Scan time leases: Referring clinicians mine for gold in radiology's backyard

Revised May 2

In late November, nearly 300 doctors and imaging center managers paid $325 each for a day-long seminar sponsored by the law firm McDermott Will & Emery. They packed a large ballroom in the swank Ritz-Carlton Hotel at Water Tower Place in Chicago to learn how to turn referrals to imaging facilities into lucrative income streams.

Just seven weeks later, Illinois Attorney General Lisa Madigan launched a legal attack that is sending shock waves through imaging centers, hospitals, and law practices that thought they had found ways to make those income streams legal. Madigan joined a whistleblower lawsuit accusing 21 Chicago-area MRI centers of fraud for allegedly selling sham leases to induce business from referring physicians.

Damned in some medical circles and embraced in others, imaging equipment leasing to referring physicians reveals wildly differing attitudes toward self-referral. Many radiologists express a visceral dislike for business strategies that allow referring physicians to make money from their ability to refer patients for diagnostic tests performed on imaging equipment in which they hold an ownership interest.

Such behavior is regulated by federal law and self-referral statutes in about 36 states. But referring physicians and their attorneys have found creative ways to work around the statutes using the in-office exception to the federal Stark self-referral law and safe harbors of the federal anti-kickback statute to permit self-referral.

The two separate events in Chicago illustrate the contradictory nature of imaging self-referral.

Critics say leasing foments corruption by allowing clinicians to share in the profits of high-tech imaging in exchange for the right to perform MRI, CT, or PET/CT on their own patients. Various studies done since the late 1980s, including those conducted by American College of Radiology Imaging Network chief Dr. Bruce Hillman, have shown that self-referral leads to practices that inflate imaging costs.

Though research has not established a link between leasing and wasteful practices, critics suggest it creates conditions that are conducive to overutilization.

Though self-referral arrangements may be legal, they are unethical, according to Dr. Leonard Berlin, chair of the ACR ethics committee and radiology chair at Rush North Shore Medical Center in Chicago.

"Referrals for diagnostic imaging should be based on medical necessity, not financial self-interest," he said.

Supporters say leasing helps referring physicians reverse years of declining personal income by giving them a share of the lucrative technical components of reimbursement.

"It is purely incremental income for referring physicians, because they are not getting anything from the technical component currently,"said Todd J. Mello, principal of HealthCare Appraisers in Castle Rock, CO.

Leasing is popular with hospitals to lock in the loyalty of physicians and persuade them not to buy scanners for in-office services that would compete against the hospitals' equipment, Mello said. It helps new services break into congested markets and lets centers fill their excess capacity by bringing in a reliable flow of patients.

Peter Myhre, president of Marcap, a finance company that lends about $150 million per year to the healthcare industry, considers leasing a double-edged sword. The hospital or imaging center earns less per patient because of leasing, but the arrangements bring in more patients and revenue.

MONEY TALKS

Lots of money can be made this way. Madigan's complaint claims that the typical amount billed for an MRI exam in the Chicago area is $800. Under the alleged kickback scheme, the fee was split 50-50: The imaging center received $400, and the referring physician pocketed the other $400. This practice spanned at least 18 months and involved thousands of patients and enough procedures to generate millions of dollars, according to the complaint. Plaintiff John Donaldson of Premier Imaging is seeking treble damages. An attorney for the defendants told Diagnostic Imaging that they will be exonerated.

Open Advanced MRI, a national chain owned by MIDI LLC of McLean, VA, also allegedly sold leases through six imaging centers in Portland, OR, and its suburbs. Documents obtained by the Willamette Week described the financial terms of a lease that OAMRI offered Neurology Associates Northwest in 2006. The turnkey arrangement promised to net the physicians $475 for every MRI and $155 for every CT. By referring 22 patients per month for MRI and five for CT, a neurologist could earn $134,000 in additional annual income. An OAMRI spokesperson who told the Willamette Week the company did nothing illegal did not respond to a request for comment from Diagnostic Imaging.

Equipment leasing is one of several questionable strategies that led to a qui tam relator complaint against Boca Raton, FL, radiologist Dr. Fred L. Steinberg in 2005. According to a complaint filed in the U.S. District Court in Southern Florida, Steinberg generated $33.2 million in imaging patient revenue from his practice and imaging centers from 1998 to mid-2002. The Wall Street Journal quoted Steinberg as denying any wrongdoing.

With so much money to be made, referring physician leasing has spread to many communities. Activity appears to be concentrated in suburbs and mature big city markets where competition is keenest. Leasing is less common in Certificate of Need states, such as Michigan and Connecticut, where MRI and CT installation is regulated.

Anne M. Haule, an attorney with Ungaretti & Harris, estimated that at least half of the freestanding imaging in the Chicago area involves leasing arrangements.

"If a doctor can make $10,000 per month just for referrals, that money talks," she said.

