United States: HHS Agencies Issue Industry Guidance on Hospital Discounts

On February 19, 2004, two branches of the Department of Health and Human Services ("HHS") – the Office of Inspector General (the "OIG") and the Centers for Medicare & Medicaid Services ("CMS") – issued guidance to the hospital industry concerning the provision of discounts to uninsured and underinsured patients. The agencies issued these guidance documents (respectively, the "OIG Guidance" and the "CMS Guidance" and together, the "Guidance Documents") ¹ in response to a December 2003 request submitted by the American Hospital Association (the "AHA") seeking clarification from HHS about the application of perceived regulatory limitations on hospitals’ abilities to offer discounts to and waive cost-sharing obligations for patients with limited means. This client memorandum provides an overview of the Guidance Documents, including an identification of the key clarifications provided by the agencies and certain of the limitations inherent in the guidance.

While the tone that the OIG and CMS take in their respective Guidance Documents is clearly intended to connote the view that federal regulations impose few, if any, meaningful limits on hospital policies to assist patients of limited means, a close examination of the Guidance Documents in the context of current federal law reveals a more complicated picture. HHS provides useful advice to hospitals on several issues but, in reality, fails to reassure hospitals on several others.

The following summarizes the areas in which the Guidance Documents provides comfort, and does not provide comfort, to hospitals:

• The CMS Guidance provides reassurance that discounting bills for patients with financial need does not alter a hospital’s uniform charge structure or the cost-to-charge ratio derived therefrom. However, for hospitals still subject to the lesser-of-costs-or-charges principle, the dispensation to offer discounts may be limited to patients who are indigent.

• The OIG Guidance provides some comfort that discounts on bills of un- or underinsured self-pay patients will not affect the hospital’s usual charges and, therefore, will not subject the hospital to potential exclusion for charging Medicare or Medicaid substantially in excess of its usual charges.

• The CMS Guidance does not relieve hospitals of the obligation to use uniform collection efforts in order to receive Medicare bad debt reimbursement for unpaid Medicare cost-sharing amounts.

• The OIG Guidance does not provide hospitals with the assurances they were seeking concerning the potential application of the federal anti-kickback statute and beneficiary inducement provisions. However, given the public attention to these issues and the tone of the government’s guidance, it may be difficult for enforcement authorities to prosecute hospitals for their provision of discounts or waivers to un- or underinsured patients, absent a fairly clear intention to promote Medicare or Medicaid business.

In late 2002 and early 2003 hospitals from coast-to-coast came under fire for their billing and collection practices as the media and consumer groups focused on hospitals’ efforts to collect unpaid bills from uninsured patients. On the heels of this increased scrutiny, in the summer of 2003, the House Energy and Commerce Committee launched a Congressional investigation on hospital billing and collection practices. In connection with this investigation, 20 hospitals and health systems nationwide were asked to submit to Congressional investigators financial information and information regarding billing and collection practices. This Congressional investigation prompted the AHA to send a letter to HHS Secretary Tommy Thompson in December 2003 requesting guidance on providing discounts to uninsured patients, either through negotiated rates or through relaxed collection efforts. The December 2003 letter was accompanied by an AHA white paper titled "Federal Regulations Hamper Hospitals’ Efforts to Assist Patients of Limited Means," which summarized many of the legal barriers the AHA believes hospitals face when trying to provide relief to uninsured patients. A little over a month after the AHA requested guidance from HHS, Congressional investigators asked HHS to respond to several questions that were raised in the AHA letter and accompanying white paper.

On February 19, 2004, Secretary Thompson published a response to the AHA, which included the Guidance Documents describing HHS’s policies regarding hospital billing and collection practices impacting the uninsured. In his letter Secretary Thompson stated, unequivocally, that the AHA’s statement that regulations require hospitals to bill all patients using the same schedule of charges is "not correct" and that "[n]othing in the Medicare program rules or regulations prohibit such discounts" for uninsured and "underinsured" patients. After the release of Secretary Thompson’s response and the accompanying OIG Guidance and CMS Guidance, hospital systems and hospital groups began to consider establishing policies for offering discounts to uninsured patients.

