HCFA Finalizes Outpatient Prospective Payment System Regulations

On April 7, 2000 the Health Care Financing Administration ("HCFA") published regulations that impose sweeping changes on outpatient hospital reimbursement. With these regulations, HCFA is pushing ahead with its new ambulatory procedure classification ("APC") outpatient prospective payment system ("OPPS"). Even though HCFA acknowledges that both it and its contractors must make "massive changes" to their payment systems to implement the OPPS, HCFA insists that the OPPS will be implemented by July 1, 2000. Fortunately, congressionally-mandated changes to the OPPS under the Balanced Budget Refinement Act of 1999 ("BBRA") should soften the financial impact of the OPPS for many facilities.

The OPPS regulations primarily affect hospital outpatient reimbursement, but also affect reimbursement in some situations for services furnished:

• by comprehensive outpatient rehabilitation facilities (CORF);
• by home health agencies (HHAs);
• by hospice programs;
• by community mental health centers (CHMHCs); and
• to SNF residents during a Part A stay.

The new OPPS regulations also implement a prohibition on unbundling of outpatient hospital services that Congress enacted in 1986. Unbundling occurs when outside suppliers or other providers furnish services to a hospital’s patients in the hospital and then bill Medicare directly for those services. To deter the unbundling of outpatient hospital services, the new regulations exclude from Medicare coverage nearly all non-physician services supplied in a hospital to a hospital’s outpatients unless the services are furnished by the hospital’s employees or by an entity under contract with the hospital. The regulations authorize a civil monetary penalty for violations of the bundling requirements.

The APC Prospective Payment System

The new regulations establish a prospective payment system for supplies and services furnished by hospital outpatient facilities to Medicare beneficiaries. The final rules include significant changes from the proposed rules; many of the changes were mandated by Congress in the BBRA. Under the OPPS, payment for most outpatient services will be made on the basis of "APC groupings." HCFA has grouped hospital outpatient services and supplies that it considers "comparable clinically and in terms of resource use" into 451 different groups and assigned one payment level to each group. For example, APC 0041—surgical arthroscopy—includes elbow, wrist and knee arthroscopy procedures represented by over a dozen Current Procedural Terminology ("CPT") codes. All of the procedures included within APC 0041 will be reimbursed at the same level.

Beginning July 1, 2000, each hospital outpatient department must change its billing functions so that:

• All claims for outpatient services or supplies are submitted using HCFA Common Procedural Coding System ("HCPCS") codes; and
• Hospital claim forms (UB-92s) are completed more fully and with added line-item information.

A hospital’s Medicare claims need not include a designation of the appropriate APC code(s). Instead, the HCPCS designation on the HCFA Form UB-92 will be adequate for the Medi-care contractor to choose the appropriate APC payment level. Under a change from the proposed regulations, one claim form can include more than one patient encounter. HCFA recently has published program memoranda to describe some of these new billing requirements, and HCFA promises to publish additional program memoranda before July 1, 2000.

Medical staff and hospital personnel should be alerted to the importance of newly designated "inpatient only" services. HCFA has designated certain services as covered only if performed on an inpatient basis. If one of these "inpatient only" services is performed on an outpatient basis, HCFA will deny payment altogether.

The APC payment system applies to virtually all hospitals (except certain Maryland hospitals and critical access hospitals). The OPPS applies to all outpatient hospital services or supplies not specifically excluded, including:

• Surgical procedures, radiology, radiation therapy, clinic visits, emergency department visits, diagnostic services and other diagnostic tests, surgical pathology and cancer chemotherapy;
• Services for patients who have exhausted their Part A benefits, including diagnostic X-rays, diagnostic services and radiation therapy;
• Partial hospitalization services, including those furnished by community mental health centers;
• Specific hospital outpatient services furnished to Medicare-participating skilled nursing facility ("SNF") residents beyond the scope of the residents’ SNF comprehensive care plans;
• Supplies such as surgical dressings used during surgery or other treatments in the hospital outpatient setting that are also paid under the durable medical equipment ("DME"), prosthetics and supplies ("DMEPOS") fee schedule;
• Screening and preventive services such as colorectal cancer screening;
• Antigens, splints, casts, pneumococcal vaccine, influenza vaccine and hepatitis B vaccine when furnished outside the pertinent plan of care or benefit by a CORF, HHA or hospice program;
• Recovery of donor tissue (except for corneal tissue); and
• Implantable DMEPOS.

