Healthcare Financial Management

HCFA defines “actual charge” in proposed rule

HCFA defines “actual charge” in proposed rule – Health Care Financing Administration

Richard Gundling

Citing the lack of a definition of “actual charge” in the Medicare statute, HCFA, in a ruling published June 18, proposed an interpretation of the term that it feels is both reasonable and consistent with Medicare law. HCFA proposes to define “actual charge” as the lesser of the amount the physician or supplier charges for the service to a particular beneficiary or the amount the physician or supplier voluntarily agrees to accept as payment in full under a private health plan contract that also covers the beneficiary when Medicare is the primary payer and the private plan is secondary.

HCFA acknowledges that a counterargument can be made that the actual charge is the amount a physician or supplier establishes, regardless of what is actually expected to be collected. Because so many people participate in private health plans, the physician or supplier may never charge or expect to collect this amount.

Similarly, HCFA has determined that the practice of routinely waiving coinsurance lowers the actual charge from the amount on the bill. At this point, HCFA wishes to apply this definition of actual charge only to suppliers, which, under Medicare, means a physician, practitioner, or an entity other than a provider that furnishes healthcare services. A provider in this context includes a hospital, skilled nursing facility, comprehensive outpatient rehabilitation facility, home health agency, hospice, or clinic.

Determining Actual Charge

Assume a physician charges $1,500 for a particular procedure, and the Medicare fee schedule amount for that procedure is $1,000. If the physician also participates in a private health plan, he or she might have agreed to accept a negotiated amount of $700 for that procedure as payment in full. When a physician performs the same procedure on a Medicare beneficiary who also has health insurance coverage under that private health plan, the physician submits a bill to Medicare (the primary payer) of $1,500 for the procedure.

After comparing the current actual charge of $1,500 with the physician fee schedule amount of $1,000, Medicare then pays the physician $800 (80 percent of $1,000), basing its payment on the lesser amount. The physician might then try to collect the Medicare coinsurance of $200 from the private health plan, but since the physician has already received greater than the negotiated amount, the private health plan would refuse to pay the physician the $200. The physician then may bill the $200 to the beneficiary.

On the basis of this example, HCFA would consider the $700 the physician agreed to accept under the private plan as payment in full as the actual charge. Medicare would pay the physician $560 (80 percent of the $700). The plan would pay $140 for the coinsurance (less any beneficiary copayments). The beneficiary would be responsible only for the copayments owed under the private health plan, as if he or she did not have Medicare coverage. The physician would receive the full amount agreed upon as payment in full with the private health plan.

Contractual Agreement for Discounted Rates

During contract negotiations, a supplier (practitioner) and a health plan agree that in exchange for a discounted fee, the health plan will place the supplier on a preferred supplier list to encourage health plan members to use them. Thus, a patient has a financial incentive to use a preferred supplier, and the health plan meets its contractual obligation to channel patients to its supplier.

For services such as those provided in workers compensation cases, automobile accident claims, and disability cases however, reduced contract rates are generally not negotiated. Similarly, fee-for-service indemnity plans do not generally entail contractual agreements for discounted rates, since channeling mechanisms or other specific obligations are not involved.

Channeling mechanisms also are not involved when Medicare is the primary payer; therefore, it is inappropriate for the contract terms to be extended. The use of discount rate information beyond an agreed contract clause should be prohibited.

Operational Difficulties for Suppliers

Requiring a supplier to submit a claim as HCFA proposes could be very difficult. Medicare beneficiaries are well known for failing to provide timely information on secondary payers to either suppliers or Medicare. The Medicare program does not provide a real-time eligibility check to verify beneficiary status or safeguard suppliers from possible fraud allegations. Nor is there a standard means for suppliers to check each incident of service.

Most current billing systems cannot handle multiple prices for the same service or procedure. While systems and accounting practices do allow for discounts from gross charges, they cannot adapt to multiple prices. Suppliers would be forced to create systems to identify all patients whose secondary payers have a discount agreement with the supplier even though the arrangement was intended to be a primary payment contract. A manually developed claim capable of meeting these actual-charge requirements would then need to be submitted to the carrier or fiscal intermediary.

Charge and Cost Structure

Changing the patient charge based on the secondary payer contract for Medicare beneficiaries violates standard charging practices. This practice even contradicts Medicare principles relating to its charge structure.

Charges refer to the regular rates established for services rendered to both beneficiaries and other paying patients. Charges should be related consistently to the cost of the services and uniformly applied to all patients. All patients’ charges should be recorded at the gross value, ie, charges before the application of allowances and discounts deductions. Accordingly, the Medicare charge for a specific service should be the same as the charge made to non-Medicare patients (including those with Medicaid, TRICARE, or private plan coverage), should be recorded in the respective income accounts of the supplier, and should be related to the cost of the service.

Since the healthcare industry is becoming increasingly integrated, the proposed definition of actual charge may have implications for all providers and suppliers. In a comment letter to HCFA, HFMA voiced its concern with the proposed definition of actual charge. To ensure that Medicare’s share of costs equitably reflects the costs and benefits of services received by Medicare beneficiaries, the charging practices of suppliers must provide an equitable basis for cost allocation. Medicare policy has recognized customary charging practice if it is consistently followed for all patients and does not result in an inequitable apportionment of cost to the program.

Any proposed rule that moves away from recognized accounting practices should be avoided. With the Federal government’s increased scrutiny of healthcare claims, those claims that contain multiple pricing for the same service could be assumed to be fraudulent and expose suppliers to investigations.


HCFA has put healthcare financial managers on notice that it is seeking alternatives for payment that will effectively apply market forces to Medicare. In the proposed rule, HCFA stated it could have defined actual charge as the lower of the lowest amount a supplier agrees to accept as payment in full from any insurer with which a contract has been negotiated. HCFA insists this proposed definition will ensure that Medicare does not pay more than the lowest amount for which the supplier is willing to furnish services in a competitive market. Although HCFA claims that it did not intend to propose such an extreme definition, healthcare financial managers should be mindful that the Medicare program might use managed care contractual rates and clauses as the basis for actual charges in the future.

Richard Gundling, FHFMA, CMA, is technical director, HFMA Washington, D.C., office group.

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