With the entire hospital industry facing increased public scrutiny concerning its billing and collection practices for un- and underinsured patients, nonprofit hospitals also began to confront additional, related challenges. On March 2, 2004, House Ways and Means Committee Chairman Bill Thomas (R-CA) announced his intention to examine the federal tax-exempt status of nonprofit hospitals. The legislator’s existing interest in this issue was heightened by the AHA’s assertions in its correspondence with Secretary Thompson that hospitals were constrained in their ability to give payment concessions to uninsured patients absent regulatory changes. Chairman Thomas has openly questioned whether nonprofit hospitals continue to deserve special treatment under federal tax laws. In addition, nonprofit hospitals watched with interest when the Illinois Department of Revenue announced its February 13, 2004 decision to revoke the property tax exemption of Provena Covenant Medical Center, based in Champaign-Urbana. Local and state officials concluded that Provena Covenant was no longer a charitable institute, in part as a result of the payment and collection practices it applied to patients with financial need. Thus, because of the connection with hospitals’ federal and local tax exemptions, hospital practices concerning billing and collection for services furnished to un- and underinsured patients may have far-reaching effects.

As hospitals adjust their indigent and charity care policies in light of recent events, it is important that they understand the actual scope and limitations of the Guidance Documents. A detailed discussion of both the OIG Guidance and CMS Guidance follows.

1. Regulatory Background

Historically, Medicare paid a hospital on the basis of its reasonable costs, as described in a cost report filed annually with the facility’s fiscal intermediary ("FI"). The cost report determined Medicare reimbursement through a two-step process – "cost finding," by which the cost of furnishing services was calculated through an allocation of direct costs and proration of overhead costs, and "cost apportionment," by which the share of facility costs attributable to Medicare and non-Medicare patients was determined. Cost apportionment was often performed by comparing a hospital’s total charges for services furnished to Medicare patients to its total charges for all patient services. Thus, hospitals have been required to maintain a uniform charge structure in order to assure that Medicare’s share of the provider’s costs, as identified in the cost apportionment process, equitably reflects the cost of services received by Medicare beneficiaries.² Only limited exceptions to the uniform charge requirement exist.³

Charges were also relevant to hospital reimbursement through the application of the "lesser of costs or charges" ("LCC") principle. Under this rule, reimbursement for services to Medicare beneficiaries was based upon the lower of the reasonable cost of providing those services or the provider’s customary charges for the same services.⁴ Deviations from a uniform charge structure could affect the "customary charges" used in applying this reimbursement principle.⁵

Although most hospitals are no longer paid directly under the cost-based system of Medicare reimbursement, some still are (e.g., critical access, children’s, psychiatric and cancer hospitals), and all hospitals are still obligated to file annual cost reports, the data from which are used to establish hospital payment rates under the hospital inpatient and outpatient prospective payment systems ("PPSs"). In addition, hospital charges continue to be used to calculate high-cost outlier payments under the PPSs applicable to general acute care hospitals, inpatient rehabilitation facilities and long-term care hospitals.⁶

In its Guidance Document, CMS states unequivocally that nothing in the agency’s regulations, the PRM or Medicare program instructions prohibit a hospital from waiving collection of charges or offering discounts to any patients if such concessions are made as part of the hospital’s indigency policy. CMS describes an "indigency policy" only generally as "a policy developed and utilized by a hospital to determine patients’ financial ability to pay for services."

The agency clarifies that offering discounts to patients with limited means does not affect a facility’s uniform charge structure or its cost-to-charge ratio, provided that the hospital’s Medicare cost report reflects its full, uniform charges rather than the discounted amounts. CMS regards discounts to needy patients no differently than other allowances, such as courtesy, charity and third-party payor allowances. Similarly, where the LCC principle still applies, CMS explains that a provider would be entitled to take advantage of the exception to the uniform cost requirement at PRM § 2606.2(D), which allows a hospital to offer free care or care at a reduced charge to patients determined to be financially indigent without causing an adjustment in charges under the LCC principle.

