February 2007 | Back to Table of Contents

Law and Policy

Legal Billing for Pathology Services

By David M. Glaser, J.D., and Katherine J. Bennett, J.D.

EDITOR'S NOTE
In October 2005, the Minnesota Society of Pathologists urged the Minnesota Board of Medical Practice (BMP) to adopt a new administrative rule prohibiting “mark-ups” by billing physicians for cytologic and anatomic pathology services. The BMP, in turn, asked the Minnesota Medical Association (MMA) to help it better understand laboratory billing practices and the ramifications of adopting the new administrative rule for the physician community.

In response, the MMA created a task force, co-chaired by Lars Conway, M.D., (pathology) and Patrick Zook, M.D. (internal medicine). The task force met on three occasions and sought the opinions of physicians across the state through an online survey. In November 2006, the MMA Board of Trustees adopted the following policy:

“It is an ethically permissible billing practice whereby an ordering and billing physician adds to the charge of the professional services rendered by a pathologist for anatomic and cytologic services if those added charges reflect the reasonable costs incurred by the ordering and billing physician during the billing process (such charges would not include costs otherwise incorporated in the ordering physician’s professional services associated with the patient visit, specimen collection, and handling (ie, inconsistent with CPT coding standards).”

ABSTRACT
Minnesota physicians recently debated whether primary care physicians can legally and ethically “mark up” or add to the fees charged by a pathologist when submitting bills for pathology services to third-party payers. This article explores the relevant federal and state laws and offers the conclusion that both federal and state law allow for such a mark-up if it reflects reasonable compensation for additional work and risk assumed by the primary care provider group.

During the past year, there has been a great deal of debate in Minnesota about what constitutes proper billing when a primary care physician purchases services from a pathologist. At the heart of the discussion is disagreement over whether primary care physicians may “mark up” or add to the fees charged by a pathologist when submitting bills for pathology services to third-party payers.

Primary care providers routinely bill private insurers for services provided by independent pathologists. In most cases, the fee charged to the private insurer exceeds that charged to the primary care physician by the pathologist. Primary care physicians argue that this additional amount is justified: first, because by preparing and sending the bill, the primary care physician absorbs a cost the pathologist would otherwise bear, and, second, because the primary care physician may take responsibility for communicating results to the patient, which takes time and also exposes that physician to malpractice risk. But some pathologists and others have argued that primary care providers are required to pass the pathologist’s charge along to the patient, or the patient’s insurer, without increasing it.

There is no legal support for such an absolute position. Although both state and federal law have provisions that limit the ability of a physician to profit from billing for the services of another physician, the law also recognizes that it is reasonable for a physician to receive compensation for his or her work.

This article explores the federal and state laws pertaining to this issue and discusses the implications of those laws for both primary care physicians and pathologists.

The Federal Regulatory Environment
Two different federal requirements apply to the billing of purchased pathology services. First, Medicare sets limits on billing for diagnostic tests. Second, the Medicare Anti-Kickback Statute prohibits remuneration if one of its purposes is to encourage referrals.

♦ Medicare Coverage of Diagnostic Services
The Medicare program considers diagnostic tests to have both a technical (the test itself) and a professional (the interpretation) component and has different rules about billing for each. Medicare generally does not permit a physician to “mark up” the technical component of a diagnostic test that a physician purchases from another party.¹ The Medicare Claims Processing Manual specifically states that the purchased diagnostic test rules apply only to the “technical component of physician pathology services furnished on or after January 1, 1994, … and not to the physicians’ service associated with the test.”¹ In other words, the general Medicare prohibition against marking up purchased diagnostic tests does not apply to billing for professional interpretations of tests; rather, it prohibits the marking up of the technical component of the test itself. Thus, a primary care physician must bill Medicare the lesser of either what the physician paid for the test or the Medicare fee schedule amount for the test.

In order for a physician to bill Medicare for a purchased interpretation, the primary care physician must have personally performed or supervised the technical portion of the diagnostic service.² This means that if a physician leases technicians and equipment but supervises the work of the technicians, the physician may charge for the test and disregard the purchased diagnostic test limitation. In most cases, the primary care physician generally has not supervised the pathology test and, as a result, is not permitted to bill Medicare for a purchased interpretation.

Even if the primary care physician does supervise the technical component, he or she still must comply with Medicare’s reassignment policy in order to bill for an interpretation performed by a pathologist.³ Under federal law, the physician providing services may reassign his or her right to bill Medicare for those services to another physician or entity, as Medicare may collect any overpayment from either party. Further, the party billing Medicare must provide the physician who performed the services with full access to the claims submitted by the party for the physician’s services.

