The Health and Human Services Office of Inspector General (OIG) on June 25 issued a special fraud alert titled “Laboratory Payments to Referring Physicians,” which should cause any laboratory that compensates referral sources for specimen collection, processing, and packaging or for submitting patient data to a registry or database to carefully review all such arrangements to be certain they are compliant. Any arrangement found to be noncompliant should be terminated immediately or reconfigured to be compliant. Any laboratory that fails to do so risks both civil monetary penalties and criminal sanctions, as well as exclusion from the federal health care programs, as would the referral source. It is likely that many states will also mirror this guidance in their enforcement of state anti-kickback laws. A laboratory’s arrangements with referring physicians will not just be subject to government scrutiny based upon the guidance in this alert. Other laboratories will review the compliance of competitors, and the alert could serve as a basis for qui tam actions. The federal anti-kickback statute is implicated when remuneration is paid in order to induce or reward referrals for any items or services reimbursed by a federal health care program. The alert cautions against arrangements that improperly take into account the volume or value of referrals or that compensate referring physicians above fair market value and that may induce a physician to use a particular laboratory. The OIG expresses four principal concerns with these types of arrangements—that they will:

• “Corrupt medical judgment”;
• Result in “overutilization”;
• Result in “increased costs to the federal health care programs”; and
• Result in “unfair competition.”

The OIG highlights certain arrangements for specimen collection, processing and packaging arrangements, and registry payments that are particularly suspect under the anti-kickback statute. Specimen Collection and Processing The OIG explains the risks associated with arrangements where a physician is paid by a laboratory (directly or indirectly) for the collection, processing, or packaging of specimens.¹ Certain characteristics that the OIG finds to be evidence that the arrangement may be unlawful include:

• The payment exceeds fair market value;
• The payment is calculated on a per-specimen, per-test, or per-patient method or some other method that takes into account the value or volume of referrals;
• The payment is offered on the condition of a certain number or type of test orders, especially where the tests are duplicative, not medically necessary, or not reimbursable;
• The physician is already paid for the services by a third party, such as Medicare;
• The payments go directly to a physician rather than the group practice that employs the physician and that actually bears the cost of the services; and
• The physician is paid for services performed by someone placed in the office by the laboratory.

The OIG makes it clear that its concerns are not abated by limiting the payment arrangement to nonfederal health care program patients, indicating that the amount paid for the nonfederal program patients could still act as a financial incentive to refer the federal health care program patients to the laboratory. There is also a practical issue of completely screening out federal government patients due to incomplete or inaccurate patient coverage information. Although more of an issue under Stark due to the lack of an intent element, a pattern of federal health care patients “slipping through the screen” may raise issues, especially when the safeguards to prevent such “slip through” are inadequate. Laboratories should also remember that state anti-kickback laws could also create civil and criminal exposure related to patients covered by private and commercial payers. Registry Payments Clinical laboratories have been getting involved more frequently in setting up and maintaining registries that collect patient data related to laboratory testing. The OIG states that there is the potential for improper arrangements because physicians may be induced to order unnecessary or duplicative tests to submit more data and thus receive higher payments. Certain characteristics that the OIG considers potentially unlawful include if:

• The laboratory requires or encourages a certain frequency or volume of tests to be performed and reported on in order to receive payment;
• The laboratory collects comparative data for the registry form and bills for multiple tests that may be duplicative (e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information) or that otherwise are not reasonable and necessary;
• The compensation is paid per-patient or in another manner that takes into account the volume or value of referrals;
• The compensation is not fair market value for the services rendered or is not supported by documentation evidencing efforts;
• The research is limited to the laboratory’s proprietary tests or only to the laboratory’s patients;
• The physicians selected to participate in the registry are only high-volume referrers; and
• The arrangement uses the laboratory requisition form, which steers the physician toward certain ordering practices and overrides independent medical judgment regarding medical necessity.

Research activities like registries are not always improper and can be intended to promote and support clinical research and treatment, but appropriate documentation, including, where applicable, the review and approval of an institutional review board, is important to document the lawful intent of the research. Such documentation and review, however, will not offset an otherwise noncompliant arrangement. Again, the OIG noted that merely carving out federal health care programs from these arrangements does not remove the risk of an anti-kickback violation. The risk of noncompliance with state law also exists. Summary This latest fraud alert highlights the OIG’s suspicion of financial relationships between laboratories and physicians that involve either the provision of free or discounted goods, equipment or services, or payments of more than fair market value for services. It is noted that the relationship between a laboratory and a physician is of concern particularly because there is typically no input from patients in the selection of laboratories for tests. The decision is fundamentally made by the referring physician. Action Steps Laboratories should:

• Carefully audit all current arrangements to determine if they are compliant and terminate or modify those that are not compliant. Any arrangement must fully comply with a Stark exception and anti-kickback statute safe harbor—fixed, fair market value compensation that does not vary based on the value or volume of referrals. This audit can be conducted by the laboratory itself or an independent party. Regardless of the identity of the auditor, the audit must be conducted in a manner that ensures a comprehensive review of all arrangements.
• Address such arrangements in their compliance plan and make them part of their compliance education and training programs. Be certain that no financial arrangement should be implemented without the consent of a laboratory compliance officer and management.
• Periodically audit arrangements to be certain they remain compliant (audits, no less frequently than annually, are recommended).
• Be prepared to explain to customers what types of arrangements are not compliant and the risks to the customer of a noncompliant arrangement. Ideally, a laboratory should have a written explanation that could be deployed across the entire laboratory platform. This provides written standards for laboratory representatives to follow, is evidence of a laboratory’s intent to be compliant, and can serve as an effective means of challenging noncompliant arrangements of competitors.
• Keep apprised of all government pronouncements and enforcement actions involving those types of arrangements and adjust their practices accordingly. A laboratory should remain current not only with respect to the federal government’s position on these types of arrangements but should also track state government and private or commercial payer developments.
• Document the compliant arrangement in a written agreement with the referring physician. The agreement, among other things, should specify the functions being performed in exchange for the payment and contain a representation and warranty from the physician that he or she is not being otherwise compensated for such services. The functions should be described in as much detail as possible. It would also be advisable if the contract contained a representation and warranty regarding the actual costs of the referring physician associated with the functions since that will be central to any fair market value assessment.
• Determine fair market value—OIG Advisory Opinion 05-08 states that if the payment is greater than Medicare reimbursement for its activity it could be in excess of fair market value. A payment more than a de minimis amount will likely raise a red flag. The recommended approach is to have the payment amount equal the physician’s actual costs so that there is no profit recognized from the payment.

For more information on this article, please contact Richard Cooper, Esq., chair of the National Healthcare Practice Group at McDonald Hopkins LLC, at 216-348-5438 or rcooper@mcdonaldhopkins.com. 1. Specimen collection is reimbursed by Medicare only in certain circumstances where it is customary practice in the region and for that particular physician to charge for specimen collection separately. There are separate CPT codes for processing and packaging specimens for transport to a laboratory.