On May 9, 2002, Centers for Medicare and Medicaid Services ("CMS"), formerly the Health Care Financing Administration ("HCFA"), issued proposed regulations to amend the requirements for a determination that a facility or an organization has provider-based status (codified at 42 CFR § 413.65). The proposed regulations were included with changes to the hospital inpatient prospective payment system. Comments will be accepted by CMS until July 8, 2002. As you are probably aware, being deemed a facility or organization with provider-based status can have certain cost reimbursement advantages. This memorandum provides a brief summary of the essential requirements for obtaining provider-based status under the current regulations and the suggested changes under the proposed regulations.

Summary of Proposed Changes

Extension of time for filing. If a facility was treated as provider-based in relation to a hospital on October 1, 2000, it will continue to be considered provider-based in relation to that hospital until the start of the hospital's first cost reporting period beginning on or after July 1, 2003. The requirements of the proposed regulations would not apply until the start of the first cost reporting period beginning on or after July 1, 2003.

Joint ventures. The proposed regulations permit facilities or organizations owned by two or more providers engaged in a joint venture to be considered provider-based, if the facility or organization is located on the campus of the potential main provider. The current regulations prohibit provider-based status for all joint ventures.

Management contracts. The proposed regulations remove the requirements for compliance with additional criteria for facilities or organization operated under management contracts, if the facility or organization is located on the campus of the potential main provider. However, the requirements must still be met be entities not located on the campus of the main provider. Under the proposed regulations, facilities and organizations not located on the campus of the potential main provider and operated under management contacts must comply with the following additional provisions: (i) the staff of the facility or organization must be employed by an entity which also employs the staff of the main provider, (ii) the administrative functions of the facility or organization must be integrated with those of the main provider, (iii) the main provider must have significant control over the operations of the facility or organization, and (iv) the management contract must be held by the main provider itself, not by a parent organization.

Loosening of requirements for entities on the campus of the main provider. As more fully set forth below, the proposed regulations remove the requirements of (i) operation under the ownership and control of the main provider, (ii) administration and supervision, and (iii) location (which requirement was further revised as set forth below) for entities located on the campus of the main provider. However, these requirements must still be met by entities not located on the campus of the main provider.

Requirements for Obtaining Provider-Based Status

A main provider or a facility must contact CMS, and the facility must be determined by CMS to be provider-based, before the main provider bills for services of the facility as if the facility were provider based, or before it includes costs of those services on its cost report. A facility that is not located on the campus of a hospital and that is used as a site where physician services of the kind ordinarily furnished in physician offices are furnished is presumed to be a free-standing facility, unless CMS determines the facility has provider-based status.

An entity must meet all of the following requirements to be determined by CMS to have provider-based status under the proposed regulations:

1. Licensure. The department of the provider, remote location of a hospital, or satellite facility and the main provider must be operated under the same license, except where the State requires a separate license.

2. Clinical services. The clinical services of the facility or organization seeking provider-based status and the main provider must be integrated as evidenced by medical staff overlap, monitoring and oversight functions, medical director appointments, medical staff committee responsibility, medical record integration, and inpatient and outpatient services of the facility or organization and the main provider being integrated, with patients having full access to all services of the main provider.

3. Financial integration. Financial operations of the facility or organization must be fully integrated within the financial system of the provider, as evidenced by shared income and expenses. Costs of the facility or organization are to be reported in a cost center of the provider, and the financial status of the facility or organization is to be incorporated and readily identified in the main provider's trial balance.

4. Public awareness. The facility or organization must be held out to the public and third party payers as part of the main provider. Patients entering the facility or organization must be aware they are entering the main provider, and shall be billed accordingly.

5. Obligations of hospital outpatient departments and hospital-based entities. Hospital outpatient departments located either on or off the campus of the hospital which is the main provider must still comply with the anti-dumping rules. This requirement exists in the current regulations, but the reference to compliance with the requirement in Section 413.65(d) has been added in the proposed regulations.

An entity not located on the campus of a potential main provider must meet all of the above requirements and the following additional requirements in order to be determined by CMS to have provider-based status under the proposed regulations:

1. Operation under the ownership and control of the main provider. The facility or organization seeking provider-based status must be operated under the ownership and control of the main provider, as evidenced by factors such as ownership, governance, operating documents, and final responsibility for various administrative decisions, including final approval for medical staff appointments in the facility or organization.

2. Administration and supervision. The reporting relationship between the facility or organization seeking provider-based status and the main provider must have the same frequency, intensity, and level of accountability that exists in the relationship between the main provider and one of its existing departments. This is evidenced by the level and degree of supervision by the main provider, monitoring and accountability by the main provider compared to its other departments, the reporting relationship between the entities, and the integration of the administrative functions of the facility or organization with those of the main provider.

3. Location. The facility or organization must be located within a 35-mile radius of the main campus of the main provider, unless the facility or organization demonstrates a high level of integration by compliance with all other criteria and serves the same patient population as the main provider (at least 75 percent of patients must reside in the same zip code areas or have received required care from the main provider if of the type furnished by the main provider). The facility or organization and the main provider must be located in the same State or adjacent States. Rural health clinics with fewer than 50 beds otherwise qualified as provider-based entities are not subject to this section. Note: Under the current regulations, all entities must be located on the same campus as the main provider, and must be within a 35-mile radius of the main campus in order to meet the "high level of integration" exception.

If CMS finds that a facility or organization is being treated as provider-based without having obtained a determination of provider-based status under Section 413.65, CMS will notify the provider, adjust future payments, review previous payments, determine whether the facility or organization qualifies for provider-based status, and continue payments where warranted. CMS may recover the difference between actual payments made and the amount of payments CMS estimates should have been made in the absence of a determination of provider-based status. However, there will be no recovery for any period before the beginning of the hospital's first cost reporting period beginning on or after January 10, 2001, if good faith efforts have been made to operate the entity as a provider-based facility or organization. CMS may review a past determination of provider-based status. Thus, an application to CMS for a determination of provider-based status is recommended prior to treating any facility or organization as provider-based.

As mentioned above, this memorandum provides only a short overview of the current and proposed regulations. If you have any questions about the provisions of the regulations, please contact any member of Buchanan Ingersoll & Rooney's Health Care Law Section.