Gerard Durney’s plans included a New Year’s toast to Medicare rule changes that, at first glance, appear to level the playing field for hospitals to compete with physician practices that have invested in imaging equipment.
Durney, administrative director of the radiology department at Lenox Hill Hospital, New York, expects the recent changes will increase service volume and decrease competition for hospitals. Those changes include banning self-referrals for nuclear medicine services and making physician office imaging reimbursements align with hospital outpatient imaging reimbursement. The rules seem to make it less attractive for physicians to offer imaging services and curtail new competition for hospitals.
Durney doesn’t expect the new rules to produce immediate volume increases, but "at some point," he says, "it could start sending more business our way."
But even the slightest uptick in volume could pay large dividends for hospitals in the high-stakes battle with physician offices and free-standing imaging centers. New technology and growing patient demand for the services are fueling growth of the multibillion-dollar industry.
David Zimba, vice president of corporate contracting at the five-hospital West Penn Allegheny Health System, Pittsburgh, says the system recently opened an imaging center to meet patient demand. He adds that, traditionally, imaging hasn’t been a large revenue-generator for hospitals, but it does produce healthy margins.
Those gains are adding up.
The Advisory Board Co., a Washington-based consulting firm, has been tracking the largest profitmakers for hospital outpatient services since 2001 and says last year marked the first time that imaging topped the list. The Advisory Board says imaging netted hospitals $20.9 billion, compared with $19.3 billion for surgery and other procedures.
To hospitals’ dismay, physicians have been able to capture more of that spending in recent years.
For Medicare alone, the spending on imaging services paid to physicians increased to $10.9 billion in 2004 from $5.7 billion in 1999, according to a June report from the Medicare Payment Advisory Commission. MedPAC advises Congress on Medicare issues and suggested that a way to control Medicare spending would be to prohibit physicians from self-referring patients for nuclear medicine services such as PET scans.
The Ethics in Patient Referrals Act of 1989, known as the Stark law, prohibits self-referrals for Medicare patients for certain "designated health services." Many imaging tests have been included on the list of designated health services, but the CMS’ previous interpretation excluded nuclear medicine services.
The CMS’ interpretation has changed, and it has decided to institute a ban on self-referrals for nuclear medicine services, which went into effect Jan. 1—the same day physician reimbursement cuts took effect.
Exceptions to the rule
While Durney and others are optimistic that the changes could steer business to hospitals, it appears the changes could have less impact than previously imagined. The imaging lobby is trying to mitigate the cuts’ damage by backing bills that would delay the lowering of the physician reimbursement for imaging, and many physician-owned organizations have found a way around the changes to the Stark law.
Martin Sandler, a physician who is president of the Society of Nuclear Medicine, says the Stark law regulations are meant to stop physicians from referring patients to facilities in which they have a financial interest. But "there are many ‘safe harbors’ in the regulations that define certain exemptions to these rules," he says in an e-mail.
Those interviewed for this story say many physician-owned practices that offer the nuclear medicine services have been able to meet an exception known as an in-office ancillary service. The exception allows group practices to self-refer Medicare patients if a designated health service takes place in their office building or at a centralized location.
Joanne Judge, a partner and co-chairwoman in the health law department at law firm Stevens & Lee, says she has counseled more than a dozen physicians who could be affected by the recently instituted addition to the Stark law. She says they are all able to meet the in-office exception. For this reason, the change will be "less dramatic" than other self-referral bans, she says.
Hospitals would be overwhelmed
The CMS proposed tighter restrictions on the in-office exception in August 2006, which has raised concerns among physicians. Terence Beven, a physician and board member with the Society of Nuclear Medicine, says if the changes do eventually lead to free-standing centers and physician offices are unable to offer the services, then it will overwhelm hospitals.
"If there was a radical change resulting in implementation of these rules, it could place a burden in volume and procedures," Beven says.
Beven was a longtime director of the nuclear medicine department at Our Lady of the Lake Regional Medical Center, Baton Rouge, La., but wants to make it clear that he isn’t speaking on behalf of the hospital. He currently practices at Lake PET Imaging, a free-standing joint venture with Our Lady of the Lake. The center won’t violate the Stark law because the physician owners don’t make referrals, Beven says.
Matt Molchan, chief financial officer of UltraScan, a mobile imaging service, says his company’s physician clients won’t be affected by the revised Stark law because their nuclear medicine machine can be wheeled into physician offices, therefore qualifying it for in-office exception.
He also believes that the rule changes will lead to access problems for patients and says if the clampdown continues it will ultimately bring more business to hospitals.
"I hope you live in an area with a good hospital," Molchan says.
The competition relief would be welcomed by hospitals. Hospitals’ outpatient facilities that offer imaging services outnumbered imaging centers 2-to-1 in 2000, but that ratio was nearly 1-to-1 in 2006, according to Verispan, a healthcare research company.
But Molchan adds that the reimbursement cuts may lead to abuse of services because if physicians do receive less per scan, they’ll need to increase volume to make up the difference. With that in mind, there will be even more competition with hospitals, says Shay Pratt, a senior consultant with the Advisory Board.
