College of American Pathologists
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cap today

Proposed rule takes "excessive" to extreme

What the CAP says

December 2003
Karen Southwick

A proposed federal rule that would define what Medicare considers "excessive charges" for laboratory and other nonphysician services has pathologists and lab groups concerned about excessive regulation.

The CAP filed comments on the proposed rule, which were due by Nov. 14, along with other lab groups, including the American Clinical Laboratory Association. The CAP’s chief objection pertains to the rule’s requirement that nonphysician providers such as labs calculate their average or median charge on each item-that is, lab test-to determine if Medicare is being overcharged.

Since many lab services are purchased by physician offices, insurers, and managed care organizations in "bundled" fashion, where volume drives the fees, laboratory groups contend it would be extremely burdensome to calculate per-test charges.

"The administrative hassles related to this are phenomenal," says Mark S. Synovec, MD, chair of the CAP Economic Affairs Committee and president of the Topeka (Kan.) Pathology Group. "Keeping track of all your individual costs and different payments will be a logistical nightmare."

Specifically, the rule, published Sept. 15 in the Federal Register by the Office of Inspector General in the Department of Health and Human Services, would:

  • Define the phrases "substantially in excess" and "usual charges" as they relate to Medicare payments versus payments from other providers. The OIG objected to a two-tier pricing structure where Medicare pays higher charges than other providers. "Unless the price differential can be justified by costs that are uniquely associated with the Medicare program, the provider is simply overcharging Medicare," the OIG wrote in the proposed rule.

  • Consider charges to Medicare that are 120 percent or more above the usual charges to be substantially in excess. Violators could be excluded from the Medicare program.

  • Include in the calculation of usual charges amounts billed to cash patients or those covered by indemnity insurers with which the provider has no contractual arrangement and any fee-for-service rates, discounted or not, that a provider accepts. Not included in the calculation of usual charges are capitated payments, free or reduced-price care to the uninsured, and fees set by federal or state programs.

  • Use a provider’s average charge, although the median charge, or 50th percentile, could also be employed at OIG’s discretion.

  • Provide for a "good cause" exception if the provider can demonstrate it is charging Medicare more than 120 percent because its costs are higher for servicing Medicare beneficiaries. The burden of proof, however, rests with the provider.

  • Exclude claims for physician services reimbursed under the Medicare physician fee schedule, or Part B.

Pathologist objections

Several pathologists raised concerns about the rule, concerns that were formalized in a CAP comment letter.

"As a taxpayer, I certainly appreciate OIG’s attempt to prevent excessive charges to the federal government," Dr. Synovec says. "But they have come up with an illogical framework for defining ’excessive’ that doesn’t consider the complexities of lab contracts."

If laboratory services were sold the way Wal-Mart sells retail items, it would be "crisp and clear what your costs are," he says, because each item has a price attached, and the direct and indirect costs attached to that price can easily be calculated.

Labs, however, are selling not individual items but different bundles of services to different payers, all of whom have their own pricing schemes. "The contracts that labs have with third-party payers and other utilizers of lab services run a wide gamut, with a significant range in costs and payments," he says, "compared to Wal-Mart, who sells the same service at a single price to everyone who comes in the door."

Besides contractual arrangements with insurers, laboratories also have wholesale contracts with physician offices, Dr. Synovec adds.

As an example of the variation in billing, some insurers will be charged in a capitated manner and others in a fee-for-service manner, with different documentation and billing requirements. (Note that these are outpatient lab services. In-hospital lab charges are covered under Medicare DRGs and are not part of the proposed rule.)

Consequently, every potassium level or complete blood cell count is not created equal. "Even if two tests are done on the same instrument, the costs are different because of the individual documentation requirements in billing," Dr. Synovec says. "We’re selling a lot of relatively inexpensive items where the cost of the billing may be larger than the cost of the actual test."

Even though the rule offers an exception to providers who can demonstrate higher costs for Medicare, "it’s very difficult to figure that out," he says. "Most providers don’t sit down with an insurance company and go test by test or CPT code by CPT code. It’s a package deal."

Dr. Synovec compares laboratory contracts with a congressional bill presented to the president: "We don’t have a line item veto. You either sign the contract or you don’t, but you can’t, in all practicality, hassle with every individual test reimbursement."

