Medicare anti-markup rules implemented last January 1, 2008, have apparently contributed to the sale of UroPath, LLC , to HealthTronics, Inc. (NASDAQ: HTRN), based in Austin, Texas. The sales price was $7.5 million and the acquisition was announced on July 21, 2008.

UroPath, of Arlington, Texas, is the largest operator of anatomic pathology condominium complexes (pod labs) in the United States. It serves 50 urology practices spread among 17 states. UroPath says it processed more than 400,000 specimens last year. With the implementation of the January 1, 2008 Medicare anti-markup rules, UroPath found itself unable to markup services on Medicare patients over its costs. The federal Centers for Medicare and Medicaid Services (CMS) amended its regulations to limit the amount a provider can bill Medicare for pathology services under certain conditions. After CMS issued the new rules in January, UroPath and its affiliates challenged the rules in a suit against federal Health and Human Services Secretary Michael O. Leavitt. In the suit, UroPath said the new rules would essentially put them out of business.

In May, U.S. District Court Judge Rosemary M. Collyer dismissed the UroPath suit, saying the plaintiffs should pursue a grievance through CMS’ administrative procedures. (see The Dark Report, May 27, 2008).

“The Centers for Medicare & Medicaid Services have been publicly concerned since at least 2004 about a growing tendency of physician groups to utilize so-called ‘pod’ [condo] laboratories for lab work, miles from the physicians’ offices, and then to claim that doctors in both locations are ‘sharing a practice’ for purposes of billing Medicare,” Collyer wrote in her decision. On June 30, 2008, CMS proposed additional amendments to its regulations which could further affect the way pathology services may be reimbursed, a fact HealthTronics noted in its announcement of the acquisition last week.

Despite the challenging regulatory environment, HealthTronics said the acquisition allows it to offer its services and products to UroPath’s 450 physicians in 50 urology practices nationwide. HealthTronics sells lithotripsy systems and other surgical products. It also owns an anatomic pathology laboratory in Augusta, Georgia, called ClariPath Laboratories.

There is one interesting aspect to this acquisition. Should the new Medicare anti-markup rules, in combination with the existing anti-markup rules, undermine the economics of the AP condo lab business model and cause the current urology group owners of the condo labs to close those operations, HealthTronics may believe it has a reasonable business alternative. Because HealthTronics owns an existing anatomic pathology company, it could convince those urology groups to refer their AP specimens to its ClariPath Lab operation.

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