Florida squeeze: Florida court ruling threatens professional component billing
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
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].) 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):
- The attending physician must request the test;
- The result must lie outside the normal or expected range in
view of the patient’s condition;
- The pathologist must produce a written narrative report; and
- 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
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
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
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
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
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
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
- 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
- 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
Jack R. Bierig, of the Chicago law firm Sidley Austin Brown & Wood, is CAP
general counsel. He represented the plaintiffs in the FSP litigation.