CMS Proposes Further Changes to the Medicare Anti-Markup Rule

October 2008Newsletters Staying Well Within the Law

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From Staying Well Within the Law, a newsletter on the current legal issues facing today's health care industry.

The Centers for Medicare and Medicaid Services (CMS) made extensive changes to the Medicare anti-markup rule in the final 2008 Medicare Physician Fee Schedule. Due to the controversial nature of several of the changes, CMS postponed the effective date of the applicability of the newly revised rule until January 1, 2009, except with respect to anatomic pathology services (i.e., pod labs) and the purchase of technical component services, for which the rule took effect on January 1, 2008. CMS is now taking a further look at refining the rule with two new proposals for the applicability of the rule, as well as requests for comments on numerous issues.

Recent History of the Rule


The Medicare anti-markup rule is codified at 42 C.F.R. § 414.50. Historically, the rule has imposed a limitation upon the amount that could be billed by a physician or group for the technical component of diagnostic tests (excluding clinical diagnostic tests performed by clinical laboratories) that were performed by an outside supplier.

The 2007 Medicare Physician Fee Schedule proposed to extend the anti-markup prohibition to the purchase of the professional component of diagnostic tests as well. The proposed revisions published at that time focused primarily on the employment status of the person performing either the technical or professional component of the test; specifically whether such person was a full-time employee of the billing entity versus an independent contractor or part-time employee.

CMS moved forward in the 2008 Medicare Physician Fee Schedule with the concept of extending the anti-markup rule to the professional component of diagnostic tests. However, the revised rule eliminated the distinction regarding the employment status of the person performing either the technical or professional component of the diagnostic test. Instead, the focus shifted to whether the technical or professional component of the test was purchased from an outside supplier, or whether it was performed at a site other than the "office of the billing physician or other supplier."

Although notably different from the proposed rule in the 2007 Medicare Physician Fee Schedule, the revised anti-markup rule was published as a final rule and was scheduled to take effect on January 1, 2008. However, in response to numerous protests and objections from physician groups and other interested parties, CMS delayed the effective date of certain of the more controversial aspects of the revised rule pending additional clarification and/or rulemaking by CMS.

CMS has revisited this topic in the proposed 2009 Medicare Physician Fee Schedule. In that document, CMS proposed two alternative approaches to the anti-markup rule and solicited comments on the timing and other aspects of the rule.

Summary of the Current Rule (as Published in the Final 2008 Medicare Physician Fee Schedule)


Pursuant to the 2008 Medicare Physician Fee Schedule, the revised anti-markup rule applies if a physician or other supplier bills Medicare for the technical or professional component of a diagnostic test that was ordered by the physician or other supplier, and the diagnostic test is either (a) purchased from an outside supplier, or (b) performed at a site other than the office of the billing physician or other supplier. The anti-markup rule limits payment to the billing entity to the lowest of the following amounts:

(1) the outside supplier’s net charge to the billing entity

(2) the billing entity’s actual charge, or

(3) the fee schedule amount that would be allowed if the outside supplier billed Medicare directly (42 CFR §414.50(a)(1))

One of the more problematic features of the 2008 version of the rule was the definition for the "office of the billing physician or other supplier." This was defined as the "medical office space where the physician or other supplier regularly furnishes patient care" and, with regard to a physician organization, the term was further defined as the space where the physician organization provides "substantially the full range of patient care services that the physician organization provides generally." This definition would arguably have subjected to the anti-markup rule diagnostic testing arrangements that were in compliance with the "same building" and "centralized building" approaches to the Stark in-office ancillary services exception. In response to numerous complaints regarding this perhaps unintended consequence, CMS delayed the effective date of the revised rule until January 1, 2009, except with respect to pod labs and the purchase of technical component services, as indicated above.

Another problematic aspect of the rule involved the concept of limiting the amount of payment to the outside supplier’s "net charge" to the billing entity. Designed in an effort to prevent what CMS called "gaming" – a situation where, according to CMS, the outside supplier’s net charge to the billing entity is inflated to cover the cost of equipment or space that is leased by the billing entity to the outside supplier – CMS defined "net charge" as exclusive of any amount that takes into effect such costs. As a consequence, a billing entity could no longer factor into its fee schedule certain costs to the entity in providing the technical or professional component of diagnostic tests, such as costs for equipment and supplies needed to perform the tests or overhead costs where the tests were performed outside of the billing entity’s office.

