On July 19, 2011, the Centers for Medicare and Medicaid Services (“CMS”) published its proposed 2012 Physician Fee Schedule (the “2012 Schedule”). Unlike prior years’ schedules, the 2012 Schedule does not appear to contain any new changes to Stark, anti-kickback, or privacy rules. However, CMS does propose a significant change to the 3-day payment window rule. The 3-day payment window rule prohibits hospitals (or entities wholly owned or wholly operated by hospitals) from separately billing Medicare for certain services provided in the three days preceding an inpatient admission. As a practical matter, the rule has historically covered only the technical portion of outpatient diagnostic services provided within the 3-day payment window. However, as discussed more fully below, CMS proposes in the 2012 Schedule to reimburse at the lower facility (versus non-facility) rate for physician services related to the inpatient admission and provided within the 3-day payment window.  

The Proposed Rule

When a physician furnishes services in a hospital, including an outpatient department of a hospital, Medicare typically pays the physician at a “facility-based” payment. The “facility-based” payment is lower than the “non-facility” payment to avoid duplicate reimbursement for expenses like supplies, equipment, and staff, which are paid directly to the hospital by Medicare. CMS proposes to apply the facility-based payment to physician services when the services are:

  • related to the inpatient admission;
  • performed within three days prior to inpatient admission; and
  • performed in a physician practice wholly owned or operated by a hospital.

On June 25, 2010, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the “Act”). The Act significantly expanded the definition of “related to admission” for the purpose of determining when services should be included in a hospital’s payment under the Hospital Inpatient Prospective Payment System. Prior to the Act’s passage, outpatient diagnostic and other services provided during the payment window were considered related to admission only when there was an exact match between the ICD-9-CM diagnosis codes assigned for both the preadmission services and the inpatient stay. The new, broader definition includes any non-diagnostic services that are clinically related to the cause of the patient’s admission, regardless of whether the inpatient and outpatient diagnoses are the same.  

In its 2012 Schedule, CMS has also taken the opportunity to restate its interpretation of “three days immediately preceding the date of [admission].” CMS reaffirms that the three day time frame should be calculated using calendar days, not a 72-hour period. As a result, outpatient diagnostic and other services related to admission that are provided in the three calendar days preceding admission must be bundled, even if more than 72 hours has passed between the time the services were furnished and the patient’s admission.  

The 2012 Schedule left the definitions of “wholly owned” and “wholly operated” unchanged for the purposes of applying the payment window rule. A facility is wholly owned by a hospital if the hospital is the sole owner of the entity; likewise, an entity is considered wholly operated by a hospital if the hospital has exclusive responsibility for conducting and overseeing the entity’s routine operations, regardless of whether the hospital also has policymaking authority over the entity. The lower “facility” rate will therefore apply not only to outpatient services provided at a hospital or any of its provider-based locations, but also hospital-owned physician practices, regardless of whether these practices are provider-based.  

CMS is accepting comments on the proposed 2012 Schedule until August 30, 2011. Comments may be submitted electronically at http://www.regulations.gov under file code CMS-1524-P.

BABC Commentary

To avoid lost revenue and minimize the compliance burden associated with having to track patients admitted to the hospital within three days following a visit to their physician, we have typically advised clients to structure arrangements with affiliated physician practices in a way that avoids ownership or operation wholly by a hospital. However, for practices which offer limited diagnostic services, it was at least possible to argue that, even with hospital ownership or operation, lost revenue and the compliance burden would be minimal. If the 3-day payment window rule is expanded to include physician services, that argument will be difficult to make. Accordingly, hospitals should consider restructuring their arrangements with affiliated physician practices to avoid hospital ownership or operation.