2008 Medicare Physician Fee Schedule: Final Rule Has Far Reaching Implications

The 2008 Medicare Physician Fee Schedule (MPFS) was published in the Federal Register on November 27, 2007. For the most part, the 2008 MPFS final rule will take effect January 1, 2008. This article will focus on two areas of the MPFS final rule that will significantly impact diagnostic testing arrangements: (1) a newly expanded anti-mark-up rule and (2) a sharing prohibition for certain independent diagnostic testing facilities (IDTFs). The changes in these areas will significantly impact the structuring of common physician diagnostic testing arrangements.

Who May be Impacted by the January 1, 2008 Anti-Markup Rule

The final anti-markup rule is effective January 1, 2008. Without limitation, physicians who provide diagnostic testing to their patients and physicians that contract with radiologists and cardiologists to provide the reading and interpretation of such diagnostic tests may be significantly impacted by the final rule (even if the arrangement complies with Stark). All physicians that currently provide these services must have their arrangements reviewed to ensure compliance with the new rule. Failure to comply with the final rule may create false claims liability.

The Final Anti-Markup Rule

Under current Medicare regulations, there is a prohibition on the markup of the technical component (TC) of certain diagnostic tests performed by outside suppliers and billed to Medicare by a different individual or entity. Due to the Center of Medicare and Medicaid Services’ (CMS) concern over certain arrangements that may technically meet the Stark in-office ancillary services exception but are not within what CMS views as its intended purpose, in the 2008 MPFS, CMS finalizes an expanded anti-markup rule. The final rule imposes an anti-markup provision on the TC and professional component (PC) of diagnostic tests ordered by a billing physician or other supplier (or related party) if: (1) the TC or PC is outright purchased or (2) if the TC or PC is performed at a site other than “the office of the billing physician or other supplier”. If the arrangement falls within the anti-markup provisions, payment to the billing entity will be limited to the lowest of: (1) the performing physician’s or other supplier’s net charge to the billing entity; (2) the billing entity’s actual charge; or (3) the fee schedule amount for the test that would be allowed if the performing physician or supplier billed directly.

Diagnostic Tests Covered by the Anti-Markup Rule

The final anti-markup rule applies to any diagnostic test covered under Section 1861 (s) (3) of the Social Security Act (other than clinical diagnostic laboratory tests paid under Section 1833 (a) (2) (D) of the Social Security Act). Examples of tests covered under the anti-markup rule, include, but are not limited to, x-ray, CT, MRI, ultrasound, sleep lab tests, and pathology. It is not limited to tests that are considered designated health services for purposes of the Federal Stark law. For example, sleep lab tests would be subject to the final anti-markup rule notwithstanding the fact that they are not designated health services under the Stark law.

Exceptions to the Anti-Markup Rule

The anti-markup rule will not apply in situations in which the billing physician or other supplier does not order the test. Thus, an independent diagnostic testing facility (IDTF) that provides imaging services pursuant to orders by outside physicians will not be subject to the anti-markup payment limitations.

Office of the Billing Physician or Other Supplier

Under the final anti-markup provisions, the “office of the billing physician or other supplier” is defined as space where the physician or other supplier regularly furnishes patient care. If the physician or other supplier is a “physician organization” as defined under the Stark regulations (i.e., physician including a professional corporation of which the physician is a sole owner, a physician practice, or a group practice that complies the Stark group practice definition), the anti-markup rule defines “office of the billing physician or other supplier” as the space in which the physician organization provides substantially the full range of patient care services that the physician organization provides generally. Of significant importance to physician practices that are providing diagnostic testing services to their patients is that there is now a new location requirement under the anti-markup rule. Consequently, physician practices that perform diagnostic tests in their offices by meeting either the Stark law “same building” or “centralized building” requirements under the in-office ancillary services exception will now need to meet the new anti-markup location test, or they cannot profit from such tests.

As a result of the final anti-markup rule’s new location requirement, a group that provides diagnostic testing in a central location, which is owned or leased by the group on a full-time exclusive basis, will no longer be able to mark up the diagnostic tests. Further, diagnostic tests that are performed in the “same building” may also be subject to the payment limitations if the tests are not performed in the same office space in which the physician practice provides substantially the full range of patient care services that it generally provides. For example, a group practice that leases space and equipment in half-day blocks in the “same building” (but not in the same office) for purposes of Stark law compliance, will be prohibited from marking up the diagnostic tests performed in such leased space unless the group performs substantially the full range of patient care services that the group generally provides in the block lease space.

