The Centers for Medicare & Medicaid Services (CMS) 2009 Physician Fee Schedule Proposed Rule (“Proposed Rule”) was published in the Federal Register on July 7, 2008.1 The Proposed Rule revises payment policies and sets payment rates for services furnished by physicians and non-physician practitioners (NPPs) which will be effective for services furnished as of January 1, 2009. Among the proposed changes are significant proposed modifications to the regulations implementing the Physician Self-Referral Law and to those concerning the Anti-Markup policy. These proposed changes are summarized below. This summary is not intended to be exhaustive, but Alston & Bird is available to provide more detailed information on these or other sections of the Proposed Rule.

Comments on the Proposed Rule must be received no later than August 29, 2008, for consideration.

Incentive Payment and Shared Savings Programs

CMS proposes a new exception to the Physician Self-Referral Law for a variety of programs, including gainsharing, pay-for-performance (“P4P”), value-based purchasing and other programs seeking to foster improvements in health care quality and efficiency through financial incentives. This proposal comes in response to the CMS solicitation of comments in the FY 2009 Inpatient Prospective Payment System Proposed Rule regarding whether to propose a gainsharing exception.2 Importantly, the proposed exception is broader than just gainsharing and covers both “incentive payment programs” and “shared savings programs”—new terminology coined by CMS in the Proposed Rule. Still, CMS notes in the Proposed Rule that its proposed exception is relatively narrow and that the agency is soliciting comments on ways to expand the exception to include other types of innovative, beneficial arrangements without exposing the Medicare program and its beneficiaries to an undue risk of fraud and abuse.

The proposed exception would protect payments made to physicians participating in the incentive payment and shared savings programs as individuals, or to physician organizations composed wholly of participating physicians, provided that such qualified physician organizations distributed payments on a per capita basis to participating physicians. CMS registers its concern with programs that lead physicians to limit their use of quality-improving but expensive devices, tests, or treatments (“stinting”); treat only relatively healthier patients (“cherry-picking”); avoid relatively sicker patients (“steering”); or discharge patients to home or post-acute care settings earlier than clinically indicated (“quicker-sicker” discharge). Furthermore, CMS expresses concern with programs that directly or indirectly provide for payments in exchange for patient referrals or that result in unfair competition among hospitals. CMS states that the criteria included in the proposed exception are designed to establish transparency, quality controls and safeguards against payments for referrals (or influencing referrals).

The proposed requirements fall into three categories: (1) Design of incentive payment and shared savings programs; (2) limitations and conditions for payments to physicians under the programs; and (3) requirements for the arrangements between the hospitals and the physicians participating in the programs.

Design and Structure of the Program

With respect to program design, CMS proposes to require programs to include patient care quality or cost savings measures (or both) that are supported by objective, verifiable, independent medical evidence indicating that the measures would not negatively impact patient care. The proposal is applicable only to hospital-sponsored programs, but CMS is soliciting comments on whether the exception should be expanded to include other programs. CMS also proposes to require that the programs be reviewed by an independent person or organization with relevant clinical expertise before the program is implemented, and at least annually thereafter, to determine the program’s impact on the quality of patient care services provided by the hospital. The exception would require appropriate corrective action, depending on the outcome of these reviews, and CMS will consider comments on appropriate types of corrective action and on how to incorporate this requirement into the regulation text.

CMS proposes to require physicians participating in the program to do so in “pools” of at least five participating physicians, among whom the payments will be divided on a per capita basis. Participating physicians must be members of the sponsoring hospital’s medical staff at the commencement of the program. The hospitals would be required to continue permitting participating physicians to access the same sets of items, supplies and devices that were available prior to the physicians’ participation in the program. The hospitals would be prohibited from restricting the availability of items, supplies or devices (including new technology linked by objective evidence to improved outcomes) that meet federal regulatory standards and are determined to be medically necessary for the patient’s care. Of note, CMS proposes to prohibit payments under product standardization programs to physicians or physician organizations for the use of items, supplies or devices, if the physician or organization has an ownership or investment interest in, or a compensation relationship with, (1) the manufacturer or distributor or the item, supply or device or (2) a group purchasing organization (GPO) that arranges for the purchase of the item, supply or device. CMS is seeking comments on whether programs that include product standardization measures disadvantage small manufacturers of items, supplies and devices, and on how product standardization could be achieved without restricting patient access to items, supplies, and devices beneficial to patient care.

