The Shape of Provider-Based Status to Come: The Impact of the Bipartisan Budget Act and the March Toward Site Neutral Payment


Authored Article

On November 2, 2015, President Barack Obama signed the Bipartisan Budget Act of 2015 (Act) into law.1 While the legislation itself—principally an effort to raise the federal debt ceiling and set federal spending—came as no surprise, its inclusion of a significant limitation in the way Medicare will reimburse hospitals for outpatient services furnished in newly created or acquired off-campus departments caught many off guard.

Beginning January 1, 2017, off-campus hospital outpatient departments that did not bill for services under the Medicare Outpatient Prospective Payment System (OPPS) prior to the date of enactment of the Act will no longer be eligible for reimbursement under OPPS. Instead, these departments will be paid under an applicable Medicare Part B payment system, such as the Physician Fee Schedule (PFS) or Ambulatory Surgical Center (ASC) payment system. These systems typically provide for lower payment rates for the same services.

The fact that a change in Medicare payment for hospital outpatient departments was made is not altogether surprising. For many years, government watchdogs have expressed concern regarding the propriety of increased payment based solely on the site of service. However, the scope of the changes made by the Act and the suddenness of their arrival surprised many in the health care industry. The purpose of this article is to provide some background on the issues at play, explain the effect of the Act on Medicare payment for services provided in off-campus hospital outpatient departments, and highlight some of the major issues left unre­solved by the Act.

A Brief History of Provider-Based Status

From the beginning of the Medicare program, hospitals have owned other facilities that are administratively integrated and operated as subordinate units. Historically, the agencies tasked with administering the Medicare program permitted these subordinate facilities to be considered “provider-based” to the hospitals in order to accommodate their financial integration (i.e., to allow hospi­tals to reflect shared overhead costs in their cost reports). 2

The transition of the Medicare program from a retrospective, cost-based payment system to a prospective payment system created a financial incentive for hospitals to designate subor­dinate facilities as provider-based. Under the retrospective, cost-based payment system, the Medicare program benefitted from the economies of scale achieved by hospitals that oper­ated provider-based facilities. With the advent of the inpa­tient prospective payment system in 1983, however, hospitals had an opportunity to increase Medicare revenue by shifting overhead costs associated with hospital inpatient services (which costs were intended to be covered by the prospective payment system payment) to provider-based departments, which at the time were still subject to a retrospective, cost-based payment system. The result, in the eyes of the Health Care Financing Administration (HCFA), was an increase in Medicare payments with no commensurate benefit to the Medicare program or beneficiaries.3

Other developments in payment policy resulted in the total Medicare payment due to a hospital for services rendered in its provider-based department often exceeding (and in some cases, far exceeding) the payment that would have been due if the department were operated as a freestanding entity. Medicare payment for services furnished in a hospital outpatient department generally consists of both a facility payment to the hospital under the OPPS and a payment for the professional services of a physician under the PFS. The total of these two payments is typically greater than the payment for comparable services rendered in, for example, a freestanding physician office, where a separate facility fee is not payable, as the fee for the professional services under the PFS is intended to include a practice overhead expense component. In addition to a larger payment from the Medi­care program, the provision of services in a hospital outpa­tient department often results in an increase in beneficiaries’ out-of-pocket expenses, as beneficiaries are required to pay coinsurance for both the facility and professional charges.4

Citing a significant increase in the number of provider-based facilities and the need for the Medicare program to act as a prudent purchaser of services, HCFA issued a program memorandum in August 1996 that specified criteria that must be met in order for a hospital or other main provider to bill for services of a facility as if the facility was provider-based.5 In April 2000, HCFA finalized regulations setting forth these criteria in greater detail.6 Among the criteria were requirements that the main provider and the provider-based facility operate under the same state license, the provider-based facility operate under the ownership and control of the main provider, and the provider-based facility be located in the immediate vicinity of the main provider. The regulations also included an explicit application requirement for all facilities seeking provider-based status: subject to certain limited exceptions, main providers were required to apply for and receive a provider-based determination for their facilities prior to billing for services in those facilities as provider-based.

