[Federal Register: August 1, 2002 (Volume 67, Number 148)]
[Rules and Regulations]               
[Page 50081-50130]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au02-15]                         
 
[[pp. 50081-50130]] Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2003 Rates

[[Continued from page 50080]]

[[Page 50081]]

even if they are not provider-based, would be made under the Medicare 
acute care hospital inpatient prospective payment system.
    In deciding whether to make a provider-based determination with 
respect to a particular facility, it would not be significant that the 
facility might have a low rate of Medicare utilization, might be 
utilized by only Medicare or only Medicaid patients, or might not have 
admitted any Medicare or Medicaid patients in a particular period. The 
fact that the facility furnishes types of services that are billable 
under Medicare or Medicaid, or both, would be sufficient to make a 
determination appropriate.
    We proposed to retain the rules that a department of a provider or 
a remote location of a hospital (such as, for example, one campus of a 
multicampus hospital) may not by itself be qualified to participate in 

Medicare as a provider under the regulations on provider agreements in 
Sec. 489.2, and the Medicare conditions of participation do not apply 
to a department as an independent entity. However, we proposed to 
delete the requirement at Sec. 413.65(a)(2) that such a department may 
not be licensed to provide services in its own right. Some States 
require separate licensing of facilities that Medicare would treat as a 
department of a hospital or other provider. In these States, we would 
not require a common license. We proposed to retain the provision that, 
for purposes of Part 413, the term ``department of a provider'' does 
not include an RHC or, except as specified in Sec. 413.65(m), an FQHC. 
(As explained below, existing Sec. 413.65(m) is being redesignated as 
Sec. 413.65(n) in this final rule.)
    Questions have arisen regarding whether the provider-based criteria 
in Sec. 413.65 are applicable in determining payment for ambulance 
services. Medicare is converting payment for ambulance services to a 
fee schedule, as described in a final rule published on February 27, 
2002 (67 FR 9100). The ambulance fee schedule is effective April 1, 
2001, and involves a transition period. During this transition period, 
the status of an ambulance supplier as provider-based could influence 
the amount of Medicare payment. However, the specific provider-based 
criteria in Sec. 413.65 were not developed for ambulance suppliers, and 
we believe that many of these criteria could not reasonably be applied 
to them. Therefore, we did not propose to apply the criteria at 
Sec. 413.65 to ambulance services.
    We note that, in the May 9, 2002 proposed rule, we inadvertently 
did not make a conforming change to the regulations at Sec. 413.65(a) 
to state that the provider-based rules do not apply to ambulances. 
Therefore, we are making this conforming change in this final rule.
    Comment: One commenter recommended that all inpatient departments 
be exempt from the provider-based rules, regardless of whether they are 
on campus or off campus, since, due to their ``very status as inpatient 
departments, they are necessarily integrated into the operations of the 
main provider. * * *'' Several other commenters recommended that 
ancillary or other departments located within a hospital (that is, on 
campus) be deemed to be provider-based and thus not be required to show 
actual compliance with provider-based criteria.
    Response: We do not agree that facilities that treat a patient 
population made up primarily or entirely of inpatients should 
necessarily be considered, on that basis alone, to be a fully 
subordinate and integral component of the main provider. There are 
instances where a Medicare payment differential exists between a 
hospital-based inpatient service and a freestanding service. For 
example, if an institution that primarily provides inpatient care is 
able to participate in Medicare as a part of a hospital, Medicare 

payment to the hospital will be made for the full range of inpatient 
hospital services defined in section 1861(b) of the Act. If the 
facility is not considered a part of a Medicare-participating hospital, 
Medicare payment would be made only for a much narrower range of 
services, such as physical and other therapies, which can be paid in 
ambulatory care settings. Compliance with the provider-based criteria 
is also needed to ensure that Medicare payment is made appropriately in 
merger situations, where the crucial issue is whether a facility is 
integral and subordinate to another that participates as a hospital. 
For example, under the TEFRA payment system applicable to psychiatric, 
children's and cancer hospitals, Medicare payment to the hospital for 
inpatient services usually is directly affected by the hospital-
specific TEFRA target rate. If a particular hospital chooses to 
reorganize to include a new site that otherwise could participate in 
Medicare only as a separate hospital or as a remote location or 
satellite of still another hospital, the amount of payment would be 
affected. Similarly, for the reasons explained in detail in the May 9, 
2002 proposed rule (67 FR 31482), a merger of two hospitals can 
significantly affect the payments made to them for their GME programs, 
even when each hospital is paid under the acute inpatient hospital 
prospective payment system. Under these circumstances, compliance with 
the provider-based criteria is also needed to warrant the higher 
payment level that would result.
    We also do not agree that location on the main campus of a hospital 
should be the sole determinant of provider-based status, since 
hospitals can and frequently do lease space on their campuses to 
physicians and other providers or suppliers of health services, and 
these providers or suppliers may have no more connection to or 
integration into the hospital's operations than the lease agreement and 
physical proximity. For example, a hospital may lease some of its space 
to an independent diagnostic testing facility (IDTF) that furnishes 
radiology services, which are frequently considered by hospitals to be 
among their ancillary services. Such a facility could be paid 
significantly more as a provider-based department than as a 
freestanding facility. Because of this payment difference, we believe 
it is important that the facility meet standards that establish that it 
is an integral and subordinate part of the main provider hospital, and 
thus that the higher payment level associated with provider-based 
status is warranted. Therefore, we are not revising this final rule to 
permit on-campus facilities to qualify as provider-based solely because 
of location.
    Comment: One commenter suggested that consolidations of facilities 
on separate campuses should not be subject to the provider-based 
requirements, but should be regulated only by the requirements on State 
licensure, Medicare certification, and Medicare enrollment.
    Response: For the reasons explained in the response to the 
preceding comment, consolidation of facilities under a single provider 
number frequently has significant implications for Medicare payment 
levels. In many cases, the amount paid for services of a consolidated 
facility can be significantly more than the sum of what would be paid 
to two or more separate facilities for the provision of identical 
services. Current State licensure and Medicare certification 
requirements are focused on the protection of patient health and 
safety, and the determination of whether a facility is part of the main 
provider is not central to that concern. On the contrary, licensure and 
certification requirements may be easily manipulated by providers 
seeking to maximize payment under Medicare or Medicaid

[[Page 50082]]

without improving either the quantity or the quality of care furnished. 
Thus, it is crucial that we establish criteria to ensure that 
consolidated facilities are truly integral and subordinate to a single 
main provider.
    Comment: Some commenters wrote on behalf of multicampus hospitals 
that operate under a single provider number and agreement, but include 
several campuses that are separately licensed by the State. The 
commenters stated that they have been structured in this way since 
before the inception of the Medicare program and thus did not adopt 
their current structures in an effort to maximize GME or DSH payments. 
The commenters explained that if multicampus hospitals are not exempted 
from the provider-based requirements, the hospitals would have to 
either designate one campus as the main campus and rearrange the 
clinical, financial, and other arrangements between the hospitals in 
order to comply with the provider-based requirements, or obtain a 
separate Medicare provider agreement and number for each campus. If the 
second course were chosen, total Medicare payment to the separate 
hospitals would be considerably less than what is currently being paid 
to them as multicampus organizations. Because the hospitals are 
unwilling to pursue either of the options outlined above, the commenter 
requested that either all multicampus hospitals be exempted from the 
provider-based requirements, or that an exemption be created for any 
such hospitals that have been structured as multicampus hospitals since 
the beginning of the Medicare program.
    Response: We understand the commenter's concern, but for the 
reasons cited earlier in this preamble believe that it is important to 
apply the provider-based criteria to multicampus hospitals in which 
each campus is separately licensed, as well as to those in which all 
components operate under a single State license. In particular, such an 
exemption could lead to increased levels of Medicare GME and DSH 
payments, relative to the amounts payable if the provider-based 
criteria were applied. In fact, the commenter admitted that Medicare 

payment to the separate hospitals would be considerably less than what 
is paid to them as a single but multicampus hospital. We continue to 
believe it is important to pay for services of hospital facilities as 
part of a single hospital only when they meet the provider-based 
criteria we have established. Therefore, we are not adopting this 
comment.
    Comment: One commenter requested more clarification of how the 
provider-based criteria apply to multicampus hospitals, and to 
multihospital systems (that is, chain organizations that include two or 
more hospitals, each of which participates separately in Medicare). The 
commenter was particularly interested in learning what would be the 
main campus of a multihospital system, and whether a facility or 
organization at one location of a multihospital system could be 
provider-based with respect to another hospital in that system.
    Response: If a hospital comprises several sites at which both 
inpatient and outpatient care are furnished, it will normally be 
necessary for the hospital to designate one site as its ``main'' campus 
for purposes of the provider-based rules. Each of the other sites 
(referred to in our regulations as ``remote locations'') would then be 
expected to meet the provider-based requirements with respect to that 
main campus. Thus, any facility not located on a hospital's main campus 
would be considered to be an ``off-campus'' facility. Hospitals would 
normally be given considerable discretion in selecting which site is to 
be the ``main'' campus for provider-based purposes. In such a case, any 
outpatient facility also providing services at a ``remote location'' 
that are to be billed as services of the hospital would be considered 
as a potential hospital department for purposes of provider-based 
status and would be expected to meet the provider-based criteria with 
respect to the location designated by the hospital as its main campus. 
However, it is important to note that the provider-based criteria apply 
to individual hospitals, not to multihospital systems (for example, 
systems owned and operated by chain organizations). Where such a system 
exists, its hospitals will participate separately in Medicare, and the 
provider-based criteria will apply separately to each hospital in the 
chain. If a facility or organization located on the campus of one 
hospital in the chain wishes to be treated as part of another, 
separately participating hospital in the chain, the facility or 
organization would have to meet the provider-based criteria with 
respect to that hospital, on the same basis as if the two hospitals 
were not part of the same chain organization.
    Comment: Several commenters stated that, in some areas, it is 
common for children's hospitals to set up and staff neonatal intensive 
care units (NICUs) in community hospitals, in order to extend these 
services into rural areas where they might not otherwise be available. 
The commenter noted that these units frequently cannot meet the 
location requirement for provider-based status in Sec. 413.65(e)(3) of 
the proposed regulations, and asked that the final rule be revised to 
create a special exception to this requirement, to allow these units to 
continue to be treated as provider-based once the grandfathering period 
ends and to permit the creation of new units of the same type.
    Response: We understand these commenters' concerns, but note that 
these units raise serious questions about the appropriate treatment of 
facilities located at long distances from the main children's hospital 
that nevertheless claim to be a part of that hospital. While these 
facilities may have very limited Medicare utilization, they frequently 
receive substantial amounts of payment under Medicaid, thus making it 
important to ensure that they are classified and paid appropriately. 
After considering these issues, we have concluded that it would not be 
appropriate to waive the location requirement for provider-based 
status, or make some other ad hoc exception to the provider-based 
criteria, for these facilities. However, we have explained in the FAQs 
the inability of units in certain locations to qualify for provider-
based status does not preclude States from adopting revisions to their 
Medicaid plans to provide more generous payment to such units. While we 
are not making a special exception for NICUs, we recognize the 
importance of further emphasizing that when a payment difference 
exists, compliance with the provider-based rules is needed to justify 
payment for services in a facility as provider-based. Therefore, in 
this final rule, we are clarifying the regulations at Sec. 413.65(a) to 
state that the determinations of provider-based status are made for 
payment purposes.
    Comment: Some commenters requested clarification of how the 
provider-based criteria apply to multicampus hospitals that participate 
in Medicare under a single provider number but comprise two or more 
campuses that are physically separate from one another. The commenters 
were particularly concerned about which campus is to be identified as 
the main campus and about whether clinics or other facilities located 
on one campus of a hospital may be considered provider-based with 
respect to another campus.
    Response: We agree that multicampus hospitals present special 
implementation issues. However, the following general principles will 
be applied. First, when hospital facilities are dispersed among two or 
more geographically separate campuses, it will be necessary for one of 
the campuses to be designated by the hospital as the main campus. 
Facilities at the other campus(es) would be

