There is ample evidence to support the view that when physicians have an ownership interest in an outside venture, the physician’s utilization of these services is likely to increase.

	Pods represent a “perfect storm” under Medicare regulations, because they bring together anti-kickback, self-referral, reassignment, and billing issues all in one entity.

This is part one of two parts. See the May issue of G2 Compliance Report for a continuation of this discussion.

Last year, when it issued the Proposed Physician Fee Schedule (PFS) rule, the Centers for Medicare and Medicaid Services (CMS) introduced a new concept of particular importance to laboratories—the "pod" or "condo" laboratory. No one seems to quite know where the term originated, but its inclusion in the proposed PFS rule was a recognition by CMS of what many in the industry had long been saying: New ventures were increasingly being developed that allowed physicians to share in the revenues earned on their referrals for different types of diagnostic services.

Peter Kazon, Esq., is a senior counsel with Alston Bird (Washington, DC). He also serves as a legal advisor to the American Clinical Laboratory Association.

Of course, physicians have long owned clinical laboratories or furnished such services in their offices. What was different about pods is that they represented a movement into the area of anatomic pathology services, which are not only more costly than most clinical laboratory services, but also actually have to be performed and supervised by a pathologist.

The proposed PFS rule included numerous different proposals aimed at curbing the growth of pods, including changes to the Stark self-referral requirements and Medicare’s prohibition on reassignment. However, when the final PFS rule came out in December, CMS announced that it needed more time to study the matter. According to the final rule, CMS remained committed to addressing "revenue-driven arrangements that may be facilitating overutilization of diagnostic services," but it wanted to ensure that it did not adversely affect other legitimate arrangements.

Now, CMS is reportedly considering re-issuing some of its proposals when the new proposed PFS rule is issued later this year. And numerous organizations representing laboratories, including the American Society of Clinical Pathology and the American Clinical Laboratory Association, have expressed concerns about the rapid growth of pods. (In the interests of full disclosure, I should point out that I act as counsel to ACLA on these and other issues.) As a result, this seems like a useful time to review the issues related to pods and see where CMS may decide to go next.

The first step in this analysis is to define what we are talking about when we discuss pods. That is not an easy task as the arrangements can take a variety of different forms. There does not appear to be a single type of pod and no single definition. The term is used to denote a variety of different business structures that permit a referring physician, who frequently orders anatomical or pathology services, to share in the revenues earned on those referrals, even though the referring physician does not actually perform or supervise the services. Recently, particular attention has been focused on arrangements involving urologists and gastroenterologists, both of whom frequently order anatomic pathology services on biopsies.

In the proposed PFS rule issued last summer, CMS described a typical pod arrangement. In such an arrangement, according to CMS, an entity leases space in a medical building and then subdivides the space into separate cubicles or pods, each of which is equipped with microscopes and other laboratory equipment. Each pod is then subleased to a physician group practice, which may be located miles away from the pod laboratory and may even be in a different state. A histotechnologist, hired by the pod organizer, does the technical component (TC) of the laboratory service, and a pathologist, who is also recruited by the pod organizer, performs the professional component (PC) and supervises the histotech. Each separate cubicle or pod is subleased to a different group practice.

In order to meet regulatory requirements under the Stark self-referral law and the reassignment rules, which are discussed further below, the pathologist and the histotech have to move from pod to pod as they perform their services. For example, when they are looking at slides referred from Group A, they have to be physically present in Group A’s pod. When they look at slides from Group B, they have to move to Group B’s pod, and so forth, for all of the cubicles on the floor. According to CMS, the group usually pays the manager of the pod a set fee to cover the costs of the histotechnologist and the rent of the pod, and then works out a per-case or other fee with the pathologist. The group practice then bills Medicare for the pathology services furnished in its pod.

Not surprisingly, the basic structure has reportedly evolved over time, and so the structure described above is probably not the only one. According to CMS, sometimes the lab entity bills the TC, and the group bills the PC. Recently, the Maryland State Board of Physicians looked at a situation where a group of urologists set up a histology laboratory in their office, but then contracted with an independent laboratory to staff it with the laboratory’s employees and perform the services.

In another scenario described in the same opinion, a urology group referred the TC of a service to an independent laboratory, which the laboratory billed directly, but then returned the prepared slide to the group. The group then contracted with a pathologist at a set fee to perform the PC, which the group then billed to payers and patients. (Incidentally, the board found that both arrangements may have violated the state’s self-referral law.)

Pods raise many of the same concerns that have been raised by other scenarios where physicians are in a position to profit from their referrals. In this instance, the physician is able to bill for (and profit from) the referrals that he makes for anatomic pathology services. As with other physician investments, the issue raised is whether or not the ability to profit affects the physician’s clinical decision making.

For example, there is ample evidence to support the view that when physicians have an ownership interest in an outside venture, the physician’s utilization of these services is likely to increase. For example, the impetus for the Physician Self-Referral Act—commonly referred to as the "Stark Law," after its chief proponent, Congressman Pete Stark—was a 1989 study that found that patients of referring physicians who owned or invested in laboratories received more services than Medicare patients in general, at a significant increased cost to Medicare.

