in advance, or is there fee-splitting involved?

• “Are there referrals back and forth between the laboratories, which usually is part and parcel of the management agreement?

• “If there are referrals back and forth, is the amount of payment made either for the management services or for the accessioning of the specimens in excess of what a fair market value arrangement would be?”

Sherrin’s insights are based on his experience in working directly with client laboratories and other healthcare providers. In this role, he has studied the implications of these three forms of referral arrangements on behalf of labs, or hospitals, or office-based physicians. In a coming issue, Sherrin will discuss new pricing policies that many labs currently use.

Contact Jeffrey Sherrin at 518-462-5601 or


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