Medicare Rules Tighten Anatomic Path Mark-ups

Federal healthcare regulators issue rules that limit how physicians can mark up AP services

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CEO SUMMARY: Effective on January 1, 2008, new rules take effect that restrict the circumstances under which physicians can mark up the anatomic pathology services provided to their patients. However, ambiguities in how the rules are written are likely to make the intent of the new rules difficult to apply to all the types of TC/PC arrangements and anatomic pathology condominium laboratories that exist in today’s marketplace.

ON NOVEMBER 1, the federal Centers for Medicare & Medicaid Services (CMS) issued its 2008 Medicare physician fee schedule and final rules, which become effective on January 1, 2008. One section of the new rules will significantly change the status quo in certain types of anatomic pathology (AP) service arrangements.

In its press release, CMS described the new rules as “imposing an anti-markup restriction on the technical component (TC) or professional component (PC) of diagnostic tests (other than clinical lab tests) that are ordered by the billing supplier, if the TC or PC is purchased by the billing supplier, or the TC or PC is performed outside of the office of the billing supplier.”

At the national law firm of McDonald Hopkins in Cleveland, Ohio, attorneys Jane Pine Wood and Rick Hindmand have studied the new rules. They believe that the new rules will directly affect AP condo/pod laboratories and several types of TC/PC arrangements involving anatomic pathology services. If the new rules prevent referring physicians from marking up AP services when billing Medicare, the economics of these types of AP service arrangements will change.

“For those new regulations which affect anatomic pathology services, the intentions of federal regulators are clear,” stated Wood. “However, there are individual examples of AP arrangements provided by the federal Office of the Inspector General (OIG) where the appropriate application of these rules to each scenario is not clear.

“The obvious recommendation is that pathologists, lab directors, and referring physicians should be aware of the effect of these regulations on AP condo/pod labs or any scenario in which a physician is marking up the price for services provided to Medicare beneficiaries and performed outside of the physician’s primary office,” advised Wood.

 ‘Mark Up From What?’

“But the question is: mark up from what?” she asked. “That’s one of the issues involving the new regulations that we would like to understand better.

“Let’s say you have a typical condo/pod lab arrangement, where a urology group in Virginia, for example, has a condo/pod lab in Florida,” she continued. “The urologists could pay the condo/pod lab management company a monthly fee for leased space, leased technicians, leased pathologists, and leased equipment. That’s an easy example. Under the regulations issued as part of the 2008 physician fee schedule, the urology group would not be able to mark up any bills from the condo/pod lab in Florida in this case.

“But consider a different arrangement for a urology group,” Wood said. “Then the question becomes: What do they pay that outside supplier to do? What if the pathology work is performed at an offsite location, but the urology group leases the space itself, employs the techs directly, and owns the equipment? In that case, the language is open to some interpretation. And, in this scenario, what does the urology group use as the charge that it can’t mark up when submitting claims to Medicare? The regulations can be interpreted to limit the charge to the amount paid to the techs to perform the technical processing, without any amounts for office or equipment overhead.”

Hindmand agreed, saying, “That is a big issue under this particular rule. Stark regulations have allowed physician group practices to have a centralized location that is offsite to do their designated health services. And, now with the exception of some clinical laboratories, which are essentially excluded, you can’t have a centralized location for the group without being subject to this anti-markup provision—unless, at the centralized location, you also do a full range of services, such as having a physician office and seeing patients there.”

“The new rules definitely affect condo/pod labs that are offsite, meaning outside the referring physician’s office,” added Wood. “Also, it should be noted that these new rules only affect pathology services provided to Medicare beneficiaries at condo/pod labs. Referring physicians can continue to mark up services provided to self-pay and privately insured patients, to the extent permissible under state law.

“Pathologists should be aware that the new rules don’t seem to limit some types of arrangements involving the technical component and professional component,” Wood added. “Often, labs will do the technical component (TC) and bill Medicare directly, and the referring urologists will hire a local pathologist to sit in the urologists’ office and do the professional component (PC). Because this PC work is being done in the urology group’s office, the rules don’t seem to affect these arrangements.”