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considered provider-based only if they meet the provider-based criteria 
in relation to the main campus. We would normally accept the provider's 
own selection of a main campus, unless the regional office concludes, 
in a particular case situation, that the campus selected by the 
provider clearly does not actually function as the main campus. The 
location requirements for a facility at a campus other than the main 
campus would be applied based on the distance between the facility and 
the main campus. Hospital chain organizations, which include a number 
of separately certified hospitals, would not be considered multicampus 
hospitals.
    Comment: One commenter stated that the provider-based criteria are 
being applied under Medicaid only because the same certification 
standards apply under Medicaid as under Medicare. The commenter also 
pointed out that States are not required to follow Medicare payment 
system rules in making payment under their Medicaid programs. The 
commenter then argued that this State flexibility to determine Medicaid 
payment means that CMS should prohibit States from applying the 
provider-based criteria in determining payment under Medicaid.
    Response: The commenter is correct in noting that the Medicaid 
regulations at 42 CFR 440.10 and 440.12 define inpatient and outpatient 
hospital services, for Medicaid purposes, as services furnished in or 
by an institution that meets the requirements for participation in 
Medicare as a hospital. Medicare participation by an institution as a 
hospital is contingent on the institution's compliance with many 
participation requirements, not merely the health and safety rules set 
forth in 42 CFR Part 482. The institution is also required under 
section 1866 of the Act and regulations at 42 CFR Part 489 to comply 
with various other statutory and regulatory provisions relating to 
(among other areas) charges to beneficiaries, maintenance of billing 
and other records, and the screening and stabilization, or appropriate 
transfer, of emergency cases. To the extent the hospital is required to 
comply with the provider-based criteria in Medicare regulations as part 
of its Medicare hospital participation obligations, the definitions of 
services in Sec. 440.10 and 440.12 also require that it comply with 
these requirements for Medicaid purposes.
    Regarding the commenter's remarks on State flexibility, we 
recognize that States are authorized to adopt, through their State 
plans, payment definitions and methods that differ from those used 
under Medicare. Thus, the commenter is correct in noting that a State 
may adopt payment methods that do not differentiate between facilities 
that meet the provider-based requirement and those that do not. To the 
extent that States amend their State plans to contain such payment 
methods, we do not object to these actions. However, we do not believe 
it would be consistent with State flexibility to prohibit States that 
wish to apply provider-based criteria in making their payment decisions 
from doing so. Such a prohibition would not benefit either States or 
their Medicaid recipients and, on the contrary, could increase State 
and Federal Medicaid spending unnecessarily. Therefore, we are not 
making any change in this final rule based on this comment.
    Comment: Several commenters noted that Indian Health Service (IHS) 
and tribal clinics and other facilities meeting the criteria in 
Sec. 413.65(l) (redesignated as Sec. 413.65(m) in this final rule) are 
in effect excluded from the scope of the provider-based criteria by the 
grandfathering provision included in that section. The commenters 
further noted that under Public Law 93-638, the Indian Self-
Determination Act, as amended, tribes have the right to contract for 
the management of all or a portion of the IHS programs that provide 
services in their communities. The commenters pointed out that tribal 
and IHS facilities remain the primary source of health care in many 
remote rural communities. However, because of the unique IHS and tribal 
administrative systems, many clinics and other facilities that might 
lose their grandfathered status under Sec. 413.65(l) (redesignated as 
Sec. 413.65(m) in this final rule) are not able to meet provider-based 
criteria. To avoid disrupting the operation of these vital sources of 
care in remote rural areas, and consistent with the objectives of the 
Indian Self-Determination Act, the commenters recommended that all 
clinics and other facilities operated by IHS or tribes should be 
exempted from the provider-based regulations.
    Response: We understand the concern about the need to preserve 
access to health care by patients using IHS facilities in rural 
communities. However, we note that existing Sec. 413.65(l) provides 
grandfathering protection for the facilities in operation when the 
existing provider-based rules were published, and that section 432 of 
BIPA amended the Medicare statute to permit payment for physician 
services in IHS clinics, thus providing an alternate funding source for 
facilities that become freestanding. Therefore, we do not believe a 
further change of the kind recommended by the commenter is needed.
    Comment: One commenter noted that excluding facilities providing 
only physical, occupational, or speech therapy to ambulatory patients 
from the provider-based requirements does not meet CMS' own stated 
criteria for such exclusions, in cases where those facilities are 
operated by CAHs. A payment difference based on provider-based or 
freestanding status would exist in such cases. If such facilities were 
operated as freestanding they would be paid on a fee schedule basis. 
However, if they were operated as integral and subordinate parts of 
CAHs, they would be paid on the same reasonable cost basis as other 
components of the CAH. The commenter recommended that the exclusion 
language in Sec. 413.65(a)(1)(ii)(H) be revised to state that the 
exclusion applies to such facilities other than those which are 
operated as part of a CAH.
    Response: We agree and are revising this final rule to reflect this 
comment.
    Accordingly, we are adopting as final the proposed revision to 
Sec. 413.65(a)(1)(ii)(G), the addition of Sec. 413.65(a)(1)(ii)(J), and 
the revisions of the definitions of ``Department of a provider,'' 
``Provider-based entity'' and ``Remote location of a hospital under 
Sec. 413.65(a)(2). In addition, in response to public comments, we are 
revising existing Sec. 413.65(a)(1)(ii)(H) to clarify that the 
exclusion of facilities providing only physical, occupational, or 
speech therapy to ambulatory patients applies to these facilities only 
if they are not operated as part of a CAH.
b. Further Delay in Effective Date of Provider-Based Rules
    As noted earlier, Sec. 413.65(b) was recently revised to reflect 
the ``grandfathering'' provision in section 404(a)(1) of BIPA. Under 
that provision, if a facility was treated as provider-based in relation 
to a hospital or CAH on October 1, 2000, it will continue to be 
considered provider-based in relation to that hospital or CAH until 
October 1, 2002.
    To allow hospitals and other facilities the time they need to make 
contractual and organizational changes to comply with the new rules, 
and to ensure that CMS Regional Offices and contractors are able to 
provide for an orderly transition to the new provider-based rules, we 
believed an additional delay in the effective date of the provider-
based criteria is needed. Therefore, in the May 9, 2002 proposed rule 
we proposed to revise Sec. 413.65(b)(2) to state that if a facility was 
treated as provider-based in relation to a hospital or CAH

[[Page 50084]]

on October 1, 2000, it will continue to be considered provider-based in 
relation to that hospital or CAH until the start of the hospital's 
first cost reporting period beginning on or after July 1, 2003. We 
proposed to further provide that the requirements, limitations, and 
exclusions specified in Sec. 413.65(d) through (j) (as proposed to be 
redesignated) will not apply to that hospital or CAH for that facility 
until the start of the hospital's first cost reporting period beginning 
on or after July 1, 2003. For purposes of paragraph (b)(2), a facility 
would be considered as having been provider-based on October 1, 2000, 
if on that date it either had a written determination from CMS that it 
was provider-based, or was billing and being paid as a provider-based 
department or entity of the hospital. We proposed to make the new 
requirements effective on October 1, 2002, with respect to provider-
based status for facilities not qualifying for the grandfathering 
provision.
    Comment: One commenter requested clarification of how the proposed 
delay in effective date for the facilities grandfathered under section 
404(a) of BIPA will be applied. Specifically, the commenter asked 
whether facilities benefiting from the grandfathering would be able to 
take advantage of any additional flexibility provided under the final 
rules before the hospital's first cost reporting period beginning on or 
after July 1, 2003.
    Response: As explained in the preamble to the proposed rule, the 
purpose of the delayed effective date for grandfathered facilities is 
to allow more time for any necessary contractual or organizational 
changes that hospitals or their grandfathered facilities might need to 
undertake to achieve actual compliance with the provider-based 
criteria. Under our proposal, this would be accomplished by simply 
extending the BIPA mandated grandfathering provision until the 
hospital's first cost reporting period beginning on or after July 1, 
2003. To clarify the effect of the delay, we are revising the final 
rule to specify that the grandfathering provision applies to the 
requirements, limitations, and exclusions specified in paragraphs (d), 
(e), (f), (h), and (i) of Sec. 413.65 of this final rule. To the extent 
a particular grandfathered hospital might benefit from any other 
changes in paragraphs of Sec. 413.65 other than those listed in the 
immediately preceding sentence, it would be able to receive that 
benefit as of October 1, 2002, which is the effective date of any 
revisions to the other paragraphs.
    Comment: Several commenters requested that the grandfathering of 
facilities treated as provider-based on October 1, 2000 should continue 
indefinitely, not just until the start of the first cost reporting 
period on or after July 1, 2003, as we had proposed.
    Response: We are providing an extension in the effective date of 
the provider-based rules for grandfathered facilities until cost 
reporting periods beginning on or after July 1, 2003, to allow these 
facilities sufficient time to make any contractual and organizational 
changes needed to comply with the new rules. However, we do not believe 
it is appropriate to allow the facilities that were treated as 
provider-based in the past to continue to be treated that way 
permanently, without ever having to meet the same requirements as newer 
facilities. To do so would create a permanent double standard under 
which some older facilities would continue indefinitely to be rewarded 
for their previous inappropriate billing. We note that even the 
statutory provision under section 404(a) of BIPA was set for a limited 
2-year time period.
    Comment: One commenter suggested that grandfathering be provided 
for all hospital facilities for which affirmative determinations of 
provider-based status had been made by CMS (previously, HCFA) before 
October 1, 2000, or that such facilities be presumed to meet the 
provider-based criteria in the revised regulations without having to 
attest to compliance with those criteria, so that any future 
determination that a facility is not provider-based would be applied on 
a prospective basis only.
    Response: For the reasons noted above, we do not believe a general 
grandfathering of facilities is appropriate. In addition, the criteria 
in the program memorandum and instructions in effect before October 1, 
2000, differ from the new proposed rules to be effective on October 1, 
2002. Therefore, we do not believe it is appropriate to assume that 
facilities that received a provider-based determination under a prior 
set of criteria meet the new set of provider-based criteria in this 
final rule. Regarding the recommendation that any revised determination 
be made effective on a prospective-only basis, we note that, under 
Sec. 413.65(c)(2), providers that have received affirmative 
determinations of provider-based status with respect to facilities or 
organizations are required to report material changes in the 
relationships between themselves and any provider-based facility or 
organization. A provider having a determination of provider-based 
status will need to comply with this rule and, in particular, as stated 
in revised Sec. 413.65(l)(1), will need to report any aspect of its 
ownership or operation of the facility that it reasonably believes 
might not meet applicable provider-based requirements, to ensure that 
any redeterminations are made effective only prospectively.
    Accordingly, we are adopting as final the proposed revision to 
Sec. 413.65(b)(2), with a further clarification in response to a 
comment that the grandfathering provision applies to the requirements, 
limitations, and exclusions of Sec. 413.65 (d), (e), (f), (h), and (i) 
only.
c. Revision of Application Requirement
    Existing regulations at Sec. 413.65(b)(2) establish an explicit 
application requirement for all facilities seeking provider-based 
status, except for grandfathered facilities and those treated as 
provider-based pending a determination on an application filed on or 
after October 1, 2000, and before October 1, 2002. Under existing 
Sec. 413.65(b)(3), a main provider or a facility must contact CMS, and 
the facility must be determined by CMS to be provider-based, before the 
main provider bills for services of the facility as if the facility 
were provider-based, or before it includes costs of those services on 
its cost report. Many providers and provider representatives have 
expressed concern that the requirement to file an application will 
increase paperwork burden for hospitals unnecessarily. In response to 
these concerns, in the May 9, 2002 proposed rule, we proposed to revise 
the application requirements as follows:
    First, we proposed to delete the existing application requirement 
under Sec. 413.65(b)(3). We proposed to revise this section to state 
that except where payment is required to be made under BIPA, as 
specified in proposed revised Sec. 413.65(b)(2) and (b)(5), if a 
potential main provider seeks an advance determination of provider-
based status for a facility that is located on the main campus of the 
potential main provider, the provider would be required to submit an 
attestation stating that its facility meets the criteria in 
Sec. 413.65(d) and, if it is a hospital, also attest that its facility 
will fulfill the obligations of hospital outpatient departments and 
hospital-based entities, as described in proposed Sec. 413.65(g). We 
also proposed to require the provider to maintain documentation of the 
basis for its attestations and to make that documentation available to 
CMS upon request. We noted that, under this proposal, there would no 
longer be an explicit requirement that a provider-based approval be 
obtained before a facility is treated as provider-based for billing or 
cost reporting purposes. It

