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Health Care Financing in the United States

An overview of facts, issues and trends in healthcare financing methods and delivery system organization.

Lynn Hill Spragens, MBA, Brooke Bumpers

Lynn Hill Spragens, MBA
The Bard Group, LLC

You will increase the potential for success for your palliative care program if you design it to meet the needs of your community and institution. This requires an understanding of the business environment within which health care is delivered. The following sections are intended to provide you with an overview of facts, issues and trends in healthcare financing methods and delivery system organization. This context will equip you to ask questions and seek information critical to program design, administration and sustainability.

National Overview of Healthcare Financing

You are probably aware that the current healthcare delivery and financing systems in the U.S. are fragmented, inefficient and burdened by complex paperwork and regulation. In addition to the widely recognized problem of "the uninsured," the current system [or lack thereof] creates other problems that impact local delivery systems and have implications for new programs such as palliative care.

A key observation about the system is that most of the players are attempting to do a "good job" and provide coverage and services to patients. However, as they individually try to achieve improvements and cope with fragmentation in the system, they make changes that inadvertently make the whole system more cumbersome and irrational.

In a system where everyone is not covered and benefits differ based upon employer packages purchased at different premium prices, each insurer must protect itself from paying for "more than" the benefit coverage purchased. Rich benefit plans and lenient administrations create adverse selection [people who need that coverage will join your plan, run up costs, drive up premiums and put you out of business].

If you wish to understand the economic theory that explains this behavior, the concept of "private good" and "public good" can be explored, but it is outside the scope of this handbook. However, the following information may at least provide a context for understanding how the current system evolved.

Historical perspective and trends in the U.S. healthcare system

Until the 1940s, most health care was paid for by individuals on an "as needed" basis. Prior to the expansion of "third party insurance" in the 1950s, healthcare systems and providers were constrained by the local public's ability to pay. Charitable institutions or public bonds largely financed hospitals and infrastructure.

1950s - 1970s "Heyday of healthcare expansion"

Third party insurance through employers [where somebody besides the individual receiving care paid the bill] emerged during and after World War II, as a response to a labor shortage and labor union impact. This dramatically shifted the cost/benefit equation of patients evaluating care options and increased the flow of funds into health care. This had some good effects [more access to care when needed, more funding for research, training and facility expansions into underserved areas]. It also began creating the culture of health care as a "free good" and began a period of rapid escalation in healthcare costs. In addition, it began creating the insurance chasm between "employer paid insurance" and individual insurance, which gradually developed into the "problem of the uninsured" we have today.

Medicare was introduced in the 1960s to expand "third party payer" coverage to the elderly [who were aging out of their employer insurance plans]. Originally resisted by the medical community as a first step toward nationalized medicine, Medicare was the major payer and viewed as a profitable source of business by the 1980s. When introduced, Medicare followed the prevalent insurance industry convention of paying based upon submitted charges [billed charges from the provider's fee schedule], with some formula of coinsurance or deductibles.

For more information please visit Medicare Payment Systems.

[See this link to the Center for Medicare and Medicaid Services (CMS) web site for more information on Medicare Part A (Inpatient) and Part B (outpatient) services: http://www.hcfa.gov/]

The addition of employer paid insurance and Medicare dramatically altered the flow of funds in health care and separated patients from consideration of care cost decisions. In addition, the prevailing reimbursement method was basically "cost-plus." Essentially, [in simplistic terms] hospitals and physicians estimated what their current costs were, needed program additions and capital investments, as well as staff pay increases and estimated expected patient volume. They divided costs by volume and determined the fees they needed to charge to breakeven and achieve an acceptable margin. This formula became the basis for their fee schedule increase. Insurance companies and Medicare paid a percentage [usually 80%] of these fees. Patients were liable for the remaining 20%, which was often "written off" as a courtesy. Thus, fee schedules were often inflated to result in 80% of fees covering costs.

In its harshest light, this period resulted in the healthcare system setting its own price, without the normal economic impact on demand [since it was a third party payer system]. Not surprisingly, this resulted in a period of rapid expansion of healthcare services and rapid inflation in healthcare costs. Increased access and new services were positive by-products.

Negative by-products of this financing system were over-expansion of facilities, little emphasis on efficiency [since costs could be passed on to payers] and emerging complacency about healthcare's entitlement to growing revenue streams.

1980s - 1990s (employer, insurance, & government responses & system fragmentation)

These dramatic and unchecked trends in costs created the backdrop for new insurance products [self-funded plans for large employers, HMOs, PPOs, etc], changes in benefit structures to limit costs, changes in payment methods and dramatic increases in audit and oversight activities.

The 1980s and early 1990s saw the emergence of many fragmented efforts to rein in healthcare costs. They included variations of the following:

  • Controlling fee schedules (each payer developed customized fee schedules and negotiated payment from that fee schedule to reduce exposure to excessive charges);

  • Controlling access to care through "pre-certification" and "case management," to manage costs and provide quality oversight to excessive testing, surgical interventions and prolonged hospitalizations;

  • Defining networks and establishing provider standards;

  • Creating standards of "appropriate billing" and auditing for abuses;

  • Narrowing benefit coverage to minimize exposure to open-ended costs [such as mental health];

  • Introduction of new ownership structures [health systems]; and

  • Blurring the lines between independent practices, hospitals and insurance companies as some health systems acquired HMOs and physician networks.

As the largest payer and with some market immunity as a government program, Medicare became the market leader in the change efforts. The "prospective payment system" for inpatient hospital services was introduced, resulting in diagnosis related groups (DRG)/case rate payments in the 1980s to counter the rapid rate of increase in fees and to provide hospitals with an incentive to manage care for efficient outcomes. [http://www.hcfa.gov/medicare/payment.htm]

Most Americans are eligible for Medicare Part A services upon age 65; this covers most inpatient services, and defined Skilled Nursing or Home Health services. Participants must pay a deductible, however the first 60 days of hospitalization is fully covered. As of day 61 (per benefit period), patients begin to pay a "coinsurance rate" of $198/day. Clearly this would only apply to very unusual cases. See the following website for detailed information on current Medicare rates: [http://www.medicare.gov/basics/amounts2001.asp]

Medicare also pays for "Part B services", which include physician fees, outpatient facility and ancillary charges.  However, patients must enroll in Medicare Part B and pay a monthly premium of $50 (approximately).  They are then eligible for coverage of a large proportion of physician expenses and outpatient charges.  Outpatient services have generally been paid based upon a Medicare fee schedule on a per service basis, rather than case rates.

Medicare introduced the "Relative Value" fee schedule for physician payments in the early 1990s. This transitioned Medicare from payments based upon submitted charges to payments based upon a Center for Medicare and Medicaid Services (CMS) -designed fee schedule. The fee schedule that CMS developed for Medicare was painstakingly created with input from many physicians to attempt to assign a "relative value" that represented the physician work associated with different activities in a fair manner. [http://www.hcfa.gov/medicare/pfsmain.htm] This system known as the "RBRVS" system [Resource Based Relative Value System], assigns a consistent relative value weighting factor to the physician work, time and intensity that goes into providing a unit of service.  Each year, Congress approves a single dollar "conversion factor" that calculates the payment for every service listed in the Current Procedure Terminology (CPT) manual for physicians.  Every five years, the relative value for physician services and procedures are reviewed/updated by CPT.  [http://www.hcfa.gov/]

During the late 1990s, the principles of the RBRVS system were widely adopted, mimicked or referenced in commercial insurance contracts and in Medicaid contracts. In addition, the DRG system for categorizing inpatient cases became the industry standard. Although many insurance companies continue to contract and pay based upon "per diems" rather than case rates, the trend has been toward rates based upon the DRG system and Medicare reimbursements.