In August 2002, the agency, now operating as the Centers for Medicare & Medicaid Services (CMS), issued another final rule in which it revised the provider-based regulations in the wake of new legislation and industry reaction.7 Chief among the revisions was the replacement of the application require­ment with a voluntary attestation process. The resulting regulations, which are set forth in Section 413.65 of Title 42 of the Code of Federal Regulations, became effective October 1, 2002, and have been largely unchanged since that time.

The provider-based regulations impose a wide range of requirements, almost all of which are geared toward ensuring that the provider-based facility is meaningfully inte­grated with the hospital or main provider. For example, the provider-based facility and the main provider must be oper­ated under the same license (except where state law does not permit as much), the clinical services of the provider-based facility and the main provider must be integrated, the finan­cial operations of the provider-based facility and the main provider must be fully integrated, and the provider-based facility must be held out to the public and other payers as a part of the main provider. Additional requirements apply to off-campus facilities, reflecting a concern that with greater distance comes greater challenges to bona fide integration.

Renewed Interest in Provider-Based Reimbursement

Notwithstanding the rigor of the standards imposed by the provider-based regulations, provider-based reimbursement— or more precisely, the difference between total Medicare payment for services rendered in a provider-based depart­ment and Medicare payment for the same services rendered in a freestanding facility—has continued to draw the atten­tion of government agencies and other interested parties. This interest is hardly surprising given the well-documented proliferation of provider-based departments, the migration of services from freestanding offices to provider-based depart­ments, and the attendant increase in Medicare spending. One recent report found that while total Part B spending grew by an average annual rate of 5.8% from 2007 through 2013, Medicare expenditures for hospital outpatient department services increased at an average annual rate of approxi­mately 8.3% during the same period. 8

The Medicare Payment Advisory Commission (MedPAC), an independent congressional agency established to advise Congress on issues affecting the Medicare program, has issued several reports in which it has recommended that action be taken to reduce the difference in Medi­care payment. For example, in its March 2012 report to Congress, MedPAC recommended that Congress direct the U.S. Department of Health and Human Services (HHS) to reduce payment rates for evaluation and management office visits provided in hospital outpatient departments so that the total payment rates for these visits are the same whether the service is provided in an outpatient department or a physi­cian office.9 In developing this recommendation, MedPAC expressed its concern that such a change could have the effect of reducing access for low-income patients, in that some hospitals that provide ambulatory services for such patients might experience significant reductions in Medi­care revenue. For this reason, MedPAC recommended that revenue losses from this change in policy be limited to 2% of overall Medicare revenue for hospitals that serve a relatively large share of low-income patients.10 In a June 2013 report, MedPAC reiterated its recommendation regarding evaluation and management services, and also suggested that Congress could eliminate or reduce payment differences for services such as cardiac imaging and surgical services.11

Most recently, MedPAC reiterated its recommendation that setting-dependent differences in payment rates for certain ambulatory payment classifications be reduced or eliminated in a March 2015 report to Congress.12 In the 2015 report, MedPAC concluded that the growth in outpatient services is in part a reflection of the incentive hospitals have to shift patients to higher cost sites of care.13 MedPAC took aim at evaluation and management services—noting, for example, that the Medicare program spent approximately $1 billion more in 2009 and $1.5 billion more in 2013 than it would have if payment rates for evaluation and management services were the same in hospital outpatient department and freestanding offices14—but did not spare other services, reem­phasizing an earlier recommendation that hospital outpatient department payment rates for 66 ambulatory payment clas­sification codes be reduced.15

