Over the past decade, diagnostic imaging services have been among the fastest growing medical services paid under the Medicare Physician Fee Schedule (MPFS).1 These services have been targeted for payment reductions and other regulatory restrictions due to this rapid growth. As summarized below, both Congress and the Centers for Medicare & Medicaid Services (CMS) have taken steps to significantly reduce payments for the technical component of diagnostic imaging services paid under the MPFS, including services provided in facilities enrolled in Medicare as physician practices (both radiology and non-radiology) or as independent diagnostic testing facilities (IDTFs).

The declining reimbursement, rising technology costs, and escalating competition have prompted diagnostic imaging facilities around the country to reconsider their choice to enroll in the Medicare program. In particular, many radiology practices and owners and managers of imaging centers have been investigating alternative structures since January 1, 2007, when the Deficit Reduction Act of 2005's payment cuts reduced technical component payments to the lesser of the payment under the MPFS or the Hospital Outpatient Prospective Payment System (HOPPS). The adoption of new regulatory requirements, including, among other things, new performance standards that have been promulgated for IDTFs, have accelerated this trend.2

For 2010, both CMS and Congress are considering steep cuts to reimbursement of the technical component of imaging services. CMS proposes to increase utilization expectations for imaging equipment from 50% to 90%, which would dramatically reduce the per-procedure practice expense formula under the MPFS. CMS also proposed a 50% reduction for multiple procedures on contiguous body parts that are discounted to technical component relative values and Medicare payment rates. Further, CMS proposes to use the new American Medical Association Physician Practice Information survey data, which could result in further cuts regardless of any Congressional action this fall.

Although legislation is moving through the House, many believe that Senate Finance Committee Chair Max Baucus' (D-MT) mark could become the eventual vehicle for healthcare reform.3 The mark attempts to roll out cuts for imaging services in a somewhat more ordered manner. Baucus proposes to increase the utilization rate assumption for calculating the payment for advanced imaging equipment from 50% to 65% for 2010-2013. The rate would be further increased to 75% in 2014. Department of Health and Human Services Secretary (HHS Secretary) Kathleen Sebelius would be required to conduct a study by January 1, 2013, on the utilization rate change's estimated impact, covering the following: (1) beneficiary access, including in rural areas; (2) utilization of advanced diagnostic imaging services; and (3) the estimated savings to the Medicare program over the period of 2010-2019. In addition, Baucus' proposal would increase the technical component payment reduction for multiple imaging services on contiguous body parts during the same visit from 25% to 50%.

Regardless of the outcome of the healthcare reform debate, it appears increasingly likely that freestanding diagnostic imaging centers will experience additional payment cuts in 2010. A number of alternates are available to freestanding centers to decrease their exposure to these cuts, including restructuring as a provider-based facility or the outright sale of assets to the hospital system, both of which allow the hospital to bill under the more favorable HOPPS rates. Any realignment of the relationship between a freestanding imaging center and a hospital requires a close study of the inevitable changes in compensation and control of the imaging center's operations. Each alternative has its own set of challenges and opportunities.  

Provider-Based Joint Ventures

A provider-based joint venture is one alternative for freestanding diagnostic imaging centers located on or near the hospital's main campus. "Provider-based" status generally determines the manner in which services provided in a facility that is physically and/or legally distinct from a hospital may be billed to the Medicare program under the hospital's Medicare provider agreement and National Provider Identifier. Unlike freestanding imaging centers, provider-based imaging centers bill a facility charge to Medicare Part B on the UB 92 claim form and, to the extent that the hospital's overhead costs (i.e., billing personnel, medical records system) are shared by the outpatient imaging facility, the hospital may allocate these costs to the outpatient imaging facility. To bill under the hospital's Medicare provider agreement, the Medicare provider-based rules set forth specific requirements that a facility must meet to be deemed "provider-based" and treated as part of the hospital.4