Results of the efforts of insurance companies and Medicare have been mixed. In the 1980s, the early adopters got short-term savings as delivery systems negotiated lower rates "on the margin." However, as lower rates became more prevalent, they became "the average reimbursement." At this point, delivery systems have developed financial problems and insurance companies can get no further contracting leverage.

The intended cost savings from creating incentives for efficiency have been absorbed by higher administrative costs necessitated by the fragmented payment methods and increasing oversight and transaction costs. The regulations intended to improve quality (consistent documentation standards, adherence to defined care standards) have often become compliance headaches rather than recipes for quality.

The increasing system complexity has also added steps to the care process (pre-certification, case review, discharge planning complicated by benefit rules and network definitions) that have exacerbated the silo/production line problems of the hospital setting.

The result is a period of increasing tension within the system. Costs are high; quality gaps are visible; coverage gaps are glaring, and most players (physicians, institutions, insurance companies, patients, employers) are under financial stress.

Current and emerging trends

The following trends and factors should be kept in mind as you investigate the climate for your palliative care program. Assessing their presence in your local market can help you design and promote your plan more effectively.

  • Pharmacy costs are the most rapidly increasing component of healthcare costs and represent a growing portion of the insurance dollar, patient payments and inpatient hospital expenses.

  • Nursing shortages and expected shortfall in supply due to retirees will continue to stress traditional delivery settings; improving quality of work environment to retain nurses and best utilize nurses will be critical.

  • Continued convergence between Medicare payment rates and methods, and commercial and Medicaid methods and rates [Increasing trend to case rates].

  • Medicare expansion of "prospective payment" to the outpatient hospital arena will impact cost/benefit decisions and potentially change preferences for site of care.

  • Dissolution of many "hospital owned physician practice networks" may change funding and collaboration climates.

  • Insurance products trending toward higher patient copays and coinsurance with more benefit limitations, will shift some cost awareness back to the consumer.

  • Employer trends toward "defined contribution plans" that shift purchasing and cost decisions back to the employee may lead to choosing networks that exclude high-cost settings, such as academic medical centers for certain care.

Summary and commentary

In addition to all the wonderful things that are achieved in health care, several things are true of the current system: 1) It is expensive. 2) It is cumbersome and inefficient. 3) It is hard for patients to navigate and understand. 4) It creates a frustrating and difficult environment for patient care. 5) The data available is often inadequate to support thoughtful decision-making. 6) Quality of care is less than it could be.

In the 1990s, many studies were done to estimate the degree of waste in the system and the opportunity for improvement. Although most of the visible [and unpopular] initiatives have focused on "right-sizing" staffing ratios and resource use, the efforts of the quality improvement movements in the 1990s repeatedly identified "process improvement and simplification" as the biggest opportunity and estimated the improvement opportunity as greater than 30% of total costs.

This does NOT mean that an institution can cut 30% out of its budget in the name of "improved processes." It does mean that the cost of poorly understood, redundant activity, unplanned and uncoordinated, is very high.

Palliative care programs incorporate some key features that begin to reverse the causes of poor quality processes by providing cross-functional teams with cross-departmental scope using consistent approaches. The approach to communication (at all levels, clinical and patient), to planning (creating a care plan) and to resource use (utilizing the right resources at the right time) are all consistent with what hospitals and health care need.

The challenge is to target the plan features and design to maximize impact in a local setting. The section on "institutional settings and local markets" will attempt to assist you in this effort. The next section gives more detail about national concepts, payers and payment types to set the stage for the local section.

Facts and Figures About the Scope of Healthcare Costs in the US

Facts and Definitions About the Current Payer Systems and Methods

There are many payers. However, they can generally be grouped as follows: Medicare (elderly), Medicaid (low income), Commercial (HMO, PPO, indemnity, etc), Self-pay (uninsured). In each market, there are usually between two and five "major" commercial carriers that represent most of the commercial business at your institution. There may be multiple products and benefit types offered in the same market by the same payer [for instance, Medicare Risk and regular Medicare].

Multiple payers: Each payer has different benefit rules, payment methods and audit or regulatory methods. The cumulative result is that every provider and institution must manage to many different masters. This drives many computer system problems, redundant and tedious paperwork and increases administrative costs. It also makes it very difficult for delivery settings to report and track their overall financial performance in accurate, consistent and useful ways.

State by state variation: Medicare is unusual in that the benefit rules are consistent nationally, but reimbursement varies by state, locality and institution. Medicaid rules and reimbursement differ dramatically between states. Commercial insurance and HMOs have different products and prices in most states and localities. States have enacted various regulatory, audit and coverage rules. The result is that reimbursement rates and benefit coverage differ by location. In addition, this complexity drives up administrative costs. Institutions or providers that have multi-state markets will have special constraints and needs.

Multiple payment methods: Each payer uses a variety of payment methods, such as fee schedules, capitations or case rates, depending on the delivery setting and locale. Each payment methodology has implications for resource use and profitability.

Medicare Payment Systems

Inpatient hospital payment, Part A. Most hospitals are paid a Medicare DRG flat rate per admission that is intended to cover the average acute care costs associated with treating a specific disease. Payment rates are based on national averages for resource consumption and length of stay for the disease grouping. Drugs are administered in the inpatient setting are covered in the DRG payment. Some special rules apply for chemotherapy drugs and experimental drugs not yet approved by the FDA. There is no specific DRG for end-of-life care or palliative medicine. These services are assumed to be covered in the rates for those DRGs most frequently billed for chronic and terminal patients. Patients who receive care in hospitals when nearing death, are treated as acute care patients for payment purposes, and the hospital must absorb the additional costs associated with an extended stay beyond the period covered by the DRG. In October 1996, the Center for Medicare and Medicaid Services initiated a new ICD-9 CM secondary diagnosis code (V66.7) for palliative care. However, the code does not affect payment when used in conjunction with the base DRG.  "Outlier payments" are made under special circumstances, but rarely cover the additional cost of care.

Center for Medicare and Medicaid Services

Financial Spreadsheet Tool: Model Potential Impact of Palliative Care (for sample DRGs with Medicare LOS and reimbursement rates)

Outpatient hospital payment, Part B.  If a patient has "Part B" coverage, the facility services provided in the outpatient clinics and surgery centers are reimbursed by Medicare, with applicable copays and deductibles.  Generally these reimbursements have been based upon a Medicare-specific fee schedule, and are reimbursed on a "per service" basis rather than a case rate.  Recently Medicare has initiated a new payment program that is converting some of the outpatient services to a prospective (case rate) if the patient is discharged and treated in the outpatient arena.  One of the implications of the Part A/Part B arrangement is that some services that are "not reimbursed" in the inpatient arena because they are considered to be covered by the DRG payment, are reimbursed if the patient is discharged and treated in the outpatient arena.

Physician payment, Part B. Physician services are not covered under Part A.  If a patient has Part B coverage, it covers physician services in all delivery settings (except those provided by a hospice medical director to hospice patients), subject to copays and deductibles.  Physicians providing visit and consultation services to patients with Part B coverage are paid under the national, resource-based Medicare Fee Schedule system, implemented in 1991. All physicians, regardless of specialty, use CPT codes to bill for services, and are paid in a similar manner providing the same service. Reimbursement rates are adjusted by geographic area to allow for variation in labor and other practice costs. Visit and consultation services, also known as, evaluation and management (EM) services, may be billed for performing physician services in any patient setting, including hospital inpatient, hospital outpatient, emergency department, physician office, nursing home, hospice and the patient's home.

CPT coding issues and "concurrent care".  For physicians in end-of-life and palliative care, it is important to understand how to include "time spent with the patient" when selecting the appropriate level of visit or consultation code; when counseling and/or care coordination with other providers dominates more than 50% of the patient and/or family encounter. In these cases, time is the used as the basisfor selecting the appropriate level of E & M service. 

