2024 U.S. Health Care Fraud, Waste & Abuse Trends (Part II): Guidance on Clinical Laboratory Arrangements

March 26, 2024
15:16 minutes

In this second installment of Ropes & Gray’s three-part podcast series exploring recent regulatory, compliance, and enforcement developments in the fraud, waste, and abuse space and the potential implications for health care and life science companies in 2024, health care partners Devin Cohen and Michael Lampert are joined by litigation & enforcement partner Andrew O’Connor for a conversation on remuneration offered and paid by labs. Topics of discussion include an exploration of the permissibility of specimen processing arrangements, and an examination of overlay between the Office of the Inspector General (“OIG”) advisory opinions and Department of Justice (“DOJ”) enforcement actions.


Devin Cohen: Hello, and welcome to today’s podcast. This is part two of our three-part series reviewing recent developments in fraud, waste, and abuse in health care. My name is Devin Cohen—I’m a partner in Ropes & Gray’s health care practice group. My practice includes a broad range of regulatory and transactional matters, with a focus strongly on insurance requirements and payor-provider alignment. With me today are Michael Lampert and Andrew O’Connor. Michael is a partner in our health care practice group whose work centers around providing strategic, regulatory, and transactional advice to clients in all sectors of the health care industry, and Michael co-heads our Chambers Band 1-Ranked False Claims Act (“FCA”) practice. Andrew helps lead the health care and life sciences industry group with Michael, co-heads our False Claims Act practice, and focuses on high-stakes litigation investigations in the health care and life sciences space.

This podcast is going to dig into clinical laboratory arrangements and specimen collection arrangements and their implications under the Anti-Kickback Statute and Civil Monetary Penalties law, and advisory opinions issued by the U.S. Department of Health and Human Services Office of Inspector General (“HHS-OIG”) in 2023. Finally, our third podcast is going to focus specifically on enforcement actions in this space over the last year. Now, let’s jump in.

OIG has historically issued quite a few documents and other information on the topic of the remuneration offered and paid by labs, stating its position that “arrangements providing free or below-market goods or services to actual or potential referral sources are suspect and may violate the Anti-Kickback Statute, and that arrangements providing greater-than-market-value goods or services are similarly suspect, as through their implication that one purpose of the over-payment could be viewed to induce a referral.” The government has repeatedly expressed concerns over these types of arrangements, and really, it’s starting to, I think, take a bit of a clear view on issues relating to overutilization and increased costs to federal health care programs and beneficiaries, as well as unfair competition.

Andrew O’Connor: Devin, just to chime in from an enforcement perspective, the area of labs has been a hot enforcement priority for the Department of Justice (“DOJ”). I sit here in Boston, where the U.S. Attorney’s Office—which has been active for a long time in the health care space—has been particularly focused on arrangements with labs, but it is something we are seeing across the country. Just recently, the acting head of the Civil Division for DOJ announced at a conference that arrangements with labs and referrals will continue to be an area of enforcement focus for DOJ.

Michael Lampert: So, here’s what OIG did here in 2023: It was Advisory Opinion 23-06, and it was issued to a pathology lab—a lab that would perform both what’s called the “professional” component of testing and the “technical” component. The “technical component” is preparing the slide for examination. The “professional component” is how a pathologist actually examines that slide: “Use the microscope to see what’s on it.” So, putting the slide together, technical component. Using the slide/examining it through the microscope, professional component. And so, this lab had a couple of features to it. Feature one is: it was in-network with a bunch of insurers. That can be an issue—not so much an issue on the Medicare side, but it can be an issue on the commercial side. Is an insurer going to pay a lab just like any health care provider to provide the service? So, it was in-network, and it received a lot of specimens to examine from physician offices—some of which may have their own labs, partial labs, or at least be in a position to prepare specimens certainly, on tissues that have been taken from the patient. Doctors in their labs would send material to this Requestor lab in order to perform the interpretations. The proposal was that, on the commercial side, where the Requestor lab was in-network, it would bill insurers for the global service—that’s to say, for the technical component, prepare the slide, and for the professional component, interpret the slide. But all it would actually perform and itself do would be that professional component, the interpretation using the smarts of its brilliant pathologists. It would buy essentially the slides pre-prepared from the physician offices—so, a doctor would prepare the slide, send it to the lab, the lab would pay the doctor for that slide, and then would interpret it and would bill the insurer to get total reimbursement. The proposal recited that the lab had determined that the payments that it would make to physicians’ offices would be at fair market value. It would be a per-specimen fee at fair market value for purchasing that technical component of the slide from the physicians who were referring the cases over.