[[Page 50085]]

could benefit the provider to obtain a determination because, under the 
proposed Sec. 413.65(l)(1) treatment of a facility as provider-based 
would cease only with the date that CMS determines that the facility no 
longer qualifies for provider-based status, if the reason the provider-
based criteria are not met is a material change in the provider-
facility relationship that was properly reported to CMS. By contrast, a 
provider which did not seek such a determination or obtained a 
determination but failed to report a material change in its 
relationship with the facility, could face a partial recovery of past 
payments. Also, under proposed Sec. 413.65(j) (Inappropriate treatment 
of a facility or organization as provider-based) a provider that does 
not seek a provider-based determination and incorrectly bills as such 
could be subject to the partial recovery of payments for all cost 
reporting periods subject to reopening in accordance with 
Secs. 405.1885 and 405.1889. We further proposed that if the facility 
is not located on the main campus of the potential main provider, the 
provider that wishes to obtain an advance determination of provider-
based status would be required to submit an attestation stating that 
its facility meets the criteria in proposed revised Secs. 413.65(d) and 
(e) and, if the facility is operated as a joint venture or under a 
management contract, the requirements in proposed Secs. 413.65(f) and 
(h), as applicable. If the potential main provider is a hospital, the 
hospital also would be required to attest that it will fulfill the 
obligations of hospital outpatient departments and hospital-based 
entities described in proposed revised Sec. 413.65(g). The provider 
seeking such an advance determination would be required to supply 
documentation of the basis for its attestations to CMS at the time it 
submits its attestations. We believe the use of an attestation process 
would strike an appropriate balance between the legitimate interests of 
hospitals in reducing paperwork and reporting, and the equally 
legitimate need of CMS to ensure proper accountability for compliance 
with the qualification requirements for a status that typically leads 
to a higher level of Medicare or Medicaid payment.
    We noted that, under the proposed revisions to the application 
procedures at Sec. 413.65(b), a hospital would not be explicitly 
required to submit an application and receive a provider-based 
determination for a facility before the time at which the hospital may 
bill for services at that facility as provider-based. However, we 
indicated that, alternatively, we would consider retaining the existing 
regulations at Sec. 413.65(b)(2) which state that, except where payment 
is required to be made under BIPA as specified in proposed revised 
Secs. 413.65(b)(2) and (b)(5), hospitals are explicitly required to 
submit provider-based applications, and to withhold billing as 
provider-based until CMS determines that a facility meets the provider-
based rules. In the May 9, 2002 proposed rule, we specifically 
solicited comments on the appropriateness of this or other alternative 
application procedures.
    Comment: Some commenters stated that although it appears that the 
mandatory application requirement under the existing regulations has 
been replaced with the voluntary attestation process, the preamble of 
the May 9, 2002 proposed rule made several references to procedures for 
applying for provider-based status. The commenters stated that if such 
references to an application in the final rule must be maintained in 
order to deal with applications submitted prior to the creation of the 
attestation process, such references should be clarified accordingly.
    Response: While we have proposed to replace the mandatory 
requirement for provider-based determinations under existing 
Sec. 413.65(b) with a voluntary attestation process, we note that 
providers still have the option of obtaining a determination of 
provider-based status for their facilities, which we encourage. The 
proposed method for doing so is through the attestation process. Under 
Sec. 413.65(b)(3), the provider may obtain a determination of provider-
based status by submitting an attestation stating that the facility 
meets the relevant provider-based requirements (depending on whether 
the facility is located on campus or off campus).
    As we stated in the May 9, 2002 proposed rule (67 FR 31481), 
``Until a uniform application is available, at a minimum, the request 
should include the identity of the main provider and the facility or 
organization for which provider-based status is being sought and 
supporting documentation for purposes of applying the provider-based 
status criteria in effect at the time the application is submitted.'' 
For purposes of this final rule, we are clarifying that, effective 
October 1, 2002, an attestation of provider-based status has the same 
effect as a request for provider-based status, in that approval of an 
attestation would result in a determination that a facility or 
organization is provider-based. Prior to October 1, 2002, the effective 
date of the final rule (or, in the case of grandfathered facilities, 
prior to the start of the provider's first cost reporting period 
beginning on or after July 1, 2003), the provider would submit a 
request for provider-based determination (as opposed to an 
attestation). (Until the effective date of these regulations on October 
1, 2002, providers should contact their CMS Regional Offices for 
information regarding application procedures). For providers wishing to 
obtain a provider-based determination after October 1, 2002, the 
providers would submit an attestation to CMS. Accordingly, until a 
uniform request or attestation form is available, at a minimum, the 
provider should include the identity of the main provider and the 
facility or organization for which provider-based status is being 
sought and supporting documentation for purposes of applying the 
provider-based status criteria in effect at the time the request or 
attestation is submitted. The provider must also enumerate each 
facility and state its exact location (that is, its street address and 
whether it is on campus or off campus) and the date on which the 
facility became provider-based to the main provider. Documentation in 
support of the attestation of provider-based status must be submitted 
with the attestation for facilities located off campus. Main providers 
that submitted a request for a provider-based determination after 
October 1, 2000, but prior to the publication of this final rule, would 
be protected under section 404(c) of BIPA from recovery of overpayments 
in periods prior to the date on which CMS determines a facility is not 
provider-based.
    We note that even though we proposed to remove the current general 
requirement that a determination of provider-based status be obtained, 
we did not propose to revise paragraph (n) of Sec. 413.65 (redesignated 
in this final rule as paragraph (o)). That paragraph states that 
provider-based status cannot be effective before the earliest date on 
which a request for provider-based status has been made and all 
requirements of 42 CFR Part 413 have been met. To avoid creating 
confusion for providers and contractors and to allow the regulations to 
be implemented properly, we are making a conforming change to paragraph 
(o) to eliminate any reference to a mandatory application or 
determination, with one exception. As explained later in this preamble, 
we also state in Sec. 413.65(o) that if a facility or organization is 
found by CMS to have been inappropriately treated as provider-based 
under paragraph (j) for certain time periods, or previously was

[[Page 50086]]

determined by CMS to be provider-based but no longer qualifies as 
provider-based because of a material change occurring during those 
periods that was not reported to CMS, CMS will not treat the facility 
or organization as provider-based for payment until CMS has determined, 
based on documentation submitted by the provider, that the facility or 
organization meets all requirements for provider-based status under 
Part 413.
    Comment: One commenter stated that the proposed rules do not appear 
to provide hospitals that submit an attestation with any benefit with 
respect to recoupment of overpayments. For example, the commenter 
stated that, under the proposed rule, a provider could submit an 
attestation and begin providing and billing for provider-based services 
for years before receiving a determination from CMS that it is not 
provider-based and consequently be subject to the recovery of payments 
if CMS later determines that the facility is not provider-based. The 
commenter requested that a provider that submits a complete attestation 
not be liable for recovery of overpayments, but rather it should only 
be improper to bill as provider-based subsequent to a determination by 
CMS that a facility is not provider-based. Another commenter expressed 
concerns about possible long delays by CMS in reaching decisions on 
attestations and recommended that CMS require its regional offices to 
approve or disapprove provider-based status for each facility within 60 
days after having received the attestation regarding that facility. 
Another commenter stated that it would like a written response to the 
attestations and accompanying documentation from CMS for the providers 
to keep on file.
    Response: We do not agree that it would be appropriate to allow a 
provider that has attested inaccurately to being provider-based to 
retain payments made to the provider as if the facility were in full 
compliance with provider-based criteria. However, CMS would not recover 
all past payments for periods subject to reopening, but instead would 
recover only the difference between the amount of payment that actually 
was made since the date the complete request for a provider-based 
determination was submitted and the amount of payments that CMS 
estimates should have been made in the absence of compliance with the 
provider-based requirements. At the time that CMS determines that a 
facility that submitted a complete attestation is actually not 
provider-based, payment would continue for up to 6 months but only at a 
reduced rate as described at Sec. 413.65(j)(5).
    Regarding the timeliness of action on attestations, we agree that 
providers should not be subject to long delays before action is taken. 
In response to this and other comments requesting further information 
on the procedures CMS will follow when an attestation is received, we 
are revising Sec. 413.65(b)(3) by adding new paragraphs (iii) and (iv). 
In new paragraph (b)(3)(iii), we are clarifying that whenever a 
provider submits an attestation of provider-based status for an on-
campus facility or organization, CMS will send the provider written 
acknowledgement of receipt of the attestation, review the attestation 
for completeness, consistency with the criteria in Sec. 413.65, and 
consistency with information in the possession of CMS at the time the 
attestation is received, and make a determination as to whether the 
facility is provider-based. In new paragraph (b)(3)(iv), we are 
clarifying that whenever a provider submits an attestation of provider-
based status for an off-campus facility or organization, CMS will send 
the provider written acknowledgement of receipt of the attestation, 
review the attestation for completeness, consistency with the criteria 
in Sec. 413.65, consistency with the documentation submitted with the 
attestation, and consistency with information in the possession of CMS 
at the time the attestation is received, and make a determination as to 
whether the facility is provider-based.
    We also will work with our regional offices and intermediaries as 
necessary to ensure that providers that submit attestations receive a 
prompt response. However, because of workload considerations and 
uncertainty about the volume of attestations that may be received, we 
have not yet specified a timeframe for completion of action on an 
attestation.
    Comment: One commenter recommended that if CMS finds an attestation 
to be incomplete, the provider be given an additional 30 days to submit 
supplementary information in support of the attestation.
    Response: We agree that providers who inadvertently omit needed 
information from an attestation should be given a reasonable 
opportunity to supplement that information. However, at the same time, 
we agree with the commenters who pointed out the importance to the 
provider of receiving a timely decision on whether a particular 
facility qualifies for provider-based status. If CMS were to delay a 
decision for a provider that repeatedly submitted incomplete 
attestations, this would prevent a timely response and could defeat the 
purpose of the attestation procedure. We intend to develop further 
implementing instructions and procedures that will strike a reasonable 
balance between the need for additional information and the need for a 
timely decision.
    Comment: One commenter requested that we reiterate that, since 
providers are no longer required under the proposed revised regulations 
to submit an attestation or an application for provider-based status as 
a precondition to billing for provider-based services, CMS would only 
consider a provider to be billing inappropriately if the provider was 
wrong in its conclusion that it meets the provider-based requirements. 
The commenter also asked that we clarify that facilities grandfathered 
under BIPA also need not submit an attestation, even at the expiration 
of the grandfathering period. Facilities grandfathered by BIPA will be 
treated the same as all other facilities on the date that their 
grandfathering period expires, which is the start of the cost reporting 
periods that begin on or after July 1, 2003.
    Response: The commenter is correct in the view that providers, 
regardless of whether they are grandfathered under BIPA, are not 
obligated to submit attestations or applications for provider-based 
status before they begin billing as provider-based, and that a provider 
would only be considered to be billing inappropriately if the facility 
actually did not meet the relevant provider-based rules. However, we 
note that if a provider does not submit a complete attestation of 
provider-based status, and CMS subsequently determines that the 
provider is billing inappropriately, the provider would be subject to 
recovery of overpayments under Sec. 413.65(j)(ii) for services at that 
facility(ies) for all prior cost reporting periods subject to reopening 
in accordance with Secs. 405.1885 and 405.1889.
    Comment: One commenter noted that all hospitals, even those 
previously subject to grandfathering, will be subject to the new 
regulations as of their first cost reporting periods starting on or 
after July 1, 2003. In view of this obligation, the commenter believed 
that it is unnecessary for attestations to be submitted for any 
facilities that are located on the campus of the hospital that claims 
them as provider-based. The commenter also recommended that if CMS 
later determines that the facility does not meet the provider-based 
criteria, CMS should not recover any past payments attributable to 
improper billing, but apply its determination only prospectively.