Services excluded from OPPS include the following:

• Physician and other non-physician practitioner services reimbursed under the physician fee schedule;
• Services already paid under fee schedules, including screening mamographies, end stage renal disease ("ESRD") services, laboratory services paid under the clinical diagnostic fee schedule and DME, orthotics, prosthetics and supplies paid under the DMEPOS fee schedule when the hospital is acting as a supplier of such items;
• Outpatient services furnished to SNF residents as part of their comprehensive care plans;
• Services and procedures that require inpatient care;
• Ambulance services;
• Recovery of donor corneal tissue;
• Physical and occupational therapy; and
• Speech-language pathology services.

Finally, some items are subject to the OPPS, but initially will enjoy advantageous "transitional pass-through reimbursement." Congress mandated in the BBRA that for certain items, HCFA must make payments in addition to the APC payments for two or three years after implementation of the OPPS. These items include:

• New medical devices, drugs and biologicals;
• Current cancer therapy drugs and biologicals and brachytherapy; and
• Radiopharmaceutical drugs and biological products.

One of the most important (and complex) goals of the OPPS is to reduce the coinsurance paid by Medicare beneficiaries for hospital outpatient services and supplies. Under the OPPS, a Medicare beneficiary’s coinsurance obligations for outpatient services are subject to the parameters described below:

• For each new APC, a predetermined coinsurance amount is calculated using 1996 payment data, and the coinsurance amount is "frozen" at this level.
• Initially, these coinsurance amounts might constitute more than 20% of the total APC payment level.
• Each APC coinsurance payment level remains "frozen" until the APC payment level rises such that the coinsurance payment constitutes only 20% of the APC payment amount, which could take a number of years.
• Thereafter, the coinsurance payment amount will be 20% of the APC payment level.
• An APC coinsurance amount can never exceed the Medicare hospital inpatient deductible amount.
• If an APC coinsurance amount exceeds the inpatient deductible amount then, in addition to the APC payment, the Medicare program will pay the hospital the excess of the APC coinsurance amount over the inpatient deductible amount.
• For items that qualify for "transitional pass-through reimbursement," coinsurance is calculated on the basis of the APC without consideration given to the additional payments.

The new regulations allow hospitals to elect to reduce the coinsurance charged for all procedures within a particular APC. Hospitals can advertise this coinsurance reduction to Medicare beneficiaries. Hospitals cannot drop the coinsurance amount below 20% of the APC payment level, however, and hospitals must charge the reduced coinsurance amount for all procedures included within the APC.

The BBRA provisions mandated by Congress soften the financial blow initially predicted for the OPPS. For the first three years of the implementation of the OPPS, HCFA has established "transitional corridors" for making retrospective payment adjustments for individual hospitals. The amount of a hospital’s payment adjustment depends on the difference between the hospital’s "PPS amount" and "Pre-BBA amount" of reimbursement for outpatient services. In short, this procedure allows a hospital to compare the amount received under OPPS with the amount that would have been received using the hospital’s payment-to-cost ratios of 1996, and to receive additional payments to partially make up significant shortfalls. Several transitional corridors are established for each calendar year through 2003; the number of corridors and the associated payments will decline over time. Interim payments will be made to hospitals, subject to retrospective adjustments.

Finally, the nation’s ten cancer hospitals will enjoy permanent financial protection under the OPPS. Under a "hold-harmless" provision, HCFA will make retrospective payments to hospitals whose OPPS payments fall significantly below pre-BBA levels.

Bundled Billing Rules; New Civil Monetary Penalty

The new regulations also prohibit "unbundling" by hospital outpatient departments. Hospital services are "unbundled" when outside suppliers or other providers furnish non-physician services to hospital patients in the hospital and separately bill Medicare for such services. In 1983, Congress prohibited the unbundling of inpatient hospital services by requiring hospitals to directly furnish all covered non-physician services to inpatients or to contract with outside suppliers to provide such services. In 1986, Congress extended the unbundling prohibition to outpatient hospital services. Although HCFA published proposed regulations implementing the outpatient unbundling prohibition in 1988 and 1998, until now these regulations were not finalized.