Thus, although there may be requirements and limitations for billing for diagnostic tests, there is no Medicare rule that requires the primary care physician to “pass through” a professional charge without any increase. Rather, the only federal limitation on this practice is the Medicare Anti-Kickback Statute.

♦ Medicare Anti-Kickback Statute
The Medicare Anti-Kickback Statute makes it a felony for anyone to offer, give, accept, or solicit anything of value if one purpose of the transaction is to encourage referrals of any patient insured by a federal health care program. As discussed earlier, most pathology groups bill Medicare for both the professional and technical components of tests. Some might interpret this to mean that the Medicare Anti-Kickback Statute is inapplicable. That conclusion, however, is mistaken. Consider the situation in which a primary care group orders tests from a pathology group. Although the pathology group may directly bill for services to Medicare patients, it might allow the primary care group to bill private insurers for pathology services to all other patients. The primary care group’s ability to bill private insurers could be characterized as a financial incentive for that primary care group to refer Medicare cases to that pathology group. The key question is whether the amount of the “mark-up” by the primary care group is reasonable in light of the work it has done.

When the primary care group bills the insurer for pathology services, it is absorbing a cost that would otherwise fall on the pathology group. As everyone in health care knows, billing and collection can be costly. It is entirely reasonable for the primary care group to receive compensation for this work.

How It Works
In 1999, the Office of Inspector General (OIG) issued Advisory Opinion 99-13, in which it considered a proposed arrangement under which a group of five pathologists would permit primary care groups to bill private insurers for the pathologist’s professional services. The following is an excerpt from the OIG’s analysis:

The Pathology Group* (*The OIG refers to the pathology group as “Company A” throughout the opinion. For purposes of clarity, this excerpt refers to Company A as the “Pathology Group.”) has several billing methodologies depending on the payer. For federal health care program patients, the Pathology Group bills its charges to the government payer and bills the patients for any applicable co-payments or deductibles. For non-federal health care program patients, referring physicians have two payment options. One option is for the Pathology Group to bill its charges directly to the applicable third-party payer and bill the patients for any co-payments or deductibles. The alternative is for the Pathology Group to bill the physicians for the pathology services and accept that payment as payment in full. The physicians then bill the third-party payers and patients for the purchased pathology services. This option is commonly referred to as “account billing.”Under its account billing arrangements, the Pathology Group has traditionally offered physicians a discount off its usual charges, which reflects the cost savings it realizes. The Pathology Group generates a single monthly statement to the referring physician who is required to pay on a prompt basis. The Pathology Group has represented that an account billing arrangement saves time and expense because: (i) claims are not submitted to a wide range of payers; (ii) the Pathology Group need not consider the claims submission criteria of the various payers; and (iii) the Pathology Group is not responsible for determining and collecting applicable co-payments and deductibles owed by the patients. In addition, the Pathology Group realizes a better collection rate under account billing. Most physicians who have an account billing arrangement with the Pathology Group refer virtually all of their patients to the Pathology Group, whether the patients’ specimens are covered under the account billing arrangement or are directly billed to the federal health care programs.

Under the proposed arrangement, the Pathology Group will offer its account billing customers discounts that are greater than its cost savings, in order to match the prices of its competitors. Some of the discounted charges will be below the actual cost of providing the pathology services. In addition, the Pathology Group’s profit margin for the non-federal health care program business under the proposed arrangement would be less than the profit margin on the services that it bills directly to federal health care programs. The discount will not be conditioned upon the physicians sending the Pathology Group its federal health care program business. However, the Pathology Group has assumed that the physicians receiving discounts under the proposed arrangement will send virtually all of their patients to the Pathology Group. If the Pathology Group does not match the discounts of its competitors, the Pathology Group has represented that it will lose both the account billing business and the federal health care program business of those clients.⁴

The OIG concluded that “the Proposed Arrangement might constitute prohibited remuneration under the anti-kickback statute, if the requisite intent to induce referrals of Federal health care program business were present . . . .”⁴

Citing Advisory Opinion 99-13, many commentators have concluded that any discounts offered by a pathology group are illegal. That conclusion, however, ignores the fact that the discounts in that case were so low that the pathology group was losing money on its services. By offering its services at a loss, the pathology group was almost admitting that the discount was intended to induce referrals for Medicare patients. A group acting rationally would not provide services at a loss unless the service was actually a loss leader, designed to encourage referrals of profitable work.

The conclusion also ignores the fact that the government has recognized that in some cases, a provider may charge different prices based on the cost associated with performing the services, and discounts or mark-ups may be permissible if they reflect the provider’s costs. The OIG, which enforces the anti-kickback statute, has concluded that when circumstances permit a medical provider to offer a cheaper service, it is permissible for the provider to charge a lower fee than it otherwise would. Conversely, when circumstances result in additional costs, the provider may charge a higher fee for the services.

