Laboratory Swapping Arrangements: When Cheap Private Testing Buys Public Referrals

Laboratory swapping arrangements exchange a financial benefit on one stream of testing for referrals on another. Cheap private lab testing in exchange for Medicare referrals puts the bargain across two payers: the referring practice gets a way to make money on commercially insured patients, and the laboratory gets the public-program business. For someone who sees the price agreement, the payer split and the sales promise, the important question is what the laboratory expected back for its discount.

The Private Margin and the Public Referral

A laboratory can give a practice something valuable without sending it a check. In the direct-bill arrangement described in the Department of Justice’s complaint announcement about Labsource, the practice paid the laboratory a set fee to run test panels. The practice then billed private insurance itself, generally for much more than it had paid the laboratory. The government alleged that Labsource offered that opportunity to induce referrals of Medicare, Medicaid and TRICARE testing. The billing opportunity itself was the inducement the government described.

The practice’s profit opportunity was on the private side. The business the laboratory allegedly bought was on the federal side. Looking only at the private invoice would leave half the transaction out.

That arrangement takes advantage of how laboratory services are purchased. The person directing the work can receive a financial benefit while someone else pays for the resulting tests. The patient’s clinical needs and the practice’s financial return can start pulling the ordering decision in different directions.

What the Discount Buys

The distinction is what the parties exchanged: a price for testing, or a price tied to a promise of other referrals. A sales offer that gives a practice a profitable private account in return for its federal testing connects the two. The promise, the payer mix and the money explain the arrangement together.

Free supplies and services can carry the same financial benefit. The HHS Office of Inspector General’s laboratory-payment alert addresses free or below-market point-of-care urine testing cups supplied to providers who use them for billable testing in their own offices. The benefit reaches beyond having a container for a specimen: the practice receives something it can use to earn testing revenue.

Processing and handling arrangements raise a related question about the work behind the payment. Collecting and packaging specimens, supplying staff and paying the ordering practice are different parts of the transaction. Who did the work, who paid for it and who received the fee can reveal whether the payment’s description matches its purpose.

A fair-market-value label covers the price, not what the lab wanted back. In a swapping inquiry, we examine both, including benefits delivered through a separate agreement or a different payer’s account.

Labsource’s Owner Admitted What the Private Billing Opportunity Bought

Labsource’s owner admitted that the direct-bill program used commercially insured urine drug testing to induce providers to send all their federally insured urine drug testing patients to his laboratory. The Department of Justice described that admission as part of his resolution of the civil False Claims Act allegations. The court entered a $9 million civil consent judgment against him in November 2021, resolving claims that included the exchange of private testing profits for federal referrals.

The owner also admitted that he acted with an intent to deceive the United States and cause it to pay false healthcare claims. The private billing opportunity was part of that admitted conduct. The arrangement’s value was the provider’s ability to profit from the testing it ordered.

The government’s case also reached how the tests were selected. It alleged that the owner and other defendants encouraged standing orders across all or most patients without regard to individual need, causing federal programs to pay for unnecessary tests. Taxpayers paid for testing patients did not need, according to the complaint. A profitable referral arrangement and a broad recurring order can reinforce each other: the first rewards sending the work, while the second supplies more work to send.

Former employees of the owner’s pain management clinics brought whistleblower cases that led to the civil resolution. Their position inside the clinics matters to this subject. The offer to a provider, the standing order and the payer’s claim can sit in different parts of the same business. An insider who understands their connection can explain more than any one document shows.

Physician Ownership Is a Different Route

Physician ownership connects referrals to laboratory revenue through a different route, as in the PremierTox and SelfRefind allegations that SelfRefind sent unnecessary tests to a laboratory its physician owners partly owned.

Why a Federal-Payer Carve-Out Leaves the Larger Bargain in View

Excluding federal patients from a payment agreement does not explain whether the private benefit was offered to obtain their referrals. The laboratory-payment alert addresses precisely that concern: payments described as compensation for nonfederal business may disguise value offered for federal-program business.

Labsource makes the connection concrete. The provider’s opportunity to bill and profit sat on the commercial side, while the owner’s admitted purpose was to obtain the provider’s federally insured testing. The federal claim did not have to appear on the private invoice for the two parts of the bargain to be connected.

We read the contract’s payer restriction against what the laboratory actually offered the practice and what business it expected back.

Copayment Waivers Buy a Different Benefit

A discount to the ordering practice and a waiver for its patients put value in different places. The first can leave the practice a testing margin. The second can make the practice more attractive to patients who would otherwise owe money.

In a whistleblower complaint concerning Health Diagnostic Laboratory and Singulex, the whistleblower alleged that the laboratories promised never to collect copayments or deductibles from the doctors’ privately insured patients. The complaint described that promise as a way for doctors to attract and retain patients, then stated the exchange:

The allegation connects a private patient’s saving to the doctor’s selection of a laboratory for Medicare patients. The benefit is different from Labsource’s private billing margin, but the referral connection crosses the payer boundary in both accounts.

The payer distinction also changes what a waiver means. Covered Medicare clinical diagnostic laboratory tests paid on assignment carry no deductible or coinsurance. The complaint’s alleged benefit was the promise to waive privately insured patients’ bills while winning the doctors’ Medicare business.

The Test Still Has a Clinical Purpose

Referral economics can also change which tests a practice orders. The Labsource allegations concerned broad standing orders, while the PremierTox allegations concerned comprehensive testing that cost much more than suitable alternatives. In both accounts, the government connected financial relationships to testing choices.

The 2014 Pain Physician paper, Ethical Perspectives on Urine Drug Screening for Pain Physicians, examines the economic incentive behind urine drug screening. Its discussion puts the ordering decision at the center of the problem:

The financial arrangement may affect both where the specimen goes and how much testing is ordered. The health care decision can start serving the testing revenue.

The Records That Connect Both Sides

We connect the direct-bill agreement, the testing orders and the payments to show what the laboratory offered and what the practice sent back.

In Labsource’s arrangement, a private invoice explains the fee but cannot explain the promised federal business on its own. In an ownership arrangement, a specimen log explains where the work went but leaves the financial return elsewhere. The person who understands the pricing agreement, ordering instructions or distribution payments can connect those pieces for us.

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

When You Know What the Discount Was For

If you know why private testing was priced to win a practice’s public-program referrals, speak with our whistleblower experts about the bargain behind the price. We develop your strongest case around the agreements, payer split and money returned to the ordering source, and bring in laboratory fraud whistleblower lawyers who understand referral arrangements. We stay with you through the case, with your knowledge of the business at its center.