February 2002

Health Care E-lert - Grandfathering for Hospital-Based Services Provided Under Contract Ends in October, 02/27/02

3 min

The Center for Medicare and Medicaid Services (CMS, and formerly known as HCFA) adopted final regulations as part of the hospital outpatient prospective payment system in April 2000 (though effectiveness was delayed) that could still have a substantial impact in Maryland even though the waiver keeps HOPPS from being effective here. In 42 CFR 413.65(d), CMS described the standards that would be used to determine whether a service would be considered to be either hospital based or a hospital department, thereby becoming eligible for payment as a hospital service. Many in Maryland thought the rules were directly exclusively at physician practices and off-site clinics, which were not rate regulated to begin with, and therefore would not impact here. That is not the case.

The Fiscal Intermediary is conducting re-surveys of "hospital based" services. The fact that a service is rate regulated is NOT in itself determinative (*1).  Any service - especially services provided under contract - is subject to a new determination about its hospital-based status. For example, services provided under a management contract, where the manager employs personnel (even if salary sourced to the hospital) run a high risk of being determined not to be hospital based. The relationship between the "under arrangements" rules and these new regulations is strained. The services likely to be involved in Maryland consist of radiology and other diagnostic or treatment services [such as ESWL or PET scans being provided under arrangement] or clinics [especially wound care clinics with a management contract] that are being billed as a regulated service. In other areas, clinics and purchased physician practices are the most likely targets.

The result in most states is purely economic - lower payment as a physician service or as an IDTF rather than as a hospital, or even non-payment in some cases. In Maryland, a hospital runs the added risk of having to charge a regulated rate for a service that Medicare will not regard as a hospital service. Any hospital that billed under UB-92 at regulated rates for a service CMS does not regard as a hospital service runs the risk of a false billing charge. This problem must, and can, be avoided.

What must be done by when?

The Fiscal Intermediary is giving hospitals until this OCTOBER to correct or change any non-complying services. Formerly, rate regulation was used as a litmus test, and many services provided under contract are or have been rate regulated. Each hospital should:

1. Review all past surveys to determine whether anything has changed.

2. Review all contractual arrangements to provide a clinical service (especially under arrangements and management contracts) to determine if they meet the regulatory criteria. Each of the criteria must be met, and management contracts have to meet additional criteria. Any failure will result in the service being determined not to be a hospital service.

3. Renegotiate or terminate any contractual relationship to enure that it meets the new criteria in every respect.


1. The reverse is still true. A service that is not rate regulated will be regarded as NOT being hospital based by CMS, so the new standards will not affect off-site, non-regulated services.

If you have any questions, or would like a copy of the regulations please feel free to call Peter Parvis at 410-244-7644 or e-mail at ppparvis@venable.com.