United States: CMS Delays Diagnostic Test Markup Prohibition

Last Updated: January 21 2008
Article by Ross C. D'Emanuele

CMS Delays Diagnostic Test Markup Prohibition The Centers for Medicare and Medicaid Services ("CMS") has delayed until January 1, 2009 the effective date of significant portions of the new Medicare prohibition on the markup of diagnostic tests.

On November 27, 2007 CMS published new regulations that prohibit ordering physicians from marking-up the price of either the professional or technical component of diagnostic tests if the tests are either: (1) performed at a site other than the "office of the billing physician or supplier"; or (2) purchased from an outside supplier. This new regulation significantly expands Medicare's traditional markup prohibition, and would force many physician practices to either disband their in-office diagnostic testing, or operate such testing at a net loss.

After publishing the rule CMS realized that the rule could limit patient access to diagnostic testing. In addition, CMS admits that whether or not testing is performed in the "office of the billing physician" is difficult to determine under the rule. For instance, the rule did not address whether an imaging center on a different floor of the same medical office building where the physician practice performs its other services would be considered the "office of the billing physician." The agency says they plan to provide additional guidance to define the "office of the billing physician."

Consequently, CMS has delayed for one year the effective date of much of the new anti-markup rule. The anti-markup rule will not apply to the professional component of diagnostic testing in 2008. In addition, the rule will not, for 2008, apply to technical diagnostic testing merely because the testing is performed in space other than the "office of the billing physician."

But CMS has not delayed the entire markup rule. The markup prohibition applies currently to the technical component of diagnostic tests that a physician purchases from an outside supplier. Furthermore, CMS refused to delay the application of rule to anatomic pathology testing furnished in space meeting the definition of a "centralized building" under Stark, but not in the same building as the physician's main practice. Pathology "pod" labs were CMS' core concern, and the agency would not delay the rule to combat what they view as an abusive practice.

This delay provides many physician groups with one year of additional time to operate in-office diagnostic testing without the Medicare markup prohibition. But it clearly remains the intention of CMS to implement the markup prohibition in full as of January 1, 2009.

Physician groups should utilize the additional time to review the finances and structure of their in-office diagnostic testing and prepare for full implementation of the new Medicare anti-markup rule.

CMS Delays "Stand In The Shoes" For Academic Medical Centers And Tax-Exempt Integrated Delivery Systems

The Centers for Medicare and Medicaid Services (CMS) will delay the application of the "stand in the shoes" provision of the Stark II Phase III final rule to academic medical centers (AMCs) and nonprofit integrated health systems for one year. Announced November 15, 2007 in a final rule (72 Fed. Reg. 64161), CMS stated that the delay was necessary to re-evaluate any unintended impacts of the "stand in the shoes" provision. According to CMS, the delay is a response to growing industry concerns over the effects of applying the "stand in the shoes" provision to AMCs and nonprofit health systems where "support payments" or other monetary exchanges are common. All other provisions appearing in the final rule will become effective December 4, 2007.

CMS published the third phase of the Stark II final regulations (Phase III) September 5, 2007. The "stand in the shoes" concept is one of the more extensive provisions of the new regulations. To reduce the risk of fraud and abuse by "closing the loophole" that allowed many indirect compensation arrangements with physician groups to receive more favorable treatment than under the direct exceptions, the "stand in the shoes" concept collapses a physician into his/her business entity for purposes of analyzing such compensation arrangements. According to CMS, the referring physician is now deemed to have the same direct compensation arrangement with a DHS entity as the physician organization in whose shoes the referring physician stands.

The delay is in effect until December 4, 2008 only with regard to compensation arrangements between the following physician entities: 1) compensation arrangements between a faculty practice plan and another component of the same AMC; and 2) compensation arrangements between a nonprofit integrated system and an affiliated physician practice in the same nonprofit system.

