College of American Pathologists
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Spirit of the law

The little-known history of Part A payments—and why they belong to you

March 2004
Jack R. Bierig

Some hospital administrators have taken the position that they have no obligation to pay pathologists for Part A services to Medicare inpatients. That position, however, reflects a lack of awareness of the relevant regulatory history. In this article, I will demonstrate how that history makes clear that pathologists are in fact entitled to reasonable compensation from the hospital for Part A services to Medicare inpatients at the hospital.

Part A of Medicare covers clinical pathology services that a pathologist performs for the benefit of Medicare patients generally-as opposed to hands-on services required for a specific patient specimen. Part A services include ensuring that the laboratory equipment is properly calibrated, supervising the laboratory personnel who operate the equipment, reviewing results that either fall outside ranges of normalcy that have been established by the pathologist or are otherwise unexpected, and being available to discuss with clinicians the diagnostic or therapeutic significance of results that are difficult to evaluate or that seem inconsistent with other findings.

These services are often referred to collectively as the "professional component" of clinical pathology procedures-or simply as "professional component services." They were succinctly summarized by the Seventh Circuit as follows:1

... setting up test protocols, calibrating the equipment and supervising the testing, and, if necessary, interpreting the results and consulting with treating physicians.

As the court noted, pathologists "are present or on call 24 hours a day" to "ensure that a test is done right, to recheck a surprising result, or to interpret ambiguous data."2 Significantly, however, a pathologist will personally review or discuss with a clinician only a fraction of the clinical pathology procedures that are performed in the laboratory.

Attorneys for hospitals often refer to the professional component of clinical pathology procedures as "administrative services." In fact, professional component services are far more than administrative services. Rather, the knowledge and skill of a physician trained in pathology are required to understand and integrate the workings of all the departments of a medical laboratory, to analyze laboratory results, and to follow up on the medical significance of abnormal, unexpected, or unusual laboratory findings.

Many people view professional component services as services for the hospital. These services do assist the hospital in that the hospital benefits by having patients properly cared for. However, the purpose of the pathologist in providing professional component services is to ensure that every test result for every patient is timely, accurate, and clinically reliable. Indeed, the pathologist can be held liable to the patient if a laboratory result for that patient is erroneous and leads to injury-even when the pathologist did not personally perform the test or review its results.3

There has been universal agreement that when a pathologist reviews the tissue of a patient to arrive at a diagnosis, the patient or the patient's insurer should pay. Moreover, there is general agreement that for those clinical pathology procedures that must be personally performed by a pathologist or on which the pathologist provides a formal consultation to the attending physician, the patient or the patient's insurer should also pay. Where the debate arises, however, is with respect to payment for the professional component of clinical pathology procedures that are necessary to ensure timely and clinically reliable test results for each individual patient but that do not require direct, hands-on involvement by the pathologist in each test that is performed. This issue is of enormous consequence to pathologists because most hospital-based pathology groups spend a significant amount of their time in directing the laboratory.

From 1965 to 1987

Payment for the professional component of clinical pathology procedures has posed a conundrum for Medicare dating back to the beginning of the program in 1965. On one hand, pathologists perform these services so that individual patients will be properly diagnosed. This aspect of the services suggests payment to the pathologist as a physician service under Part B of Medicare. On the other hand, unlike other physician services, most professional component services do not involve the direct performance of a specific service by a physician for a specific patient. This aspect of professional component services suggests that coverage under Part B might not be appropriate.

In the bill that became the Medicare Act, there was originally a Part C to address the unique payment issues raised by the services of hospital-based physicians, including pathologists. However, Part C was deleted shortly before the enactment of the statute. Consequently, for the first 15 years of the Medicare program, there was no clear rule regarding payment for the professional component of clinical pathology procedures for Medicare patients.

