Medicare Program; Replacement of Reasonable Charge Methodology by Fee Schedules

Federal RegisterJul 27, 1999

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 414

[HCFA-1010-P]

RIN 0938-AJ00

Medicare Program; Replacement of Reasonable Charge Methodology by

Fee Schedules

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: We are proposing to implement fee schedules to be used for

payment of services, excluding ambulance services, still subject to the

reasonable charge payment methodology. The authority for establishing

these fee schedules is provided by section 4315 of the Balanced Budget

Act of 1997 (Public Law 105-33), which adds to the Social Security Act

a new section 1842(s). A fee schedule for ambulance services is

mandated by a different statutory provision. Section 1842(s) of the

Social Security Act specifies that statewide or other areawide fee

schedules may be implemented for the following services: medical

supplies; home dialysis supplies and equipment; therapeutic shoes;

parenteral and enteral nutrients, equipment, and supplies;

electromyogram devices; salivation devices; blood products; and

transfusion medicine.

DATES: Comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m. on

September 27, 1999.

ADDRESSES: Mail an original and 3 copies of written comments to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: HCFA-1010-P, P.O. Box 26688,

Baltimore, MD 21207-0488.

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If you prefer, you may deliver an original and 3 copies of your

written comments to one of the following addresses: Room 443-G, Hubert

H. Humphrey Building, 200 Independence Avenue, SW., Washington, D.C.

20201, or Room C5-09-26, 7500 Security Boulevard, Baltimore, Maryland

21244-1850.

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code HCFA-1010-P. Comments received timely will be available

for public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in Room 443-G of

the Department's offices at 200 Independence Avenue, SW., Washington,

DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.

(phone: (202) 690-7890).

Copies: To order copies of the Federal Register containing this

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of the issue requested and enclose a check or money order payable to

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client software, or by telnet to swais.access.gpo.gov, then log in as

guest (no password required). Dial-in users should use communications

software and modem to call (202) 512-1661; type swais, then log in as

guest (no password required).

FOR FURTHER INFORMATION CONTACT: Joel Kaiser, (410) 786-4499.

SUPPLEMENTARY INFORMATION:

I. Background

A. Payment Under Reasonable Charges

Payment for most services, including supplies and equipment,

furnished under Part B of the Medicare program (Supplementary Medical

Insurance) is made through contractors known as Medicare carriers. At

one point, payment for most of these services was made on a reasonable

charge basis by these carriers. The methodology for determining

reasonable charges is set forth in section 1842(b) of the Social

Security Act (the Act) and 42 CFR part 405, subpart E of our

regulations. Reasonable charge determinations are generally based on

customary and prevailing charges derived from historic charge data. The

reasonable charge for service is generally set at the lowest of the

following factors:

The supplier's actual charge for the service.

The supplier's customary charge for the service.

The prevailing charge in the locality for similar

services. (The prevailing charge may not exceed the 75th percentile of

the customary charges of suppliers in the locality.)

The inflation indexed charge (IIC). The IIC is defined in

Sec. 405.509(a) as the lowest of the fee screens used to determine

reasonable charges for services, including supplies, and equipment paid

on a reasonable charge basis (excluding physicians' services) that is

in effect on December 31 of the previous fee screen year, updated by

the inflation adjustment factor. Fee screens are those factors

identified above, including the IIC and lowest charge level if

applicable, used to determine payment under the reasonable charge

methodology. The inflation adjustment factor is based on the current

change in the consumer price index for all urban consumers (CPI-U) for

the 12-month period ending June 30.

For parenteral and enteral nutrients, equipment, and supplies, an

additional factor, the lowest charge level (LCL), is used to determine

the reasonable charge. In accordance with Sec. 405.511(c), the LCL is

set at the 25th percentile of the charges (incurred or submitted on

claims processed by the carrier) for the above services, in the

locality designated by the carrier for this purpose, during the 3-month

period of July 1 through September 30 preceding the fee screen year

(January 1 through December 31) for which the service was furnished.