CMS Rescues Payments By Physician Exception In Stark II Phase III Correction Notice

CMS issued a Correction Notice November 30, 2007 addressing "technical and typographical errors" for the Stark II Phase III regulations that went into effect on December 4, 2007. Nearly all of the corrections involve changes in punctuation, grammar and syntax, but one of CMS's revisions to Section II. B. "Corrections to the Regulations Text" is more than merely a cosmetic modification.

Despite insisting it was making no change to the payments by a physician exception, CMS changed the Stark II Phase III regulatory text from "not specifically excepted under another provision" to "not specifically addressed by another provision." This change is significant because the fair market value exception was broadened to include payments by a physician as well as payments to a physician. When interpreted together with the Stark II Phase III amendment to the fair market value exception, the usefulness of the payments by a physician exception would be all but eliminated because the fair market value exception appears to "address" almost everything.

The unintended repercussions of restricting the payments by a physician exception would have been considerable. For example, a physician's purchase of healthcare services or medical supplies from a DHS entity could no longer fall within the payments by a physician exception because the fair market value exception "addresses" the payments. Purchases from a hospital store or café by a physician would suffer a similar fate. Attempting to squeeze these arrangements into the fair market value exception would be a melee of artificiality.

In its Correction Notice, CMS changed the regulatory text of the payments by a physician exception back to a version closely resembling the Stark II Phase II language: the phrase "not specifically addressed by another provision" was changed to "not specifically excepted by another provision." The Correction Notice eliminates the unintended repercussions discussed above by keeping the payments by a physician exception available for payments "not specifically excepted by another" exception.

Physical Therapy Provider To Pay $16.6 Million To Resolve False Claims Allegations

Michigan-based Stryker Corporation and its former outpatient therapy division, Physiotherapy Associates Inc. (Physiotherapy), entered into a settlement agreement whereby they will pay $16.6 million to resolve allegations that Physiotherapy submitted false claims to Medicare, state Medicaid programs and the TRICARE program and retained excess or duplicate payments from the programs.

Specifically, the allegations charged Physiotherapy with fraudulently billed claims as one-on-one services. Physiotherapy also agreed to enter into a corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. The settlement arose from two qui tam actions filed by former employees of Physiotherapy.

Medicare Secondary Payer Statute Does Not Allow A Private qui tam Action On Behalf Of The Government, Court Rules

In its dismissal of a consolidated action against Catholic Health Initiatives, Triad Hospitals, Inc. and other various insurance defendants, the Court of Appeals for the Eighth Circuit ruled that the Medicare Secondary Payer (MSP) statute does not permit a private qui tam action on behalf of the government. The court stated the MSP, which mandates that Medicare be the secondary payer of medical services provided to Medicare beneficiaries when payment is available from a primary payer, does not permit a relator to assert the government's injury.

Plaintiff Douglas B. Stalley alleged the defendant hospitals and insurance companies negligently injured Medicare patients, triggering liability under the MSP. Stalley argued he could bring the claim on behalf of the federal government because the MSP is a qui tam statute comparable to the False Claims Act: it relies on private persons who are in a position of greater knowledge and can more ably discover the government's claim, increases damages to inspire private actions by individuals and involves the government receiving a portion of the private party's recovery.

Though acknowledging these similarities to a qui tam statute, the Court found the plain language of the statute and the congressional intent indicate that plaintiffs are to assert their own injuries under the MSP. The Court concluded the MSP was designed to allow injured individuals to vindicate their own private rights against primary payers even though Medicare had already made a conditional payment of the beneficiaries' expenses. Because Plaintiff Stalley is not a Medicare beneficiary and did not suffer an injury-in-fact, the Court held he lacked standing to pursue his claim and dismissed the suit.

Arizona Heart Hospital And Two Physician Groups Agree To Pay $6.7 Million To Settle Allegations Of Improperly Billing Medicare For Non-Covered Procedures

A Phoenix-based hospital and two physician groups agreed to a $6.7 million settlement in connection with allegations that they improperly billed for procedures not covered by Medicare. Arizona Heart Hospital, AHI Cardiovascular Surgeons, Ltd. and the Arizona Heart Institute allegedly submitted claims to Medicare Part A for procedures provided to Medicare beneficiaries involving implantation of graft devices to treat abdominal and thoracic aortic aneurysms. The devices, not yet finally approved by the FDA, were either implanted without an approved investigational device exemption or were implanted without complying with investigational device exemption protocol.