[[Page 50087]]

    Response: As explained more fully earlier in this preamble, under 
these final rules, while the provider-based criteria must be met, no 
provider is required to submit an attestation for any facility as a 
precondition to billing for its services as a provider-based facility. 
This is the case even where the facility is located on the main campus 
of a hospital. However, we believe an attestation has value, in that a 
provider that makes such an attestation presumably does so after having 
reviewed the provider-based criteria and assessed a particular 
facility's structure and operations in relation to them. Moreover, the 
attestation relates to compliance with only a minimal level of 
integration, and does not require any supporting documentation. 
Therefore, we do not believe that providing an attestation will require 
an unreasonable level of effort from the provider.
    Comment: One commenter recommended that off-campus facilities be 
required to submit attestations of compliance with the provider-based 
criteria before the date on which the revised regulations become 
effective for them. (For grandfathered facilities, Secs. 413.65(d), 
(e), (f), (h), and (i) of the revised regulations would become 
effective for the hospital's first cost reporting period starting on or 
after July 1, 2003.) The commenter also recommended that if these 
facilities are later found not to have met the provider-based 
requirements, any determination that they are not provider-based should 
be applied only prospectively.
    Response: As explained in response to a previous comment, we cannot 
agree that a provider should be allowed to retain payments made as if a 
facility were provider-based after a determination has been made that 
the provider-based criteria were not met. Therefore, this final rule 
provides for recovery of past payments to the extent necessary to make 
those payments relate more closely to what would have been paid if the 
facility's services had been billed on a freestanding basis.
    Comment: One commenter expressed approval of our proposal under 
which supporting documentation would not have to be submitted with the 
attestation for on-campus facilities. The commenter suggested that the 
paperwork burden for providers could be further reduced if the 
regulations were revised to eliminate the need for supporting 
documentation for attestations regarding off-campus facilities or 
organizations as well. Another commenter stated that hospital-licensed 
community health centers frequently are located within a few miles of 
the main provider-campus and are closely integrated with it. The 
commenter believed these facilities should not be required to submit 
supporting documentation.
    Response: We understand and share the commenters' interest in 
reducing the paperwork burden on providers. However, this important 
objective must be balanced against the equally important need to ensure 
proper accountability by providers for the status of the facilities or 
organizations for which they are claiming provider-based status. 
Determining whether an off-campus facility is truly integrated with a 
main provider is more difficult than for a facility located on the main 
campus of a provider, and this is why there are additional requirements 
for off-campus facilities to demonstrate provider-based status. In view 
of this, we believe it is reasonable to require that an attestation 
regarding an off-campus facility, including hospital-licensed community 
health centers, be accompanied by supporting documentation that clearly 
shows the basis for the attestation.
    Comment: One commenter noted that proposed Sec. 413.65(b)(3)(i) 
requires a provider that makes a provider-based attestation with regard 
to an on-campus facility to make documentation supporting that 
attestation available to CMS upon request. The commenter recommended 
that the regulation be revised to require that the supporting 
documentation also be made available to CMS contractors (fiscal 
intermediaries and carriers) upon request. Response: We agree, and are 
revising the final rule accordingly.
    Comment: One commenter asked CMS to provide guidance as to the type 
of documentation that is required to be submitted with an attestation 
for an off-campus facility. Another commenter suggested that before a 
uniform application is available, providers should be required to 
submit information regarding physical location, a contact person, and 
the date the facility became provider-based to the main provider.
    Response: As stated above, until a uniform attestation form is 
available, at a minimum, the attestation should include the identity of 
the main provider and the facility(ies) or organization(s) for which 
provider-based status is being sought and supporting documentation for 
purposes of applying the provider-based status criteria in effect at 
the time the application is submitted. The provider must also enumerate 
each facility and state its exact location (that is, its street address 
and whether it is on campus or off campus) and the date on which the 
facility became provider-based to the provider. We plan on issuing 
further guidance in program instructions after publication of this 
final rule.
    Comment: One commenter noted CMS' authority to terminate payment 
prospectively if a provider fails to provide all necessary information 
as part of the continuation of payment provisions under 
Sec. 413.65(j)(5). Given this authority, and because the commenter 
believed it will be difficult for providers to know what constitutes a 
complete attestation, the commenter recommended that CMS provide the 
opportunity for providers to supplement their original submissions with 
additional information within 30 days of receipt of notice from CMS 
that the submission is incomplete.
    Response: Under Sec. 413.65(b)(3), a complete request (or 
attestation) is one that includes all information needed to permit CMS 
to make a determination. We have stated above that we plan to issue 
further guidance as to what information should be included in an 
attestation. However, we note that, under Sec. 413.65(j)(5), a provider 
must notify CMS in writing within 30 days of the date that CMS issues 
its denial of provider-based status, of whether the provider intends to 
seek a determination of provider-based status for the facility or 
whether the practitioners will be seeking to enroll to bill Medicare or 
Medicaid for services at that location as a freestanding facility. If 
the provider notifies CMS of its intentions within 30 days, the 
provider has up to 6 months to take whatever steps are necessary to 
comply with the relevant rules, whether that means providing CMS with 
supplemental documentation or making changes to meet the regulatory 
requirements (for example, a provider is renegotiating its management 
contracts). Therefore, we believe it is unnecessary to add an 
additional 30 days to the interim period in which payment continues at 
a reduced rate.
    Comment: One commenter asserted that if CMS has concerns about the 
status of on-campus facilities, it should be incumbent on CMS to 
initiate an investigation and to provide notice to the provider and 
opportunity for the facilities to fix any discrepancies prior to losing 
provider-based status. The commenters added that it is still unclear 
whether every service on the hospital's campus would need to submit an 
attestation, or if one attestation is sufficient to cover all on-campus 
facilities. Some commenters also asked whether, and in what timeframe, 
these sites will receive a written response from CMS.

[[Page 50088]]

    Response: We do not agree with this commenter's suggestion that 
providers that have been inappropriately treating certain facilities as 
provider-based and have not attempted to obtain a provider-based 
determination should be protected from recovery of past overpayments. 
However, we note that Sec. 413.65(j)(5) of this final rule would allow 
such a provider up to 6 months of continued payment, at an adjusted 
rate, to meet applicable billing requirements.
    In regard to the commenter's request for clarification concerning 
whether every service on the hospital's campus would need to submit an 
attestation, or if one attestation is sufficient to cover all on-campus 
facilities, we emphasize that the provider-based rules do not apply to 
specific services; rather, these rules apply to facilities as a whole. 
That is, the facility in its entirety must be a subordinate and 
integrated part of the main provider. For example, a provider may have 
several outpatient facilities, some located on campus and some located 
off campus, yet each facility as a whole must meet the applicable rules 
for provider-based status. However, a main provider would not need to 
submit a separate application for each one of its facilities for which 
a provider-based determination is sought. A provider may attest in a 
single application package that each one of its facilities in which it 
intends to bill for services as if the facility is provider-based meets 
the applicable provider-based rules under Sec. 413.65. For those 
facilities that are located on campus, no documentation is required to 
be submitted with the attestation. Documentation must be submitted for 
those facilities located off campus. However, we are requiring that as 
part of its attestation, the main provider enumerate each facility and 
state its exact location (that is, its street address and whether it is 
on campus or off campus).
    As noted earlier, the commenters also asked whether, and in what 
timeframe, a provider that submits an attestation will receive a 
written response from CMS. While we are making revisions in these final 
rules to provide more information about the actions CMS will take in 
response to such an attestation, at this time, due to the uncertainty 
of the volume of requests that will be submitted by providers, we 
cannot state an exact timeframe in which the provider-based 
determinations will be made for on-campus or off-campus facilities. 
Each attestation will be received and processed by the appropriate CMS 
Regional Office (or fiscal intermediary) and will be reviewed as soon 
as possible.
    Comment: One commenter asked if a ``re-attestation'' is required 
after a certain period of time.
    Response: Just as providers are no longer explicitly required to 
submit an initial attestation, there is also no explicit requirement 
for hospitals to re-attest that their facilities continue to meet the 
provider-based requirements. However, we note that, under proposed 
Sec. 413.65(k) (revised as Sec. 413.65(l) in this final rule), if CMS 
determines that a facility that had previously been determined to be 
provider-based no longer qualifies for provider-based status, and the 
failure to qualify for provider-based status results from a material 
change in the relationship between the main provider and the facility 
that the main provider did report to CMS, treatment of the facility as 
provider-based would cease with the date that CMS determines that 
facility no longer qualifies for provider-based status. Conversely, if 
a main provider did not report a material change to CMS, the main 
provider will be subject to recovery of overpayments as described under 
Sec. 413.65(j)(1)(ii).
    Comment: One commenter stated that the use of the term ``advance 
determination'' is confusing because the rule does not provide for an 
advance determination of provider-based status.
    Response: We agree with the commenter and are removing all 
references to ``advance'' used in connection to provider-based 
determinations from this final rule. We note that, under proposed 
Sec. 413.65(k) (revised as Sec. 413.65(l) in this final rule), a 
provider that submits a complete attestation of compliance with the 
provider-based status requirements for a facility that has not 
previously been found by CMS to have been inappropriately treated as 
provider-based, may bill and be paid for services of the facility as 
provider-based from the date of its attestation of provider-based 
status until the date that CMS determines that the facility is not 
provider-based.
    Accordingly, we are adopting as final the proposed changes to 
Sec. 413.65(b)(3) with the following modifications: We are revising 
Sec. 413.65 by adding new paragraphs (b)(3)(iii) and (iv) to include 
further information on procedures for submitting and processing 
attestations; removing references to the term ``advance'' in connection 
with determinations in paragraphs (b)(3)(i) and (ii); and adding 
language under paragraph (b)(3)(i) regarding the availability of 
documentation to contractors.
d. Requirements Applicable to All Facilities or Organizations
    Under existing Sec. 413.65, all facilities seeking provider-based 
status with respect to a hospital or other main provider must meet a 
common set of requirements. These include requirements relating to 
common licensure (paragraph (d)(1)), operation under the ownership and 
control of the main provider (paragraph (d)(2)), administration and 
supervision (paragraph (d)(3)), integration of clinical services 
(d)(4)), financial integration (paragraph (d)(5)), public awareness 
(paragraph (d)(6)), and location in the immediate vicinity of the main 
provider (paragraph (d)(7)). (In addition, as described more fully 
below, specific rules applicable to all facilities rule out provider-
based status for facilities operated as joint ventures by two or more 
providers (paragraph (e)) and limit the types of management contracts 
that facilities seeking provider-based status may operate under 
(paragraph (f)).)
    Since publication in final of the existing provider-based rules in 
April 2000, hospitals and other providers have expressed concern that 
the requirements outlined above are overly restrictive and do not allow 
them enough flexibility to enter into appropriate business arrangements 
with other facilities. We understand these concerns, and agree that 

Medicare rules should not restrict legitimate business arrangements 
that do not lead to abusive practices or disadvantage Medicare 
beneficiaries. At the same time, we believe our existing rules provide 
a high level of assurance that a facility complying with them is, in 
fact, an integral and subordinate part of the facility with which it is 
based, and do not accord provider-based status to facilities that are 
not integral and subordinate to a main provider, but in fact have only 
a nominal relationship with that provider.
    After considering all comments received on these issues, we believe 
that further changes in the provider-based rules would be appropriate. 
In particular, we agree with those who argue that a facility's or 
organization's location relative to the main campus of the provider is 
relevant to the integration that is likely to exist between the 
facility or organization and the main provider. For example, if a 
facility or organization is located on the main campus of a provider, 
is operated under the main provider's State license, is medically and 
financially integrated with that provider, and is held out to the 
public and other payers as a part of that provider, we believe the 
necessary

