Assessing the cost-effectiveness of provider-based status: large hospitals are finding provider-based status can result in annual six-figure gains

Healthcare Financial Management, August, 2002 by Lawrence A. Manson, Allwyn J. Baptist

Outpatient clinics that qualify for provider-based status under Medicare can see significant financial gain--in some cases, receiving total payments that are 50 to 60 percent higher than those of a freestanding facility To take advantage of this potential for additional revenue, hospitals should begin making appropriate preparations now The deadline for provider-based status attestations and applications is October 1, 2002, and analyzing applicable regulations and their financial implications, as well as implementing changes necessary for compliance, could take many weeks.

Just because a facility has received provider-based status in the past does not mean it automatically will continue to do so, The Centers for Medicare and Medicaid Services (CMS) published a proposed rule on May 9, 2002, that could modify the requirements of existing final regulations (a) The proposed regulations would make it much easier for most on-campus clinics to qualify for provider-based status and may change the application process to an attestation submission. However, some facilities that previously were determined to be provider-based would no longer qualify or would have to make operational modifications to maintain their status.

In many cases, organizations may ensure they continue to qualify for provider-based status simply by changing information forms, signage, and other documents. In more complex situations, reassigning personnel, changing management relationships, or adjusting to financial reporting practices may be required. Just because a clinic was historically included on a hospital cost report or possesses an earlier fiscal intermediary determination does not mean it has provider-based status, although CMS has included a grandfather clause to allow clinics that previously enjoyed provider-based status to transition to such status under the new requirements. Providers that wish to continue to qualify for provider-based status would be wise to align themselves with the existing and proposed regulations to ensure they meet all necessary criteria for such status before the October deadline arrives.

Weighing the Benefits, Drawbacks

Provider-based status, although usually advantageous, is not necessarily the best option for every organization. Healthcare financial managers need to determine what is best for their particular facility.

The chief benefit of provider-based status is that the facility is entitled to ambulatory payment classification (APC) payments under the Medicare outpatient prospective payment system (PPS) regulations. Thus, two bills will be generated by clinics with provider-based status: a facility charge, billed on the UB 92 form, and a charge for the physician's professional services, billed on a CMS 1500 form. Under this separate billing format, the facility receives higher payments than it would if it were freestanding (see Exhibit 1).

Provider-based status also has some drawbacks. As a result of billing separately for the facility and professional components, an additional coinsurance payment is required of beneficiaries. Exhibit 2 shows coinsurance differences for a facility based on freestanding and provider-based status.

Also, operational costs may increase when an outpatient clinic transitions from freestanding to provider-based status. For example, it may be necessary to hire additional staff or purchase additional hardware and/or software to perform the needed registration, billing, and collection procedures associated with managing the facility and professional components separately and the resulting coinsurance amount.

Hospitals should consider these factors when examining the cost-effectiveness of provider-based designation. Exhibit 3 shows a cost-benefit analysis for a typical hospital, including coinsurance and operational costs that could occur once provider-based status is attained. Payments increase by $300,000, and expenses increase by $30,000 for uncollected coinsurance and $70,000 for operational changes. Even after the coinsurance and operational costs are considered, the overall net gain for the hospital associated with provider-based status, $200,000, is substantial.

Qualifying for Provider-Based Status

To receive provider-based status, clinics must demonstrate integration with the main facility in several key areas. Under existing regulations, providers must establish that the facility has the same licensure, ownership, administrative supervision, clinical services, financial operations, public identity, and relative location as the main provider.

Same licensure. The regulations specify that clinics or other units seeking provider-based status must operate under the same license as the hospital. A limited exception is made for facilities that must be licensed separately under state law

Same ownership and control. The clinic or other unit seeking provider-based status must have the same ownership, an identical governing body, and the same organizational documents as the hospital. In comments accompanying the April 2000 publication of the final rule for the outpatient PPS, CMS made it clear that overlap of the board of directors is not sufficient to meet ownership requirements. (b) An identical governing body has to be present. An October 1, 2000, revision of the final rule states that joint-venture entities cannot qualify for provider-based status. (c) In addition, the main provider must have final responsibility and approval for administrative decisions, personnel actions, personnel policies, and medical staff appointments.