Davis Wright Tremaine LLP

On December 2, 2020, the Centers for Medicare & Medicaid Services (CMS) released the calendar year 2021 Final Rule implementing changes to the Medicare hospital Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center (ASC) Payment System. The Final Rule is issued with comment periods running 30 to 60 days, depending on the provision.

Among the most significant changes in the Final Rule were the:

  • Phase out of the hospital inpatient only list over a three-year period;
  • Addition of procedures to the ASC Covered Procedures list;
  • Removal of restrictions on the expansion for certain physician-owned hospitals;
  • Maintenance of 340B payment rates (already drastically reduced in recent years); and
  • Implementation of mandatory COVID 19 reporting.

CMS finalized an annual payment adjustment that included a projected market-basket update of 2.4 percent, with a zero percent adjustment for multifactor productivity. CMS estimates that the Final Rule will result in an overall increase of 2.4 percent for OPPS payments, or approximately $1.6 billion, compared with 2020.

Notwithstanding this increase in OPPS payments, many of the changes in the Final Rule could impact hospitals as CMS continues to signal its effort to ensure site neutrality, expand coverage for services in non-hospital settings, and maintain and, perhaps, further reduce 340B drug reimbursement in the future.

All of this comes at a time when hospitals continue to grapple with pandemic-related challenges and unique financial difficulties.

The Demise of the Inpatient Only List 

CMS will begin a three-year phase-out of the inpatient only list (IPO)—services that must be performed in the hospital inpatient setting in order to be eligible for Medicare reimbursement—and to assign the removed codes to clinical APCs to permit payment under the OPPS. Musculoskeletal services is the first group of services that CMS is removing from the IPO with over 260 musculoskeletal-related services that will be eligible to be paid by Medicare when performed in a hospital outpatient setting in 2021.

By 2024, CMS will completely eliminate the IPO, making the 1,740 services that were previously on the list eligible for Medicare reimbursement whether performed in the hospital inpatient setting or the hospital outpatient setting when outpatient care is otherwise appropriate. CMS did not, however, provide guidance in the Final Rule to assist providers in determining the appropriate setting for a given procedure and patient.

Despite concerns about quality and safety by some hospital groups, CMS pointed to private payors allowing procedures to be performed in the outpatient setting as support for this move. Although CMS believes the IPO list could be removed in its entirety immediately, the services will have new prices under the outpatient prospective payment system, so one of the reasons CMS is providing a transitional phase out is to give providers time to update their billing systems accordingly.

Additionally, consistent with the calendar year 2020 OPPS/ASC final rule, procedures that have been removed from the IPO list will be exempted from site-of-service claim denials and from eligibility for referral to Recovery Audit Contractors (RACs) for noncompliance with the Two-Midnight rule. (The requirement that an inpatient admission and payment by Medicare is appropriate when the admitting physician expects the patient to require hospital care that crosses two midnights.)

In the Final Rule, CMS extended the exemption period indefinitely to give providers time to adjust to the ability to bill Medicare for outpatient services previously only reimbursable when provided for hospital inpatients. CMS emphasized that even though medical review activities are delayed indefinitely, the delay is not an exemption from the Two-Midnight rule.

Site Neutrality: Expansion of ASC-Covered Procedures

Building upon CMS' push for site neutrality between hospital outpatient departments and ASC settings, CMS added 11 procedures to the ASC Covered Procedures List (ASC CPL)—including total hip arthroplasty, which CMS previously considered adding in calendar year 2018 but ultimately declined to do so. CMS also plans to add 267 additional surgical procedures to the list starting in CY 2021.

The expansion of the ASC CPL provides an opportunity for the expansion of ASC services Medicare will cover, although ASCs should ensure that any expansion is permitted under applicable state law. This is important, as some states apply a different standard as to what services can be provided in an ASC or non-hospital setting. For example, California does not permit an ASC to perform cardiac catheterization-related procedures, despite Medicare's addition of the procedure to its calendar year 2020 ASC CPL.