A long-standing Medicare payment policy on "concurrent care" prohibits two physicians of the same specialty from billing for the same E & M service unless they are treating for a distinctly different patient condition. For example, palliative medicine consulting physicians should not use the same diagnosis code (ICD9 code) for a visit service as the patient's primary care attending physician if both physicians provide a service on the same date.

Coding accuracy is closely audited and it is important to review all applicable guidelines to ensure compliance.

Visit Procedure/Diagnosis Coding and Reimbursement Mechanisms for Physician Services in Palliative Care  to read more about time and use of IDC9s for symptom management.

Carrier Manual Instruction on Concurrent Care

Financial Spreadsheet Tool: Model Potential Impact of Palliative Care

Other settings.   Medicare coverage for services in other settings such as skilled nursing facilities, home health services, etc is subject to very specific eligibility requirements.  Please refer to the Center for Medicare and Medicaid Services (CMS) website at http://www.hcfa.gov/ for specific information.

Medicare risk.  Some health care systems and managed care organizations participate in "Medicare risk" programs.  In these programs, Medicare pays a fixed amount per covered patient per month to the organization.  This capitation is based upon actuarial models of historical costs.  In these programs, organizations are NOT paid case rate or "per service."  "Medicare risk" reimbursement is designed to give maximum flexibility to the organization to use the payments to organize care efficiently.  Such environments may be very receptive to palliative care initiatives and have fewer barriers to adoption.  These programs are varied and complex.  Seek more information from your organization, if you think they participate in Medicare Risk programs.

Institutional Settings and Local Market Issues

Delivery system organization and "HealthCare Systems:" Hospitals and hospital systems have experimented with many varieties of horizontal [creating consortiums or corporations of multiple hospitals] and vertical integration [creating ownership or partnership relationships with skilled nursing facilities, home health businesses, hospices and physicians] within their geographic communities over the last ten years. These relationships are constantly changing as systems acquire or divest related businesses.

These systems may exist primarily as contracting entities [negotiating with insurance companies], as marketing entities [creating a unified "brand" identity marketed to patients] or as truly integrated organizations, which plan services and budgets in a strategic way that maximizes system success, rather than success of the individual entities. Most systems aspire to achieve coordination of care across the spectrum of settings, improved quality of care due to system wide use of care protocols and electronic tools and efficiency in business functions.

An important early step in your program development is to ask questions that will help you understand the dominant system themes in your market and institution. The findings may influence your program design and/or your approach to soliciting institutional support.

Example: Assume that a palliative care program will help appropriately triage patients from inpatient status to home health services. If your institution has a low patient census and no ownership relationship with home health services, administrators may believe that support to palliative care will result in reduced hospital revenues. On the other hand, palliative care may be viewed as a great idea if your hospital has a high patient census and often has to turn new cases away due to capacity constraints and has an ownership interest in home health care. In this case, palliative care can free up capacity for more profitable inpatient cases and provide reliable referral business to home health services.

Several key features to assess are as follows:

  • Which institutions are competitors or collaborators? Who funds whom?

  • Do the specialists and primary care physicians in your market admit to multiple hospitals or systems? What determines their pattern? [Patient insurance, level of care needed, service and convenience to the physician, availability of OR time?]

  • Are institutions reporting losses or profits? Which are growing in service volume?

  • Who has the authority to make budget decisions for new programs and where are they located in the system?

  • Does your institution participate heavily in "Medicare Risk" contracts or other risk contracts? What group of institutions and entities share the risk contracts?

Data Collection Tool Questionnaire

You will not become an expert on this topic overnight, but you may find that being alert to health system governance and business arrangements can save you time as you seek the best configuration of services and solicit program advocates.

Patient demographics and payer mix: An understanding of the basic facts about your institution. s specific payer mix and patient population will help you assess which palliative care models may work best in your setting. There are now model programs nationally in a variety of settings and conditions, from "for-profit" commercial hospitals to "inner-city" indigent care hospitals. Delivery Model Information

When asking questions and using information about payer mix and patient mix, keep in mind there are at least four different ways of defining mix and each is important for different reasons. They are:

  • Percentages, based upon number of total days;
  • Percentages, based upon total "billed" charges;
  • Percentages, based upon revenues collected (paid charges);
  • Percentages, based upon number of discharges.

For example, Medicare might represent 50% of total days, 40% of admissions, 65% of billed charges and 45% of paid charges. This would be logical, given longer lengths of stay, more complex patients and lower average reimbursement rates. Since your model may target a specific cross section of patients, you will want to be aware of these differences as you ask for information and interpret information.

Why is payer mix important? Payer mix plays a large role in determining institutional priorities, but it is not essential to know about "all" payers. Focus on the top five to eight only. [Usually this is Medicare, Medicaid, Self-pay, and the top few commercial carriers.]

Bed capacity and implications: The most commonly used indicator of bed capacity is the "average occupancy rate." This often ranges from 60% of available beds to 90%. Beds usually count "open" beds that have nursing staff vs. "licensed beds," which may indicate potential capacity that has been taken out of circulation for an extended period of time. Hospitals may consider occupancy of 85% or higher as "full" due to the logistics of bed turnover, reassignment and location.

High occupancy will make getting "dedicated" palliative care beds more difficult, but will also increase the value of a consult service that can use good planning and communication to facilitate appropriate discharges to other settings. Low occupancy may also make the idea of converting some beds to Hospice beds attractive.

Even when overall occupancy is medium to low, there may be a serious bottleneck in certain services, such as the ICU/NICU/CCU. These are the most expensive beds to operate [and to add capacity]. They are also critical to the potential case volume that can be accepted by lines of service such as Cardiac Care and Cancer Care. Basically, a bottleneck in the ICU causes the institution to lose potential cases that would be profitable, while often retaining cases with long lengths of stay that are not. This creates an excellent opportunity for palliative care. Knowing which services are frustrated with the bottlenecks will also identify key constituencies for involvement in program design.

Keep these questions in mind:

  • How busy are the institutions, and with what lines of business [Cardiac? Cancer? OB?]?

  • Which services are the "bottlenecks" for access [ER? ICU? SNF? General medicine?]?

Nursing as a resource capacity issue: The importance of understanding the nursing staffing, morale and leadership situation in your institution cannot be overemphasized. In some cases, nurses are in such short supply that units are being closed. This is a difficult environment to seek special treatment and dedicated staff for a dedicated palliative care unit. Also, floor nurses and nurse leaders may be hypersensitive to presentations that point out gaps in care. They are aware of the problem, but often feel too stretched to fix it. Current demographics of pending retirements and enrollment in nursing schools indicate that low supply will be a persistent problem. Hospitals must find ways to improve the working conditions that contribute to nursing morale problems and flight to other care settings.

However, it is possible to present the palliative care initiative as one that helps nurses. When physician leaders take on responsibilities for coordinating care with other physicians, it helps nurses who otherwise get stuck in the middle. When physicians and care teams take responsibility for communicating with the patient and the patient's family, it helps nurses. If a dedicated unit ensures that complex patients are treated in a consistent manner with appropriate oversight and staffing, that reduces the strain of managing these patients in the diversity of a general medicine unit.

Nursing leadership should be included early and often in your planning. The support of the VP of nursing may be critical to program approval in a community hospital. Their role may be less visible in an academic center.

Budgeting, accounting and reporting issues: For reasons that were introduced in the "National overview" section, hospitals and health systems are often handicapped by accounting systems and budgeting methods and tools that were created for a different business model (the "cost plus" environment of the 70s, with a focus on capital needs and expense management). In many institutions, new capabilities have been added to support billing functions, but these systems have not been fully integrated with the detailed accounting systems.

This section is included for a few reasons:

  • To develop tolerance in your approach to finance and information technology staff in your institution; they are often aware of the problems and frustrated, too.

  • To give you some context for listening to your institution's approach to budget requests, so that you can identify the best approach for your plan.

