On February 4, 2022, the Department of Health and Human Services’ Office of Inspector General (“OIG”) issued a favorable advisory opinion on a proposal by a nonprofit children’s hospital to enter into an arrangement with two individual donors, who intend on making a testamentary gift to the hospital that would be used to reduce and subsidize costs incurred by patients.

The OIG indicated it would not impose administrative sanctions, despite the fact that the proposed arrangement would not fall squarely within any safe harbor under the federal Anti-Kickback Statute (“AKS”) or exception to the definition of “remuneration” for purposes of the beneficiary inducement prohibition (“Beneficiary Inducement CMP”).

Arrangement created restricted endowment fund

Under the proposed arrangement, the hospital would be the beneficiary to a restricted endowment fund established through a testamentary gift from two donors. The fund would be used to subsidize bills for families with children who have an established care relationship with the hospital’s physicians and who receive services provided by the hospital’s programs.

The amount spent on eligible recipients annually will be based on an endowment spending policy adopted by the hospital’s board of trustees. To be eligible, the family must have a child receiving treatment in the hospital’s cancer, cardiac, or neurosurgical programs. If there are remaining sums in the annual fund after the out-of-pocket expenses for eligible families’ in those programs are paid, then that money may be used to pay for  the eligible families’ out-of-pocket expenses for other services at the hospital, provided that (i) the hospital consults with and obtains consent from the donors or their estate’s representative and (ii) the proposed expenses do not exceed  an annual limit determined by hospital.

The money would be distributed in the following manner:

  1. The hospital must determine the patient’s cumulative bill for hospital fees and professional fees and submit a claim for reimbursement to the appropriate third-party payor (including federal health care programs), if any.
  2. After payment by the appropriate payor, the hospital would calculate the remaining balance on the patient’s bill. Patients who satisfy the hospital’s financial assistance policy would receive a financial need reduction, and then all bills, regardless of the patient’s financial need status, would receive a percentage reduction.
  3. Finally, the hospital would use money from the endowment fund to pay any balance remaining on the patient’s bill.

Additional aspects of the proposed arrangement include:

  • The individual donors and their estate representatives are not providers or suppliers of health care items or services.
  • The hospital would not advertise the existence of the proposed arrangement, and it will only be discussed with patients’ families after the hospital establishes the patient meets the fund’s eligibility criteria described above.
  • The criteria for clinical determinations regarding the appropriateness of care would not change.
  • The hospital would not consider insurance coverage, type of insurance, or a patient’s diagnosis or medical condition (other than during fund eligibility assessments) in determining whether families are eligible.
  • Reduction or subsidization of cost-sharing amounts would not be part of any price reduction agreement with third-party payors.
  • The hospital would not report unbilled cost-sharing amounts as bad debt on cost reports, nor would it shift those amounts to third-party payors, including federal health care programs.
  • The funds would not be earmarked to cover only cost-sharing for federal health care program beneficiaries.

Proposed arrangement didn’t meet safe harbors or exceptions

OIG noted that the Proposed Arrangement involves several streams of remuneration that would implicate the federal AKS and the Beneficiary Inducement CMP, especially because the reduction and waiver in cost-sharing obligations could influence federal health care program beneficiaries to select the requesting hospital over other hospitals that provide the same services.

The AKS, has a safe harbor for beneficiary copayment, coinsurance, and deductible amounts, which allows hospitals to waive cost-sharing amounts if the hospital: (i) does not later claim the reduced or waived amount as a bad debt for payment purposes under a federal health care program or otherwise shift the burden of the reduction or waiver onto a federal health care program, other payors, or individuals; (ii) offers to reduce or waive the cost-sharing amounts without regard to the reason for admission, the length of stay of the beneficiary, or the diagnostic related group for which the claim for reimbursement is filed; and (iii) does not make the offer to reduce or waive the cost-sharing amounts as part of a price reduction agreement between a hospital and a third-party payor.

Additionally, the beneficiary inducement civil monetary penalty statute contains an exception, which protects waivers of cost-sharing amounts that are: (i) not offered as part of any advertisement or solicitation; (ii) not routine; and (iii) made following an individual determination of financial need.

In this case, OIG determined that the proposed arrangement would not fully meet the  AKS safe harbor because the safe harbor only applies to “waiver[s]” of cost-sharing obligations and not to “reduction[s] or waiver[s]” of cost-sharing limited to patients receiving treatment through specified programs (that is, not without regard to reason for admission, the length of stay, etc.). OIG also noted that the arrangement didn’t qualify for an exception under the Beneficiary Inducement CMP because  the hospital would implement the reductions routinely and financial need is not a requirement to qualify for the cost-sharing reductions and waivers.

Proposed arrangement still showed low risk of fraud

However, OIG decided that the proposed arrangement would present a sufficiently low risk of fraud and abuse and be unlikely to lead to overutilization of services and increased federal health care program costs for the following reasons:

  1. The proposed arrangement would cover care-related expenses incurred by all eligible families, regardless of payor, for the treatment of their children at the hospital, including all remaining costs on the bill of an uninsured eligible family. The funds would not be earmarked to cover only cost sharing for federal health care program beneficiaries. Moreover, the funds would cover cost-sharing amounts for few federal health care program beneficiaries—that is, children covered by Medicare or S-CHIP.
  2. The hospital would not advertise the proposed arrangement. Instead, the hospital would inform eligible families that their cost-sharing amounts would be covered only after their children met the fund’s established eligibility criteria. This safeguard not only reduces the risk of overutilization, but it also decreases opportunities for inappropriate patient steering.
  3. The hospital would not report unbilled cost-sharing amounts under the proposed arrangement as bad debt on cost reports or shift those amounts to third-party payors, including federal health care programs.
  4. The arrangement included other safeguards that also reduce the risk that the hospital would use the Proposed Arrangement to attract highly profitable patients. For example, the usual clinical criteria for inpatient or outpatient care would not change because of the proposed arrangement. Furthermore, the hospital would not consider insurance coverage, type of insurance, or a patient’s diagnosis or medical condition when determining whether the family is eligible to receive cost-sharing support.
  5. The donors are not health care providers or suppliers, are not involved in health care aside from charitable endeavors, and are not in a position to make or receive referrals for health care items or services.

Although OIG gave the hospital a green light on this arrangement, there is no guarantee that similarly structured reductions and subsidization of costs would be immune from administrative sanction. Regardless, the analysis of this arrangement outlined in this advisory opinion sheds some light on how future arrangements are likely to be reviewed and analyzed by the OIG.

Should you have any questions related to this advisory opinion, or any other health care compliance issues, please do not hesitate to reach out to the health care attorneys at Reed Smith.