The HHS Office of Inspector General (OIG) also has taken an interest in the issue. In April 2014, OIG issued a report entitled, “Medicare and Beneficiaries Could Save Billions if CMS Reduces Hospital Outpatient Department Payment Rates for Ambulatory Surgical Center-Approved Procedures to Ambulatory Surgical Center Payment Rates.”16 In the report, which was completed in response to a congressional request for an assessment of the impact of providing surgical services in an ASC as opposed to other outpatient settings, OIG estimated savings to the Medicare program of $7 to $15 billion for 2012 through 2017 if CMS reduced hospital outpatient department payment rates for ASC-approved procedures to ASC payment levels for procedures performed on beneficiaries with low-risk and no-risk clinical needs.17 In addition to the April 2014 report, OIG has highlighted compliance with the provider-based regulations and the comparison of provider-based and freestanding clinics as areas of focus in several of its recent annual work plans. 18

In addition to these reports and recommendations, several recent enforcement efforts evince government interest in ensuring compliance with the provider-based regulations, perhaps in acknowledgment of the significance of the financial benefit that is often associated with provider-based status. In October 2014, the U.S. Department of Justice (DOJ) announced a $3.37 million settlement with a New York hospital to resolve federal False Claims Act liability stemming from self-reported non-compliance with the provider-based regulations involving the hospital’s hyper-baric oxygen therapy services program.19 One news outlet reported a $2.635 million settlement with DOJ in 2015 for what appears to have been a similar self-reported matter involving a hospital system in Michigan.20 In addition to these settlements, many commentators have remarked on the increased scrutiny applied by CMS in its review of provider-based attestations over the past few years, particularly with respect to arrangements involving shared space.21

The Bipartisan Budget Act of 2015

Against this backdrop, the Act was passed by Congress and signed into law on November 2, 2015. Section 603, entitled “Treatment of Off-Campus Outpatient Departments of a Provider,” is the portion of the Act that, in approximately 500 words, makes significant changes in the way new, off-campus hospital outpatient departments will be reimbursed by the Medicare program. The changes made by Section 603 have been estimated by the Congressional Budget Office to result in savings of $9.3 billion to the federal government over the next 10 years.22

Section 603 of the Act amends Section 1833(t) of the Social Security Act, which governs Medicare payments for hospital outpatient department services, to add a new clause that excludes from the definition of covered services most items and services furnished on or after January 1, 2017, by an “off-campus outpatient department of a provider.” The term “off-campus outpatient department of a provider” is defined by reference to the provider-based regulations to include a department of a provider that is not located on the provid-er’s campus or within a 250-yard radius from a remote location of a hospital. Importantly, the Act excludes from the definition those departments that were billing Medicare for covered hospital outpatient department services furnished prior to the date of enactment. Thus, off-campus depart­ments in operation prior to November 2, 2015, will receive “grandfathered” status and continue to be paid under the OPPS, but new off-campus departments will only be eligible for such reimbursement until January 1, 2017, at which time they will be paid under an applicable Part B payment system, such as the PFS or ASC payment system. In other words, new off-campus hospital outpatient departments will, beginning January 1, 2017, be paid at the same rate as if the depart­ments were freestanding facilities unaffiliated with a hospital.

Several of the changes made by Section 603 are particularly noteworthy. First, the payment limitation does not apply to on-campus hospital departments (i.e., those departments that are located in the physical area immediately adjacent to, and in any event within a 250-yard radius of, the hospital’s main buildings).23 In addition, the payment limitation does not apply to certain other off-campus facilities that are required to meet the provider-based regulations, including remote locations of a hospital, satellite facilities, and provider-based rural health clinics. No change in payment to these facilities will occur as a result of the Act, even if they are established or acquired on or after January 1, 2017; the payment limitation applies solely to off-campus hospital outpatient departments.

Second, the scope of the grandfathering provision is limited and somewhat ambiguous. Section 603 shields from the payment limitation off-campus hospital outpatient departments that were “billing [as a hospital outpatient department] with respect to covered [hospital outpatient department] services furnished prior to the date of the enactment.” No opportunity is given for hospitals to seek exceptions to this rule, nor does Section 603 include any allowance for rural or safety net hospitals, or for hospi­tals currently in the process of acquiring or creating a new off-campus department. It also is not entirely clear how the language applies to recently added off-campus departments. Consider, for example, the case of a hospital that added an off-campus outpatient department effective November 1, 2015, but did not see a Medicare patient until November 2, 2015 (or that saw a Medicare patient on November 1, 2015, but did not bill for services until November 2, 2015).

