Dr. Smith is a primary care physician who has a clinical laboratory in her office suite. The laboratory is personally supervised by Dr. Smith, or a lab director when Smith is away from her office visiting patients at the local hospital. The lab is modestly equipped, and is typically not utilized to its full capacity.

An internist, Dr. Jones, also has an office across the hall in the same building as Smith. Smith and Jones have been professional colleagues for many years, and Smith occasionally refers patients to Jones for treatment. Dr. Jones currently uses an off-site, independent lab that is fairly expensive and does not always return test results as quickly as Jones would like. Some of the tests require specialized equipment.

In order to provide more timely test results to her patients at lower cost, Jones offers to pay Smith for use of her lab facilities and personnel in conducting tests for Jones' patients. Jones would lease any necessary specialized equipment and locate it in Smith's lab. Smith would like to increase the utilization of her lab, and agrees. Smith then engaged your services to help determine the costs of the specific lab tests Jones will likely request, and to design a payment system that reflects costs and volume of the tests in a manner that does not violate the Physician Self-Referral prohibitions.

1. How would you advise Smith on the design of a payment system for use of the lab?

2. What are the ownership and financial interests of Smith and Jones?