By Thomas W. Greeson, Esq.

Published September 2001

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The HOPPS implementation, along with changes in the rules hospital-operated subordinate facilities must meet to be designated "provider-based," may have important ramifications for imaging services heretofore delivered primarily in hospitals. More radiology procedures may well be shifted out of the hospital setting. And some hospitals may see the advantages of working with radiology groups on outpatient diagnostic imaging center joint ventures.

HOPPS in Summary

When the HOPPS rules went into effect, all covered outpatient services, including radiology services, were divided into multiple "ambulatory payment classification" (APC) groups, which represent services that are clinically similar and require comparable resources. All services within a particular APC generally are paid at the same prospectively fixed rate. The HOPPS rules also limit beneficiary coinsurance payments for hospital outpatient services.

The APC payment rate (and applicable beneficiary copayments) for each group applies to every CPT code classified within the APC group. A review suggests that APC-based payments for many imaging services are generally lower than the current reimbursement for hospitals. For instance, payment for similar technical component services using current CPT coding and paid under the resource-based relative value scale (RBRVS) system appears to be a more generous formula. For outpatient radiology services, hospitals will be paid a varying percentage of the difference between the old reasonable cost/blended rate system and the new payment levels.

Provider-Based Designation

In addition to implementing the HOPPS, the final s also address the criteria a facility must meet to be designated "provider-based," which is CMS jargon for "hospital-based."

The provider-based designation refers to circumstances in which a subordinate facility of a hospital is treated as "part" of a provider for Medicare payment purposes. This facility can include any department, remote location of a hospital, satellite facility or other entity that a provider treats or seeks to treat as having provider-based status. This issue is very important to imaging services, since the payment methodology for Medicare services is largely dependent on whether an entity is classified as provider-based or as a freestanding facility.

The changes in qualifications for provider-based status instituted in the HOPPS final rules, coupled with the reimbursement changes, could spark a re-examination of the benefits of the provider-based designation, possibly resulting in greater opportunities for freestanding radiology centers and hospital-radiology joint ventures.

In the final rules, CMS stated that the main provider or subordinate facility must seek and obtain a determination of provider-based status before the main provider bills for the relevant services as if the subordinate facility were provider-based, or before the main provider includes the costs of those services on its cost report. Moreover, sites that are located off a hospital’s campus and used for physician services of the kind ordinarily furnished in physician offices will be presumed to be freestanding facilities, unless they are determined by CMS to have provider-based status.

Moreover, the approach under the new provider-based standards is to contemplate freestanding status as the default classification for services. Consistent with this view, CMS requires unambiguously that a provider affirmatively seek a determination from HCFA before it bills for any of its services as provider-based. Consequently, if a service does not qualify as provider-based for any reason, the provider will be required to treat it as freestanding.

Prohibition on Unbundling

The final HOPPS rules implemented a long-standing provision of the Omnibus Budget Reconciliation Act of 1986 that prohibits payment for nonphysician services furnished to hospital patients, both inpatients and outpatients, unless the services are furnished by the hospital, either directly or "under an arrangement." Similarly, federal law requires each Medicare-participating hospital to agree to furnish directly all covered nonphysician services required by its inpatients and outpatients or to have the services furnished under an arrangement. Congress authorized the imposition of a civil monetary penalty—up to $2,000 for each bill or request for items and services—against any person who presents a bill or request for payment for a hospital outpatient service under Medicare Part B that violates this "bundling" requirement.

Consistent with these provisions, the revised regulation excludes from coverage under Medicare Part B any service furnished to a hospital inpatient or outpatient during an "encounter" by an entity other than the hospital unless the hospital has an arrangement with that entity to furnish that particular service to the hospital’s patients. For purposes of this provision, the term "outpatient" is defined as "a person who has not been admitted as an inpatient but who is registered on the hospital...records as an outpatient and receives services (rather than supplies alone) directly from the hospital." In addition, an "encounter" is defined as "a direct personal contact between a patient and a physician, or other person who is authorized by State licensure law and, if applicable, by hospital...staff bylaws, to order or furnish hospital services for diagnosis or treatment of the patient."

The prohibition on unbundling hospital outpatient services clearly does not apply where a freestanding service furnishes care to a patient who has been referred to the service by an independent practitioner and who is not registered as a hospital inpatient or outpatient at the time the care is rendered. Yet, both a technical reading of the foregoing regulatory provisions as well as the CMS responses to comments set forth in the preamble to the revised rules suggest that the unbundling prohibition also may not apply to a registered hospital outpatient when the patient goes outside the hospital to obtain a service.

Under this view, the exclusion from coverage under the revised regulation applies to services furnished to a hospital outpatient "during an encounter," and an encounter refers to a contact with a patient for the purpose of furnishing hospital services. Arguably, however, if a patient goes to a freestanding site—one that does not qualify as provider-based and therefore cannot be regarded as part of the hospital—to obtain a service, that patient is no longer receiving a hospital service and thus is no longer being treated as part of an encounter. Under this view, the services received by the hospital outpatient from the freestanding site would not be subject to the bundling requirement.

HCFA’s responses in the preamble to the final HOPPS rules may also be read to support this interpretation. In one response to a comment about bundling for clinical diagnostic laboratory tests, HCFA made the general statement that, while all diagnostic tests furnished by a hospital (whether directly or under arrangement) to a registered hospital outpatient during an encounter at a hospital are subject to the bundling requirement, the "hospital is not responsible for billing for the diagnostic test if a hospital patient leaves the hospital and goes elsewhere to obtain the diagnostic test."

Joint Ventures

Under the final rules, a subordinate facility cannot be considered provider-based if the entity is owned by two or more providers engaged in a joint venture. Similarly, the final rules state that a subordinate facility cannot qualify for provider-based status if all patient care services available at the facility are furnished under arrangement.

CMS notes in the preamble that, where a subordinate facility offers a variety of services, provision of a single type of service under arrangement would not trigger this prohibition. Furthermore, CMS clarifies that the restriction only applies with respect to patient care services furnished under arrangement, rather than housekeeping, security, billing and other support services.

For practical purposes, this distinction means that a joint venture between a hospital and a radiology practice would not be provider-based, regardless of the proportion of hospital control of the joint venture. To the extent that the payments to freestanding imaging centers under the physician fee schedule—that are not inconsistent with the bundling rules—are higher than those under the HOPPS, hospitals may have strong economic incentive to move diagnostic imaging services off-campus and into freestanding joint-ventured arrangements.

Thomas W. Greeson. Esq., is a partner with Reed Smith Hazel & Thomas LLP in Falls Church, VA.