By Karl A. Thallner, Jr., Esq. & Brad M. Rostolsky, Esq.
Buried within the 1400-plus pages of the recently published final rule setting physician payment rates and policies for 2007, the Centers for Medicare & Medicaid Services (CMS) announced that its proposed changes to the Stark law’s in-office ancillary services (IOAS) exception, as well as to Medicare’s reassignment rules, which had been published in the August 22, 2006 Federal Register, have not been finalized. Deciding to give further consideration to the potential ramifications of finalizing these proposed changes, CMS Acting Administrator Leslie V. Norwalk commented that CMS “want[s] to be careful that we do not interfere with legitimate group practice arrangements that enable Medicare beneficiaries to receive medical services at one location.” In fact, a closer look at the proposed changes reveals that if these changes are eventually finalized as they had been proposed, some physician group practices may very well need to consider revamping the manner in which they furnish ancillary services in connection the patient care they provide.
The Stark Law and the Reassignment Prohibition
At the center of the proposed changes are the federal Stark law and the Medicare prohibition on a physician’s reassignment of his right to bill and collect for services. The Stark law prohibits a physician from making referrals for “designated health services,” such as laboratory, diagnostic imaging, therapy and certain other ancillary services, payable by Medicare to an entity with which the physician (or an immediate family member) has a financial relationship, unless an exception applies. The Stark law further prohibits the entity from billing Medicare, another payor, or the beneficiary for those services unless an exception applies. The IOAS exception is one of the most widely used of the Stark exceptions, and is often relied upon by physician groups to avoid Stark violations in connection with arrangements to furnish ancillary services.
Medicare’s reassignment prohibition generally forbids a physician to “reassign” to a third party his right to payment for services that he provides to a beneficiary. Several exceptions have been recognized over the years, but many of the exceptions applicable to services furnished by a physician in an independent contractor relationship contain significant limiting conditions. For example, the “purchased interpretation” exception allows a supplier of diagnostic tests to bill for interpretations performed by an independent contractor only if the entity performing the interpretation is enrolled in the Medicare program, the diagnostic test was ordered by a physician or medical group that is independent of the person or entity that performed the technical component and the physician or medical group that performed the interpretation, and the physician performing the interpretations does not see the patient.
Similarly, the “purchased diagnostic test” rule effectively prohibits a physician practice from marking-up the technical component of a purchased test by limiting payment to the lower of the cost of the purchased test or the actual charge, unless the diagnostic test was performed or supervised by the physician billing for the service or performed or supervised by another physician who shares a practice with the billing physician. However, a major new reassignment exception was established by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). The new exception broadly permits reassignment between parties in an independent contractor relationship as long as certain limited fraud and abuse safeguards are met, and therefore may make moot many of the limiting conditions contained in the other exceptions to the reassignment prohibition.
Concern over Abusive “Pod Lab” Arrangements
According to CMS, the proposed changes to Stark’s IOAS exception and the Medicare reassignment rules were aimed at curtailing arrangements commonly referred to as “pod,” or “condo” laboratories. Pod laboratory arrangements typically involve an entity, such as an existing Medicare-certified anatomic pathology laboratory, which owns or leases space in a medical building that has been subdivided into separate areas, or “pods,” each of which are equipped with a minimal amount of laboratory equipment, subleasing the subdivided pods to multiple physician groups, which are located elsewhere (even in a different state) than the pod laboratory. As described by CMS in its August 2006 proposed rule, the entity hires a histologist and pathologist to perform the technical component (TC) and the professional component (PC, also referred to as “interpretation”) of the pathology service, respectively. The entity’s histologist and pathologist move from pod to pod, each of which are rented to a different physician or group practice. The hired pathologist also provides supervision of the pod lab in order to comply with requirements of the IOAS exception, which will be explained in detail below.
Once the entity’s histologists and pathologists have performed both the TC and PC of the pathology service, Medicare payment for the pathology service are submitted through a number of arrangements. One common arrangement involves a physician group practice billing Medicare for the both the TC and PC, while paying the entity a management fee, as well as a per slide fee to the entity’s pathologist. Often, reimbursement from Medicare is greater than the total of the fees paid to the entity and its pathologist; thus the referring physician group earns a profit from its referrals. Another such arrangement involves the entity billing Medicare for the histologist’s TC, while the group practice bills Medicare for the interpretation performed by the pathologist, who has reassigned to the physician or group practice his right to receive Medicare payment. Under this arrangement also, the referring physician group earns a profit from its referrals based on the difference in the reimbursement for the interpretation and its payment to the pathologist.
Application of Current Stark IOAS Exception and Reassignment Rules
The pod lab arrangement described above is not clearly prohibited under the current Stark law and reassignment prohibition. It is worth note, however, that in April 2003 the Office of Inspector General (OIG) issued a Special Advisory Bulletin on suspect “contractual joint ventures,” warning that arrangements similar to the pod lab structure could violate the Anti-Kickback Statute, and in December 2004 the OIG issued an Advisory Opinion concluding that a pod lab arrangement “could potentially generate prohibited remuneration under the anti-kickback statute.”
The Stark IOAS exception is designed to allow physicians to provide certain professional services that are supplemental, or “ancillary,” to their core medical practice in a location where the core medical services are normally provided. The IOAS exception has three sets of requirements in the areas of supervision, location and billing. With regard to supervision, the IOAS exception requires that designated health services must be furnished by the referring physician or a physician “in the same group practice” as the referring physician or an individual who is supervised by the referring physician or another physician in the group practice. An independent contractor physician can be a physician in the same group practice as a referring physician. The level of supervision must comply with Medicare payment and coverage rules, and may be provided by an independent contractor of the group practice, such as the pathologist in the pod lab scenario described above.
