On July 2, 2007, CMS released the Proposed Revisions to Payment Policies Under the Physician Fee Schedule and Other Part B Payment Policies for CY 2008 (the “Proposed Rule”). As expected, the Proposed Rule includes a 9.9 percent decrease in physician payment. Perhaps less expected are numerous proposals aimed at curtailing fraud and abuse. If fi nalized in its current form, the Proposed Rule would result in sweeping changes in a number of key areas, including joint ventures, contracting arrangements, and diagnostic testing. CMS is accepting comments on the Proposed Rule through August 31 and plans to publish the fi nal rule this fall. The fi nal rule will be effective for services provided as of January 1, 2008. Among the areas addressed are the following:

1. Stark Law Changes

Perhaps foreshadowing changes to come in the Stark Phase III regulations currently under review by the Offi ce of Management and Budget, the Proposed Rule suggests several Stark rule changes that would foreclose existing loopholes as a means to eliminate fraud and abuse.

Adding Under Arrangements Services to Stark “Entity” Definition

CMS is proposing to expand the defi nition of Stark “entity” to include the person or entity that performs the Stark designated health services (the “DHS”). Stark currently defi nes “entity” to include only the person or entity that bills Medicare for DHS and not entities furnishing DHS under arrangements. This defi nition has enabled physicians to own, or provide items or services to, an entity that furnishes DHS under arrangements to hospitals, without creating a Stark financial relationship. In addition, recent changes resulting in higher Medicare reimbursement for services billed under outpatient hospital prospective payment rates than under freestanding rates have further fueled growth in “under arrangements” contracting. In particular, CMS found problematic physician-hospital joint ventures involving specialist physicians referring to joint ventures for services previously provided by hospitals. In CMS’ view, “[t]here appears to be no legitimate reason for these arrangements for services other than to allow referring physicians an opportunity to make money on referrals for separately payable services … or to share hospital revenues with referring physicians.” If the Proposed Rule’s expanded defi nition becomes fi nal, physicians could no longer refer for DHS to their physician-owned entities providing DHS “under arrangements” and many existing “under arrangements” ventures would be forced to restructure or close to avoid Stark violations. Because all hospital inpatient and outpatient services are DHS, including ambulatory surgery services, virtually any physician-owned venture furnishing services “under arrangements” to a hospital will be affected.

Per Click and Time-Based Payments in Space and Equipment Leases

In an apparent reversal of the 2001 Stark Phase I fi nal rule, in which CMS opened the door to use of unit-of-service (per click) and time-based payments, CMS is now proposing to prohibit these payment methods in certain space and equipment leasing arrangements. The Proposed Rule would prohibit the use of per-click and time-based based payments for services furnished by a lessee to patients who are referred by a physician-lessor to the lessee. CMS cited concerns about space and equipment lease arrangements that “are structured so that a physician is rewarded for each referral he or she makes for DHS.” The Proposed Rule change would prohibit these types of payment arrangements, which are commonly used in block-time and other shared facility and equipment arrangements. CMS is likewise concerned about arrangements where a physician rents space or equipment from a hospital or other DHS entity on a per-click basis, such as a physician renting an MRI only when the physician refers a patient for MRI, and the physician then providing the MRI service “under arrangements” to the hospital. CMS is also requesting comments regarding whether it should prohibit both time-based and per click based payments to an entity-lessor by a physician-lessee if the payments are for services furnished to patients sent to the physician-lessee by the entity-lessor.

Percentage-Based Payments Permitted Only for Personally-Performed Physician Services

CMS took issue with the increasing use of payments to physicians based on the percentage of revenues earned by the use of equipment or in rented space. As a result, CMS is proposing to clarify that percentage compensation arrangements may be used only for paying for personally performed physician services and must be based on revenues directly resulting from the physician’s services rather than some other factor, such as a percentage of savings by a hospital department.

In-Office Ancillary Services Exception (“IOAS”)

CMS took a dim view of proliferating arrangements relying on the IOAS exception that permit physicians to order and perform ancillary services as part of the physician’s offi ce practice (e.g., diagnostic imaging). CMS expressed concern that “services furnished today purportedly under the in-offi ce ancillary services exception are often not as closely connected to the physician practice” as Congress may have intended when the Stark law was passed (e.g., pathology services furnished by an independent contractor pathologist in a remote location; physician practices contracting with independent entities for DHS in the “same building” or “centralized building”; “turn-key” arrangements to bring lab or imaging services into physician offi ces). CMS summed up its perspective by saying “these types of arrangements appear to be nothing more than enterprises established for the self-referral of DHS.” In hopes of eliminating further abuse of the IOAS, CMS is requesting comments on whether the IOAS should be revised to:

  • eliminate certain types of services from qualifying for the IOAS (e.g., therapy services not provided “incident to” the physician’s services, services not needed during the physician’s visit to diagnose the patient);
  • change the "same building" and "centralized building" defi nitions;
  • prevent non-specialist physicians from using the IOAS exception to refer patients for specialized services involving use of the equipment owned by the non-specialist;
  • incorporate any other restrictions on ownership or investment in the services that would minimize Medicare or Medicaid program or patient abuse.

