CMS Issues Final (Final) Provider-Based Rules: And Why is This So Important Again?

For those following the development of the provider-based rules since the issuance of Program Memorandum A-96-7 back in August of 1996, one can only be reminded of that catchy tune by former L.A. Lakers’ cheerleader turned pop star Paula Abdul, "Opposites Attract"—two steps forward, two steps back. Every turn and twist in the development of the provider-based rules have been characterized by one move forward by the Centers for Medicare and Medicaid Services ("CMS") and subsequent retrenchment in the face of industry criticism, scholarly commentary and Congressional mandates. It should therefore come as no surprise that the latest "final" revisions in the Provider-Based rules issued on August 1, 2002, represent some degree of compromise between the two camps.

Because the final provider-based rules (the "Final Provider-Based Rules") assume a basic understanding of these provisions, this summary only addresses the final revisions and any important clarifications between the proposed revisions issued on May 9, 2002, and these final rules.

Since publication of the provider-based rules in April 2000 (the "Provider-Based Rules"), CMS has continued to field questions regarding which types of entities would be subject to the rules’ provisions. The revised, and now final rules, clarify that provider-based determinations will not be made with respect to independent diagnostic testing facilities that furnish only services paid under a fee schedule, such as facilities that furnish only screening mammography services, as defined in Section 1861(jj) of the Social Security Act ("SSA" or "Act"), facilities that furnish only clinical diagnostic laboratory tests, or facilities that furnish only some combination of these services. Second, CMS also clarifies that it will not make provider-based determinations with respect to departments of providers (for example, laundry or medical records departments) that do not furnish types of health care services for which separate payment could be claimed under Medicare or Medicaid. Consistent with CMS’ prior comments, CMS also adds a technical amendment to make clear that provider-based criteria do not apply to ambulance services operated by providers.

One area of continued confusion surrounds the issue of physical, occupational, or speech therapy to ambulatory patients. While the general rule remains that CMS will not make provider-based determinations with respect to facilities or entities providing such services so long as the $1,500 annual cap for such services remains in effect (as set forth in Section 1833(g)(2) of the Act), CMS notes that a payment difference for such services does exist when such services are provided by critical access hospitals (CAH). Accordingly, provider-based criteria will be applied to such services when furnished by CAHs.

As in the proposed revisions issued in May 2002, CMS deletes the requirement that provider-based departments may not be licensed in their own right. CMS notes that "[s]ome States require separate licensing of facilities that Medicare would treat as a department of a hospital or other provider. In these States, we would not require a common license."

CMS considered and rejected a request to exempt all inpatient departments from the provider-based rules, regardless of whether they are on-campus or off-campus. CMS responded that:

We do not agree that facilities that treat a patient population made up primarily or entirely of inpatients should necessarily be considered, on that basis alone, to be a fully subordinate and integral component of the main provider. There are instances where a Medicare payment differential exists between a hospital-based inpatient service and a freestanding service.

By way of example, CMS notes that "under the TEFRA payment system applicable to psychiatric, children's and cancer hospitals, Medicare payment to the hospital for inpatient services usually is directly affected by the hospital-specific TEFRA target rate" and that if a particular hospital chooses to label a new site as a remote location or satellite of another hospital, the amount of payment would be affected. CMS also notes that, a merger of two hospitals can significantly affect the payments made to them for their GME programs, regardless of whether each hospital is paid under inpatient PPS.

CMS also rejected a blanket exception for ancillary or other departments which are located within a hospital or on a hospital’s campus. As rationale for their rejection of a blanket exemption for on-campus services, CMS notes that "hospitals can and frequently do lease space on their campuses to physicians and other providers or suppliers of health services, and these providers or suppliers may have no more connection to or integration into the hospital's operations than the lease agreement and physical proximity."

