Assault on lease deals could bring their demise

April 1, 2007

When imaging centers first entered the market, they provided MRI and other imaging services to patients who were referred by local physicians. These physicians selected imaging centers based on quality and convenience for their patients.

When imaging centers first entered the market, they provided MRI and other imaging services to patients who were referred by local physicians. These physicians selected imaging centers based on quality and convenience for their patients.

For a variety of reasons, including imaging profitability and deregulation resulting from changes in state certificate of need laws, the number of imaging centers grew substantially, creating excess supply. As a result, many markets became oversaturated with imaging centers, and these centers faced significant underutilization and corresponding decreases in income.

At the same time imaging centers were facing these problems, physicians were experiencing their own financial woes due to decreases in reimbursement from both the government and managed care payers. Given these dynamics, it is not surprising that before too long imaging centers and physicians devised a plan to resolve their respective financial problems. That plan was the lease agreement.

Under a lease agreement, the imaging center leases itself out as a turnkey operation to a referral source physician, on either a per-use or block-time basis. In a typical lease arrangement, the physician makes a relatively small "lease" payment for use of the center, its personnel, and equipment. The physician then bills the payer as if the physician (rather than the imaging center) has provided the service. The physician then retains the difference between the lease payment and the collections-in some cases as much as double the amount of the lease payment.

The technical fee that in the past had been the exclusive property of the imaging center is now being shared with referral-source physicians through this new contractual arrangement. Those imaging centers that are willing to share their fees in this manner with referral-source physicians have a steady flow of referrals. Similarly, physicians who are willing to send their patients to these centers that they have "leased" are able to supplement their income-quite substantially in many cases.

Although participating physicians and imaging centers were benefiting from these lease agreements, some would argue that these arrangements result in unnecessary scans and lower quality services. Both governmental and private payers have expressed concern at the dramatic increase in imaging services utilization.

LEGAL IMPLICATIONS

Depending on the details of a particular lease arrangement, various laws may be implicated and potentially violated. If a physician refers Medicare or other governmental payer patients to an imaging center with which he or she has a lease agreement, federal anti-kickback, self-referral, and false claims statutes could come into play.

Even if governmental payer patients are not referred (either for imaging services then billed by the physician under the lease arrangement or for imaging services billed directly by the imaging company), the arrangement may still violate the law if the parties are located in a state with its own anti-kickback and/or self-referral laws that protect consumers and private payers from kickback schemes.

Many states now have such anti-kickback and self-referral laws, some of them with hefty whistleblower inducements (as much as 50% of the total recovery). Moreover, nearly all states have insurance fraud laws that may be implicated by lease agreements.

Not only are state and federal laws at issue; lease arrangements may raise contractual concerns. Certain major insurance companies, attempting to control the skyrocketing utilization of imaging services, have warned physicians that lease arrangements result in pass-through claims-that is, claims that are not reimbursable and could subject the physician to breach of contract and recoupment claims by the insurer.

ASSAULT ON THE PRACTICE

Over the past few years, numerous developments, both directly and indirectly related to lease agreements, have drawn much attention. There have been news stories, lawsuits, governmental advisory opinions and agency reports, and regulatory changes.

The most recent assault on lease agreements is found in Centers for Medicare and Medicaid Services Transmittal 187 dated Jan. 26, 2007, with an implementation date of Feb. 26, 2007, establishing new compliance standards, for independent diagnostic testing facilities (IDTFs). On Feb. 19, 2007, CMS rescinded these new standards and it remains to be seen whether and to what extent CMS may rework them for implementation. Some pundits predict that, if ultimately implemented, such standards may deal a body blow to most lease agreements.

Among other compliance standards set forth in this transmittal are the following statements: An IDTF "may not share space with another active Medicare supplier (physicians owning an IDTF and sharing space are exempt from this requirement)" and "may not share equipment with any other IDTF or supplier."

These statements appear to prohibit lease arrangements between an IDTF and a physician who is a Medicare supplier because such arrangements do involve the sharing of space and equipment. Although some might argue that "sharing" equipment is different from "leasing" equipment, this distinction seems nominal and perhaps unlikely to save the day for IDTFs that want to continue to enter into lease agreements with referral-source physicians.

