For more than a quarter century, clinical laboratories have struggled with the Medicare program over application of medical necessity requirements to laboratory services. The issue is complicated because, most frequently, a laboratory claims payment for the services, but the tests were ordered by an unrelated physician. This results in tension among various Medicare statutory principles: The Medicare program pays only for services that are reasonable and necessary to diagnose or treat an illness or injury,¹ and Medicare providers are required to furnish documentation to support Medicare payments due them.² However, under limitation of liability and related “without fault” provisions discussed below, a provider is to be protected from financial liability when it did not know or have reason to know that payment for its services would be denied based on lack of medical necessity. The specific nature of medical necessity disputes has changed since the early years of Medicare because clinical laboratories are now required to submit a diagnosis code on Medicare claims for payment, and ordering physicians are required to provide laboratories with diagnosis or other medical information required for the laboratory to receive payment.³ Additionally, national coverage determinations (NCDs) and local coverage determinations (LCDs) frequently provide laboratories with some ability to determine, in advance, whether Medicare will consider a test to be medically necessary. We will address below Medicare medical necessity requirements, Medicare financial liability protection provisions and related principles, and the application of these principles by courts and the Department of Health and Human Services (HHS), of which the Centers for Medicare and Medicaid Services (CMS) is a part. We then offer suggestions as to how a clinical laboratory may reduce loss of revenues from tests later determined to lack medical necessity. Medicare Medical Necessity Requirements It is well-recognized that a test can be found not “reasonable and necessary” if it is determined to be not medically necessary given the patient’s diagnosis or condition.⁴ In addition, a claim for a clinical laboratory test can be denied as not reasonable and necessary if the test is determined to be not safe and effective or if it is considered experimental or investigational.⁵ There are, however, numerous other bases on which a laboratory test can be found to be not reasonable and necessary. This might be the case if the test was not “ordered” in accordance with Medicare requirements, if the physician ordering the test was not the “treating” physician, or if the ordering physician did not use the test results to diagnose or treat the patient’s specific medical problem.⁶ In many cases, the completed test requisition—the only information available to the laboratory prior to performance of the test—will not provide any indication that the requested test was not reasonable and necessary. In fact, based on the diagnosis information provided by the physician, it may appear that the test requested satisfies medical necessity requirements as specified in an NCD or LCD. However, the medical records maintained by the ordering physician may fail to support coverage of the test. As part of a post-payment audit, it may be determined that the test “order” was not reflected in the patient’s medical record, the medical record entry was not properly authenticated, or the content of the medical record did not support the diagnosis code included on the requisition. At least one Medicare contractor has found medical records inadequate when they did not explain the reason that certain tests were ordered, i.e., provide a “nexus” between the patient’s signs and symptoms and the tests that were ordered. Medicare Financial Protection Provisions The Medicare statute includes limitation of liability provisions which indicate that when services furnished by a provider are determined not to be reasonable and necessary, Medicare will nevertheless pay the provider for its services, so long as neither the individual for whom the services were furnished nor the provider knew, or could reasonably have been expected to know, that Medicare would not reimburse the items or services in question.⁷ The Medicare statute also provides that overpayments should not be recovered from a provider if it was “without fault,” i.e., if it exercised reasonable care in billing and accepting Medicare payment.⁸ This requires that the provider have made full disclosure of all material facts and that, based on the information available to the provider, it had a reasonable basis for assuming that the payment that it received was correct. Medicare administrative contractors and other Medicare auditing organizations are specifically required to make a limitation of liability and “without fault” determination when a claim is denied because an item or service is not reasonable and necessary.⁹ Application of Statutory Principles Based on the limitation of liability and “without fault” authorities discussed above, clinical laboratories would appear to have a strong argument that they should not be required to forego payment for services that are determined not to be reasonable and necessary—or to repay amounts previously received from Medicare—when the only basis for denial of the claims is the content of the physician’s medical records. In earlier years, these arguments appear to have been accepted frequently. These arguments have not fared nearly as well in recent years, although the controversies have frequently related to items or services other than clinical laboratory tests. This appears to be true for at least three reasons. First, in several cases, there may have been significant question whether the provider furnishing the services was independent of the ordering physician, such that it actually had no reason to believe that the services ordered by the physician were not medically necessary. Second, the Medicare Appeals Council and courts reviewing its decisions have permitted the statutory obligation of the entity seeking Medicare payments to provide documentation supporting its claims to trump any argument based on the supplier’s lack of knowledge of the reasons for which the test was ordered, how the results were used, or its lack of access to related medical record documentation. Additionally, even though regulations require only that the laboratory maintain documentation received from the ordering physician and documentation demonstrating that its Medicare claim accurately reflected that information, a laboratory’s failure to provide additional documentation supporting medical necessity has resulted in denial of claims for payment.¹⁰ CMS Understands the Laboratory’s Problem In one recent decision involving tests furnished by an independent diagnostic testing facility (IDTF), the council stated that the “entity submitting the claim for its services will not receive Medicare coverage . . . unless the services are documented as reasonable, necessary, and otherwise in compliance with Medicare requirements.” The council recognized that “providers of laboratory . . . services are dependent upon the ordering physicians to provide part of the documentation required to obtain Medicare coverage for their services.” Nevertheless, it held that the IDTF was financially responsible for the services that it furnished when it was unable to provide documentation to support their medical necessity. According to the council, “Medicare’s documentation requirements are not intended to make . . . laboratories . . . the reviewers of the medical necessity, but rather require those entities, if they are going to bill Medicare, to support their claim for payment with documentation showing that the service is a service covered by Medicare.”