CMS recently released new regulations intended to curb the ability of a physician to earn a profit on either the technical component (TC) or professional component (PC) of tests ordered by the physician, but performed by another party. The regulation is effective January 1, 2008 and applies to all Medicare-covered diagnostic tests including imaging and anatomic pathology, but excluding clinical laboratory tests.

General Rule

The new rule applies to diagnostic tests that are billed by a physician, physician group, or other supplier and are ordered by the billing party or its affiliate (i.e., a party that is related to the billing party by common ownership or control). If the PC or TC of such a test is either (A) purchased from an outside supplier or (B) performed at a site other than the office of the billing party, the billing party will be paid the lesser of (1) the net charge the billing party paid for the test, (2) the billing party’s actual charge, or (3) the Medicare fee schedule amount. In other words, the billing party may not “mark up” the TC or PC. An “outside supplier” is someone who is not an employee of the billing party and who does not furnish the test or interpretation to the billing party pursuant to a permitted reassignment of benefits. If the anti-markup rule applies, the billing party must disclose this fact on the Medicare claim form, along with the identity of the party that performed the purchased TC or PC and the net charge for the purchased component.

Practical Consequences of the Rule

The practical consequences of the new anti-markup rule are illustrated by the following examples:

A physician orders a test that is performed at an independent diagnostic testing facility (IDTF). The ordering physician is not affiliated with the IDTF. If the ordering physician bills for the TC, the anti-markup rules apply because the IDTF is an outside supplier to the physician. If the IDTF bills for the TC, the anti-markup rules do not apply because the IDTF did not order the test.

A physician group operates a centralized diagnostic center in a building across the street from the office where the group performs all its office visits. The group pays an independent radiologist a per diem fee to interpret images on-site at the group’s diagnostic center. The anti-markup rule prevents the group practice from marking up the PC services that the group buys from the radiologist because the diagnostic center does not qualify as part of the group’s “office.” The anti-markup rule defines a group’s office as “space in which the physician organization provides substantially the full range of patient care services that the physician organization provides generally.”  In the preceding example, the anti-markup rule applies despite the fact that the group practice pays the radiologist a per diem fee for the PC services. CMS requires the billing group practice to convert the per diem payment into a per-procedure rate, for purposes of applying the anti-markup rule’s payment cap.

An orthopedic surgery group operates an xray machine in its office and provides the full range of its patient care services in that office. The surgeons transmit the images electronically to an off-site radiologist for interpretation. The anti-markup rule will apply to the PC of the test, because the PC is not being performed in the surgeons’ office. As a result, the surgeons may not collect more from Medicare for the PC (less copays and deductibles) for each interpretation than the surgeons pay to the radiologist for PC services.

Need For Clarification

The major ambiguities that CMS should clarify include:

Is a diagnostic test subject to the anti-markup rule if it is performed in the same building, but not in the same suite, where the billing physician performs medical office visits?

How does the rule apply to tests ordered by a hospital-employed physician from a hospital-radiologist joint venture? More particularly, will tests ordered by the hospital employed physician be deemed to have been ordered by the joint venture, and therefore potentially subject to the anti-markup rule if the joint venture bills globally?

To what degree may the billing party recoup its overhead and equipment costs when the anti-markup rule applies and the test is furnished through a combination of the billing party’s resources and those of another party? For example, if a physician group contracts with an outside supplier to furnish technical services in connection with diagnostic tests performed on equipment located in the group’s office, is billing by the group for the TC limited to the “net charge” of the independent contractor or may the group also include its overhead and equipment costs? Given the number of ambiguities contained in the new anti-markup rule, CMS will likely be pressured to issue further guidance on this topic.

Authentication of Verbal Orders: New CMS Guidance

CMS has clarified an apparent inconsistency in the verbal order authentication standards contained in Medicare’s Hospital Conditions of Participation (CoP) and those in the federal CLIA (Clinical Laboratory Improvement Amendment) regulations.  The CLIA regulations allow a lab to perform tests based on a verbal order, and require the lab to solicit electronic or written authorization for the test within 30 days of receipt of the verbal order.  In contrast, the CoP relating to hospital medical records require that verbal orders be authenticated within 48 hours, unless state law specifies a different time limit.  

The “state agencies” (such as the Michigan Department of Community Health) that survey providers on behalf of the Medicare program recently received a letter from CMS regarding this inconsistency. The letter states that when state agencies survey a lab (including a hospital lab) for compliance with CLIA, the more lenient CLIA standard on authentication of verbal orders will be applied. However, when a hospital lab is surveyed under the Medicare Hospital CoP, verbal orders for lab tests that originate during a hospital inpatient stay or hospital outpatient clinic visit will be subject to the stricter hospital CoP authentication requirement.

While the matter is not expressly addressed in the CMS letter, Dykema has confirmed with CMS that the CoP standard does not apply to orders for “non-patient testing” by a hospital lab, i.e., tests on specimens that are collected by a party other than the hospital, such as a physician’s office, and forwarded to the hospital lab for testing.

CMS Delays Implementation of Proposed Changes to the Stark Regulations

Proposed changes to the Stark (physician self-referral) regulations that would substantially curtail “under arrangement deals,” per-click leases,” and “pod lab arrangements” will not be finalized as part of the 2008 Medicare Physician Fee Schedule (PFS) rule.  Instead, the proposed changes will be finalized in a separate rule. CMS announced the delay in the final 2008 PFS rule, which was posted on the CMS website on November 1st. Since the proposed changes were published in mid-July, CMS has received over 1,000 public comments. The key provisions of the announcement are as follows:

The final rule will address “services furnished under arrangements,” “per click” payments in lease arrangements, the “set in advance” standard and percentage-based compensation arrangements, a “stand in the shoes” provision for entities owned or controlled by a DHS entity, alternative criteria for satisfying certain exceptions in the event of an inadvertent violation and other topics.

CMS did not indicate when the final rule will be published. The final 2008 PFS rule does contain final changes to the anti-markup rules for diagnostic tests. These changes are discussed in an accompanying article.

Proposed changes to the in-office ancillary services exception, which may exclude certain types of tests (e.g., complex lab tests or tests not used in connection with an office visit) from protection under the exception, will not be included in the final rule. Instead, CMS will issue a notice of proposed rulemaking regarding the changes to this exception.