“New” Legal Landmines For Clinical Laboratories

Ongoing changes in liability, malpractice and legal risk require attention from labs

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CEO SUMMARY: HIPAA is a big “new” source of legal expo- sure for laboratories and other healthcare providers. Also, recent court decisions and changes in clinical practices are adding to the legal risk for labs. Attorney Richard S. Cooper offers insights on how laboratories can better protect them- selves, along with specific strategies to use in negotiating better terms with managed care companies.

IT MAY BE TIMELY TO DO A LEGAL AUDIT within your laboratory to identify evolving legal landmines that might possibly prove troublesome, if not downright dangerous.

Has your laboratory recently changed the complexity of its test menu? Did your lab expand the geographic area where it provides laboratory testing services? Answer yes to either of these questions and your laboratory may have additional legal exposure.

Do you know that a lab that has failed to properly update its insurance coverage and liability plan is more likely to have exposure from liability issues than it is to have problems with either fraud and abuse or HIPAA violations? These questions represent a sample of the legal landmines waiting to explode, usually at the most troublesome time.

Legal Landmine #1:
New Lab Service Lines and Liability

“It is smart for every laboratory to notify its legal advisors whenever it
takes on a significant new service line (particularly one involving new technologies), establishes new laboratory operations or services in a new location, or opens a new draw station,” stated Richard S. Cooper, Partner and manager of the health law department at McDonald Hopkins, LPA.

“Each one of these business actions can change the laboratory’s potential liability profile and create new legal exposure,” he noted. “Every laboratory should make it standard practice to consult with their legal advisor whenever it adds significant new services, expands into a new location, or opens additional patient service centers.

“The first step in reducing your potential liability is to review the contracts which cover new tests, services, or facilities,” he added. “It is essential that you understand, fully and completely, the terms and consequences of these contracts. Next, review your insurance coverage with your legal department to see if you are adequately protected on these new activities. Coverage limits, exclusions, and imitations are all relevant and should be reviewed.

“It is best to do this review before entering into new contract agreements,” advised Cooper. “That allows you to reshape contracts so as to minimize your laboratory’s potential liability and other forms of legal exposure,” stated Cooper.”

Legal Review

“This same type of legal review should be done when entering into agreements with clients such as physicians’ offices, nursing homes, hospitals, and the like,” Cooper said. “Often such contracts can contain language which may void or limit your current insurance coverage, or may inappropriately shift risk to your laboratory.

“Hospital laboratories must also coordinate their activities with existing hospital-wide legal policies and management programs,” recommended Cooper. “This insures that the laboratory’s operational activities do not trigger unexpected and unpleasant financial repercussions for the parent hospital or health systems.

“Liability can derive from unexpected sources. As laboratory medicine becomes more complex, it creates new exposure. Technology and changes in laboratory services, coupled with evolving regulatory environments, can change both the liability and malpractice status quo—often in ways that work against laboratories,” counseled Cooper.

“With rapid changes expected in the fields of genomics, proteomics and pharmacogenomics, every lab’s exposure to liability or malpractice deepens,” he observed. “That is why lab directors and pathologists should consider it prudent and reasonable to discuss such issues with their legal advisors whenever the lab takes active steps to introduce new technology and new services.”

Undertaking these legal reviews is only a first step. In today’s litigious environment, it is necessary for laboratories to demonstrate that they are taking regular and proactive steps to minimize and eliminate liability. “Does your laboratory have adequate plans in place to cover each area of liability? Are your managers and staff trained to respond properly to an event which triggers liability?” asked Cooper.

“Without a clear plan of action, people may do things unintentionally, possibly triggering significant financial exposure,” said Cooper. “Every laboratory should train all employees in the formal process for reporting liability risk concerns and liability events. However, don’t establish a rule that is not consistently followed, as this will create more liability problems for your laboratory.”

Legal Landmine #2:
Reducing Risk From Managed Care Contracts

When negotiating managed care contracts, risk exposure is a key element. Careful negotiations by laboratories at contract time can prevent potentially heavy financial losses in the future.

“Laboratories should view two contracting areas with concern,” advised Cooper. “The first involves “most favored nation” (MFN) clauses. The second involves medical necessity.

“The MFN clause typically states that your laboratory must give the health plan your best prices,” he explained. “Avoid MFNs. At the least, work to limit them. Should your laboratory sign a contract for a lower fee with another managed care plan, then your original contract with the first health plan will be paid at a lower rate.

“In this scenario, your laboratory has played into the hands of the managed care company. You have reduced their plan costs and provided them with a marketing advantage. They can lower their rates and charge lower premiums, ‘using’ your money!”

If an MFN clause must be included, Cooper has additional advice. “The MFN clause should only be triggered with respect to ‘like’ plans: same payment type (e.g. HMO-HMO), comparable patient mix, same capitation arrangement, same demographics, same size plan, and same specimen volume,” he said.

