I.  INTRODUCTION

On October 31, 2000, the Health Care Financing Administration ("HCFA") sponsored a town hall meeting at the agency’s central office in Baltimore to discuss issues relating to implementation of the final provider-based status regulations published on April 7, 2000 (the "Final Rule"). 65 Fed. Reg. 18434. Reed Smith attorneys attended the Town Meeting in light of the significant impact that the Final Rule may have on our clients. This Client Memorandum furnishes a brief report on the matters discussed at the meeting and highlights those issues on which clarification or other noteworthy commentary was given by HCFA staff.

The Final Rule established regulatory requirements for services, facilities or organizations (hereafter referred to as "subordinate facilities") seeking provider-based status for purposes of Medicare reimbursement. HCFA built the new standards upon the existing principle that, in order to be treated as provider-based, a subordinate facility must be an integral and subordinate part of the main provider with which it is associated. See Program Memorandum A-99-24 (May 1999); Provider Reimbursement Manual § 2446; State Operations Manual § 2004. However, in addition to finalizing the operational requirements that must be met in order to satisfy this overall test, the Final Rule imposes a number of new standards on provider-based subordinate facilities, many of which will prove to be highly burdensome to affected providers. Pursuant to an October 3, 2000 notice (see 65 Fed. Reg. 58919), HCFA delayed the effective date of the Final Rule from October 10, 2000 to January 10, 2001, applicable for individual provider cost reporting periods beginning on or after January 10, 2001.

A. General

The Town Meeting was attended by approximately 250 individuals representing a variety of provider organizations, including general and specialty hospitals and hospital chains, hospital associations, therapy and other ancillary service providers and management companies. Discussion of each of the meeting topics described below was initiated by a brief presentation by HCFA staff and was followed by prepared presentations and open questions from the meeting attendees.

Although HCFA staff acknowledged providers’ general frustration with certain aspects of the new provider-based designation standards and the existence of numerous continuing questions concerning the application of the Final Rule, they also emphasized that the agency has no present plans to amend the Final Rule. Instead, HCFA will be focusing on implementation of the published standards and will clarify open issues through so-called "subregulatory" guidance, including questions and answers published on the HCFA website, new Program Memoranda and updated HCFA Manual provisions.

HCFA staff also noted the potential effect of the pending "Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000" (H.R.5543) (the "Medicare Refinement Bill"). This legislation would modify the application of the Final Rule in several respects, including in the following two ways. First, under the Medicare Refinement Bill, any subordinate facility that is treated as provider-based in relation to a main provider as of October 1, 2000 would continue to be treated as provider-based during the two-year period following that date and would not be required to comply with the standards in 42 C.F.R. §§ 413.65(d), (e), (f) and (h) during the same period. Thus, during this period, the foregoing standards would apply only to new subordinate facilities (i.e., those that were not being reimbursed as provider-based prior to October 1, 2000). In this regard, HCFA staff also observed that the legislation would not relieve subordinate facilities that are treated as hospital departments of their Emergency Medical Treatment and Active Labor Act or "EMTALA" compliance obligations pursuant to § 413.65(g).

Second, the Medicare Refinement Bill would enable an off-campus subordinate facility to meet the geographic location requirement of the Final Rule either by satisfying the requirements set forth at § 413.65(d)(7) (i.e., the so-called "75% tests") or by being located not more than 35 miles from the main campus of the hospital. This change would reduce significantly (although not eliminate) the burden of the Final Rule’s "immediate vicinity" requirement. However, HCFA staff articulated their view that a statutory reference to the requirements at § 413.65(d)(7) will limit the agency’s ability to propose future revisions to that regulatory provision absent Congressional action.

