On Monday, March 30, 2020, the Centers for Medicare and Medicaid Services (“CMS”) issued a number of blanket waivers and an interim final rule entitled “Medicare and Medicaid Programs; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency” that temporarily relax a variety of regulations in an effort to allow the United States healthcare system to prepare for and address patient surges during the COVID-19 public health emergency (“PHE”).  

An important component of this effort is CMS’s “Hospital Without Walls” initiative, which provides hospitals with flexibility to utilize non-traditional sites to provide hospital services, such as room and board, nursing, and other hospital services.  Under this initiative, CMS is waiving certain requirements relating to the physical environment under the Medicare Conditions of Participation for hospitals (the “COPs”) to allow for flexibility during hospital surges and will permit non-hospital buildings/space to be used for hospital services, provided that the location is approved by the applicable state authority.  Further, CMS is waiving the provider-based department requirements at 42 CFR §413.65, which will allow hospitals to establish and operate as part of the hospital any location meeting the COPs in operation during the PHE and to change the status of their current provider-based department locations to the extent necessary to address the needs of hospital patients as part of the applicable state or local pandemic plan. Finally, CMS is offering some additional flexibilities to furnish inpatient services under arrangements.

In addition to other non-traditional hospital sites (e.g., hotels and community facilities), the CMS waivers specifically contemplate the use of ambulatory surgery center (“ASC”) facilities as expansion sites, as such facilities offer the advantage of already being set up to provide healthcare services.  There are three mechanisms to use ASC facilities as expansion sites:  (1) an ASC can lease (or license) its facility, equipment, and/or staff to a hospital, with the hospital operating the ASC premises as an additional site or campus of the hospital; (2) the ASC can provide services to a hospital on an “under arrangements” basis (as explained below); and (3) the ASC can enroll with Medicare and operate as a new hospital (with or without the ownership or involvement of an existing hospital).  

This alert discusses various scenarios made possible by the recent CMS blanket waivers and interim final rule that would result in increased capacity across the United States healthcare system to offer hospital services and the regulatory, financial, and logistical considerations associated with each.   

Option 1:  Hospital Use of Non-Traditional Site

A hospital can establish and operate as part of the hospital a hospital location in a non-traditional site, such as a hotel, dormitory, or community facility, including, but not limited to, a convention center or outside sports arena.  

1.  Requirements:

a.  Lease/License Agreement – The parties would need to enter into a written lease or license agreement, setting forth the compensation the hospital will pay for use of the facility, if any.

b.  Waiver of State Licensure Requirements – The hospital would need to seek a waiver of state requirements that the non-traditional site be licensed as part of the hospital during the PHE.  Through the blanket waivers, Medicare has already approved the hospital using a non-hospital location to provide hospital services during the PHE, as long as the space is approved by the state.  We anticipate that state licensing authorities will react quickly to facilitate this type of arrangement if consistent with the state’s emergency preparedness plan.  Several states have already issued guidance on these licensure issues. 

c.  Securing Equipment and Staff – The hospital would need to secure additional staff and equipment to facilitate the use of non-healthcare space for the provision of hospital services.

d.  Conversion of Physical Space – Although CMS is waiving certain COPs relating to the physical environment of hospital space, non-traditional sites will not have basic safety features necessary to treat infectious patients, such as negative pressure, sealed rooms, appropriate electrical supply and backup generators, HEPA filtering systems, and infectious waste disposal.  The CARES Act appropriates $100 billion dollars to the Public Health and Social Services Emergency Fund to reimburse healthcare providers for healthcare-related expenses, including the building or construction of temporary structures and leasing of properties.  However, given the uncertainty associated with how these funds will be distributed to healthcare providers, both the cost and logistics of these conversions could present a complicating factor associated with the use of non-traditional sites by hospitals.

2.  Financial Considerations:

a.  The hospital would bill for services provided at the non-traditional site and bear the cost of additional staff and equipment necessary to provide hospital services. 

b.  Compensation from the hospital to the non-traditional site would not be subject to the Stark Law or Anti-Kickback Statute, unless there is physician ownership of the non-traditional site or if the non-traditional site has the ability to refer patients to the hospital for healthcare services, which is unlikely.¹

Option 2:  Hospital Lease/License of ASC Facility, Equipment, and/or Staff

A hospital can enter into a lease or license arrangement with an ASC pursuant to which the hospital would have use of some or all of the ASC facility, equipment, and/or staff and could operate the ASC facility as part of the hospital.  The hospital would compensate the ASC for its use of the ASC space, equipment, and/or staff.  