The allegations were limited to whether the procedures performed were properly reimbursable to Medicare; quality of patient care was not an issue. Though never admitting to any wrongdoing, the hospital agreed to pay $5.8 million and the physician groups paid $900,000. A corporate integrity agreement with the Department of Health and Human Services Office of Inspector General (OIG) was also part of the settlement.


Federal Officials Using Device Companies Disclosures To Determine Whether Physicians Accepted Kickbacks, Illegal Payments Five orthopedic device manufacturers have made information available about their payments to physician consultants pursuant to agreement stipulations filed in New Jersey federal court. Biomet Orthopedics Inc., DePuy Orthopaedics, Zimmer Inc., and Smith & Nephew entered into deferred prosecution agreements requiring the companies take certain steps to avoid prosecution for violating Medicare Anti-Kickback provisions. These four companies also agreed to settle pending civil claims against them for a total of $311 million. Stryker Orthopedics, the fifth company, entered into a non-prosecution agreement and is not the subject of a civil settlement. Each of the companies were accused of inducing surgeons to use a particular product exclusively for minimal or no work, according to the Department of Justice.

The agreements provide that the companies must accept appointment of federal monitors for compliance purposes to ensure the obligatory corporate reforms, including reviewing all existing and new consulting relationships with the companies. Terms of the prosecution agreements also required disclosure within 30 days of the agreements' effective date certain information regarding payments to physician consultants. Each company agreed to disclose the name, city, and state of residence of any consultant retained at any time during the year 2007.

These disclosures are now being used by Federal officials to investigate whether some doctors may be liable for accepting illegal payments from the device companies. Department of Health and Human Services Office of Inspector General Chief Counsel Lewis Morris explained that the review of the device manufacturer payments is part of the OIG's new strategy to warn physicians they can be held liable in kickback arrangements just as pharmaceutical and device companies can be liable. Morris noted the government has broadened its focus in handling kickback cases to include holding physicians accountable for accepting illegal remuneration paid to them by the companies


Merck to Pay $4.85 Billion to Settle Vioxx Litigation Merck & Co., Inc. agreed to a $4.85 billion settlement to resolve federal litigation over its anti-inflammatory drug Vioxx. The pharmaceutical giant faced tens of thousands of suits, including claims by approximately 47,000 plaintiff groups, over Vioxx-related injuries. The money will be paid into two settlement funds, one with $4 billion for claims of heart problems and another with $850 million for ischemic stroke claims. Qualifying claims that enter the resolution process will be evaluated on an individual basis.

Claimants will have to meet three requirements to qualify: 1) an injury threshold requiring objective medical proof of a myocardial infarction or ischemic stroke; 2) a duration requirement where a plaintiff must show documented receipt of at least 30 Vioxx pills; and 3) a proximity requirement demonstrating receipt of pills in sufficient proximity to the event in order to support a presumption of ingestion of Vioxx within 14 days before the claimed injury.

Merck discontinued selling Vioxx in September 30, 2004 after an internal study revealed it increased the risks of heart attacks and strokes in patients who took it for 18 months or longer. The settlement agreement does not represent any admission of fault or liability on Merck's part, the company said in a statement. However, the move marked a major reversal of course for Merck, which previously stood firm in its policy to fight more than 26,000 lawsuits.

Merck senior vice president and general counsel, Bruce N. Kuhlik, noted that the Vioxx settlement agreement is "the product of [Merck's] defense strategy in the United States during the past three years and is consistent with [its] commitment to defend each claim individually through rigorous scientific scrutiny." The agreement was signed by Merck and the Plaintiffs' Steering Committee of the Vioxx litigation after they met with the judges overseeing the coordination of more than 95% of the current Vioxx claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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