College of American Pathologists
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Lab Discounts

March 2000
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 patients.

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 work—including work for Medicare patients—to 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 to Medicare.

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 rates.’

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 client—physicians; 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 are reasonable.

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 comparable.

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.

Other issues

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.