Choosing the right business setup for your lab.

By Jayme R. Matchinski, Esq

There are many decisions involved in choosing the right business structure for your sleep lab. Certain factors will drive these decisions including ownership, location, regulatory climate, reimbursement, enrollment with third-party payors, corporate structure, governance, capital investment, and risk exposure. There are several different models and ways to structure a sleep lab, and these models have legal implications and may have certain advantages and disadvantages.


An IDTF is an entity considered independent from a physician’s office or a hospital’s outpatient department. An IDTF receives a separate Medicare provider number, and the IDTF must be surveyed and approved by the Centers for Medicare and Medicaid Services (CMS). The use of an IDTF allows investors to share in the technical component of sleep lab services through the profits generated by the IDTF. Various entities and individuals may have an ownership interest in an IDTF including sleep technicians, physicians, physician practice groups, sleep companies, hospitals, and health systems.

With regard to ordering diagnostic tests and interpretation of test results at an IDTF, a treating physician must order all diagnostic tests furnished to a Medicare beneficiary. A diagnostic test would include sleep medicine services. When sleep lab services are performed at an IDTF, the technical component may be billed, along with the Part B professional services, as long as a physician is supervising the service.

The IDTF must provide for a supervising physician responsible for direct and ongoing oversight of the quality of the polysomnography test performed, proper operation and calibration of any equipment, the qualification of nonphysician personnel to operate such equipment, and supervision of those nonphysician personnel. The supervising physician must perform a general level of supervision over the operations of nonphysician personnel. The supervising physician may not order sleep studies to be performed by the IDTF, unless the IDTF’s supervising physician is, in fact, the Medicare beneficiary’s treating physician. This means that the physician in question must have had a relationship with the Medicare beneficiary prior to the performance of the testing, and the physician is treating the patient for a specific medical problem.

As part of the 2008 Medicare Physician Fee Schedule (MPFS) final rule, CMS expanded the Medicare Conditions of Participation for IDTFs to include a 15th performance standard, which requires that, at the time of enrollment or reenrollment, an IDTF must certify that it meets the list of 15 performance standards. CMS previously promulgated 14 performance standards in an effort to curb alleged abusive practices at IDTFs, and these performance standards became effective on January 1, 2007. CMS subsequently set forth in the 2008 MPFS a number of changes to the performance standards as well as the Medicare Conditions of Participation. One of the most significant policy decisions made in the IDTF performance standards was the decision by CMS to adopt its proposal to prohibit an IDTF from sharing space or equipment with any other Medicare-enrolled individual or entity.

This IDTF shared space and equipment prohibition provides that, with limited exceptions, an IDTF may not: (i) share a practice location with another Medicare-enrolled individual or organization; (ii) lease or sublease its operations or its practice location to another Medicare-enrolled individual or organization; or (iii) share diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. In order to participate in the Medicare Program, an IDTF sleep lab must certify that it “does not share space, equipment or staff or sublease its operations to another individual or organization.”

The impact of this rule is that fixed IDTFs that are located somewhere other than in a hospital building will now be precluded from entering into any type of arrangement with a physician, physician practice, or other entity that involves: (i) subleasing the IDTF’s office space and/or imaging equipment; (ii) subleasing the IDTF’s office space for a referring physician practice to establish a medical office location in the building; or (iii) offering block-time lease arrangements of the IDTF’s office space and imaging equipment to physician practices.

This prohibition does not apply to hospital-based and mobile IDTFs, nor does it prohibit the sharing of nonclinical space and staff (eg, waiting rooms, receptionists, and schedulers). This prohibition has required the restructuring or unwinding of many existing arrangements, including block lease and shared space arrangements. There is also a preclusion of utilizing hotel and motel rooms as testing sites. As of January 1, 2008, IDTF sleep labs may not conduct Medicare or Medicaid sleep studies in a hotel or motel setting.


Physicians who specialize in sleep medicine have provided diagnostic sleep testing as an extension of their medical practice. If a sleep lab is structured as an extension of a physician’s practice, all sleep services are provided by the physician and the practice’s staff, and the sleep studies and interpretations are billed under the practice’s provider number. Physicians and physician practices that structure a sleep lab and the provision of CPAP as an extension of their practices should check applicable state regulations regarding regulatory compliance and to determine if any state licensure is required for the provision of sleep studies.

Physicians and practices that have not provided sleep medicine services in the past are exploring ways to provide sleep studies and CPAP to their patients without sending the patient to an outside sleep lab. For example, primary care physicians who screen their patients for possible sleep disorders are entering into arrangements and contracts with management companies for the implementation and development of a sleep lab within their practice. Primary care physicians, and other physicians who do not specialize in sleep medicine and are not board certified in sleep medicine, are also entering into agreements with sleep physicians to perform interpretations of sleep studies.


