[Federal Register Volume 68, Number 178 (Monday, September 15, 2003)]
[Proposed Rules]
[Pages 53939-53945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23351]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991-AB13


Medicare and Federal Health Care Programs: Fraud and Abuse; 
Clarification of Terms and Application of Program Exclusion Authority 
for Submitting Claims Containing Excessive Charges

AGENCY: Office of Inspector General (OIG), HHS.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This proposed rule would amend OIG exclusion regulations 
addressing excessive claims, by including definitions for the terms 
``substantially in excess'' and ``usual charges,'' and by clarifying 
the ``good cause'' exception set forth in this section.

DATES: To assure consideration, public comments must be delivered and 
received at the address provided below by no later than 5 p.m. on 
November 14, 2003.

ADDRESSES: Please mail or deliver your written comments to the 
following address: Office of Inspector General, Department of Health 
and Human Services, Attention: OIG-53-P, Room 5246, Cohen Building, 330 
Independence Avenue, SW., Washington, DC 20201.
    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code OIG-53-P.

FOR FURTHER INFORMATION CONTACT: Darlene M. Hampton, Office of Counsel 
to the Inspector General, (202) 619-0335.

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Legal Framework

    Section 1128(b)(6)(A) of the Social Security Act (the Act) provides 
that the Secretary may exclude any individual or entity from 
participation in any Federal health care program if the Secretary 
determines that the individual or entity:

``has submitted or caused to be submitted bills or requests for 
payment (where such bills or requests are based on charges or cost) 
under subchapter XVIII of this chapter or a State health care 
program containing charges (or, in applicable cases, requests for 
payment of costs) for items or services furnished substantially in 
excess of such individual's or entity's usual charges (or, in 
applicable cases, substantially in excess of such individual's or 
entity's costs) for such items or services, unless the Secretary 
finds there is good cause for such bills or requests containing such 
charges or costs. * * *''

    The Secretary has specifically delegated the authority under 
section 1128 of the Act to the Department's Office of Inspector General 
(OIG) (53 FR 12993; April 20, 1988).
    The implementing OIG regulations effectuating section 1128(b)(6)(A) 
of the Act are set forth at 42 CFR 1001.701. Section 1001.701(a)(1) 
provides that the OIG may exclude an individual or entity that has 
``[s]ubmitted, or caused to be submitted, bills or requests for 
payments under Medicare or any of the State health care programs 
containing charges or costs for items or services furnished that are 
substantially in excess of such individual's or entity's usual charges 
or costs for such items or services. * * *'' In addition, Sec.  
1001.701(c)(1), implementing the statutory ``good cause'' exception, 
provides that an individual or entity will not be excluded for 
``[s]ubmitting, or causing to be submitted, bills or requests for 
payment that contain charges or costs substantially in excess of usual 
charges or costs when such charges or costs are due to unusual 
circumstances or medical complications

[[Page 53940]]

requiring additional time, effort, expense or other good cause. * * *''
    Absent certain aggravating or mitigating circumstances, a 
permissive exclusion imposed under section 1128(b)(6)(A) of the Act 
will be for a period of 3 years (Sec.  1001.701(d)(1)).

B. Previous OIG Rulemaking

    The OIG has published 2 proposed rules in the Federal Register 
expressing its desire to provide further guidance related to Sec.  
1001.701. In the preamble to the April 2, 1990 proposed rule (55 FR 
12205, 12215), the OIG stated that ``[w]e are considering whether to 
define in regulations the terms `substantially in excess of' and `usual 
charges or costs,' and we invite comment on whether defining these 
terms would be useful, and if so, what the appropriate definitions 
should be.'' Most commenters agreed that definitions would be helpful, 
although none were able to suggest feasible ones (57 FR 3298, 3307; 
January 29, 1992). After reviewing the public comments, the OIG elected 
to continue evaluating the billing patterns of individuals and entities 
on a case-by-case basis. (Id.)
    Subsequently, the OIG published proposed rulemaking on September 8, 
1997, setting forth the revised or expanded OIG exclusion authorities 
authorized by the Health Insurance Portability and Accountability Act 
of 1996, Public Law 104-191. As part of that rulemaking, the OIG 
proposed amending Sec.  1001.701(a)(1) to authorize the exclusion of an 
individual or entity that has submitted, or caused to be submitted, 
bills or requests for Medicare or State health care program payments 
that contain charges or costs that are substantially in excess of its 
usual charges or costs for items or services furnished to any of its 
customers, clients, or patients (62 FR 47182, 47186). However, after 
reviewing the public comments, the OIG elected not to amend Sec.  
1001.701(a)(1). In the preamble to the final rule, the OIG noted that 
the increasing use of fee schedules could limit the application of 
Sec.  1001.701(a)(1), which applies where a claim is made on a charge 
or cost basis (63 FR 46676, 46681; September 2, 1998).