"The diagnostic imaging arena will become even more competitive as free-standing centers look to capture more of the hospital share of the outpatient market," he says.
One suggestion that Molchan and others have is developing accreditation and utilization standards, which would set some requirements before a scan could be authorized.
Glenn Hackbarth, MedPAC chairman, testified before the House Energy and Commerce health subcommittee in July and suggested that Congress set standards for all providers that bill Medicare for performing and interpreting diagnostic imaging services. He told the committee that hospitals have to meet Medicare’s conditions of participation, which include standards for radiology, but "no national Medicare standards for imaging apply to physician offices."
Hackbarth cited research done by Dartmouth Medical School, Hanover, N.H., for MedPAC that showed increasing imaging services were not associated with improved survival rates in any of the three patient groups—colon cancer, heart attack and hip fractures—it examined. He also referenced a study by the National Committee for Quality Assurance that found nearly one-fourth of patients with lower-back pain in managed-care plans received unnecessary imaging services, which included X-rays, magnetic resonance imaging and CT scans.
Hackbarth believes that standards could help stop the unnecessary services in physician offices and help ensure quality, but Congress has taken no action. Congress, however, does have bills before it that would delay the start date of the imaging physician fee schedule cuts, which are aimed at aligning those payments with hospital outpatient payments.
The imaging alignment was stipulated in the Deficit Reduction Act of 2005, and the CMS’ final rule for the 2007 physician fee schedule caps payment rates for imaging services at the amount paid for the same services when performed in hospital outpatient departments.
The American College of Radiology is one group concerned about how damaging the cuts could be. It says that making the payments align with hospital outpatient payments will not cover the cost of services in the physician’s office.
A report produced for the radiology group said 87% of imaging procedures affected by the Deficit Reduction Act would be reimbursed at rates estimated below what it costs physicians to provide exams.
Change of philosophy
In 2001, the CMS said nuclear medicine services would not be subjected to the Stark law. In 2005, the agency reversed its decision.
What changed was where the procedures were being performed, according to the CMS.
In 2001, the CMS said nuclear medicine services were primarily being performed in hospitals. But in its 2005 proposed rule to make nuclear medicine services subject to the Stark law, it said there were increasing numbers of nuclear medicine procedures being performed in physician offices or at physician-owned free-standing facilities.
The CMS cited MedPAC data that showed Medicare payments under the physician fee schedule for nuclear medicine services grew 85% between 1999 and 2003. The increase outpaced the growth of Medicare physician spending for imaging services (45%) and the growth for all physician services (22%) over the same period.
The CMS noted that advancements in technology and greater availability of radioactive tracers were likely factors in the increase. And similar to Hackbarth’s testimony, the CMS also claimed the proliferation of practices offering the nuclear medicine services was an indicator that unnecessary procedures were possibly being performed.
"We believe financial relationships related to diagnostic and therapeutic nuclear medicine, including joint ventures and leases, pose a risk of anti-competitive behavior and risk of abuse," the CMS said in its proposed rule.
In a comment letter, the American Medical Association disagreed with the CMS’ reasoning. "The proposed rule takes the position that because nuclear medicine and other imaging services have experienced rapid growth in the last several years, some of the growth must be due to physicians making inappropriate referrals to imaging facilities in which they have a financial interest," according to the letter.
In its final rule, the CMS did realize that the reversal of its decision would cause some financial hardship on physician investors and delayed implementation of the rule until Jan. 1, 2007, from Jan. 1, 2006. Some, however, don’t think the grace period went far enough.
Judge, the attorney from Stevens & Lee, says the CMS should have grandfathered the affected providers. The four-year window didn’t allow providers to realize a return or even recoup their investments.
"It’s a short period of time from a business structure standpoint," she says.
John Watson, administrator of Northwest Diagnostic Clinic, Houston, says this year physicians from his practice invested in a joint venture alongside several oncologists to open a dedicated PET and CT imaging center. Watson, who declines to mention how much the physicians invested, says he would now be surprised if the physicians were able to recoup the money they initially put up.
Watson says the physicians made the investment before the Deficit Reduction Act cuts to imaging were set in the physician fee schedule for 2007. The initial investment value was based on projected revenue before the cuts, but now—when they are paid for selling Northwest’s stake—the payment will be based on projected revenue after the cuts.
Watson says Northwest physicians don’t refer patients to the imaging center but they wanted to divest the stake in the joint venture anyway. Since the physicians wouldn’t have been violating the self-referral rule, Watson describes the decision to divest as precautionary.
"What if ... one of my doctors decided to refer a patient for a PET scan, the (office of the inspector general) did an audit, and somebody went to jail? I don’t look good in stripes," he says.
Not surprisingly, the American Hospital Association, a vocal critic of physician-owned ventures, thinks the ban on self-referrals for nuclear medicine services "is a good thing," says Don May, AHA’s vice president of policy.
May describes the pending physician fee schedule imaging cuts as "probably appropriate." He doesn’t think the cuts and changes to the Stark law will give hospitals an advantage, but "in some cases, it really levels the playing field."