The final rule, effective January 1, 2008, narrows the Stark Law in-office ancillary services exception in a manner that will disrupt a number of medical group practices’ diagnostic imaging and pathology arrangements.

The Centers for Medicare and Medicaid Services (CMS) have issued the final 2008 Medicare physician fee schedule (MPFS) rule, which will be published in the Federal Register on November 27, 2007. In our July 2007 White Paper regarding the proposed version of the MPFS rule, we focused on certain sections of the proposed rule other than the technical payment calculation issues (not addressed here). In particular, we noted that CMS was using this MPFS rulemaking as a vehicle for revisions to the Stark Law regulations, certain rules regarding reassignment and purchased services, and requirements applicable to independent diagnostic testing facilities (IDTFs). The status of these provisions under the final rule is discussed below.

Stark Law Proposals and Other Physician Self-Referral Proposals

In the final rule, CMS has decided not to finalize the proposed Stark Law revisions, except for the proposed anti-markup rule, which, as discussed below, has significant Stark Law ramifications. With respect to the MPFS Stark Law proposals, CMS stated:

given the number of physician self-referral proposals, the significance of the provisions both individually and in concert with each other, and the volume of public comments, we do not believe it is prudent to finalize any of the proposals in this rule (except for the proposal for anti-markup provisions for diagnostic tests, as discussed below in this section). Although we are not finalizing the proposed revisions to the other physician self-referral regulations in this final rule with comment period, we are confident that we have sufficient information, both from the commenters and our independent research, to finalize revisions to the physician self-referral regulations without the need for new proposals and additional public comment.

CMS has indicated that it does indeed intend to address all of the Stark Law topics covered in the proposed MPFS rule. Moreover, note that the Stark Law proposals in the MPFS rule are distinct from the Stark Law Phase III final rule, which was published in September 2007 and will be effective December 4, 2007 (except for application of the “stand in the shoes” rule to certain academic medical centers and integrated tax-exempt systems, which has been extended to December 4, 2008). The Phase III rule was summarized in our White Paper entitled “CMS Publishes Phase III Stark Law Rule."

Big Changes to Diagnostic Anti-Markup Rule Undercut In-Office Exception

The final 2008 MPFS (effective January 1, 2008) expands substantially the scope of the long-standing prohibition on a physician practice marking up to the Medicare program the cost of a purchased diagnostic test ordered by the physician practice. In so doing, CMS effectively narrows the Stark in-office ancillary services exception in a manner that will disrupt a number of medical group practices’ diagnostic imaging and pathology arrangements. Further, in combination with CMS’s new prohibition on an IDTF sharing its facility with another Medicare supplier or provider, these amendments effectively prohibit most physician practices and imaging centers from sharing a diagnostic imaging facility, regardless of whether the sharing is accomplished through a shared expense, part-time block lease or other method.

Specific Changes

First, CMS extends the anti-markup rule to the professional component (interpretation) of the diagnostic test. Second, CMS defines a purchased diagnostic test or interpretation as a test or interpretation purchased from an “outside supplier,” i.e., someone who is not an employee (full-time or part-time) of the billing practice, and who does not furnish the test or interpretation to the billing practice (or other supplier) pursuant to a permitted reassignment of Medicare benefits. If the billing practice purchases the technical component of the diagnostic test, the practice is limited to the lower of the Medicare fee schedule amount, the practice’s actual charge and the outside supplier’s “net charge” to the practice (i.e., the outside supplier’s actual charge net of any payment by the outsider supplier to the practice for the use of the practice’s space or equipment). Notably, since a contracted or leased technologist does not have an independent basis for billing Medicare for the diagnostic test pursuant to an assignment from the patient (i.e., is not an enrolled Medicare supplier), the technologist has no basis for reassigning the Medicare payment for the test to the billing practice. Accordingly, such a technologist is an “outside supplier,” as defined in the rule. However, this begs the question whether contracting for or leasing a technologist amounts to the “purchase” of the “technical component” of the diagnostic test when the billing practice owns or has a long-term lease of the diagnostic equipment, a key part of the technical component. If so, is the billing practice limited to billing Medicare for the “net charge” of the technologist, and cannot count the practice’s own costs associated with the diagnostic equipment and supplies? Additional clarification from CMS on this point is needed, because the question of what constitutes the “purchase” of the “technical component” of a diagnostic test goes to the heart of whether and how the rule applies.