Sections 405.502(g) and 405.506 permit exceptions to the general

rules for determining reasonable charges. Section 405.502(g) gives the

carrier the authority to establish special payment limits for a

category of service if it determines that the standard rules for

calculating payments result in grossly deficient or grossly excessive

payments. Section 405.506 provides that a charge which exceeds the

customary charge, the prevailing charge, or the LCL ``may be found to

be reasonable, but only where there are unusual circumstances, or

medical complications requiring additional time, effort or expense

which support an additional charge, and only if it is acceptable

medical or medical service practice in the locality to make an extra

charge in such cases.''

B. Payment Under Fee Schedules

The law gradually replaced the reasonable charge payment

methodology with fee schedule payment methodologies for most services

furnished under Part B of the Medicare program. Fee schedules have been

established for physicians' services, laboratory services, durable

medical equipment (DME), prosthetics and orthotics, surgical dressings,

and, beginning in the year 2000, ambulance services. Subject to

coinsurance and deductible rules, Medicare payment for these services

is equal to the lower of the actual charge for the service or the

amount determined under the fee schedule methodology.

Section 4315 of the Balanced Budget Act of 1997 (BBA) amends the

Act at section 1842 by adding a new subsection(s). Section 1842(s) of

the Act provides authority for implementing statewide or other areawide

fee schedules to be used for payment of the following services that are

currently paid on a reasonable charge basis:

Medical supplies.

Home dialysis supplies and equipment (as defined in

section 1881(b)(8) of the Act).

Therapeutic shoes.

Parenteral and enteral nutrients, equipment, and supplies

(PEN).

Electromyogram devices.

Salivation devices.

Blood products.

Transfusion medicine.

Section 1842(s)(1) of the Act provides that the fee schedules for

the services listed above are to be updated on an annual basis by the

percentage increase in the CPI-U (United States city average) for the

12-month period ending with June of the preceding year. The fee

schedules for PEN, however, may not be updated before the year 2003.

Finally, total payments for the initial year of the fee schedules must

be approximately equal to the estimated total payments that would have

been made under the

[[Page 40536]]

reasonable charge payment methodology.

II. Provisions of the Proposed Regulations

A. General

We propose, under section 1842(s) of the Act, to implement fee

schedules for those services listed above. Subject to coinsurance and

deductible rules, Medicare payment for these services is to be equal to

the lower of the actual charge for the service or the amount determined

under the applicable fee schedule payment methodology presented below.

The fee schedules we propose would apply to services furnished on or

after January 1, 1999, and would be calculated using base reasonable

charges updated by an inflation update factor.

Section 4315(d) of the BBA requires that the total payments for the

initial year of the fee schedules be approximately equal to the

estimated total payments that would have been made under the reasonable

charge payment methodology. For this reason, for services other than

PEN, we are proposing that the fee schedule amounts be based on average

reasonable charges from the period July 1, 1996 through June 30, 1997,

the same data period used in calculating the 1998 reasonable charges.

Furthermore, for the purposes of calculating the 1999 fee schedule

amounts, we are proposing that the base fee schedule amounts be

increased by the change in the CPI-U for the 12-month period ending

with June of 1998, the inflation adjustment factor that would have

otherwise been used in calculating the 1999 IICs. This would update the

reasonable charge data to the 1999 level, the initial year of the fee

schedules. For PEN, which accounts for approximately 90 percent of the

Medicare expenditures for services addressed in this rule, we are

proposing that the fee schedule amounts be based on the reasonable

charges that would have been used in determining payment for PEN in

1999.

The proposed fee schedules would have a minimal, if any, impact on

the efforts of HCFA and its contractors to revise their current systems

to be millennium or Y2K compliant, as Y2K compliant fee schedule

systems are already in place for other services. The proposed fee

schedules would be incorporated into these current systems.

B. National Limits

For medical supplies, electromyogram devices, salivation devices,

blood products, and transfusion medicine furnished within the

continental United States, we propose national limits on the statewide

fee schedule amounts similar to those that were mandated by the

Congress for DME and surgical dressings in section 1834 of the Act. The

Congress mandated ceilings and floors, equal to 100 percent and 85

percent, respectively, of the median of all statewide fee schedule

amounts, to limit unreasonably high and low fees resulting from the

local fee calculations for DME and surgical dressings. The Congress

recognized the unique costs of doing business in areas outside the

continental United States and therefore did not apply the national

limits for DME and surgical dressings to these areas.

