College of American Pathologists
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Florida squeeze: Florida court ruling threatens professional component billing

December 2002
Jack R. Bierig

On July 12, 2002, a Florida appellate court issued a decision that raises significant issues regarding the ability of pathologists to charge patients for "professional component" services, that is, services in providing medical direction of a laboratory for the benefit of each patient whose specimens are tested in the laboratory. That decision, Central States v. Florida Society of Pathologists (824 So.2d 935 [Fla. 5th DCA 2002]), is important for all pathologists—not just those who bill patients for professional component services. Remarkably, it suggests that the medical direction of a clinical laboratory is not the practice of medicine for patients. According to the court, pathologists who direct medical laboratories "are not in the process of offering pathology services" to patients (Id. at 940).

This article begins with background on the efforts of pathologists to be fairly compensated for their services in directing clinical laboratories. It then discusses the Florida Society of Pathologists decision. Finally, it explores how pathologists might want to respond to that decision.

Controversy over PC billing

One’s position on the propriety of billing patients for professional component services may depend on how the issue is framed. On one hand, these services are provided so that each test result for each patient is timely and clinically reliable. Moreover, the pathologist must be available to answer clinicians’ questions about the diagnostic or therapeutic significance of specific laboratory results for specific patients. If a result is improperly reported and the patient suffers injury as a consequence, the pathologist laboratory director may well be held liable to the patient. These considerations suggest that the patient, or the patient’s insurer, should be responsible for paying—on a per-test basis—for the services of the pathologist in directing the laboratory.

On the other hand, many tests performed in the laboratory do not require the pathologist’s direct, hands-on involvement. A nurse or technician employed by the hospital collects the specimen. In the laboratory, an automated machine generates a numeric value that is reported to the clinician without the pathologist’s direct involvement. Indeed, the pathologist may not even be aware that the specimen is in the laboratory. This perspective on the facts has led some insurers to refuse to pay for the services of the pathologist responsible for the laboratory unless that pathologist actually had direct, hands-on involvement with a test.

The issue of fair payment for clinical pathology services should be of concern to all pathologists. Community-based pathologists generally spend about 25 percent of their time directing the clinical laboratory. Unless they are adequately compensated for this time, pathologists cannot be expected to be willing to devote themselves to clinical pathology. Over time, pathology residents will gravitate more and more to anatomic pathology, where they will have a better chance of securing acceptable remuneration. And the future of clinical pathology as a branch of the specialty critical to the proper diagnosis and treatment of the patient will be very much in doubt.

TEFRA’s effect. Congress dealt a major blow to payment for clinical pathology procedures in 1983. In the Tax Equity and Fiscal Responsibility Act, or TEFRA, enacted that year, Congress decreed that pathologists could not bill Medicare patients for their services in directing the laboratory for the benefit of such patients. (See 42 U.S.C. §1395xx[v][1].) After TEFRA, pathologists are permitted to bill a Medicare patient for a lab test for that patient (other than specified cytopathology, hematology, and blood banking services) only if four criteria are satisfied (see 42 C.F.R. §415.130):

  1. The attending physician must request the test;
  2. The result must lie outside the normal or expected range in view of the patient’s condition;
  3. The pathologist must produce a written narrative report; and
  4. The report must require the exercise of medical judgment.

For clinical laboratory services for Medicare patients that do not meet these criteria, pathologists are expected to look to hospitals for payment.

Congress did not, however, specify any amount that a hospital is required to pay to a pathologist who directs the laboratory at that hospital. Thus, many hospitals have made no, or token, payments to pathologists for professional component services for Medicare patients. Although the Office of the Inspector General has said that failure to pay fair market value for these services may constitute Medicare fraud and abuse, the OIG has never taken action against a hospital on this issue. Likewise, pathologists have not sued hospitals for making inadequate payment because there is no private right of action under federal law to enforce the Medicare fraud and abuse provisions and because pathologists are understandably reluctant to bring litigation against the hospitals at which they practice. As a result, many pathologists are not being paid, or are woefully underpaid, for directing laboratories for the benefit of Medicare patients.

