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Profiting from Pathology
Is buying pathology services wholesale and retailing them to patients a good
Dan O'Connor
Publish Date: November 17, 2007

If a doctor sends a patient's biopsy to a pathology lab that offers him a discounted rate, then is reimbursed for the testing at a higher rate by the patient's insurer — reaping a profit in the process — he may be within the law, but the practice has engendered debate. These are typically wink-wink deals between doctor and lab, with patients and insurers unaware that an outside lab did the work at a discount and that the doctor simply marked up the price without adding any value. Doctors say they're entitled to mark up work farmed out to a contractor to cover costs such as billing for the work and delivering the results to patients. "It doesn't cost $40 for a GI practice to do the billing and collection," says one fed-up pathologist glumly. "It's called fee-splitting — taking a service that someone else provided and cutting a deal to profit as a middleman. Splitting the fees. For a referral. I would say that's unprofessional."

With reimbursements shrinking and demand growing for expensive lab work to detect diseases such as prostate cancer, pathology has become a favorite target of doctors seeking ancillary revenue. On the one hand, there's no shortage of pathology labs willing to barter the margins that they enjoy to surgical centers for referrals. On the other hand, payments for pathology's technical side keep going up, not down, with pathology successful in getting paid reasonably well for each unit of work, unlike such surgical specialties as gastroenterology. "Under the right circumstances, the margins on this business are still good," says our pathologist.

"Somehow, what the pathologist does has been deemed a commodity that can be bought and traded," says Jane Pine Wood, JD, of the law firm McDonald Hopkins in Dennis, Mass. "It's like the primary care doctor who refers a patient to the surgeon telling the surgeon that he has to let him bill for part of the surgery."

Loophole closing?
These deals soon might be curbed. Expected changes to federal anti-markup restrictions and the Stark law in January will limit the ability of non-pathology specialists to pursue these fee-splitting arrangements. "I don't think it will totally come to an end, but certainly the [state and federal] government is looking to curb it," says Ms. Wood.

Fee-splitting, although technically legal in many states, is under increased scrutiny from payors, patients and the Department of Health and Human Services' Office of Inspector General. What's more, there are concerns about doctors recommending unnecessary tests and procedures because of profit motives, says Ms. Wood, who represents about 400 pathology practices and labs at risk of losing their large-volume GI and urology groups to fee-splitting arrangements.

A few large private payor plans have implemented new payment policies to deny payment for any technical or professional pathology services unless a pre-approved pathology provider provides the pathology services. These private payors have declined to "approve" urology or gastroenterology practices for reimbursement of pathology services, says Ms. Wood. Similarly, some payors have added language to their participating provider agreements to prohibit the provider from re-billing for purchased pathology services.

The American Medical Association is unequivocal in its stance: Payment by or to a physician solely for the referral of a patient is fee-splitting and is unethical. It adds, however, that doctors can impose a processing fee on such services. Yet pathology services continue to share revenues with physicians, perhaps to keep their business flowing, even though Medicare severely frowns on anyone getting lower-priced laboratory work than they do, especially a single physician.

Others say these deals improperly incentivize overutilization of pathology services, tempting physicians to order more tests than are needed. "The joke among pathologists is you know exactly who's going to put in a lab because utilization spikes six months beforehand," says. Ms. Wood.

"We are unaware of evidence of overutilization by gastroenterologists who have entered into these arrangements," says Joel V. Brill, MD, AGAF, FASGE, FACG, CHCQM, chief medical officer of Predictive Health and chair of the American Gastroenterological Association's practice management and economics committee.

Currently, if a Part B provider purchases the technical component of a diagnostic service, the purchaser must indicate on its claim to Medicare that the technical component was purchased, identify its supplier and indicate the amount paid. The purchaser must also refrain from marking up the price paid for the technical component. The anti-markup rule would be expanded to prohibit physicians and medical groups from profiting from the professional component unless the interpreting physician is a full-time employee. This anti-markup provision would not apply to independent laboratories that perform the technical component and order the professional component.

"Should CMS change their anti-markup policies on the professional component of a purchased test, practices should be prepared to address such if they are targeted for an audit by the [recovery audit] contractors to identify and collect overpayments made by Medicare to healthcare providers," says Dr. Brill.

CMS is also considering whether in-office pathology laboratories should be allowed under the in-office ancillary services exception.

Variations of the practice
Here are the four most common strategies to share the profits generated by pathology referrals. In outlining them, Ms. Wood notes that none are entirely free of compliance risks and that every arrangement in which a practice profits from its pathology referrals implicates federal and state laws.

