[Code of Federal Regulations] [Title 42, Volume 2] [Revised as of October 1, 2005] From the U.S. Government Printing Office via GPO Access [CITE: 42CFR405.502] [Page 107-113] TITLE 42--PUBLIC HEALTH CHAPTER IV--CENTERS FOR MEDICARE & MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES PART 405_FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED--Table of Contents Subpart E_Criteria for Determining Reasonable Charges Sec. 405.502 Criteria for determining reasonable charges. (a) Criteria. The law allows for flexibility in the determination of reasonable charges to accommodate reimbursement to the various ways in which health services are furnished and charged for. The criteria for determining what charges are reasonable include: (1) The customary charges for similar services generally made by the physician or other person furnishing such services. (2) The prevailing charges in the locality for similar services. (3) In the case of physicians' services, the prevailing charges adjusted to reflect economic changes as provided under Sec. 405.504 of this subpart. [[Page 108]] (4) In the case of medical services, supplies, and equipment that are reimbursed on a reasonable charge basis (excluding physicians' services), the inflation-indexed charge as determined under Sec. 405.509. (5) [Reserved] (6) In the case of medical services, supplies, and equipment (including equipment servicing) that the Secretary judges do not generally vary significantly in quality from one supplier to another, the lowest charge levels at which such services, supplies, and equipment are widely and consistently available in a locality. (7) Other factors that may be found necessary and appropriate with respect to a category of service to use in judging whether the charge is inherently reasonable. This includes special reasonable charge limits (which may be either upper or lower limits) established by CMS or a carrier if it determines that the standard rules for calculating reasonable charges set forth in this subpart result in the grossly deficient or excessive charges. The determination of these limits is described in paragraphs (g) and (h) of this section. (8) In the case of laboratory services billed by a physician but performed by an outside laboratory, the payment levels established in accordance with the criteria stated in Sec. 405.515. (9) Except as provided in paragraph (a)(10) of this section, in the case of services of assistants-at-surgery as defined in Sec. 405.580 in teaching and non-teaching settings, charges that are not more than 16 percent of the prevailing charge in the locality, adjusted by the economic index, for the surgical procedure performed by the primary surgeon. Payment is prohibited for the services of an assistant-at- surgery in surgical procedures for which CMS has determined that assistants-at-surgery on average are used in less than 5 percent of such procedures nationally. (10) In the case of services of assistants at surgery that meet the exception under Sec. 415.190(c)(2) or (c)(3) of this chapter because the physician is performing a unique, necessary, specialized medical service in the total care of a patient during surgery, reasonable charges consistent with prevailing practice in the carrier's service area rather than the special assistant at surgery rate. (b) Comparable services limitation. The law also specifies that the reasonable charge cannot be higher than the charge applicable for a comparable service under comparable circumstances to the carriers' own policyholders and subscribers. (c) Application of criteria. In applying these criteria, the carriers are to exercise judgment based on factual data on the charges made by physicians to patients generally and by other persons to the public in general and on special factors that may exist in individual cases so that determinations of reasonable charge are realistic and equitable. (d) Responsibility of Administration and carriers. Determinations by carriers of reasonable charge are not reviewed on a case-by-case basis by the Centers for Medicare & Medicaid Services, although the general procedures and performance of functions by carriers are evaluated. In making determinations, carriers apply the provisions of the law under broad principles issued by the Centers for Medicare & Medicaid Services. These principles are intended to assure overall consistency among carriers in their determinations of reasonable charge. The principles in Sec. Sec. 405.503 through 405.507 establish the criteria for making such determinations in accordance with the statutory provisions. (e) Determination of reasonable charges under the End-Stage Renal Disease (ESRD) Program--(1) General. Reasonable charges for renal- related items and services (furnished in connection with transplantation or dialysis) must be related to costs and allowances that are reasonable when the treatments are furnished in an effective and economical manner. (2) Nonprovider (independent) dialysis facilities. Reasonable charges for renal-related items and services furnished before August 1, 1983 must be determined related to costs and charges prior to July, 1973, in accordance with the regulations at Sec. 405.541. Items and services related to outpatient maintenance dialysis that are furnished after that date are paid for in accordance with Sec. Sec. 405.544 and 413.170 of this chapter. [[Page 109]] (3) Provider services and (hospital-based) dialysis facilities. Renal-related items and services furnished by providers, or by ESRD facilities based in hospitals, before August 1, 1983 are paid for under the provider reimbursement provisions found generally in part 413 of this