One of the most interesting topics in liability claims handling is unraveling the mysterious concept of usual, customary, and reasonable (UCR) rates. It is essential for the claims professional to have a clear understanding of the past, present and future of this elusive concept.
In this article we will examine the application, rules and limitations of UCR with respect to third party liability, first party liability, personal injury protection (PIP) and MedPay applications. Our goal is to look at the operational practicality and to understand the role of this concept within the claims organization.
Definitions of Payment Methodologies.
Insurers pay medical bills in one of two ways, either through fee schedules, or through a repricing concept that has come to be known as usual, customary and reasonable, or simply as UCR.
Fee schedules can either be voluntary as with HMOs or PPOs, or governmentally mandated. Medical service providers who participate in Medicare-Medicaid for example receive a fixed fee for the services they provide that is set by the federal government. In the same manner, providers treating patients covered by State worker’s compensation and disability programs, or patients covered under a State No-Fault, PIP (Personal Injury Protection) mandate, also have their reimbursements limited to amounts authorized by State-mandated fee schedules. In addition when a medical service provider joins a PPO (preferred provider organization) or HMO (health maintenance organization) that provider agrees to accept the fee schedule set by the PPO or HMO.
UCR payments to medical service providers are used by insurers as a method of controlling and standardizing medical costs. In their simplest form, UCR payment schedules are determined from statistical analysis of prevailing charges among all providers within a given geographical area for a given service or procedure. An article by Michael Hood and Lane Wood in the Dallas Bar Association’s publication Headnotes, describes UCR pricing this way:
Few states define the terms “usual, customary and reasonable,” and even fewer have regulations on the methodology used to determine UCR charges. Typically, a UCR charge is defined as the general prevailing cost of that service by a majority of health providers of the same discipline within the same geographic area.
To determine UCR charges, insurers use health care billing information collected from privately owned databases….(Headnotes, March 2009, p8)
UCR History and Litigation
The development of the UCR concept was pioneered by the health insurance industry.
One of the initial steps in the evolution of physician payment in the United States was the development of usual, customary, and reasonable (UCR) fee schedules. The Blue Shield plans, which then provided the largest portion of physician insurance and operated with the support of local medical societies, collected information on what each physician charged for each service in a local area during the previous year. When a physician submitted a bill, it was checked to determine whether it was above his or her median charge for the same service the previous year (usual), above the 75th percentile of charges by all doctors in the area (customary), or justifiably higher because of a patient’s complicating secondary illness or another acceptable reason (reasonable). When Medicare was implemented in 1966, it adopted the Blue Shield UCR method of paying physicians. (Getzen, 2010, p.136)
After Medicare adopted the UCR pricing system other payers followed suit and UCR became the standard method used by the insurance industry in repricing medical bills. Because of increasing costs however, Medicare in the early 1990’s began a move away from the UCR based fee system and began reimbursing physicians using what is called a resource-based relative value scale (RBRVS). RBRVS was developed by a Harvard research group and basically relates the value of medical procedures to each other (based on time, skills required and other factors), assigns a dollar conversion factor along with a geographic factor to derive a formula which computes payments for specific services and procedures. (For more on the development and methodologies of the Medicare fee schedule system, see “The Medicare Fee Schedules – History, Development and Role” section of this article.)
While some insurance companies followed Medicare’s lead most continue to use a UCR – based reimbursement system. UCR has never been popular with medical providers or patients. Providers say that the methodology used to calculate UCR schedules is skewed in favor of payers and does not provide fair compensation for their services. Patients complain that when they go out of network, reimbursement rates are lower than in-network rates, and that they are left to pay the difference between what the insurer pays and the actual charges.
