As if the health care reimbursement picture for 2007 was not complex enough with the present and upcoming Deficit Reduction Act (DRA) changes for diagnostic imaging, on June 29 the Centers for Medicare and Medicaid Services (CMS) published a proposed rule in the Federal Register that will, according to CMS, create the “largest revisions ever proposed for services related to patient evaluation and management.”

The document is the result of Medicare’s third 5-year review of work relative value units (RVUs) under the Medicare Physician Fee Schedule (MPFS), and, when its proposed changes are implemented on January 1, 2007, it will not only drastically alter how Medicare calculates the value of the time physicians spend treating patients, but also, and more importantly for outpatient diagnostic imaging facilities, it will change how Medicare calculates practice expenses.

CMS’s stated goal is to make its methodology for calculating those expenses easier to understand and more consistent across procedures by moving to a “bottom-up” methodology. In other words, instead of looking at final costs for procedures and making assumptions about what part of that cost is needed to cover the expense of running the practice and offering the procedure (top-down methodology), CMS will use survey data on actual practice expenses from eight different specialties and the Relative Value Update Committee (RUC) of the American Medical Association and apply a methodology closer to strict addition to figure out practice expenses. Think clinical staff time plus supplies plus equipment costs plus an allowance for indirect expenses such as office rent, utilities, billing staff, and receptionist time.

As part of this change, the methodology used to calculate indirect practice expenses will also change and CMS will eliminate the “non-physician work pool” exemption to the current methodology, which was used to calculate practice expense RVUs for services without physician work RVUs, primarily radiology and pathology services. These costs will now be accounted for using the standard practice expense methodology.

The Good, the Bad, and the Ugly

According to the American College of Radiology (ACR), these changes are a bit of a mixed bag for radiology. Reimbursement for some procedures may go up under the new methodology. However, others will certainly go down—in some cases substantially. Furthermore, despite CMS’s goal of making the whole system easier to understand, it is, in reality, a lot more complex than just pure addition. For one thing, different specialties that provide diagnostic imaging may have different practice expenses, but CMS is not allowed to, for example, pay a cardiologist or a neurologist who performs an imaging procedure more or less than a radiologist who performs the exact same procedure. As a result, the practice expense data for a service that crosses several specialties must be combined and weight-averaged by which specialties perform it the most.

According to Pam Kassing, senior director of economics and health policy for the ACR, the change in the practice expense methodology may produce some extreme cuts. For example, using CMS’s proposed figures, reimbursement for bone densitometry, a screening test for osteoporosis, may go down 72% with just this methodology change. “We are trying to look at the logic behind that, how that could happen,” Kassing said.

Kassing and the ACR are examining the new methodology to make sure it is sound and that it is being applied correctly while also preparing for further changes expected later this summer, such as the announcement of the annual Medicare conversion factor that is expected to reduce all Medicare physician payments by nearly 5% unless Congress intercedes, and CMS’s highly anticipated rule on how it will implement the multiple procedure discount on contiguous body part scans that was part of the DRA changes for radiology.

“There should be concern by all of medicine that there are a lot of changes going on with the Medicare fee schedule next year and we don’t know really how they are going to fall out until the very end of the year,” Kassing said.

Final numbers will likely not be announced until November 1, and, while in past years proposed numbers and final numbers mirrored each other closely, such an assumption cannot be made this year because of the size of the changes.

A Gradual Approach

Switching the methodologies is no small step for CMS either, and the agency did write in the Federal Register that it was concerned about the impact the switch may have on providers of services and procedures that would be paid a lower rate under the new system. Consequently, CMS will phase in the changes over 4 years instead of switching over completely in 2007.

This means that, for a hypothetical diagnostic imaging procedure whose technical component is currently reimbursed $500 and, under the new system, would be reimbursed $400, CMS will calculate both figures each year and combine them such that in the first year the payment will be 75% of the old figure and 25% of the new—in this hypothetical case $475. The next year, it would be half the old figure and half the new, or $450. In the third year, it would be 25% the old figure and 75% the new, or $425. Finally, in the fourth year, it would be 100% the new figure or $400.

Another factor that may cushion the blow to nonhospital-based outpatient radiology is that CMS has, at least for the time being, decided to stick with its past assumptions about equipment utilization and the interest rate on equipment purchased on credit from manufacturers. When figuring the numbers, CMS assumed a utilization rate of 50% for imaging equipment, even though the Medicare Payment Advisory Committee (MedPAC) has said that many practices now run diagnostic scanning equipment much more than just half the time through tighter scheduling, longer days, and special weekend hours. In addition, CMS has continued to assume an equipment interest rate of 11%, even though most manufacturers do offer a slightly lower interest rate, at least for the time being.

