Radiologists have long questioned how Medicare can essentially require them to give it a "most favored nation" status by prohibiting charges substantially in excess of the physician's usual charges to Medicare, Medicaid, and other federal healthcare programs. This obligation arises from authority given to the Office of Inspector General for the U.S. Department of Health and Human Services to exclude a provider from participating in federal healthcare programs if the provider submits charges to Medicare that are substantially in excess of the provider's usual charges.

Unfortunately, neither the law nor the regulations define "substantially in excess" or "usual charges," leaving the healthcare community to speculate as to what constitutes an excessive charge. In 2000, the OIG attempted to quell provider speculation with a statement at its Web site holding that the exclusionary rule did not apply "unless a provider's charge to Medicare is substantially in excess of its median non-Medicare/Medicaid charge." Thus, "a provider need not even worry about . . . [the rule] . . . unless it is discounting close to half of its non-Medicare/Medicaid business." Nevertheless, questions linger as to how the rule operates.

In a further attempt at clarification, the OIG published a proposed rule on Sept. 15, 2003, that attempts, with mixed results, to define the terms "substantially in excess" and "usual charges."

According to the OIG, professional services reimbursed under the Medicare physician fee schedule are to be exempt from the rule. As proposed, however, the rule could have a major impact on the revenues of radiology practices that bill Medicare for items such as drugs or other ancillary services. Practices linked with hospitals that are paid under the ambulatory payment classification (APC) system for joint-venture services could also be affected. Thus, services such as payments to imaging centers in joint ventures with hospitals that are paid under schedules outside the physician fee schedule could also be affected.

Usual Charge

The OIG proposes adoption of one of two methods for determining a provider's usual charge. The first method uses simple averaging. The radiology group would list all charges used for a particular item or service for the most recent one-year period (either a calendar year or a rolling 12-month period) and divide the sum by the total number of charges listed. The second method identifies the median charge. The provider lists all charges for a particular item or service from the lowest to the highest amount and divides the total number of charges by two. Starting with the lowest number, the group counts up the list until it reaches the median number indicated by the previous calculation. That number is the group's usual charge.

Whichever method the OIG eventually selects, the list a group uses to calculate its usual charges may include only certain types of charges:

• charges billed directly to patients, if a good faith effort was made to collect the entire amount;
• negotiated rates with commercial third-party payers, using the rate obtained from third-party payers rather than the actual amount billed to such
  payers;
• charges billed to third-party payers with which the provider does not have a contractual arrangement, if the group makes a good faith effort to collect the entire amount from the third-party payer and/or the patient; and
• contractual rates with commercial managed-care plans, Medicare+Choice plans, state managed-care plans, and any other federal managed-care plans as long as no more than 10% of the provider's maximum potential compensation can be in the form of a bonus and/or withhold payment.

Note that the contractual rate for purposes of determining usual charges is the base rate (without bonus and/or withhold payments), plus one-half of the potential bonus and/or withhold payment, regardless of whether the bonus and/or withhold payments are actually paid.

The list of usual charges would not include:

• capitated payment rates or fee-for-service payment rates if the arrangement involved a potential bonus of greater than 10% of the total payment; and
• payment rates established by Medicare, Medicaid, or other federal fee-for-service programs.

The exclusion of fee schedule rates for federal healthcare programs is critical because it may have an adverse impact on medical practices that derive a substantial portion of ancillary service revenue from these programs. An on-campus joint-venture imaging center, for example, qualifies as a provider-based entity and is paid using the APC methodology. Say the center has a patient mix of approximately 55% Medicare fee-for-service, 10% Medicaid, and 35% commercial health plan and private pay. To determine its usual charge for a particular diagnostic test, the center would create a list of all charges and/or negotiated rates for the tests used in the past year, excluding the payment rate for the 55% of patients covered by Medicare pursuant to the Medicare fee schedule and the 10% of Medicaid patients. The list used to calculate the center's usual charge would include only amounts charged for the 35% of its mix involving services to private pay patients and the contractual rates it
negotiated with commercial health plans. If the average of those amounts is less than the Medicare APC payments, the center may be submitting charges to Medicare that are considered substantially in excess of the center's usual charges, thereby forcing it to reduce its charges below the Medicare fee schedule or fight to obtain higher payment rates from commercial health plans.

Substantially In Excess

The OIG is proposing to define charges as "substantially in excess" of "usual " if the provider's charges are more than 120% of the usual charge as calculated above. In those cases in which the actual charge submitted to Medicare by the provider exceeds the Medicare fee schedule amount, the radiology group should compare the fee schedule amount to the provider's usual charge in order to determine whether the submitted charge exceeds 120% of the provider's usual charge.

Although radiologists and other physicians are generally prohibited from submitting excessive charges to the Medicare and Medicaid programs, the OIG has the authority to allow submission of excessive charges if it finds there is "good cause for such bills or requests." The regulations currently define "good cause" as including charges that are due to "unusual circumstances or medical complications requiring additional time, effort, expense, or other good cause."

The proposed rule would expand the good cause exception to include charges or costs that are due to "increased costs associated with serving Medicare or Medicaid beneficiaries" and "other good cause." Thus, under the proposed rule, even if an imaging center's charges are determined to be more than 120% of usual, the OIG might not exclude the center, or any physician, from participation in the federal healthcare programs if the center can demonstrate that it incurs increased costs directly related to serving Medicare or Medicaid beneficiaries.

Best Rate

While the exclusion of professional services paid pursuant to the Medicare fee schedule from the general prohibition on excessive charges is certainly welcome, it may not reduce the impact of the proposed rule on radiology practices providing certain ancillary services that will remain subject to the rule or practices participating in ventures that are reimbursed outside the Medicare fee schedule. These radiology practices should examine charges for each of the services under the proposed rule to determine whether the charges submitted to Medicare might exceed usual charges by more than 120%. If a charge to Medicare is substantially in excess of a practice's usual charge, the practice may be forced to either negotiate higher rates with commercial health plans (clearly the preferred option) or lower its Medicare charges to bring them in line with its commercial contract rates.

But until the proposed rule is finalized, the exclusionary rule remains in effect for all services to Medicare patients, including those reimbursed under the Medicare physician fee schedule. Radiologists should continue to assure that their charges to Medicare are not substantially in excess of their median non-Medicare/Medicaid charges.