A later study by the General Accounting Office (GAO) came to a similar conclusion, finding that "physician owners tended to order more and more costly laboratory services." A recent study by McKinsey & Company, a well-known consulting and economics firm, found that one of the contributing factors to higher healthcare costs in the United States generally was physicians’ ownership of facilities, which gave them a strong incentive to self-refer cases, thereby driving up utilization and costs.

Although there is no research on the impact of pods, per se, these studies raise the possibility that if a physician is able to earn a profit on referrals, then that may affect decisions about when to order tests and how many tests to order. As a result, the physician may be more likely to order testing, and may order more tests, than would one without such incentives. In pathology, because every specimen examined represents a separate billable event, it is fairly easy for a referring physician to increase the number of biopsies and thus increase the billings.

Clearly, CMS has recognized this possibility because it noted in the proposed PFS rule that it was "concerned that allowing physician group practices or other suppliers to purchase or otherwise contract for the provision of diagnostic tests and then to realize a profit when billing Medicare may lead to patient and program abuse in the form of overutilization of services and result in higher costs to the Medicare Program." Similarly, the Medicare Payment Advisory Commission, which advises Congress on Medicare payment policy, noted in its comments to CMS on the PFS rule that it would support policies that would limit financial incentives for inappropriate use of services.

A related issue raised by pod arrangements concerns Medicare’s long-standing policy that limits when physicians or other suppliers can purchase services from others and then bill them to the Medicare program. In general, Medicare tries to restrict these arrangements and imposes specific requirements that they must meet.

For example, Medicare has also limited the ability of physicians to purchase diagnostic tests and then bill the program for them as their own. While a physician can purchase the technical component of a diagnostic test and bill for it, the physician is not permitted to mark up the cost of the TC above the acquisition cost and must also usually perform the professional component. Other restrictions apply to the purchase of the professional component. In short, Medicare’s long-standing policy is to pay the person who did the service, and it has enumerated specific requirements where it deviates from this policy.

Under the anti-kickback law, it is unlawful to offer or pay "remuneration" to induce referrals reimbursed by Medicare. It is also unlawful to solicit or accept such remuneration, in connection with the referral of Medicare, Medicaid, or other services reimbursed by federal healthcare programs. The OIG, which enforces the anti-kickback law, has often expressed concern about arrangements that are comparable to pods, and the issues they may raise under the anti-kickback law.

In 2003, the OIG issued a Special Fraud Alert on what it referred to as "Contractual Joint Ventures," which it described as situations where a referring physician enters into an agreement with an outside entity to provide the resources needed to operate a business to which the physician then refers. According to the OIG, in these situations, the physician is the nominal owner of the venture, but he neither operates the new business nor commits substantial financial, capital, or human resources to the venture. Instead, the business contracts out substantially all the operations of the new business. A manager or supplier, comparable to the organizer of a pod, typically agrees to provide not only management services, but also a range of other services, to run the business. According to the OIG, the practical effect of the arrangement, viewed in its entirety, is to provide the physician-owner the opportunity to bill insurers and patients for business otherwise provided by the manager or supplier.

Subsequently, the OIG actually applied this analysis to a pod situation in an advisory opinion. In Opinion 04-17, it reviewed a situation where a pathology laboratory entered into a series of contracts with physician group practices to operate pathology laboratories for the groups in an off-site location. The organizer of the lab would obtain the space and the technical and professional services, but they would all be billed by the group practice. The pathologist and histotechnoloist would rotate among the various spaces subleased by each practice, just as in the example described above.

The OIG noted that the lab could provide services in its own right and in its own name, but had chosen instead to enter into an agreement with a referring group. The payment to the manager of the laboratory varied with the volume of referrals from the physicians, and the benefit to the physicians would also vary based on its referrals. As a result, the OIG found that the relationship could raise issues under the anti-kickback law. It noted that "we are unable to exclude the possibility that the parties’ contractual relationship is designed to permit the [laboratory organizer] to do indirectly what it cannot do directly; that is, pay the Physician Groups a share of the profits from their laboratory referrals."

The OIG went on to note that this could constitute "impermissible remuneration" because it gave the group "the opportunity to obtain the difference between the reimbursement received by the Physician Groups from the federal healthcare programs and the fees paid by the Physician Groups to the [laboratory organizer] (i.e., the profit from pathology services ordered by the Physician Groups)." In short, this opinion seems to call into question the very structure of many pod arrangements, and raises significant questions about them.

April 2007 - Table of Contents

GCR April 2007 (full PDF issue)

Government Looks to Increase Oversight of Laboratory-Developed Tests

Lab Industry Requests Delay on NPI Compliance

CMS Extends Deadline for Using Old Version of Provider Claims Form

Phase III Self-Referral Rule May Be Delayed

Two Versions of ABN May Be Combined Into One

What’s Next With Pod Laboratories?

Illinois Court Upholds PC Billing by Pathologists

Medicaid HMO Hit With Additional $190 Million Penalty

Proposal to Subsidize Ambulance Costs Could Violate Kickback Rules, OIG Says

News in Brief (0704)