The CMS Guidance offers hospitals a definite level of comfort that the agency will not treat the provision of discounts or waivers of cost-sharing amounts to un- or underinsured patients as affecting a provider’s uniform cost structure for Medicare cost reporting and reimbursement purposes. Hospitals must, however, continue to ensure that their full charges are reflected in their Medicare cost reports. For any hospitals still subject to the LCC principle, the CMS Guidance provides only limited reassurance about the effect of discounts on charge structure since the referenced exception to the uniform charge requirement applies only with respect to "financially indigent" patients. The term "financially indigent" remains undefined and, presumably, will not encompass underinsured patients who do not meet the indigence standard.

Section 1128(b)(6)(A) of the Social Security Act (the "Act") provides that the Secretary of HHS may exclude any individual or entity from participation in any federal health care program if the Secretary determines that the individual or entity has submitted requests for payment under Medicare or any state health care program (where those requests are based on charges or costs) containing charges (or costs) that are substantially in excess of the individual’s or entity’s usual charges (or actual costs).⁷ An exception to this exclusion authority exists where the Secretary finds there is good cause for the provider to have submitted the payment request at issue, with "good cause" having been defined in regulation to mean where the charges or costs requested are due to "unusual circumstances or medical complications requiring additional time, effort, expense, or other good cause."⁸ On two occasions in the past, the OIG (which has enforcement authority with respect to § 1128 of the Act) proposed to provide additional guidance on the application of this exclusion authority. ⁹ In both cases, however, the OIG elected to continue evaluating the issue under the applicable regulatory provisions, 42 C.F.R. § 1001.701(a)(1), which have been in place for over 12 years.

Most recently, on September 15, 2003, the OIG again published a proposed rule to furnish guidance on this subject and, in particular, to define the terms "substantially in excess" and "usual charges or costs" and to provide additional criteria for the "good cause" exception. ¹⁰ Relevant to this discussion, the OIG proposed that a provider’s "usual charge" be calculated based on one of two methods – by taking the average of all charges or by identifying the median charge. Further, the OIG proposed a listing of what charges should be included in and excluded from the usual charge list. Among the charges to be included in the list were negotiated rates with non-governmental payors and contractual per-service rates offered to commercial or governmental managed care payors provided that no more than 10% of the provider’s compensation was at-risk through a withhold or bonus structure. Significantly, among the charges to be excluded from the list were charges for services provided free-of-charge or at a substantially reduced rate to uninsured patients and charges submitted to federal health care programs (other than those noted above).

In its Guidance Document, the OIG emphasizes that the exclusion authority at Section 1128(b)(6)(A) of the Act is permissive and that the "OIG has never excluded or attempted to exclude any provider or supplier for offering discounts to uninsured or underinsured patients." However, in order to provide additional reassurance to the hospital industry, the OIG stated that, until it promulgates a final rule on changes to 42 C.F.R. § 1001.701(a)(1) (or declares its intention not to issue such a final rule), the agency would follow an enforcement policy under which providers "do not need to consider free or substantially reduced charges to (i) uninsured patients or (ii) underinsured patients who are self-paying for the items or services furnished." The OIG also reiterated its longstanding position that the exclusion provision does not require a hospital to charge everyone the same price or to offer Medicare and Medicaid the hospital’s "best price." The agency noted, however, that "hospitals cannot routinely charge Medicare or Medicaid substantially more than they usually charge others."

The OIG Guidance takes a material step by expanding the proposed exclusion from "usual charges" to include charges to underinsured, self-paying patients as well as those to uninsured patients. In this manner and through its comments, the OIG offers substantial assurance to hospitals that payment concessions made to patients of limited means will not adversely affect the determination of a provider’s "usual charges" and will not form the basis for an exercise of the OIG’s permissive exclusion authority. Hospitals are advised, however, to watch for publication of a final rule on the September 15, 2003 proposal. The agency can be expected to offer further insight on how it will exercise its enforcement authority in this area.

