[Federal Register Volume 63, Number 4 (Wednesday, January 7, 1998)]
[Rules and Regulations]
[Pages 687-690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-269]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 405

[HCFA-1908-IFC]
RIN 0938-AI37


Medicare Program; Application of Inherent Reasonableness to All 
Medicare Part B Services (Other than Physician Services)

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule implements section 4316 of the 
Balanced Budget Act of 1997. It revises the process for establishing a 
realistic and equitable payment amount for all Medicare Part B services 
(other than physician services) when the existing payment amounts are 
inherently unreasonable because they are either grossly excessive or 
deficient. This rule describes the factors HCFA (or its carrier) will 
consider and the procedures it will follow in establishing realistic 
and equitable payment amounts.

EFFECTIVE DATE: These regulations are effective on March 9, 1998. 
Comments will be considered if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on March 9, 1998.

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-1908-IFC, P.O. Box ____, Baltimore, MD 
21207-5187.
    If you prefer, you may deliver an original and 3 copies of your 
written comments to one of the following addresses:
    Room 309-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.
    Comments may also be submitted electronically to the following e-
mail address: [email protected]. E-mail comments must include the 
full name, address, and affiliation (if applicable) of the sender, and 
must be submitted to the referenced address in order to be considered. 
All comments must be incorporated in the e-mail message because we may 
not be able to access attachments. Because of staffing and resource 
limitations, we cannot accept comments by facsimile (FAX) transmission. 
In commenting, please refer to file code HCFA-1908-IFC. 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 309-G of the Department's offices at 200 
Independence Avenue, SW., Washington, D.C., 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 
document, send your request to: New Orders, Superintendent of 
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    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents home page address 
is http://www.access.gpo.gov/su__docs/, by using local WAIS client 
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password required). Dial-in users should use communications software 
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password required). For general information about GPO Access, contact 
the GPO Access User Support Team by sending Internet e-mail to 
[email protected]; by faxing to (202) 512-1262; or by calling 
(202) 512-1530 between 7 a.m. and 5 p.m. Eastern time, Monday through 
Friday, except for Federal holidays.

FOR FURTHER INFORMATION CONTACT: William J. Long, (410) 786-5655.

SUPPLEMENTARY INFORMATION:

I. Background

    Title XVIII of the Social Security Act (the Act) contains various 
methodologies for making payment under Part B of the Medicare program. 
These payment methodologies vary among the different categories of 
items and services covered under Part B.
    Section 4316 of the Balanced Budget Act of 1997 (BBA), however, 
permits the Secretary to diverge from title XVIII's statutorily-
prescribed payment methodologies if their application results in the 
determination of an amount that, because it is grossly excessive or 
deficient, is not inherently reasonable. Section 4316 of the BBA also 
requires the Secretary to describe the factors to be considered in 
determining an amount that is realistic and equitable.
    The inherent reasonableness concept is not new to the statute. The 
Secretary has taken the position that the authority to regulate 
unreasonable payment amounts was inherent in section 1842 of the Act. 
Moreover, effective September 10, 1986, section 9304(a) of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 added 
section 1842 (b)(8) and (b)(9) of the Act. These provisions permit the 
Secretary to diverge from the statutorily-prescribed payment 
methodologies if their application results in the determination that 
the payment amount for a particular service or group of services, 
because of its being grossly excessive or deficient, is not inherently 
reasonable. The statute requires the Secretary to describe in 
regulations the factors to be considered in determining an amount that 
is realistic and equitable.
    Regulations implementing this provision are contained in 42 CFR 
405.502 (g) and (h), which were first published in the Federal Register 
on

[[Page 688]]

August 11, 1986 (51 FR 28710). These regulations describe the factors 
to be used in determining if the application of the reasonable charge 
methodology results in a charge that is grossly excessive or grossly 
deficient. They also describe the factors to be considered in 
establishing a reasonable charge that is realistic and equitable.
    As implemented by the current regulations, section 1842(b)(8) of 
the Act applies not only to our authority to establish national 
reasonable charge limits, but also to our carriers' authority to 
establish carrier-level reasonable charge limits on grossly excessive 
or deficient charges.
    Section 4316 of the BBA amends section 1842(b)(8) of the Act and 
includes the following key differences:
     It excludes physician services from application of 
inherent reasonableness.
     It extends the authority to establish special payment 
limits to Medicare carriers regardless of the methodology used for 
determining payment and simplifies the inherent reasonableness process 
for adjustments to payment amounts that are 15 percent or less.
     It allows the Secretary to streamline the factors to be 
considered in making an inherent reasonableness determination.