In New England and other parts of the Northeast, pathologists tended to be employees of hospitals. Hospitals treated the salary or other compensation they paid to pathologists as costs of the hospital. They reported these costs to Part A of Medicare and were reimbursed under the reasonable-cost system that governed payment under Part A from 1966 until the introduction of the DRG system in 1984. In most of the remainder of the United States, pathologists billed Medicare patients or the Medicare program for professional component services for such patients. Thus, in these areas of the country, payment for professional component services was made directly to pathologists by the Part B Trust Fund.

In 1980, the Medicare program decided to make the treatment of payment for professional component services uniform across the United States. In a notice published on March 11 of that year, the Health Care Financing Administration (HCFA, now CMS) adopted the New England approach.4 Specifically, HCFA forbade pathologists to bill Medicare patients directly for the professional component of clinical pathology procedures. It required instead that pathologists be paid by hospitals for professional component services to inpatients covered by Medicare.

The CAP and the Arkansas Society of Pathologists challenged the March 11, 1980 HCFA pronouncement in a lawsuit in federal court in Little Rock.5 The court found that professional component services are "professional services performed for the benefit of patients."6 It issued a preliminary injunction against enforcement of the policy announced in the March 11 notice.

After this decision, HCFA sought an amendment to the Medicare Act to effectuate legislatively the position that it had taken in the March 11, 1980 notice. Its efforts were successful when Congress enacted §108 of the Tax Equity and Fiscal Responsibility Act of 1982, or TEFRA.7 Section 108 directed the secretary of the Department of Health and Human Services to distinguish between services performed by hospital-based physicians

(A) which constitute professional medical services, which are personally rendered for an individual patient by a physician and which contribute to the diagnosis or treatment of an individual patient and which may be reimbursed as physician services under Part B of [Medicare], and

(B) which constitute professional services which are rendered for the general benefit to patients in a hospital or skilled nursing facility and which may be reimbursed only on a reasonable cost basis ... .

Under subsection B of this section, pathologists were to look to hospitals for compensation for professional component services to Medicare patients from payment to hospitals made under Part A of Medicare.

On March 2, 1983, HCFA issued regulations that implemented §108 of TEFRA.8 Those regulations, titled "Payment for Physician Services Furnished in Hospitals," were designed to distinguish between (a) physician services for which HCFA would pay the "reasonable charge" under Part B of Medicare, and (b) physician services for which HCFA would pay the "reasonable cost" under Part A. Under the regulation, Part B services were to be paid directly to the physician while Part A services were to be paid indirectly through the pro vider.

In response to the concern that payment through the provider might "disqualify physician services for reimbursement," HCFA stated as follows in the preamble to the regulation: "We wish to assure both physicians and the public that all physician services, whether services to individual patients, or services to providers, that are covered under the Medicare program will still be reimbursable under these regulations."9

It is most significant that when TEFRA was enacted in 1982 and when the regulations implementing §108 were issued in 1983, hospitals were reimbursed under the reasonable-cost system. Thus, hospitals paid pathologists for their Part A services to Medicare patients and included the amounts of those payments in their cost reports to the Medicare program. In due course, the hospitals would be reimbursed the full amount of their costs for the payment to pathologists for Part A services. For this reason, there was no need to provide in §108 of TEFRA or in the implementing regulations that hospitals had to pay pathologists the fair market value of such services-even though that was the intent behind the legislation and the regulations.10 The reasonable-cost method of reimbursement gave hospitals every incentive to pay the pathologist for Part A services of Medicare inpatients.

Indeed, a key concern of HCFA in the March 2, 1983 regulations was to prevent hospitals from paying pathologists excessively for Part A services. Thus, HCFA announced that it would not reimburse hospitals for payments to hospital-based physicians for Part A services by such physicians unless such payments were (a) "related to the amount of time actually spent by a compensated physician in furnishing such services" and (b) did "not exceed the reasonable compensation equivalent for such services."11 To effectuate the first of these conditions, the regulations required hospital-based physicians to enter into allocation agreements with hospitals that specified the percentage of the time the physicians devoted to Part A services. To implement the second condition, HCFA established "Reasonable Compensation Equivalents," or RCEs, for various categories of physicians, which it regarded as reflecting reasonable payment to such physicians.

