On Nov. 2, 2017, the Centers for Medicare and Medicaid Services (CMS) finalized a rule changing reimbursement rates under the Medicare Physician Fee Schedule (MPFS) for certain non-excepted hospital off-campus provider-based departments (PBDs). These off-campus PBDs will see their payments cut by 20 percent beginning Jan. 1, 2018, meaning they will receive only 40 percent of the applicable outpatient prospective payment system (OPPS) rate, as opposed to the 50 percent they receive this year. To prepare non-excepted PBDs for these reimbursement changes, this legal alert outlines the key reimbursement changes established by the CY 2018 final rule.

As discussed in a Jan.18, 2017, McGuireWoods legal alert, Reimbursement Changes for Hospital Off-Campus Provider-Based Departments, CMS this year implemented Section 603 of the Bipartisan Budget Act of 2015’s “site-neutral” payment policies for newly acquired, developed or relocated PBDs. As a result, only excepted off-campus PBDs — such as those facilities that billed as PBDs prior to Nov. 2, 2015 — continue to be paid under the OPPS. Non-excepted PBDs are now reimbursed under the MPFS, which reimburses PBDs based on a “relativity adjuster” to the OPPS rate. Currently, non-excepted PBDs receive approximately 50 percent of the OPPS rates for non-excepted items and services; however, as discussed in a Sept. 1, 2017, McGuireWoods legal alert, “CMS Proposes Reimbursement Cuts for Certain Hospital Provider-Based Departments,” CMS’s 2017 interim final rule proposed slashing the relativity adjuster in half, to 25 percent — a proposal that would have greatly impacted reimbursement for non-excepted PBDs.

In the CY 2018 final rule, CMS slightly backed away from its proposal and instead finalized a 20 percent reduction to the current MPFS payment rates. Accordingly, non-excepted PBDs will be reimbursed at 40 percent of the OPPS beginning Jan. 1, 2018, as opposed to the current relativity adjuster of 50 percent. CMS explained that this reduction more closely reflects its estimate that the average payment difference for the top 22 codes paid in a PBD (including the most commonly billed code, which was not included in the calculations developing the CY 2017 rates: an outpatient clinic visit) averages 35 percent of OPPS rate payment. CMS hopes this adjustment will provide a more level playing field for competition between hospitals and physician practices by promoting greater alignment in payment. Nevertheless, CMS notes that this new payment rate is likely transitory, in place only until CMS has an opportunity to analyze CY 2017 claims data.

In arriving at this new OPPS relativity adjuster for 2018, CMS compared the OPPS rate to the difference under the MPFS between the non-facility and facility rates. While noting that not all billed codes have both facility and non-facility rates (hence, the need for a relativity adjuster), CMS rejected comments that the comparison should be the full non-facility rate instead of the difference. CMS maintained that its approach better approximates the technical component to be paid to the PBD, whereas the physician bills for the professional component (which is theoretically removed when taking the difference). CMS also continued its policy of excluding certain OPPS payment adjustments (such as outlier payments, rural sole community hospital payments, cancer hospital adjustments and quality reporting payment adjustments) in the MPFS rate for PBDs

Given the temporary nature of this change to reimbursement rates under the MPFS, non-excepted PBDs should expect even more changes to reimbursement in the not-so-distant future. Further, CMS noted in response to comments that it did not have authority to develop or implement modified payment rates to further reduce payment differentials. Such commenters may turn to Congress for further site neutrality reimbursement changes.

Anecdotally, McGuireWoods lawyers have seen fewer hospital-physician group acquisitions followed by PBD conversions. This seems to indicate that the congressional intent to eliminate the Medicare payment incentive for such conversions is working. This additional 20 percent cut, as well as corresponding changes in 340B pharmaceutical reimbursement, will likely further reduce such acquisitions. Hospitals and physician groups will continue considering reimbursement changes in structuring future transactions.

In addition, hospitals have had to be careful in relocating or expanding offerings at existing PBDs. As mentioned above, PBDs that billed under the OPPS prior to enactment of the Bipartisan Budget Act of 2015 are excepted and allowed to bill under the OPPS. CMS has taken the position that relocation of such facilities (even to a new suite in the same building) will mean they lose their grandfathered status and must be paid similarly to the non-excepted PBDs discussed herein. Only if there are “extraordinary circumstances” — such as natural disasters, significant seismic building code requirements, or significant public health and safety issues — will a CMS regional office approve relocation. CMS declined to further discuss or refine its position in the CY 2018 final rule.

The CY 2018 final rule is one of several rules reflecting CMS’ stated strategy to create better accessibility, quality, affordability, empowerment and innovation in healthcare, and it will take effect January 1, 2018. Although the explanation above details the major proposed reimbursement change under the MPFS for non-excepted PBDs, the CY 2018 final rule also contains changes and policies related to the expansion of telehealth-eligible services, modifications to the Medicare Shared Savings Program and Physician Quality Reporting, and implementation of the new Medicare Diabetes Prevention Program, among others. Accordingly, hospitals and non-hospital providers should closely examine and review the CY 2018 final rule to understand the nature of such changes.