You asked for a review of recent state legislation on the licensure of outpatient surgical facilities. You are also interested in a provider payment system known as “site of service differential,” which some payers in the state are apparently using for certain outpatient surgical procedures.

SUMMARY

Acts passed in 2001, 2003, 2004, and 2005 established that outpatient surgical facilities are defined in terms of the level of anesthesia they use. Any provider, including physicians' office-based surgical practices, using moderate or deep analgesia or general anesthesia, is included in the definition of an outpatient surgical facility.

Since more surgical procedures are being performed in the outpatient setting, this definition was developed “to ensure all outpatient surgical facilities would become subject to the same regulatory oversight as hospital-owned surgical facilities and was considered a critical implementation in protecting the safety of patients in all surgical settings,” according to the Office of Health Care Access (OHCA; see OHCA Report-“Public Act 04-249, A Study of the Feasibility of an Expedited Process by Which Outpatient Surgical Facilities May Obtain a Certificate of Need,” attached).

The law excepts from the outpatient surgical facility definition a medical office owned and operated exclusively by one or more licensed physicians if it does not (1) have an operating room or designated surgical area, (2) bill facility fees to third party payers, or (3) administer deep sedation or general anesthesia. Exempt facilities may perform only minor surgical procedures incidental to the work done in the office and use only light or moderate sedation or analgesia.

“Site of service differential” refers to the difference in the amount paid when the same service is performed in different practice settings, for example, an outpatient visit in a physician's office versus one in an outpatient surgical center. Medicare uses a site of service differential, known as the “Resource Based Relative Value Scale,” as part of its system for reimbursing physicians. Under this fee schedule, physician payments are based on relative amounts of resources needed to provide procedures regardless of the health care setting. It is based on three components—a physician work component, a malpractice insurance component, and the practice expense component.

Medicare provides higher payments for procedures performed in physicians' offices than those performed in hospitals or ambulatory (outpatient) surgical centers. Medicare payments for procedures in physicians' offices are higher to account for their increased practice expenses. These differences in Medicare reimbursements based on the setting are known as “site of service payment differentials. ”

Some commercial payers have instituted site of service differentials in their reimbursement rates.

STATE LEGISLATION CONCERNING OUTPATIENT SURGICAL FACILITIES

PA 01-50

PA 01-50 (CGS § 19a-691) established accreditation requirements for certain unlicensed health care facilities (e. g. , physicians' offices) where various levels of anesthesia and sedation are administered. Health care practitioners or practitioner groups operating unlicensed facilities must meet at least one of four specified accreditation standards before using moderate or deep sedation or analgesia or general anesthesia. Dentists with Department of Public Health (DPH)-issued permits to use general anesthesia or conscious sedation were exempt from these requirements.

The act required facilities to obtain accreditation by the later of January 1, 2003, or 18 months after the date on which such anesthesia is first administered there.

PA 03-274

PA 03-274 (CGS § 19a-493b) required certain outpatient surgical facilities using specified levels of sedation or anesthesia to obtain a license from DPH. The licensure requirement applies to facilities (1) established, operated, or maintained by an entity, individual, firm, partnership, corporation, limited liability company, or association, but not one operated by a hospital (hospital-based outpatient surgical facilities are already subject to DPH and OHCA requirements) and (2) providing surgical services for human health conditions that include the use of moderate or deep sedation or analgesia or general anesthesia, as these levels are defined by the American Society of Anesthesiologists or other DPH-recognized entity.

The act provided initial exceptions from licensure based on certain OHCA determinations, but facilities initially receiving an exemption had to be licensed by March 30, 2007. No facility could be established between July 1, 2003 and July 1, 2004 unless it satisfied one of these exceptions.

Specifically, in order to be exempt from licensure, the entity had to (1) provide evidence to OHCA that it was operating on or before July 1, 2003; (2) obtain from OHCA by July 1, 2003 a determination that a certificate of need (CON) was not required and provide OHCA with satisfactory evidence that it began developing the facility before that date; or (3) between July 1, 2003 and June 30, 2004, obtained a CON based on OHCA's policies and procedures in effect as of July 1, 2003. If the facility met any of these exceptions, it could operate without a license until March 30, 2007. But it must be licensed by that date.

The act specified that outpatient surgical facilities that had received anesthesia accreditation continued to be subject to such accreditation requirements. Its provisions did not apply to licensed dentists and licensed outpatient clinics.

The act established an advisory committee to address various outpatient surgical facility issues.

