Specialty histology labs increase risks

Medical Laboratory Observer, Sept, 2004 by Jane Pine Wood, Richard S. Cooper

There is an increasing trend toward the establishment of histology laboratories by nonpathology medical practices, particularly gastroenterology, urology, and dermatology practices. A specialty practice can establish an in-house histology laboratory, but there are many serious legal issues and risks involved in this activity. These include fraud and abuse compliance (particularly, the Stark law), significantly increased malpractice risk, financial expenditures, license and certification issues, and payor issues.

Because pathology services are subject to the Stark self-referral prohibition, it is important that the structure and operation of an in-house histology laboratory by a referring physician practice comply with the in-office ancillary service exception if the practice plans to bill the Medicare/Medicaid programs. This exception protects referrals made by a physician to his own practice for designated health services (including pathology services) that are provided through his practice, if all of the requirements of the quite lengthy exception are met.

If a specialty practice with an in-house histology laboratory fails to meet any of the requirements of this Stark exception, then the physicians are subject to the significant penalties for violation of the Stark law, including repayment of the Medicare/Medicaid amounts paid for the pathology services, substantial civil fines, and exclusion from the Medicare/Medicaid programs.

These in-house histology laboratories also present issues under the Medicare/Medicaid anti-kickback law. The Office of the Inspector General has indicated that these laboratories may run afoul of its Special Advisory Bulletin: Contractual Joint Ventures (April 2003). A request for an advisory opinion on a specialty in-house histology laboratory was submitted to the Office of the Inspector General in January 2004. As of the date of this summary, the Office of the Inspector General had not yet issued its opinion.

If the specialty practice also wishes to provide and bill for professional pathology services, it must ensure that it complies with the in-office ancillary service exception of the Stark exception with respect to the professional services. The group must ensure that it has sufficient malpractice insurance coverage for the pathologist's acts or omissions on behalf of the group, particularly if the group practice is named as a defendant in a lawsuit based upon the alleged malpractice of the pathologist.

If the pathologist is an employee of the practice, the practice must ensure that the pathologist is included in all mandatory benefit plans of the group practice (to the extent the pathologist meets eligibility requirements). Furthermore, the group will need to include the pathologist as a participating provider in its managed-care plans.

This is one of the most significant issues involved in the establishment of an in-house histology laboratory. Because the practice is now the actual provider of the pathology services, it has full legal liability for the services. In the event of a malpractice action, the group will be held to the standard of care of a hospital or pathology laboratory, which is a high standard of care.

A specialty practice with an in-house histology laboratory should confirm that its malpractice insurance covers not only the provision of the pathology services, but also the supervision of the laboratory personnel. This could entail additional insurance premiums.

Obviously, there are significant financial expenditures involved in the establishment and operation of a histology laboratory. Not only must the group practice make space available for the laboratory, but it also must invest in equipment, personnel, and supplies. In order to provide quality services, the group practice must continue to invest in new equipment and in education and training for laboratory staff.

The group practice must ensure that its histology laboratory is in full compliance with all applicable federal and state license and certification requirements. The failure to maintain proper licenses and certifications places the group practice at risk for administrative penalties, the disallowance of payment for the pathology services, and increased malpractice liability.

If a specialty practice wishes to establish an in-house histology laboratory, it should ensure that its major payors will reimburse the group practice for the pathology services. Increasingly, payors are refusing to reimburse for diagnostic services provided by a referring physician practice. Instead, such payors will only reimburse for diagnostic services provided by a hospital or an independent free-standing diagnostic provider.

In light of the serious compliance ramifications of in-house histology laboratories, it is advisable for practices to consult with legal counsel prior to establishing such laboratories.

Jane Pine Wood is a healthcare attorney with the Cleveland law firm of McDonald Hopkins, and represents a broad range of healthcare professionals and facilities. Richard Cooper is also a healthcare attorney and is a director of McDonald Hopkins. He manages the firm's health law department and has a national practice in the representation of laboratories and pathology groups.