In its proposed update to the Medicare Physician Fee Schedule for Fiscal Year 2008 (the “Proposed 2008 MPFS Update”), the Centers for Medicare and Medicaid Services (CMS) has revisited the issue of the appropriate scope of the purchased diagnostics rule (42 U.S.C. § 1395u(n)(1); 42 C.F.R. § 414.50) and its interplay with Medicare’s reassignment rules and the Stark law to address what CMS characterizes as “revenue-driven arrangements that may be facilitating over utilization of diagnostic services.” 71 Fed. Reg. 69,624, 69,688 (Dec. 1, 2006). CMS, however, has approached the issue in a different, and more intellectually consistent, manner in the Proposed 2008 MPFS Update than it did in last year’s proposed update.

Specifi cally, CMS has abandoned its earlier proposal to build the purchased diagnostics rule and possibly the purchased interpretation rule into Medicare’s reassignment prohibition and the Stark law’s defi nition of a “physician in the group.” Instead, it now proposes expanding the scope of the purchased diagnostics rule so that its anti-markup provision covers both the professional and technical components of diagnostic tests billed by a physician or medical group but performed by someone other than a full-time employee of the billing physician or medical group. That is, under the Proposed 2008 MPFS Update, the anti-markup provision would apply to both components of those diagnostic tests covered by the purchased diagnostics rule whenever such component is performed by an outside supplier, regardless of whether the billing physician purchases the component or whether the right to payment for the component is reassigned to the billing physician. CMS further proposes that for purposes of the purchased diagnostics rule, a diagnostic test is performed by an outside supplier whenever it is performed by someone other than a full-time employee of the billing physician or entity.

To prevent gaming of the anti-markup provision (i.e., the billing physician or group charging the outside supplier for space or equipment to manufacture a margin of the component), CMS would limit payment to the supplier’s charges net any equipment or space rental amounts paid by the supplier to or through the billing physician or entity. Finally, CMS has proposed not to apply the anti-markup provision when the professional component is ordered by independent laboratories, since CMS believes that such arrangements pose a minimal risk of program abuse because independent laboratories do not order the technical component.

If enacted in the fi nal rule, the effect of the proposed changes could be dramatic. As CMS clearly desires, the proposed changes to the purchased diagnostics rule would essentially remove any fi nancial incentive for purchasing either the professional or technical components of diagnostic tests. The proposed changes, however, would also impact how physicians and group practices are paid for services rendered by independent contractors and part-time employees. For instance, the proposed changes seem to provide that if a group practice employs a part-time physician who interprets a diagnostic test subject to the purchased diagnostics rule, the anti-markup provision would apply and the group would be paid the lowest of the Medicare fee schedule amounts, its actual charges, or the part-time employed physician’s charges. Although CMS provided no guidance regarding how such part-time employee’s charges to the billing physician or group should be calculated, any such conversion would appear administratively complex, given that such charges are rarely assessed on a per-test basis.