November 9, 2015

"Site Neutrality" Bill Impacts Off-Campus Hospital Outpatient Departments

Holland & Knight Alert
Robert H. Bradner


  • President Obama recently signed into law the Bipartisan Budget Act of 2015, which, through Section 603, implements "site-neutral" Medicare payment reform, altering how and how much Medicare pays for off-campus outpatient hospital services at new sites.
  • For many in the hospital industry, the provision will create a new challenge in attempting to pivot many inpatient services to lower-cost outpatient settings, to capture more market share through expanded services and to deliver care in more convenient locations for the communities they serve.

On Nov. 2, 2015, President Obama signed into law H.R. 1314, the Bipartisan Budget Act of 2015 (the Act).1 The Act suspended the federal debt ceiling through March 2017. It also set overall appropriations limits for the federal budget for the 2016 and 2017 fiscal years at a level that is $80 billion higher than the levels allowed by spending caps that were put in place in 2011. The cost of these increases is offset by a package of revenue increases and spending cuts included in the Act. One of the spending cuts, contained in Section 603 of the Act, implements a so-called "site-neutral" Medicare payment reform for new off-campus hospital outpatient departments. This Alert explains Section 603 and its potential impact. It also identifies some unanswered questions regarding the scope of the legislation and the potential for further legislative changes.

General Background

The issue of "site neutrality" under Medicare has gained increased attention in recent years. One major focus area is how payments for the same procedural code may differ depending on whether the service is provided in a physician office, ambulatory surgical center or hospital outpatient department. Different payment systems apply to each of these settings. Earlier this year, the Medicare Payment Advisory Commission (MedPAC), a non-partisan legislative branch agency that provides Congress with analysis and policy advice on the Medicare program, reported that Medicare utilization of outpatient services had increased 33 percent over the past seven years. MedPAC attributed the increase to a shift in care away from inpatient settings and growth in hospitals purchasing freestanding physician practices and converting them into hospital outpatient departments.2

Section 603 of the Bipartisan Budget Act

Section 603 does not address Medicare payment differences that currently exist between various sites of care. Instead, it imposes a dramatic change in reimbursement that will impact many new hospital outpatient departments. It does so by creating a new statutory definition of an "off-campus outpatient department of a provider." Items and services that are furnished on or after Jan. 1, 2017, by such a department will not be covered under Medicare's Prospective Payment System for Hospital Outpatient Department Services (OPPS).3 Instead, providers will need to seek reimbursement for those services under the Physician Fee Schedule or the Ambulatory Surgical Center Payment System.

An "off-campus outpatient department of a provider" is defined in Section 603 by reference to several existing regulatory definitions.4 The term covers the following type of entity:

  • a department or facility that was created or acquired by a hospital to furnish healthcare services of the same type as those furnished by the hospital and is under the name, ownership, and financial and administrative control of the hospital and could not by itself participate in Medicare,5 and
  • is not located within 250 yards of the main buildings of the hospital provider (or any other area determined by the applicable Centers for Medicare and Medicaid Services (CMS) regional office on a case-by-case basis), or within 250 yards of a facility or organization of the hospital that was created or acquired to provide inpatient hospital services under the name, ownership and financial and administrative control of the hospital (not including a satellite facility of the hospital), and
  • was not billing under the OPPS for "covered OPD services" furnished prior to Nov. 2, 2015

The new definition does not apply to items and services furnished in a dedicated emergency department.6 Section 603 requires hospitals to provide to the Secretary of the U.S. Department of Health and Human Services (HHS) any information deemed appropriate to implement the changes, and it largely precludes judicial review of its implementation.7

In sum, an outpatient department of a hospital, other than a dedicated emergency department, that is located more than 250 yards from the hospital's main campus or remote location and was not billing under the OPPS fee schedule as of Nov. 2, 2015, will only be able to bill under the OPPS until Jan. 1, 2017.

