Potential Updates to Hospital Co-Location Rules Provide Opportunities for Healthcare Providers

Earlier this year, the Centers for Medicare & Medicaid Services (CMS) released a proposed survey memo (Memo), which, if adopted, would expand the ability of Medicare-enrolled hospitals to co-locate with other healthcare entities.

Specifically, the Memo would amend the CMS State Operations Manual Appendix A, which provides interpretive guidelines for contractors who certify hospital compliance with the Medicare conditions of participation (CoPs). The amendments would allow hospitals and providers to share certain non-clinical space, staff, and services (subject to restrictions). Moreover, signaling that CMS recognizes the need for real, substantive changes to its current hospital co-location guidance, it invited the public to comment on the Memo, a rare move for guidance documents of this kind. The comment period, which ended July 2, 2019, drew written comments from numerous sources, including a letter from Senator Grassley (R–IA).

This alert briefly explores (i) the current state of CMS guidance regarding the co-location of hospitals with other healthcare provider entities, (ii) how the guidance proposes to change historical CMS guidance, (iii) certain open issues, and (iv) what the guidance might mean for healthcare providers.

Current CMS Guidance Regarding Co-Location Arrangements

Historically, CMS has permitted co-location between Medicare-enrolled providers under limited circumstances. For example, hospitals may be permitted to co-locate with other hospitals under the “hospital within a hospital” model (42 CFR 412.22(e)). Moreover, two or more ASCs may co-locate in the same clinical space when such space is used exclusively by only one ASC at a time. Finally, ASCs are increasingly sharing space with other types of providers, such as Office Based Labs. However, when it comes to co-location arrangements between hospitals and non-hospital providers, CMS has historically taken a far more restrictive view.

Under current guidance, provided in CMS’ State Operations Manual, CMS has indicated that it evaluates a hospital’s compliance with its CoPs “as a whole,” including whether “all of its components are under legal control of the hospital governing body.” In 2011, CMS interpreted this guidance to effectively ban co-location arrangements where hospitals “acquire only portions of a freestanding space to treat as a department of the hospital” regardless of whether the hospital “attempts to create a subsection of the overall space through a sublease or other arrangement.” In subsequent official presentations, CMS’ Technical Director of Hospital Survey & Certification indicated that hospital space must be “under the hospital’s control 24/7.”

Taken together, many providers have interpreted CMS’ guidance as effectively prohibiting all co-location arrangements between hospitals and other providers. And, because the penalty for running afoul of CMS’ guidance is so high (up to and including Medicare disenrollment of the hospital), many hospitals have abandoned their co-location arrangements, foregoing the substantial financial benefits associated with renting underutilized space or otherwise providing their patients with increased access to more flexible types of care. Those that have not abandoned co-location entirely have ensured that their operations were indeed completely separate from the other providers, including providing completely separate entrances, waiting areas, restrooms and other “non-clinical” spaces.

Providers have routinely expressed, however, that co-location arrangements could be significantly expanded without negatively impacting patient care. In the Memo, CMS appears to agree, at least in part.

Proposed Changes

Under CMS’ proposed guidance in the Memo, CMS would provide greater certainty and flexibility to Medicare-enrolled hospitals in how they structure co-location arrangements. The Memo proposes two substantive changes to CMS’ current guidance, subject to state licensure requirements (some states may not permit providers to share certain spaces that CMS otherwise would).

First, CMS would permit co-located providers to share “public spaces” and “paths of travel,” including public lobbies, waiting rooms and reception areas (with separate check-in areas and clear signage), public restrooms, staff lounges, elevators and main corridors through non-clinical areas, and main entrances to a building. Notably, however, CMS expressed concern regarding patient privacy, security, and infection control and advised that paths of travel that move patients through clinical space could not be permissibly shared under the expanded guidance.

Second, in an unanticipated move, CMS proposed to permit co-located providers to also share certain personnel and services, subject to limitations. For example, shared staff would not be permitted to “float” (i.e., CMS would require that they be assigned to specific entities for specific shifts and that they would not provide services to both during the same shift), unless the staff were part of the entity’s active medical staff. In practice, the guidance appears to permit staff working primarily at one entity to also serve the co-located entity during specific times. Both entities, however, would still be required to separately meet minimum staffing requirements at all times, as dictated by state law or the CoPs. The guidance would also permit co-located providers to share certain services “under-arrangement,” including non-clinical food services, maintenance, housekeeping and security services, as well as clinical laboratory and pharmacy services.

Open Questions

Timesharing Arrangements for Clinical Space

While the draft Memo was relatively clear in its intent, one particular omission will be disappointing for many providers: CMS did not include additional guidance on timesharing of the same clinical space between providers. We suspect many providers will welcome the ability to share non-clinical space, which has the potential to significantly decrease non-clinical operational costs. However, the draft Memo does not modify the requirement that clinical space remain entirely separate at all times.

Many hospital providers, especially in rural areas, increasingly desire to lease or “timeshare” portions of their clinical spaces to other providers, where only one provider would have exclusive use over clinical space at a specific time. Rural hospitals in particular argue that, as acute care providers, timesharing their clinical space to sub-acute care providers such as ASCs or specialists would represent a win-win for everyone, providing new life for underused hospital space and avoiding costly buildout costs for the sub-acute providers.

CMS’ published guidance regarding hospitals time sharing with other providers appears to foreclose this option. Specifically, in addition to CMS’ guidance indicating that hospital space must be under the hospital’s control on a 24/7 basis, Medicare State Operations Manual, Appendix L, Q-0002 provides that while two ASCs may enter into a timesharing arrangement:

“an ASC and a hospital or CAH outpatient surgery department, including a provider-based department that is either on or off the hospital’s or CAH’s main campus, may not share the same physical space, since the regulations at 42 CFR 413.65(d)(4) require that the provider-based department be held out to the public as a part of the main hospital, and that patients entering the provider-based facility are aware that they are entering the hospital.”

The draft Memo does not address or otherwise modify these prohibitions on timesharing of clinical space between hospitals and non-hospital providers.

Clarifications to Proposal

As with any draft guidance document, one purpose of soliciting feedback is for the public to highlight portions of the proposal that could benefit from additional clarity. Among numerous other submissions from the public, on June 26, 2019, Senator Grassley published a letter detailing his office’s requests for clarification in the guidance. While he did not go so far as to request that CMS permit sharing of clinical space under certain circumstances, he did request that CMS to:

Clarify important definitions (such as the term “healthcare entity,” “distinct space” and “duty hours”) to prevent confusion;
Provide exceptions to permit patients to travel under supervision through the clinical space of the co-located entity, if the such travel would assist in providing better patient care;
Clarify precisely the types of staff permitted to “float” between entities (noting that the roles comprising a “medical staff” may vary, depending on the entity); and
Provide additional guidance regarding provision of emergency services in co-located entities.

Opportunities for Providers

Regardless of any opportunities to further clarify or expand its guidance regarding proper co-location between hospitals and other providers, the draft Memo, if finalized, will represent a significant opportunity for new hospital co-location ventures.

Hospitals may benefit from sharing non-clinical space and services with separate providers, especially in high-cost real estate markets.
The ability to share staff, especially when additional full-time employees are not necessary for one co-located provider, can provide benefits of convenience, better patient care and flexibility.

We hope on behalf of our provider clients that CMS’ openness to the benefits of co-location and space sharing arrangements may result in additional flexibility in the future to benefit patients and providers alike.