1.  Requirements:

a.  Lease/License Agreement – The parties would need to enter into a written lease or license agreement, setting forth the space, equipment and/or staff being leased/licensed and the fees that are owed to the ASC for such space, equipment and/or staff.

b.  Waiver of Provider-Based Requirements – CMS has waived the provider-based rule requirements applying to provider-based departments during the PHE.  Therefore, it is not necessary to meet the provider-based requirements or obtain a waiver of such requirements for hospital services provided in an ASC facility setting under this option.

c.  Waiver of State Licensure Requirements – The ASC would need to seek a waiver from the state licensing authority of any requirement that the ASC facility be in operation as an ASC.  Likewise, the hospital would need to seek a waiver of state requirements that the ASC facility be licensed as a hospital.  We anticipate that state licensing authorities will react quickly to facilitate these arrangements if consistent with the state’s emergency preparedness plan.  As discussed in paragraph 1.b. of Option 1, Medicare has approved hospital use of a non-hospital location (including an ASC) to provide hospital services, provided that the space is approved by the state.  

2.  Financial Considerations:

a.  The hospital would bill for services provided at the ASC facility and pay the ASC for the use of space, equipment, and/or staff being leased/licensed by the hospital.

b.  A lease/license arrangement would generally be more advantageous financially to the hospital than to the ASC, at least when compared to the other ASC options discussed below.

i.  The hospital would be entitled to all fees collected for hospital services provided by the hospital in the ASC facility, but the lease/license arrangement would provide a stream of revenue to the ASC that would cover some of its fixed costs.

ii.  The lease or license fee would need to be fair market value.  While the Stark Law blanket waivers provide flexibility with respect to the fair market value requirement of various direct Stark Law exceptions (i.e., those applying to arrangements with physicians, their practices, and their immediate family members), the blanket waivers do not apply to indirect arrangements such as those with ASCs; nor has the OIG issued blanket waivers for purposes of the Anti-Kickback Statute.  However, the OIG has stated that with respect to conduct during the PHE that may be subject to OIG administrative enforcement, OIG will “carefully consider the context and intent of the parties when assessing whether to proceed with any enforcement action.”²  CMS similarly has indicated that COVID-19 related requests for individual Stark Law waivers will receive expeditious treatment.  Unless an entity has received comfort from the OIG and CMS, the arrangements should be consistent with fair market value. Given the circumstances and need for the parties to quickly enter into these arrangements, it may not be possible to obtain an independent valuation to confirm the fair market value of an arrangement.  However, the parties should document the basis for the lease or license fee as evidence that the fee is fair market value, as well as the intent of the parties in undertaking the arrangement.

Option 3:  ASC Provides Services to Hospital “Under Arrangements”

During the PHE, a hospital can contract with the ASC for the ASC to provide hospital services, including “routine” hospital services, “under arrangements” to the hospital.  These “under arrangement” services are considered as being provided by the hospital, allowing the hospital to bill for the services.  The hospital would be required to exercise sufficient control and responsibility over the use of hospital resources in treating patients through an “under arrangements” arrangement with an ASC. 

1.  Requirements:

a.  Services Agreement – The parties would need to enter into a services agreement, setting forth the terms and conditions under which the ASC will provide services to the hospital “under arrangements” and the fees that are owed to the ASC for its provision of such services.

b.  Waiver of Provider-Based Requirements – As described above, CMS has waived the provider-based rule requirements applying to provider-based departments during the PHE.  Therefore, it is not necessary to meet the provider-based requirements or obtain a waiver of such requirements if the ASC does not meet the provider-based requirements that usually apply in order for services provided outside the primary hospital location to be considered hospital services.

c.  Waiver of State License Requirements – Both the ASC and the hospital would need to seek permission from state licensing authorities for the ASC to provide hospital services and for the hospital to obtain some of its services through an ASC. Through the blanket waivers, Medicare has already approved the hospital using a non-hospital location (including an ASC) to provide hospital services, as long as the space is approved by the state.  We anticipate that state licensing authorities will react quickly to facilitate these types of arrangements.

