On November 1, 2007, the Centers for Medicare and Medicaid Services (“CMS”) issued the Medicare Physician Fee Schedule Final Rule with Comment Period (“Final Rule”). As expected, the Final Rule imposed a 10.1 percent cut to physician payment rates, which Congress is expected to reverse, as it has in the past. In addition, the Final Rule addressed significant changes in the areas of fraud and abuse that will go into effect on January 1, 2008.

The Final Rule addresses changes to policies and payments originally proposed by CMS in July 2007. CMS modified and finalized its proposal to apply anti-markup provisions to both the technical and professional components of certain diagnostic tests. However, it did not finalize other wide-ranging proposals, which would have modified certain provisions in the Stark physician self-referral law, included in the Proposed Physician Fee Schedule Rule (“Proposed Rule”) issued in July.1 CMS had proposed changes to the provisions involving the in-office ancillary services exception, “per-click” rental payments, percentage-based compensation arrangements, “under arrangements” and other provisions. CMS stated that it intends to finalize the Stark-related provisions in future rulemakings once it processes the large number of comments it received on these numerous and significant proposals.

Key Finalized Provisions

Anti-Markup Provisions

CMS did finalize, with some significant changes, its proposal limiting the ability of physicians to mark up diagnostic tests performed by outside suppliers. The new provision will make it significantly more difficult for physicians to purchase diagnostic tests, such as pathology and imaging services, from outside suppliers and then mark up those services when billing Medicare. CMS was motivated by concerns that these arrangements led to increased use of diagnostic services, as physicians attempted to profit from the markup on these services. By eliminating the possibility of markup, CMS clearly expects to eliminate that incentive.

Current rules already prohibit the markup of the technical component (“TC”) of certain diagnostic tests — e.g., the preparation of a pathology slide or taking and developing an x-ray — when performed by outside suppliers and billed to Medicare by a different individual or entity, but the professional component (“PC”) is not currently subject to an anti-markup provision. In addition, even the limitation on the anti-markup of the TC was often not followed.

Basically, the Final Rule imposes an anti-markup requirement on all diagnostic tests performed at a site other than the billing physician’s office. This new provision applies to both the TC and the PC of a diagnostic service. It also imposes an anti-markup provision on diagnostic tests that are ordered by a party related by common ownership or control to the billing supplier.

CMS makes clear that for purposes of the anti-markup provisions, the phrase “billing physician or other supplier” is intended to mean “any supplier.” The “office of the billing physician or other supplier” is the medical office space where the physician or other supplier regularly furnishes patient care, or space in which a “physician organization” provides substantially the full range of patient care services that the physician organization generally provides.

The Final Rule clarified that for purposes of the anti-markup provisions, part-time employees will be treated no differently than full-time employees or contractors who reassign benefits. As such, under the Final Rule, diagnostic tests provided by part-time employees and independent contractors in the office of the billing supplier will not be subject to the anti-markup provisions, unless the services of the independent contractor are billed as a purchased diagnostic test. However, if a full or part-time employee or an independent contractor performs the services off-site, then the billing party is not permitted to mark up the charge from the performing entity.

The Final Rule leaves it up to the billing entity to establish a reasonable and accurate methodology for determining the net charge. However, it requires that the net charge be calculated exclusive of costs incurred by the billing party for leasing space or equipment. It also defines the previously undefined term “outside supplier” as “someone other than a full-time employee of the billing physician or medical group.” In light of its finalized anti-markup provisions, CMS elected not to amend the definition of “centralized building” because the agency believed such an amendment was not necessary to mitigate possible overutilization.

These provisions are designed to curtail “pod” lab operations and will significantly affect the manner in which diagnostic procedures are provided and billed. They may also cause some group practices to look at the possibility of bringing such services in house, to avoid the anti-markup provisions.

Pending Proposals on the Stark Physician Self-Referral Rules (Not Finalized)

CMS opted not to finalize proposed changes to the Stark physician self-referral law, saying that:

“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). . . . 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 intends to publish a final rule on proposals on the following subjects not addressed in the Final Rule:

  • Burden of proof
  • Obstetrical malpractice subsidies
  • Unit-of-service (per-click) payments in lease arrangements
  • Period of disallowance for noncompliant financial relationships
  • Ownership or investment interests in retirement plans
  • “Set in advance” and percentage-based compensation
  • “Stand in the shoes” provisions
  • Alternative criteria for satisfying certain exceptions
  • Services furnished as “under arrangements”

In the Proposed Rule, CMS also solicited comments on changes to the in-office ancillary services exception, although it made no specific proposal. In the Final Rule, CMS has clarified that any changes to the in-office ancillary exception will be accomplished through the full notice and comment rulemaking process. More information on the specifics of these pending proposals is available in Alston & Bird’s July 12th Health Care Advisory: CMS Proposes Major Changes in Physician Self-Referral Rules.2


In the Final Rule, CMS made significant changes to the anti-markup provisions on diagnostic tests. CMS sought to address program and patient abuse in the form of overutilization of services and the resulting higher costs to Medicare. The changes finalized in this rulemaking will significantly impact the manner in which diagnostic procedures are provided and billed.

While CMS decided not to finalize any of the proposed revisions to the physician self-referral regulations, aside from the anti-markup provisions, it announced its intent to publish a final rule addressing the proposals noted above. The changes set forth in the Proposed Rule remain important indications of the ongoing concerns of CMS and the means it may employ to address abuse. The proposed changes would have far-reaching consequences for physician relationships with hospitals and other providers. Health care providers and suppliers should review the impact that these pending changes will have on their operations.