Don’t Overlook Varying State Requirements Applicable to Independent Clinical Labs

Through acquisition, merger, or organic growth, labs may find their operations expanding regionally or nationally. If your lab is operating facilities in multiple states or testing specimens collected or received from patients in multiple states, you must understand the distinct laws and rules in each applicable state. As these state law requirements may be different from those that apply in the state in which your lab facility is based, you may need to alter certain business practices and update the lab's compliance program and control protocols. All labs must also be cognizant of the ever changing legal landscape and monitor each applicable state for new or amended state laws and rules.

The majority of states contract with CMS to administer the CLIA program for lab facilities operating in the state (independent, hospital, or physician-office lab). The states of New York and Washington have adopted laws that are equal to or more stringent than the CLIA regulations, and therefore, lab facilities operating in these states are termed CLIA-exempt.¹

While many states follow or adopt the CLIA regulations for lab facility and personnel requirements by reference, multiple states impose additional requirements beyond the CLIA prerequisites to operate a lab facility or collection station within the state. Several of these states impose the same or similar state requirements upon out-of-state labs testing specimens collected or received from patients in the state. In addition, a lab that is "doing business" in a state, will be subject to the state business laws applicable to such commercial activities.

This article discusses in more detail several state law requirements that may apply to your lab operations. However, there are numerous other state law requirements that an independent clinical lab must understand and comply with that are not addressed in this article.

State License or Permit
A state license or permit may be required to operate a lab facility in the state or for an outof- state lab to test specimens collected or received from patients in the state. Typically, a hospital or physician-office lab performing diagnostic tests for its patients is exempt from such state license or permit requirements, but may need to register with the designated state agency. Currently, 23 states (including Washington D.C. and Puerto Rico) impose licensure or permit requirements on independent labs physically located in the state, and 7 of those states (and Washington D.C.) impose state licensure or permit requirements on out-of-state labs testing specimens collected or received from patients in the state. Most of the remaining states only require a CLIA certified or accredited lab to register with the designated state agency. (See box on page 9-10 for a list of states with license or permit requirements).

The requirement to obtain a state license or permit is generally limited to labs performing moderate to high complexity testing (waived and provider performed microscopy procedures (PPMP) testing generally require only registration and approval). The lab may only perform the specialty or subspecialty procedures authorized under its state license or permit. It is important to note that any change in ownership, the lab director, or the physical location of the lab facility may automatically void or revoke the existing state license or permit unless prior notice and approval by the state agency.

The state licensing laws typically address common issues such as applications, training requirements, fees, renewal, cancellation, and exceptions. In some states, the lab may be subject to performance standards, on-site inspections and/or proficiency testing conducted by the state agency to assess compliance with state requirements, including specimen collection, handling, transporting, identification, examination and storing and quality control, recording, test reporting, and even advertisements.

Failure to comply with these requirements may result in civil or criminal penalties, depending on the state, enforced against the individuals performing tests and owning, operating, or maintaining a testing facility without a proper license or permit. While some states may issue a temporary permit, the lab is not otherwise authorized to begin testing specimens during the period of time the application is under review.

There are also nuances to this issue for certain specific operations:

Reference Laboratory: There are several states that require an out-of-state lab to obtain a state licensure or permit if acting as a reference lab to an in-state licensed lab. In fact, in several states, the referring laboratory could have its state license revoked if it refers a specimen for examination to a lab which is not properly licensed by the state agency. Whereas certain states only require that the out-of-state, reference lab is approved by the state agency and comply with state requirements for specimen collection, identification, examination, quality control, and test reporting. Of course, there are usually exemptions to such rules; for example, Pennsylvania state law does not require an out-of-state reference lab to be issued a state permit in order to receive and test a specimen from an in-state lab, if the referring lab is unable to perform a "needed test."²

Collection or Draw Station: Depending on the state, there are three types of state requirements that may impact the operation of a collection station (synonymous with draw station, patient service center, or outpatient center) by an independent lab within the state.

First, several states require a collection station to be operated by a state licensed lab or to be licensed by the state agency. The Florida statute is representative of this type of state requirement: "[i]f person represents or maintains an office or specimen collection station or other facility for the representation of any lab in-state or out-of-state which makes examinations in connection with the diagnosis and control of diseases." In some states, to collect or receive specimens for analysis by a lab not licensed by the state agency is a limited or prohibited act.

Second, a few states require an in-state or out-of-state lab to register a collection station with the state agency and comply with state requirements for specimen collection, identification, shipping, and recording.

Third, several states limit or prohibit the location of a collection station or the placement of a phlebotomist in a physician's office. For example, in New York, a lab is prohibited from locating a collection station "within or sharing space in any part of the practice, administrative, office or waiting area of any health services purveyor that refers specimens to the clinical laboratory."³

Lab Personnel
CLIA regulations require individuals performing moderate to high complexity or PPMP testing to possess a current license issued by the state in which the lab facility is located (if such licensing is required), in addition to meeting the level of personnel skill and training required by the CLIA program.⁴ However, only a minor percentage of states have state licensure requirements for certain lab personnel. Typically, the states have opted to regulate the lab personnel and require minimum qualifications and experience standards.

