Where Will “Free Tests” Take the Lab Industry?

Increased use of this marketing strategy could have serious financial consequences

CEO SUMMARY: In the absence of public discussion, continued use of the “free testing” strategy by the nation’s more aggressive laboratory companies could trigger some unpleasant consequences that would affect all laboratories and pathology group practices. Five questions, presented here, illustrate how private and public healthcare payers might react to the ongoing use of “free testing.”

WHEN IT COMES TO THE TOPIC of “free testing,” it seems every laboratorian with knowledge of this lab sales and marketing strategy has an opinion.

These opinions can be mostly categorized as either outright opposition to the concept of “free testing” or a belief that the “free testing” strategy has a useful place in the competitive market.

But the use of “free testing” (as allowed by the OIG’s “Waiver of Charges to Managed Care Patients fraud alert) has occurred without much public debate within the laboratory profession. That denies the profession the opportunity to better understand the pros and cons before continued use of “free testing” arrangements triggers permanent (and possibly damaging) consequences to both the healthcare system and the laboratory industry.

In fact, so little has appeared in the public space on this topic that there are still lab directors and pathologists who are surprised to discover, for the first
time, that there are circumstances where the Medicare program will allow a laboratory to test some specimens from a physician’s office for free, in order to gain access to the other specimens, including those from Medicare and Medicaid patients.

Discussion and Debate

To fill this information vacuum and encourage discussion and debate, THE DARK REPORT devoted this issue to the twin topics of “Waiver of Charges to Managed Care Patients” and uneven compliance by some laboratories.

The “free testing” debate should be centered around five basic questions. First, is it smart business for any laboratory to publicly offer “free testing” for a portion of a client-physician’s laboratory test referrals, in exchange for access to the balance of that client’s test referrals?

Second, what message does the offer of “free testing” for one managed care plan’s patients send to other payers in the same region about the value of laboratory testing and the cost to provide such testing? Third, what are the compliance thresholds for the allowable percent of “free testing,” such that if a lab exceeds these thresholds, the “free testing” strategy in that situation is recognized to be a clear violation of Medicare fraud and abuse statutes?

Effect On “Customary Fees”

Fourth, as Medicare takes steps to create more specific calculations for “usual and customary charges,” is it unwise for some laboratories to be offering “free testing” in a form that may be noticed by Medicare officials and cause them, at some future time, to justify lower reimbursement because laboratories are willing to perform “free testing” for private payers’ beneficiaries? Could this also cause Medicare officials to expand a future definition of “usual and customary” calculations of laboratory test charges to include “free testing” provided to private payers’ beneficiaries?

Fifth, could expanded use of “free testing” put those labs using this strategy in the same type of jeopardy that resulted from the charges settled in the OIG’s “LabScam” operation ten years ago? At the time when some laboratories first began to create lab test panels and unbundle certain tests in these panels when billing Medicare, regulatory guidance on these points was either vague or non-existent. It was only after federal investigators decided to stop what they considered had become an abusive practice that legal interpretations of these practices became quite specific.

Collectively, laboratories paid more than $1 billion in fines and restitution to the Medicare and Medicaid programs to settle these allegations of Medicare fraud and abuse. If the use of “free testing” was to continue and grow, it is possible that federal healthcare investigators could build a legal argument that the actual implementation of “Waiver of Charges for Managed Care Patients” went beyond the intent of the December 1994 OIG fraud alert. This would place both laboratories and the physician-clients who signed contracts to enter these “free testing” arrangements at risk for claims of Medicare fraud and abuse.

Collectively, these five questions demonstrate that there are potential industry-wide risks that accompany the use of the “free testing” strategy. It would be timely and beneficial for lab industry leaders to address and debate these topics in both public forums and the lab industry press. THE DARK REPORT is willing to devote time during the upcoming Executive War College, scheduled for April 27-28, 2004 in New Orleans.

Shaping The Debate

Those laboratory directors and pathologists interested in helping to develop this topic should contact our offices. The phone number and e-mail address is listed below. Also, to better evaluate the potential impact of this growing trend, it would be helpful to gather examples of how “free testing” is being used in the laboratory marketplace. Laboratories with such information should feel free to provide information in full confidence.

If “free testing” has the potential to trigger a variety of negative financial consequences for the laboratory professional several years down the road, then timely research, discussion, and debate about this issue is important. Such debate may forestall inappropriate use of “free testing.” If this is the eventual outcome, it would prevent the “deja vu” of repeating the mistakes of the below- cost pricing for capitated HMO lab testing contracts that occurred in the lab industry some 10 to 15 years ago.


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