In the proposed 2009 Medicare Physician Fee Schedule, CMS proposes two alternatives to its 2008 “same office suite” location test that was partially delayed until January 1, 2009.

Introduction and Background

In last year’s final 2008 Medicare Physician Fee Schedule (MPFS) rule, effective January 1, 2008, the Centers for Medicare and Medicaid Services (CMS) made sweeping changes to the Medicare diagnostic test anti-markup rule (the “Anti-Markup Rule”). This rule implements a statutory prohibition on a billing physician receiving payment in excess of the net charge for a diagnostic test that is not performed or supervised by the billing physician or another physician with whom the billing physician shares a practice (the “Payment Limitation”). For many years, CMS treated the Payment Limitation as a limit on what physicians could be paid by the Medicare program for the technical component of purchased diagnostic tests. However, in a controversial move last year, CMS extended the Anti-Markup Rule to the professional component (interpretations) of diagnostic tests, and added a new site-of-service basis for the Payment Limitation. Specifically, the Payment Limitation would apply (in addition to diagnostic tests purchased outright) to diagnostic tests ordered by a physician and not performed in the same office suite where the physician’s medical practice provides the full range of patient care services that the practice provides generally. This new test, in effect, creates a location test for when the ordering physician is deemed to “share a practice” with the performing or supervising physician.

However, after realizing that this new site-of-service test would have the effect of disrupting many group practices’ advanced imaging operations developed in reliance on the Stark law’s in-office exception, on January 9, 2008, CMS delayed implementation of the modified Anti-Markup Rule until January 1, 2009, except as applied to anatomic pathology. After reconsidering its original approach, CMS now, in the proposed 2009 MPFS rule, proposes an alternative to the site-of-service test, along with a second alternative that, while retaining the site-of-service test, makes significant changes to it. To appreciate these proposed alternatives, it is helpful to review some of the background that informs CMS’s focus on modifying the Anti-Markup Rule.

Over the last several years, CMS has become concerned that the Stark law permitted certain anatomic pathology “pod” (or “condo”) lab arrangements to proliferate in reliance on the Stark law’s in-office ancillary services exception and, in particular, the regulatory definition of a “centralized building.” The “centralized building” approach to the Stark in-office exception permits a group practice to place a diagnostic service, such as an anatomic pathology lab, many miles away from its offices, and operate the lab through a “turn-key” lease or management arrangement with a third-party pathology laboratory or affiliated management company, so long as the group has exclusive use and control of the space on a 24/7 basis. (The “same building” approach, a second approach to the Stark in-office exception, permits the same arrangement, but without the exclusive use and control requirement.) CMS concluded that these pathology laboratory arrangements, in particular, the “centralized building” approach, abuse the Stark in-office exception and CMS decided to prohibit the arrangements by adopting a site-of-service test under the Anti-Markup Rule that effectively carves all diagnostic testing arrangements out of the Stark in-office exception, unless the diagnostic testing is performed in the same office suite where the ordering physician’s practice provides the full range of patient care services the practice provides generally. This “same office suite” test resulted in an outcry from the many group practices that had developed advanced imaging facilities in reliance on the Stark in-office exception (under either the “centralized building” or the “same building” approach), prompting CMS to delay implementation of the modified Anti-Markup Rule except for anatomic pathology. In the proposed 2009 MPFS rule, CMS outlines two alternatives:

“Exclusive Arrangement” Test

Under CMS’s first alternative, for which it does not propose any regulatory text, a physician practice is subject to the Payment Limitation if: (i) the practice purchases a diagnostic test outright; or (ii) the physician who performs the interpretation (the professional component) or supervises the technical component of the diagnostic test is not exclusive to the billing physician practice. The performing (interpreting or supervising) physician may be an employee or contractor, full- or part-time, of the physician practice, but the physician may not perform interpretations or supervise technical component diagnostic testing for any other entity but the ordering physician’s practice.

This “exclusive arrangement” test is notable for the fact that it is indifferent to where the diagnostic test is interpreted or supervised, or whether the practice is billing Medicare in reliance on the “centralized building” or the “same building” approach to the Stark in-office exception. It would accommodate large group practices that have sufficient diagnostic testing volume to justify hiring one or more interpreting and supervising physicians who are exclusive to the practice, and it would also accommodate smaller group practices that can supply their own supervising physician(s) (and, thus, mark-up the technical component to Medicare), but are willing to forego any margin on the professional interpretations performed by physicians, such as radiologists, who have reading arrangements with multiple physician practices and imaging facilities.

However, the “exclusive arrangement” test would effectively foreclose shared diagnostic testing facilities, whereby more than one physician practice relies on the same physician(s) to supervise the diagnostic testing and/or perform the interpretations. Few medical practices participating in shared diagnostic facility arrangements have sufficient testing volume to support an exclusive arrangement for physician supervision and interpretations. Shared imaging facilities, for example, rely on a single radiologist to interpret and supervise imaging for multiple practices. In light of CMS’s stance on anatomic pathology “pod” labs, and its recent comments critical of shared ancillaries, generally, this foreclosure of shared diagnostic testing facilities is likely an intended effect of this exclusive arrangement test. (Even if CMS does not adopt this “exclusive arrangement” test, CMS’s proposed rule requiring physician practices that furnish diagnostic tests to meet most of the standards that Independent Diagnostic Testing Facilities must meet would also have the effect of prohibiting shared diagnostic testing facilities.)

