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Testimony on Private Contracting in Medicare by Nancy-Ann Min DeParle
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Finance Committee
February 26, 1998


Mr. Chairman, and other Members of this Committee, I appreciate the opportunity to be here today to discuss the issue of private contracts between Medicare beneficiaries and their doctors. As you know, the bipartisan Balanced Budget Act of 1997 included a provision that allows physicians to contract privately with Medicare beneficiaries. There are a number of misconceptions surrounding this issue, and I hope my testimony will help clear up some of the confusion.

Today, I will summarize the law related to private contracts; address several misconceptions about private contracts and Medicare; and discuss principles by which I believe alternatives to the Balanced Budget Act private contract provision should be evaluated. Our goal is to assure fair and equitable payments to physicians within a framework that guarantees affordable and accessible health care to beneficiaries.


Under section 4507 of the Balanced Budget Act, a private contract is an agreement between a Medicare beneficiary and a physician in which the beneficiary agrees to pay fully out-of-pocket for a Medicare-covered service. The beneficiary and physician agree not to submit a claim to Medicare, even though the service would be covered if a claim were submitted. The beneficiary pays the physician's charge entirely out of personal funds and Medicare does not pay any part of the charge, Medicare protections, such as limitations on the physician's ability to charge the beneficiary more than Medicare's fee schedule, do not apply.

A private contract exempts a physician from two statutory billing requirements: (1) the claims submission provision, which requires physicians to complete and submit claims to Medicare, and (2) balance billing limits, which limit the amount a physician can charge a beneficiary above the Medicare fee schedule. The significance of these two billing requirements merits discussion in greater detail.

Claim Submission: Since September 1, 1990, the Medicare law has required that, for items or services covered under Part B of Medicare, a physician, supplier or other person must complete a claim form and submit it to Medicare on behalf of a beneficiary. Congress enacted the claims submission requirement as part of the physician payment reform legislation in 1989 for two key reasons: (1) to facilitate assessment of physician performance under the Physician Volume Performance Standard System, and (2) as a service to beneficiaries who would sometimes "shoe- box" claims and inadvertently forget to send them to Medicare. The private contracting provision exempts physicians from this requirement. Under a private contract, both the beneficiary and physician agree not to submit a claim to Medicare.

Balance Billing Limits:

When Congress enacted limits on Medicare payments in l984, it included limits on how much physicians could bill beneficiaries. Since that time, beneficiary financial protections have been part of every legislated change in Medicare physician payments. These protections were designed to prevent physicians from passing on legislated payment reductions to beneficiaries through excess charges. When limits on physician charges to beneficiaries were initiated, Senator Dole, then Chairman of this Committee, explained: "Needless to say, there has been a great deal of concern about how physicians can be prevented from shifting the burden of such a freeze to beneficiaries. Simply freezing what we pay for physician services provides little protection to program beneficiaries." Senator Dole expressed concern that "If a physician does not elect to take assignment, beneficiaries can be held responsible for the full difference between what the program pays and what the physician charges." For that reason, Congress enacted limits on how much a physician can charge a beneficiary: these limits are called "balance billing limits."

The Balanced Budget Act of 1997

The Balanced Budget Act included a provision that allows physicians and beneficiaries to privately contract for Medicare-covered services. Under the new law, physicians can privately contract with Medicare beneficiaries only when specific requirements are met. The bipartisan Balanced Budget Act requires that private contracts be written, not oral, and must be signed by the beneficiary before any item or service is furnished under the contract. It cannot be signed by the beneficiary when an emergency or urgent service is needed and must contain specific elements to assure that beneficiaries understand and consent to the private contract. Physicians and beneficiaries must also agree not to submit a claim to Medicare and acknowledge that Medicare will not make any payment. This provision helps ensure that the beneficiary willingly and knowingly enters into a private contract.