II. Summary of Proposed Amendments

    Notwithstanding the increasing use of fee schedules by Federal 
health care programs, many of the payment provisions of the Act, 
especially under Part B of Medicare, continue to be charge-based in 
that programs are only obligated to pay the lower of the actual charge 
or the fee schedule amount.\1\ In other words, the fee schedule is not 
an entitlement, but a cap on the amount that Medicare will pay for the 
item or service. In many cases, payments from Medicare and other 
Federal health care programs--even when capped by a fee schedule--may 
be substantially more than the payments that providers have agreed to 
accept from most or all of their other third party payors. (For 
convenience in this preamble, the term ``providers'' includes both 
suppliers and providers, where appropriate.) Other Medicare payment 
provisions, such as the inpatient outlier payment methodology, also 
depend in whole or part on a provider's costs or charges. Therefore, 
section 1128(b)(6)(A) of the Act has continuing relevance for, and 
applicability to, bills and requests for payment submitted for items or 
services for which payment is based directly or indirectly on the 
provider's charges or costs, especially in Medicare Part B, including 
by way of example only, clinical laboratory services, durable medical 
equipment, medical supplies, and drugs.
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    \1\ Some State health care programs' reimbursement is based upon 
a pure fee schedule payment (i.e., a provider receives the fee 
schedule amount regardless of its charges) or some other payment 
methodology that is not based directly or indirectly on the 
provider's charges or costs. In such cases, providers would have no 
opportunity to submit claims containing excessive charges or costs, 
and section 1128(b)(6)(A) of the Act would not apply to their bills 
or requests for payment.
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    We are excluding from the scope of the proposed regulation claims 
for physician services reimbursed under the Medicare physician fee 
schedule, including physician services provided by other health care 
professionals paid under the aegis of the Medicare physician fee 
schedule, such as nurse practitioners. While reimbursement for 
physician services under section 1848(a) of the Act is the lower of the 
actual charge or the fee schedule amount, the Medicare fee schedule for 
physician services is developed independently by the Centers for 
Medicare and Medicaid Services based on a review of actual costs of 
delivering such services, updated annually, and subject to public 
notice and comment. Given that the physician fee schedule is subject to 
detailed statutory direction as to the components and the method of 
calculation, which include relative value units (RVUs) and empirical 
market data, we have determined that the fee schedule amounts for 
physician services under section 1848(a) of the Act are functionally 
equivalent to a prospective payment methodology and should be treated 
accordingly for purposes of section 1128(b)(6)(A) of the Act. We are 
soliciting comments as to whether any services reimbursed based on the 
physician fee schedule should be subject to these regulations. We note 
that ancillary services, such as laboratory tests and drugs, would 
remain subject to these regulations, even when furnished by physicians.
    Because Medicaid programs vary by State, we cannot develop a 
uniform rule applicable to all Medicaid physician services. If a 
State's Medicaid fee schedule is based on the Medicare fee schedule, we 
would treat it like the Medicare fee schedule. Other Medicaid 
reimbursement schemes would need to be analyzed on a case-by-case 
basis. Historically, Medicaid has typically been a low payor, and it 
would be unusual for a provider's charge to Medicaid to be 
substantially in excess of its usual charge.
    While Medicare pays for a number of other items and services using 
fee schedules, these fee schedules differ significantly from the 
physician RVU-based fee schedule. These other fee schedules are updated 
less regularly, are subject to fewer statutory constraints, and may 
receive less public input. The OIG recognizes that, in most cases, fee 
schedules are intended to approximate a reasonable payment amount. 
However, fee schedules are administered prices and, in some situations, 
may quickly become out-of-date based on market forces. When market 
forces cause a provider's usual charge to most of its customers to drop 
substantially below the Medicare fee schedule allowance, some providers 
continue to charge Medicare at least the fee schedule amount. In this 
situation, the provider creates a two-tier pricing structure with 
Medicare paying more than other customers. Unless the price 
differential can be justified by costs that are uniquely associated 
with the Medicare program, the provider is simply overcharging 
Medicare. In such circumstances, section 1128(b)(6)(A) of the Act 
obligates providers to either charge Medicare and Medicaid 
approximately the same amount as they usually charge their other 
purchasers for the same items or services or risk exclusion from all 
Federal health care programs.
    The principal protection against overpaying for services to Federal 
health care program beneficiaries is timely and accurate updating of 
the various fee schedules used by Federal health care programs. 
However, section 1128(b)(6)(A) of the Act provides useful backstop 
protection for the public fisc from providers that routinely charge 
Medicare or Medicaid substantially