Because the proposed Medicare rule would require lab providers to break down their costs by individual tests, he says, it would be particularly onerous for labs that do a lot of outreach work and small labs that aren’t computerized.

"The data collection required to prove your additional billing costs related to Medicare-for example, Medicare secondary payer forms, checking the common working file, and ABNs-will add additional cost to labs attempting appropriate payment," he says. "This equates to another unfunded governmental mandate. If this rule goes into effect, there are going to be labs like ours that will question whether it’s feasible to continue providing outpatient services."

Dr. Synovec says if Medicare is indeed being excessively charged, some kind of rule makes sense. But he questions, at least in the case of labs, the magnitude of the problem, and he is convinced that the current proposed rule "is a disaster waiting to happen."

Stephen Black-Schaffer, MD, a member of the CAP Economic Affairs Committee and associate chief of pathology at Massachusetts General Hospital, Boston, agrees with these points.

"Actual contracting does not take place by CPT code," he says. Bundled contracts may pay more than cost for certain services and less for others. The intent is to cover costs overall, he says. "You may not even know what your costs and charges are until a particular contract period has expired and you can identify the volume of services you provided."

What the proposed rule will do "is insist that everybody else take a fee schedule predicated on Medicare," he says, because figuring out alternative costs will be too burdensome. "It’s a rather major undertaking to determine how much you got paid for, say, all your CBCs."

Dr. Black-Schaffer also notes that laboratories with significant outreach programs will be affected most by the regulation. If you do only in-hospital lab work, the rule won’t have much, if any, impact, he says. But since most hospital labs are trying to use overnight, off-peak capacity by obtaining outreach work, the rule would hit them hard.

"We’re trying to make our labs less of a cost center by taking off-peak capacity and selling it to people at a marginal rate," he says. "By doing that, you hope to underwrite the overall cost of providing lab services and be able to afford Medicare’s payment rate."

While the OIG is looking at its rule "from a coding and financial analysis," labs consider their business from a "volume of service" analysis. The off-peak capacity beyond what is required overnight for hospital testing is offered at less than the fully loaded cost for peak capacity, daytime hospital testing, he says.

The proposed regulation would make it problematic to offer those marginal rates because the easiest solution would be simply to charge everyone the Medicare rate. Under that scenario, "the overall cost of health care is going to go up," Dr. Black-Schaffer warns. "Hospital labs have already been squeezed to the limit. If they take away our off-peak capacity, we’re in trouble."

Like Dr. Synovec, he says the OIG has a "legitimate concern" in ensuring that Medicare is not being overcharged. The question, though, is, "With regard to the services we offer, is there evidence that [overcharging] is taking place?" Dr. Black-Schaffer asks.

If there are specific examples of "a clear pattern where Medicare is paying more than it should, the rule should target that," he adds. For instance, if Medicare can show that a particular HMO has lowered its costs in a region because Medicare is overpaying, that would be a legitimate target for the rule. But don’t place a "severe administrative burden on every lab to track its accounts unless you can document that an abusive practice is taking place."

Dr. Black-Schaffer would like to see the rule amended to exclude provider services where there isn’t such evidence. In most outpatient settings, he says, due to a highly competitive market and existing regulations, "a hospital lab doesn’t find itself in a position to collect more per test than it should."

Thomas M. Sodeman, MD, CAP president-elect and chairman of laboratory medicine at North Shore Long Island Jewish Health System, Lake Success, NY, says there are simpler ways to achieve the government’s objective.

"Instead of taking an average for each single CPT code, I would suggest that they allow us to average the group charges of all the CPT codes and compare that to the average for Medicare," he says. In other words, take the average across all the CPT codes and all the prices in the contracts and compare that to the same figure for Medicare.

The current proposal goes against the executive branch’s expressed desire "to reduce the paperwork involved in dealing with the government," Dr. Sodeman adds.

Like his colleagues, he doesn’t believe laboratories are systematically overbilling Medicare. The federal program is charged more because Medicare billing results in frequent denials, roughly 20 percent of the time, Dr. Sodeman estimates. By contrast, private insurers seldom deny payment. That means it costs a laboratory more to do business with Medicare.

The provisions of the proposed rule, he says, could have a "destabilizing effect on the lab industry." Either other charges will go up in relation to Medicare, or Medicare charges will come down. Given the competitive nature of the industry, "the pressure will be on us to drive Medicare prices down," he says. While very large labs may be able to accommodate that, "smaller independent operations or hospitals with small outreach programs may not."

