Prevailing charges are those charges which fall within the range of charges that are most frequently and widely used in a locality for a particular procedure or service. The top of this range establishes an overall limitation on the charges which the carrier accepts as reasonable for a given procedure or service, except where unusual circumstances or medical complications warrant an additional charge.

For any fiscal year, the prevailing charge limit in a locality for a service must be calculated as the 75th percentile of the customary charges determined for that service in accordance with HI 00401.315 B. (However, see D. below regarding the economic index limitation.) In this calculation, each customary charge for the service is arrayed in ascending order and weighted by how often the physician or other person rendered the service (as reflected by the charge data the carrier used to calculate the customary charge). The lowest customary charge which is high enough to include the customary charges of the physicians or supplier who rendered 75 percent of the cumulative services is determined to be the prevailing charge for the service (subject to the economic index limitation). The proper procedure for establishing revised prevailing charge screens based on the 75th percentile is illustrated by the following example:

In the above example, 75 percent of the total of 5,000 services equals 3,750 services. The prevailing charge is, therefore, $7. (A total of 2,517 services were rendered by the physicians with $5 and $6 customary charges, and an additional 1,680 services were rendered by the physicians with $7 customary charges. The 3,750th service was thus rendered by a physician with a $7 customary charge.)

Where it is necessary to establish customary charges through the use of price lists (see HI 00401.315 B.), these customary charges are also used to establish the required prevailing charge limits. In this regard, if a carrier cannot derive precise data on the frequency of services from its records, it may use any information it has about the volume of business done by various suppliers in its area in order to weight the customary charges used to calculate the prevailing charges.

Carrier prevailing charge screens may not be rolled back below the level of the screens in effect on December 31, 1970, where the latter had been found acceptable by the Secretary.

For the purpose of making reasonable charge determinations, a locality is the geographic area for which the carrier is to derive the prevailing charges for services. Usually a locality is a political or economic sub-division of a State, and includes a cross-section of the population with respect to economic and other characterstics. Where people tend to gravitate toward certain population centers to obtain medical care or service, localities may be recognized on a basis constituting medical service areas (interstate or otherwise), comparable in concept to “trade areas.”

Carriers delineate localities on the basis of their knowledge of local conditions. The localities may differ in population density, economic level, and other major factors affecting charges for services. However, distinctions between localities are not made so finely that a locality includes only a very limited geographic area whose population has distinctly similar income characteristics (e.g., a very rich or very poor neighborhood within a city).

Where appropriate, different localities are established with respect to different types and levels of services. For example, a carrier may determine that a State has five localities for general practitioners’ charges, but only one locality (the entire State) for members of a particular specialty group. This might happen where there are not enough members of the specialty group in any one of the five localities to establish a valid basis for deriving the prevailing charges for their services.

The range of prevailing charges in a locality may be different for physicians or suppliers who engage in a particular specialty practice or service than for those who are engaged in another type of specialty practice or in general practice or service. 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 prevailing charge for application by the carrier in its determination of reasonable charges. Carrier decisions in this respect are responsive to the existing patterns of charges made by physicians and suppliers who render covered services, and establish differentials in the levels of charges between different kinds of practice or service only where this would be in accord with such patterns.

For example, a cardiologist may charge $25 for a specific examination while a general practitioner’s charge is $15 for a similar examination. Both charges are customary for each physician and fall within their respective ranges of prevailing charges in the locality. Thus, the charges made by each of these physicians may be accepted as reasonable charges.

There may be preeminent specialists whose charges reflect their special positions in the profession. The customary charges of such a physician are included with the customary charges of all specialists in the locality in establishing the prevailing charges for specialists in the same medical field. However, the customary fee for a service may not be determined to be the reasonable charge if it is higher than the prevailing charge for the procedure in the locality. In such a case, to obtain the reasonable charge, the customary charge is reduced to the prevailing charge.

For example, the prevailing charge for a particular service by specialists is $230. Dr. A’s customary charge is $220 and Dr. B’s customary charge is $225. Both of these charges are “reasonable.” But Dr. C who is renowned in the performance of the procedure has a customary fee of $300 for that service (Dr. C’s customary charge was considered in the array of charges to establish the prevailing charge.) The reasonable charge for Dr. C’s services is $230 since that is the prevailing charge for the service in that locality.

Pursuant to section 224(a) of P. L. 92-603, prevailing charge levels used in determining Medicare reasonable charges for physician’s services may be increased above the level for fiscal year 1973 only to the extent determined to be justified by the Secretary on the basis of appropriate economic index data. The economic index figure is furnished by CMS to all carriers. The economic index limitation applies only to increases in prevailing charges and only to physician’s services. It does not affect carrier’s customary charge calculations. The law established the carrier’s prevailing charge screens for fiscal year 1973 (based on physician’s charge levels during calendar year 1971) as the base for measuring all future increases. The economic index calculated for each fiscal year will, therefore, reflect on a cumulative basis the changes that have taken place in physician’s practice expenses and in general earnings levels since calendar year 1971.