Palliative care programs encounter resistance (often) because they propose a program with very specific costs (staff, space, supplies) and very diffused benefits (incremental savings in costs per day or length of stay). Everyone thinks the idea is good, but they hesitate to put it into "their" budget as an expense, because "their" budget does not get credit for the downstream savings. The downstream savings are hard to quantify because there is not a clear comparison group.

This phenomenon can be a "show-stopper" unless you have some combination of the following:

  • Clear support from very senior leaders that this is a strategic initiative, rather than a tactical program that must stand alone on cost/benefit.

  • Excellent data on gaps and opportunities in the hospital, combined with "good stories" that illustrate the opportunity cost of not acting. (This requires collaboration with finance staff and case management staff).

  • Very clear tracking measurements of financial or resource use impact included in your plan to demonstrate commitment to a positive impact. [Measuring resource use decisions such as switching drug protocols, or not using specific radiology or lab tests in the revised orders of a care plan may be a very powerful tool.]

Special Settings:

Veterans' Administration hospitals: VA hospitals generally operate on a "global budget," which means that their funding levels are determined annually by the Veterans' Administration, based upon current expenses, level of service and other budgetary constraints. This creates an environment where the managers can focus on supporting programs that improve care if they at least cover their direct program costs.

Integrated systems with true global capitation: These organizations have budgets determined by actuarial models of expected costs and utilization patterns (based upon market norms for the demographics of the population served).

Both VA hospitals and integrated systems with global capitation: These will achieve economic advantage if they can organize care "across the continuum" in such a way that resource use is efficient and care is timely and coordinated. This has several implications for a palliative care program:

  • It is less important that many of the team services are "not billable." Services usually need to be tracked for other purposes, but the fact that there is no CPT code or no direct reimbursement is not a barrier.

  • Team composition and duties can focus on appropriate skills, training and availability, rather than concerns about "which professionals can bill for services."

  • Creativity around care and education delivered in a group vs. individual setting is more appropriate.

  • There should be more flexibility in budgeting/accounting methods around direct program costs and indirect benefits.

  • Since all care is "prepaid" either through capitation or global budget, no one in the delivery setting benefits from delivering more care, particularly more tests and procedures, than indicated for quality of care. There is rarely a situation of revenues decreasing because of a more conservative plan of care.

Teaching hospitals: "Teaching" hospitals that are not academic medical centers will most often mirror the issues and challenges of a community hospital. "Academic medical centers" have some unique characteristics, however.

  • In addition to payments from insurance companies, Medicare, and Medicaid for direct patient care [through the same DRG/CPT code/fee schedule methods as are used for all other hospitals], academic centers receive some indirect funding from CMS for education and training functions.

  • Academic centers may put a high value on the progressive educational opportunities offered by a palliative care program.This provides another rationale for support.

  • Academic centers are often more segmented in their decision processes than community hospitals, due to size and multiple roles (deans, chairmen, chiefs, etc). This increases the political complexity of "making the case."

  • Due again to complexity, data systems may be harder to use, and some data that would be useful to the program may not be available. Given this, you will need to be creative and use proxy data as needed.

  • Due to the complexity of cases handled in an academic center, use of averages (average length of stay, cost per day, etc) may be misleading. There is a need to examine the profile of outlier cases and to look at costs by day of care to fully identify potential impacts.

  • It may be relatively "easy" to get initial approval to start from one clinical department, but harder to get sustainable funding that supports hospital-wide activity, given the silo based activity style.

  • Referral sources for palliative care consults may be more complicated (academic sources, and community physicians).

  • Coverage issues (call and after hours) are potentially helped by having residents and fellows, but this may also increase the risk of discontinuity of care.

Hospice: The Medicare Hospice Benefit

(Prepared by Hogan and Hartson, LLC, Washington, DC)

In exploring the opportunities and challenges of providing palliative care in the hospital setting, it is important to understand the Medicare hospice benefit, including its specific statutory and regulatory requirements, and the effect its structure may have on the provision of palliative care services, including the setting of services.

A hospice benefit was first added to the Medicare program in 1982. Although the hospice benefit has been changed a number of times since, the basic structure has remained the same and is in keeping with the goals that led to its creation. Hospice was, and is, viewed as a philosophy of care as well as a complete package of services that stresses palliative, as opposed to curative, care, and that takes into consideration all aspects of the patient's and the patient's family's lives, rather than simply focusing on the terminal medical condition. Hospice care primarily is provided in patients' homes, with the Medicare benefit structured to support the patient's ability to remain at home until his or her death however the benefit also provides coverage for inpatient care under various circumstances.

  1. Eligibility

    Patients may be referred to hospice by their physician or another healthcare provider, or they may independently request hospice care. In order to be eligible for the Medicare Hospice Benefit, a Medicare beneficiary must be certified by the hospice's medical director and the beneficiary's attending physician (if there is one) as being "terminally ill," which is defined as having a medical prognosis that the patient's life expectancy is six months or less if the illness runs its expected course.1

    Upon electing the hospice benefit, beneficiaries sign an election statement with the particular hospice they have chosen, acknowledging that they fully understand the palliative, rather than curative, nature of hospice care. In this statement, they agree to waive their entitlement to Medicare payment for any Medicare services related to the treatment of their terminal condition, or that are equivalent to hospice care, except for the services of an attending physician or as provided (or arranged) by the hospice they have elected.2 In other words, once Medicare beneficiaries elect the hospice benefit, they agree that all care related to their terminal illness will be the responsibility of the hospice they have chosen, and only the hospice may bill Medicare for such care. Therefore, once a beneficiary has elected hospice, all Medicare payments related to the terminal illness (except for the services of an attending physician) flow only to, or through, the hospice. Hospitals and other facilities that provide services to hospice patients are paid by the hospice rather than by the Medicare program, under the terms of agreements between the hospice and those facilities. However, any services that are not related to the patient's terminal illness continues to be covered and paid for under the regular Medicare program.

    Patients may revoke their election of hospice at any time, at which point they are again eligible for full Medicare services under the regular Medicare program.3 If patients later decide they want to return to hospice care, they can re-elect the benefit at any time, provided they meet the eligibility criteria.

    In some respects, hospice was the first Medicare "managed care" benefit. The hospice is responsible for providing or arranging for all necessary services within the hospice setting, and also for arranging for any services not provided directly by the hospice, such as inpatient care in an acute care hospital. The hospice also remains responsible for the professional management of all of those services.4 In addition, as discussed in more detail below, hospices receive a set payment for each day a patient is enrolled in the hospice benefit. This payment is intended to cover all services related to the patient's terminal illness, other than physician services, which continue to be paid under the Medicare physician fee schedule.

  2. Benefit periods and certification

    Once a Medicare beneficiary has elected the hospice benefit and has been certified as being "terminally ill," the beneficiary is re-evaluated at regular intervals to determine that he or she continues to meet the eligibility criteria, and a recertification statement must be completed.5 The Medicare Hospice Benefit currently consists of two benefit periods of 90 days each, followed by an unlimited number of 60-day periods.6 There is no actual limit on the amount of time a beneficiary is eligible for hospice benefits, since the course of a particular illness and a person's life expectancy are often difficult to predict.  However information regarding the patient's condition and the clinical basis for the recertification should be documented in the record.

