Ready for prime time? Make your financial assistance policy a class act: 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

Healthcare Financial Management, March, 2005 by Dennis Barry, Christopher L. Keough

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 Hohz- 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, how ever, 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"

Payments 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.