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Determining Usual, Customary, And Reasonable Charges For Healthcare Services

By: Ronald T. Luke, JD, PhD
Research Planning Consultants, LP

Tel: 512-371-8166
Email Dr. Luke / Research & Planning Consultants


View Profile on Experts.com.


EXECUTIVE SUMMARY

     1. Research & Planning Consultants, LP (“RPC”) determines the maximum reasonable charges for most medical services based on the industry-standard definition of Usual, Customary, and Reasonable (“UCR”) charges. This is the definition adopted by many states and major commercial insurers to define maximum reasonable charges for out-of-network care. Medicare used the term “prevailing charge” for the same approach before it adopted the Resource Based Relative Value Unit model in 1993.

     2. The UCR method calculates the maximum reasonable charge for a specific service in a medical market by comparing what all providers in the medical market charge for the service. All UCR charge analysis is performed on undiscounted billed charges. The determination whether a charge is reasonable is not based on what payors pay or on any government fee guideline. The UCR charge is based entirely on charges set unilaterally by providers without any adjustments.

     3. A threshold percentile determines the maximum reasonable charge for that service in that medical market. Charges less than or equal to the threshold percentile value are reasonable; charges more than the threshold value are not reasonable. The 80th and 75th percentiles are threshold percentiles most commonly used in state and federal laws and by major health plans. This means the charge for a service of 80% or 75% by providers in a medical market was less than or equal to this threshold value.

     4. RPC determines the UCR charge based on the 80th percentile when possible as this is the most frequently used threshold. Some publications do not publish an 80th percentile threshold charge, but they do publish a 75th percentile threshold charge. When an 80th percentile threshold is not available, RPC determines the UCR charge based on a 75th percentile threshold.

     5. RPC uses several data sources to calculate UCR charge thresholds depending on the type of provider that delivers the service. All data sources RPC uses to determine UCR charges are publicly available and were primarily created for uses other than litigation. The data sources include public use data files from the federal Center for Medicare and Medicaid Services, and the Texas Department of State Health Services. These public use data bases allow RPC to directly calculate the 80th percentile threshold value for many services. For other services by physicians and other practitioners, RPC calculates an 80th percentile charge nationally and adjusts this charge by a charge-based geographic adjustment factor specific to location and the category of the code in question. When RPC cannot directly calculate threshold values due to data limitations, RPC relies on a published benchmark generally relied on by providers to set their charges.

     6. RPC identifies specific services based on industry standard medical coding. RPC assumes the codes assigned by the provider in the billing and medical records accurately describe the services. When there are missing codes, RPC works with medical coders and coding software to assign the appropriate codes. When the provider did not assign codes and did not provide records sufficient to assign codes, RPC sets the reasonable charge as zero dollars until the provider supplies additional information.

     7. RPC applies industry standard coding edits before determining if the provider’s charges are reasonable. These edits are applied by consulting medical coders and by using standard industry software, such as Optum 360’s EncoderPro software. Not all types of edits apply to all bills. The types of edits include:

  1. Multiple Procedure Rule
  2. Bilateral Procedure Rule
  3. Unbundling of services or of supplies included in the CPT code
  4. Mutually inconsistent codes
  5. Percentage of surgeon charges for assistant surgeons, co-surgeons, and assistants at surgery
  6. Pre- and post-surgery services included in the global surgery charge
  7. Medically Unlikely Edits

INTRODUCTION

     8. The question of whether a provider’s charges are reasonable arises when there is no contract between a provider and a payor setting a negotiated rate for a service (i.e., out-of- network providers), or when there is no fee schedule set by a statute or rule (e.g., Medicaid, Medicare, and workers’ compensation). This paper documents ongoing research by RPC on methods of determining the reasonableness of healthcare providers’ charges. RPC based the opinions expressed in this paper on information available at the time of writing. Should additional information become available, we may modify the opinions expressed.1

     9. This paper identifies and discusses industry standards for what charge percentile threshold state laws and private health plans consider reasonable to determine allowable amounts for payment. The term “allowable amount” refers to the total amount a regulation or private health plan determines a provider should be paid. It is the sum of the payment responsibilities of the plan and the patient.

