February 27, 2008Client Alert

OIG Issues Advisory Opinion Regarding Prompt Pay Discounts

On January 20, 2008, the Department of Health and Human Services Office of Inspector General (“OIG”) issued Advisory Opinion 08-03. This Advisory Opinion reviewed a health care system’s proposed prompt pay discount program (the “Proposed Arrangement”) to determine whether it violated the Anti-Kickback Statute, 42 U.S.C. §13207b(b), which prohibits the payment of any remunerations with the intent to induce referrals for items or services which are reimbursable by a Federal health care program.

The Proposed Arrangement

The Proposed Arrangement offers all insured patients a discount for the prompt payment of the patient’s cost-sharing portion of outpatient and inpatient services. The discounts ranged from five percent (5%) to fifteen percent (15%), depending upon the size of the bill and time period within which the bill is paid. The discount is offered regardless of the patient’s financial status or ability to pay. In addition, the discount is available to Medicare and Medicaid beneficiaries, as well as other insured patients. According to the health system, there is a direct relationship between the discounts and the amount of savings the health system would gain. The financial savings to the health system included a reduction in collection costs and accounts receivable, as well as positive benefits to the health system’s cash flow. The Proposed Arrangement potentially implicates the Anti-Kickback Statute because it involves the payment of money (i.e. the discount) that has the potential to induce patients to come to the health system for services, some of which are reimbursed by Federal health care programs. Thus, the Proposed Arrangement must either fit within a safe harbor or be of a benign nature such that the OIG determines that it will refrain from issuing sanctions.

Inpatient Services Discount

The Proposed Arrangement necessitated a two-part analysis because it applied to both inpatient and outpatient services. First, the OIG determined that the inpatient services discount, if structured properly, could fall within a regulatory safe harbor. Safe harbor protection only results from an arrangement which precisely fits within the specific requirements of the applicable safe harbor. There is a safe harbor for the waiver of beneficiary coinsurance and deductibles, but this only extends to inpatient discount arrangements. The health system certified that the Proposed Arrangement would fall within the safe harbor by meeting the following conditions: (1) the discounted amount would not be treated as bad debt and thereby shifted to Medicare, Medicaid, another third-party payor or individual patients; (2) the discount would apply to patients regardless of reason for admission, length of stay or diagnostic related group; and (3) the discount would not be part of a price reduction agreement already existing between the health system and a third-party payor. Therefore, the Proposed Arrangement, at least with regards to inpatient services, would fit within a proscribed regulatory safe harbor and would not violate the Anti-Kickback Statute.

Outpatient Services Discount

The same is not true for the outpatient services discount which does not fall within a safe harbor and therefore potentially would be subject to sanctions under the Anti-Kickback Statute. As the outpatient services discount did not fall squarely within a safe harbor, the OIG examined the Proposed Arrangement to determine if there was the requisite intent to induce or encourage prohibited referrals. In conducting this analysis, the OIG considered five (5) factors: (1) the discount program would not be advertised; (2) the only time patients were informed of the discount program was through the ordinary billing process; (3) all third-party payors would be notified of the discount program; (4) any costs associated with the arrangement would be bourn by the health system; and (5) the discount would bear a reasonable relationship to the amount saved by the health system. Even though the Proposed Arrangement did not fit within any safe harbor, after considering the aforementioned factors, the OIG determined that the Proposed Arrangement was not just a disguised method for inducing referrals and stated that it would not subject the health care system to sanctions.


While the Proposed Arrangement could potentially violate the Anti-Kickback Statute, the OIG decided, based on the conditions and safeguards instituted by the health system, that it would not subject the Proposed Arrangement to sanctions. Thus, it is possible for hospitals to provide prompt pay discounts to patients, as long as specific safeguards are put in place. While this may be good news to hospitals looking for creative ways to boost collections of accounts receivable, it should be noted that the OIG Advisory Opinion is limited to the particular arrangement proposed in the Advisory Opinion and does not have the force of law.

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