Special Report: 5 Lab Kickback Risks Involving Incentives

As covered in previous G2 Intelligence Special Reports, the Anti-Kickback Statute (AKS) makes it illegal for laboratories and other healthcare providers to exchange (or offer to exchange) anything of value to induce or reward the referral of business reimbursable by federal healthcare programs. “Anything of value” includes a variety of incentives. This report covers five common kickback risk areas involving: patient data registry arrangements, favorable rent agreements, provider referral exchanges, waiver of copays and deductibles, and EPSDT (early and periodic screening, diagnostic, and treatment) incentives.

Risk Area 1: Patient Data Registry Payments

It has become increasingly common for labs to get involved in registry arrangements. Such arrangements involve the establishment, coordination, or maintenance of databases, either directly or through an agent, to collect data on the demographics, presentation, diagnosis, treatment, outcomes, or other attributes of patients who have undergone, or who may undergo, certain tests that the lab performs. Often, these arrangements are made in support of research into the effectiveness of certain tests or utilization patterns.

In addition to Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other privacy issues, such practices, though they can be used for legitimate purposes such as promoting research and treatment, also raise kickback concerns. The U.S. Department of Health and Human Services Office of Inspector General’s (OIG’s) June 2014 Special Fraud Alert on Specimen Processing Arrangements covers registry payments, warning that “Registry Arrangements may induce physicians to order medically unnecessary or duplicative tests, including duplicative tests performed for the purpose of obtaining comparative data, and to order those tests from laboratories that offer Registry Arrangements in lieu of other, potentially clinically superior, laboratories.”¹

According to the OIG, registry arrangements hold kickback risks since they induce physicians to order unnecessary or duplicative tests so they can submit more data and thus receive higher payments. Characteristics that the OIG considers potentially unlawful include arrangements where:¹

• • The lab requires or encourages a certain frequency or volume of tests to be performed and reported on for payment to be received.

• • The lab collects comparative data for the registry form and bills for multiple tests that may be duplicative, e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information, or that otherwise aren’t reasonable and necessary.

• • The compensation is paid per-patient or in another manner that takes into account the volume or value of referrals.

• • The compensation is not fair market value for the services rendered or is not supported by documentation evidencing efforts.

• • The research is limited to the lab’s proprietary tests or only to the lab’s patients.

• • The physicians selected to participate in the registry are only high-volume referrers.

• The arrangement uses the lab’s requisition form, which steers the physician toward certain ordering practices and overrides independent medical judgment regarding medical necessity.

What to do

Appropriate documentation, including, where applicable, the review and approval of an institutional review board, is important to show the lawful intent of the research. Such documentation and review, however, won’t offset an otherwise noncompliant arrangement. Again, the OIG has noted that merely carving out federal healthcare programs from these arrangements doesn’t remove the risk of an Anti-Kickback Statute (AKS) violation.

Recognize that the OIG is suspicious of lab registry arrangements and vet any arrangements you implement or are thinking of implementing to ensure they don’t exhibit what the OIG describes above as potentially unlawful characteristics. While no one characteristic or group of characteristics is dispositive, the more suspect elements your registry arrangements exhibit, the greater your compliance concerns should be.

Risk Area 2: Leasing or Renting Space from Physicians

Labs may rent or lease space directly from a physician or a building that the physician owns for use by its own phlebotomists and other lab personnel. These arrangements raise red flags under the AKS and Stark Law.

For example, Quest Diagnostics agreed to pay $315,093.35 for allegedly paying kickbacks to a referral source. Quest self-disclosed the conduct to the OIG, which involved rent payments made by one of its New Jersey labs to a medical practice at above fair market value. Although there’s not much information available about the case, the apparent takeaway is that Quest caught the problem and used the OIG self-disclosure protocol to minimize its resulting liability.²

The arrangement may also work in reverse where the doctor is the landlord and the lab/tenant pays rent above fair market value. For example, in 2022, BioReference Health, LLC, (formerly known as BioReference Laboratories, Inc.) and its parent company, OPKO Health, Inc., agreed to pay $9.85 million to settle charges of leasing office space from physicians at above-market rents to induce lab test referrals. BioReference allegedly overcalculated the amount of rental space required for its patient services centers by including a “disproportionate share of common spaces” over which it didn’t have exclusive use, according to the DOJ. The former BioReference employee who brought the original whistleblower lawsuit received a roughly $1.7 million share of the settlement.³

In addition to the fact that BioReference is a huge lab, another reason that the settlement price tag for this case was so high was that after OPKO acquired BioReference, the companies conducted multiple internal audits showing that lease payments to the specified physician-lessors exceeded fair market value. But BioReference didn’t report or return any overpayments to federal health programs in which improperly referred patients participated.

