Classification of Provider-Based Space a Key Consideration for Rural Hospitals



If you work in or lead a Critical Access Hospital, it’s likely one of the key issues you face is space—specifically, utilizing rooms within your facility for multiple uses.

One such use is specialty clinic services. Rural hospitals, whether they’re located an hour from an urban area, or several hours away from the nearest large town, allocate a certain percentage of their space each month for this purpose. Under this scenario, outside specialty physicians, from orthopedic specialists to dermatologists, ENTs, etc., will commute in and see patients in spaces set aside for that purpose.

This practice is certainly beneficial to rural patients, providing them with the specialty services they need close to home. Yet it creates significant administrative and operational issues for the hospitals.

How so? When billing for these services, the physician will usually bill professional outpatient services on the CMS-1500, while the hospital will bill the facility fee under Revenue Code 510  on a UB, which classifies the space in which the specialty physician operates as hospital space. However, situations may arise that necessitate different billing requirements. For example, certain physicians may prefer to pay rent in the space they utilize for patient care and billing for this space as their office, which in turn bars the hospital from billing a facility fee. Correspondingly, there are insurers who no longer pay Revenue Code 510 facility fees, and instead, pay only facility fees that are part of the professional fee schedule reimbursement.

There are other examples, but the bottom line is that space used by outside specialty care physicians can be classified differently based on how it’s regarded by hospitals, physicians, insurers and even Medicare. Is it hospital space? Rental space? Some other classification? Whatever the answer may be, ambiguity in this area causes significant billing headaches for all involved—and it also threatens hospitals with potentially lower reimbursements and compliance issues.

Clearing the Air – Setting the Facts Straight

From Medicare’s perspective, hospital space should be classified into one category—not two or more categories. As far as billing and reimbursement are concerned, it can’t be hospital space one day, then physician office space the day after. Medicare does not allow for the ambiguity, and it tends to confuse beneficiaries as well from a billing perspective. For example, if you classify three suites at the end of a hallway as provider-based hospital space one day and bill each outside provider a hospital facility fee for use of that space, then classify that same space as physician office space the following day by accepting a rental payment for the space, Medicare may disallow your hospital-based designation for that space, making you re-bill, decreasing your hospital’s reimbursement.

For Medicare-participating hospitals, space for outsourced specialty care services cannot be formally considered as mixed-use space. If you plan to bill it as a hospital space, then it needs to be held out to the public as a hospital space and integrated into hospital operations like all other hospital spaces. Recent CMS determinations have set forth an “exclusive use” standard and require that provider-based space be sufficiently separated from non-hospital space. This separation can and should include the following:

  • An exclusive entrance, waiting area and registration area for non-hospital areas
  • Permanent walls to separate provider-based and non-provider based space
  • Distinct suite designation(s) (i.e., rooms are designated for specific services)

Takeaways – Charting the Way Forward for Your Facility

If your hospital utilizes outsourced specialty physician services, consider the following go-forward strategies:

  • First, analyze and understand your exposure and risk from all angles. Specifically, identify the number of CMS criteria under provider-based regulation 42 CFR 413.65 and PM-03-030 that your facility satisfies. Failing to satisfy these criteria puts your facility at risk of being declassified as provider-based for these areas. All this can be confusing for anyone—even seasoned hospital administrators. In this regard, we recommend utilizing trusted advisors – accounting, legal and otherwise – who have deep experience in these matters.
  • Based on input and recommendations from your advisors, make the necessary arrangements with your outsourced specialty clinic physicians so that your facility can continue to bill facility fees and remain in compliance with CMS regulations. To that end, consider terminating existing leases and using hospital outpatient service agreements instead of space leases. Essentially, such agreements allow providers to deliver care in hospital-designated space. This may compromise some hospitals to an extent with private insurers, but Medicare is generally the larger payer in most instances; it wields the larger compliance stick, so we generally recommend adhering to its compliance mandates, unless your specific situation dictates otherwise.
  • Consider provider-based issues in site planning decisions. Whether you’re planning new construction, renovations or reconfiguration initiatives, be sure your hospital leadership accounts for provider-based space issues up front.


Do you have questions about provider-based space, or other financial-related health care issues? Contact Kirk Delperdang, Healthcare Manager, at 402.827.2361 or





Kirk Delperdang is a Healthcare Director at Lutz with over 28 years of experience. He provides healthcare enrollment services to clients with a focus on Medicare providers and reimbursement analyses. In addition, he is responsible for leading Lutz's cost report service line.

  • Healthcare Financial Management Association - Nebraska Chapter, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • BA in Accounting, University of Northern Iowa, Cedar Falls, IA
  • St. Vincent de Paul, Knights of Columbus, Member
  • Active in various youth sports leagues: Aldrich Elementary, Millard Athletic Association, Millard North Schools, Omaha FC, Skutt Catholic High School and YMCA


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