United States: Therapy Cap Goes Into Effect January 1, 2006; CMS Developing Exceptions Process for Medically Necessary Services

The long-anticipated Medicare therapy "caps" are now in place for calendar year 2006. Exceptions to the caps will be available for services that HHS determines to be medically necessary, which may largely diminish the impact of the caps for 2006.

Congress first enacted annual caps on therapy services as part of the Balanced Budget Act of 1997. The caps were subject to a series of moratoriums, the most recent of which expired on December 31, 2005. As a result, caps on outpatient rehabilitation coverage took effect on January 1, 2006. The 2006 statutory cap for each patient is $1,740 for physical therapy and speech therapy services (combined) and $1,740 for occupational therapy services. The cap does not apply to therapy services furnished in hospital outpatient departments, except if those services are provided to SNF residents occupying a Medicare-certified bed and billed under PPS/consolidated billing.

On February 1, 2006, Congress passed a budget reconciliation bill (S. 1932, the "Deficit Reduction Act"), signed into law by the President on February 8, 2006, that requires HHS to develop a process for determining exceptions to the 2006 cap. HHS' exception process must provide for a patient or a person on behalf of the patient to obtain, upon request, an exception to the cap if HHS determines that the services are medically necessary. If HHS does not make a decision on such a request within ten days of receiving the request, the services will be deemed medically necessary. HHS is required to develop and implement this process in a timely manner.

It is unclear whether the medical necessity determinations HHS will make as part of the exception process will be substantively different than already existing Manual requirements that services be "reasonable and necessary." Therapy services currently covered by Medicare must be reasonable and necessary to the treatment of an individual's illness or injury and must meet certain conditions outlined in Medicare Policy Benefit Manual. Thus, a medical necessity standard is arguably already in place. The new exception process seems like an administrative hurdle that will not necessarily result in the denial of claims exceeding the cap, assuming that claims already meet the "reasonable and necessary" criteria of the Medicare Policy Benefit Manual. Consistent with this, one therapists' trade group has referred to the congressionally approved exception process as a "fix" to the therapy cap.

A CMS official stated in a January 27, 2006 letter to Congress that the agency is working to implement the exception process as quickly as possible. The official suggested that the agency is considering establishing automatic exceptions that do not require a written request for certain conditions such as a closed head injury, or a broken arm suffered in the same year as a hip replacement. Patients with other conditions would have to submit a written request and document the need for services exceeding the cap. These requests would be reviewed by contractors who could approve a number of services beyond the cap when they are justified by medical necessity. The official suggested that Medicare will make adjustments to claims denied due to the cap retroactive to January 1, 2006.

• HHS has not yet published instructions for utilizing the exception process or details on the medical necessity standard. Long-term care providers should continue to provide needed therapy services and maintain comprehensive documentation so that, once the exception process is in place, any necessary requests for an exception can be filed.

• Notices provided to patients should inform Medicare beneficiaries of the annual caps and the fact that Medicare does not pay for services exceeding the caps unless Medicare grants an exception by determining that the services are medically necessary. Long-term care providers may use Medicare's Notice of Exclusion of Benefits, which can be downloaded from CMS' website at: http://www.cms.hhs.gov/BNI/11_FFSNEMBGeneral.asp#TopOfPage.