Medicare Implications of Discounts to the Uninsured

The past two years have presented many challenges to hospital financial managers who are responsible for setting hospital charges. First came the controversy surrounding Medicare outlier payments, which C MS views as excessive in some instances due to disproportionate increases in hospital charges relative to COSTS. Next came a series of articles in various national newspapers, such as The Wall Street Journal and The New York Times, accusing the hospital industry of price gouging with respect to uninsured patients who may be billed "full charges: Outlier payments and hospital charge practices have also been the focal point of a congressional inquiry and regulatory rulemaking by both CMS and the HHS Office of Inspector General (OIG).

Given the current attention to charges, hospitals considering changes to their discount policies are caught between a rock and a hard place.

On the one hand, hospitals want to avoid negative press surrounding charges to some uninsured patients that may result in payment at rates substantially higher than those paid by commercial insurers for the same services. Accordingly, some hospitals are considering whether they can discount charges for services provided to these patients, and if so, how. Hospitals also are considering which uninsured patients should receive discounts (e.g., indigent only).

Meanwhile, increased regulatory scrutiny has caused many hospitals to question what are allowable charge practices. HHS has recently taken steps to alleviate some concerns about discounting charges to the uninsured, but the regulatory environment, even in light o! those steps, is hardly conducive.

Medicare Regulation of Charges

To determine whether a potential discounting policy complies with applicable Medicare regulatory provisions necessary first to understand how Medicare regulates a hospital's charges. Though not defined in Medicare regulations, the term "charges," as used in the Medicare Part A context, generally refers to the data in a hospital's charge description master that are posted on all bills.
Notwithstanding all the recent attention that has been brought to bear on charge-setting practices, there is a paucity of guidance on what constitutes acceptable charge-setting practices. Most Medicare regulation in this area dates back to an era when hospitals received cost-based payment.

When Medicare paid hospitals on a cost basis, it relied on hospital data reflecting charges for ancillary services to determine a hospital's costs. These charges were used to apportion costs to Medicare and other payers.

To ensure that a particular hospital's charges could properly be used as a comparative tool for cost-apportionment purposes, Medicare required that charges be "related" to the cost of the corresponding services (42 C.F.R. [section] 413.53[b]). The absolute magnitude of a hospital's charges was irrelevant. The functionality of the cost-.apportionment system depended solely on the existence of some relation ship between a hospital's charges and its costs.

Thus, Medicare has never limited the extent to which a hospital could mark up its charges. This idea is reflected in Provider Reimbursement Manual [section] 2003.1, which states that Medicare "cannot dictate what a provider charges," although Medicare can decide whether a hospital's charge structure meets the necessary criteria for use as a tool for apportioning a hospital's cost.

Another principle implicating charges from the era of cost-based payment is the lesser-of-cost-or-charges (LCC) limitation. Under this principle, Medicare payment could not exceed a hospital's charges, and so a hospital could adversely affect its payment by setting charges too low.

On the other hand, there was no limit on how high hospital charges could escalate. The sole goal of the LCC limitation was to ensure that Medicare not pay more than the general public for similar goods and services.

Accordingly, application of the LCC limitations was based on "customary charges," which are defined in 42 C.F.R. [section] 413:13(a) as "the regular rates that providers charge both beneficiaries and other paying patients." Specifically, these rates were defined in 42 C.F. R. [section] 413.13(e) as the charges paid by "patients liable for payment for [the provider's] services on a charge basis." Consequently, discounts on charges to charge-paying patients could have caused a hospital's "customary charges" to fall below costs, triggering application of the LCC limit.

The LCC limitation also contains some important exceptions.

For instance, hospitals can waive their charges for indigent patients without affecting the calculation of customary charges, according to Provider Reimbursement Manual [section] 2604.3(B)(3). Also excepted from the calculation are charges relating to patients covered by a plan or agent that negotiates payment on a basis other than full charges. In addition, this section of tea manual states that discounts to some nonindigent patients without any third-party coverage could he given without reducing customary charges provided that a "substantial percentage" of the hospital's charge-paying patients are paying full charges.

Although a certain degree of ambiguity exists with respect to each of these exceptions, the LCC principle has been subject to surprisingly little controversy, likely due to the fact that prospective payment took effect less than a decade after the Medicare program implemented the principle.

Presently, charges have an impact on payment only indirectly and only in a few, limited circumstances. The calculation of outlier payments is one example. The Medicare outlier payment is 80 percent of the difference between the Medicare prospective payment for the discharge, plus a fixed-loss threshold amount, and the total estimated cost el a case (42 C.F.R. [section] 412.84[j]). To estimate the cost of a case, Medicare multiplies the hospital's charges relating to the discharge by a cost to-charge ratio derived from a prior cost-reporting period, thus, changes in a hospital's charge structure could affect the imputed costs for a discharge.

In addition to outliers, there are certain pass-through payments relating to new technologies, both in the inpatient and outpatient context, that entail using e cost-to-charge ratio to convert charges to costs. The cost-to charge ratio used in these formulas also is based on historic data from previously settled (or tentatively settled) cost reports.

Due to the time lag between the historic cost-to-charge data and current charges, these types of payments may artificially increase (or decrease) when charges are increasing (or decreasing) more rapidly than costs. As a result of this anomaly, regulatory authorities have subjected hospital-charge structures to heightened scrutiny over the past couple of years. However, no new mandates have stated what should be considered acceptable charge-setting practices.

