The Centers for Medicare and Medicaid Services (“CMS”) has released its final physician fee schedule rule for calendar year 2009. This final rule addresses a number of important diagnostic testing and federal physician self-referral (“Stark”) issues that were raised in the agency’s July 7, 2008 proposed rule.

One key area that is clarified in the final rule is the scope of the anti-markup rule for diagnostic tests. CMS has fundamentally shifted the focus of the anti-markup regulations, but has also provided physician groups with greater flexibility in structuring in-office diagnostic testing to avoid the markup prohibition. Although the rule will create difficulties for some groups, it is an improvement on the proposed rule and should help the most common physician office diagnostic testing structures avoid the markup prohibition.

I. Diagnostic Test Anti-Markup Rule

A. Summary of Proposed Rule

CMS proposed that the anti-markup rule apply whenever a physician or other supplier bills Medicare for the technical component (“TC”) or professional component (“PC”) of a diagnostic test (other than a clinical diagnostic laboratory test) that is ordered by the physician or other supplier, and such test is either: (a) purchased from an outside supplier; or (b) performed or supervised by a physician who does not “share a practice” with the billing physician or supplier.

B. Final Rule Provisions

CMS has changed the structure of the anti-markup rule by eliminating all provisions regarding purchasing tests from an outside supplier. Under the final rule, the only grounds for application of the anti-markup rule is when a physician or other supplier bills for a TC or PC that the physician or supplier orders, and that test is performed by a physician who does not share a practice with the billing physician or supplier. All of the questions surrounding who is an outside supplier and when a physician has purchased a test are no longer relevant.

The only anti-markup rule inquiry is now whether the performing physician “shares a practice” with the billing physician. CMS had proposed two alternatives regarding the meaning of “shares a practice.”

Under the first proposal, a performing or supervising physician shares a practice with a billing physician or supplier if the physician was employed or contracted exclusively to the billing physician or supplier. If a physician performed any services for any entity other than the group billing for diagnostic tests, the physician would not be sharing a practice with the billing group; consequently all diagnostic tests performed or supervised by that physician would fall within the markup prohibition.

Alternatively, CMS proposed that the performing or supervising physician shares a practice with the billing physician or supplier if the diagnostic test was performed within the office of the billing physician or supplier. The office of the billing physician or supplier would include the same building in which the billing physician or supplier regularly furnishes patient care.

In the final rule CMS states that a physician “shares a practice” with the group billing for the diagnostic test if either of these two alternatives is satisfied. CMS has modified the exclusivity requirement so that physicians can provide a certain percentage of services to other groups.

Under the final rule, if a physician that performs or supervises the TC or PC performs at least 75% of his or her professional services for the billing physician group or supplier, then none of the diagnostic services that the physician performs or supervises are subject to the anti-markup rule. In other words, the performing or supervising physician need not work exclusively for the billing physician group, and may provide up to 25% of his or her professional services for other entities or groups and still be “sharing a practice” under the anti-markup rule with his or her primary physician group.

If the performing or supervising physician does not meet this 75% test, then the billing physician or supplier may nonetheless avoid application of the anti-markup rule if the TC or PC is performed by an owner, employee, or independent contractor physician in space located in the same building where the ordering physician provides substantially the full range of patient care services that the ordering physician provides generally.

This means that beginning January 1, 2009 if a physician or supplier bills for a TC or PC that was ordered by that physician or supplier, the anti-markup rule will not apply if: (a) the physician that performs or supervises the TC or PC performs at least 75% of his or her professional services through the billing physician or supplier; or (2) the test is performed in the building where the physician that ordered the TC or PC provides substantially the full range of patient care services that they provide generally.

If the billing physician or supplier fails both of these tests and the anti-markup rule applies to a diagnostic test, then the billing physician or supplier may only charge Medicare an amount equal to the cost of the performing or supervising physician for the test, without regard to equipment or space used to perform the test. The billing physician would receive in reimbursement the lesser of this amount or the physician fee schedule amount for the test (the lesser amount would almost certainly be the cost of the performing or supervising physician). This means that the group would operate the diagnostic test at a financial loss, because they could not recover any overhead associated with providing the test other than the cost of the performing or supervising physician.

C. Application of the Anti-Markup Rules

Two examples will illustrate how the new anti-markup rules function, as well as some of the ambiguity that still exists in the new rules.

Suppose a radiologist is employed by physician group A and performs 60% of his or her professional services through physician group A, and performs the other 40% of his or her professional services as an independent contractor to physician group B. The radiologist does not perform at least 75% of his or her services for either physician group A or B. This means that physician group A and physician group B can avoid the anti-markup prohibition only for diagnostic test services that the radiologist performs or supervises within a building where the ordering physician performs substantially the full range of patient care services that the ordering physician generally provides.

Physician group A may have two office locations, and the radiologist may perform services exclusively in only one of those office locations. An ordering shareholder of physician group A may perform substantially his or her full range of services only in physician group A’s other office location, where the radiologist is not located. In that case, any diagnostic testing services ordered by the shareholder physician and performed or supervised by the radiologist would fall within the ambit of the anti-markup rule, and physician group A could charge Medicare only the cost to physician group A of having the radiologist perform or supervise each test.

