CMS Delays Finalization of Proposed Changes to Stark Regulations and Finalizes Expanded Diagnostic Test Anti-Markup Rule

In the final 2008 physician fee schedule rule published yesterday in the Federal Register, CMS largely postpones finalizing its previously proposed Stark regulatory changes. However, CMS expands the scope of the diagnostic test anti-markup rule in a way that will affect the ability of physician groups to profit (or even break even) on diagnostic tests performed off-site (e.g., at a Stark centralized building).  Accordingly, at least with respect to tests performed by physician groups in centralized buildings, the rule might be called a "mandatory loss" rule instead of an "anti-markup" rule.

STARK REGULATORY CHANGES
Due to the number and significance of its proposed changes and the number of comments it received, except for the change to the definition of "entity" discussed below, CMS does not finalize any of its previous Stark regulatory proposals.  CMS has not, however, abandoned its proposals.  Rather, without soliciting further comment, it intends to publish a final rule addressing the following:

● Burden of proof;

● Obstetrical malpractice insurance subsidies;

● Unit-of-service (per-click) payments in lease arrangements;

● The period of disallowance for noncompliant financial relationships;

● Ownership or investment interests in retirement plans;

● “Set in advance” and percentage-based compensation arrangements;

● “Stand in the shoes” provisions;

● Alternative criteria for satisfying certain exceptions; and

● Services furnished “under arrangements."

CMS may also publish a proposed rule addressing changes to the in-office ancillary services exception.  CMS does not say when it will publish either the final rule or the proposed rule.

DIAGNOSTIC TEST ANTI-MARKUP RULE
Under an existing rule, a physician purchasing a diagnostic test (other than certain clinical diagnostic laboratory tests) from another physician or supplier may not “mark up” the technical component of the test when submitting the bill to Medicare.  CMS expands the anti-markup provisions of the current rule to apply to all suppliers, to the technical and professional components of applicable diagnostic tests and, depending on where the test is performed, to even tests performed in the billing supplier's space by the billing supplier's full-time employees using the billing supplier's equipment.

Application of the Anti-Markup Rule
The anti-markup rule applies to both the technical and professional components of diagnostic tests (other than clinical diagnostic laboratory tests subject to certain special billing rules) as follows:

The anti-markup rule applies only if the billing supplier orders the diagnostic test.  For purposes of determining whether the billing supplier ordered the diagnostic test, tests ordered by a related party are deemed to be ordered by the billing supplier.  "Related party" means a party related to the billing supplier through common ownership or control as described in 42 C.F.R. § 413.17.  Common ownership exists when an individual or individuals possess significant ownership or equity in the billing supplier and the party ordering the test.  Control exists where an individual or an organization has the power, directly or indirectly, significantly to influence or direct the actions or policies of the billing supplier and the party ordering the test.

If the billing supplier ordered the diagnostic test, CMS looks to the location where the test was performed.  Tests performed in other than the billing supplier's office are subject to the anti-markup rule.  The "billing supplier's office" means medical office space where the billing supplier regularly furnishes patient care.  With respect to physicians or physician organizations (as defined in Stark II, Phase III), the term means the space in which the physician organization provides substantially the full range of patient care services that it provides generally.  It is not clear whether the test must be performed in the same suite or merely in the same building to be performed in the billing supplier's office.  Further, "substantially the full range of patient care services" is not defined.  The language is similar, but not exactly the same, as the language in the "range of care" element of Stark's group practice definition.  However, it is clear that the billing supplier's office will typically not include a Stark centralized building.

In a departure from its proposed rule, for purposes of determining whether the anti-markup rule applies, CMS makes no distinction between full-time and part-time employees.  If a diagnostic test ordered by the billing supplier is performed in the billing supplier's office by an employee, the anti-markup rule does not apply, regardless of whether the employee is full or part-time.  On the other hand, if the test is performed off site (e.g., in a Stark centralized building), the anti-markup rule applies regardless of who performed the test. 

Calculation of the Permissible Charge to Medicare
If the anti-markup rule applies to the component of a diagnostic test, the amount the billing supplier may charge Medicare is limited to the lesser of the following: (i) the performing supplier's net charge to the billing supplier; (ii) the billing supplier's actual charge; (iii) the fee schedule amount.

CMS leaves it to the billing supplier to determine how to calculate the performing supplier's net charge.  For example, where the performing supplier (such as a technician) is paid on a weekly basis, the net charge might be determined by dividing the technician's weekly compensation by the number of procedures performed.  However, the net charge must be determined without regard to any charge that is intended to reflect the cost of equipment or space leased to the performing supplier by or through the billing supplier.  Further, CMS states in the preamble to the final rule that the billing supplier cannot recoup its overhead costs (such as the cost of billing).  CMS advises suppliers that wish to recoup their overhead costs to either structure the arrangement with the performing supplier so that the anti-markup rule does not apply or allow the performing supplier to bill for its component.  CMS also advises billing suppliers to maintain contemporaneous documentation of their calculation of the performing supplier's net charge.

Stark and the Anti-Markup Rule
Because CMS believes that diagnostic tests billed in accordance with the anti-markup rule are not subject to overutilization, CMS revises Stark's definition of "entity" such that components of diagnostic tests billed in accordance with the anti-markup rule are generally no longer subject to Stark's general prohibition against self referrals.  For example, if the anti-markup rule applies, independent contractor physicians may render services off-site without the need to comply with the in-office ancillary services exception. 

Effective Date
The provisions of the final 2008 physician feel schedule rule will be effective on January 1, 2008.

Commentary
Notwithstanding its change to the definition of "entity", the anti-markup rule seems part of a concerted effort by CMS to make it more difficult for physician groups to refer patients to themselves for specialized services (e.g., radiology) outside of their core practices.   Because the anti-markup rule does not apply to diagnostic tests not ordered by the billing supplier, the rule should not have a dramatic effect on free-standing IDTFs.  The calculation of the maximum amount a billing supplier may charge is especially troubling, however, in the context of diagnostic tests performed by physician groups in their centralized buildings by their employees using their equipment.  CMS seems to suggest that many basic expenses, such depreciation on the equipment, space lease costs, etc. may not be included in the calculation of the "performing supplier's" net charge.  If so, physician groups will be almost guaranteed to lose money on diagnostic tests performed in a centralized building.  As a practical matter therefore, groups will likely either need to perform diagnostic tests they order in their offices or allow the performing supplier to bill for the test.  However, CMS cautions that it intends to monitor the effectiveness of its site-of-service approach.  If diagnostic tests simply migrate to groups' offices, CMS may consider alternative approaches that would make it more difficult to profit from even diagnostic tests performed in groups' offices by their employees.

CMS is rumored to be issuing additional guidance on this and related issues by the end of the year.  It is also rumored that CMS has been threatened with litigation on the theory that the anti-markup rule is a de facto repeal of the Stark centralized building rule and thus overbroad from a constitutional standpoint.  Accordingly, stay tuned for additional developments.  For more information on the 2008 physician fee schedule rule and its affect on Stark and the anti-markup rule, please feel free to contact any member of the Health Care Team.