Prior judicial developments. TEFRA’s enactment in 1983 did not prohibit pathologists from billing non-Medicare patients for their services in directing the laboratory for the benefit of these patients. While practices differed in various regions of the United States, pathologists in many states continued to bill non-Medicare patients for these professional component services. Through the 1980s, most private insurers paid for such services for their insureds without objection. Accordingly, in 1991, a Florida court was able to say that professional component billing was "the established practice in the majority of . . . states" (American Medical Intl. Inc. v. Scheller, 590 So.2d 947, 949 [Fla. 4th DCA 1991]).

In the early 1990s, a few private payers began to question pathologists’ right to bill their insureds for professional component services. In 1992, one of these payers, an ERISA plan known as Central States Southeast and Southwest Areas Health and Welfare Fund, brought separate lawsuits in federal court in Chicago against about 50 different pathology groups that billed patients for professional component services. In these lawsuits, Central States sought to have professional component billing of private patients declared unlawful. It requested, among other things, an injunction (1) enjoining the pathology groups from billing patients covered by Central States for professional component services and (2) requiring these groups to make restitution to Central States for payments for professional component services that Central States had previously made.

Central States and the various defendant pathology groups reached agreements by which all of the cases would be stayed pending the outcome of the case against Pathology Laboratories of Arkansas. At one point in the case, Judge Brian Barnett Duff referred to professional component billing of Central States insureds as "unreasonable." That characterization of professional component billing was repudiated, however, by the trial judge who actually decided the case. That judge, Elaine E. Bucklo, after holding an evidentiary hearing, refused to enjoin Pathology Laboratories of Arkansas from billing privately insured patients for professional component services. Further, she denied Central States’ request for restitution. Central States appealed Judge Bucklo’s ruling to the U.S. Court of Appeals. On Dec. 1, 1995, that court issued a sweeping decision that vindicated professional component billing of privately insured patients. (See Central States v. Pathology Laboratories of Arkansas, 71 F.3d 1251 [7th Cir. 1995].) It described professional component services as including "setting up test protocols, calibrating the equipment and supervising the testing, and, if necessary, interpreting the results and consulting with treating physicians" (Id. at 1252). Based on this understanding of the services of pathologists in directing the clinical laboratory for patients, the Court of Appeals noted that pathologists provide "supervisory services of value to all patients, and interpretation services of value to some" (Id. at 1253). Most important, the court held that either the patient whose specimen was analyzed in the laboratory or the patient’s insurer is responsible for paying for the pathologist’s supervisory services (Id. at 1255).

The decision in Pathology Laboratories of Arkansas was an important judicial endorsement of the medical services that pathologists perform in directing clinical laboratories for patients and their right to bill patients for those services. Nevertheless, some insurers refused to pay pathologists for professional component services for their patients. At least one payer, Central States, embarked upon a campaign to induce its insureds not to pay for such services. Thus, despite the victory in Pathology Laboratories of Arkansas, many pathologists found it difficult to collect for professional component services in the last years of the 20th century.

Central States v. Florida Society of Pathologists
Faced with the increasing difficulty of collecting payment for the services for which the Court of Appeals in Pathology Laboratories of Arkansas had ruled that they have a right to bill patients, Florida pathologists decided in 1998 to bring a lawsuit to establish the legitimacy of professional component billing in that state. The Florida pathologists were concerned about the growing resistance of some payers to provide coverage of professional component services. When an insurer refuses to pay for such services, pathologists must look directly to the patient for payment. However, collecting from patients, who generally do not understand the important services the laboratory director provides for them, can be difficult. And it is particularly difficult when the payer has undertaken a campaign to induce patients not to pay for the services.

Central States is the payer that went the farthest in seeking to dissuade patients from paying pathologists for professional component services. It wrote letters to its insureds asserting that PC billing is "improper" and even "fraudulent." It told its insureds that it had already made payment for these services when it paid the hospital for the technical component of clinical pathology services. It repeatedly quoted Judge Duff’s statement in the Pathology Laboratories of Arkansas case that professional component billing is "unreasonable"—without mentioning that that statement had been repudiated by a subsequent trial judge in the case and was, in any event, superseded by the decision of the Court of Appeals.