The Medicare program reimburses hospitals for the uncollectible cost-sharing amounts of Medicare beneficiaries. Like the uniform charge requirement, Medicare’s bad debt reimbursement rules represent an attempt to prevent cross-subsidization between Medicare and non-Medicare patients. Under federal regulations, a provider must demonstrate that the following criteria are met before uncollected Medicare cost-sharing amounts are allowable as bad debt:

• The debt must be related to covered services and derived from deductible and coinsurance amounts;

• The provider must be able to establish that reasonable collection efforts were made;

• The debt was actually uncollectible when claimed as worthless; and

• Sound business judgment established that there was no likelihood of recovery at any time in the future.¹¹

In order to be considered "reasonable," a provider’s efforts to collect cost-sharing amounts from Medicare beneficiaries must be comparable to the efforts that the provider uses to collect comparable amounts from non-Medicare patients.¹² Such efforts must include the issuance of a bill as well as other actions, including subsequent billings, collections letters and personal contacts. In addition, collection efforts may include using or threatening court action.

A provider can forego such reasonable collection efforts if it determines that the Medicare beneficiary is indigent.¹³ Medicare beneficiaries who are also eligible for Medicaid can be deemed indigent without further assessment. Otherwise, a hospital must apply its "customary methods" for determining the indigence of patients. PRM guidelines indicate that, for this purpose, a provider should take into account a patient’s total resources, including an analysis of assets, liabilities and income and expenses. Further, the patient’s file should contain documentation of the method used to determine indigence and all back-up information necessary to substantiate the determination.

Among the amounts that hospitals often seek to claim as bad debt are Medicare cost-sharing amounts owed by so-called "dual eligibles" or "Qualified Medicare Beneficiaries" ("QMBs") (i.e., Medicare beneficiaries who also meet certain eligibility requirements for their state Medicaid program). State Medicaid programs provide coverage for Medicare cost-sharing amounts to individuals who qualify as QMBs. A provider can deem such an individual to be indigent, which obviates the need to pursue reasonable collection efforts against the individual. However, CMS still requires the provider to obtain a payment denial from the state Medicaid program before the provider can claim the unpaid cost-sharing amounts as bad debt.¹⁴

Through the course of several questions and answers, the CMS Guidance essentially reiterates the established principles relating to Medicare bad debt reimbursement and reasonable collection efforts required for such payments. Namely, the Medicare program will reimburse a hospital for a Medicare beneficiary’s unpaid cost-sharing amounts provided the facility sends a bill to the patient and engages in reasonable, consistent collection efforts. Further, patient-directed collection efforts are not required where the patient is deemed to be indigent. In such a case, unpaid cost-sharing amounts can be claimed as bad debt, but only after the hospital has determined that no other source is responsible for payment.

CMS does confirm that providers have a fair degree of flexibility in the methodology they use to determine whether a patient is indigent. For example, CMS explains that a hospital can use a "sliding scale" to make indigency determinations. Under this type of arrangement, the provider would deem the patient indigent with respect to a portion of the patient’s account, where that portion equals a percentage of the debt depending on the patient’s income or assets or on the size of the liability relative to the patient’s income. However, consistent with general Medicare bad debt reimbursement rules, whatever indigency criteria are adopted by a hospital must be applied uniformly to Medicare and non-Medicare patients. In addition, the criteria used to determine indigency for Medicare patients must be consistent with the guidance in PRM § 312. Providers can use their "own business judgment" in determining whether a non-Medicare patient is indigent and, thus, eligible for payment concessions, since Medicare rules do not apply in that case.