CMS also rejected commenters’ requests for an exemption for consolidated facilities operating on separate campuses under a single provider number. CMS notes that the consolidation of facilities under a single provider number has significant implications for Medicare payment levels and that "[i]n many cases, the amount paid for services of a consolidated facility can be significantly more than the sum of what would be paid to two or more separate facilities for the provision of identical services." Moreover, when two or more hospital facilities are dispersed among two or more geographically separate campuses, CMS states that it will be necessary for one of the campuses to be designated by the hospital as the "main campus" and one as the "remote location" and that the agency will generally defer to the provider’s self-determination unless "the campus selected by the provider clearly does not actually function as the main campus."

Accordingly, while efforts to consolidate Medicare provider agreements following a change of ownership have become in vogue in some areas of the country in an effort to avoid the so-called ‘Vernon liability’ associated with provider-agreement assignment, providers and their counsel should carefully consider whether the combined multi-campus provider entity will meet provider-based criteria—irrespective of state licensure requirements which may be less restrictive than the Provider-Based Rules.

With respect to "chain organizations" or multi-hospital systems operating under separate provider numbers that the provider-based criteria only apply to individual hospitals, not to multi-hospital systems which participate separately in the Medicare program. In such instances, the provider-based criteria would apply to ‘each provider’ within the system and the departments and on and off-campus facilities which are billed under that provider’s Medicare provider number.

CMS rejected the pleas of some commenters seeking an exception for children’s hospitals which set up and staff neonatal intensive care units ("NICUs") in community hospitals in order to extend these services into rural and underserved areas outside the children’s hospitals immediate service areas. CMS acknowledged the commenters’ concerns, but noted that "these units raise serious questions about the appropriate treatment of facilities located at long distances from the main children’s hospital…". Note, however, that while the provider-based criteria apply for both Medicare and Medicaid participation/certification purposes, States are expressly authorized to adopt, through amendments to their State Medicaid plans, payment definitions and methods that different from Medicare. Accordingly, while a NICU operated in a rural hospital by a children’s hospital might not meet "provider-based" criteria, "States may adopt payment methods that do not differentiate between facilities that meet the provider-based required and those that do not." Accordingly, providers that will not meet these requirements, should immediately evaluate Medicaid reimbursement systems (to the extent not already undertaken) to determine whether State plan modifications will be necessary.

As in the proposed revisions to the Provider-Based criteria, CMS grants an additional extension for facilities that were treated as provider-based in relation to a hospital or CAH on October 1, 2000. Specifically, the entity will continue to be considered provider-based in relation to that hospital or CAH until the start of the hospital's first cost reporting period beginning on or after July 1, 2003. For purposes of paragraph (b)(2), a facility would be considered as having been provider-based on October 1, 2000, if on that date it either had a written determination from CMS that it was provider-based, or was billing and being paid as a provider-based department or entity of the hospital or CAH.

To clarify the effect of this extension, CMS revised the provider-based criteria to make clear that the extended grandfathering provision only applies to the requirements set forth in 42 C.F.R. § 413.65(d)—requirements applicable to all facilities or organizations including the licensure, clinical services, financial integration, public awareness, and compliance obligations provision; § 413.65(e)—requirements applicable to off-campus facilities only including the common ownership/control, administration and supervision and location criteria; § 413.65(f)—the joint venture criteria; § 413.65(h)—the management contracts criteria; and § 413.65(i)—the under arrangements criteria (all as revised by this final rule). Predictably, CMS rejected commenters’ requests for a permanent grandfathering extension asserting that, "to do so, would create a permanent double standard under which some older facilities would continue indefinitely to be rewarded for their previous inappropriate billing."

As in the proposed revisions issued in May 2002, CMS now finalizes its replacement of the mandatory "application" process with a voluntary attestation process with varying requirements based upon whether the entity seeking provider-based status is located on or off-campus. Specifically, if a potential main provider seeks a determination of provider-based status for a facility that is located on the main campus of the potential main provider, the provider would be required to submit an attestation stating that its facility meets the criteria in § 413.65(d) and, if it is a hospital, also attest that its facility will fulfill the obligations of hospital outpatient departments and hospital-based entities, as set forth in § 413.65(g) (with any further modifications to this section). CMS deletes the term "advance" before determination in recognition of the fact the rule does not provide for an "advance" determination process.