    Recent federal legislation, the Benefits Protection and Improvement Act of 2000 (BIPA) amended the Medicare statute by clarifying that the certification of terminal illness of an individual who elects hospice "shall be based on the physician's or medical director's clinical judgment regarding the normal course of the individual's illness."7 This clarification was effective for certifications made on or after December 21, 2000. CMS also recently issued a program memorandum regarding this recent change in the law, further emphasizing that medical prognostication of life expectancy is not an exact science.8

  3. Levels of service and payment

    As discussed above, the hospice benefit is intended to provide comprehensive coverage of palliative care for terminally ill patients. In seeking Medicare coverage for a hospice benefit, hospice advocates fought for a requirement that hospice services be provided and overseen by a group of professionals from different disciplines, and that it not just be a "medical" benefit. As a result, the Medicare statute requires that the scope of hospice care be determined and overseen by an "interdisciplinary group" of hospice personnel.9 This group must include a physician, a registered nurse, a social worker and a pastoral or other counselor. The interdisciplinary group establishes for each patient a plan of care, which is regularly reviewed and updated, and they are responsible for providing or supervising the care and services specified in the patient's plan.10

    The hospice benefit covers a wide array of services, and requires that certain "core services" be provided directly by hospice employees.11 Although the hospice may use contracted staff to provide those services during periods of peak patient load, the hospice still must maintain professional, financial and administrative responsibility for the services. The "core services" include nursing services, medical social services, physician services and counseling services.

    Other specifically covered services may be provided by the hospice directly or by contracting with others. These include physical, occupational and speech-language therapy, home health aide and homemaker services, short-term inpatient care, and medical supplies and appliances including durable medical equipment, drugs and biologicals.12 In addition to other types of counseling services, hospices are required to make efforts to arrange for visits of clergy and other members of religious organizations for patients and their family members who request them, and to provide bereavement services to families after the patient's death.13 Hospices also must recruit and train volunteers to provide administrative and/or patient care services, and must document the level of such services and the cost savings attributable to volunteers.14 Ambulance services also may be covered if they are needed under the patient's plan of care. The specific services provided to a particular patient by a hospice also may vary depending on who is available to provide them as needed (i.e., whether or not the patient has a family caregiver who can provide a service or it is provided by a hospice volunteer).

    As noted above, Medicare pays for hospice care on the basis of a set rate for each day of a beneficiary's election of hospice. There are four different levels of payment that may be made, depending on the type of care being provided on a given day.15

    The vast majority of hospice care days are paid at the routine home care rate. This rate covers care provided to patients who are at home and who are not receiving "continuous care."16 It is important to note that nursing facility residents also may elect to receive hospice care, and for such patients, the nursing facility is considered their "home" under the hospice benefit. For care and services furnished on or after April 1, 2001 through September 30, 2001, the routine home care rate is $106.93. (All rates are subject to geographic adjustment, so the actual rate paid to a particular hospice may be slightly more or less than this amount.) For each day a patient remains enrolled in the hospice benefit, payment is made at the routine home care rate unless services are provided under one of the other three levels of care.

    The second category of care for which hospices may be paid is for a continuous home care day, which is a day on which the patient is at home but is receiving hospice care, consisting primarily of nursing care, on a continuous basis.17 This level of care is provided only during brief periods of crisis, as necessary to maintain the patient at home. The payment for a continuous home care day from April 1, 2001 through September 30, 2001 is $624.13. If the care is provided for more than 8 hours but less than 24 hours in a given day, then the daily rate is divided into an hourly rate and paid accordingly. If this care is provided for less than 8 hours, reimbursement is paid at the "routine home care" rate.

    The third category of hospice payment is for an inpatient respite care day.18 This care must be provided in an approved inpatient facility (e.g., a hospital or nursing facility) when necessary to provide a respite to the family members or other persons caring for the hospice patient. Inpatient respite care may be provided as needed, but each period of respite care is limited to five consecutive days. {The payment for an inpatient respite care day from April 1, 2001 through September 30, 2001 is $110.62}.

    And finally, the Medicare Hospice Benefit also pays for general inpatient care when needed for pain control or acute or chronic symptom management that cannot feasibly be treated in other settings.19 In addition, the Medicare Hospice Manual states that such care "may be needed by a patient whose home support has broken down if this breakdown makes it no longer feasible to furnish needed care in the home setting," or when a patient elects the hospice benefit at the end of a covered hospital stay but continues to need pain control or symptom management while he or she prepares to receive hospice home care.20 Other examples of appropriate inpatient care include patients in need of medication adjustment, observation or other stabilizing treatment, or a patient whose family is unwilling to permit needed care to be furnished in the home.21 For care and services provided from April 1, 2001 through September 30, 2001, the general inpatient care rate is $475.69.

    The Medicare benefit includes a provision referred to as the "inpatient care limitation," which specifies that the total number of inpatient days used by Medicare patients of a hospice in the aggregate may not exceed 20 percent of the total number of hospice days billed by a certified hospice in a given year.22 In addition to the inpatient care limitation, hospices are subject to an overall limit on Medicare reimbursement known as the hospice cap. The cap amount is adjusted annually, and each hospice's total allowed payment is calculated by multiplying the cap amount by the number of Medicare beneficiaries who have elected to receive hospice care from the hospice during that particular "cap year."23 In practice, these limitations rarely become issues for hospices (see Chapter 4, p. _, for further discussion).

  4. Medicaid hospice services

    In addition to Medicare coverage, most state Medicaid programs also cover hospice care for patients who are certified as terminally ill.24 If a Medicaid program opts to include hospice coverage, it must be provided by a Medicare certified hospice, and the scope of hospice services available must include all of the services provided under the Medicare Hospice Benefit and may include additional services.25 Medicaid payment for hospice care must be no lower than the amounts provided under Medicare, and must be calculated using the same methodology.26 States may, however, establish their own procedures for how patients elect the hospice benefit, and they may have different benefit periods than those required under Medicare.27

  1. Social Security Act (SSA) section 1814(a)(7); 42 CFR 418.22.
  2. SSA section 1812(d); 42 CFR 418.24.
  3. SSA section 1812(d)(2); 42 CFR 418.28.
  4. 42 CFR 418.56.
  5. SSA section 1814(a)(7).
  6. SSA section 1812(d).
  7. Subtitle C, Section 322, Benefits Protection and Improvement Act, P.L. 106-554.
  8. Transmittal AB-01-09, dated January 24, 2001.
  9. SSA section 1861(dd).
  10. Id.
  11. 42 CFR 418.80.
  12. 42 CFR 418 Subpart E.
  13. 42 CFR 418.88.
  14. 42 CFR 418.70.
  15. 42 CFR 418.302.
  16. 42 CFR 418.304.
  17. Id.
  18. Id.
  19. Id.
  20. Medicare Hospice Manual 230.1(E).
  21. Id.
  22. S.S.A. section 1861(dd)(2)(A)(iii).
  23. S.S.A. section 1814(i)(2).
  24. Currently 43 states and the District of Columbia's Medicaid programs cover hospice care. NHPCO, "Facts and Figures on Hospice Care in America".
  25. Social Security Act section 1905(o)(1)(A).
  26. S.S.A. section 1902(a)(13)(D).
  27. S.S.A. section 1905(o)(2).
Legal issues in the hospice-hospital relationship

Inpatient hospice care

The Medicare Hospice Benefit pays for general inpatient care when it is necessary for pain control or acute or chronic symptom management, as well as for inpatient respite care.

Hospices are responsible for making arrangements for hospice patients to receive these types of inpatient care when necessary. These arrangements may be structured in a variety of ways. For example, a hospice might contract for services from a hospital or skilled nursing facility or freestanding hospice. Under this type of arrangement, the hospital or other institution would provide short-term inpatient services to the hospice patient. Another option is for a hospice to lease space from a hospital or other institution on an autonomous basis. Beds may be located within a designated unit, scattered throughout the institution or located within a more limited area of a hospital, such as an oncology unit. Under such an arrangement, the hospice may pay rent to the hospital and may provide certain services directly while purchasing other services (e.g., laundry or food services) from the hospital. Another approach is the creation of a freestanding hospice inpatient unit. Here, the hospice directly employs and manages the staff and provides all inpatient services.

