Stakeholders in the clinical laboratory industry have frequently expressed concern about potentially suspect donations of electronic health records software, information technology, and training services (EHRs) to physicians, with blame cast on all the players—labs, the physicians, and the EHR vendors. The federal government, following the lead of various states, recently tried to address this problem by eliminating laboratories as a category of protected donors of EHRs under pertinent safe harbors and exceptions to the federal anti-kickback statute (AKS) and the federal physician self-referral (Stark) law.¹ This revision to the law is expected to change the competitive landscape for laboratories and reduce fraud and abuse. This change is effective March 27, 2014. Laboratories should act now to unwind arrangements no longer protected by the EHR safe harbor/exception and review their risk profile to ensure compliance with applicable law. Labs No Longer Protected Donors of EHRs On Dec. 27, 2013, the U.S. Department of Health and Human Services Office of Inspector General (OIG) and the Centers for Medicare and Medicaid Services (CMS) jointly released final rules removing laboratories as protected donors of EHRs to physicians, effective March 27, 2014 (the 2013 final rules).² The two agencies have historically sought to maintain consistency between the provisions of the AKS safe harbor and the Stark exception, subject to the differences in the underlying laws, and again attempted to do so here. The revised regulations under the 2013 final rules create a national standard carving “laboratory companies” out of the otherwise broad definition of protected donors of EHRs: The AKS EHR Safe Harbor: “An individual or entity, other than a laboratory company, that provides services covered by a Federal health care program and submits claims or requests of payment, either directly or through reassignment, to the Federal health care program.”³ The Stark Law EHR Exception: “The items and services are provided to a physician by an entity (as defined at 411.351) that is not a laboratory company.”⁴ The agencies explain that “laboratory companies” include laboratories that provide clinical laboratory services and those that provide anatomic pathology services, but generally do not include hospitals with laboratory departments. However, if a hospital-affiliated or hospital-owned company with its own supplier number provides laboratory services that are billed under the billing number assigned to the company (and not to the hospital), then the laboratory is considered a “laboratory company” for purposes of the safe harbor/exception and does not qualify as a protected donor.⁵ Reasoning Behind Removal of Labs as Protected Donors Stakeholders have historically identified alleged bad behavior by various parties with respect to the donation of EHRs by laboratories to physicians. This list of complaints included concerns that laboratories conditioned EHR donations on the receipt of referrals and targeted physician recipients based on the volume or value of potential referrals. Other improper practices alleged include the charging of high fees by vendors to other laboratory companies to interface with the technology donated by a given laboratory and the blocking of other companies from buying the EHRs for donation to their own clients. In complaints lodged against physicians, laboratories argued that physicians threatened to withhold referrals and redirect business absent EHR donations and chose EHRs based on the largest donations offered. This long list of complaints reached the ears of the government. In its August 2006 final rule initially establishing the EHR safe harbor under the AKS, the OIG created a broad definition of protected donors but expressed concern about including laboratories due to past instances of abusive referral payments and a belief that laboratories may not have a comparable stake in advancing the goal of intraoperable EHRs for patients.⁶  Despite this articulated concern in the 2006 final rule, the complaints continued and led to the removal of laboratories as donors in these latest final rules. The agencies justify their exclusion of laboratories as the best means to find a balance between promoting the adoption of intraoperable EHRs and reducing fraud and abuse given the circumstances of which it had become aware:

We believe this decision is consistent with and furthers the goal of promoting the adoption of interoperable electronic health record technology that benefits patient care while reducing the likelihood that the safe harbor will be misused by donors to secure referral. We also believe that our decision will address potential abuse identified by some of the commenters involving potential recipients conditioning referrals for laboratory services on the receipt of, or redirecting referrals for laboratory services following, donations from laboratory companies.