Implications, Questions and Possible Changes

Section 603 has no effect on hospital outpatient departments that were billing under the OPPS prior to Nov. 2, 2015. Also, it only applies to off-campus hospital departments, a term that does not include satellite hospital facilities or hospital-owned, provider-based entities such as home health agencies or skilled nursing facilities. Additionally, as mentioned, it does not apply to new, dedicated emergency departments. Finally, it does not directly affect reimbursement under Medicaid, Medicare Advantage or commercial insurance (although those payers often adopt Medicare payment rule changes).

But for providers who were contemplating – or who had commenced but not completed – the establishment of new, non-emergency off-campus outpatient departments, the new law has significant implications. Many of these initiatives are undertaken pursuant to business arrangements that assume the applicability of the OPPS rates. The new law may chill the creation of new off-campus outpatient departments and create a variety of headaches for those who had commenced planning for or acquiring such facilities, but had not begun billing under the OPPS by Nov. 2, 2015. For many in the hospital industry, the provision will create a new challenge in attempting to pivot many inpatient services to lower cost outpatient settings, to capture more market share through expanded services and to deliver care in more convenient locations for the communities they serve.

Going forward, we expect that hospitals will place a premium on locating new outpatient departments within 250 yards of their campus or remote facility so as to not trigger the restrictions on payment established by the Act. The changes may also create even more incentive to move away from the Medicare fee-for-service reimbursement model toward arrangements with Medicare Advantage (Part C) providers, or to embrace new alternative payment models such as those being developed pursuant to the Medicare Access and CHIP Reauthorization Act (MACRA).8

As the ink dries on this new law, it will fall to CMS, an agency of the HHS, to develop implementing regulations. These regulations will likely address several ambiguities in the statutory language, such as:

  • For purposes of determining whether an off-campus outpatient department is grandfathered into the OPPS, what does "that was billing" under the OPPS for covered outpatient department services furnished prior to Nov. 2, 2015 mean? For instance, would an entity that was billing under the OPPS prior to obtaining full approval from CMS for its off-campus department meet the exception?
  • Will grandfathered departments be able to bill under the OPPS for new or additional service lines commenced after Nov. 2, 2015? Will they be allowed to expand the footprint of an existing off-campus department?
  • Will CMS exercise as much regulatory discretion as possible to mitigate the burden created by Section 603?

Finally, and very importantly, there is a distinct possibility that Congress will make further changes to Section 603. Numerous provider groups such as the American Hospital Association – many of whose members were caught unaware by the change in the law and had broken ground or entered into agreements on new off-campus departments – are crying foul over the virtual immediacy of the new law's effective date. Changes are under consideration that might be included in a year-end spending package. While outright repeal is highly unlikely given the budgetary cost, some form of relief may be offered to those who had projects in the pipeline.

At present, we recommend that hospitals or other entities that may be affected assess the Act's impact on their operational plans and goals and identify mechanisms that can be used to minimize the impact of the new payment restrictions. Holland & Knight has extensive experience performing such an assessment and evaluating regulatory ambiguities in the new law. We also have experience in cultivating outreach to elected officials and CMS to have potential concerns addressed through further legislation and the regulatory process.


1 Public Law 114-74.

2 Medicare payments for the same or similar services are often higher in hospital outpatient departments than in physician office settings. MedPAC has identified approximately 60 reimbursement codes where it believes there is no justification for paying a higher rate in the hospital outpatient setting than the physician office setting.

3 Section 1833(t) of the Social Security Act.

4 These existing definitions are "department of a provider," "campus" and "remote location of a hospital facility," as set forth in 42 C.F.R. 413.65(a)(2) as of Nov. 2, 2015.

5 The regulations distinguish a "department of a provider" from a "provider-based entity," which is created or acquired by a hospital to provide services of a different type from the hospital and may by itself be qualified to participate in Medicare as a provider. 42 C.F.R. 413.65(a)(2).

6 As defined in 42 C.F.R. 489.24(b).

7 There is no judicial review of determinations as to (i) whether items and services meet the definition of "covered OPD services" and what the applicable payment system for the items and services will be; (ii) whether a facility or organization meets the definition of "off-campus outpatient department of a provider"; or (iii) the determination of what information hospitals are required to report to the Secretary.

8 Public Law 114-10.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

Related Insights