January 31, 2018
The last year has seen a whirlwind of proposals and discussions regarding hospital outpatient department (“HOPD”) reference laboratory arrangements. Hospitals may have been approached by an independent reference lab with a golden opportunity to increase revenues under these HOPD reference lab arrangements. Unfortunately, if hospitals found themselves thinking that an HOPD reference lab arrangement sounded too good to be true, they were probably right.
HOPD reference lab arrangements often consist of an in-network hospital contracting with an independent laboratory (in-network, out-of-network, and potentially even out-of-state) for the provision of outpatient laboratory services. The services are billed (often using the hospital’s provider number) at the in-network, provider-based rate as if the hospital performed the laboratory services itself, even though the independent laboratory is actually performing the services. Under this arrangement, the parties are able to capture the significantly higher reimbursement rate for hospital outpatient laboratory services, as compared to the lower rate a third party payor negotiates with an independent laboratory if the lab billed for the services directly. Under these proposed arrangements, the hospital and the laboratory usually split the revenue from the higher reimbursement rate. As you might imagine, “gaming the system” in this manner could draw the attention of the third party payors who are paying more than they normally would for tests performed in a reference lab.
Although we are not aware of any specific litigation initiated to date in Alabama, we understand from various conversations with BCBSAL that they consider HOPD reference lab arrangements to be fraudulent, at least under certain circumstances. In addition, Blue Cross & Blue Shield of Mississippi (“BCBSMS”) has instituted litigation of ERISA and state law fraud/conspiracy/misrepresentation claims against a hospital and various independent laboratories for their attempts to take advantage of higher hospital outpatient lab reimbursement rates under an HOPD reference lab arrangement. BCBSAL’s and BCBSMS’s concerns about fraud appear to arise from the apparent manipulation of reimbursement rates under the HOPD reference laboratory arrangements.
Traditional fee-for-service Medicare does not have the same in-network/out-of-network issues of private insurance, but Medicare does impose certain billing limitations on reference laboratory arrangements. For instance, a referring laboratory can only bill on the clinical laboratory fee schedule (“CLFS”) for diagnostic tests performed by a reference laboratory if one of the following conditions is met: (a) the referring laboratory is located in (or is part of) a rural hospital; (b) the referring laboratory and the reference laboratory are under some form of common ownership; or (c) the referring laboratory does not refer more than 30% of its clinical laboratory tests out to a reference lab during the year (not including referrals under the common ownership exception). This limitation prevents hospitals from using reference laboratories to receive payment on the CLFS for diagnostic laboratory tests that otherwise could be considered ancillary services and would be packaged into the OPPS rate for services provided to outpatients (assuming the hospital is subject to OPPS). Even if a hospital could satisfy one of the conditions above, the hospital must still meet applicable Stark Law exceptions or Anti-Kickback Statute safe harbors if there is any remuneration exchanged between the hospital, the reference laboratory, or a physician referring for designated health services.
Additional Indicia of Fraud
Sometimes HOPD reference laboratory arrangements are paired with other questionable practices, such as pushing physicians to order unnecessary tests, paying unlawful kickbacks disguised as medical directorships, paying marketing fees, unbundling lab tests, or using higher diagnosis codes to increase reimbursement. If any of these elements is present, there is a heightened risk of a qui tam relator suit under the False Claims Act or other civil, criminal, or administrative action. However, even without adding any additional fraud indicators as described above, the HOPD lab arrangements have been considered verging on fraudulent by BCBSAL and have resulted in substantial overpayments and recoupment actions. Hospitals and lab providers should be careful not to exploit billing and reimbursement arrangements in order to generate higher reimbursement.
 Similar to the general description of the HOPD reference lab arrangements in the body of this memo, Sharkey-Issaquena Community Hospital in Sharkey County, Mississippi allegedly entered into agreements with several Texas-based independent laboratories in which claims would be submitted as if laboratory services were ordered and provided at the hospital, although the actual lab testing was conducted by the independent labs in Texas. BCBSMS paid the claims based on the representation that the lab tests were ordered by and conducted at the hospital. BCBCMS alleges that this scheme allows the independent labs (none of which had provider agreements with BCBSMS according to the complaint) to bill the hospital reimbursement rate, which is considerably higher than the rate that would have been paid for an independent laboratory to perform the same services. Blue Cross & Blue Shield of Mississippi v. Sharkey-Issaquena Community Hospital, et al., Case 3:17-cv-00338-DPJ-FKB (S.D. Miss., filed May 4, 2017).
 Similarly, BCBSAL has also removed physician providers from their approved provider list for “over-utilization” of out-of-network labs.
 Medicare Claims Processing Manual, Publication No. 100-04, Chapter 16, Section 40.1 (Revised February 10, 2017), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c16.pdf.