The new regulations exclude from Medicare coverage services that are provided in a hospital to outpatients during an encounter in the hospital unless:

• The services are furnished directly by the hospital’s employees or by a supplier with which the hospital has contracted;
• If a supplier furnishes the services, it must look solely to the hospital for payment; and
• Only the hospital may seek reimbursement from Medicare for the services.

The following services, when provided in a hospital to a hospital outpatient, are covered by Medicare only to the extent that they are furnished directly by the hospital’s employees or by a supplier under contract with the hospital:

• Clinical laboratory services;
• Diagnostic services and testing;
• Pacemakers, artificial limbs, knees and hips, and other prostheses and prosthetic devices that replace internal body organs (all or which are considered "services" for Medicare coverage purposes); and
• Services furnished incident to a physician’s services.

Services excluded from the bundled billing requirement include:

• Physician services paid under the physician fee schedule;
• Services of physician assistants, nurse practitioners, certified nurse mid-wives, psychologists, certified registered nurse anesthetists, and anesthesiologists’ assistants; and
• Services furnished to residents of SNFs that are beyond the scope of the residents’ SNF comprehensive care plans.

Comments to the 1998 regulations also clarify that DME is not a hospital service, and therefore is not subject to the bundling requirement.

The new regulations authorize the Office of Inspector General ("OIG") to impose civil monetary penalties ("CMPs") for violations of the bundled billing requirement. The regulations permit the OIG to impose CMPs, not to exceed $2,000, against any person who knowingly and wilfully presents a bill or request for payment that violates the bundling requirement.

Cami Gearhart

, an attorney in DWT's Seattle office, focuses her practice on the regulatory aspects of the healthcare industry, including anti-kickback, physician self-referral and Medicare billing issues. Cami can be reached in Seattle at (206) 628-7664 or [email protected].

Robin Turner

, an associate in DWT’s Seattle office, is a member of the firm’s Health Law and Business Law Departments. She focuses her practice on healthcare transactions, including mergers and acquisitions, and Medicare billing issues. Robin can be reached at (206) 628-7729 or [email protected].

FINAL RULES FOR DETERMINING PROVIDER-BASED STATUS AFFECT HOSPITAL SERVICES AND MANAGED DEPARTMENTS

New EMTALA Requirements for Off-Campus Sites

The final OPPs rules established new guide-lines for determining whether a facility or organization which is operated by a Medi-care provider should be considered "free-standing" or "provider-based" for the purpose of Medicare billing, cost reporting and cost allocation. However, the rules apply to all providers, whether or not they are paid on a reasonable cost basis.

What Services are Affected by the New Rules?

The new rules apply to all services offered by a "facility or organization" created or acquired by a provider for the purpose of rendering such services under the provider’s name and provider number, including;

• All inpatient and outpatient services
• All services that are not wholly owned by the provider
• All services operated under joint venture or joint ownership arrangements
• All on-campus and off-campus services
• All inpatient and outpatient services that are operated under management contracts, including joint venture MSO relationships

When are the New Rules Effective; is There a Grandfather of Existing Services?

The new rules are effective October 10, 2000 ("Effective Date"). There is no grandfathering for existing arrangements.

When is Determination of Provider-Based Status Required?

Under the final rules;

• Providers must seek determination from HCFA of provider-based status before the main provider bills for services of a facility or organization and before the main provider includes costs for the facility or organization on its cost reports.
• A main provider must seek a prior determination of provider-based status for any facility or organization it creates or acquires, if the facility or organization is:
• off-campus, or
• will increase costs on main provider’s cost report by 5%.
• Off-campus physician offices are presumed to be free-standing, unless determination is sought from HCFA for provider-based status.

See definitions (1) below.

Does a Determination Need to be Sought for Existing Provider-Based Arrangements?

There are many existing arrangements that have not been subject to a formal determination process. Enforcement by HCFA and state survey agencies was inconsistent prior to the publication of Program Memorandum AB-96-7 in 1996.

Many existing arrangements have survived cost reporting audits without challenge, leading many providers to believe that the practices were acceptable.

