Abusive Pathology Self ReferralAugust 9, 2011 12:00 am
Since 2004, CMS has acknowledged a concern about abusive anatomic pathology self-referral arrangements that increase utilization and costs to the Medicare program. Despite several attempts to remedy the problem, it has only escalated. In response to CMS’ most recent attempt—a 2009 amendment to the “anti-markup rule”—similar abusive arrangements have in fact become even more prevalent. These arrangements allow physician specialists to take advantage of loopholes in the Medicare regulations and to profit from anatomic pathology services provided to Medicare beneficiaries by physicians and technicians unrelated to their practice. This not only increases utilization and costs, but also impacts patient care as clinical decisions are based more on the physician’s ability to profit than on the basis of quality and service.
The American Clinical Laboratory Association, which represents independent clinical laboratories across the country, has consistently urged CMS to take action to stop these arrangements. We believe that many of the applicable regulations should be amended to address these concerns; however, we believe there is also a role for the Center for Program Integrity, given its important role in preventing waste and abuse in the Medicare program.
Problem: Anatomic Pathology Self-Referral Arrangements
Threaten Patient Health and Abuse the Medicare Program
Increasingly, physicians are entering into arrangements that permit them to bill and be paid for pathology services that they order, even though the services are actually furnished by physicians who have little or no relationship with the physician and his or her group. These arrangements permit physicians, such as gastroenterologists, urologists, and dermatologists, among others, to order pathology services and then profit from those referrals.
Anatomic pathology is an important physician service that involves the microscopic analysis of tissue and other human specimens to determine whether or not cancer is present and, if so, its characteristics. Anatomic pathology services usually include both a Technical Component (TC), which includes the preparation of the slide, often performed by a technician called a histotechnologist, and a Professional Component (PC), which is the actual interpretation and diagnosis performed by a pathologist. The most common pathology CPT code, 88305, is actually the 7th highest ranking procedure, by allowed charges, among all Medicare procedures. CMS has expressed concern for some time about abusive anatomic pathology arrangements, beginning with its attention to “pod” laboratories and has noted that “anatomic pathology diagnostic testing arrangements precipitated our proposal for revision of the anti-markup provisions and remain our core concern.” Unfortunately, since the 2009 revisions to the anti-markup rule, such abusive arrangements have only escalated.
Issue: The Current Regulations Have Actually
Fueled the Growth of Abusive Arrangements
The current arrangements take advantage of both the In-Office Ancillary Services (IOAS) exception to the Stark self-referral law and the anti-markup regulations. The IOAS exception was originally designed to permit physicians to offer services “for the convenience of patients during their patient visits.” But it has now expanded to include services, such as anatomic pathology services, that can never be performed while the patient waits. Thus, there is no increase in patient convenience by allowing the physician to order and bill for these services.
Further, under the current anti-markup rule, finalized in the 2009 Physician Fee Schedule final rule, a billing physician may mark up the TC or the PC of a diagnostic test if the performing physician or supplier “shares a practice” with the billing physician. However, to meet that requirement, the test (or component) only has to be performed in the office of the billing physician. And, for the Technical Component of the service, the rule looks at whether or not the supervising physician performs supervision on site. However, because there is no supervision requirement for the TC of anatomic pathology services, CMS has taken the position that the anti-markup rule does not apply to the TC at all.. Furthermore, CMS in the 2009 rule removed all references to “purchased tests,” thus eliminating a longstanding rule that prevented physicians from marking up tests they purchased from an outside supplier.
As a result of these changes, anatomic pathology self-referral arrangements have exploded. We have seen dozens of examples—direct advertising materials, newsletters, and displays at conferences—touting in-house labs and contract arrangements as a legal way to profit from ancillary services. This is possible because under the current rules, a physician who has a lab space in his office (or even somewhere else in the same building) can contract with a pathologist to read slides and a histotechnologist to prepare slides, pay each practitioner below the fee schedule rate, and then turn around and bill Medicare at the full fee schedule rate, often yielding a significant profit. Contrary to the intent of the “shared practice” language in the anti-markup rule, a pathologist visiting a physician’s office one day per week to read slides can hardly be thought to truly “share” the practice with the billing physician.
Typical Anatomic Pathology Self-Referral Arrangements
In a typical anatomic pathology self-referral arrangement, a group practice of specialists decides to establish an in-house anatomic pathology laboratory. They may contract with an outside consultant who will arrange for construction and management of the lab and will provide them with a histotechnologist to prepare the slides (the TC) and a pathologist who may come once or twice a week to read the slides (the PC). The consultants who establish these arrangements tout the returns that can be earned by the group practice. As the practice earns a profit on each test ordered, there is an incentive to increase the utilization of the tests.
