On September 28, 2023, the Office of Inspector General of the Department of Health and Human Services (OIG) issued Advisory Opinion 23-06, involving a proposed services arrangement between a pathology laboratory (the Requestor) and third-party referring pathology laboratories. 

The OIG determined that, if the requisite intent were present, the proposed purchase of the technical component of anatomic pathology services from certain laboratories would generate prohibited remuneration under the federal Anti-Kickback Statute (AKS). In doing so, the OIG highlighted the proposal’s lack of commercial reasonableness and reaffirmed its longstanding suspicion over arrangements that “carve out” federal health care program business.

Factual Background

The Requestor operates anatomic pathology laboratories across the United States and bills third-party payors for both the technical and professional components of those anatomic pathology services.  The Requestor sought the advisory opinion after receiving various laboratories’ proposals to enter into written agreements under which Requestor would purchase the technical component of the services from those laboratories. According to the Requestor, the proposed arrangement would not involve the referral of or billing for services reimbursable by federal health care programs.  In other words, only commercially insured patients would be included.

Under the proposed arrangement, a third-party lab would refer a pathology service to the Requestor, and the Requestor would then be required to purchase the technical component of the service from that lab.  The Requestor would perform the professional component and bill commercial payers for both components as an in-network provider and then compensate the referring laboratory a fair market value, per-specimen fee in exchange for its work on the technical component.  According to the Requestor, although certain of the referring laboratories might have the capacity to perform both components of the pathology services, those labs may seek to enter into the proposed arrangement because they are out-of-network with, or are completely unable to bill, certain commercial payors for pathology services. 

In essence, the proposed arrangement would present third-party laboratories with an opportunity to perform, and receive payment for, the technical component of pathology services for patients of commercial health plans the third-party laboratories would not otherwise be able to bill as an in-network provider.  Referring laboratories would thus derive an otherwise unavailable benefit by referring pathology services to other labs, including the Requestor, that possess favorable in-network contracts with commercial payors. 

The Requestor certified the accuracy of the following key facts that led to an unfavorable result:

i. A significant portion of Requestor’s pathology services derive from physician referrals to assist those physicians in diagnosing and treating patients;

ii. The Requestor is already capable of performing both components of pathology services without referring the technical component to a third-party lab;

iii. Certain of the referring laboratories are also already capable of performing both components of pathology services;

iv. Performing both components in-house is generally more efficient and cost-effective than paying a third-party lab; and

v. Referring physicians are more likely to refer pathology services to laboratories that have contracts with commercial payors.

OIG Analysis and Conclusions

Despite the Requestor’s certification that the proposed arrangement would satisfy the personal services and management contracts and outcomes-based payment arrangements safe harbor and that any Requestor paid fee would be fair market value, the OIG concluded that the proposed arrangement would implicate the AKS, given that the Requestor would be compensating a party in a position to refer services payable by a federal health care program.  Based on the above facts, the OIG found it difficult to discern any “commercially reasonable business purpose” for Requestor to enter into the proposed arrangement, other than the possibility that such payment may induce referrals of patients, including federal health care program beneficiaries.  In its analysis, the OIG noted the following:

  • The proposed arrangement could give rise to a significant incentive for third-party laboratories to refer federal health care program beneficiaries. Despite the proposed arrangement’s carve-out of federal health care program business, the remuneration paid from the Requestor to third-party laboratories may increase the likelihood that the laboratories or their affiliated referring physicians would order other services from the Requestor that are billable to federal health care programs. The OIG could not conclude the absence of a nexus between the remuneration paid as part of the proposed arrangement and potential referrals to the Requestor for services reimbursable by federal health care programs.
  • The proposed arrangement would not be protected by the safe harbor for personal services and management contracts and outcomes-based payment arrangements. The Requestor could not certify that the aggregate services contracted for would not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of those services. 
  • The proposed arrangement would allow the Requestor to provide laboratories the opportunity to bill and receive payment for services they otherwise would not be able to bill for as in-network providers. The OIG could, therefore, not perceive a commercially reasonable purpose for the Requestor to give up its opportunity to bill for those services “other than the possibility that such payment may induce referrals of patients, including federal health care program beneficiaries.”

Key Takeaways

Below are key opinion takeaways for laboratories considering arrangements that share similar features to the proposed arrangement:

  • A federal health care program business carve-out in an arrangement is not dispositive of whether that arrangement implicates the AKS. The OIG expressed “longstanding concern” regarding arrangements that carve out federal health care program business, as these carve outs often represent efforts to disguise remuneration for federal health care program business as remuneration for non-federal health care program business.
  • Where an arrangement does not have a commercially reasonable explanation – other than to induce referrals – it is likely to be viewed as implicating the AKS.
  • Even if the purported intent of an arrangement is not to induce referrals, an arrangement that “gives rise to a significant incentive” for an entity to refer patients, including federal health care program business, may be viewed as implicating the AKS.
  • Although OIG advisory opinions bind only the requesting party, it is possible that the Requestor sought OIG’s guidance knowing that it may lead to an unfavorable opinion and scrutiny of its competitors. Although this advisory opinion may draw future scrutiny of comparable arrangements, companies who have entered into similar arrangements may present defenses and/or mitigating factors that were neither presented by the Requestor nor analyzed by the OIG in issuing the advisory opinion.  The opinion thus serves as a good reminder to anyone considering similar arrangements to carefully structure those arrangements and seek advice of counsel.

Reed Smith will continue to follow developments with regard to the AKS and advisory opinions. If you have any questions about this opinion or its implications, please contact the health care lawyers at Reed Smith.