[[Page 53941]]

more than their other customers. This proposed rule would clarify that 
providers are not required to give Medicare and Medicaid their best 
price. Rather, this proposed rule only addresses the narrow situation 
in which the providers are charging Medicare or Medicaid substantially 
more than they regularly charge a majority of their other customers for 
the same items or services.
    In an effort to more clearly define the scope of section 
1128(b)(6)(A) of the Act, we are proposing to revise Sec.  1001.701 to 
define specifically the terms ``usual charges'' and ``substantially in 
excess,'' and to clarify the ``good cause'' exception.

A. Definition of ``Usual Charges''

    We propose to define the term ``usual charges'' to include the 
amounts billed to cash paying patients; the amounts billed to patients 
covered by indemnity insurers with which the provider has no 
contractual arrangement; and any fee-for-service rates it contractually 
agrees to accept from any payor, including any discounted fee-for-
service rates negotiated with managed care plans. Given the changes in 
the health care marketplace, negotiated rates have become a substantial 
portion of many health care providers' revenues. To the extent a 
provider agrees to discount its rates, the discounted contract rate is 
its ``charge'' to those patients.
    Specifically, when a provider contractually agrees to accept a 
fixed amount for an item or service or an amount based upon a payor's 
fee schedule, such amount is the provider's charge for that item or 
service to patients covered by the contract.
    We also propose that the following charges should not be included 
when determining the usual charge:
    [sbull] Charges for services provided to uninsured patients free of 
charge or at a substantially reduced rate;
    [sbull] Capitated payments;
    [sbull] Rates offered under hybrid fee-for-service arrangements 
whereby more than 10 percent of the individual's or entity's maximum 
potential compensation could be paid in the form of a bonus and/or 
withhold payment; and
    [sbull] Fees set by Medicare, State health care programs, and other 
Federal health care programs, subject to the limitations described 
below.
1. Determining the ``Usual'' Charge
    To determine the ``usual'' charge, we are considering two 
alternative approaches. First, in order to determine the ``usual'' 
charge, we are considering using the provider's average charge. To 
determine the average charge, one would list all of the provider's 
charges for a particular item or service for the most recent 1-year 
period (this 1-year period can be the calendar year or a rolling 12-
month period ending with the most recent month for which data are 
available), and then divide the sum of the charges by the number of 
charges. As noted above, Medicare fee-for service charges and certain 
other charges would not be included.
    Alternatively, we are considering using the ``fiftieth percentile'' 
method (i.e., the median). To determine the median, one would take the 
following steps:
    [sbull] List the provider's charges for a particular item or 
service for the most recent one-year period. (This one-year period can 
be the calendar year or a rolling 12-month period ending with the most 
recent month for which data are available.)
    [sbull] Arrange the charges from the lowest to the highest. (If the 
same rate is charged more than once, it must be listed each time that 
it is charged.)
    [sbull] Select the median, which is a charge (or charge range) at 
which exactly half the provider's charges are below and half are above.
    This can be done in the following manner:
    [sbull] Count the total number of charges and divide that number by 
2.
    [sbull] If the result is a whole number (n), begin at the lowest 
charge and count to the n\th\ charge. The median is a number that is 
between the nth charge and the n\th\+1 charge.
    [sbull] If the result is a fraction (e.g., n.5), then begin at the 
lowest charge and count to the n\th\+1 charge. This is the median 
charge.
    Set forth below are 3 examples that demonstrate how the median 
should be calculated.