Joined by two pathology groups, the Florida Society of Pathologists sued Central States in state court in Orlando in 1998. The three plaintiffs (collectively, "the FSP") made, in essence, two claims. First, the FSP asserted that statements made by Central States that professional component billing is "improper," "fraudulent," "unreasonable," or "double-billing" constituted deceptive trade practices under the Florida Deceptive Trade Practices Act. Second, it charged that Central States’ ongoing campaign of misinformation, designed to get patients to refuse to pay for PC services for those patients, amounted to tortious interference in the relationship between pathologists and the patients whose specimens were tested in the laboratory—in violation of Florida law.

Trial court’s decision. After extensive discovery and resolution of numerous procedural issues, the trial court entered summary judgment in favor of the FSP. It ruled that Central States had misled its members by telling them that professional component charges do not reflect a service to the patient, that professional component charges are unreasonable, and that members are not obligated to pay these charges. The trial court further held that Central States had falsely told its members that pathologists have no legal right to collect payment from those members.

The court made extensive findings of fact and conclusions of law in support of an injunction against Central States. That injunction enjoined Central States from asserting to its membership that:

  • Professional component billing is fraudulent, improper, or unreasonable;
  • The Pathology Laboratories of Arkansas decision supports the position that such billing is unreasonable; and
  • Professional component billing is double-billing.

The trial court further found that pathologists have valid business relationships with patients whose specimens are tested in laboratories directed by those pathologists. It ruled that Central States’ campaign of misinformation about professional component billing tortiously interfered with those relationships. In short, the trial court ruled 100 percent in favor of the pathologists.

Appellate court’s decision. Not surprisingly, Central States appealed. On July 12, 2002, the Florida Fifth District Court of Appeal reversed the trial court’s decision. Its decision stands in stark contrast with that of another Florida appellate court in the Scheller case 11 years previously, with the ruling of the U.S. Court of Appeals in Pathology Laboratories of Arkansas, and with the findings of fact and conclusions of law entered by the trial court. The decision of the District Court of Appeal demonstrates tremendous hostility toward billing patients for the professional component of clinical pathology procedures for those patients.

The court based its analysis on the proposition that pathologists may properly bill a patient for professional component services only if they have "legal or contractual rights" to do so (824 So.2d at 940). Ignoring the detailed findings of fact by the trial court about the services that form the basis of pathologists’ "legal right" to bill, the District Court of Appeal ruled that ". . . the pathologists have not shown that the patients are legally obliged to pay for the professional component.. . ." (Id.). In a frontal assault on the practice of clinical pathology, it said that pathologists who direct laboratories but who do not have direct hands-on involvement with a particular test for a patient "are not in the process of offering pathology services" to the patient (Id.). Rather, the Court of Appeal characterized PC billing as a charge for "the pathologist’s overhead and/or a pro rata share of hands-on pathology services performed for another patient" (Id. at 939).

With respect to a possible "contractual right" to bill patients, the court noted that "small print" in the admission forms signed by patients "mentions that the patients may receive bills from pathologists&" (Id. at 939). However, the court deemed those forms inadequate to create a contractual right to bill patients. In this connection, it observed that it saw "no mention" in the forms "of a professional component, and no mention of the nature of any bills the patients may receive from the pathologists" (Id.). The implication of this observation is that the court might have found a contractual right to bill a patient for PC services if a document signed by the patient had clearly and conspicuously described those services and the nature of the bills the patient would receive.

Status of the case. In early October, the FSP petitioned the Supreme Court of Florida to review the case. Under the Florida Constitution, the Supreme Court may hear a case of this nature only if the case poses a "direct and express conflict" with a prior decision of another Florida court. Thus, even if the Florida Supreme Court were to conclude that the issues presented by the case are of great public importance and that the case conflicts with the decision of the U.S. Court of Appeals in Pathology Laboratories of Arkansas, it could not grant review unless it were to find a direct and express conflict with a previous decision of a Florida court.

In seeking Supreme Court review, the FSP has asserted that the decision in this litigation is in "direct and express conflict" with the 1991 decision of the Fourth District Court of Appeal in the Scheller case. In Scheller, another Florida appellate court upheld a huge damage award against a hospital that had interfered with the right of a pathologist to bill patients for professional component services. That court characterized such services as medical services for patients, and it pointed out that professional component billing spreads the costs of directing the laboratory across all patients whose specimens are tested in the laboratory.