⁷ The government also acknowledges that its new national standard, applicable regardless of location, aligns with the actions of various states, including Missouri, New Jersey, and New York, that have already precluded or restricted laboratories from donating EHRs in order to eliminate suspected fraud and abuse. Activists at the state level supported this federal solution, as did laboratories located in such states who believed they were at a competitive disadvantage when they could not offer EHR donations. Laboratory Interfaces Still Protected Another important aspect of the 2013 final rules is the agencies’ proclamation that limited-use laboratory interfaces fall outside the AKS and Stark law prohibitions. Laboratories typically rely on laboratory information systems (LISs) or special IT systems unique to anatomical pathology and bloodbanking, rather than EHRs, to operate and manage patient information specific to the laboratory. Critical to laboratories, then, are the interfaces that allow their LISs and related systems to interact with the EHRs of physicians and other referral sources. Laboratories generally invest considerable resources in designing, updating, and maintaining these interfaces. Under the 2006 final rules, the government appeared to include items like interfaces and patches under the rubric of the types of EHR that were protected by the EHR safe harbor/exception.⁸ Some risk thus existed that elimination of laboratories as donors in the 2013 final rules also eliminated the ability of laboratories to offer interfaces. Significantly, the government now clarifies that certain limited-use interfaces are outside the ambit of the AKS and the Stark law. Specifically, the OIG indicated that it has long distinguished between free items and services that are integral to a supplier’s services (i.e., lacking independent value) from those that are not integral or that have independent value to the physician. The government concluded that free access to a limited-use interface that has no independent value to physicians would not require AKS safe harbor protection.⁹ Similarly, CMS indicated that the donation of limited-use laboratory interfaces would fall outside of the definition of “remuneration” under the Stark law because the definition does not include “the provision of items, devices, or supplies that are used solely to: (i) collect, transport, process, or store specimens for the entity providing the item, device, or supply; or (ii) order or communicate the results of tests or procedures for such entity.”¹⁰ Accordingly, the provision of such interfaces would not result in a compensation arrangement that would implicate the Stark law’s referral and billing prohibitions. The loss of the protection of the EHR safe harbor/exception will not impact many laboratory interfaces, which are protected under other provisions of the law. Next Steps for Labs In light of the final rules, laboratories may wish to consider some or all of the following steps: Unwinding or Restructuring Arrangements Laboratories should determine if revision to existing EHR contribution contracts with physicians is possible or if termination is necessary prior to March 27, 2014. Parties may consider continuing EHR relationships under other safe harbors and exceptions to the extent requirements can be met. For example, EHRs that are leased at fair market value may potentially comply with safe harbors and exceptions for personal services, equipment leases, or fair market value transactions. Review Other Ongoing Commitments Laboratories should also review any ongoing commitments with respect to maintenance, training, clinical support, or other services provided for free under the protection of the EHR safe harbor/exception. These commitments should be unwound prior to the effective date of the 2013 final rules, or laboratories should confirm that such arrangements comply with other AKS safe harbors and Stark law exceptions. Compliance Analysis of Previous Conduct The government, and in particular the OIG, concluded that a number of practices identified by commenters in the final rules would likely not comply with the EHR safe harbor/exception, presenting risk of an AKS or Stark law violation. For example, the OIG cautioned that any quid pro quo arrangements, whether they originate with the donor, the physician, or the vendor, and conversion arrangements involving equivalent items or services, are problematic and are not subject to safe harbor protection. Similarly, reimbursement for previously incurred expenses and donations of hardware are also not protected. Among other things, CMS also identified quid pro quo arrangements, particularly where laboratories conditioned donations of EHRs on referral by physicians, the targeting of physicians based on their volume or value of referrals, and agreements between laboratories and vendors that preclude or limit the ability of competitors to interface with donated EHRs as conduct that would not meet Stark law exceptions. Given the enhanced fraud and abuse enforcement provisions under the Patient Protection and Affordable Care Act of 2010, laboratories may consider conducting compliance reviews of past conduct and determining their risk profile with respect to previous EHR donations. For example, if an EHR donation was not protected by the EHR Stark law exception (or any other exception) then the physician’s referrals to the laboratory may be tainted, precluding the laboratory from billing for such tests. Importantly, the government did not specifically indicate in the 2013 final rules that it intended to seek out or prosecute such previous conduct for violations of the AKS or Stark law. Laboratories should remember, however, the ever-present threat that qui tam relator plaintiffs (who may be employees or competitors) may pursue claims for suspected fraud and abuse under the federal False Claims Act. Laboratories should consult counsel as appropriate. The revised EHR safe harbor and exception are expected to have a positive effect on competition. Improper use of EHR donations as a means to gain referral sources or a competitive advantage will be largely minimized and laboratories will be allowed to compete on other bases, such as the quality and timeliness of their services and the nature of the tests. Likewise, the quality of laboratory services available to patients should improve, as a physician’s decision to choose a certain laboratory can be better focused on factors such as choice of the best test for the patient, quality of services, availability of tests, and turnaround times. Barbara Cammarata is available at 202-736-8785; bcammarata@sidley.com. Hae-Won Min Liao is available at 415-772-1227; hminliao@sidley.com. 1. 78 Fed. Reg. 78751 (Dec. 27, 2013); 78 Fed. Reg. 79202 (Dec. 27, 2013). 2. The final rules waive the 30-day delay in effective date generally applicable to final rulemakings solely with respect to extension of the “sunset” provision of the final rules. In order to prevent expiration of the EHR AKS safe harbor and Stark law exception, the OIG and CMS have extended the sunset from December 31, 2013, to December 31, 2021, effective immediately. All other provisions of the final rules take effect on March 27, 2014. 3. See 42 CFR §1001.952(y)(1)(i) (emphasis added). 5. 78 Fed. Reg. at 79210. 6. CMS included laboratories in its 2006 final rule establishing the EHR exception to the Stark law because laboratories are suppliers of designated health services under the Stark law. 7. 78 Fed. Reg. at 79208. 4. See 42 CFR §411.357(w)(1) (emphasis added). 8. See, e.g., 71 Fed. Reg. at 45151. 9. 78 Fed. Reg. at 79210. 10. 42 U.S.C. §1395nn(h)(1).