Collapsing Indirect to Direct Compensation Arrangements

To safeguard against perceived program abuse by parties attempting to avoid application of the Stark referral prohibition by inserting an entity in a chain of fi nancial relationships, CMS is requesting comments on how best to approach collapsing indirect relationships to direct compensation arrangements. CMS is proposing that where a DHS entity owns or controls another entity to which a physician refers for DHS, the DHS entity would “stand in the shoes” of the entity that it owns or controls. In that case, the DHS entity would have the same compensation arrangements with the physician as does the entity it controls. For example, under the Proposed Rule, a hospital (DHS entity), that owns or controls a foundation that contracts with a physician, would have a direct fi nancial relationship with the physician. As almost an aside, CMS also notes that it may have already fififi nalized a rule change requiring physicians to stand in the shoes of their physician practices. These changes will undoubtedly affect many existing arrangement structured under the current defi nition of indirect compensation arrangement.

Burden of Proof

CMS is proposing that if a claim is denied based on a referral prohibited by Stark, the DHS entity submitting the claim would have the burden to prove that the DHS was not furnished pursuant to a prohibited referral. Correspondingly, CMS would not bear the burden of proof to disprove that the referral was prohibited.

Alternative Criteria to Satisfy Stark Exceptions

On a positive front, CMS is proposing to create “alternative criteria” for cases of inadvertent noncompliance with certain technical Stark requirements. These new criteria might apply if, for instance, one party to a written agreement meeting all other Stark requirements merely failed to sign the agreement. In that type of situation, the arrangement could still qualify for the applicable Stark exception if the parties self-disclose the failure to CMS and CMS determines that the arrangement lacks indicia of fraud and abuse.

2. Anti-Mark-Up Limit on Purchased or Reassigned Diagnostic Tests

In response to industry comments that physicians purchasing diagnostic tests may inappropriately realize profi ts from their own referrals for diagnostic tests, CMS is proposing to add an anti-markup rule for both the technical component (“TC”) and professional component (“PC”) services of diagnostic tests, regardless of whether the billing entity purchases the service or whether the performing physician or supplier reassigns the right to bill to the billing entity. The current purchased diagnostic test rule prohibits marking up TC charges, if the service is purchased from an outside physician or supplier, but not when the physician or other supplier reassigns the right to bill. The Proposed Rule would extend this prohibition to PC services if either purchased or reassigned. CMS is also proposing to change how a reassigning physician or supplier’s net charge to the billing entity can be calculated. Specifi cally, CMS would prohibit the net charge from including any charge intended to cover the costs of equipment or space leased to the performing physician or other supplier by the billing entity. This change would prevent reassigning physicians from infl ating charges to recoup space or equipment lease costs as part of the charge for the reassigned service.

3. Independent Diagnostic Testing Facility (“IDTF”) Performance Standards

In the final CY 2007 Physician Fee Schedule rule, CMS introduced fourteen performance standards that IDTFs must meet in order to enroll or re-enroll in the Medicare program. CMS is now proposing to change these standards to require fi xed IDTFs to certify that they do not share space, equipment, or staff with, or sublease operations to, another individual or organization. The aim of this proposal appears to be to ensure that an IDTF’s operations are distinct from the operations of other businesses and can meet all Medicare conditions of participation. As proposed, these changes would apply only to fi xed IDTFs. However, CMS is requesting comments on whether it should extend these same changes to mobile IDTFs.

4. Medicare Part B Reimbursement Changes

CMS is proposing several Part B reimbursement changes including:

Changes to Medicare Part B drug payments, including changing the calculation of the average sales price (“ASP”) for drugs by defi ning bundled arrangements and requiring that drug manufacturers allocate bundled price concessions proportionately to the dollar value of units of each drug sold under the bundled arrangements when reporting ASPs, thereby enabling ASPs to better refl ect true drug costs;

Changes to the End-Stage Renal Disease (“ESRD”) composite rate payments, including a growth update and an update to the wage adjustment factor; and

Updating regulations for payment of certain services furnished in Comprehensive Outpatient Rehabilitation Facilities (“CORF”) based on statutory mandates that they refl ect payments under the Physician Fee Schedule.

Does The Proposed Rule Affect Existing Arrangements?

Because changes refl ected in the Proposed Rule are only proposed, it is not necessary to comply with them now. At this stage, it is unknown whether the Proposed Rule will ultimately be finalized in its current form or with additional modifications or retractions. Generally, adopting a “wait and see” strategy before making any changes to existing arrangements is appropriate. Nevertheless, parties in this situation may wish to submit comments to CMS addressing the Proposed Rule’s impact and suggesting alternatives. CMS is soliciting comments through August 31, 2007. By contrast, for those structuring new arrangements, it may be prudent to wait until the fi nal rule is published this fall before moving forward. Alternatively, parties in this dilemma could attempt to structure arrangements to comply with the Proposed Rule, but need to be prepared to make any changes necessary to comply with the requirements of the final rule effective in January, 2008.

A comprehensive review of all issues addressed in the Proposed Rule and its potential implications is beyond the scope of this Client Bulletin. If you have remaining questions or concerns about how the Proposed Rule may affect you, contact Karen- Smith at ksmith@bricker.com; Diane Signoracci at dsignoracci@bricker.com; or Claire Turcotte at cturcotte@bricker.com.