Top Considerations for Setting up Direct-to-Consumer Laboratory Testing Services

The direct-to-consumer (DTC) laboratory testing landscape is rapidly evolving, and the opportunities are significant. As more states open the door to DTC laboratory testing, laboratories, digital health companies, hospitals, and other healthcare organizations are racing to determine whether such an expanded service offering can unlock new revenue streams and improve patient care. But before proceeding with a DTC laboratory testing offering, the regulatory terrain requires careful navigation. State-by-state requirements create a complex patchwork of rules that could make or break a DTC laboratory testing program. Below are the top four considerations every healthcare organization should address before launching into this space.

1. Determine whether DTC testing is prohibited, restricted, or permitted in the applicable state(s).

Nearly all states permit some form of DTC laboratory testing, but there are various restrictions. For example, California permits DTC testing only for specific tests, which include pregnancy, glucose level, cholesterol, occult blood, and any other FDA-approved over-the-counter test kit.

2. Ensure compliance with prohibitions on the corporate practice of certain licensed professions and fee-splitting.

Most DTC laboratory testing models have physicians ordering the laboratory test on the back end to help ensure compliance with the various state restrictions discussed above. Approximately half of all states (including California, Illinois, Texas, New York, and Pennsylvania) prohibit the corporate practice of medicine and other professions and prohibit professionals from splitting their fees with others. This means that a lay entity is prohibited from hiring a physician to perform medical services, including ordering laboratory tests, and physicians are prohibited from sharing the fees received from patients for such services unless certain requirements are met or an exemption applies.

Healthcare organizations may consider creating a “Friendly PC Model” to comply with corporate practice restrictions or contracting with a telehealth company platform for access to physician services for their patients.

3. Ensure compliance with billing requirements.

Contractual Requirements

DTC testing is not currently covered by commercial health plans or federal healthcare programs (e.g., Medicare or Medicaid). Providers that are enrolled in health plans and/or contracted with federal healthcare programs must ensure compliance with their applicable provider participation agreements to ensure health plan members and federal healthcare program beneficiaries are billed for DTC testing services appropriately.

Direct Billing Requirements, Anti-Markup Rules, and Disclosure Laws Applicable

States have varying requirements related to billing for laboratory services, particularly for anatomical pathology services. For example, some states, such as New York, have “direct billing” laws that require the laboratory performing the test to bill the patient directly and thus prohibit pass-through or client billing models. In addition, several states (including California, Michigan, and Oregon) prohibit physicians and practice groups from marking up the cost of laboratory tests, while some states (including Arizona, Pennsylvania, and Texas) permit such markups but require patient disclosure. These billing requirements are covered in more depth here.

Medicare — Advanced Beneficiary Notice

Generally, Medicare-enrolled providers are required to obtain a signed Advanced Beneficiary Notice of Noncoverage (ABN) from their Medicare beneficiary patients to inform them when Medicare is expected to deny payment for a service or item that is usually covered. Even though DTC laboratory testing is not covered by Medicare, generally, laboratory testing is covered. According to the Centers for Medicare & Medicaid Services, Medicare-enrolled providers should consider providing an ABN to Medicare beneficiaries explaining that DTC testing is a non-covered service. State Medicaid programs may also have advance notice requirements for Medicaid beneficiaries.

4. Verify compliance with applicable licensing, fraud and abuse, and privacy laws.

State and Federal Laboratory Licensing Laws

Various states require separate state clinical laboratory licenses in addition to CLIA certificates. For more information, visit: State-by-State Laboratory Licensing Information - Map.

State and Federal Fraud and Abuse Laws

Although federal laws such as the federal Anti-Kickback Statute (AKS) and the federal Stark Law are not applicable to cash pay services, analogous state laws may apply, and self-referrals for laboratory services are generally prohibited in states with self-referral prohibitions. In addition, the Eliminating Kickbacks in Recovery Act (EKRA) is a federal law that is applicable to all clinical laboratory services (even cash pay services) and prohibits payments that induce referrals to clinical laboratories. Although the AKS may not be applicable, complying with the Professional Services and Management Contracts Safe Harbor under the AKS is an exception to EKRA. Ownership arrangements with physicians and other payment arrangements with referral sources should be structured to comply with all applicable laws.

State and Federal Privacy Laws

The Health Insurance Portability and Accountability Act (HIPAA) is often not applicable to laboratories performing DTC testing because such testing is not reimbursable by health plans. Thus, many laboratories performing DTC testing do not bill insurers. Laboratories that do not bill insurers under any circumstances are not covered entities under HIPAA because they do not engage in covered transactions. In such cases, state consumer protection and healthcare privacy laws, such as the California Consumer Privacy Act and the Washington My Health My Data Act, may apply. In addition, DTC laboratory testing that involves genetic testing may trigger additional privacy requirements under the Genetic Information Nondiscrimination Act (GINA) and applicable state laws. It is important to ensure implementation of appropriate privacy policies and procedures and post all required privacy notices.

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The Goodwin Healthcare team will continue to monitor the DTC laboratory testing landscape. For more information on the issues discussed in this alert, please contact the authors or reach out to Goodwin’s Healthcare Regulatory and Compliance group or the Goodwin lawyer with whom you typically consult.

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