Recent OIG advisory opinion scrutinizes laboratory purchased service arrangements

November 9, 2023

Alert

On September 25, 2023, the Office of Inspector General (OIG) issued Advisory Opinion No. 23-06 (AO 23-06). In AO 23-06, the OIG evaluated a proposed arrangement between laboratories for the purchase of the technical component (TC) of anatomic pathology (AP). The OIG arrived at an unfavorable determination, finding that the arrangement could generate prohibited remuneration under the federal Anti-Kickback Statute (AKS) and could create grounds for the imposition of sanctions.

This is an important opinion not only for pathology groups with purchased service arrangements, but also for physician owned laboratories and independent clinical laboratories that maintain purchased service arrangements. The OIG’s analysis of the arrangement in AO 23-06 highlights the OIG’s view on the importance of commercial reasonableness and the level of scrutiny applied to purchased service arrangements with a laboratory’s referral sources.

Overview of the Proposed Arrangement

The proposed arrangement in AO 23-06 is described as follows:

The requesting laboratory (Billing Laboratory) is an independent laboratory with the ability to perform both TC and the professional component (PC) of AP services.
The Billing Laboratory was approached by other laboratories to purchase TC services from such other laboratories, but only for commercial specimens.
These other laboratories are described as being owned by and/or employing physicians (Referring Laboratories) with the ability to refer specimens to the Billing Laboratory, so presumably such Referring Laboratories would likely be generating orders for federal specimens as well as commercial specimens.
Under the proposed arrangement, the Billing Laboratory would purchase TC services for commercial specimens from the Referring Laboratories and perform the PC.
The Billing Laboratory would then bill commercial insurers as an in-network provider for both the TC and the PC and compensate the Referring Laboratories a per-specimen fee for the performance of the TC. The Billing Laboratory certified the fee as being fair market value for purposes of the OIG’s review.

Purchased Service Arrangements Characterized as Remuneration

In AO 23-06, the OIG characterizes the purpose of the proposed arrangement as an arrangement to allow the Referring Laboratories to gain access to in-network rates of the Billing Laboratory’s commercial payor arrangements, as the other laboratories are out of network with such commercial payors and therefore unable to obtain reimbursement for the TC services. These types of arrangements are also utilized when physician group laboratories have commercial payor agreements, but laboratory services are not covered or are reimbursed unfavorably because the payor agreement was designed and negotiated as a physician group agreement rather than a laboratory agreement.

In the discussion of the arrangement described in AO 23-06, the OIG notes that these types of arrangements offer value to the laboratories that are in a position to direct both commercial and federal work, as it offers the Referring Laboratories an opportunity to monetize the TC where the Referring Laboratories would otherwise be unable to do so based on their own payor arrangements. As support for its ultimate conclusion, the OIG highlighted the fact that the proposed arrangement would allow the Billing Laboratory to give the Referring Laboratories the opportunity to bill and receive payment for TC services they otherwise would not be able to bill for as in-network providers.

“Commercial Only” Arrangements Challenged

The OIG has expressed its skepticism regarding arrangements in the past that “carve out” federal healthcare program business [See Advisory Opinions 15-04, 22-09, and 99-13]. It has been the position of the OIG for some time that arrangements that carve out federal health care program business can disguise remuneration for federal health care program business through the payments of amounts purportedly related to commercial business. The OIG has therefore viewed such arrangements skeptically.

The OIG’s concern with such arrangements is highlighted again in AO 23-06, with the OIG observing that that referring providers generally prefer to be able to route all specimens to one laboratory and therefore are more likely to refer federal work to the same laboratories with which a referral source has an arrangement for commercial specimens. AO 23-06 reinforces the OIG’s position that client billing arrangements present significant risk and goes far enough to call into question the permissibility of any such arrangement going forward.

Increased focus on commercial reasonableness of purchased service arrangements

The AO 23-06 decision highlights the OIG’s view on the importance of commercial reasonableness. The concepts above were highlighted as part of the OIG’s overall evaluation of the commercial reasonableness of the arrangement proposed in AO 23-06.

The OIG concluded that the proposed arrangement implicated the AKS and failed to satisfy the commercial reasonableness element of potential AKS safe harbors because the Billing Laboratory was “unable to certify that the aggregate services contracted for would not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.”

As support for its conclusion that the proposed arrangement was not commercially reasonable, the OIG highlighted multiple elements of the arrangement, including:

The fact that the proposed arrangement would allow the Billing Laboratory to give the Referring Laboratories the opportunity to bill and receive payment for services they otherwise would not be able to bill for as in-network providers.
The fact that the Billing Laboratory acknowledged that in most cases, it is capable of performing both the TC and PC without referring the TC to any other party and that performing both components in-house is generally more efficient and cost-effective than paying a third-party laboratory.

For these reasons as well as others described in AO 23-06, the OIG found no commercially reasonable business purpose for the Billing Laboratory to enter into the proposed arrangement and forego “the opportunity to bill and retain payment for both components of the anatomic pathology services, in an arrangement that is both less efficient and more costly – other than the possibility that such payment may induce referrals of patients, including federal health care program beneficiaries.”

Implications for existing arrangements

The OIG concluded that there was significant risk that the proposed arrangement would function, at least in part, as an opportunity for the Billing Laboratory to pay valuable remuneration to a potential source of referrals for laboratory services to induce laboratories to refer specimens reimbursable by federal health care programs to the Billing Laboratory. The OIG noted that carving out of federal health care program business to minimize risk under the AKS did not save the proposed arrangement.

In this particular Advisory Opinion, the Billing Laboratory seemingly reinforced the OIG’s position by certifying that the proposed arrangement would very likely result in referrals of federal health care program business from Referring Laboratories to the Billing Laboratory and that the arrangement therefore appeared “designed to influence physician laboratories (or their referring physician-owners and referring physician-employees) and non-physician laboratories to refer other specimens to [the Billing Laboratory] for testing, including testing that may be reimbursable, in whole or in part, by a federal health care program.”

As noted above, purchased service arrangements have been scrutinized for years, even though purchased service arrangements continue to exist in the laboratory industry. Although AO 23-06 appears to have been framed in a way that reinforces the OIG’s skepticism of such arrangements, it also provides important insight into how the OIG analyzes specific elements of purchased service arrangements. AO 23-06 cannot be ignored and should be a call to all laboratories to re-evaluate existing purchased service arrangements to determine if and how such arrangements can be distinguished from the proposed arrangements giving rise to the OIG’s concerns in AO 23-06 and prior advisory opinions.

For questions related to this advisory opinion and the impact on your lab, please contact a member of McDonald Hopkins' laboratory practice team.

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