Under this now final provision, there is no longer an explicit requirement that a provider-based approval be obtained before the facility may bill for such services as "provider-based." If the facility or entity is not located on the provider’s main campus, the potential main provider seeking determination would be required to meet the requirements for on-campus attestations and supply documentation of the basis for its attestation to CMS at the time it submits its attestation. Thus, the primary difference between on and off-campus entities is the documentation that must be provided to CMS with the "attestation form."

Whether CMS has accomplished much of significance by converting the mandatory application process to a "voluntary" attestation process is unclear. At least in the short run, CMS indicates that until a "uniform request or attestation form" is developed, at a minimum, the provider should:

[I]nclude the identity of the main provider and the facility or organization for which provider-based status is being sought and supporting documentation for purposes of applying the provider-based status criteria in effect at the time the request or attestation is submitted. The provider must also enumerate each facility and state its exact location (that is, its street address and whether it is on campus or off campus) and the date on which the facility became provider-based to the main provider. Documentation in support of the attestation of provider-based status must be submitted with the attestation for facilities located off campus.

As for those main providers that submitted an application for provider-based determination after October 1, 2000 but prior to August 1, 2002, CMS notes that they will be protected from recovery of overpayments in periods prior to the date on which CMS determines a facility is not provider-based.

The fact that a new "form" is to be created may suggest to some providers that CMS is simply replacing an "application form" with an "attestation form." In addition, while providers may file a voluntary attestation and commence billing, if CMS subsequently determines the attestation to be inaccurate, CMS would recover the difference between the amount of payment actually made by CMS since the date the "complete request" for a provider-based status was submitted and the amount of payments that CMS estimates should have been made in the absence of compliance with the provider-based requirements. At the time that CMS determines that a facility that submitted a "complete attestation" is not provider-based, payment would continue for up to 6 months but only at the reduced rate so long as the provider responds within 30 days of receipt of notice by CMS and/or its contractors.

CMS does attempt to respond to long-standing provider concerns regarding the timeliness of CMS application processing. For those familiar with the general Medicare enrollment process vis-à-vis the CMS 855 forms, many providers and suppliers have grown frustrated with application and processing delays at the contractor level. In partial response to provider concerns, CMS amends the Provider-Based Rules to provide that whenever a provider submits an attestation of provider-based status for an on-campus facility or organization, CMS will send the provider written acknowledgement of receipt of the attestation, review the attestation for completeness, consistency with the provider-based criteria in § 413.65, and consistency with information in the possession of CMS at the time the attestation is received, and make a determination as to whether the facility is provider-based. For off-campus facilities or organizations, the rule separately adds that the contractors will review the "submitted documentation" for consistency with the application. That being said, CMS only commits to "work with our regional offices and intermediaries as necessary to ensure that providers that submit attestations receive a prompt response." As with the general Medicare enrollment process, CMS has resisted efforts to force regional offices and contractors to issue final determinations within a set time frame.

While the BIPA-grandfathered facilities receive an extension until cost reporting periods beginning on or after July 1, 2003 to come into compliance, the final rules do not provide an express exception to the attestation process after that date. In other words, while the attestation is a voluntary process and, thus, providers are not required to submit attestations, providers who do not submit an attestation after July 1, 2003, could be subject to recovery of overpayments for all cost reporting periods beginning after this date.

One particular problem created by the "attestation" process owes, in part, to the fact that the partial recoupment process available to CMS relates back to the date CMS receives a "complete application" as CMS will only recover the "difference" in Medicare payment amounts (as opposed to the entire amount) back to the date that a "complete application" was received. Herein lies a catch-22. While CMS indicates that they will be issuing guidance as to what information should be included in a "complete" attestation, historically CMS has given its regional offices and contractors broad discretion in determining "completeness." Contractors and regional offices are currently free to ask for additional documentation and frequently do so, often near the end of the review period. If additional documentation is requested some 45 or 60 days into a review cycle, then this raises the question as to whether an application is deemed "complete." Counsel for providers submitting attestations may wish to include cover letters indicating that the provider believes, in good faith, the application to be complete and request that the contractor immediately apprise the "attestor" if they believe the application to be missing any relevant information.