II. Provisions of this Interim Final Rule

    This interim final rule revises 42 CFR 405.502 (g) and (h) by 
excluding references to physician services. It also deletes specific 
references to the reasonable charge payment methodology. We have 
deleted these references because the inherent reasonableness provisions 
apply to all Part B services, except physician services, irrespective 
of the payment methodology. We have also simplified the process for 
making adjustments to payment amounts for a category of items or 
services when the increase or decrease in the payment amount is no more 
than 15 percent. (For purposes of Sec. 405.502 (g) and (h), a 
``category of items or services'' may consist of a single item or 
service or any number of items or services.)
    Section 4316(a) of the BBA amends section 1842(b)(8)(C) of the Act 
to require the Secretary to consider the following factors in making 
inherent reasonableness determinations concerning payment for Part B 
services (other than physician services):
     Medicare and Medicaid are the sole or primary sources of 
payment for a category of items or services.
     The payment amounts for a category of items or services do 
not reflect changing technology, increased facility with that 
technology, or changes in acquisition, production, or supplier costs.
     The payment amounts for a category of items or services 
are grossly higher or lower than the payments made for the same 
category of items or services by other purchasers in the same locality.
    Amended section 1842(b)(8)(C) of the Act also permits the Secretary 
to consider any additional factors determined to be appropriate. 
Therefore, we have retained four of the five factors that appear in 
Sec. 405.502(g)(1), because they remain as appropriate examples of 
factors that may result in deficient or excessive payment amounts. We 
removed the factor related to the use of new technology for which an 
extensive charge history does not exist, because we would not use the 
inherent reasonableness criteria to establish payment amounts for a 
category of items or services brought about by new technology. There is 
already in place a process for establishing payment amounts for new 
items or services for which an extensive charge history does not exist. 
The additional factors we may consider include, but are not limited to, 
the following:
     The market place is not competitive.
     The payment amounts in a particular locality grossly 
exceed amounts paid in other localities for the category of items or 
services.
     The payment amounts grossly exceed acquisition or 
production costs for the category of items or services.
     There have been increases in payment amounts that cannot 
be explained by inflation or technology.
    When we implemented section 9304(a) of COBRA of 1985, we 
interpreted the law as codifying both our authority and a carrier's 
authority to establish realistic and equitable payment amounts. We are 
interpreting the provisions of section 4316 of the BBA in the same way. 
Thus, these final regulations describe the circumstances and factors we 
and our carriers will use in setting realistic and equitable payment 
amounts if the existing payment amounts are grossly excessive or 
deficient.
    Section 4316 of the BBA amends section 1842(b)(8) of the Act by 
adding provisions that apply if a reduction or increase would vary the 
payment amount by less than 15 percent ``during any year.'' (Other 
provisions apply to larger increases and decreases.) By its own terms, 
the 15-percent variance applies to the amount of an inherent 
reasonableness adjustment for any given year. Under this authority, we 
(or a carrier) may determine that more than a 15-percent adjustment is 
warranted, but we may choose to apply only a 15-percent adjustment in 
any given year and use the ``15 percent'' methodology. For example, we 
(or a carrier) may determine that a 25-percent reduction is warranted. 
However, the adjustment could be accomplished over 2 years--15 percent 
applied the first year, and 10 percent applied the following year.
    Other than these changes and some minor modifications, the revised 
regulations are the same as the final regulations that were published 
in the Federal Register (53 FR 26067) on July 11, 1988.

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 that we receive by the date and time specified in the 
DATES section of this preamble, and, when we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

IV. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite public comment on the proposed rule. The 
notice of proposed rulemaking includes a reference to the legal 
authority under which the rule is proposed and the terms and substance 
of the proposed rule or a description of the subjects and issues 
involved. This procedure can be waived, however, if an agency finds 
good cause that a notice-and-comment procedure is impracticable, 
unnecessary, or contrary to the public interest and incorporates a 
statement of the finding and its reasons in the rule issued.
    We believe that it is unnecessary to publish this regulation as a 
proposed rule since it is not significantly changing the existing 
methodology for application of the inherent reasonableness process. 
This process has been specified in regulations since 1986. We also 
believe that it would be contrary to the public interest to delay 
implementation of these regulations by publishing a proposed rule. 
Finalizing this rule is clearly in the interest of the public because 
affording notice and opportunity for comment would postpone the time 
that limits may be established on grossly excessive charges and would 
unnecessarily impede further savings to the Medicare trust fund and 
beneficiaries. We believe that it is contrary to the public interest to

[[Page 689]]

provide a notice of proposed rulemaking since it would delay the 
implementation of these provisions.
    Therefore, we find good cause to waive the notice of proposed 
rulemaking and to issue this final rule on an interim basis. We are 
providing a 60-day comment period for public comment.

V. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

VI. Regulatory Impact Statement

    We have examined the impacts of this 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 604 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 Part B services, other than physician 
services, to be affected by this rule. We do not have sufficient data 
to predict exactly the nature of the impact of this rule or the 
magnitude of such impact. Below, we discuss likely outcomes.
    Should the provisions of these regulations be applied, the 
resultant payment amounts will no longer be grossly excessive or 
deficient. If a payment amount is adjusted upward because it is 
deficient, it will benefit suppliers and beneficiaries. A more generous 
payment amount may result in greater availability of items and services 
to Medicare beneficiaries. The converse may not be true if the payment 
amount is adjusted downward. A lower payment amount should not 
necessarily result in a lack of availability of items and services 
since the revised payment amount would be realistic and equitable. We 
believe that a realistic and equitable payment amount would ensure 
continued availability of items and services. Thus, we believe that the 
application of an adjustment will merely serve as a vehicle for 
eliminating windfall profits. This adjustment will benefit the Medicare 
program by reducing costs and benefit beneficiaries by reducing 
coinsurance payments.
    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 rule will 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.

List of Subjects in Part 405

    Administrative practice and procedure, Health facilities, Health 
professions, Kidney diseases, Medicare, Reporting and recordkeeping 
requirements, Rural areas, X-rays.
    For the reasons set forth in the preamble, 42 CFR chapter IV is 
amended as set forth below:

PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED

    Part 405 is amended as set forth below:
    1. The authority citation for part 405, subpart E, continues to 
read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

    2. In Sec. 405.502, paragraphs (g) and (h) are revised to read as 
follows:


Sec. 405.502  Criteria for determining reasonable charges.

* * * * *
    (g) Determination of payment amounts in special circumstances--(1) 
General. (i) For purposes of this paragraph, a ``category of items or 
services'' may consist of a single item or service or any number of 
items or services.
    (ii) HCFA or a carrier may determine that the standard rules for 
calculating Part B payment amounts for a category of items or services 
identified in section 1861(s) of the Act (other than physician services 
paid under section 1848 of the Act) will result in grossly deficient or 
excessive amounts.
    (iii) If HCFA or the carrier determines that the standard rules for 
calculating payment amounts for a category of items or services set 
forth in this subpart will result in grossly deficient or excessive 
amounts, HCFA or the carrier may establish special payment limits that 
are realistic and equitable for a category of items or services.
    (iv) The limit on the payment amount is either an upper limit to 
correct a grossly excessive payment amount or a lower limit to correct 
a grossly deficient payment amount.
    (v) The limit is either a specific dollar amount or is based on a 
special method to be used in determining the payment amount.
    (vi) Except as provided in paragraph (h) of this section, a payment 
limit for a given year may not vary by more than 15 percent from the 
payment amount established for the preceding year.
    (vii) Examples of excessive or deficient payment amounts. Examples 
of the factors that may result in grossly deficient or excessive 
payment amounts include, but are not limited to, the following:
    (A) The marketplace is not competitive. This includes circumstances 
in which the marketplace for a category of items or services is not 
truly competitive because a limited number of suppliers furnish the 
item or service.
    (B) Medicare and Medicaid are the sole or primary sources of 
payment for a category of items or services.
    (C) The payment amounts for a category of items or services do not 
reflect changing technology, increased facility with that technology, 
or changes in acquisition, production, or supplier costs.
    (D) The payment amounts for a category of items or services in a 
particular locality are grossly higher or lower than payment amounts in 
other comparable localities for the category of items or services, 
taking into account the relative costs of furnishing the category of 
items or services in the different localities.
    (E) Payment amounts for a category of items or services are grossly 
higher or lower than acquisition or production

