CMS PROPOSES DRASTIC CHANGES TO THE PURCHASED DIAGNOSTIC AND REASSIGNMENT RULES

On July 2, 2007, the Centers for Medicare and Medicaid Services (CMS) issued its 2008 Medicare Physician Fee Schedule Proposed Rule (the 'Proposed Rule'). The Rule contains significant revisions to the so-called 'Stark Rule' and related Medicare reimbursement rules, that are intended to curtail patient and program abuses that lead to over utilization and higher costs to the Medicare program. One proposed change would fundamentally alter the relationship between many practices and certain physician-independent contractors by further tightening the prohibition against marking up purchased diagnostic tests , thereby targeting a broad spectrum of arrangements under which physicians may currently be profiting. If these changes are adopted, many existing ancillary services arrangements would have to be restructured and some would no longer be viable options, particularly for solo practitioners and smaller group practices.

Under the current provisions for purchased diagnostic tests, a physician purchasing the technical component of a test from another physician or outside supplier may not 'mark up' the test when submitting the bill to Medicare. The purpose of this anti-markup prohibition is to bar arrangements that allow a billing physician or group to profit from diagnostic tests that such billing physician or group did not actually perform or supervise.

However, under the current rules, the anti-markup provision does not extend to the professional component of diagnostic tests that a physician or group either purchases under a contractual arrangement or obtains pursuant to a reassignment from an outside radiologist or other specialist. In fact, many physician practices routinely enter into part-time or independent contractor arrangements with outside physicians, who then reassign their professional interpretations to the billing practice. This, in turn, allows the practice to bill Medicare directly, and make a profit from the contracted services.

CMS has long expressed serious concern that allowing physician group practices (and other suppliers) to purchase diagnostic testing services and then realize a profit when billing Medicare leads to over utilization and higher costs to the Medicare program. In fact, in the 2007 Medicare Physician Fee Schedule Proposed Rule, CMS solicited public comment on expanding the anti-markup provision to the professional component of diagnostic tests. After reviewing public comments, CMS appears to have decided to close this loophole and, in the new Proposed Rule, extends the anti-markup prohibition to the professional component of diagnostic tests.

Under the Proposed Rule, the anti-markup prohibition for purchased diagnostic tests would apply whether the technical or professional component is purchased outright, or the physician or supplier performing the test or interpretation reassigns his or her right to bill Medicare to the billing physician or group. The only exception would be a reassignment from a full-time employee of the billing physician or group, thus essentially eliminating a practice's ability to profit from the professional work of physicians who are not full-time employees of such practice.

In addition, in order to prevent any circumvention of the anti-markup provisions, CMS is also proposing strict rules for calculating the charges that a billing physician or group will be able to bill the Medicare program for purchased diagnostic services. More specifically, the billing physician or group would only be permitted to bill Medicare for the lowest of: (i) the outside supplier's 'net charge' to the billing physician or group (defined as an amount determined without regard to any charge intended to reflect the cost of equipment or space leased to the outside supplier by or through the billing physician or group); (ii) the billing physician's or group's actual charge; or (iii) the fee schedule amount for the test that would be allowed if the supplier billed Medicare directly. These proposed restrictions would essentially eliminate a medical practice's ability to mark-up or profit from tests performed by an independent contractor or part-time employee.

If adopted, the Proposed Rule would likely put many pathology pod labs and other entities that provide the shared use of equipment, technicians, and professional interpretation services to multiple solo and group practices out of business. In addition, most part-time or independent contractor arrangements for the provision of interpretation services would either have to be unwound or terminated. In the short term, the proposed changes would have an immediate and significant economic impact on smaller medical practices, which typically don't have sufficient patient volume to justify hiring a full-time physician for professional interpretation services. In the long term, these new restrictions may act as an incentive for physicians to come together and form larger group practices that will have the economies of scale not only to hire full-time physicians to provide interpretation services, but also provide other efficiencies that may increase physician revenue, even as CMS continues to tighten its purse strings.

Physician practices that are involved in these arrangements should carefully monitor the progress of the Proposed Rule and seek legal guidance in assessing its legal and financial impact.

See 72 Fed. Reg. 38122 (July 12, 2007).

Providers, including, but not limited to those with shared laboratory and diagnostic facilities, per-click leasing arrangements, percentage compensation arrangements, block leases, under arrangement service agreements, and those who utilize the in-office ancillary services exception under the Stark Law need to review their activities and arrangements in anticipation of the proposed changes.

See 42 U.S.C. 1395u(n)(1); 42 C.F.R. 414.50.