[[Page 50089]]

degree of integration of the facility or organization into the main 
provider can be assumed to exist. We also are concerned that further 
prescribing the types of management contracts or other business 
arrangements that may exist between the main provider and the facility 
or organization would unnecessarily restrict its flexibility to 
establish cost-effective agreements without significantly enhancing the 
integration of the facility or organization into the main provider. 
Therefore, in the May 9, 2002 proposed rule, we proposed to simplify 
the requirements applicable to facilities or organizations located on 
the campus of the main provider (as campus is defined in existing 
regulations at Sec. 413.65(a)(2)). Under our proposal, all facilities 
seeking provider-based status, including both on-campus and off-campus 
facilities, would be required to comply with the existing requirements 
regarding licensure, clinical services integration, financial 
integration, and public awareness. (These requirements are currently 
codified at Secs. 413.65(d)(1), (d)(4), (d)(5), and (d)(6) and were 
proposed to be redesignated as paragraphs (d)(1) through (d)(4), 
respectively, of Sec. 413.65.)
    With respect to financial integration, existing regulations at 
Sec. 413.65(d)(5) require that the financial operations of the facility 
or organization be fully integrated within the financial system of the 
main provider, as evidenced by shared income and expenses between the 
main provider and the facility or organization. The regulations also 
require that costs of a provider-based facility or organization be 
reported in a cost center of the provider, and that the financial 
status of any provider-based facility or organization be incorporated 
and readily identified in the main provider's trial balance.
    Some hospital representatives have questioned the appropriateness 
of requiring that the costs of a remote location of a hospital be 
reported in a single cost center, noting that such costs ordinarily 
would appear in multiple cost centers of the main provider, with (for 
example) employee health and welfare costs of the remote location being 
included in the corresponding cost center of the main provider. In 
recognition of this concern, in the May 9, 2002 proposed rule, we 
proposed to revise the requirement to state that the costs of a 
facility or organization that is a hospital department must be reported 
in a cost center of the provider, and that costs of a provider-based 
facility or organization other than a hospital department must be 
reported in the appropriate cost center or cost centers of the main 
provider.
    Paragraph (d) of Sec. 413.65 was proposed to be retitled 
``Requirements applicable to all facilities or organizations'' and, as 
indicated by its revised title, would set forth those core requirements 
that any facility or organization would have to meet to qualify for 
provider-based status.
    We proposed to delete from this paragraph (d) the requirements in 
existing paragraphs (d)(2) and (d)(3) relating to operation under the 
ownership and control of the main provider and administration and 
supervision because we proposed to no longer apply these requirements 
to on-campus facilities or organizations. These requirements would be 
moved to paragraph (e) as described below to reflect the proposed 
limitation of their applicability to off-campus departments. The core 
requirements for all facilities or organizations, including facilities 
located on campus, also would not include the requirement regarding 
location in the immediate vicinity of the main provider (existing 
Sec. 413.65(d)(7)). Because any facilities or organizations located on 
the campus of the main provider automatically meet the requirement 
regarding location in the immediate vicinity (existing 
Sec. 413.65(d)(7)), the requirement is only of relevance to off-campus 
facilities or organizations. For clarity, we proposed to relocate the 
requirement to paragraph (e) as described below.
    We also proposed to require, in paragraph (d)(5) of Sec. 413.65, 
all hospital outpatient departments and hospital-based entities, 
including those located on campus and those located off the campus of 
the main provider hospital, to fulfill the obligations currently 
codified and proposed to be retained at Sec. 413.65(g) in order to 
qualify for provider-based status. (Fulfillment of these obligations is 
currently required under Sec. 413.65(g).) As explained further below, 
we also proposed other changes to paragraph (g).
    We did not receive any comments on these proposed changes. 
Therefore, in this final rule, we are adopting the proposed changes as 
final.
e. Additional Requirements Applicable to Off-Campus Facilities or 
Organizations
    We recognize that facilities or organizations located off the main 
provider campus may also be sufficiently integrated with the main 
provider to justify provider-based designation. However, the off-campus 
location of the facilities or organizations may make such integration 
harder to achieve than for on-campus facilities or organizations, and 
such integration should not simply be presumed to exist. Therefore, to 
ensure that off-campus facilities or organizations seeking provider-
based status are appropriately integrated, in the May 9, 2002 proposed 
rule, we proposed to retain certain requirements to demonstrate 
integration that we proposed to remove for on-campus facilities or 
organizations. These requirements were set forth in proposed new 
Sec. 413.65(e). The requirements set forth in proposed paragraphs 
(e)(1), (e)(2), and (e)(3) included the requirements on operation under 
the ownership and control of the main provider (existing 
Sec. 413.65(d)(2)), administration and supervision (existing 
Sec. 413.65(d)(3)), and location (existing Sec. 413.65(d)(7)).
    We did not receive any comments on these proposed changes. 
Therefore, in this final rule, we are adopting the proposed changes as 
final.
f. Joint Ventures
    Consistent with our views as expressed earlier in this preamble 
regarding the assumption that a higher degree of integration can be 
presumed for on-campus facilities or organizations and in recognition 
of the need to promote reasonable cooperation among providers and avoid 
costly duplication of specialty services, in the May 9, 2002 proposed 
rule, we proposed to revise the regulations on joint ventures 
(currently set forth under Sec. 413.65(e)) to limit their scope to 
facilities or organizations not located on the campus of any potential 
main provider. Specifically, we proposed to redesignate Sec. 413.65(e) 
as Sec. 413.65(f) and revise it to state that a facility or 
organization that is not located on the campus of the potential main 
provider cannot be considered provider-based if the facility or 
organization is owned by two or more providers engaged in a joint 
venture. We also proposed to make minor changes to the second sentence 
of the redesignated paragraph (f) to clarify its meaning.
    Comment: One commenter noted that proposed Sec. 413.65(f) states 
that facilities or organizations operated by two or more providers 
engaged in a joint venture cannot be considered provider-based if they 
are not located on the campus of the potential main provider. The 
commenter believed that the rule would be more easily understood if 
paragraph (f) were revised to state that a facility or organization 
owned by two or more providers engaged in a joint venture cannot be 
considered provider-based unless it is located on the campus of at 
least one of the providers engaged in the joint venture.

[[Page 50090]]

    Response: We agree that clarification of the joint venture 
requirements is needed. Therefore, in this final rule we are revising 
Sec. 413.65(f) to clearly state that, in order for a facility or 
organization operated as a joint venture to be considered provider-
based, it must (1) be partially owned by at least one provider; (2) be 
located on the campus of a provider who is a partial owner; (3) be 
provider-based to that one provider whose campus on which the facility 
or organization is located; and (4) meet all of the requirements 
applicable to all provider-based facilities and organizations in 
Sec. 413.65(d). Therefore, to be treated as provider-based, the 
facility operated as a joint venture must be provider-based to the 
provider whose campus on which the facility is located, regardless of 
whether that provider is the majority owner.
    For example, if Hospital A owns 60 percent of Facility C and 
Hospital B owns 40 percent of Facility C, but Facility C is located on 
the campus of Hospital B, Facility C may only be provider-based to 
Hospital B.
    Comment: One commenter asked if the provider where the service is 
located has to be the billing provider of the joint venture. The 
commenter also had questions about the rules concerning public 
awareness and other criteria as they relate to a joint venture service. 
The commenter asked whether the facility had to advertise as a joint 
venture, as a service of the provider where the site is located, or as 
a service of the billing provider.
    Response: As we explained in the response to the previous comment, 
the facility owned by a joint venture must be provider-based to the 
provider whose campus on which the facility is located, regardless of 
whether that provider is the majority owner. The main provider does not 
have to advertise as a joint venture, but as a facility that is 
provider-based to the main provider. Accordingly, the services in the 
facility would be billed using the provider number of the provider 
whose campus on which the facility is located. (The facility cannot, of 
course, be provider-based with respect to both hospitals.) In addition, 
the facility owned by a joint venture must also meet all the 
requirements applicable to all provider-based facilities in 
Sec. 413.65(d).
    Comment: Some commenters requested that CMS allow facilities owned 
by a joint venture but not located on a hospital's campus to be 
considered provider-based. The commenters stated that joint ventures 
among and between hospitals in rural areas greatly help to improve 
access to care.
    Response: While it is not our intent to limit access to care, we 
continue to believe that facilities owned by joint ventures that are 
not located on a main provider's campus do not qualify as provider-
based. Thus, we are not adopting the commenter's request.
    Accordingly, we are adopting as final the proposed Sec. 413.65(f), 
with clarifying changes to the criteria for being determined a joint 
venture as discussed under the responses to comments.
g. Clarification of Obligations of Hospital Outpatient Departments and 
Hospital-Based Entities
    Existing regulations impose specific obligations for hospital 
outpatient departments and hospital-based entities, but do not specify 
the sanction that applies if the facility or organization does not 
fulfill its obligations. To clarify policy on this issue and emphasize 
the importance of compliance with the requirements in this area, in the 
May 9, 2002 proposed rule, we proposed to revise existing 
Sec. 413.65(g) to state that to qualify for provider-based status in 
relation to a hospital, a facility or organization must comply with 
these requirements. In regard to these obligations, we proposed to make 
three changes in existing Sec. 413.65(g). First, we proposed to revise 
paragraph (g)(1) by deleting the second sentence of that paragraph. In 
paragraph (g)(2), we proposed to delete the reference to site-of-
service reductions and instead refer to more accurately determined 
physician payment amounts, in order to more accurately describe how 
payment under the physician fee schedule is determined. In addition, we 
proposed to revise the first sentence of paragraph (g)(7) to clarify 
that the notice requirements in it do not apply where a beneficiary is 
examined or treated for a medical condition in compliance with the 
antidumping rules in Sec. 489.24. We believed that this clarification 
was needed because we believe it would be a violation of the 
antidumping requirements if examination or treatment required under 
Sec. 489.24 was delayed in order to permit notification of the 
beneficiary or the beneficiary's authorized representative. Further, we 
proposed to revise Sec. 413.65(g)(7) to state that notice is required 
once the beneficiary has been appropriately screened and the existence 
of an emergency has been ruled out or the emergency condition has been 
stabilized.
    We did not receive any comments on these proposed changes to 
Sec. 413.65(g)(2) and (g)(7). Therefore, in this final rule, we are 
adopting the proposed changes as final
    With regard to the proposed changes to Sec. 413.65(g)(1), although 
we stated above that we are planning to finalize EMTALA policy proposed 
on May 9, 2002 in a separate document to be published shortly, we are 
adopting as final the proposed change concerning the applicability of 
EMTALA to provider-based entities located on the hospital main campus. 
Currently, under Sec. 413.65(g)(1), if any individual comes to any 
hospital-based entity (including an RHC) located on the hospital main 
campus and a request is made on the individual's behalf for examination 
or treatment of a medical condition, the entity must comply with the 
antidumping rules at Sec. 489.24. We stated in the proposed rule (67 FR 
31477) that, since provider-based entities, as defined in 
Sec. 413.65(b), are not under the certification and provider number of 
the main provider hospital, this language, read literally, would appear 
to impose EMTALA obligations on providers other than hospitals, a 
result that would not be consistent with section 1867 of the Act, which 
restricts EMTALA applicability to hospitals. To avoid confusion on this 
point and the extension of EMTALA requirements to other nonhospital 
providers, we are clarifying at Sec. 413.65(g)(1) that EMTALA applies 
in this scenario to only those departments on the hospital's main 
campus that are provider-based. Accordingly, EMTALA does not apply to 
provider-based entities (such as RHCs) that are either on or off the 
hospital campus.
    Because we received no public comments on this proposed 
clarification on the applicability of EMTALA to provider-based 
entitles, we are adopting as final this one change at Sec. 413.65(g)(1) 
by deleting the second sentence at existing Sec. 413.65(g)(1) that 
addresses this policy. However, we note again that in this final rule 
we are not adopting other clarifications in the proposed rule 
concerning application of EMTALA to provider-based departments, on or 
off the campus, or any other proposals concerning EMTALA. We received 
over 600 pieces of correspondence on these subjects. In order to give 
proper consideration to these comments, we plan to issue a final policy 
on the EMTALA proposals in a separate document.
h. Management Contracts
    Under existing regulations, facilities or organizations operated 
under management contracts may be considered provider-based only if 
they meet specific requirements in Sec. 413.65(f) (proposed in the May 
2002 proposed rule to be redesignated as Sec. 413.65(h)).

