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By Joseph W. Plandowski
10/09/07
Insourcing AP Services by Physician Specialty Groups: Practice and Business
Implications for Pathologists
There is an increasing trend among certain physician specialty groups to bring
anatomic pathology (AP) services in-house to capture ancillary revenue and
better serve their patient needs. A few years ago, the hot market phenomenon
were “condo” or “pod labs.” Under this arrangement,
physician specialty groups maintained their own AP labs. The labs were generally
established on a “turnkey” basis by a third party. The physicians
billed Medicare for the work, although the lab was usually located in a different
geographic area from where the group’s practice was based—often
in a different state.
However, these ventures subsequently drew a governmental
red flag. It is likely that the Centers for Medicare & Medicaid Services
(CMS) will issue proposed rules in August 2007 that will have a material impact
on pod labs. It is also possible that these proposed rules will affect in-house
specialty labs, although it is likely that the impact on such labs will not
be as great as on pod labs. CMS had issued proposed rules in 2006 but withdrew
them recently. It is also likely that the rules issued in August will differ
materially from those proposed earlier by CMS.
Because of these events, a growing
number of large urology and gastroenterology practices began operating AP labs
onsite in their own offices. Some of the practices hire pathologists directly
to furnish professional services inside the office, while others contract with
local pathology groups to furnish professional services.
This article will address
the fundamental issues relating to insourcing AP practices, including legal,
compliance, ethical, business, and financial considerations, as well as how
these issues impact both hospitals and community-based pathologists.
Legal Considerations
“There are two categories of legal issues that relate
to AP labs in these situations,” says Richard Cooper, Esq., Manager of
the Health Law Practice Group at McDonald Hopkins Company LPA, (Cleveland). “The
first relates to the actual lab venture itself and its formation. The second
category relates to the mechanics that the specialty groups go through to be
in a practical position to justify formation of an AP lab.
“In many instances,
the specialty groups are not of a size individually to make an onsite AP lab
viable,” he continues. “What we’re
seeing in many, principally urban, locations is previously independent lab
gastro and urology groups coming together to form ‘supergroups’—largely
driven to be in a position to justify and support a laboratory. That’s
not necessarily the sole motivating factor, but in many cases it is a principal
factor.”
Often, however, these groups are not focusing on some of the
key issues involved in their creation. “For example, they are not properly
analyzing the antitrust laws as they apply to combination specialty groups—in
fact, in many of the marketing materials we see for these ventures, antitrust
laws are not even mentioned. In addition they are not paying enough attention
to the combination of cultures and the divergent compensation systems and benefit
programs,” Cooper points out.
Stark and Anti-Kickback Laws
Several legal issues apply to the creation of
an onsite specialty lab. “The
two that get the most attention deal with fraud and abuse—the need for
these types of ventures to comply with Stark law and anti-kickback law, both
on the federal and state levels. Most attention is paid at the federal level,
although most states now have equivalent laws on the books and they often mirror
the federal law,” he says.
According to Cooper, the Stark law basically
prohibits referrals of designation health services—including pathology
labs—by physicians to entities
in which they have a financial interest, or a family member has a financial
interest, unless there is an exception that applies. “The exception that
is generally relied upon in these types of ventures is what is called the ‘in-office
ancillary services exception.’ A number of elements must be achieved
for this exception to apply. However, if you don’t fall into an exception
of the Stark law, you are per se in violation of the law at the point of distinction
from the anti-kickback law.”
For the in-office ancillary services exception
to apply:
1.The
service group must constitute a group practice. “You want to make sure
whatever group you have configured fits within this definition of group practice.
If it doesn’t, you can’t go any further—you are not going
to meet the exception.”
2. It
specifies who can render the designated health services in question. “There
are three categories. It can be the referring physician (i.e., the urologist),
or a physician who is a member of the group—that could be a pathologist,
but by ‘member of the group,’ the law means a physician who is
either employed by the group or an owner of the group. On its face, it would
not include an independent contractor, although generally speaking, most people
feel comfortable with these individuals serving as independent contractors
because there is contrary language elsewhere in the Stark law that would suggest
that it’s OK. In addition, you could have individuals supervised by a
member of the group or a physician group—and generally that is not going
to apply to a pathologist because he or she is not going to be supervised by
a non-pathologist.”
Cooper notes that you have two models to consider. “You
have the pathologist serving as an employee of the group, and the pathologist
or the pathology group serving as an independent contractor. If a pathologist
is serving as an employee, it has to be a bona fide employee/employer relationship.
