"Condo" Labs

EXECUTIVE SUMMARY

Statement of the Problem

Recent regulatory changes affecting the billing of anatomical pathology services, highly complex diagnostic services that are an important factor in detecting the presence of cancer and other diseases, have fueled the establishment of new types of abusive arrangements. These arrangements threaten to increase utilization of pathology services by allowing physicians who are large referrors of pathology services, including gastroenterologists, urologists, and dermatologists, to share in the revenues earned on their own referrals, even though the referring physician exercises no supervision or oversight over the services.

The American Clinical Laboratory Association ("ACLA"), an association of federally-regulated independent clinical laboratories, including local, regional and national laboratories, strongly urges CMS to take action to curb the growth of these abusive arrangements.

Two Types of Arrangements Have Recently Sprung Up.

Pod Arrangements. The first type of arrangement involves joint venture or "turnkey" arrangements between referring physicians and pathologists (referred to as "Pod" laboratories). A "manager" leases space in a medical building and subdivides the space into separate cubicles, which are equipped with microscopes and other equipment needed for a histology laboratory. The manager then subleases each cubicle to a group practice, identifies a pathologist who will supervise the cubicle-laboratories and perform the professional component ("PC") of the pathology service, and hires the histotechnologist who performs the technical component ("TC") of the service. In order to appear to be meeting applicable exceptions to the federal selfreferral law, the pathologist and histotech are required to move from cubicle-to-cubicle as they review each group practice's slides. Each group practice pays the pathologist a discounted fee for every slide reviewed and pays the manager a management fee, which covers the lease costs and histotech salaries. The group then bills for the entire pathology service.

Referring Physician Billing Arrangements. In the other type of arrangement, a laboratory simply offers to perform anatomic pathology services for referring physicians, performs the anatomic pathology services in its laboratory, and bills such services to the referring physician at a discount. The referring physician then marks up the bill from the laboratory and bills Medicare.

These Arrangements Have Been Fueled by Recent Changes in Federal Regulatory Policies.

Prohibition on Reassignment. The Prohibition on Reassignment was specifically designed to limit the situations in which physicians bill for services that they do not, in fact, perform. In the past, with limited exceptions, a physician could not purchase the PC if he or his practice was the one that actually triggered the referral. Furthermore, the physician who purchased the TC of a diagnostic test was not allowed to mark up the service when billing Medicare. These restrictions limited the ability of physicians to share in the revenues from their own anatomical pathology referrals.

Last year, as a result of a provision in the Medicare Modernization Act ("MMA"), CMS enacted a new exception to the Prohibition on Reassignment. Although the MMA provision was reportedly designed to make it easier for emergency room staffing companies to bill for their independent contractor physicians, CMS implemented the provision through a Transmittal that had far broader application. In Transmittal 111, CMS permitted an entity (including a person, group or facility) to be paid for any physician service so long as there exists a "contractual arrangement with that entity, regardless of where the service is furnished." Although it is not clear how the previous limitations in the Reassignment Rule interact with this new provision, the exception has permitted these new, abusive arrangements to proliferate.

In essence, the loosening of the Reassignment Rule has had the unintended effect of fostering the potential for abuse that comes when entities are able to bill and earn a profit from Medicare services that they themselves did not provide. CMS recognized these unintended effects in the 2005 Physician Fee Schedule Proposed Rule by noting that the new reassignment exception could create new fraud and abuse vulnerabilities and that arrangements should not be used to camouflage inappropriate fee-splitting relationships or payments for referrals. CMS further reminded group practices that they are still subject to other applicable Medicare laws governing billing (including those regarding payment for purchased diagnostic tests and purchased test interpretations), and that, in particular, they should be mindful of the requirements of the in-office ancillary services exception in relationships with contractors.

The physician self-referral law. The physician self-referral law has also been modified in ways that make it easier for these abusive relationships to occur. For example, the Pod arrangements usually attempt to take advantage of the In Office Ancillary Services ("IOAS") exception, which requires that the services be furnished in a centralized building. However, subdividing the space into cubicles in the manner described above should not constitute a centralized space. Second, the Phase I physician self-referral regulations issued in 2001 permitted independent contractor physicians, who are not employed by, or a member of, the group to supervise services ordered by the group practice physicians. Supervision services can not usually be directly billed to Medicare. However, these Pod arrangements are also using these independent contractor pathologists to perform billable physician services, in addition to mere supervision services, a significant expansion of the exception.

These Arrangements Have Numerous Adverse Effects.

These arrangements give the ordering or investing physician an incentive to order more tests, which could lead to increased utilization. In addition, if the need to take a biopsy is uncertain, then these arrangements give the physician an incentive to do the procedure rather than to defer it. Also, when the pathology examination is performed, each separate site that is biopsied is separately billable; thus, there is an incentive to biopsy more sites in order to increase the reimbursement that the referring physician can receive.

Furthermore, the Referring Physician Billing Arrangements described above were never permitted under the Reassignment Rules prior to the enactment of the new contractual arrangement exception. Thus, the new exception dramatically changes the reimbursement scheme for physician services in ways that Congress could not have intended by the MMA. In addition, these arrangements would be flatly prohibited for clinical laboratory services, a related type of diagnostic testing, which are reimbursed at a fraction of the amount paid for anatomical testing. Thus, not only is it irrational to permit this type of arrangement for anatomic pathology services where the potential profits to the test-ordering physician are far greater than for clinical lab services, but it is flatly inconsistent with 20 years of federal payment policy.

In addition, many of these ventures raise significant issues under the OIG's Special Alert on Contractual Joint Ventures, which was issued in April 2003. In fact, recent press reports state that the OIG has significant concerns about these arrangements and their lawfulness under both the anti-kickback and the self-referral laws. See National Intelligence Rpt., Vol. 25, No. 17 at 1 (June 21, 2004).

Action is Necessary to Curb This Abuse.

Given the risk of overutilization and abuse stemming from these arrangements, ACLA believes clarifications and changes must be made in the applicable regulations to limit the growth and expansion of these abusive arrangements. Among the proposed changes are the following:

• In the preamble to the 2005 Medicare Physician Fee Schedule Final Rule, CMS should underscore the comments it made in the preamble to the Proposed Rule by stating that arrangements, which involve the Reassignment Rule, must also comply with other applicable Medicare laws and regulations.
• CMS should clarify that the independent contractor provision under the IOAS exception applies only to supervisory services, which are not directly billed to Medicare.
• CMS should clarify that the use of the sub-division of space in the manner utilized by the Pod laboratories does not meet the centralized building requirement in the IOAS exception.
• CMS should clarify that under Stark, a group that bills for services pursuant to the contractual arrangement exception to the Reassignment Rule is considered the "entity" furnishing DHS, pursuant to 42 C.F.R. § 411.351.
• CMS should use the authority granted to it by the MMA's revision of the contractor exception to the Reassignment Rule to prevent the use of that exception for the purchase and billing of pathology and other diagnostic services by the ordering physician.
• CMS should add further safeguards to Proposed Regulation § 424.80, which is included in the 2005 Physician Fee Schedule Proposed Rule. In particular, CMS should include the long-standing prohibition on the mark-up of purchased diagnostic services. In addition, CMS should also continue to apply the existing rules related to purchased professional interpretations, which prevent the physician who triggered the referral from also billing for it.
• The OIG should issue a Fraud Alert that emphasizes that these pathology arrangements implicate the anti-kickback law in accordance with the recent Special Alert on Contractual Joint Ventures, which the OIG issued in April 2003.
• The OIG and the CMS Program Integrity Group should investigate these arrangements and take appropriate action where they violate federal law.

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