[[Page 50091]]

In particular, staff of the facility or organization, other than 
management staff, may not be employed by the management company but 
must be employed either by the provider or by another organization, 
other than the main provider, which also employs the staff of the main 
provider. Under existing regulations, these requirements apply equally 
to on-campus and off-campus facilities or organizations.
    Consistent with our intent to simplify provider-based requirements 
for on-campus facilities or organizations, we proposed to restrict the 
applicability of proposed redesignated paragraph (h) to off-campus 
facilities or organizations. In addition, we proposed two additional 
changes that we believe are needed to respond to questions that are 
raised frequently about the regulation. First, we proposed to specify 
that a facility or organization operated under a management contract 
may be considered provider-based only if the main provider (or an 
organization that also employs the staff of the main provider and that 
is not the management company) employs the staff of the facility or 
organization who are directly involved in the delivery of patient care, 
except for management staff and staff who furnish patient care services 
of a type that would be paid for by Medicare under a fee schedule 
established by regulations at 42 CFR Part 414. We did not propose to 
specify who may employ other support staff, such as maintenance or 
security personnel, and who are not directly involved in providing 
patient care, nor did we propose to require licensed professional 
caregivers such as physicians, physician assistants, or certified 
registered nurse anesthetists to become provider employees. We also 
proposed to revise the regulations to clarify at Sec. 413.65(h)(2) that 
so-called ``leased'' employees (that is personnel who are actually 
employed by the management company but provide services for the 
provider under a staff leasing arrangement) are not considered to be 
employees of the provider for purposes of this provision.
    Comment: One commenter supported the proposal eliminating 
restrictions on management contracts and joint ventures for on-campus 
facilities. The commenter also supported the modification to the 
management contract rules applicable to off-campus facilities that 
requires the main provider to employ only those staff who are directly 
involved in the delivery of patient care, other than staff who may be 
paid under the Medicare fee schedule, management staff, and other 
support staff. Another commenter recommended that CMS limit the 
management contract restrictions for off campus facilities by allowing 
the management company to employ at least some of the patient care 
staff at the facility, as long as the facility remains integrated with, 
and under the control of, the main provider.
    Response: We agree with the commenter who stated that it is 
appropriate to require the main provider to employ only those staff who 
are directly involved in the delivery of patient care, other than staff 
who may be paid under the Medicare fee schedule, management staff, and 
other support staff. We considered the comment suggesting that the 
regulations be further changed to allow at least some of these staff to 
be provided under a management contract. However, we are not adopting 
this change. We note that the revisions in the proposed rule would have 
significantly relaxed the requirements relating to management contracts 
by restricting the scope of those provisions to off-campus facilities 
and by expanding the range of services that may be furnished under 
management contracts in those facilities. Under our proposal, even if 
only the services described in this comment would have to be furnished 
by the provider, the provider would be permitted to bill as if it 
delivered the services itself. If we were to further weaken the 
management contract requirements, this would remove any effective 
control on such contracts, thereby allowing the provider to claim 
provider-based payment for a facility with which it has only a 
contractual relationship. We believe such a tenuous connection between 
the provider and the facility does not warrant payment for the 
facility's services as services of an ``integral and subordinate'' part 
of the provider. Therefore, we are not adopting this comment.
    Comment: One commenter recommended that inpatient facilities be 
exempted from the management contract requirements in proposed 
Sec. 413.65(h).
    Response: We note that our proposed rule accomplished much of what 
the commenter recommended, in that it would exempt on-campus 
facilities, including those facilities that treat a patient population 
made up largely or entirely of inpatients, from the management contract 
requirements in Sec. 413.65(h). We are adopting this proposal without 
change in the final rule. However, for the reasons discussed earlier in 
responding to comments on the scope of the provider-based requirements, 
we do not believe it would be appropriate to exclude off-campus 
facilities and organizations from the management contract requirements.
    Comment: One commenter recommended that CMS regional offices be 
authorized to exempt facilities or organizations from the management 
contract requirements on a case-by-case basis, depending on the 
circumstance in each case.
    Response: We agree that regional offices need to exercise judgment 
in application of the criteria, but do not agree that the exercise of 
that judgment should include discretion to entirely waive applicability 
of a requirement. This could lead to wide variations in the 
applicability of the provider-based criteria in different areas of the 
country. Therefore, we are not making any change in the final rule 
based on this suggestion.
    Comment: Some commenters requested clarification of the 
relationship between provision of services under management contracts 
and under arrangements of the kind described in section 1861(w)(1) of 
the Act. The commenters further recommended that proposed 
Sec. 413.65(i), which states that a facility or organization cannot 
qualify for provider-based status if all services at the facility are 
furnished under arrangements, be revised so that it does not apply to 
on-campus facilities. The commenters expressed concern that if that 
change is not made, management contracts for on-campus facilities or 
organizations that are permitted under proposed Secs. 413.65(d) and (h) 
would nevertheless be prohibited by Sec. 413.65(i).
    Response: Generally, we believe there is a substantial difference 
between the use of management contracts to obtain some or all input 
services needed to operate a health care facility, including not only 
management but professional and other staffing, security, maintenance, 
other support services, and the use of section 1861(w)(1) arrangements 
by a provider to obtain specialized health care services that it does 
not itself offer, and that are needed to supplement the range of 
services that the provider does offer its patients. In the first 
situation, it is possible that all or virtually all services needed to 
operate a facility could be obtained under contract, resulting in 
nothing more than a nominal connection between the facility and the 
provider that claims it as an integral and subordinate part. To prevent 
a facility operated in this way from inappropriately claiming to be 
part of a provider, reasonable controls on management contracts are 
needed. In the latter case, a provider may

[[Page 50092]]

legitimately obtain limited specific services under arrangements 
without sacrificing its ability to function independently as a provider 
and directly furnish care to its patients.
    In this context, we would agree with the commenter that a provider 
that operates a facility that qualifies legitimately as provider-based 
may choose to obtain some specialized services for its patients under 
arrangements without needing to meet the management contract 
requirements of Sec. 413.65(h) with respect to each individual service. 
As noted above, these requirements apply to facilities, not to 
individual services. However, we continue to believe it would be 
inappropriate for a facility, whether located on or off campus, to 
evade the provider-based requirements by claiming to provide all of its 
services under arrangements. Therefore, we are not making further 
changes to Sec. 413.65(i).
    Comment: One commenter stated that CMS' intentions were unclear in 
the proposed regulations at Sec. 413.65(h)(1) that state, ``Leased 
employees (that is, personnel who are actually employed by the 
management company but provide services for the provider under a staff 
leasing or similar agreement) are not considered to be employees of the 
provider for purposes of this paragraph.'' The commenter added that it 
is unclear if this provision prohibits arrangements under which a 
management company employs clinical staff paid under a fee schedule 
that are subsequently leased to the main provider to provide services 
in the provider-based facility. The commenter suggested that we clarify 
this language and, in the final rule, state that the exception to the 
main provider employment requirement for patient care staff that 
furnish services paid for under a fee schedule also applies to leased 
employees from a management company.
    Response: In the proposed rule, we stated that the main provider is 
required to employ only those staff who are directly involved in the 
delivery of patient care other than staff who may be paid under the 
Medicare fee schedule, management staff, and other support staff. 
Therefore, the main provider may not use ``leased'' employees if those 
employees are directly involved in delivering patient care and cannot 
be paid under the Medicare fee schedule. However, this provision would 
not prohibit arrangements under which a management company employs 
clinical staff who may be paid under a fee schedule that are leased to 
the main provider to provide services in the provider-based facility. 
The management company may otherwise employ and provide the staff who 
furnishes patient care services that may be paid for by Medicare under 
a fee schedule. Accordingly, as the commenter recommended, we are 
clarifying the regulations text to state that, other than staff that 
may be paid under a Medicare fee schedule, the main provider may not 
utilize the services of leased employees who are directly involved in 
patient care in off-campus facilities.
    Comment: One commenter stated that the proposed regulation that 
would require the main provider to employ all staff who ``are directly 
involved in the delivery of patient care, except for management staff * 
* *'' is confusing, because in many instances, managers are involved 
both in management activities and in furnishing direct patient care.
    Response: If these managers are also medical professionals who may 
receive payment for their patient care services under a Medicare fee 
schedule, they do not need to be employed directly by the main 
provider.
    Comment: Some commenters stated that the prohibition of off-campus 
management contracts will have harmful consequences, particularly in 
areas where private hospitals have partnerships with local government 
to operate off-campus psychiatric facilities in remote, underserved 
areas. The commenter explained that the county government manages an 
off-campus psychiatric facility as an inpatient psychiatric unit of a 
private hospital, and that county employees provide all patient care 
services in the unit. Although the facility is currently grandfathered 
under section 404(a) of BIPA, the facility will be unable to qualify 
for provider-based status when the grandfathering period expires, 
resulting in a loss of essential mental health services to the 
surrounding communities. The commenters requested that counties that 
have partnerships with private entities in order to ensure access to 
care and meet all other provider-based criteria be exempted from the 
management contract prohibition.
    Response: While we are sympathetic to the needs of the medically 
underserved, we do not believe the management contract requirements to 
be overly restrictive. Rather, we believe the employment of the staff 
of an off-campus facility is a significant factor in determining the 
degree to which a facility or department is integrated (that is, 
provider-based) with its parent hospital. This is particularly 
important in a facility operated under a management contract. Because 
such a facility already receives management (and typically, many other 
services and supplies) from the management company, employment of the 
caregivers by the provider provides a strong link to the provider's 
other operations and demonstrates that the facility continues, despite 
the purchase of management services under contract, to be an integral 
and subordinate part of the provider. As such, we do not believe that 
it is appropriate to exempt any off-campus facilities from the 
management contract requirement.
    Accordingly, we are adopting as final the proposed Sec. 413.65(h) 
with one change to paragraph (h)(1) to clarify use of leased employees 
by a provider as discussed in the response to comments.
i. Inappropriate Treatment of a Facility or Organization as Provider-
Based
    Below we describe the steps that we would take if we discover that 
a facility is billing as provider-based without having requested a 
determination or having submitted a complete attestation regarding 
provider-based status as described earlier, or if the facility received 
a provider-based determination but the main provider did not inform CMS 
of a subsequent material change that affected the provider-based status 
of its facility.
(1) Inappropriate billing
    The existing regulations at Sec. 413.65(i) state that if we 
discover that a provider is billing inappropriately, we will recover 
the difference between the amount of payments that actually were made 
and the amount of payments that CMS estimates should have been made in 
the absence of a determination of provider-based status. Existing 
Sec. 413.65(j)(2) states that we would adjust future payments to 
estimate the amounts that would be paid, in the absence of a provider-
based determination, if all other requirements for billing are met. In 
addition, existing Sec. 413.65(j)(5) describes a procedure under which 
CMS would continue payments to a provider for services of a facility or 
organization that had been found not to be provider-based, at an 
adjusted rate calculated as described in existing paragraph (j)(2), for 
up to 6 months in order to permit the facility or organization adequate 
time to meet applicable enrollment and other billing requirements. 
While CMS is not legally obligated to continue payments in this matter, 
we believe it would be appropriate to do so, on a time-limited basis, 
to allow for an orderly transition to either provider-based or 
freestanding

