One of the most significant changes in Medicare hospital payment policy in the last year came in the form of a largely unexpected addition to the Bipartisan Budget Act of 2015. Section 603 of the act extended the concept of site-neutral payment policy by requiring that newly created off-campus hospital outpatient departments no longer be paid under the outpatient prospective payment system (OPPS) beginning in 2017, instead being paid under an alternative — and presumptively less remunerative — payment system. The new law left major issues unresolved and drew sharp criticism from key industry stakeholders.

On Nov. 1, 2016, the Centers for Medicare and Medicaid Services released a prepublication version of its final rule to implement Section 603 as part of the annual OPPS rulemaking process. The final rule imposes significant limitations on new off-campus hospital outpatient departments, but includes two major changes from a proposed rule issued earlier this year that soften the blow on hospitals.

Bipartisan Budget Act of 2015

The Bipartisan Budget Act of 2015 was signed into law on Nov. 2, 2015. Section 603, entitled “Treatment of Off-Campus Outpatient Departments of a Provider,” amended Section 1833(t) of the Social Security Act, which governs Medicare payments for hospital outpatient department services, to add a new clause that excludes from the definition of covered services most items and services furnished on or after Jan. 1, 2017, by an “off-campus outpatient department of a provider.” The statute defines the term “off-campus outpatient department of a provider” by reference to the provider-based regulations to include a department of a provider that is not located on the provider’s campus or within a 250-yard radius from a remote location of a hospital.

Importantly, Section 603 excluded from the definition those departments that were billing Medicare for covered services furnished prior to the date of enactment. Thus, off-campus departments in operation prior to Nov. 2, 2015, receive grandfathered or “excepted” status and will continue to be paid under the OPPS, but new, or “nonexcepted,” off-campus departments will only be eligible for such reimbursement until Jan. 1, 2017, at which time they are to be paid under an applicable Part B payment system.

Proposed Rule

CMS issued a proposed rule to implement Section 603 on July 6, 2016. The proposed rule failed to deliver the flexibility and certainty sought by many in the hospital industry. CMS proposed severe restrictions on excepted off-campus provider-based departments (PBDs), including limitations on hospitals’ abilities to relocate or expand excepted sites, offer new service lines at excepted sites, and transfer ownership of excepted sites without triggering payment cuts or losing excepted status. In effect, CMS proposed to freeze excepted off-campus PBDs precisely as they existed when Section 603 was signed into law.

Another key part of the proposed rule concerned CMS’s plans to pay for nonexcepted items and services in 2017 and beyond. While CMS stated its intent to create a method of reimbursement to hospitals for nonexcepted items and services, it concluded that it lacked a way to do so by Jan. 1, 2017. As a result, CMS proposed that, for 2017, the physician fee schedule (PFS) would be the applicable payment system. Payment would be made to physicians at the nonfacility rate (i.e., the rate paid when no separate facility fee is paid), but no payment would be made directly to hospitals. Hospitals were left to seek payment from the physicians providing services at these sites or, potentially, to cause their nonexcepted PBDs to enroll as different types of suppliers that could be paid under the PFS.

CMS’s proposed rule posed significant financial, operational, and even legal challenges. Many trade associations, including the American Hospital Association, the Federation of American Hospitals and America’s Essential Hospitals, urged CMS to delay implementation of the proposed rule until a direct payment mechanism could be devised. Commenters were also critical of CMS’s proposals regarding relocation, expansion and ownership transfers, requesting that hospitals be given greater flexibility to adapt and respond to patient and community needs.

Final Rule

In its final rule, CMS finalized many of its proposals without significant modification. However, CMS made major revisions to its 2017 payment policy for nonexcepted PBDs and declined to adopt its proposal regarding the offering of new service lines by excepted off-campus PBDs.

Applicable Payment System for Nonexcepted PBDs

Beginning Jan. 1, 2017, the PFS will be the applicable payment system for the vast majority of items and services furnished in nonexcepted off-campus PBDs. In a major change from the proposed rule, the final rule provides that hospitals will be able to continue to submit institutional claims for these items and services, identifying them through use of a new claim line modifier. The Medicare program generally will pay for these items and services at a rate equal to half of the OPPS rate.

