The Centers for Medicare and Medicaid Services (“CMS”) recently finalized its calendar year 2008 Medicare payment rule for physician services. The final rule can be found at http://www.cms.hhs.gov/PhysicianFeeSched/downloads/CMS-1385-FC.pdf, and is expected to be published in the Federal Register on November 27, 2007. The rulemaking contains a number of draconian provisions, particularly regarding diagnostic radiology, including diagnostic radiology testing within group practices. Although the final rule addresses a large number of physician and Medicare Part B payment issues, this report will focus on a few of the most significant changes.

I. Physician Payment Rates

Medicare physician payment rates for calendar year 2008 will drop by 10.1% under the rule. Federal legislation may reverse those cuts as in previous years; but the rule is a reminder that avoiding deep cuts in Medicare physician payment rates will be a constant struggle without structural changes to the physician payment formula under the Social Security Act.

II. Stark Regulations and Anti-Markup Provisions

A. Stark Regulations.

CMS had proposed several revisions to the federal physician self-referral (or Stark) regulations, including but not limited to changing the definition of “entity” to combat certain “under arrangements” transactions, and prohibiting compensation methodologies based on per-service payments in space and equipment leases if the service is referred by the lessor to the lessee, among others. In response to its proposed changes, CMS received many comments expressing concern about the complexity and breadth of the Stark proposals.

CMS decided not to finalize any of its Stark proposals in the 2008 Physician Fee Schedule rule, except for a single change relating to the anti-markup provisions for diagnostic tests that are discussed below. However, CMS says that it intends to publish a separate final rule addressing its Stark proposals at a later, unspecified, date without additional public comment. The deferral of more Stark changes may provide temporary relief to providers still reacting to the new Stark rules from September 2007. However, the agency’s approach sustains the prospect of more frequent Stark changes and a more unstable and shifting regulatory environment for the health care provider industry.

B. Diagnostic Testing: Anti-Markup Provisions.

Clearly the most sweeping provisions in the rule involve diagnostic testing and the anti-markup rules. CMS’s new rule imposes an anti-markup restriction on both the technical and the professional component of diagnostic tests that are billed by the ordering physician or other supplier (or ordered by a party related by common ownership or control to the billing physician or supplier) under two sets of circumstances.

1. Site of Service

The anti-markup rule applies any time a test is performed at any site other than the office of the billing physician or other supplier. For a physician group, the “office of the billing physician or other supplier” means the medical office space where the physician group provides substantially the full range of patient care services that the group provides generally.

This means that even when the equipment is owned by the physician group, the physician group employs the radiologic technicians running the imaging machines, and the group directly provides the necessary physician supervision, the anti-markup rule may still apply due to the mere fact that the location of the testing is outside of the office space where the group performs its nearly full range of evaluation, procedures, and other physician services.

This part of the regulation fails to answer what precisely the billing physician group’s “office” is in many circumstances. For instance, if a physician group performs its full range of services on the second floor of a medical office building, but places its imaging center on the first floor of that same medical office building, is that imaging center in the same “office” space? And how would the regulation apply to an imaging center in noncontiguous space on the same floor as the group’s other physician services, or a multi-specialty clinic campus that houses its MRI machine in a separate building across the courtyard from the main physician offices?

Physician groups that structured in-office imaging centers to comply with the location requirements of the “centralized building” test under the Stark in-office ancillary services exception may find that they can still bill for the tests under Stark, but are not allowed to mark up the price of the tests to Medicare.

If the anti-markup rule applies, then payment to the billing physician or other supplier for the technical component or professional component of the diagnostic test is the lowest of the following amounts:

(i) The performing supplier’s net charge to the billing physician or other supplier.

(ii) The billing physician or other supplier’s actual charge.

(iii) The fee schedule amount for the test that would be allowed if the performing supplier billed directly.

The net charge must be determined without regard to any charge that is intended to reflect the cost of equipment or space leased to the performing supplier, or other overhead by or through the billing physician or other supplier.

The definition of net charge is another area of uncertainty, particularly for providers who pay employed technicians and physicians on an annual salary basis. The agency provides no real guidance, but states that the methodology must be reasonable and verifiable.

The regulations state that where the technical or professional component is performed in the office of the billing supplier such that the anti-markup rule does not apply, then the billing supplier may recoup some or all of the overhead it incurs in the performance of the technical or professional component. If, however, the billing supplier performs the test at a site other than the office of the billing supplier, the billing supplier will not be able to recoup overhead, but rather will be limited to the lowest of the performing supplier’s net charge, the billing supplier’s actual charge, or the applicable fee schedule amount. In other words, the application of the anti-markup rule makes it impossible for a provider to recover expenses. In this way, the rule forces physician groups to operate diagnostic testing at an actual loss, not just at zero profit.

2. Purchased From Outside Supplier

The other circumstance in which the anti-markup rule applies is when a billing physician or supplier purchases the test from an outside supplier. Even if the test is done in the “office space” of the billing physician or supplier, if the test is purchased from an outside supplier, the anti-markup rule applies. An outside supplier is defined as anyone who is neither an employee (part-time or full-time) of the billing physician or supplier nor an independent contractor who reassigns their right to receive Medicare reimbursement to the billing physician or supplier.

