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					                                 REPORT OF THE BOARD OF TRUSTEES

                                                                                   B of T Report 20 - I-04

     Subject:        Liability Surcharges in Physician Offices
                     (Resolution 213, A-04)

     Presented by:   J. James Rohack, MD, Chair

     Referred to:    Reference Committee L
                     (Andrew W. Gurman, MD, Chair)

 3   At the 2004 Annual Meeting, Resolution 213, “Liability Surcharges in Physician Offices,”
 4   introduced by the District of Columbia Delegation, asked “that our AMA study, support, and
 5   develop guidelines on the issue of „liability surcharges‟ [in conjunction with patient visits at]
 6   physician offices, and report back to the House of Delegates at the 2004 Interim Meeting.” The
 7   House of Delegates referred the resolution to the Board after Reference Committee B expressed
 8   mixed support for the resolution and recommended further development of the legal and political
 9   issues presented by a surcharge.
13   Despite mounting economic strain stemming from reduced payments and increased overhead costs,
14   physicians remain limited in their ability to pass on costs as other professionals and various sectors
15   of the economy can, due to contract and other limitations. To maintain financial viability, an
16   increasing number of physicians add surcharges to billings for services provided. Physician
17   surcharges may be designated to defray specific costs, such as medical professional liability
18   insurance (PLI) premiums or administrative work, or act as a retainer. Whatever the origin, the
19   surcharge is intended to cover non-medical services.
21   AMA Policy
23   The AMA has no Policy directed specifically at physician surcharges. However, AMA Policy H-
24   385.989, “Payment for Physician Services,” (AMA Policy Database) states, “Physicians have the
25   right to establish their fees at a level which they believe fairly reflects the costs of providing a
26   service and the value of their professional judgment.” (See also H-383.989). Two separate
27   policies, each entitled “Payment for Physicians‟ Services,” H-383.990 and H-380.992, support the
28   right of physicians to establish fair and equitable fees.
30   Legal Issues
32   Physicians considering instituting a “liability surcharge” on either privately or publicly-insured
33   patients should beware of potentially substantial legal barriers. Network service contracts between
34   physicians and private insurance carriers often prohibit physicians from levying redundant or
35   supplementary charges upon insured patients. Likewise, Medicare and Medicaid-participating
                                      B of T Report 20 - I-04 -- page 2

 1   physicians are contractually obligated not to charge beneficiaries fees beyond the deductible and
 2   co-insurance.
 4           a. Privately-Insured Patients
 6   Physicians must carefully review the terms of each of their network service contracts with private
 7   payers. These contracts commonly prohibit physicians from charging insured patients for any costs
 8   already reimbursed by the payer to the physician. These contracts may specify that medical
 9   liability insurance costs a physician incurs are “bundled,” or included, in the payment made by the
10   payer for the physician‟s services. If medical liability insurance costs are bundled, they may not be
11   separately billable to prevent redundant patient charges.
13   Other contracts forbid physicians from charging patients fees “above and beyond” what the payer
14   agrees to reimburse to the physician, even if costs associated with liability coverage are not
15   specifically mentioned.
17   Where a contractual barrier exists, physicians will need to consider renegotiating their contract
18   with the payer to assure adequate payment for liability-related costs directly from the payer.
19   Physicians may also negotiate for the ability to spread costs by surcharging patients.
21   State insurance regulations complicate the issue further and need to be checked. Certain states
22   protect enrollees in particular private insurance plans from being billed for any sums beyond what
23   the insurance company pays, except for co-pays and deductibles. (See Connecticut Code §
24   381.193(c) and § 20-7f9b (2004)).
26           b. Publicly-Insured Patients
28   Medicare and Medicaid-participating physicians cannot charge publicly-insured patients for
29   services already reimbursed by Medicare or Medicaid. A recent Health and Human Services‟
30   Office of the Inspector General (OIG) alert (OIG Alerts Physicians About Added Charges For
31   Covered Services, Mar. 31, 2004) reminded physicians that “when participating providers request
32   any other payment for covered services from Medicare patients they are liable for substantial
33   penalties and exclusion from Medicare and other Federal health care programs.” The OIG takes
34   the position that non-participating physicians could also be “subject to penalties and exclusion for
35   overcharging beneficiaries for covered services.” Because Medicare payment is determined in part
36   based on the medical liability insurance-related costs physicians pay, physicians are prohibited
37   from charging Medicare or Medicaid beneficiaries surcharges to cover premiums.
39   In instances where physicians are neither prohibited by contract, nor by state or federal law or
40   regulations, from assessing a liability surcharge, the advantages and disadvantages of doing so
41   must be assessed, preferably with assistance from appropriate legal counsel.
43   Benefits and Drawbacks of Liability Surcharges
45   The most obvious benefit of a liability surcharge is the cost-offset to a physician.
47   A physician‟s thorough explanation of the reasons behind the surcharge may also help patients
48   better understand the current medical liability crisis and the connection between costs associated
49   with litigation and the rising cost of healthcare, along with access to care issues.
                                       B of T Report 20 - I-04 -- page 3