Time block leasing is the most popular form of these agreements. Block leases assign a referring physician group specific time slots, often four- or eight-hour blocks on a specific scanner. The physicians are responsible for supplying (and sometimes scheduling) patients for imaging during that time. They earn money by filling their slots, but they can lose money if the slots go unfilled.

The imaging center may supply everything involved with patient scheduling, imaging, and follow-up. Responsibility for global billing is assigned to the referring group. This arrangement gives the referring physician an opportunity to read the films and claim the professional fee. Because of malpractice concerns, however, interpretation is often contracted to a radiologist. The referring physician typically pays the radiologist 17¢ for every dollar billed globally to the insurer, Mello said.

The referring physician group pays the imaging center a fixed, predetermined monthly fee for leased time. An independent appraiser is often contracted to calculate the block's fair market value. In combination, these features address the space, equipment, personal services, and management contract elements of the federal anti-kickback statutes, said Joshua Kaye, a partner in the Miami office of McDermott Will & Emery.

Myhre informally surveyed customers and prospects at the 2006 RSNA meeting about their involvement in block leasing. He was surprised to hear that about 20% employ block leasing. It provides 10% to 20% of their imaging-related revenue, he said.

Kaye advises clients on several dozen new leasing arrangements annually. Across the country, referring physicians have been leasing MRI and CT since at least 1997, according to attorney Jerry Sokol, another partner with McDermott Will.

Many imaging service operators have gained confidence in the legality of block leasing. It accounts for a majority of referring physician leasing contracts, Sokol said.

Per-click deals, unlike block leases, allow physicians to reserve time on the fly. The lease applies whenever the physician refers a patient. This format provides more convenient scheduling options for the patient and shields the referring physician against financial losses. Though referring physicians would logically prefer paying for leasing time only when they can charge for it, the lack of financial risk weakens per-click leasing's legal standing.

"If you look at the guidance documents, you'll see the federal government wants, at a minimum, substantial financial risk and frontline responsibility, such as supervision, billing, and collections," Kaye said. "Per-click arrangements can involve turnkey management, with little or no operational risk."

RISKY BUSINESS

The Centers for Medicare and Medicaid Services' Office of the Inspector General enforces the Stark self-referral and anti-kickback statutes. An OIG official, who declined to be identified by name, warned that leasing carries substantial legal risks. The OIG cautioned physicians that arrangements that pay them for referrals while someone else performs the work could lead to a costly investigation.

Many physicians have become less guarded about their behavior, however, as in-office imaging self-referral has proliferated. Kaye and Sokol advise clients to make sure the block lease model they use meets all aspects of the in-office exception. The service must be billed through a referring physician's practice, be appropriately supervised by a physician from that practice, and be provided in either a space that is used exclusively by the practice or a building where the practice has a full- or part-time office, Kaye said.

This formula may increase protection against federal action, but the Illinois suit shows that leasing arrangements are still vulnerable to actions under state law. The suit, initiated by John Donaldson, an investor in Premier Imaging, alleges that leasing arrangements run by 19 Chicago-area imaging centers violate Illinois insurance claims fraud protection act, the consumer fraud act, and deceptive business practices laws. Both per-click and block leases are involved, according to plaintiffs' attorney Floyd Perkins.

Steven A. Miller, counsel for MIDI LLC, owner of the nine Advanced Open MRI Centers named in the suit, said his client will be vindicated and that he would seek a motion to dismiss or a summary judgment.

The complaint claims that the leases devastated Premier Imaging centers in Chicago, Arlington Heights, and Algonquin. Imaging volumes at MRI of River North, one of Premier's Chicago centers, fell from 25 to 13 patients a day after the leases appeared in 2004, according to medical director Dr. Ruth Ramsey.

"Doctors who were sending us between one and five patients a day told us straight out, 'We want to do a leasing agreement with you. If you won't do it, we will do it with somebody else,'" she said.

Other Chicago-area imaging operators faced the same dilemma. At Rush North Shore, medical staff internists in 2005 promised to direct their patients to the hospital and its imaging center, if they could get a lease. When Berlin refused, the patients were referred elsewhere.

Beyond its effect on local competition, leasing degraded the quality of MRI and CT services, Ramsey said. Neurological cases best examined on her 1.5T MR scanner were diverted to centers equipped with low field strength open magnets. In 2006, a neurologist who was capitalizing on a leasing arrangement sent Ramsey a patient whose condition remained a puzzle after low field MR imaging.

"The images were awful," Ramsey said. "The patient had multiple sclerosis, detected with our magnet, that could not have been diagnosed from those scans."