Discounted account billing. This is the most prevalent and controversial practice. "It involves the purchase of private payor pathology services by referring physicians at a discount," describes Ms. Wood. "The purchasing physicians then mark up the price of the purchased pathology services and rebill the private payors.

"The concern is, it encourages overutilization and it tends to drive the physician to buy from the lowest-cost [pathology] provider, maybe not the best quality provider," says Ms. Wood.

Many states have enacted restrictions on account billing and markup. Some, however, only apply to clinical laboratory or cytology services. Client billing is prohibited in Arizona, California, Iowa, Louisiana, Massachusetts, Montana, Nevada (for cytology), New Jersey, New York, Rhode Island and South Carolina. California, Florida, Michigan and Oregon have anti-markup laws. Arizona, Connecticut, Louisiana, Maine, Maryland, North Carolina, Pennsylvania, Tennessee, Texas and Vermont allow markups, provided that physicians notify patients and private insurers what they paid.

"Marking up services is a common business practice outside of the world of medicine. Some people in medicine are mystified as to why it has such a bad reputation," says Frank J. Chapman, MBA, chief operating officer of Asheville Gastroenterology Associates in Asheville, N.C., who, for the record, doesn't discount-bill.

Professional pathology services by non-pathology practices. Another strategy involves a surgery center (often one specializing in urology or GI) which employs or contracts with a pathologist or pathology service for the provision of professional interpretations, says Ms. Wood. Under this arrangement, the surgery center then performs and bills for the professional pathology component while an independent and off-site laboratory performs and bills for the technical pathology component. "For this independent contractor scenario to comply with the Stark law, there must be a written agreement that specifies the covered services [and] payment to the pathology provider must reflect fair market value and may not be determined in a manner that reflects the volume or value of referrals or other business generated between the parties," says Ms. Wood.

Establishing an in-house histology laboratory. To circumvent restrictions on purchasing pathology services and then marking them up, more and more surgery centers are building their own pathology labs and hiring their own pathologists, says John Poisson, executive vice president and strategic partnerships officer at Physicians Endoscopy, a leading GI corporate partner, in Doylestown, Pa. "In this scenario, the GI practice actually creates some value by building the slides necessary for the pathology professional reading," says Mr. Poisson. "Some GI practices have taken the concept full circle by also hiring the pathologist for the professional read. In either case, by developing the histology lab or hiring the pathologist, the GI practice performs real work instead of simply marking up the outsourced work of others."

"From a clinical standpoint, having a pathologist within the group establishes a collegial on-site relationship. You can literally be looking at pathology results on patients that you did that morning," says the administrator of a GI center that built its own path lab.

This strategy is not without its cautions, though, says Ms. Wood. "In order to refer specimens of its Medicare and Medicaid patients to its own anatomic laboratory, the surgical facility must comply fully with the in-office ancillary service exception of the Stark law," she says. "An important requirement of this exception is that the revenues from the referring practice's technical component services can't be allocated among the referring practice physicians based upon referral volume."

Off-site "condo" laboratory. In this scenario, a surgery center provides its own pathology services, but at an off-site location such as in a strip mall. "The concept is that several laboratory operations will be established in the strip mall, each in its own unit," says Ms. Wood. "While each laboratory operation will have its own physical space and equipment, the same technical personnel and pathologists will be employed or contracted, on a part-time basis, by each of the laboratories. They'll move between units to provide their services for each of the laboratories." She notes, however, that the government is presently considering further restrictions to the Stark law that would limit the ability of referring practices to operate "condo" labs, including minimum square footage requirements, restrictions on shared equipment and geographic limitations.

"Developing your own lab is nothing like having your own outpatient endoscopy center, which I would consider to be a home run. It's more like a single or double," says a GI administrator.

This arrangement also raises issues under the anti-kickback law. "Condo" labs were at issue in the OIG's Advisory Opinion No. 04-17 when a pathology company that aimed to contract with urology, GI and dermatology groups, with the intent that each group would set up individual, off-site "condo" pathology labs, was placed under the microscope.

After investigating, the OIG ruled that it couldn't "exclude the possibility that the parties' contractual relationship is designed to permit the [pathology company] to do indirectly what it cannot do directly; that is, pay the physician groups a share of the profits from their laboratory referrals."

Cut once, bill twice
As one observer noted, dermatologists have been doing this for decades as many of them read their own cases — known as "cut once and bill twice." Yet no matter how you slice it, some people feel that unless you're directly providing the service and are clinically responsible for it, profiting from pathology is inappropriate.

"I'm very concerned for docs who've gotten into this that they're truly placing themselves in harm's way," says our glum pathologist. "Don't participate in anything that can be misconstrued by the government as fee-splitting or an arrangement that could violate Stark."