 2   The most obvious drawback is the potential of a surcharge to alienate patients and harm the
 3   physician-patient relationship. There is also a risk that critics will point to surcharges as evidence
 4   physicians care predominantly about personal pocketbook issues rather than patient concerns.
 6   Unease about a physician‟s “undue influence” over patients lead some critics to assert that even
 7   voluntarily-accepted surcharges are not truly voluntary. Others consider insurance premiums a
 8   “physician issue” that should not involve patients directly.
10   Finally, the AMA‟s continued advocacy centered on reforming the Medicare Sustainable Growth
11   Rate (SGR) may be diluted by a coinciding campaign bringing attention to inadequate professional
12   liability insurance payments under Medicare.
14   Ethical Issues Surrounding Surcharges
16   The AMA has no express ethical guidelines regarding liability surcharges. According to existing
17   ethical policy, physicians have an obligation to support access to medical care (Principle IX of the
18   “Principles of Medical Ethics” and E-9.065). More specifically, Opinion E-6.12, “Forgiveness or
19   Waiver of Co-Insurance Payments,” states, “When a co-payment is a barrier to needed care because
20   of financial hardship, physicians should forgive or waive the co-payment.” By analogy, physicians
21   should not impose a liability surcharge if it would constitute a barrier to needed care. However, in
22   fulfilling their obligation to support access, it is not expected that physicians would compromise
23   the viability of their practice (E-10.05).
25   Taken together, these ethical considerations caution that liability surcharges should not be applied
26   without careful balancing of patient and physician interests.
28   Implementation of Surcharges
30   Implementation of liability surcharges should be handled with care. Physicians may find legal
31   barriers to surcharges so significant that they become impractical. To start, Medicare and Medicaid
32   patients must be exempted outright. State law restrictions should identified—along with
33   restrictions in existing network contracts with private payers.
35   After accounting for legal prohibitions, physicians may find a relatively small number of patients
36   remain eligible for a surcharge. Physicians should consider the fairness and practicality of
37   charging a small portion of their total patient base a surcharge that other patients are not subject to.
39   Even if no contract restrictions appear, it may still be advisable to inform private payers in advance
40   of implementing a liability surcharge in order to preclude any argument that the physician is
41   charging above and beyond contracted rates or fee schedules for covered services.
43   The logistics of implementing a liability surcharge also need to be considered. Questions to be
44   answered include whether the surcharge will be assessed annually, quarterly, per visit or otherwise;
45   and what is a “reasonable” surcharge. Affected patients should be given ample advance, written
46   notice of the surcharge and the reasons behind it. All communications should make clear that the
47   patient‟s decision whether or not to pay will have no effect on the physician-patient relationship or
48   quality of care.
                                     B of T Report 20 - I-04 -- page 4