HHS-OIG gave a “no,” or at least it gave, as I said before, a “not-a-green-light.” In the process of seeking an advisory opinion, HHS-OIG will tell the Requestor before the “no” comes out that this is going to be “no.” And so, there is the question, “Why keep going? Why not just take your answer and go home?” I think an answer there is, as I had suggested before, “To use it competitively. To communicate to the market.” In this case, to the physicians who were seeking, expecting, and asking for this payment to say, “No, sorry, folks—can’t do it.” It could also be to competitor labs that were making this payment, to send them a signal, or to send the market a signal, that what those competitor labs were doing was subject to enforcement scrutiny. So, this is, as Devin had said, an area that isn’t brand new at all for HHS-OIG. Back in 2005, there was a “not-green-light,” a negative opinion issued to a lab around specimen-collection arrangements, ordering physicians for specimens that they would prepare to send. In 2014, HHS-OIG issued a Special Fraud Alert on the same thing. In 2022, there was another opinion that HHS-OIG issued—it was another negative opinion, a “not-green-light” opinion, also around the payment for specimen-collection. And so, it comes in a pretty long line of—from HHS-OIG’s perspective—consistent guidance saying, “We do not support labs’ payments to organizations sending those labs slides, tissue specimens, or whatever it might be, for the preparation of those specimens.”

Devin Cohen: Michael, it’s those per-specimen arrangements that we saw OIG continue to dig its heels in here, with another Advisory Opinion 23-06 focusing on per-specimen collection. Some of the important takeaways of this advisory opinion are how the Requestor, or the arrangement, was structured with efforts to mitigate risk of fraud and abuse but, according to the OIG, not effective to do so. And so, some of the factors that the OIG saw here on a per-specimen arrangement—really consistent with a number of past opinions—were, first, the arrangements carving out federal health care business does not insulate it from posing a risk of fraud and abuse to Medicare, Medicaid, or TRICARE, etc., because physicians very often would like to use a single stop for all of their labs, despite the type of insurance that would be covered by the patients. This is very akin to the “pull-through risk” that we’ve seen and discussed previously. Also, in this arrangement, it’s not surprising to see it was “not a green light” because the OIG found the financial terms weren’t “reasonable.” There also were unfair competition risks in that market, where there was a significant incentive they saw of being paid under this arrangement to refer patients.

Michael Lampert: Devin, I agree with all that. Five quick takeaways I might offer:

