Laboratory rep “rules of the road”

April 1, 2010

Following the hiring of a sales representative,
one of the
first duties of any clinical or anatomical pathology lab is to expose the
new employee to the lab’s compliance obligations. Regardless of whether the
person has been selling within the lab industry or not, reviewing compliance
as it relates to sales remains essential. There exist a number of
constituents within a sales compliance program. Among them are those
relating to fraud and abuse authorities (e.g., false claims, anti-kickback
statute, and Stark Laws), pricing issues, in-office phlebotomy, client
entertainment, and donations of electronic medical records (EMR) software.

The False Claims Act and Anti-Kickback Statute

The conduct of sales people can trigger cases under the
False Claims Act as cases can be based upon alleged violations of other
laws, such as the Anti-Kickback Statute. In addition, to the extent that the
conduct of sales representatives gives rise to changes in test-ordering
patterns, allegations can be made under the False Claims Act that medically
unnecessary services have been performed by a particular laboratory. A lab
faces severe financial penalties for violating the False Claims Act (up to
$11,000 for each claim for reimbursement submitted to a federal government
healthcare program [e.g., Medicare or Medicaid] plus three times the amount
“wrongfully” paid in reimbursement).

This area demands full cognizance of sales
representatives. The Federal Anti-Kickback statute specifically states that
a person may not knowingly or willfully offer, pay, solicit, or receive
remuneration to induce, or to recommend or arrange for, referrals of
Medicare/Medicaid patients or items of services provided to such patients.
Penalties include criminal fines and imprisonment, significant civil money
penalties, and/or exclusion from the federal programs, including Medicare
and Medicaid.

The Stark Self-Referral Prohibition

The Stark Laws dictate that a healthcare provider may not
refer a Medicare or Medicaid patient to a clinical lab with which the
physician (or an immediate family member) has a financial relationship.
Sanctions include denial of reimbursement, exclusion from Medicare and/or
Medicaid and substantial civil money penalties .

Under the Stark II Laws, Designated Health Services (DHS)
for Medicare and Medicaid patients may not be referred by a physician to a
DHS provider if he or an immediate family member has a financial
relationship with that provider. Clinical labs, radiology, radiation
therapy, physical and occupational therapy, and home-health services are
examples of businesses that fall within the DHS definition.

The Stark II Laws apply to non-monetary compensation.
Under the non-monetary compensation rules, in 2010, a representative may not
offer clients items or services that are valued at more than $355 per year.
A rep might think that if there were four physicians in a group practice, he
could offer a one-time/year non-monetary compensation gift of $1,400. This
is not the case, however. Also, any form of entertainment or non-cash
item(s) cannot take into account the client’s testing volume. In addition —
a point rarely understood by lab sales reps — a physician or any member
of the doctor’s office may not solicit non-monetary compensation (e.g.
lunch) if the representative’s lab currently receives
Medicare/Medicaid testing referrals from that physician. In addition,
bringing lunch to a prospective client who sees Medicare or Medicaid
patients can be seen as implicating the Anti-Kickback Statute.

Regrettably, many office personnel (and physicians) have
not been educated about the DHS rules. Therefore, if the lab sales rep hears
from a current client, “If you want to speak to the doctor, you will
have to bring in lunch…,” a conversation should ensue that explains how labs
fall under the DHS rules under the Stark II Laws. While it remains lawful
under Stark II for the lab rep to offer to bring in food to the client,
neither the doctor nor any member of the office staff may make the request.

IOPs, leasing space in a doctor’s office, and supplies

According to the Health and Human Services (HHS) Office
of Inspector General, the provision of an in-office phlebotomists (IOPs) by
a laboratory at no cost remains acceptable so long as certain safeguards are
observed. The IOP may only provide duties associated with specimen
collection and preparation. She may not offer (or be asked) to help with
traditional office duties or assist with testing the office routinely
performs. The doctor’s office, of course, may not charge for phlebotomy
services performed by the lab’s IOP. It should also be noted that some state
laws prohibit IOPs.

Sometimes, a client wants to lease space to the lab as a
full-access patient service center (PSC). This is permissible, but certain
“rules of the road” should be followed. For example, the agreement must be
in writing, the space must be used solely by the lab, the monthly lease must
be fair market value, the term must be for a minimum of 12 months, and the
rental charges must be a set fee and not be based upon specimen volume. In
addition, the PSC should serve patients in addition to those of the lessor-physician.

Representatives may not offer free items such as biopsy
needles, gloves, or fax machines to test-ordering physicians. Nor should
they supply a volume of free specimen-transport items to physicians that
exceed the volume of specimens referred to the lab that employs the sales
rep. If the lab furnishes any type of hardware to a physician to be used for
test ordering, specimen preparation, or result reporting, the physician
should sign a written equipment-loan agreement with the lab. The agreement
should prohibit use of the equipment for anything other than the client’s
testing to be sent to the lab, and the equipment should be retrieved if the
physician ceases to be a client..