Physicians who choose to provide covered services to Medicare beneficiaries under private contracts must "opt out" of the Medicare program for two years. During this two-year period, Medicare does not pay the physician either directly or on a capitated basis for any covered services provided to Medicare beneficiaries. A physician must treat all Medicare beneficiaries in the same way; the physician cannot choose to privately contract with some Medicare beneficiaries but not others, and for some services and not others.

Requiring a physician who chooses private contracting to opt out for a finite period has two key policy implications. First, it diminishes the opportunities for fraud and abuse. Because physicians would have to notify Medicare that they are opting out for a finite period of time, the Medicare carrier would know who those physicians were, and could then ensure that no Medicare payments were made to them. Second, having a physician opt out for a specific period of time allows a beneficiary to make an informed choice of physician. In this way, the beneficiary could choose a physician, before seeking care, based on knowledge of whether the physician would accept Medicare payment or would require private contracts for all services. If a physician were allowed to opt out for some services or beneficiaries but not all, a beneficiary would not know from one visit to the next whether he or she will have to pay out-of-pocket, or whether Medicare would pay.

Misconceptions about Private Contracts

There has been substantial misunderstanding about what section 4507 of the Balanced Budget Act does, so I would like to clarify several major points. The confusion rests predominantly on four issues: who is affected by Medicare rules; when Medicare beneficiaries can pay out-of-pocket for services not covered by Medicare; what advance beneficiary notices (ABNS) are; and other beneficiary choice issues. I will also address the situation with respect to Medicare managed care.

Who Is Affected by Medicare Rules?

Medicare rules apply only to individuals enrolled in Medicare. Part B of Medicare, which covers physician services, is a voluntary program and beneficiaries choose to enroll and they can disenroll at any point. Medicare Part B rules do not apply to individuals or disabled persons who are eligible for Medicare, but not enrolled in Part B. Medicare rules do not apply to physicians' or practitioners' treatment of patients who are not enrolled in Medicare. Therefore, a private contract is not necessary for a physician to provide services to an individual who is Medicare-eligible, but who is not enrolled in Part B of the program.

Beneficiary Payment for Services Not Reimbursed by Medicare

There has been substantial confusion over the issue of what services beneficiaries can, and cannot, pay for with their own funds. Let me clarify the situation.

Medicare rules apply only to services covered by Medicare. Medicare beneficiaries can, and in fact must, pay out of their own funds or have other sources of insurance for services that Medicare does not cover. Medicare covers about half of the elderly's health expenses, and Congress determines what services are covered. Examples of services that Medicare does not cover include cosmetic surgery, hearing aids, routine physical exams, outpatient prescription drugs and long term nursing home care. If Medicare doesn't cover a service, no private contract is needed, and physicians are not limited in what they can charge. The Balanced Budget Act provision on private contracts did not change this aspect of Medicare. A physician does not have to opt out of Medicare for two years in order to provide a non-covered service to a Medicare beneficiary. That was the law a year ago; it's still the law today.

The law requires that Medicare pay only for medically necessary services which requires judgments about the type and quantity of services that are medically necessary. For example, Medicare may determine that one physician visit per month to a nursing home resident would be medically necessary (absent other medical complications) and would pay for one such visit. However, a Medicare beneficiary who wanted more frequent visits (absent medical complications) could pay for them out of his or her own funds, even though the carrier determined the additional visits not to be reasonable and necessary.

A private contract is not necessary to provide these more frequent visits; a physician who remains in Medicare can still provide these services to beneficiaries. In such a case, the physician files a claim with Medicare and provides the beneficiary with an "Advance Beneficiary Notice" (ABN) stating that the service may not be covered by Medicare and the beneficiary agrees to pay for the service if Medicare doesn't pay. Again, the Balanced Budget Act did not change this aspect of Medicare.

There has also been extensive misinformation about whether a beneficiary can pay for certain types of preventive services. Let me explain the situation using prostate specific antigen tests (PSAs) as an example. These are laboratory tests for which a physician generally draws the blood specimen and sends it to an independent laboratory to perform the test.

