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A Laboratory’s Liability for Medically Unnecessary Lab Tests under the False Claims Act, Part II

By Russell Paul

In Part I of this blog series, we discussed when lab tests are considered “reasonable and necessary” under the False Claims Act (“FCA”) and therefore reimbursable by government health insurers such as Medicare and Medicaid, as well as a laboratory’s responsibility for ensuring that lab tests submitted for reimbursement are properly justified by the patient’s diagnosis. In this blog post, we will discuss the documentation that labs are required to maintain and supply in order to prove that the claims they submit for payment are covered under government health insurer regulations and the FCA.

Government Healthcare Regulations for Lab Test Documentation

Medicare regulations require a lab to document that its tests for a given patient are medically necessary and allow it to request more information from the doctor in order to meet this requirement.  The relevant regulation provides:

(i) Ordering the service. The physician . . .  who orders the service must maintain documentation of medical necessity in the beneficiary’s medical record.

(ii) Submitting the claim. The entity submitting the claim must maintain the following documentation:

(A) The documentation that it receives from the ordering physician or nonphysician practitioner.

(B) The documentation that the information that it submitted with the claim accurately reflects the information it received from the ordering physician or nonphysician practitioner.

(iii) Requesting additional information. The entity submitting the claim may request additional diagnostic and other medical information to document that the services it bills are reasonable and necessary. If the entity requests additional documentation, it must request material relevant to the medical necessity of the specific test(s), taking into consideration current rules and regulations on patient confidentiality.

42 C.F.R. § 410.32(d)(2) (emphasis added).

Sub-section (iii) above authorizes a lab to “request additional diagnostic and other medical information to document that the services it bills are reasonable and necessary.” 42 C.F.R. § § 410.32(d)(2)(iii) (emphasis added).  This provision plainly requires that labs review the ICD diagnostic codes submitted by physicians to ensure that the ordered tests(s) are medically necessary.  If a lab was not required to review the information provided by the ordering physician, then there would be no reason for an express authorization to request additional information to substantiate medical necessity.  Sub-section 410.32(d)(2)(iii) plainly contemplates the demand for further information to ensure that the documentation explicitly evidences the medically necessity of the tests.  Indeed, this requirement set forth in 42 C.F.R. § 410.32(d)(2)(iii) is repeated verbatim under the heading “Medical necessity” in § 410.32(d)(3)(iii), showing that the lab, which is the entity submitting the claim, must ensure the medical necessity of that claim.

Furthermore, Local Coverage Determination (“LCD”) L35000 (effective October 1, 2015 for various jurisdictions) also requires a lab to review the diagnosis given and ensure that its tests are warranted:

. . . the medical record must contain documentation that the testing is expected to influence treatment of the condition toward which the testing is directed. The laboratory or billing provider must have on file the physician requisition which sets forth the diagnosis or condition (ICD10-CM code) that warrants the test(s).

(emphasis added). Thus, if the ICD code assigned to the patient does not justify the test, then the lab necessarily does not have on file “the physician requisition…that warrants the test.”

“Medical Necessity” Case Examples

Courts around the country have confirmed that Government healthcare programs may require labs and other billing entities to maintain and supply documentation that justifies payment of the lab test or other service provided when a separate provider, such as a doctor, orders the test or service.  In KGV Easy Leasing Corp. v. Sebelius, 2011 WL 490990 (9th Cir. 2011), a medical diagnostic testing lab appealed the district court’s decision upholding the Secretary of the Department of Health and Human Services’ (the “Secretary”) determination that its lab tests were not reimbursable by Medicare because it failed to demonstrate that the tests were medically reasonable and necessary. The Ninth Circuit affirmed, holding that the lab never “established medical necessity.”  Id. at *1. The lab “never presented evidence that supplemented the information contained on its order forms” and “provided no evidence that the referring physician was also the treating physician, or that the test results were later used to help manage the patient’s medical conditions.”  Id. (emphases added).

Likewise, in Gulfcoast Med. Supply, Inc. v. Sec’y, Dep’t of Health & Human Servs., 468 F.3d 1347 (11th Cir. 2006), a motorized wheelchair supplier brought an action against the Secretary challenging the Secretary’s decision that Medicare had overpaid that supplier for wheelchairs. The supplier argued that the “certificate of medical necessity” (CMN) signed by a physician was by itself sufficient to establish that the wheelchair was necessary for the patient and that the supplier need not submit any additional medical documentation beyond the CMN to prove medical reasonableness and necessity of the wheelchairs and be paid. The Eleventh Circuit disagreed, holding that “when the Medicare Act is read as a whole, it unambiguously permits carriers and the Secretary to require suppliers to submit evidence of medical necessity beyond a CMN.”  Id. at 1352; see also Maximum Comfort Inc. v. Sec’y of Health & Human Servs., 512 F.3d 1081, 1087-1088 (9th Cir. 2007) (“[T]he Secretary may require, as a condition of reimbursement to an equipment supplier, information in addition to that provided by the certificate of medical necessity” to substantiate supplier’s claims for Medicare reimbursement); MacKenzie Med. Supply, Inc. v. Leavitt, 506 F.3d 341, 347 (4th Cir. 2007) (same); Druding v. Care Alternatives, Inc., 164 F. Supp. 3d 621, 631 (D.N.J. 2016) (“[E]ven if Defendant [hospice] has provided for each patient a certification signed by a physician, the claim [by the hospice] is not reimbursable if the patient’s medical record does not contain clinical information that supports the terminal prognosis.”).

Thus, when the lab test performed by the lab is wholly unrelated to and not justified by the diagnosis given by a doctor, the lab cannot submit a claim for payment for that test to the Government, and the lab may be liable under the FCA for doing so.

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