In an important advisory opinion, the U.S. Department of Health and Human Services Office of Inspector General (OIG) gave a thumbs-down to a proposed clinical laboratory “pull-through” arrangement even though the patients in question were not federal healthcare program beneficiaries and the physician practices derived no direct financial benefit from the arrangement.  The OIG opinion confirms the government’s antipathy towards so-called “pull-through” discounting arrangements, which involve a lab offering free or discounted tests to certain commercially insured patients of an entity (such as a managed care organization or a physician practice) in order to secure referrals of federal program business.   

The OIG’s analysis confirms that any incidental benefit derived by a provider as a result of laboratory or other supplier discounting may be viewed as improper remuneration under the federal anti-kickback statute.  In addition, the OIG cautioned that a discounting arrangement may implicate the OIG’s authority to exclude a provider from participation in federal healthcare programs because such practices could result in charging Medicare “substantially in excess” of the provider’s usual charges.

The Proposed Arrangement

The advisory opinion was requested by a multi-regional laboratory that provides testing services to various healthcare institutions and physician practices.  Under the proposed arrangement, the laboratory would provide free testing services to patients of physician practices for whom the laboratory is not an approved laboratory provider under their insurance plan.  The stated purpose of the arrangement was to facilitate the physician practices’ desire to work with a single laboratory “for ease of communication and consistency in the reporting of test results.” 

The OIG Finds that the Arrangement Could Constitute Prohibited “Remuneration” Under the Anti-Kickback Statute

Although the laboratory certified that it would provide no financial benefits to the physician practices in connection with the arrangement, the OIG nonetheless determined that the arrangement resulted in “remuneration” to the physician practices, based on a combination of factors:

• First, the OIG took the position that the mere “convenience of receiving test results with consistent reference ranges and the efficiency gained from maintaining a single interface with a single laboratory” could constitute remuneration to the physician practice.  This conclusion may come as a surprise to providers who might have assumed that legitimate, quality-based considerations for entering into an arrangement would not be factored into an anti-kickback analysis.
• Second, the OIG cited reduced financial and administrative burdens for the physician practice as a result of using only one laboratory interface and the avoidance of connection fees that they would otherwise pay to electronic medical record vendors for additional lab interfaces. 
• Finally, and perhaps most crucial to its analysis, the OIG cited the lack of “discernable quality or safety improvements” gained by eliminating referrals to multiple laboratories or “any other safeguards that would make this remuneration low risk under the anti-kickback statute.”

In short, the OIG remains deeply skeptical of efficiency justifications for laboratory discounting arrangements that have the ultimate effect of securing federal program business from referral sources.  The agency was willing to look past the obvious convenience and practice management benefits of the proposed arrangement and assume that the laboratory’s willingness to provide free services was designed, at least in part, to secure federal healthcare program referrals. 

Discounts May Trigger OIG Exclusion Authority

In addition to posing risk under the anti-kickback statute, the OIG also concluded that the proposed arrangement implicates its authority to exclude an entity from participating in federal healthcare programs if it bills Medicare in an amount “substantially in excess of” its “usual charges” for such services.  Although the OIG has yet to define the terms “substantially in excess” and “usual charges,” it has previously said that it will not use its exclusion authority against any provider or supplier that discounts or gives away services to uninsured or underinsured patients, or against any provider or supplier unless it is discounting “close to half of its non-Medicare or non-Medicaid business.” 

Given the high percentage (10-40%) of physician practice patients in the proposed arrangement whose health plans require them to use a specific laboratory, the OIG thought it was plausible that the “close to half” threshold could be reached.  The OIG was troubled by the lack of justification for a “two-tiered pricing structure” other than enabling “physician practices to refer all of their laboratory business” to the requesting laboratory.  But given that the OIG also believes that “[t]he substantially in excess provision is not designed to prevent providers and suppliers from negotiating rates with private plans,” providers and suppliers are left guessing as to what degree of discounting might trigger the OIG’s wrath. 

The OIG seems to be sending a message to labs that they must be cautious or possibly face the economic capital punishment that exclusion typically entails.  In light of this latest opinion, “pull-through” arrangements of this nature should be carefully examined for compliance risk before implementation.