[[Page 50093]]

status for the facility and to avoid disruption in the delivery of 
services to patients, particularly Medicare patients, who may be 
relying on the facility for their medical care.
    In the May 9, 2002 proposed rule, we proposed to adopt a policy 
concerning recoupment and continuation of payment that closely 
parallels the policy stated in existing regulations at Sec. 413.65(j). 
Under proposed Sec. 413.65(j)(1), if CMS learns that a provider has 
treated a facility or organization as provider-based and the provider 
did not request an advance determination of provider-based status from 
CMS under proposed Sec. 413.65(b)(3), and CMS determines that the 
facility or organization did not meet the requirements for provider-
based status under proposed Sec. 413.65(d) through (i), as applicable 
(or, in any period before the effective date of these regulations, the 
provider-based requirements in effect under Medicare program 
regulations or instructions), CMS would take several actions. First, we 
proposed to issue notice to the provider, in accordance with proposed 
paragraph (j)(3), that payments for past cost reporting periods may be 
reviewed and recovered as described in proposed paragraph (j)(2)(ii), 
that future payments for services in or at the facility or organization 
will be adjusted as described in proposed paragraph (j)(4), and that 
continued payments to the provider for services of the facility or 
organization will be made only in accordance with proposed paragraph 
(j)(5). In addition, we proposed (proposed Sec. 413.65(j)(1)(ii)) that 
CMS would, except for providers protected under section 404(a) or (c) 
of BIPA (implemented at Sec. 413.65(b)(2) and (b)(5)) or the exception 
for good faith effort at existing Sec. 413.65(i)(2) and (i)(3)), 
recover the difference between the amount of payments that actually was 
made to that provider for services at the facility or organization and 
an estimate of the payments that CMS would have made to that provider 
for services at the facility or organization in the absence of 
compliance with the requirements for provider-based status. We proposed 
to make recovery for all cost reporting periods subject to reopening in 
accordance with Secs. 405.1885 and 405.1889. Also, we proposed to 
adjust future payments to estimate the amounts that would be paid for 
the same services furnished by a freestanding facility.
    Recovery of past payments would be limited in certain 
circumstances. If a provider did not request a provider-based 
determination for a facility by October 1, 2002, but is included in the 
grandfathering period under Sec. 413.65(b)(2), we proposed to recoup 
all payments subject to the reopening rules at Secs. 405.1885 and 
405.1889, but not for any period before the provider's cost reporting 
period beginning on or after July 1, 2003.
    Comment: One commenter stated that, under current policies, 
teaching hospitals may claim the time residents spend training at 
freestanding facilities (known as ``nonhospital sites'') only when 
there is a written agreement between the hospital and the nonhospital 
site. No written agreement is needed if the site is provider-based. The 
commenter asked that if CMS determines that a facility does not meet 
the provider-based rules, the indirect medical education (IME) payments 
that were received by the teaching hospital should not be affected.
    Response: If CMS determines that a provider, whether teaching or 
nonteaching, is inappropriately receiving payment in a facility since 
the facility is determined not to be provider-based, CMS would take 
several actions, including, as described under Sec. 413.65(j)(3), 
reviewing payments for past cost reporting periods in order to recover 
the difference between the amount of payment that was made to the 
provider and an estimate of payments that CMS would have made had the 
facility not been provider-based. It is conceivable that overpayments 
may have been made, not only for IME but also for direct GME, to a 
teaching hospital that incorrectly treated a facility as provider-
based, and, as such, we would recover an amount of payment for both IME 
and direct GME that would otherwise not have been received by the 
hospital had the facility been freestanding.
(2) Good Faith Effort
    We proposed to retain the existing exception for good faith effort 
(proposed redesignated Sec. 413.65(j)(2)). Under this exception, we 
specified that we would not recover any payments for any period before 
the beginning of the hospital's first cost reporting period beginning 
on or after January 10, 2001 (the effective date of the existing 
provider-based regulations for providers not grandfathered under 
Sec. 413.65(b)(2)) if during all of that period--
     The requirements regarding licensure and public awareness 
at Sec. 413.65(d)(1) and proposed redesignated (d)(4) were met;
     All facility services were billed as if they had been 
furnished by a department of a provider, a remote location of a 
hospital, a satellite facility, or a provider-based entity of the main 
provider; and
     All professional services of physicians and other 
practitioners were billed with the correct site-of-service indicator, 
as described at Sec. 413.65(g)(2).
    Under Sec. 413.65(j)(5), we proposed that CMS would continue 
payment to a provider for services of a facility or organization for a 
limited period of time, in order to allow the facility or organization 
or its practitioners to meet necessary enrollment and other 
requirements for billing on a freestanding basis. Specifically, the 
notice of denial of provider-based status sent to the provider would 
ask the provider to notify CMS in writing, within 30 days of the date 
the notice is issued, as to whether the provider intends to seek an 
advance determination of provider-based status for the facility or 
organization, or whether the facility or organization (or, where 
applicable, the practitioners who staff the facility or organization) 
will be seeking to enroll and meet other requirements to bill for 
services as a freestanding facility.
    If the provider indicates that it will not be seeking an advance 
determination or that the facility or organization or its practitioners 
will not be seeking to enroll, or if CMS does not receive a response 
within 30 days of the date the notice was issued, all payments under 
proposed paragraph (j)(5) would end as of the 30th day after the date 
of notice. If the provider indicates that it will be seeking an advance 
determination, or that the facility or organization or its 
practitioners will be seeking to meet enrollment and other requirements 
for billing for services in a freestanding facility, payment for 
services of the facility or organization would continue, at the 
adjusted amount described in proposed paragraph (j)(4) for as long as 
is required for all billing requirements to be met (but not longer than 
6 months).
    Continued payment would be allowed only if the provider or the 
facility or organization or its practitioners submits, as applicable, a 
complete request for an advance provider-based determination or a 
complete enrollment application and provide all other required 
information within 90 days after the date of notice; and the facility 
or organization or its practitioners furnishes all other information 
needed by CMS to process the request for provider-based status or, as 
applicable, the enrollment application and verify that other billing 
requirements are met. If the necessary applications or information are 
not provided, CMS would terminate all payment to the

[[Page 50094]]

provider, facility, or organization as of the date CMS issues notice 
that necessary applications or information have not been submitted.
    As clarified in Sec. 413.65(o) of this final rule, we would not 
resume provider-based payment to such a facility or organization based 
on an attestation of compliance. On the contrary, if a facility or 
organization is found by CMS to have been inappropriately treated as 
provider-based under paragraph (j) for any period on or after October 
1, 2002 (or, in the case of facilities or organizations described in 
Sec. 413.65(b)(2), for cost reporting periods starting on or after July 
1, 2003), CMS will not treat the facility or organization as provider-
based for payment until CMS has determined, based on documentation 
submitted by the provider, that the facility or organization meets all 
requirements for provider-based status under Part 413.
    Comment: One commenter suggested that, given the complexities 
surrounding the provider-based rules and the delays in implementing the 
regulations and establishing a uniform process, the final rule should 
provide that any provider that complies with the good faith exception 
under Sec. 413.65(j)(2) should also not be subject to any retroactive 
recoupment of payments under proposed paragraphs (j) and (k).
    Response: The regulations at Sec. 413.65(j)(2) state that recovery 
of overpayments will not be made for any period before the beginning of 
the hospital's first cost reporting period beginning on or after 
January 10, 2001, if the provider made a good faith effort to treat its 
facilities as provider-based during all that period. This good faith 
exception was originally included in the April 7, 2000 regulations 
(originally applicable to periods before October 10, 2000, the original 
effective date of the provider-based regulations, but subsequently 
delayed to January 10, 2001).
    We believe a good faith exception is appropriate for cost reporting 
periods beginning before January 10, 2001, when the provider-based 
regulations first became effective, since it would protect providers 
that were unaware of the new regulations, yet operated facilities that 
met a minimal threshold for integration. However, CMS has now published 
two proposed rules and one final rule on provider-based status, has 
published ``Qs and As'' on its website, and has consulted extensively 
with the hospital industry through teleconferences and meetings. Given 
the publicity that the provider-based regulations have received and the 
latest delayed effective date of these rules, we do not believe it is 
appropriate to extend the scope of the good faith exception.
    Accordingly, we are adopting the proposals discussed above as 
final. In addition, we are revising section 413.65(j)(2)(ii) to refer 
to ``billed with the correct site-of-service'' rather than ``site-of-
service indicator'', for consistency with the revision to 
Sec. 413.65(g)(2) described above.
j. Temporary Treatment as Provider-Based and Correction of Errors
    Under proposed revised Sec. 413.65(k), we proposed to specify the 
procedures for payment for the period between the time a request is 
submitted until a provider-based determination is made, and the steps 
we would take if we discover that a facility for which a provider 
previously received a provider-based determination no longer meets the 
requirements for provider-based status.
    First, we proposed that, if a provider submits a complete request 
for a provider-based determination for a facility that has not 
previously been found by CMS to have been inappropriately treated as 
provider-based under proposed revised Sec. 413.65(j), the provider may 
bill and be paid for services at the facility as provider-based from 
the date of the application until the date that we determine that the 
facility or organization does not meet the provider-based rules under 
Sec. 413.65. If CMS determines that the requirements for provider-based 
status are not met, CMS will recover the difference between the amount 
of payments that actually was made since the date the complete request 
for a provider-based determination was submitted and the amount of 
payments that CMS estimates should have been made in the absence of 
compliance with the provider-based requirements. We indicated that we 
would consider a request ``complete'' only if it included all 
information we need to make an advance determination of provider-based 
status under Sec. 413.65(b)(3).
    Second, similar to what we specify in existing Sec. 413.65(k), if 
we determine that a facility or organization that previously received a 
provider-based determination no longer qualifies for provider-based 
status, and the failure to qualify for provider-based status resulted 
from a material change in the relationship between the provider and the 
facility or organization that the provider reported to CMS under 
Sec. 413.65(c), treatment of the facility or organization as provider-
based ceases with the date that CMS determines that the facility or 
organization no longer qualifies for provider-based status.
    Third, if we determine that a facility or organization that had 
previously received a provider-based determination no longer qualifies 
for provider-based status, and if the failure to qualify for provider-
based status resulted from a material change in the relationship 
between the provider and the facility or organization that the provider 
did not report to CMS, as required under Sec. 413.65(c), we proposed to 
take the actions with respect to notice to the provider, adjustment of 
payments, and continuation of payment described in proposed paragraphs 
(j)(3), (j)(4), and (j)(5). In short, we would treat such cases in the 
same way as if the provider had never obtained an advance 
determination. However, with respect to recovery of past payments for 
providers included in the grandfathering provision at proposed revised 
Sec. 413.65(b)(2), we proposed not to recover payments for any period 
before the provider's first cost reporting period beginning on or after 
July 1, 2003.
    Also, we proposed that, as under regulations currently in effect, 
the exception for good faith concerning recovery of overpayments under 
proposed revised Secs. 413.65(j)(2) described above would only apply to 
any period before the beginning of the hospital's first cost reporting 
period beginning on or after January 10, 2001.
    Comment: One commenter requested that provider-based payment for 
services of a facility be allowed to continue while the facility is 
challenging any determination that it is not provider-based.
    Response: As we explain in the proposed revised regulations at 
Sec. 413.65(k), provider-based payment for services at a facility will 
continue until the date that CMS determines that the facility does not 
meet the provider-based rules. Once a determination concluding that a 
facility does not meet the provider-based rules is made, we believe it 
is inappropriate to continue paying for services at that facility as 
provider-based. Then, depending upon a number of factors, including 
whether the facility had previously been determined by CMS to be 
provider-based and whether the loss of provider-based status resulted 
from a material change that was or was not reported to CMS, CMS will 
take actions with respect to recovery of overpayments and continuation 
of payments at the appropriate nonprovider-based reduced rate, as 
described in the proposed revised Sec. 413.65(j).
    Comment: One commenter noted that proposed paragraph (k) contains 
some rules applicable to facilities for which there has not been a 
previous