If another shareholder of physician group A works from the same physician group A office location where the radiologist is located, then physician group A could submit their full charges to Medicare for any diagnostic testing services ordered by that shareholder and performed or supervised by the radiologist.

Physician group B is in the same position as physician group A in this scenario. The status of the performing or supervising physician as an employee or independent contractor makes no difference to the application of the anti-markup rule; only whether the physician meets the 75% service threshold.

If, for example, physician group B has only one office location, and the radiologist performs all of his or her work for physician group B within that single office location, then the anti-markup rule would not apply to any tests that physician group B orders.

The final rule does not specify precisely how the 75% threshold should be calculated, but the commentary in the regulation refers to the definition of “group practice’ under the Stark rules, which specifies a time-based measurement, or any alternative measure that is reasonable, fixed in advance, uniformly applied, verifiable and documented.

The rule also allows groups to comply with the 75% threshold with regard to a performing or supervising physician if they have a reasonable belief that either: (a) for the 12 months prior to and including the month in which the service is performed, the physician met the 75% threshold; or (b) the performing physician will meet the 75% target for the next 12 months, including the month the service is performed. This will allow groups to remain in compliance with the anti-markup rule with regard to physicians performing or supervising diagnostic tests that end up performing more than 25% of their services to other entities due to circumstances that the group reasonably did not expect.

Use of shared diagnostic testing space is also allowed under the final anti-markup rules. If physician Y and physician Z are both located in a medical office building and both perform substantially their full range of patient care services in that medical office building, physicians Y and Z could share diagnostic testing space in that same medical office building. Physicians Y and Z could each hire an independent contractor physician to provide diagnostic testing services part-time on their behalf, and it would not matter whether the independent contractor physician meets the 75% service commitment to either physician Y or Z. Because the tests are done in the same building where physicians Y and Z perform substantially their full range of patient care services, the anti-markup rule does not apply.

II. Independent Diagnostic Testing Facility Issues

A. Physician Groups as IDTFs

In its proposed fee schedule rule, CMS had proposed to require that all physician and non-physician practitioner offices that bill for diagnostic tests enroll in Medicare as independent diagnostic testing facilities (“IDTFs”) and comply with most of Medicare’s IDTF standards. This proposal would have, among other things, prohibited physician groups from sharing with any other Medicare-enrolled entity diagnostic testing equipment and space where diagnostic testing is performed; despite the fact that the Stark rules can permit such arrangements.

CMS is not adopting this proposal at this time. The agency indicates that they are deferring implementation of this proposal while they continue to review public comments on the proposal, and will consider finalizing it in a future rulemaking.

B. Mobile Entity Enrollment and Billing Requirement

CMS has, however, finalized a regulation requiring that all entities furnishing mobile diagnostic services enroll in Medicare and bill Medicare directly for mobile diagnostic services that they furnish. There are no exceptions to the enrollment requirement. The only exception to the direct billing requirement is for mobile diagnostic test providers that perform services “under arrangements” with hospitals. In those “under arrangements” circumstances, the hospital may bill for the diagnostic test services.

This mobile entity regulation fails to answer at what point an entity provides enough of the inputs required to furnish a mobile diagnostic test that the entity is considered to itself be providing the test such that the enrollment and direct billing rule is triggered.

Does an entity that solely furnishes radiologic technician staffing to physician groups that use mobile diagnostic equipment now become a separate provider of mobile diagnostic test services that must enroll and bill Medicare directly?

Or would CMS consider a lessor of mobile diagnostic equipment to be an entity providing mobile diagnostic tests that must enroll and bill Medicare directly for all services provided on the leased equipment?

As practical matter, failure to be clear about when the mobile entity enrollment and direct billing rule applies allows the Part B Carriers to assert their own views on how the rule applies to various fact scenarios, and leaves providers who bill for diagnostic tests open to varying and inconsistent interpretations of the rule.

III. Stark Issues

In their proposed rule CMS offered a new Stark exception for certain quality incentive and shared services programs, commonly called gainsharing programs, between hospitals and physicians. The final rule defers action on this Stark exception. Instead, CMS is reopening the comments period to solicit further information on how to expand their proposed exception without posing any risk of program or patient abuse.

And although the proposed rule discussed various possible changes to the Stark rules, including changes to the in-office ancillary services exception to Stark, CMS has taken no action on Stark in this final rule. The agency states that they may make further Stark changes in future rulemakings.

IV. Conclusion

The final rule settles a number of long-standing ambiguities in the anti-markup rule. It should provide most physician groups and other suppliers of diagnostic tests with the opportunity to arrange their diagnostic testing to avoid the markup prohibition.

It is important, however, that physician groups understand that the anti-markup rule and the Stark rules, including the in-office ancillary services exception, are different sets of rules, and that compliance with Stark does not necessarily result in compliance with the anti-markup rule. Physician groups that bill for any diagnostic testing must ensure that they are in compliance with both sets of rules to avoid overpayment liability and potential allegations of false claims.