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The Office of the Inspector General (OIG) of the Department of Health and Human Services (HHS) released a statement on October 30, 2015 that advises hospitals that it will not administratively sanction them if they discount or waive charges for an outpatient’s self-administered drugs. Thus, hospitals now have the option, and a greater incentive, not to charge outpatients for these drugs. While the OIG’s statement is a step in the right direction, more should be done to better guarantee that Medicare beneficiaries are not subject to onerous out-of-pocket charges when they need self-administered drugs unrelated to their outpatient treatment.


Many patients who receive care in a hospital are called “outpatients” in Observation Status instead of admitted inpatients.[1] This distinction in status is important when a patient needs self-administered prescriptions, which CMS defines as prescriptions “you would normally take on your own” that are separate from the hospital’s outpatient treatment.[2] Inpatient status, payable under Medicare Part A, covers all care and services received in the hospital, including all prescription drugs; outpatient status, payable under Part B, does not.[3]

While Medicare Part B generally covers the medical and nursing care that an Observation Status patient receives in the hospital, Part B covers only those drugs that are required as part of the Part B-covered outpatient service.  As a consequence, many Observation Status Medicare patients must pay out-of-pocket for their so-called self-administered prescriptions.[4]

In theory, a patient’s self-administered drugs may be covered by a Part D prescription drug plan if the following criteria are met: 1) The drug must be a prescription and not an over-the-counter drug, 2) The prescription cannot be received “in an outpatient [setting] or emergency department on a regular basis,” and 3) The drug must be either included in the Part D prescription drug plan’s formulary or covered as an exception in the plan.[5]

A February 2011 CMS directive states,  “only hospitals with pharmacies that dispense prescriptions to outpatients and have contracts with Medicare drug plans” can dispense such self-administered drugs to patients during their outpatient stay.[6] In reality, most hospital pharmacies do not participate in Part D and patients have consequently had to pay the full price out-of-pocket and later submit the claim to Part D for a refund, which, if it happens at all, is generally only partial.[7] If Part D does not cover the costs, a Medicare beneficiary can be left with a burdensome drug bill.

Hospitals often bill patients more than the actual cost for self-administered drugs.  The Medicare Payment Advisory Commission (MedPAC) estimates that in 2012, hospitals billed patients, on average, approximately $209 for self-administered drugs, compared to an average actual cost to the hospitals of $43.[8]

Until recently, OIG had warned hospitals that they would be subject to various administrative fines, based on the Federal anti-kickback statute, if they offered discounts on self-administered drugs.[9] Consequently, hospitals had a strong incentive not to discount drugs for outpatients and patients were more likely to be left with large prescription drug bills.[10]

New Guidance Concerning Penalties

On October 30, 2015, OIG announced that hospitals would no longer be subject to OIG administrative sanctions if they discounted or waived an outpatient’s self-administered drug charges. OIG states that the move was prompted by evidence of the financial hardships caused by the previous policy.[11]

Under the new policy, hospitals have the option of continuing to charge beneficiaries the full amount for self-administered drugs. Should a hospital wish to apply the discounts, it must do so for all patients “uniformly…without regard to a beneficiary’s diagnosis or type of treatment.” Furthermore, hospitals cannot claim the discounted amounts as bad debts and then shift the costs onto the Medicare program.[12]

Implications and Recommendations

The OIG directive explicitly forbids hospitals from advertising that they offer a discounted rate for Part-D covered, self-administered drugs.[13] Patients must find other means of discovering which hospitals offer discounted rates.

The larger problem for beneficiaries is that the OIG policy statement does not require hospitals to offer a discounted rate. Given that hospitals cannot advertise that they discount or waive self-administered drug costs and thus gain a market advantage from such advertising, there is perhaps little financial incentive for hospitals to offer patients a discount.

At their April 2, 2015 public meeting, MedPAC Commissioners voted to recommend that outpatient observation beneficiaries no longer be subject to out-of-pocket costs related to self-administered drugs.[14] If cost-sharing were uniform across all hospitals and beneficiaries, as MedPAC proposes, hospitals not offering a discount would no longer have a relative financial advantage over hospitals offering a lower price. On the one hand, MedPAC recognizes that hospitals may suffer a small loss in revenues as a result of this uniform policy. On the other hand, it recognizes that such a policy would level the playing field among hospitals. Finally, MedPAC highlights that the administrative costs for hospitals relating to cost-sharing and beneficiary complaints concerning self-administered drugs would disappear if this policy were uniformly applied to all hospitals.

The real solution to patients being charged for drugs that would be covered for inpatients under Part A is to ensure that all hospital patients with overnight stays are no longer inappropriately classified as outpatients.

December 10, 2015 – M. Hubbard

[1] The NOTICE Act of 2015. Public Law Number §114-42. 06 August 2015. (site visited November 5, 2015) requires that hospitals notify a patient who is classified as observation status if the patient’s stay is more than 24 hours. The law will become effective August 6, 2016. For more information on the NOTICE Act, please see our Alert on the subject here: (site visited Nov 5, 2015).
[2] CMS. “How Medicare Covers Self-Administered Drugs Given in Hospital Outpatient Settings.” 01 February 2011. (site visited November 5, 2015). P. 1.
[3] While CMS established in 2014 that patients staying in a hospital for more than two midnights should be admitted as inpatients, Congress placed enforcement of this so-called two-midnight rule on hold and has now authorized exceptions for shorter in-patient stays on a case-by-case basis. 80 Fed. Reg. 70537 (Nov. 13, 2015).
[4] CMS. “How Medicare Covers Self-Administered Drugs Given in Hospital Outpatient Settings.” P. 1.
[5] Ibid.
[6] CMS, “Billing for Self-Administered Drugs Given in Outpatient Settings.” (Feb. 2011), (site visited Nov. 5, 2015).
[7] Ibid.
[8] Medicare Payment Advisory Commission, “Hospital Short Stay Policy Issues” (Presentation, Jan. 16, 2015, slide 11,     
[9] CMS. Section 1128B(b) of the Social Security Act, 42 U.S.C. § 1320A-7b(b). Medicare Benefit Policy Manual.
[10] Office of the Inspector General, Department of Health and Human Services. “OIG Policy Statement Regarding Hospitals that Discount or Waive Amounts Owed by Medicare Beneficiaries for Self-Administered Drugs Dispensed in Outpatient Settings,” (Oct. 30, 2015), (site visited November 5, 2015).
[11] OIG: No Sanctions for Hospitals Discounting Certain Medications,” BNA Snapshot (Nov. 6, 2015).
[12] Office of the Inspector General, Department of Health and Human Services. “OIG Policy Statement Regarding Hospitals that Discount or Waive Amounts Owed by Medicare Beneficiaries for Self-Administered Drugs Dispensed in Outpatient Settings.” P. 2.
[13] Ibid. P. 2.
[14] MedPAC, Transcript of April 2, 2015 public meeting, pages 19- 21 (discussion of self-administered drugs), pages 42-43 (voting on recommendations),


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