Over the past year, significant regulatory changes began to take shape that will have lasting effects on the laboratory industry for years to come. After publishing draft guidance regarding the regulation of laboratory developed tests (LDTs) in late 2014, the Food and Drug Administration (FDA) made clear in 2015 that it intends to move forward with its proposal next year, and the Centers for Medicare & Medicaid Services (CMS) published a proposed rule outlining the process for overhauling the Medicare Clinical Laboratory Fee Schedule (MCLFS) for the first time in over 20 years. In addition, laboratories faced more than their fair share of enforcement actions and other litigation, and this level of activity is likely to continue in 2016.

Enforcement Actions: LabScam Revisited?

The recent uptick in enforcement actions against laboratories is reminiscent of the Project LabScam settlements in the 1990s, which involved a number of multi-million dollar civil and criminal settlements and criminal convictions. The conduct primarily involved billing for medically unnecessary laboratory tests or for tests not performed; using incorrect diagnosis codes to obtain payment or incorrect CPT codes to obtain higher reimbursement amounts; and paying kickbacks to physicians. 2015 has left many in the laboratory industry with a feeling of déjà vu.

The False Claims Act (FCA) case involving Health Diagnostic Laboratory, Inc. (HDL) has undoubtedly received the most attention. Back in September 2014 the Wall Street Journal (WSJ) published a story about HDL and its rapid growth since incorporating in 2008. The article discussed in detail how HDL had collected hundreds of millions of dollars from Medicare while at the same time “[paying] doctors who sent it patients’ blood for testing.” In response, HDL asserted that these payments “fairly compensated doctors for the labor cost of handling blood that went beyond the $3 that Medicare pays for each blood draw.” HDL reportedly stopped making such payments after the Office of Inspector General for the Department of Health and Human Services (HHS OIG) issued a Special Fraud Alert on June 25, 2014, questioning this practice.

In March 2015, just six months after the WSJ published its first story, HDL announced that it had settled three related FCA cases filed by qui tam relators (a physician pitched by HDL, a physician office employee, and a competitor). To settle these cases, HDL agreed to pay $47 million and signed a Corporate Integrity Agreement (CIA). In January 2015, another laboratory company made a similar announcement, and it agreed to pay $1.5 million and also signed a CIA. HDL has since filed for Chapter 11 bankruptcy and sold most of its assets to another laboratory, and it is unclear whether the government will ever collect on the settlement, which is considered to be an unsecured debt. HDL’s shareholders, executives, and employees, as well as the owners of Blue Wave (an independent sales group that worked on HDL’s behalf), may face some hard questions from HDL’s unsecured creditors in 2016.

In August 2015, the government filed its complaint in intervention against the former CEO of HDL, BlueWave, BlueWave’s owners, and another, now-defunct laboratory. With respect to the HDL and BlueWave defendants, the government alleges that they:

• offered and/or paid illegal remuneration to health care providers through processing and handling payments; speaker programs; advisory boards; consulting arrangements; goods and services and gifts in violation of the AKS and the Stark Law;

• routinely offered to waive and/or waived cost-sharing obligations, such as copayments and deductibles for certain TRICARE beneficiaries, with the intent to induce referrals in violation of the AKS (note that this allegation does not relate to the waiver of amounts owed by commercially insured patients);

• submitted or caused to be submitted claims for payment for tests that were not medically necessary or that were not appropriately coded; and

• offered and/or paid illegal remuneration in the form of commission payments to BlueWave to induce BlueWave to arrange for or recommend referrals in violation of the Anti-Kickback Statute (AKS).

This case has just begun and will be closely watched by the laboratory industry in 2016.

Millennium Health (formerly known as Millennium Laboratories Inc.) also settled multiple FCA cases and then filed for Chapter 11 bankruptcy this year. The company agreed to pay $256 million, without admitting liability (which is typical when a case is settled). The company also signed a CIA and an administrative settlement agreement to resolve payment issues and appeals related to Medicare audits. These allegations also brought back memories of Project LabScam – misuse of custom profiles and standing orders, inducements to physicians to increase the number of tests ordered, and schemes to encourage the ordering of medically unnecessary tests. Some of the same practices were at issue in the suit filed against Millennium Health by Ameritox, which won a jury award that was later overturned by a federal appeals court in September 2015.

