Medicare Payments Involving Hospital Based Physicians in Illinois

Published by the Government Accountability Office on 1971-06-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             U:~~TEDSTATES GENERAL AC~‘JU~~TING OFFICE
                                        WASHINGTON,‘D   C   2X%


                                                                   JIRM 28, 1971

                   Dear Mr. Ball:

                          mrtig a recent snrvey of I%dEcas?epayments 3.lwol.ving
                   hospS.tsX-based ghysi.e%a~~ in ZlXU.nois, we noted a situation
                   where cme hospsital mce%w!d, zmd tm others may hmm received,
                   excess5~ part B PehbnPs@ments Ql! '~dfas"         which were not
                   acl;jpastedbythe %nte~mtimy~
                       IB are bre.&nmg this matter to ymr attention so that
                   appWprfate adjustmnts may be made for the three hosp3.taIls.
                         Althou&R wa believe that the situ&Ion    be2ng questionad
                   by us is covered undw2 scMi.ng Eedicam rebmbursement remIs=
                   tims, we are also bring&      this mattir to your attention so
                   that this t;sas of situat5on may be considered in conmct~on
                   with the iwtmmtions--which      we understand the Social Secwity
                   Adm5.n%splration is dev&.opamag--to pzotide fog the retioaetive
                   ad$wstment of armounts incorrectly   mMmrsed to hospitals and
                   other grotidsrs for tie charge s of provider-based phys%chm
                   undflsr the supp1enl0ntary me&Cal z.ixEm?ance(part El) portCi.on of
                          The excesskm re%mbursements kwol.ved a situation where
                   42~ hospftti-bmed    physfcian, using the hoslpitsl as Us b332&ng
                   agent, bzlCL;bedthe par%%B eamler for his sertices to &~&are
                   pat%ents at the hosp%tal and had a kmsa agzwmmt tith the
                   ho@kz.l.L w&mby t-!! hosp2ta.l retamed a fkxed pement~      of
                   the total chsrge?s to cwmr certain i.lwkimct cqfmdag costs; the
                   portion of the physicfan*s chas(ges retaimd by the hospital
                   exceeded the hosp&izCl.~s rslatid costs. 'I% 5ntemetiary   did
                   not take such retslanues md costs Vito accomt when makkg final.
                   settlmmmts with the hospitKL fez' the cost of services under
                   the hospftal irasartance (part A) portion of the Idsdicme pmgram,

                                       5OTH ANNIVERSARY     1921- 1971
    The Medicare reimbursement principle    dealing with payments
for tie services of hospital-based physicians under these
c3mxmstames (20 (3% hO~.&%b) provides in part that:         ’
               W+Where th.e physician biLls tne patient d%mctly,
          costa of opeleating the hospital depaptmnt which am
          borr,e by the physician wU1 be reElected 3.n h5.s
          reason,able ehargos which a38 e~mable      under the
          supplementary mediccil insurance program; the hospdtti
          will receive reimbursment though the hospital
          insurance program for those costs, if any, tieh it
          inCUPS   @
              Where, howemr , a hospital. in%ti&ly     pays %an8 or
          all of the opePatS.ng e       es of a hospW&L department
           (hg, pays the salarie        norxprofessiQna1 psrsonw01
          and purchases supplies and equ%pmnt), emn though
          subsecfhlently those items and servLees fop which it
          pays the opepatirg expenses ax% fmtished for the use
          of the physician la return fop m agzeed upon payment
          by the physician to the hosp-ktal, such opemt%ng coats
          8pe re2mburaabl.e underr the hospital 3.nsurance program
          as hospita    Costs, apadlare not to be reflected 3n

      In our opinion, the E&S.xm? Blue Cuss intermediary
forLmoLs,      Hospital Sertice Corpomtion, did not follow th3.s
pd.ne%p~,e %n rm.ktig 3pecent FinaIL sett%ments vith the DeKLLb
P&&&C f%osp%td. in DeKalb, XU%nois. As a ~esu?.t, the hospft$l.
reaES%ed wind.fas     (xmmmes %n excess of related costs), of
about $9,800 and $&IL,100 fmm pax% I3 HedlSeare payments fo?? the
years ended Apr5.l 30, 1969, ad April 30, 1970, rsspect2vely.
The basis for our estximates   of the wind.faUs fs showrt 5n
Appendix I,

