December 2003 Bulletin

OIG’s proposed clarifications to Exclusionary Rule

Prohibits excessive charges

By Robert E. Wanerman, JD, MPH

The federal government has a wide range of criminal, civil and administrative remedies for violations of the fraud and abuse laws. One of the lesser-known remedies authorizes the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) to exclude individuals or entities from participating in federally funded health care programs if they submit excessive charges to the Medicare or Medicaid programs.

On Sept. 15, 2003, the OIG published a proposed regulation that would enhance its ability to enforce this law. If adopted in its current form, the new regulation may have a significant negative impact on practitioners who accept low contractual payment rates from commercial health plans.

Overview of the proposed regulation
Section 1128 of the Social Security Act grants the Secretary of HHS the authority to exclude from participation in the federal health care programs any provider that submits or causes to be submitted bills or requests to Medicare or Medicaid that are “substantially in excess” of the provider’s “usual charges.” The proposed rule, if adopted, would define these key terms and provide objective criteria for the Secretary to consider when determining whether or not there is “good cause” for a provider to submit higher charges or costs.

The prohibition on submitting excessive charges applies to bills and requests for payment submitted for items or services for which payment is based either directly or indirectly on the provider’s submitted charges. Indirect charges might include clinical laboratory services, durable medical equipment (DME), medical supplies and drugs. These items and services are paid based on the lower of a provider’s submitted charges or an established fee schedule amount, and typically include ancillary services such as laboratory tests or drugs. This does not affect physician services reimbursed under the Medicare physician fee schedule.

The rationale for excluding services paid under the Medicare physician fee schedule is that, unlike the fee schedules for DME or drugs, the physician fee schedule is updated annually and developed pursuant to detailed statutory directions based on estimated resource requirements rather than on historical charge data. Therefore, the payment amounts on the physician fee schedule are presumed to be fairly accurate indicators of the amount a physician should be billing and receiving for his or her services.

Defining excessive charges
The definition of an excessive charge is based on the provider’s usual charge. The proposed rule would define “usual charges” as either the provider’s average charge for a given item or service, or the median charge, excluding charges to Medicare, Medicaid, or other federally funded programs; services provided under capitation contracts; or services provided without charge.
The OIG is proposing to define a provider’s charges as “substantially in excess” of usual charges if they are more than 120 percent of the usual charges. The proposed rule does not refer to any particular evidence for this conclusion; instead, it states, “We believe that a 20 percent differential is high enough that most people would agree that the charges to Medicare are substantially in excess.”

Even though the calculation of “usual charges” excludes charges submitted to federally funded programs, the proposed rule could adversely affect practitioners with large Medicare and Medicaid caseloads if it is adopted in its current form. For example, if a practice mainly bills Medicare and only has a handful of contracts with commercial insurers, that practice’s “usual” charge would be calculated solely on the handful of infrequently used commercial contracts rather than the charges routinely submitted to Medicare.

If that practice’s contracts with commercial insurers establish payment levels that are less than the Medicare fee schedule payment, the provider’s “usual charge” could be an amount that is less than the Medicare fee schedule payment. This could potentially force the practice to charge and accept less than the Medicare fee schedule.

“Good cause” exception
Under the current regulations, providers will not be subject to penalties for submitting claims with excessive charges if there is “good cause,” which includes charges that are due to “unusual circumstances or medical complications requiring additional time, effort, expense or other good cause.” The proposed rule would expand the good cause exception to include charges or costs that are due to “increased costs associated with serving Medicare or Medicaid beneficiaries” and “other good cause.”

Thus, under the proposed rule, even if the charges are more than 120 percent of the provider’s usual charges, the OIG will not exclude the practitioner from participating in the federal health care programs if the Secretary determines that the provider had good cause for submitting otherwise excessive charges, including a showing that the provider incurred increased costs directly related to serving Medicare or Medicaid beneficiaries. For example, the provider might be able to demonstrate a higher payment denial and bad debt rate for Medicare and/or Medicaid patients as compared to the provider’s commercially insured patients.

The proposed rule provides formal criteria for the OIG to exclude providers for submitting charges “substantially in excess” of “usual” charges. Although this proposed change will not affect reimbursement under the Medicare fee schedule, practitioners should be aware that a small number of non-federal charges might have a disproportionate impact on their ability to comply with this part of the fraud and abuse laws.

For more information on the Proposed Rule, you can view the Sept. 15, 2003, Federal Register, Vol. 68, No. 178 by visiting Web site
This article is for informational purposes only and does not constitute legal advice.

Robert E. Wanerman, JD, MPH, is counsel at Reed Smith LLP, Washington, D.C. He can be reached at (202) 414-9242 or via e-mail at

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