Martin Merritt, JD

The United States Department of Justice issued a 

 on March 9 announcing that the CEO of Palo Pinto General Hospital in Texas pled guilty to a scheme that defrauded commercial carriers by use of what is termed pass-through billing. Physician practices need to be aware of the risks posed by these schemes. 

Pass-through billing arrangements are typically pitched to clinics as a way to increase revenue, without increasing overhead. A contractor proposes to provide equipment and a technician to perform some ancillary service, whether it be a CLIA laboratory, sonogram testing, or some other well-patient test using the latest gadget or device. 

As the scheme entails, all you need do is order the test, let the contractor do the work on a machine you don’t own using personnel employed by the contract, and then your clinic is expected to bill for the service using your clinic NPI number. When the claim is paid, you both split the money. The contractor is paid as a 1099 independent contractor. 

There are multiple reasons this is illegal and fraudulent.

, because the contractor, not your clinic, performed the service. In the Palo Pinto Hospital case, the hospital paid an outside CLIA lab to perform tests, but billed insurance as though the tests were performed by the hospital. 

because the actual cost of the service is the amount paid to the contractor, not the marked-up price listed in the HCFA 1500 claim form.

Pass-through billing violates Stark Law and the Anti-Kickback Statute. 

In Medicare, Medicaid and federal payer cases, the service will not meet the “ancillary services exception” or safe harbor. This is because the services were not performed by the clinic as part of its own in-office ancillary services, but instead by an independent contractor, yet the services were billed as if the clinic had performed the test. 

The American Medical Association takes the position that pass-through billing is unethical as set forth in 

.  Physicians are not allowed to mark-up the costs of ancillary services performed by others. 

Pass-through billing violates your PPO contract

 lists the provisions of various insurance manuals that are violated by pass-through billing. 

Furthermore, it’s very easy for insurance and government agencies to spot these schemes. Particularly in well-patient visits, insurance companies employ algorithms which detect spikes, or changes in utilization. A clinic may previously bill $200 for a well-patient exam, then suddenly the cost is $500.00.  This will trigger an audit. 

At first, you may simply be asked to provide a certificate.At this stage, the payer may assume that you actually own the equipment and employ the personnel. The first line of inquiry will be a request for certification, for example, a CLIA certificate, or other certification showing that you have the proper certification to perform the ancillary service. If you do not produce the requested certificate, payment will be recouped. 

But recoupment is the least drastic consequence.In most commercial insurance settings, recoupment will be the goal of the payer. The Palo Pinto criminal prosecution is somewhat rare, due to the size of the amounts charged. If you cannot pay the money back, you will not be paid on future claims until the amount is repaid. 

In government cases, fines and prosecution are more likely.  Under the False Claims Act, penalties of over $20,000.00 per claim may be assessed. The Anti-Kickback Statute is a criminal statute which may be invoked in appropriate cases. 

Pass-through billing is never a good idea. The trouble lies in the fact that certain exceptions and safe harbors for equipment leases, in-office ancillary services, and group practice exceptions appear similar. If you have any doubt, ask for the help of an experienced healthcare attorney. 

Martin Merritt is a health lawyer and healthcare litigator at Martin Merritt PLLC, and serves as the executive director of the Texas Health Lawyers Association as well as the board of directors of the Dallas Bar Association Health Law Section. He can be reached at 

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There are multiple reasons pass-through billing is illegal and fraudulent-and easy to catch. 

How to avoid pass-through billing traps

Until recently, arrangements between physicians and commercial laboratories escaped federal anti-kickback rules because the arrangements did not involve government payers. But with passage of the 

Eliminating Kickbacks in Recovery Act of 2018

 (EKRA), physicians will need to review their standing arrangements and ensure compliance.

Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act

 (SUPPORT Act), which was signed into law on October 24, 2018. EKRA establishes an all-payer anti-kickback prohibition that extends to arrangements with recovery homes, clinical laboratories, and clinical treatment facilities.