Lastly, CMS notes that a main provider may attest in a single application package that all of its facilities or organizations (both on and off-campus) meet the provider-based criteria. Again, for those facilities that are located on campus, no documentation is required to be submitted--documentation only must be submitted for off-campus facilities. Of course, notes CMS, "the main provider enumerate each facility and state its exact location (that is, its street address and whether it is on campus or off campus)."

As in the proposed revisions to the Provider-Based Rules issued in May 2002, the provider-based criteria are dependent upon whether the facility or organization will be located on or off-campus. The Final Provider-Based Rules separately break out these sections in the regulations under the headings "Requirements applicable to all facilities or organizations" and "Additional requirements applicable to off-campus facilities or organizations." This summary assumes a basic understanding of the revised rules and only addresses clarifications as they relate to the specific criteria within these general categories.

In general, joint ventures may only qualify for provider-based status if they are located on the campus of one of the potential main-providers. In an effort to clarify any lingering ambiguity, CMS revises the criteria to state that in order for a facility or organization operated as a joint venture to be considered provider-based, it must (1) be partially owned by at least one provider; (2) be located on the campus of a provider who is a partial owner; (3) be provider-based to that one provider whose campus on which the facility or organization is located; and (4) meet all of the requirements applicable to all provider-based facilities and organizations in the provider-based rules. CMS offers the following example:

[I]f Hospital A owns 60 percent of Facility C and Hospital B owns 40 percent of Facility C, but Facility C is located on the campus of Hospital B, Facility C may only be provider-based to Hospital B.

CMS further clarifies that, while the main provider does not have to advertise that the facility or organization is a "joint venture," the facility must be held out as being provider-based to the main provider and, therefore, must be billed under the provider number of the main provider to which it asserts provider-based status.

CMS rejects commenters’ request to provide an exemption to the joint venture criteria for rural areas continuing to express integration concerns with these types of entities.

The favorable news from a provider perspective is the fact that the management contracts provisions only will apply to off-campus facilities or organizations seeking provider-based status. This means that most common management contract arrangements on-campus (including lithotripsy and radiology management arrangements) should not fail provider-based status solely on this criteria.

That being said, the Final Provider-Based Rules continue to draw a hard line with respect to who can employ the clinical personnel at the off-campus provider-based entity and reject the notion of "leased employees" in this area. First, a facility or organization operated under a management contract only may be considered provider-based if the main provider (or an organization that also employs the staff of the main provider and that is not the management company) employs the staff of the facility or organization who are directly involved in the delivery of patient care, except for management staff and staff who furnish patient care services of a type that would be paid for by Medicare under a fee schedule. This provision does not preclude the management company from employing other support staff, such as maintenance or security personnel, and others who are not directly involved in providing patient care.

Second, the Final Provider-Based Rules revise the regulations to clarify that "leased employees" (that is personnel who are actually employed by the management company but provide services for the provider under a staff leasing arrangement) are not considered to be employees of the provider for purposes of meeting this provision. Importantly, however, the addition of the "fee schedule" language is designed to clarify that a management company may employ clinical staff paid on a fee schedule (such as physicians, physician assistants and nurse practitioners) and they may "lease" such employees to the main provider to provide services in the provider-based facility or organization. Thus, basic clinical personnel such as nurses, medical technicians and other clinical personnel that cannot separately bill for such services (i.e., any individual for whom Medicare’s payment is included in the provider’s Part A outpatient payment), must be directly employed by the main provider.

Note, CMS rejected commenters’ suggestions that the regulations allow at least some of the staff to be provided by the management company. Although perhaps unintended, this would seem to preclude the provider from using any independent contractor staff, regardless of whether supplied by the management company or, for example, third-party nursing or medical tech staffing organization. Because many facilities use some part-time contractors in various capacities (such as to fill temporary staffing needs), additional guidance clarification may be necessary from CMS or those relatively innocuous staffing solutions could cause any off-campus entity operating under a management contract to fail to meet the provider-based criteria.