      In May 1960, the Bond of Directors of DeKalb Public Hospital
entered i&o a f;-yea2 agreement with a pathologist    to direct
its Pabmato~y. The weement, tick included an awtmat%c
$year renewd. dame, provitid      that the hospital was to furr&sh
the gstho%ogist tith faboslatoley space, utiXi.tles, housekeeping
semices, and the use of existing equipment. The pathologist
was to protide any necessary technica persomel and any new
equipment and supplies.

         The business manager of the hospital was designated as
the pathologist's      agent for the collection    of laboratory fees
which were to be distributed       monthly on the basis of (1) 65
percent to the pathologx3t       and (2) 35 percent to the hospital
as its compensation for provzd%ng laboratory space, heat,
utilities,     maintenance and housekeeping sxvices,         and the use of
hospital equipment; and for the billing         aad collection     expenses.
      Under this arrangement the hospital billed  the Medicare
part B carrier and the Medicare patients for (1) laboratory
services from July 1, 1966, through October 31, 1970 and
(2) the blood bank servx.ces from July 1, 1966 through September 30,
1969, and Feta%ned 35 percent of such billfngs.
         In, making final settlements mith th%s hospital for the
yeam ended April 30, 1969 and 1970, the Intermediary         did not
take Lnto account the amounts retained frown the pathologistts
bfllfngs      and the related ind%reet costs and, as a result,     the
hospital resJ%iaed substantial       profits or windfalls.  Two other
Illinois      hospitals  (See Appendix II) may also have adsalizsd
windfalls      under similar lease agreements with the same pathologist.

       We provided the Illfnois    Blue Cross intermediary with details
of our findzings and requested comments on the final settlements
made wfth DeXalb Fublfc Hospital.       Officials     of the fntirmediary
advised that, under theti interpretatnon         of the Medxare
regulations 3 it was proper to disregard the amounts retained from
the pathologist~s   balltigs    and the related costs km making f‘fnal
sBttlements . The Pgtermedbary officials         apparently took this
positton because (1) the Medicare payments retained by the hospital
for pathologistrs    services were made by the part B carrfar on the
baszs of reasonable charges for physicians*         services which were
not the respons%bility      of the %mtermed$ary and (2) the regulation,
as quoted above, @.ves e         Pes of d&e& operating costs whereas
the De&lb Hospftal costs related to the pathologist*s             charges
wem considered indxreet costs.
        In contrast, we noted that t.ne Blue Cross 3.ntermediary for
Indxana, in making final settlements with an Indiana hospital
served by the same patholomst       under a sz.mPlar lease and
compensation agreement, xnterprefxd      section 405.486b to require
that the amounts retaxned by the hospital from the pathologistts
billings    be deducted from the allowable costs re%mbursable under
the hospital msuxwxe program. !Fhfs hospital and four additional
fi?diana hospitals    served by this pathologkt    are also identified
in Appendix II.
        hJe recognize      that there can be various       lnterpretatlons      of the
language of the Kedicare reunburserrent             regulations      pertaining   to
hospital-based        physicians.       We belleve,   however, that the Illinois
intermediaryts        posit~~on is inconsistent       with the overriding
principle      established     by the law and the regulations            that
hospitals      till    be rezmbursed by Hedz.care for the reasonable            costs
incurred      5~1providing      sernces    to MedzLcare patients.


        In view of the differing       interpretations        of section 405.486b
of the Redfcare reimbursement          regulations      by two Dlue Cross
intermediaries      under similar     circumstances,      I+* recommend that
SSA consider whether its proposed instruczi.ons                 to its intermediaries
providing     for the retroactive      adjustment      of amounts incorrectfy
reimbursed      to hospftals    for the professional        fees of provider-
based physicians       should include reference         to the type of situst%on
discussed in this report.

