Are Feds Ready to Strike at TC/PC Arrangements?

CMS proposes new rules for comment and sends a message on ancillary services schemes

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CEO SUMMARY: Pathologists and laboratory directors will want to pay attention to the proposed rules published by the Centers for Medicare and Medicaid Services on July 2, 2007. The document is a grab bag of proposals and rules that would significantly curb many common ancillary services arrangements now used by physicians to capture revenue. Diagnostic testing, including both radiology and pathology services, were the subject of several of the proposed new rules.

RECENT ACTIONS BY FEDERAL REGULATORS and the Medicare program show that officials are taking a broad swipe at a range of activities. In particular, proposed language in the latest rulemaking process targets how referring physicians participate in programs designed to generate ancillary revenue.

The ancillary services of anatomic pathology and radiology seem to be a primary focus for federal attention. On July 2, 2007, the Centers for Medicare and Medicaid Services (CMS) published its proposed rules as part of the 2008 Medicare Physician Fee Schedule. This document included many proposed rules that could restrict how physicians generate revenue from ancillary services.

Knockout Punch By Feds

One attorney was direct and blunt about how these proposals could kill a number of popular ways that physicians use to capture ancillary service revenue generated by their patients. “CMS outlined 11 proposals or initiatives that could provide the necessary 1-2-3 punch to knock out many existing arrangements,” wrote Bruce A. Johnson, attorney with Faegre & Benson in Denver, Colorado. “One proposal would impose new limits on reimbursement for diagnostic testing services. A second group of proposals— with seemingly minor wording changes to the Stark final rule—would have major practical implications, and a third set would emphasize the enforcement environment.”

THE DARK REPORT believes that, with the publication of these proposed rules and certain other events in the regulatory domain, federal health program officials are signaling their intent to curb behavior and activities they deem to be counter to the spirit and purpose of the Medicare and Medicaid programs. Because some of these proposed rules will affect diagnostic testing services— both in pathology and radiology—pathologists and laboratory directors will want to stay informed about these issues.

Proposed rules that expand anti-markup restrictions are probably the most prominent issue that directly affects today’s anatomic pathology marketplace. Essentially, these rules will prohibit physicians and medical groups from profiting from the professional component (PC) unless the interpreting physician is a full-time employee.

Public Comment Period

With the publication of these proposed rules by CMS on July 2, the public is invited to comment. Pathologists and other parties have until August 31 and, in some cases, until the end of the first week in September to make comments on the proposals.

To get context and understanding about these federal proposals, THE DARK REPORT caught up with Rick L. Hindmand and Richard S. Cooper, two attorneys at McDonald Hopkins with extensive legal expertise in pathology and clinical laboratory matters.

“Probably the single most significant proposal in the July 2 document is a further restriction on anti-markup regulations,” observed Hindmand. “There is a proposed rule that would revise payment policies next year for the Medicare Physician Fee Schedule and payment policies under Medicare Part B. This particular proposal has significant implications for pathologists and laboratories, independent diagnostic testing facilities (IDTFs) such as imaging centers, and physicians who provide ancillary services.

Payment Policies Reviewed

“Essentially, CMS proposes to extend the restrictions that currently exist on purchased diagnostic tests and apply these same restrictions to certain reassigned professional diagnostic interpretations,” explained Hindmand. “This would be a major change in how physicians can bill professional component services (PC) to Medicare.

“If a physician or group practice accepts reassignment from a pathologist for the professional interpretation of a pathology service, under the new proposal, the billing physician or medical group would be restricted from marking up the price paid to the pathologist,” said Hindmand, “The billing physician or medical group would also be required to identify the interpreting pathologist in that claim it submits to Medicare.

“The group also must indicate the amount paid for the interpretation, unless the interpreting pathologist is a full-time employee of the billing physician or medical group,” he stressed. “If the interpreting pathologist is a part-time employee, a full-time independent contractor, or a part-time independent contractor, then the physician or group could not mark up the amount paid to the interpreting pathologist in the claim to Medicare for the professional component (PC).”

Anti-Markup Provision

“It should be noted, however,” interjected Cooper, “that this anti-markup provision would not apply to independent laboratories that provide the technical component (TC) and purchase the PC.”

“Yes, and there is more,” added Hindmand. “The CMS is proposing rules that would extend these same restrictions to the technical component (TC) service performed by personnel who are not full-time employees of the billing entity. It is unclear, however, how this standard would be interpreted and applied, in cases where a medical practice with its own laboratory uses histotechnologists who are not full-time employees.”

