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2 Page 2 of 5 January 2008 SEARCH Enter term(s) Go Medicare takes aim at self-referred imaging Anti-markup restrictions and limitations on scan leases top latest rule making moves from Centers for Medicare and Medicaid Services --Thomas W. Greeson, J.D. The regular fall update to the Medicare Physician Fee Schedule is used by the Centers for Medicare and Medicaid Services each year to introduce new procedural codes, update the relative value units for all billing codes, and announce the new sustainable growth rate-mandated update (i.e., cut) in the conversion factor. But this annual rule making has taken on an even bigger role. The fee schedule update has also become the principal vehicle for CMS to promulgate new Medicare payment rules, including modifications to the Stark laws. This year's MPFS rules should prove to have a truly significant impact on imaging. The final rules make important changes to independent diagnostic testing facility (IDTF) performance standards and remove the profit in many technical and professional component diagnostic test agreements via a new "anti-markup" restriction. Although CMS deferred proposed action on most of the Stark rule changes published in its proposed rule, those proposals remain hovering in the wings. We can expect to see them made final some time early this year. In a surprise move, CMS announced at year-end that it was deferring most of its anti-markup restrictions until Jan. 1, The new rules make numerous modifications to IDTF performance standards, most beyond the scope of this column. One major new element of the performance standards will preclude most IDTFs from sharing space or equipment with any other Medicare-enrolled individual or entity. This means that lease deals by IDTFs with referring physicians are now barred outright. Fixed IDTFs that are located somewhere other than in a hospital building will now be precluded from entering into any type of arrangement with a physician, physician practice, or other entity that involves: subleasing the IDTF's office space and/or imaging equipment to a radiology group to perform interventional procedures; subleasing the IDTF's office space for a referring physician practice to establish a medical office location in the building; or offering even safe harbored block-time lease arrangements of the IDTF's office space and imaging equipment to physician practices. Although the regulations do not specifically state this, it appears that CMS is applying the "separate post office address" rule. If the IDTF and another Medicare-enrolled individual/entity are in space that has one post office address, then the two entities would be "sharing space." If, however, the two entities have different addresses, then they are not sharing space, even if they do share common hallways, reception area, or parking. In no event can the IDTF share

3 Page 3 of 5 its equipment. Recognizing that this new standard would require IDTFs currently engaged in actual office space sharing arrangements with physician groups to restructure, CMS has delayed the implementation date for existing IDTFs until Jan. 1, 2009, to provide them a full year to make changes. But any sublease agreement, however, is barred after Jan. 1, ANTI-MARKUP RULE Under Medicare's long-standing "purchased diagnostic test" rule, also referred to as the "anti-markup" rule, if a physician bills Medicare for the technical component of a diagnostic test performed by an outside supplier, the physician is prohibited from marking up the charges submitted to Medicare for the technical component services above what the physician paid to purchase the test. But application of the anti-markup provision has heretofore been quite limited, and it has been impotent in deterring most leasing arrangements. Nor has the rule previously applied to billings submitted for professional interpretation services. All that would have been changed by the new rule, and in a very meaningful way. The anti-markup rule, as drafted, has teeth. Register to Receive your free digital subscription to Enterprise Imaging & IT. Register Now Clearly, CMS has come to the realization that overutilization of diagnostic testing services may be escalating as ordering physicians seek profits from self-referral for imaging services. In response, the Medicare agency has expanded the anti-markup provision and its reassignment rules by broadening the application of the rule to more technical component test arrangements and by applying the prohibition on marking up charges to professional interpretation services. Here's how it works. Whenever the ordering physician either purchases technical or professional component services from an "outside supplier," or the technical or professional component testing services are performed at a site other than the "office" of the billing physician or other supplier, the anti-markup bar comes into place. These services can be billed by the ordering physician, but that physician or physician practice may not profit from that order. CMS did not define "ordering physician," but the clear meaning is one authorized to order a diagnostic test. An "outside supplier" is someone who is not an employee of the billing physician or other supplier and does not furnish the test or interpretation to the billing physician or other supplier under a reassignment. In other words, a part-time employee (or even an independent contractor) who reassigns his or her right to payment to the billing physician will not be deemed an outside supplier. The office of the billing physician is defined as "the medical office space where the physician or other supplier regularly furnishes patient care." The anti-markup provisions would have a profound impact on many arrangements. CMS has effectively removed the profit from many testing services contracted by self-referring physicians. The rule was crafted as an attack on "pod labs." Even many arrangements that comply with the "centralized location" or "same building" elements of the Stark in-office ancillary services exception will also be subject to billing rules that remove any profit from the arrangements. If the professional or technical component of a test is "performed at a site other than the office of the billing physician or supplier" it will be subject to anti-markup prohibition even if it's in a centralized location used exclusively by the billing group or even if performed in the same building but not in the office of the billing physician's group. The only feature of the new rule that CMS has allowed to go into effect in 2008 is the application of the restrictions on pod labs used by physician groups for anatomical pathology services. Thus, for example, if an orthopedic group with a full-time office in the same building as a radiology group's imaging center leased space, equipment, and personnel from the imaging center, the arrangement would be subject to the

