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Partner with hospitals, but approach carefully


Free-standing imaging facilities have taken some hits lately. This is no secret to readers of Diagnostic Imaging, but they've not always been under such intense fire.

Free-standing imaging facilities have taken some hits lately. This is no secret to readers of Diagnostic Imaging, but they've not always been under such intense fire.

In 2000, when the Health Care Financing Administration (now Centers for Medicare and Medicaid Services, or CMS) published its final hospital outpatient prospective payment system rules, it ushered in far-reaching reimbursement changes.

When the Hospital Outpatient Prospective Payment System (HOPPS) rules went into effect, all covered hospital outpatient services for Medicare beneficiaries, including radiology services, were divided into ambulatory payment classification groups, which represent services that are clinically similar and require comparable resources. All services within a particular APC generally are paid at the same prospectively fixed rate. But HOPPS started out behind the Medicare Physician Fee Schedule in its payment rates.

Initially, payments for such radiology services as MR, CT, and PET were considerably better under the Physician Fee Schedule than payments for comparable services performed in hospital outpatient settings that were paid at APC rates. This payment differential contributed to making the development of free-standing imaging centers a good investment opportunity for radiologists. The advantage in payments under the Physician Fee Schedule helped lead to a significant migration of imaging services out of hospitals and into physician office and independent diagnostic testing facility (IDTF) settings. Many radiology group/hospital joint ventures were formed as a result of the payment advantages available under the Physician Fee Schedule.

Now the tables are turned. Nonhospital technical-component imaging has suffered multiple imaging procedure and Deficit Reduction Act cuts.

As this column is written, the House Ways and Means Committee has released its proposed imaging services "reforms" as part of the new State Children's Health Insurance Program bill. President Bush was, at press time, expected to veto the bill, but the committee's proposals signal that the cuts to nonhospital imaging may not be over. Although CMS has kept the cuts to physicians for multiple imaging procedure claims at 25%, the committee's bill would increase the reduction to 50%.

Hospitals are clearly winning the payment wars for outpatient imaging services. Not only are they winning with their Medicare payments, but also through their generally more lucrative private-payer contracts. As a result, parties are actively exploring ventures in which physician groups and IDTFs can benefit from more favorable hospital reimbursement rates. The mechanisms by which a hospital may bill for nonhospital outpatient imaging include "under arrangement" services and agreements that would permit the hospital to treat a free-standing facility as a provider-based entity. My view is that there is considerable regulatory risk in partnering with hospitals via the under-arrangement route. The provider-based approach is the safer-although more cumbersome-tactic.


If CMS determines that an outpatient imaging facility qualifies as a provider-based facility for a hospital, the hospital may bill and be paid for services provided at that facility under the APC system. To qualify for this enrollment status, detailed rules delineate specific requirements that a facility must meet in order to be deemed provider-based and treated as part of the hospital.

The provider-based rules generally address the governance and control of patient care services. Provider-based entities must be financially and clinically integrated with the hospital. When provider-based status is sought for facilities not on the hospital campus (or within 250 yards of the campus), the rules require that the hospital have final responsibility for administrative decisions, final approval of contracts with outside parties and personnel actions, final responsibility for personnel policies, and final approval of medical staff appointments in the facility seeking status. Rules appear to require the hospital to employ the technologists and other staff at an offsite facility who are directly involved in the delivery of patient care (excluding physicians and other practitioners who can bill Medicare directly).

Without question, any arrangement between a radiology group and a hospital structured to comply with the provider-based rules will substantially limit the control the radiologists may exert over services offered at the off-campus location.

The rules specifically state that a facility may not qualify for provider-based status if all (some is okay-all is not) patient care services provided at the facility are furnished under arrangement. But this CMS admonition has not deterred many who have explored the under-arrangement alternative to provider-based status.


The under-arrangement alternative is a less cumbersome-but riskier-route by which hospitals can offer services directly through a facility that is not on its campus or staffed by its personnel. The Medicare program allows hospitals to obtain certain specialized services, including diagnostic imaging services, by arrangement with another healthcare provider. Under this approach, Medicare pays for hospital diagnostic services furnished to outpatients "by or under arrangements made by a participating hospital." CMS has put no limitations on where outpatient diagnostic services must be performed when provided "under arrangement" with another healthcare provider. The Medicare Benefit Policy Manual states that "when the hospital makes arrangements with others for diagnostic services, such services are covered under Part B as diagnostic tests whether furnished in the hospital or in other facilities."

Because the under-arrangement rules seem to be so much more flexible, some lawyers and consultants have promoted this approach to permitting the hospital to bill for technical component imaging services that would once have been billed under the Physician Fee Schedule by the free-standing physician office or IDTF.

Be careful if you consider this route. CMS has expressed concern that under-arrangement services "could, if not limited, become a means of circumventing the provider-based requirements." In comments to the HOPPS rule published in 2002, CMS expressed its understanding of these arrangements as follows: "We believe the provision of services under arrangement was intended to be allowed only to a limited extent, in situations where cost-effectiveness or clinical considerations, or both, necessitate the provision of services by someone other than the provider's own staff. The 'under arrangement' provision . . . is not intended to allow a facility merely to act as a billing agent for another."

The attitude of CMS appears to be, in short, that it's inappropriate for a facility, whether located on- or off-campus, to evade the provider-based requirements by claiming to provide all of its services under arrangement.


CMS noted in the preamble discussion to the 2008 proposed Physician Fee Schedule rule that, perhaps due to Medicare payment cuts to nonhospital imaging and surgical services, under-arrangement contracts with hospitals were proliferating. CMS expressed concern about these relationships with physician-owned entities for a number of reasons:

  • a risk that the arrangement encourages physician-owners to overutilize services;

  • "[t]here appears to be no legitimate reason for these arranged for services other than to allow referring physicians an opportunity to make money on referrals";

  • in many cases, the services furnished under arrangement were previously provided directly by the hospital; and

  • the services furnished under arrangement to hospital patients are typically furnished in a less medically intensive setting than a hospital but billed at the higher HOPPS rates.

Under-arrangement agreements can be proper and lawful, however. In fact, certain services must be provided under arrangement with a hospital. Because of the prohibition against hospitals unbundling the Diagnosis-Related Groups and APC payments to Medicare inpatients and certain registered Medicare outpatients, some services must be provided under arrangement when the hospital cannot provide them directly. Only the hospital can bill for these nonphysician, technical component services to Medicare patients. But CMS doesn't want the under-arrangement approach to be abused.

Consequently, if a radiology group or IDTF chose not to bill separately under the fee schedule for its imaging services, but were to provide all its imaging services to hospital patients at the radiologists' office under arrangement with the hospital and without complying with the provider-based rules, the group could expose itself to additional risk of scrutiny by CMS. This would be especially so if imaging services are the only services provided at the location and those services would otherwise be entirely staffed, performed, and managed by the radiology office or IDTF. The hospital would have little, if any, control over or involvement with providing or managing the services rendered in this location. CMS could interpret an arrangement that subcontracted the staffing, operations, and management of diagnostic imaging services as an attempt to sidestep the provider-based rules and its more restrictive regulatory requirements.

So by all means, look at partnering with hospitals. But be careful how you do it.

Mr. Greeson is a partner in the healthcare group of Reed Smith LLP in Falls Church, VA. He can be reached at 703/641-4242 or tgreeson@reedsmith.com

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