On this issue of collection efforts, in a somewhat "cheeky" approach, CMS declares that "hospitals aren’t required under federal law to engage in any specific level of collection effort for Medicare or non-Medicare patients" but then confirms that they must send the Medicare patient a bill and must make the same efforts to collect as they would for non-Medicare patients. In fact, as an example, CMS notes that, if a hospital sends non-Medicare patients’ bills to a collection agency and fails to do the same for Medicare patients, it has not engaged in uniform collection efforts and will not be entitled to bad debt reimbursement. Thus, on the one hand, CMS states federal law does not require specific types of collection actions, while on the other hand, the agency acknowledges that baseline efforts – applied consistently to Medicare and non-Medicare patients – are required if a hospital wants Medicare reimbursement for the unpaid cost-sharing amounts.

The federal anti-kickback statute prohibits the knowing or willful offer, payment, solicitation or receipt of any remuneration in exchange for referring an individual to another person or entity for the furnishing, or arranging for the furnishing, of any item or service that may be paid for in whole or in part by Medicare, Medicaid or other federally-funded health care programs.¹⁵ Illegal payments (or offers or solicitations of payments) include those in cash or in kind, those made directly or indirectly, and those made overtly or covertly. Violations of the law can give rise to both civil and criminal penalties.

A statutory exception to the anti-kickback statute exists for properly disclosed discounts appropriately reflecting the costs claimed or charged by the provider.¹⁶ This discount exception is a product of congressional intent to encourage price competition benefiting the federal health programs. The statutory exception for discounts is reflected in the regulatory safe harbors to the anti-kickback statute, originally promulgated by the OIG in 1991. ¹⁷ The safe harbor regulations identify business relationships that will not be regarded as violating the anti-kickback statute; however, failure to comply with a safe harbor provision does not make the activity per se illegal. Rather, the safe harbors set forth specific payment practices that, if fully met, protect the entities involved from being criminally or civilly prosecuted.

Under the discount safe harbor, a "discount" is defined as a reduction in the amount a buyer is charged for an item or service based upon an arm’s-length transaction. ¹⁸ The discount safe harbor requires that a hospital offering a discount to a patient must provide information regarding the discount to

HHS at its request.¹⁹ Importantly, the definition of "discount" explicitly excludes routine reduction or waiver of any coinsurance or deductible owed by a beneficiary. ²⁰

Another safe harbor provision addresses waivers of coinsurance and deductible amounts for inpatient hospital services for which Medicare pays under the PPS.²¹ In order for waivers to be protected under this safe harbor, the following three conditions must be satisfied:

• The hospital cannot claim the waived amount as bad debt or otherwise shift the burden of the Medicare or Medicaid program, other payors or other individuals;

• The waiver must be made without regard to the reason for admission, length of stay or diagnosis-related group; and

• The waiver may not be part of a price reduction agreement between the hospital and a third-party payor (other than a Medicare SELECT plan).

In its Guidance Document, the OIG "disagrees" that the anti-kickback statute would prevent hospitals from offering discounts to uninsured patients, emphasizing that the "anti-kickback statute does not prohibit discounts to uninsured patients ...." However, in making this statement, the OIG also cautions that the discounts may not be linked "in any manner" to the generation of business payable by federal programs. The OIG does not expound on this point, but we note that, hypothetically, a discount given to an uninsured patient could have anti-kickback implications if such a discount resulted in referrals of, for example, business from the family members of the patient or if the patient were expected to become Medicaid-eligible during the course of care. Therefore, although providing a discount to an uninsured patient may not violate the prohibition against beneficiary inducement (see discussion below), in some cases, such a discount could have anti-kickback implications.

Discounts to underinsured patients raise a more significant concern in the OIG’s view. These patients may include Medicare beneficiaries who do not have supplemental insurance to pay for services that are not covered by Medicare Parts A or B and who do not have the financial means to pay for these services themselves. Under these circumstances, provision of a discount on a non-covered service could be characterized as an inducement to obtain a Medicare-covered service. By way of guidance, the OIG says merely that "hospitals should exercise care to ensure that such discounts are not tied directly or indirectly to the furnishing of items or services payable by a Federal health care program." However, the OIG’s comments in this regard are somewhat superficial. As a practical matter, it is unclear how a provider can eliminate the possibility that an enforcement authority would assert a linkage between a discount and program-related business where the hospital furnishes some Medicare- or Medicaid-covered service to the underinsured individual.