B. Scope Of Application Of Provider-Based Designation Standards

The Town Meeting coincided with HCFA’s publication of two new Questions and Answers on the agency’s web site, the first of which addressed the types of subordinate facilities that will not be required to obtain a determination of provider-based status in order to be billed as such. In the first new Q&A, HCFA confirms its earlier-stated view that it will not require a subordinate facility to obtain a provider-based determination in the absence of any effect either on Medicare payment levels or beneficiary liability from a provider-based (versus freestanding) designation. As a result, HCFA will instruct its Regional Offices ("ROs") not to make provider-based status determinations for comprehensive outpatient rehabilitation facilities, home health agencies, skilled nursing facilities and facilities furnishing only clinical diagnostic laboratory tests. Similarly, HCFA will not make determinations with respect to providers of outpatient physical, occupational and speech therapy as long as the moratorium on the $1,500 annual cap on these services remains in effect.

One significant implication of this stance is that therapy management services furnished to an acute care hospital need not comply with the management contracts provisions of the Final Rule. Provider-based status will have no effect on Medicare payments for therapy services furnished to hospital inpatients because such payment is bundled into the facility’s diagnosis-related group reimbursement. Nor will it affect payment for therapy furnished to hospital outpatients because outpatient therapy services are paid under a fee schedule and because the moratorium on the $1,500 cap (which would not have applied to therapy services furnished by hospitals) remains in effect. Thus, as long as the therapy cap moratorium continues, hospital therapy services need not pursue provider-based determinations. Consequently, the management contract requirements of the Final Rule currently would be inapplicable to these services.

In the second new Q&A, HCFA clarifies earlier statements concerning the implications of Medicare provider-based status on Medicaid status and payment for hospital subordinate facilities. Effectively, the agency states that the provider-based or freestanding status of a hospital-affiliated subordinate facility under Medicaid must follow from its status for Medicare payment purposes. While taking the position that state Medicaid agencies will be bound by provider-based determinations under Medicare, HCFA also opines that the state plans have flexibility in determining appropriate payment rates and could increase reimbursement for services at freestanding entities to reflect special circumstances, including higher cost structures due to affiliation with a provider.

Other noteworthy comments by HCFA concerning the scope of the new standards included:

• The agency’s continued implication that any hospital department that performs outpatient services (for which there could be a payment differential under the hospital outpatient prospective payment system versus the Medicare physician fee schedule) requires a provider-based determination; and
• The agency’s suggestion that it will consider establishing a de minimis threshold of outpatient services below which a hospital inpatient department will not be required to seek a provider-based determination.

C. Implementation Process For New Standards

HCFA staff commented on the status of the implementation process for the Final Rule, making the following observations:

• The agency anticipates that a standardized application form for provider-based determinations will be available in late Spring 2001. HCFA plans to minimize the paperwork burden on hospitals that have many departments requiring determinations by structuring the form to allow the submission of one application for multiple subordinate facilities of a single main provider.
• Until the application form is published, providers may apply for determinations by submitting a letter to the appropriate RO that includes information supporting a provider-based determination in compliance with the Final Rule. The RO will be entitled to request further documentation should it be needed in order to make a determination.
• ROs will bear the ultimate responsibility for making determinations of provider-based status; however, at their discretion, ROs may delegate the initial application intake and fact-finding functions to local fiscal intermediaries and/or state survey agencies.

D. "Immediate Vicinity" Requirement

Under the Final Rule, any off-campus subordinate facility must demonstrate that it serves the same patient population as the main provider by satisfying one of the 75% tests set forth at § 413.65(d)(7). These 75% tests have raised significant issues for many providers from a substantive perspective. The particularly harsh effects of the "immediate vicinity" requirement were described by representatives for a number of provider types, including specialty hospitals that operate satellite or remote locations, children’s hospitals that operate remote outpatient clinics and general hospitals that serve a significant number of foreign nationals and tourists.

Moreover, numerous questions also continue to exist concerning the practical application of the "immediate vicinity" requirement. In addition to discussing the potential effect of H.R. 5543, HCFA staff provided the following clarifications and comments on the application of the "immediate vicinity" test:

• HCFA staff outlined the following steps that providers should take to perform the calculations necessary to demonstrate satisfaction of the "immediate vicinity" test:

• For an identified 12-month reference period, identify all zip codes in which patients served by the main provider reside.
• Array these zip codes in order of their contribution to the main provider’s population base from highest to lowest. If two or more contribute the same amount, count all such zip codes. Cut off the list after the zip code accounting for at least 75% of the main provider’s patients.
• Repeat these steps for the subordinate facility seeking provider-based status.
• All of the zip codes in the top 75% for the subordinate facility must be in the main provider’s top 75% zip codes. For instance, if the top 75% of the main provider’s patients come from 10 zip codes and the top 75% of the subordinate facility’s patients come from five zip codes, the five zip codes of the subordinate facility must among the top 10 zip codes of the main provider.