What to do

Be mindful of the liability risks of leasing or renting space that’s owned by a physician or another entity that may make or control referrals to the lab. If you do make such arrangements, it’s crucial to ensure that they meet the AKS space rental safe harbor,⁴ and if the lease is with a physician, the Stark space rental exception.⁵ The requirements of each are similar:

• • The parties must execute and sign a formal written lease with a term of at least one year. The Stark regulations also permit month-to-month holdover rentals, on the same terms as the preceding lease, as long as the holdover meets the exception criteria and the preceding lease: i.) lasted at least one year, and ii.) met all the criteria of the exception when it expired.

• • The rent must be set in advance and not exceed fair market value.

• • Under the Stark exception, the lease also must be commercially reasonable without taking into account the volume or value of federal program referrals from the landlord. That requirement may not be met if the lab operates the collection center solely to service the landlord physician—and does not also use the station to deliver lab services to other customers.

• The leased premises must be dedicated to the exclusive use of the lab and be necessary for the lab’s operation.

A common complication arises when the lab’s draw station is not in a separate office suite from the leasing provider’s practice and the lab shares space with the medical practice. The OIG has provided a formula for allocating common space shared either physically or temporally by a lab and a referral source. However, even if the shared space is properly delineated in the lease, the lab often must overcome the challenge of preventing its space from being used by its valued lab customer as a storage room, overflow office, or conference facility.⁶

The need to comply with the strict letter of Stark when entering lease agreements with physicians is highlighted by the March 2011 settlement by Fairview Northland Regional Health Care in Minnesota.⁷ After self-disclosing conduct to the OIG, the medical center settled alleged Stark and AKS violations for $50,000. The OIG alleged that Fairview Northland had an unwritten lease agreement with a physician practice. According to a September 2011 legal update by law firm Foster Garvey, “the case underscores that the OIG cares about technical as well as substantive compliance with the Stark Law.”⁸

Risk Area 3: Participating in Provider Referral Exchanges

Rather than interface directly with physicians, labs may establish the necessary links by participating in referral exchanges created by third-party electronic health record (EHR) vendors. Although these services are vital in promoting coordinated and effective healthcare delivery, the fees charged to use them create potential kickback concerns.

The OIG addressed these concerns for the first time in December 2011 Advisory Opinion 11-18. A practice management services vendor wanted to know if it could offer a package of EHR software to physicians for a discounted monthly fee plus a per-transaction fee for transferring health records to labs (and other ancillary providers), who also had to pay the transaction fee. The amount of the transaction fee varied depending on whether the lab was a “trading partner,” i.e., subscriber to the service. The OIG said the arrangement was okay. Even though the fee structure gave physicians a financial incentive to make referrals to “trading partners,” the network was open to all healthcare professionals and the fees charged reflected fair market value, the OIG concluded.⁹

But in April 2014, the OIG revisited the issue in Advisory Opinion 14-03. Result: For the first time ever, it actually rescinded an Advisory Opinion. The requestor in this case was a national lab that wanted to use the very same referral system addressed in AO 11-18 to create a bi-directional interface between the system and the systems of its client physicians allowing for direct transfer between the parties. Under the proposed arrangement, the lab rather than the ordering physician would pay the transaction fees associated with the transfers, and per-order amounts would be subject to volume-based discounts. The OIG rejected the arrangement, citing three problems:¹⁰

• • it took away the physicians’ previous ability to order and receive test results electronically from the lab without a fee, e.g., via fax, and forced them to pay the vendor a fee for ordering tests from an out-of-network lab,

• • the fee structure could influence referrals because the more tests physicians ordered, the less they’d have to pay, and

• there appeared to be no other reason for the requestor to pay fees to the vendor except to secure referrals.

Risk Area 4: Waiver of Copays and Deductibles

Labs may waive patients’ copays, deductibles, or other cost-sharing amounts for a number of reasons—to accommodate the patient, as a professional courtesy, or as a marketing tactic, to name a few. This practice raises potential problems. The OIG has argued that providers who routinely waive copays are misrepresenting their actual charges on which Medicare Part B reimbursement is based. More significantly, copays and deductibles are designed to discourage overutilization and reduce costs. By waiving them, labs defeat these disincentives.