Notably, the entire system of payment to hospitals on which §108 of TEFRA and the March 2, 1983 regulations were predicated changed dramatically later in 1983 when Congress enacted the prospective payment system.12 Under that system, most hospitals are paid, with certain exceptions, without regard to their actual costs. As part of that system, Congress enacted a four-year phase-in of payment by diagnosis-related groups. During the phase-in period, each hospital was paid a rate that blended the hospital's historic costs with an adjusted national DRG rate. From 1984 to 1987, the weight given to historic costs in the blending decreased while the weight given to DRG rates increased. By 1987, hospitals were paid solely on the basis of adjusted national DRGs.

With the full implementation of the prospective payment system in 1987, the incentives for hospitals to pay pathologists had been completely reversed. Beginning that year, hospitals received the same payment under Part A of Medicare regardless of how much, if anything, they paid pathologists for professional component services. Thus, hospitals were no longer able to pass through to Medicare any payments they would make to pathologists for these services. Consequently, the absence from §108 of TEFRA (and from the March 2, 1983 regulations) of any language explicitly requiring hospitals to pay pathologists the fair market value of their Part A services became extremely significant. Specifically, the absence of such language enabled hospital attorneys to take the position that their clients were not required to make any payment to pathologists for their Part A services-even though payment by the hospital for these services out of its Part A revenues was a fundamental premise underlying §108 and its implementing regulations.

Regulatory developments since 1987

As hospital attorneys relied on the absence of any statutory language requiring payment by hospitals for Part A pathology services, advocates for pathologists looked for theories that would support required payment for such services. They found such support in the Medicare anti-kickback statute.13 In essence, that statute prohibits the giving or receiving of anything of value in exchange for the referral of any item or service paid for by the Medicare program.

The most obvious sort of violation of the anti-kickback statute is the actual payment of money for referral of Medicare work. However, there are many other ways to give something of value in return for a referral. Thus, for example, a below-market loan from a hospital to a physician who refers patients to that hospital may violate the statute. Similarly, making office space available to such a physician rent-free or at below-market rents may also violate the statute.

In the case of pathologists, the theory was somewhat different. Specifically, most hospital-based pathology groups have an agreement with the hospital by which they are the exclusive provider of pathology services to patients at the hospital. Since the issuance of the March 2, 1983 regulations, these groups would expect to be paid by patients (or their insurers, including Part B of Medicare) for anatomic pathology services to identifiable patients and for those clinical pathology services that have to be personally administered or that meet the definition of a "consultation" under the regulations implementing §108 of TEFRA. They would expect to be paid by the hospital for those clinical pathology services for Medicare inpatients that are described in 42 U.S.C. §1395xx(a)(1)(B)-that is, professional component services.14

A pathology group that foregoes payment by the hospital for Part A services to Medicare inpatients has given something of value to the hospital, that is, an amount equal to the fair market value of those services. Similarly, a pathology group that receives a fixed amount from the hospital that is below the fair market value of the Part A services is giving the hospital the difference between the fair market value of the services and the amount actually received. In exchange, the pathology group is receiving referral of items or services covered by the Medicare program. In particular, it is receiving referral of Medicare patients who require Part B pathology services, that is, anatomic pathology and consultations that qualify for Part B payment. Frequently, the only way in which that pathology group can get the referral of this work from the hospital is to agree to receive no or below-market payment for its Part A services to Medicare patients.

Based on this analysis, the theory arose that a hospital violated the Medicare anti-kickback statute when it made no or token payment to a pathologist for the Part A services of that pathologist for Medicare inpatients. In effect, the hospital was receiving something of value-that is, the fair market value of the pathologist's services that were supposed to be covered by Part A-in exchange for making referrals of patients for services covered by Part B. Conversely, the pathologist was giving the hospital the value of the Part A services in return for referral by the hospital of patients covered by Part B of Medicare.