    Example A: Even number of charges (i.e., the result is a whole 
number).
    Charges: $100, $100, $150, $175, $200, $250, $300 and $500.
    Median: Any number between $175 and $200.
    There are 8 charges. The result of 8 divided by 2 is 4 (i.e., a 
whole number) and, therefore, n equals 4. Since the result (i.e, 4) 
is a whole number, the median is a number that is between the nth 
charge (i.e., the 4th charge) and the n\th\+1 charge (i.e., 4\th\+1 
charge or the 5\th\ charge). The 4\th\ charge is $175 and the 5\th\ 
charge is $200. Therefore, the median is any number between $175 and 
$200.
    Example B: Odd number of charges (i.e., the result is a 
fraction).
    Charges: $100, $100, $150, $175, $200, $300 and $500.
    Median: $175.
    There are 7 charges. The result of 7 divided by 2 is 3.5 (i.e, a 
fraction) and, therefore, n equals 3. Since the result (i.e., 3.5) 
is a fraction, the median is the n\th\+1 charge (i.e., the 3\rd\ +1 
charge or the 4\th\ charge). Therefore, the median is the 4\th\ 
charge or $175.
    Example C: Many duplicate charges.
    Charges: $250, $250, $250, $250, $250, $300, $350 and $350.
    Median: $250.
    There are 8 charges. The result of 8 divided by 2 is 4 (i.e., a 
whole number) and, therefore, n equals 4. Since the result (i.e., 4) 
is a whole number, the median is a number that is between the n\th\ 
charge (i.e., the 4th charge) and the n\th\+1 charge (i.e., 4\th\+1 
charge or the 5\th\ charge). The 4\th\ charge is $250 and the 5th 
charge is $250. Therefore, the median is $250.

    We are soliciting public comments about these and other 
methodologies as a means of determining the ``usual'' charge.
2. Principles To Be Considered in Determining What Charges To Include
    When determining what charges should be included in calculating a 
provider's usual charges, the following principles should be 
considered:
a. Charges Billed Directly to Patients
    The entire charge billed directly to patients can be included in 
determining usual charges as long as the provider makes a good faith 
effort to collect the full amount. However, if, for example, the 
provider charges $100, but routinely accepts $80 without trying to 
recoup the $20 copayment balance, then the $80 charge should be used in 
determining the usual charge. As noted above, charges for services 
provided to uninsured patients free of charge or at a substantially 
reduced rate are not included when determining the usual charge.
b. Charges Negotiated With a Third Party Payor
    If the provider has a contract with a third party payor to accept 
an amount other than the provider's actual charge, then for each 
service or item provided at the negotiated rate, this negotiated rate, 
together with the applicable copayment, if any, should be included when 
determining the usual charge.\2\ This negotiated rate should be used 
even if the bill submitted to the payor lists a higher charge, because 
the higher charge is never collected.
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    \2\ The lower negotiated rate may be based upon a predetermined 
fixed amount, a payor's fee schedule, a fixed discount (such as a 
percentage discount) or some other payment methodology.

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[[Page 53942]]