The national limits for DME and surgical dressings have been

effective at eliminating outlying fees that cannot be explained by the

differences in the costs of doing business in one part of the country

versus another. We are therefore proposing that this methodology be

applied to the services identified above. Accordingly, the statewide

fee schedule amounts for these services may not exceed 100 percent of

the median of all statewide fee schedule amounts for areas within the

continental United States and may not be less than 85 percent of the

median of all statewide fee schedule amounts for areas within the

continental United States. The statewide fee schedule amounts for areas

outside the continental United States will not be subject to the

national limits. National limits are not proposed for home dialysis

supplies and equipment, therapeutic shoes, or PEN because the payment

amounts for these services are already subject to national limits or

are determined on a national basis in the case of PEN.

C. Medical Supplies

Medical supplies are miscellaneous supplies or devices including,

but not limited to, casts, splints, and paraffin that are not already

included under an existing fee schedule. In addition, intraocular

lenses (IOLs) inserted during or subsequent to cataract surgery in a

physician's office are considered medical supplies for payment purposes

under this rule. For calendar year 1999, we propose statewide fee

schedule amounts equal to the weighted average of allowed charges for

the services. For these calculations, we will use reasonable charge

data with dates of service from July 1, 1996 through June 30, 1997,

increased by the change in the CPI-U for the 12-month period ending

with June of 1998. The fee schedule amounts are to be updated on an

annual basis in accordance with section 1842(s)(1) of the Act.

Beginning with the second year of the fee schedule, the statewide fee

schedule amounts for IOLs inserted in a physician's office are not to

exceed the Medicare allowed payment amount for IOLs furnished by

ambulatory surgical centers (ASCs).

D. Home Dialysis Supplies And Equipment

These are services as defined in Sec. 410.52. For calendar year

1999, we propose statewide fee schedule amounts equal to the weighted

average of allowed charges for the services. For these calculations, we

will use reasonable charge data with dates of service from July 1, 1996

through June 30, 1997, increased by the change in the CPI-U for the 12-

month period ending with June of 1998. However, amount of payment under

this methodology may not exceed the limit specified for equipment and

supplies in Sec. 414.330(c)(2). The fee schedule amounts are to be

updated on an annual basis in accordance with section 1842(s)(1) of the

Act.

E. Therapeutic Shoes

These services are defined in section 1861(s)(12) of the Act as

``extra-depth shoes with inserts or custom molded shoes with inserts

for an individual with diabetes.'' In addition, section 1833(o)(2)(D)

of the Act provides that an individual ``may substitute modification of

such shoes instead of obtaining one (or more, as specified by the

Secretary) pairs of inserts (other than the original pair of inserts

with respect to such shoes).'' Section 1833(o)(2)(A) of the Act

establishes national payment limits for these services. These are upper

payment limits, or ceilings, applied to the reasonable charges

calculated for these services. The initial year, 1988 limits were $300

for one pair of custom molded shoes (including any inserts that are

provided initially with the shoes), $100 for one pair of extra-depth

shoes (not including inserts provided with such shoes), and $50 for any

pairs of inserts. In accordance with section 1833(o)(2)(C) of the Act,

these national payment limits are increased on an annual basis by the

same annual percentage increase provided for DME, rounded to the

nearest multiple of $1. We may establish limits lower than these limits

if shoes and inserts of appropriate quality are readily available at or

below the limits. We have determined that, to the extent that

reasonable charges for shoes and inserts are lower than the limitations

contained in section 1834(o)(2)(A) of the Act, shoes and inserts are

readily available at that level. Therefore, we find it appropriate and

consistent with the

[[Page 40537]]

direction of the BBA to apply fee schedule amounts lower than the

limits.

For calendar year 1999, we propose statewide fee schedule amounts

equal to the weighted average of allowed charges for the services. For

these calculations, we will use reasonable charge data with dates of

service from July 1, 1996 through June 30, 1997, increased by the

change in the CPI-U for the 12-month period ending with June of 1998.

