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Starting in the early 1990s, interest in the concept of hospital-based clinics began to grow. Hospitals realized that if clinic services were provided as though the clinic were a part of the hospital, then two different claim forms could be filed: one for the professional component and one for the hospital, outpatient component. This generated significantly increased revenue for the clinic activities.

Prior to the implementation of the MPFS (Medicare Physician Fee Schedule), through the resource-based relative value scales (RBRVS) there were very few codes that actually generated a decrease in physician or professional payment due to the fact that services were provided in a hospital-based clinic. Thus, for most services, there was full payment for both the physician and hospital components.

With the implementation of MPFS in 1992, a rather long process of payment reductions for physician payment was introduced through the development of two different RVUs (relative value units) for the overhead expense RVU, which was one of the components falling under the RBRVS. For certain codes, each facility RVU was reduced below the non-facility RVU. Over the years, the number of codes for which there was a reduction increased. The decrease in payment is called the site-of-service (SOS) differential.

Even with the site-of-service reductions, hospitals still could establish or convert clinics in which there was significantly increased reimbursement relative to physician clinics that were not a part of a hospital. Whenever there is the potential for increased payments, compliance issues are almost certain to follow.

The Medicare program recognized the significantly increasing number of hospital-based clinics and formalized the rules and regulations governing such operations as a part of the implementation of APCs, or ambulatory payment classifications. The formal rules are referred to as the provider-based rule (PBR), which can be found in the Code of Federal Regulations (CFR) at §413.65. With the implementation of this rule, hospital-based clinics became specific examples of the more general provider-based clinics.1

Because of the rather extensive requirements under the PBR, compliance concerns became present because hospitals must meet all of the requirements or criteria. Meeting a preponderance of the requirements is not an option. While federal auditing programs, including the recovery auditors, have not aggressively audited for this issue, the potential is always present.

Current Status

Hospitals across the country increasingly have embraced the development of provider-based clinics, often by acquiring physician practices. The increased revenue from provider-based operations can be significant. For larger, integrated delivery systems and academic teaching centers, the increased reimbursement can mount into the millions of dollars.

But again, when there is an opportunity for increased revenues, there generally will be compliance concerns present. In this case, the main compliance issues arise from the PBR itself. Besides the series of criteria that must be met in order to qualify a clinic as provider-based, there are now physician supervision requirements that in recent years have undergone significant changes.2

Both the OIG (Office of the Inspector General) and MedPAC (Medicare Payment Advisory Commission) have weighed in on the existence of payment differentials for provider-based clinics. The OIG has recommended that the payment differential based on different sites (i.e., provider-based versus freestanding) be eliminated entirely. This would mean that any service (i.e., E/M, medical or surgical) that can be provided in either of these settings would be eligible for exactly the same amount of reimbursement. MedPAC stopped short of the OIG recommendation, but has recommended that payment for E/M services be the same for both settings.

Thus far, CMS has maintained that there is a significant cost difference between the two settings. Thus, the economic advantage for provider-based clinics has stayed in place even in light of the recommendations to the contrary.

What is Coming?

CMS’s stance on this issue may be in the process of changing. In both the MPFS/RBRVS update in the Federal Register3 and the OPPS/APC update in Federal Register4, CMS has indicated that data gathering for provider-based clinics will commence starting in 2015. The precise form of data gathering has not been established. Specifically:

We (CMS) stated in the CY 2014 OPPS/ASC and MPFS proposed rules that in order to better understand the growing trend toward hospital acquisition of physician offices and subsequent treatment of those locations as off-campus provider-based outpatient departments, we were considering collecting information that would allow us to analyze the frequency, type, and payment of services furnished in off-campus provider-based hospital departments.” (78 FR 75061)

Interestingly enough, CMS references only off-campus, provider-based situations. When the data gathering commences, likely all provider-based situations (i.e., off-campus, on-campus but outside the hospital, and in the hospital) will be addressed.

So CMS will be gathering and assessing data from provider-based clinics. Hospitals should anticipate the possibility of changes (that is, reduction in payments) within the next five years. Obviously, CMS could elect not to make any changes. However, considering the potential savings to the Medicare program that would result from eliminating this payment differential, there will be pressure to make this change.

Bottom Line

Provider-based clinics already pose a clear compliance challenge. Hospitals must meet all of the requirements under the PBR, and there has been increased vigilance concerning proper physician supervision. Thus, operating provider-based clinics can be more expensive than having a hospital simply own a physician-based, freestanding clinic. The era of the extra payments may be coming to a close. Watch for future developments in this area.


The payment differential for provider-based clinics is a specific example of two payment systems interfacing or intersecting. Virtually all of the Medicare payment systems have been developed over many years, generally based upon cost considerations. The real question is whether CMS has developed these systems so that there is a smooth interface.

Many, if not most, of the compliance problems with inpatient versus outpatient payment would be mitigated if IPPS and OPPS payments were smoothly integrated.

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.

Contact the Author


To comment on this article please go to editor@racmonitor.com

1 In theory, any “provider” (that is, an entity having a provider agreement with the Medicare program) can establish provider-based clinics. This includes entities such as skilled nursing facilities (SNFs).

2 While the word ‘change” is used, CMS adamantly has maintained that only “clarification” was provided. See the OPPS/APC update Federal Register starting in CY2008.

3 See December 10, 2013 Federal Register, 78 FR 74229.

4 See December 10, 2013 Federal Register, 78 FR 74825.


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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