Physician-Owned Hospitals: High Medicaid Facilities 

In general, to qualify for either the Stark Law's whole hospital or rural hospital exception, grandfathered physician-owned hospitals have been precluded from increasing the number of operating rooms, procedure rooms and beds absent a waiver from CMS. In the Final Rule, CMS relaxed the restriction on expansion for grandfathered physician-owned hospitals if the hospital:

  • (a) Is not the only hospital in a county;
  • (b) Has an annual percentage of total inpatient admissions under Medicaid estimated to be greater than any other hospital located in the country for the three most recent 12-month periods; and
  • (c) Does not discriminate against federal program beneficiaries. 

For these "high Medicaid facilities," CMS streamlined the process for requesting an exception to the prohibition on expanding the number of beds, operating rooms and procedure rooms. More specifically:

  • High Medicaid facilities may request an exception at any time (as opposed to only once every two years), so long as the hospital has pending only one exception request at a time;
  • The expansion, if approved through the exception process, is no longer capped at 200 percent of the previously grandfathered number of operating rooms, procedure rooms, and beds; and
  • The expansion may occur in facilities on and off the hospital's main campus.

CMS also restated its position from a 2020 FAQ that it will give deference to state law when determining which beds count towards a hospital's baseline number. If a bed was considered licensed for state licensure purposes when the prohibition on expansion was established in 2010, it will count for purposes of evaluating the applicability of the Stark Law exception.

Staying the Course on 340B: Finalized Hospital Reimbursement Reductions

Despite legal challenges to its 2018 adjustment of the 340B drug payment rate, CMS has maintained the program's rate reductions. In 2018, CMS slashed reimbursement for drugs purchased through the 340B program and payable under OPPS from the average sales price (ASP) plus 6 percent to ASP minus 22.5 percent. The policy exempted certain facilities, such as rural sole community hospitals and children's hospitals, and did not apply to drugs with pass-through payment status or to vaccines.

The American Hospital Association and a number of other associations challenged these rate cuts in federal court under Section 405(g) of the Social Security Act, arguing that HHS exceeded its statutory authority for reducing the 340B rates so dramatically based on an estimation of drug acquisition costs rather than the drugs' average sales price. In July of 2020, the U.S. Court of Appeals for the District of Columbia overturned the prior ruling from the District Court for the District of Columbia and held that the reduction in drug reimbursement rates for 340B hospitals was based on a reasonable interpretation of the Medicare statute and upheld it.

Following its success at the Court of Appeals level, CMS is continuing its current policy of maintaining OPPS payments for 340B drugs at the ASP minus 22.5 percent rate. This is an improvement from the proposed rule, which contemplated a further reduction in 340B reimbursement to ASP minus 28.7 percent.

The American Hospital Association expressed disappointment with the Final Rule, stating in a press release that "[c]ontinued cuts will result in the further loss of resources for 340B hospitals at the very worst possible time as COVID-19 cases and hospitalizations continue to climb across the country." Rural sole community hospitals, children's hospitals, and PPS-exempt cancer hospitals continue to be exempt from the reduction.

CMS is considering adjusting the payment rate for 340B-acquired drugs to a net payment rate of ASP minus 28.7 percent in future years. So while the current ASP minus 22.5 percent payment rate is staying in place, CMS has not ruled out more drastic adjustments in the years to come.

Mandated COVID-19 Therapeutics and Treatment Reporting

With the ongoing pandemic and public health emergency, CMS finalized a requirement that hospitals and critical access hospitals report data elements as a Condition of Participation for Medicare for both hospitals (42 CFR 482.42) and CAHs (42 CFR 485.640), thereby potentially impacting both Medicare and Medicaid participation.

The required reporting includes the facility's current inventory of COVID-19-related therapeutics and the facility's current usage rate for COVID-19-related therapeutics. In addition, hospitals must report information about acute respiratory illnesses, including seasonal influenza, influenza-like illnesses, and severe acute respiratory infections, until the COVID-19 pandemic ends.

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