The Office of Inspector General (OIG) of the U.S. Department of Health and Human Services recently published an advisory opinion (issued June 7, 2013, posted June 13, 2013) adverse to a proposed clinical laboratory management arrangement. Under the proposed arrangement, an operator of an independent clinical laboratory (the “Parent Laboratory”) would establish a management company that would contract with physician groups to assist them in setting up and operating their own clinical laboratories. The physician groups would commit to providing testing only for patients who are not beneficiaries of federal healthcare programs (e.g., Medicare/ Medicaid) and sending specimens from patients who are federal healthcare program beneficiaries to other laboratories, which could include the Parent Laboratory. Despite this “carve-out” of federal business, the OIG concluded that the proposed arrangement could contain prohibited inducements for the physicians to order services from the Parent Laboratory that are reimbursable under federal healthcare programs.

The Proposed Arrangement

Under the proposed arrangement, the management company would lease to each physician group a separate laboratory suite in a building operated by the management company. Each physician group would lease its individual suite on an exclusive, full-time basis. The lease agreement “would describe fully the subject matter of the agreement, run for a term of not less than one year, and specify a fixed rate consistent with fair market value in an arms-length transaction.” The management company would also provide various laboratory management services on behalf of the physician groups. These would include assistance in selecting and installing laboratory equipment and supplies, as well as certain support services. This arrangement would be set forth in a management agreement that, again, would specify all of the services to be provided, have a term of not less than one year, and specify fixed-rate compensation consistent with fair market value in an arms-length transaction. The physician groups would also have the option of licensing certain proprietary methods of operation and leasing laboratory personnel and equipment from the management company—once again, pursuant to written agreements that would specify all of the licenses provided and personnel/equipment leased, remain in effect for at least one year, and set forth compensation rates consistent with fair market value in an arms-length transaction.

Of particular note, the physician groups would not, under the proposed arrangement, perform testing on specimens from patients who are federal healthcare program beneficiaries. Such specimens would instead be sent out to other laboratories, which could include the Parent Laboratory. The Parent Laboratory, however, certified as part of its advisory opinion request that it would not require or induce the physician groups to refer any testing to it or any other healthcare entity owned by or affiliated with it.

The OIG’s Analysis

Despite such protections, however, the OIG concluded that the proposed arrangement could potentially generate prohibited remuneration under the anti-kickback statute.1 In arriving at this conclusion, the OIG restated its long-standing concern that federal “carve out” arrangements may nonetheless include inducements for referrals of federal healthcare program business:

Such arrangements implicate, and may violate, the anti-kickback statute by disguising remuneration for Federal health care program business through the payment of amounts purportedly related to non-Federal health care program business. Under the Proposed Arrangement, the Parent Laboratory would offer the Physician Groups remuneration in the form of the potentially lucrative opportunity to expand into the clinical laboratory business with little or no business risk. Although the Physician Group Laboratories would bill only for services for non- Federal health care program patients, participation in the Proposed Arrangement may increase the likelihood that physicians will order services from the Parent Laboratory for Federal health care program beneficiaries.

The OIG considered the following as possible inducements for the physician groups to order federally reimbursable services from the Parent Laboratory: reasons of convenience, demonstrating a commitment to the Parent Laboratory, possibly obtaining more favorable pricing on private-pay services, or simply failing to distinguish between the Parent Laboratory and other laboratories supported by the management company. The OIG also stated its belief that the proposed arrangement could influence the physicians’ decision-making, resulting in overutilization and increased federal costs:

Finally, we are concerned that the financial incentives offered through the private pay clinical laboratory business under the Proposed Arrangement are likely to affect a physician’s decision-making with respect to all of his or her patients, including Federal health care program beneficiaries, potentially resulting in the overutilization of laboratory services generally and increased costs to the Federal health care programs.

Conclusion

From the brief descriptions contained in this advisory opinion of the underlying agreements, it appears that they were specifically drafted for compliance (or near compliance) with anti-kickback safe harbors.2 But this was not enough for the OIG to issue a favorable advisory opinion. The OIG will apparently look beyond any safe-harbored components of an arrangement that potentially offers the opportunity for private pay as an inducement for referral of federal healthcare program business. This advisory opinion provides an example of why simply carving Medicare/Medicaid out of a business arrangement involving referral sources is no inoculation against being found in violation of the anti-kickback statute. To access this advisory opinion, please click here.3