Laboratory Pass-Through Billing Fraud: Using a Hospital’s Rate for Outside Tests

Laboratory pass-through billing fraud occurs when a provider pays an outside laboratory to perform tests, then bills as though it performed them itself. The provider may be a physician or a hospital, and the arrangement can also run between laboratories.

In the hospital version, the specimen goes to an independent laboratory. The claim goes out under the hospital’s name, drawing on its higher reimbursement rate. The person running the assay sees one business. The insurer paying the bill sees another. If you work in laboratory operations, hospital finance or billing, you may know exactly where that switch happens.

Why a Hospital’s Rate Is Worth Buying

A laboratory test billed at a rural hospital reimbursement rate can bring in more money than the same test billed by the outside laboratory. That difference was central to the Justice Department’s rural-hospital criminal indictment announced in 2020. It alleged that operators took over financially troubled hospitals through management companies, then used their contracts to bill private insurers for tests performed mostly at outside laboratories.

According to the indictment, the hospitals had negotiated higher private-insurance rates than the outside laboratories. The alleged arrangement joined control of the hospital, the testing laboratory and the billing company. Recruiters and healthcare providers allegedly received kickbacks for supplying specimens, often from sober homes and substance abuse treatment centers. The government also alleged that many tests were medically unnecessary.

The rate belonged to the hospital. The testing business could be somewhere else entirely.

The indictment alleged approximately $1.4 billion in billings to private insurers and approximately $400 million paid. A jury acquitted some defendants in March 2023.

Hospital Pass-Through Lab Tests When the Patient Never Visited the Hospital

Hospital pass-through lab test billing can put a hospital on the claim even when the patient never visited the hospital and the specimen never arrived there. The useful comparison follows the collection site, the performing laboratory and the billing hospital separately.

A 2025 federal criminal indictment in El Paso charged that hospitals billed Blue Cross Blue Shield for urine drug tests on patients with no hospital relationship. It alleged that the hospitals received neither the original orders nor the specimens, yet used their own NPI, tax identification or CLIA numbers to make the testing appear to be hospital work or a hospital referral to another laboratory.

One example in the indictment involved a patient whose specimens were drawn in Sugar Land, Texas, and tested in North Texas. The billing hospital was in El Paso. Another involved a requisition bearing the hospital’s logo for a patient who had never been to El Paso. In the government’s account, the hospital name traveled farther than the specimen did.

The indictment alleged that one hospital had no functioning laboratory testing equipment while contracting to provide outreach testing. It also alleged that claims listed patients as discharged to home even though they had never been hospital inpatients or outpatients. The patient status, the requisition and the laboratory’s actual work told different stories about the same test.

Clinical Laboratory Direct Billing Rule and the 30% Exception

The clinical laboratory direct billing rule generally directs Medicare payment to the person or entity that performed or supervised the test. The Social Security Act’s laboratory payment provisions also recognize specific arrangements in which another provider receives payment.

Can a Test Be Billed by Another Lab?

Yes. Medicare permits a referring laboratory to bill for another laboratory’s work under specified exceptions. These cover a referring laboratory located in or part of a rural hospital, qualifying wholly owned laboratory relationships, and the annual limit on testing sent to other laboratories.

The ownership provision covers a referring laboratory wholly owned by the performing laboratory, the reverse relationship, or both laboratories wholly owned by another entity.

The Centers for Medicare & Medicaid Services distinguishes the referring laboratory, which receives and sends out the specimen, from the reference laboratory, which receives it from that laboratory and performs the test. The billing laboratory is the entity submitting the claim. Those roles give an insider something concrete to compare with the contract’s description of the arrangement.

What Does the Percentage Count?

Under this exception, no more than 30% of the clinical diagnostic laboratory tests requested during the year may be performed by other laboratories. The count starts with all tests requested from the referring laboratory during the year the testing occurs.

The agency’s explanation of referred-test billing excludes referrals within the qualifying wholly owned relationship from the outside-referral count. Its worked example starts with requests for 200 tests. The laboratory performs 139 and sends 61 to an unrelated laboratory. The manual states that the referred share is 30.5%, which exceeds the exception’s limit. The payment restriction in that example concerns the referred Medicare tests, while the laboratory can still bill for work it performs itself.

Hospital arrangements have a separate payment provision. The manual names a hospital or skilled nursing facility as the payment recipient for testing obtained under an arrangement. The performing laboratory bills that facility. For referred laboratory services, the Centers for Medicare & Medicaid Services also specifies that only one laboratory may bill Medicare for the same service.

