Christopher L. Keough
Hospitals should feel free to offer uninsured patients discounts or financial assistance to pay for healthcare services; but they also should make sure their financial assistance policies are ready for the bright light of regulatory scrutiny.
At a Glance
Today's regulatory climate makes it far from simple for hospitals to offer discounts to uninsured and indigent patients. Questions abound regarding whether offering such discounts might lead to reductions in Medicare payments for outliers, new technology, and bad debt. Offering waivers of coinsurance or deductibles may seem an attractive option, but routine waivers could implicate federal statutes regarding illegal remuneration and patient inducement.
And across-the-board discounts to uninsured patients could change the calculation of a hospital's "usual charges," resulting in the hospital's violation of the statutory bar against having charges to Medicare that are "substantially in excess" of the "usual charges." The best course for hospitals is to have clearly defined financial assistance policies in place that reflect an awareness of all the related potential legal and regulatory concerns.
Nearly 30 years ago, Milton Friedman wrote, "There's no such thing as a free lunch." To which hospitals might respond, "Have you heard about health care, Milton?"
Hospitals traditionally have provided a great deal of care to indigent and uninsured patients without regard to their ability to pay, and this tradition of service continues. The American Hospital Association reports that in 2003 the hospitals incurred nearly $25 billion in uncompensated care costs (AHA News, Nov. 29, 2004).
Proving that no good deed goes unpunished, hospitals are under pressure to do more. In many ways, the hue and cry against hospitals is irrational. No one is suing grocery chains for charging low-income shoppers the list price for a gallon of milk. Nevertheless, although hospitals absorb billions of dollars of uncompensated care costs every year, they face real pressures to do even more for the uninsured.
The real problem is a societal one. An estimated 44 million people do not have health insurance, and the great majority of those uninsured patients have incomes below 200 percent of the federal poverty income level, according to Congressional Budget Office director Douglas Holtz-Eakin in testimony before the Subcommittee on Health of the House Ways and Means Committee on March 9, 2004.
If taken only at face value, some hospital charging practices provide an easy target for critics. Some hospitals' charges may be high as compared with cost. And, for the most part, the only individuals who pay full charges-self-pay patients-are often the least able to afford hospital care (although most self-pay patients are really "no-pay" patients). Combine hospitals' high charges for self-pay patients with the inevitable examples of poor patient communications or overzealous collection efforts, and it's easy to portray hospitals as overbearing and heartless.
At the center of the controversy are personal injury lawyers. Flush from victory in the tobacco litigation, these lawyers are filing class action lawsuits against hospitals around the country. The lawsuits seem to be targeted at not-for-profit hospitals or health systems that have substantial assets or cash on hand and low ratios of costs to charges. They claim that these hospitals have breached their obligations as tax-exempt organizations to provide charity care to uninsured patients, have breached implied contractual obligations, or have violated federal or state laws by failing to charge fair rates and deal in good faith, by employing deceptive or unfair trade practices, or by employing abusive collection tactics.
So far, the federal courts have concluded that the federal claims asserted in these suits are unfounded. But hospitals still confront claims under state law, and some federal and state legislators and enforcement authorities are joining the fray.
Because they exist to serve, and in response to these external pressures, many hospitals want to establish comprehensive policies for offering discounts and financial assistance to uninsured or other indigent patients. Their challenge, however, is to ensure these policies do not violate federal rules or adversely affect payments for services furnished to Medicare patients. To this end, hospitals should review the Medicare payment and compliance concerns related to offering such discounts and assistance.
Medicare Payment and Compliance Concerns
Under the current PPSs applicable to most hospital services, the primary concerns related to offering discounts and financial assistance to the uninsured are:
- The impact of the discounts on Medicare payments for outliers and new technology (which use charges as a statistic for estimating cost)
- The impact of the discounts on Medicare payments for bad debts
- Compliance with the federal illegal remuneration and patient inducement statutes
- Compliance with the statutory bar on charges to Medicare that are "substantially in excess" of a hospital's "usual charges"
Payment for outliers and new technology. Hospitals may be concerned that the practice of extending discounts to uninsured patients could adversely affect Medicare payments for outliers and other Medicare payments for new technology that use charges to estimate costs. In actuality, the practices should not affect these payments because the payments are supposed to be computed based on the full actual charges from the hospital's chargemaster and the hospital's cost-to-charge ratio.
The concern, however, is that the practice of discounting charges for uninsured patients would cause Medicare to disregard the actual charges on a hospital's chargemaster. For instance, some have questioned whether Medicare might determine that the charges listed on a hospital's chargemaster are not the hospital's "real" charges if discounts are extended to a substantial proportion of self-pay patients-the patients who are liable for payment on a charge basis. If Medicare disregarded full charges and instead used discounted charges, the estimated cost of each case would be artificially deflated, and payments for outliers and new technology would be reduced.