Today, Medicare coverage of the PSA test depends on whether it is a diagnostic or a screening service. A diagnostic test is performed to evaluate a sign or symptom that a physician finds in a particular patient, whereas a screening test is performed for patients across the board without regard to a symptom experienced by a particular patient. Medicare currently covers diagnostic PSA tests only. The Balanced Budget Act legislated coverage of screening PSA tests beginning in 2000. Until then, screening PSAs are not covered services and beneficiaries can pay for them out of their own funds as with any other non-covered service. Therefore, a private contract is not needed when a beneficiary wants a PSA test for screening purposes because it is not now a covered service.

If a physician believes a diagnostic PSA test is medically necessary, then Medicare will pay for it. If the beneficiary wants a screening PSA, he may pay for it out of his own funds. He does not need a private contract. If the physician believes that Medicare is likely to deny payment for a certain diagnostic PSA (for example, when the patient wants to have the test more frequently than Medicare would likely pay for), then the physician should use an ABN. The Balanced Budget Act does not preclude a beneficiary from obtaining, or a physician from providing, a diagnostic or screening PSA test.

The Advance Beneficiary Notice

An Advance Beneficiary Notice (ABN) allows a beneficiary to make an informed consumer decision by knowing in advance that they may have to pay out-of-pocket for a service. An ABN is used by a physician who believes that a service, which Medicare covers under some circumstances, may not be paid for by Medicare in a particular case. The physician provides the beneficiary a written notice, before the service is rendered, indicating this fact and explaining why denial is expected. A beneficiary agrees to pay for the service if Medicare does not pay for it. If a physician does not use this mechanism, the statute generally does not allow the physician to collect payment from the beneficiary. The physician sends the claim to Medicare to determine whether payment will be made. If Medicare does not make payment, then the beneficiary is responsible for paying.

There has been some confusion about Advance Beneficiary Notices and their relationship to private contracts. An ABN is not a private contract. An ABN is used when the physician believes that Medicare likely will not make payment, while private contracts are used for services that are covered by Medicare and where payment would be made if the physician were in Medicare and a claim were submitted. Therefore, a physician using an ABN remains in Medicare, while a physician using a private contract for services covered by Medicare would voluntarily opt out.

I understand that some physicians have expressed concern that widespread use of ABNs is not an acceptable practice. We are concerned that ABNs may be misunderstood by beneficiaries and the medical profession. We will be working with these groups to improve ABNs to make them easier to use, and to assure that there is a better understanding of what they are and how they are to be used.

Beneficiary Choices

A beneficiary may choose, on a "service-by-service" basis, to see any physician whether the physician remains in, or opts out, of Medicare. In the former case, Medicare would pay for the services while the beneficiary would pay out of their own pocket for the services in the latter case.

A beneficiary may, in some situations, refuse to authorize the release of medical information needed to submit a claim. In this case, a physician who remains in Medicare does not have to submit a claim for a covered service provided to a Medicare beneficiary. Examples would be when the beneficiary does not want information about mental illness or HIV/AIDS to be disclosed to anyone. I want to clarify that a physician will not be subject to penalties for Failing to submit a claim if the beneficiary refuses to authorize release of the medical information needed to submit the claim. The Balanced Budget Act did not change this aspect of Medicare. It was the law a year ago, and it is still the law today.

Managed Care Plans

There has been confusion about whether the private contracting provision applies to a beneficiary who is enrolled in a Medicare risk-based managed plan and goes out of plan to acquire a service. In general, Medicare's relationship with a beneficiary enrolled in a managed care plan is significantly different from Medicare's relationship with a beneficiary in Medicare fee-for-service. My previous discussion of private contracting pertained to Medicare fee-for-service. Beneficiaries enrolling in managed care plans agree to obtain all of their services through the plan, which is the only entity authorized to receive Medicare payment for services provided to these enrollees. Thus, these beneficiaries receive services only from physicians affiliated with that plan. In contrast, in Medicare fee-for-service, beneficiaries can receive covered services from any qualified provider who meets minimum program requirements and renders such services.