In the FSP decision, by contrast, the District Court of Appeal took a fundamentally different view of professional component services—and of billing patients for those services. It vacated an injunction that had been based on interference with the pathologist’s right to bill patients for professional component services. Far from recognizing the medical nature of those services, it referred to charges for the professional component of clinical pathology procedures as charges for the pathologist’s "overhead." And it made no mention of the cost-spreading feature of professional component services.

The two decisions are fundamentally different in their treatment of professional component services and billing. Significantly, however, the Fifth District Court of Appeal refused to acknowledge the existence of a conflict. Instead, it purported to distinguish Scheller on grounds that there was no insurer objection to professional component billing in Scheller and that there was a contractual right to bill patients in that case.

These distinctions are disingenuous. The presence or absence of insurer objection is irrelevant to whether billing patients for professional component services is a legitimate practice. In addition, the presence or absence of a contract between Dr. Scheller and the patients whom he billed for professional component services played no role whatsoever in the Scheller decision.

Nevertheless, the unwillingness of the Fifth District Court of Appeal to certify the existence of a conflict, even after explicitly being asked to do so, reduces the probability that the Supreme Court will take the case. As a matter of pure statistics, moreover, the Supreme Court accepts only a small percentage of the cases it is asked to review. Thus, the Supreme Court is unlikely to intervene. The Supreme Court’s decision on whether to grant review is expected in February or March of 2003.

What pathologists can do Assuming the Supreme Court of Florida does not grant review, the District Court of Appeal’s decision will stand. Each pathology group that bills patients for professional component services will, therefore, have to determine how to respond to the decision. The possible options are as follows:

  • Continue to bill patients as usual.
  • Make full disclosure of the nature of professional component services and secure the written consent of patients to pay for those services.
  • Stop billing patients for professional component services.

Deciding on a course of action is not easy. It is a judgment that more and more pathology groups will have to make, however, as hospitals increasingly refuse to pay pathologists for their services in directing the laboratory and require instead that pathologists look to non-Medicare patients for payment. In the final analysis, the judgment may depend on the size of the revenues that a group derives from professional component billing, its ability to secure signed consent forms from patients, the availability of other sources of payment, and the level of risk the group is willing to assume. The following discussion examines the alternatives.

Bill as usual. Pathologists should understand that the Court of Appeal’s decision is binding only in those Florida counties that are in the Fifth District, generally east-central Florida. Needless to say, pathologists should not bill patients in the Fifth District without obtaining the requisite consent. The decision is not controlling in other parts of Florida, however, and it is certainly not controlling in other states. Everywhere but the Fifth District of Florida, pathologists are free to argue that the FSP case was wrongly decided and should not be followed. In making this argument, they can derive significant support from previous cases, such as Pathology Laboratories of Arkansas, which have been favorable to professional component billing. Pathologists can also cite the final judgment entered on Oct. 9, 2002 in Arizona Society of Pathologists v. AHCCCS. It provides, in pertinent part, that the "practice of billing for indirect services (or "professional component billing") whereby pathologists bill a nominal fixed fee for each laboratory test, regardless of the amount of time a pathologist devotes to a particular test, is an appropriate billing practice...."

Although the FSP decision is binding only in the Fifth District, it nonetheless increases the risks elsewhere in billing patients for professional component services without obtaining a written agreement from the patient. The risks are greater in Florida because appellate courts in other districts in that state are more likely to follow the decision of another Florida court. The risks are somewhat less in other states, where the FSP decision can be said to represent the law of Florida only.

Even outside Florida, however, opponents of professional component billing will invoke the decision and argue that it should be followed. It is foreseeable that class actions will be brought asserting that billing patients for PC services is unlawful in the absence of written agreements that meet the disclosure criteria of the District Court of Appeal. If these class actions are brought, plaintiffs will seek repayment of all charges for professional component services that the defendant pathology groups collected from patients going back for several years. If the plaintiff class were to prevail, the result would be financially devastating for the pathologists. And in any event, the legal fees to defend the litigation—to say nothing of the anxiety that such litigation would provoke—would be substantial.