With regard to the specific obligations for hospital outpatient departments and hospital-based entities (e.g., the compliance obligations for the facilities meeting the provider-based criteria), CMS substantially adopts the proposed revisions issued in May 2002. First, CMS clarifies that EMTALA applies only to those departments on the hospital's main campus that are provider-based. Accordingly, EMTALA does not apply to provider-based entities (such as RHCs) that are either on or off the hospital campus. Note, however, although CMS issues this one EMTALA clarification, the Final 2003 Inpatient PPS rules (which include the Final Provider-Based Rules) do not include the balance of the EMTALA provisions proposed in the May 2002 proposed rule. CMS states that they are planning to finalize the balance of the EMTALA provisions in a separate document to be "published shortly."

Second, CMS deletes the reference to site-of-service "indicators" with minor editorial changes to more accurately describe how payments are made under the physician fee schedule. Lastly, CMS clarifies that the written notice requirements (the requirements to provide the beneficiary with a notification of the amount of any coinsurance liability attributable to an outpatient visit) to not apply if the beneficiary is examined or treated for a medical condition in compliance with the EMTALA antidumping rules set forth 42 C.F.R. § 489.24. The revised rules provide that "notice must be given as soon as possible after the existence of an emergency has been ruled out or the emergency condition has been stabilized."

The Final Provider-Based Rules adopt a policy of recoupment and continuation of payment that closely parallels the overall structure of the regulations as alluded to above. Recoupment and continuation of payment depends upon a number of factors including (1) whether the provider submitted a complete attestation; (2) whether the provider submitted a complete attestation but failed to notify CMS of "material changes;" and (3) whether the "good faith" and grandfathering provisions will nevertheless "save" the provider in certain situations for certain time periods. Counsel should carefully review these provisions.

In general, if CMS learns that a provider has treated a facility or organization as provider-based and the provider failed to submit an attestation of provider-based status, and CMS determines that the facility or organization did not meet the requirements for provider-based status, CMS would take several actions. First, CMS issues notice to the provider and automatically adjusts future payments to the provider. Second, unless an exception applies, CMS would recover the difference between the amount of payments that actually was made and the amount that should have been made for all cost reporting periods subject to reopening.

Recovery for past payments would be limited in certain circumstances. The Final Provider-Based Rules confirm that "if a provider did not request a provider-based determination for a facility by October 1, 2002, but is included in the grandfathering period under § 413.65(b)(2), we proposed to recoup all payments subject to the reopening rules at Secs. 405.1885 and 405.1889, but not for any period before the provider's cost reporting period beginning on or after July 1, 2003." Second, even if the grandfathering provisions would not apply, the provider may still be entitled to the "good faith" effort protection that would limit recoupment to periods on or after January 10, 2001 (the effective date of the Provider-Based Rules) if during all that period (1) the licensure and public awareness criteria were met (redesignated as § 413.65(d)(4)); (2) all facility services were billed as if they had been furnished by a department of a provider, a remote location of a hospital, a satellite facility, or a provider-based entity of the main provider; and (3) all professional services of physicians and other practitioners were billed with the correct site-of-service as set forth in § 413.65(g)(2). Again, if the "good faith" criteria can be satisfied (which should be fairly easy to demonstrate assuming the provider did, in fact, use the correct site-of-service indicator for physician and other practitioner services), the provider will be given up to 6 months to either submit and meet provider-based criteria or apply as a freestanding provider. During this period, payment will be made, albeit at the reduced rate.

CMS rejected commenters’ requests to extend the "good faith" extension beyond cost reporting periods beginning after January 10, 2001 stating that, irrespective of any complexities surrounding the provider-based rules and delay in implementing the regulations, CMS has published two proposed rules, one final rule, Q & A documents and "consulted extensively with the hospital industry through teleconferences and meetings." For those counsel who have attended religiously these teleconferences, participated in town hall meetings, reviewed the "Q & A" documents and still found themselves struggling to advise clients in this area, there may be little solace in this advice.

