New Physician Leases May Be Needed to Avoid Compliance Risk

Did your hospital’s outpatient department begin operations, expand its service lines or relocate after November 2, 2015?

If it did, your hospital outpatient department (HOPD) may be subject to the site-neutral payment provisions in the 2017 outpatient prospective payment system (OPPS) proposed rule issued by the Centers for Medicare & Medicaid Services in July.

The proposed rule modifies Medicare payments for HOPDs that began operations, expanded service lines, or relocated after November 2, 2015, by implementing the site-neutral payment provisions of Section 603 of the Bipartisan Budget Act of 2015. Dedicated emergency departments and HOPDs within 250 yards of the hospital are excluded from the site-neutral payment modifications.

Under the proposed rule, Medicare would no longer pay for new, expanded, or relocated HOPDs under OPPS, but would instead pay under Medicare Part B beginning Jan. 1, 2017. As a result of this change, hospitals would continue to be responsible for “facility expenses,” including the facility itself, staff, equipment, supplies, patient medical records, and maintenance, as well as other expenses. Community physicians using the facility, however, would receive a higher Medicare “non-facility reimbursement rate,” as if they were responsible for those costs.

Not only does the change reduce payments to already financially-strapped hospitals, it also produces a legal compliance quagmire for hospitals and indirectly limits a hospital’s ability to relocate or expand service lines of existing HOPDs to meet patient-care needs. Under the Stark Law and the federal Anti-Kickback Statute (AKS), hospitals cannot lease or provide items such as equipment, office space, or other services for less than fair market value. Because 100 percent of Medicare reimbursement would go to referring physicians, while the hospital would bear responsibility for facility expenses, physicians could be receiving free services from the hospital, triggering possible Stark Law and AKS violations and risking government and qui tam whistle-blower scrutiny.

There is a limited window of time to remedy arrangements made suspect under the proposed rule. If hospitals continue to bear the financial responsibility for facility expenses in applicable HOPDs, they could be perceived as providing free benefits to physicians. On the other hand, if hospitals and physicians are not able to come to a conclusion that is based on fair market value and meets regulatory requirements under fraud and abuse laws, patients may lose access to care.

There are a few possible solutions to address the challenges brought forth under the proposed rule. One such solution is for the physicians practicing at affected HOPDs to lease the space, staff, supplies, etc. at fair market value. However, negotiating such arrangements before the end of 2016 may be extremely difficult. It is important to remember that even if hospitals and physicians come to an agreement on terms, modifications to existing agreements could still present compliance risks.

Comments to the proposed rule were due Sept. 6, 2016 and the final rule is expected by Nov. 1, 2016. Due to the short timeline of the proposed rule, planning and monitoring developments once the final rule is released will be key.

We recommend seeking the help of qualified healthcare legal counsel and valuation analysts given the number of regulatory issues that are presented by the proposed rule.


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Topics: Healthcare Valuation, Healthcare Quality

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