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Provider-based clinics have become very popular with hospitals over the past several decades. While different reasons can be proffered explaining this popularity, one of the reasons is that hospitals can make significantly more money with provider-based clinics than can be made with freestanding clinics. For provider-based clinics, physicians experience a reduction in payment through MPFS (Medicare Physician Fee Schedule) by virtue of the site-of-service (SOS) differential. This reduction is more than made up for by the facility payment to the hospital, which generally are made through APCs (ambulatory payment classifications).

Whenever there is a payment difference, there are compliance issues. Hospitals that have provider-based operations must make certain that they are compliant. The compliance guidance for being provider-based is found in the Code of Federal Regulations (CFR) at §413.65. The penalty for not meeting all the requirements is the recoupment of the extra payments. Note that this is a “condition of payment” issue, not a “condition of participation” issue. See also the closely related physician supervision issue, which is also a condition of payment issue.

Co-location means that the provider-based operation(s) are in the same building or facility along with some other business. There are many examples ranging from the fairly simple to the exotic. For instance, a hospital may have decided to establish an off-campus clinic. Part of a building is leased for this operation, while the other part of the building houses, for example, a real estate agency. 

A similar example is when a hospital builds a building, off-campus, part of which is used for a freestanding clinic owned and operated by the hospital, with the other part of the building housing a provider-based operation providing radiology and physical therapy services. Another example is when a hospital has a medical office building, part of which is used by private practices (i.e., they pay rent for use of the facilities) and provider-based practices.

A somewhat different example involves specialty clinics. Many hospitals, particularly rural hospitals, have established a suite of examination rooms that are used by visiting physicians. Sometimes the visiting physician will pay rent for the use of the facilities, while in other cases the space is provider-based and the hospital files a UB-04 for the facility. Depending upon the circumstances, the examination rooms may be construed as hospital property while if the physician pays rent, then the space is the physician’s office.

The provider-based rule (PBR) is silent on any specific requirements for co-location as it pertains to provider-based activities. One of the underlying tenets of being provider-based is that the individual, probably a patient, entering the facility must know that they have entered hospital property. This is usually accomplished by copious signage indicating hospital property; thus the provider-based operation holds itself out to be part of the hospital.

Is proper signage enough to justify these co-location situations? As mentioned above, the PBR is silent on co-location. There have been some hints that the Centers for Medicare & Medicaid Services (CMS) would like to further define these requirements and issue rules. For instance, in 2008, CMS issued Transmittal 87 to the Medicare Benefit Policy Manual, addressing incident-to billing and referencing physician/NPP-owned and operated clinics. From the PBR, “freestanding” simply means the clinic is not provider-based. We could certainly use a formal definition of “freestanding” – yet this transmittal was quickly withdrawn due to complaints from the healthcare community.

More recently, there was a Medicare representative who participated in a webinar sponsored by the American Healthcare Lawyers Association, in which some unofficial comments concerning co-location issues were made. As reported by Christopher Kenny of King and Spalding, two points worth noting are:

  1. “… the CMS representative expressed his view that not only is a hospital prevented from sharing clinical space with another provider (e.g., exam and procedure rooms), but the hospital also may not share patient registration space or waiting areas with another provider. The CMS representative stated that a hospital could share certain other non-clinical areas, such as an atrium or elevator lobby, but that patient registration areas are, in his view, ‘hospital space’ that must remain dedicated solely to a single provider.”
  2. “…the CMS representative stated that hospitals that lease office space within their four walls to independent physicians could only do so if patients who present to see such independent physicians do not pass through any hospital space beyond an atrium or elevator lobby.”

While these are unofficial comments, they do indicate that CMS is thinking about co-location requirements within the PBR. Given the fact that hospitals have developed many different types of arrangements with their provider-based operations, we should all be prepared for future guidance that may not allow what hospitals have been doing. Also, we must be constantly vigilant of Recovery Auditors (RACs) and other federal auditing agents and their role in determining compliance in the provider-based area.

About the Author

Duane C. Abbey, Ph.D., CFP, is an educator, author and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University.

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Duane C. Abbey, PhD, CFP

Duane C. Abbey, PhD, CFP, is an educator, author, and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University. Dr. Abbey is a member of the RACmonitor editorial board and is a frequent guest on Monitor Mondays.

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