New Medicare Rules Will Impact Many Common Diagnostic Service Arrangements

December 18, 2007


Bruce A. Johnson,

Gina M. Kastel,

In the Medicare Physician Fee Schedule published Nov. 1, 2007, the Centers for Medicare and Medicaid Services (CMS) included changes that may eliminate the economic viability of many common arrangements for diagnostic services. Effective Jan. 1, 2008, CMS will impose expanded “anti-markup” prohibitions on diagnostic testing arrangements used by physician practices and other suppliers. CMS will also implement new enrollment standards governing suppliers participating in the Medicare program as independent diagnostic testing facilities (IDTFs).

The fee schedule changes will effectively trump provisions of the Phase III final rule to the federal Stark self-referral law. Notably, CMS delayed publishing final rules that would implement other changes proposed in July. Changes to the Stark law could include prohibition of “per click” leases, “under arrangements” and other deals. CMS stated it would publish final rules to address these issues in the future.

Overview of Current Rules

Medicare currently imposes a prohibition on “marking up” prices charged to Medicare by physicians who purchase diagnostic tests from third-party suppliers. Under the current rule, a physician who bills for a “purchased” test—i.e., a diagnostic test performed by an outside supplier—may charge Medicare only the amount the physician paid for the test. Diagnostic tests include the technical component of X-rays, MRIs, anatomical pathology, sleep laboratory, and many additional services other than clinical laboratory tests.

Under the current anti-markup rule, Medicare’s payment to the physician (less deductibles and co-insurance) may not exceed the outside supplier’s net charge, the physician’s actual charge or the Medicare fee schedule amount. The rule requires the physician to identify the supplier and indicate the supplier’s net charge for the test. Payment is denied if the information is not provided.

Notably, the anti-markup rule applies only to physicians and not to other “suppliers” under the Medicare program. Suppliers are generally defined as any entity other than physicians and providers. These may include hospitals, skilled nursing facilities, comprehensive outpatient rehabilitation facilities and certain other entities. Thus, the current rule does not apply to IDTFs.

In the proposed 2008 Medicare Physician Fee Schedule published in July 2007, CMS laid out anti-markup rule changes that focused primarily on the employment status of the persons performing the tests. The fee schedule final rule, however, goes well beyond the original proposal—adopting changes that will impact physicians, group practices, IDTFs and other suppliers of diagnostic services.

Changes Under New Rules

The fee schedule final rules change the regulatory scheme governing diagnostic services in significant ways. Specifically, the rules do the following:

  • Expand the anti-markup provision beyond the technical component of purchased diagnostic tests to include the professional component (the physician services involved in interpreting the test).
  • Expand the anti-markup rule’s application to physician organizations, IDTFs and other “suppliers” of diagnostic tests.
  • Shift the compliance focus away from whether the test was performed by an outside supplier, to whether a test was ordered by the physician or supplier (or by a related party under common ownership or control).
  • Limit the locations where a diagnostic test ordered and billed by physician or a physician organization may be performed. The new rule requires the test to be performed solely in an “office” in which “substantially the full range of patient care services” are furnished by the physician organization.
  • Apply the anti-markup provisions to all diagnostic tests, including many not currently defined as “designated health services” under the Stark law to include, for example, electromyography services and sleep laboratory services furnished outside of a hospital.
  • Prohibit fixed-site (i.e., non-mobile) IDTFs from sharing or subleasing their operations, thereby prohibiting physician groups from operating office-based imaging centers and IDTFs in the same space—even though the Stark rule permits the operation of “shared” facilities.

New Anti-Markup Rule Details

The new anti-markup rule may apply when a physician or other supplier, such as an IDTF, bills for the professional or technical component of a diagnostic test (other than clinical laboratory tests), and the test was ordered by the physician, supplier, or a party related to the billing physician or supplier by common ownership or control. In such cases, anti-markup provisions will apply if:

  • The test is purchased from an outside supplier (as in the current rule).
  • The test is performed at a location other than the “office of the billing physician or other supplier.”

The anti-markup rule defines the “office of the billing physician or other supplier” as the medical office space where the physician or supplier regularly furnishes patient care. However, the rule defines the office of “physician organizations” (defined as solo practice physicians, physician practices and group practices) more narrowly as the “space in which the physician organization provides substantially the full range of patient care services that the physician organization provides generally.”

IDTF Enrollment Changes

The fee schedule also modifies and expands the Medicare enrollment requirements applicable to IDTFs. Among other requirements, fixed-site (i.e., non-mobile) IDTFs will be prohibited from sharing, leasing or subleasing the IDTF’s operations or practice location with another Medicare-enrolled individual or organization. The new IDTF enrollment requirements are effective as of Jan. 1, 2008, and applicable to both new and existing IDTFs. CMS has delayed the effective date of the prohibition on shared fixed-site facilities until Jan. 1, 2009.