In this connection, it should be noted that in 1995, a class-action case of this nature was brought against two pathology groups in Peoria, Ill. (See Smith v. Peoria Tazewell Pathology Group.) After extensive litigation, the pathology groups prevailed in 1997. The expenses of defending the case were enormous, however, and the psychological toll on the defendant pathologists should not be underestimated. After the FSP decision, it is less clear that the Smith case would have had the same outcome.

In sum, a pathology group outside the Fifth District of Florida may decide to bill patients for professional component services without obtaining a prior agreement. Such a group should make this determination, however, only if it is prepared to accept risk. The degree of risk depends to some extent on whether the pathologist practices in Florida or elsewhere.

Secure written agreements. Probably the safest course for those who wish to bill patients for professional component services after the FSP decision is to disclose the nature of those services clearly and to secure written agreements from patients to pay for them. On page 54 is a long form disclosure statement agreement, and on this page is a short form. Both documents are designed to give the explanation about PC billing that the District Court of Appeal appeared to envision. The long form is intended as a stand-alone document while the short form is intended to serve as an insert to a general form to be signed by the patient at admission. These forms are prototypes only; each pathology group should modify them to reflect its own practices and preferences.

Of course, there can be no guarantees. The long form, however, should give pathologists a firm basis for billing any patient who has signed the form. It should insulate such pathologists from allegations that they acted fraudulently or deceptively in billing for professional component services. The short form offers slightly less protection in that it provides less explanation and is likely to appear in the middle of a longer document that addresses other matters. It may be the only one, however, that the hospital is willing to include in the admission packet.

So why wouldn’t all pathology groups that intend to bill for professional component services use forms of this nature? There are several reasons, each of them legitimate:

  • They may not want to take any action that might be construed as indicating that the right to bill patients for professional component services is dependent on a contract rather than on the value of the services.
  • The hospital may be unwilling to include either form in the admission materials.
  • The pathologists may be concerned that a significant number of patients will not sign the form.

The worst of all courses of action would be to ask a patient to sign a form consenting to payment and then bill the patient after the patient refused to sign. Thus, if a pathology group has reason to believe that a significant percentage of patients will not sign, it probably makes sense not to use the form. In this situation, a pathology group might consider including a disclosure form about professional component billing—without seeking a signed agreement. This approach involves risk in that it doesn’t result in an actual contract, as apparently contemplated by the Florida court. It is preferable, however, to making no disclosure at all.

A related issue concerns outpatients. If a pathology group is obtaining signed consents to bill inpatients for PC services, does that imply that consents are necessary to authorize professional component billing? If so, shouldn’t the group seek similar consents from outpatients whom it will bill for professional component services? These questions suggest that a group that secures signed consents from inpatients but that also derives significant revenues from professional component billing of outpatients may want to devise a mechanism by which it can get the consent of such patients before tests are performed.

The agreement approach, while attractive in some respects, raises issues of its own. Each pathology group will have to weigh those issues in light of its own circumstances and its willingness to accept risk. There are no easy or pat answers.

Not bill patients for professional component services. The FSP decision addresses billing patients for professional component services; it does not speak to billing third-party payers. At this juncture, most payers can be assumed to understand the basis for professional component billing. Moreover, if a payer has been paying for professional component services, it is fair to assume the payer has consented to pay for such services. Accordingly, unless the pathologist has misrepresented the services for which the payer is being billed, it seems appropriate to continue to bill payers that are willing to cover professional component services—particularly if the pathologist is confident that the payer understands the nature of the service.

With respect to payers that refuse to pay for professional component services, a pathology group may rationally conclude after the FSP decision that it does not want to take the risk of billing patients for those services. This conclusion may depend in part on the amount of revenues the group expects to derive from PC billing and the anticipated costs of collecting from patients. It may also depend on the willingness of the hospital at which the pathologist practices to pay a reasonable fee for the direction of the laboratory—or on the willingness of payers to consider other forms of payment. For example, the pathology group may want to explore the payers’ willingness to pay for professional component services on a per diem or other basis that may be less objectionable to the payer.

In any case, each pathology group should make an informed decision about how it wishes to proceed in light of the FSP decision. Moreover, pathology groups in a state may want to consider legislation that addresses professional component billing.

Jack R. Bierig, of the Chicago law firm Sidley Austin Brown & Wood, is CAP general counsel. He represented the plaintiffs in the FSP litigation.