Office-Based Docs Want Anatomic Path Revenues

Why specialist physicians are eager to bring anatomic pathology in-house

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CEO SUMMARY: Specialist physicians think they’ve found gold in anatomic pathology services. Indifferent regions of the United States, urologists and gastroenterologists are taking active steps to cut themselves a piece from the anatomic pathology revenue pie. Some physician groups are building their own histology labs and hiring pathologists. Others are entering into TC/PC arrangements as away to make money.

FACED WITH DECLINING REIMBURSEMENT for many of their important clinical procedures, specialist physicians are looking at anatomic pathology as a lucrative source of replacement revenue.

This is a simple trend, but one with the potential to radically transform the anatomic pathology profession. After all, specialist physicians are a major source of case referrals to local pathology groups and national laboratory companies. By redirecting their specimen referrals, these physicians have the power to create new financial winners and losers in the anatomic pathology profession.

The medical specialties of urology and gastroenterology (GI) are the twin drivers and major factor in this trend—at this time. In certain regions of the country, urology groups and GI groups are moving aggressively to develop business arrangements that allow them to capture revenues generated by the anatomic pathology procedures performed for their patients.

The purpose of this intelligence briefing is to provide an overview of this trend, describe its variations, and assess the likely impact this trend will have on the anatomic pathology profession. Much of this information has never before been published. Some of it builds on information provided by THE DARK REPORT in recent years.

Moreover, three basic types of AP business arrangements have emerged during the past 36 months. One is the anatomic pathology laboratory condominium complex. The second is a physicians’ office laboratory (POL). The third is a split service arrangement, where a laboratory provides technical services to the referring physician group and sends the processed slides back to that group. The group then engages a pathologist to read the slides and the group bills directly for the professional component. TC/PC is the new shorthand to describe this business arrangement. It stands for Technical Component/Professional Component.

Client Billing Is Different

It must be stressed that these business arrangements are different from the longstanding practice in many regions of “client billing.” In its simplest form, client billing describes a business relationship where a laboratory agrees to provide testing services at a discounted price to the referring physician or medical group practice.

This client receives a discounted bill from the laboratory provider, which it pays. The referring physician or medical group practice then marks up the laboratory testing services and bills the payer or patient directly. (Of course, because of Medicare laws, the laboratory which performs the test must bill these government programs directly, so the referring physician can not legally mark up a client bill for a Medicare patient and submit that claim to a Medicare carrier.) There are also nine states with direct billing laws which negate client billing. They are: AZ, CA, IA, LA, MT, NV, NJ, NY, SC and RI.

Services Are Discounted

There are two essential differences between a client billing arrangement and the business models of specialist physicians bringing anatomic pathology services in-house. First, in the client billing scenario, the laboratory or pathology group continues to provide lab testing services to clients, albeit at a discounted price. Second, the laboratory continues to bill directly for Medicare patients.

In the scenarios described above, the referring physician groups are actually bringing pathology technical services and/or pathology professional services into their medical practice. In other words, they are establishing their own pathology labs and bringing their own pathologists into the group, specifically to perform tests on the specimens generated by their own patients, allowing them to file claims with all classes of payers, both private and public.

Therein lies the threat to the existing anatomic pathology establishment. As specialist physicians take steps to bring their pathology work in-house, it denies local pathology groups and national pathology lab companies access to this work—and the revenues associated with this testing.

Three Business Models

Currently, few pathologists understand the differences between the three basic business models of anatomic pathology services now making inroads with- in the urology and gastroenterology specialties. This is particularly true of TC/PC arrangements, which can be structured in a number of ways. Further, each of these three AP business models have unique compliance issues and implications to the specialist physician group which is the source of the referrals, as well as to any laboratory and/or pathologist providing contracted services to the referring physician group.

It is easy to understand why specialist physicians have a growing interest in setting themselves up in the anatomic pathology business. Like pathologists and clinical laboratories, urologists and GIs have seen ongoing erosion in reimbursement for many of their most important clinical procedures. To replace this lost revenue, these specialist physicians have looked for revenue-generating opportunities in ancillary services.

Anatomic pathology attracted their attention for two reasons. First, because of the volume of specimen referrals they generate, even smaller specialist groups can generate enough business to cover costs and generate a profit from doing their own anatomic pathology.

Second, getting into the anatomic pathology business requires a relatively small amount of capital for the histology laboratory. Staff can be limited to as few as one histotechnologist and a single pathologist who can be engaged, full time or part time, to work only the hours needed.

As a bonus, the complexity of running a histology laboratory is much less than that of a clinical laboratory. That also makes it an attractive ancillary service, because it requires less management effort.

As urologists and GIs got interested in anatomic pathology, three different business models have emerged. First is the anatomic pathology laboratory condominium complexes, dubbed “pod labs” by attorney Jane Pine Wood of McDonald Hopkins, the law firm based in Cleveland, Ohio. AP lab condos were a particularly hot item in the urology profession during 2003 and 2004.

Lab Condo Complex

Essentially, a promoter leased or purchased a building of, say, 10,000 square feet. This building would be divided into separate rooms of, say, 1,000 square feet. Then, each room would be built out as a histology laboratory and sold to a physician group. The promoter provides management services for these AP condo labs.

Labor would be provided by a histotechnologist and a pathologist. These individuals would either be part-time employees or independent contractors of each physician group owning a condo laboratory in that complex. During the day, the histotech and the pathologist would walk from laboratory to laboratory to perform the work required by each physician group owner.

THE DARK REPORT covered this development in great detail in the summer of 2004. It published two expanded issues devoted to anatomic pathology laboratory condominium complexes. This coverage won a journalism award from a professional association. It was estimated that, at that time, as many as 60 urology and GI groups had purchased AP lab condos during the previous 24 months. (See TDRs, July 19, 2004 and August 9, 2004.)