Large questions surround this part of the rule as well. The regulations do not directly address how they apply to radiologic technicians who do not have Medicare billing numbers, and thus, cannot reassign to the billing physician or supplier. An independent contractor technician appears to meet the definition of an “outside supplier” because they do not reassign. Language in the preamble to the rule suggests that this means that a physician contracting with an independent contractor technician could not mark up the price of the test beyond what the technician charged. But can you purchase a test from a technician who is not permitted to bill Medicare for the test him/herself? If a physician group directly performs the necessary physician supervision, in their own facility, but chooses to use an independent contractor technician to run the machine, it would appear a better characterization to say the only thing the group has “purchased” is the technician’s services, and the group has not purchased the test itself. But the agency simply provides no answer, leaving this provision open to the interpretation of local Medicare Part B Carriers and others.

III. Independent Diagnostic Testing Facilities

CMS finalized various amendments to the standards for independent diagnostic testing facilities (“IDTFs”) participation in Medicare.

A. Sharing and Subleasing. CMS states that by sharing space and/or equipment, Medicare contractors are unable to determine if an IDTF meets all of the enrollment requirements or whether each IDTF meets and maintains all performance standards.

Accordingly, the final rule prohibits IDTFs from: (1) sharing a practice location with another Medicare-enrolled individual or organization; (2) leasing or subleasing its operations or its practice location to another Medicare-enrolled individual or organization; or (3) sharing diagnostic testing equipment used in the initial diagnostic test with another Medicare-enrolled individual or organization. There are two exceptions to this final rule: mobile IDTFs and hospital-based IDTFs.

Although this provision is effective as of January 1, 2008, given the changes that some IDTFs must make to their business model, CMS has adopted a one-year transition period for IDTFs that are currently enrolled and are sharing a practice location with another Medicare individual or organization. This one-year provision only applies to the shared space prohibition. Accordingly, IDTFs are prohibited from maintaining and establishing leasing or subleasing agreements or the sharing of diagnostic equipment used in taking initial diagnostic testing after January 1, 2008.

B. Insurance. Under the insurance requirements, IDTFs must now maintain a comprehensive liability insurance policy in the minimum amount of $300,000 per location. Failure to maintain the required insurance results in revocation of billing privileges retroactive to the date the insurance lapsed. Additionally, IDTF suppliers are responsible for providing the contact information for the issuing insurance agent and the underwriter to Medicare.

C. Reporting. In the proposed rules, CMS stated that changes to an IDTF’s reporting requirements were needed to ensure timely reporting of certain events and less frequent reporting of other events. Currently, an IDTF is required to report all changes in its enrollment application within 30 calendar days of the change. To reduce the administrative burden on IDTFs, the new reporting requirements will require IDTFs to report some changes in 30 days and others in 90 days. The revised language requires IDTFs to report changes in ownership, location, general supervision, and adverse legal actions to the Medicare contractor on the Medicare enrollment application within 30 calendar days of the change. All other changes to the enrollment application must be reported within 90 days. CMS intends to further clarify what events need to be reported in 30 days in the future.

D. Beneficiary Complaints. Current law states that IDTFs must answer beneficiary questions and respond to complaints. CMS, in its proposed and now final rule, sought to correct an oversight in the initial drafting of IDTF performance standards and make IDTFs document, maintain, and respond to beneficiaries’ complaints. To limit the documentation burden, the final rule mandates that IDTFs maintain and respond to written clinical complaints only. The IDTF can document this information in the manner most convenient for the IDTF. However, this documentation should be made readily available for examination.

E. Supervising Physician. Under the final rule, an IDTF’s supervising physician must be responsible for direct and ongoing oversight of the quality of the testing performed, the operation of the equipment, and the qualification of the nonphysician personnel working with the equipment.

A physician providing general supervision can oversee a maximum of three IDTF sites where concurrent operations can be performed. A site is defined as either fixed or mobile IDTF sites.

F. Billing. IDTFs may not bill for services prior to submission of an enrollment application. Accordingly, the earliest date an IDTF can bill and obtain payment for services is the latter of submission of an enrollment application that was subsequently approved by a Medicare contractor or the first date of service at the IDTF site.

This change will not impact existing IDTFs that are making a change to their enrollment record, but will apply to IDTFs that are adding a new fixed or mobile practice location to their existing enrollment record.

IV. Conclusion

The impact of the new anti-markup rule on many physician groups who perform in-office diagnostic testing can hardly be overstated. Groups that structured their imaging to comply with the centralized building component of the Stark in-office ancillary services exception may find that the new rules have turned a profitable part of their practice into a net loss. Some groups may find themselves caught within the anti-markup rule due to physical facility restrictions that preclude placing imaging in the same space as their other physician services.

Although CMS has not changed the Stark in-office ancillary services exception, the anti-markup rule essentially devalues that exception for many groups.

It is also worth noting that the markup rules do not apply only to physician-owned groups. Integrated 501(c)(3) systems with employed physician affiliates must also contend with the rules.

Beyond their massive impact, the rules are problematic because they are so vague and ill-defined. There are significant questions in almost every aspect of the rule, such as: (1) how do you create a net charge; (2) what does it mean to be in the same office space in which physicians provide substantially their full range of services; and (3) when does a group “purchase” a test from an outside supplier? Hopefully, CMS will provide additional guidance so that providers are not at the mercy of differing interpretations among Part B Carriers, qui tam plaintiffs and their attorneys, and others.