Management of Pathology Practices

October 2005


9.30.2005 - AP Day of Infamy


The September 30, 2005 Wall Street Journal major story on page one concerned physicians making absurd profits from their pathology referrals with discounted client billing. "Pod labs" were also briefly mentioned. This watershed article may have the same effect that a similar Wall Street article had on Pap smear testing several years ago. If you remember that article it highlighted how cytotechs were being paid by the slide, working out of their homes, with resultant poor quality control. Now there are mandated federal and state rules for how many slides per day a cytotech can read and the percent of reported cases that get re-screened by others. A cytology proficiently test has also been recently instituted for anyone reading paps.


I was quoted in the article. Discounted client billing has been around for over 30 years. I first encountered it working for a laboratory in Chicago. Everything that was mentioned in the recent article about discounted client billing was prevalent during my first AP sales call in the 70’s. The practice is still rampant today in Chicago for paps and biopsies. Ironically, the CAP (College of American Pathologists) headquarters are located in a Chicago suburb. Illinois has no anti-mark up laws or direct billing regulations like NY, MI, and CA. What does that tell you? Tells me a lot.


The article also "slammed" dermatologists for reading their own pathology slides after receiving significant client discounts. This dermatologist practice has continued from the early 70's. It is a major source of income to their practices. It was interesting how the head of the American Dermatology Association handled the conflict of interest issue with very soft kid gloves. In sales we jokingly refer to dermatologists as the only specialty that “cuts once and bills twice”. The CAP has danced around this issue as well. It is hard to call clinicians, other than dermatologists, unethical when the dermatologists scrounge for the bottom in client pricing. Internet labs are promoting $5-$6 slide preparations for them.


Clinicians have always pleaded ignorance when there are any laboratory scandals in the newspapers. However, this time a noted gastroenterologist was also "slammed" for being dumb enough to speak at several GI society meetings and proudly display a chart showing how his large practice made over $650,000 profit from discounted client billing. Urologists in the UroCor billing fraud case are also under the spotlight for getting testing below UroCor’s cost so they could mark it up to 3rd parties. These urologists were paid consultant fees for work never performed. Ignorance will probably not cut it this time around. They may be spending time in Lompoc, CA prison cutting lawns.


"Pod labs" are now under Office of Inspector General scrutiny. Several of their lab partners are under investigation to see how well those long distance laboratories are being managed by those physician groups. Over utilization of services is being checked as well as the financial arrangements. Someone should contact each of those pod lab owners and arrange to have their equipment shipped back to their home locations for physician in-office pathology laboratories. Those laboratories, if placed into their practices, would all be legal under Stark II.


Nowhere in the article was it mentioned that having a physician in-office pathology laboratory was questionable or illegal. There are over 100,000 physician in-office laboratories today and the number is expanding. Both the AMA and Congress are staunch proponents of these physician in-office laboratories (POL). As long as the group services only their patients the in-office laboratory is within the limits of the law. However, several clinicians wishing to open commercial pathology laboratories have contacted me. They have no idea the obstacles they will be up against in the open market. They are basing their dreams on making the same returns as they do in their in-office pathology laboratory. They have neglected to include such major expenses as courier pickup, sales salaries, and expenses plus commissions, and professional marketing activities. When I tell them that these expenses will absorb a full 25% of their gross margin they are sick to their stomachs. Making that kind of major investment without checking the market realities are just hard to fathom as a good businessman.


What is the solution? Insurance companies and managed care plans can simply say that unless a pathologist UPIN number is on the pathology bill they will not pay for the services submitted. The Journal article asked that question and got no answers from many of the major plans. They certainly cannot approve of such behavior. Could it be that their IT systems are not capable of picking up this information? Or do they feel that the practice is simply cost neutral. Either the pathology laboratory makes the profit or the clinician does. Several Blue Cross plans have already done so in this regard. The Journal article mentioned Georgia Blue Cross as the latest to ban client billing. Kansas Blue Cross has the same provision. The only legal alternatives for clinicians will then to be open their own physician in-office pathology laboratories with a pathologist as medical director. I predict this scenario to be implemented throughout the urology and GI and dermatology communities. If clinicians want to practice better medicine and derive new revenues, they will make the financial investment and take the risk. They feel they have no choice.


Medicare outlawed discounted client billing several decades ago. I predict that many pathology laboratories are going to receive inspections to see how much these laboratories are charging private physicians for pathology specimens. If the laboratory is charging significantly less than what Medicare reimburses don’t be surprised if there are fines, penalties, and interest payments for overpayments to these laboratories. Several pathology laboratories have contacted me since the Journal article worried about their low pricing to dermatologists and others for pathology services. My advice was to raise their prices and fast! I asked each of them is they liked the stripes in their suits to run horizontal or vertical. Going to jail for some clinician to make profits from the laboratory is not a wise choice. Neither is breaking large rocks into small pebbles all day long on a chain gang. Until the feds take some clinicians out of their offices in handcuffs in front of TV cameras for fraud and abuse in billing, the practice will continue unabated.



Bernie Ness is the President and CEO of B. J. Ness Consulting Group, whose goal is to provide the finest in innovative and cost effective solutions to management, sales, and marketing problems in the medical laboratory industry.  You can contact him at, toll free at 800-280-3785, website