If a beneficiary who is enrolled in a managed care plans receives a service from a physician who does not have a contract with the plan, and the service is not authorized by the plan, then the service is not a "covered service". In that case, neither the managed care plan nor Medicare pays the physician or reimburses the beneficiary. The service can be provided at the fee agreed upon between the physician and the beneficiary and a private contract is not necessary in order to provide the service. The physician does not have to opt-out of Medicare for two years under the private contract provision in order to provide this service.


Senator Kyl and Representative Archer have proposed legislation, the Medicare Beneficiary Freedom to Contract Act (S. 1194/H. 2497, hereafter S. 1194), to expand opportunities for physicians and practitioners to privately contract with Medicare beneficiaries. The bill would eliminate the requirement that physicians opt out of Medicare for two years in order to privately contract and would allow them to contract privately with beneficiaries on a patient-by-patient and service-by-service basis. For example, a physician could accept Medicare payment to diagnose a problem, then require the beneficiary to enter into a private contract and pay out-of-pocket to treat the same problem.

Principles to Evaluate Alternative Approaches

Any private contracting provision must strike a balance between expanding physicians' ability to charge higher fees and protecting the Medicare program and beneficiaries. We believe that section 4507 struck the proper balance. Any proposal to expand private contracting and relax the beneficiary protections in current law should be judged by the following four principles:

Does the proposal minimize the potential for fraud and abuse?
Does it promote the ability of beneficiaries to make informed choices?
Does it provide stable and predictable financial protection for beneficiaries?
Does it promote access to high quality care, regardless of ability to pay?

I will evaluate S. 1194 according to these principles.

Reducing the Potential for Fraud and abuse

Reducing fraud, waste and abuse in Medicare must be one of our highest priorities. This includes being watchful that we do not provide any new opportunities for fraud and abuse. Therefore, a key principle to evaluate any new Medicare proposal is whether is would encourage, or discourage, fraud and abuse.

Under current law physicians are required to notify Medicare of their decision to opt out. Since the opt out is for a finite period, Medicare carriers can identify those physicians and therefore prevent double billing (i.e., billing both the beneficiary and Medicare). The problem is that under S. 1194, Medicare would not know which claims were the subject of a private contract and thus would not be able to deny payment for such claims with certainty. This is not to say that we expect all physicians to submit claims for services where private contracts are used, but even if their offices do so inadvertently, Medicare carriers would not be able to deny payment. An inability to enforce rules creates an environment where fraud, abuse, and double billing could become more pervasive. As the Congressional Budget Office pointed out in analyzing S. 1194: "HCFA's efforts to screen inappropriate or fraudulent claims could be significantly compromised."

It has been suggested that HCFA could use the authority of "the minimal information necessary" in S. 1194 to require physicians to submit a "no-pay claim", which is a claim that contains much the same information as a normal claim for reimbursement and indicates that a private contract was used. Even with a "no-pay claims" approach, our experience is that these claims are generally under reported. And if claims are submitted without private contract identification, it would not be possible for Medicare to deny payment. As such, we are concerned that the new proposal would encourage fraud and abuse and undermine our efforts to improve program integrity.

Furthermore, Medicare's capitated payments to managed care organizations include payment for physicians' services. S. 1194 would allow a physician who is a member of a managed care network to privately contract with a beneficiary who is a member of that managed care plan. This feature would result in overpayments to managed care plans since they would not have to compensate the physician for the privately contracted services. In addition, it could encourage fraud and abuse to the extent that managed care plans encourage physicians in their network to use private contracts.

Promoting the Ability of Beneficiaries to Make Informed Choices

Medicare should also enhance the ability of beneficiaries to make informed choices. This was one of the objectives of the new Medicare + Choice program reforms in the Balanced Budget Act.