chapter. Items and services related to outpatient maintenance dialysis that are furnished after that date are paid for in accordance with Sec. Sec. 405.544 and 413.170 of this chapter. (4) Physicians' services. Reasonable charges for renal-related physicians' services must be determined considering charges made for other services involving comparable physicians' time and skill requirements, in accordance with regulations at Sec. Sec. 405.542 and 405.543. (5) Health maintenance organizations (HMOs). For special rules concerning the reimbursement of ESRD services furnished by risk-basis HMOs, or by facilities owned or operated by or related to such HMOs by common ownership or control, see Sec. Sec. 405.2042(b)(14) and 405.2050(c). (f) Determining payments for certain physician services furnished in outpatient hospital settings--(1) General rule. If physician services of the type routinely furnished in physicians' offices are furnished in outpatient hospital settings before January 1, 1992, carriers determine the reasonable charge for those services by applying the limits described in paragraph (f)(5) of this section. (2) Definition. As used in this paragraph (f), outpatient settings means-- (i) Hospital outpatient departments, including clinics and emergency rooms; and (ii) Comprehensive outpatient rehabilitation facilities. (3) Services covered by limits. The carrier establishes a list of services routinely furnished in physicians' offices in the area. The carrier has the discretion to determine which professional services are routinely furnished in physicians' offices, based on current medical practice in the area. Listed below are some examples of routine services furnished by office-based physicians. Examples Review of recent history, determination of blood pressure, ausculation of heart and lungs, and adjustment of medication. Brief history and examination, and initiation of diagnostic and treatment programs. Treatment of an acute respiratory infection. (4) Services excluded from limits. The limits established under this paragraph do not apply to the following: (i) Rural health clinic services. (ii) Surgical services included on the ambulatory surgical center list of procedures published under Sec. 416.65(c) of this chapter. (iii) Services furnished in a hospital emergency room after the sudden onset of a medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain) such that the absence of immediate medical attention could reasonably be expected to result in-- (A) Placing the patient's health in serious jeopardy; (B) Serious impairment to bodily functions; or (C) Serious dysfunction of any bodily organ or part. (iv) Anesthesiology services and diagnostic and therapeutic radiology services. (v) Federally qualified health center services paid under the rules in part 405 subpart X. (5) Methodology for developing limits--(i) Development of a charge base. The carrier establishes a charge base for each service identified as a routine office-based physician service. The charge base consists of the prevailing charge in the locality for each such service adjusted by the economic index. The carrier uses the prevailing charges that apply to services by nonspecialists in office practices in the locality in which the outpatient setting is located. (ii) Calculation of the outpatient limits. The carrier calculates the charge limit for each service by multiplying the charge base amount for each service by .60. (6) Application of limits. The reasonable charge for physician services of the type described in paragraph (f)(3) of this section that are furnished in an outpatient setting is the lowest of the [[Page 110]] actual charges, the customary charges in accordance with Sec. 405.503, the prevailing charges applicable to these services in accordance with Sec. 405.504, or the charge limits calculated in paragraph (f)(5)(ii) of this section. (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) CMS or a carrier may determine that the standard rules for calculating payment amounts set forth in this subpart 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 and those items and services for which payment is made under a prospective payment system, such as outpatient hospital or home health) will result in grossly deficient or excessive amounts. A payment amount will not be considered grossly excessive or deficient if it is determined that an overall payment adjustment of less than 15 percent is necessary to produce a realistic and equitable payment amount. For CMS initiated adjustments, CMS will publish in the Federal Register an analysis of payment adjustments that exceed $100 million per year in compliance with Executive Order 12866. If CMS makes adjustments that have a significant effect on a substantial number of small entities, it will publish an analysis in compliance with the Regulatory Flexibility Act. (iii) If CMS or the carrier determines that the standard rules for calculating payment amounts for a category of items or services will result in grossly deficient or excessive amounts, CMS, or the carrier, may establish special payment limits that are realistic and equitable for a category of items or services. If CMS makes a determination, it is considered a national determination. A carrier determination is one made by a carrier/intermediary or groups of carriers/intermediaries even if the determination applies to all State fees. (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 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. [[Page 111]] (H) A new technology exists which is not reflected in the existing payment allowances. (2) Establishing a limit. In establishing a payment