In addition, the statewide fee schedule amounts may not exceed the

national payment limits established under section 1833(o)(2) of the

Act. The fee schedule amounts are to be updated on an annual basis in

accordance with section 1842(s)(1) of the Act.

F. Parenteral and Enteral Nutrients (PEN)

These services are covered by Medicare as prosthetic devices, which

are defined in section 1861(s)(8) of the Act. However, PEN is excluded

from the prosthetic and orthotic fee schedule payment methodology by

section 1834(h)(4)(B) of the Act. In accordance with section 4551(b) of

the BBA, the reasonable charges for PEN for the years 1998 through 2002

may not exceed the reasonable charges determined for 1995. The

prevailing charges for PEN are currently determined on a nationwide

basis (that is, the 75th percentile of the customary charges of

suppliers in the entire nation).

As explained above, section 4551(b) of the BBA limits the

reasonable charges calculated for 1998 through 2002 for PEN to the

reasonable charges calculated in 1995. Therefore, payment under the

reasonable charge methodology would be based on the lesser of the

charges calculated for the given fee screen year (for example, 1999) or

the charges calculated for 1995. For calendar year 1999, we propose

nationwide fee schedule amounts equal to the lesser of the charges

determined to be reasonable for the services during 1995 or the charges

determined to be reasonable for the services during 1998 (using charge

data with dates of service from July 1, 1996 through June 30, 1997),

increased by the inflation adjustment factor that would have otherwise

been used in calculating the 1999 IICs, in effect, the 1999 reasonable

charges. Beginning the fee screen year 2003, the fee schedule amounts

are to be updated on an annual basis in accordance with section

1842(s)(1) of the Act.

G. Electromyogram Devices And Salivation Devices

The decision regarding Medicare coverage of these services is made

at the carrier's discretion. In any carrier area in which these

services are covered, for calendar year 1999, we propose statewide fee

schedule amounts equal to the weighted average of allowed charges for

the services. For these calculations, we will use reasonable charge

data with dates of service from July 1, 1996 through June 30, 1997,

increased by the change in the CPI-U for the 12-month period ending

with June of 1998. The fee schedule amounts are to be updated on an

annual basis in accordance with section 1842(s)(1) of the Act.

H. Blood Products

For calendar year 1999, we propose statewide fee schedule amounts

equal to the weighted average of allowed charges for the blood products

services. These services are not included under the definition of drugs

and biologicals in section 1861(t)(1) of the Act. For these

calculations, we will use reasonable charge data with dates of service

from July 1, 1996 through June 30, 1997, increased by the change in the

CPI-U for the 12-month period ending with June of 1998. The fee

schedule amounts are to be updated on an annual basis in accordance

with section 1842(s)(1) of the Act.

I. Transfusion Medicine

For calendar year 1999, we propose statewide fee schedule amounts

equal to the weighted average allowed charges for transfusion medicine

services. For these calculations, we will use reasonable charge data

with dates of service from July 1, 1996 through June 30, 1997,

increased by the change in the CPI-U for the 12-month period ending

with June of 1998. The fee schedule amounts are to be updated on an

annual basis in accordance with section 1842(s)(1) of the Act.

III. Response to Comments

Because of the large number of items of correspondence we normally

receive on Federal Register documents published for comment, we are not

able to acknowledge or respond to them individually. We will consider

all comments we receive by the date and time specified in the DATES

section of this preamble, and, if we proceed with a subsequent

document, we will respond to the comments in the preamble to that

document.

IV. Regulatory Impact Statement

We have examined the impacts of this proposed rule as required by

Executive Order 12866 and the Regulatory Flexibility Act (RFA) (Public

Law 96-354). Executive Order 12866 directs agencies to assess all costs

and benefits of available regulatory alternatives and, if regulation is

necessary, to select regulatory approaches that maximize net benefits

(including potential economic, environmental, public health and safety

effects, distributive impacts, and equity). The RFA requires agencies

to analyze options for regulatory relief of small businesses. For

purposes of the RFA, small entities include small businesses, non-

profit organizations and government agencies. Most hospitals and most

other providers and suppliers are small entities, either by non-profit

status or by having revenues of $5 million or less annually. For

purposes of the RFA, all suppliers of Medicare Part B services are

considered to be small entities. Individuals and States are not

included in the definition of a small entity.

