Hospital Outpatient Costs Not Limited by “Reasonableness”


Medicare beneficiaries, as most people know, are required to pay 20% of the reasonable charges for outpatient physician and inpatient hospital services. The ability of Medicare to set “reasonable” charges and require health care providers to abide by its determination is frequently cited as one of the principal reasons Medicare costs rise more slowly than medical costs outside the Medicare system. There is no doubt that the limitation on medical costs is a boon to Medicare participants.

A little-known quirk in the law recently came under closer scrutiny in a Federal Court of Appeals case. Although Medicare rules limit physicians and hospitals from charging more than the “reasonable” rate, Medicare has refused to set or enforce such rates for hospital outpatientservices. The result of this failure is that Medicare recipients are now paying about half the costs of such services, and the Department of Health and Human Services (HHS) predicts that their share will increase to over two-thirds by the turn of the century.

Hospital outpatient services now typically include radiology and diagnostic procedures and outpatient surgery. Making the problem worse is the increasing shift by hospitals to more outpatient treatment. Since the effect of doing a given procedure on an outpatient basis is to remove the Medicare cap on prices while at the same time reducing costs to the hospital, most observers predict that there will be even more pressure to treat patients on an outpatient basis in the future.

Whether the shift to outpatient care is a desirable result or not (and most critics concede that outpatient care is often preferable), the result of this funding glitch is to increase the cost of care to elderly and disabled patients. For that reason, the Center for Health Care Rights in Los Angeles brought action in Federal Court to require HHS to treat hospital outpatient costs in the same way as inpatient costs and physician’s outpatient services.

The Ninth Circuit Court of Appeals has now ruled against the Center. Although the Center argued that several sections of federal law compelled HHS to restrict reimbursement rates for outpatient services, the Court agreed with HHS’ argument that nothing in Medicare law expressly covered the reasonableness of rates for hospital outpatient services. Since the Center brought the lawsuit as a nationwide class action, this result will affect all Medicare recipients.

The Court of Appeals ruled that “although reasonableness has long been a condition on Part B provider agreements, Congress has never specifically directed the Secretary [of HHS] to cap the charges for hospital outpatient services.” Since the issue is now before the Congress, the Court also declined “the beneficiaries’ invitation to preempt congressional action in this very delicate area of public policy.” Stephenson v. Shalala , June 25, 1996.

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