This theory was endorsed in a 1991 OIG management advisory report titled "Financial Arrangements Between Hospitals and Hospital-Based Physicians."15 In that report, the Department of Health and Human Services Office of Inspector General listed several examples of "agreements that provide payments or remuneration to hospitals in excess of the fair market value of the services provided by them."16 Among the examples was this one:

A hospital provides no, or token, payback to pathologists for Part A services in return for the opportunity to perform Part B services at that hospital.17

The OIG concluded that all of the examples that it listed, including the one quoted above, "appear to violate" the Medicare anti-kickback statute.18

The position the OIG took in 1991 was affirmed by the Department of Health and Human Services five years later. In a March 13, 1996 letter to Raymond C. Zastrow, MD, then-president of the CAP, the deputy director of the Bureau of Policy Development, Barbara Wynn, addressed the "concern that some hospitals are declining to pay pathologists for services related to management and supervision of the laboratory." In response to this concern, deputy director Wynn explained as follows:

Under the Medicare program, these services are considered services by the physician to the provider rather than direct identifiable physician services to individual patients. As a result, no Medicare payment is made directly to the physician for the services. Instead, Medicare's payment to the hospital covers the management and supervision services performed by the pathologist. Medicare's diagnosis related group (DRG) payment under the prospective payment system for inpatient services, and the clinical laboratory fee schedule payments for outpatient services, include the pathologist's services to the hospital.

Wynn then stated unequivocally: "The hospital is responsible for paying the pathologist for any provider services." Finally, she concluded that the concerns and recommendations expressed by the OIG in 1991 "remain valid today."

In sum, the background of 42 U.S.C. §1395xx(a), the March 2, 1983 HCFA regulations on payment to hospital-based physicians, and subsequent statements by the DHHS all provide support for the position of pathologists that the hospital is supposed to make reasonable compensation to the pathology group that provides Part A services for Medicare inpatients at the hospitals. Indeed, the DHHS and the OIG have opined that it appears to violate the Medicare anti-kickback statute if hospitals do not pay such compensation. The question therefore is this: What level of compensation for these services is reasonable?

Determining reasonable compensation

The precise value of the pathologists' Part A services for general benefit of Medicare patients should depend, in part, on the quality of those services and other factors that are particular to the pathologist and the hospital. However, the Centers for Medicare and Medicaid Services has provided an indication of what it regards as the "reasonable compensation equivalent" for pathologists. This figure serves as an excellent starting point for determining the amounts that hospitals should pay pathologists as reasonable compensation for Part A services to Medicare inpatients.

Specifically, on Aug. 1, 2003, the CMS provided its "Estimates of FTE Annual Average Net Compensation Levels for Cost Reporting Periods Beginning On or After January 1, 2004."19 With respect to pathologists, those figures were $208,000 for those practicing in nonmetropolitan areas, $219,500 for those practicing in areas with a population of less than 1 million, and $215,700 for those practicing in areas with a population greater than 1 million. Using the CMS figures as a starting point, one can determine the reasonable compensation that the hospital should pay for Part A pathology services.

Suppose, for example, that three pathologists in a five-person group practicing in a metropolitan area of fewer than 1 million people each spend 30 percent of their time performing clinical pathology services. Suppose further that the hospital has an average daily census of 60 percent Medicare patients whom the group cannot bill for Part A services. Assuming that each of the three pathologists works approximately 2,000 hours per year, the reasonable compensation can be calculated by multiplying .9 (30% + 30% + 30%) by .6 (the Medicare census)-and then multiplying that figure by $219,500 (the 2004 RCE for one FTE pathologist in a metropolitan area of less than 1 million people). That process yields a figure of $118,530. In future years, that figure can be adjusted to account for inflation if the RCEs are not updated.