If the pathologist or group is serving as an independent contractor, you have
to meet the Stark exception for a personal service contract. Basically, that
requires fair-market compensation, a written agreement, and compensation determined
in a manner that is not reflective of referrals.”
The third element that has to be met for the in-office ancillary exception
regards the location of the services. “The services have to be either
on the premises where the group practices or in a centralized building. Often,
the centralized building approach is used if previously independent groups
in a specialty came together to form a supergroup and they establish a central
location to service all the separate practice locations. If you’re going
to have a central location, the space must be used exclusively by that specialty
practice on a 24/7 basis,” he notes.
The anti-kickback law prohibits anything
of value in exchange for referral of something that is in essence billable
to the Medicare or Medicaid program. “There
are safe harbors that mirror some of the exceptions to the Stark law. However,
the big difference between the Antikickback and Stark laws is that if you fall
outside an Antikickback safe harbor, you are not automatically in violation
of the law—which is not the case for Stark,” Cooper explains.
“Nevertheless, you should generally try to fall within an applicable
safe harbor. The safe harbor that is most likely going to be applicable to
these types of situations would be either for a bona fide employee relationship
or a personal service contract if the pathologist or pathology group is an
independent contractor,” Cooper elaborates. “The criteria for that
would be a written agreement for specific services that is not for a term of
less than a year, or aggregate compensation set in advance at fair-market value
and it does not reflect volume or value or referrals. Depending on the nature
of the relationship, there may also be management services involved, and there
is a comparable safe harbor for those types of relationships.”
Malpractice
Issues
In addition to the fraud- and abuse-related laws, there are other key
issues that are malpractice-related. “You need to know whether the malpractice
or reinsurance policy in force for the group covers pathology and laboratory
services. Carefully review existing policies to be certain there are no gaps
in coverage,” Cooper suggests. “There may be an increase in malpractice
costs by taking on additional services, particularly where the services are
not directly related to the specialty of the group.”
There are also malpractice
liability issues. “If a specialty group is
taking laboratory services in-house, it has a different relationship to those
services than it had when it was simply sending the test out,” he notes. “In
addition, whether the pathologist is an employee, or independent contractor,
the specialty group can have exposure for the errors and omissions of the pathologist.
There can also be exposure based on a theory of inadequate supervision or negligent
hiring.”
Cooper also points out that a relatively recent change to the
reassignment rules allows physician groups to bill for independent contractor
physicians, whereas before it was limited to employee physicians. “What’s
important, however, is that one of the requirements is shared liability for
malpractice events.”
Payer Issues
“A variety of payor issues have surfaced, especially the
reassignment rules for Medicare and Medicaid. Basically, if your structure
contemplates the use of an independent contractor physician who is going to
be assigning the right to bill your group or the professional pathology services,
there are a few elements that have to exist,” Cooper says.
1. There
has to be a contractual agreement that allows the group to bill and collect
for that person’s services.
2. The
pathologist and the specialty group are going to be jointly and separately
liable for erroneous billings and the pathologist or pathology group has to
have access to all billing information.
Another key payor issue, and one of
the greatest hurdles for these types of structures, generally surfaces in the
commercial payor or private payor sectors. “We
are seeing an increase in number of payors that are either beginning to deny
reimbursement to referring physicians for ancillary services they provide in-house
or imposing fairly significant hurdles on those types of structures qualified
for reimbursement. We first saw this surfacing in the imaging arena and now
it’s arising in the laboratory and pathology arena,” he points
out.
“If you start seeing data that suggests there is a substantial increase
in testing utilization as a result of these structures, which will undoubtedly
increase the cost to the payor, you are going to see payors beginning to impose
these types of restrictions or prohibitions,” he explains. “Other
payors are approaching it through either exclusive or limited panel arrangements
that limit to a relatively low number the number of laboratories authorized
to provide certain types of services, including AP services. Payors can very
much intrude on the economic viability of these types of ventures.”
Audit
Risks
“Even though we don’t have concrete proof, one of the concerns
with these types of structures, particularly if it results in utilization patterns
that trigger ‘red flags’ or system flags within a payor’s
system, is that it may expose the underlying specialty practice to broader
or increased audits,” Cooper says. “Payors are going to be concerned
about these types of structures and may implement audits specifically focused
on these types of arrangements.”
