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Medicare private contracting: increasing patient choice and access? (Health Policy Update).

Congress modified the Medicare program through the Balanced Budget Act of 1997 (BBA) to expand patient choices for payment to physicians and certain other practitioners. Section 4507 of this act permits Medicare patients to privately contract with physicians and practitioners for Medicare covered services, only if the physician/practitioner agrees not to seek payment for any Medicare patient for two years. This prohibition includes both capitation and direct payments. The two year opt out provision has caused concern from physicians/practitioners about the integrity of Medicare's policies, and raised the specter for seniors about access to care.

Before the Balanced Budget Act

The legislation that created Medicare in 1965 is silent on whether It intended to specifically prohibit private contracting. However, as Medicare evolved, the Health Care Financing Administration (HCFA) and Congress put into place polices that made it impossible to privately contract for Medicare covered services. Since the 1980s, limits on balance billing and requirements that the physician/practitioner must file the Medicare claim meant physicians and beneficiaries could not privately agree to pay outside of Medicare for services covered by the program. By filing the claim with Medicare, the practitioner is agreeing to adhere to Medicare's payment levels and is limited in how much he or she can balance bill. This prohibition did not apply to services Medicare does not cover, like prescription drugs, hearing aids, and eyeglasses; therefore, they could privately purchase these services from the practitioner of their choice.

In 1992, ambiguity in enforcing the private payment rules resulted in a case against the Secretary of Health and Human Services, Steward v. Sullivan. That case was dismissed because the court felt both the law and the way it had been enforced were so ambiguous that the issue was not yet ready for judicial review. (1)

In 1993, HCFA issued Medicare manual instructions (Sec. 3044) that prohibited private contracting in an effort to clarify past practices. In addition, it noted significant penalties for failing to submit a claim within one year for a covered service. The Social Security Act Amendments of 1994 further clarified the administration's policy against private contracting.

In 1997 Senator John Kyl (R-AZ) introduced a floor amendment to the Balanced Budget Act. The original Kyl amendment language would have permitted private contracting among Medicare patients and physicians "who do not provide items or services" under the Medicare program. Senator Kyl said the amendment would have affected the "9 percent of physicians who do not treat Medicare patients." (2)

During the debate, the Office of Management and Budget (OMB) offered its opinion that private contracting would change existing policy and make patients "totally responsible for out-of-pocket expenses for the physician's entire bill, even though services would be covered by Medicare if the bill were submitted to Medicare. Private agreements could become license for physicians to coerce beneficiaries exposing beneficiaries to unlimited liability and making meaningless the Medicare coverage they have paid for." (3)

Ultimately, Senator Kyl's original language was amended to require that a physician/practitioner who enters into private contracts may not seek Medicare reimbursement for two years. By leaving Medicare, the physician/practitioner is not eligible for Medicare reimbursement for any covered service that he or she provides, even if that service is provided under a different benefit, such as laboratory or radiology.

Section 4507 in practice

Physicians/practitioners must terminate their Medicare Part B agreement with HCFA in order to elect this option. Individuals in a group practice can opt out of payment for Medicare without effecting the payment practices of other group members, however physicians/practitioners that have assigned their benefits or work in practices where the organization is the payee are unable to elect this option. Certain practitioners, such as dentists, oral surgeons, podiatrists, chiropractors, physical or occupational therapists in independent practice, and optometrists are not allowed to opt out under this legislation.

Some beneficiary groups believe that the only protection against fraud and abuse in the current private contract is the policy that requires the physician to forgo all reimbursement from Medicare for at least two years. However, to ensure that beneficiaries know the consequence of their decision to contract privately, the new law also requires the physician/practitioner to disclose to the individual that private contracting means that:

* No Medicare payment will be made for privately contracted services

* Balance billing limits will not apply

* Medigap coverage will not be available

* The patient has the right to receive services from and have Medicare pay for services provided by another physician/practitioner who is a participant in the Medicare program. The physician/practitioner must also notify the patient if they have been excluded from the Medicare program for fraud or quality issues.