Third, the payment limitation will apply to all items and services rendered by new off-campus hospital outpatient departments, except for items and services furnished by a dedicated emergency department.24 Not only does Section 603 limit payment for evaluation and management services, it also limits payment for procedures and surgical services. As described above, previous proposals and recommendations from MedPAC and OIG generally focused on reducing site-of-service payment differentials for a narrower range of services.

Fourth, Section 603 authorizes CMS to collect more detailed information from hospitals about their off-campus hospital outpatient departments. Specifically, Section 603 directs hospitals to provide to CMS such information as CMS requires to implement Section 603, which may include listing a code or modifier on claims for off-campus outpa­tient department services or reporting information about off-campus outpatient departments on enrollment forms. CMS may take this opportunity to require the reporting of information beyond that which is currently required (which includes listing off-campus departments as “practice loca­tions” on Medicare enrollment applications and, beginning January 1, 2016, adding modifier “PO” to every Health­care Common Procedure Coding System code for services furnished in off-campus departments).

Open Questions

Five hundred words is not enough to address the many ques­tions that arise from a payment system shift as significant as that caused by Section 603 of the Act. CMS has indicated

that it will implement Section 603 of the Act through notice and comment rulemaking in 2016.25 Many anticipate that these regulations will be made part of the annual OPPS rulemaking cycle, with a proposed rule issued in late June or early July, and a final rule in late October or early November. What follows is a brief discussion of some of the major ques­tions that CMS may take up in the rulemaking process.

How Will CMS Identify Off-Campus Outpatient Departments?

It remains to be seen precisely how CMS will identify off-campus outpatient departments for purposes of imple­menting the payment changes made by Section 603. The statute does not speak to the issue, and there are several readily apparent options. For one, CMS could look to hospitals’ enrollment files. Hospitals are required to identify all practice locations where the hospital provides services as part of the Medicare enrollment process. CMS also could identify off-campus outpatient departments by reference to the now required “PO” modifier on claims. Both approaches are unsatisfactory to a degree, in that a hospital’s failure to take relatively simple administrative actions (i.e., updating its Medicare enrollment profile or properly appending a new modifier to its claims for services) would have outsized payment consequences. Another alternative would be to identify off-campus outpatient departments by reference to hospitals’ cost reports.

Of course, CMS could develop an entirely new means of identifying off-campus outpatient departments pursuant to its authority under Section 603. While a return to a manda­tory attestation process may not be workable (for providers and CMS alike), CMS could develop an attachment to Form CMS-855A that required disclosure of additional data regarding off-campus outpatient departments, along the lines of what it has done with respect to home health agencies and physician-owned hospitals.

What Exactly is an Off-Campus Outpatient Department?

The changes made by Section 603 bring the definition of “campus” to the forefront. The provider-based regulations define the term to mean “the physical area immediately adjacent to the provider’s main buildings, other areas and structures that are not strictly contiguous to the main build­ings but are 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.”26 Yet, many of the key phrases in this definition, including “main building,” “immediately adjacent,” and “strictly contiguous,” are not specifically defined in the regulations. Given the financial impact of whether an outpatient department is located on the “campus,” the industry would benefit greatly from a clearer definition of the term.

May Grandfathered Departments Be Expanded? Repurposed? Relocated?

Section 603 leaves open many questions regarding the limits imposed on grandfathered off-campus outpatient depart­ments. As patient needs change and physical plants age, hospitals will need to expand, repurpose, and relocate off-campus outpatient departments. Whether these actions jeop­ardize the grandfathered status of the departments is unclear.

