[Name and address redacted]

Dear [Name redacted]:

We are writing in response to your memorandum of March 27, 2000, in which you asked for our views on whether an advisory opinion issued by this office requires laboratories to raise their charges to meet or exceed Medicare's fee schedule. Specifically, you received a question from the Regional Health Administrator ("RHA"), Region VIII concerning a grantee under Title X of the Public Health Service Act, 42 U.S.C. § 300 et seq. The grantee, which is a component of the State of South Dakota, has been told by one of its laboratory contractors that its charges will be increased for lab samples received on or after February 1, 2000. The RHA has indicated that the grantee believes other laboratories will follow suit and that the rise in charges will have a significant impact on the grantee's Title X program. The laboratory asserts that it must increase its charges due to changes mandated under the Balanced Budget Refinement Act of 1999 ("BBRA"), as well as Advisory Opinion No. 99-13 (December 7, 1999).

The laboratory arrangements you have asked about raise potential issues under both the Federal health care program anti-kickback statute, section 1128B(b) of the Social Security Act (the "Act"), and the exclusion authority relating to charges to the Medicare or Medicaid programs that are substantially in excess of a provider's or supplier's usual charges, section 1128(b)(6)(A) of the Act. These generic issues were the subject of OIG Advisory Opinion 99-13.

OIG advisory opinions, special fraud alerts, and similar guidance sometimes identify certain practices as "suspect" in relation to the Federal health care program anti-kickback statute. We think there may be some misunderstanding in the industry as to the import of this identification. These practices are not per se violations of the anti-kickback statute; the statute is a criminal statute and requires proof beyond a reasonable doubt that the parties had unlawful intent. It is not only what the parties did, but why they did it, that is crucial to a prosecution. Our guidance identifies the types of practices that we believe potentially violate the statute if there is improper intent. Specifically, our designation of a practice as "suspect" is based on our assessment that the practice itself is some evidence of a violation and serves as a warning to the health care industry that they participate in such activities at their own risk.

An anti-kickback statute violation is not determined by the size of the discount; rather, a violation arises if the discount ­ whatever its size ­ is implicitly or explicitly tied to referrals of Federal business. Advisory Opinion 99-13 specifically addressed the issue of a laboratory giving deep discounts to physicians for business that the physicians pay for out of their own pockets, in return for the referral of more lucrative Medicare Part B business for which the laboratories receive direct reimbursement from Medicare. Our concern was that the proposed conduct potentially involved purposeful discounting of private pay business to induce the referral of Federal health care program business ­ prohibited conduct under the Federal anti-kickback statute. While advisory opinions are only binding on the requesting parties, the same analytical framework laid out in the opinion would apply to arrangements between other providers and laboratories.

In order to establish a violation, there must be evidence to support a linkage between the discounts and the referral of non-discounted Federal health care program business. In order to determine if a discount is linked to the referral of other Federal program business, such as Medicare, we would first look to see if there is any Medicare business referred by the facility to the laboratory, and if so, if it is substantial enough in relation to the discounted business to infer a connection between the two.

Where there is evidence of a connection between the two, the size of a discount may provide further indicia of intent. Accordingly, the opinion identified two pricing benchmarks below which we believe discounts raise anti-kickback concerns. However, discount arrangements below those benchmarks are not illegal per se, but only "suspect" in the sense that they may merit further investigation depending on the facts and circumstances presented. For example, we recognize that there are reasons why a company might agree to sell services below its average fully loaded costs. Notwithstanding, we think that pricing arrangements that couple the referral of Medicare business that is reimbursed above the provider's average fully loaded costs with charges for private business that are below the provider's average fully loaded costs merit close scrutiny.

In addition, section 1128(b)(6)(A), which permits exclusion of providers that submit claims to Medicare or Medicaid for amounts substantially in excess of the provider's usual charges, is not a blanket prohibition on discounts to private pay customers. Section 1128(b)(6)(A) addresses a much narrower issue ­ tiered pricing structures that set one price for Medicare or Medicaid and a substantially lower price for most other customers. Given the statutory language, we do not believe that the section 1128(b)(6)(A) is implicated unless a provider's charge to Medicare is substantially in excess of its median non-Medicare/Medicaid charge. In other words, a provider need not even worry about section 1128(b)(6)(A), unless it is discounting close to half of its non-Medicare/Medicaid business. In addition, the statute contains an explicit exception permitting a charge differential where " the Secretary finds there is good cause" for the disparate treatment. Within these parameters, providers are free to negotiate discounts, so long as the discounts are not tied to unlawful referrals of Federal health care program business.

Finally, we are not aware of any provision of the BBRA that specifically mandates laboratories to raise their charges for non-Medicare business.  We hope this information is helpful. 

Sincerely,

/s/

Kevin G. McAnaney
Chief, Industry Guidance Branch