However, the HCFA central office in Baltimore has confirmed that under the final rules:

• Providers who do not have a formal determination of provider-based status for any entity or organization that they have been treating as provider-based must bring their arrangements into compliance and seek a determination from HCFA of provider-based status by October 7, 2000.
• Providers who have formal determinations of provider-based status for an entity or organization must report to HCFA by October 7, 2000 any material change to such arrangements since the determination. Material change is defined in the rule as a change in ownership or in a management agreement that would affect provider-based status.

What are Criteria for Determining Provider-Based Status?

There are seven requirements that a provider must meet in order for a service, department or facility to be considered provider-based. These requirements are: licensure under the main provider’s license (unless prohibited by state law); common ownership and control; integrated administration and supervision; integrated clinical oversight; financial integration; public awareness and common service area for all services.

Some of the key tests for determining provider-based status are in the checklist (2) below.

Does the Provider Have to Meet all of the Requirements for Provider-Based Status?

The final rules require that each and every integration standard must be met. HCFA specifically rejected the "substantial compliance" standard that has been in effect under the existing law and Program Memorandum AB-96-7. In some regional offices (such as Region IX), HCFA has already been enforcing the existing standards more strictly than in the past.

What Happens if a Provider Continues to Bill for a Service or Facility that Does Not Meet the Requirements or Has Not Received a Formal Determination of Provider-Based Status?

The final rules permit HCFA to correct any previous incorrect determinations of provider-based status, and to recover the difference between what was paid and what should have been paid. In the Preamble, HCFA states that it has no intention to review all past determinations, but will re-visit any prior determination or prior treatment of an entity or organization as provider-based if it receives information of non-compliance. The extent of the recovery will depend on whether the provider operated the non-compliant entity or organization in good faith as provider-based with the rules in effect at the time.

"Good faith" means, at minimum, that the provider;

• satisfied the regulation’s licensure and public awareness requirements;
• billed Medicare for facility fees as if it were provider-based; and
• billed Medicare for professional fees using the correct site of service indicator.

When a facility or organization that previously was determined to be provider-based is found to no longer qualify for provider-based status, treatment of the facility or organization as provider-based ceases on the first day of the first cost reporting period following notification of the redetermination, or six months after the date of the notice, whichever comes first. In order to mitigate the effects of a denial of provider-based status, HCFA will adjust but not stop payments to an entity or organization that has been denied provider-based status if the entity or organization informs HCFA of its intent to enroll properly within the Medicare program within 30 days of the date of the denial, and within 90 days the facility or organization, or its practitioners, take other necessary action to enroll.

If the facility or organization does not enroll as a free-standing entity, then it may not bill Medicare at all. The final rule does not address what happens to inpatient units that do not qualify for provider-based status because the contracts they are managed under do not comply with the requirements (as described further below). For such units, there is no alternate provider category for which they can enroll as a free-standing provider.

What are the New Rules for Management Contracts?

Departments, remote locations of hospitals, satellite facilities and other entities that are provider-based but are operated under management agreements must comply with all of the following additional requirements;

• All staff except "management" must be employed by the main provider, or by the same entity that also employs the employees of the main provider.
• The same employees that handle the main provider’s administrative functions must handle the administrative functions of the provider-based department or entity, specifically including: billing services, records, human resources, payroll, employee benefit package, salary structure and purchasing services.
• All outside contracts for administrative services must be under the same contracts as the main provider, or the contracts must be managed by the main provider.
• The main provider must demonstrate "significant control" over the operations of the facility, consistent with the specified rules.
• The management contract must be held by the main provider itself and not by the parent organization that controls both the main provider and the facility or organization.
• Cost reporting for management contracts must comply with specified standards.
• A facility or organization that provides all patient care services through contracts is excluded from being considered provider-based.

It is not clear in the final rule whether every contract entered into by a provider for the management of a department must be submitted to HCFA for a determination of compliance with provider-based regulations. It is also unclear what would happen if a management agreement failed to comply with the foregoing requirements. This will be particularly troublesome for managed inpatient units, for which there are no options to qualify as "free-standing" and no ability to bill other than through the main provider’s number.

What are the Physician Supervision and Billing Requirements at On-Campus and Off-Campus Facilities?