4 Page 4 of 5 anti-markup rule, even when such a lease qualifies under the same building requirements of the Stark in-office ancillary services exception. This is a major blow to part-time leasing arrangements. And if the interpretation services were not performed in the orthopods' office, the professional component services would also have to be billed to Medicare at cost. In all events, the new rules require the billing physician group to disclose the identity of the outside supplier on the CMS 1500 claim form. The anti-markup rule requires that the billing group be paid the lesser of the fee schedule amount, the actual charge, or the "net charge" for the test. CMS received numerous comments requesting further guidance on how to determine the net charge when the performing supplier is paid on some basis other than per test or per interpretation (e.g., hourly, per diem, monthly). CMS responded that it is "leaving the responsibility for determining the net charge for a test with the billing supplier.... Suppliers must calculate the net charge in a reasonable manner." Should the rule go into effect in 2009, parties that enter into a purchased diagnostic test or interpretation arrangement that involves payment on some basis other than per test may expose themselves to unanticipated legal risk in the event CMS ever scrutinizes the claims submissions and disagrees with how the parties arrived at the supplier's net charge. STARK ONSITE REQUIREMENT Under the current Stark rules, the exception for professional interpretation services when the referring physician has an investment interest in the entity to which he or she refers and which bills for the Medicare/Medicaid service is the "physician services" exception available to physician group practices. When an independent contractor radiologist performs a Stark designated health service (DHS), such as the professional component of a radiology procedure, for a Medicare/Medicaid patient that is billed by the self-referring physician group practice, the physician services exception requires that the performance of DHS by the independent contractor radiologist must be provided on the group practice's premises. Under previous Stark requirements, if the contractor radiologist interpreted a study from a remote location for a Medicare or Medicaid patient who was referred by an investing physician, the independent contractor radiologist must have billed separately for the interpretation services provided, since the physician practice would have violated Stark if it billed for the services. CMS had amended its rules to make a technical correction to the definition of "entity" under the Stark regulations through the final rule to clarify that a physician or group practice does not make a referral to an "entity" and thus does not violate Stark when that physician or practice "bills Medicare for the technical or professional component of a diagnostic test for which the anti-markup provision is applicable in accordance with the appropriate provisions in the CMS Internet-Only Manual." In 2009, if an independent contractor radiologist performs reading services offsite from the referring physician's practice, the referring physician will nowwould be able to bill Medicare for the professional component services without violating Stark. Any claims submitted to the Medicare program for the independent contractor radiologist's services provided, however, will now be subject to the anti-markup prohibition. Thus, although the referring physician could bill for the offsite services without running afoul of the Stark rules, the referring physician cannot profit from those services to Medicare patients. Separate billing by the interpreting physician's group remains an option. Should the referring group contract with a local radiology group to read studies for Medicare and Medicaid beneficiaries

5 Page 5 of 5 onsite, those services may be reassigned to the referring physician group without application of the anti-markup requirement. Because Stark rules govern the arrangement, the independent contractor must have a direct contractual arrangement with the referring physician group pursuant to the new Stark II Phase III regulations. PROPOSED STARK REGULATIONS CMS declined to adopt as final the bulk of the other significant and controversial changes to the Stark rules it had earlier proposed via the MPFS rules. CMS reported that it received approximately 1100 comments in response to the proposed Stark changes. It apparently decided that, given the significance of the proposals and the volume of public comments they received, it was not prudent to finalize any of the other proposed changes to the Stark regulations. CMS noted, however, that because it received sufficient information both from the commenters and its own independent research, it intends to finalize revisions to the Stark regulations without requesting or providing any additional public comment period. My best guess is that we could see the next round of significant rulemaking that could have an impact on many imaging arrangements as early as March 2008.