Finally, CMS has announced a second and completely novel application of the anti-markup rule that for many billing practices will make the question of whether the technical component of the test is “purchased” moot. A physician practice that orders a diagnostic test (professional or technical component) that is not purchased from an outside supplier is still prohibited from marking up the test to the Medicare program if the diagnostic test is “performed at a site other than the office of the billing physician . . . ” “Office of the billing practice” is defined as space in which the physician practice provides “substantially the full range of patient care services” that the physician practice provides generally. The rule does not specify whether a part-time office can meet this location standard. Although we believe that one should be able to presume that a part-time office that meets the Stark in-office ancillary services (“in-office”) exception’s definition of the “same building” can qualify, additional clarification on this point is needed.

Implications for Technical Component Billing

This rule change means that, in order to markup to the Medicare program the charge paid by the practice for the technical component of a diagnostic test, a billing practice will, at a minimum, need to locate the technologist and diagnostic testing equipment in the billing practice’s office suite where the practice regularly conducts patient office visits. Consequently, as a practical matter, this new location-based application of the anti-markup rule effectively amends the location test of the Stark in-office exception. In reliance on the Stark in-office exception, many physician practices today furnish and bill the Medicare program for the technical component of diagnostic imaging and pathology services performed in space in which the practices do not provide the full range of patient care services that the practices provide generally. This includes virtually every medical practice that is billing Medicare for the technical component of diagnostic imaging and pathology services in reliance on the “centralized building” approach to the Stark in-office exception. “Centralized building” means space owned or leased by the practice on a 24/7 exclusive use basis, and, as a practical matter, is not space where the practice conducts office visits or furnishes other patient care services. Based on this rule change, practices that are billing the Medicare program for the technical component of diagnostic testing furnished directly by the practice (i.e., not purchased) in reliance on the “centralized building” approach (to the Stark in-office exception), and that cannot relocate their imaging or pathology operations to meet this new location test, will now be limited to the lower of the Medicare fee schedule amount, the practice’s actual charge and the “net charge” for the test. Based on preamble statements by CMS, the practice cannot include any other direct or indirect costs in its calculation of the “net charge” for the test. Depending on the resulting effect on technical component revenues and margins, this rule change could eliminate the utility of the “centralized building” approach (to the Stark in-office exception) for these practices.

Moreover, even practices that have relied on the “same building” approach to the Stark in-office exception for their Medicare claims for the technical component of diagnostic imaging and pathology services will have to carefully assess the impact of the rule. The “same building” approach requires only that the practice have a full- or part-time office (as defined by regulation) in the same building where the diagnostic testing is performed, not the same space. Based on our inquiry to CMS, the new location-based application of the anti-markup rule is not limited to diagnostic testing performed in reliance on the “centralized building” approach (to the Stark in-office exception), and CMS interprets same “space” to mean the same office suite. Consequently, a practice’s diagnostic testing facility (e.g., MRI) located on a different floor or wing of the building (perhaps done to satisfy special state licensing or building code standards designed to minimize the radiation risk to employees and patients), would not satisfy this new location test for the anti-markup rule. In other words, CMS appears to require that the space where the diagnostic testing is performed be contiguous with and accessible from those areas of the practice’s office suite where the practice furnishes substantially the full-range of patient care services the practice provides generally. This is a new burden on practices that have for years relied on the current Stark law definition of “same building.” CMS has effectively changed the “same building” test to a “same office suite” test.

Implications for Professional Component Billing

With respect to group practice billing for the professional component of diagnostic imaging and pathology services ordered by a group practice physician, such billing is done today on the basis of a permitted reassignment from a physician contractor or employee. Thus, under the amended anti-markup rule, such interpretations would not be purchased from an “outside supplier.” Further, such interpretations are billed to Medicare in reliance on the physician services exception to the Stark prohibitions. Thus, if the interpretations are performed by physicians in the group practice who are contractors, the interpretations must be performed “in the group’s facilities.” However, the term “group’s facilities” is not defined by the Stark regulations and, thus, is reasonably interpreted to include any practice site. If the interpretation is performed by an employee of the practice, the Stark physician services exception permits the interpretation to be performed at any location. Under the new location-based rule, however, an interpretation performed by either an employee or contractor of the practice will be subject to the anti-markup rule unless it is performed at a site where the practice provides substantially the full range of patient care services that the practice generally provides. This means, for example, that a practice that is billing on a reassignment basis for the professional interpretations of a contracted radiologist performed at an imaging facility located at a “centralized building” location of the practice will now be subject to the anti-markup rule.