In a 1994 Special Fraud Alert, the OIG took the position that waiving copays, deductibles, or other cost sharing amounts raise AKS issues if “one purpose” of the waiver is to induce or reward federal program business. The OIG has specifically warned against the following practices:¹¹

• • advertisements stating “Medicare Accepted as Payment in Full,” “Insurance Accepted as Payment in Full,” or “No Out-of-Pocket Expenses”;

• • advertisements promising “discounts” will be given to Medicare beneficiaries;

• • routine use of “financial hardship” forms which state that the beneficiary is unable to pay the coinsurance/deductible without a good faith attempt to determine the beneficiary’s actual financial condition;

• • collection of copays and deductibles only where the beneficiary has Medicare supplemental insurance (“Medigap”) coverage which, in effect, makes services “free” to the beneficiary;

• • charges to Medicare beneficiaries which are higher than those made to other persons for similar services and items so that the higher charges offset the waiver of coinsurance; and

• failure to collect copays or deductibles for a specific group of Medicare patients for reasons unrelated to being unable to afford basic necessities.

Waiver of copays and deductibles of privately insured patients

It’s not just Medicare, Medicaid, and other government health programs. Routine waivers of copayments and deductibles can also cause AKS compliance issues with private payers. A good example is the case involving BlueWave Healthcare Consultants Inc., the same marketing firm implicated in the Health Diagnostics Laboratory Inc. (HDL) and Singulex case discussed in other G2 Intelligence reports. The U.S. Department of Justice (DOJ) argued that routine waivers of copays and deductibles by BlueWave clients were kickbacks to induce referrals even though they applied to patients of private insurers. BlueWave disagreed and asked the South Carolina federal court to throw out the charges without a trial.¹²

The court refused, reasoning that waivers of private insurance copays and deductibles may amount to kickbacks under the AKS and citing evidence suggesting that the waiver arrangements in this case did cross the line:

• • BlueWave’s agreement with HDL and Singulex allegedly required the labs to agree not to charge patients for copays and deductibles, and

• BlueWave then leveraged the labs’ no-balance billing practices to induce referrals by highlighting those practices in the marketing pamphlets it gave to physicians.

The concept of finding a kickback violation based on an arrangement involving services paid by private insurers is nothing novel, notes Baker Donelson attorney Robert Mazer. For example, the OIG has stated that improper physician discounts on private pay business can be used to unlawfully induce referrals of Medicare tests. But, Mazer suggests, the relationship between forgiveness of a private patient’s cost sharing responsibility and financial benefit to a physician related to referrals of federal healthcare program patients appears much more attenuated.

What to do

Be mindful that waiver arrangements can raise kickback red flags for not only Medicare but also private payers. Labs are well advised to consider expressly and clearly prohibiting physicians from using the waivers as a marketing tool as part of any waiver arrangement they make. Other steps to manage liability risks:

• • Determine your “usual charges.” You also need to calculate how waived charges affect determination of those usual charges. A first step may be to compute the volume of tests that have been provided without charge and compare that number to the total volume of tests billed to payers other than Medicare and Medicaid. Some labs follow a policy that if the percentage of free tests is substantially below 50 percent, the arrangement should not cause concern.

• • Audit your waived charges policies and agreements to determine if they provide for reduced or waiver of charges.

• • Look for benefits/remuneration to referral sources. Consider what benefits to referral sources, financial or otherwise, may result from the waiver policy or arrangement.

• • Make sure physicians aren’t getting reimbursed for anything related to lab services.

• Get physicians to sign an attestation that they are not receiving any financial benefit from the free testing, including the elimination of any monthly interface fee. An arrangement proposed in AO 15-04 did require physicians to sign attestations that they didn’t receive any benefit, but didn’t specifically mention the interface fees. So, your attestation should include reference to such fees, including the utilization incentives mentioned in the 1994 Fraud Alert, as well as a general catchall for physicians to disclaim any other financial benefit.¹³

Risk Area 5: EPSDT Incentives

Proactive rather than reactive has become a mantra of the modern healthcare model. Early and periodic testing of patients is a critical element in this strategy. However, it appears that not all physicians have gotten the message. Consequently, some physicians may have to be prodded out of their old-school ordering patterns via incentives to increase early and periodic screening, diagnostic, and treatment (EPSDT) services. The problem, of course, is that paying physicians incentives to order tests is a blatant kickback violation. But an October 2018 advisory opinion signals the OIG’s willingness to accept this practice, provided that proper safeguards are in place.¹⁴