Those arguments got a big boost in 2009 when then NY Attorney General Andrew Cuomo announced a $50 million settlement with the nation’s second largest health insurer, UnitedHealthcare, regarding their ownership and operation of the Ingenix UCR database. Two days later Cuomo announced a $20 million settlement with Aetna, the nation’s third largest insurer, over their use of the Ingenix database. This was followed almost immediately by UnitedHealthcare agreeing to settle a class action lawsuit for $350 million, which had been brought by the American Medical Association, health plan members, health care providers and state medical societies.
The settlement of the lawsuit involving Ingenix, the United Healthcare unit that provides data used to set “usual and customary” charges for medical services, is at least on the surface a big step toward reducing uncertainty on the part of healthcare providers and patients about how charges are set, and who will be paying them….
The investigation by New York State Attorney General Andrew Cuomo revealed that the Ingenix database intentionally skewed usual and customary rates downward through faulty data collection, poor pooling procedures, and the lack of audits…
The investigation also revealed that having a health insurer determine the usual and customary rate, a large portion of which the insurer then reimburses, creates an incentive for the insurer to manipulate the rate downward…
Under the terms of the settlement, United Healthcare will fund the establishment of a new, independent database run by a nonprofit organization, which will develop data collection protocols and other methodologies used in connection with the database.
The nonprofit will also develop a Web site where consumers around the country can find out in advance how much they may be reimbursed for common out-of-network medical services in their area… (CBS Moneywatch, March 2009, p1)
A company called FAIR Health Inc. is the nonprofit organization that will develop the new UCR databases which will replace the UnitedHealthcare – Ingenix databases. FAIR Health was established in October 2009 and will serve as an independent, objective, and transparent source of healthcare reimbursement data for consumers, insurers, healthcare providers, researchers and policymakers. On the FAIR Health website the organization defines its mission as:
FAIR Health was established in response to New York State Attorney General Andrew Cuomo’s investigation into the insurance industry’s methods for determining reimbursement rates for patients who seek care from out-of-network providers. The investigation determined that such reimbursement policies were conflict-laden, potentially flawed, and opaque to patients seeking cost information…
In implementing its mission, FAIR Health is developing two types of data products. The first, the FAIR Health Consumer Cost Lookup, will be targeted to consumers and consists of a free, user-friendly website whereby patients can estimate the out-of-pocket expenses they will incur if they seek out-of-network care. FAIR Health’s second set of products will be targeted to payers, and will consist of licensed benchmarking tools that can be used to assist in their establishment of out-of-network reimbursement rates.
The foundation for all of FAIR Health’s products will be its national database of millions of de-identified healthcare claims. These claims are submitted directly to FAIR Health by insurers and other healthcare payers. In recognition of the groundbreaking contribution that FAIR Health’s claims database can make to research on the nation’s healthcare system, we intend to offer our data at modest cost to qualified researchers and policymakers studying health costs and care delivery…
For all of our data products, FAIR Health’s paramount goal is transparency and integrity. Stated simply, our aim is for our data to become a gold standard in reimbursement data. (FAIR Health Mission Statement as presented on the FAIR Health website – Jan, 2011)
As part of the agreement with New York, Ingenix has stopped marketing its UCR database products to new customers but will continue to issue normally schedule updates to its existing customers. Once FAIR Heath begins marketing its replacement UCR database modules, Ingenix will end its involvement with UCR database products entirely.
For the insurance industry the Ingenix settlement means that insurers may have to re-evaluate how they calculate UCR rates. Some insurers may simply switch to one of the competing UCR database products such as the Wasserman Physician Fee Reference, PFR, or they may choose to use the FAIR Health database when it becomes available. However some experts think that the Ingenix episode could lead to more fundamental changes. Doreen Corwin, director of network affairs for StrataCare Inc. notes that, “This may well cause payers and review companies to consider other options for defining reasonableness in payments based not on charge data but rather some percentage of a widely accepted payment methodology such as Medicare.” CBS Moneywatch – (March, 2009 p3)
UCR Use Within Mandated Coverage Systems (No Fault, Workers Comp)
State mandated insurance programs such as worker’s compensation and No-Fault Auto Insurance personal injury protection (PIP), will often employ medical reimbursement fee schedules that are based on the UCR concept. The fee schedules used by these programs are developed from various UCR databases – commercial, governmental and hybrids of both. States will mandate how fee schedules are developed, and from what sources they may be derived, within the applicable law governing the specific program to which they are to be applied. Just as with commercial insurers, states use UCR fee schedules to control medical costs and insure that providers adhere to treatment guidelines and billing practices consistent with the mandates of the program in which they are participating.