Payment Limitations

Physician diagnostic testing arrangements that fall within the ambit of the newly expanded anti-markup rule will be subject to harsh payment limitations. Under the anti-markup provisions, payment to the billing entity will be limited to the lowest of: (1) the performing physician’s or other supplier’s net charge to the billing entity; (2) the billing entity’s actual charge; or (3) the fee schedule amount for the test that would be allowed if the performing physician or supplier billed directly. Most importantly, the net charge amount must be determined without regard to any charge that is intended to reflect the cost of equipment or space leased to the performing supplier by or through the billing physician or other supplier. CMS emphasizes that in situations in which the TC or PC is performed “in the office of the billing physician or other supplier”, the billing physician or other supplier may recoup some or the entire overhead it incurs by billing at the fee schedule amount. On the other hand, CMS notes that if the billing physician or other supplier incurs overhead expenses for the TC or PC that was performed at a site other than the “office of the billing physician or other supplier” (such as a centralized building), the billing physician or other supplier cannot recoup the overhead. CMS believes that if billing physicians or suppliers were able to recoup such overhead, the anti-markup rule would be undermined because of the incentive to overutilize. The billing physician has the responsibility to determine a reasonable manner to calculate an accurate net charge.

As a consequence of CMS’ net charge approach, physician practices will be precluded from taking into account the cost of equipment or space when billing for the TC or PC of diagnostic tests that are not performed in their offices. This is true regardless of whether the arrangement is structured to comply with the Stark in-office ancillary services exception. It appears doubtful that such arrangements could be economically viable for group practices providing diagnostic testing in a manner that does not meet the new anti-markup location requirement.

Examples of the Anti-Markup Rule’s Application to Common Imaging Arrangements

Examples addressing the anti-markup rule’s application to some common diagnostic testing arrangements are set forth below.

 Urology Group’s Centralized Pathology Lab Arrangement. A urology group practice contracts with a leasing company for a technician and a pathologist to perform testing on prostate samples. The technician performs the sampling and the pathologist reads the slides. All of the pathology work is performed outside of the office of the billing group practice in a space that is rented exclusively by the urology group on a full time basis (meeting the definition of centralized building under Federal Stark law) for the sole purpose of providing pathology services to the group’s patients. The anti-markup rule will apply to both the TC and the PC of the pathology services provided by the urology group because the centralized building does not qualify as “the office of the billing physician or other supplier.”

 Group Practice Radiology Arrangement. A physician in a group practice orders an x-ray and the part-time employed technician performs the x-ray in the group’s office. A physician who is an independent contractor with the group practice performs the PC of the test in the group’s office and reassigns his right to payment to the group. The anti-markup rule does not apply to the group’s billing of the TC or the PC of the x-ray testing services. If, however, the independent contractor physician performs the PC of the test off-site (e.g., teleradiology), the anti-markup rule would apply to the group’s billing of the PC of the test because the service was not performed in the office of the group.

 IDTF Arrangement. A physician orders a diagnostic test from an IDTF. The IDTF bills globally for the test (TC and PC). The anti-markup rule does not apply because the IDTF did not order the test, rather it was ordered by an outside physician.

IDTF Sharing Prohibitions

In addition to the anti-markup provisions, CMS also took aim at sharing agreements between IDTFs and physicians by placing a restriction on fixed-based IDTFs from sharing space and equipment with any third party.

The MPFS final IDTF performance standard provides that a fixed-based IDTF may not share a practice location with another Medicare-enrolled individual or organization, lease or sublease its operations or its practice location to another Medicare-enrolled individual or organization, or share diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. The final sharing prohibition, however, does not apply to mobile IDTFs or to hospital based IDTFs.

In order for IDTFs and physician practices to find new office space, recruit additional staff, and restructure existing sharing arrangements, CMS adopts a one-year delay (effective January 1, 2009) of the space-sharing provision for IDTFs that are currently occupying a practice location with another Medicare-enrolled individual or organization. The one-year delay does not, however, apply to sharing of diagnostic equipment or to newly enrolling IDTFs (those with applications that are still pending as of January 1, 2008). The sharing restrictions do not prohibit the sharing of hallways, waiting areas, parking lots or other common areas or to non-clinical space and equipment.

This sharing restriction will prevent common leasing arrangements such as physician practices that lease blocks of time from an IDTF to provide diagnostic testing services to their patients (structuring the arrangement to meet the “same building” test under the Stark in-office ancillary services exception). However, the final anti-markup payment limitations would have applied to such IDTF/physician sharing arrangements.

Conclusion

Notably, CMS’ newly expanded anti-markup provisions and IDTF sharing restrictions will require restructuring for many common diagnostic testing arrangements. With these final rules, CMS is sending a clear message regarding its concern with what it perceives as abusive in-office ancillary service arrangements by essentially requiring the restructuring of many common in-office ancillary service arrangements through the use of harsh billing and payment limitations. The 2008 MPFS was issued as a final rule with comment period. If CMS does not provide any further changes, physicians and other suppliers will be subject to these new rules January 1, 2008. Physician practices providing diagnostic testing services (e.g. x-ray, MRI, CT, ultrasound, sleep studies, pathology, etc.) in their offices should have their arrangements reviewed by a health care attorney to determine whether the newly expanded anti-markup up limitations will apply. For example, a practice that sends out their diagnostic testing reads to an outside physician must have the arrangement reviewed prior to January 1, 2008. If the new rules do apply to an arrangement, restructuring of the arrangement may be an option so that the physician practice can continue to profit from the testing services provided to its patients. Physicians should be mindful that certain billings that are inconsistent with the new rules may create false claims liability.