Medicare Proposed Regulations on Designation of Provider-Based Status as of 1998

October 1, 1999 Advisory

As many of you are aware, the Health Care Financing Administration ("HCFA") is implementing a prospective payment system ("PPS") for outpatient hospital services. As part of this initiative, HCFA has published proposed regulations concerning PPS for hospital outpatient services, including new requirements for designation of provider-based status. These new requirements may make it more difficult for off-campus entities to qualify for hospital-based status.
1 In addition, the proposed regulations will require all hospitals seeking hospital-based status for existing or new off-campus entities to notify their HCFA Regional Office and receive a formal determination that the off-campus entities meet the requirements for hospital-based status before billing for Medicare.

HCFA has undertaken this initiative in order to address the dramatic growth in the number of off-campus entities seeking reimbursement as hospital-based. HCFA believes that hospitals are inappropriately treating many of these off-campus entities as hospital-based in order to shift cost from the inpatient to the outpatient setting. Further, HCFA believes hospitals, through the development of integrated delivery systems, are moving traditional physician services from private practice to outpatient departments. These developments have increased the cost to the Medicare program (and its beneficiaries through increased coinsurance costs) without any recognizable improvement in the quality of services being provided.

Under the proposed regulations, a hospital will not be allowed to bill Medicare for services at an existing or new off-campus entity without obtaining a formal determination of hospital-based status from HCFA. Designation of hospital-based status will be a prerequisite for reimbursement for (i) outpatient hospital services and supplies incident to physician services, (ii) outpatient hospital diagnostic services, and (iii) outpatient ambulatory surgical services. Further, HCFA may seek to recover past payments to the hospital for services provided by an off-campus entity, if the hospital does not secure a determination and HCFA determines that the entity does not satisfy the requirements for hospital-based status.

HCFA currently offers general instructions on the designation of hospital-based status. These requirements are set forth in Program Memorandum A-96-7. The proposed regulations establish requirements similar to those set forth under Program Memorandum A-96-7. However, the proposed regulations differ in two major areas. First, the proposed regulations require that an off-campus entity satisfy all the requirements for hospital-based status (Program Memorandum A-96-7 requires off-campus entities to satisfy only those requirements that are applicable to their situation). Second, the proposed regulations will not take into account any determination of an accreditation agency that the off-campus entity is part of the hospital. These two differences may make it more difficult for an off-campus entity to obtain hospital-based status. Hospitals seeking a determination of hospital-based status for off-campus entities will be evaluated under the requirements set forth under Program Memorandum A-96-7 until 30 days after the final rule becomes effective. Hospitals that have obtained a determination (under Program Memorandum A-96-7) will not be required to obtain a re-determination once the final rule becomes effective.

A brief summary of the requirements that must be satisfied in order to secure a determination of hospital-based status under the proposed regulations (and, in many cases, Program Memorandum A-96-7) is as follows:

  1. Licensure. The off-campus entity must be operated under the same license as the hospital, except in areas where the state requires a separate license for the off-campus entity. The Connecticut Department of Public Health will either include the off-campus entity under the license of the hospital or require separate licensure depending upon the structure and services of the off-campus facility. HCFA indicates that it will defer to the findings of a state agency that has authority to set rates charged by hospitals or other providers as to whether the off-campus entity is part of the hospital. Currently, the Connecticut Office of Health Care Access ("OHCA") has authority to set Connecticut hospital inpatient and outpatient revenues. Therefore, a hospital should confirm that OHCA will include an off-campus entity's rates in the hospital's revenues for purposes of rate setting. Note that if a hospital has not included the off-campus entity in its revenues, and decides to do so, it will have to notify OHCA of the "rebundling" and obtain an adjustment to its rate order.

  2. Operation under Ownership and Control of the Hospital The off-campus entity must be 100% owned by the hospital, share the same governing body and be operated under the same organizational documents (bylaws) of the hospital. The proposed regulations would require the hospital to have final responsibility for administrative decisions, final approval for outside contracts, final responsibility for personnel policies and final approval for medical staff appointments in the off-campus entity.

  3. Administration and Supervision. HCFA will determine whether the off-campus facility is under the direct supervision of the hospital, and under the same monitoring and oversight as other outpatient departments of the hospital. HCFA expects a day-to-day reporting relationship and sharing of certain administrative functions (including billing services, records, human resources, payroll, employee benefit package, salary structure and purchasing services).

  4. Clinical Services. The hospital and the off-campus entity must share clinical services. This includes credentialing of professional staff at the hospital, monitoring and oversight of the off-campus entity in the same manner as other outpatient departments, and a day-to-day reporting relationship with the chief medical officer of hospital. Hospital medical staff committees would have oversight of off-campus entity (including quality assurance and utilization review). Also, HCFA expects integrated medical records.