[[Page 690]]

costs for the category of items or services.
    (F) There have been increases in payment amounts for a category of 
items or services that cannot be explained by inflation or technology.
    (G) The payment amounts for a category of items or services are 
grossly higher or lower than the payments made for the same category of 
items or services by other purchasers in the same locality.
    (2) Establishing a limit. In establishing a payment limit for a 
category of items or services, HCFA or a carrier considers the 
available information that is relevant to the category of items or 
services and establishes a payment amount that is realistic and 
equitable. The factors HCFA or a carrier consider in establishing a 
specific dollar amount or special payment method for a category of 
items or services may include, but are not limited to, the following:
    (i) Price markup. This is the relationship between the retail and 
wholesale prices or manufacturer's costs of a category of items or 
services. If information on a particular category of items or services 
is not available, HCFA or a carrier may consider the markup on a 
similar category of items or services and information on general 
industry pricing trends.
    (ii) Differences in charges. HCFA or a carrier may consider the 
differences in charges for a category of items or services made to non-
Medicare and Medicare patients or to institutions and other large 
volume purchasers.
    (iii) Costs. HCFA or a carrier may consider resources (for example, 
overhead, time, acquisition costs, production costs, and complexity) 
required to produce a category of items or services.
    (iv) Utilization. HCFA or a carrier may impute a reasonable rate of 
use for a category of items or services and consider unit costs based 
on efficient utilization.
    (v) Payment amounts in other localities. HCFA or a carrier may 
consider payment amounts for a category of items or services furnished 
in another locality.
    (3) Notification of limits--(i) National limits. HCFA publishes in 
the Federal Register proposed and final notices announcing a special 
payment limit described in this paragraph (g) before it adopts the 
limit. The notices set forth the criteria and circumstances, if any, 
under which a carrier may grant an exception to a payment limit for a 
category of items or services.
    (ii) Carrier-level limits. A carrier proposing to establish a 
special payment limit for a category of items or services must inform 
the affected suppliers and State Medicaid agencies of the factors it 
considered in determining and in establishing the limit, as described 
in paragraphs (g)(1) through (g)(3) of this section, and solicit 
comments. The carrier must evaluate the comments it receives and inform 
the affected suppliers, State Medicaid agencies, and HCFA of any final 
limits it establishes. HCFA acknowledges in writing to the carrier that 
it received the carrier's notification. After the carrier has received 
HCFA's acknowledgement, the limit may be effective for services 
furnished at least 30 days after the date of the carrier's 
notification.
    (h) Special payment limit adjustments greater than 15 percent of 
the payment amount. In addition to applying the general rules under 
paragraphs (g)(1) through (g)(3) of this section, HCFA applies the 
following rules in determining and establishing a payment adjustment 
greater than 15 percent of the payment amount for a category of items 
or services within a year:
    (1) Potential impact of special limit. HCFA considers the potential 
impact on quality, access, beneficiary liability, assignment rates, and 
participation of suppliers.
    (2) Supplier consultation. Before making a determination that a 
payment amount for a category of items or services is not inherently 
reasonable by reason of its grossly excessive or deficient amount, HCFA 
consults with representatives of the suppliers likely to be affected by 
the change in the payment amount.
    (3) Publication of national limits. If HCFA determines under this 
paragraph (h) to establish a special payment limit for a category of 
items or services, it publishes in the Federal Register proposed and 
final notices of a special payment limit before it adopts the limit. 
The notice sets forth the criteria and circumstances, if any, under 
which a carrier may grant an exception to the limit for the category of 
items or services.
    (i) Proposed notice. The proposed notice----
    (A) Explains the factors and data that HCFA considered in 
determining that the payment amount for a category of items or services 
is grossly excessive or deficient;
    (B) Specifies the proposed payment amount or methodology to be 
established with respect to a category of items or services;
    (C) Explains the factors and data that HCFA considered in 
determining the payment amount or methodology, including the economic 
justification for a uniform fee or payment limit if it is proposed;
    (D) Explains the potential impacts of a limit on a category of 
items or services as described in paragraph (h)(1) of this section; and
    (E) Allows no less than 60 days for public comment on the proposed 
payment limit for the category of items or services.
    (ii) Final notice. The final notice----
    (A) Explains the factors and data that HCFA considered, including 
the economic justification for any uniform fee or payment limit 
established; and
    (B) Responds to the public comments.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; Program No. 93.774, Medicare--
Supplementary Medical Insurance)

    Dated: December 12, 1997.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Approved: December 30, 1997.
Donna E. Shalala,
Secretary.
[FR Doc. 98-269 Filed 1-6-98; 8:45 am]
BILLING CODE 4120-01-P