42 C.F.R. § 405.504 : Public Health — CENTERS FOR MEDICARE & MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES — MEDICARE PROGRAM — FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED — CRITERIA FOR DETERMINING REASONABLE CHARGES — Determining prevailing charges

(a) Ranges of charges.
(1) In the case of physicians' services furnished beginning January 1, 1987, the prevailing charges for a nonparticipating physician as defined in this paragraph will be no higher than the same level that was set for services furnished during the previous calendar year for a physician who was a participating physician during that year. A nonparticipating physician is a physician who has not entered into an agreement with the Medicare program to accept payment on an assignment-related basis (in accordance with §424.55 of this chapter) for all items and services furnished to individuals enrolled under Part B of Medicare during a given calendar year.
(2) No charge for Part B medical or other health services may be considered to be reasonable if it exceeds the higher of:
(i) The prevailing charge for similar services in the same locality in effect on December 31, 1970, provided such prevailing charge had been found acceptable by CMS; or
(ii) The prevailing charge that, on the basis of statistical data and methodology acceptable to CMS, would cover:
(A) 75 percent of the customary charges made for similar services in the same locality during the 12-month period of July 1 through June 30 preceding the fee screen year (January 1 through December 31) in which the service was furnished; or
(B) In the case of services furnished more than 12 months before the beginning of the fee screen year (January 1 through December 31) in which the claim or request for payment is submitted, 75 percent of the customary charges made for similar services in the same locality during the 12 month period of July 1 through June 30 preceding the fee screen year that ends immediately preceding the fee screen year in which the claim or request for payment is submitted.
(3)
(i) In the case of physicians' services, furnished before January 1, 1992, each prevailing charge in each locality may not exceed the prevailing charge determined for the FY ending June 30, 1973 (without reference to the adjustments made in accordance with the economic stabilization program then in effect), except on the basis of appropriate economic index data that demonstrate the higher prevailing charge level is justified by:
(A) Changes in general earnings levels of workers that are attributable to factors other than increases in their productivity; and
(B) changes in expenses of the kind incurred by physicians in office practice. The office-expense component and the earnings component of such index shall be given the relative weights shown in data on self-employed physicians' gross incomes.

Example. The available data indicate the office-expense and earnings components of the index should be given relative weights of 40 percent and 60 percent, respectively, and it is calculated that the aggregate increase in expenses of practice for a particular July through June period was 112 percent over the expenses of practice for calendar year 1971 and the increase in earnings (less increases in workers' productivity was 110 percent over the earnings for calendar year 1971. The allowable increase in any prevailing charge that could be recognized during the next fee screen year would be 110.8 percent ((.40 x 112) + (.60) x 110) = 110.8) above the prevailing charge recognized for fiscal year 1973.

(ii)
(A) If the increase in the prevailing charge in a locality for a particular physician service resulting from an aggregate increase in customary charges for that service does not exceed the index determined under paragraph (a)(3)(i) of this section, the increase is permitted and any portion of the allowable increase not used is carried forward and is a basis for justifying increases in that prevailing charge in the future. However, if the increase in the prevailing charge exceeds the allowable increase, the increase will be reduced to the allowable amount. Further increases will be justified only to the degree that they do not exceed further rises in the economic index. The prevailing charge for physicians' services furnished during the 15-month period beginning July 1, 1984 may not exceed the prevailing charge for physicians' services in effect for the 12-month period beginning July 1, 1983. The increase in prevailing charges for physicians' services for subsequent fee screen years similarly may not reflect the rise in the economic index that would have otherwise been provided for the period beginning July 1, 1984, and must be treated as having fully provided for the rise in the economic index which would have been otherwise taken into account.
(B) Notwithstanding the provisions of paragraphs (a)(3)(i) and (ii)(A) of this section, the prevailing charge in the case of a physician service in a particular locality determined pursuant to paragraphs (a)(2) and (3)(i) of this section for the fiscal year beginning July 1, 1975, and for any subsequent fee screen years, if lower than the prevailing charge for the fiscal year ending June 30, 1975, by reason of the application of economic index data, must be raised to such prevailing charge which was in effect for the fiscal year ending June 30, 1975. (If the amount paid on any claim processed by a carrier after the original reasonable charge update for the fiscal year beginning July 1, 1975, and prior to the adjustments required by the preceding sentence, was at least $1 less than the amount due pursuant to the preceding sentence, the difference between the amount previously paid and the amount due shall be paid within 6 months after December 31, 1975; however, no payment shall be made on any claim where the difference between the amount previously and the amount due shall be paid within 6 months after December 31, 1975; however, no payment shall be made on any claim where the difference between the amount previously paid and the amount due is less than $1.)
(iii) If, for any reason, a prevailing charge for a service in a locality has no precise counterpart in the carrier's charge data for calendar year 1971 (the data on which the prevailing charge calculations for fiscal year 1973 were based), the limit on the prevailing charge will be estimated, on the basis of data and methodology acceptable to CMS, to seek to produce the effect intended by the economic index criterion. The allowance or reduction of an increase in a prevailing charge for any individual medical item or service may affect the allowance or reduction of an increase in the prevailing charges for other items or services if, for example, the limit on the prevailing charge is estimated, or if the prevailing charges for more than one item or service are established through the use of a relative value schedule and dollar conversion factors.
(b) Variation in range of prevailing charges. The range of prevailing charges in a locality may be different for physicians or other persons who engage in a specialty practice or service than for others. Existing differentials in the level of charges between different kinds of practice or service could, in some localities, lead to the development of more than one range of prevailing charges for application by the carrier in its determinations of reasonable charges. Carrier decisions in this respect should be responsive to the existing patterns of charges by physicians and other persons who render covered services, and should establish differentials in the levels of charges between different kinds of practice or service only where in accord with such patterns.
(c) Re-evaluation and adjustment of prevailing charges. Determinations of prevailing charges by the carrier are to be re-evaluated and adjusted from time to time on the basis of factual information about the charges made by physicians and other persons to the public in general. This information should be obtained from all possible sources including a carrier's experience with its own programs as well as with the supplementary medical insurance program.
(d) Computation and issuance of the MEI after CY 1992-
(1) For update years after CY 1992, the MEI is a physician input price index, in which the annual percent changes for the direct-labor price components are adjusted by an annual percent change in a 10-year moving average index of labor productivity in the nonfarm business sector.
(2) The MEI is constructed, using as a base year, CY 1989 weights and annual percent changes in the economic price proxies as shown on the following chart:

MEDICARE ECONOMIC INDEX EXPENDITURE CATEGORIES, WEIGHTS, AND PRICE PROXIES

Expense category 1989 weights1 2 (percent) Price proxy3
Total 100.0
1. Physician's Own Time (net income, general earnings) 54.2
a. Wages and Salaries 45.3 Average hourly earnings, total private non-farm.4
b. Fringe Benefits 8.8 Employment Cost Index, fringe benefits, private non-farm.4
2. Physician Practice Expense 45.8
a. Non-physician Employee Compensation 16.3
(1) Wages and Salaries 13.8 Employment Cost Index, wages and salaries weighted for occupational mix of non-physician employees.4
(2) Fringe Benefits 2.5 Employment Cost Index, fringe benefits, white collar.4
b. Office Expense 10.3 CPI-U, housing.
c. Medical Materials and Supplies 5.2 PPI, ethical drugs; PPI, surgical appliances and supplies; and CPI-U medical equipment and supplies (equally weighted).
d. Professional Liability Insurance 4.8 CMS survey of change in average liability premiums for $100,000/$300,000 liability coverage among 9 major insurers.
e. Medical Equipment 2.3 PPI, medical instruments and equipment.
f. Other Professional Expense 6.9
(1) Professional Car 1.4 CPI-U, private transportation.
(2) Other 5.5 CPI-U, all items less food and energy.

1Sources: Martin L. Gonzalez, ed.: Physician Marketplace Statistics, Fall, 1990. Center for Health Policy Research, Chicago, American Medical Association, 1990; Mark Holoweiko, "Practice Expenses Take the Leap of the Decade," Medical Economics, November 12, 1990; and CMS, OACT special study.

2Due to rounding, weights may not sum to 100.0%

3All price proxies are for annual percent changes for the 12 months ending June 30th.

4Annual percent change values for Physicians' Own Time and Non-physician Employee Compensation are net of the change in the 10-year moving average of output per man-hour to exclude changes in non-farm business sector labor productivity.

(3) If there is no methodological change, CMS publishes a notice in the FEDERAL REGISTER to announce the annual increase in the MEI before the beginning of the update year to which it applies. If there are changes in the base year weights or price proxies, or if there are any other MEI methodological changes, they are published in the FEDERAL REGISTER with an opportunity for public comment.

42 C.F.R. §405.504

32 FR 12600, 8/31/1967, as amended at 40 FR 25447, 6/16/1975; 42 FR 18275, 4/6/1977. Redesignated at 42 FR 52826, 9/30/1977, as amended at 43 FR 4430, 2/2/1978; 47 FR 63274, 12/31/1982; 51 FR 34978, 10/1/1986; 53 FR 6648, 3/2/1988; 57 FR 55912, 11/25/1992