  • Point one: Lab specimen-collection arrangements are just subject to scrutiny. HHS-OIG, at least, has expressed continually negative views of them.
  • Point two: Just as you said, the federal carve-out wasn’t enough. The relationship between the lab and the practices that would send it business is a relationship that goes beyond commercial—it includes both commercial volumes and federal health care program volumes. And so, if there’s a payment on just the commercial, folks get the view, “It could affect the totality of that relationship,” which would include, as you said, Devin, the “pull-through” of the Medicare business.
  • Point three: Fair market value—not enough there. There was a recitation of fair market value. In regulations, HHS-OIG is not authorized to opine on fair market value, and so, therefore, it needs to accept it as a “certification given.” But it wasn’t enough to save the arrangement.
  • Point four: It is a good illustration of the difference between the protection available for formula-based compensation under the Stark Law (not relevant here) from the protection available under the Anti-Kickback Statute (relevant here). The safe harbor for personal services arrangements on the Anti-Kickback Statute has been amended to permit formula-based comp, but if the formula is volume-variable—that’s not saying the formula changes based on the volume, but if the formula itself associates, or incorporates, the volume of referrals—that is not going to be, in HHS-OIG’s view, eligible for protection under that safe harbor. So, if you have a per-specimen fee, and it is just multiplied by the number of specimens, the aggregate amount of money is going to take into account the volume of referrals. And that’s not protectable under the Anti-Kickback Statute safe harbor, which is a different world than the Stark personal services exception, which would protect arrangements with that type of variability baked into the formula, so long as the per-click amount isn’t changing. So, it’s a good illustration of that.
  • And point five: This is actually the same point as point one, but I just want to underscore it, which is to say lab-collection arrangements—payments for lab specimens by labs—are just payments that HHS-OIG for a while has flagged as inconsistent with its view of the world, and payments, therefore, that face an uphill push.

Devin Cohen: Thanks, Michael. Going forward, others in the health care industry should be keeping in mind this OIG skepticism and disfavoring of per-specimen arrangements between labs, particularly when trying to identify new or unique revenue opportunities in the lab-testing space, accounting for the contours and the safeguards that OIG has been laying out over its series of advisory opinions.

Michael Lampert: We’ve focused obviously on advisory opinions. Those advisory opinions are the result not of HHS-OIG’s election of where to enforce, but, instead, the result of when people write in and say, “This is something we’re thinking about. What do you say, oh, Agency?” And they’re significant, though, from a legal perspective, from an enforcement perspective, in my view, I think, because OIG does get sign-off from DOJ if it gives a favorable opinion. The view is that that favorable opinion offers essentially an immunity cloak, while the opinions don’t technically bind DOJ—in each opinion, it says at the back, it “binds only HHS-OIG.” From this lawyer’s perspective, it would be difficult, I’d think, for the government to bring an action successfully, charging that a party acting in accordance with an advisory opinion was knowingly or intentionally violating the law, and so, it would seem difficult from a scienter perspective. Andrew, what do you think?

Andrew O’Connor: I agree, Michael. DOJ really ought to be less likely to pursue an action against an entity that’s modeled their behavior on OIG guidance. After all, HHS, where OIG sits, is supposed to be DOJ’s client in FCA cases, and, certainly from a policy perspective, we would hope that they would be aligned one-to-one. That being said, as you pointed out, opinions are not formally binding on anybody but OIG and with respect to anyone other than the entity that requested that opinion. So, DOJ, with its 90-some U.S. Attorneys Offices and Main Justice, which has its priorities, is certainly free in other circumstances to bring a False Claims Act case, even though we would certainly argue they would have an uphill battle. Second, I would add, and maybe more importantly, that these advisory opinions are not binding on relator’s counsel. Someone can file a False Claims Act case in the government’s name, even if OIG is telling the world they wouldn’t exercise their enforcement discretion in that same way. And so, because we know the DOJ very rarely exercises its authority to intervene and dismiss a case out from under a relator, if you don’t have an advisory opinion, or even if you do, there is still some risk that a private party could bring an FCA case on that same conduct.

OIG opinions, I agree, are very important. In our next podcast, we will frame up a number of other considerations in the enforcement space that folks in the health care world, whether they be manufacturers, providers, or other vendors, will want to consider as they look ahead to assess and minimize their risk in 2024.

Devin Cohen: Thank you all for joining us for our review on fraud, waste, and abuse trends and developments in this health care podcast series. For those of you listening who’d like more information on the topics discussed today, or our health care group more broadly, or our litigation enforcement team, please don’t hesitate to contact us. Our next podcast will address trends we observed in enforcement actions, as Andrew just said, over the last year. And you can also remember to subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Spotify and Apple. Thanks again for listening.

Subscribe to RopesTalk Podcast