2.  Financial Considerations:

a.  The hospital would bill for the services provided as hospital services and would be reimbursed for such services.  The parties would need to agree upon compensation to be paid by the hospital to the ASC for the “under arrangements” services provided by the ASC.

b.  Assuming that the physician owners of the ASC make referrals of designated health services (“DHS”) services (including inpatient and outpatient hospital services) to the hospital, the compensation paid by the hospital to the ASC for the “under arrangements” services would need to comply with the Stark Law regulations regarding indirect compensation arrangements; i.e., the compensation could not vary with or take into account the volume or value of referrals of other business generated by the physician owners for the hospital, which would prevent use of a “unit of service-based” or percentage-based methodology.  In addition, the ASC would also need to seek a Stark Law waiver from CMS protecting the distributions the physicians will receive as owners in the ASC, given that there is likely significant risk that the ASC would be seen as “performing” the inpatient or outpatient hospital services that it is providing “under arrangements” to the hospital.³   Finally, for the reasons discussed in paragraph 2.b.ii. above under Option 2, the services fee payable to the ASC under the services agreement would need to be fair market value.  We recommend that the parties follow the principles outlined in paragraph 2.b.ii. of Option 2 for determining and documenting the fair market value of the services fee. 

Option 4:  ASC Enrolls as a Hospital 

CMS is permitting currently enrolled ASCs to temporarily (during the PHE) enroll with Medicare as a hospital, provide inpatient and outpatient hospital services, and bill as Part A providers.⁴   However, it is uncertain whether Medicaid or commercial payors will recognize ASCs as hospitals and reimburse them for providing hospital services.  

1.  Requirements:

a.  State License Requirements – The ASC would need to obtain a state license to operate as a hospital and satisfy any certificate of need requirements or obtain a waiver for both.  Again, we anticipate that state licensing authorities will react quickly to requests for ASCs to be licensed as hospitals during the PHE.

b.  Stark Law Requirements – There is no requirement to obtain a waiver, if one would be otherwise required⁵, for physician ownership of an ASC enrolled as a hospital and providing DHS to satisfy an exception to the Stark Law, as the blanket waiver issued by CMS implicitly permits physician owners of the hospital to receive remuneration as a result of DHS provided at the ASC.

c.  Medicare Enrollment Requirements – The ASC would need to enroll with Medicare as a hospital.  This is a temporary enrollment that will end when the PHE ends.  To enroll, the ASC should notify the Medicare Administrative Contractor (MAC) of its intent by calling the MAC’s COVID-19 Provider Enrollment Hotline, and then complete and sign an attestation form specific to the COVID-19 PHE, which is attached as Attachment 1 to this Alert.  Any ASC that is enrolled as a hospital will have its ASC billing privileges deactivated while it is enrolled as a hospital.  More information about the enrollment process can be found here. 

The MAC will review and forward the signed attestation statement to the CMS Regional Office (“RO”), which will review all survey activity of the ASC during the previous three years (recertification and/or complaint).  If no IJ-level deficiencies were found in the previous three years, or if IJ-level deficiencies were found but subsequently removed through the normal survey process, the RO will review and approve the attestation statement; create a new facility profile and certification kit in the Automated Survey Process Environment (ASPEN) and assign a hospital CMS Certification Number (CCN), and send a tie-in notice as a hospital to the MAC. The effective date of the ASC’s enrollment as a hospital is the date when the attestation was accepted by the MAC.  If IJ-level deficiencies are found within the last year and enforcement activities are currently ongoing, then the RO will not accept the attestation and notify the MAC of denial of temporary hospital enrollment. 

While an onsite survey is not required for RO approval for an ASC to enroll as a hospital, the RO may authorize a survey by the State Survey Agency at a later date to ensure quality and safety. If survey activity is warranted, it will be a focused infection control survey,⁶ and the availability of personal protective equipment as needed.  