“If the anti-markup rule is enforced as proposed, a medical group practice that retains a pathologist part time would be restricted in terms of what it could bill,” Hindmand explained. “The group could not bill Medicare more than the amount that it paid to the pathologist for the professional component.”

Cooper explained how this changes the financial motives for specialist physicians to participate in TC/PC (Technical Component /Professional Component) arrangements. “In essence, the incentive to bill for the PC goes away. If CMS implements this proposed rule, this is likely to have a positive result for pathologists,” predicted Cooper.

“Further, this could have an impact that extends beyond the Medicare and Medicaid programs,” continued Cooper. “It is increasingly common for private health insurers to adopt Medicare coverage and reimbursement policies without major modifications. If CMS adopts this policy, I would assume pathologists and the lab community would begin lobbying commercial and private payers to adopt similar provisions.”

Hindmand agreed that implementation of the proposed rule would definitely affect many existing ancillary service arrangements. “The proposal would affect a group practice that operates an office laboratory and has part-time laboratory staff members,” Hindmand said. “The way the proposal is drafted, the group would have to have full-time employees if they are going to perform the technical component without being subject to the anti-markup restriction. If the group can’t mark up the amount it paid, then it can’t make any profit at all. Furthermore, in order to bill for the technical component, the group would be required to directly perform the professional component.”

Ancillary Service Models

During the past four years, specialist physicians have developed several ancillary service models for anatomic pathology (AP) that allow them to profit from AP services provided to their patients. (See TDR, July 3, 2006.) One model is for the specialist physicians to establish an in-house laboratory and hire their own histotechnologists and bring in a pathologist as a partner or full time employee. A second model used by specialist physicians is to establish an in- house laboratory (TC) and contract out the pathology professional component (PC).

A third approach is to use an outside laboratory for the technical component, then contract with a pathologist to perform professional component services.

A fourth approach is the anatomic pathology laboratory condominium complex (pod lab). In a single building of 10 to 15 rooms, each room is a fully equipped histology laboratory. Each laboratory is owned by a different specialist group practice. During the day, histologists and pathologists move from one laboratory to the next to perform the work. These histologists are often either: 1) part-time employees of each of the different groups that own labs; or, 2) are contracted on a part-time basis by each group that owns a lab to perform the TC and the PC services. (See TDRs, July 19, 2004, and August 9, 2004.)

A Significant Effect on Profit

According to Cooper, the goal of CMS is not to restrict or constrain a common contracting arrangement in pathology. “It is a long-established practice that hospitals can contract with pathologists for services that may range from full-time to part-time, including only a few days per week,” noted Cooper. “Consequently, a number of individual pathologists will spend time providing services at several hospitals each day and each week. It is not the intent of CMS to change these long-standing arrangements between hospitals and pathologists.

“In fact, this proposal appears to be aimed at restricting how specialist physicians can profit from ancillary services,” he explained. “A pathologist working for a number of hospitals doesn’t seem to raise the same concerns.

“These proposed rules have triggered another question,” continued Cooper. “Does this particular proposal affect those pathologists who work in a centralized building in a condo lab/pod lab business model? Would this proposed language remove the PC markup capability from the condo/pod lab concept?

“Unless the pathologist is a full-time employee or partner in the specialist medical group that owns the condo laboratory, the specialist group can only bill for the actual cost of the PC service it paid,” observed Cooper. “Weigh that against that the negative effects of the increased liability risk associated with a pathologist delivering professional component (PC) services in a condo/pod lab model, along with the licensure, insurance, and liability issues. If a markup is prohibited on PC, it may cause some of these condo/pod lab owners to rethink the clinical and business justification for maintaining an off-site laboratory operation like this.”

Hindmand agreed, saying, “The anti-markup proposal wouldn’t prohibit this kind of business operation, but it would limit the amount of reimbursement the group could receive. That probably removes the business incentive to do it.”

THE DARK REPORT observes that Medicare officials and private payers have been concerned for several years about the rapid increase in the number of physicians establishing arrangements that allow them to file claims for ancillary services, particularly in radiology and pathology. The number and scope of the proposed rules is a sign that federal policymakers are ready to act with some energy to curb and redirect certain forms of these arrangements.

CMS Issues List of Proposed Rules in July, Hoping to Curb Ancillary Arrangements

FOLLOWING A CAREFUL READING of the CMS proposed rules, published on July 2, 2007, one healthcare attorney believes significant changes will soon reshape how physicians are able to profit from ancillary services.

“If the proposals are implemented, many ancillary service arrangements would be weakened and some knocked out entirely,” declared Attorney Bruce A. Johnson of Faegre & Benson in Denver, Colorado. “CMS would effectively direct providers to retreat to their respective corners and [their] historical involvement with ancillary services—even though the healthcare delivery environment continues to change dramatically.”