For example, in Advisory Opinion 98-8, the OIG considered whether it was appropriate for a durable medical equipment (DME) supplier to discount its fee to “cash and carry” customers because it enabled them to forego the costs associated with billing Medicare and having to comply with its rules. Although the OIG could not comment on the actual cost calculations, it agreed that it was reasonable for the DME supplier to have different prices based on the cost of providing the services. The OIG opinion stated, “[w]e agree that additional costs incurred by [the DME company] that are solely attributable to complying with Medicare requirements may constitute ‘good cause’ for charging Medicare substantially in excess of [the DME company’s] usual charge for identical items.”⁵ The OIG suggested that as long as the seller’s profit margin was unchanged, a discount was reasonable.

Although Opinion 98-8 focused on a DME company, its logic is applicable to pathology billing. Following the line of reasoning in the opinion, it may be appropriate and reasonable for a pathologist to charge a billing physician a lower, discounted price for an interpretation than the pathologist would charge Medicare or a third-party payer for the same interpretation because when charging the billing physician, the pathologist does not need to account for the costs associated with billing, collection, and compliance with payer rules. Similarly, it may be reasonable and appropriate for a billing physician to charge a third-party payer more than the billing physician paid for a purchased pathology interpretation to reflect the costs associated with billing compliance.

The big difference between the two advisory opinions is that the DME company asserted that its profit margin after the discount was comparable to the profit margin on cases for which it billed Medicare directly. That appears to be a key, or possibly even a controlling, factor. Under the anti-kickback statute, the intent of the parties is the main focus, and the government considers whether or not the parties considered the discount to be related to the flow of referrals between them. If the pathology group lowers its price for the interpretations billed to physicians such that profit is being shifted to the referring physician, there is a very real risk for both parties under the anti-kickback statute. The government will likely argue that this added profit creates an incentive for the physician to refer the Medicare and Medicaid work to the pathology group. On the other hand, if the difference in price is justified by the pathology group’s cost savings or by work performed by the primary care group, then there is little risk to either the pathology group or the purchasing physician. However, it should be noted that while a fair market value payment suggests that referrals are not a factor in pricing, a fair market value alone does not determine the outcome of an anti-kickback analysis. If there is an intent to pay for referrals, the government may seek penalties under the Medicare Anti-Kickback Statute.

Minnesota Law
In addition to federal law, two Minnesota laws apply to pathology billing. First, the state anti-kickback statute extends the federal law to all third-party payers. (Under Minnesota law, violators are fined whichever is greater—$1,000 per violation or 110% of the improper benefit.) Because the state law is simply an extension of the federal provision, the analysis under the state law is identical to the federal law analysis.

The second state law prohibits “fee splitting,” which is defined as “dividing fees with another physician or a professional corporation, unless the division is in proportion to the cost of the services provided and the responsibility assumed by each professional, and the physician has disclosed the terms of the division.”⁶ Although the federal anti-kickback statute and the Minnesota fee-splitting prohibition are different laws with very different penalties, the analysis of the relationship between a purchasing physician and an interpreting pathologist is similar under both statutes. Both laws attempt to ensure that physicians are not paying for patient referrals. If the physician who is purchasing the services pays the pathologist a fair-market price for the pathologist’s work, then there is a strong argument under both statutes that the payment is proper.

The Minnesota fee-splitting statute does require physicians to notify patients when the physician splits a fee with a physician who is not part of his or her group. The statute, read literally, seems to require disclosure to patients of the relationship between the physician and the pathologist. In fact, the literal wording of the statute seems to require written disclosure of every independent contractor arrangement. It is not clear whether the law is intended to cover independent contractor arrangements, but the safest approach is to provide written notice to patients.

Conclusion
As long as there is no intent for a pathology group to pay a primary care group for referrals and the pathology group’s charges are reasonable, it is permissible for a primary care group to charge a private insurer a higher fee than that charged by the pathologist for the pathology interpretation. Both federal and state law allow for reasonable compensation for the additional work performed by the primary care group. As long as the difference in fees is justified by the pathology group’s savings or the primary care group’s additional work, there is little risk to either party. MM

David Glaser and Katherine Bennett are attorneys with Fredrikson & Byron’s Health Law Group in Minneapolis.

References
1. Medicare Claims Processing Manual, Ch. 13, § 20.2.4.
2. Medicare Claims Processing Manual, Ch. 13, § 20.2.4.1.
3. Medicare Claims Processing Manual, Ch. 1, § 30.2.7.
4. OIG Advisory Opinion 99-13 (Dec. 7, 1999).
5. OIG Advisory Opinion 98-8 (July 6, 1998).
6. Minn. Stat. § 147.091.