Operating a successful independent diagnostic testing facility (IDTF) or imaging division of a medical practice could prove to be more difficult than ever. Such difficulties are in large part due to major Medicare reimbursement cuts under the Deficit Reduction Act of 2005 (DRA), which became effective on January 1, 2007, for many imaging procedures commonly performed by IDTFs and physician practices. For those providers able to weather the reimbursement storm, the Centers for Medicare and Medicaid Services (CMS) recently implemented sweeping reforms (and is considering others) that will likely have a drastic impact on the imaging industry.

Although some imaging centers may think they have little choice other than trying to sell their business, there are, unfortunately, very few buyers. To make matters worse, those buyers that remain interested in imaging are generally not paying any type of a meaningful purchase price. As a result, many imaging centers are considering ways to obtain a competitive edge by collaborating with referring physicians. This article addresses four arrangements that would allow physicians and IDTFs (and even health systems) to successfully work together in the delivery of medical imaging services.

Medicare Changes

1) Reimbursement Changes. The DRA is arguably the single most important piece of legislation to affect the medical imaging industry since the passage of the Stark law. In brief, the DRA provides that reimbursement for certain imaging services furnished in an IDTF or physician office is capped at the amount paid to a hospital for the same service. Medicare currently pays for most imaging services in an IDTF or physician practice setting based on the Medicare Physician Fee Schedule (MPFS). Prior to January 1, 2007, the MPFS paid a higher fee for many imaging services billed by an IDTF or physician practice than by a hospital.

As a result of the reimbursement cuts, an IDTF or physician practice performing a PET scan in 2007 now receives nearly half the reimbursement that it received for the same scan in 2006. The reimbursement cuts extend to MRI, CT, and many other imaging modalities. The DRA’s elimination of the higher technical component payment historically paid to IDTFs prior to January 1, 2007, is a harsh reality to face for IDTFs and physician practices with imaging divisions.

If the reimbursement cap was not enough, the DRA also reduces the amount reimbursed for the second and subsequent images performed at the same session on the same body part. This change first was implemented in 2006 to provide that IDTFs receive 75% of the original rate for subsequent scans. In 2007, IDTFs must incur an additional squeeze, as reimbursement is now limited to 50% of the original rate for subsequent scans.

2) IDTF Rule Changes. In the finalized 2007 MPFS, CMS has adopted stringent physician supervision standards for IDTFs. In particular, the supervising physician is now responsible for the overall operation and administration of the IDTF. This is a significant change, because it expands the supervising physician’s responsibilities from solely the clinical aspects of the IDTF’s imaging modalities to cover the business and administrative functions as well. It essentially requires the supervising physician to take on those responsibilities historically allocated to a chief executive officer. Additionally, a supervising physician is now limited to supervising no more than three IDTFs. By expanding the level of responsibilities of the supervising physician, there is likely a smaller pool of physicians willing to take on such a role. This concern is further exacerbated by the fact that imaging companies with multiple IDTFs must find a number of physicians to supervise in light of the rule limiting a physician supervision to no more than three IDTFs.

Joshua M. Kaye, JD

CMS also implemented more stringent standards on an IDTF’s ability to generate patients. Specifically, an IDTF is prohibited from directly soliciting patients by means of telephone, computer, or in-person contact. Although CMS did clarify that it is not intending to prohibit IDTFs from using public media (eg, television, radio, or newspaper ads), the practical effect of these changes is that IDTFs will be severely hampered in generating business other than from those patients who are referred by the patient’s treating physician. In light of these changes, IDTFs are encouraged to review their marketing policies and materials to ensure that they do not violate these newly adopted standards.

3) Medicare Reassignment Rule and Other Proposed Changes. Prior to adopting the finalized MPFS for 2007, CMS had proposed to revamp the Medicare reassignment rule by eliminating the ability of a physician practice to provide and bill for interpretations performed by an independent contractor. Doing so would have made it virtually impossible for a medical practice to bill for interpretations unless the interpretation is performed by a physician employee of a medical practice. Many medical practices in the imaging business currently engage a radiologist or radiology group on an independent contractor basis to perform the scan interpretations for the practice’s patients. The practice then bills for the interpretation and pays the radiologist or radiology group a per-interpretation fee.

Thus, CMS’s proposed changes would have resulted in a drastic departure from how interpretations currently are performed and billed by many medical practices. Fortunately, CMS did not adopt these standards as part of the finalized MPFS for 2007. It is very possible that changes to the Medicare reassignment rule will be revisited by CMS in the future.

