Health Law Alert by Lamb McErlane PC attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

The HHS Office of Inspector General (“OIG”) issued Advisory Opinion No. 23-06 (“Opinion”) on September 25, 2023 regarding a proposed arrangement in which various laboratories would purchase the technical component of anatomic pathology services (“Services”) provided by the “Requestor” (the “Proposed Arrangement”). Specifically, the Requestor inquired as to whether the Proposed Arrangement would warrant sanctions under Section 1128(b)(7) or Section 1128A(a)(7) of the Social Security Act (“SSA”), as they relate to Section 1128B(b), the federal anti-kickback statute (“AKS”).

The Opinion ultimately concludes that the Proposed Arrangement, if undertaken, would generate prohibited remuneration under the AKS, if the requisite intent were present, which would warrant sanctions under both provisions of the SSA.

Factual Background

The Requestor operates anatomic pathology laboratories across the United States, the technical and professional components of which are reimbursed by commercial payors. The “technical component” covers the physical preparation of the specimen, which results in the production of a glass slide for review by a pathologist. The pathologist then analyzes the slide, the outcome of which is reported to the referring physician (the “professional component”). A significant proportion of the anatomic pathology testing is a result of referrals from physicians who order tests to assist them in diagnosing and treating patients.

The Requestor was approached by two types of laboratories (collectively, “Laboratories”): (1) laboratories that are owned by physicians who refer patients for Services (“Referring Physicians”) and laboratories that employ Referring Physicians (collectively, “Physician Laboratories”); or (2) laboratories that are not owned by and do not employ Referring Physicians (“Non-Physician Laboratories”). Each of the Laboratories would be in a position to refer laboratory business to the Requestor, including services billable to Federal health care programs.

Proposed Arrangement

Under the Proposed Arrangement, the Requestor would enter into written agreements with the Laboratories where the Requestor would purchase the technical component of Services from the Laboratories for certain anatomic pathology tests for commercially insured patients. Here, the Laboratories would perform the technical component of the referred sample and the Requestor would perform the professional component. The Requestor would then bill commercial insurers as an in-network provider for both components and would pay the referring laboratory a fair market value, per-specimen fee for performing the technical component of the referred tests. The Arrangement would be advantageous for Laboratories that are unable to bill certain commercial payors for Services or are not in-network with certain commercial payors. Accordingly, the Proposed Arrangement would provide the Laboratories with an opportunity to perform, and receive payment for, a portion of those Services.

While the Requestor, itself, could generally perform, bill for, and retain the full reimbursement for both components of the Services billable to commercial payors (which would be more efficient and cost-effective), the Requestor noted that Referring Physicians in Laboratories that lack contracts that would give them the ability to bill certain commercial insurers for Services as in-network providers would be more likely to refer Services to laboratories, including the Requestor, that maintain contracts with commercial insurers to bill for those Services.

Though the Proposed Arrangement would not require Laboratories to refer patients or any Federal health care program business to the Requestor, the Requestor opined that the Arrangement nonetheless would likely result in referrals of Federal health care program business to the Requestor. Accordingly, without the Proposed Arrangement, the Requestor likely would not receive a significant volume of referrals of Federal health care program business from the Laboratories.

The Law: Federal Anti-Kickback Statute

The AKS[1] makes it “a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in in return for, the referral of an individual to a person for… any item or service reimbursable under a Federal health care program.” The prohibition extends to remuneration to induce, or in return for, the purchasing, leasing, or ordering of, or arranging for or recommending the purchasing, leasing, or ordering of, any good, facility, service, or item reimbursable by a Federal health care program. Here, remuneration includes the transfer of anything of value. The statute applies to any arrangement where at least one purpose of the remuneration is to induce referrals for items or services reimbursable by a Federal health care program. Violations of the AKS constitute a felony punishable by a maximum fine of $100,000 and/or up to 10 years of jail time, as well as exclusion from Federal health care programs and potential imposition of fines by the OIG. The OIG noted that the “Safe Harbor” exception[2] for personal services and management contracts and outcomes-based payment is potentially applicable to the Proposed Arrangement, specifically the requirement that the services contracted for must not exceed those reasonably necessary to accomplish the commercially reasonable business purpose of those services.

