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
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
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
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
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
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.
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
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.
PROPOSED PRIVATE CONTRACTING LEGISLATION
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
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
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
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.