4) Collaborating with Referring Physicians. Each of the arrangements discussed below is premised on compliance with the two commandments of health law: the Stark law and the federal anti-kickback law. Under the Stark law, the only practical way for a physician to have a financial relationship with an entity to which they refer patients for imaging services is by satisfying the in-office ancillary services exception (the In-Office Exception). If complied with, the In-Office Exception permits a physician to refer patients for medical imaging services (and other designated health services [DHS]) that are billed by such physician’s own group practice. With the exception of the under arrangements model, the models below are premised on meeting the In-Office Exception. The under arrangements model is premised on meeting other applicable Stark law exceptions.

With respect to the anti-kickback law, it is critical that any imaging arrangement with referring physicians be implemented with careful guidance to make sure it takes into account the concerns raised by the Office of Inspector General (OIG) in its special bulletin on Suspect Contractual Joint Ventures as well as more recent OIG Advisory Opinions 04-08 (addressing a shared expense arrangement among physician practices) and 04-17 (addressing clinical pathology pod laboratories).

A) Block Leasing. The block lease arrangement has arguably become a staple of the imaging industry. The underlying concept of a block lease arrangement is quite simple. A physician practice desires to provide imaging services to its own patients to ensure the availability of such services to the group’s patients and enable the practice to generate profits from these services. However, the practice does not have enough patient volume to justify the full-time use of the imaging modality.

Under a block lease arrangement, the IDTF or health system would lease to a medical practice or multiple practices—for distinct blocks of time—the space, equipment, and other services necessary for the practice to furnish one or more imaging services to such practices’ patients. In exchange, the practice would pay a fair market value rent and service fee to the IDTF, in addition to assuming the financial and operational risks of the diagnostic business during the blocked periods of time.

The physician practice bills and collects from Medicare for the technical component of the imaging scan. The group practice also could bill for the professional component (ie, billing globally) if either an independent contractor performs the interpretation at the IDTF or at an office location of the physician practice, or a physician employee of the group practice performs the interpretation regardless of where the read is done.

From a Stark law perspective, satisfying the “same location” test is often the greatest impediment to a medical practice’s satisfaction of the In-Office Exception in a block lease arrangement. The “same location” test requires for the medical imaging scan to be provided from within the same building in which the referring physician or a group practice member furnishes substantial physician services unrelated to the furnishing of designated health services.

Historically, there was no concrete guidance on what the government meant by providing substantial physician services unrelated to DHS. However, under the Phase II regulations of the Stark law, there is a more straightforward and flexible approach that recognizes the use by physician practices of both full-time and satellite (part-time) offices.

With respect to the anti-kickback law, in light of the heightened scrutiny that contractual joint ventures have received from the OIG, the block lease arrangement is intended to qualify for safe harbor protection. This can be difficult to do, because it requires the parties to agree on the specific blocks of time in a day (eg, every Monday, 8 am to 2 pm), during which the physician practice can send its patients for imaging scans.

The primary advantage of a block lease arrangement is its ease to implement and terminate. Since a participating practice has no equity position in the equipment or imaging facility, the relationship can be quickly ended. The speed with which this arrangement can be terminated often eliminates many of the concerns that arise when trying to unwind other types of physician/IDTF or health system joint ventures.

B) Shared Ancillary. The shared ancillary model is a variation of the block lease model, except that instead of each physician practice leasing blocks of time, they would each assume a commercially reasonable proportion of the costs of the imaging business, and use the imaging equipment on a concurrent, first-come, first-served basis. Like the block lease arrangement, the shared ancillary arrangement would require each practice to satisfy the In-Office Exception.

In particular, the physician practices desiring to participate in the arrangement, along with an IDTF (and/or health system), would form a single new limited liability company to purchase or lease the imaging equipment and incur substantially all of the expenses of operating the imaging facility. All of the participants would provide a meaningful initial capital contribution and sign on pro rata to any required debt guarantees. The amount of such contribution varies depending on the type of modalities being shared and the number of participants.

The newly formed limited liability company is not intended to generate a profit, but rather is established for the sole purpose of incurring virtually all of the expenses of the shared facility. The expenses are then allocated to each participant based on each participant’s use of the imaging facility. Each participant bills and collects for the services that it renders to its own patients. The shared ancillary arrangement also could include payment of a fee to the IDTF or health system for day-to-day management of the diagnostic business.

From a regulatory perspective, the shared ancillary arrangement is slightly more aggressive than a block lease arrangement; however, some physician practices may prefer this type of arrangement due to its added flexibility of scheduling patients on a first-scheduled/first-served basis and paying expenses in a manner that more closely reflects their actual use of the imaging equipment.