The billing requirement of the IOAS exception mandates that the designated health services be billed only by certain parties, including the physician performing or supervising the services, or the group practice of which the physician is a member or contractor under a billing number assigned to the group practice.
It is the location requirement of IOAS exception that is the subject to the proposed changes to Stark. In order for the IOAS exception to apply, the designated health services must be furnished in the same building in which significant physician services are furnished or at a “centralized building.” As presently defined by CMS, a centralized building includes all or part of a building that is owned/leased and exclusively used by a group practice on a full-time basis (i.e., 24 hours per day, seven days per week, for a term of not less than six months). The pod lab arrangement arguably does not violate this requirement because, although each leased pod is used only part-time (i.e., when diagnostic laboratory testing services are furnished on specimens of the leasing physician practice), each leased pod is used solely by the leasing physician practice.
Additionally, the Medicare reassignment prohibition arguably imposes no restriction on the business objectives of the pod lab arrangement. The broad exception mandated by the MMA permits the leasing physician group to bill for the laboratory services furnished in the leased pod lab through independent contractor arrangements. Specifically, for example, the physician group would be able to bill for the professional interpretation of the pathologist, even though the pathologist is an independent contractor of the physician group and the test is ordered by a physician who is not independent of the entity that furnishes the TC or PC.
Proposed Changes Seek to Curtail Pod Labs
Concerned that the Stark IOAS exception’s definition of “centralized building” and the MMA’s broad exception to the reassignment prohibition may encourage the unnecessary ordering of ancillary services, CMS has proposed to add additional elements to each of these rules.
CMS attempts to diminish the economic incentive associated with a group practice’s engagement of a pod lab by proposing to add a minimum square footage requirement of 350 square feet to the definition of “centralized building” under the IOAS Exception. Exceptions are built into the proposed change, however, that would permit up to three smaller stand-alone physician offices to own or lease space in the same building without an imposition of the 350 square footage requirement. Furthermore, the proposed changes would require any owned or leased space used by a group practice for the purposes of provided laboratory services to “contain, on a permanent basis, the necessary equipment to perform substantially all of the [designated health services] that are performed in the space.” Thus, if this change is adopted, an entity operating a pod lab would not be permitted to move laboratory equipment from pod to pod.
CMS has also proposed that a group practice must employ a non-physician employee or independent contractor to perform services exclusively for that group for at least 35 hours per week in any space qualifying as a “centralized building.” In the last of its proposed changes to the IOAS exception, CMS has proposed eliminating a group practice’s ability to maintain a “centralized building” in a state different from the state or states in which the group practice has an office.
In addition to the proposed changes to the IOAS exception’s centralized building requirement, CMS has proposed changes to the exceptions to the reassignment prohibition. Specifically, to curtail group practices from profiting through arrangements involving a pod lab, CMS has proposed to limit the amount a group practice can bill Medicare for the TC component of a diagnostic test to what essentially amounts to the actual charge incurred by the physician group for acquiring the TC. This would eliminate some of the economic incentive of a stereotypical pod lab arrangement.
CMS has also proposed to require that a physician or entity can only bill for the TC if it also performs the associated interpretation. In that vein, the proposed changes also describe conditions on when a physician or medical group may bill for a reassigned interpretation of a diagnostic test. Such reassignment would be permissible only if the test is “ordered by a physician that is financially independent” of the person or entity performing the TC and PC of the test. Additionally, the physician or group billing for the interpretation must have performed the TC of the test, and the physician or group performing the interpretation cannot see the patient. Lastly, CMS in considering applying an anti-markup provision to the reassignment of the PC of diagnostic tests performed under a contractual arrangement.
Possible Unintended Consequences
Although the proposed changes are aimed at stopping pod lab arrangements, which the government clearly considers abusive, they also would have an impact on other arrangements of which there may not be the same concern. For example, an orthopedic, cardiology, or other group practice that owns diagnostic imaging equipment for testing on its own patients might contract with a radiologist to perform the needed professional interpretations. If the proposed changes to the reassignment prohibition are implemented, a physician practice that performs and bills for imaging services under IOAS exception would effectively be barred from billing for the professional component of those services performed by an independent contractor radiologist because the billing physician practice would be both ordering and performing the technical component of the test.
Similarly, some arrangements by which a hospital’s radiology group contracts with independent radiologists to perform final reads via teleradiology – a common and important means of providing coverage to a hospital – could be impaired. The radiology group would not be able to satisfy the proposed new requirement that the group perform and bill for the technical component of the service under its billing number. As a result, the radiology group would be precluded from billing Medicare for professional interpretations performed by the radiologists supplied by a teleradiology company.
Although the time frame within which CMS is likely to announce the status of the proposed changes to the Stark IOAS exception and the Medicare reassignment rules remains uncertain, physicians and group practices should be aware that some of their arrangements with regard to the provision of ancillary services, in particular those dealing with diagnostic tests, may no longer be compliant with federal regulations if the proposed changes are finalized as originally drafted. In the spirit of preparedness, physicians and group practices that are considering entering into any of the above described arrangements should do so only after careful consideration of what the future may bring. Additionally, those physicians and group practices that provide ancillary services through use of the IOAS exception and the Medicare reassignment rules may want to consider how their practices will be affected if the proposed changes are finalized.
Karl A. Thallner, Jr., Esq., is a partner, and Brad M. Rostolsky, Esq., is an associate, in the health care group of the law firm of Reed Smith LLP. Both are resident in the firm’s Philadelphia office.