When the Secretary of the U.S. Department of Health and Human Services determiners that the PHE has ended, the RO will terminate the ASC’s hospital CCN and send a tie-out notice to the MAC.  The MAC will deactivate the ASC’s hospital billing privileges and reinstate the ASC’s ASC billing privileges effective on the date the ASC’s hospital status is terminated.  If a hospital-enrolled ASC desires to revert back to an ASC prior to the end of the PHE, the ASC must notify its MAC in writing.   

d.  Compliance with Hospital Conditions of Participation – An ASC-enrolled hospital is required to meet the COPs, to the extent not waived, when enrolled as a hospital, though it would not be required to meet the Medicare ASC conditions for coverage (“CFC”) while it was enrolled as a hospital.  

A summary of the hospital COPs, as well as those COPs that have been waived in the context of the PHE, is set forth in Attachment 2.  As seen in the attestation form in Attachment 1, the ASC is required to attest to its compliance with non-waived hospital COPs at the time of the ASC’s enrollment as a hospital, with particular emphasis on the COPs relating to (i) nursing services, (ii) pharmaceutical services, (iii) infection control and antibiotic stewardship programs, and (iv) respiratory services.

Upon the ASC’s temporary hospital enrollment ending, the ASC would need to come back into compliance with all applicable ASC federal participation requirements, including the CFCs. 

2.  Financial Considerations: The ASC would bill Medicare for the hospital service provided by the ASC.  As mentioned above, it is not clear whether other payors would recognize the ASC as a hospital provider during the PHE.  The ASC would need to engage in discussions with other payors to determine whether the payors would recognize the ASC’s temporary hospital status. Financial benefit to an existing hospital would be limited to its share of ASC profits as an owner of the ASC, if applicable, or payment for any services it might provide to the ASC. The ASC would also need to consider the cost of any changes that might be needed to facilitate provision of hospital services and whether those costs can be recovered.

Kutak Rock attorneys are actively engaged in monitoring the legislative and regulatory changes undertaken in response to COVID-19 pandemic.  Other client alerts and special publications relating to COVID-19 can be accessed on Kutak Rock’s COVID-19 Legal Resource Portal.  If you are interested in determining whether the scenarios discussed in this Alert are available to you, please contact a member of our national Healthcare practice group.

Increasing the Healthcare System’s Capacity to Provide Hospital Services

_{¹ To the extent that a non-traditional site is physician-owned, we note that, as discussed below, the Blanket Waivers issued by CMS include certain waivers of the Stark Law that could apply to the compensation arrangement between the hospital and non-traditional site, depending on the terms and structure of the arrangement.  In addition, the Office of Inspector General, the federal agency responsible for administrative enforcement of the Anti-Kickback Statute, has stated that a transaction between a hospital and a vendor who delivers services and supplies that has as its primary purpose the delivery of supplies or services necessary to the hospital’s response to the PHE will not be subject to prosecution or sanctions under the Anti-Kickback Statute. 
² https://oig.hhs.gov/coronavirus/letter-grimm-03302020.asp.
³ This is only the case if the physician-owners of the ASC make referrals of the services to be performed “under arrangements.”  Otherwise, there would not be an indirect financial relationship between the hospital and the physician-owners of the ASC, the Stark Law would not be implicated, and no Stark Law waiver would be necessary.
⁴ CMS has also stated that under the “Hospital Without Walls” initiative, other interested entities, such as freestanding emergency departments, can pursue enrolling in Medicare as an ambulatory surgery center and then convert the enrollment to a hospital during the COVID-19 public health emergency. Given the potential time associated with two conversions, it is not clear whether this would be a viable alternative for freestanding emergency departments. 
⁵ Under normal circumstances, a physician who makes referrals of designated health services (“DHS”) to an entity providing those services (a “DHS Entity”) cannot have a financial relationship with the DHS entity unless the financial relationship satisfies the requirements for an exception to the Stark Law.  In the current situation, depending upon the case mix of the ASC-enrolled hospital and the specialties of the ASC physician owners, it is possible that the physician owners of the ASC would not make referrals of DHS to the ASC-enrolled hospital.  If so, then the Stark Law would not be implicated by the physician-owned ASC-enrolled hospital, even in the absence of CMS’s blanket waiver.
⁶ The infection control survey will be based on the criteria set forth in the CMS Memo QSO-20-20-All.  Any need for enforcement actions as a result of the survey would follow what is outlined in the CMS Memo or any subsequent updates to the CMS Memo.}