The shared ancillary model provides a good opportunity for radiologists and IDTFs to partner with referring physicians. It also has proven to be a great method for owners of medical office buildings to make occupancy more attractive.

C) Ancillary-Only Management. A derivative of the physician practice management industry (notwithstanding that industry’s fate), the ancillary-only management model gives physician practices access to imaging management and the expertise of imaging suppliers. Under this model, the imaging management company offers a physician practice a laundry list of imaging management services, including the equipment, supplies, and assistance with billing. In exchange, the medical practice pays the imaging company a fee.

While this arrangement has been around for some time, the underlying economics and business aspects have changed dramatically. The first generation of the ancillary-only management model provided for the imaging company to incur all the expenses associated with the physician practice’s imaging division. Those costs were then passed through to the physician practice. However, in light of recent OIG guidance, newer models now provide for the physician practices to incur some direct financial risk and frontline responsibility by being responsible for providing the space in which the imaging equipment is housed, employing the imaging technologist, and being responsible for the patient scheduling and billing and collection services (although the imaging management company might still assist the practice by generating, for example, a patient’s superbill).

Depending on the parties’ tolerance for risk, the medical practice would pay the imaging company either a fixed fee or a fixed fee plus a percent of the physician practice’s imaging division revenue or profits, or the medical practice would reimburse the imaging company for the expenses it incurs to assist the physician practice to operate the practice’s imaging division plus a percentage of the practice’s imaging division profits or revenues. From a regulatory perspective, this model is better suited for pure imaging management companies, as opposed to those companies that also operate IDTFs and that are in a position to compete for a medical practice’s imaging business.

D) Under Arrangements Model. The reimbursement cuts have driven many imaging companies to consider ways of taking advantage of a hospital’s higher reimbursement rates. As a result, the health care industry is likely to see an increase in “under arrangements” being formed. While this model can take on many forms, they generally have the following three common characteristics: (i) the participating physicians or IDTF provides to the hospital the imaging service—from as little as the primary equipment to as much as a turnkey management arrangement; (ii) the hospital purchases the service on a “per click” or “per use” basis; and (iii) the hospital bills and collects for the services under the hospital APC codes.

Jerry J. Sokol, JD

Under this arrangement, the participating physician or IDTF receives the per-click or per-use fee from the hospital, while the hospital retains the reimbursement from the third-party payor. These arrangements require the physician practice or IDTF to incur substantial financial and operational risk since they are the entity initially incurring all of the costs and expenses for operating the imaging equipment. However, it also may provide a unique opportunity to take advantage of higher reimbursement rates in light of the reimbursement cuts.

Be aware that in addition to the Stark law and anti-kickback law, a myriad of other health care laws and regulations must be navigated before implementing any business model for the provision of ancillary services, including the purchased diagnostic test rule and Medicare reassignment rules. Also, be sure not to overlook the laws of the state where your imaging center operates, which most likely has similar laws against physician self-referrals and kickbacks, as well as fee splitting.

Industry Prognosis

It will not be long before the imaging industry begins to feel the impact of the DRA reimbursement cuts and other recent changes imposed on imaging providers. Imaging centers are encouraged to develop a strategy for coping with these changes. Some imaging centers may be considering whether this is the time to get out of the industry. However, they may find it difficult to find a buyer willing to pay meaningful dollars, as private equity funds and other institutional buyers turn away toward more promising sectors of the health care industry. Those imaging centers in dire financial straits with little hope for a turnaround may find private equity distressed funds a viable option, as they stand poised to strike at the first opportunity. Strategic buyers, such as hospitals and health systems or large imaging companies, also may be worth pursuing to see if they are interested in acquiring additional imaging centers.

Although the outlook may seem bleak for some, the substantial majority of imaging centers are in a position to implement one or more of the aforementioned business models. With proper legal guidance and implementation, each of these models has the potential to increase an imaging center’s revenue and lower its expenses by taking advantage of higher hospital reimbursement rates, solidifying relationships with referring physicians, and/or sharing expenses of operating an imaging facility among a number of different users. In light of the realities of the current marketplace, implementing one of these models may be just the right strategy for these uncertain times in the imaging industry.

Jerry J. Sokol, JD, is a board-certified health care lawyer and partner in the health law department of McDermott Will & Emery’s Miami office; . Joshua M. Kaye, JD, is a partner in the health law department of McDermott Will & Emery’s Miami office; . For additional information, please contact .