On July 2, 2007, CMS announced its proposed MPFS for the calendar year 2008. As expected, the proposed MPFS includes a 9.9% decrease in physician payments; however, this is a wide-ranging proposal that will impact far more than the amounts paid to physicians. If fi nalized, the proposal would make signifi cant changes to the diagnostic test payment rules, independent diagnostic testing facility standards and the Stark Law. These changes could signifi cantly impact existing or planned physician provider relationships. In fashioning the Phase III Rule, CMS accepted comments on the proposal through August 31, 2007. It is unclear when CMS will fi nalize the MPFS; however, the rate portion of the MPFS must be fi nalized before the end of this year.

A. Anti-Markup Provision

In response to comments that physicians purchasing diagnostic tests may inappropriately realize profi ts from their own referrals for diagnostic tests to an outside supplier, CMS is proposing signifi cant revisions to the “purchased diagnostic test rule,” also known as the “Anti-Markup Provision,” for both the professional component (“PC”) and the technical component (“TC”) of diagnostic tests performed by “outside suppliers.” CMS defi nes “outside suppliers” as anyone other than a full-time employee of the physician or medical group billing for diagnostic services. These changes would impact tests that were purchased by the billing entity and tests that were reassigned to the billing entity.

With respect to the PC (e.g., an independent contractor radiologist reassigns the PC fee to the medical group), the billing entity would be prohibited from charging Medicare more than its actual “net charge.” CMS proposes the following criteria for calculating the “net charge.” Under the proposed rule, the amount billed to Medicare must be the least of (i) the physician or other supplier’s “net charge” to the billing entity; (ii) the billing entity’s actual charge; or (iii) the physician fee schedule amount. To prevent “gaming,” CMS defi nes “net charge” to mean an amount exclusive of any lease of equipment or space to the physician or supplier furnishing the test. For example, if the physician charges the billing entity $60 for the test, the billing entity charges the physician or other supplier performing the test $10 for the lease of the equipment to perform the test, the billing entity’s usual charge for the test is $100 and the physician fee schedule amount is $80, the “net charge” for the test would be $50. The billing entity could charge Medicare only $50 for the test.

Similar provisions would apply to the TC of diagnostic tests. This means that if a technician is not a full-time employee of the billing physician or medical group, then the billing entity will be limited to billing Medicare its actual cost in acquiring the technician’s services. This is true regardless of whether the medical group or a physician supervises the technician.

If the proposed changes to the Anti-Markup Provision are adopted, they may impact the ability of a billing entity (e.g., an IDTF or radiology group) to utilize the services of part-time employees or independent contractors. These revisions would also impact management companies that manage laboratories for physicians who have entered into POD lab arrangements. However, CMS states that the proposed PC revisions to the Anti-Markup Provision will not apply to independent laboratories.


In the proposed MPFS, CMS has revised several of the previously published independent diagnostic testing facilities (“IDTF”) performance standards and has added several new IDTF performance standards. These standards include prohibitions on the sharing of space, revising the supervision standard, requiring that the IDTF list its Medicare administrative contractor (“MAC”) on any liability insurance policy and changes to the effective date of an IDTF’s enrollment. These changes are discussed below.

CMS is proposing a new performance standard that states that, in order for a fi xed IDTF to satisfy the Medicare conditions of participation, the IDTF must certify that it does not share space, equipment or staff with, or sublease operations to, another individual or organization. CMS clarifi es that the prohibition on sharing offi ce space applies to shared waiting rooms and the prohibition on sharing staff applies to supervising physicians. The aim of this proposal is to ensure that an IDTF’s operations are distinct from the operations of other businesses. Currently, CMS is limiting the proposed standard to apply only to fi xed-based IDTF locations, but is soliciting comments on whether it should also apply to mobile IDTFs. This proposal would eliminate the ability of an IDTF to enter into a sublease arrangement with a physician practice or other applicable entities such as a hospital.

