2007 Physician Fee Schedule Proposals Would Have Implications for Diagnostic Testing Services

The proposed 2007 Medicare physician fee schedule, published in the August 24, 2006 Federal Register, would make a number of significant changes to the rules governing reassignment and the Stark law. The proposed changes are part of an effort by the U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services ("CMS") and Office of Inspector General ("OIG") to eliminate "condo" pathology laboratory arrangements. While the proposals would address condo path labs, they could have far-reaching implications for many common arrangements for diagnostic services, including:

• Medical group contracts with third parties for the use of diagnostic testing equipment and personnel in order to furnish diagnostic tests to the medical group's patients;
  
• Medical practice "shared facility" arrangements involving imaging, laboratory and other diagnostic testing services furnished to medical practice patients;
  
• Radiology and pathology professional service contracts with medical groups for provision of the professional component of diagnostic tests that the group bills globally; and
  
• Remote reading arrangements in which radiologists who are located in another facility and/or state provide professional interpretations via PACS systems where the entity furnishing the test bills the interpretations.

Overview of Proposed Changes

The proposed changes would modify the Medicare rules in two major ways.

First, the most significant changes would be made to the recently promulgated exception to the prohibition on reassignment that permits reassignment to an entity under a "contractual arrangement." The proposed reassignment rule changes would apply solely to those contractual reassignments relating to diagnostic tests.

CMS has proposed changes that effectively would merge existing rules governing purchased diagnostic tests and associated anti-markup provisions with the contractual reassignment exception. CMS is considering another change that, for most groups and some hospitals, effectively would prohibit the acquisition of professional interpretations under contractual (rather than employment) arrangements. These changes, while not actually proposed in the rule, would render the contractual reassignment exception useless for arrangements involving diagnostic tests.

Second, proposed changes to the Stark law final rule would impose more restrictive requirements on what qualifies as a "centralized building" under the law's in-office ancillary services and physician services exceptions.

Condo Path Lab Arrangements

CMS and OIG are proposing the rule changes due to their dislike of "condo" anatomical pathology laboratory service arrangements such as those reviewed by the OIG in Advisory Opinion 04-17. OIG disapproved of the arrangements reviewed in OA 04-17 because they had characteristics identified as suspect in an OIG April 2003 Special Advisory Bulletin on "contractual joint ventures," and because they could implicate the federal anti-kickback statute.

In a typical "condo" lab arrangement, multiple "turn-key" centralized pathology laboratories are co-located in a single facility. Each lab is operated by a separate medical group, but the same group of pathologists and technicians service the multiple labs. The arrangements were only made possible by recent changes to the contractual reassignment exception that permits reassigned services to be furnished outside of the group's premises, and because centralized ancillary service facilities that use independent contractor physicians are allowed under the Stark law final rule.

Proposed Purchased Diagnostic Test Changes

As a general rule, Medicare pays only the physician, entity or other provider or supplier that actually furnishes a service to a beneficiary. However, specific exceptions to this general rule permit "reassignment" under employment, contractual and certain other arrangements, including in the case of diagnostic tests, for "purchased diagnostic tests" and for "purchased interpretations."

Under present rules, when it comes to diagnostic tests, a physician, medical practice or other supplier can use either the contractual reassignment or purchased diagnostic test exception with the appropriate choice depending upon the nature of the relationship. This enables many medical practices to contract with outside entities to access diagnostic testing equipment and personnel to furnish diagnostic services to the practice's patients. Diagnostic tests that are billed under such arrangements are billed either as purchased diagnostic tests (which are subject to separate "anti-mark-up" provisions), or more commonly, under the contractual reassignment exception (often without application of the anti-markup provisions, depending upon the nature of the arrangement).

The proposed rule would amend the current contractual reassignment exception as applied to diagnostic tests to provide that, with certain exceptions, if the technical component of a diagnostic test is billed by a physician or medical group ("billing group") under a contractual arrangement with another supplier who performs the service, the billing group will be required to perform the interpretation of the study and Medicare will limit the payment to the physician or group (less deductibles and co-insurance) to the lower of:

• The supplier's net charge to the billing physician or group;
  
• The billing physician or group's actual charge; or
  
• The Medicare fee schedule amount.

These proposals essentially would apply the purchased diagnostic test anti-markup provisions to any contractual arrangement that involves furnishing the technical component of diagnostic tests (other than clinical laboratory tests). Thus, all contractual arrangements involving the performance of diagnostic tests would be subject to the anti-markup provisions without regard to whether the arrangement truly constitutes the "purchase" of a test from another supplier. The application of the anti-markup rule would change substantially the economics of all contractual arrangements involving diagnostic tests, thereby causing many physician groups to reconsider arrangements that currently provide convenient and efficient testing to patients.