Although the HDL and Millennium Health cases received the most attention in 2015, other settlements involved laboratories as well (e.g., Family Dermatology, Pharmasan Labs, Piedmont Pathology Associates, Inc./Piedmont Pathology P.C.), and the first indictment (which followed multiple guilty pleas) was announced in the Biodiagnostics Laboratory Services case. Given the government’s renewed focus on the prosecution of individuals, enforcement actions in 2016 may involve not only multi-million dollar settlements or judgments but also the pursuit of more individuals than in the past.

Patient Billing Issues: More Lawsuits to Come?

Managing out-of-network status has always presented challenges for laboratories, and 2015 added another problem to that list: litigation risk. Both CIGNA and Aetna have filed suit against HDL primarily based on its alleged failure, as an out-of-network laboratory, to collect amounts owed by patients covered by those insurers. In addition, private insurers have reportedly sent letters to various other laboratories around the country questioning their patient billing practices.

In October 2014, CIGNA filed suit for $84 million against HDL. CIGNA claimed that HDL had unlawfully waived out-of-pocket expenses for patients and billed CIGNA at “exorbitant and unjustified rates” that misrepresented what HDL actually intended to collect.” CIGNA specifically alleged that HDL failed to charge CIGNA’s members for out-of-network services and paid referral fees to in-network providers to encourage the referral of patients to out-of-network providers in violation of the in-network providers’ contracts. The effect of HDL’s scheme, CIGNA argued, was (1) deceiving health benefit plans into paying far more for services than they were obligated to pay; and (2) increasing HDL’s volume of business by convincing patients that HDL provided services at little or no cost (which further increased the harm to CIGNA and other plans). Ultimately, CIGNA argued that HDL’s scheme induced CIGNA into paying $84 million, which CIGNA sought to recover.

Similarly, Aetna has accused HDL of routinely waiving Aetna members’ out-of-pocket costs that are typically associated with using an out-of-network provider and submitting billed charges to Aetna without disclosing that HDL had already agreed with the patient to discount the amount of the bill. Aetna argued that the billed charges should have been reduced by the copayment and coinsurance amounts that had been waived.

As discussed in a previous post, in 2015 the HHS OIG opined on an arrangement involving a laboratory’s promise not to bill for any out-of-network testing provided to patients covered by commercial insurance in exchange for referrals of all other testing in Advisory Opinion 15-04 (AO 15-04). The HHS OIG ultimately found that the proposed arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute (AKS) and also subject the laboratory to certain administrative sanctions based on factors unrelated to the waivers of amounts owed by patients. However, the permissive exclusion authority commonly referred to as the “substantially in excess prohibition” (SIE Prohibition) reared its ugly head. Although the HHS OIG had stated previously that providing discounted or free services to uninsured or underinsured patients does not implicate the SIE Prohibition – which authorizes permissive exclusion of a provider who charges Medicare or Medicaid “substantially in excess” of its “usual charges” to other payors – the HHS OIG noted that the proposed arrangement involved the provision of free services to insured patients. The OIG thus found that the SIE Prohibition may be implicated because the proposed arrangement could potentially cause more than half of the laboratory’s non-Medicare and non-Medicaid patients to receive free services while Medicare and Medicaid would be charged at the regular rate.

The significance of AO 15-04 is debatable. In addition to the fact that this type of arrangement is not common in the laboratory industry, the HHS OIG’s legal arguments are puzzling. The American Clinical Laboratory Association rightly criticized AO 15-04 as contradicting previous HHS OIG guidance on AKS compliance and attempting to apply the “ill-defined” SIE Prohibition. The HHS OIG has tried and failed on multiple occasions to implement regulations interpreting the substantially in excess provision. Its last attempt was on September 15, 2003, but it withdrew the proposed rule in 2007.

Although enforcement action involving the waiver of amounts owed by out-of-network patients covered by commercial insurance may be unlikely, the laboratory industry may not have seen the last of suits filed by commercial insurance companies. The CIGNA and Aetna cases are still pending, which means that the allegations and the underlying legal theories are still untested. It thus remains to be seen whether commercial insurance companies do indeed have a legal basis for taking issue with the waiver of amounts owed by their insureds.

Implementation of PAMA: Will Repricing Put Some Laboratories Out of Business?

In addition to feeling the squeeze of enforcement actions, the laboratory industry is facing the most significant changes in the Medicare Part B payment structure since implementation of the MCLFS in 1984. The Protecting Access to Medicare Act of 2014 (PAMA) will require certain laboratories to report, for the first time, payment data so that the Medicare program can tie MCLFS reimbursement to private payor rates as of January 1, 2017. CMS published a proposed rule intended to implement PAMA on October 1, 2015, three months after the June 30th deadline imposed by law. Even so, CMS has proposed a collection period that would begin on January 1, 2016. CMS would then publish the updated proposed MCLFS in early September 2016 with a 30-day public comment period before the final rates for calendar year 2017 are published on November 1, 2016.

