Pass-through billing happens when a physician practice bills for a diagnostic test or lab service performed by an outside supplier as though the practice performed it in-house. It is one of the more common ways a small practice ends up on the wrong side of Medicare’s anti-markup rule without meaning to — and the penalties for getting it wrong are steep enough that it is worth understanding exactly where the line sits.
What Is Pass-Through Billing?
A practice orders a diagnostic test, sends it to an outside lab or imaging center to actually run, then bills the payer for it under its own name and NPI as if the test happened in the practice’s own office. The practice never performed or supervised the work; it is simply passing the claim through its own billing number, often marking up the price along the way.
The practice is not always trying to defraud anyone — sometimes it is a scheduling gap, a broken piece of equipment, or a referral relationship that grew informally. But regulators do not distinguish intent from effect: if the billing entity did not perform or properly supervise the service, pass-through billing rules apply regardless of why the work went elsewhere.
The Medicare Anti-Markup Rule
Medicare’s anti-markup payment limitation (42 CFR §414.50) caps what a billing physician can collect for the technical or professional component of a diagnostic test performed by an outside supplier. Payment is limited to the lowest of: the performing supplier’s net charge to the billing physician, or the fee schedule amount Medicare would have paid if the performing supplier had billed directly. The rule applies to tests paid under the Medicare Physician Fee Schedule and specifically excludes clinical diagnostic laboratory tests, which have their own billing rules.
The rule does not apply automatically just because a physician orders a test from someone else. It turns on whether the performing physician or supplier meets the “sharing a practice” test — essentially, whether the work happened in the billing physician’s own office, by an owner, employee, or contractor who regularly works from that same location. Miss that test and the anti-markup limitation kicks in even on an arrangement that looked routine. This is exactly the kind of arrangement a medical billing audit is designed to surface before a payer does.
Where Does Pass-Through Billing Create Legal Exposure?
- Stark Law and the in-office ancillary services exception. Billing for a test as if it were an in-office service, when it was not performed by the practice under the terms of that exception, removes the safe harbor the practice was relying on.
- The Anti-Kickback Statute. Arrangements where a performing lab or facility offers favorable terms in exchange for referrals — including the referral volume that comes from being billed through the ordering practice — can trigger AKS exposure on both sides of the arrangement.
- False Claims Act penalties. Pass-through claims submitted in violation of these rules can be treated as false claims, with penalties running well over $20,000 per claim on top of repayment.
- Payer contract violations. Commercial payer and PPO contracts frequently prohibit pass-through billing outright, independent of federal rules, so a practice can breach its own network agreement even on non-Medicare claims.
How Practices End Up Doing This Without Intending To
The most common path is informal: a practice refers a patient out for imaging or specialized lab work, the outside facility does not bill the payer directly, and the ordering practice’s billing team submits the claim under the practice’s own NPI because that is simply how the workflow has always worked. Nobody set out to mark up a purchased service — the arrangement grew that way and nobody flagged it.
This is also common where a practice leases space or equipment to another provider group and the billing lines blur. If the performing physician does not meet the same-building, shared-practice test, billing their work under the leasing practice’s NPI is pass-through billing even if the intent was administrative convenience rather than markup.
How Can a Practice Stay on the Right Side of the Rule?
- Bill the performing entity directly where the relationship allows it, rather than routing the claim through the ordering practice’s NPI.
- Confirm the “sharing a practice” criteria before billing in-house — same building, and a real employment or contractor relationship with the performing physician, not just a referral pattern.
- Check state-level rules separately from federal ones. Some states are direct-billing states that require the performing lab to bill payors itself, others are anti-markup or disclosure states with their own requirements — federal compliance does not guarantee state compliance.
- Fold this into your standard billing review process — audit existing referral and lease arrangements for any case where the practice bills for work it did not perform or directly supervise, especially arrangements that predate current staff and were never formally reviewed.
Frequently Asked Questions About Pass-Through Billing
Is pass-through billing always illegal?
Not automatically — but it is tightly restricted. If the performing supplier does not meet the same-practice criteria, Medicare’s anti-markup rule limits payment regardless of intent, and the same arrangement can separately violate Stark Law, the Anti-Kickback Statute, or a payer contract depending on the specifics.
Does the anti-markup rule apply to lab tests?
No — the anti-markup payment limitation specifically excludes clinical diagnostic laboratory tests, which are governed by separate purchased-test billing rules rather than the technical/professional component rules that apply to other diagnostic tests.
What is the difference between pass-through billing and purchased diagnostic testing?
“Purchased diagnostic tests” is the term Medicare uses for the specific, permitted version of this arrangement — billing for a test purchased from another supplier under the anti-markup payment limitation. “Pass-through billing” is typically used for arrangements that go further, billing as if the practice performed the work with no accompanying markup limitation applied.
Can a practice fix a pass-through billing problem after the fact?
Yes, but it usually requires a compliance review, corrected claims where required, and in some cases voluntary disclosure to CMS or the OIG. Waiting until a payer audit surfaces the issue removes the option of a lower-penalty voluntary correction.
What OmniBridge Actually Does
We flag referral and purchased-service arrangements during onboarding as part of our medical billing compliance review, so a practice knows before we ever submit a claim whether an existing arrangement needs to be restructured.
If you are not sure whether a referral or lease arrangement in your practice qualifies as pass-through billing, request a free practice audit and we will walk through it with you.
