OIG report threatens provider-based practices

Hospitals’ failure to report ownership of physician practices could lead to charges of double-billing

A new report from the Department of Health and Human Services Office of the Inspector General (OIG) could increase federal scrutiny of hospital-owned physician practices, experts say.

In the report, "Hospital Ownership of Physician Practices," the OIG claims that some hospitals are improperly classifying the physician practices they own as "provider-based" rather than "freestanding" practices, resulting in significant overpayments from Medicare.

If adopted, the OIG's recommendation that the "provider-based" designation be done away with entirely could have a serious negative impact on reimbursement both for hospitals and the practices they own.

In addition, the report could trigger a new focus for federal fraud investigators — the possibility that hospitals and their physician practices are effectively double-billing Medicare for the same services.

Based on information gathered between 1995 and 1997, the report found that about 62% of hospitals purchased or owned a physician practice. But, the report says, Medicare's Fiscal Intermediaries were aware of only about 50% of those purchasing or operating arrangements. As a result, the OIG says there may be inaccurate reporting of services by hospitals on their cost reports, leading Medicare to pay too much.

"The implication that they're making in that statement is that fiscal intermediaries know [about the arrangements] only half the time; therefore, half of what's going on out there is somehow wrong or being reimbursed incorrectly," says Carmela Coyle, senior vice president for policy at the Chicago-based American Hospital Association. "The problem with the report in general is that it paints with too broad a brush all hospital ownership arrangements of physician practices."

Hospitals that own physician practices may classify them in one of two ways. If they include them as part of the hospital, they must also list the operating costs of the practices on their Medicare cost report. If the practices in question meet certain criteria laid out by the Health Care Financing Administration (HCFA), the practice is classified as provider based. Alternatively, physician practices may be classified as freestanding entities, in which case the clinic wouldn't be included on the hospital's cost report and would receive Medicare payments through the physician fee schedule — Medicare Part B.

Under this second method, services — such as administrative services — provided by the hospital to the clinic would have to be accounted for via a nonreimbursable cost center in the hospital cost report, says an analyst at the Englewood, CO-based Medical Group Management Association. The hospital would have to exclude any of these services costs to the freestanding clinic from the cost report because the government considers those costs as already covered through the Part B payment.

"We do feel that the existing situation is vulnerable to fraud and abuse," says Ben St. John, an OIG spokesman. "Because of the limited reporting requirement, and the fact that the fiscal intermediaries and carriers would not always know whether or not the claims being submitted are appropriate, there could be duplicate billings or billings for a higher reimbursement than what is appropriate."

St. John says that without knowing the exact relationship between the hospital and the physician practice, the fiscal intermediary would have no way of knowing if it was paying duplicate reimbursement for a single service. "In terms of false claims, it would be on a case-by-case basis of whether this was knowingly done or if there was ignorance of the [reporting] requirement."

In the report, the OIG recommends that HCFA eliminate the provider-based designation, which allows hospitals to operate physician practices as though they were a part of the hospital and not a freestanding clinic. The OIG believes that some hospitals use this designation to boost reimbursement even though some clinics don't qualify for it. The OIG also recommends that HCFA require hospitals to alert fiscal intermediaries of any purchases of physician practices and seek legislation allowing it to sanction entities for failing to alert intermediaries of such an arrangement.

If the provider-based designation is scrapped, those hardest hit are likely to be physician-run clinics in inner-city or rural areas, Coyle says. "The losers would be patients who currently are able to access hospital-based clinics, who won't be able to if that higher reimbursement is not made available," she predicts. "The OIG report may move us a step backward in terms of the public policy process."

In its response to the report, HCFA agreed with the recommendations regarding tougher reporting requirements, but significantly, it shied away from endorsing OIG's recommendation to eliminate the provider-based designation. HCFA advocates level payments in all settings, so that there would be no advantage to classifying a clinic as freestanding or provider-based. HCFA indicated that it would be difficult to write rules that differentiate physician practices from outpatient clinics so that one is included in provider-based designations and the other is not.

It remains to be seen whether the OIG report will have a chilling effect on hospital ownership of physician practices, but Coyle notes that for many hospitals, those arrangements are already money-losers. If the OIG gets its way, there's likely to be even less incentive for hospitals to purchase physician practice.