Licensure and Certification
“For specialty groups, you are likely heading
into a whole new realm of requirements in terms of state and federal licensure
and certification that you need to pay particular attention to,” Cooper
says.
He notes that careful attention should be paid to the AMA Code of Ethics. “Section
8.09 contains some limitations and prohibitions that would impact these types
of arrangements, basically in two ways. First, it mandates that the physicians
be primarily focused on the quality of the laboratory services and not on personal
interest (i.e., economic) and, second, that physicians should not mark up services
performed by others. In most states the code of ethics prohibitions are also
incorporated into state law, generally in licensure law. Violations of the
code of ethics can result in sanctions against licenses,” Cooper concludes.
Business
Opportunities
“In-office pathology laboratories are very profitable and
they are growing in number,” comments Joe Plandowski, Founder and President
of Lakewood Consulting Group (Lake Forest, IL). “The real action, as
you might expect, is in labs for urology, gastroenterology, and dermatology
practices because this is where the real volume of tissue specimens are generated.”
Overall,
he notes that in-house laboratories are a golden opportunity for hospital-based
pathologists who don’t have an outside pathology laboratory or do not
have an active hospital outreach program.
Plandowski emphasizes that practices
that are interested in having an in-office pathology laboratory need to keep
these four key items in mind to be exempt from the self-referral provisions
of Stark law:
1. The
laboratory has to be wholly owned by the practice.
2. The
laboratory can only serve the needs of the practice’s patients. “Just
because there is another physician down the hall doesn’t mean you can
take their specimens and bring them into your laboratory—that’s
out of the question.”
3.The
laboratory needs to be located on the premises of the practice.
4.The
pathologists who are retained to do the professional services work must do
that work in the laboratory. “Those slides cannot be sent over to the
hospital to be read,” Plandowski points out.
The Numbers
According to Plandowski, there are 106,000 CLIA-registered physician
office-laboratories (POLs). “That number is staggering because I compare
that to 5,200 CLIA-registered independent laboratories and 8,600 CLIA-registered
hospital laboratories,” he
says. (There are more registered laboratories than hospitals because many large
hospitals have more than one registered laboratory.) “Critics will argue
that about half of those 106,000 POLs only do waived testing—which is
true. However, consider that there are approximately 40 waived tests, and that
number continues to grow each year—HIV and glycohemoglobin are actually
waived tests.”
POLs are growing and not in danger of disappearing, he
adds. “Over the
years, Congress has always taken a strong stand in favor of POLs regardless
of which party has been in control and the AMA is a very staunch supporter.
However, the College of American Pathologists has danced around the issue.
They did issue a statement on tissue diagnoses by dermatologists that supports ‘advocacy
for direct billing not designed to limit who can perform a pathology service.’”
As
an example of financial opportunities, Plandowski notes that GI groups, which
typically have four to five physicians, produce about 5,000 billable slides
a year, and about one-third of those require special staining. “In
terms of revenue, that is at least $700,000 in laboratory revenues,” he
estimates.
“A urology group with 20 physicians produces about 15,000 billable slides,
and about one-third of them require special staining,” Plandowski continues. “They
also turn out about 2,000 urine cytology slides that are stained. In terms
of revenue, that’s $2 million a year. There are also some mega-groups—a
GI group with 50 specialists, for example, that produces 40,000 billable slides
a year, with one-quarter of them requiring special staining. This particular
group generates $6 million a year in laboratory revenues.”
Pre-tax profitability
amounts to slightly less than one-half of revenues. “One
reason is that there are no sales reps, no couriers, and no computer interlink
system,” Plandowski says. “In addition, the amount of testing being
done is very narrow in scope. For a urology group, for example, the testing
is prostate biopsies and you can really streamline the operation for profitability.
A group that does $2 million in revenues is going to wind up with at least
$900,000 in profit that is pre-tax income. Finally, specialty labs (urology,
gastroenterology) are the lowest-investment, highest-return ancillary service
available today. Urology and GI groups understand that they can’t see
enough extra patients to earn the profit available from an in-office laboratory.”
Challenges
and Solutions
“Most hospital-based pathologists have seen their income
stagnate because lots of tissue specimens never make it to the hospital—it
gets diverted between surgery centers and specialty practitioners, which keeps
patients from having procedures at hospitals,” Plandowski notes. “Unless
pathologists have their own outside laboratory or are blessed with an active
hospital laboratory outreach program that can chase down these specimens, they
are doomed to income depression simply because those specimens are not getting
into the hospitals. Once those patients are diverted, there are a host of independent
laboratories with highly trained sales forces that are after those specimens.