The OIG Guidance repeats the requirements of the safe harbor for waivers of coinsurance and deductible amounts for inpatient hospital services. The agency goes on to explain that, while it is not concerned about "bona fide cost-sharing waivers for beneficiaries with genuine financial need," it holds a "long-standing concern" about providers that use "insurance only billing" and similar arrangements to "entice Federal health care program beneficiaries to obtain items or services that may be medically unnecessary, overpriced, or of poor quality." The OIG’s comments – particularly, its focus on beneficiaries with "genuine financial need" – are noteworthy because demonstration of financial need is not a requirement of the cost-sharing waiver safe harbor. The commentary does suggest that offering cost-sharing waivers to Medicare beneficiaries who are determined to be of limited means is likely to involve less risk of enforcement action than similar waivers in the absence of financial need. Hospitals should also bear in mind that the cost-sharing waiver safe harbor is limited in application to inpatient hospital services; safe harbor protection is unavailable for hospital outpatient and other services that a facility may want to make available to patients in need.

When examined it its totality, the OIG Guidance offers little comfort or new information concerning the OIG’s authority to apply the anti-kickback statute to payment concessions that may be afforded to financially needy Medicare and Medicaid patients. The general tenor adopted by the agency, as well as its insistence that OIG rules do not prohibit discounts and waivers to such individuals, do suggest, however, that it may be hard to prosecute a provider for offering reasonable and justified concessions in the absence of a clear intent to induce federal program business.

The Act imposes civil money penalties on any party that offers an inducement to a federal or state health care program beneficiary that the offeror knows or should know is likely to influence the beneficiary’s selection of a particular provider.²² The prohibition applies only to inducements offered to federal and state health care program beneficiaries. An exception to the prohibition exists for the waiver of cost-sharing amounts where:

• The waiver is not offered as part of any advertisement or solicitation;

• The party offering the waiver does not routinely waive coinsurance or deductible amounts; and

• The party waives the cost-sharing amounts after determining in good faith that the individual is in financial need or reasonable collection efforts have failed.²³

In addition, any waiver that fits within a safe harbor to the anti-kickback statute is also protected under the beneficiary inducement law. ²⁴

The OIG asserts that "the fraud and abuse laws clearly permit the waiver of all or a portion of a Medicare cost-sharing amount for a financially needy beneficiary." Further, the OIG notes that, under the fraud and abuse laws, "financial need" is not limited to indigence and can include "reasonable measures of financial hardship."

With respect to the financial need exception to the beneficiary inducement prohibition, the agency provides some useful guidance on what constitutes a good faith determination of financial need. In the OIG’s view, hospitals should have flexibility to take into account relevant variables, including the local cost of living, a patient’s income, assets and expenses, the patient’s family size and the magnitude of medical bills. Hospitals are advised to use a "reasonable set of financial need guidelines … based on objective criteria and appropriate for the applicable locality." Consistent with Medicare reimbursement principles, those guidelines should be applied uniformly. Notwithstanding the desired level of flexibility, the OIG believes it is inappropriate for hospitals to inflate income guidelines in order to justify waivers for individuals who are not in genuine financial need. Further, the agency advises that a patient’s eligibility for waivers should be rechecked at reasonable intervals. Finally, it is recommended that providers take reasonable measures to document determinations of financial need.

Oddly, the OIG does not discuss its view of how the beneficiary inducement prohibition applies to discounts offered to federal and state health care program beneficiaries. Hospitals should be aware that many of the same issues and risks discussed above concerning how the anti-kickback statute might apply to discount arrangements would also pertain under the beneficiary inducement prohibition.

Based on the tone of the Guidance Documents, it can be expected that the OIG and CMS will be highly supportive of hospital system moves to expand indigent care policy and discount programs to assist the un- and underinsured. However, hospitals should be careful to understand the limitations of the Guidance in crafting modifications to existing policies and programs.

This article is presented for informational purposes only and is not intended to constitute legal advice.