PWW Article - The Discounting Dilemma

How much can you discount your services without getting in trouble with the law? A good question for which at this point, no one has a clear answer. This brief article attempts to put the issue in perspective and remove some of the “cloud of uncertainty” that goes with it.
Overview of the Problem
A key government weapon in the anti-fraud campaign is the federal Anti-Kickback Statute (AKS), 42 U.S.C. § 1320a - 7b(b). An important area of potential violation under the AKS involves discounts that are granted by a supplier of Medicare service to other suppliers and providers in order to obtain additional federal health care business. Discounts provided to hospitals and skilled nursing facilities (“SNFs”) are particularly suspect when:
  • The ambulance service discounts prices below the ambulance service’s fully loaded cost per transport;
  • The ambulance service discounts prices on Medicare Part A or PPS covered ambulance service in return for---explicitly or implicitly---other federal program business, such as Part B Medicare covered service. 
What the Law Says
The AKS prohibits any knowing or willful solicitation or receipt of any remuneration (including any kickback, bribe, or rebate) directly or indirectly, in cash or in kind, in return for referrals of services reimbursable by any federal health care program. The statute has criminal penalties of up to five years imprisonment and a $25,000 fine for a violation. A separate statutory section also provides civil monetary penalties of up to $50,000 per violation (i.e., per transport) for acts that violate the anti-kickback statute. 42 U.S.C. § 1320a-7a(a)(7). 
A conviction under the AKS is grounds for automatic exclusion from the Medicare and Medicaid programs. A very significant aspect of the AKS is that it is a “two way” law---both parties to an unlawful arrangement can be found in violation and are thus equally at risk, which is a key point when negotiating with nursing facilities and hospitals.
In addition to potential criminal liability under the anti-kickback statute, there is legal authority that any claim tainted by a kickback arrangement is a "false or fraudulent" claim under the Federal False Claims Act, 31 U.S.C. § 3729. Parties to such arrangements risk exposure not only to the government but also to qui tam “whistleblower” lawsuits by their employees, competitors, and others. 
What the OIG Says About Discounted Contracts

In February of 1999, the OIG released Advisory Opinion (AO) 99-2. The ambulance provider in AO 99-2 proposed to enter into an agreement with a skilled nursing facility where the ambulance provider offered discounts for PPS (Part A) transports of up to 50% off of its Medicare allowable charge. The provider claimed that it should be permitted to give discounts to the facility because the provider’s cost in serving the Part A residents was lower than the cost in serving Part B residents, primarily because it did not incur the expenses associated with Part B billing.

But in this case the provider was only able to demonstrate marginal cost savings of approximately 10% between its Part A and its Part B costs, primarily from the fact that it was not required to bill Part B for the PPS trips. A marginal cost savings of 10% was not, in the OIG's view, sufficient to justify the 50% discounts being given to the SNF. There would be a violation of the AKS if the requisite intent to induce the referral of Part B business were present. Intent to induce a referral is much harder to prove than the discount itself, but courts have held that intent can be proven even if the inducement of the referral is only one reason for the providing the discount, and not the sole reason.

Well, How Much Can We Discount?

It is fair to ask: (1) is any discounting allowed, and (2) if so, how much? On September 22, 1999 the OIG released a letter, which notes that the key inquiry under the anti-kickback statute is whether the discount on the PPS-covered business is intended to induce the referral of Part B business. The actual size or structure of the discount is not the only thing that is examined. However, even a minimal discount could potentially implicate the AKS, but only if the intent to induce the referral was present---and “intent” is a state of mind that the OIG cannot evaluate in an opinion letter. 

The OIG has stated that when evaluating discounts under the AKS, it will look to determine whether the charges reflect “fair market value,” which is been defined as "the value that would be assigned to the item or service in question by individuals or entities who have an arms-length relationship and who have no ability to influence referrals of any health care business to each other."

“Fair market value” is a determination that the parties to a facility contract need to make based on evaluating the marketplace. The key “sniff test” is: Would the ambulance provider give the same rate to an entity that doesn’t refer any Medicare Part B business? If the answer is YES, then it is less likely that the AKS is violated.

The “bottom line” is that the rates charged to a facility whenever the facility bears the financial risk (e.g., Medicare Part A or PPS covered trips) should be greater than the costs of providing that service, and should reflect fair market value for that service. A likely “safe” discount for non-Part B trips would be one that is equal or close to the ambulance service’s Medicare Part B approved charges for that service, but it could possibly be lower, depending on your costs and the fair market value of services in your community, as long as no illegal intent to induce the referral is present. 

Another Separate Issue: Exclusion From Medicare

In addition to direct implication of the AKS---even if the discounting practice does not constitute grounds for an AKS violation---the ambulance service may be excluded from the Medicare program for charging Medicare an amount “substantially in excess” of its usual charges made to other payers. 42 U.S.C. § 1320a-7.   This action would be separate from any criminal or administrative action under the AKS. 

In an April 20, 2000 letter to the American Ambulance Association, the Chief Counsel to the Inspector General indicated that the “substantially in excess” exclusionary authority would not be implicated unless a provider’s Medicare charge is substantially in excess of its median non-Medicare/Medicaid charge. While this may seem like a positive development, we must keep in mind that the “substantially in excess” exclusionary authority is a different issue from the statutory AKS criminal provisions. 

Some good news---we know of no actual criminal enforcement of the AKS against an ambulance provider for “unlawful” discounting, and the OIG opinions are not court determinations that are binding on anyone except the party requesting the opinion. But that does not mean that the OIG opinions should be ignored, as they are a “roadmap” on how the OIG would enforce the statute. And no company wants to see an OIG investigation. 

Until there is clearer guidance and court decisions on the subject, we believe that the best way to minimize the risk of raising AKS implications in your arrangements is to follow a few simple guidelines: 
  •  Know Your Costs. Make certain that you have a handle on all the costs that go into providing a unit of service. There is no clear definition of “fully loaded costs,” but OA 99-2 refers to taking the total of all costs divided by the total number of ambulance trips. Certainly you can allocate appropriate overhead costs to coming up with this number. Use this number as a floor in your negotiations with the facility.
  • Negotiate at “Arms Length” Sweetheart arrangements that are unwritten, or involve other benefits (such as free wheelchair van service or memberships for everyone) may be suspect. Keep your negotiations business-like and professional.
  • Educate Your Facilities Provide them with information on the AKS and other materials from newsletters, the OIG, HCFA, the AAA, and other state associations or sources to help the facility understand that they also have a responsibility as you do to avoid potentially unlawful arrangements, and that they are subject to potential liability. 
  • Critically Review the Proposed Contract. Seek competent advice in making sure there are protections built into the contract that help minimize risk of an AKS violation and other legal landmines. The agreement should provide the safeguards you need to ensure good and profitable service to your customer without tying your hands behind your back. Don’t simply sign off on a contract the facility provides without careful review and negotiation where possible. Many such contracts contain boilerplate slanted in favor of only the facility’s interests.