Hospitals with off-campus provider-based departments should take note of the newly issued FY 2027 IPPS Proposed Rule (IPPS Proposed Rule), as CMS has proposed narrowing one of the “75 percent” tests used by remote off-campus facilities to qualify for provider-based status. That proposed regulatory change may make it more difficult for off-campus inpatient departments to qualify as provider-based and appears to be part of a broader government effort to tighten oversight of off-campus facilities seeking or maintaining provider-based status.
Comments to the IPPS Proposed Rule are due by 5:00 p.m. EDT on June 9, 2026.
75 Percent Tests and IPPS Final Rule
Under the Medicare provider-based regulations at 42 C.F.R. § 413.65, a facility or organization located more than 35 miles from the main provider may still qualify as “provider-based” if, among other requirements, it “serves the same patient population as the main provider.” To satisfy that requirement, the off-campus facility or organization must demonstrate that it meets at least one of two “75 percent” tests during rolling 12-month periods. Specifically, the facility or organization must demonstrate that:
- “[a]t least 75 percent of the patients served by the facility or organization reside in the same zip code areas as at least 75 percent of the patients served by the main provider” (Geographic Overlap Test); or
- “[a]t least 75 percent of the patients served by the facility or organization who required the type of care furnished by the main provider received that care from that provider” (Services Overlap Test).
CMS’s current regulations provide the following example to illustrate satisfaction of the Services Overlap Test: “at least 75 percent of the patients of an RHC [rural health clinic] seeking provider-based status received inpatient hospital services from the hospital that is the main provider.”
Hospitals have used the Services Overlap Test to support the provider-based status of both inpatient and outpatient facilities located outside of the 35-mile radius of the main provider. That may change, however, based on the IPPS Proposed Rule, which was issued on April 14, 2026. In that rulemaking, CMS has proposed limiting the application of the Services Overlap Test, such that it would be available only to outpatient departments seeking provider-based status.
In preamble, CMS took the position that this proposed change is more consistent with the agency’s “original intent” for the Services Overlap Test. CMS began by noting that the RHC example included in the Services Overlap Test describes a “referral relationship” between the off-campus facility and the main provider, in which “inpatient services are not readily available” in the outpatient facility’s geographic area and hence the outpatient facility’s patients need to travel more than 35 miles to receive inpatient care. According to the agency, this example was included in the original regulation to “reinforce CMS’s intention” that the Services Overlap Test “could be applied to exceptionally isolated outpatient facilities where additional services are routinely received by patients at more distant acute care facilities.” In the agency’s view, the Services Overlap Test was not intended to permit a hospital to “choose[] to operate two distinct inpatient locations more than 35 miles apart.”
In addition to contending that the proposed change is more consistent with the agency’s original intent, CMS also took the position that narrowing the application of the Services Overlap Test would help prevent “unwarranted payment advantages” by hospitals that otherwise would be excluded from the Medicare IPPS. Certain categories of hospitals—including, for example, children’s hospitals, cancer hospitals, psychiatric hospitals, and rehabilitation hospitals—are not paid under the IPPS and are instead paid under different (typically, cost-based) reimbursement methodologies. CMS expressed concern that some of these hospitals may be using the Services Overlap Test to circumvent the IPPS-excluded designation and hence “obtain significant payment advantages for inpatient services provided at considerable distances from the main provider.”
The IPPS Proposed Rule does not include any proposed changes to the Geographic Overlap Test, which would remain available to both inpatient and outpatient facilities seeking provider-based status.
Implications
CMS’s proposed change to the Services Overlap Test is one of several recent government efforts tightening oversight over off-campus, provider-based facilities. Earlier this year, for example, Congress enacted new statutory requirements for off-campus, provider-based departments through the Consolidated Appropriations Act, 2026 (CAA, 2026). Section 6225 of the CAA 2026 amends the Social Security Act to add new conditions of payment for off-campus outpatient provider-based departments. Specifically, for items and services furnished on and after January 1, 2028, off-campus outpatient departments of a provider will not be eligible for payment under the Medicare OPPS unless (i) the department has obtained a separate NPI, (ii) the items and services at issue are billed under that separate NPI, and (iii) the provider has timely submitted an attestation of compliance with the provider-based rules at 42 C.F.R. § 413.65. It is anticipated that CMS will propose implementing regulations for these new requirements in the forthcoming CY 2027 OPPS Proposed Rule.
Given this increased government scrutiny, providers with off-campus, provider-based departments would be well advised to ensure they can demonstrate compliance with all Medicare provider-based requirements, particularly those that are or may be newly enacted. For example, given the changes made by the CAA, 2026, hospitals with off-campus outpatient provider-based departments may wish to begin inventorying their locations, preparing provider-based attestations, and applying for location-specific NPIs in advance of the January 1, 2028, deadline. Similarly, given the proposed changes to the Services Overlap Test in the IPPS Proposed Rule, hospitals operating off-campus inpatient facilities more than 35 miles from the main provider may wish to evaluate whether they can satisfy the Geographic Overlap Test. If not, CMS’s proposed changes may put their provider-based designation at risk. Providers that may be impacted by the IPPS Proposed Rule also should consider submitting a comment to CMS by the June 9, 2026, deadline.
