OIG Moves to Address “Usual Charge” Issue

“Discriminatory billing practices” is target of new rules published on September 15

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CEO SUMMARY: Federal regulators are taking another crack at defining “usual charges.” Language in the proposed rules published last month precisely defines which payers should be included in determining “usual charges” and what charge basis to use for specific payers. Once effective, the new rules will have financial impact on many laboratories, particularly those known to offer clients heavy discounts.

ONCE AGAIN the Office of the Investigator General (OIG) is tackling the subject of “discriminatory billing practices” in the Medicare and Medicaid programs.

On September 15, 2003, the OIG published rules in the Federal Register that would amend regulations related to the Medicare/Medicaid prohibition against discriminatory billing practices. The public can comment on the proposed language until November 15.

Clinical laboratories typically discount lab test prices to HMOs and certain other payers, physician clients, employers, and other customers. Because price discounting is widespread across the laboratory industry, the proposed new rules could have significant financial impact on many laboratories.

“This issue revolves around a long- standing federal law that basically says ‘providers should not bill Medicare more than they customarily bill others’,” stated Jane Pine Wood, Partner in the Cleveland, Ohio-based law firm of McDonald Hopkins.

“The law itself is unambiguous,” she added. “It says that no provider shall bill Medicare for services at a price which is ‘substantially in excess of such individual’s or entity’s usual charges or costs for such items or services to any of their customers, clients, or patients.’ The ambiguity has always been in the definition of ‘usual charge.’

“This is at least the third major attempt by federal rule-makers to address this issue,” Wood said. “Their concern is that Medicare pays more for services than the private sector, because it doesn’t get discounts equal to what providers will offer private clients.”

Within the laboratory industry, this is certainly true. Highly-discounted fee-for-service contracts between laboratories and payers are widespread. In states that permit physicians to mark up, it is common for laboratories to offer those physicians extremely low prices in client-bill arrangements while generally submitting claims to Medicare for the full amount allowed under Medicare reimbursement guidelines.

“The proposed new regulations are very precise in several ways,” observed Thomas P. Joseph, a billing and compliance expert with Sprick, Stegall and Associates. “For the first time, there are detailed definitions of the key terms ‘usual charges’ and ‘substantially in excess.’ (See Sidebar on next page.)

“While not specifically mentioned, account bill clients appear to fall under the categories of payers that should be included in the usual charge calculation,” explained Joseph. “The financial impact could be considerable for labs that maintain a high proportion of account-bill clients who get significant discounts in the price of their lab tests.

Detailed Analysis Required

“Also, the proposed language makes it clear that the rules apply to individual procedures, not charges for all combined procedures,” he added. “That means labs will have to do a detailed analysis of each procedure to determine the ‘usual charge.’ These calcultions will need to be updated periodically to ensure compliance to reflect changes in the laboratory’s payer mix or as changes occur in different payers’ fee schedules.

“Certainly in the long run, the proposed rules, if implemented as written, will limit a laboratory’s ability to negotiate reduced fees to HMOs, managed care organizations, physicians, and other clients,” Joseph said.

Significant Impact on Labs

“Further, the inclusion of Medicaid in the proposed rules may create a significant impact for laboratories operating in states where Medicaid program fees are substantially less than Medicare fees,” said Joseph. “For example, if the Medicaid program is reimbursing at 70% of the Medicare rate for lab tests, to meet the excessive charges requirement in the new rules, a much higher proportion of that lab’s charges would need to be reduced.”

To help clients and readers of THE DARK REPORT, Joseph prepared tables to show, based on assumptions of payer mix and proportion of discounted business, how much of a typical laboratory’s book of business would be considered “excessive charges” and how that would change the Medicare billing rate. (See sidebar on page 5.)

Even if these rules take effect, this may not be the final word on the issue of Medicare “discriminatory billing practices” and “usual charges,” according to attorney Wood. “The original letters which defined usual charges were issued by the Healthcare Finance Administration (HCFA, now Centers for Medicare and Medicaid [CMS]) and the OIG back in the 1980s. That predates HMOs and a variety of new healthcare contracting models which appeared in the 1990s,” stated Wood.

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“Each revision to these rules is an attempt by regulators to clarify existing law,” she continued. “The proposed rules are much more precise than earlier attempts. However, for laboratories that like a level playing field for compliance, there is still a loophole.

“The rules specify a formula for determining excess charges relative to
Medicare and Medicaid fees. This formula determines an average of charges and creates the opportunity for manipulation by an aggressive laboratory.”

Wood’s observation strikes at the heart of the compliance conundrum with- in the laboratory industry. Laboratories which follow conservative compliance policies often find themselves at competitive disadvantage when other labs in their region take a more aggressive position on compliance. Because federal regulators seldom act on “minor” compliance infractions, laboratories with the laxer policies gain economic advantage, often for years. These new regulations promise to rectify some of the inconsistencies in the marketplace, but still leave room for interpretive mischief.

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