Commercial Payer Contracts Have Their Own Terms

A commercial insurer’s agreement determines the billing arrangements it accepts. Medicare’s referral exceptions answer the Medicare question. The private payer’s contract answers a different one.

The El Paso criminal indictment reproduced Blue Cross Blue Shield’s policy for the period it charged. That policy prohibited pass-through and under-arrangement billing except as provided in the provider agreement or policy. The indictment alleged that the hospitals used their identities to collect a higher rate while concealing the actual testing relationship.

The same indictment described an agreement giving a marketing company 80% of a hospital’s net income from outreach laboratory testing. It also described a separate agreement giving the hospital executive a percentage of the marketing company’s gross collections from that hospital arrangement. Those alleged contracts help explain the incentive: bringing in more specimens expanded the income shared among participants.

For a hospital employee, the payer agreement and the management agreement reveal different sides of the transaction. One describes what the insurer agreed to buy. The other describes who would share the proceeds.

The Records That Connect the Specimen to the Payment

The strongest account connects the order, the test performed, the claim and the money received. A billing employee may see the hospital identity and payment. A laboratory employee may see where the specimen arrived and which laboratory produced the result. We connect those views with the people who understand the work.

Requisitions, accession records and result reports connect the requested testing to the laboratory that received and tested the specimen. The claim identifies the provider presented to the payer. We work with insiders who can explain where those accounts part company.

Clinical purpose belongs in that comparison too. In Model Plan Helps Laboratories Fight Fraud, published in Laboratory Medicine in 1997, the discussion of the Department of Health and Human Services Office of Inspector General’s model plan describes requisition forms recording the medical need for each test and physician notices explaining how test profiles would be billed. The order and the billing description are connected before the specimen ever reaches a hospital’s claim.

The commercial trail continues through the reference-laboratory invoice, hospital reimbursement and payments to managers or recruiters. The Healthcare Fraud Prevention Partnership’s review of clinical laboratory services describes pass-through arrangements used to work around a laboratory’s lack of payer contracts or avoid scrutiny of that laboratory. It also describes duplicate billing when both parties submit a claim for the same work.

What the Civil Cases Show

Civil cases show how outside testing, hospital billing and referral payments can meet in the same business. When government health care programs pay, taxpayers fund the arrangement.

Sutter Health’s Settlement Over Outside Quantitative Testing

Sutter Health agreed to pay $13,091,452 in an October 2022 civil settlement over allegations that it billed government health programs for urine toxicology tests performed by outside laboratories.

The government alleged that Navigant Network Alliance referred specimens from physicians and laboratories across the country to Sutter’s Alta Bates Summit Medical Center. Sutter billed for qualitative and quantitative testing, but third-party laboratories performed the quantitative tests on thousands of specimens. The alleged payments came from the Federal Employees Health Benefits Program, Medicare, Medicaid and TRICARE.

The distinction was inside the testing workflow. The government identified the quantitative work that outside laboratories performed and the reimbursement Sutter sought for it. An insider familiar with which tests stayed in-house and which went out could recognize that split.

Little River’s Alleged Referral Payments and Hospital Claims

Little River Healthcare’s alleged arrangement joined hospital outpatient billing to payments for referrals. In its 2022 civil complaint announcement, the Justice Department alleged that True Health Diagnostics and Boston Heart Diagnostics performed testing referred through small Texas hospitals, including Little River.

The government alleged that hospitals paid part of their laboratory profits to recruiters, who paid referring doctors through management service organizations. Payments presented as investment returns allegedly depended on referrals. The government also alleged that Little River falsely billed the tests as hospital outpatient services to increase reimbursement. It joined a case brought by a whistleblower company.

A later civil settlement with Little River’s former chief executive addressed the referral payments. The executive agreed in 2024 to pay $5,343,630 and accepted responsibility for the allegations against him. They included paying a physician $2,000 a month in purported medical-director fees to induce referrals, although the hospital received no genuine medical-director services.

Here the hospital claim and the payment back to the doctor explain different parts of the same alleged business. The claim sought government reimbursement. The referral payment helped bring the testing in.

A Whistleblower Case Starts With the Claim You Understand

The False Claims Act addresses false claims for government money. Sutter’s settlement concerned payments from government health programs, and Little River’s civil case connected hospital claims and referral payments to federal health care programs. Knowing which payer funded the testing helps us assess the case your records support.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Where the Testing Happened

If the hospital on the claim is different from the testing operation you know, speak to one of our whistleblower experts about the specimens, contracts and payments. We work with you to build your strongest laboratory whistleblower case around who performed the tests, who billed them and who benefited from the arrangement. We bring in laboratory fraud whistleblower lawyers who understand hospital billing and referral payments, and stay beside you through the case.