As the new Congress begins a shift toward a more domestic policy-dominated agenda, health care issues are expected to receive substantial attention. While there was hope during the last quarter of 2006 that a bill proposed in the House (HR 5704) as well as one proposed in the Senate (S. 3795) would result in a moratorium on the DRA reimbursement cuts, neither bill became law. As the medical imaging industry begins to cope with reimbursement cuts, the following other legislative and federal agency actions should not be overlooked.

(1) Under Arrangements. The DRA reimbursement cuts have driven many imaging companies to consider entering into an “under arrangements” with a hospital in order to take advantage of a hospital’s higher reimbursement rates. Physician practices are seeking similar opportunities, as the Centers for Medicare and Medicaid Services (CMS) created a narrow exception under the Stark law that for the time being arguably permits physicians to own entities that provide medical imaging services and equipment to hospitals. This exception has been used by physicians and imaging companies to acquire one or more imaging modalities and then lease those modalities (along with certain related services) to a hospital on a fixed fee or a per-click/per-scan under-arrangements basis.

Under-arrangements agreements between hospitals and imaging suppliers (without financial involvement of physician practices) should remain largely unaffected during the 2007 calendar year. However, CMS has indicated that it will likely address the Stark Law under-arrangements loophole, as it relates to an existing hospital service being provided by an entity owned by referring physicians. For now, it is unclear what is meant by an “existing hospital service” or whether CMS will grandfather in certain existing arrangements. As a result, imaging companies, physicians, and health systems should be cautious in pursuing an under-arrangements agreement that involves providing an existing hospital service, unless, perhaps, the project involves a new replacement facility, or an additional site. Even then, the participants are strongly advised to plan a solid exit strategy so that they are not forced to unwind the arrangement, should such a need arise, under dire and urgent circumstances.

(2) Specialty and Surgical Hospitals. On August 8, 2006, the Department of Health and Human Services submitted the final report to Congress required under the DRA. Effective with the release of the report, CMS discontinued its moratorium on issuing new Medicare provider numbers to physician owned specialty and surgical hospitals. Physician-owned specialty hospitals are now free to enroll to participate in the Medicare program, and many are doing just that. While state certificate of need and licensure laws may serve as some impediment, the number of physician owned specialty hospitals is expected to dramatically increase during the 2007 calendar year.

Specialty hospitals provide an attractive investment opportunity to physicians. First, physician owners of a specialty hospital are permitted to profit from medical imaging procedures provided by such hospital. While the Stark law prohibits a physician from investing in a division of a hospital, it permits a physician to invest in a whole hospital, including a whole specialty hospital. Of course, this means that a physician could also have ownership in a general acute care hospital. However, physicians are often not interested in investing in a general acute care hospital comprised of multiple divisions and expenses unrelated to that physician owner. Moreover, many general acute care hospitals operate on a tax-exempt basis making physician ownership virtually impossible.
Additionally, a small specialty hospital can provide a physician owner with the often physician-preferred (and patient-preferred) surgical setting of an ambulatory surgical center. However, Medicare will not reimburse an ambulatory surgical center for diagnostic imaging procedures. By contrast, a specialty hospital can receive Medicare reimbursement for medical imaging procedures.“SGR fix” is what led to the imaging cuts included in the DRA of 2005.

Notwithstanding the end of CMS’s moratorium, Congress will likely continue to look carefully at the physician owned specialty hospital issue. While new legislation could be introduced, it appears for now that many surgical hospital companies, medical imaging companies, and physicians are currently considering specialty hospital opportunities.