Nonetheless, it is reasonably clear that extending discounts to uninsured patients would not have this effect. Charges and the cost-to-charge ratio are statistical proxies used to estimate costs in the computation of outlier and new technology payments. To maintain the integrity of these proxies, there must be consistency across the current charges listed on a claim (from the chargemaster) and the cost-to-charge ratio. Because the cost-to-charge ratio is computed from cost report data, and providers are required to record full charges in their cost reports, it would be inappropriate to require hospitals to use discounted charges to compute the estimated cost of an outlier case or new technology.
Indeed, in its answers to frequently asked questions about the uninsured, CMS confirmed earlier this year that discounts to uninsured patients will not affect Medicare payment for outliers. This guidance states that outlier payments will be unaffected even if discounts-as framed in the question-"are not based on individualized determinations of need, but, rather, are offered solely on the basis of the patient's uninsured status."
Bad debts. If certain requirements are met, Medicare pays hospitals for 70 percent of debts incurred but not paid by Medicare patients for deductible or coinsurance amounts. In brief, the provider must undertake reasonable collection efforts and the debt must be actually uncollectible when written off.
Among the answers to frequently asked questions posted on its web site, CMS notes that discounts to uninsured patients should not affect payment for Medicare bad debts. Medicare does not pay hospitals at all for "charity allowances" or other uncollected amounts owed by non-Medicare patients.
With respect to Medicare patients, the regulations require a reasonable effort to collect deductibles and coinsurance before those amounts may be written off and paid as bad debt. To be deemed reasonable, a hospital's effort to collect Medicare coinsurance and deductibles must be "genuine" and "similar" to its collection effort to collect on non-Medicare accounts. Thus, a hospital is not required to file collection suits or place liens on patients' property, unless these types of collection efforts are undertaken for non-Medicare patients.
Medicare regulations also provide that a hospital is not obligated to undertake collection efforts on copayments and deductibles owed by Medicare patients who are determined to be indigent. Program guidelines state that a hospital should apply its "customary methods" for determining indigence. Instructions in the Provider Reimbursement Manual also state that hospitals must apply both an income and an asset test in determining indigence for bad-debt purposes. Nevertheless, at a June 4, 2004, Open Door Forum, CMS officials indicated that a hospital would not lose payment for Medicare bad debts if it does not use an asset test for determining indigence, so long as the same income criteria are applied both to Medicare and non-Medicare patients.
Illegal remuneration and patient inducement statutes. Waivers of coinsurance or deductibles owed by patients enrolled in Medicare, Medicaid, or other federal health programs may implicate the federal illegal remuneration statute and the patient inducement statute, if waivers are granted routinely without regard to individual financial need.
The illegal remuneration statute makes it a felony to knowingly offer or pay anything of value in exchange for, or to induce, the purchase or order of any item or service for which payment may be made in whole or in part by Medicare, Medicaid, or another federal health program. There is a safe harbor for routine waivers of deductibles and coinsurance amounts for inpatient hospital services if three conditions are met:
- The waived amount is not claimed as a Medicare bad debt.
- The reduction is made without regard to the diagnosis or length of stay.
- The offer is not part of a price reduction agreement with a third-party payer.
There is no safe harbor protection, however, for routine waivers of Part B copayments for outpatient hospital services. These types of routine waivers were described in a fraud alert published by the HHS Office of Inspector General in the Dec. 19, 1994, Federal Register as probable violations of the illegal remuneration statute.
The patient inducement statute prohibits any offer of remuneration that is likely to influence the beneficiary's choice of provider. The statute contains an exception for amounts waived based on an individualized finding of financial need. Specifically, the OIG stated in guidance issued Feb. 2, 2004, that such waivers are permissible if the following criteria are met:
- 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.
- The party waives the coinsurance and deductible amounts after determining in good faith that the individual is in financial need or reasonable collection efforts have failed.
OIG representatives offered additional clarification at the June 4, 2004, Open Door Forum, emphasizing that the federal fraud and abuse statutes do not apply to waivers of charges for nongovernmental patients. In addition, OIG representatives clarified that a provider may waive collection of copayment amounts for governmental patients if the provider has a reasonable indigence policy and, pursuant to that policy, makes an individualized determination of financial need. The OIG representatives also indicated that, although providers should not advertise waivers of coinsurance or deductible amounts for patients insured under governmental programs, hospitals may post notices informing patients of the availability of financial assistance for those who qualify.
Bar on charges substantially in excess of usual charges. The Social Security Act prohibits the submission of bills or requests for payment containing charges that are "substantially in excess" of the provider's "usual charges." More specifically, the statute permits (but does not require) the OIG to exclude:
Any individual or entity that . . . has submitted or caused to be submitted bills or requests for payment (where such bills or requests are based on charges or cost) under title XVIII or a State health care program containing charges (or, in applicable cases, requests for payment of costs) for items or services furnished substantially in excess of such individual's or entity's usual charges (or in applicable cases, substantially in excess of such individual's or entity's costs) for such items or services, unless the Secretary finds there is good cause for such bills or requests containing such charges or costs.