Limitations and Conditions on Payments

In addition to the requirement for per capita-based payment distribution (mentioned above), another proposed payment requirement is that payment must be made directly to the physician or to the qualified physician organization (as defined in the regulation). The proposal includes a prohibition on including in payments to physicians or physician organizations any amounts that take into account the provision of an increased volume of services to federal health care program beneficiaries when compared with the volume provided during a period of equal length immediately preceding implementation of the program. CMS is soliciting comments on how to address volume increases due to market dynamics or physician practice expansion. CMS also proposes to limit program duration to at least one year, but no more than three years, which would be a welcome expansion to the limited duration approved by the Office of Inspector General (OIG). CMS proposes two types of limitations on payments, which could be adopted independently or together: (1) A limit on payments calculated as a defined percentage of the savings available to hospitals generated by participating physicians’ changes in clinical or administrative practices (e.g., a 50 percent cap for programs of any length, or a reduced percentage cap each year for multi-year programs); and, (2) for multi-year programs, a limit on payments that takes into account payments already made under the program to physicians for achieving performance measures (“re-basing”).

CMS is considering whether to allow the exception to cover payments from hospitals to physician organizations that include both participating and non-participating physicians (e.g., multi-specialty practices when the program includes only certain specialties) where the organization would be responsible for passing through payments to participating physicians. CMS identifies one benefit of an appropriately structured pass-through proposal as avoiding confusion that could otherwise be created in relation to the “stand in the shoes” provisions in § 411.354(c)(2).

Requirements for Hospital-Physician Arrangements

With respect to the requirements for hospital-physician arrangements, CMS proposes to include the criteria common to most Physician Self-Referral Law exceptions for compensation arrangements. Included among these are the requirements that the arrangement (1) be set out in writing, signed by the parties, and specify compensation that is set in advance, does not vary during the term of the arrangement and is not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties; and (2) be disclosed in writing to patients affected by the program. CMS also proposes to require monitoring by an independent outside party or an internal committee of the patient population treated by participating physicians, in order to identify any significant changes from the hospital’s historical measures. Significant changes relating to one physician would require that physician’s termination from the program, and significant changes spread across all participating physicians would require the termination of the entire program.

Anti-Markup Provisions

In the 2008 Physician Fee Schedule Final Rule with Comment Period (“2008 Final Rule”), CMS revised the anti-markup provision that applies to various types of diagnostic tests. As a result, a physician could not mark up his cost when billing for the technical component (TC) or the professional component (PC) of a diagnostic test not performed in the office of the billing physician or other supplier. Subsequently, CMS delayed the application of the anti-markup provision until January 1, 2009, except for most anatomic pathology diagnostic testing services.

Under the Proposed Rule, CMS is proposing two alternative approaches to revising the anti-markup provision. In addition, CMS seeks comments on other approaches that would curb overutilization resulting from abusive arrangements involving diagnostic services.

First Proposal

CMS’ first proposal maintains that the anti-markup provision would apply in all cases where the PC or TC of a diagnostic testing service is either (1) purchased from an outside supplier; or (2) performed or supervised by a physician who does not “share a practice” with the billing physician or physician organization.

CMS would make clear that a physician who is employed by, or contracts with, a single physician or physician organization “shares a practice” with that physician or physician organization. CMS considers that when a physician provides his or her efforts for a single physician organization (regardless of whether it is fulltime or part-time), he or she has a sufficient nexus with that practice to justify not applying the anti-markup provision. Accordingly, a physician who is an employee of, or independent contractor with, more than one billing physician or physician organization would not “share a practice” with any of the physicians or physician organizations with which he or she is affiliated. In that case, the anti-markup provision would apply.

CMS recognizes, however, that there may be circumstances where it is necessary for a physician to provide diagnostic testing services to more than one physician practice. CMS uses the example of a physician in one practice who may contract to provide physician services on a locum tenens basis to another practice while a physician in that practice is on leave. CMS is seeking comments on whether and, if so, how a physician could be permitted to provide occasional services outside of his of her physician organization without the secondary arrangement precluding the physician from “sharing a practice” with his or her physician organization for purposes of applying the anti-markup provision.

This proposal is offered by CMS as a simpler and more “bright line” approach to determining when the anti-markup provision should be applied. For example, if a pathologist only had a relationship with one group, the anti-markup would likely not apply regardless of where the services were performed.

Second Proposal

CMS’ second proposal is an alternative to the first one discussed above, and basically attempts to clarify many of the ambiguities that existed in the original formulation of the anti-markup rule. CMS is re-proposing to apply the anti-markup provision to TCs and PCs of tests that are performed outside the “office of the billing physician or other supplier.” CMS is soliciting comments on whether this is the best approach or whether the agency should consider a different one. CMS is also proposing additional changes to amend the anti-markup provision with respect to the definitions of the “office of the billing physician or supplier,” “outside supplier,” and the performing supplier’s “net charge.”

Specific Solicitation of Comments

CMS is seeking comments on specific areas relating to the anti-markup provision. We have summarized those areas below: 

  • The calculation of “net charge”;
  • Whether, in addition to, or in lieu of the anti-markup provision, CMS should prohibit reassignment in certain situations and require the physician supervising the TC or performing the PC to bill Medicare directly; and 
  • Whether the revisions made by the 2008 Final Rule should go into effect on January 1, 2009, as scheduled, and whether any proposals contained in this Proposed Rule should go into effect on that date, or whether some or all of the revisions should be delayed past January 1, 2009.

