How to avoid pass-through billing traps

The United States Department of Justice issued a press release 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.

1. Pass-through billing is illegal, 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. 

2. Pass-through billing is fraudulent, 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.

3. 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. 

4. Pass-through billing is unethical. The American Medical Association takes the position that pass-through billing is unethical as set forth in Opinion 8.0321.  Physicians are not allowed to mark-up the costs of ancillary services performed by others. 

5. Pass-through billing violates your PPO contract. The Texas Medical Association website 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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