Practical Implications

The new rules are likely to knock out—either directly or in economic terms—many arrangements currently used by physician practices to provide diagnostic services. Examples of arrangements that will be adversely impacted include:

  • A medical group’s operation of a “shared” in-office diagnostic facility in the practice’s offices through which the same space, equipment and personnel are used to furnish services to patients of the medical group and a separately enrolled IDTF.
  • A multispecialty group’s operation of a centralized diagnostic service facility. While centralized DHS facilities are still allowed by the Stark law, unless the group also furnishes “substantially the full range of services furnished by the group” in the centralized facility, the anti-markup rule will apply to prohibit any payment beyond the “net charge” of the professional and technical components furnished in the facility.
  • A group practice’s use of a mobile MRI or PET/CT that is owned and operated exclusively by the group to provide technical component services to the group’s patients. The anti-markup rule will apply because the mobile facility is not located in the group’s offices. (The group may be able to enroll the mobile facility as an IDTF that is wholly owned by the group practice—thus avoiding the rule’s application to the technical component of tests performed in the mobile facility.)

Examples of arrangements that will survive application of the new anti-markup rule include the following:

  • A physician group’s furnishing of diagnostic services in an office in which all or most of the group’s physicians practice medicine.
  • Provision of the technical component of diagnostic services by a physician-owned, joint venture IDTF located in a rural area. Physicians may own interests in a “rural provider” under the Stark law, and the anti-markup rules will not apply to technical component services that are furnished in the IDTF’s offices.
  • Professional interpretations of diagnostic studies billed by physicians who perform the interpretations in their office. However, the anti-markup prohibition will apply if the interpretation is performed at any location other than the billing physician’s office, including the physician’s home, a hospital or the offices of an IDTF.

In conjunction with changes to the anti-markup rule, CMS made other changes to the Stark rule to permit groups to bill for the professional component of interpretations performed outside of the group’s premises where the billing group complies with the anti-markup provisions. This change will eliminate the need for radiologists to be physically present in the offices of groups billing for services on a global basis, thereby permitting radiology groups to perform professional interpretations at remote office locations via the use of a PACS, but only if the anti-markup rule is complied with — meaning that the billing group must reduce the global bill in accordance with markup prohibition since the radiologist is not furnishing the service in the billing group’s office.

Challenges and Uncertainties

The new anti-markup provision presents a number of practical challenges. Where the rule applies, payment is limited to the lesser of the net charge, actual charge or fee schedule amount. Where a medical practice wishes to global bill, the practice should be able to pay the interpreting physician an amount that is equal to or greater than the Medicare allowable professional component amount and still receive full reimbursement from Medicare.

It is less clear how a group is to calculate the net or actual charge of the technical component. CMS notes that in calculating the net charge, there should be no consideration of facility, equipment or other overhead (other than personnel) costs.

Further, because the anti-markup rule applies to each test, it is unclear how a practice should calculate a cost per test when the practice employs technician personnel, and the cost per test depends on how many tests are performed (e.g., if total technician fixed costs are $1,000 and 10 tests are performed, the cost per test is $100. Cost per test drops to $50, however, if 20 tests are performed.).

Finally, on its face, the new anti-markup rule would appear to have extremely harsh implications for many common arrangements involving delivery of diagnostic services in the “same building” used by a group practice to furnish substantially the full range of services that the practice provides—but not in the same exact office suite within that building. Many physician groups, for example, operate imaging facilities on different floors or in different office suites in the same medical office building (e.g., diagnostic imaging in Suite 101, exam rooms in Suite 201).

It is difficult to fathom that CMS intends that otherwise legitimate service models—models that meet “same building” requirements under Stark’s law—should now be subject to anti-markup provisions. A plain reading of the new rule, however, suggests this is the case.


The new anti-markup and IDTF rules are likely to create a firestorm in the physician and diagnostic testing communities. In the agency’s quest to eliminate “condo” pathology labs and other abusive arrangements, CMS has cast a wide net that brings many arrangements currently used by physician organizations within the scope of the new rules.

The fee schedule was published as a final rule with comment—meaning that physicians and other affected suppliers have an opportunity to help CMS understand how the rules will impact Medicare patient access, quality of care and the suppliers themselves. Even so, it is unclear whether CMS will provide a less restrictive interpretation of what constitutes the “office” for purposes of the anti-markup rule. Until additional clarification and/or changes to the rule occur, physicians and other diagnostic testing suppliers will be well served to pay attention to the new rules’ application.

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