Quest Diagnostics 2006 Annual Report Download - page 40

Since then, Congress has periodically reduced the national ceilings. The Medicare national fee schedule
limitations were reduced in 1996 to 76% of the 1984 national median of the local fee schedules and in 1998 to
74% of the 1984 national median. The national ceiling applies to tests for which limitation amounts were
established before January 1, 2001. For more recent tests (tests for which a limitation amount is first established
on or after January 1, 2001), the limitation amount is set at 100% of the median of all the local fee schedules
established for that test in accordance with the Social Security Act. The MMA eliminated for five years
(beginning January 1, 2004) the provision for annual increases to the Medicare national fee schedule based on the
consumer price index. Thus, by law an adjustment to the national fee schedule for clinical laboratory services
based on the consumer price index cannot occur before January 1, 2009. However, the MMA added coverage for
certain cardiovascular screening tests and diabetes screening tests, subject to certain frequency limitations. The
MMA evaluates new diagnostic tests for coverage as they are introduced.
With regard to the clinical laboratory services performed on behalf of Medicare beneficiaries, we must bill
the Medicare program directly and must accept the carrier’s fee schedule amount as payment in full. In addition,
state Medicaid programs are prohibited from paying more (and in most instances, pay significantly less) than
Medicare. Major clinical laboratories, including Quest Diagnostics, typically use two fee schedules for tests billed
on a fee-for-service basis:
•“Client” fees charged to physicians, hospitals, and institutions for which a clinical laboratory performs
testing services on a wholesale basis and which are billed on a monthly basis. These fees are generally
subject to negotiation or discount.
•“Patient” fees charged to individual patients and third-party payers, like Medicare and Medicaid. These
fees generally require separate bills for each requisition.
The fee schedule amounts established by Medicare are typically substantially lower than patient fees
otherwise charged by us, but are sometimes higher than our fees actually charged to certain clients. During 1992,
the OIG of the HHS issued final regulations that prohibited charging Medicare fees substantially in excess of a
provider’s usual charges. The laboratory industry believes that the term “usual charges” specifically applies to
amounts charged to similarly-situated third-party payers and to patients and that client fees should not be
included in “usual charges”. The OIG, however, declined to provide any guidance concerning interpretation of
these rules, including whether or not discounts to non-governmental clients and payers or the dual-fee structure
might be inconsistent with these rules.
A proposed rule released in September 1997 would have authorized the OIG to exclude providers, including
clinical laboratories, from participation in the Medicare program that charge Medicare and other programs fees
that are “substantially in excess of . . . usual charges . . . to any of [their] customers, clients or patients”. This
proposal was withdrawn by the OIG in 1998. In November 1999, the OIG issued an advisory opinion which
indicated that a clinical laboratory offering discounts on client bills may violate the “usual charges” regulation if
the “charge to Medicare substantially exceeds the amount the laboratory most frequently charges or has
contractually agreed to accept from non-Federal payers”. The OIG subsequently issued a letter clarifying that the
usual charges regulation is not a blanket prohibition on discounts to private pay customers.
In September 2003, the OIG published a Notice of Proposed Rulemaking that would amend the OIG’s
exclusion regulations addressing excessive claims. Under the proposed exclusion rule, the OIG would have the
authority to exclude a provider for submitting claims to Medicare that contain charges that are substantially in
excess of the provider’s usual charges. The proposal would define “usual charges” as the average payment from
non-government entities, on a test by test basis, excluding capitated payments; and would define “substantially in
excess” to be an amount that is more than 20% greater than the usual charge. We believe that the proposed rule
is unnecessary for the clinical laboratory industry because Congress has already established fee schedules for the
services that the rule proposes to regulate. We also believe that the proposed rule is unworkable and overly
burdensome. Through our industry trade association, we filed comments opposing the proposed rule and we are
working with our trade association and a coalition of other healthcare providers who also oppose this proposed
regulation as drafted. If this regulation is adopted as proposed, it could potentially reduce the amounts we bill
and collect from Medicare and other federal payers, affect the fees we charge to other payers, or subject the
Company to penalties for non-compliance, and could also be costly for us to administer.
The 1997 Balanced Budget Act permits CMS to adjust statutorily prescribed fees for some medical services,
including clinical laboratory services, if the fees are “grossly excessive”. In December 2002, CMS issued an
interim final rule setting forth a process and factors for establishing a “realistic and equitable” payment amount
for all Medicare Part B services (except physician services and services paid under a prospective payment
system) when the existing payment amounts are determined to be inherently unreasonable. Payment amounts may
be considered unreasonable because they are either grossly excessive or deficient. In December 2005, CMS
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