Lab Management: Billing Company Contract Liability Risks & How to Avoid Them

Like many labs, you may outsource your billing and coding to an outside medical billing company. While this might be cost-effective, be aware that it can put your lab at risk for liability under federal and state kickback laws to the extent the billing company charges fees based on a percentage of claims for which it bills and codes.

The Dangers of Percentage Compensation Arrangements

The federal anti-kickback statute (AKS) makes it illegal to offer or pay any remuneration to induce referrals of lab tests or other services reimbursed by Medicare, Medicaid and other federal health care programs (which we’ll refer to collectively as “Medicare”). Percentage compensation arrangements raise a red flag under the AKS because they’re based on the volume and value of business generated rather than the fair market value of the services provided.

While this principle makes sense for direct arrangements between labs and physicians and other referral sources, it doesn’t seem to pertain to an arrangement between labs and third party billing companies who don’t generate any referrals. However, the AKS defines “referrals” broadly as including arrangements not just directly referring but also “recommending and arranging for” services reimbursed by Medicare. The OIG interprets this language as including the provision of marketing services. And it may stretch things even more by interpreting billing and coding as marketing.

OIG Advisory Opinion 2011-17

Even though arrangements paying volume-based percentage fees to third party management companies for billing and marketing services are common in the lab industry, the OIG has historically taken a dim view of them. For example, in Advisory Opinion 2011-17, the OIG weighed in on a proposed arrangement under which physicians would pay 60% of their gross collections from allergy testing and immunotherapy services to a third party company for a fully array of laboratory management services, including billing and coding.

The parties contended that the fee was equal to fair market value but the OIG wasn’t impressed. The AKS was implicated under the “recommending and arranging for” services language, the OIG noted, reasoning that the management company’s provision of print materials to the physicians in their offices and use of management company personnel to review patient files and flag those who may be suitable for allergy testing constituted marketing.

The OIG also found that the arrangement didn’t qualify for the personal services and management contracts safe harbor (which we’ll discuss below) because aggregate fees were based on the volume and value of business generated between the parties and not set in advance. Even though an arrangement that doesn’t qualify for safe harbor treatment can still be legal, the Finally, the OIG concluded that there weren’t adequate safeguards in place to allay the AKS concerns. Elements of the arrangement that the OIG cited as being problematic:

• The percentage fee wasn’t tied to the actual services the lab services management company provided; and
• The use of management company to review physicians’ charts and identify potential allergy testing patients created the risk of overutilization.

How to Manage the AKS Liability Risks

If possible, try to structure your arrangements to meet all seven criteria of the regulatory safe harbor for personal services and management contracts. Focus on three key criteria, including ensuring that the contract:

• Sets the amount of total aggregate compensation in advance, rather than being based on a rate yielding a total amount that can’t be determined at the outset of the deal;
• Bases total compensation on fair market value; and
• Doesn’t determine compensation in a way that takes into account the volume or value of Medicare referrals or business generated by the parties.

The other four criteria the arrangement must meet for the safe harbor to apply:

• It must be contained in a written agreement signed by both parties;
• The agreement must have a term of at least one year;
• The agreement must set out the exact services required to be performed; and
• The arrangement must serve a commercially reasonable business purpose.

Takeaway: You probably already realize how percentage compensation arrangements raise AKS liability risks when your lab contracts with third party marketing companies. What you may not realize is that these same risks may arise when the third party you contract with provides billing and coding services. While you might think you’re making a purely administrative arrangement, the OIG may interpret the contract as a marketing deal and subject it to AKS scrutiny, especially when the billing company’s fees are pegged to the volume or value of claims billed and coded.