Payment for hospice services provided in a hospital setting

Regardless of the nature of the arrangement between a hospice and a hospital, Medicare reimbursement for hospice services must flow through the hospice rather than the hospital. The hospice bills Medicare and pays the hospital according to the terms of the agreement between the hospice and the hospital. Typically, the hospice pays the hospital a fixed percentage of the hospice payment amounts established by CMS. The hospital may only seek Medicare reimbursement and bill a hospice patient for Medicare deductibles and coinsurance for Medicare-covered services that are not related to the patient's terminal illness.

Just as all Medicare payment for hospice services must flow through the hospice, the hospice maintains certain responsibility for the hospice patient's care at all times, including when the patient is in the hospital. Even when the hospice patient is in the hospital, the hospice must retain professional management responsibility for the services provided, and the hospital services must be provided in accordance with the patient's hospice plan of care, or as authorized by the hospice.

The hospital-hospice agreement

In order to ensure continuity of care for patients and to specify the roles and responsibilities of the parties, the arrangement between a hospice and hospital for the provision of inpatient care must be set forth in a legally binding written agreement. At a minimum, hospice regulations require that the agreement include at least the following: (1) identification of the services to be provided; (2) a stipulation that services will be provided only with the express authorization of the hospice; (3) the manner in which the contracted services will be coordinated, supervised and evaluated by the hospice; (4) the delineation of the roles the hospice and hospital will each play in the admission process, the patient/family assessment and the interdisciplinary team care conferences; (5) the requirements for documenting that services are furnished in accordance with the agreement; and (6) the qualifications of the personnel providing the inpatient services.28

As stated above, the hospice retains both professional management and financial responsibility for its patients who are in an inpatient setting. The hospice also is responsible for appropriate hospice care training of hospital staff providing inpatient services to hospice patients. The hospice regulations also require that a hospice furnish the inpatient provider with a copy of the patient's plan of care and specify the inpatient services to be provided. In addition, the patient's medical record should reflect all inpatient services and events, and the hospital must provide the hospice with a copy of the discharge summary and, if requested, a copy of the medical record. Finally, the hospital must have established policies consistent with those of the hospice and must agree to abide by the patient care protocols established by the hospice.

When a hospice admits a patient to a hospital, both the hospice and the hospital must still meet their respective Medicare conditions of participation. The procedures set forth in the hospice-hospital agreement should reflect agreement by the hospital to provide services in accordance with the hospice patient's plan of care and by the hospice to be cognizant of any applicable hospital regulatory requirements in its care planning. For example, the Medicare conditions of participation require that a hospital conduct and document a physical examination of a patient no more than seven days before or 48 hours after a patient's admission to the hospital, but this requirement could be met by having the examination performed by a hospice physician within the specified period of time.

There are a number of other issues that also should be addressed in the hospice-hospital agreement. For example, there needs to be an arrangement to grant temporary or full medical staff privileges to properly licensed physicians who serve as a hospice patient's physician, as well as to physicians employed directly by the hospice to render medical care to hospice patients in accordance with the patient's plan of care. Most hospice patients retain their personal physician upon entering the hospice program, and these physicians participate in patient assessment, care planning and direct medical care. Frequently, these physicians obtain admitting privileges and continue to provide care to their patients in the inpatient setting. In other hospices, the patient receiving inpatient care temporarily may come under the care of the hospice medical director or other hospice physician, either of whom would continue to work closely with the patient's attending physician. The hospice-hospital agreement should anticipate these possibilities and facilitate the hospice goal of providing continuity of care by having an efficient process for ensuring that qualified physicians serving hospice patients are able to obtain some level of hospital privileges.

The hospice-hospital agreement should set forth the responsibilities of each entity, including, to the extent possible, the liability of each for any negligent acts that occur while a hospice patient is cared for in the hospital. While determining who is liable for a particular event will necessarily be fact-dependant, under the requirements of the Medicare Hospice Benefit, the hospice maintains professional responsibility for the hospice services provided and beneficiaries remain patients of the hospice, regardless of the setting in which those services occur. If negligence arose because the hospice was not appropriately supervising the services, or due to something omitted from a patient's plan of care, then the hospice may bear greater responsibility for the negligence. However, if the hospital fails to permit the hospice to maintain professional responsibility for the patient, or if a hospital employee was involved in a negligent act, then the hospital may bear greater responsibility. The hospice-hospital agreement should clearly set forth the responsibilities of each party and should include a discussion of liability and indemnification.

The hospice-hospital agreement should address policies and procedures for protecting the privacy of medical records, as required by the Health Insurance Portability and Accountability Act of 1996 [HIPAA] and related regulations. This might include provisions regarding the exchange of protected health information, the staff that may need access to such information for purposes of providing patient care and a process for facilitating the patient consent required by each entity prior to using or disclosing protected health information. Staff of both entities will need to be trained in the privacy procedures to be followed while a hospice patient is in the hospital.

The hospice-hospital agreement should also reflect the need for coordination among hospice and hospital staff. For example, the hospice interdisciplinary group continues to play an active role in the care of hospice patients receiving inpatient care. The care coordinator will continue to oversee the patient's care and assure continuity through the admission, stay and discharge process. Hospice social service staff continue to provide counseling and supportive services to the patient and family members, as well as assisting in details related to issues such as discharge planning. Volunteers, counselors and spiritual service providers may also continue to be involved. The care coordinator, as well as other hospice staff, will need to work closely with the hospital staff, particularly the unit's nursing staff. To facilitate this staff coordination, both hospice and hospital staff should understand the hospice-hospital arrangement, including communication and coordination procedures, policies and procedures related to the delivery of hospice inpatient services, the services the hospice and the hospital will each provide to hospice patients, the involvement of the interdisciplinary team and the relationship of the inpatient component of the hospice to the home care component.

Under the Medicare conditions of participation, hospitals are required to provide discharge planning for all patients, and evaluation of the need for post-hospital services, including hospice services, if appropriate.29 If a hospice uses a liaison nurse to manage and facilitate the transfer of a hospital patient from acute care to the hospice benefit, the role of this nurse needs to be set forth in an agreement. A liaison nurse typically coordinates a patient's transfer and ensures continuity of care. The nurse may perform these duties in various settings, including the hospital and the location where hospice services are provided, such as the patient's home. Liaison services may be provided once the patient has decided to receive hospice services, the patient's physician has determined that the patient is eligible for hospice, and the patient has chosen a particular hospice.

Liaison activities should not duplicate or take the place of the discharge planning services that a hospital is required to provide its patients under the Medicare hospital conditions of participation. A hospital may, however, pay the hospice fair market value to perform its required discharge services. The hospice-hospital agreement should detail any discharge services the hospice is providing on behalf of the hospital and the specific costs of such services. If multiple hospices, or a hospital and hospice, share the costs of a liaison nurse position, the services should be set forth in an agreement. The liaison nurse should not be soliciting patients to a particular hospice, and the amount of payment from each entity supporting the liaison nurse should be unrelated to any referrals to or from that entity. Agreements regarding liaison nurses, particularly if their salary is funded by both hospices and hospitals, should be reviewed by legal counsel to avoid potential problems under federal and/or state antikickback and related laws.

As mentioned above, the hospice is responsible for training the inpatient staff providing care to hospice patients. The amount of training necessary will depend in part on the amount of past experience the staff has with hospice services, as well as the nature of the arrangement between the hospice and the hospital. For example, where inpatient hospice services are provided within a particular unit in the hospital, training may be more extensive and focused, because the inpatient staff on that unit are likely to provide hospice care on a regular basis. Where the hospice services are provided throughout the hospital in a scatter-bed arrangement, the hospice will have to depend more on a general orientation through various hospital departments and conduct more detailed orientation on a case-by-case basis as patients are admitted to various floors. Particularly in the latter type of arrangements, it may be helpful for the hospice to provide written materials that concisely delineate basic hospice tenets, policies and procedures.