  5. Financially Integrated. The hospital and the off-campus entity must share income and expenses. The off-campus entity's costs must be reported as a cost-center of the hospital on the hospital's cost report.

  6. Public Awareness. Patients must be aware that they are entering the hospital and will be billed accordingly.

  7. Serve the Same Patient Population. The off-campus entity and the hospital must service the same patient population as evidenced by a high percentage of the patients coming from the same geographic area or patients of the off-campus entity also utilizing services of the hospital.

  8. Management Contracts. Off-campus entities operated under management contracts will be considered hospital-based if all the following criteria are met: (a) staff is employed by the hospital or by another entity (other than a management company); (b) administrative functions are integrated with the hospital (which means the administrative functions of hospital and off-campus entity must be contracted out under same agreement or the agreement with the off-campus entity must be managed by the hospital); (c) the hospital has significant control over the operation of the off-campus facility; and (d) the management contract is held by the hospital itself (not a parent company that has control over both hospital and off-campus entity).

  9. Under Arrangement. Some of the services furnished at the off-campus entity must be furnished by the hospital itself. An off-campus entity may not qualify for hospital-based status if all of the services provided by the entity are provided under arrangement.

  10. Physician Offices. An off-campus facility used as a site of physician services ordinarily furnished in physician office will be presumed to be a free-standing facility, unless HCFA determines otherwise.

Under the proposed rules, HCFA clarifies that designation as a hospital-based entity carries with it some specific obligations, including:

  1. Compliance with the anti-dumping requirements (EMTALA);
  2. Billing physician services with the correct site-of-service indicator so that applicable site-of-service reductions can be applied;
  3. Compliance with the hospital's Medicare provider agreement;
  4. Compliance by physician staff at the hospital-based entity with the Medicare nondiscrimination rules;
  5. Consistent representation of hospital-based status to other third party payors and treatment of patients as outpatients;
  6. Compliance with payment window provisions;
  7. Notice to Medicare beneficiaries that they will be liable for a facility visit as well as physician services; and
  8. Compliance with Medicare's hospital conditions of participation.

Under the proposed regulations, an off-campus entity will not be entitled to be treated as hospital-based simply because it (or the hospital) concludes it is hospital-based. A hospital cannot bill Medicare for services performed at off-campus entity or include costs of such services on its cost report until it obtains a determination from the HCFA Regional Office. If a hospital inappropriately treats an off-campus entity as hospital-based before obtaining a determination, HCFA may recover payments in excess of those payments that should have been made in absence of the provider-based status for all- periods subject to reopening. HCFA proposes a good faith exception, which would avoid recovery of payments made prior to the effective date of the final rule. HCFA also may review past determinations to determine whether they satisfy the new requirements.

The comment period for the proposed regulations has been extended until January 8, 1999. Final rules are not anticipated before late Spring, 1999 (and probably, more realistically, next Fall). The new requirements would be effective 30 days after publication of the final rules.

We strongly recommend that each hospital immediately evaluate the hospital-based status of all of its existing or proposed off-campus entities(or entities that account for more than 5% of the hospital's costs on its cost reports).

For those entities that meet the requirements of hospital-based status, we suggest that the hospital submit a request for determination to the HCFA Regional Office in Boston as soon as possible. Hospitals that submit a request for determination of hospital-based status for off-campus entities will be evaluated under the requirements set forth in Program Memorandum A-96-7 until the final rules become effective. Any delay in seeking such determination until publication of the final rules may result in an interruption in reimbursement under Medicare while the hospital awaits a determination from the HCFA Regional Office.

For any entity that cannot be restructured to meet the requirements for hospital-based status, HCFA shall treat it as a free-standing facility (not part of the hospital) for billing purposes. Among other things, this means that the off-campus entity will not be entitled to a facility fee. Hospitals tempted to transfer such nonhospital-based entities to a third party should proceed with caution. Connecticut law provides that "[n]o nonprofit hospital shall enter into an agreement to transfer a material amount of its assets or operations or a change in control of operations to a person that is organized or operated for profit without first having notified and, if applicable, received approval of the agreement by the Commissioner of Health Care Access and the Attorney General pursuant to this act and his authority under section 3-125 of the general statutes. Any agreement without the approval required by this act shall be void."


  1. For purposes of convenience, this memo will focus on off-campus entities (although the proposed regulation also apply to facilities that account for more than 5% of the costs included in a hospital's cost report), and hospitals (although other health care providers, such as nursing homes, also would be covered).