OREGON TRAIL

Referring physician practices in Portland came to light because radiologist Dr. Gerald Warnock resisted the trend. Warnock owns an Epic imaging center on the east side of Portland and partners with five other radiologists and center manager William Dunlap in the ownership of a second facility on the west side. Epic employs 190 people and performs imaging on six MR scanners: three 1.5T, two 0.7T open, and one 3T. The two centers are also equipped with two 64-slice CT scanners, a PET/CT, a dedicated PET breast scanner, and a mammography section that performs 120 studies daily.

Epic competes with Open Advanced MRI, which has six centers equipped with 0.3T open MR scanners, a 1.5T scanner and several CT systems in Portland and neighboring Vancouver, WA. Warnock first learned about referring physician leases when several primary-care physicians asked him for the same leasing terms they got from OAMRI. He declined, and his MRI referrals soon began falling.

A representative of the Pacific Medical Group also wanted a lease for its 34 primary-care physicians, Dunlap said. He gave Warnock a chance to match the offer, which was refused. The dollar value of Pacific Medical's MRI referrals to Epic peaked at nearly $224,000 in 2003, the year before it established a leasing arrangement with OAMRI. By 2006, its referrals had dropped to about $52,000.

Leasing had a dramatic effect on referrals from two primary-care groups that signed the contracts (see chart). The annual dollar value of their MRI referrals to the two Epic sites rose 90% from 2000 through 2003. With leasing, the value of their annual dollar value fell fourfold.

Court records from the other side of the country state that Florida neuroradiologist Dr. David Clayman was fired in July 2002 after trying to discuss suspected Medicare billing irregularities with his employer, Dr. Fred L. Steinberg. The incident led Clayman to file a federal whistleblower suit that alleged his former boss filed false claims for thousands of imaging procedures. Twelve medical services and 56 physicians were named as codefendants.

Though alleged billing fraud is at the heart of the case, Steinberg was also accused of orchestrating an elaborate scheme to channel kickbacks to referring physicians. Allegations include appointing referring physicians to paid medical directorships that required none of their time and setting up sham leases to funnel even more money to physicians who sent patients to Steinberg's imaging centers.

The amended complaint alleges that Steinberg sent a letter to Rheumatology Associates in April 2001 proposing four scenarios for leases, billing, and the performance of scans on a dedicated extremity scanner, for example. It provided income projections of $258,650 to $1,034,560 on scans performed during a 250-day period and set terms that would permit the group practice to share the technical and professional fees from Medicare and private insurers for imaging services referred to Steinberg and his facilities.

In May 2000, Steinberg sent Glades Medical Group a letter with a bone mineral density lease agreement. The letter explained that the lease was set for 10 scans per month, but 30 to 40 scans could be performed to generate up to $57,000 per month.

Also in May 2000, Dr. Robert Mellman and his group practice signed an ultrasound lease agreement with Steinberg's University MRI of Boca Raton for a base rate of $40 per hour, though a special fee schedule showed the rate was $20 per scan, according to the complaint. The complaint also asserts that a physician was never present during ultrasound scanning, as required by the contract. Steinberg's clinic allegedly paid Mellman's practice $30,500 in purported equipment fees, $27,000 in purported leases and rents, and $3000 in loans.

In all, the complaint claimed that Steinberg was involved in six fraudulent imaging equipment leasing schemes that were sometimes intertwined with agreements to refer patients to his imaging centers.

No trial date had been set as of March 28. The case was stayed to allow the sides to negotiate, according to Peter W. Chatsfield, counsel for Clayman.

TARNISHED REPUTATIONS

The proliferation of physician leasing and other forms of self-referral has damaged diagnostic imaging's reputation on Capitol Hill and at CMS, said William Sarraille, a partner in the law firm Sidley Austin Brown & Wood in Washington, DC.

Washington lawmakers have made a connection between allegations of utilization abuses orchestrated by some physicians and the financial burden of imaging utilization growth. High-tech imaging abuses were alleged during congressional deliberations before passage of the Deficit Reduction Act of 2005, and those discussions are reflected in the approved rate cuts, he said. Some imaging center operators have blamed those reduced rates for revenue drops of 20% to 50% for procedures performed with various imaging modalities since the enactment of the cuts in January.

"This action spilled over to hurt a lot of providers who don't have financial relationships with referral sources," Sarraille said. "It punished everyone in imaging for the perceived abuses of a few."

Ironically, the DRA legislation may unintentionally stir more interest in physician block leasing, he said. While some marginal providers have already ceased operations, others may adopt block leasing to boost imaging volume.

CMS's interest in regulating leasing and in-office self-referral was reflected in its publication and then rapid withdrawal of Transmittal 187 in February. Proposed restrictions on the shared use of office space and medical equipment would have essentially eliminated block leasing and dampened in-office utilization, said W. Kenneth Davis Jr., a partner with the law firm Katten Muchen Rosenman in Chicago. Within a week of publication, the transmittal was rescinded to quell a howl of criticism from sectors of the healthcare industry that support those practices.

