Clinical laboratories face a range of federal and state legal and regulatory constraints that affect their formation, operation, procedural coding and billing, and transactions. Fraud and abuse laws, specifically those related to the federal Anti-Kickback Statute (AKS) and physician self-referral laws (the “Stark Law”), may have the greatest impact on the operations of healthcare providers. Further, clinical labs must adhere to regulations mandating minimum quality control standards, most notably federal requirements under the Clinical Laboratory Improvement Amendments (CLIA). The last installment in this three-part series on the valuation of clinical labs will discuss the regulatory environment in which these organizations operate.

Federal Fraud and Abuse Laws

The AKS and Stark Law are generally concerned with the same issue – the financial motivation behind patient referrals. However, while the AKS is broadly applied to payments between providers or suppliers in the healthcare industry and relates to any item or service that may be paid for under any federal healthcare program, the Stark Law specifically addresses the referrals from physicians to entities with which the physician has a financial relationship for the provision of defined services that are paid for by the Medicare program.¹ Additionally, while violation of the Stark Law carries only civil penalties, violation of the AKS carries both criminal and civil penalties.²

Anti-Kickback Statute

Enacted in 1972, the federal AKS makes it a felony for any person to “knowingly and willfully” solicit or receive, or to offer or pay, any “remuneration”, directly or indirectly, in exchange for the referral of a patient for a healthcare service paid for by a federal healthcare program,³ even if only one purpose of the arrangement in question is to offer remuneration deemed illegal under the AKS.⁴ Notably, a person need not have actual knowledge of the AKS or specific intent to commit a violation of the AKS for the government to prove a kickback violation,⁵ only an awareness that the conduct in question is “generally unlawful.”⁶ Further, a violation of the AKS is sufficient to state a claim under the False Claims Act (FCA).⁷

Criminal violations of the AKS are punishable by up to ten years in prison, criminal fines up to $100,000, or both, and civil violations can result in administrative penalties, including exclusion from federal healthcare programs, and civil monetary penalties plus treble damages (or three times the illegal remuneration).⁸ In addition to the civil monetary penalties paid under the AKS, if the AKS violation triggers liability under the FCA, defendants can incur additional civil monetary penalties of $13,508 to $27,018 per violation, plus treble damages.⁹

Due to the broad nature of the AKS, legitimate business arrangements may appear to be prohibited.¹⁰  In response to these concerns, Congress created a number of statutory exceptions and delegated authority to the U.S. Department of Health & Human Services (HHS) to protect certain business arrangements by means of promulgating several safe harbors.¹¹ These safe harbors set out regulatory criteria that, if met, shield an arrangement from regulatory liability, and are meant to protect transactional arrangements unlikely to result in fraud or abuse.¹² Failure to meet all of the requirements of a safe harbor does not necessarily render an arrangement illegal.¹³ It should be noted that, in order for a payment to meet the requirements of many AKS safe harbors, the compensation must not exceed the range of fair market value and must be commercially reasonable.

Of note, in a December 2020 final rule, the HHS Office of Inspector General (OIG) released several revisions to the AKS, many of which are similar to those revisions to the Stark Law proposed by the Centers for Medicare & Medicaid Services (CMS), as discussed below.¹⁴ Among the more notable revisions are new safe harbors for value-based arrangements (the safe harbor requirements for which arrangements lessen as the participants take on more financial risk) and revisions to existing safe harbors.¹⁵

Stark Law

The Stark Law prohibits physicians from referring Medicare patients to entities with which the physicians or their family members have a financial relationship for the provision of designated health services (DHS).¹⁶ Further, when a prohibited referral occurs, entities may not bill for services resulting from the prohibited referral.¹⁷ For the purposes of this article, DHS include, but are not limited to, clinical lab services and inpatient and outpatient hospital services.¹⁸

Under the Stark Law, financial relationships include ownership interests through equity, debt, other means, and ownership interests in entities also have an ownership interest in the entity that provides DHS.¹⁹ Additionally, financial relationships include compensation arrangements, which are defined as arrangements between physicians and entities involving any remuneration, directly or indirectly, in cash or in kind.²⁰

Civil penalties under the Stark Law include overpayment or refund obligations, a potential civil monetary penalty of $15,000 for each service, plus treble damages, and exclusion from Medicare and Medicaid programs.²¹  Further, similar to the AKS, violation of the Stark Law can also trigger a violation of the FCA.²²

Notably, the Stark Law contains a large number of exceptions, which describe ownership interests, compensation arrangements, and forms of remuneration to which the Stark Law does not apply.²³ Similar to the AKS safe harbors, without these exceptions, the Stark Law may prohibit legitimate business arrangements. It must be noted that in order to meet the requirements of many exceptions related to compensation between physicians and other entities, compensation must: (1) not exceed the range of fair market value; (2) not take into account the volume or value of referrals generated by the compensated physician; and, (3) be commercially reasonable. Unlike the AKS safe harbors, an arrangement must fully fall within one of the exceptions in order to be shielded from enforcement of the Stark Law.²⁴

As noted above, in December 2020, CMS released a number of revisions to the Stark Law in a final rule, including:

1. Revised definitions for Fair Market Value, General Market Value, and Commercial Reasonableness; and,
2. New permanent exceptions for value-based arrangements.²⁵