Hospitals and health systems have historically established sleep labs within the hospital or on the hospital’s campus. Most hospital-based sleep labs have been structured as part of the hospital’s outpatient department or outpatient programs, and sleep studies are billed under the hospital’s outpatient provider number and under the Outpatient Prospective Payment System (OPPS) for Medicare patients.

There appears to be a trend in recent years where hospitals are joint venturing with other providers or entities to provide sleep studies. Some of these joint ventures with other providers have been structured as freestanding sleep labs that are enrolled as Medicare IDTFs and located either on the hospital’s campus or as a satellite of the hospital. Hospitals have also engaged the services of management companies to establish sleep labs and provide staffing, equipment, supplies, billing, and other management services to operate the sleep lab.

On October 28, 2010, the Office of Inspector General (OIG) issued two Advisory Opinions, which analyze arrangements between an entity with no physician ownership and a hospital for the provision of equipment, technology, supplies, and staff required to operate a sleep lab owned by a hospital. In the first opinion, the hospital pays a per-test fee that covers all items and services provided by the entity supplying the services. In the second opinion, the hospital pays a fixed, annual fee consisting of three separate components. Under both of these arrangements, the entity supplying the services to the hospitals also provides marketing services. Both of these arrangements were reviewed by the OIG in light of the Anti-Kickback Statute and laws related to certain sleep lab arrangements. The facts in both of these OIG Advisory Opinions are similar except in the manner in which the marketing fees are paid. Hospitals and sleep labs utilizing management agreements and marketing services provided by other entities should carefully review both of these recent OIG Advisory Opinions.


If a sleep lab is structured as a joint venture, the proposed structure should be reviewed in light of the OIG guidelines for joint ventures. In April 2003, the OIG issued a Special Advisory Bulletin on Contractual Joint Ventures. The Bulletin addresses contractual arrangements for the provision of items and services previously identified as suspect in the OIG’s 1989 Special Fraud Alert, which was reprinted in the Federal Register on December 19, 1994. To help identify the suspect contractual joint ventures that are the focus of the OIG Special Advisory Bulletin, the OIG describes some characteristics, which, if taken separately or together, potentially indicate a prohibited arrangement. The following list developed by the OIG is illustrative and not exhaustive and should be reviewed in light of the proposed joint venture:

New Line of Business. The owner typically seeks to expand into a health care service that can be provided to the owner’s existing patients.

Captive Referral Base. The newly created business predominantly or exclusively serves the owner’s existing patient base (or patients under the control or influence of the owner). The owner typically does not intend to expand the business to serve new customers (ie, customers not already served in its main business) and, therefore, makes no or few bona fide efforts to do so.

Little or No Bona Fide Business Risk. The owner’s primary contribution to the venture is referrals; it makes little or no financial or other investment in the business, delegating the entire operation to the manager/supplier, while retaining profits generated from its captive referral base.

Status of the Manager/Supplier. The manager/supplier is a would-be competitor of the owner’s new line of business and would normally compete for the captive referrals. It has the capacity to provide virtually identical services in its own right and bill insurers and patients for them in its own name.

Scope of Services Provided by the Manager/Supplier. The manager/supplier provides all, or many, of the following key services: day-to-day management; billing services; equipment; personnel and related services; office space; training; and health care items, supplies, and services.

Remuneration. The practical effect of the arrangement, viewed in its entirety, is to provide the owner with the opportunity to bill insurers and patients for business otherwise provided by the manager/supplier. The remuneration from the venture to the owner (ie, the profits of the venture) takes into account the value and volume of business the owner generates.

Exclusivity. The parties may agree to a noncompete clause, barring the owner from providing items or services to any patients other than those coming from the owner and/or barring the manager/supplier from providing services in its own right to the owner’s patients.

The presence or absence of any one of these factors is not determinative of whether a particular arrangement for a joint venture is suspect. As the OIG indicated, this Special Advisory Bulletin is not intended to describe the entire universe of suspect contractual joint ventures.


It is imperative that any proposed structure for a sleep lab or restructuring of an existing lab be reviewed for compliance with the applicable federal and state regulations, including the Anti-Kickback Statute and Stark law. Polysomnography is not designated health services (DHSs) under the Stark law. However, CPAP would be considered durable medical equipment (DME), and therefore would be a DHS for purposes of Stark law analysis and compliance. Furthermore, sleep studies conducted on either an inpatient or outpatient hospital service basis would be considered DHSs, and thus, the Stark law prohibition and its exceptions would apply. It is important that the structure of a sleep lab also be reviewed in light of the applicable state regulations because many states have specific regulations and requirements regarding licensure, accreditation, supervision, documentation, scope of practice, and patient referrals.

Jayme R. Matchinski, Esq, a partner with the law firm of Hinshaw & Culbertson, LLP, in Chicago, concentrates on health care law and has counseled sleep disorder centers, physicians, and health care providers nationally.