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Anti–Markup Rule Now in Effect for Anatomic Pathology Services


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By Claire Turcotte and Megan McCarthy*

May 23, 2008

On May 5, 2008, the U.S. District Court for the District of Columbia vacated an injunction and dismissed Atlantic Urological Associates, P.A. v. Leavitt, Civil Action No. 08-141 (RMC), thereby permitting the Department of Health and Human Services (DHHS) to enforce the recently revised anti-markup rule for anatomic pathology services effective immediately. The injunction, won on March 31, 2008, by several urology practices and a laboratory management company, had enjoined DHHS from enforcing the revised anti-markup rule for anatomic pathology diagnostic testing services.

At issue in Atlantic Urological Associates were anti-markup rule changes that the Centers for Medicare and Medicaid Services (CMS) made in the final CY 2008 Medicare Physician Fee Schedule on November 27, 2007. In particular, the changes extended the anti-markup rule's restrictions to apply, effective January 1, 2008, to both technical component (TC) and professional component (PC) services of diagnostic tests when they are purchased from an outside supplier or furnished outside the office of the billing physician. Prior to these recent changes, the anti-markup rule had applied only to purchased TC services since 1992.

In response to significant industry concerns about the potentially disruptive effect of these changes on physician practices providing diagnostic testing services, CMS issued a final rule on January 3, 2008, delaying application of the anti-markup rule changes for one year, except as applied to (i) the TC of diagnostic tests and (ii) the TC and the PC of anatomic pathology tests furnished in space used by the physician
group practice as a "centralized building" and not qualifying as the "same building" under the federal Stark law
. This meant that, as of January 1, 2008, physicians could not mark up for Medicare billing purposes the TC and PC of anatomic pathology diagnostic tests above the lower of
(1) the net charge paid by the billing physician; (2) the billing physician's actual charge; or (3) the Medicare Fee Schedule amount. As a result, physicians could not recover their overhead costs incurred in operating pathology labs if the lab is not located in the physician group's practice offices because these cannot be included in the net charge.

This change presented a significant problem for certain physician practices, including the Plaintiff urologists, who were involved in arrangements known as "pod labs." Under the pod lab model, physicians order anatomic pathology services from off-site labs shared by several practices. These "pod labs" are often located away from the billing physician group's regular offices, and therefore, cannot qualify as an "office of the billing physician." As a result, the anti-markup restrictions apply to prohibit these physicians from marking up their billing charges for these off-site "pod lab" services above the lower of the net charge paid for the test to the pod lab, or the Medicare Fee Schedule rate. Because physicians can no longer recover the overhead costs incurred in operating the pod lab in their billing charges for the anatomic pathology tests, pod labs are generally now financially infeasible arrangements for physician groups. This may be the result CMS intended, however, as CMS has been concerned about the potential abuse arising from pod labs as far back as 2004. In fact, it was these concerns that prompted CMS to make its recent anti-markup rule changes. CMS indicated that the anti-markup rule's application to anatomic pathology services is intended to close a loophole in the Stark anti-referral law, which permitted physicians to profit from referrals to centralized pod labs.

The Atlantic Urological Associates Plaintiffs asked the court to invalidate CMS' final delay in an attempt to avoid application of the revised anti-markup rule to anatomic pathology services, and its undesirable economic effect. In dismissing the lawsuit, the D.C. District Court concluded that the Plaintiffs lacked standing to challenge CMS' final rule delaying the anti-markup rule because a Court decision invalidating the final delay rule would provide no relief for the Plaintiffs. Rather, they would remain subject to the final anti-markup rule changes included in the final CY 2008 Physician Fee Schedule. In addition, Plaintiffs' management company and its director lacked standing because neither of them in fact is a Medicare provider or supplier. In addition, the Court ruled that even if the plaintiffs had standing, the Court lacked jurisdiction to hear the case because the plaintiffs had failed to exhaust administrative remedies available to them through the DHHS administrative process. Thus, as a result of the court's May 5 dismissal of Atlantic Urological Associates, the anti-markup rule became effective immediately to the TC of a diagnostic test and to the TC and PC of anatomic pathology diagnostic testing services. The anti-markup rule will apply to all other diagnostic testing services on January 1, 2009.

Access the final order and the memorandum opinion on the Fraud and Abuse Practice Group Corner.

*We would like to thank Claire Turcotte, Esquire (Bricker & Eckler LLP, Cincinnati-Dayton, OH) and Megan McCarthy, Esquire (Bricker & Eckler LLP, Columbus, OH) for writing this summary.

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