The anti-markup rule applied to dermatology

By Daniel F. Shay, Esq., December 1, 2025

Every month, DermWorld covers legal issues in “Legally Speaking.” This month’s author Daniel F. Shay, Esq., is a health care attorney at Alice G. Gosfield and Associates, P.C.

For dermatology practices looking to expand the range of services they provide into diagnostic testing, the concept of purchasing such tests and billing them at higher rates than what the practice paid may be an attractive one. Why outsource pathology services, for example, if you can bill them yourself? However, as is often the case, it is never quite that simple when Medicare is involved, and in the case of purchased diagnostic testing, the fly in the ointment is the anti-markup rule. As confusing as the rule may seem, this article will try to make sense of it and provide some context for how often it applies to dermatology practices.

The anti-markup rule explained

The anti-markup rule is a Medicare payment restriction that has existed since 2009 and applies to certain types of diagnostic tests. Prior to the anti-markup rule, federal regulations and CMS manuals made reference to “purchased diagnostic tests,” but these references have now been changed to “anti-markup tests.” In fact, the concept of a “purchased test” no longer exists in Medicare. The rule functions as a limitation on the charge for diagnostic testing when those tests are performed under contract between an ordering physician and the entity performing the test. Note, however, that the anti-markup rule does not apply to clinical laboratory services.

At its most basic level, the anti-markup rule is focused on (1) the physician who orders the test; (2) the entity (usually a physician or group, or a diagnostic testing entity) that performs the test, and (3) the entity that bills for the test. When the ordering physician is part of the same billing entity, and that ordering physician does not “share a practice” with the entity or person that performs the test, the payment restrictions apply.

In that case, payment is limited to (1) the performing entity’s net charge to the billing entity; (2) the billing entity’s actual charge for the test, or (3) the Medicare fee schedule amount for the test if it were billed directly by the performing entity. Put more simply, this means that the billing entity cannot make a profit on the performance of the test; at best, they can “pass through” the cost of the test. The key question, therefore, becomes whether the billing entity (when the physician who ordered the test is also part of the billing entity) “shares a practice” with the performing entity.

There are two main ways by which billing entities and diagnostic testing physicians may meet the requirement to “share a practice.” First, the performing entity can share a practice if it provides the service in the same office space as the ordering physician. The regulations consider this to have occurred if the service was performed at the same “site of service” or in the “same building” (as those terms are defined under the Stark regulations) as the ordering and billing entity. This is, by far, the easier of the two requirements. Alternatively, to share a practice, the performing entity or physician must perform “substantially all” of their services (i.e., at least 75% of the total services they perform) through the billing entity. With independent contractors and other outside diagnostic testing physicians, this requirement is much harder to meet.

If these requirements can be met, however, the anti-markup limits will not apply, and the billing entity may “mark up” the cost of the test.

Anti-markup in context

With dermatology practices, the most common arrangement that will raise questions about the anti-markup rule is where a dermatology practice wishes to obtain diagnostic testing services from a pathologist to whom the dermatologists are sending samples. When will the anti-markup rule apply in this situation?

First, recall that the anti-markup rule only applies to diagnostic testing where the ordering practice pays the outside physician for the services, and then bills that service itself. It does not apply to other services obtained from outside physicians, nor does it apply to clinical laboratory services. Most importantly, it does not apply if no money ever changes hands between the two entities (i.e., the ordering physician and the entity performing the diagnostic test). If the dermatology practice simply sends slides offsite to be analyzed, and an outside pathologist bills for the diagnostic testing performed on those slides, the anti-markup rule does not apply; this is simply one practice referring services to another, with each practice billing for the services it has performed.

However, assuming that the dermatology practice does want to bill for the service, and the pathologist is willing to provide such services for a price, the next question to be asked is whether the pathologist “shares a practice” with the dermatology practice in a manner sufficient to satisfy the anti-markup rule requirements. As noted above, the easiest way for this to happen is for the pathologist to actually go to the dermatology practice’s offices and perform the diagnostic test there. If the pathologist does this, the anti-markup rule will not apply, and the dermatology practice can bill the service for more than what they pay the pathologist to perform it.

If, however, the pathologist is unwilling to uproot themselves to go to the dermatology practice’s offices, then the only other way to avoid the anti-markup rule applying is if the pathologist performs 75% of their total services (i.e., not simply total Medicare services, but literally all services that the pathologist performs) through the dermatology practice (i.e., where the dermatology practice is billing for the pathologist’s services). This is a high bar to clear for someone who is truly an outside practitioner not otherwise already affiliated with the dermatology practice. If the pathologist simply does not meet that requirement and does not wish to so closely tie themselves to the dermatology practice, as to make that practice 75% of their revenue stream, then the anti-markup rule will apply.

Conclusion

The anti-markup rule can seem complex at first, but once the actual requirements are better understood, the true complexity may be in managing to avoid it applying. On its face, it may seem simple to have an outside diagnostic testing physician come to the offices of a dermatology practice to provide their services, so that the dermatology practice can bill for the service and make a profit. This, of course, requires providing the space necessary to perform such testing services, and the willingness of the testing physician to come to the office in the first place. The “substantially all” aspect is considerably harder to satisfy, at least if the outside physician wishes to remain truly independent. If they are unwilling to compromise, it may simply make more sense to abandon the notion of purchasing diagnostic tests from them or to find a different physician.

This article is provided for informational and educational purposes and is not intended to provide legal advice and should not be relied upon as such. Readers should consult with their personal attorneys for legal advice regarding the subject matter of this article.

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