James C. Dechene and Ty Howton
A recent advisory opinion issued by the Office of Inspector General of the
Department of Health and Human Services raises important issues for pathology
groups that offer discounted laboratory services to physicians.
In Advisory Opinion 99-13 (released Dec. 7, 1999), the OIG opined
that substantial discounts to referring physicians may violate the
Medicare prohibition against giving kickbacks in exchange for referrals.
The OIG opinion also suggests that a laboratory may be excluded
from federal health care programs if it charges Medicare or Medicaid
substantially in excess of discounted charges to the physician.
Although not addressed by the advisory opinion, discounted billing
arrangements also may have implications under the Stark law, which
states that physicians may not refer laboratory services to an entity
with which they have a financial relationship except under specific
circumstances, and under state law. Consequently, pathologists should
pay careful attention to the guidelines set forth in Advisory Opinion
99-13 and to past OIG guidelines relating to discounts.
The North Carolina pathology group that submitted the request
for an advisory opinion provides services to hospitals and the patients
of physicians in private practices. The request describes two billing
arrangements the group currently uses. For patients covered under
a federal health care program such as Medicare or Medicaid, the
pathology group bills the appropriate program directly for pathology
services and collects copayments and deductibles directly from the
patient. For patients not covered by a federal health care program,
the pathology group either 1) bills the patient directly for services,
or 2) bills the physician office for services rendered to the physicianÕs
Under the second, or ‘bill account,’ arrangement, the physician
office pays the pathology group for the services, then bills the
patients or their payers. The pathology group traditionally has
offered a discount to the physician office under the second ar-range-ment
that reflects cost savings generated by the account billing arrangement.
Under the proposed arrangement, the pathology group would offer
physicians a discount that exceeds the cost savings attributable
to the account billing arrangement. As a result, the profit margin
for pathology services provided to patients who are not covered
by a federal health care program under bill account arrangements
would be lower than the profit margin for services billed directly
to federal health care programs. According to the advisory opinion,
the pathology group believes this pricing structure is necessary
to compete with other laboratories. The request for the opinion
recites that, although the discounted prices would not be conditioned
on the receipt of specimens from federal health care program patients,
the pathology group anticipates that physician offices likely would
send all laboratory workincluding work for Medicare patientsto
a single laboratory.
Issues relating to the antikickback law In the advisory opinion,
the OIG opines that the proposed arrangement may violate the antikick-back
statute 42 USC ¤1320a-7b(b). In reaching this conclusion, the OIG
focuses on whether an improper nexus would exist between the proposed
discount for nonfederal health care program business and referrals
of federal health care business. The OIG concludes that an improper
nexus might exist between the discounts and the federal program
patients. The OIG reasons that the referring physicians are in a
position to send a significant amount of federal program business
to the pathology group, that the pathology group believes these
physicians are likely to refer federal health care program business,
and that both the referring physicians and the pathology group have
obvious motives for the arrangement.
In support of its conclusion, the OIG cites its 1994 Special Fraud
Alert regarding laboratory practices that may constitute illegal
remuneration. In that fraud alert, OIG restated its longstanding
position that illegal remuneration is inferred ‘when a laboratory
offers or gives to a referral source anything of value for less
than fair market value.’
The OIG also analyzes the proposed arrangement under the discount
safe harbor to the anti-kickback statute [42 CFR ¤1001.952(h)].
However, the OIG concludes that the arrangement would not fall within
this safe harbor because the same discounts offered to physicians
who have entered into bill account arrangements are not provided
OIG finds support for this conclusion in the preamble to the discount
safe harbor, which expresses concern about the possibility of laboratories
providing discounted services for nonfederal health care program
patients to receive referrals of specimens from federal health care
patients. The OIG states that, in these situations, ‘neither Medicare
nor Medicaid benefits from the discounts; to the contrary, Medicare
and Medicaid may, in effect, subsidize the other payor’s discounted
In light of Advisory Opinion 99-13, pathologists should review
carefully any discounted prices in bill account arrangements, bearing
in mind several factors. First, the antikickback statute only prohibits
remuneration paid for the referral of patients covered under a federal
health care program. Thus, for the advisory opinion to affect a
discounted billing arrangement, the arrangement must include, or
have the potential to include, the referral of Medicare, Medicaid,
or -other fed-eral health care program pat-ien-ts to the laboratory.
To the extent that a discount is offered to a physician group that
is not in a position to refer federal health care program patients,
the antikickback law is not implicated.
Second, pathologists should consider whether discounts offered
to referring physicians are 'reasonable.' Discounted prices that
equal or exceed the Medicare fee schedule amount generally should
be considered commercially reasonable. If discounted prices are
lower than the Medicare fee schedule amount, they may still be considered
commercially reasonable if justified by the cost savings generated
by the particular arrangement. Cost savings may accrue because 1)
claims are submitted only to the clientphysicians; 2) claims
submission criteria do not have to be evaluated; 3) the costs of
collecting copayments and deductibles are avoided; and 4) bad debt
associated with collection from patients is avoided. In no event
should charges to physician offices be lower than the costs of providing
the service. Thus, the OIG states that 'discounts on account billing
business that are particularly suspect include, but are not limited
to: discounted prices that are below the laboratory's cost . . .'
(Advisory Opinion 99-13).
For the purposes of the advisory opinion, the OIG defines costs
as fully allocated costs, including labor, overhead, and equipment.