 1   It is recommended that any physician considering implementing a surcharge proceed with the
 2   advice of knowledgeable legal counsel.
 4   AMA Policy on Medicare Payment Reform
 6   Liability surcharges seem increasingly necessary in the broader context of ever-declining payments
 7   from public and private payers, coupled with skyrocketing malpractice insurance premiums. While
 8   surcharges offer a short-term solution to inadequate payment for insurance premiums, a
 9   fundamental restructuring of Medicare payment methods, in particular the SGR formula on which
10   payments are partially based, is needed in the long-term. The priority the AMA has given to
11   achieving significant reform of physician payments under Medicare is reflected in numerous HOD
12   Policies.
14   “Malpractice Insurance Rate Increases and Physician Reimbursement,” H-435.996, reads, “Our
15   AMA will: (1) call upon the CMS to use current data in calculating the malpractice insurance
16   portion of the Resource-Based Relative Value Scale and that this calculation take into account
17   inter-specialty and geographic variances; and (2) study the calculated malpractice insurance portion
18   of the RBRVS to determine the effect increasing malpractice insurance costs have on physician
19   reimbursement.” “Malpractice Costs in the Medicare Fee Schedule,” H-400.981, affirms “It is the
20   policy of the AMA: (1) to review the recommendations for incorporating malpractice costs in
21   Relative Value Units in order to correct inequities in such a system so that physicians will be
22   reimbursed for current costs in a fair and equitable manner under the Medicare Physician Payment
23   System; and (2) to pursue legislative, regulatory and all other relevant means to effect such
24   change.” “Physician Payment Reform,” H-400.972, calls for the same actions to combat
25   “inequities in the implementation of the RBRVS.”
27   Basic Medicare Payment Methodology
29   In 1992, Medicare began reimbursing physicians using a standardized physician payment schedule
30   based on a Resource-Based Relative Value Scale (RBRVS). Physician payments for services
31   under this system are based on the costs of providing each service as divided into three
32   components: physician work, practice expense and PLI. The sum of the relative values of these
33   components is multiplied by a monetary conversion factor and adjusted geographically. Many
34   private payers in turn use the RBRVS to calculate their payments to physicians.
36   Resource-Based PLI RVUs were introduced only in 2000 upon the government‟s recognition of the
37   unique and important nature of liability costs compared to other practice expenses. The PLI RVS
38   component is the smallest, constituting about 4% of the total relative value for each service. As
39   mentioned above, because physicians are reimbursed by Medicare based partially on PLI costs,
40   physicians are prohibited from charging beneficiaries a surcharge to cover liability costs.
42   CMS surveys medical malpractice premium rates across the country to calculate the PLI percentage
43   basis in RBRVS. Data for the survey is obtained from state departments of insurance and also
44   from the largest insurers in 33 states. The survey does not contemplate claims-made policies, and
45   so PLI values do not account for costs associated with tail coverage.
47   CMS has recently completed a review of the PLI RVUs and has published its proposal for
48   calculation in the August, 5, 2004 Federal Register. The AMA and the AMA/Specialty Society
49   RVS Update Committee (RUC) have raised a number on concerns regarding the methodology used
                                    B of T Report 20 - I-04 -- page 5

 1   to calculate the revised PLI RVUs. The AMA has separately testified before the Physician
 2   Payment Advisory Committee (PPAC) on the issue of insufficient PLI RVUs. Advocacy efforts
 3   aimed foremost at changing the SGR formula are necessary so a PLI increase can be fully factored
 4   into the conversion factor and not offset by the spending targets.
 6   The Board is aware of the shortcomings in Medicare payment methodology generally and the PLI
 7   component specifically and AMA‟s advocacy efforts will continue to address these concerns.
11   The Board of Trustees recommends that the following be adopted in lieu of Resolution 213 (A-04)
12   and the remainder of this report be filed:
14          1) That our AMA support the ability of a physician to institute a “liability surcharge”
15             where not prohibited by contract, state or federal law or regulation, but urges
16             physicians to seek legal counsel in doing so. (New HOD Policy)

     Fiscal note: None.

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