Hospital lab charge spikes found at rural hospitals

Rural hospitals across Texas, have been inundated by sales pitches for such lab arrangements, said Kevin Reed, general counsel for the Texas Organization of Rural & Community Hospitals. The arrangements typically bill commercial insurers, so as not to draw attention from the CMS. They also favor the use of management services agreements involving physicians, which Reed said seem to exist solely to pay the doctors. The agreements allow the management company to collect up to 80% of the lab test revenue, he said.

"In those cases, the physicians are obviously being paid to refer to the lab," Reed said. "To say they're highly suspect is to be kind. I think they're nothing but kickback arrangements."

Medicare rules allow rural hospitals to bill for lab tests performed on patients from other facilities and by outside labs, but there's disagreement over whether such arrangements comply with contracts between the hospitals and commercial insurers. "We know that these operators that do this are very coy," Morrow said. "They work right up to the edge of the law."

The 30% lab charges-to-total charges ratio used by Modern Healthcare, while well above average, does not necessarily mean something untoward is going on. Rural hospitals often serve as laboratory test providers for local doctors, nursing homes and other providers.

A spokeswoman for the critical-access hospital Mercy Hospital Columbus, for example, wrote in an email that the hospital serves a number of outpatient clinics and local nursing homes. Outpatient labs accounted for 41% of the hospital's total charges last year, and nearly half in 2016. Similarly, Dallas County Medical Center in Fordyce, Ark., whose 2016 ratio was 32%, performs lab testing for a 100-bed nursing facility, an assisted-living facility and a home health practice it owns. Some of its patients see out-of-town physicians who have the tests performed locally, a spokeswoman wrote in an email.

Lab charges at those hospitals, while higher than their peers, were relatively stable over the past five years.

Other hospitals show spikes in recent years, and a company called Little River Healthcare is deeply involved. At Stephens Memorial Hospital in Breckenridge, Texas, lab charges jumped from 33% of total charges in 2016 to 63% in 2017. CEO Matthew Kempton said that's because the hospital dramatically expanded its outpatient lab testing capacity, adding new equipment and hiring two new med techs in an effort to expand on a strong and growing revenue source. The hospital takes samples from local providers and communities as far as Abilene and the Dallas-Fort Worth area, but none from outside of Texas, he said. The hospital performed more than 200,000 tests last year, most of them blood tests. It does not perform toxicology tests.

"Many of these physicians want to support hospitals that are within their local communities and neighboring communities," Kempton said. "They would prefer to do that rather than send it to a large reference lab like LabCorp and Quest."

Stephens Memorial billed insurers $24 million for outpatient labs last year, but Kempton said the hospital only collected about 30% of that.

Some spikes are more dramatic. Outpatient lab charges at Mountain Lakes Medical Center in Clayton, Ga., for example, jumped about 1,100% between 2015 and 2016. The critical-access hospital, whose former CEO resigned last year, did not respond to a request for comment.

Commercial insurers are by now well aware of the lab test billing arrangements, and are fighting to recoup money they believe they paid inappropriately. They're also renegotiating contracts to preclude billing to lab tests for non-local patients, or, they're pulling their contracts with the hospitals in question altogether. In some cases, they're even taking the management companies to court.

Four hospitals sued Blue Cross and Blue Shield of Oklahoma last year after the insurer removed them from its network, alleging breach of contract. In October, a judge granted a temporary restraining order that permitted the hospitals to remain in-network. One of those hospitals, Drumright (Okla.) Regional Hospital, reported outpatient lab charges that were 44% of its total charges last year, according to Medicare cost report data.

The lab test billing arrangements initially gained attention after Missouri's state auditor issued a scathing report that identified $90 million in inappropriate lab test payments to a rural hospital in Unionville. Nicole Galloway wrote that a management company used the hospital as a pass-through for out-of-state laboratory services. U.S. Sen. Claire McCaskill called for a federal investigation.

That hospital, Putnam County Memorial Hospital, paid a company called Empower HIS, led by Jorge Perez, nearly $12 million to oversee lab billing between November 2016 and March 2017, according to an investigation by Side Effects Public Media.

Empower HMS, North Kansas City, Mo., an affiliated company whose website names Perez as its CEO, lists a number of hospitals that showed unusually high lab charges in recent years according to Modern Healthcare's analysis, including Regional General Hospital in Williston, Fla., Washington County Hospital in Plymouth, N.C., I-70 Community Hospital in Sweet Springs, Mo., and Drumright Regional. Empower HMS did not respond to a request for comment.

Three of those hospitals, Washington County, I-70 Community and Drumright, are referenced in a lawsuit brought by the lab company LGMG that names Perez as a defendant. LGMG wrote in its complaint that Perez and his associates violated their contract to provide lab services at the hospitals by canceling it last year without giving the required notice or letting the company remove its equipment. The original contract, signed in December 2015, requires the hospital to pay LGMG 60% of all lab services performed under the contract.

Often the hospitals are in such precarious financial conditions that they're at risk of closure, and view the arrangements as last-ditch efforts to keep the facilities open. Those pitching the deals promise to hire more staff and add new equipment. The arrangements can be mutually beneficial for a time. For hospitals, though, the reckoning comes when insurers try to recoup their money. In the most severe cases, hospitals have had to close.

The situation underscores the rural healthcare crisis. If there's no systemic response, the number of loopholes exploited by enterprising entrepreneurs or desperate hospitals will only grow, said Jamie Orlikoff, president of Orlikoff & Associates, a Chicago-based healthcare consulting firm. "The real crime here is that it's driving up total healthcare costs," he said, "and it's basically a shell game."

Scott Phillips, managing director of the healthcare consultancy Healthcare Management Partners, a turnaround specialist that is a partner in Modern Healthcare Metrics, said he's amazed insurers haven't responded faster. He thinks that's because when it comes to group plans, most of their commercial customers, employers bear the underwriting risk. When costs go up, they pass them onto employees through higher premiums.

"It's in the interest of the consumer and, frankly, of healthcare providers everywhere, to get this sorted," he said.

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