In addition, section 1102(b) of the Act requires us to prepare a

regulatory impact analysis if a rule may have a significant impact on

the operations of a substantial number of small rural hospitals. This

analysis must conform to the provisions of section 603 of the RFA. For

purposes of section 1102(b) of the Act, we define a small rural

hospital as a hospital that is located outside of a Metropolitan

Statistical Area and has fewer than 50 beds.

We expect suppliers of the Part B services listed in this preamble

to be affected by this proposed rule. For 1999, the initial year of the

fee schedules, we estimate that there will be a decrease of less than 1

percent in total expenditures for the services addressed in this

proposed rule. Therefore, we expect that the overall impact of this

proposed rule will be negligible.

With regard to IOLs, beginning with the second year of the fee

schedules, we are proposing that the fee schedule amounts not exceed

the Medicare allowed payment amount for IOLs furnished by ASCs.

Therefore, it is likely that the IOL fee schedule amounts will decrease

after the first year of the fee schedules. We do not believe, however,

that limiting payment for IOLs furnished in a physician's office to the

amount paid for IOLs furnished in an ASC will result in a lack of

availability of IOLs to Medicare beneficiaries. The IOLs furnished by

ASCs are the same devices that are furnished in a physician's office.

The Medicare payment amount for IOLs furnished by ASCs is established

through separate regulations and is based on the average price paid by

ASCs for these devices. This amount should represent adequate payment

to physicians for the cost of the IOL device that they insert in their

office.

[[Page 40538]]

We expect that total expenditures in the outlying fee schedule

years of 2000 and beyond will continue to approximate total

expenditures that would have otherwise been made under the reasonable

charge methodology in part because the fee schedules are updated using

the same factor used in updating the IICs under the reasonable charge

methodology.

For these reasons, we are not preparing an analysis for either the

RFA or section 1102(b) of the Act because we have determined, and we

certify, that this proposed rule would not have a significant economic

impact on a substantial number of small entities or a significant

impact on the operations of a substantial number of small rural

hospitals.

In accordance with the provisions of Executive Order 12866, this

regulation was reviewed by the Office of Management and Budget.

42 CFR part 414 would be amended as set forth below:

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

1. The authority citation for part 414 continues to read as

follows:

Authority: Secs. 1102, 1871, and 1881(b)(1) of the Social

Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1)).

Subpart A--General Provisions

2. A new Sec. 414.70 is added to read as follows:

Sec. 414.70 Fee schedules for certain items and services previously

paid on a reasonable charge basis.

(a) General rule. For services defined in Sec. 400.202 of this

chapter furnished on or after January 1, 1999, Medicare pays for the

services as described in paragraph (b) of this section on the basis of

80 percent of the lesser of--

(1) The actual charge for the service; or

(2) The fee schedule amount for the service, as determined in

accordance with paragraphs (e) through (k) of this section.

(b) Payment classification. (1) HCFA or the carrier determines fee

schedules for the following categories of services:

(i) Medical supplies, as specified in paragraph (e) of this

section.

(ii) Home dialysis supplies and equipment, as specified in

paragraph (f) of this section.

(iii) Therapeutic shoes, as specified in paragraph (g) of this

section.

(iv) Parenteral and enteral nutrients, equipment, and supplies

(PEN), as specified in paragraph (h) of this section.

(v) Electromyogram devices and salivation devices, as specified in

paragraph (i) of this section.

(vi) Blood products, as specified in paragraph (j) of this section.

(vii) Transfusion medicine, as specified in paragraph (k) of this

section.

(2) HCFA designates the specific services in each category through

program instructions.

reasonable charge for the service furnished in a State, the District of

Columbia, or a United States territory during the period July 1, 1996

through June 30, 1997, as determined by the carrier, increased by the

change in the consumer price index for all urban consumers (CPI-U) for

the 12-month period ending with June 1998.