[[Page 50095]]

determination of provider-based status (paragraph (k)(1)) and others 
that apply to facilities for which such a determination has been made 
(paragraphs (k)(2) and (k)(3)). The commenter believed these rules 
would be more clearly understood if the rules for each situation were 
stated in separate paragraphs.
    Response: We agree with the commenter. In this final rule, we are 
placing the text of proposed paragraph (k)(1) concerning facilities for 
which there has been no previous determination in new paragraph (k), 
and the text of proposed paragraphs (k)(2) and (k)(3) concerning 
facilities for which previous determinations have been made in 
paragraph (l). Proposed sections (l) through (n) are being redesignated 
as paragraphs (m) through (o).
    In addition, as noted earlier in this preamble, we state in 
Sec. 413.85(o) of this final rule that, effective for any period on or 
after October 1, 2002 (or, in the case of facilities or organizations 
described in Sec. 413.85(b)(2), for cost reporting periods starting on 
or after July l, 2003), if a facility or organization previously was 
determined by CMS to be provider-based but no longer qualifies as 
provider-based because of a material change occurring during those 
periods that was not reported to CMS, CMS will not treat the facility 
or organization as provider-based for payment until CMS has determined, 
based on documentation submitted by the provider, that the facility or 
organization meets all requirements for provider-based status under 
Part 413.
    Comment: Regarding the references in paragraphs (k)(1) and (k)(2) 
of proposed Sec. 413.65 (to be redesignated as (l)(2) and (l)(3), as 
explained above) to reporting of material changes in the relationship 
between a provider and a facility or organization that had been found 
to be provider based, one commenter recommended that the term 
``material change'' be defined more specifically, to give providers 
more direction as to what events to report. The commenter believed a 
material change should be defined as including only ``a change of 
ownership, adoption of a new management contract for an off-campus 
department of a provider or a provider-based entity, change to an off-
campus location, or a change in licensure status.''
    Response: We share the commenter's belief that the events listed 
would be considered material changes. However, we do not agree that the 
term ``material change'' should include only these events. On the 
contrary, other types of occurrences, such as formation of a separate 
medical staff for the facility or organization or discontinuation of a 
service on the main provider's campus that would prevent referral of 
patients from the facility organization to the main provider would also 
represent material changes. Because we believe limiting the definition 
of the term ``material change'' as suggested by the commenter would 
inappropriately restrict the range of events to be reported, we are not 
adopting this comment.
    Comment: One commenter recommended that reporting of material 
changes not be required for on-campus facilities. The commenter 
believed this reporting is unnecessary because adequate safeguards are 
already built into the provider enrollment requirements.
    Response: Several of the kinds of changes noted in response to the 
preceding comment, relating to the integration of clinical services of 
the facility or organization with those of the main provider, are not 
subject to any mandatory reporting under the provider enrollment 
process but could affect provider-based status. Therefore, we are not 
making any change in the final rule based on this comment.
    Comment: One commenter noted that, in the preamble to the proposed 
rule, CMS states that there would be `` * * * a delay in the effective 
date for any facility that is found not to meet the provider-based 
criteria following a previous advance determination, if the reason the 
provider-based criteria are not met is a material change in the 
provider-facility relationship that was properly reported to CMS. The 
removal of provider-based status would be effective following 
notification of the redetermination, but not less than 6 months after 
the date of notification'' (67 FR 31483). The commenter pointed out 
that this minimum 6-month compliance period is not included in the 
proposed Sec. 413.65(k)(2). Rather, this regulation states that under 
these circumstances, provider-based status ``ceases with the date that 
CMS determines that the facility or organization no longer qualifies 
for provider-based status.'' The commenter requested that CMS revise 
Sec. 413.65(k)(2) to reflect the minimum 6-month compliance period.
    Response: We agree that the language quoted by the commenter from 
page 31483 of the preamble to the proposed rule is inconsistent with 
the language in the proposed regulations text. While this language is 
consistent with the current policy as stated in existing 
Sec. 413.65(k), the inclusion of the language on page 31483 of the 
proposed rule was inadvertent on our part. We note that the correct 
proposed policy, which correctly mirrors the proposed regulation text 
at Sec. 413.65(k)(2), is stated on page 31487 of the proposed rule. 
Specifically, we state that ``if we determine that a facility of 
organization that had previously received a provider-based 
determination no longer qualifies for provider-based status, and if the 
failure to qualify for provider-based status resulted from a material 
change in the relationship between the provider and the facility or 
organization that the provider reported to CMS under Sec. 413.65(c), 
treatment of the facility or organization as provider-based ceases with 
the date that CMS determines that the facility or organization no 
longer qualifies for provider-based status.'' We did not intend to 
propose to allow a 6-month grace period before a facility's status as 
provider-based would be revoked.
    While we regret the confusion caused, we are not adopting the 
commenter's request regarding a 6-month grace period prior to removal 
of a provider-based status designation, since we do not believe it 
would be appropriate to provide for payment to the provider as 
provider-based for a period for which the provider was clearly not 
provider-based. While we do not plan to recover overpayments from a 
facility or organization that no longer qualifies as provider-based if 
the provider reported a material change in the relationship between the 
provider and the facility or organization, CMS retains the authority to 
recoup overpayments and apply civil monetary penalties if a provider is 
in violation of section 1128A or 1128B of the Act.
    Accordingly, we are adopting our proposals as final with the 
following changes: We are reorganizing the text of proposed 
Sec. 413.65(k) into new paragraphs (k) and (1), without substantive 
change, to distinguish the rules applicable to facilities for which 
there has been no previous determination from those that apply to 
facilities for which a previous determination has been made. Proposed 
sections (l) through (n) are being redesignated as paragraphs (m) 
through (o).
k. Technical Amendments
    We proposed to correct a typographical error in the heading of 
paragraph (m) of Sec. 413.65 (redesignated as paragraph (n) in this 
final rule) so that it reads ``FQHCs and ``look alikes' ''.
    In paragraph (n) of Sec. 413.65 (redesignated as paragraph (o) in 
this final rule), we proposed to add a cross-reference to the 
requirements for

[[Page 50096]]

provider-based status described in paragraph (b), for purposes of 
specifying the effective date of provider-based status.
    We did not receive any public comments on these technical 
amendments and are adopting them as final without change except for the 
redesignation of paragraph codes indicated above.




L. CMS Authority Over Reopening of Intermediary Determinations and 
Intermediary Hearing Decisions on Provider Reimbursement

    Our existing regulations provide various means for the reopening 
and revision of an intermediary determination or an intermediary 
hearing decision on provider reimbursement by the fiscal intermediary 
or the intermediary hearing officer(s) responsible for the 
determination or the hearing decision, respectively. (In this 
discussion, we will use the term ``intermediary'' to refer to, as 
applicable, the intermediary responsible for an intermediary 
determination (see Secs. 405.1801(a) and 405.1803) or the intermediary 
hearing officer or panel of intermediary hearing officers responsible 
for an intermediary hearing decision (see Secs. 405.1817 and 
405.1831.)) Section 405.1885(a) provides that an intermediary ``may'' 
reopen an intermediary determination or an intermediary hearing 
decision, on its own initiative or at the request of a provider, within 
3 years of the date of the notice of the intermediary determination or 
intermediary hearing decision. However, while Sec. 405.1885(a) provides 
the intermediary with some discretion about whether to reopen an 
intermediary determination or an intermediary hearing decision, we have 
always considered the intermediary's discretion to be limited by any 
directives that we may issue. Thus, although Sec. 405.1885(a) provides 
that the intermediary ``may'' reopen, that provision neither states nor 
implies that the Secretary lacks authority to direct the intermediary 
to reopen or not reopen a specific matter. Furthermore, we have 
prescribed, in Medicare Provider Reimbursement Manual, Part I 
(``PRM''), section 2931.2, criteria that guide the intermediary's 
reopening actions under Sec. 405.1885(a) in the absence of a particular 
CMS directive. Also, given that the intermediaries are our (CMS') 
contractors, we have always believed that, under basic principles of 
agency law, we have inherent authority to direct the actions of our own 
agents with respect to reopening matters under Sec. 405.1885(a), just 
as for any other aspect of program administration. (See also 42 U.S.C. 
1395h and 1395kk(a); and 42 CFR 421.1(c), 421.5(b), 421.100(f), 
421.124(a), and 421.126(b).)
    Under Sec. 405.1885(b), an intermediary determination or an 
intermediary hearing decision ``must be reopened and revised by the 
intermediary if, within the aforementioned 3-year period, the Centers 
for Medicare & Medicaid Services notifies the intermediary that such 
determination or decision is inconsistent with the applicable law, 
regulations, or general instructions issued by the Centers for Medicare 
& Medicaid Services.'' We have always considered our notice, which is a 
precondition of mandatory intermediary reopening under 
Sec. 405.1885(b), to be one in which we explicitly direct the 
intermediary to reopen. We have never considered a notice or other 
document from us that only states or implies that an intermediary 
determination or an intermediary hearing decision is inconsistent with 
law, regulations, CMS ruling, or CMS general instructions, sufficient 
to require intermediary reopening under Sec. 405.1885(b). Moreover, our 
understanding has always been that the phrase ``law, regulations, or 
general instructions'' in Sec. 405.1885(b) refers to the legal 
provisions in effect, as we understood such legal provisions at the 
time the intermediary rendered the determination or hearing decision. 
Conversely, we have never considered changes in, or judicial 
explications of, ``law, regulations, or general instructions,'' that 
occur after the intermediary rendered the determination or hearing 
decision, sufficient to require intermediary reopening under 
Sec. 405.1885(b). Also, Sec. 405.1885(b) refers to the Secretary's 
agreement with an intermediary; we believe such agreement requires the 
intermediary to apply the law, regulations, CMS rulings, and CMS 
general instructions in effect, as we understood such legal provisions 
when the intermediary determination or hearing decision was rendered. 
Accordingly, we have not instructed intermediaries to reopen and 
recover reimbursement, or to reopen and award additional reimbursement, 
due to a subsequent change in law or policy, whether the subsequent 
change is made in response to judicial precedent or otherwise.
    Section 405.1885(c) provides: ``Jurisdiction for reopening a 
determination or decision rests exclusively with that administrative 
body that rendered the last determination or decision.'' We have always 
interpreted Sec. 405.1885(c) to provide that authority to reopen an 
intermediary determination or an intermediary hearing decision is 
vested exclusively with the responsible intermediary, as distinct from 
the Provider Reimbursement Review Board (PRRB) and the CMS 
Administrator (in the context of reviewing PRRB decisions (see 
Sec. 405.1875)) which may not reopen an intermediary determination or 
hearing decision and may not review an intermediary's denial of 
reopening. However, we have never considered the intermediary's 
authority to reopen an intermediary determination or hearing decision, 
which is exclusive under Sec. 405.1885(c) only as to the PRRB and the 
CMS Administrator (in the context of reviewing PRRB decisions), to 
limit our authority to direct the actions of our agents with respect to 
reopening matters. (See Your Home Visiting Nurse Services, Inc. v. 
Shalala, 525 U.S. 449, 452-53 (1999)(Sec. 405.1885(c) divests the PRRB 
of ``appellate jurisdiction to review the intermediary's refusal'' to 
reopen, but does not limit the Secretary's authority to direct an 
intermediary's ``original jurisdiction'' in the reopening area).) As 
discussed previously, the regulations do not constrain our authority to 
direct the intermediary to reopen or not reopen a specific matter; 
instead, we have placed generally applicable limits on the 
intermediary's discretion through the reopening criteria prescribed in 
section 2931.2 of the PRM. In addition, we have always believed that, 
under basic principles of agency law, the intermediary's discretion 
over a particular reopening matter is no less circumscribed by any CMS 
directives that may be issued than would be the case for any other 
aspect of program administration.
    Two recent court decisions conflict with our longstanding 
interpretation of the forgoing provisions of the reopening regulations. 
In Monmouth Medical Center v. Thompson, 257 F.3d 807 (D.C. Cir. 2001), 
the court found that a statement in a CMS ruling, changing CMS' 
interpretation of the statute in response to circuit court precedent, 
constituted a directive to the intermediary under Sec. 405.1885(b) to 
reopen, notwithstanding an explicit directive in the CMS ruling that 
the change in interpretation was to be applied only prospectively. The 
court ordered the intermediary to reopen over the Secretary's 
objection. We disagree with the court's decision, which we believe does 
not comport with our settled interpretation (discussed above) of 
Sec. 405.1885(b). Therefore, in the May 9, 2002 proposed rule, we 
proposed to revise Sec. 405.1885(b) to make clear that,

[[Page 50097]]

in order to trigger the intermediary's obligation to reopen, our notice 
to the intermediary must explicitly direct the intermediary to reopen 
based on a finding that an intermediary determination or an 
intermediary hearing decision is inconsistent with the law, 
regulations, CMS ruling, or CMS general instructions in effect, and as 
we understood those legal provisions, at the time the determination or 
decision was rendered. We also proposed to clarify Sec. 405.1885 to 
reflect our longstanding interpretation (discussed above) that a change 
of legal interpretation or policy through regulation, CMS ruling, or 
CMS general instruction, whether made in response to judicial precedent 
or otherwise, is not a basis for reopening an intermediary 
determination or an intermediary hearing decision under this section.
    The Monmouth Medical Center decision was followed in Bartlett 
Memorial Medical Center v. Thompson, 171 F. Supp. 2d 1215 (W.D. Okla. 
2001). In a subsequent order in the Bartlett Memorial Medical Center 
case, the court concluded that a CMS ruling, which prohibited 
intermediary reopening on a particular reimbursement issue, improperly 
interfered with the intermediary's discretion under Sec. 405.1885(c) 
over provider requests for reopening under Sec. 405.1885(a). 
Accordingly, the court ordered the intermediary to act on the provider 
reopening requests without regard to the CMS ruling or any other 
involvement of the Secretary. We disagree with the court's decision, 
which we believe is contrary to our settled in