EMR donations and write-offs

This exception to the Stark Law and the Anti-Kickback
Statute allows labs to provide EMR software and related training to a
physician’s office practice so long as certain rules are followed. Hardware
is not permitted, however. The software must be interoperable, meaning that
it must be able to interface with any lab or any other provider. Labs may
donate up to 85% of the cost of the EMR software (two entities may
contribute to the 85% limit). This EMR donation cannot be tied to the volume
of referrals. If the client stops the referrals, the lab may not request a
refund or discontinue the monthly payments. The client must pay the
additional 15% of the software cost. Many labs prefer paying the software
company directly as opposed to making payments to the client. Bottom line,
the client sits “on-the-hook” for the donation even if the client decides to
take his business elsewhere in the future.

There remain several gray areas regarding EMR donations.
The best policy is to check with legal counsel before engaging in a donation
program. To meet the requirements of the exception, the transfer of the
items and/or services that comprise the EMR donation must occur before
December 31, 2013, as the exception will end on that date.

If a laboratory does not have a contract with an
insurance company (or a particular product of the insurance company), it
must decide as a business matter whether to accept samples of patients who
are covered by that plan. If, however, a lab decides not to bill anyone for
the service, a compliance issue may be created. Such compliance risks may be
heightened if the test-ordering physician benefits from the lab’s decision
not to bill.

Typically, private health-insurance companies offer two
types of coverage — in-network (“par”) and out-of-network. The former
involves using only those providers (doctors, labs, imaging, and so forth)
who have contracts with the insurance company and who appear in the
insurance company’s directory. This contract generally requires that the par
providers accept an agreed-upon rate for services and collect co-payments
from patients. In return for agreeing to these conditions, providers receive
direct payment from the insurance company and, they hope, a higher volume of

In the out-of-network scenario, the provider (physician,
lab, and others) does not have a contractual relationship with the insurer.
There may be strict limitations on this type of coverage. Generally, the
insurance company will pay benefits only after the patient satisfies a
deductible. Even after the deductible has been met, the patient may be
responsible for co-insurance (a percentage of the allowable charge).

If a lab holds an out-of-network position, its business
opportunities may be more problematic. Labs may bill 100% of their charges
to an insurance company but, in order to remain competitive with in-network
participating labs, they may write-off any patient balance (accepting as
payment-in-full the amount from the insurance company). A lab may be liable,
however, for waiver of co-insurance, deductibles, or balance obligations.
This type of activity can raise issues under various fraud and abuse laws.

As a simple example, a lab bills a test for $100 to an
insurance company with the expectation that it will receive $80. In normal
circumstances, the lab expects the patient to pay $20 co-insurance. If it
waives the $20 patient co-payment, some regulators and/or prosecutors argue
that the lab’s usual and customary charge actually becomes $80, not $100.
Consequently, they assert that the insurer’s obligation should be $64, not
$80, and they contend that billing $100 with the expectation of receiving a
total of $80, rather than the billed $100, raises compliance issues. To
avert this situation, some laboratories bill patients for the co-insurance
amounts but do not aggressively pursue payment with multiple dunning

Pricing and custom profiles

If a particular state or insurance plan permits “doctor
billing” of lab tests, sales representatives typically do offer discounts to
test-ordering physicians wishing to purchase testing services. If a lab
grants discounts, it should strive to match the prices at which it sells its
testing to the tests’ fair market value. The HHS Office of the Inspector
General may take exception to below fair market prices that are offered in
return for referrals of testing that will be reimbursed by the federal
programs. As noted previously, the anti-kickback statute makes it a criminal
offense to knowingly and willfully offer, pay, solicit, or receive
remuneration to induce service referrals reimbursable by federal healthcare
programs. When a laboratory offers testing at a price that is less than fair
market value, the OIG may infer — depending on the facts — that the below
fair market value price was offered in exchange for higher paying federal
healthcare program business. The question, therefore, is whether the
discounted price represents a fair market value rate.

As a side note, sales people must realize that the
anti-kickback statute ascribes liability to all parties of an
impermissible kickback transaction (i.e., the lab, sales rep and the
physician are equally involved).

Sometimes, a physician may request a custom profile of
tests that facilitates his test ordering. Compliance safeguards for custom
profiles include annually securing the physician’s signature on a custom
profile form that: a) identifies the tests that the physician wants included
in the profile, b) recommends that the physician order the profile for his
Medicare and Medicaid patients only when all of the tests that are included
in it are medically necessary for the patient for whom the profile is being
ordered, and c) discloses the Medicare reimbursement amount for each
component of the profile. The lab must also inform the physician(s) that
using a custom profile may result in the ordering of tests which are not
covered, reasonable, or medically necessary. The doctor should sign and date
the notice and return it to the laboratory

Due to direct contact with their clients/prospects, sales
people are at risk for tripping into the laws that regulate conduct between
those who refer and those who receive referrals. Compliance programs exist
to reduce the likelihood of inadvertent violation of the fraud and abuse
laws. The penalties for violation of the fraud and abuse laws can be
extremely severe. It behooves every laboratory to develop its own compliance
plan and ensure that those individuals who interface with clients and
prospective customers fully understand the legal “rules of the road.”

Peter Francis is president of Clinical Laboratory Sales
Training. For more information, visit

The author wishes to thank Hope Foster, a healthcare fraud and compliance lawyer with Mintz Levin
in Washington, DC, for her review of this manuscript.

The discussion
provided in this article equates to a broad overview for general
informational purposes only. Any legal questions or advice should be
discussed with an attorney, specifically one well-versed in
laboratory-related compliance.