      We recommend also that SSA review the settlements                 made with
the three Illinois      hospitals    identified     in Appendixes I and II
and require    appropriate     adjustments      for any excessive EIedlcare
reimbursements     to the hospitals      for pathologists1      billings.

       Copfes of this report may be made available  to the Blue
Cross Associataon for its information    and use., We would
appreciate   your comments on the matters discussed herein and
advice as to any action     taken.

       Copies of thfs report are being sent today to the Assistant
Secretary,    Comptroller,  and the Dfrector of the HEW Audit Agency,

                                                          Sincerely    yours,

                                                          Assistant    Dnrector

Mr. Robert M. Ball
Commfssioner of Social Security
Department of Health, Education,
   and Welfare
                                                             Page 1

              FOR HOSPITAL YEAR ENDED APRIL 30, 1969
Pathology     charges                            patients
Laboratory -     inpatient                        $.m, 881
           -     outpatient
           -     extended care facility               128
Blood bank -     inpatient                          3,105
           -     extended care facility

   Total-                                         $!%1114      $-h53,016

windfall     corq3utation
Total charges                                                  $l63,016
Less, payments to pathologists        (note a>                  107,002

Hospital rewnue                                                  56,ozlr
Less, inhrect   expenses deducted from
   hospital costs allowed under part A                           15,402
Ret hospital     income not tmated as a
   reduction     of allowable costs                             $40,612

Estimated windfall   to hospital for
    Medicare patients @ 24% (nob b)                               $9,747

aIdmMfied   as direct expenses in the hospital’s  cost report; note
that this amount slightly exceeds 65 percent of the total charges
($105,960) as the agreed percentage payment.
bThis represents the percentage of ancillary  costs apportioned
to Medicare  under the combination method of apportionment which
the hospital had elected to use.
                                                                Page 2

            FOR KOSPlTALYEAR EXDEDAPBIL 30, 1970
                                             Medicam              All
Pathology charges                            patients             patients
Laboratory     - inpatient                    $!a,951             $n83,482
               - outpatient                                           2,802
Blood bank (note a)                             2,563                 5,737
   Total                                      $54,514             $l92,021

W3.Mfal.l ccanputation (note b)
Total charges                                                     $192,021
Less, payments to pathologists          (note c>                   123,202
Hospital revenue                                                     68,819
Less, indirect expenses deducted from
   hospital costs allowed under part A                               17,757
Net hospital     income not treated as a
   reduction     of allowable costs                                 $51,062

Estimated windfall to hospital for
    Me&care patumts 8 238 (note d)                                  $11,744
Less, underpayment to the hospital from
   exclusion of blood bank for 7-month
   period 10/l/69-~/30/70  in the hospital
   cost report and settlement                                            613
Estimated Medicare windfall          to hospital                    $ll,131

aPortion applicable         to the !Gmonth     period S/l/69   through 9/30/69
when direct billing         applied.
bFor laboratory      full     year and blood bank for 5 months.
 CIdentified  as direct expenses in the cost report; note that this
 amount is slightly   less than 65 percent of the total charges
 ($124,814) as the agreed percentage payment.
 4rhis represents the percentage of anctilary costs apportioned
 to Medicare under the cabinatzon method of apportionment which
 the hospital had elec"ted to use.
                                                              Page 1
Illinois    Ho,qitals                                        through
SJWUYIOP~   mnfcipal    Hospital     (lb-0142)               Continues
Sandwich cmtity         Hospital     (14-0203)               12/31/7o

Indiana Hospitals
Garrett     Community Hospital      (1!%3$)       (note a)
Marshall     County Parkview Hospital          (ls-0076)
Murphy Medical Center (150080)
Pulaski Meraoruil Hospital         (ls-0095)
Starke Meraorial Hospital        (15-0102)

aFop th%s hospital., the in-k%mEary,  Blue Cross Hospital
Sem%ce, treated net immne for the labos!atory as rental income
and deducted it fmn other allovable hospital. costs in the hosp-ital
costs Peports and fmal settlements for the two yeaps ended
September 30, 1967.