The Medicare Fee Schedules – History, Development and Role
Since its establishment in 1965 Medicare has become the largest single healthcare payer in the United States covering some 45.2 million people according to the 2009 Medicare Trustees Report. A 2009 Congressional Budget Office report noted that:
Federal spending for Medicare made up 21 percent of total health care expenditures in 2007, and federal and state spending for Medicaid, 16 percent. A variety of other public programs accounted for 10 percent of total spending. Such programs included those run by state and local governments’ health departments, the Department of Veterans Affairs, and the Department of Defense; workers’ compensation programs; and the Children’s Health Insurance Program. (CBO – The Long Term Budget Outlook, 2009)
When Medicare was first instituted it paid providers based upon their usual and customary charges as long as those charges were reasonable. It basically adopted the Blue Shield developed UCR fee schedules which were at the time, the standard method of payment for service providers. Medicare also allowed providers to bill Medicare enrollees directly and for any difference between their charges and Medicare reimbursement rates, (a practice known as balance billing.) In testimony before a House subcommittee in 2004, the head of the CBO noted the effects of this method of reimbursement:
The charge-based reimbursement system gave physicians the incentive to raise their charges from year to year to boost their revenues, and those increases led to a rate of growth in spending that averaged 13 percent annually from 1967 through 1974.
As concerns grew about the program’s rising costs, policymakers focused on restraining fees. In 1972, they mandated that the annual update to physicians’ fees be limited to the increase in the MEI, a provision that was implemented in 1975. (Douglas Holtz-Eakin, CBO Director, Testimony before the House subcommittee on Health, May 5, 2004, p2)
The Medicare Economic Index, MEI, adopted in 1975 was an attempt to limit the growth in fees for physician’s services. The MEI is essentially a measure of the prices for the resources needed to provide physician services. It was designed to provide a basis upon which to estimate the total costs required for an average physician to operate a medical practice.
The effort to control Medicare costs by tying provider fees to the MEI soon proved insufficient and Congress responded through the 1980’s with legislative fee freezes and specified increases:
Tying increases in fees to growth in the MEI was not sufficient to keep total payments from rising, however, and lawmakers took further steps to limit spending from 1984 through 1991. The Congress froze fees from 1984 through 1986; from 1987 through 1991, it raised them by amounts specified in legislation. The effect of those actions was that spending grew at an average annual rate of 15 percent from 1975 to 1991. (Douglas Holtz-Eakin, CBO Director, Testimony before the House subcommittee on Health, May 5, 2004, p3)
In 1992 an effort was made to control Medicare expenditures through the redistribution of payments based upon physician services provided. Analysts believed that the prior payment systems over compensated procedural services such as surgeries, at the expense of what they termed cognitive services such as office visits and consultations. The result was the implementation of the current RBRVS, Resource Based Relative Value Scale, fee schedule reimbursement system.
RBRVS is a listing of physician services with Relative Value Units, RVUs, assigned for each service. (Services are defined by their CPT codes.) RVU’s encompass three elements, physician work, practice expenses, and malpractice insurance. Components within each of these elements are weighted to reflect different costs, levels of expertise, etc. For example the RVU element for practice expenses varies with where the service is provided. If a physician provides a service within a hospital facility the practice expense value is less than if that physician provides that service within their own office. This accounts for office expenses, supplies, etc. Similar valuation occurs for the physician work element – for example a simple office visit has a higher value for a new patient than an established patient which reflects the additional work needed for assessing the patient through consultation, medical history etc. RVU’s also are adjusted for geographic variations in each of the three component elements using what are called geographic practice cost indexes, GPCIs.