However, economic justification exists for using incremental costs,
or the costs of performing one additional test, rather than fully
allocated costs when determining such savings. In any event, pathologists
should determine the savings that are generated from the account
billing arrangements. This type of empirical justification for discounted
prices provides good support for an argument that discounted fees
The third relevant factor is how the discounted price offered
to referring physicians compares with charges to other payers. The
OIG views skeptically discounted prices that are lower than the
prices pathologists charge other payers who have similar volume
but who do not refer patients covered by federal health care programs.
This comparison often will not prove useful in practice because,
in most bill account arrangements, the laboratory also receives
the lab work for the physician's Medicare and Medicaid patients.
However, to the extent a laboratory has clients who do not send
Medicare and Medicaid work, it should make sure the discounts are
Issues relating to charging below Medicare levels
Under 42 USC ¤1320-7(b), individuals or entities may be excluded
from participating in federal health care programs if they submit
to Medicare or Medicaid charges for payment that are substantially
in excess of their usual charges. However, an exception may be made
in circumstances where the secretary of the Department of Health
and Human Services finds good cause for the differential.
In Advisory Opinion 99-13, the OIG states that if 'the charge
to Medicare or Medicaid substantially exceeds the amount the laboratory
most frequently charges or has contractually agreed to accept from
nonfederal payors, the laboratory may be subject to exclusion.'
The OIG has provided, in an earlier advisory opinion, more detailed
guidance regarding what constitutes excessive charges. Specifically,
in Advisory Opinion 98-8, the OIG addressed an arrangement that
involved the submission of claims for durable medical equipment
that were in excess of the charges set by a durable medical equipment
company ('DME company') for non-Medicare clients.
The DME company argued that the variance in charges resulted from
the increased costs associated with complying with Medicare and
Medicaid requirements and, therefore, should fall within the 'good
cause' exception. Although the OIG stated there was insufficient
information for a determination that the proposed arrangement was
grounds for permissive exclusion, it did provide a valuable benchmark
for determining whether higher Medicare charges meet the 'good cause'
exception. That advisory opinion stated that as long as the profit
margin for a Medicare sale is less than or equal to that of other
sales, the 'good cause' exception should be satisfied.
Advisory Opinions 99-13 and 98-8 provide important guidance on
how to avoid being excluded from the Medicare program for charging
excessive amounts to the program. In particular, charging Medicare
more than account billing customers may be permissible if the discount
to non-Medicare clients is justified by cost savings and the profit
margins on work for patients not covered by federal programs do
not exceed the profit margins on work for patients covered by such
programs. In these circumstances, the 'good cause' exception to
the permissive exclusion provisions should apply. As previously
discussed, any cost savings should be measured by calculating the
laboratory's costs for the pathology tests. Calculation of these
costs can help provide a defensible basis for determining the profit
margin on tests performed by the laboratory.
Although not addressed by the OIG in Advisory Opinion 99-13, the
proposed arrangement raises an issue under the Stark law and under
state law. As stated earlier, the Stark law says physicians may
not refer laboratory services to an entity with which they have
a financial relationship unless an exception applies (42 USC ¤1395nn).
The OIG has determined that discounts, such as those offered to
physicians as part of the account billing arrangement, constitute
a financial relationship under the Stark law [63 Federal Register
1664 (Jan. 9, 1998)].
However, such arrangements may qualify for the 'payments by physicians'
exception to the Stark law [42 USC ¤1395nn(e)(8)]. That provision
excepts 'Payments made by a physicianÑ(A) to a laboratory in exchange
for the provision of clinical laboratory services, or (B) to an
entity as compensation for other items or services if the items
or services are furnished at a price that is consistent with fair
market value.' If, despite receiving a discount, a physician pays
a laboratory fair market value for pathology services, the account
billing arrangement should fall within both (A) and (B) of the exception.
Less clear is the situation in which a physician pays below fair
market value for the pathology services. Arguably, the arrangement
may still fall within (A) of the exception because it does not appear
to have a fair market value qualifier. However, a discount to below
fair market value could be viewed as a circumvention scheme. In
any event, if federal health care program patients are involved,
pathology services that are offered at less than fair market value
may violate the antikickback law for the aforementioned reasons.
Laboratories providing discounted pathology services pursuant
to account billing arrangements should also be aware of state laws
regulating such arrangements. A few states have laws that either
prohibit a physician's office from billing patients for services
performed by an independent laboratory or limit the amount a physician
or other provider may mark up the discounted laboratory services
that are billed to the patient. Violation of these laws can result
in the revocation of a professional or facility license. Pathologists
should be aware of applicable state law requirements before entering
into discounted account billing arrangements.
Although it does not break new ground, Advisory Opinion 99-13
dismisses any misconception that the OIG's position on discounts
does not apply to laboratories and pathologists who offer discounted
prices to physicians. Rather, it provides insight into how the OIG
will approach such arrangements in the future. Accordingly, before
entering into such arrangements, pathologists should carefully consider
the issues raised in the advisory opinionÑas well as relevant issues
concerning the Stark and state laws.
If a competitor is offering a discount that does not satisfy the
standards set forth in the advisory opinion, a laboratory can use
the opinion to inform its customers or compliance officers of the
risk. More-over, the advisory opinion can be used as the basis for
making a complaint to OIG. Numerous issues obviously should be considered
before making such a complaint. In any event, the published advisory
opinion itself is likely to discourage inappropriate discounts.
n James C. Dechene is a partner with the law firm Sidley & Austin,
Chicago. Ty How-ton is an associate with Sidley & Austin. Note:
Advisory Opinions 99-13 and 98-8 are on the CAP Web site.