PA 04-249

PA 04-249 (CGS §. 19a-493b) revised the law on outpatient surgical facilities by:

1. amending the definition of “outpatient surgical facility” to eliminate the term “free standing,” include facilities performing diagnostic procedures under certain conditions, and exclude certain medical offices owned and operated exclusively by physicians;

2. requiring DPH licensure of outpatient surgical facilities except for certain facilities that did not have to be licensed until a later date;

3. requiring outpatient surgical facilities to obtain, except in certain cases, a CON from OHCA;

4. requiring OHCA to study the feasibility of an expedited CON process for certain outpatient surgical facilities; and

5. establishing a task force to study outpatient surgical facility-related issues.

In addition to the existing definition of “outpatient surgical facility” (see PA 03-274 above), this act added facilities providing diagnostic procedures that use moderate or deep sedation, analgesia, or general analgesia. And, for purposes of DPH licensure, the act removed the requirement that they be “free standing. ”

The act specified that an outpatient surgical facility does not include a medical office owned and operated exclusively by a licensed physician or physicians if it (1) has no operating room or designated surgical area, (2) does not bill facility fees to third party payers, (3) does not administer deep sedation or general anesthesia, (4) performs only minor surgical procedures incidental to the work performed in the office of the physician that owns and operates it, and (5) uses only light or moderate sedation or analgesia in connection with this minor surgery. The act states that it should not be construed to affect compliance with the law requiring accreditation for physicians' offices where various levels of anesthesia and sedation are administered.

The act restricted the exceptions to outpatient surgical facility licensure found in PA 03-274 to those facilities that could show (1) they (1) were operating before July 1, 2003 and (2) received an OHCA determination by that date that a CON was not required. It eliminated the exemption in the 2003 act for an entity that provided OHCA with satisfactory evidence that it began developing the facility before July 1, 2003 and associated criteria OHCA had to consider in determining whether this was true. PA 04-249 instead specified that any entity otherwise in compliance with the law could operate without a license until March 30, 2007, but had to obtain a license to continue operating after that date.

The task force the act created was charged with addressing (1) whether licensure and CON requirements should apply to oral maxillofacial surgery; (2) licensure requirements for procedures not requiring moderate or deep sedation, analgesia, or general anesthesia and other procedures in settings other than hospitals or outpatient surgical facilities; and (3) transfer agreements between outpatient surgical facilities and hospitals.

The task force submitted its report (attached) on January 1, 2005. On the first issue, it recommended that the General Assembly wait for DPH's recommendations before acting. On the second, it recommended that no action be taken on licensing facilities performing procedures requiring no or only light sedation. No action was the recommendation on issue three.

PA 05-3

PA 05-3 (CGS § 19a-493b(b)) amended the licensure exemption conditions found in PA 04-249 by specifying that only one of the conditions had to be met (instead of both) in order for the facility to operate without a license until March 30, 2007.

SITE OF SERVICE DIFFERENTIAL

In 1992, the Health Care Financing Administration (HCFA; now known as the Centers for Medicare and Medicaid Services (CMS)) began implementing a resource-based physician fee schedule for the Medicare program. This fee schedule is applicable to procedures conducted in a variety of health care settings, including hospitals, ambulatory (outpatient) surgical centers (ASCs), and physicians' offices. Under this fee schedule, physician payments are based on the relative amounts of resources needed to provide procedures regardless of the health care setting.

The physician fee schedule includes three components. First, the physician work component provides payment for the physician's time, effort, skill, and judgment necessary to provide a service. Second, the malpractice insurance component reimburses physicians for the expense of their professional liability insurance. The third component, practice expense, compensates physicians for direct expenses, such as clinical staff salaries, medical supplies, and medical equipment and indirect expenses, such as administrative staff salaries and other office expenses incurred in providing services.

Unlike the other two components, physician practice expenses can differ depending on where the procedure is performed. In the office setting, the physician is responsible for providing clinical staff, supplies, and equipment needed to perform a service. In the facility setting, such as a hospital or ASC, these are the facility's responsibility.

Medicare's practice expense payments to physicians can differ depending on the medical setting to reflect these differences. For medical facilities, practice expense payments to physicians are generally lower because Medicare pays for nursing support, equipment, and supplies with a separate facility fee. But when these procedures are performed in an office, Medicare pays physicians for these expenses in the practice expense portion of the fee schedule.

This difference in practice expense payments for the same procedure is referred to as the “site of service differential (SOSD)”. In 1999, HCFA began a three-year phase in of SOSD as part of the resource-based practice expense system. Medicare's higher payment for office-based procedures reflects the higher expenses to the physicians of providing those procedures, but this payment may not cover all of their expenses.

SOSDs affect many gastroenterological and urological endoscopic procedures. (For more information, see “Medicare Physician Payments-Medical Settings and Safety of Endoscopic Procedures, GAO Report No. 03-179, October 2002. )

Various commercial payers around the nation have instituted an SOSD in their reimbursement schedules. These include Anthem Ohio Blue Cross and United Health Group (see “CMS 'Site of Service Differential' Slashes Colonoscopy Pay Rate,” attached. )

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