The dollar value of an RVU is called the conversion factor and it is updated annually by the Centers for Medicare and Medicaid Services (CMS), through its Medical Payment Advisory Commission, MedPAC. The conversion factor is multiplied by the RVU to calculate the payment for a given service. The following representative formula was provided by the American Medical Association (note the approved conversion factor of $33.9764 for calendar year 2011) – (AMA website – The Medicare Physician Payment Schedule):
Work RVU x Work (GPCI)
+ Practice Expense (PE) RVU x PE GPCI
+ Malpractice (PLI) RVU x PLI GPCI
= Total RVU
x CY 2011 Conversion Factor of $33.9764
= Medicare Payment
Medicare, because of its sheer size has become a defacto baseline in the calculation of UCR rates for payers nationwide. In an article in the Spring 2002 issue of the Journal of Health Care Finance, author Paul L Grimaldi notes that, “Medicare’s conversion factor has served as the floor for other insurers physician fee schedules. The most notable exception is Medicaid, in which case Medicare’s conversion factor often serves as the ceiling.”
The fact that Medicare has become (as Grimaldi said) a “floor for other insurers physician fee schedules” means that two standards have emerged for calculating UCR rates. That fact, in combination with the payouts that many insurers were forced to make because of the Ingenix case, could conceivably cause more insurers to consider switching their UCR model to one based upon Medicare. Such a move could protect insurers against lawsuits similar to the one brought against Ingenix. It is not difficult to envision insurers using Medicare rates as a cap on UCR payments, for example capping UCR payment rates at 150% of the Medicare rate. By combining an insurer’s historical payment data with the Medicare physician fee schedule (such as is done by the unique methodology created by VMG), insurers can have both a consistent and defensible methodology that they can use in establishing their UCR rates.
Concept of Settlement and Medical Specials. – Third Party Liability Claim Process
It is true that cost containment of medical specials is vital to an insurer’s bottom line and that the proper use of a valid and defensible UCR based fee schedule is a key element of that cost containment strategy. However insurers must always keep in mind that reduction in medical special payments achieved through the application of UCR based fee schedules might not achieve the equivalent in overall settlement savings as are achieved in the medical specials portion of the settlement. In other words a reduction of 20% in medical specials might not result in a reduction of 20% in the total settlement.
Insurers need to be wary of the forest and trees scenario, whereby they focus solely on stringent UCR fee schedule application as a means of achieving savings yet ignore the possibility of even greater savings offered by sophisticated liability decision support systems and their ability to drill down into the details of the medical specials themselves. It is within these details where the real potential for savings lies. Duplicate bills, duplicate lines within bills, CPT and ICD9 code mismatches, billed treatments for CPT codes unrelated to the accident caused injury, etc. All of these are areas of potential savings that would remain unexploited if the focus was solely limited to UCR fee schedules.
Understanding Medical Specials – The Cost Containment Pyramid
Smart insurers will employ liability decision support systems that provide both sophisticated UCR fee schedule application and more importantly give adjusters the ability to drill into medical treatment patterns to assess the appropriateness and effectiveness of treatments for the diagnosed injuries.
In looking at medical cost containment strategies for medical specials a good analogy is that of a pyramid divided into thirds. The upper third of the pyramid can be thought of as representing the savings achieved by focusing on stringent UCR fee schedule application, while the middle and lower thirds of the pyramid can be thought of as representing the savings achievable by applying a systematic in-depth review to the entirety of each medical special. In thinking of this pyramid model it is readily apparent that the bulk of potential savings regarding medical specials lies in the comprehensive review of all elements of medical specials rather than a narrow focus on the single element of UCR application.