Physician’s services furnished in hospital outpatient departments or hospital-based entities must be billed with the correct site of service indicator.

Physicians who work in hospital outpatient departments or hospital-based entities are obligated to comply with non-discrimination provisions.

Hospital outpatient departments must treat all Medicare patients as hospital outpatients for billing purposes.

Hospital outpatient department services are part of the three day window.

Written notice must be provided to beneficiaries of their liability for facility fees prior to delivery of service at an off-campus provider-based outpatient department, including liability for coinsurance for both professional and facility components.

In order for off-campus hospital outpatient department services and supplies provided by ancillary staff to be billed incident to a physician’s service, a physician must be present and available in the suite at the time the services are delivered.

What are the New EMTALA Rules for On-Campus and Off-Campus Facilities?

The final rules apply EMTALA to all provider-based services, including off-campus departments. The final rules codify current EMTALA enforcement guidelines by defining the hospital as the entire hospital campus, including parking lots, driveways and side-walks. The regulations further define "hospital campus" as the main hospital buildings other areas and structures that are located within 250 yards of the main buildings, and other areas that are determined by the HCFA regional office to be part of the hospital campus.

HCFA has also expanded the patient anti-dumping obligations to off-campus services that are provider-based services of the hospital. The new regulations require off-campus departments to comply with the following:

Provide medical screening examinations and necessary stabilizing treatment within the capability of the entire hospital (not just the off-campus department) to all individuals seeking care for potential emergency conditions;

Establish protocols for handling patients with potential emergency conditions; The protocols must include direct contact with emergency personnel at the main hospital in the event that a patient presents with an emergency medical condition;

Off-campus urgent care, primary care and other services routinely staffed by physicians and nurses must have at least one staff person on duty during regular hours of operation to provide medical screening examinations and stabilizing treatment; The categories of personnel who may provide emergency services in off-campus departments must be designated by the hospital and the medical staff in the same manner as personnel designated in the main hospital to perform emergency services;

Off-campus services that are not routinely staffed by physicians and nurses must have protocols for contacting emergency personnel at the main hospital and arranging either transport of a potential emergency to the hospital or transfer to another hospital; and

An off-campus service must transport an emergency patient needing a higher level of care to the main hospital; If the main hospital cannot provide the care, or the patient requests a transfer to another facility or transporting of the patient to the main hospital will significantly jeopardize the life or health of the patient, the off-campus service can transfer the patient to another hospital in accordance with EMTALA transfer rules.

Do the Final Rules Apply to the Medicaid Program?

HCFA states in the preamble that the rules apply to both Medicare and Medicaid. State Medicaid agencies have not commented on how Medicare’s determination of provider-based status will affect cost allocation and the reimbursement of facilities that are paid by Medicaid on a reasonable cost basis. Medicaid programs, however, generally have the discretion to design the methods and standards whereby they calculate payments for covered services. Those methods and standards are defined in a document called the "State Plan." Although HCFA must approve the State Plan, the scope of its review is limited by regulations. To the extent that an approved State Plan creates a different definition of what constitutes a provider-based facility for the purpose of Medicaid reimbursement, it is not clear that HCFA’s statement in the preamble invalidates that definition. In addition, as long as the Medicaid program offers the necessary assurances that it pays in the aggregate no more than would be paid under Medicare principles, it is not clear that HCFA could refuse to approve a state-specific definition of what constitutes a provider-based facility for Medicaid payment purposes. Consequently, the magnitude of the effect of the final rule on Medicaid programs is unclear at this time.

Diane M. L. Lee

is partner in DWT's San Francisco office, focusing on the regulatory aspects of healthcare transactions and operations, including billing, reimbursement, anti-kick-back, self-referral, licensing, certification, and corporate compliance, for hospitals, physicians, ancillary providers, telemedicine and internet companies. Diane can be reached at (415) 276-6508 or [email protected].

Steve Lipton

, a partner in DWT's San Francisco office, focuses on transactional and regulatory matters pertaining to hospitals, medical groups and other healthcare providers. Steve has assisted numerous clients in licensing and certification matters as well as federal investigations for violations of patient dumping laws. Steve can be reached at (415) 276-6550 or [email protected].

