Proposed Exclusive Arrangement Between Lab and Physician Practices May Violate Federal Law

A laboratory proposing to enter into an exclusive relationship with physician practices has been advised that the arrangement may violate federal law.  The laboratory sought advice from the Office of Inspector General (“OIG”) of the Department of Health and Human Services on an arrangement in which the laboratory would contract with physician practices to provide all laboratory services to the practices’ patients, without regard to the patients’ health insurance coverage.  The requesting laboratory would not bill those patients whose health plans — so-called “exclusive plans” — require them to use other laboratories (nor would the lab bill the practices themselves).  In its Advisory Opinion posted on March 25, 2015, the OIG concluded that the arrangement may violate the Anti-Kickback Statute and subject the laboratory to administrative sanctions, including exclusion from federal health care programs (e.g., Medicare and Medicaid).

Anti-Kickback Statute

The federal Anti-Kickback Statute is a criminal law that prohibits offering, paying, soliciting, or receiving cash or in-kind benefits (so-called prohibited “remuneration”) to induce or reward referrals for services that may be reimbursed by federal health care programs.  In order to violate the Anti-Kickback Statute, the parties to an arrangement must intend to induce or reward referrals of federal health care beneficiaries.  So long as one purpose of an arrangement is to obtain cash or in kind benefits or induce referrals (the “one purpose test”), the Anti-Kickback Statute may be violated—even if the arrangement also has permissible purposes.

The OIG’s analysis focused on whether the physician practices would receive a benefit under the proposed arrangement.  Two key items supported the OIG’s conclusion that the arrangement could generate prohibited remuneration.  First, the OIG advisory opinion highlighted the laboratory’s claim that some physician practices preferred to work with a single laboratory because doing so would provide consistency in testing result reference ranges and remove the inefficiency of interfacing with multiple labs.  Second, choosing a single lab would allow physician practices to eliminate monthly fees charged by some vendors for maintaining interfaces with other labs.  In the OIG’s view, these potentially lower administrative and financial costs could constitute a prohibited benefit.  The OIG also noted that the requesting laboratory had not proposed any safeguards to reduce the Anti-Kickback risk.  Moreover, the arrangement could result in physician practices “inappropriate[ly] steering” patients, including federal health care program beneficiaries, to the lab.

Although the OIG stated that it could not reach a definitive conclusion on whether the proposed arrangement would violate the Anti-Kickback Statute without discerning the parties’ intent, the opinion states that “the main purpose of the [proposed arrangement] is to secure all the referrals” from the physician practices.  This statement suggests that the OIG viewed the proposed arrangement as possibly failing the one purpose test.

Exclusion

Under the “substantially in excess” provision of the Social Security Act, the OIG is authorized to exclude providers or suppliers that charge Medicare and Medicaid programs “substantially in excess” of their “usual charges” to third party payors for the same items.  The OIG opinion also suggested that the proposed laboratory arrangement could warrant the laboratory’s exclusion from federal health care programs.

Although the OIG reiterated its stated position that it would not use its authority to exclude any provider that provides discounted or free services to the uninsured or underinsured, the OIG opinion explained that the proposed arrangement would provide free services to insured patients whose lab services could be covered if they used the labs their health plans required.  The OIG concluded that greater than half of the practices’ non-Medicare and non-Medicaid patients could potentially receive free lab services under the proposed arrangement, while federal health care programs would pay the lab’s regular rate.  The OIG also observed that the laboratory offered no explanation for providing free services to insured patients (who may not have financial need) other than “to remove an obstacle to the physician practices referring all of their laboratory business” to the requesting lab.

Key Takeaways

This Advisory Opinion offers a few lessons to laboratories, physician practices, and other health care providers who service federal health care program beneficiaries.  First, any exclusive relationship between health care providers relating to patient referrals should be carefully analyzed for compliance purposes.  Second, any agreement to waive patient copayments or other fees creates significant legal risks.  Third, some states have statutes analogous to, or more stringent than, the federal laws analyzed in this proposed arrangement, so providers should also examine state law implications in considering exclusive relationships and patient payment waivers.  Fourth, any provider engaged in acquisitions should examine referral relationships during the due diligence process.

Finally, although outside the scope of the OIG’s analysis, the proposed arrangement could implicate the physician self-referral law, commonly known as the “Stark Law.”  Any referral relationship between a physician practice and a provider of laboratory services (or any other “designated health services”) should be carefully structured for compliance with the Stark Law and corresponding state laws.

Advisory Opinion 15-04 is available here.

Amanda Hayes

Amanda Hayes

Amanda Hayes counsels clients in connection with mergers and acquisitions, divestitures and other business matters, with a particular focus on the health care industry. She regularly serves as lead counsel on acquisitions and divestitures, guiding the client through deal structuring, due diligence, drafting, negotiation and closing. In addition to health care, Ms. Hayes’ mergers and acquisition experience includes a variety of industries, such as manufacturing, retail, automotive, contract research, environmental remediation, engineering and construction supply.

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