Johnson discussed the CMS language dealing with diagnostic tests, saying that “the first major proposal in the 2008 PFS (Physician Fee Schedule) addresses diagnostic tests and revisits issues first raised in 2007 when CMS proposed to modify the ‘contractual arrangements’ exception to Medicare’s prohibition on reassignment, impose anti-markup prohibitions on ‘purchased diagnostic tests,’ and restrict what constitutes a ‘centralized building’ under the Stark Law. These proposals were directed at perceived abusive arrangements such as ‘condo’ anatomical pathology laboratories which were rejected in OIG Advisory Opinion 04-17, and similar ‘contractual joint venture’ arrangements which were the subject of an April 2003 OIG Special Advisory Bulletin.

Significant Concerns

“CMS didn’t implement its 2007 proposals,”continued Johnson, “but based on the 2008 PFS, the agency continues to have significant concerns regarding ‘condo’ path labs and similar arrangements.

“Tellingly, CMS declined to propose any specific changes to the in-office ancillary services exception in the PFS, but it clearly has its eye on the exception, and changes may be in the works,” he said. “In the PFS, CMS solicited comments on whether certain services should be permitted under the exception (including, for example, physical therapy services that are not furnished incident to a physician’s services, ancillary services that are not required to assist in patient diagnosis or developing a plan of treatment, and certain complex laboratory services). It also requested comments regarding potential changes to the exception’s “building” requirements, and others that would help curtail program or patient abuse.

More Expansive Solution

“In the 2008 proposal, CMS appears to have crafted a simpler, but more expansive solution by proposing an anti-markup provision on both the professional and technical components of diagnostic tests performed by‘outside suppliers’ who CMS would define as anyone other than a full-time employee of the physician or medical group billing for diagnostic services.

“The proposals clearly convey the agency’s concerns with the variety of ancillary service and related ventures that have been developed—despite the presence of the Stark Law,” stated Johnson. “…if the proposals are implemented, the size and shape of providers who remain active in the provision of ancillary health care services is likely to change. Providers that are likely to be able to continue to furnish such services include hospitals, large multispecialty physician groups, large single specialty “network” practices focusing on defined disease states (e.g., cancer care, cardiovascular care, neuro/musculoskeletal care), integrated delivery systems and niche service providers.

“Absent persuasive comments, the projected massive cuts in reimbursement under the 2008 PFS, combined with the significant changes suggested in the proposed rules, could very well constitute the knock-out punch for many providers and existing service arrangements,” concluded Johnson.


Feds Solicit Comments on In-Office Ancillary Exception

IN RESPONSE TO THE PUBLICATION OF PROPOSED RULES in the 2008 Medicare Physician Fee Schedule, Hall, Render, Killian, Heath & Lyman, a law firm with offices in Michigan, Indiana, Kentucky, and Wisconsin, issued a Health Law Alert.

Hall Render noted that the OIG was soliciting comments on potential changes to the in- office ancillary services exception. It quoted the federal language on this point: “At the time of enactment, a typical in-office ancillary services arrangement might have involved a clinical laboratory owned by physicians located on one floor of a small medical office building. Under such an arrangement, a staff member would take a urine or blood sample to the clinical laboratory, create a slide, perform the test, and obtain the results for the physician while the patient waited.”

Hall Render next wrote that “CMS believes that, today, services furnished pursuant to the exception are not so closely connected to the physician practice. For example, a group practice provides pathology services furnished in a centralized building that is not physically close to any of the group’s other offices and, in some cases, the technical component of such services is furnished by laboratory technologists who are employed by an entity unrelated to the group. The professional component of the pathology services may be furnished by contractor pathologists who have virtually no relationship to the group practice. CMS states that, ‘in sum, these types of arrangements appear to be nothing more than enterprises established for the self-referral of DHS.’ Even when ancillary services are furnished in the same building as the group practice’s office, CMS is concerned that there may be little interaction between the physicians who are treating patients and the staff that provide the ancillary services.”

Hall Render concluded by writing that “CMS specifically seeks comments on: (1) whether certain services should not qualify for the exception (for example, therapy services that are not provided on an incident-to basis, services that are not needed at the time of the office visit in order to assist the physician in his or her diagnosis or plan of treatment, and complex laboratory services); (2) whether, and, if so, how the definitions of ‘same building’ and ‘centralized building’ should be changed; (3) whether nonspecialist physicians should be able to use the exception to refer patients for specialized services involving the use of equipment owned by the nonspecialists; and (4) any other restrictions on the ownership or investment in services that would curtail program or patient abuse.”


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