The debate continues

On September 18, 1997, less than two months after the BBA was signed into law, Senator Jon Kyl and Representative Bill Archer (R-TX) proposed new legislation repealing some of the program integrity and consumer protections, including the private contacting proposal (S. 1194 & H.R. 2497). If these bills were to pass the effect would be to:

* Allow all physicians to charge more than the levels set by the Congress or negotiated with Medicare+ Choice plans by contracting privately with beneficiaries.

* Expand the private contracting provision in the BBA to let physicians charge higher fees by contracting privately on a service by service basis. This means that a physician could bill a beneficiary for all of his or her charge or some of the services the beneficiary received and bill Medicare for other services.

* Allow physicians to negotiate higher charges privately with low-income "dually eligible" and Qualified Medicare Beneficiary recipients.

* Repeal the requirement that physicians who privately contract for higher fees file an affidavit with the HCFA, and forgo reimbursement from Medicare for all Medicare patients for two years.

* Allow Medicare to collect only "minimum information" necessary from physicians to assure the program does not pay for services that have already been paid for by the beneficiary.

Maintain the BBA provision that physicians who have been excluded from the Medicare program for fraud and/or poor quality of care disclose this fact to beneficiaries in the contract.

Maintain the provision prohibiting private contracting in emergency situations unless the contract was entered into before the onset of the emergency medical condition.

Maintain the BBA requirement that the contract a beneficiary signs clearly indicates that: claims will not be submitted to Medicare by either the physician or the beneficiary; the beneficiary is responsible for the full cost of the privately contracted services; balance billing limits do not apply to contracted services: Medigap coverage will not be available for contracted services; and the services to be performed could be paid for by Medicare if provided by another physician.

While the Senate debated its version of the Budget Resolution this Spring, Senator Kyl brought the debate back to the floor. In a vote of 51-47, an amendment declared that doctors should have an unfettered right to enter into private contracts to provide any health care services to Medicare eligible seniors at whatever price the parties agree to, without forfeiting the right to participate in Medicare.

Senator Kyl also joined with Senator Richard Durbin (D-III) to sponsor an amendment stating that Medicare beneficiaries "deserve to know" that under current law they may pay out of pocket for Medicare covered services if they decline to have a claim submitted to Medicare and if a doctor will accept Medicare payment rates, and for non-covered services at rates determined by physicians. The resolution also states that no change should be made to Medicare that could "impose unreasonable" costs on seniors or "allow unscrupulous providers" to bill twice for services. Like the other amendments considered during the floor debate on the budget resolution, the measure is a non-binding Sense of the Senate resolution. Further Congressional action this year may continue to define the private contracting issue.

The United Seniors Association, which had sued the U.S. Department of Health and Human Services to prevent enforcing the new law, contended that the statute denies retirees freedom to arrange personal payment plans with doctors. This lawsuit was thrown out of court in April 1998 by U.S. District Judge Thomas F. Hogan. Judge Hogan ruled that "The provision at issue serves the general welfare by limiting the amount that Medicare beneficiaries, many of whom are on fixed incomes, pay for services." (4) This means that Congress has the right to set conditions for participation in programs that distribute federal dollars as long as the purpose is the pursuit of the general welfare.


Changing Medicare payment policies will have a profound effect on access and patient choice. If access improves as well as quality of care, then these policy changes should be encouraged. Should they prove to be restrictive and drive physicians from providing needed care, they should be remodeled as appropriate to meet the needs of the American public. Only time will tell.


(1.) Medicare Suit Dismissed, The Wall Street Journal, September 8, 1997.

(2.) Private Contracting Moves Forward in Balanced Budget Act Proposal, AMA News, 40, 27, 1997.

(3.) Office of Management and Budget, Letter to Members of Congress, 1997.

(4.) Judge Throws Out Seniors Suit on Medicare, The Wail Street Journal, April 17, 1998.

Georges C. Benjamin, MD, FACP, is the Maryland Deputy Secretary for Public Health Services in Baltimore. He can be reached at 410/767-6510 or via fax at 410/767-6489.
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Author:Benjamin, Georges C.
Publication:Physician Executive
Geographic Code:1USA
Date:Jul 1, 1998
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