Recently, the arrangements have become increasingly complex and sophisticated. Often the arrangement involves one or several “middlemen” who establish a separate entity that referring physicians invest in. That intermediate entity may lease equipment to a third party, which pays a rental fee for each service it performs. That payment back to the intermediate entity ultimately redounds to the benefit of the investing physician. This is similar to the Physician Owned Distributorships, about which Senator Orrin Hatch, and other members of the Senate Finance Committee recently wrote to Administrator Berwick. In those arrangements, as with the laboratory arrangements under discussion, referring physicians invest in a middle entity that earns a profit with each service ordered. 
The Impact of these Abusive Referral Arrangements
Of course, there is nothing unlawful about physicians earning a profit. However, the Stark and anti-markup provisions were designed to prevent physicians from earning a profit on their referrals, where the services they refer are furnished by outside physicians or contractors with little relationship to the group that is billing for the services. In fact, under the current interpretation of the anti-markup rules, the histotechnologist does not even have to be supervised by a pathologist (or any other group physician). Similarly, the pathologist is not “sharing a practice” with the group in any real sense. The pathologist is not integrated with the group practice that is profiting from his work; he or she is simply coming in one or more times per week to read slides for the group. Thus, CMS’ current interpretation of the Stark and anti-markup rules has actually accelerated this practice, rather than slowing it down. According to one recent periodical, “Unless the Stark in-office exception rule is changed, [Laboratory Economics] expects that nearly all big urology groups will bring their pathology services in-house. Smaller groups will follow suit as they merge into larger practices.”
These arrangements have become especially prevalent in several physician specialties—particularly urology, dermatology and gastroenterology—and, as a result, physicians are changing their practice patterns. For example, because of the potential to profit from a test, a urologist could decide to do a biopsy that ordinarily he would not do. Or, instead of biopsying one or two sites, a dermatologist might biopsy four or five sites and send 12 jars for processing, solely because she can be paid per specimen by Medicare, not because it is better for the patient. Further, they can also increase the number of “add-on” services such as special stains, which are sometimes used to assist a pathologist in rendering a diagnosis on a difficult case.
Finally, there is an impact on patient care and quality. In a clinical laboratory, a histotechnologist is supervised by a pathologist who can ensure that the technical component is performed correctly; in the office setting, on the other hand, the histotechnologist may be unsupervised, or supervised by practitioners without any pathology training. This is significant because it is during the TC portion of the service that the majority of errors in diagnosis arise. Furthermore, the pathologist who reads the PC for the group may only come to the office once or twice a week to read slides, which increases turnaround time, requires patients to wait longer to receive a diagnosis, and delays any necessary treatment.
Solutions: CMS Should Act To Stop the Growth in these Arrangements.
We believe CMS must take a stronger stand against these abusive arrangements. As noted above, such arrangements increase utilization, cost Medicare millions of dollars each year, and do a disservice to patients. We believe these arrangements necessitate a strong reaction from CMS. The agency should review the current regulations and close the loopholes that make these arrangements possible. Further, we believe that Program Integrity should consider subjecting these arrangements—and their billings—to greater scrutiny as well. Finally, and most importantly, we urge CMS officials to publicly express concern about such arrangements, as CMS’ silence on this issue only reassures those engaging in them that they can act with impunity.
 See 69 Fed. Reg. 66236, 66316 (Nov. 15, 2004) (stating that CMS shares commenters’ concerns about abusive “pod” laboratory arrangements).
 73 Fed. Reg. 404, 405 (Jan. 3, 2008).
 Health Care Financing Administration, “Medicare and Medicaid Programs; Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships; Final Rule,” 66 Fed. Reg. 856, 888 (Jan. 4, 2001).
 This problem arises because the Clinical Laboratory Improvement Amendments (CLIA) regulations do not require supervision of the TC of anatomic pathology services, and such supervision is not required by 42 C.F.R. §410.32, which defines the level of supervision required for other diagnostic services. In recent correspondence, CMS has continued to take the position that CLIA does not regulate the TC of anatomic pathology services.
 “Senators Request Probe of Surgeons” Wall Street Journal (June 9, 2011).
 Most Big Urology Groups Now Have In-Office Labs, Laboratory Economics, Mar. 2011, at 7.