Implications of the Unclarified “Net Charge” Concept

Since many arrangements for services that are considered to be purchased under the revised regulations do not involve a “charge” per se, CMS’ refusal to further define what constitutes the “net charge” in these situations leaves entities with significant operational and billing risks. For example, while some preamble discussion suggests that it may be acceptable to implement the requirement using a “net cost” analysis, since the regulatory language, however, refers to the supplier’s net charge to the billing entity not to the billing entity’s costs, such an approach may expose an entity to false claims investigation. As CMS explained in response to a comment regarding the difficulty or impossibility of determining a “net charge” in some common arrangements, if the entity cannot calculate an accurate “net charge,” it can structure its arrangements so that the anti-markup provision does not apply. Unfortunately, unless CMS provides further guidance regarding this critical aspect of the rule, it may be necessary for many entities to (i) forgo revenue and require the supplier to bill for the component it provides, (ii) arrange to have the services furnished in the offices of the billing physician or supplier, (iii) change the method of payment to reflect an easily identifiable charge or (4) prepare a net cost analysis in good faith and take the risk of challenge down the road.

Implications for Shared Diagnostic Testing Arrangements

Finally, we note that this new location-based application of the anti-markup rule could effectively prohibit physician practices with offices in the same building from sharing a diagnostic imaging facility, whether the “sharing” takes the form of a part-time block lease, shared expense or other arrangement. Since it appears that the imaging facility must be contiguous to the office suite of the billing practice in order for the imaging site to be in “space” where the billing practice furnishes substantially the full-range of its patient care services, multiple practices sharing an imaging facility in the same building would have a difficult time meeting this standard. As discussed elsewhere in this On the Subject, an IDTF can no longer share space or equipment with, or lease or sublease its operations to, another Medicare provider or supplier. Thus, whatever shared diagnostic testing arrangements may survive this amended anti-markup rule may not include IDTFs.

Next Steps

In light of the January 1, 2008, effective date for these changes, physician practices with diagnostic imaging or pathology facilities that are not located in an office suite where the practice is providing substantially the full range of patient care services that the practice generally provides should immediately assess the effect of the amended anti-markup rule on their operations, including their arrangements for professional interpretations. This would include physician practices that are billing for diagnostic testing in reliance on the “same building” approach to the Stark in-office exception (including shared imaging arrangements), as well as practices billing in reliance on the “centralized building” approach.

IDTF Issues

CMS adopted essentially all of the key changes to the IDTF Medicare conditions of participation that it had proposed earlier this year. Although CMS did provide some clarifications and distinctions between the final MPFS rule and the proposed rule with respect to IDTF reporting requirements, liability insurance coverage and other standards, the IDTF industry will probably be most affected by the adoption of the IDTF sharing prohibition in 42 C.F.R. § 410.33(g)(15).

The new sharing prohibition provides that, with limited exceptions, an IDTF may not (i) share a practice location with another Medicare-enrolled individual or organization, (ii) lease or sublease its operations or its practice location to another Medicare-enrolled individual or organization, or (iii) share diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. The prohibition does not apply to hospital-based and mobile IDTFs, nor does it prohibit the sharing of non-clinical space and staff (e.g., waiting rooms, receptionists and schedulers).

The sharing prohibition will likely require the restructuring or perhaps unwinding of many types of existing imaging arrangements, including block leasing and shared imaging arrangements, by January 1, 2008. Acknowledging that some IDTFs may need additional time to address these changes, CMS did delay the effective date of the sharing prohibition until January 1, 2009, but only for existing IDTFs that are sharing a practice location. This extension does not extend to the leasing or subleasing of an IDTF’s operations or location, including block leases or the sharing of equipment used in an initial diagnostic test. The practical effect of the final rule is to require the restructuring or unwinding of most IDTF shared imaging arrangements in a very short time.

Since the sharing prohibition is applicable only to IDTFs and to not other types of Medicare providers providing diagnostic services, many physician practices and radiology practices will likely continue to consider participating in block leasing and other shared imaging arrangements without the involvement of an IDTF, to the extent such arrangements are otherwise properly structured to comply with applicable federal and state health care laws. IDTFs that are currently engaged in shared imaging arrangements should have such arrangement promptly reviewed to determine the rights and obligations it may have. Material equipment leasing and financing documents that may have been executed in connection with such arrangement should also not be overlooked.