“Same Building” Test

CMS’s second alternative, for which it proposes regulatory text, also applies to diagnostic tests that are purchased outright, and retains the site-of-service approach. However, the requirement that the diagnostic testing be performed in the same office suite where the billing medical practice provides the full range of patient care services that it provides generally is changed to the “same building” where the ordering physician provides substantially the full range of patient care services that the ordering physician provides generally. (The proposed regulatory text is unclear on whether the ordering physician must, in addition to providing substantially the full range of his or her patient care services in the same building where the testing is performed, also provide patient care services in the building on a regular basis. Presumably, CMS would clarify this point if this alternative is adopted as a final rule.) Same building has the meaning given it by the Stark regulations, i.e., a structure with, or combination of structures that share, a single street address as assigned by the U.S. Postal Service, excluding all exterior spaces and interior loading docks or parking garages. Mobile vehicles, vans and trailers are specifically excluded from the definition of same building, which means that a medical practice could not, as a practical matter, operate a mobile diagnostic testing business to which it would refer its own patients.

This same building test preserves the ability of multiple group practices with offices in the same building to share a diagnostic testing facility. It also accommodates groups with their own diagnostic testing facility in the same building where they maintain an office, but which rely on non-exclusive arrangements with physicians to perform Medicare-covered interpretations and, perhaps, supervision of the diagnostic tests.

However, this same building test requires that interpretations performed by an employee or a contractor of a practice must be performed in the same building where the ordering physician provides substantially the full range of patient care services he or she provides generally, even though the practice may arrange to have tests or images transmitted to a practice site in another building. (Stark regulations, by contrast, require that interpretations by contractor physicians be performed “in the group’s facilities,” but not necessarily the same building where the ordering physician practices. Stark regulations place no restriction on where employees of a physician practice may perform interpretations.)

More importantly, this same building test forecloses the “centralized building” approach to diagnostic testing taken by many large group practices. Although these large, multi-site group practices may often have physician offices in the same building where they have consolidated (centralized) their diagnostic testing, such as advanced diagnostic imaging, the same building test only permits ordering physicians in the practice that provide substantially the full range of their patient care services in the same building to utilize the facilities without application of the Payment Limitation. Physicians who do not practice in the building where the diagnostic testing has been consolidated could not send their Medicare patients to the facility without the claims being subject to the Payment Limitation.

Recognizing that the same building test would have an adverse effect on such multi-site group practices, CMS has, in effect, requested comments on an exception to the “same building’ test for large group practices with multiple offices on the same medical or hospital campus where the practice has consolidated its diagnostic testing. However, most large group practices today have multiple practice sites spread out across multiple cities or counties. A “same campus” test would not be helpful to such practices, and substitutes physical proximity for true practice integration. The apparent result of this approach would be that multiple group practices with single sites in the same building and no other integration could share a diagnostic testing facility in the same building, but a single, fully integrated, but multi-site group practice with a diagnostic testing facility in one building could not accept referrals from any of its physicians not practicing in the same building.

Nonprofit Exception

Except for purchased technical component testing, CMS proposes an exception to the Anti-Markup Rule for tests billed by a physician practice that is organized as an entity in which no person has any rights to a profit distribution, e.g., a nonprofit corporation. If the same building approach is adopted in the final rule, this exception would be a tremendous benefit for large, tax-exempt, nonprofit medical practices that would otherwise be unable to meet the restrictions of the same building test.

“Purchased Test” Definition Issue

CMS attempts to shed some light on the continuing and perplexing problem of distinguishing between a “purchased” test and a diagnostic test furnished by the billing practice directly. First, CMS confirms that a test interpretation performed by a contractor or employee physician pursuant to a reassignment to the practice is not a purchased test. Since a physician practice can easily obtain a reassignment of benefits from an employed or contracted physician performing interpretations on behalf of the practice, a physician practice should be able to easily avoid having these interpretations characterized as “purchased” tests under this proposed provision. However, any site-of-service or other test, such as the same building or exclusive arrangement test discussed above, would still apply to these interpretations, and, if not met, the interpretations would still be subject to the Payment Limitation. Second, CMS proposes that if the technical component of the diagnostic test is performed and supervised in a building meeting the same building test, and the test is supervised by an employee or contractor of the practice, the technical component test is not a purchased diagnostic test subject to the Payment Limitation. However, CMS requests comments on an alternative approach to determining whether the technical component test is purchased. This alternative approach turns on the employment status of the technologist performing the diagnostic test. If the technologist is not employed directly by the billing practice, the technical component test would be deemed to be purchased, regardless of where the test is performed or how much financial risk the practice has assumed for the testing space, equipment, technologists or supply inventory.

“Net Charge” Definition Issue

Another definitional issue raised by the modified Anti-Markup Rule is how to determine the “net charge” of a diagnostic test that is not purchased outright, but that fails a site-of-service test. CMS proposes to define the “net charge,” for purposes of the professional component, as the charge of the interpreting physician, and, for purposes of the technical component, the charge of the supervising physician. This approach would appear to be feasible for the professional component, but, since physicians are rarely separately compensated by payors (including Medicare) or their practices for supervision of diagnostic tests, determining such a “net charge” for supervision does not seem feasible. CMS has requested comments on whether and how it should provide specific regulatory guidance for determining the net charge for a diagnostic test, including comments on whether it should permit the inclusion of certain overhead expenses of the practice.

Additional Requests for Comments

CMS requests comments on the idea of narrowing the exception for reassignment of diagnostic tests, citing the example of certain state laws requiring that physicians (primarily pathologists) bill payors directly for their professional services. CMS requests comments on the timing of its implementation of the 2008 MPFS revisions to the Anti-Markup Rule and any of its new proposals in the 2009 MPFS rule, e.g., should any of the revisions or proposals not be implemented on January 1, 2009.

Comments on the 2009 MPFS rule are due August 29, 2008.