Question:

Our hospital has a nonprofit subsidiary that employs physicians.  Will Medicare payments to this subsidiary be covered by the new “3-day window rule”?

Answer:

No, as long as the hospital does not completely control the operations of the subsidiary. Under the 3-day window rule, a hospital (or an entity that is “wholly owned” or “wholly operated” by the hospital) must include on the claim for a Medicare beneficiary’s inpatient stay, the diagnoses, procedures, and charges for all outpatient diagnostic services and admission-related outpatient non-diagnostic services that are furnished to the beneficiary during the 3-day payment window. 42 C.F.R. §412.2(c)(5).  Diagnostic services have long been subject to this rule. The current effective date for this rule as it pertains to non-diagnostic services is July 1, 2012.  The key question is whether a subsidiary employing physicians is “wholly owned” or “wholly operated” by the hospital so as to trigger the applicability of the rule.

Medicare regulations, at 42 C.F.R. §412.2(c)(5)(i), provide:

An entity is wholly owned by the hospital if the hospital is the sole owner of the entity.  An entity is wholly operated by a hospital if the hospital has exclusive responsibility for conducting and overseeing the entity’s routine operations, regardless of whether the hospital also has policymaking authority over the entity.

Commentary from CMS issued with the 2012 physician fee schedule program payment policies in the November 28, 2011 Federal Register provided some guidance on how CMS interprets the “wholly owned and wholly operated” provisions of the 3-day window rule.  CMS stated that at the present time, physician practices self-designate whether they are owned or operated by a hospital on the 855B enrollment form filed with Medicare.  76 Fed. Reg. 73285.  These regulations went on to restate guidance from 1998 regulations when the 3-day window rule was first adopted and applied to diagnostic services.  However, this commentary was not particularly helpful in that it simply gave examples of physician practice entities wholly owned by a hospital, which CMS said would be subject to the 3-day window rule, contrasted with a physician practice entity and a hospital both owned by a third corporation, which CMS said would not be subject to the rule.  The commentary never addressed the meaning of “wholly owned” or “wholly operated” beyond parroting the regulations.

The Medicare Claims Processing Manual, CMS Pub. 100-04, §90.7, as amended by Transmittal 2373 (Dec. 21, 2011), also restated the regulations when it purported to give guidance on the meaning of “wholly owned” or “wholly operated,” by saying:  “Wholly owned or wholly operated entities are defined in 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 entity’s routine operations, regardless of whether the hospital also has policymaking authority over the entity.’”

Since CMS has never issued any guidance as to the meaning of “wholly owned” or “wholly operated” other than the provisions cited above, these terms are to be interpreted based on their plain meaning. As a nonprofit corporation, the subsidiary in your case is not “owned” by anyone since nonprofit corporations have no owners or shareholders.

Furthermore, the subsidiary would not be “wholly operated” as long as the hospital does not have exclusive responsibility for conducting and overseeing the routine operations of the subsidiary.  As long as the subsidiary has separate staff who are responsible for its day-to-day operations, it would not be considered to be wholly operated by the hospital for the purposes of the 3-day window rule.