New Rules Start On Jan. 1

CMS will publish the physician fee schedule and new rules in The Federal Register on November 27. On November 1, CMS posted The Medicare Physician Fee Schedule (MPFS) and associated regulations on its Web site (

The fee schedule and new rules contain 1,481 pages. The portions that are most relevant to pathologists and lab directors include examples of laboratory contracts that may help pathologists and lab directors understand the issues involved, said Hindmand and Wood.

THE DARK REPORT observes that this is likely to be the first round of a continuing effort by federal healthcare regulators to address a variety of issues triggered by physicians establishing their own, in- practice ancillary services. This current round of rule-making includes rules that alter existing radiology arrangements.

In recent years, as physician groups established in-practice radiology and pathology services, the year-to-year increase in use of these services has caught the attention of Medicare officials. Federal healthcare regulators will watch how these new rules alter existing business arrangements in radiology and pathology. If these rules do not achieve the outcomes intended by Medicare regulators, it is likely that they will propose additional rules.

This result is consistent with the efforts Medicare officials have taken in recent years. Within the pathology sector, AP condo labs and TC/PC arrangements have gotten lots of scrutiny. It is reasonable to expect further federal action on these arrangements.

Feds Provide Seven Examples to Explain Appropriate Billing for Anatomic Path Services

HERE ARE SEVEN EXAMPLES provided in the federal guidance on how to properly bill for anatomic pathology services as directed by new rules in the CMS 2008 physician fee schedule and regulations.

Example 1: A urology group practice contracts with a leasing company that supplies a technician and a pathologist to perform testing on prostate samples. The technician performs the tissue sampling and the pathologist reads the slides. All work is done outside of the office of the billing group practice, and instead is performed in space that is rented exclusively “24/7” by the group practice (thus meeting the definition of a “centralized building” at 411.351) for the sole purpose of providing pathology services for the group’s patients. Because the centralized building does not qualify as “the office of the billing physician or other supplier,” the anti-markup provisions apply to both the TC and the PC, and the group may bill Medicare the lowest of the following: (1) the leasing company’s net charge to the group; (2) the group’s actual charge; or (3) the fee schedule amounts for the TC and interpretation that would be allowed if the leasing company were enrolled in and billed Medicare directly.

Example 2: Same as Example 1, except that the TC and PC are performed by the group practice’s employee technician and a pathologist who is an independent contractor of the group practice, respectively. Here, the anti-markup provisions again apply to both the TC and the PC because the work was not done in the “office of the billing physician or other supplier” (that is, the office of the group practice). It does not matter that the technician is an employee and the pathologist is an independent contractor because the work was not performed in the office of the billing group practice.

Example 3: A physician in a group practice orders a diagnostic test and a technician who is a part-time employee of the group performs the test in the group’s office. A physician who is an independent contractor of the group performs the PC in the group’s office and reassigns his or her right to payment to the group. The anti-markup provisions do not apply to the group’s billing of the TC or the PC.

Example 4: Same as Example 3, except that the independent contractor physician performs the PC in his or her home and reassigns his or her right to payment to the group. The group’s billing of the TC is not subject to the anti-markup provision, but the group’s billing of the PC is subject to the anti-markup provision because the work was not per- formed in the office of the billing supplier.

Example 5: A group practice purchases both a diagnostic test and its interpretation from a laboratory and bills the TC and PC to Medicare. The anti- markup provisions apply to both the TC and the PC. Because the TC and the PC were purchased, the location(s) at which the TC and the PC were performed does not matter.

Example 6: A group practice orders a diagnostic test from an independent laboratory. The laboratory performs the test and contracts with a physician to perform the PC. The laboratory bills Medicare for both the TC and the PC. The laboratory is not subject to the anti-markup provision for the PC, because the laboratory did not order the test.

Example 7: Same as Example 6, except that a physician orders a diagnostic test from an independent diagnostic testing facility (IDTF). The IDTF bills Medicare for both the TC and the PC of the test. The anti-markup provisions do not apply because the IDTF did not order the test.



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