OIG to Pathology Lab: Don't Pay for Services You Don't Need - McDermott Will & Emery

OIG to Pathology Lab: Don’t Pay for Services You Don’t Need


In September, the US Department of Health and Human Services Office of Inspector General (OIG) issued an unfavorable advisory opinion to a pathology laboratory concerning a proposed services arrangement with referring pathology laboratories. This result was unsurprising, because the services contracted for were not commercially reasonable. The opinion allowed OIG to repeat its skepticism of arrangements that carve out federal healthcare program business because of the potential for a “pull-through” effect (in which the arrangement may influence or result in the other party sending federal healthcare program business to the counterparty). The opinion provides several lessons in how to properly structure legitimate pathology services arrangements.

In Depth


Anatomic pathology laboratories (path labs) and physician practices routinely enter into arrangements whereby a path lab receives a request from a physician practice to perform either the technical component (TC) of a pathology service (e.g., sample preparation and staining) or the professional component (PC) (i.e., reading and interpreting a stain), or both. Although most payors expect each party to bill and collect for their own individual services pursuant to their own payor agreements, some payors, including Medicare, allow for the physician practice or path lab to bill for both components of the pathology service (global billing) when certain contractual and billing requirements are met.


On September 28, 2023, OIG issued an unfavorable advisory opinion (Advisory Opinion 23-06) regarding a proposal for global billing of pathology services by a requestor, an independent path lab. In the proposed arrangement, a physician practice or non-physician-owned path lab would refer a pathology service to the requestor to perform the TC and PC. The requestor would then contract the performance of the TC back to the physician practice or non-physician-owned path lab. The requestor would bill payors globally for the pathology service, receive payment for the global claims and remit payment back to the physician practice or non-physician-owned path lab for the TC of the test at a fair-market-value, per-test rate. Referring path labs would be attracted to the proposal because they lack in-network contracts with certain commercial insurers and thereby could benefit from referring to laboratories, including the requestor, that have favorable in-network contracts with commercial payors.

Individuals may request an advisory opinion in order to secure a negative opinion from the OIG. Here, the requestor certified to facts that guaranteed an unfavorable result, including that:

  • The personal services and management contracts safe harbor was not met because the services the referring path lab would perform exceeded those reasonably necessary to accomplish the commercially reasonable business purpose of the arrangement
  • In most cases, the requestor has the capacity to provide the TC itself and would do so at a lower cost than it would pay to the referring laboratories
  • Although the proposed arrangement would carve out services provided to federal healthcare program beneficiaries, the nature of referrals to path labs would likely lead to referrals of federal healthcare program business. Requestor predicted that if it did not enter into the proposed arrangement, it likely would not receive a significant volume of referrals of federal healthcare program business from these labs


OIG concluded that the arrangement would implicate the Anti-Kickback Statute (AKS) because it would involve the requestor paying a party that is in a position to refer services that may be paid, in whole or in part, by a federal healthcare program. The requestor stated that referring labs would be primarily motivated to engage the requestor to perform path lab services due to its favorable in-network contracts with commercial insurers. However, OIG could not conclude that carving out federal healthcare program business would insulate the arrangement from liability under the AKS and that there would be no nexus between the payment as part of the proposed arrangement and potential referrals to the requestor for services reimbursable by federal healthcare programs.

In its analysis, OIG reiterated its longstanding concern about arrangements that carve out federal healthcare program business or beneficiaries in an attempt to justify questionable compensation arrangements, citing a 2014 OIG advisory opinion and noting that such arrangements can disguise remuneration for federal healthcare program business through payments purportedly related to non-federal healthcare program business. This is because the remuneration paid from the requestor to laboratories may increase the likelihood that these entities would order services from the requestor that are billable to federal healthcare programs simply out of convenience and familiarity. Indeed, the requestor predicted that if it did not enter into the proposed arrangement, it would be unlikely to receive a significant volume of federal healthcare program referrals.

OIG further concluded that the arrangement would not be protected by the AKS personal services and management contracts and outcomes-based payment arrangements safe harbor, because the requestor was unable to certify that the aggregate services contracted for would not exceed those that are reasonably necessary to accomplish the commercially reasonable business purpose of the services. Because the requestor generally could perform both the TC and PC in house—and do so more efficiently and cost-effectively than by “purchasing” the TC from a referring laboratory—the OIG found it difficult to discern any commercially reasonable business purpose for which the requestor would enter into the arrangement, other than the possibility of inducing referrals of patients, including federal healthcare program beneficiaries.


  • Given the fact that the services contracted for were not commercially reasonable, OIG had no choice but to issue an unfavorable opinion. When reviewing unfavorable opinions, keep in mind that requestors can withdraw an opinion request if OIG informs them that the opinion will be unfavorable. As with many negative advisory opinions, the requestor in this case may have had some other purpose behind continuing to seek an unfavorable opinion, such as aiming to prevent competitors from engaging in the proposed practices or establishing that an arrangement into which the requestor was being asked to enter would be prohibited by OIG.
  • The OIG has remained staunchly skeptical of arrangements that carve out federal healthcare business as a way to minimize risk under the AKS. From OIG’s perspective, the commercial payment could act as a “pull-through” inducement for federal healthcare program business. If there are no federal healthcare program referrals made between the parties, then the AKS would not be implicated. If there are federal healthcare program referrals, there may be some business relationships where a carve-out makes sense, but such carve-outs should be followed in order to achieve the purpose of protecting the arrangement from AKS risk. Here, the requestor negated the ability to take such a position by saying that it was likely that requestor would receive more federal healthcare program referrals as a result of the arrangement and likely would not receive such referrals if it did not enter into the arrangement.
  • OIG did not address whether its conclusion would have been different if the requestor disclosed that it performed and billed the TC by using claims modifiers rather than billing globally, though this was not an option for the requestor, because the referring lab was out of network. We speculate that the attempt to mask the arrangement from payors may have been a sufficiently bad fact to demonstrate malfeasance and raise OIG’s scrutiny. Commercial payors do not always allow in-network providers to bill for services performed by other entities, which could be viewed as mitigating the remunerative value of the arrangement.
  • An undergirding intent of the arrangement may have been for referring laboratories to “price shop” for the most favorable commercial insurer contract rates. This intent does not necessarily implicate the AKS, because it is unrelated to federal healthcare program referrals. However, it may raise commercial contract, state law and antitrust risks.
  • As described in the background, agreements between a physician practice and a path lab to purchase TC or PC are common in the industry for myriad reasons, including a physician practice not having in-house capabilities to perform special pathology stains. Such arrangements are not specifically implicated by this advisory opinion. Nevertheless, providers should evaluate their purchased-services arrangements in light of the facts and risks identified in this advisory opinion to ensure that they are commercially reasonable, and providers should note that such arrangements may not be permissible under commercial payor rules.
  • As always, parties to any arrangement for purchased services, or where one party is billing for services provided by another, should not attempt to characterize the arrangement in a manner that is known to be false to the participants. In this proposed arrangement, it would be nonsensical for a physician office to refer the performance of both the TC and PC of a pathology service to a path lab and then require the path lab to refer the TC back to the physician office. Parties should not assume that a regulator would not be able to immediately identify that the arrangement is in fact for referral of the PC only. Of course, the requestor here likely understood the inherent problem in the arrangement because the requestor certified that it did not need the services of the practice to achieve commercially reasonable purposes.