Many Town Meeting attendees objected to this proposed methodology as being overly restrictive in light of the applicable regulatory language and as raising a significant potential for illogical results.

• HCFA staff indicated that they have not yet finally determined what universe of patients should be used by providers for purposes of the foregoing calculations (i.e., all hospital patients or only inpatients or outpatients? Patients covered by all payors or only Medicare beneficiaries?). Furthermore, it remains unclear what the agency considers to be the "type of care furnished by the main provider" for purposes of the second 75% test. HCFA staff said that they would entertain providers’ suggestions on these and other similar interpretive issues for purposes of future subregulatory guidance.
• HCFA clarified that the 75% tests must be met every year and that providers should be prepared to produce the documentation of compliance upon request from HCFA, the state survey agency or the fiscal intermediary.

E. Management Contracts

Under the Final Rule, subordinate facilities that otherwise meet the requirements for provider-based status but are operated under management contracts must meet several additional criteria. See 42 C.F.R. § 413.65(f). The most significant of these requirements is that the staff of the subordinate facility other than management staff (namely, health care and support staff) must be employed by the main provider or by another organization, other than the management company, which also employs the staff of the main provider. Thus, organizations will no longer be permitted to furnish both management and clinical staff to a subordinate facility that is treated for Medicare reimbursement purposes as provider-based.

As HCFA staff explained at the Town Meeting, the agency adopted these requirements due to its concern about "turnkey" operations, where a main provider transfers virtually all responsibility for the day-to-day operation of a subordinate facility to a third-party pursuant to a management contract. HCFA regards such subordinate facilities as being provider-based only in a "nominal sense." Several attendees argued, however, that by limiting providers’ ability to seek specialized management and staffing services from outside vendors, HCFA is improperly restricting providers’ statutory right to furnish services under arrangement and is denying the Medicare program the benefit of cost savings produced from these management services. As part of this discussion, HCFA indicated that it may be willing to regard leased employee arrangements as satisfying the management contracts standard.

Based upon HCFA staff’s comments on the management contracts standard, we note that whether or not a subordinate facility must comply with the standard may depend in large part on how the subordinate facility (e.g., a hospital department) is structured. HCFA staff indicated that they would find it acceptable for a provider to enter into a management contract for some portion of the services offered by a subordinate facility without having to satisfy the requirements at § 413.65(f). In contrast, the agency appeared to take an unfavorable view of management arrangements that cover the entire scope of services offered by the subordinate facility seeking provider-based status.

Even in the face of numerous comments from providers and provider associations over the past six months concerning the unintended and inappropriately severe effects of certain aspects of the Final Rule, it remains clear from the discussion at the Town Meeting that HCFA staff are not currently prepared to take material steps, by modifying the Final Rule or otherwise, to ameliorate many of those effects. HCFA staff still seem to focus on the potential abuses associated with off-campus physician operations as a driving force behind the Final Rule. This is so notwithstanding the fact that, in the past several years, both the business environment and the reimbursement incentives that drove many hospitals to acquire physician practices and treat them as part of the hospital outpatient department have changed dramatically. This focus seems doubly inappropriate in light of the scope of the Final Rule, which reaches far beyond off-campus hospital-based physician offices.

Unfortunately, while some provider-based status issues were clarified in the course of the October 31 Town Meeting, a host of questions remain unanswered. Beyond ambiguities relating directly to the new provider-based standards, these open issues include matters that are secondary to a facility’s provider-based or freestanding status, such as application of the prohibition on unbundling of hospital outpatient services to services furnished by freestanding ancillary service providers located on a hospital campus. Providers will be forced to await future subregulatory guidance for further certainty on many of these issues.