c. Charges Billed to Third Party Payors With Whom the Provider Does Not 
Have a Contractual Arrangement
    A provider often bills third party payors with whom the provider 
does not have a contractual relationship. In such cases, the patient is 
usually responsible for the difference between the full charge that is 
billed to the third party payor and the amount received from it. The 
usual charge includes cost-sharing amounts that should be collected.
d. Contractual Rates Offered, Directly or Indirectly, to Managed Care 
Plans
    In determining usual charges, providers should include any 
contractual per-service rate offered, directly or indirectly, to 
commercial managed care plans, Medicare+Choice plans, State managed 
care plans and other Federal managed care plans. In addition, providers 
should include contractual per-service rates that vary depending on 
conditions (i.e., bonuses or withholds), provided the total variance is 
less than or equal to 10 percent. We have selected the 10 percent 
benchmark because we believe it is a small enough number that we can be 
confident that the charge will be reasonably ascertainable. We believe 
that a larger percent would increase the uncertainty as to the actual 
amount of payment for the item or service. In determining usual 
charges, we propose that providers handle contractual per-service rates 
in the following manner:
    [sbull] Include contractual per-service rates offered, directly or 
indirectly, to managed care plans only if 10 percent or less of the 
provider's maximum potential compensation could be paid in the form of 
a bonus and/or a return of certain funds previously deducted from the 
provider's compensation (i.e., a ``withhold payment'').
    [sbull] In determining usual charges, the rate to be used for such 
contractual per-service rates would be the base contractual per-service 
rate (without the bonus and/or withhold payment), plus one-half the 
potential bonus and/or withhold payment, regardless of whether the 
bonus or withhold payments are actually paid.
    We recognize that, in many cases, the aggregate rate paid for a 
particular item or service cannot be determined until a decision is 
made regarding the contingent, additional compensation. 
Notwithstanding, we believe that, in cases where the additional 
compensation is less than or equal to 10 percent of the provider's 
maximum potential compensation, the contractual per-service rate 
(adjusted in the manner set forth above) can be included in a 
provider's usual charges without significantly distorting the accuracy 
of those charges.
    We are soliciting comments on the foregoing, including comments on 
whether 10 percent is the appropriate range or whether a larger range 
would be appropriate in situations where the fee paid for the item or 
service could otherwise be ascertained. In addition, we are seeking 
comments about the difficulties, if any, that may arise in assessing 
the rates paid for items and services provided under managed care 
plans, and how those difficulties might be resolved.
e. Rates Offered to TriCare (Including TriCare Standard, Formerly Known 
as CHAMPUS)
    Rates offered to the Department of Defense (DoD) for its various 
health care plans should be included in determining usual charges, 
regardless of whether they are offered in connection with a managed 
care plan, unless the rates are based upon (1) capitated payments or 
(2) hybrid fee-for-service arrangements employing bonuses or withhold 
payments that exceed the proposed 10 percent threshold established 
above in section II.A.2.d. of this preamble discussion. Providers often 
offer the DoD's health care programs rates that are significantly lower 
than those offered to other Federal health care programs.
f. Charges of Affiliated Entities
    Some companies create separate legal entities for their Medicare 
and non-Medicare business. By segregating the Medicare business, such 
companies often have substantially different charges for Medicare and 
non-Medicare business. However, in determining the usual charge, the 
provider should include all charges of any affiliated entities 
providing substantially the same items or services in the same or 
substantially the same markets. An ``affiliated entity'' is any entity 
that directly or indirectly, through one or more intermediaries, 
controls, is controlled by, or is under common control with the 
provider.

B. Definition of ``Substantially in Excess''

    Section 1128(b)(6)(A) of the Act is a permissive exclusion statute. 
That is, the OIG may, but is not required to, exclude a provider for 
violation of the statute. In exercising its discretionary authority, 
the OIG is proposing that, for purposes of section 1128(b)(6)(A) of the 
Act, only those charges or costs that are more than 120 percent of a 
provider's usual charges or costs will be deemed to be ``substantially 
in excess.'' Having considered various options, we believe this 120 
percent measure is a reasonable interpretation of ``substantially in 
excess'' and is high enough to permit reasonable variation. Based on 
anecdotal evidence and our review of particular factual situations in 
the advisory opinion context and elsewhere, we believe that a 20 
percent differential is high enough that most people would agree that 
the charges to Medicare are substantially in excess.
    For purposes of the regulation, where the actual charge submitted 
exceeds an applicable fee schedule, we would consider the fee schedule 
amount as the actual charge. As a result, providers submitting charges 
(as capped by any applicable fee schedule) or costs that are equal to 
or less than 120 percent of their usual charges or costs will not be 
subject to sanction under section 1128(b)(6)(A) of the Act. Moreover, 
for providers submitting charges or costs that are more than 120 
percent of the provider's usual charges or costs, exclusion is not 
mandatory. That is, the authority regarding whether to exclude such a 
provider from Federal health care programs remains within the 
discretion of the OIG, notwithstanding the 120 percent benchmark.
    We are specifically seeking comments on both this proposed 
definition of ``substantially in excess'' and the 120 percent 
benchmark. We are also interested in comments as to whether the numeric 
benchmark for ``substantially in excess'' should vary based upon 
certain factors (e.g., whether the benchmark should be lower for some 
providers than others based on the type or location of a provider or 
the reimbursement methodology applicable to the provider or whether the 
benchmark should take into account certain market considerations) and, 
if so, how and why. We will continue to consider data on charging 
practices and are interested in suggestions on potential sources of 
data. We are also interested in comments on whether and in what 
circumstances it might be appropriate to define ``substantially in 
excess'' on a case-by-case basis when below the threshold.