Depending on the state, the term "lab personnel" may include lab directors, supervisors, assistants, scientists, technologists, technicians and phlebotomists. In some states only the laboratory director must obtain a state license, while in others the lab director and other specified lab personnel must obtain a state license or certificate of qualification. The components of the laws vary by state, but typically the state agency will examine the credentials of lab personnel by requesting documentation of certification, education, training, or professional competency and require the lab to maintain current records of the same. Generally, lab directors and scientists are able to perform any test in their specialty or subspecialty areas, and technicians are limited to performing tests that do not require independent judgment and must work under supervision.

Typically, the state requirements related to lab personnel do not apply to pathologists (or pathologist assistants) duly licensed and registered to practice medicine in the state and certified or eligible for certification by the American Board of Pathology. However, it is important to note that there may be state licensure issues to address if an out-of-state pathologist examines a specimen and renders a primary diagnosis of a patient who is located in another state. The question is whether the pathologist is engaged in the practice of medicine and must be licensed by the originating state. A majority of the states restrict out-ofstate physicians from diagnosing or treating patients in the state without a state license to practice medicine. For example, South Carolina has opined that an out-of-state pathologist would need to be licensed under its state law; however, a "pathologist who merely reports a numerical value, such as a prothrombin time, would not have to be licensed by the State."⁵

Finally, the American Society for Clinical Pathology has taken the position that the CLIA lab personnel standards are insufficient for "the complexity of new test requirements, especially for genetic and molecular testing…" and "[s]tate licensure laws can and should provide higher standards." 6 As such, the industry may experience new and more stringent state regulation of lab personnel related to training and qualification requirements.

Waiver of Copayment and Deductible
A major issue in the lab industry is the waiver of cost-sharing amounts owed by patients under their private health benefits plan (i.e., deductible and coinsurance) (also referred to as "out-of-pocket costs"). There are currently only a handful of states with statutes, regulations, or guidance that expressly limit or prohibit the waiver of the cost-sharing amount owed by the patient.7 Furthermore, unlike the federal Anti-Kickback Statute, most state anti-kickback laws only prohibit the offer, payment, solicitation or receipt of remuneration to a referring provider—not to a patient—and thus do not encompass such waivers.

As a result, commercial insurers have initiated civil actions against providers, including labs, alleging the practice of waiving deductibles and coinsurance violates certain state insurance fraud and unfair competition laws.8 The majority of the state insurance fraud laws throughout the country prohibit the "knowing submission of false or misleading information" concerning "any fact or matter material to the claim." The argument, in summary, is that if the provider had no intention of collecting the deductible or coinsurance, in whole or part, from the patient upon submission of the claim, then billing the full service charge is a false claim or at least a fraudulent misrepresentation of the provider's actual charges.

The complexity inherent in a state regulated insurance industry, however, is that each individual state may promulgate, interpret and enforce seemingly similar state laws in a divergent manner. For example, the term "material" is not always clearly defined under most state insurance fraud laws or consistently interpreted by the state agency overseeing the enforcement of the law.9 Nonetheless, a common premise is that advance notice to the insurer of the intent to waive or not pursue the patient for the deductible or coinsurance may offer a stronger defense against a civil action for violation of state law or common law.10 Nevertheless, the notice and disclosure may result in a denial of the claim and, if the insurer does not accept, a provider risks displaying the requisite intent.

Another common cause of action alleged is tortious interference of contract between the insurer and enrollee related to the contractual obligation of the enrollee to pay a defined cost-sharing amount for the health service.11 In fact, certain health plans have started to withhold or deny payment to out-of-network providers, including labs, unless and until the provider submits proof that the patient has paid the full amount of his or her cost-sharing obligation in accordance with the plan policy. The argument, in summary, is that the terms and conditions of the plan policy do not obligate the insurer to make payment for health care services unless and until the plan enrollee has incurred any expenses and met his or her cost-sharing obligations. Depending on the applicable state law, this may violate prompt payment laws and be grounds for a breach of contract action against the insurer. However, this practice is relatively recent and this author is not aware of any case law addressing the legality of the practice.

Moreover, the implementation of the Marketplace under the Affordable Care Act ("ACA") is reflective of a recent trend in the health insurance industry to market lower premiums (or the face-value) by deferring costs on the backend through a higher deductible and coinsurance. In the end, the negative result of this trend is that patients will not be able to cover the high out-of-pocket costs, and the providers will need to address how to deal with the increased collection activities and loss of revenue due to unpaid patient services.

Charles C. Dunham IV is an Associate in the Health Care and Life Sciences practice at Epstein Becker Green, 250 Park Avenue, New York, NY 10177, and is available at 212.351.5582; CDunham@ebglaw.com