The intent of Section 8122 is to address the opioid crisis and prevent patient brokering and kickbacks related to substance abuse treatment facilities. However, the express wording of the statute does not limit the statute’s application to clinical laboratory arrangements which deal with treatment facilities. This means that any commercial-only, clinical laboratory arrangement-whether structured as a small business investment, management arrangement (MSO), or personals services arrangement, such as a medical director agreement-is subject to the new law, which carries severe criminal penalties. 

Penalties under the new law include a $200,000 fine "per occurrence" and up to 10 years in prison. It is not clear what "per occurrence" means. In addition, the Department of Justice may seek forfeiture of assets accumulated through any criminal infraction. Thus, the monetary impact can be much higher than the actual fine.

As a result, physicians with such arrangements should look to experienced health law counsel to ensure that their arrangements meet an available safe harbor.  

Martin Merritt, JD, is the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP.

Until recently, arrangements between physicians and commercial laboratories escaped federal anti-kickback rules because the arrangements did not involve government payers. 

New anti-kickback provisions impact laboratory-physician relationships

Negotiating and reviewing contracts is probably one of the more unnerving task physicians face. That’s good! Your subconscious is sending you “danger” signals. You simply need to channel this emotion into action to protect yourself.

Sales representatives are very good at selling the benefits of their company’s product to you and your practice, with emphasis on how these benefits outweigh the cost. Essentially, the sales meeting is all about what happens if everything goes as planned. You should never agree to the deal as presented until you are provided a contract and understand the terms thoroughly. The contract spells out what happens when things go wrong. Keep the following in mind before you sign any contract.

Sales personnel will tell you anything to make a sale. 

That’s what they do. Watch for it and remember that the contract is what you are bound by. When you receive the contract, read it carefully to note where the contract deviates from the sales pitch and to determine which of three possible types of contracts you have been handed: “A”, “B” and “C”. “A” is very favorable to you. “B” is fair and balanced–so much so that you honestly can’t tell which side drafted it. “C” is only favorable to the seller. These are full of one-sided indemnity clauses, penalties, restrictive covenants, and other legal results which were never negotiated.

Under contract law, a contract is enforceable unless it is illegal or violates public policy. That means, “if you sign it, you are stuck with it, unless your lawyer can get you out.” There are consumer protection laws, but litigating them is very expensive. Retain a lawyer to review a contract before you sign it. After you sign it, all we can do is read it to you, and tell you what you have done to yourself. 

Do not be swayed by promises of cost savings.

For every business need, there is a solution that is cheaper, quicker, and has disaster written all over it. Large, well-capitalized companies often offer the best services or products but cost more than smaller competitors and are less likely to negotiate contracts. This leaves plenty of room for startups of all stripes to attempt to undercut the industry leader. Smaller companies may negotiate but are more likely to present a “C” contract, because they are undercapitalized and can’t afford liability when things go wrong. So, they write liability out of the contract.

Beta testing is code for “we don’t know what we are doing but are hoping for the best.”

Watch out for signs a startup or small vendor is trying their product to see if it works. It means they don’t really know and can’t really say if it works. This also means you are the test case. Ask for references and check them.     

When you sign a contract for billing and EHR systems, in a very real sense, the vendor controls your access to the life blood of your practice. Many software as a service (SaaS) agreements often allow for a “lockout” if you don’t pay, for any reason. You must make sure that you have a right to your data in a usable form no matter why the contract is terminated. 

may be asked to sign more than just an SaaS contract. The vendor may produce a finance contract, which is a type of negotiable instrument, called a “promissory note.”  Under the promissory note, you become not only a purchaser, but also a 

the total obligation under the SaaS contract. This can have very negative consequences because you may be required to pay the note, even if the SaaS doesn’t work. Even if the SaaS vendor is the payee, the note will usually be sold to a bank or finance company unrelated to the vendor.  When that happens, the bank or finance company is considered a bona fide purchaser if it pays value to purchase the note without knowledge of any defenses or reasons why the note might not be owed, such as the product is defective. This means you still must pay the bona fide purchaser note even if the product failed, the same as if you had paid cash up front. Your only recourse is against the vendor. And that is where the “disclaimer of warranties” in a “C” contract will become a real problem.  

