OIG Nixes Pathology Lab Management Proposal

October 20, 2011

National Intelligence Report

Rob Mazer is quoted in G-2's National Intelligence Report on an OIG opinion quashing a proposed pathology lab management arrangement. Under the arrangement, physicians would invest in a company that would provide lab management services to a third party. Rob's remarks are excerpted below: 

The advisory opinion is a good reminder that health care arrangements are subject to several different laws and regulations, each of which must be followed. For example, an arrangement can comply with the Stark self-referral law and violate the federal anti-kickback statute (FAS), or it can comply with the FAS and violate Stark.

The arrangement reviewed by the OIG would provide referring physicians, including urologists, gastroenterologists, and dermatologists, with an economic interest in anatomic pathology services that they generated. Stark prevented these physicians from owning the pathology laboratory that would perform the services that they referred. The in-office ancillary services exception to the self referral prohibition was not available because the physicians were not members of a single group practice that might operate the pathology lab. Therefore, the arrangement provided for the referring physicians to have an ownership interest in a legal entity that provided management services to the pathology laboratory, rather than in the laboratory itself. The physician-owned entity, however, would receive a percentage of the laboratory’s profits as compensation for its services.

In determining that the arrangement potentially violated the FAS, the OIG recognized that the physicians would receive compensation that reflected their referrals to the pathology lab. Put simply, the more tests that they referred to the lab, the greater the lab’s income, and the greater the lab’s payments to the physician-owned entity for its management services. In fact, according to OIG, this appeared to be the arrangement’s purpose. The laboratory would have been able to operate independently; it did not have to obtain management services from the physician-owned entity.

The OIG expressed no opinion on the application of the Stark law, stating that Stark and the FAS are “independent legal authorities” that must be evaluated separately. When Stark was enacted, that’s what Congress envisioned. But that’s not always the case anymore. The regulatory exception to Stark’s self-referral prohibition for indirect compensation arrangements between a physician and health care entity developed later by the Centers for Medicare and Medicaid Services — and which would potentially be applicable to this type of arrangement — prohibits a compensation arrangement that violates the FAS. Therefore, an indirect compensation arrangement that violates the FAS can also result in Stark violations.