Importantly, as clarified in the Final Provider-Based Rules, CMS would not resume full provider-based payments based solely on an attestation of compliance. Rather, if a facility or organization is found by CMS to have been inappropriately treated as provider-based for any period on or after October 1, 2002 (or, in the case of facilities or organizations qualifying for grandfathering extension until cost reporting periods starting on or after July 1, 2003), CMS will not restore full payment "until CMS has determined, based on documentation submitted by the provider, that the facility or organization meets all requirements for provider-based status. . .".

As described above, CMS substantially adopted the voluntary attestation process which allows providers to bill at the provider-based payment rates without awaiting an advance determination. The Final Provider-Based Rules provide that if CMS determines that the requirements for provider-based status are not met, CMS will recover the difference between the amount of payments that was made since the date the "complete request" was submitted and the amount of payments that CMS estimates should have been made in the absence of compliance with the provider-based criteria.

Second, if CMS determines that a facility or organization that previously received a provider-based determination no longer qualifies for provider-based status due to a material change in the relationship between the main provider and the facility or organization asserting provider-based status, the agency’s ability to recoup and the amount of recoupment will depend upon whether the provider reported the "material change" to CMS. If the provider reported the "material change," treatment of the facility or organization as provider-based ceases with the date that CMS determines that the facility or organization no longer qualifies for provider-based status. If, however, the facility did not report the "material change" to CMS, the agency would treat the provider in the same fashion "as if they had never obtained an advance determination" and recoupment of any overpayments could go back to all cost reporting subject to reopening, as modified by the grandfathering (July 1, 2003) and "good faith" (January 10, 2001) exceptions, to the extent applicable.

Importantly, although some commenters had encouraged the agency to develop a definition of "material change" as limited to a "change of ownership, adoption of a new management contract for an off-campus department of a provider or a provider-based entity, change to an off-campus location, or a change in licensure status," CMS rejected commenters’ requests that "material change" should be limited to these events. While CMS agreed that the commenters’ list of events would be a "material change," it noted that other types of events such as "formation of a separate medical staff for the facility or organization or discontinuation of a service on the main provider's campus that would prevent referral of patients from the facility organization to the main provider would also represent material changes." According, because the ability of the agency to recoup is tied back to whether and when a provider reports "material change" events to the agency, counsel would be wise in taking a conservative posture in reporting events that affect the operations of a provider-based entity. When in doubt, it may be wise to report.

Lastly, in an effort to clarify a discrepancy between the preamble text in the proposed rule issued in May 2002 and the regulatory language at 42 C.F.R. § 413.65(k)(2), CMS indicates that "treatment of the facility or organization as provider-based ceases with the date that CMS determines that the facility or organization no longer qualifies for provider-based status." According, providers will not be allowed an additional 6-month grace period before a facility’s provider-based status would be revoked. This means that, for example, if a provider reports a "material change" on January 15th of a calendar year and, on May 15th, the agency determines that the provider fails to meet the provider-based criteria as a result of the properly disclosed change, the reduced payment would commence as May 15^th, although CMS would not recover any overpayments from such provider. However, if the provider failed to report the "material change" on January 15^th to CMS, the agency would reduce payments effective May 15^th and retains the authority to recoup overpayments and apply civil monetary penalties under § 1128A or § 1128B of the Act. "Clarification" on this provision in these final rules, further heightens the importance of reporting "material changes" to CMS.

In the end, the Provider-Based Rules remain in tact with welcome clarification. In many instances—particularly in the on-campus environment, the Final Provider-Based Rules should allow many facilities or organizations to continue to qualify for provider-based status without disruption or modification of existing practices. Clearly, off-campus facilities or organizations must meet heightened requirements which, generally, reflect longstanding agency concerns that such organizations be fully integrated with the main provider—a seminal feature of the Final Provider-Based Rules. Whether the new "voluntary attestation" process will greatly simplify the current "application" process remains to be seen. Indeed, in an era of second guessing CEO certifications of financial statements in a post-Enron and WorldCom environment, providers seeking definitive comfort may elect to submit an attestation and await a formal determination before billing for provider-based services. If this occurs, then the attestation will simply become a surrogate for the now defunct "application" process.