The current regulations relating to this "excessive charge" provision paraphrase the statutory language and provide no meaningful guidance.
On Sept. 15, 2003, the OIG published a proposed rule in the Federal Register that could be problematic with respect to hospital discounts if the rule is adopted in its current form. The OIG's proposed rule makes it clear that providers are not obligated to give Medicare or Medicaid their best price.
The proposed rule is potentially troublesome, however, because it would define "usual charges" by reference to payments accepted from nongovernmental payers. Specifically, the proposed rule would define "usual charges" as the average of amounts that a provider agrees to accept as payment in full for all classes of patients except:
- Rates set for governmental patients (but not excluding rates providers negotiate with managed care payers for governmental patients)
- Charges based on capitated rates when more than 10 percent of the provider's maximum potential compensation could be paid in the form of a bonus
- Charges for services furnished to uninsured patients free of charge or at a "substantially reduced rate"
The "substantially-in-excess" limitation would be the amount that is 20 percent over the calculated "usual charge."
The OIG's proposed definition of "usual charges" could penalize hospitals for offering discounts to nongovernmental patients who are insured or underinsured. In addition, the OIG has not clarified how it would treat sliding-scale discounts under the proposed definition of "usual charges." Under some hospitals' indigent care policies, discounts taper to relatively modest levels as the patient's income approaches the cut-off for eligibility for financial assistance. For example, a hospital might offer a 5 percent discount from full charges for patients who have income at 350 percent of the federal poverty level.
A major problem with the OIG's proposed rule is that the calculation of "usual charges" would factor in discounts extended to all nongovernmental patients, except for "substantially reduced rates" offered to wholly "uninsured" patients. This approach could have the effect of reducing the calculated average "usual charge," thereby forcing hospitals to reduce the charges stated on Medicare bills (below the chargemaster) to avoid charging Medicare at a rate "substantially in excess" of the calculated usual charges. The lowered Medicare charges, in turn, could result in reduced payments for outliers and new technology because, under the current Medicare payment formula, the reduced charges reflected on a Medicare bill would not properly align with the cost-to-charge ratio computed on the basis of the full charges recorded on Medicare cost reports.
Honing the Financial Assistance Policy
To effectively address all the foregoing concerns, a hospital's financial assistance policy for uninsured or low-income patients should reflect the following considerations.
Written policy. The policy should be in writing, and-most important-it should be applied consistently.
Eligibility criteria. The eligibility criteria for discounts should be spelled out in the written policy. These criteria should:
- Provide for individualized determinations of financial need
- Address whether assistance will be provided for uninsured nongovernmental patients, indigent government program patients, and/or other low-income, underinsured patients
- Define qualifying income levels-typically, a multiple (e.g., one to three times) of the federal poverty income level, but possibly taking into account local considerations that reasonably allow for some leeway
- Address whether expenses (such as child support) are considered
- Address whether the patients' assets are considered, and if so, what types of assets are considered available for payment of hospital bills and what other expenses are considered
- Address whether the hospital will consider cases of medical need in catastrophic cases where income or assets would otherwise be considered to be too high to qualify for assistance
Notice. Waivers of coinsurance or deductibles for patients in governmental programs should not be advertised, but hospitals may post notices that financial assistance is available for qualifying individuals.
Documentation. The hospital's written policy should address what documentation will be required to verify a patient's eligibility for assistance. Self-attestations may not be sufficient to establish indigence for Medicare bad debts.
Time limits for financial assistance applications. The policy should specify whether there is a presumptive time limit for applications for assistance. For example, will applications for assistance be considered if submitted after the accounts have been sent to a collection agency, and will any money be refunded to patients who have been determined to be eligible for assistance after some amount has been collected?
Beneficiaries of assistance. The policy should make clear that the assistance is intended solely for the benefit of the patient and his or her family and does not relieve third parties of liability for payment.
Payment plans. The policy should outline the types of payment plans the hospital will accept and whether it will charge interest.
Collection activities. The policy should state whether unpaid accounts will be sent to outside collection agencies and, if so, what level of review or approval are required for initiation of legal proceedings.
In Sum . . .
Hospitals have a long-established tradition of providing care to the uninsured and indigent. Hospital senior financial executives can help their organizations sustain that tradition by insisting that their organizations develop clear policies for discounting charges to uninsured or indigent patients in a way that is mindful of pertinent payment and compliance concerns.
Dennis Barry, JD, is a partner and co-section head, Vinson & Elkins, LLP, Washington, D.C., and a member of HFMA's Washington Metropolitan Chapter.
Christopher L. Keough, JD, is a partner, Vinson & Elkins, LLP, Washington, D.C., and a member of HFMA's Washington Metropolitan Chapter.
Questions and comments about this article may be sent to Dennis Barry at firstname.lastname@example.org or to Christopher Keough at email@example.com.
Publication Date: Tuesday, March 01, 2005