Q&A: Dividing income from an on-site lab

A: Lab services fall under "Designated Health Services." As such, the self-referral law (section 1877 of the Code of Federal Regulations) prohibits a physician from referring patients to an entity for a designated health service if the physician, or a member of his or her immediate family, has a financial relationship with the entity, unless an exception applies. (The exceptions are specified in 42 CFR Part 411, Subpart J of the Social Security Act.) There is an exception for "In Office Ancillary Services," but there are a number of rules that apply to this exception of the prohibition. Essentially, the main requirement is that the provider cannot be paid on the basis of the number of referrals for the ancillary services. The provider must be compensated by a formula based upon non-DHS services and the compensation arrangement defined in advance, so that at no time is the physician directly compensated for his own referrals of patients for DHS. An overview of the legislation can be found at http://www.cms.hhs.gov/PhysicianSelfReferral/01_overview.asp#TopOfPage.