CMS has narrowed the scope and responsibilities of physicians who provide general supervision of the IDTF. The language requiring the supervising physician to be responsible for the “overall administration and operations of the IDTFs … and assuring compliance with applicable regulations” has been deleted. In addition, CMS proposes to clarify that a supervising physician providing general supervision can oversee a maximum of three sites. This prohibition applies to both fi xed and mobile IDTFs. However, CMS stated this limitation is not meant to apply to physicians providing direct or personal supervision services to IDTFs.

An IDTF must now also add its MAC as a certifi cate holder on its liability insurance policy and notify its MAC of any policy changes or cancellations. Failure to maintain the required insurance results in revocation of billing privileges retroactive to the date of the lapse. One potential problem with this revision will be that insurance companies may no longer be willing to underwrite these policies, since this addition could potentially give the MAC certain rights to payment or indemnifi cation that it would not normally have. This proposal will likely meet with some resistance and be subject to extensive comment from the insurance industry.

CMS has also revised the guidelines for ascertaining an IDTF’s enrollment date in the Medicare program. Currently, Medicare permits IDTFs to bill for services furnished to Medicare benefi ciaries up to twenty-seven months prior to the IDTF’s actual enrollment in the Medicare program. CMS is proposing that retroactive billing would now be permitted only from the later to occur of: (i) the fi ling of the Medicare application (which is subsequently approved); or (ii) the date that the IDTF began rendering services at its location. This proposal would adversely impact IDTFs that apply for Medicare supplier status after a prolonged period of business.

C. Proposed Changes to the Stark Law

In the proposed MPFS, CMS has suggested several changes to the Stark Law. Some of the more signifi cant proposals are discussed below. The proposed changes would close some potential loopholes currently found under the Stark Law and may result in the elimination of certain types of arrangements.

Services Furnished “Under Arrangements.” The most signifi cant change under the proposed MPFS is CMS’s proposal to prohibit certain arrangements where physicians supply items and services to hospitals, skilled nursing facilities (“SNFs”), home health agencies (“HHAs”) and hospices. Citing concerns that referring physicians are improperly profi ting as a result of fi nancial relationships with “under arrangement” service providers that do not submit claims, CMS is proposing to expand the defi nition of what constitutes an “entity” under the Stark Law. Stark currently defi nes “entity” to include only the entity or person that submits the claim for DHS to Medicare. CMS is now proposing to expand the defi nition of “entity” to include not only the entity or person that submits the claim to Medicare, but also the entity or person that provides the service and the entity that causes the claim to be presented. This modifi cation would impact many “under arrangements” transactions in which a physician has an ownership interest in the entity furnishing the DHS. Under this proposal, the referring physician would now need to satisfy the ownership/investment exception under the Stark Law, instead of the indirect compensation exception. If this proposal were to be fi nalized, many currently permissible physician-ownership interests in “under arrangements” providers would be forced to restructure.

In-Office Ancillary Services Exception. CMS is currently reviewing services that it believes were not contemplated as in-offi ce ancillary services when the Stark Law was enacted. As a result, CMS is interested in reining in the “migration of sophisticated and expensive imaging or other equipment to physician offi ces” when this equipment is not closely related to the physician’s practice. CMS is also concerned with services furnished in a remote “centralized building” or “turnkey arrangements” in which third parties other than the group practice are responsible for much if not all of the patient care. Some of the services that will likely receive close scrutiny by CMS will be certain radiology services, physical therapy services and anatomic pathology services that are furnished in the “same building” where the physician practice is located or in a separate “centralized building.”

CMS has not issued a specifi c proposal to revise the inoffi ce ancillary services exception and no revisions were made in the Phase III Rule, but instead CMS is requesting comments in reference to the exception. In particular, CMS is soliciting comments on the following: (i) whether certain services should qualify for the exception; (ii) whether CMS should change the defi nitions of “same building” and “centralized building”; (iii) whether nonspecialist physicians should be able to refer patients for specialized services involving the use of equipment owned by nonspecialist physicians; and (iv) any other restrictions on ownership or investment in services that would curtail program or patient abuse.

