The anti-markup rule in the final 2008 Medicare Physician Fee Schedule will require a number of physician office-based diagnostic testing arrangements to be restructured or unwound by January 1, 2009. 

In the final 2008 Medicare Physician Fee Schedule rule (Final 2008 PFS), the Centers for Medicare and Medicaid Services (CMS) made far-reaching changes to the long-standing Medicare diagnostic test anti-markup rule (AMR). The AMR implements the statutory prohibition against an ordering physician billing Medicare in excess of the net charge for a diagnostic test that is not performed or supervised by the ordering physician or another physician with whom the ordering physician shares a practice. The AMR applies to all diagnostic tests except clinical laboratory tests, which are subject to special Medicare billing and payment rules.

For many years, CMS treated the AMR as a limitation on what physicians could be paid by the Medicare program for the technical component of a test purchased from an outside supplier. However, in 2007 CMS extended the AMR to “other billing suppliers” that order diagnostic tests and the professional component (interpretations) of diagnostic tests. Examples of other billing suppliers that order diagnostic tests are nurse practitioners and a pathology laboratory that has a contracted pathologist who occasionally orders a follow-up pathology test billed by the pathology laboratory. Additionally, CMS added a new site-of-service test that extended the AMR to diagnostic tests not performed in the same office suite where the ordering physician’s medical practice provides the full range of patient care services that the practice provides generally.

However, on January 9, 2008, CMS delayed implementation of the modified AMR until January 1, 2009, except as applied to anatomic pathology. The delay was prompted by CMS’s recognition that the new site-of-service test would have the unintended effect of preventing group practices from locating diagnostic imaging facilities on another floor or wing of the building where the practice maintains its offices. The Final 2009 PFS includes two important new developments for the AMR.

Two Key Developments

In the Final 2009 PFS, CMS simplified the AMR by abandoning its application to diagnostic tests that are “purchased.” Instead, the revised AMR focuses on the question of whether the performing or supervising physician shares a practice with the ordering/billing physician practice. Thus, CMS has eliminated the interpretive difficulties in determining what constitutes a purchased test, who is an “outside supplier” and who employs the technologist. This is sea change in CMS’s approach to the AMR.

The Final 2009 PFS gives physician practices the option of relying on either of two alternative tests in determining whether a diagnostic test is performed by a physician sharing a practice with the billing physician. Further, a physician practice can rely on one alternative test for purposes of the technical component of a diagnostic test, and the other alternative test for purposes of the professional component of a diagnostic test. CMS’s two new alternative tests are, in the Final 2009 PFS, close to what CMS proposed earlier in 2008 in draft form, with some modifications. Each test, discussed below, is effective January 1, 2009.

“Substantially All” Test

The professional and technical components of a diagnostic test will be deemed to be performed or supervised by a physician sharing a practice with the billing physician or other (ordering) supplier if he or she furnishes at least 75 percent of his or her professional services through such billing physician or other (ordering) supplier. This 75 percent test simply requires that, at the time the billing physician or other (ordering) supplier submits a claim for a diagnostic test, it has a “reasonable belief” that either the performing physician furnished at least 75 percent of his or her professional services through the billing physician or other (ordering) supplier for the 12 previous months, or will furnish at least 75 percent of his or her professional services through the billing physician or other (ordering) supplier for the next 12 months.

Notably, the “substantially all” test is indifferent to whether the performing physician is an employee or an independent contractor of the billing physician or other (ordering) supplier, or whether the diagnostic testing is performed in the same office or building where the billing practice provides the full range of its physician services. Thus, for example, if the interpreting radiologist for a diagnostic CT is an employee of the ordering practice, the radiologist could perform the interpretation at any location, provided the employed radiologist performs at least 75 percent of his or her professional services through the billing practice. (If the radiologist is an independent contractor, the radiologist would generally still need to be present in the office suite of the ordering practice because of Stark Law issues.) In addition, if a group practice has multiple medical office sites, and the practice has centralized its advanced diagnostic imaging services in a building or office suite where only some of the practice’s physicians practice, or where the practice does not maintain medical offices, the AMR won’t apply so long as the “substantially all” test is met. Consequently, the “substantially all” test will be especially attractive to larger multi-site group practices that have sufficient diagnostic testing volume to justify hiring one or more interpreting or supervising physicians who will provide at least 75 percent of their patient care services through the group. (Notably, the interpreting physician and the supervising physician do not have to be the same physician.) Believing that the “substantially all” test will provide larger nonprofit group practices with sufficient operational flexibility, CMS declined to create a special or more liberal test for nonprofit group practices. This may prove to be a challenge for some academic medical centers with separately incorporated faculty practice plans for their various medical specialties.

“Same Building” Test

The professional and technical components of a diagnostic test will also be deemed to be performed or supervised by a physician sharing a practice with the billing physician or other (ordering) supplier if: (i) the performing or supervising physician is an owner, employee or independent contractor of the practice; and (ii) the interpretation or the supervision (as the case may be) is performed in the offices of the billing physician or other supplier. This test has two definitions of “offices of the billing physician or other supplier,” one for physicians and other suppliers, and one for “physician organizations” (POs) as defined by the Stark regulations. Stark regulations define a PO as a sole-shareholder professional corporation, a physician practice and a group practice.