The hospital-based pathologist who is trying to track down the specimens from
this competition has a very tough task.”
Plandowski suggests that the
best game plan for hospital-based pathologists is to aggressively go after
in-office pathology laboratory professional-service agreements. “The
in-office pathology laboratory business is really in the infant stage—this
is the time to be out there chasing them—and
you don’t need couriers, fancy software programs, renowned pathologists,
or order entry reporting computer systems. Without any investment, hospital-based
pathologists can improve their incomes by providing pathology services to specialists
with in-office pathology laboratories. In addition, you can also encourage
other local specialists to install in-office pathology laboratories while they
provide local professional pathology services,” Plandowski says.
“No other option can beat this program—both hospital-based pathologists
and specialty practice physicians are winners. Specialty practitioners can
be legally compensated for laboratory services by owning an office pathology
laboratory and they need you to diagnose those cases, which you are compensated
for. Moreover, patients are the biggest winners. When specimens don’t
leave the practice, the turnaround time is superb and they are able to meet
a pathologist at their clinician’s office,” he explains.
“On
a cautionary note: expect specialty practices to bill globally and compensate
you on a negotiated-fair-market-rate-fee basis,” Plandowski
says. “The fair-market rate is determined through a request-for-proposal
process. That’s the only way the specialty practice can determine what
is the true market rate in the geographic area it is serving. They also want
to bill globally to avoid patient issues such as confusion over being billed
from two separate sources for the same relative procedure—albeit one
is for the PC and the other for TC.
“If in-house office pathology laboratories
are widely adopted, consider the near-term turmoil that will result in the
business of anatomic pathology. Whenever there is market turmoil, there are
terrific opportunities for the select few who recognize what is happening—in-office
pathology laboratories may cause that near-term turmoil,” Plandowski
concludes.
Trends and Issues
“There are three types of in-house pathology labs,” explains A.
K. Koso Thomas, MD, Lab Director, Theranostix Laboratories (Baltimore, MD).
1.Technical
Component and Professional Component (TC/PC) where the pathologist performs
professional interpretation services as a member of a multi-specialty group.
2. Physician
Office Laboratory where the pathologist performs professional interpretation
services as a member of a full-service laboratory.
3. Histology
Laboratory where the pathologist performs professional interpretation services
in a pathology owned laboratory. The histology (TC) is done at a physician-owned
histology laboratory.
Pathology Business Trends
“Pathology business trends have led an exodus of surgery and diagnostic
procedures away from hospitals and into ambulatory care centers,” Thomas
says. A number of factors have led to the rapid growth of these centers, including:
1. Technology
that provides for safer procedures, such as cholecystectomies and endoscopic
procedures.
2. Improved
anesthesia, sedation, and recovery in outpatient surgery.
3. Intervention
radiology that can obtain more diagnostic material from mass lesions, for example.
In-House
Advantages
From a pathologist’s viewpoint, in-house labs offer several
advantages, according to Thomas.
Improve quality and efficiency of medicine:
1. Patient
care is completed within the same clinical organization.
2. Paths
provide additional consultative services to clinicians.
3. A
multi-specialty team approach re-creates the hospital setting, avoids hospital
costs and overhead, reduces healthcare costs, and improves measurement of outcomes
based medicine.
4. Improves
access of patients to healthcare providers (i.e., nurses) and the “critical
diagnostic step” (i.e., pathologist) in the management of care.
Clinician
Expectations
According to Thomas, clinicians will naturally have certain expectation
from an in-house lab, including:
- Pathology
reports that are comparable in quality with current pathology service. “Clinicians
may or may not accept technology that is of lower quality—meaning that
most reports provided by independent laboratories usually have images and schematics
while in-house pathologists typically use plain, text-based reports. While
the formatting won’t matter, clinicians will insist that the quality
of the pathology be up to speed with what they’ve had,” Thomas
says. “They also expect similar turnaround time and improved ability
to provide stat case results.”
- Transparency
with easy access to second opinion, as well as the ability to send out any
case reported by in-house pathologist for a second opinion. “In some
hospitals you might find pathologists who may not be as cooperative in sending
out cases for a second opinion,” he notes. “However, clinicians
have a higher degree of anxiety when working with in-house labs and they also
will insist on having the ability to send out cases for a second opinion when
they request it.”