In this case, a managed care organization (MCO) wanted to pay providers incentives to increase EPSDT services to enrolled Medicaid patients under age 21. The MCO paid the providers on a capitation basis, i.e., providers received a set amount for each enrolled Medicaid patient, regardless of services utilized. The MCO would provide per-enrollee incentive payments to providers that met benchmarks for increases in EPSDT services provided. Providers would be eligible for one of three different levels of incentive payments, based on the percentage increase (see Figure 1):

FIGURE 1

Three Levels of Incentive Payments

Incentive Amount	Incentive Trigger
$1 per patient	10% to 19% year-over-year increase in screenings
$2 per patient	20% to 29% year-over-year increase in screenings
$3 per patient	30% or higher year-over-year increase in screenings

Although the arrangement clearly incentivizes higher utilization of testing, it did so to further the state’s objective of detecting ailments early before they become more complex and expensive to treat. The arrangement provided no incentives to providers for recruiting new Medicaid beneficiaries nor for participating in the MCO’s Medicare Advantage Plan or other lines of business. The MCO also covered the payments out of its own pocket and did not pass them on to the state Medicaid agency.

The OIG said the proposed arrangement was allowed under the so-called AKS eligible managed care organization (EMCO) safe harbor because:

• • payments would be based solely on the provision of Medicaid services to existing enrollees, and

• the arrangement wouldn’t inappropriately increase or shift costs to federal healthcare programs.

What to do

While not technically binding (nor applicable to the Stark Law), the 2018 advisory opinion is potentially significant to not just payers but also labs and other providers considering arrangements incentivizing utilization of EPSDT testing. In describing the required safeguards, the OIG, in effect, provided a blueprint on how to structure these arrangements so as to fall into the EMCO safe harbor.

Protecting your lab from these 5 kickback risk areas

There are two key steps lab leaders can take to protect themselves from the kickback risk areas outlined above:

1. 1. Analyze payment relationships with physicians to ensure that they’re in writing, specific about the services provided, at least a year in duration, and provide for fair market value compensation that is in no way tied to referrals or the volume of business generated that involves Medicare, Medicaid, or other federal healthcare programs.

1. Document all the business decisions and arrangements you make, the reasons you make them, the AKS and Stark Law issues you identified and how you addressed them, and why you concluded that the decision or arrangement was compliant. Remember the old lawyer’s saying: If it isn’t documented, it never happened.

References:

1. 1. OIG Special Fraud Alert: “Laboratory Payments to Referring Physicians” (June 25, 2014). https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/2006053221-hi-oigsfalaboratorypayments06252014.pdf

1. 1. https://oig.hhs.gov/fraud/enforcement/quest-diagnostics-agreed-to-pay-315000-for-allegedly-violating-the-civil-monetary-penalties-law-by-providing-remuneration-in-the-form-of-above-than-fair-market-value-rent-for-space/

1. 1. https://www.justice.gov/usao-ma/pr/bioreference-laboratories-and-parent-company-agree-pay-985-million-resolve-false-claims

1. 1. 42 C.F.R. 10001.952(b)

1. 1. 42 U.S.C. § 1395nn(e)(1)(B); 42 CFR § 411.357(a)

1. 1. OIG Special Fraud Alert, Rental of Office Space in Physician Offices by Persons or Entities to which Physicians Refer (February 2000)

1. 1. OIG Kickback and Physician Self-Referral Archive (March 24, 2011)

1. 1. https://www.foster.com/newsroom-alerts-Strictly_Speaking__CMS_Stark_Law_Guidance_to_Labs_on_Speculums_and_Other_Supplies

1. 1. OIG AO-11-18 (December 7, 2011)

1. 1. OIG AO-14-03 (April 8, 2014)

1. 1. 59 Fed. Reg. 65377 (December 19, 1994). https://www.govinfo.gov/content/pkg/FR-1994-12-19/html/94-31157.htm

1. 1. https://www.justice.gov/opa/pr/two-cardiovascular-disease-testing-laboratories-pay-485-million-settle-claims-paying

1. 1. OIG AO-15-04 (March 25, 2015)

1. OIG AO-18-11 (October 18, 2018)