The inpatient care provided to a hospice patient, like hospice home care, focuses on the combined physiological, emotional, sociological and spiritual needs of the hospice patient and the patient's family. The inpatient setting should, to the extent possible, provide a home-like environment to the hospice patient, and the hospice-hospital agreement should reflect this. The agreement should also address other issues pertaining to the continuance of a hospice environment for patients receiving inpatient care. For example, the visiting privileges available to relatives and friends of hospice patients should be unlimited. There should be adequate space, such as a lounge, for private visiting among hospice patients and their visitors, as well as adequate accommodations for family members to remain with the patient throughout the day and night.

  1. 42 C.F.R. 418.56(b).
  2. SSA section 1861(ee)(2).

The Antikickback Law and Hospice-Hospital Relationships

(Prepared by Hogan and Hartson, LLC, Washington, DC)


Since hospitals are sources of referral for hospices, and vice-versa, the financial relationships that these entities enter into with each other can pose risks under healthcare fraud-and-abuse laws. In the last few years, state and federal governments have significantly increased the resources available to investigate health care fraud and abuse across all types of healthcare providers. Hospices and hospitals have not been excused from this heightened level of review and there is no reason to believe that the tide of governmental fraud-and-abuse investigations has crested. Increasingly, private individuals (including disgruntled employees) are also becoming active in the prosecution of alleged healthcare fraud, through the filing of qui tam lawsuits under the federal False Claims Act.

With respect to hospice-hospital arrangements, applicable laws, including the state and federal laws prohibiting kickbacks, should be well understood in order to avoid costly lawsuits and potential liability. Below, the federal antikickback law is discussed in general terms . what the law prohibits, how arrangements can be structured to assure protection from liability under the law and how the law has been applied to hospice-hospital arrangements.

It is important to understand, however, that many states have similar laws that may apply regardless of whether Medicare, Medicaid or other federal funds are at issue. Although such laws will not be addressed specifically here, they are conceptually similar to the federal law. It is also important to understand that whether or not a particular arrangement may run afoul of the antikickback laws will depend on a very fact-specific analysis. Because each situation must be analyzed independently and applicable state laws may differ from federal laws, hospices and hospitals entering into collaborations should seek guidance from legal counsel knowledgeable about both federal and state antikickback and related laws.

Federal prohibition against kickbacks

The Federal antikickback statute provides both civil and criminal penalties for, among other things, offering or paying any remuneration to induce someone to refer patients to or for, or to purchase, lease or order (or arrange for or recommend the purchase, lease or order of) any facility, item, or service for which payment may be made by a Federal Health Care Program. The term "Federal Health Care Program" includes Medicare, Medicaid and virtually all federally funded healthcare programs, with the exception of the Federal Employee Health Benefits program. The statute also prohibits soliciting or receiving any remuneration in exchange for engaging in any of these activities. The prohibition applies whether the remuneration is provided directly or indirectly, or "in cash or in kind."

Penalties for violations of the antikickback statute are severe, consisting not only of substantial criminal fines and imprisonment (5 years in prison, $500,000 fine), and the imposition of civil monetary penalties ($50,000 per kickback), but also of exclusion from participation in the Medicare and Medicaid programs. The exclusion remedy may be imposed in an administrative proceeding, even in the absence of any criminal proceeding or investigation.

Although the antikickback statute does not outlaw all financial transactions or relationships that providers of healthcare items or services may have with each other, interpretations of the law have been very broad. The antikickback statute has been held applicable to a wide variety of financial relationships that are quite different from an obvious kickback on a patient referral or a bribe to recommend the purchase of specific products or services. Federal courts and administrative bodies considering the statute in the context of actual enforcement cases have established several important interpretive principles:

  • the statute is violated if even one purpose (as opposed to a primary or sole purpose) of a payment is in exchange for or to induce the referral of patients or the ordering, purchasing or recommending of items or services;

  • although some financial benefits may be too remote or de minimis to affect referral practices, the threshold appears to be relatively low, and a payment or other benefit may violate the statute when the amount is sufficient to influence the physician's (or other provider's) reason or judgment;

  • giving a potential referral source the opportunity to earn a fee that exceeds the reasonable value of any services provided (or return on investment made) will constitute evidence that the payment is unlawful; however, a reasonable fee will not in itself serve as a defense if the intent underlying the arrangement is to exchange payment for referrals;

  • intent may be inferred from the circumstances of the case, and there need be no proof of an agreement to make referrals, or to order, purchase or recommend medical items or services, for illegal intent and a violation to be found;

  • the mere potential for increased costs to Medicare or Medicaid may be enough to violate the law, and no actual payout by Medicare or Medicaid is necessary as long as the challenged remuneration is for an item or service that could be paid for by Medicare or Medicaid; and

  • the fact that a particular arrangement is common in the healthcare industry is not a defense to an antikickback violation.

Exceptions and safe harbors

The antikickback statute itself contains several limited exceptions to the prohibition on remuneration. Moreover, the Department of Health and Human Services may issue regulations defining certain practices that would not be deemed to violate the antikickback statute. The OIG published an initial set of final regulations in July 1991 creating a relatively small number of "safe harbors" from the reach of the antikickback statute, and has promulgated others since then.

While those who structure their business arrangements to satisfy all the criteria of a safe harbor are protected from liability under the antikickback statute, failure to qualify for a safe harbor does not necessarily mean that there has been a violation of the antikickback statute. However, the OIG has stated that arrangements that are of the same generic kind as those for which a safe harbor is available may be subject to scrutiny if they fail to satisfy all the criteria for the appropriate safe harbor.

Where a practice does not qualify for a safe harbor, the OIG will examine the practice to determine whether it involves any remuneration and, if so, whether the practice appears to involve the types of abuses that the antikickback statute was designed to combat. In determining whether to prosecute, the OIG will look at a variety of factors, including:

  • the potential for increased charges or reported costs for items or services paid for by Medicare or Medicaid;
  • possible encouragement of over utilization;
  • the potential for adverse effect on competition by freezing competing suppliers out of the marketplace; and
  • the intent of the parties. 

No one factor is dispositive, and the OIG and the Department of Justice (which is responsible for criminal enforcement of the antikickback statute) have considerable discretion in selecting cases to prosecute.

Personal services & management contracts safe harbor

The most relevant safe harbor to hospice-hospital arrangements is the "personal services and management contracts" safe harbor. An arrangement would be protected from antikickback law liability if all of the following criteria were satisfied:

  • there is a signed written agreement for a term of not less than one year which specifies the services to be performed;

  • the aggregate compensation paid is set in advance, consistent with fair market value in arms-length transactions, and is not to be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties;

  • if services are to be performed on a part-time basis, the agreement specifies exactly the schedule of intervals, their precise length and the exact charge for each; and

  • the services do not involve counseling or promotion of any arrangement or other activity that violates state or federal law. 

Application to hospice-hospital relationship

The OIG has issued a number of "Special Fraud Alerts" setting forth its views regarding the application of the statute to certain types of arrangements. While there have been no alerts specific to hospital-hospice collaborations, some of the principles in an alert addressing fraud and abuse in hospice arrangements with nursing homes also appear relevant to hospice arrangements with hospitals. According to that fraud alert, a hospice that offers remuneration in return for securing an exclusive or semi-exclusive arrangement with a nursing home to provide hospice services to its patients could run afoul of the antikickback law. The same could be true if a hospice offered remuneration to a hospital to ensure that hospital patients needing hospice services are referred to that hospice. Indeed, in the OIG's Compliance Guidance for Hospices, the OIG indicated that a hospice that provides nursing or administrative services that are the responsibility of the hospital could be in violation of the antikickback law because those services are a form of "remuneration." Accordingly, when a member of the staff of a hospice performs hospital discharge planning duties at no cost to the hospital, there is a potential violation of the antikickback law.

