CMS Proposed Medicare Physician Fee Schedule Does More Than Cut Fees

July 1, 2007

By: Attorneys Lucy C. Hodder and Barbara J. Greenwood at Rath, Young and Pignatelli, Professional Corporation

This summer, the Centers for Medicare and Medicaid Services ("CMS") published not just a proposed and seriously reduced fee schedule, but far-reaching changes to the Stark regulations and other CMS payment rules. The proposed changes, if made final, would have a dramatic effect on many physician-hospital contractual arrangements and radiology joint ventures. Comments on the proposed changes must be submitted by August 31, 2007.

The following is a very brief summary of the proposed rules, published in the July 12 Federal Register. Medicare billing and Stark regulations are complex. Each brief point could be the subject of a complete article and providers should seek complete advice regarding arrangements once the rules are finalized. The proposals include:

• Reduced Fees. A negative 9.9% update in the Medicare physician fee schedule for 2008 under the Sustainable Growth Rate (SGR) formula. Congress claims it is continuing to explore solutions to ensure stability in reimbursements.

• Quality Reporting. Quality measures for seven different categories of physician services to be included in the 2008 Physician Quality Reporting Initiative (PQRI). For example, the proposed rule would increase the value of the work component of anesthesia services by 32 percent.

• Independent Diagnostic Testing Facilities. As expected, CMS has again revised IDTF performance standards for participation. The proposed rule prohibits an IDTF from sharing space, equipment or staff, or subleasing its operations to another individual or organization. This would essentially prohibit imaging center "pod-leases" or leasing arrangements with hospitals or physician practices. The IDTF standards also include requirements for securing comprehensive liability insurance, reporting enrollment changes, recording responses to beneficiary questions and concerns, limiting supervising physicians from supervising more than 3 IDTF sites and would change the rules effecting enrollment (and thus retroactive payment) dates.

• Anti-Mark Up Prohibition Affecting Charges for Diagnostic Services. CMS proposes to expand the purchased diagnostics rule. The current rule prohibits a physician or medical group from marking up the technical component of a diagnostic test billed by the physician or group but performed by an outside supplier. The proposed changes will also prohibit a physician or group from marking up the technical or the professional component of such a diagnostic test. CMS proposes to define "outside supplier" as someone other than a full time employee, and to apply the rule regardless of whether the physician or group purchases the test or obtains the right to payment through a reassignment. (CMS proposes related revisions to the Medicare reassignment rule.) If the proposed changes are adopted, physicians and groups will only be able to mark up technical or professional services performed by their full time employees. The proposed rule will have an enormous impact on the ability of physician groups that provide in-office imaging services to contract with and bill for independent radiologists for interpretation services.

• Stark - Physician Anti-Referral Rule Changes. The Stark law generally prohibits a physician from referring a Medicare patient for a designated health service (DHS) by an entity with which the physician has an ownership interest or compensation arrangements. The Physician Fee Schedule update included several significant proposed revisions to the current Stark regulations. This was surprising, given that it is widely expected that Phase III of the Stark II regulations will be released before April 2008. Among the proposed Stark revisions are:

"Per Click" Lease Payments. "Per click" lease payments are permissible under the current Stark exceptions for space and equipment leases. CMS is proposing to revise these exceptions to prohibit "per click" payments to physicians who lease space or equipment to a provider of designated health services (such as a hospital, DME provider, imaging company, or physical therapy office) to the extent that the payments relate to services provided to patients referred by the physician to the DHS entity. Specifically, the proposed rule states: "per unit-of-service rental charges are not allowed to the extent that such charges reflect services provided to patients referred by the lessor to the lessee." Thus, for example, a physician could not lease imaging equipment to a hospital on a "per click" basis.
Percentage-Based Compensation. Several of the current Stark exceptions require that the compensation between physicians and DHS entities be "set in advance." The regulations provide that compensation will be considered "set in advance" if a specific formula for calculating compensation is set forth in the agreement between the parties. This type formula is relied on, for example, in many billing or management services agreements between physicians and hospitals. Over the years, CMS has taken different positions on whether percentage-based compensation is permissible under this rule. CMS is now proposing to revise the regulations to provide that percentage-based compensation will not be considered "set in advance" except in the case of revenues directly resulting from personally performed physician services. The effect of the proposed change, if adopted, will be to prohibit the use of percentage-based compensation in space and equipment leases and possibly even in billing services agreements and management agreements. Percentage-based compensation will be permitted only for professional physician services.
Ownership or Investment Interest in Retirement Plans. Under the current Stark regulations, a physician is considered not to have an ownership or investment interest in a DHS entity by virtue of having an interest in its retirement plan. CMS is concerned that some physician groups may have been abusing this provision by using their retirement plans to buy entities that provide DHS (such as imaging centers) and then referring their patients to such entities. CMS proposes to revise the regulations to close this loophole.
Services Provided "Under Arrangements." Medicare rules permit hospitals to enter into "under arrangements" contracts whereby physicians or other providers provide services to hospital patients, on the hospital campus, for which the hospital bills. Because of differing fee schedules, (i.e. HOPPS) these types of arrangements have recently proliferated. Because it is the hospital that bills for the services provided "under arrangements," the hospital is considered the "entity" under current Stark rules. Thus the physicians may be able to refer their own patients for such "under arrangements" services without violating Stark, because the referral is considered to be to the hospital. CMS is proposing to revise the definition of "entity" so that these arrangements will no longer be legal. This proposed rule is highly controversial.

• Other Stark Issues on which CMS is Seeking Comments.

In-Office Ancillary Services. The in-office ancillary services exception permits group practice physicians to provide designated health services (including diagnostic radiology) to their patients if certain supervision, billing and location requirements are met. Many, many practices rely on this exception to provide and bill for PT/OT, imaging, DME and tab services, for example. CMS has not proposed any revisions to the in-office ancillary services exception. CMS is, however, seeking comments on whether changes are necessary, including whether there are certain services that should not be protected under this exception, and whether non-specialist physicians should be able to rely on the exception to provide specialized services.
Obstetrical Malpractice Insurance Subsidies. CMS is seeking comments on appropriate safeguards for subsidies for obstetrical malpractice insurance.