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July 25, 2016

Policy Watch – Provider-Based Clinics in the Wake of Section 603: What You Need to Know About CMS’ Proposed Rule

CMS’ July 6 release of the 2016 Proposed Medicare Outpatient Prospective Payment System (OPPS) rule begins to answer a few questions about how the so-called “site neutral” policy, hurriedly adopted late last year by Congress, may be implemented. But it leaves as many questions opened as it answers. Below, we sort out the known from the unknown. If one thing is certain, however, it is that the site neutral policy will fundamentally change strategies and incentives in ways that could have far-reaching—and unintended—implications for our health care system.

Background: Section 603 of the Bipartisan Budget Act

Enacted as part of a larger, year-end budget deal, Section 603 embodies the principle that Medicare should not pay more for outpatient services provided in an outpatient hospital setting than it would pay for those same services in a physician office setting.  But Section 603 does not go so far as to implement that principle for all outpatient hospital services.  Instead, it seeks to apply it prospectively only, and only for outpatient hospital services provided in off-campus clinics.

Beginning in 2017, Section 603 makes provider-based outpatient clinics ineligible for hospital OPPS reimbursement unless the clinics are grandfathered or meet other statutory exceptions ; specifically

  • The clinic is grandfathered, meaning that it billed Medicare for services before November 2, 2015 (the date of enactment);
  • The clinic is on-campus;
  • The clinic is within 250 yards of a remote location of the hospital; or
  • The clinic is a dedicated emergency department.

Hospitals or health systems that:

  • Have existing networks of off-campus provider based clinics
  • Are in the planning phase of opening new off-campus clinics
  • Are considering or undertaking mergers, acquisitions or other corporate arrangements involving off-campus clinics
  • Participate in the 340B Drug Pricing Program as a hospital covered entity
  • Rely on Medicaid supplemental hospital payments that include outpatient services and/or disproportionate share hospital payments
  • Rely on professionals other than employed professionals to staff off-campus clinics

Outpatient clinics that do not fall within one of these categories will not be paid under the hospital OPPS starting January 1, 2017, but may be eligible for payment under another Medicare payment system (such as the physician fee schedule), provided they meet the requirements for such other payments.

Much of the proposed rule released in early July reiterates the statutory language described above and keeps in place existing regulations governing provider-based off-campus hospital clinics. For example, for off-campus facilities excepted from the rule, CMS adheres to existing definitions—i.e., CMS retains the current definition of a “dedicated emergency department” (at 42 CFR 489.24(b)), and does not alter the definition of a “campus” or “remote location.” But CMS adopts surprising positions on other issues.

CMS proposes unexpectedly strict rules about what changes a clinic can make and still retain its “grandfathered” status, and a narrow scope of the services that can continue to be paid under the OPPS even in grandfathered clinics.

  • Relocation of Existing Clinics: One major unanswered question in the wake of the passage of Section 603 was whether an existing clinic (that had been billing Medicare prior to November 2, 2015) could relocate and still retain its “grandfathered” status as eligible for OPPS reimbursement. CMS’ answer is no. And not only will moving to a new site disqualify a clinic for OPPS reimbursement, but even moving or expanding into new units within an existing building is considered to be “relocating.” The only possible exception(s) CMS is willing to entertain is if the relocation is necessitated by circumstances beyond a hospital’s control, such as for hospitals struck by a natural disaster or other extraordinary circumstances.
  • Expansion of Existing Clinics: CMS proposes to allow grandfathered clinics to expand their services and retain their OPPS eligibility but only to the extent that the expansion is within the same “clinical family of services” that the clinic offered (and billed for) prior to Section 603 enactment. Nineteen such clinical families of services are listed in the proposed rule. Any expanded services offered in a new clinical family of services would be ineligible for OPPS reimbursement. As a result, some clinics will be grandfathered for some services but not for others, adding further complexity to an already bifurcated system.
  • Clinics Under Development: CMS did not address whether clinics that were under development at the time of enactment would be eligible for grandfathering, likely because Section 603 is fairly clear that a clinic had to be billing under OPPS prior to enactment. Nonetheless, Congress has been considering legislative changes to Section 603 to address concerns raised by hospitals about the unfairness of adopting the provision without warning and without a phase-in period. Legislation has passed the House to provide flexibility, and is pending in the Senate. But the proposed rule is silent on the issue.

