HEALTH INDUSTRY ONLINE - Alternatives to Freestanding Facilities

As Medicare reimbursement rates for freestanding healthcare facilities continue to fall, physician owners of such facilities have begun exploring organizational and operational alternatives. Three options that exist for physicians seeking to assure the financial feasibility of freestanding healthcare facilities: (1) obtain provider-based status for the facility; (2) enter into an under-arrangements agreement with a hospital; or (3) enter into a purchased services arrangement with a hospital.

Obtaining provider-based status is the first alternative to freestanding facility status and the alternative which has the most limited applicability. Because of the higher costs associated with operating a full-service hospital, Medicare reimbursement rates for certain healthcare services offered in hospitals are often higher than Medicare reimbursement rates for the same services offered in freestanding facilities. If a freestanding facility obtains provider-based status, Medicare will reimburse the facility at the higher hospital rate for the services provided at the facility. Consequently, the provider-based facilities are likely to enjoy higher revenues than freestanding facilities that provide the same healthcare services as the provider-based facilities. In order for a freestanding facility to obtain provider-based status, the facility must be owned, at least in part, by the hospital and located on the hospital campus. Furthermore, the facility must be: (1) operated under the same license as the hospital, if applicable; (2) clinically and financially integrated with the hospital; (3) held out to the public as part of the hospital and (4) if more than one hospital owns the facility, the facility must be provider-based as to the hospital on whose campus it is located.

One benefit to entering into a joint venture with a hospital is that by co-owning a facility, the physicians may minimize the managerial demands associated with ownership as the hospital will likely be able to contribute administrative expertise to the venture. In addition, hospitals already have managed care contracts. Depending on the specific terms and requirements of those arrangements, it is possible the joint venture would not have to wait for an indefinite period of time for managed care contracts.

A purchased services arrangement with a hospital is a second alternative to a freestanding facility. Purchased services arrangements are similar to under arrangements (as described in the next paragraph) in that the hospital pays a fair market, per click fee to a service facility for services it provides to hospital patients and the hospital bills for the services. However, service facilities that are parties to purchased services arrangements must comply with the requirements for obtaining provider-based status. Accordingly, purchased services arrangements are not as structurally and operationally flexible as are under-arrangements and are typically utilized when a service provider facility provider serves one hospital exclusively.

Third, freestanding facilities can also enter into an agreement with a hospital in which the facility provides the services "under arrangements" with the hospital. The facility provides a service to the hospital which the hospital does not otherwise have available. Under arrangements is a payment mechanism which Medicare recognized as a way to reimburse hospitals for services which they need, and do not otherwise provide, but which are provided by others. For example, a hospital may contract with emergency room physicians to staff the emergency department under arrangements. Applying the under arrangements payment methodology to physician-owned freestanding facilities is a relatively new phenomenon and not without inherent regulatory risks.

In an under arrangements situation, the service facility provides the equipment, supplies, and staff required to provide the hospital service and the hospital supervises the services provided in the service facility. Instead of the service facility billing Medicare, Medicaid, or other payors or the patients for the services it provides to the hospital, the hospital pays the facility a fair market per procedure fee, and the hospital bills for the services provided to its patients pursuant to its fee schedule. The service facility's sole source of revenue is the fee it receives from the hospital for providing the services. Under arrangements payment methodologies offer flexibility in the manner and location in which the service facility provides services. Accordingly, under arrangements are typically utilized when a service facility provides services to more than one hospital.

One of the obvious regulatory risks with an under arrangements payment methodology is that it has the potential to violate the fraud and abuse prohibitions or, if the facility provides designated health services (DHS), it may violate the physician self-referral prohibition (i.e., Stark Law) unless it fits squarely within a Stark exception. The federal fraud and abuse prohibitions apply to claims made for payment under the Medicare program or one of the other federally funded healthcare programs. In addition, however, most states also have state fraud and abuse prohibitions with which an arrangement must comply, whether or not government funding is involved. One organizational construct which is gaining some traction in the industry is a joint venture which is co-owned by the hospital and physicians. Once again, however, the regulatory analysis will likely be the biggest hurdle and quite possibly the most expensive component of the start-up.

All three of these arrangements will need to be structured to fall within the Stark Law and Anti-Kickback Statutes as well as applicable state law. Stark prohibits physicians from referring Medicare and Medicaid patients for the provision of designated health services to entities in which they, or an immediate family member, have a financial relationship unless an exception is met. If any of the above-mentioned arrangements involve the provision of designated health services, the physician owner cannot refer patients unless the arrangement falls within a Stark exception. The Anti-Kickback Statute prohibits anyone from soliciting, receiving, offering or paying remuneration in any form to induce a referral or in return for a referral of services where a state or federal healthcare program is responsible for payment. If the arrangement is unable to fall within a safe harbor to the Anti-Kickback Statute, the arrangement must be supported by a strong business justification with no intent to pay physicians for the referrals they make. Structuring of an arrangement to meet the applicable regulatory requirements depends on the specific facts of each arrangement.