Legal Analysis

The Proposed Arrangement described herein would violate the AKS because it would involve the payment of remuneration by the Requestor to a party that is in a position to make referrals to the Requestor for items and services that may be paid for, in whole or in part, by a Federal health care program. Though the Proposed Arrangement would supposedly not involve the referral of or billing for Services reimbursable by Federal health care programs, it may still implicate, and violate, the AKS by disguising remuneration for Federal health care program business through the payment of amounts purportedly related to non-Federal health care program business. The OIG previously noted “because physicians typically wish to minimize the number of laboratories to which they refer for reasons of convenience and administrative efficiency, Specimen Processing Arrangements that carve out Federal health care program business may nevertheless be intended to influence physicians’ referrals of Federal health care program business to the offering laboratories.”[3] Accordingly, with respect to the Proposed Arrangement, the OIG could not conclude that there would be no nexus between the remuneration paid as part of the Arrangement and potential referrals to the Requestor for services reimbursable by Federal health care programs.

Further, the Proposed Arrangement would not be protected by the Safe Harbor for personal services and management contracts and outcomes-based payment arrangements because the Requestor was unable to certify that the aggregate services contracted for would not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.

The OIG found it difficult to discern any commercially reasonable business purpose for the Requestor to enter into the Proposed Arrangement other than the possibility that such payment may induce referrals of patients, including Federal health care program beneficiaries because the Arrangement provides the Laboratories with the opportunity to bill and receive payment for Services they otherwise would not be able to bill for as in-network providers, which would likely result in referrals to laboratories such as the Requestor, despite the fact that the Requestor could more efficiently and cost-effectively provide the Services in-house. Accordingly, the Proposed Arrangement appears designed to influence Laboratories to refer other specimens to the Requestor for testing that may be reimbursable by a Federal health care program. Consequently, there is a significant risk that the Arrangement would function, in part, as an opportunity for the Requestor to pay valuable remuneration to a potential source of referrals for laboratory services to induce Laboratories to refer laboratory services reimbursable by Federal health care programs to the Requestor.

Though the Requestor certified that the compensation paid would be consistent with fair market value and the Laboratories would not be required to refer business or patients to the Requestor, such certifications are not sufficient. Violations of the AKS depend on the intent of the parties (i.e., the knowing and willful payment by a clinical laboratory for services if even one purpose of the payment is to induce or reward referrals of Federal health care program business), regardless of fair market value compensation.[4]

Here, the OIG found that the Proposed Arrangement could give rise to a significant incentive for the Laboratories to refer patients, including Federal health care program beneficiaries, to the Requestor, which could result in the selection of a laboratory that offers the most remuneration to the Laboratories, instead a more appropriate laboratory that offers the highest quality for patients. Therefore, such an Arrangement could create the potential for patient steering and result in unfair competition by favoring laboratories in the competitive marketplace that are willing and able to pay the Laboratories technical component fees.

Conclusion and Limitations

Based on the facts provided, the OIG concluded that the risk of fraud and abuse presented by the Proposed Arrangement is not sufficiently low under the AKS for the OIG to issue a favorable advisory opinion. The OIG concluded that the Proposed Arrangement, if undertaken, would generate prohibited remuneration under the AKS, if the requisite intent were present, which would warrant sanctions under Sections 1128A(a)(7) and 1128(b)(7) of the SSA.

It is important to note that the Opinion is limited in scope to the specific Proposed Arrangement and is not to be relied upon by any person other than the Requestor. While the Opinion may not be specifically relied upon for other arrangements, the reasoning stated therein is useful to keep as a consideration when engaging with other businesses to provide, or arrange for the provision of, certain services.

 

[1] 42 U.S.C. § 1320a-7b(b).

[2] 42 C.F.R. § 1001.952.

[3] OIG, Special Fraud Alert: Laboratory Payments to Referring Physicians 5 (2014), 

[4] Id. at 4.

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*This article is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, reach out to Vasilios J. (Bill) Kalogredis, Esq or Sonal Parekh, Esq.

Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq. is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.