The location requirements of the provider-based rules create a significant limitation on this restructuring alternative. The provider-based rules permit hospitals to provide and bill for services furnished by a joint venture if the facility is located on the hospital's main campus. For purposes of the provider-based rules, a facility will be considered to be located on the hospital's campus if it is located on "the physical area immediately adjacent to the [hospital's] main buildings, other areas and structures that are not strictly contiguous to the main buildings but are located within 250 yards of the main buildings, and any other areas determined on an individual case basis, by the CMS regional office, to be part of the [hospital's] campus."5

In addition to the location requirements, the rules impose significant limits on an outside vendor's management of the facility. While the provider-based rules permit hospitals to contract for management services for provider-based facilities (e.g., with a radiology practice that has the capacity to manage an imaging center), the contractor's role is substantially limited because the provider-based facilities must integrate administrative functions and clinical staff with the hospital. Accordingly, as a provider-based entity, the hospital's administration will have more authority over the imaging center than they might have over a joint venture enrolled in the Medicare program as a physician practice or an IDTF.

Payment rates and control of the operations are not the only factors to consider when restructuring an outpatient imaging facility. The co-pay responsibility for Medicare patients can be substantially higher under HOPPS. Under HOPPS, a greater portion of the allowed payment is shifted to the patient, which can be more difficult and time consuming to collect. Of course, many Medicare patients have supplemental insurance that would address this difference in payment. The percentage of patients with supplemental insurance will vary depending on the local market's economics. In some markets, the competitive disadvantage of higher co-pays can be significant.

Lease and Management Arrangement

In situations where the imaging center is located off the main campus of the hospital, an alternative to a provider-based joint venture is an arrangement where the space and equipment necessary for operating the imaging center are leased to the hospital. In a lease arrangement, the hospital operates the former group practice or IDTF as a provider-based imaging center that bills its services under HOPPS. The on-campus restrictions that apply to provider-based joint ventures do not apply in a lease arrangement where the hospital licenses the space and has exclusive control over the imaging facility. Consequently, off-campus facilities could also meet the provider-based requirements if the facility is within thirty-five miles of the hospital and the hospital retains substantial responsibility and control over the delivery of services at the facility.

As a condition of the lease agreement, the hospital typically enters into a long-term management agreement with the radiology group (or owner of the assets) for the management of the imaging center. A lease and management arrangement limits the control the radiologists or owner of the assets may exert over services offered at off-campus facilities. For off-campus facilities operated under a management agreement, the Medicare provider-based rules require, among other things, that: (1) the hospital must employ the staff of the facility who are directly involved in the delivery of patient care (e.g., all technologists); (2) the billing, records, human resources, payroll, and similar administrative functions must be integrated with those of the hospital and should be handled by the same group of employees that perform those functions for the hospital; and (3) the hospital must have significant control over the operations.6

As a result of these restrictions, the ability for the owner of the imaging center assets to provide a full range of management services, including staffing the facility with technologists, is significantly restricted. The radiologists are limited to providing the facility: (1) front-desk and back-offer personnel; and (2) an administrator and medical director who could provide general management and oversight of administrative and patient care activities to the facilities. While a manager may make recommendations on key issues, the ultimate decision on administrative issues, including personnel actions and approval of contracts, must be made by the hospital.

Sale of Business to Hospital System

Another option for imaging centers is the outright sale of assets to a local hospital system. As a condition of sale, radiology groups enter into a long-term management agreement with the hospital for the management of imaging centers and professional services agreements that allow the radiology practice to continue to provide professional medical services to the hospital's patients. For some radiology groups and owners of freestanding imaging centers, the opportunity to manage an imaging service line with no ownership interest can be an attractive opportunity if the parties are able to reach an agreement that provides the manager with sufficient security, control, and compensation. Recognizing their ability to increase revenues as a provider-based service, hospital administrators are often eager to purchase and operate imaging centers as provider-based facilities.


In the current economic and regulatory environment that confronts freestanding diagnostic imaging centers, the trend toward structuring a new relationship with a local hospital is likely to continue. Due to the complexity of the issues involved, hospitals, radiologists, and other owners and managers of imaging centers often require legal and financial advice to construct an arrangement that meets each party's expectations and, when applicable, meets the requirements of the Medicare provider-based rules.