It is not surprising that the American Clinical Laboratory Association, the American Hospital Association, and other industry players submitted comments that are highly critical of the proposed rule’s timeline and that take issue with various other aspects of the proposed rule. Recently certain Senate and House members joined the fray by submitting separate letters to Andy Slavitt, Acting Administrator of CMS. In addition to questioning the proposed timeline, both letters expressed concern about the fact that the proposed rule would prohibit many laboratories from submitting data, which, in turn, may affect the accuracy of market data. If CMS finalizes the proposed rule without making meaningful concessions, stakeholders may have no choice but to resort to litigation in 2016.

Regulation of Laboratory Developed Tests: What Will FDA Do Next?

When FDA released in October 2014 a draft guidance document that set forth its plans for regulating LDTs pursuant to its authority over in vitro diagnostics (IVDs), the agency set the stage for controversy in 2015. Historically FDA has exercised its enforcement discretion and elected not to regulate LDTs, leaving CMS to regulate LDTs primarily under the federal Clinical Laboratory Improvement Amendments (CLIA) program. As part of its rationale for changing course in this area, FDA has cited the increased complexity and higher patient risks involved with more modern LDTs. LDTs are defined by FDA as a subset of IVDs that are developed and used within a single laboratory and are intended for clinical use.

Through its CLIA program, CMS regulates laboratories performing tests on patient specimens and ensures that all tests performed at a laboratory, including LDTs, generate accurate and reliable results. As highlighted consistently by CMS and FDA officials in their public comments, the CLIA program and FDA’s authority to regulate IVDs serve different regulatory goals that are important for comprehensive oversight of LDTs. Under the CLIA program, CMS ensures that clinical laboratories provide accurate and reliable results on patient specimens, but it does not review the “clinical validity” of a particular test, which is whether the test accurately identifies, measures, or predicts a patient’s clinical condition or predisposition. For all medical devices, including IVDs, FDA examines clinical validity through its premarket review process. FDA’s 2014 draft guidance states that the agency would use a risk-based approach to regulate LDTs. Low-risk LDTs, or LDTs for rare diseases or for “unmet needs” (when there is no approved or cleared device available), would not be subject to premarket review but would have to register and submit adverse reports to FDA. Moderate- and high-risk LDTs, on the other hand, would be required to meet premarket review requirements demonstrating their safety and effectiveness, in addition to registration and adverse event reporting. However, any currently marketed tests that fit in this category would be able to remain on the market during the review process.

FDA has proposed to phase in the new regulatory process over 10 years, with high-risk LDTs being reviewed first. In support of its regulatory position, FDA released a report in mid-November that highlights 20 case studies of LDTs that it believes could cause (or have caused) harm to patients due to the lack of FDA oversight.

Many industry stakeholders oppose FDA’s move to oversee LDTs as an unnecessary burden that will slow the development of cutting-edge LDTs and harm patients desperately in need of those technologies. Following the release of FDA’s draft framework in late 2014, laboratory trade groups challenged FDA’s authority to regulate LDTs; members of the House released draft legislation that would limit FDA’s oversight; and several groups developed alternative proposals to the agency’s risk-based LDT framework. Concurrently, IVD manufacturers, certain patient groups, and other professional organizations have expressed support for FDA’s approach.

In November of this year, Dr. Jeffrey Shuren, director of the FDA’s Center for Devices and Radiological Health (CDRH), told the House Energy and Commerce Committee’s Subcommittee on Health that CDRH would move forward with finalizing its plan to regulate LDTs sometime in 2016. Shuren’s statements demonstrate that the agency is committed to finalizing and implementing a new regulatory framework for LDTs, despite pushback from laboratories and some other stakeholders. But given the political realities of a presidential election year, if CDRH does not finalize the LDT regulatory framework during the first half of 2016, it may end up on the backburner until as late as 2017.

In any event, the immense controversy associated with FDA’s proposal means that legal challenges (whether procedural, substantive, or both) are almost guaranteed after the final guidance document is issued, and we will continue to report on LDT developments in the tumultuous years ahead. It will also be interesting to see whether and how FDA and the industry negotiate user fees and review goal dates that may be specific to LDTs as part of the upcoming five-year reauthorization of MDUFA IV (the Medical Device User Fee Amendments law); the MDUFA IV consultation and negotiation process began earlier this year and will continue into 2016.