Written by: cancermd
Thursday, January 01, 2009 

Insourcing AP Services by Physician Specialty Groups: Practice and Business Implications for Pathologists

By Joseph W. Plandowski 10/09/07

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.

Trackback Print

Tags:

Categories:

Location: Blogs POL PATH AP Business

Your name:
Your email:
	(Optional) Email used only to show Gravatar.
Your website:
Title:
Comment:
Security Code Enter the code shown above in the box below
Add Comment   Cancel