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June 25, 2012



Medicare’s 3-day payment rule reducing payments to physicians in practices that are wholly owned or wholly operated by hospitals for preoperative testing and related procedures will be implemented on July 1, 2012.


Another Medicare compliance deadline approaches, and it has attracted a fair amount of attention.  The good news is that it will apply to few pain physicians and even fewer anesthesiologists.  Sometimes it is necessary to explain a new rule or requirement just so that our readers know not to worry.  This is one of those times.

By July 1, 2012, those physicians and facilities that are affected are expected to be in compliance with the “3-day payment policy.” The 3-day payment window applies to certain outpatient services provided by hospitals and hospitals’ wholly owned or wholly operated entities, including physician practices.

The policy has applied to diagnostic services and related non-diagnostic services since 1998.  The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 broadened the definition of related non-diagnostic services that are subject to the payment window to include any non-diagnostic service that is clinically related to the reason for a patient’s inpatient admission, regardless of whether the inpatient and outpatient ICD-9 diagnosis codes are the same.

CMS issued final regulations implementing the 2010 legislation last November, expanding the 3-day payment policy for outpatient services provided within the three days prior to an inpatient admission.  Medicare will pay a reduced fee for physicians’ services that are clinically related to an inpatient admission, occur within the 72 hours before the admission, and are furnished by a physician practice or clinic wholly owned and operated by a hospital.  There is a new payment modifier, “PD,” to identify claims for such physician services.  Medicare will pay claims with modifier “PD” at either of the following lower rates:

  • Service with a technical and a professional component, i.e., a diagnostic test—only the professional component
  • Service without a technical/professional component split, e.g., an office visit—only the “facility rate,” which has a reduced practice expense allowance.

The intent of the 3-day payment policy is much clearer than the statutory or regulatory history or language—or than much of the commentary.  Medicare already pays hospitals for the “technical” (nonphysician, i.e., practice cost) component of diagnostic tests performed within three days prior to an inpatient admission and for procedures related closely in time and nature to an admission.  The DRG payment covers the hospital costs for diagnostic services such as laboratory services, e.g., hematology and chemistry; diagnostic x-rays, isotope studies, EKGs, pulmonary function studies and thyroid function tests.  It also covers the practice costs of related non-diagnostic visits and procedures.  CMS does not want to pay twice for these overhead and direct practice costs by adding them into the amount payable to the physician who provides the professional service as well as figuring them into the hospital’s DRG.  

The revised policy is scheduled for implementation on July 1, 2012.  The American Medical Association and the Medical Group Management Association, among others, are calling on CMS to delay implementation, or to rescind the policy altogether, on the grounds that physicians are still confused about the operational details of the change and need more guidance “’on who is affected and how to properly comply with the new rules to avoid billing errors and delays” (AMA President Peter W. Carmel, MD, quoted in Hospital-owned practices to receive lower Medicare rates under new rule, American Medical News, June 18, 2012).

Compliance with the new rules will involve establishing new communication protocols between wholly owned or wholly operated physician groups and their hospitals.  Practices and the hospitals will need to coordinate their billing practices so that the group physicians’ claims are held for at least 72 hours to avoid being submitted without modifier PD when the patient was admitted during the 72 hours.  Staff will have to be trained to make sure that the documentation supports the unrelated-ness of the preoperative service.  Failure to append the modifier may result in an overpayment and a potential fraud investigation if the overpayment is not refunded.

Again, fortunately, the vast majority of anesthesiologists and pain physicians are not going to be affected by the 3-day payment policy.  First, surgical anesthesiologists rarely, if ever, provide diagnostic services or even preoperative visits in private offices that they, not the hospital, own.

It is more likely that pain physicians will perform a procedure that is clinically related to an inpatient admission occurring within three days.  But neither the pain practice nor the anesthesiology practice will often be “wholly owned or operated” by the hospital. 

If they are employed by the hospital, the physicians who order preoperative tests or perform related nondiagnostic services will be using the hospital’s personnel, equipment and space for such tests and services.  There is nothing new about the principle that these employed physicians cannot be paid for the associated practice costs incurred by their employer, and that they should only submit claims for the facility fee.  CMS has stated that “most hospital owned entities providing physician services will be considered part of the hospital and operating as hospital outpatient departments,” and also that it has no idea how many physician practices are wholly owned or operated by hospitals.

The question comes down to whether a group is independent, in which case it never needs to use modifier PD, or whether it is wholly owned or wholly operated by a hospital. 

Wholly owned or wholly operated entities are defined in part of the regulations at 42 CFR §412.2. “An entity is wholly owned by the hospital if the hospital is the sole owner of the entity,” and “an entity is wholly operated by a hospital if the hospital has exclusive responsibility for conducting and overseeing the entities routine operations, regardless of whether the hospital also has policy making authority over the entity.” [Emphasis added by CMS in its Frequently Asked Questions CR 7502].  If the hospital and the physician office are both owned by a third party, such as a health system, the 3-day payment window does not apply.   CMS declined to be more specific or precise and instead placed the responsibility for determining whether it does apply on the practice and the hospital, stating in FAQ #14:

CMS believes that ownership and operational issues are inherently fact specific and hospitals and hospital owned and operated entities will know and understand best their individual circumstances and whether the physician practice is subject to the payment window policy.  If an entity determines that it is not wholly owned or wholly operated and not subject to the payment window policy, we recommend that it maintain documentation to support that determination.

It is hard to imagine that more than a handful of pain practices—if that many—would be 100% owned by their hospital, or that the hospital would be solely responsible for conducting a practice’s routine operations, including scheduling and billing.  ABC will be alerting those clients who might be affected by the 3-day payment policy and working with them to ensure correct billing.   We hope that this Alert has dispelled most of our readers’ concerns.

With best wishes,

Tony Mira
President and CEO