“Next, be aware of the patient populations and geographic locations included in the managed care contract,” he said. “There may be different cost structures and usage levels at play. HMOs use actuaries to determine rates based on geographic location and population size; the larger the insured population, the lower the risk to the HMO. Your laboratory should negotiate a contract to address differentials in the risk and cost to serve the plan’s beneficiaries.

“In cases where a laboratory does have a managed care contract with the “most favored nation” clause, it should also have a plan in place to monitor for events that might trigger the MFN,” noted Cooper. “The goal here is to avoid unintentional violations of the contract.

Include Contract Provisions

“One additional way to protect against MFN clause violations is to include provisions in the contract which allows an independent auditor to review your managed care book of business and preserves your laboratory’s right to challenge any findings. Collectively, these can prevent your laboratory from significant penalties.”

Cooper next discussed medical necessity. “Negotiate a provision in your lab’s managed care contracts that effectively gets the payer to agree that it will not deny reimbursement for services provided by the laboratory based upon determinations that the services were not medically necessary or that pre-authorization was not obtained,” he said.

“This is a reasonable provision. Laboratories are not usually in the position to determine medical necessity and the payer retains the discretion to determine medical necessity,” explained Cooper. “Similarly, your laboratory should attempt to negotiate out claim denials due to lack of an ABN, because the laboratory does not provide service directly to the patient and often cannot obtain an ABN.”

Legal Landmine #3:
Misuse of Business Associate Agreements

With the arrival of HIPAA comes a new legal issue, centered around “Business Associate Agreements” (BAA). “In the case where a laboratory is simply referring a specimen to a reference laboratory, it is not necessary to execute a BAA,” he explained. Similarly, if a laboratory merely receives referrals from another laboratory, it is not required to sign a BAA.

“It is important to understand the contractual responsibilities that result from a BBA,” added Cooper. “For that reason, unless a laboratory is actually a business associate of the referring laboratory, it probably doesn’t need to sign a BBA.”

Legal Landmine #4:
Legal Education For Diagnosis Codes

Obtaining diagnosis codes from physician offices is an ongoing problem for almost all laboratories. One way to reduce the laboratory’s potential exposure to fraud and abuse charges is to establish a proactive and ongoing education program for physician-clients.

“Most well-run laboratories handle this issue in a consistent manner,” observed Cooper. “They conduct regular education programs for their clients. They also include language in their service contract with clients that requires physicians to properly complete diagnosis information. This makes the physician legally and contractually obligated to provide that information. It also documents that the laboratory is following a consistent policy with all its client-physicians concerning diagnosis information.

Physician Cooperation

“Such contract language is just the first step, however. When physicians don’t follow the contract and fail to provide the diagnosis information, laboratories need to ‘stick to their guns’,” advised Cooper. “This is business that you don’t want. Accepting specimens from a physician without diagnosis codes creates a legal land mine for the laboratory. In a situation like this, where the laboratory accepts specimens and assumes significant non-reimbursement due to lack of diagnosis codes, it faces possible exposure to fraud and abuse claims.

“When physicians don’t follow the contract and fail to provide the diagnosis information, laboratories need to ‘stick to their guns’…”

“Laboratories should not overlook developing good relationships with client physicians,” added Cooper. “Studies have repeatedly shown that good relationships play a key role in minimizing legal risk. Laboratories should help physicians understand that a good working relationship works to the best interests of all parties. In the case of diagnosis codes, proper compliance is one way of precluding legal action which could embroil the physicians as well as the laboratory.”

Cooper has good advice for another aspect of the diagnosis code problem. “Some managed care firms require diagnostic codes,” he explained. “Laboratories should not assume responsibility for obtaining diagnosis information for patients under managed care contracts, because laboratories have no control over the physicians when it comes to capturing this information. In fact, we recommend that laboratories work with health insurers to have them include language in their contracts with physicians that makes it a requirement of the physician to provide the diagnostic information to the lab.


The insights and recommendations Cooper offers here cover a range of legal topics. Collectively, these topics demonstrate the significant and ongoing changes that affect a laboratory’s exposure to liability, malpractice claims, and other legal risks.

However, Cooper is optimistic that every laboratory has the ability to tighten its legal defenses. “The most successful laboratories in my law practice have a common trait. They recognize that establishing a good legal foundation to their operations is essential to protecting the operational and financial integrity of the laboratory.

This is particularly true of hospital laboratories, which must operate outreach testing programs in a way that stays within the hospital’s existing framework of liability coverage, managed care contracts, and legal policies. The continuing evolution in legal risk and liability exposure means that every laboratory should regularly revisit these topics and update the lab- oratory’s policies and procedures as appropriate.


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