By: Jeff Bramschreiber, CPA, Partner

Hospitals that own and operate medical practices, both on the hospital campus and satellite locations, can achieve higher Medicare reimbursement for physician services and enhance
their bottom lines if they qualify for “provider-based” status.

However, qualifying for provider-based status and potentially higher Medicare reimbursement is a complex and oftentimes frustrating process. There are regulations, obligations, eligibility requirements, and a new regulatory vocabulary to contend with, not to mention rules dealing with eligible clinic locations.

This article provides an easy-to-understand summary of the provider-based regulations and a checklist of issues to review to ensure that your Medicare bases are covered.

What is “provider-based” reimbursement?
Physician or clinic services furnished in a nonprovider setting (e.g., a traditional free-standing clinic location) are generally reimbursed by Medicare under the Medicare physician fee schedule with a single, global rate. Those same services furnished in a provider-based setting are reimbursed in two separate components: 

• Hospital facility payment under the ambulatory payment lassification (APC) rate for the outpatient hospital services.
• Separate payment for physician services under the Medicare physician fee schedule, but reduced for the hospital site-of-service.

The bottom-line:  The combination of the APC payment and the reduced fee schedule amount can be substantially greater than the global fee schedule payment for traditional free-standing clinics.

Does every practice benefit from provider-based status?
Not every practice can benefit from a change to provider-based status, nor can every practice qualify for this alternative reimbursement methodology. Certain practices, by their very nature, already practice in a provider-based setting even though they may not view it as such. For example, emergency department physicians, radiologists, pathologists, hospitalists, and anesthesiologists who currently practice in a hospital department are already subject to the provider-based billing and payment method. Their professional services are reimbursed by Medicare Part B using the physician fee schedule, and the hospital receives a separate APC payment for the facility component of the services rendered to Medicare outpatients.

Some practices may fare better continuing to receive Medicare payments as a traditional free-standing clinic as opposed to a provider-based department. This is a result of differences in the Medicare payment system between hospitals and other ambulatory care settings. For example, Medicare reimbursement for certain oncology, imaging, and cardiology services has been shown to favor the traditional free-standing clinic setting as opposed to a hospital department location.

Still other practices cannot take advantage of the higher Medicare reimbursement of provider-based status due to their inability to meet one or more of the various requirements necessary to qualify for provider-based status. As discussed in greater detail later in this article, a provider-based clinic must be owned and operated as a department of the main provider (hospital). Therefore, an independently owned medical practice would have difficulty meeting this requirement without undergoing a complete change in its organizational structure and operations.

Who should consider provider-based status?
Nearly every physician practice owned and operated by a hospital or hospital system should evaluate the potential differences in Medicare reimbursement as a provider-based department.

Typically, primary care practices with relatively high Medicare utilization will benefit most from provider-based status. These specialties include internal medicine and family practice. The historically low Medicare utilization in pediatric and OB/GYN practices prevents these specialties from benefiting from a change in Medicare reimbursement from provider-based status. Surgical specialties, such as orthopedics, urology, and cardiovascular surgery, have relatively high Medicare utilization; however, the bulk of their services are provided in a hospital surgery department or ambulatory surgery center. These settings are already considered provider-based, and the Medicare reimbursement for these services would be largely unaffected by a change to provider-based status.

What about Critical Access Hospitals (CAH)?
The concept of provider-based status clearly applies in the Critical Access Hospital setting; however, the payment methodology is significantly different. Instead of the APC payment system for hospital outpatient services, the CAH receives cost-based payment for Medicare services. Therefore, a provider-based clinic in a CAH would receive:

• Hospital facility payment based on cost as reported on the Medicare cost report.
• Separate payment for physician services under the Medicare physician fee schedule, but reduced for the hospital site-of-service.

The combination of the cost-based payment and the reduced fee schedule amount may be greater than the global fee schedule payment for traditional free-standing clinics. However, the addition of a provider-based department to the CAH Medicare cost report can have unintended results. For example, hospital administrative and other costs will be allocated to the provider-based clinic through the cost report step-down methodology. This could result in lower costs being allocated to hospital services and could, therefore, negatively impact the hospital’s cost reimbursement. A more detailed analysis of the Medicare reimbursement impact is required before proceeding with a change to provider-based clinic status in a CAH setting.

Advantages of provider-based status
The primary advantage of provider-based status is that it can offer an opportunity for increased reimbursement for services furnished to Medicare beneficiaries. While this may not be the case in every instance, increased payments of 50 percent or more can be realized. Increased payments due to provider-based status can mean the difference between red ink on the bottom line of a medical practice and a break-even or slightly profitable financial position. This is particularly true for practices that rely heavily on Medicare reimbursement.