Importantly, the new value-based arrangements exceptions protect the following arrangements:

1. Full Financial Risk Arrangements: Includes capitated payments and predetermined rates or a global budget;
2. Value-Based Arrangements with Meaningful Downside Financial Risk: Where a physician pays no less than 25% of the value of the remuneration the physician receives when he or she does not meet pre-determined benchmarks; and,
3. Value-Based Arrangements: Applies regardless of risk level to encourage physicians to enter value-based arrangements, even if they only assume upside risk.²⁶

It is important to note that, the regulatory scrutiny of healthcare entities (especially with regard to fraud and abuse violations) has generally increased over the past two decades. Therefore, under current regulation, the severe penalties that may be levied against healthcare providers under the AKS, the Stark Law, and/or the FCA will likely raise a hypothetical investor’s estimate of the risk related to clinical lab services.

Clinical lab Improvement Amendments (CLIA)

Prior to 1988, only independent and hospital laboratories were subject to federal regulation under the Medicare, Medicaid, and Clinical labs Improvement Act of 1967.²⁷  Following a public outcry after numerous reports of inaccurate Pap smear results, Congress passed the Clinical lab Improvement Amendments (CLIA), and its subsequent amendments, in order to improve the quality of laboratory test results.²⁸  Three agencies – CMS, the Food & Drug Administration (FDA), and the U.S. Centers for Disease Control and Prevention (CDC) – possess regulatory authority over clinical labs under CLIA.²⁹ CMS is charged with regulating healthcare providers who perform laboratory testing on patient specimens in order to ensure accurate and reliable test results.³⁰  Laboratory testing performed for forensic purposes; on human specimens without patient specific results; or, drug testing by Substance Abuse and Mental Health Service Administration (SAMHSA) laboratories are exempted from CLIA’s requirements.³¹

CLIA regulations categorize laboratory testing procedures by complexity, assigning each test to a waived, moderate, or high level.³² A test’s category is determined by assessing its complexity, on a scale of 1 to 3, based on seven distinct areas:

1. The level of scientific and technical knowledge required to perform the test;
2. The level of training and experience required for the three pre-analytic, peri-analytic, and post-analytic phases of the test;
3. The stability and reliability of the materials needed for the test;
4. The relative ease or difficulty of each step of the testing process;
5. The calibration, control, and proficiency of the testing materials;
6. The relative ease or difficulty of maintaining or troubleshooting the testing system; and,
7. The amount of interpretation and judgment needed during the three phases of the test.³³

Laboratories only performing the lowest level complexity tests, known as “waived tests,” must enroll in CLIA, pay applicable fees, and follow specific manufacturing instructions as well as standards related to cytology tests.³⁴ Laboratories performing moderate and high level complexity tests are subject to more stringent rules that set minimum qualifications for individuals who perform or supervise testing procedures. Laboratories performing moderate and high level complexity tests must satisfy quality standards related to: (1) proficiency testing; (2) patient test management; (3) quality control; and, (4) personnel training.³⁵  Penalties for non-compliance include: “(A) Use of intermediate sanctions; (B) Suspension, limitation, or revocation of the certificate of a laboratory that is out of compliance with one or more requirements for a certificate; and, (C) Civil suit to enjoin any laboratory activity that constitutes a significant hazard to the public health.”³⁶

COVID-19 Testing Enforcement

During 2020, the first year of the COVID-19 pandemic in which COVID-19 tests were available, Medicare spent approximately $1.5 billion on COVID-19 tests alone.³⁷ The federal government also issued a number of regulatory “flexibilities” to ease provider burden during the public health emergency (PHE). For example, during the PHE, Medicare beneficiaries may obtain their first COVID-19 test without a physician/practitioner order, but must obtain an order for subsequent tests. Additionally, some documentation and recordkeeping requirements for COVID-19 test orders were removed. However, CMS has made clear that “After the PHE, Medicare will require all COVID-19 and related testing that is performed by a laboratory to be ordered by a physician or other practitioner.”³⁸ Further, in order to ensure proper government spending occurred for these tests, the OIG announced in December 2021 its plans to audit tests, “looking more closely at which lab tests had declines in volume in 2020….[as well as] monitor annual payments for lab tests, including COVID-19 tests.”³⁹

Conclusion

Considering the various competitive, reimbursement, technological, and regulatory trends discussed in this three-part series, clinical labs may face some challenges in the coming years. As noted in the first installment, the growth in the Baby Boomer population, a significant portion of whom have one or more chronic conditions, may create significant demand that greatly benefit clinical labs. However, a clinical lab’s ability to meet this demand may be tempered by the shortage of pathologists and other laboratory professionals. Therefore, as discussed in this second installment, clinical labs that are positioned to adopt rapidly-advancing technology may be able to utilize technology to automate some manual work in order to thwart any workforce shortage. Further, in some industries, a gap between supply and demand may lead to increased prices, but with the U.S. healthcare system’s third-party payor system, in which the government has an outsized influence, the typical supply-demand dynamic does not affect prices. In fact, Medicare reimbursement is expected to stay stagnant (if not decrease) in the next couple of years. This will require clinical labs to be clinically efficient – while remaining compliant with regulations and keeping clear of government enforcement initiatives – in order to survive.