For physicians and other (ordering) suppliers that are not POs, CMS defines “offices of the billing physician or other (ordering) supplier” as the “same building” (as defined by the Stark law) where the ordering physician regularly furnishes patient care. The Stark law defines “same building” as a structure with, or combination of, structures that share a single street address as assigned by the U.S. Postal Service, excluding exterior spaces, interior loading docks, parking garages, mobile vehicles, vans and trailers. For purposes of the “same building” test, the diagnostic test is considered to be performed where the test is conducted, i.e., where the equipment and technologists are located, and where the supervising physician is located.

For physicians and other (ordering) suppliers that are POs, “offices of the billing physician or other supplier” means space where the ordering physician provides substantially the full range of patient care services that the ordering physician provides generally. Although the literal text of the Final 2009 PFS is unclear on this point, CMS clearly intends for “space” to include the same building where the ordering physician provides substantially the full range of patient care services that the ordering physician provides generally.

This “same building” test would not accommodate larger, multi-site group practices that have centralized their diagnostic testing at one or two of their sites, because the AMR would apply to tests ordered by physicians in the group who do not practice in the same building where the testing has been centralized. CMS declined to except non-profit, multi-site group practices from the “same building” standard, and so such practices will need to rely on the “substantially all” test discussed above. Those multi-site group practices that can meet the “substantially all” test for purposes of the supervising physician (i.e., the technical component) could simply forego billing Medicare for the professional component if they are unable to meet the “substantially all” with regard to the interpreting physician.

Unlike CMS’s original “same office” test, this “same building” test will, however, accommodate solo physicians and small group practices that share a diagnostic testing facility with other physicians in the “same building.” Such shared diagnostic facilities were in jeopardy of having to unwind or live with the AMR’s Medicare payment limitation. In the preamble to the Final 2009 PFS, CMS states explicitly that shared diagnostic testing arrangements can meet the “same building” test. However, CMS is continuing to study in-office ancillary services arrangements generally, and is considering narrowing the scope of the Stark in-office ancillary services exception. Such modifications to the Stark in-office ancillary services exception could effectively prohibit certain shared diagnostic testing arrangements.

“Net Charge” Definition Issue

If a diagnostic test is not performed by a physician who shares a practice with the billing physician or other (ordering) supplier, Medicare payment to the billing physician or other (ordering) supplier for the diagnostic test is limited to the net charge for the test. In the Final 2009 PFS, “net charge” means, with respect to the technical component, the net charge of the supervising physician, and, with respect to the professional component, the net charge of the interpreting physician, and such charge cannot reflect the performing physician’s cost of leasing space or equipment from the billing physician or other (ordering) supplier. (CMS clarifies that technical component diagnostic tests that do not require any physician supervision for purposes of Medicare coverage and payment are not subject to the AMR.) Some commenters to the Final 2009 PFS expressed concerns about not being able to recover through the net charge calculation the direct, and identifiable and reasonable indirect, costs of furnishing the diagnostic test to a Medicare beneficiary. In the context of the professional component, such costs would presumably be fairly minor; however, for the technical component, such costs could be substantial and, effectively, go unreimbursed by Medicare.

For example, if a vendor with its own supervising physician charges a billing practice a fixed amount per test, the net charge for purposes of the AMR appears to be the vendor’s full fixed price for the test. In other words, the billing practice can pass through to Medicare the vendor’s fully loaded cost of the test (not just an allocated amount for the supervising physician), not to exceed the Medicare fee schedule amount. However, if a billing practice leases additional space, purchases or leases/finances expensive diagnostic equipment, and incurs the full cost of employing the technologist, the practice’s net charge is limited to the supervising physician’s net charge, which, in most cases, means some allocated portion of an employed physician’s salary and benefits. Such reimbursement would soon drive a billing practice with a significant Medicare payor mix out of the diagnostic testing business. CMS believes that such discrimination in reimbursement is justified by the government’s concern that capital investment by medical practices in diagnostic testing may create inappropriate incentives to overutilize the service. Arguably, such concerns should be addressed under the Stark and anti-kickback laws, but not necessarily the AMR. The AMR is intended to prevent ordering physicians from marking up to the Medicare program the cost of a test performed by a physician who does not share a practice with the billing physician; the statutory language does not appear to be intended to be applied such that the billing physician will only be reimbursed a fraction of his or her cost of furnishing the test.

Finally, in the 2009 PFS, CMS indicates that it will continue to consider the idea of simply prohibiting the reassignment of the professional and technical components of diagnostic tests. CMS believes that this would be a simpler approach, but declines to do so now because of concerns that it would prohibit non-abusive diagnostic testing arrangements.

Medical practices and other (ordering) suppliers billing Medicare for diagnostic tests will appreciate CMS’s liberalization of the AMR in the Final 2009 PFS. However, the AMR is still considerably narrower than it was historically, and will require a number of physician office-based diagnostic testing arrangements to be restructured or unwound by January 1, 2009.