This Health Law Advisory Bulletin is a publication of the law firm of Davis Wright Tremaine LLP and is prepared by its Health Law Department, chaired by Susan G. Duffy, Peter N. Grant and Keith M. Korenchuk. Our purpose in publishing this advisory bulletin is to inform our clients and friends of recent health law developments. It is not intended, nor should it be used, as a substitute for specific legal advice since legal counsel may be given only in response to inquiries regarding particular factual situations. To change your address or to receive additional information, please contact Sandy Andolora in our Seattle, Washington office at (206) 628-7448 or [email protected]. Copyright © 2000

Definitions (1):

Departments of providers

: Facilities, organizations or physician offices that are created or acquired by main providers for the purpose of providing the same type of services as the main provider under the main provider’s name, ownership, financial and administrative control, excluding rural health clinics (RHC’s) and, in some cases, Federally Qualified Health Clinic (FQHC’s). A department of a provider may not be licensed or certified in its own right to provide healthcare services or to participate in Medicare.

Main provider

: A provider that either creates, or acquires ownership of another entity to deliver additional health-care services under its name, ownership, and financial and administrative control.

Provider-based entities

: A provider of healthcare services that is created or acquired by a main provider for the purpose of furnishing different services from the main provider under the main provider’s name, ownership, administrative and financial control, such as skilled nursing facilities, home health agencies, RHCs and FQHCs.

Remote locations of a hospital

: A facility or organization created by or acquired by a hospital for the purpose of providing inpatient hospital services in its own right under the main hospital provider’s name, ownership, financial and administrative control, which remote location is not separately licensed or certified. Remote locations do not include satellite facilities. This category includes multi-campus hospitals operating under a consolidated license.

Satellite facilities

: An entity or organization that operates under the license and certification of a PPS-exempt hospital and that is located on-campus of another provider pursuant to the definitions of a satellite facility under §412.22(h) (1)[for hospitals] or § 412.25(e)(1) [for units]. A facility or organization must meet the requirements for provider-based status as a precondition to being recognized as satellite facility. The difference between a remote location of a hospital and a satellite facility is that the satellite facility always involves co-location with another provider.

Checklist (2) for Compliance with Provider-Based Status

For each department and location that is billed to the Medicare or Medicaid Program under the main provider’s license and provider number:

• Are there any services that have not been determined by HCFA to be provider-based? Is each such service operated under the main provider’s license?
• Is each off-campus facility listed on the provider’s license?
• Is the business entity that operates the department or location 100% owned by the provider?
• Does the provider have the final approval over all outside contracts, personnel actions and policies and other major decisions for each department?
• Does each department or location’s management have the same reporting relationship as services provided in the main facility?
• Are administrative functions (such as billing, human resources, salaries and benefits and purchasing) of each department integrated with the main facility?
• Are the clinical services in each department under the over-sight of the provider’s medical staff?
• Are the medical records for each department integrated into a unified retrieval system of the provider?
• Is each department integrated with the financial systems of the provider and identifiable in the trial balance of the provider?
• Are the services of each department held out to the public as services of the provider?
• Does each department serve the same population as the provider’s main facility?
• Do 75% of the patients served at each service reside in the same zip codes as 75% of the patients served at the main facility?
• Alternatively, do 75% of patients served by a department who require services offered by the main provider receive those services from the main provider?
• Have professional services in each hospital outpatient department been billed with the correct site of service indicator?
• If the answer to any of the fore-going questions is "no," then the department, facility, organization, remote location, or satellite facility operated and billed under a main provider’s number may not meet the regulatory requirements for provider-based status

The final rules do not apply to

:

• CORFs
• ESRD facilities
• Facilities or entities whose status as provider-based has no affect on payment levels or beneficiary liability, e.g., labs

Special rules apply to:

Rural Health Clinics (RHCs)

Federally Qualified Health Centers (FQHCs)

Indian Health Services (IHS) facilities

The purpose this publication is to inform our clients and friends about the firm and of recent legal developments in different areas of law. It is not intended nor should it be used as a substitute for specific legal advice or opinions since legal counsel may be given only in response to inquiries regarding particular situations. Internet subscribers and online readers should not act upon this information without seeking professional counsel.