In addition, there are a variety of issues to avoid in establishing a financial relationship between a hospital and a hospice that refer patients to each other. Any payment in such an arrangement should not be tied to patient census or referrals. For example, an agreement with a hospital to accept hospice patients for inpatient care with the hospice paying a set percentage of the Medicare rate for the first 20 patients and a lower percentage for the next 20 patients may be viewed as an unlawful inducement to the hospice to refer its patients to that hospital. In addition, when one entity pays the other entity for services provided, the payment should be at a fair market value level. Thus, if a hospice provides an employed nurse to a hospital to provide certain services for which the hospital is being compensated, the hospital's payment to the hospice for that nurse's services should be at fair market value. If the payment is in excess of fair market value, it could be viewed as an incentive from the hospital to refer hospice patients to that hospital.

Contributing authors include:

Lynn Hill Spragens, MBA
The Bard Group, LLC
Newton, MA

Brooke Bumpers, JD
Hogan and Hartson, LLC
Washington, DC

Appendix 1

Payment methods to hospitals: definitions, characteristics and implications

Payment Method Capitation
Definition Payment based upon a "per member per month" basis; pays for all or a category of services based upon actuarial average costs for populations of patients over time. Funds are paid on a regular monthly basis and are not directly linked to service volume or fee schedules.
Characteristics & Intent Provides predictable cash flow and allows provider to plan and fund new services. Should support investment in preventative care and patient education as well as acute episodic care.

Works best for large covered populations, and in systems where all or most lives are capitated. Works best when many services are covered by a global cap, rather than "primary care cap" or "inpatient cap."
Implications for Palliative Care program Relatively few systems have "real" capitation. Those that do are excellent candidates for palliative care because they can justify program expenses that have incremental impacts across multiple settings, time frames and departments.
Appendix 1
Payment Method Global Budgets
Definition Many public hospitals and the Veterans Administration operate under "global budgets," receiving funding streams based upon expected expenses, and must manage resources within the budgeted dollars, regardless of actual volume.
Characteristics & Intent The institutions receive most of their funds through one source. They do not receive more funds for providing higher volume of services, so should prefer to manage resource use tightly; getting needed services to the patients, and eliminating tests, procedures or days that are not contributing to quality outcomes.
Implications for Palliative Care program These systems may have very tight overall funding but if they believe that a program can help them manage capacity or resources better, they are receptive. These systems often care for the most needy cases, with tertiary care needs, little family support and disjointed care. This is a good setting for palliative care.
Appendix 1
Payment Method Case Rates
Definition Payment is based upon expected cost of care for a specific case type, regardless of LOS or resource use.
Characteristics & Intent Best known through Medicare DRG payments. Targets an expected acceptable average cost per case. Shift focus to managing/planning care & discharge vs. rewarding resource use and Long LOS.
Implications for Palliative Care program Hospital is at risk for daily costs and for LOS. Should be supportive of programs with measurable impact. Hospitals often cannot match true cost/case wt revenue.
Appendix 1
Payment Method Per Diems
Definition Payment is based upon contracted daily rate by bed type. ICU usually separate.
Characteristics & Intent Protects payer against inflated charges. Usually first day is most expensive to provide. Hospital may view later days as "profitable."
Implications for Palliative Care program Unless there are capacity issues (bed shortages) hospital is NOT receptive to LOS arguments. Would support reduced resource use.
Appendix 1
Payment Method Discounted FFS (fee for service)
Definition Rare for major payers. Negotiated rate is simple discount from charges, or from specified fee schedule.
Characteristics & Intent Hospital is paid more to do more. Promotes culture of testing, procedures and aggressive interventions. This payment type is rare now, as a percent of total revenues.
Implications for Palliative Care program If DFFS is dominant in your institution, they are unlikely to support the program on economic grounds. The services are not billable, and the impact is likely to reduce other billings.

Appendix 2

Common payment methods across healthcare settings

[This indicates the most common types of reimbursement; there are examples of each payment type in each setting]
M = Most Common, S = Somewhat Common, U = Unusual, N/A = Not Available

Setting Hospital [inpatient facility] Hospital [outpatient]
Salary or Stipend N/A N/A
Capitation S U
Global Budgets S
[certain institutions only]
[certain institutions only]
Case Rates M S
[growing wt Medicare APCs]
Per Diems S N/A
Disc. FFS S M
Appendix 2
Setting Physician services [inpt] Physician services [office based]
Salary or Stipend S S
Capitation U S
Global Budgets U S
[integrated systems]
Case Rates N/A S (surgery)
Per Diems S N/A
Disc. FFS M M
Appendix 2
Setting Hospice Skilled Nursing Facilities
Salary or Stipend N/A N/A
Capitation N/A N/A
Global Budgets N/A N/A
Case Rates N/A N/A
Per Diems M M
Disc. FFS N/A N/A
Appendix 2
Setting Home Health Services
Salary or Stipend N/A
Capitation N/A
Global Budgets N/A
Case Rates N/A
Per Diems M
Disc. FFS N/A

Appendix 3

Payment methods by payer type and delivery setting

Medicare Medicaid
Hospital Inpt Case rate Per diem, other
Hospital Outpt Fee Schedule moving to case rates Fee schedules (low)
Surgery Centers Same as above Fee schedules (low)
Physician Services   Fee schedules (low)
Skilled Nursing Facility Per diem Per diem
Home Health Per diem Per diem
Hospice Per diem Per diem
Pharmacy (outpatient) Not covered Fee schedules (low)
Appendix 3
Commercial [HMO/PPO] Commercial Indemnity
Hospital Inpt Per diem, case rate, other DFFS
Hospital Outpt DFFS, case rate mixes DFFS
Surgery Centers DFFS, case rate mixes DFFS
Physician Services Fee schedules (90-140% of Medicare) DFFS
Skilled Nursing Facility Per diem DFFS
Home Health Per diem DFFS
Hospice Per diem DFFS
Pharmacy (outpatient) Negotiated fees wt third party managers DFFS
Appendix 3
Self Pay
Hospital Inpt DFFS
Hospital Outpt DFFS
Surgery Centers DFFS
Physician Services DFFS
Skilled Nursing Facility DFFS
Home Health DFFS
Hospice DFFS
Pharmacy (outpatient) DFFS

Appendix 4

Illustration: Where the healthcare dollar goes


Related References

1. Von Gunten C. Ferris F, Kirschner C, Emanuel L.  Coding and Reimbursement Mechanisms for Physician Services in Hospice and Palliative Care.  J Pal Med 2000;(3):157-164.  http://www.liebertpub.com/JPM/defaultstatic.asp

2.  Skolnick AA. MediCaring Project to Demonstrate, Evaluate Innovative End-of-Life Program for Chronically Ill. JAMA 1998;279:1511.

3.  Gundersen L. From the Ground Up: A Look at the Role of Foundations in Health. Annals of Internal Medicine 2000;132:849.

4.  Dowday MD, Robertson MD, Bander JA. A study of proactive ethics consultation for critically and terminally ill patients with extended lengths of stay. Crit Care Med 1998;26(2):252-259.

5.  Campbell ML, Frank RR. Experience with an end-of-life practice at a university hospital. Crit Care Med 1997;25(1):197-202.

6.  Campbell ML, Field BE. Management of the patient with do not resuscitate status: Compassion and cost containment. Heart & Lung 1991;20(4):345-348.

7.  Francke AL. Evaluative research on palliative support teams: A literature review. Patient Education and Counseling 2000;41:83-91.

8.  Carlson RW, Devish L, Frank RR. Development of a comprehensive supportive care team for the hopelessly ill on a university hospital medical service. JAMA 1988;259(3):378-383.

9.  Lilly CM, Demeo DL, Sonna LA, Haley KJ, Massaro AF, Wallace RF, Cody S. An intensive communication intervention for the critically ill. Am J Med 2000;109:469-475.

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