These payment rates are intended to approximate the technical component or facility fee associated with PFS services. To devise these rates, CMS reviewed 2016 hospital outpatient claims data for services billed with the “PO” modifier, signifying that they were billed in an off-campus hospital department and paid under the OPPS. CMS identified the 25 most frequently billed codes and, for each, compared the payment made under the OPPS to the PFS payment estimated to be attributable to nonprofessional resource costs.

Through this analysis, CMS determined that, on average, the PFS payment attributable to nonprofessional resource costs was equal to 45 percent of the OPPS payment rate. Based on this comparison, as well as a comparison of ASC payment rates to OPPS payment rates, CMS concluded that, for 2017, the payment rate for items and services furnished in nonexcepted PBDs generally will be equal to 50 percent of the OPPS payment rate for such items and services. Payment rates for other items and services that are already paid at PFS rates, such as therapy services, preventive services and separately payable drugs, will remain the same. Physicians will continue to be paid for their professional services at the facility rate (i.e., the rate paid when a separate facility fee is paid).

CMS emphasized that its 2017 payment policy for nonexcepted off-campus PBDs is a transitional one, and that it will be refined over time as CMS obtains more data. CMS also foreshadowed potential decreases in future years, noting its suspicion that the equivalent portion of PFS payment for evaluation and management codes, and for PFS services on average, would likely be less than 50 percent of OPPS payment rates for the same services.

Because this payment methodology was not described in the proposed rule, CMS cast its policy in the form of an interim final rule with comment period. Interested parties may submit comments until Dec. 31, 2016.

Expansion of Services at Excepted Off-Campus PBDs

CMS had proposed that an excepted off-campus PBD would continue to be paid under the OPPS only for the items and services it was furnishing prior to Nov. 2, 2015. If an excepted off-campus PBD expanded its services into additional “clinical families of services,” those services would not be paid under the OPPS. Citing commenters’ concerns about the operational challenges associated with this proposal, CMS declined to finalize it.

An excepted off-campus PBD will receive payments at the OPPS rate for all items and services, regardless of whether it furnished those types of items and services prior to Nov. 2, 2015. CMS was, however, careful not to close the door on its proposed policy, stating that it would monitor service line growth in excepted off-campus PBDs and may propose limitations on service line expansion in future rulemaking.

Relocation of Excepted Off-Campus PBDs

With one limited modification, CMS adopted its proposed policy on the relocation of excepted off-campus PBDs. As a result, an excepted off-campus PBD will lose excepted status if it moves from the physical address — including the unit or suite number — listed on the hospital’s Medicare enrollment form as of Nov. 1, 2015. CMS did, however, grant a single, narrow exception: an excepted off-campus PBD may relocate without the loss of excepted status in the event of extraordinary circumstances outside of the hospital’s control, such as natural disasters, significant seismic building code events, or significant public health and safety issues.

Exceptions to the relocation prohibition — which CMS made clear would be “limited and rare” — will be evaluated on a case-by-case basis by the appropriate CMS regional office. CMS stated its intent to issue subregulatory guidance regarding the exception request process.

Changes of Ownership of Excepted Off-Campus PBDs

CMS also finalized its proposals regarding changes of ownership involving excepted off-campus PBDs. When a hospital undergoes a change of ownership, the excepted status of an off-campus PBD will be retained by the new owner only if the new owner accepts assignment of the former owner’s Medicare provider agreement. If the provider agreement is terminated, the off-campus PBD will lose its excepted status. In addition, individual excepted off-campus PBDs cannot be transferred from one hospital to another and maintain excepted status.

Other Noteworthy Issues

CMS clarified that off-campus PBDs need not have submitted a bill to the Medicare program prior to Nov. 2, 2015, in order to qualify for excepted status. Rather, so long as an off-campus PBD furnished services prior to that date and submitted a bill for those services under the OPPS in accordance with timely filing limits, it would qualify for excepted status.

Several commenters pushed CMS to clarify whether off-campus PBDs that were under development or “mid-build” on Nov. 2, 2015, but were not yet providing services to Medicare beneficiaries, would be granted excepted status. CMS stated that it lacked authority to provide an exception for these departments or delay implementation of Section 603. It should, however, be noted that the U.S. House of Representatives passed legislation in June of this year that potentially would provide relief to certain projects under development as of the date Section 603 was enacted. The legislation, titled the Helping Hospitals Improve Patient Care Act of 2016 (H.R. 5273), is currently pending in the Senate.