Potential Concerns Raised by Discounting Practices

Although limitations on hospital charge-setting practices remain scant, interest in these practices by regulatory and enforcement authorities remains high due to the publicity focused on perceived abuses. This combination of factors invites creativity in a hospital's effort to curb behavior that the regulators may now perceive to be abusive.

For instance, if a hospital aggressively discounts charges to the uninsured, it might be alleged that the hospital had improperly reported inflated charges on Medicare outlier and pass-through payment claims that do not reflect its "real" charges. It also might be argued that if a hospital maintains a substantial discount program, all of its claims that are paid based in whole or in part on charge--even those that are not subject to the LCC limitation--should be reduced to the lowest common denominator.

Because these would be novel theories el liability, however, it is likely that a government authority would assert them only in extreme cases. A more moderate program is less likely to be challenged. Even if these theories were asserted, they lack a strong foundation in the applicable regulatory framework, and thus the probability of their successful prosecution is uncertain.

An additional concern is the recent rulemaking issued by the OIG. In the September 15, 2003, Federal Register, the OIG issued a rule interpreting the statutory prohibition on charges for Medicare patients that are "substantially in excess" of a hospital's "usual charges." The OIG would apply this prohibition to all claims paid based on charges, such as outliers. If the proposed rule is finalized, hospitals could run afoul of this prohibition if their charges to Medicare exceed 120 percent of their calculated average charges under the terms of the proposed rule.

To determine average charges, the OIG would look not to amounts billed, but to payments received, by a hospital. This figure would include discounted contractual rates paid by third-party payers. Limited exceptions would apply for waivers of charges or "substantially reduced" rates offered to the uninsured. It this rule were to go into effect, therefore, hospitals offering widespread discounts, other than the as-yet undefined "substantially reduced" rates to the uninsured, could find that they would need to significantly reduce their charges on outlier claims and pass through claims to Medicare.

Impact of HHS's Announcement

The American Hospital Association (AHA) has responded to the increasing pressure applied to its members to reduce their charges in an uncertain regulatory environment by sending a letter to HHS outlining the issues and asking for guidance as to what are permitted practices. In its letter, the AHA requested regulatory relief tram perceived impediments to reducing charges or forgiving debt for indigent patients.

In its response to the AHA, HHS dismissed the notion that its regulations anted as obstacles to discounts to the indigent. In the question-and-answer sheet Questions on Charges for the Uninsured, HHS affirmed that hospitals have discretion to design their own indigence policies, pursuant to which they may waive collections for indigent patients and patients with large medical bills Although H HS acknowledged the possible implication of the LCC principle in failing to collect full charges from a substantial percentage of charge-paying patients, it also recognized that, with the advent of prospective payment, this principle has only limited applicability Accordingly, HHS did not propose any changes to the present regulatory framework.

Although helpful, this guidance does not answer all questions pertinent to hospital-discounting policies. For instance, there is no discussion regarding whether a hospital would be allowed to offer discounts to its indigent patients if all or substantially all of a hospital's self-pay population is indigent, leaving no patients paying on a full-charge basis. Further, HHS's guidance focuses only on core to the indigent. HHS did not address discount policies applicable to patients who might be capable of paying full charges

What Should You Do?

Given the uncertainty surrounding future enforcement efforts, hospitals should approach discounting decisions with some degree of circumspection. What is clear based on the recent HHS guidance is that discounting or waiving charges to the indigent is acceptable. Prior to engaging in any such practices, however, hospitals should establish a bona tide indigence policy and apply it consistently.

Such a course of action would also serve to vitiate most of the strongest criticisms launched against the hospital community by the press and others in recent years. Discounts that are integral to legitimate and lawful commercial purposes, such as discounting or waiving charges as part of a risk management strategy, should also be acceptable.

Further, although it has always been clear that negotiating with insurers is acceptable, hospitals should also consider negotiating with discount-card entities--for example, entities offering cards entitling the uninsured to discounts from full charges at participating hospitals. Anecdotal reports indicate that these entities are growing more prevalent.

Finally, hospitals can furnish discounts in isolated instances that do not in the aggregate amount to systemic discounts or call into question the integrity of the hospital's charge structure.

Alternatively, some hospitals may consider simply making an across-the-board reduction in their charges Under most circumstances, the incidental effects may be problematic For instance, the hospital's computation of its costs in the outlier formula and new technology payment system would be understated through use of the old cost-to-charge ratio, which could result in lower payment, at least temporarily.

Although recent changes to the outlier regulation allow a provider to request use of a revised cast-to-charge ratio, the provider must present "substantial evidence" regarding the inaccuracy of its then-current cost-to-charge ratio, which is a standard still in need of clarification. Further, some commercial insurers pay based on either full or discounted charges, and thus they would become unintended beneficiaries of the hospital's reduced-charge structure. Accordingly, a policy of carefully planned discrete discounts is likely to he the preferable approach for most hospitals.

Although the OIG contends that outliers are paid on the basis of charges, this an inaccurate statement. Outliers are paid on the basis of costs; charges are merely the proxy used to determine what those costs; may be.

What Does CMS Say?

To read Questions on Charges for the Uninsured, a CMS question-and-answer sheet on hospital pricing for the uninsured, go to FAQ_Uninsured .

Christopher L. Keough, Esq., is a partner, Vinson & Elkins, LLP, Washington, D.C., and a member of HFMA's Metropolitan Washington Chapter.

Andrew Ruskin, Esq., is an associate, Vinson & Ekins, LLP, Washington, D.C.
Questions or comments about this article may be sent to Christopher Keough at ckeough@velaw.com.

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