Two New Alternative Approaches for the Rule


CMS is now proposing two alternative approaches for the Medicare anti-markup rule in the proposed 2009 Medicare Physician Fee Schedule.

Under the first approach, the rule would apply where the professional or technical component of a diagnostic test is either (1) purchased from an outside supplier or (2) performed or supervised by a physician who does not "share a practice" with the billing physician or organization. Under this proposal, if a physician is an employee (full time or part time) or an independent contractor of a single medical practice (which is the billing organization), the anti-markup rule would not apply. However, the rule would apply in the event that a physician is an employee or independent contractor of more than one billing organization. CMS acknowledges that an exception may be necessary for physicians to provide occasional services outside of their physician organization, such as locum tenens coverage, without the arrangement violating the "sharing a practice" component of the rule, and is requesting comment on this issue.

Under the second approach, CMS is proposing to keep the "site-of-service" approach outlined in the 2008 Medicare Physician Fee Schedule, but to issue additional guidance as to what constitutes the "office of the billing supplier" and other relevant defined terms. The rule would continue to apply to the technical and professional components of non-purchased tests that are performed outside the "office of the billing supplier."

CMS has solicited feedback as to which of these two approaches is more appropriate, or whether a different approach altogether would be preferable.

Clarification on What Constitutes the "Office of the Billing Physician or Other Supplier"


Under the site-of-service approach, CMS is proposing to clarify this defined term to include space in which diagnostic testing is performed that is located in the same building where the billing physician or supplier regularly furnishes patient care (and for physician organizations, in the same building where the ordering physician provides substantially the full range of patient care services that the ordering physician provides generally). CMS also clarifies that a physician may have more than one office in which he or she regularly furnishes patient care. Further, in response to comments that a multi-specialty group may provide substantially the full range of services at multiple locations, CMS is proposing to clarify that with respect to a physician organization, the defined term will include space in which diagnostic testing is performed that is located in the same building where the ordering physician provides substantially the full range of patient care services that the ordering physician provides generally.

While this approach essentially adopts the "same building" approach under the Stark in-office ancillary services exception, it notably does not adopt the "centralized building" approach under that exception, and may have an adverse effect on large, multi-site, group practices that provide diagnostic testing services in a centralized location.

Clarification as to "Performance" at a Site Other Than the Office of the Billing Physician or Other Supplier


The anti-markup rule applies to the technical component of a diagnostic test that is "performed" outside of the office of the billing physician or outside supplier. CMS is proposing to clarify that the anti-markup rule will apply if either the conducting of the technical component or its supervision by a physician is performed at a location outside of the billing physician/supplier’s office.

Definition of "Net Charge"


CMS is also taking another look at the definition of the outside supplier’s "net charge" to the billing entity. CMS is proposing to clarify that the "net charge" for purposes of the professional component is the charge of the interpreting physician, and for purposes of the technical component, is the charge of the supervising physician. While this approach may be relatively easy to apply in connection with the professional component, its application may present some difficulties in connection with the technical component since physicians are not generally compensated on a separate basis for the supervision of diagnostic tests.

Requests for Additional Comments


CMS specifically requested guidance regarding the following issues in the proposed 2009 Medicare Physician Fee Schedule:

  • whether in lieu of or in addition to the anti-markup rule, CMS should prohibit reassignment in certain circumstances and require the physician performing the professional component or supervising the technical component to bill Medicare directly
  • how the "net charge" should be calculated
  • whether the January 1, 2009, effective date for some or all of the revisions to the anti-markup rule contained in the 2008 Medicare Physician Fee Schedule should be delayed or any proposed revisions to that rule which may become finalized before that date

The deadline for submitting comments to the proposed 2009 Medicare Physician Fee Schedule was August 29, 2008.

Stay Tuned


As discussed above, the final anti-markup rule published in the 2008 Medicare Physician Fee Schedule significantly differed from the proposed rule published in the 2007 Medicare Physician Fee Schedule, for which comments were solicited and received. It will be interesting to see whether a similar result will occur this time around. Providers of diagnostic testing services are advised to stay tuned for additional developments with respect to the Medicare anti-markup rule.