C. Clarification of the ``Good Cause'' Exception

    Section 1128(b)(6)(A) of the Act grants the Secretary the authority 
to permit providers to charge Medicare or Medicaid substantially in 
excess of their usual costs or charges if the Secretary determines 
there is good cause for the higher charges or costs. The Secretary's 
decision regarding whether good cause

[[Page 53943]]

exists is not subject to administrative or judicial review. Moreover, 
as previously mentioned, the Secretary's authority under section 1128 
of the Act, including the authority to assess ``good cause,'' has been 
delegated to the OIG.
    Given the myriad of health care payment and service arrangements, 
the OIG believes that ``good cause'' should be interpreted broadly. In 
general, we are proposing that Sec.  1001.701(c)(1) should apply when 
there is a reasonable set of underlying facts and circumstances.\3\ The 
regulations in Sec.  1001.701(c)(1) currently permit submission of 
excessive charges or costs that are due to unusual circumstances or 
medical complications requiring additional time, effort, or expense in 
individual cases. We are proposing a new exception for cases where the 
higher charge or cost submitted to Medicare or Medicaid is a result of 
increased costs associated with serving program beneficiaries. For 
example, higher charges or costs may result from claims processing or 
delays and denials in payment associated with serving Medicare or 
Medicaid beneficiaries. The burden of proof to establish the existence 
of, and to quantify, the higher charges or costs rests upon the 
individual or entity relying on the good cause exception.
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    \3\ In order to make clear that the changes proposed in this 
rulemaking do not affect Sec.  1001.701(c)(2) (which relates to a 
different exclusion authority, section 1128(b)(6)(B) of the Act), we 
have made a technical change in Sec.  1001.701(c)(2) that does not 
change the existing substance or language of that provision.
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    We believe that there may be other circumstances in which providers 
should be permitted to submit higher charges or costs to Medicare and 
Medicaid, including factors specific to certain types of providers. The 
OIG is interested in comments on its proposed amendments pertaining to 
``good cause,'' including any comments identifying other circumstances 
that may constitute good cause for submitting excessive charges or 
costs.
    In addition to the generic exceptions included in the proposed 
amendments, a provider may also request, in accordance with 42 CFR part 
1008, a formal advisory opinion concerning the application of section 
1128(b)(6)(A) of the Act to specific billing arrangements that either 
are in existence or are arrangements the provider in good faith plans 
to undertake. In order to receive a binding opinion, the specific 
regulatory requirements and procedures for official advisory opinions 
set forth in 42 CFR part 1008 must be followed. In addition, the OIG 
has created preliminary questions and a preliminary checklist as a 
guide to crafting advisory opinion requests. All of these materials can 
be found on our web page at http://oig.hhs.gov/fraud/advisoryopinions.html.
    Finally, wholly apart from the ``good cause'' exception, the 
determination to exclude a provider is discretionary and must be for a 
remedial purpose. Accordingly, use of this authority for isolated or 
unintentional mistakes would be inconsistent with the remedial purpose 
and inappropriate.