Requiring a physician who chooses to enter into private contracts to opt out of Medicare for a finite period of time facilitates this goal. Knowing a physician's decision about opting-out of Medicare is important information that allows a beneficiary to make an informed decision about his financial liability when seeking a physician's services. For example, if a physician opted out, a beneficiary would have an opportunity to know this in advance and would be aware that he would be responsible for the entire cost of the physician's services for at least two years. Under the Balanced Budget Act, the beneficiary can know the potential liability by simply inquiring whether the physician accepts Medicare or has opted out of Medicare.

Under the new bill, physicians would be allowed to pick and choose which beneficiaries and which services to bill under private contracts, and which to bill under Medicare. Therefore, the new bill makes it more difficult for a beneficiary to choose a physician. The new bill creates uncertainty about whether a physician will accept Medicare or will require private contracts for each Medicare covered service. In cases where a physician privately contracts for some services, but not others, a substantial potential exists for beneficiaries to misunderstand the extent of their liability, with many Beneficiaries finding out, after the fact, that they are liable for a large portion of their medical bills.

And, private contracting, on a claim-by-claim basis, changes the nature of the physician-patient relationship. The new bill makes it easier for a private contract to be the result of coercion rather than beneficiary freedom of choice. Consider, for example, the situation faced by a Medicare beneficiary who has a longstanding relationship with her doctor and then develops breast cancer. The doctor may say he will treat her under a private contract, and she may feel she has no choice but to accept that arrangement and forego Medicare reimbursement. While some argue that the beneficiary has the freedom of choice to switch physicians, that choice can be hollow indeed, under these circumstances.

Providing Stable and Predictable Financial Protection for Beneficiaries

Medicare was designed to provide financial protection to beneficiaries against the high cost of illness. To expand private contracts potentially erodes the financial protection that Medicare provides to beneficiaries precisely when they need it most, that is, when they are sick and in need of the services Medicare provides. Beneficiaries who encounter numerous physicians requiring private contracts and out-of-pocket payments for Medicare-covered services would find the Medicare premium a wasted payment. Private contracts would make Medicare effectively meaningless for those beneficiaries.

Promoting Access to Care, Regardless of Ability to Pay

Medicare was also designed to help beneficiaries obtain access to care. We and the Physician Payment Review Commission (PPRC) have studied Medicare beneficiary access to care, and particularly monitored it after the Medicare physician fee schedule was implemented. While there may be long-standing differences in use among groups or areas, and while there may be problems with access in particular areas or specialties, we and PPRC have found no overall problems with access to care. In 1996, 96 percent of physicians reported having some Medicare patients. And in 1996, of physicians who treated Medicare patients, assignment was accepted for 96 percent of the dollar value of services, meaning physicians were willing to accept Medicare payment rates as payment-in-full. If the concern is that Medicare does not compensate physicians fairly, then we should work together to address that problem. We should not place beneficiaries in situations where they have to renounce the Medicare coverage for which they have paid in order to obtain a service.

Like Social Security, Medicare has been enormously successful. It has literally changed what it means to be old or disabled in America, moving millions of older people out of poverty and alleviating their fears that a medical crisis would lead to financial devastation. And one of the reasons it has been so successful is because it treats everyone the same --- all Medicare beneficiaries can get the medical care they need and have earned, regardless of ability to pay.

The new proposal would allow certain physicians to provide preferential treatment to higher income and middle-income Medicare beneficiaries because they could pay out of their own pockets for services. This would undermine Medicare as a social insurance program and turn it into a program with two classes of care. In some areas or some specialties, it might become difficult for low income beneficiaries to receive access to care.


The private contracting issue requires a balance between allowing physicians increased flexibility to charge higher fees and protecting Medicare beneficiaries. The Administration opposed the original private contract provision in the Senate bill, but agreed to the Balanced Budget Act provision because it appeared to strike an acceptable balance between the two objectives. We have carefully studied S. 1194 and evaluated it against the principles outlined earlier in my testimony. I have also discussed these issues with Members of Congress, physicians, and with beneficiaries. While I know that the sponsors of S. 1194 are sincere in wanting to improve upon the Balanced Budget Act, I do not believe that S. 1194 achieves that goal and therefore cannot support a change in the law.

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