The final rule for the Medicare Physician Fee Schedule for 2012 expands bundled payments for inpatient stays to include all services within three days of admission by a wholly owned or operated physician practice.

The new policy, effective July 1, 2012, has huge implications for hospital--and physician reimbursements at a time when hospitals increasingly are buying physician practices.

Donald Michaels, senior vice president at Hayes Management Consultants, spoke with Health Data Management at HIMSS12 and gave a plain-language explanation of the change: “The rule says that if a patient is admitted to the hospital, then everything done to the patient in the 3 days prior to admission must be billed as part of the inpatient stay (which usually means a lower reimbursement). For example, if I go to the ED on Tuesday but am not admitted and then my condition gets worse and I get admitted to the hospital on Thursday, then the ED visit from Tuesday must be billed with my hospital stay (including labs, X-rays, etc.). There are a similar set of circumstances if I go and see a hospital employed physician, then within three days I am admitted to the hospital.

“Several interesting issues: In the first example, what happens if the ED claim was sent out on Wednesday? Will it be paid or will CMS know to wait before paying that bill (don’t know how/why they would) to see if I am admitted into the hospital within three days? Will providers (EDs) be expected to hold bills for three days until they are sure that the person is not admitted into the hospital? In the second case, the hospital ED will need to develop a different work flow to make sure that they ask the patient if they had been seen by a hospital employed (or owned) physician practice. I’m not sure many hospitals will be able to do that effectively.”

The Greater New York Hospital Association has issued the following bulletin on the 3-day payment window changes to its membership:

The Medicare Physician Fee Schedule (PFS) Final Rule for 2012 included important clarifications to the “3-day payment window” for inpatient admissions. Under the current 3-day payment window, a hospital must include the technical portion of all outpatient diagnostic services and any non-diagnostic (therapeutic) services related to the admission provided during the payment window on an inpatient claim. Pursuant to changes implemented in 2010, all non-diagnostic services are deemed to be related to the admission and must be billed with the inpatient stay, unless the hospital attests that the services are “unrelated.” The term “unrelated” for this purpose is defined as clinically distinct or independent from the reason for the beneficiary’s inpatient admission.

In the 2012 PFS final rule, the Centers for Medicare & Medicaid Services (CMS) clarified its policy and stated that all services provided by a “wholly owned or operated physician practice” are also included in the payment window. CMS notes that while the discussion in the rule focuses on the application of this change to physician practices, pursuant to statute, the policy applies to any wholly owned or operated entity providing Part B outpatient services, except for Federally Qualified Health Centers (FQHCs) or Rural Health Clinics (RHCs). Payments for the physician portion of the services that are added to the 3-day payment window under the PFS final rule will be made at the reduced facility rate, the rate paid to physicians providing services furnished in the hospital or a hospital clinic. The technical portion of such services will be bundled with the inpatient stay.

This memo outlines the definitions of wholly owned and operated and clinically related, and describes the billing changes CMS will implement effective July 1, 2012, to ensure that claims are processed in accordance with this policy.

Definition of “Wholly Owned or Operated”

As noted, the change focuses on whether a physician practice is “wholly owned or operated.” In the final rule, CMS states that it will continue to use existing regulatory definitions and that an entity is “wholly owned if the hospital is the sole owner of the entity. An entity is wholly operated by a hospital if the hospital has exclusive responsibility for conducting and overseeing the entity’s routine operations, regardless of whether the hospital also has policymaking authority over the entity” (see CFR §412.2(c)(5)). In addition, CMS reiterates its position from a 1998 final rule that “if a hospital has direct ownership or control over another entity’s operations, then services provided by that other entity are subject to the 3-day window. However, if a third organization owns or operates both the hospital and the entity, then the window provision does not apply” (see Federal Register Vol. 63, No.28, Wednesday, February 11, 1998).

The 2012 PFS final rule includes examples from the above-cited 1998 rule that may be useful to hospitals in determining if specific entities qualify as wholly owned or operated. Hospitals are encouraged to review their own structures and, as needed, consult with counsel on whether physician practices are considered wholly owned or operated.

Clinically Related

Again, all diagnostic services are already included in the 3-day payment window. For non-diagnostic services, a determination of whether the services are “clinically related” is required. If so, they are also subject to the changed policy. If not, the determination that they are not clinically related should be documented in the patient’s medical record. As a reminder, CMS changed its policy in 2010 so that an exact match of the ICD-9-CM diagnosis codes is no longer required for the services to be considered clinically related, and therefore subject to the 3-day payment window. The physician payment for non-diagnostic services that are not clinically related will continue to be made at the higher non-facility payment rate. Again, GNYHA members are encouraged to review their specific policies and practices.

Billing Requirements

The final rule also establishes new billing requirements for wholly owned or operated physician practices when the services are provided in the 3-day payment window. The purpose of the new requirements is to ensure that Medicare pays for the professional services only in these situations, and not the technical or facility portion of the services, since these are considered to be included in the inpatient payment. Hospitals will need to include the technical portion of any services that fall into the payment window on its inpatient claims.

Physician services subject to the policy will need to be billed with the new billing modifier “PD” (diagnostic or related non-diagnostic item or service provided in a wholly owned or wholly operated entity to a patient who is admitted as an inpatient within three days for acute care hospitals or one day for exempt hospitals) to indicate preadmission services were provided in a physician office and are subject to the payment window policy. The modifier was available for use beginning January 1, 2012, but facilities have until July 1, 2012 to implement it. Claims with the “PD” indicator will pay the professional component (PC) only for services that have a PC/Technical Component (TC) split and at the facility rate for codes without a PC/TC split.

In addressing questions about the application to global surgery services, CMS noted that it will include them in this policy when the date of the surgical procedure falls within the 3-day payment window. Surgical procedures provided outside of the 3-day window are not subject to the policy. CMS’ rationale for this is that it is not appropriate to unbundle postoperative services.

To successfully implement this policy, hospitals will need to modify their individual processes to notify any wholly owned or operated facility that an inpatient admission occurred so that the billing for bundled services is coordinated. Both the physician and hospital claims will need to be submitted according to the above guidance. Though this may pose operational challenges, it is CMS’ expectation that because the hospital owns the facility, it will be able to coordinate and track the patient services. This is an area for individual hospital review and modification if necessary.

Cost Reporting Requirements

The final rule also reminds hospitals to accumulate the costs incurred and the adjustments required for any bundled services as costs from related organizations on the Medicare cost report. The costs associated with these services can then be captured for purposes of computing the diagnosis-related group (DRG) weights in future updates. The technical portion of any payments associated with these services should also be captured so that revenues and expenses match.

GNYHA encourages members to carefully review their operations and processes to assess whether certain entities are “wholly owned or operated” and therefore subject to the policy. Hospitals should also begin any necessary discussions with their billing system vendors and physician practices to implement any systems and operational changes necessary to comply with this policy by July 1, 2012.

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