A blanket prohibition could not happen fast enough for some radiologists who have been exposed to referring physician leasing. Berlin worries that radiology's reputation will be sullied, from the general public's response to newspaper accounts about doctors who take kickbacks for MRI exams. Ramsey worries about how leasing will affect the future of her profession.

"Without making this go away, it will be the end of radiology as we know it," she said.

Mr. Brice is Senior Editor of Diagnostic Imaging.

Varied lease models adjust to suit local conditions

Designs cover excess capacity, hospital-physician collaboration, nonimaging services

Referring physician leasing arrangements come in various flavors to fit specific situations. Some maximize scheduling flexibility. Others are designed to allow several group practices to share a single scanner, and still others combine features of services that qualify for an in-office exception and the block leasing strategy to maximize legal protection. The following list was provided by attorney Joshua Kaye, a partner with McDermott Will & Emery in Miami.

• Excess capacity arrangements. Rather than locking physicians into a scheduled time block, the contract defines a specific number of hours for referrals in a given month (e.g., 50 hours per month). The arrangements run counter to the OIG's guidance on referring physician involvement in such arrangements but may be permissible in limited circumstances.

• Shared arrangements. These are designed for collaborating group practices that wish to share time in an imaging service. The expenses of operating the services are allocated to the participating practices based on some commercially reasonable standard, such as scan volume relative to the other participants' scan volume. A group that orders 10% of the arrangements imaging during a given month would be allocated 10% of the expenses. Income is not shared. Each practice bills and collects for its own patients.

• Hospital-physician collaborations. Leasing arrangements between hospitals and their physicians are common for equipment used in either inpatient or outpatient settings. They can involve block leasing or per-click leasing, which is also called "under arrangements." Under such circumstances, the hospital bills for services under arrangements for a particular component of a medical service. Physicians are then paid at a subcontracted rate.

• Leasing other services. Referring physician leasing is often applied to radiation therapy and surgical equipment. It applies to everything physicians could buy and set up in competition with the hospital. -JB

State laws attempt to control self-referral leasing

Louisiana and Maryland take initiative to outlaw referring physician leases

In addition to self-referral laws in 36 states, Louisiana and Maryland have specifically outlawed referring physician leases. Legislation has been introduced in California, and the Florida legislature passed additional self-referral restrictions.

MARYLAND
A Maryland Board of Physicians ruling in December 2006 rejuvenated the state's physician self-referral law. It issued an exemption allowing radiologists to own and operate CT, MR, and radiation therapy equipment, while denying other physicians the same privilege.

Referring physicians were banned from using the in-office exemption to justify patient referrals to high-tech imaging equipment in their offices. The ruling indirectly prohibited referring physician leasing arrangements as well, said Barry F. Rosen, a partner with the law firm of Gordon, Feinblatt in Baltimore. Violators could lose their medical licenses, face fines, and be required to reimburse insurers for all the money paid for the prohibited imaging procedures.

A dozen orthopedic surgery groups and a urology group appealed the ruling. Rosen expects the issue to ultimately be decided by the Maryland Supreme Court.

LOUISIANA
The Louisiana State Board of Medical Examiners issued a statement of position in June 2005 defining conditions when leases between diagnostic imaging services companies and referring physicians violate state anti-kickback law. It prohibits agreements that make imaging center facilities available to referring physicians on a turnkey, as-needed basis for a predetermined user fee, according to general counsel Philip Bergeron.

The board also banned the practice of assigning third-party payer billing to the physician and allowing the physician to retain the difference between the collections from that billing and the discounted fee paid by the physician to the imaging services provider. The statement clearly outlawed per-click leasing. The board will examine other approaches on a case-by-case basis, Bergeron said.

FLORIDA
As reported in the American College of Radiology Bulletin, Florida enacted a law in February that cracks down on physicians who serve as medical directors at investor-owned imaging clinics. The law makes it a third-degree felony for the directors to refer patients from their private practices for imaging services at the facilities they serve. Physician-owned centers are exempt.

MASSACHUSETTS
Rep. Paul Kujawski (D-Worcester) introduced legislation in 2007 that would ban block leases in Massachusetts. The bill is seen as a modest alternative to a sweeping ban against in-office self-referral that stalled in House committee last year.

Support for the bill may hang on the results of a legislative commission report on in-office self-referral practices. Commissioned in 2006, the report will probably be published this year, according to Dr. Kenneth Peelle, president of the Massachusetts Medical Society.

CALIFORNIA
A bill restricting physician leasing fell several votes short of passage in legislative committee in 2006. Supported by the California Radiological Society, the measure would have allowed only the actual owners of imaging equipment to bill payers for the technical component of reimbursement. The restriction would have banned the reassignment of the technical component to referring physicians, a key feature of leasing deals. New legislation proposing the ban is expected in 2007. -JB