“I don’t think their assumption on the interest rate is such a wild mark, and I think the 50% utilization makes sense,” said Joseph Paul, president of Cypress Partners LLC, Palm Beach Gardens, Fla—a company that owns outpatient imaging centers in Georgia, Alabama, and Maryland. He pointed out that most financial experts have predicted that interest rates on all loans, including equipment purchased on credit, will go up in the near future and that makes 11% a very realistic figure assumption for 2007.

Should CMS later change its mind and either increase its assumed utilization percentage or decrease its assumed equipment interest rate, the reimbursement on imaging services would go down even further.

“This is a multi-dimensional chess game,” said Liz Quam, director of the Center for Diagnostic Imaging (CDI) Institute in Minneapolis, Minn, and chair of the public policy committee of the National Coalition for Quality Diagnostic Imaging (NCQDIS), which has been working hard on reversing the DRA cuts to imaging while also keeping a close eye on the reimbursement methodology changes at CMS.
Insult Added to Injury?

This latest news—which overall will mean a net decrease for the 7,000-series Healthcare Common Procedure Coding System (HCPCS) and Current Procedural Terminology (CPT) codes that cover diagnostic imaging—has left many in radiology reeling.

“Is it a third shifting of money?” wondered Doyle Rabe, CEO of Austin Radiological Associates, a radiology group with 14 imaging centers in the Austin, Tex-area. “To me that is just going to gut radiology. Every imaging center in town other than ours is for sale except for two that are owned by referring physicians.”

He said what happened with the reimbursement cut on consecutive scans on contiguous body parts is a good lesson. Prior to the cut, the diagnostic imaging industry had identified that there were some savings there, but they were closer to 17% to 23%. “Where did they come up with 50%? I think it was purely a budget hack, and I don’t think they particularly care that it doesn’t match the data,” he said. “So it scares me when they say we are going to do it from the ground up, make it easier to understand and base it all on the data….so far you have not done a very good job with that.”

Austin Radiological Associates will read 1.2 million exams this year and with a patient mix that is 20% Medicare and 7% to 8% Medicaid, it was expecting to take a $3 million hit on just the DRA changes next year. To consider a change to practice expense methodology that might mean and additional overall 5% cut to the technical component of the MPFS is hard to swallow for a practice that strives to provide the best and most cutting-edge technology.

Rabe pointed out that, when looking at practice expense data, CMS needs to be very careful with the numbers because costs in diagnostic imaging can vary widely based on how good the equipment used is. For example, many magnetic resonance imaging (MRI) procedures are currently paid the same regardless of the age and the quality of the equipment the procedures were performed on. “I have competitors whose newest magnet is 6-years-old; my oldest magnet is 6-years-old; my newest magnet is last week’s,” Rabe said. “I have some high-end Siemens stuff that cost over $2 million, and they are getting paid the same rate on an old GE that is completely paid for and they use a third-party company for their maintenance so that they can get it under $70,000. Is that data being thrown in?”

What to Do

The impact of the CMS change to its PE methodology will, of course, hit different radiology practices differently depending on their unique patient and procedure mix. “The devil is in the details,” said Douglas G. Smith, managing partner of the imaging business-consulting firm The Barrington Lakes Group, Barrington, Ill. He cautioned anyone in diagnostic imaging to not just assume that the macro-level estimates of the effect on changes will apply to their businesses but to do their own individual analysis.

“Any individual practice has to understand by volume use by CPT code what does this mean for them,” he said.

In analyzing the proposed numbers based on the Medicare procedure mix of 10 to 12 different clients, Smith found that for one the reimbursement would go up 0.6%, a change he considered negligible, and for another, the reimbursement for this change alone, not counting any other changes (such as the DRA cuts to diagnostic imaging or the multiple-procedure on contiguous body parts), reimbursement would fall 6.7%.

The fact that reimbursement rates might decrease on top of the other cuts for 2007 while real-world practice expenses have only gone up may spark some major changes in the field, Smith predicted. “All of this is coming to what I see as the boil point in radiology.”

Rabe was considering getting tough with private payors and re-negotiating rates for some procedures. It is an option that larger radiology practices can use, but not much help to smaller providers that lack the leverage of doing thousands of procedures per year, Smith said.

The best strategy, at the moment, may be to just let the dust settle. “Sit tight and wait and see what happens is probably the best thing you can do,” Kassing said. “The whole thing is very fluid right now.”

The Silver Lining

Finally, if there is something good coming out of this change, it is that it opens the discussion with CMS on what the actual costs are of providing diagnostic imaging services are in the non-hospital outpatient setting, Quam and Smith both pointed out. The importance of expensive, sophisticated testing equipment makes radiology different from every other medical sector, and in the past it may have suffered because general payment methodologies meant to apply to all services provided under Medicare do not recognize the importance—and cost—of rapidly advancing high technology. The new system has the mechanism within it to be much more factually based.

“We need this kind of dialogue,” Quam said. “As long as they allow us a voice and as long as we speak with one voice, there is hope here.”