III. Regulatory Impact Statement

A. Regulatory Analysis

    We have examined the impacts of this proposed rule as required by 
Executive Order 12866, the Unfunded Mandates Reform Act of 1995, the 
Regulatory Flexibility Act (RFA) of 1980, and Executive Order 13132.
Executive Order 12866
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulations are 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects; distributive impacts; and equity). A regulatory impact 
analysis must be prepared for major rules with economically significant 
effects ($100 million or more in any given year).
    This is not a major rule as defined at 5 U.S.C. 804(2), and it is 
not economically significant since it would not have a significant 
effect on program expenditures and there are no additional substantive 
costs to implement the resulting provisions. This proposed rule is 
designed to further clarify existing statutory requirements. The 
statute has been in effect in the absence of these clarifying 
regulations. We presume that the vast majority of providers have been 
in compliance with the existing statute and will be minimally impacted, 
if at all, by these regulations. We hope that these regulations will 
facilitate compliance by establishing bright line rules that will make 
it easier for parties to ensure that they are not at risk of being 
excluded. Thus, we believe that any aggregate economic effect of these 
regulatory provisions would be minimal and would impact only those 
limited few who engage in prohibited behavior in violation of the 
statute. Although these regulations would not require providers to 
change their charges to the Medicare or Medicaid programs, we 
anticipate that some providers who are overcharging Medicare or 
Medicaid may comply with the statute and regulations by lowering their 
charges to the programs. While we do not have adequate information at 
this time to ascertain and quantify the effect of such changes on 
Federal or State expenditures, we note that a number of OIG and General 
Accounting Office studies have shown that the Medicare program pays 
considerably more for some items and services than other payers. 
Notwithstanding, given the likelihood of substantial current compliance 
with the statute, we believe that the likely aggregate economic effect 
of these regulations would be less than $100 million.
Regulatory Flexibility Act
    The RFA, and the Small Business Regulatory Enforcement and Fairness 
Act of 1996, which amended the RFA, requires agencies to analyze 
options for regulatory relief of small businesses. For purposes of the 
RFA, small entities include small businesses, nonprofit organizations, 
and government agencies. Most providers are considered to be small 
entities by having revenues of $5 million to $25 million or less in any 
one year. For purposes of the RFA, most physicians and suppliers are 
considered to be small entities.
    In addition, section 1102(b) of the Social Security 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 providers. This analysis must conform to the provisions of 
section 604 of the RFA. While these provisions may have some impact on 
small entities and rural providers, we believe that the aggregate 
economic impact of this proposed rulemaking would be minimal since it 
is the nature of the conduct and not the size or type of the entity 
that would result in a violation of the statute and the regulations. As 
a result, we have concluded that this proposed rule should not have a 
significant impact on the operations of a substantial number of small 
or rural providers, and that a regulatory flexibility analysis is not 
required for this rulemaking.
Unfunded Mandates Reform Act
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule that may result in expenditures in any 
one year by State, local or tribal governments, in the aggregate, or by 
the private sector, of $110 million. As indicated, these proposed 
revisions comport with congressional and statutory intent and

[[Page 53944]]

clarify the Department's legal authorities against those who defraud or 
otherwise act improperly against the Federal and State health care 
programs. As a result, we believe that there are no significant costs 
associated with these revisions that would impose any mandates on 
State, local or tribal governments, or the private sector that will 
result in an expenditure of $110 million or more (adjusted for 
inflation) in any given year, and that a full analysis under the 
Unfunded Mandates Reform Act is not necessary.
Executive Order 13132
    Executive Order 13132, Federalism, establishes certain requirements 
that an agency must meet when it promulgates a rule that imposes 
substantial direct requirements or costs on State and local 
governments, preempts State law, or otherwise has Federalism 
implications. In reviewing this rule under the threshold criteria of 
Executive Order 13132, we have determined that this proposed rule would 
not significantly effect the rights, roles and responsibilities of 
State or local governments.
    The Office of Management and Budget (OMB) has reviewed this 
proposed rule in accordance with Executive Order 12866.

B. Paperwork Reduction Act

    While the provisions of this proposed rule impose no express new 
reporting or recordkeeping requirements on health care providers, we 
believe some providers may wish to seek a determination by the 
Secretary that they qualify under the good cause exception on the basis 
of the costs associated with serving Medicare beneficiaries. While, in 
these limited situations, providers may need to generate documentation 
that shows such costs, we estimate that this number of providers would 
be less than 9 per year. We are soliciting public comments on the 
possible need to document such data.

IV. Response to Public Comments

    Comments will be available for public inspection beginning on 
September 29, 2003 in Room 5518 of the Office of Inspector General at 
330 Independence Avenue, SW., Washington, DC, on Monday and through 
Friday of each week from 8 a.m. to 4 p.m., (202) 619-0089. Because of 
the large number of comments we normally receive on regulations, we 
cannot acknowledge or respond to comments individually. However, we 
will consider all timely and appropriate comments when developing the 
final rule.

List of Subjects in 42 CFR Part 1001

    Administrative practice and procedure, Fraud, Health facilities, 
Health professions, Medicaid, Medicare.

