Diagnostic Laboratories and Radiology Services will pay $17.5 million to settle allegations of paying kickbacks to skilled nursing facilities (SNF) in exchange for the referral of fee-for-service Medicare and Medicaid laboratory testing.
The settlement covered both the federal and California’s False Claims Acts (FCAs) alleged violations. Any laboratory doing business with SNFs should read about this case and follow its progress because of the implications for those labs.
Diagnostic Labs, formerly Kan-Di-Ki Inc., one of the largest providers of laboratory and radiology services for nursing homes in California, took advantage of different payment systems in SNFs for patients in a Part A (inpatient) or Part B (outpatient) stay. The system, known as consolidated billing (enacted as part of the Balanced Budget Act of 1997) said that SNFs should be paid under a consolidated billing arrangement, essentially a bundled payment, for nearly all services including laboratory testing for Part A beneficiaries and fee-for-service for SNF patients in a Part B stay.
The Part A patients were paid a set fee by Medicare for all of the included services, which allowed the SNF to negotiate, if it could, discounted rates from other providers like labs and increase its profits on Part A beneficiaries. The discounts they received, if any, should have been shared with the government.
According to a report in the California Watch (
http://californiawatch.org/), Diagnostic Lab provided discounts as steep as 70 percent off its regular fees, or capitation rates low as $1 per patient per day for Part A patients, as long as the SNF referred its Part B lab and radiology services to Diagnostic. The alleged scheme started in March 2005, and the case was filed in 2010 and unsealed in November 2011.
Diagnostic stated in court documents that the whistleblowers made the leap that giving discounts equals an intent to induce referrals and that there is no factual evidence that tied any specific referral to any remuneration. In a Watch news article, Zack Buck, a visiting assistant professor at Seton Hall Law School who teaches a class on health care fraud and abuse, said, “Diagnostic may have some right to offer discounts to their clients. The question is, where do you cross the line and it becomes an inducement to refer business? That’s what’s sticky.”
The settlement has been reported at $19.4 million and $17.5 million. The difference is the $1.9 million paid to the attorneys of the two whistleblowers in the case. Former employees, salesmen Jon Pasqua and Jeff Hauser, said they tried to report the questionable practices to supervisors but were ignored. They will receive $3,755,500 to share as their part of the recovered money.
Practical View
These kinds of arrangements are not all that uncommon in the laboratory industry. Laboratories that do business with SNFs face complex pricing and service challenges in a marketplace where resources are already tight and profit margins are already thin, if they exist at all. Labs and nursing homes may even be part of the same system in some cases. Competition for the more profitable Part B business can lead to aggressive arrangements or contracts where the involved facilities both receive some benefit but, because the lab is receiving the higher-paying referrals directly, it becomes the entity at fault under the anti-kickback statute and FCA.
Tips for Labs
Laboratories doing business with nursing homes should have contracts in place that spell out the specifics of the arrangements between the parties. If there are provisions that include discounts for the Part A beneficiaries, make certain that the contract clearly states that the discounts are not dependent on the referral of Part B services.
Besides the contract, the laboratory should be able to show that the discount offered on the Part A business is commercially feasible and would be profitable even without any Part B referrals.
Also, the regulations governing this relationship do not require the SNF to defer the Part B billing to the lab providing services. It could contract in an “under arrangements” manner for the services and bill them directly to Medicare. The lab could discount its services equally for both sets of business and reduce its risk since there is no “swapping” of discounts. Other things to consider when doing business with SNFs are that these kinds of clients tend to have high service needs for services that are, for the most part, not reimbursed and they have high turnover of employees requiring repeated training to maintain compliance with the billing needs of the laboratory.
Takeaway: It is likely that, because of this case, laboratories doing business with nursing homes may face increased scrutiny and whistleblower suits and should examine their arrangements with their SNF clients to ensure compliance with anti-kickback statute provisions. 