The views of pathologists are reflected in the CAP’s comment letter, says a spokesman for the CAP’s professional and regulatory affairs team in Washington (see "What the CAP says"). The main points of the letter are the inordinate burden the proposed rule places on labs to do "sophisticated cost accounting" that is not in place and the fact that the evidence of overcharging Medicare is "largely anecdotal." As a result, the definition of the 120 percent threshold "appears arbitrary and artificial."

ACLA objections ACLA objections

The American Clinical Laboratory Association has a number of objections to the proposed rule as well, which the association detailed in its comment letter. It also hoped to enlist other laboratory groups to sign a joint letter outlining common concerns, according to a spokeswoman, but that letter was not expected to be sent until after the comment period.

ACLA’s comment letter included these objections:

  • "Charges" historically has meant the charges to third-party payers and similarly situated payers, not charges to physicians, other types of clients, or managed care plans. The OIG’s proposal is inconsistent with longstanding interpretations of that term.

  • It is unreasonable for the OIG to assume that Medicare should receive the same price as other payers without also considering the other factors that led to such price concessions. Moreover, in many instances, Medicare is already paying a lower price than other payers because of the implementation of fee schedules.

  • Laboratory payments have consistently been revised to reflect market conditions; therefore, like physician payments, they should be excluded.

  • The proposal places the OIG in the role of setting reimbursement policy, which should be done by the Centers for Medicare and Medicaid Services. To the extent that CMS-which is in charge of setting reimbursement policy-believes it is overpaying for laboratory testing, or any other service, it can use its authority to establish a new price.

  • The proposal for calculating usual charges would be impossible to administer and interpret. There are 1,100 CPT codes for laboratory services. Although the examples in the proposed rule use eight different data points, a laboratory might have hundreds of data points per CPT code.

  • The proposal could increase costs for laboratory testing. Laboratories will have two choices: lower prices to Medicare or increase prices to others. Because Medicare is such a large payer, many providers probably will choose to raise their prices to others, driving up health care costs.

  • It is excessive for this type of rule to be applied as an exclusion provision. A laboratory that has one CPT code out of line could be excluded from the program. These penalties are not consistent with the severity of the "offenses."

The best deal?

Jim Dechene, a partner with the law firm of Sidley Austin Brown & Wood, Chicago, cautions that while the proposed rule will probably be amended before taking effect, it might be the best deal that providers will get.

The Medicare governing agency issued an advisory letter in 1999 that suggested that charging Medicare more under any circumstances would be a problem under anti-kickback and anti-gouging provisions, Dechene says, unless the provider could show that its costs were less for other payers.

"This new rule, on one level, is more flexible," he says, because it allows providers to calculate their average charges and then says as long as that average charge is not 20 percent less than Medicare, "you’re okay."

The suggested rule is "far less draconian" than the one proposed in 1999, he adds. At that time, there was such a "hue and cry that Medicare backed away. My own view is that this [new] rule is really not that bad, so don’t expect them to back away."

There is a caveat, however. The proposed regulation addresses anti-gouging concerns but not anti-kickback concerns. That means "the risk here is that if you charge your other accounts 20 percent less than Medicare, maybe you’re doing that as a financial inducement," Dechene says. That would be prohibited under anti-kickback rules.

"You could make the argument that if you comply with the new regulation, it’s not a financial inducement to get the business because the rule recognizes some discount [from Medicare] is appropriate," he adds. But he would like to see such language written into the rule to make it clear.

Meanwhile, Dechene advises laboratories to begin collecting the information that would enable them to figure out their average charge. "My impression is that most labs are not going to have more than a 20 percent differential because Medicare reimbursement is already pretty low," he notes.

To the extent that laboratory work is performed under a bundled rate, "I agree that it would be hard to calculate an average charge," he says. "In my experience, however, most pathology work still is done on a fee-for-service basis rather than on a bundled rate."

As for the timing of the rule, Dechene says the OIG has 60 days to review the comments it received by Nov. 14 and then has an unspecified time frame in which to determine how it might revise the proposal in light of those comments. "I wouldn’t expect a final rule before the second quarter of next year," he says.

Karen Southwick is a writer in San Francisco.