Although some commenters requested that CMS provide a more specific definition of a hospital’s “campus” or the hospital’s “main buildings” for purposes of measuring the 250-yard radius of its campus, CMS side-stepped the issue. According to CMS, the current regulatory definition of “campus” provides adequate flexibility to address the various configurations of hospitals’ campuses. Despite its reluctance to refine the definition of “campus,” CMS did provide some insight into its interpretation of the 250-yard measurement. In describing how to measure the distance from a remote location of a hospital, CMS stated that a hospital may measure 250 yards from “any point of the physical facility that serves as the site of services of the remote location to any point in the PBD.” CMS stated that this approach is consistent with how the agency has historically implemented the 250-yard criterion when making on-campus determinations under the provider-based regulations.

CMS also addressed the potential impact of Section 603 on hospitals participating in the 340B drug pricing program. Commenters had expressed concern that the proposed rule would limit hospitals’ eligibility to furnish or prescribe 340B drugs at nonexcepted off-campus PBDs because the proposed rule did not provide a mechanism for paying hospitals for services at such locations. Although CMS deferred to its sister agency responsible for administering the 340B program, it clarified that, under the final rule, services provided at nonexcepted off-campus PBDs will continue to be reported on the hospital cost report.

Lastly, CMS made clear that all items and services furnished by a dedicated emergency department of a hospital, whether or not they are emergency items or services, will continue to be paid under the OPPS. Although the statutory language of Section 603 arguably requires this result, an earlier draft of the legislation limited the exception to “emergency department services” corresponding to a narrow range of CPT codes, stoking concerns that only certain services furnished by a hospital-based dedicated emergency department might qualify for OPPS payment.

Practical Considerations

In the wake of the final rule, hospitals and health systems should consider taking a number of actions. First and foremost, hospitals should review all of their service locations to determine which locations might be subject to the upcoming change in payment policy. Not only should hospitals consider the potential impact on off-campus locations developed, acquired, relocated or expanded since the enactment of Section 603, but they should also review the bona fides of historical off-campus locations. Hospitals also may wish to evaluate the status of locations presumed to be on campus or within 250 yards of a remote location, as well as any departments that operate as dedicated emergency departments.

For excepted PBDs, hospitals should compile documentation demonstrating that these locations billed the Medicare program for services rendered prior to Nov. 2, 2015. CMS emphasized in the final rule its expectation that hospitals would maintain “proper documentation” — without offering meaningful guidance as to what sort of documentation would suffice — and that hospitals would make this documentation available upon request.

Useful documentation may include: Medicare billing data (though CMS noted that this alone may not be sufficient, since multiple PBDs may bill under the same provider number); Medicare enrollment records (note that CMS plans to issue instructions to Medicare contractors to identify each off-campus PBD and the date it was added as a location of the hospital through a review of enrollment data); cost report data; and provider-based attestations and approvals. Hospitals also may wish to collect surveyor reports or other documentation to support that on-campus PBDs are indeed on campus (or within the prescribed 250-yard radius in the case of PBDs located near remote locations).

For nonexcepted PBDs, hospitals should consider revising financial projections, undertaking a code-by-code review of the services offered in nonexcepted PBDs to determine the expected financial impact in 2017 and beyond. Hospitals should also ensure that billing and coding systems are updated, and staff are trained, to append the new claim line modifier to items and services furnished in nonexcepted PBDs, where appropriate, beginning next year.

Clearly, the final rule will affect future development activities. In considering the development of new service locations, hospitals should evaluate the potential financial impact of operating the location as a nonexcepted off-campus PBD as compared to a freestanding operation. Depending on the range of services offered and payor mix, hospitals may stand to gain more from operating new locations as freestanding rather than PBDs, at least under the payment policy set forth in the final rule.

Finally, hospitals and other stakeholders should bear in mind that this final rule is not the last word on Section 603. Many critical questions remain unanswered. Medicare payment policy for 2018 and beyond is unclear. So too are certain aspects of qualifying for and maintaining excepted status. It also remains to be seen what will come of the mid-build legislation currently residing with the Senate Finance Committee. Hospitals should account for this uncertainty in their operational activities and closely monitor future developments.

Republished with permission. This article first appeared in Law360 on November 9, 2016.