Potential Purchased Interpretation Changes

CMS is also considering amendments that would merge existing requirements governing "purchased interpretations" into the contractual reassignment exception. Under these changes, a physician or group would be able to bill for the reassigned professional component of a diagnostic test under the contractual arrangements exception only where:

• The test is ordered by a physician who is outside of the group performing the billing, and independent of the interpreting physician;
  
• The physician or group performing the interpretation does not see the patient (but only sees the test for purposes of furnishing an interpretation); and
  
• The physician or group billing for the interpretation also performed the technical component of the diagnostic test.

Many physician practices currently contract with radiologists and/or pathologists to furnish the professional component of diagnostic testing services that are furnished to the practice's patients, and for which the practice bills on a global basis. Many of these arrangements could not meet the new requirements because the physician who orders the test is part of the group that bills for the test and the interpretation. The rule change that CMS is considering would require these physician practices to either perform the professional interpretation themselves, directly employ (rather than contract with) the pathologists or radiologists to read the tests, or cease billing for the interpretation, singally or globally.

Proposed Changes to Stark "Centralized Building" Definition

Under the Stark law final rule, bona fide group practices can furnish designated health services through the use of a "centralized building" that is used exclusively by the group practice for the furnishing of some or all of the practice's designated health services. CMS proposes to amend the definition of what constitutes a centralized building to require that facility, in most circumstances, to:

• Involve at least 350 square feet of space, and
  
• The equipment used in the space must be exclusively located in, and used in the centralized facility.

Certain limited arrangements in which three or fewer medical groups each have centralized space in the same building would be excluded from the proposal. CMS is also considering other changes to this definition including those that would require a group operating a centralized facility to have technician staff working in the facility at least 35 hours per week, and other changes that would affect facilities located in states outside of the practice's normal clinical offices.

Implications

The proposed rules would make major changes to the regulatory landscape governing diagnostic services by either prohibiting outright, or undermining the economics and efficiencies of many common arrangements, including those described below.

Leases for Diagnostic Equipment and Personnel. Medical practice contracts with any third party for the use of diagnostic testing equipment and personnel, including common medical practice "shared facility" arrangements involving diagnostic services, could be swept into the same regulatory net as the condo path lab arrangements reviewed in AO 04-17. If the proposed rule changes are adopted, a physician who contracts with another medical practice, a hospital or an outside company to access the use of diagnostic equipment and personnel on a block-of-time basis could very well become subject to the purchased diagnostic test anti-markup provisions, thereby causing physician groups to re-evaluate the economics of such arrangements. Medical groups presumably still could elect to purchase directly all required diagnostic testing equipment and directly employ technician staff in order to avoid the rule's application, but the cessation of these arrangements could reduce the availability and efficiency of tests furnished to patients.

Purchase of Professional Services. If CMS eventually adopts rule changes relating to purchased interpretations, independent contractor pathologists and radiologists effectively would be barred from performing the professional interpretation of diagnostic tests that are billed by medical practices. The treating physician could still read and bill for diagnostic tests furnished in the physician's own medical practice for patient treatment purposes. Medical practices also could establish direct employment (rather than independent contractual) arrangements with radiologists and pathologists, although such employment options likely would be resisted by radiology and pathology groups.

Remote Interpretation Arrangements. Implementation of the proposed change to the Stark law's centralized building definition or reassignment provisions dealing with purchased interpretations could prove troublesome for medical groups that contract with radiologists or other ancillary service providers in other locations to meet the group's patient service needs on a 24/7 basis. Under such arrangements, radiologists are able to provide interpretations through the use of PACS systems by working in a "centralized building" that is operated by the billing medical group, but located in the remote location. Even if no change is made to the purchased interpretations, provision referenced above, an amendment of the centralized building definition could make the economic feasibility of such remote reading arrangements questionable due to the space, equipment and other potential requirements.

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CMS appears to recognize that these sweeping changes might go too far. To that end, it is soliciting comments on whether the proposed changes should not apply to radiology and other imaging services, and whether services furnished on the premises of the billing entity should be excluded from the proposed changes. Physicians and groups engaged in legitimate and useful diagnostic test arrangements should consider commenting on the rules and provide a discussion on the value of such arrangements under the current Medicare regulations. Written comments on the proposals may be provided until October 10, 2006.