The in-office ancillary service exception is one of the most widely used exceptions under the Stark Law, and any changes to this exception will have a signifi cant and far-reaching impact. However, based on CMS’s solicitation of comments on the topics listed above, it is likely that these changes would be benefi cial to radiologists, independent laboratories and physical therapy companies that have lost business to these physician practices. The impacted physician practices would now be required to refer patients to an unrelated source.

Per-Click Lease Payments. It is currently permissible under the Stark Law exceptions for space and equipment leases to provide for payment on a per-use or per-click basis as long as certain other conditions are satisfi ed. The current provisions permit such arrangements even when a physician makes a referral to a DHS entity that leases space or equipment from the physician for use in furnishing the service.

In light of the potential for overutilization by the lessor physician, CMS is proposing to prohibit per-use or per-click charges for services provided to patients referred by the lessor physician to the lessee. As a result, per-use or perclick charges would be allowed only to the extent that the rental payments not include payments for services furnished to patients referred by the lessor physician to the lessee. For example, the exception would prohibit a cardiologist from leasing an MRI to an IDTF and receiving per-click payments for scans performed on patients referred by the physician. The payment provision of any such leasing arrangement would need to be restructured to that of a fi xed-rate rent. Additionally, under the Phase III Rule, this prohibition would extend to relationships between a physician organization and a DMS entity. CMS is also seeking comments as to whether the prohibition should apply when the physician is the lessee (e.g., a physician leases a piece of equipment on a per-click basis from a hospital).

Percentage-based Compensation. CMS has proposed to prohibit most percentage-based compensation structures by changing the defi nition of what it means for compensation to be “set in advance.” CMS, in particular, wants to prohibit percentage arrangements for equipment and offi ce space. As a result, CMS is proposing that the only percentage compensation arrangements that would meet the “set in advance” requirement would be compensation directly resulting from personally performed physician services and such compensation must be based on revenues generated by the professional services rather than some other factor, such as a percentage of savings by a hospital department. CMS also clarifi ed that a physician may not receive a portion of the TC receipts that result from the physician’s diagnostic testing referrals.

Ownership or Investment in Retirement Plans. The Stark Law currently states than an investment in a retirement plan is not an ownership interest, and as a result, physicians who hold such interests have not been subject to the Stark Law’s prohibition on this basis. The proposed regulation would limit the exclusion to state that an interest in a retirement plan does not constitute ownership under the Stark Law only if the interest in the retirement plan is offered to a physician (or his/her immediate family member) through the physician’s (or family member’s) employment. CMS intends to eliminate arrangements where physicians have created a retirement plan to purchase entities that bill DHS and to which the physician then refers patients for DHS.

D. Miscellaneous Provisions

The MPFS contains many additional provisions. The more signifi cant ones are set out below:

  • CMS is proposing to increase the number of imaging services that are subject to a payment cap to the lower of the physician fee schedule amount or the hospital outpatient prospective payment amount.
  • CMS is proposing several Medicare Part B reimbursement changes. These changes would include defining “bundled arrangements” and providing the methodology of how drug companies include “bundled drugs” in the calculation of average sales price (“ASP”). The proposal would also require a drug manufacturer to allocate the total value of all bundled price concessions proportionately to the dollar value of each drug sold under the “bundled arrangements.”


While the changes proposed in the MPFS seem significant, these changes are only proposals and as a result it is not necessary to comply with them now. CMS is currently reviewing the responses it receives pursuant to this proposed MPFS, and as a result the fi nal MPFS may look entirely different. For those physicians or entities whose arrangements may be impacted by the proposed MPFS, it may be best to take a wait-and-see approach before making signifi cant changes to any existing structural arrangements. Additionally, there will be a period between fi nal publication of the MPFS and the effective date of the MPFS. For those structuring new arrangements, it may be prudent to wait until publication of the final MPFS. Alternatively, the arrangements could be drafted to comply with the applicable proposals under the proposed MPFS and then modifi ed if necessary. We will keep readers advised on important regulatory developments concerning both the Phase III Rule and the final MPFS and will issue an update upon publication of the final MPFS.