Another recent development is a private lawsuit in Illinois that was recently joined by the state attorney general (People of the State of Illinois v Midi LLC, et al). The private plaintiff in this case owned an imaging center but did not participate in lease agreements. He alleges that other imaging centers that did participate in lease agreements violated the Illinois Insurance Claims Fraud Prevention Act and the Illinois Consumer Fraud and Deceptive Business Practices Act.

The suit, against a number of Chicago-area imaging centers, was originally filed under seal. The attorney general conducted an investigation into these practices and decided to join the suit on behalf of the people of Illinois.

This case is a frontal assault on lease arrangements. It alleges that the defendant imaging centers in fact performed all of the services in doing the MR scans. Their employees scheduled scans with the patients, the centers supplied all personnel, and they performed the scans at their own facilities with their own equipment.

The complaint alleges that the physicians who refer their patients provide no services but instead receive payment for the services rendered by the imaging centers. The essence of the kickback case is found in the following allegation:

"The purported lease agreement is a subterfuge, utilized to cloak and hide the kickback paid for the referral. The fiction of the lease is shown by the fact the physician does not participate in doing the scan, has no involvement at the service center, the scan is done by and under the control of the MRI service center's employees and agents and the scan results and radiology reports are performed by service center radiologists . . . [T]he only activity by the referring physicians is referring the patient, billing the services as his own, and receiving the kickback. In the final analysis, the physicians provide nothing other than a referral and receive an unlawful kickback from the payments made by insurers."

This lawsuit is in its early stages, so it's too soon to predict its outcome. Many physicians and imaging centers in Illinois are discontinuing their lease agreements, however. This suit has received considerable national and local press. Many healthcare lawyers are advising their clients to cease the practice altogether or to exercise extreme caution.

Other significant developments affecting lease arrangements include the March 2005 MedPAC report to Congress, a Wall Street Journal cover story expose on May 2, 2005, "MRI and CT Centers Offer Doctors Way to Profit on Scans," and a June 2005 pronouncement against the practice by the Louisiana State Board of Medical Examiners.

MEDPAC RECOMMENDATIONS

MedPAC, an independent federal body established to advise Congress on the Medicare program, made a number of recommendations to the Congress intended to improve the quality and utilization of imaging services. These recommendations include improving Medicare's ability to audit imaging studies, setting standards for performing and interpreting diagnostic imaging studies for all providers who bill Medicare, measuring individual physicians' use of imaging services to compare practice patterns, and strengthening rules that govern physician investment in imaging centers to which they refer patients.

The article in The Wall Street Journal provides a comprehensive look at the practice from a variety of perspectives and concludes that, even though doctors profit on each scan and imaging centers have a steady volume of referrals, these deals risk clashing with laws precluding payment for referral and self-referral, and they may encourage overuse.

The Louisiana State Board of Medical Examiners, addressing per-use lease arrangements head-on, held that arrangements under which a referring physician leases and/or purchases the full complement of technical and professional services necessary to provide imaging services to the physician's patients on an unscheduled, per-use basis for less than the referring physician's reimbursement for the patient or the patient's third-party payer violates the Louisiana antikickback law. As such, Louisiana physicians who engage in this practice now subject themselves to disciplinary action.

FINAL BLOW

Public awareness of this practice may strike the final blow against lease agreements. Patients, unaware of the financial arrangements between their physicians and the imaging center to which they are referred, may be subjected to unnecessary tests, inconvenient imaging center locations, and substandard equipment. However, due to national and local press coverage of this issue, consumers are now becoming more informed. In a recent article in the Chicago Tribune, consumers were warned to challenge their physicians on the need for testing, and if the answer was still yes, to inquire further about the existence of any financial inducement that the physician may have with the imaging center.

Media exposes, educated and inquiring consumers, payer restrictions, licensure penalties, and civil liability-the assault on lease agreements may have succeeded in taking the practice down.

Ms. Haule is an attorney with the firm Ungaretti & Harris in Illinois. She represents the private plaintiff in a lawsuit recently joined by the Illinois attorney general attacking lease agreements.