¹¹ Second, findings that a provider knew or had reason to know that a claim would be denied have been supported by the thinnest of reeds. In an appellate decision frequently cited by HHS, the court relied on regulations stating that a provider is deemed to know the content of manual issuances, bulletins, and other written guidelines provided by CMS or the Medicare contractor. According to the court, since these guidelines indicated that the supplier was responsible for supporting medical necessity with documents that were generally in the possession of the ordering physician, it had sufficient notice that Medicare might require such documentation and would deny the claim if it was not provided.¹² Therefore, although the court did not find explicitly that the provider knew or could have been expected to know “that payment would not be made,” it upheld the council decision that the supplier would not receive protection under limitation of liability provisions. The council has also found that an IDTF had reason to know that its claim would not be paid because the contractor’s denial of coverage put it on notice that additional documentation supporting medical necessity was required.¹³ In another case, the council did not even address application of potentially applicable limitation of liability principles, resulting in a federal court’s remand of the case back to the council so that it could do so.¹⁴ Preventive Actions Although clinical laboratories may view the medical necessity issue as Medicare’s version of “blame the victim,” there are some actions that a laboratory can take to protect itself from denial of Medicare claims based solely on the content of the physician’s medical record or its lack of access to those records. A laboratory can educate physicians regarding its need for a copy of the physician’s medical records to support the medical necessity of clinical laboratory tests that the physician ordered.¹⁵ If there is any type of contractual relationship with the physician or medical group, the laboratory might consider including a provision requiring the physician or medical group to provide medical record documentation upon the laboratory’s request. A laboratory should encourage referring physicians to personally sign test requisitions. Although CMS has stated that this is not required by Medicare regulations, a signed requisition may eliminate risk of assertions that the test was not “ordered” (or that the laboratory did not provide documentation of the test order) or that the order was not authenticated as required by Medicare regulations. A laboratory should also confirm that it is obtaining Advance Beneficiary Notices of Noncoverage (ABNs) whenever appropriate and is encouraging physicians to do so on its behalf when the individual for whom testing is to be performed does not personally present at a laboratory patient service center.¹⁶ Conclusion Medical necessity requirements will continue to raise troublesome issues for laboratories. However, laboratories should take available actions to limit their financial exposure and should continue to argue based on limitation of liability principles in appropriate cases. After all, in doing so, they are asking only that these provisions be applied based on their stated terms, as Congress likely intended. Robert E. Mazer is a shareholder in the Baltimore-based firm of Ober|Kaler where he concentrates on representation of hospitals, clinical laboratories and other providers of diagnostic services. He can be reached at remazer@ober.com. 1. 42 U.S.C. § 1395y(a)(1)(A). 2. 42 U.S.C. § 1395l(e). 3. 42 U.S.C. § 1395u(p)(4). Although this statutory provision does not expressly provide for penalties, at least one Zone Program Integrity Contractor has indicated that a referring physician’s failure to provide the required documentation may result in revocation of its Medicare enrollment and billing privileges. 4. See Medicare Program: Negotiated Rulemaking: Coverage and Administrative Policies for Clinical Diagnostic Laboratory Services; Final Rule, 66 Fed. Reg. 58788, 58792 (Nov. 23, 2001). 5. Medicare Program Integrity Manual (“MPIM”), §§ 3.6.2.2, 13.5.1. 6. See 42 C.F.R. 410.32(a). 7. See 42 U.S.C. § 1395pp(a). 8. 42 U.S.C. § 1395gg(b); see also, Medicare Financial Management Manual, Ch. 3, § 90. 9. MPIM, § 3.6.2.3. 10. See Meridian Laboratory Corp. v. AdvanceMed Corp. (PSC), Departmental Appeals Board, Decision of Medicare Appeals Council, 2011 WL 6960470 (June 24, 2011), remanded, 2012 WL 3112066 (W.D. N.C. 2012). 11. Virtual Imaging Services v. First Coast Service Options, Departmental Appeals Board Decision of Medicare Appeals Council, M-14-1254 (May 16, 2014). 12. Maximum Comfort, Inc. v. Secretary, 512 F. 3d 1081, 1088-89 (9th Cir. 2007). 13. See D/B/A I.M.I.G. Sonomed Diagnostics, Departmental Appeals Board, Decision of Medicare Appeals Council, 2013 WL 7217919 (March 7, 2013). 14. Meridian Laboratory, 2012 WL 3112066. 15. Medicare regulations provide for CMS to request such documents from the ordering physician. If it does not receive the requested documents, the Medicare claim is denied. They also permit the laboratory to request such documents from the physician. 42 C.F.R. § 410.32(d)(2), (3).  One MAC has indicated that a physician’s failure to cooperate with a supplier violates a legal requirement.  See n.3 and accompanying text. 16. The provision of an ABN, however, has been used as evidence that the provider had some knowledge that the services would be denied on medical necessity grounds. CMS forbids “routine ABNs” that state only that Medicare denial of payment “is possible”; according to the agency, an ABN must specify a “genuine reason that denial by Medicare is expected.”CMS Medicare Claims Processing Manual, Ch. 30, § 40.3.6.1. It is difficult to reconcile this manual provision with the agency’s position that a Medicare provider may not invoke limitation of liability because it should be aware that Medicare payments may be denied if additional documentation required to establish medical necessity is requested, but not provided. See n. 12 and accompanying text. Close attention to ABN requirements is generally advisable. In one recent case, an administrative law judge ruled that an ABN that was provided to a patient after he arrived at a hospital for collection of his specimen was ineffective because it was a last-minute, coercive notice that did not permit the beneficiary to make a rational, informed consumer decision. Appeal of Olympic Medical Center, ALJ Appeal No. 1-1097162747 (Dec. 9, 2013), appeal pending, Medicare Appeals Council (2014). ABNs have also been rejected based on use of acronyms, because they were “equivocal” or because they did not provide a meaningful explanation of reasons why Medicare was likely to deny payment.

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