Independent Diagnostic Testing Facility Performance Standards

Although not included as part of the self-referral provisions, the proposals included in this section of the Proposed Rule have the potential to greatly impact provider relationships and to affect the implementing regulations for the Physician Self-Referral Law.

During the comment period for the 2008 Physician Fee Schedule Proposed Rule, CMS received comments requesting that the independent diagnostic testing facility (IDTF) performance standards apply to physicians and NPPs who are performing diagnostic testing services for Medicare beneficiaries and who have enrolled in the Medicare program as a clinic, group practice or physician office. CMS addresses these comments in the 2009 Proposed Rule, noting the agency’s concerns that (1) certain physician entities, including physician group practices, and clinics, can enroll as a group practice or clinic and provide diagnostic testing services without the benefit of qualified non-physician personnel to conduct diagnostic testing; (2) some physician entities expect to furnish diagnostic testing services for their own patients and the general public, and are making the decision to enroll as a group or clinic, thereby circumventing the performance standards found in the IDTF requirements; and (3) some physician organizations are furnishing diagnostic tests using mobile equipment provided by an entity that furnishes mobile diagnostic services.

Proposed Requirement

As such, CMS proposes to add a new section to the IDTF performance standards that would require physician organizations furnishing diagnostic testing services (except diagnostic mammography services) to (1) enroll as IDTFs for each practice location furnishing these services and (2) meet all IDTF performance standards (other than those from which they are specifically excluded by the proposed regulation).3 CMS proposes to define a “physician organization or nonphysician practitioner (NPP) organization” as “any physician or NPP entity that enrolls in the Medicare program as a sole proprietorship or organizational entity such as a clinic or group practice.”4 With respect to the performance standards, CMS is proposing certain exceptions to these standards because it believes that physician organizations already meet or exceed some of the standards. While the proposed regulation, as written, would apply to all diagnostic testing services (other than diagnostic mammography services) furnished in physicians’ offices, CMS is considering whether to limit it to a subset of diagnostic testing services, such as to procedures that generally involve more costly testing and equipment (e.g., advanced imaging services like MRI or CT). CMS is seeking comments on whether to narrow the scope of the proposal in this way. CMS proposes that these changes, if adopted, would be effective September 30, 2009, for suppliers already enrolled in Medicare and January 1, 2009, for newly-enrolling suppliers.

Application to Shared Facilities

Under the proposal, physician organizations would be exempt from the IDTF performance standard at 42 C.F.R. § 410.33(g)(15)(i), which prohibits IDTFs from sharing practice locations with another Medicareenrolled individual or organization. CMS states that it would exempt physician organizations from this requirement to separately enroll each practice location because compliance with this standard “would be costly and burdensome and possibly limit beneficiary access, particularly in rural or medically underserved areas.”5 The proposal would, however, still subject physician organizations to the requirements found at 42 C.F.R. § 410.33(g)(15)(ii) and (iii), which prohibit IDTFs from leasing or subleasing their operations or practice locations to other Medicare-enrolled individuals or organizations and, in addition, from sharing diagnostic testing equipment used in initial diagnostic tests with other Medicare-enrolled individuals or organizations.

Concerns Going Forward

CMS states in the Proposed Rule that it is concerned that “[s]ome physician entities expect to furnish diagnostic testing services for their own patients and the general public and are making the decision to enroll as a group or clinic, thereby circumventing the performance standards found in the IDTF requirements in § 410.33.”6 CMS also characterizes its proposed expansions of the “quality and program safeguard activities” previously implemented for IDTFs as intended to enhance quality of care for Medicare beneficiaries and to improve CMS’ ability to monitor suppliers for compliance with Medicare enrollment requirements.7

If this provision of the Proposed Rule is finalized without modification, physicians would no longer be able to lease or sublease their practice locations to other Medicare-enrolled individuals or organizations, or to share diagnostic testing equipment used in initial diagnostic tests with such individuals or organizations. The proposed limitation on physician organization space leasing and equipment sharing reduces physicians’ opportunities to use existing arrangements for providing diagnostic testing services. As a result, physician organizations will not be able to continue meeting the “same building” requirement of the In-Office Ancillary Services (IOAS) Exception to the Physician Self-Referral Law with the arrangements they had previously used to comply with this exception. Consequently, the Proposed Rule represents a narrowing of the IOAS Exception under the Physician Self-Referral Law without an acknowledgement by CMS that this proposal is inconsistent with the existing Stark III requirements. CMS’ sweeping proposal, including mandatory enrollment as an IDTF and application of IDTF rules to physician practices, may substantially impact opportunities for shared imaging facilities in the future.