OIG Advisory Opinion

Within six months of publishing this information, the Office of the Inspector General (OIG) issued Advisory Opinion 04-17. In reviewing a proposed AP lab condo business plan, the OIG issued an opinion that was generally negative. Since publication of that opinion in December 2004, sales of new AP lab condos fell off dramatically. (See TDR, January 3, 2005.)

The second business model for in-house anatomic pathology services is the basic physicians’ office laboratory (POL) arrangement. The doctors create a histology laboratory within their practice. This laboratory is staffed by a histotechnologist who is a full employee of the practice. All pathology technical services are performed in this laboratory.

The pathology professional services can be handled in several ways. First, the group may bring in a pathologist as a partner. Second, the group may hire a pathologist, either full-time or part-time, as an employee. Third, a pathologist or pathology group practice may provide professional services on a fee-for-service basis.

Traditional POL Model

In the case of a pathologist as partner or employee, the physician group can bill for pathology technical and professional services with a global claim. In this scenario, the group’s anatomic pathology laboratory and professional service are identical to the traditional POL business model.

The group can directly bill private payers, Medicare, and Medicaid. The pathology laboratory fully meets all the regulatory requirements for ancillary services. Because POLs are a long-accepted ancillary service model, there are few compliance issues with this arrangement.

There are, however, some interesting variations. Once the specialist physicians build their technical lab, they have the option to contract for the pathology professional services. THE DARK REPORT is aware of several different types of relationships.

Contracted Path Services

In a few cases, the specialty physicians will let a local pathology group perform—and bill for—the professional component. The most common approach is to obtain proposals from local pathology groups to do the professional work on-site. This is perfectly acceptable. It is no different than an independent commercial lab contracting with a local pathology group to provide pathology services on-site. These pathology services are then globally billed to all payers.

If the specialist group has some type of contracting arrangement with outside pathologists, then both parties must be careful to structure this relationship to be in full compliance with appropriate federal and state laws and regulations, which include such items as a written agreement, a term of at least one year, a fixed flat rate on a time period basis (monthly, etc.) or on a unit basis, etc.

The third business model is what is often described as a “TC/PC arrangement.” It is a business model where a laboratory agrees to provide the technical services to a physician group. It sends the processed slides to the physician group, which has made its own arrangements for pathology professional services.

Submitting TC/PC Claims

Under this business model, the laboratory provider will submit claims for the technical component of the case. The physician group will bill for the pathology professional component.

In the TC/PC arrangement, care must be taken by all parties to properly comply with federal and state laws and regulations. There is significant potential for compliance violations if the TC/PC relationships are not properly designed and followed diligently by all parties.

In the marketplace today, these are the three types of business arrangements finding favor with specialist physicians. For clarity, we can label them: 1) pathology POLs; 2) AP laboratory condos; 3) TC/PC arrangements.

In the balance of this issue, we provide information about how urology and GI groups learned to use these three business models to enter the anatomic pathology business and we recommend strategies pathology groups can use to respond. That is followed by predictions on how this trend is likely to affect the pathology profession. There is also a letter to the editor concerning the trend of specialist physicians entering the anatomic pathology business.

How Specialty Docs are Entering The Anatomic Pathology Business

WHEN SPECIALTY PHYSICIANS decide to enter the anatomic pathology business, they seem to be choosing from among three basic business models. Each is described below, along with a profile of the type of group which seems to prefer this model.

Business Model 1:

Physicians’ Office Laboratory (POL)
Business strategy is in-house ancillary service that allows the physician group to bill globally for anatomic pathology services.

Technical Component: Doctors build their own histology laboratory within the practice and process their own slides.

Professional Component: Doctors have two options, either: 1) bring in a part-time/ full-time pathologist as partner or employee to provide professional services; or, 2) negotiate with a local pathology group or national lab company to provide professional services at a competitive rate.

Group Profile: Preferred by larger urology and gastroenterology groups (six or more physicians). GI groups typically want a laboratory connected to their endoscopy center or ambulatory surgery center, where feasible.

Business Model 2:

Physicians’ Office Laboratory (POL) in the form of AP Lab Condominium or “Pod Lab”

Business strategy is to use the AP lab condo as an in-house, off-site ancillary service that allows the physician group to bill globally for anatomic pathology services.

TC and PC: Managed by the promoter, the arrangement maximizes labor productivity of the histotechnologists and pathologists for groups with smaller volumes of specimens, but still allows the doctors to bill globally for anatomic pathology services.

Group Profile: Not popular in light of OIG Advisory Opinion 04-17. During 2003 and 2004, was of high interest to urology groups located primarily in Florida and Texas.

Business Model 3:

Business Arrangement that Splits Technical Services & Professional Services
Business strategy is to structure either TC or PC as an in-house ancillary and bill for it.

Option A: No Histology Laboratory
TC: Physician group selects a laboratory to provide technical services and process slides. Lab bills for TC (and sometimes provides TC and PC for Medicare patients for which it sends a global bill).
PC: Physician group either brings a pathologist into the practice, or contracts with outside pathologists to do the work at a discount. Physician group bills private payers for professional services.
Group Profile: Mostly of interest to specialty groups with 2-4 physicians, which lack volume to support an in-house lab.

Option B: In-house Histology Laboratory
TC: Physician group has its own histology lab. It sends processed slides to pathologists. It bills the technical component.
PC: Unlike the POL business model, here the doctors want a discounted billing arrangement with contract pathologists (so they can mark up and bill globally); or, the doctors want to outsource pathology to local pathologists (with whom they’ve had long-standing relationships) and let these pathologists bill the professional component.
Group Profile: Physician groups with established pathology relationships that they want to continue, even as the physician group keeps TC in-house.

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