The key element of a comprehensive medical cost containment strategy is a liability decision support system that integrates all elements of the claim (including medical specials) into an integrated whole that provides adjusters instant and thorough access to all claims documentation materials. In the realm of medical specials this type of liability decision support system allows the adjuster to assess the mechanism of injury by accessing the accident report, compare that information to the injury diagnosis through ICD9 coding, and assess appropriateness of treatments provided by comparing the treatment CPT codes to a comprehensive ICD9-CPT database. The liability decision support system should have the capability of automatically flagging injury-treatment mismatches. It should also have the ability to catch duplicate bills and duplicate line items within bills. These areas represent substantial potential savings for insurers.
Once each line item of each medical special has been checked for duplicates and cleared as appropriate, the decision support system should allow the adjuster to assess the charges for each line item by comparing each charge against a standardized UCR database which is accepted as authoritative within both the payer and the provider communities. As we have seen earlier in this article, using a UCR database whose statistical accuracy is in question can cost substantially more than it saves. A UCR database consisting of both an insurer’s historical payment data and standardized government reimbursement guidelines such as the annual physician fee schedule, (PFS) published by the Centers for Medicaid and Medicare Services (CMS) can provide an insurer both a consistent and defensible baseline for reducing excessive service charges. (The Historical / Medicare UCR is a unique methodology created and supported by VMG).
Provider Negotiations vs. Claimant Negotiations
In examining the application of UCR to medical special charge reductions, insurers need to be aware of the pitfalls of using a one-size-fits all approach, particularly when it comes to negotiating with claimants versus providers. Negotiating tactics and strategy that is appropriate in the case of providers can easily become counterproductive if applied to claimants.
For example if an accident and injury occurs in a no-fault (PIP) state, then it is perfectly appropriate for the insurer to use the payment provisions and fee schedules that are mandated by law in that state. And there certainly is no problem with reducing payments to providers who have charged in excess of the specified fee schedule.
Likewise when negotiating with a provider directly there is little or no downside in rigorously applying a company’s UCR fee schedule.
However, when negotiating with a claimant directly, a dogmatic approach to UCR based reductions may save a few dollars – but at a much greater cost to the insurer’s reputation and perception. Most claimants who are injured and have paid out of pocket medical expenses simply want those expenses reimbursed in a timely manner without needing to argue about (to them) arcane concepts such as UCR reimbursement. Of course we are not talking about fraudulent claims here – such claims should be vigorously pursued by any insurer. But for the average claimant, dealing with an insurer that he or she perceives is trying to nickel and dime them over medical treatment payments, is one sure way to turn that claimant into a plaintiff. Such a result is to no one’s benefit. When negotiating with a claimant directly, particularly one with no ulterior motive, the insurer will be far better off showing flexibility and maintaining the good will of the claimant.
Pragmatic Understanding of a Good Medical Cost Containment Program and Tool
For an insurer, understanding where the bulk of savings can be found in medical specials is key to unlocking those savings. Focusing your efforts on fundamentals that lead to a consistent approach to treatment patterns, duplicate elimination, etc., as discussed in this article, rather than relying on mechanical, non-defensible UCR strategies, is a sound and pragmatic liability and medical cost containment strategy.
In order for a medical cost containment program to provide maximum savings it must be comprehensive. It must take into account and exploit all areas of potential savings within medical specials. This requires a fully integrated liability decision support system – one that provides real time access to all of the documentation that comprises the claim and does so in an easy to use, intuitive way.
Of equal importance is that the liability decision support system provides consistency of analysis across all varieties of claims. By establishing a consistent methodology in analyzing claims an insurer can go a long way in deflecting claims of bad faith. Databases used by the liability decision support system must be supportable and defensible, that is they must be accepted as authoritative by both payers and providers.
By combining a “big picture” view of medical cost containment with the right tools provided by a comprehensive liability decision support system, an insurer can have a consistent approach to medical cost containment.
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(CC) January 2011 Vatti-Manhattan Group
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