     10. The industry standard for the reasonable range of percentiles at which to determine the allowed amount when paying using the UCR method is from the 75th to the 80th percentile. RPC found many state governments and private health plans adopt the 75th or 80th charge percentile as the threshold for the maximum reasonable charge in a medical market. RPC uses the 80th percentile as the threshold when data are available to that percentile value and the 75th percentile when we must rely on publications that do not publish the 80th percentile value.

     11. For some services, the data do not permit looking up or calculating reasonable percentile values. For these services RPC uses other data and other methods to determine reasonable charges as exceptions to our usual procedure.

     12. This paper cites many web pages that document definitions and document payment policies of health plans and regulations of state and federal governments. Web pages can change at any time. The citations were accurate at the time of writing. RPC maintains printed copies of the web pages as they appeared at the time of writing.

DEFINITIONS

     13. Although some organizations and publications use the terms “usual and customary” (“UC”) and “usual customary and reasonable” (“UCR”) interchangeably, these two terms have distinct meanings as used herein.

Usual and Customary (“UC”) Charges

     14. “Usual and customary charges” are the charges on a provider’s chargemaster. A chargemaster is a comprehensive list of charges unilaterally established by a provider that apply to all patients, without regard to the expected source of payment. While a provider can change its chargemaster at any time, on any day the provider charges all patients receiving service the same amount.2 Usual and customary charges are usually more than the amounts providers accept as payment in full from the patient and other payors.3 Put briefly, UC charges are a provider’s standard charges for given services, which together make up the provider’s chargemaster.

Billed Charges

     15. “Billed Charges” are the charges, determined by a provider, and submitted to the patient or payor for payment. Billed charges are assumed to be UC charges. These charges are not the result of negotiation, discounting, or adjustment by private health plans or by government regulation. These charges are set unilaterally by providers. Patients rarely know what billed charges will be when receiving the service, and the submission of a bill by a provider does not by itself reflect any agreement that the patient or payor will pay full billed charges. Generally, most providers accept as payment-in-full less than full billed charges for most patients.

Usual, Customary, and Reasonable Charges

     16. A “Usual, customary and reasonable,” charge is a provider’s charge for a service less than or equal to a charge percentile threshold for that service in the medical market where the service was delivered. The threshold may be set by state law. In the absence of state law, a private health plan may set a threshold, which may or may not be accepted by providers.

     17. The term “UCR” is sometimes used imprecisely in the healthcare industry. The Physicians’ Fee Reference software program explains that each private health plan has its own policies on payment limits, and they often refer to these limits as Usual, Customary and Reasonable, or UCR.4 However, this does not mean those limits were established using the UCR charge method explained in this paper. Similarly, FAIR Health explains on its FAQ page that while their UCR data may be used by insurers to determine UCR rates or out-of-network reimbursement rates, FAIR Health’s UCR data is not the same thing as an insurer’s internal determination of UCR based on its policies.5 HealthCare.gov defines the term as “the amount paid for a medical service in a geographic area based on what providers in the area usually charge for the same or similar medical service.” The UCR amount sometimes is used to determine the allowed amount.6 In this paper RPC uses the term “UCR charge” only to mean a charge less than or equal to a charge percentile threshold.

     18. The acronym “UCR” sometimes stands for “usual and customary rate.” The term “rate” refers to the allowed amount paid under a provider contract, a health plan’s policies and procedures, or government regulation. In this paper RPC uses “UCR” only to stand for a Usual, Customary, and Reasonable charge.

Allowable Amount

     19. “Allowable amount” is the total amount a public or private health plan determines a provider should be paid for a service. It is the sum of the amount the health plan will pay plus the patient’s responsibility under the plan. Subject to any state regulation, each private health plan sets its own allowable amount for a particular area. A private health plan may determine the allowable amount as a percentage of billed charges, as a percentage of the Medicare payment amount, or as a mathematical function of its negotiated rates. Those methods of determining allowable amounts are not determining UCR charges.

