On September 25, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued Advisory Opinion 23-06, in which it declined to approve an anatomic pathology laboratory’s proposal to purchase technical component (TC) services from out-of-network pathology laboratories for commercially insured patients. This opinion is noteworthy not because of the outcome, which is consistent with OIG’s longstanding concerns about “carve-out” arrangements, but because it hinged on the requesting entity’s certifications that the arrangement was commercially unreasonable and likely would involve referrals of federal healthcare program business.

The Arrangement

Requestor (Requestor) operates anatomic pathology laboratories across the United States that perform both the TC (i.e., the slide preparation) and the professional component (PC) (i.e., the pathologists’ interpretation) of anatomical pathology services. According to Requestor, certain laboratories that are capable of performing both the TC and PC services but that cannot directly bill commercial payors with which they are not in-network have proposed to enter into arrangements with Requestor. Under those arrangements, the laboratories would perform the TC for specimens obtained from patients who are insured by a payor with which Requestor is in-network, but the laboratories are not.

Requestor would pay the laboratories a fair market value fee for the TC services, and the laboratories would send the slides to Requestor for its pathologists to conduct the PC. Requestor would then submit a global claim to the commercial payor for both the PC and TC services, which Requestor acknowledged is permitted by its commercial payors as long as Requestor performs at least part of the PC or TC. The parties would enter into a written agreement documenting the arrangement. Importantly, the arrangement would not involve any anatomic pathology services reimbursable by federal healthcare programs (FHCPs).

Requestor certified that two types of laboratories have proposed this type of arrangement:

1. Laboratories that are owned by, or that employ, physicians who order anatomic pathology services for their patients (Physician Laboratories).
2. Laboratories that are not owned by, and that do not employ, physicians who order anatomic pathology services for their patients (Non-Physician Laboratories).

According to Requestor, both types of laboratories would be in a position to refer laboratory business to it, including laboratory services billable to FHCPs.

Requestor also certified the following:

• The written agreement would not meet the commercial reasonableness requirement of the personal services and management contracts safe harbor, which requires that the aggregate services contracted for do not exceed those reasonably necessary to accomplish the commercially reasonable business purpose of the services.
• Although the fee it would pay for the TC services would be fair market value, it is capable of performing the TC services itself and can do so more efficiently and at a lower cost.
• Although neither party would be required to refer any federally reimbursable business to the other, the proposed arrangement “likely would result” in Physician and Non-Physician Owned Laboratories referring federally reimbursable business to Requestor.

Requestor predicted that if it declines to enter into the arrangement, it likely would not receive a significant volume of FHCP business from either Physician or Non-Physician Owned Laboratories.

OIG’s Analysis

Requestor’s certifications appeared to be designed to force OIG’s hand and left little doubt as to the outcome. OIG began its analysis by noting that the proposed arrangement would implicate the Anti-Kickback Statute because Requestor would pay remuneration to the Physician and Non-Physician Laboratories which in turn, could refer FHCP business to Requestor. Despite the fair market value fee and FHCP business carve-out, OIG determined that the arrangement could increase the likelihood that the Laboratories or their referring physicians would order federally reimbursable services from Requestor and did not pose a sufficiently low enough risk under the Anti-Kickback Statute for OIG to issue a favorable advisory opinion. OIG reasoned:

1. Carving out FHCPs is not dispositive. OIG reiterated its longstanding position that carving out FHCP business from an arrangement does not insulate the arrangement from Anti-Kickback Statute liability. Rather, these types of arrangements may disguise remuneration that is designed to induce the referral of FHCP business as payments for non-FHCP business.
2. Potential Nexus. Because Requestor certified that the arrangement likely would result in the Physician and Non-Physician Laboratories referring federally reimbursable services to Requestor, OIG could not rule out any nexus between the remuneration paid and the FHCP referrals to Requestor.
3. Facts & Circumstances Review. Requestor certified that the arrangement would not satisfy the personal services and management contracts safe harbor’s requirement that the aggregate services do not exceed those which are reasonably necessary to accomplish the arrangement’s commercially reasonable business purposes—thus essentially certifying that the arrangement was not commercially reasonable. In its facts and circumstances review, OIG noted that the arrangement would allow the Physician and Non-Physician Laboratories to bill and receive payment for TC services for which they otherwise would be unable to bill as in-network providers. Pointing to Requestor’s certifications that it (1) is capable of performing both the TC and PC, (2) can do so more cost-effectively, and (3) absent the proposed arrangement, referring physicians would be more likely to directly refer to in-network providers such as Requestor, OIG found it difficult to identify any commercially reasonable business purpose for Requestor to enter the arrangement. Ultimately, OIG concluded that the proposed arrangement could be an opportunity for Requestor to pay remuneration to potential referral sources to induce referrals of federally reimbursable laboratory services.
4. Fair market value compensation does not save the arrangement. The fact that the compensation to the Physician and Non-Physician Laboratories would be fair market value is not sufficient to protect the proposed arrangement from implicating, and potentially violating, the Anti-Kickback Statute. Citing its Special Fraud Alert on Laboratory Payments to Referring Physicians, OIG reiterated that the Anti-Kickback Statute is violated if even one purpose of the payment is to induce referrals of FHCP business, regardless of whether that payment is fair market value. OIG explained that the proposed arrangement could provide an incentive for the referring laboratories to select the pathology laboratory that pays the highest price for their TC services, which could result in patient steering and unfair competition in the market.

Key Takeaways

Despite OIG’s straightforward analysis using familiar principles, this opinion has some significant omissions and limitations. Most importantly, OIG analyzed the proposed arrangement from Requestor’s perspective, based on Requestor’s certifications, and without analyzing or opining with respect to either party’s intent. Here, Requestor certified that the Physician and Non-Physician Laboratories are potential referral sources of FHCP business. But laboratories such as the Physician and Non-Physician Laboratories at issue in Advisory Opinion 23-06 have the financial incentive to perform and bill for both the TC and PC themselves whenever possible, and FHCPs—particularly fee-for-service Medicare and traditional Medicaid programs—typically do not exclude laboratories from their networks. Consequently, it would be unlikely that a Physician or Non-Physician Laboratory would refer any pathology specimens from patients covered by these FHCPs to another laboratory, such as Requestor. To the extent a Physician Laboratory or, less likely, a Non-Physician Laboratory needs to refer FHCP-covered non-pathology laboratory testing to another laboratory, it could simply choose another laboratory (i.e., one that does not pay it for TC services). If the Physician and Non-Physician Laboratories do not refer any FHCP business to Requestor, then the arrangement would not implicate the Anti-kickback Statute.

Even if a Physician or Non-Physician Laboratory were to refer some FHCP business to a laboratory that paid it for TC services, it is possible that the Laboratory’s receipt of remuneration might not implicate the Anti-Kickback Statute. Laboratories that are considering entering into arrangements similar to the one described in Advisory Opinion 23-06 may wish to do so for reasons wholly unrelated to FHCP business, such as to avoid the administrative costs associated with billing patients for out-of-network fees or to leverage centrally located digital pathology scanners. Under the one purpose test, unless the government (or a whistleblower) can demonstrate that the referring laboratory accepted the TC fees at least in part in return for referring FHCP business to the entity paying the remuneration, the arrangement arguably would not implicate the Anti-Kickback Statute. Nonetheless, it may be hard for a laboratory to rely solely on the inability of the government (or a whistleblower) to be able to prove one purpose was to induce referrals.

Finally, the proposed arrangement in Advisory Opinion 23-06 failed to meet a safe harbor only because Requestor effectively certified that the arrangement was not commercially reasonable. Not only is such a certification highly unusual—if not unprecedented—in the advisory opinion context, it was dispositive to the outcome, as an arrangement that is commercially unreasonable is highly unlikely to pose only a minimal risk of fraud and abuse under the Anti-kickback Statute. Consequently, Laboratories considering entering into arrangements similar to the arrangement described in Advisory Opinion 23-06 will want to carefully assess whether the arrangement is commercially reasonable; and document its determination and reasoning.

We note that at least one state has taken legislative steps that may reduce the need for arrangements such as the one Requestor proposed. Specifically, Tennessee recently enacted The Medical Laboratory Participation Act, an “any willing laboratory” law that limits the ability of healthcare insurers to exclude Tennessee-licensed laboratories from their networks.