Private payers cracks down on suspect arrangements

State courts vary widely in their response, attorneys say

While most health care compliance efforts focus on government efforts to enforce federal laws, health care attorney Laura Keidan Martin says compliance officers should be aware of new initiatives insurance companies are undertaking to combat arrangements that fall outside state laws or prompt overutilization. While these efforts have not received the same press as some federal initiatives, they already have met with some success in various state courts across the country, Martin says.

"Private payer enforcement has always been more important than most providers thought, and its importance is increasing," says Bill Sarraille, a health attorney with Arent Fox in Washington, DC.

According to Martin, an attorney with Katten Muchin in Chicago, states have adopted a range of statutes to prohibit arrangements that result in overutilization or that put profit motive ahead of patient interest. Laws on the books that address these problems include fee-splitting bans, kickback bans, and state self-referral statutes. 

Possibly due to a lack of enforcement resources and poor reporting mechanisms, most of these state statutes have gone largely unenforced, reports Martin. "As a result, unlawful arrangements that incentivize the provision of medically unnecessary health care goods and services run rampant in many states," she asserts. "In many states, you see entire industries springing up where the arrangements don’t comply with state law."

Because overutilization is difficult and time-consuming to prove on a case-by-case basis, insurers now are taking a more systemic approach to the problem, Martin says.

To date, most of the arrangements that have been targeted by insurance companies have involved blatant violations of state law, she says. These arrangements include several variations. The first is in states with corporate practice of medicine statutes in which medical providers are controlled by laypersons. Martin says these arrangements come in many forms, including business corporations that directly employ physicians.

The second scenario involves laypersons or lay entities that contract with physicians to serve as the "paper owners" of medical practices.

Finally, there are arrangements in which a layperson or lay entity exerts control over the medical practice through a management agreement structure and derives all the profits from the practice through the management fee.

One specific scenario Martin points to is abusive diagnostic testing arrangements that allow the billing entity to capture the markup on services performed by others.

She says this type of arrangement surfaced frequently in Florida concerning Magnetic Resonance Imaging (MRI) services because there was an oversupply of MRI facilities and too few patients. Although MRI companies performed all the work, some brokers billed insurers at a 200% to 400% markup and pocketed the difference, she says.

Martin says these arrangements can run afoul of anti-kickback statutes (because the spread between the third party’s fees and the billed fee constitutes an inducement for referrals) as well as fee-splitting prohibitions, because the referral source and actual provider split fees.

They also can violate self-referral prohibitions if a physician acts as the "broker" and if state law bars out-of-office referrals absent on-site supervision.

"The Florida MRI cases have been creating quite a stir among insurers in other states that are watching their imaging and diagnostic costs climb," Sarraille notes.

As people caught on to that arrangement, Martin says diagnostic facility "leasing" arrangements, which are one step removed from a purchased service arrangements, started to emerge. These agreements call for the referral source to "lease" space, equipment, personnel, and any necessary supplies from a third party for a fixed fee per test or per period.

The referral source, which provides no component of the service, then bills the insurer at a significant markup.

"The radiology market is torn over these lease relationships, with opinion about them sharply divided," Sarraille observes.

Finally, Martin points to portable diagnostic equipment and staffing arrangements. Under these arrangements, providers capture additional revenue streams by hiring diagnostic testing companies to bring equipment and technicians to their offices to perform diagnostic tests on their patients, typically on a below-market, "per-click" fee basis.

The referring physician then bills for the test at a significant markup. The diagnostic testing company typically bills for the interpretation, which Martin says are often performed by an out-of-state physician who is willing to provide below-cost testing as a quid pro quo for the professional service referral.

"Like the first two scenarios, you have a situation where the practice is not providing any real supervision," says Martin. "It is simply sending referrals to the testing company."

One legal theory insurance companies have been asserting is that by fraudulently incorporating a medical practice or entering into a sham arrangement, that is fraud on the insurance company.

"Dropping a dime on the providers and trying to initiate investigations by insurance departments, state attorneys general, and medical boards are clearly tactics that insurers are increasingly inclined to employ," says Sarraille, who has handled some of these cases.

Martin says courts have taken different positions regarding these claims. However, she says a number of courts that have ruled that if an arrangement violates state law, there is no right to payment for those services. "The battle is still raging, and the issues are far from resolved," she says.