RPC’s UCR Charges

     20. RPC determined the percentile thresholds for UCR charges based on a broad review of state laws and private health plans. The industry standard for the reasonable range of percentiles at which to determine the allowed amount when paying using the UCR method is from the 75th to the 80th percentile, The threshold percentile for the upper bound of the UCR charge for a service may be found in state or federal regulations, in an ERISA plan description, in the internal policies of a health plan, or through a dispute resolution process. The 80th percentile of billed charges is most frequently used as the UCR percentile threshold, as described below.

Definitions of Various Medical Code Sets Used in Calculating UCR

Common Procedural Terminology Codes

     21. Common Procedural Terminology (“CPT”) codes are licensed and maintained by the American Medical Association.7 CPT codes are five-digit codes assigned to medical services and procedures. Each code has a narrative description. CPT coding is required for all claims filed with the federal government and is accepted or required by all other third-party payors.

Health Care Procedure Coding System Codes

     22. Health Care Procedure Coding System (“HCPCS”) codes are five-character alphanumeric codes maintained by CMS. CPT codes are a subset of HCPCS codes, called Level I codes. Each code has a narrative description. HCPCS also contains Level II codes which cover supplies, services, materials, and injections not included in the Level I CPT codes. These codes are available on the CMS web site.8

Diagnosis Related Group Codes

     23. Diagnosis Related Group, or DRG codes, are used to identify inpatient hospital admissions. Admissions with the same DRG are for similar diagnoses, include similar procedures, and generally have the same costs to hospitals. The most commonly used DRG code set is the Medicare Severity Diagnosis Related Group (“MS-DRG”). MS-DRGs are maintained by CMS, and are available on the CMS website.9

ICD 10 Procedure and Diagnosis Codes

     24. International Classification of Diseases and Health Related Problems Version 10, or ICD 10 Codes, are three- to seven-digit code sets used to identify highly-detailed diagnoses and medical procedures. These codes are used in assigning inpatient DRGs, and ICD 10 procedure codes can be used to identify the primary surgical procedure in an outpatient setting. ICD is a code system maintained by the World Health Organization. CMS, in conjunction with the National Center for Health Statistics, created a modified system called ICD-10 Clinical Modification, which is used in the United States. When RPC methodology uses ICD-10 codes, this refers to the ICD-10 Clinical Modification set. ICD-10 codes are available, free, from the CMS website.10

Definition of Percentiles and How They are Determined

     25. Percentiles of charges are calculated based on provider charges with no discounts or adjustments. The sources referenced in this paper define the UCR charge for a service as the charge amount that falls at a certain percentile rank in a geographic area. A percentile rank is a number between zero and one hundred that indicates the percent of the observations in a group below it, excluding any observation exactly at the percentile rank. To determine the percentile distribution of a set of numbers, we sort the observations from the lowest number to the highest number. We then review the resulting distribution of numbers to determine the percentile rank of each number. If there are 13 numbers, the number ranked 7th highest is the 50th percentile value, as half of the other 12 numbers are less than the 7th number and half are greater than the 7th number, as shown in the example below.11 For the number representing the 25th percentile value, 25% of the other numbers should be less than it and 75% should be greater than it. In the example below, this occurs at the 4th number in the ranking.

...To continue reading article and footnotes, download PDF version.


Research & Planning Consultants, LP, has been assisting clients with expert services for over 45 years, including consulting and expert witness testimony for personal injury, healthcare litigation, commercial litigation and Certificate of Need matters. RPC also offers a wide selection of health data. They have served clients across the U.S, from Alaska to Florida and from New England to California.

Ronald T. Luke, JD, PhD, is a principal consultant and President of RPC, LP. Ron joined RPC in 1976 and became its president and principal owner in 1979. He has consulted on projects for health care providers, managed care plans and public agencies in more than 25 states. He also serves as an expert witness in trials, administrative proceedings and legislative hearings.

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