In conclusion, no matter how well the sales presentation might have gone, always remember these final words, “I need to see the contract before I decide,” and you are well on your way to successfully negotiating the entire transaction. 

Never agree to a deal as presented until you are provided a contract and understand the terms thoroughly.

Negotiating your contracts: Hidden pitfalls and traps

Physicians Practice contributor Martin Merritt, JD, the executive director of the Texas Health Lawyers Association and a health lawyer at Friedman & Feiger, LLP, sat down with Angela Miller, CHC, CMC, a payer claim auditing specialist and founder and president of Medical Auditing Solutions, LLC, to discuss how to prepare and manage payer audits.

: Angela, what guidance can you provide to physician practice personnel in dealing with payer audits?

: First, providers need to understand the difference between an audit and prepayment additional documentation request (ADR).

An audit is post-payment review of the claim to determine compliance with any of a number of payer requirements. An ADR is a prepayment request and usually relates to high-dollar, frequently abused, or high-volume procedures. The ADR seeks chart notes and other documentation reflecting medical necessity, before the claim can be paid. An audit will have defined deadlines for response while an ADR will suspend altogether the deadlines for payment under many prompt-payment statutes. 

: Payers use algorithms to identify high-utilization practices, or those practices which stand out as either ordering more procedures than their peers, or those ordering more high-cost procedures than their peers. Although payers are careful to state that they do not interfere with medical judgment, if actual utilization trips an algorithm, payers have at their disposal a number of remedies, increasing in severity from least to most severe. First, payers may send a warning letter that utilization is higher than a provider’s peers. No action is taken, other than a warning to modify prescribing behavior. Second, payers may place a practice on pre-payment review where payment is withheld until documentation is provided supporting the claim. Third, a recoupment demand may be made for claims already paid. Fourth, network participation may be terminated. Fifth, a complaint to a licensing board may be made especially for out of network/balance billing. Finally, in only the most egregious cases, a criminal complaint may be filed with the FBI or state prosecutor.

: What is the first thing providers need to do when receiving an ADR or post pay audit request?

: First, make sure the person in charge of mail knows the importance of these documents. Time is critical. A failure to respond timely will result in denial or 100% failed audit. This can result in a provider being put on “prepayment audit” or “document hold,” under which no practice can survive for very long.

Second, make it easy for the auditor to review the materials provided. Documentation that is hard to read won’t be read. Transcribe any handwritten notes on a copy of the chart note. Gather all documents requested and organize them in the exact same way for each patient and claim. Review the packet for any missing documents. Some systems store test results and the physician electronic interpretation and notes in two different spots in the EHR. All documents and all clinical assessment of said documents must be provided.

What you want to avoid is antagonizing the auditor. This is the second most common mistake, second only to missing deadlines, that I see.  If the documents are disorganized, or illegible, you invite denials. 

: I know some audits are small and providers are tempted to cut a check and be done, do you have an opinion on this?

: Number one, never cut a check without thoroughly reviewing the claims data, verifying the reason for the overpayment. Payers can make mistakes just like providers–an example being not applying the correct policy based on date of service. Some audit results can be extrapolated. A recoupment involving 30 claims can sometimes be extrapolated over the entire universe of claims. 

Second, it may be a good investment to employ a healthcare attorney to draw up a settlement agreement which releases all recoupment claims, known or unknown, through the date of the payment. Of course, this would not apply if the recoupment is sought because the claim was paid twice, for example. But in larger recoupment payments, it is good to attempt to obtain a release to prevent future recoupment claims.

: Is it necessary to pull any of the payer policies and manuals when reviewing payer audits?

: That is the most important work that an auditing specialist can perform. It is important to look at the time period and the procedure codes being audited and pull all policies from the payer to cover all dates of service and all procedure codes in the audit sample. Practices are typically not equipped to do this kind of work. There are times when a payer audit will apply current policies to dates of service outside the current policy period. This can save thousands of dollars in recoupment claims.

Payer claim auditing specialist Angela Miller shares what practices need to know to understand and prepare for payer audits. 

Author | Martin Merritt, JD

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