There are other advantages that may be realized from transforming an independent, free-standing medical practice to a provider-based clinic. Integration with a hospital can allow access to hospital resources that may not be available otherwise. For example, the sharing of hospital information services, quality assurance, compliance, purchasing, managed care contracting, and human resource functions can have a positive impact on the operations and financial performance of a medical practice. While the impetus for this type of change may be reimbursement-driven, these other factors can also contribute to the success of the organization.

Disadvantages of provider-based status
The disadvantages of converting to provider-based status can best be summarized in one word—“change.” The extent to which changes are necessary depends on the degree to which the current operations are already integrated with the main provider (i.e., the hospital). Take the case of a hospital that currently owns and operates several medical clinics, employs all the clinic staff as well as the physicians, owns the clinic real estate, and the hospital employees do the billing, purchasing, cleaning, and management functions. Essentially, the medical clinics are operationally and financially integrated with the hospital; however, Medicare billing is performed as a traditional free-standing clinic. This structure is perfectly fine and is, in fact, fairly common. Nevertheless, the Medicare reimbursement may prove to be better under the provider-based methodology. Should the hospital pursue provider-based status for its clinics, very few operational changes may be needed. Medicare billing, of course, will be affected, but the degree of overall changes in clinic operations may be minimal.

The previous example may be contrasted with a free-standing medical practice that is independently owned and operated by a group of physicians. While the potential increase in Medicare reimbursement due to provider-based status could be substantial, the organizational and operational changes required to achieve provider-based status may be too drastic to undertake. For instance, the independent group practice would be required to transfer the ownership and control of its practice operations to the hospital—not a popular suggestion among many independent physicians. Among other changes, the independent group practice would cease to exist as a separate entity and instead become a department of the hospital. In this example, the initial lure of higher reimbursement can quickly fade once the magnitude of the necessary changes is closely examined.

Provider-based regulations
The concept of provider-based status has existed within the world of Medicare reimbursement for many years. However, it was not until the issuance of the final rules for implementing the prospective payment system for outpatient hospital services on April 7, 2000, that the requirements for provider-based departments received widespread attention. Previous to the publication of the provider-based requirements in the April 7, 2000, Federal Register, the provider-based concept was loosely defined and interpreted. This began to change as Medicare redefined the payment system for hospital outpatient services and a clear definition of a hospital outpatient was needed. Subsequent to the initial requirements, various changes were made on August 3, 2000; December 21, 2000; November 30, 2001; and August 1, 2002. Most recently, the Centers for Medicare and Medicaid Services (CMS) furnished clarification of its policies in Program Memorandum A-03-030 published on April 18, 2003.

Provider-based requirements
In the August 2002 changes to provider-based regulations, CMS made important distinctions between the requirements for on-campus and off-campus sites. The effect of these changes was to reduce the regulatory requirements for on-campus locations. Therefore, the distinction between on-campus and off-campus locations is very important when evaluating the requirements for provider-based status. In 42 CFR §413.65(a)(2), CMS defines “campus”, in part, as “the physical area immediately adjacent to the provider’s main buildings, other areas and structures that is not strictly contiguous to the main buildings but is located within 250 yards of the main buildings, and any other areas determined on an individual case basis, by the CMS regional office, to be part of the provider’s campus.” Through this definition, CMS provides a “bright line” distinction between on- and off-campus but also allows for some discretion from the regional CMS office.

Requirements that apply to all locations
The provider-based regulation requires that all provider-based sites satisfy all of the following requirements:

1. Licensure:  Provider-based departments must be operated under the same licensure as the main provider, except in areas where the state requires a separate license for the site. If, however, the particular state does not permit that a provider-based department or entity be licensed together with the main provider, then the CMS requirement will be waived. 
2. Clinical integration:  The clinical services of the provider-based department or entity are integrated with the main provider (hospital) and are treated as any other department of the hospital with respect to the following areas:
   • Hospital privileges of the professional staff
   • Monitoring and management oversight
   • Reporting by the medical director
   • Responsibility for medical activities such as utilization review and quality assurance
   • Medical records
   • Access to inpatient and outpatient services of the main provider (hospital)
3.  Financial integration:  The financial operations of the provider-based department or entity are integrated within the financial system of the main provider (hospital) as evidenced, for example, by a complete sharing of income and expenses, as well as common accounting and reporting of financial data.
4. Public awareness:  The provider-based location must portray itself as being part of the main provider (hospital) such that patients entering the department are aware that they are entering the hospital and will be billed accordingly.