(d) Updating the fee schedule amounts. Except for the fee schedule

amounts for services described in paragraph (h) of this section, for

each year subsequent to 1999, the fee schedule amounts of the preceding

year are updated by the percentage increase in the CPI-U for the 12-

month period ending with June of the preceding year. For services

described in paragraph (h) of this section, for each year subsequent to

2002, the fee schedule amounts of the preceding year are updated by the

percentage increase in the CPI-U for the 12-month period ending with

June of the preceding year.

(e) Medical supplies. (1) This category includes, but is not

limited to, cast supplies, splints, paraffin, and intraocular lenses

(IOLs) inserted during or subsequent to cataract surgery in a

physician's office.

(2) Payment for medical supplies is made in a lump sum amount for

purchase of the item based on the applicable fee schedule amount.

(3) The fee schedule amount for an item furnished in 1999 is one of

the following:

(i) Within the continental United States, 100 percent of the local

payment amount if the local payment amount is neither greater than the

median nor less than 85 percent of the median of all local payment

amounts for areas within the continental United States.

(ii) Within the continental United States, 100 percent of the

median of all local payment amounts for areas within the continental

United States if the local payment amount exceeds the median of all

local payment amounts for areas within the continental United States.

(iii) Within the continental United States, 85 percent of the

median of all local payment amounts for areas within the continental

United States if the local payment amount is less than 85 percent of

the median of all local payment amounts for areas within the

continental United States.

(iv) 100 percent of the local payment amount for areas outside the

continental United States.

(4) For each year subsequent to 1999, the fee schedule payment

amounts for IOLs inserted in a physician's office may not exceed the

Medicare allowed payment amount for IOLs furnished by ambulatory

surgical centers.

(f) Home dialysis supplies and equipment. (1) This category

includes items and services as defined in Sec. 410.52 of this chapter.

(2) Payment for home dialysis supplies and equipment is made in a

lump sum based on the applicable fee schedule amount, but may not

exceed the limit for equipment and supplies in Sec. 414.330(c)(2).

(3) The fee schedule amount for a service furnished in 1999 is

equal to the local payment amount.

(g) Therapeutic shoes. (1) This category includes extra-depth shoes

with inserts or custom molded shoes with inserts for an individual with

diabetes, modifications of the shoes, and replacement inserts for the

shoes.

(2) Payment for therapeutic shoes is made in a lump sum based on

the applicable fee schedule amount.

(3) The fee schedule amount for payment for a service furnished in

1999 is the lesser of--

(i) The local payment amount; or

(ii) The national payment limit specified in section 1833(o)(2) of

the Act.

(h) Parenteral and enteral nutrients, equipment, and supplies

(PEN). (1) Payment for PEN is made in a lump sum based on the

applicable fee schedule amount.

(2) The fee schedule amount for payment for a service furnished in

1999 is the lesser of--

(i) The charge determined to be reasonable for the service during

1995; or

(ii) The charge determined to be reasonable for the service during

1998, increased by the inflation adjustment factor used in calculating

the 1999 IIC.

(i) Electromyogram and salivation devices.

(1) Payment for an electromyogram device or a salivation device is

made in a lump sum for purchase of the device or on a monthly rental

basis based on the applicable fee schedule amount.

(2) The fee schedule amount for payment for an electromyogram

device or a salivation device furnished in 1999 is one of the

following:

(i) Within the continental United States, 100 percent of the local

payment

[[Page 40539]]

amount if the local payment amount is neither greater than the median

nor less than 85 percent of the median of all local payment amounts for

areas within the continental United States.

(ii) 100 percent of the median of all local payment amounts for

areas within the continental United States if the local payment amount

within the continental United States exceeds the median of all local

payment amounts for areas within the continental United States.

(iii) 85 percent of the median of all local payment amounts for

areas within the continental United States if the local payment amount

within the continental United States is less than 85 percent of the

median of all local payment amounts for areas within the continental

United States.

(iv) 100 percent of the local payment amount for areas outside the

continental United States.

(j) Blood products. (1) Payment for blood products is made in a

lump sum based on the applicable fee schedule amount.

(2) The fee schedule amount for payment for a blood product

furnished in 1999 is one of the following: