Legal Intelligencer article by Lamb McErlane PC Health Law attorneys Vasilios J. Kalogredis and Rachel E. (Lusk) Klebanoff.

May 27, 2022

On April 28, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services issued an advisory opinion (No. 22-09) declining to approve a laboratory company’s proposal to pay hospitals a fair market value, per-patient-encounter fee to collect, process and handle specimens.

The OIG declined to approve the proposed arrangement for two key reasons. First, in the OIG’s view, lab services are particularly susceptible to the risk of patient steering under the federal anti-kickback statute (AKS). Second, the “per-click” fee structure, even if consistent with fair market value, inherently reflects the volume or value of referrals or other business the hospital sends to the labs. Together, these dynamics created risk that the fees were intended to induce hospitals to steer business to the labs, thereby implicating the AKS.

The Proposed Arrangement

Under the proposed arrangement, a network of clinical laboratories (the requestor), sought OIG approval to contract with participating hospitals (referred to in the opinion as contract hospitals) whereby the requestor would pay the contract hospitals a per-patient-encounter fee to collect, process and handle specimens that the hospitals send to the company’s labs. Specimens would be collected by phlebotomists employed or contracted by the contract hospitals. Fees would be paid only for patients who present with orders for testing and who are not inpatients or registered outpatients of the contract hospital. The contract hospitals would have the opportunity to choose to which laboratory it would send the specimens for testing for any order not specifying a particular laboratory. The lab company, in turn, would bill the applicable third-party payor (including federal health care programs) for the testing.

The requestor certified to the following safeguards with respect to the proposed arrangement:

It would be set out in a writing signed by the parties;

It would cover all of the services to be provided, which would not exceed those that are reasonably necessary to accomplish a reasonable business purpose;

It would be for a term of at least one year;

The per-patient-encounter fee would be consistent with fair market value in an arm’s-length transaction;

Contract hospitals would be prohibited from separately billing any payors or patients for the collection services; and

Contract hospitals would represent that none of their employed/contracted physicians or affiliated practices would be required to refer to requestor and such would not receive renumeration from the contract hospitals for any referrals to the Requestor.

AKS and OIG’s Analysis

The AKS is a federal law that prohibits anyone from knowingly and willfully soliciting or receiving, or offering or paying, any remuneration (i.e. kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal health care program (such as Medicare and Medicaid). The statute has been interpreted to cover any arrangement where one purpose of the remuneration is to induce referrals for items or services reimbursable by a federal health care program. The OIG has created several safe harbors to provide protection to certain arrangements that meet the conditions set forth in an applicable safe harbor.

The OIG concluded the proposed arrangement would implicate the AKS because it would involve payments from a laboratory to a hospital that is in a position to make referrals to the laboratory and to arrange for the laboratory to furnish services that may be paid for by a federal health care program. Thus, the per-patient-encounter fee provides a financial incentive for the hospital to make referrals to the lab company.

In its analysis, the OIG explained the proposed arrangement would not fit within the safe harbor for personal services and management contracts because the per-patient-encounter fee takes into account the volume or value of referrals or other business generated. Because it would not fit a safe harbor, the OIG evaluated the arrangement on the totality of the facts and circumstances.

In OIG’s view, the arrangement warrants careful scrutiny for two reasons: lab services can be particularly susceptible to steering and the per-click fee structure inherently reflects the volume or value of referrals or other business generated.

Although the proposed arrangement featured certain safeguards, they were inadequate for OIG to approve it. Fair market value fees and the prohibition against double-billing do not, in OIG’s words, “overcome” the per-encounter incentive to inappropriately steer business to the lab company. Moreover, even though the contract hospitals would not require physicians to refer to any particular lab, the contract hospitals would still have an incentive to encourage physicians to order lab services from the company.

Ultimately, the OIG determined that the per-encounter fee and corresponding strong incentive for steering created too great a risk that the fee would be used to induce or reward referrals from hospitals to the lab company. Under these circumstances, the arrangement presented more than a minimal risk of fraud and abuse under the AKS in the eyes of the OIG.

Conclusion

Advisory Opinion 22-09 marks another unfavorable decision for lab arrangements. The OIG undoubtedly remains concerned about steering risk in lab arrangements, particularly when remuneration from a lab reflects the volume or value of referrals or other business generated. Collection fees and similar fee structures that reflect the volume or value of specimens sent to a lab amplify this risk, even when they are consistent with fair market value.

Although this advisory opinion is expressly limited to the requestor and its circumstances, it does provide a clearer roadmap for evaluating arrangements between laboratories and hospitals for collection-based services.

Vasilios J. (Bill) Kalogredis has been advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is chairman of Lamb McErlane’s health law department. Contact him at bkalogredis@lambmcerlane.com or 610-701-4402.

Rachel E. (Lusk) Klebanoff is a senior associate at the firm who focuses on health law and health care litigation. She represents physicians, dentists, nurses, medical group practices, and other health-related entities in transactional, regulatory and compliance matters. Contact her at rlusk@lambmcerlane.com or 610-701-4416.

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