- Board-certified
pathologists on staff. “The environment is full of horror stories of
physicians employing just-out-of-training pathologists and having unfortunate
experiences with them,” Thomas says.
Conversely, pathologists who enter
into arrangements with in-house labs also have expectations.
- A
CLIA-approved lab and office with adequate space for pathology equipment and
staff. “This can be an issue in facilities developed by non-pathologists
and non-laboratory-oriented staff,” Thomas says. “These types of
facilities might require additional work to be approved.”
- The
ability to obtain second opinions without limitation. “These will be
paid for by the laboratory and will be a cost to the clinician, but the pathologist
must insist on having the right and the ability to send case evaluations out
as often as required.”
- Easy
access to clinical information. This is one reason why this type of model is ‘better
medicine,’” Thomas says. “If pathologists work in these settings
but don’t have access to clinical information, it will defeat the purpose.”
- Innovate
pathology. “Having this close interaction between pathologists and clinicians
can result in learning about better ways of proving medicine,” Thomas
notes. “There are institutional factors that affect this interaction
in a hospital setting. Ultimately, the interaction can also provide patients
better pathology and improved healthcare outcomes.”
Planning Logistics
How does this all work? “Logistically, the surgery
or ambulatory care center would do a biopsy and package the specimen with the
requisition and send it to the histology lab. If the center is using an independent
pathology lab for the technical component, the specimen is couriered there
for that part. The specimens are examined by grossing them by the naked eye,
they are described, and the description is put into the initial part of the
report. The specimens are placed in the histology processor and are processed
in a variation of two to 10 hours, after which the specimens are removed from
a special processor and slides are created. The latter usually happens on the
second day,” Thomas
relates.
“After the slides are created, the histology laboratory sends
the slides to be stained by hematoxylin and eosin (H&E) or special stains
to their reading center. The reading center in a laboratory would merely be
the pathologist’s
office. The pathologist now has the slides and the half-completed report from
the technical part of the arrangement. The pathologist can examine the slide
under the microscope and create a report that will be the professional component
of the arrangement,” he continues.
“In an in-house setting, it would
also be more convenient for the pathologist to discuss challenging cases with
the clinician as well as the nursing staff and physician assistants. Once the
pathologist obtains any additional clinical information, the report is completed
and, following the typical reporting function, copies are sent to the referring
physician and the clinician.”
There are some differences in the various
settings for TC/PC when the in-office lab has a complete set of histology operations—primarily
logistical in nature. “In this setting, there is no courier transporting
the material and you have the slides being processed down the hall from where
they are being obtained from the patient. After they are processed, they are
moved a couple of doors down to the pathologist’s office,” Thomas
explains.
“With an in-house histology operation owned by clinicians, the
first steps are done similarly in the same building, where the specimen is
first sent to the pathology part of the laboratory. Then it’s sent out
to the pathologist who performs microscopy, whether in the pathology group,
hospital group, or other setting,” he says.
Technology Issues
With in-house pathology, the question of technology often
comes up. “At
the moment, and in the current setting of in-house pathology, particularly
the classic TC/PC system where the histology is performed by an outside laboratory,
the technology is important because the technical component (histology) and
the diagnosis (microscopy) can be performed at different locations—perhaps
even across the country from one another. Good technology allows us to combine
the slide creation (gross description and histology) with the diagnosis (microscopy)
to create a full report accurately and easily,” Thomas explains.
There are several marketplace issues to consider. “Most of the best technology
is owned by the histology laboratories involved in TC/PC because it is quite
expensive to develop,” Thomas says. “In addition, there are new
technology platforms that work like online banking, e.g., Vitalaxis. In these
systems, everyone in the process of creating and reading the case from clinical
office staff to pathologist to physician interfaces with any computer that
has Internet connectivity. These systems have practical tools that integrate
all the data and make report creation much easier for the pathologist,” Thomas
adds.
There are a number of reasons reporting information systems are important. “First,
without being able to transfer information you’ll be doing double entries—re-entering
the gross description and the patient logistics. Multiple data entry increases
the risk of error and 100 percent accuracy is critical for pathologists. In
some of the in-house laboratories, if you are not sending anything out, you
can make do with very basic technology—i.e., simple Word documents. This
is a little more cumbersome and there is a slight increased risk of error,
but it can be done at a lower cost. However, it is not an amenable solution
for high-volume laboratories because the risk of error is unacceptable,” Thomas
concludes.
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