    Accordingly, 42 CFR part 1001 would be amended as set forth below:

PART 1001--[AMENDED]

    1. The authority citation for part 1001 would be revised to read as 
follows:

    Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7b, 1395u(j), 
1395u(k), 1395y(e), 1395cc(b)(2), and 1395hh; and sec. 2455, Pub.L. 
103-355, 108 Stat. 3327 (31 U.S.C. 6101 note).

    2. Section 1001.701 would be amended by revising paragraphs (a) and 
(c) to read as follows:


Sec.  1001.701  Excessive claims or furnishing of unnecessary or 
substandard items or services.

    (a) Circumstance for exclusion. (1) The OIG may exclude an 
individual or entity that has submitted, or caused to be submitted, 
bills or requests for payments under Medicare or any of the State 
health care programs containing charges or costs for items or services 
furnished (other than physician services under section 1848(a) of the 
Act reimbursed using the Medicare physician fee schedule) that are 
substantially in excess of such individual's or entity's usual charges 
or costs for such items or services.
    (2) The OIG may exclude an individual or entity that has furnished, 
or caused to be furnished, to patients (whether or not covered by 
Medicare or any of the State health care programs) any items or 
services substantially in excess of the patient's needs, or of a 
quality that fails to meet professionally recognized standards of 
health care.
    (3) For purposes of paragraphs (a)(1) and (c)(1) of this section, 
the terms substantially in excess and usual charge are defined as 
follows--
    (i) Substantially in excess means any charge or cost submitted for 
a furnished item or service that is more than 120 percent of the 
individual's or entity's usual charge or cost for that item or service; 
provided, however, that for items and services whose reimbursement is 
subject to a payment cap, including without limitation, a payment cap 
in the form of a fee schedule amount, the charge or cost for that item 
or service will be deemed to be the lower of the submitted charge or 
cost or the payment cap.
    (ii)(A) Usual charge for an item or service means an amount that is 
determined by--(1) Arraying for the most recent calendar or rolling 1-
year period all charges for an item or service offered or contracted 
for by the individual or entity (and its affiliated entities), 
including duplicate charges; provided, however, that an affiliated 
entity means any entity that directly or indirectly, through one or 
more intermediaries, controls, is controlled by, or is under common 
control with the individual or entity;
    (2) Excluding certain unusual charges described in paragraph 
(a)(3)(ii)(B) of this section; and
    (3) Dividing the sum of the remaining charges by the number of 
remaining charges.
    (B) In determining the usual charge, the individual or entity 
should exclude--
    (1) Charges for services provided to uninsured patients free of 
charge or at a substantially reduced rate;
    (2) Charges based upon capitated payments or rates offered under 
contracted fee-for-service arrangements whereby more than 10 percent of 
the individual's or entity's maximum potential compensation could be 
paid in the form of a bonus and/or a return of all or part of certain 
funds previously deducted from the individual's or entity's 
compensation; and
    (3) Fees set by Medicare, State health care programs, and other 
Federal health care programs; provided, however, that charges 
negotiated with the Department of Defense (DoD) for its health care 
programs, including TriCare Standard, and charges consisting of 
negotiated rates offered, directly or indirectly, to Medicare+Choice 
plans, State managed care plans, or other Federal managed care plans, 
including any DoD managed care plans, should be included (except where 
such charges are excluded in accordance with paragraph (a)(3)(ii)(B)(2) 
of this section).
* * * * *
    (c) Exceptions. (1) Based on a reasonable set of facts and 
circumstances, an individual or entity will not be excluded for 
submitting, or causing to be submitted, bills or requests for payment 
that contain charges or costs substantially in excess of usual charges 
or costs when such charges or costs are due to--
    (i) Unusual circumstances or medical complications requiring 
additional time, effort, or expense;
    (ii) Increased costs associated with serving Medicare or Medicaid 
beneficiaries; or
    (iii) Other good cause.
    (2) An individual or entity will not be excluded for furnishing, or 
causing to be furnished, items or services in excess of the needs of 
patients, when the items or services were ordered by a physician or

[[Page 53945]]

other authorized individual, and the individual or entity furnishing 
the items or services was not in a position to determine medical 
necessity or to refuse to comply with the order of the physician or 
other authorized individual.
* * * * *

    Dated: May 22, 2003.
Lewis Morris,
Acting Principal Deputy Inspector General.
    Approved: June 5, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-23351 Filed 9-12-03; 8:45 am]
BILLING CODE 4152-01-P