With respect to the issue of expansion, Section 603 includes no specific limitation on grandfathered departments; rather, the exception simply requires that the department was billing with respect to covered outpatient department services furnished prior to the date of enactment. One could argue that the statutory language permits an expansion of services, provided that the expansion did not result in a change in location and did not result in a change in what the “department” is. One could make a similar argument regarding repurposing a grandfathered department, though such an argument would have to work around the idea that the repurposed department was not itself billing for services as of the date of enactment. Of course, CMS may take a different approach in the rulemaking process. For that reason, providers would be well-served to wait for regulatory guidance before making material changes to a grandfathered off-campus outpatient department.

Whether a grandfathered off-campus outpatient department may be relocated is another difficult question. The provider-based regulations define the term “department of a provider” to “comprise[] both the specific physical facility that serves as the site of services of a type for which payment could be claimed under the Medicare or Medicaid program, and the personnel and equipment needed to deliver the services at that facility.”27 In commentary to its 2002 final rule modifying the regulations, CMS stated: “We proposed this change because we believed it would help clarify that we would make deter­minations with respect to entities considered in their role as sources of health care services and not simply as physical locations.” 28 In the view of the authors, these statements leave providers with an unsatisfying duality that would benefit from additional rulemaking. Going a step further, it is easy to imagine scenarios in which it would seem unfair and inconsis­tent with the policy goals of the Medicare program to penalize a provider with the loss of grandfathered status due to mere relocation. For example, consider the case of a grandfathered off-campus outpatient department that was required to relo­cate due to the expiration or termination of its lease.

Did Congress Miss the Mark?

Separate and apart from the question of how Section 603 of the Act will be implemented is the question of whether it really does what it was intended to do, or, more precisely, whether it addresses the concerns expressed by those who have been studying the issue. As described above, MedPAC and OIG recommendations generally focused on payment reductions for a narrower range of services. They also did not propose a grandfathering concept. In addition, they gener­ally did not draw a distinction between services provided in on-campus and off-campus outpatient departments.

In December 2015, the Government Accountability Office (GAO) issued a report at the request of Senator Orrin Hatch (R-UT), Senator Mike Enzi (R-WY), and Representative Jim McDermott (D-WA) in which it concluded that, in order to stem the shift of services from lower paid freestanding settings to higher paid hospital outpatient department settings, Congress should direct HHS to equalize payment rates between settings for evaluation and management office visits. 29 While in some ways the GAO report came too late, it proposed a nuanced change similar to those previously recommended: a relatively narrow range of services, with no distinction between services on- and off-campus, and no grandfathering. In contrast, Section 603 preserves the ability of grandfathered facilities to continue being paid in the same manner that they have been, while shutting the door on OPPS reimbursement for virtually all items and services provided at newly created or acquired off-campus facili­ties. As described by one commentator, its solution is more hatchet than scalpel.30

Its lack of nuances aside, Section 603 is the law of the land. Given the many questions associated with its implementa­tion, providers should monitor CMS activity on the subject of provider-based status closely and be on the lookout for rulemaking later this year.

*This article is for educational purposes only and does not constitute legal advice. The views expressed herein are the personal views of the authors and do not represent the position of Bradley Arant Boult Cummings LLP, any other individual attorneys associated with the firm, or any of its clients. The authors expressly reserve the right to freely advo­cate other positions on behalf of clients.