CMS also dealt a significant surprise in its proposal for implementing the new payment and billing system for non-grandfathered clinics starting in 2017.  CMS claims that it will be unable to implement necessary system changes to allow hospitals to submit claims under other applicable Medicare payment systems (as Section 603 envisioned) by January. As a stop-gap measure, therefore, CMS proposes that for 2017 only, the physicians that provide professional services in non-grandfathered clinics submit claims under the Medicare Physician Fee Schedule. The hospital clinic itself would not submit bills or receive Medicare payment.  Rather, the physicians will be paid for both the professional and technical component of the services—even though the hospital will have incurred the technical costs.  It will be up to the hospital to enter into appropriate business arrangements with physicians to allocate the payments.

What Impact Will the Proposed Rule Have Beyond Medicare Reimbursement? 
340B Eligibility of Non-Grandfathered Clinics: The proposed rule is silent on the impact (or, more appropriately, lack therefore) of Section 603 on off-campus clinic eligibility for the 340B Drug Pricing Program. The silence is disappointing, as the Health Resources and Services Administration has traditionally used a shortcut test to determine 340B eligibility that relies on the treatment of the clinic on the hospital’s cost report. While the full cost report implications of Section 603 implementation—especially in this odd transition year of 2017—are not yet clear, we believe it is exceedingly clear, from a legal perspective, that Section 603 doesnot affect 340B eligibility. As long as the clinic is provider-based and part of the hospital, it is eligible for 340B discounts if the main hospital is eligible.  And in the preamble to the proposed rule, CMS clarifies that Section 603 “do[es] not specify that the off-campus outpatient departments of a provider are no longer considered a [provider based department] of the hospital.”

Other potential ramifications to consider include:

  • Fraud and abuse consequences
  • Steps necessary to maintain the grandfathered and provider-based status of existing off-campus clinics, including the structure of potential corporate ventures, location of new and expansion of existing clinical service lines throughout the system, and physician affiliations and relationships
  • Alternatives to provider-based status for new off-campus clinics
  • Alternative Medicare reimbursement for new off-campus clinics
  • Maintaining uniform charges in non-grandfathered clinics
  • Cost report treatment of non-grandfathered clinics
  • Preserving Medicaid outpatient hospital reimbursement, including supplemental payments and disproportionate share hospital (DSH) payments
  • Implications for the new uncompensated care portion of Medicare DSH payments

Unintended Consequences?
The apparent intent in enacting Section 603 (and CMS’ interpretation of it) is to halt hospital acquisitions of physician practices for the sole purpose of increasing reimbursement under the OPPS.  But while the legislation may be successful in removing such incentives, at what cost to the health care system? At a time when hospitals are looking to increase access to primary and specialty care in neighborhood locations accessible to patients, this policy may force them to consolidate their new service offerings on campus instead. Hospitals may have to reconsider the feasibility of building new locations for aging off-campus sites, or newly co-locating services (such as primary care and behavioral health) in a single location to encourage more integrated and coordinated care. Some hospitals may seek to open a remote location of a hospital (i.e., open up off-campus inpatient units so that the site meets an exception to Section 603), in order to maintain access in that area, where it did not previously make sense to create new inpatient services. Similarly, the site neutral policy could alter incentives for locating urgent and emergency care centers for reimbursement reasons. And it could significantly complicate the expansion of clinically and financially integrated systems where practitioners and hospitals work together to seamlessly coordinate a full range of inpatient and outpatient services.