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Pass-Through Lab Billing Arrangements Draw Payor Scrutiny, Ire

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NEW YORK — In recent years a confluence of factors, including growing financial pressures and increased payor stringency regarding laboratory networks, have led to a rise in dubious lab pass-through billing arrangements.

These deals, which typically consist of an outside laboratory billing tests through a hospital in order to take advantage of that facility's higher reimbursement rates or in-network status, range from the clearly fraudulent to the somewhat questionable. The vast majority, though, don't pass legal muster, said Richard Cooper, co-chair of the national healthcare practice group at law firm McDonald Hopkins.

Broadly defined, pass-through billing refers to arrangements where a provider other than the performing laboratory bills for a test. Traditionally, such deals have been a regular part of the lab landscape, with hospitals contracting with outside labs for certain testing services and then themselves billing payors for those tests.

"It's not unusual for hospitals to send certain specimens out for certain tests that they don't perform internally, and those arrangements are perfectly appropriate," Cooper said.

Over the last several years, though, Cooper said he and his colleagues have seen a rise in a different kind of arrangement — one that is not a true reference lab arrangement, but instead is characterized by independent laboratories or management companies working with independent laboratories making deals with hospitals under which an independent lab’s client base specimens are billed by the hospital through the hospital's payor contracts.

For the hospital, such an arrangement offers the potential for a boost in test volume and associated revenue, while for the independent lab it allows them to access the hospital's in-network status with payors they don't have contracts with. In some cases, these arrangements have also involved hospitals kicking back a portion of their higher reimbursement rates to the independent lab.

This has led to some eye-popping lab claims, noted healthcare consultant Donna Beasley, who spoke about these arrangements during a presentation at the recent Lab Institute meeting.

She cited as an example the case of Sharkey-Issaquena Community Hospital, a 29-bed facility in rural Mississippi that, according to a suit filed in 2017 by Blue Cross Blue Shield of Mississippi, submitted around $34 million in outreach lab testing claims in 120 days.

Another case she highlighted involved the 25-bed People's Choice Hospital in Shattuck, Oklahoma. According to a 2017 suit by Aetna, that facility entered into agreements with a number of independent labs and lab management companies, after which its lab claims went from an average of 72 per month and a total average monthly reimbursement of $1,300 to more than 10,000 lab claims per month at a monthly average of $1.35 million.

"Pass-through billing, where [a hospital] sends a specimen to a reference laboratory and then the reference laboratory sends the hospital an invoice for that test, has always happened," Beasley said. "The difference is, they weren't sending 100 percent of their patient work through the reference lab, and the other part is, when the hospital files the claim and gets paid for it, they wouldn't ever give the reference lab a portion of that payment. So that is new. These are new scenarios."

Beasley said these new arrangements have arisen as hospitals, particularly in rural areas, struggle to stay afloat.

"These hospitals are absolutely desperate to find revenue sources," she said. "And so when somebody comes in and says, you're going to make all this additional revenue, you just have to pay us a portion of it, they think, 'Well, that's fine, I'm still going to come out ahead.' And they go ahead and do it."

These deals, however, can run afoul of federal and state anti-kickback laws as well as false claims acts and other state laws covering laboratory billing.

Beyond arrangements involving hospital kickbacks, many of these newer pass-through billing deals are meant to let out-of-network independent labs bill for the customers as if they were in-network.

"Presumably, many of these laboratories actually do have relationships with providers and they are probably representing themselves as being no different than a lab that is in-network, and they might actually have some compelling customer service or quality or turnaround time aspects to their business," said Elizabeth Sullivan, co-chair of McDonald Hopkins' national healthcare practice group.

However, in recent years, many payors have become more aggressive at enforcing their exclusive or limited panel lab networks, Sullivan said. "And that, I think, has created challenges for out-of-network labs that didn't necessarily exist before."

The newer breed of pass-through billing deals are "a work around to let a lab company that is out of network access payor contracts to bill as if they were in network by piggybacking on a hospital's contracts," Cooper said.

Payors are predictably unenthused by this idea as it impacts exclusivity agreements they may have with other in-network providers, negatively affects their ability to monitor the quality of the providers they have contracted with, and generally degrades their control over who is and is not participating in their networks.

A number of payors have moved to crack down on these arrangements. In 2017, Aetna announced that it would begin denying "pass-through billing for most lab charges." UnitedHealthcare also announced in 2017 that it did not allow pass-through billing for lab services. Cigna announced that it was disallowing the practice effective May 2019.

"This is becoming the norm," Beasley said. "Payors have caught on to this problem, and so in their contracts with hospitals they are starting to include language to stop it."

In response to the increased attention and recoupment actions from payors, independent labs and management companies pursuing pass-through deals have begun tweaking their arrangements in hopes of passing muster with insurers, Sullivan said.

"There's a sense of people trying to move towards something that at least looks more compliant," she said.

In some cases that might mean the independent lab will place a facility on the premises of the hospital it is working with or that the hospital in fact performs some component of the testing process.

"When we drill down into these arrangements, though, we still don't get comfortable with them," Cooper said, "because fundamentally it still gets you to the same point" of an out-of-network lab using a hospital to bill as if it were in network. And payors are now hypersensitive to these arrangements," he added. "I suppose there are ways that you could structure these [deals legitimately], but I would say that I don't think we have seen one that we've been comfortable with."

Sullivan said that, in theory, a hospital could enter an arrangement with an independent laboratory or consulting company for the genuine purpose of growing its outreach business throughout its established catchment area, but she added that even these arrangements could be subject to scrutiny from payors about the facility's true intent and whether it is actually working to grow its business within its natural footprint and consistent with its payor agreement.

In practice, Cooper noted, the tests billed through these arrangements are often performed far from the hospital's actual patient population.

"You have specimens from six states over getting billed through a critical access hospital," he said. "You look at that logically and you ask, just from an operational and clinical standpoint, why would specimens from state A be getting billed through a hospital six states away? It just doesn't pass the optics test."

Cooper said that he believes formation of these pass-through billing arrangements has declined as payors have begun scrutinizing them more closely, but added that his firm still receives regular inquiries from clients about them.

"We're still getting calls with enough regularity that we know new arrangements are at least being proposed," he said.