Requirements that apply only to off-campus locations
Off-campus sites must satisfy all of the requirements applicable to on-campus locations. In addition, off-campus sites must meet requirements relating to ownership, administration and supervision, and proximity.

1. Ownership and control:  The provider-based department or entity must be owned 100% by the main provider (hospital) and must be under the direct control of the hospital.
2. Administration and supervision:  The reporting relationship between the provider-based department or entity and the main provider (hospital) must have the same frequency, intensity, and level of accountability that exists with any other hospital department. Administrative functions, such as billing services, human resources, payroll, and purchasing services, must be handled by the same personnel for both the hospital and the provider-based site. 
3. Location in immediate vicinity:  The provider-based location must be within 35 miles of the main campus of the hospital, or it must be demonstrated that the hospital and the provider-based department share a common service area. The common service area test (the “75/75 test”) is very stringent and difficult to meet in many geographic areas. To meet this test, it must be shown that the service areas of the hospital and the provider-based department overlap such that at least 75 percent of the patients served by one location reside in the same zip codes as 75 percent of the patients served by the other location.

Additional requirements (“obligations”) that apply to all hospital-based locations
In addition to the previous requirements, both on-campus and off-campus hospital-based locations must fulfill the following obligations to meet the provider-based requirements:

1. Comply with the Emergency Medical Treatment and Active Labor Act (“EMTALA”) requirements as amended by CMS on September 9, 2003. As revised, the EMTALA requirements only apply to a “dedicated emergency department,” whether on or off the hospital campus. 
2. Ensure that physician services furnished in a hospital-based department are properly billed with the correct site-of-service indicator so that the Medicare site-of-service payment reduction for physician services can be properly applied.
3. Comply with all the terms of the hospital’s Medicare provider agreement.
4. Physicians working in hospital-based departments or entities must comply with Medicare’s nondiscrimination provisions.
5. Hospital-based departments must treat all Medicare patients as hospital outpatients for billing purposes.
6. Medicare payments for services in a hospital-based department are subject to the 72-hour payment window provisions applicable to prospective payment system (PPS) hospitals.
7. Hospital-based departments must meet applicable hospital health and safety rules for Medicare participating hospitals.

Additional obligations that apply only to off-campus locations
An additional obligation applies only to off-campus hospital-based locations. When a Medicare beneficiary is treated in a hospital-based location that is not on the hospital campus, the hospital must provide written notice to the beneficiary, before the delivery of services, of the amount of the beneficiary’s potential financial liability for coinsurance on both the professional service and the hospital outpatient visit. Since it is unlikely that the exact type of service will be known prior to the patient's treatment, CMS will allow the hospital to furnish a written notice to the patient that explains that he or she will incur a coinsurance liability that would not be incurred if the location were not provider-based. This obligation may discourage Medicare beneficiaries from obtaining care at a provider-based location if care can be received from an alternative provider that is not provider-based.

Approval process
Formal CMS approval to obtain provider-based status is not required for on-campus or off-campus sites. However, CMS will consider applications, or “attestations,” and will approve or reject them. Providers should seriously consider filing an attestation to seek approval prior to billing as a provider-based location because the filing of an attestation limits the risk of retrospective recoveries of Medicare payments should the location subsequently be determined not to meet the requirements.

Making the decision on provider-based status
Proceeding down the path to provider-based status requires a thoughtful and thorough analysis. The following checklist of steps can be helpful in deciding if a transition to provider-based status can be beneficial to an organization.

• Perform a detailed reimbursement analysis to determine the potential financial impact of a change to provider-based reimbursement. Note that the change in reimbursement only applies to Medicare outpatient services currently performed in the location(s) being considered for provider-based status.
• Form a work team to closely review the provider-based requirements and obligations applicable to each location. Note which requirements currently are not met.
• Develop a list of unmet requirements; identify barriers and the changes that would be necessary to meet the provider-based requirements.
• Estimate the cost to the organization of complying with each requirement.
• Identify the qualitative aspects of transitioning to a provider-based location, such as the public perception of increasing costs to Medicare beneficiaries.
• Compare the advantages and disadvantages of provider-based status; make a decision on whether or not to proceed with provider-based status in each location.
• Formulate an action plan to achieve provider-based status, if applicable.

Final thoughts
In this era of shrinking margins and downward pressure on reimbursement, providers will want to look for opportunities to optimize revenues and protect their bottom lines. Provider-based reimbursement may not fit every situation, and not every hospital or clinic will qualify. But for those who do, the improvement in Medicare payments can be significant.