Of course, it is preferable if the hospital does not have to rely on guesswork in estimating the amount of time the pathologists devote to professional component services. For this reason, pathologists are well advised to keep time records that indicate the percentage of time they devote to such services. Pathologists need not keep time sheets for every minute they spend in the laboratory. However, keeping records that indicate the breakdown of time spent one week a month-or some specified period per quarter-can help both pathologists and hospitals have confidence that the figures they are using are defensible.

Some hospital attorneys have suggested that, against any amounts otherwise payable to the pathologists, there can be a set-off for the value of the space, equipment, transcription services, and other items furnished by the hospital to the pathologists. Notably, however, hospitals do not charge such a set-off to other physicians, like surgeons, who use the space and equipment of the hospital to perform their services. In addition, the hospital already receives reimbursement for these items and services through its DRG payment. Thus, requiring a set-off could be a form of double recovery.


Payment by hospitals to pathologists for Part A services to Medicare inpatients is a subject that has generated much controversy. This article has sought to provide factual and regulatory background on that controversy. In particular, while there is no explicit language in 42 U.S.C. §1395xx(a) or in its implementing regulations that expressly requires hospitals to pay reasonable compensation to pathologists for the value of professional component services for Medicare inpatients, the history and purpose of these provisions, as well as statements by the DHHS and the OIG, demonstrate that pathologists should receive such compensation from hospitals. Reasonable compensation for Part A services to Medicare inpatients can be approximated using the figures the CMS established on Aug. 1, 2003, adjusting those figures for inflation, and applying them to the relevant facts of the pathology group's practice.



1. Central States v. Pathology Laboratories of Arkansas, 71 F.3d 1251, 1252 (7th Cir. 1995).

2. Id.

3. See, e.g., Dougherty v. Gifford, 826 S.W. 2d 668 (Tex. App. 1992). See also Lazevnick v. General Hospital, 499 F. Supp. 146 (M.D. Pa. 1980).

4. 45 Fed. Reg. 15550 (March 11, 1980).

5. Arkansas Society of Pathologists v. Harris, CCH Medicare and Medicaid Guide A6 30,546 (E.D. Ark. 1980).

6. Id. at p. 10,118.

7. Pub. L. No. 97-248, codified at 42 U.S.C. A41395xx(a)(1).

8. 48 Fed. Reg. 8901 et seq. (March 2, 1983), currently codified at 42 C.F.R. §415.100 et seq.

9. Id. at 8909.

10. See Physician Payment Review Commission, 1990 Annual Report to Congress, at 134.

11. 48 Fed. Reg. at 8904.

12. 42 U.S.C. §1395ww.

13. 42 U.S.C.. §1320a-7b.

14. Payment for professional component services to non-Medicare patients has taken a variety of forms. It can be paid through a fixed fee from the hospital-along the lines of the Medicare model. Or, the pathologist can bill the patient (or the patient's insurer) for these services-as was the Medicare model prior to 1983. Alternatively, the pathologist can receive a percentage of the hospital's charges for clinical pathology procedures or can receive some form of per-diem from the patient's insurer.

15. OEI-09-89-00330 (Jan. 31, 1991).

16. Id. at 3.

17. Id.

18. Id. at 4. See also "OIG Compliance Program Guidance for Hospitals," 63 Fed. Reg. 8987, 8990 n. 25 (Feb. 23, 1998).

19. 68 Fed. Reg. 45459 (Aug. 1, 2003).

Jack R. Bierig is a partner in the law firm Sidley Austin Brown & Wood, LLP, Chicago. He serves as CAP general counsel. This article is adapted from an article he wrote for the American Health Lawyers Association and which was published in AHLA's Health Lawyers News, December 2003. Copyright 2003 American Health Lawyers Association, Washington, DC. Reprint permission granted. Further reprint requests should be directed to American Health Lawyers Association, 1025 Connecticut Ave., NW, Suite 600, Washington, DC 20036; 202-833-1100.