1 Pub. L. No. 114-74 (2015).
2 See 65 Fed. Reg. 18434, 18504 (Apr. 7, 2000) (“2000 Final Rule”).
3 See 63 Fed. Reg. 47552, 47587-47588 (Sept. 18, 1998).
4 Id. at 47588.
5 See HCFA, Program Memorandum A-96-7 (Aug. 27, 1996). This Pro­gram Memorandum was later reissued, without substantive change, as Program Memorandum A-98-15 and Program Memorandum A-99-24. It also was incorporated in the Provider Reimbursement Manual, Part I, Transmittal 411, and the State Operations Manual, Transmittal 11.
6 See 2000 Final Rule.
7 See 67 Fed. Reg. 49982 (Aug. 1, 2002) (“2002 Final Rule”).
8 U.S. Government Accountability Office, Medicare: Increasing Hospital-Physician Consolidation Highlights Need for Payment Reform, GAO-16­189 (Dec. 2015) (“2015 GAO Report”).
9 MedPAC, Report to the Congress: Medicare Payment Policy (Mar. 2012).
10 Id. at 74.
11 MedPAC, Report to the Congress: Medicare and the Health Care Deliv­ery System (June 2013).
12 MedPAC, Report to the Congress: Medicare Payment Policy (Mar. 2015).
13 Id. at 54.
14 Id.
15 Id. at 71. In its March 2014 report, MedPAC found that setting-depen­dent payment differences were not justified for 66 ambulatory payment classification codes on the basis that the codes met all or most of the following criteria: (1) the services are provided in a physician’s office more than 50% of the time; (2) the services have minimal differences in packaging of supplies and ancillary services in the payment rates; (3) the services are infrequently provided in emergency departments; (4) the services occur when patient severity is no greater in hospital outpatient departments than in physician offices; and (5) the codes are not a 90-day global code in the PFS. See MedPAC, Report to the Congress: Medicare Payment Policy (Mar. 2014).
16 OIG, Medicare and Beneficiaries Could Save Billions if CMS Reduces Hospital Outpatient Department Payment Rates for Ambulatory Surgical Center-Approved Procedures to Ambulatory Surgical Center Payment Rates , A-05-12-00020 (Apr. 2014).
17 Id. at ii.
18 See OIG, Work Plan for Fiscal Year 2014; OIG, Work Plan Fiscal Year 2015; OIG, Work Plan Fiscal Year 2016. In its work plan for fiscal year 2016, OIG indicated that it will determine the number of provider-based facilities that hospitals own and the extent to which CMS has methods to oversee provider-based billing, as well as the extent to which provider-based facilities meet the requirements set forth in the provider-based regulations.
19 See DOJ Press Release,Our Lady Of Lourdes Memorial Hospital Has Paid More Than $3.37 Million To Resolve Self-disclosed Billing Im­proprieties (Oct. 16, 2014), available at our-lady-lourdes-memorial-hospital-has-paid-more-337-million-resolve-self-disclosed.
20 See AISHealth, Provider-Based Rules Trigger 2nd Hospital Settlement; CMS Targets Shared Space, Report on Medicare Compliance (Apr. 6, 2015), available at
21 See, e.g., Emily W. G. Towey and Colin P. McCarthy, The Risky Business of Co-Location Arrangements: What Hospitals and Other Providers Should Know, AHLA CONNECTIONS (MAR. 2015).
22 See Congressional Budget Office, Estimate of the Budgetary Effects of H.R. 1314, the Bipartisan Budget Act of 2015, as Reported by the House Committee on Rules on October 27, 2015, available at sites/default/files/114th-congress-2015-2016/costestimate/hr1314.pdf.
23 In a departure from prior CMS policy, Section 603 excludes from the definition of “off-campus outpatient department of a provider” those departments that are located in or within a 250-yard radius of a remote location of a hospital. In other words, by its terms, Section 603 permits a multi-campus hospital to add outpatient departments within 250 yards of the main buildings of any of its campuses (i.e., its remote locations) without loss of OPPS payment after December 31, 2016.
24 An earlier version of the legislation did not categorically exclude items and services furnished by a dedicated emergency department, instead ex­cluding only emergency department services identified by HCPCS codes 99281 – 99285. However, as enacted, the Act excludes all items and services furnished by a dedicated emergency department, as that term is defined in 42 C.F.R. § 489.24(b).
25 See CMS, Off-Campus Provider Based Department “PO” Modifier Frequently Asked Questions,
26 42 C.F.R. § 413.65(a)(2).
27 Id.
28 2002 Final Rule, 67 Fed. Reg. at 50080.
29 See 2015 GAO Report.
30 See Norman G. Tabler, Jr., GAO Recommendations on Payment Reform: Too Little, Too Late?, AHLA WEEKLY (JAN. 15, 2016).

Copyright 2016, American Health Lawyers Association, Washington, DC. Reprint permission granted. This article first appeared in AHLA RAP Sheet on March 16, 2016.