limit for a category of items or services, CMS 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 CMS 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, CMS 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. CMS 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. CMS 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) Use. CMS or a carrier may impute a reasonable rate of use for a category of items or services and consider unit costs based on efficient use. (v) Payment amounts in other localities. CMS 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. CMS publishes in the Federal Register proposed and final notices announcing a special payment limit described in paragraph (g) of this section 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)(A) 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 Medicaid agencies of the proposed payment amounts, the factors it considered in proposing the particular limit, as described in paragraphs (g)(1) through (g)(4) of this section, and solicit comments. The notice must also consider the following: (1) The effects on the Medicare program, including costs, savings, assignment rates, beneficiary liability, and quality of care. (2) What entities would be affected such as classes of providers or suppliers and beneficiaries. (3) How significantly would these entities be affected. (4) How would the adjustment affect beneficiary access to items or services. (B) The carrier must evaluate the comments it receives. The carrier must notify CMS in writing of any final limits it plans to establish. CMS will acknowledge in writing to the carrier that it received the carrier's notification. After the carrier has received CMS's acknowledgement, the carrier must inform the affected suppliers and State Medicaid agencies of any final limits it establishes. The effective date for a final payment limit may apply to services furnished at least 60 days after the date that the carrier notifies affected suppliers and State Medicaid agencies of the final limit. (4) Use of valid and reliable data. In determining whether a payment amount is excessive or deficient and in establishing an appropriate payment amount, valid and reliable data will be used. To ensure the use of valid and reliable data, CMS or the carrier must meet the following criteria to the extent applicable: (i) Develop written guidelines for data collection and analysis; (ii) Ensure consistency in any survey to collect and analyze pricing data. (iii) Develop a consistent set of survey questions to use when requesting retail prices. (iv) Ensure that sampled prices fully represent the range of prices nationally. (v) Consider the geographic distribution of Medicare beneficiaries. [[Page 112]] (vi) Consider relative prices in the various localities to ensure that an appropriate mix of areas with high, medium, and low consumer prices was included. (vii) Consider criteria to define populous State, less populous State, urban area, and rural area. (viii) Consider a consistent approach in selecting retail outlets within selected cities. (ix) Consider whether the distribution of sampled prices from localities surveyed is fully representative of the distribution of the U.S. population. (x) Consider the products generally used by beneficiaries and collect prices of these products. (xi) When using wholesale costs, consider the cost of the services necessary to furnish a product to beneficiaries. (5) If CMS or a carrier makes a payment adjustment of more than 15 percent spread over multiple years, CMS or the carrier will review market prices in the years subsequent to the year that the initial reduction is effective in order to ensure that further reductions continue to be appropriate. (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)(4) of this section, CMS applies the following rules in 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. CMS 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, CMS consults with representatives of the supplier industry likely to be affected by the change in the payment amount. (3) Publication of national limits. If CMS determines under paragraph (h) of this section to establish a special payment limit for a category of items or services, it publishes in the Federal Register the proposed and final notices of a special payment limit before it adopts the limit. The notices set 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 CMS 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 for a category of items or services; (C) Explains the factors and data that CMS 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 CMS considered, including the economic justification for any uniform fee or payment limit established; and (B) Responds to the public comments. (i) Paramedic intercept ambulance services. (1) CMS establishes its payment allowance on a carrier-wide basis by using the median allowance from all localities within an individual carrier's jurisdiction. (2) CMS's payment allowance is equal to the advanced life support rate minus 40 percent of the basic life support rate. (3) CMS bases payment on the lower of the actual charge or the amount described in paragraph (i)(1) and (i)(2) of this section. (Secs. 1102, 1814(b), 1833(a), 1842(b), and (h), and 1871, 1903(i)(1) of the Social Security Act; 49 Stat. 647, as amended, 79 Stat. 296, 302, 310, 331; 86 Stat. 1395, 1454; 42 U.S.C. 1302, 1395u(b), 1395hh, 1396b(i)(1). [32 FR 12599, Aug. 31, 1967] Editorial Note: For Federal Register citations affecting Sec. 405.502, see the List of CFR Sections Affected, which appears in the [[Page 113]] Finding Aids section of the printed volume and on GPO Access.