AMERICAN HEALTH LAWYERS ASSOCIATION. Year in Review

Transcription

1 AMERICAN HEALTH LAWYERS ASSOCIATION Year in Review

2 American Health Lawyers Association Year in Review Table of Contents...2 Accountable Care Organizations Antitrust...4 Arbitration/Mediation..24 Employment and Labor..39 EMTALA..44 ERISA..53 Food and Drug Law/Life Sciences..68 Fraud and Abuse.98 Healthcare Reform.177 Health Information Technology..196 HIPAA 203 Hospitals and Health Systems Individual Patient Rights..214 Insurance/Managed Care Long Term Care..232 Medical Records.238 Medicaid 242 Medical Malpractice Medicare Patient Safety..354

3 Physicians 357 Quality of Care RICO..384 Tax.389 3

4 Accountable Care Organizations CMS Issues Proposed Rule On Accountable Care Organizations The Centers for Medicare and Medicaid Services (CMS) issued March 31, 2011 the muchanticipated proposed rule on the Medicare Shared Savings Program for accountable care organizations (ACOs) pursuant to Section 3022 of the Patient Protection and Affordable Care Act (PPACA). The proposed rule, slated for publication in the April 7, 2011 Federal Register, is intended to help physicians, hospitals, and other providers form patient-centered ACOs to better coordinate care across healthcare settings. Among other things, the proposed rule details and seeks comments on various aspects of ACO formation and participation in the shared savings program, including eligibility criteria, legal and governance structures, quality measures, performance scoring, and payment models. ACOs will enter into agreements with the Department of Health and Human Services (HHS) for not less than three years under one of two tracks, discussed more below. HHS emphasized that participation in an ACO is purely voluntary. According to an analysis of the proposed regulation, Medicare could potentially save as much as $960 million over three years as a result of the shared savings program. Comments on the proposed rule are due June 6. HHS is planning a series of open door forums on the proposal during the comment period. Accountable Care Under Section 3022, ACOs agree to be accountable for the quality, cost, and overall care of the Medicare fee-for-service beneficiaries assigned to the organization. Beginning in January 2012, ACOs that meet specified quality performance standards will be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a sufficient percentage below benchmark amounts set by CMS. For too long, it has been too difficult for health care providers to work together to coordinate and improve the care their patients receive. That has real consequences: patients have gaps in their care, receive duplicative care, or are at increased risk of suffering from medical mistakes. Accountable Care Organizations will improve coordination and communication among doctors and hospitals, improve the quality of the care their patients receive, and help lower costs, said HHS Secretary Kathleen Sebelius. An ACO will be rewarded for providing better care and investing in the health and lives of patients, said Donald M. Berwick, M.D., CMS Administrator. ACOs are not just a new way to pay for care but a new model for the organization and delivery of care. Eligibility for Shared Savings The PPACA identifies four groups as eligible to participate in the shared savings program: ACO professionals (i.e., hospitals and physicians) in group practice arrangements, networks of individual practices of ACO professionals, partnerships or joint venture 4

5 arrangements between hospitals and ACO professionals, and hospitals employing ACO professionals. The statute also gives the Secretary the discretion to expand eligibility to other groups of providers and suppliers as appropriate. Under the proposed rule, the four statutorily identified groups, as well as critical access hospitals, would be allowed to form ACOs independently. Other Medicare-enrolled entities, like skilled nursing facilities, long term care hospitals, and federally qualified health centers, could participate in established ACOs, but not form them on their own. CMS is seeking further comments on the providers/suppliers that should be eligible to participate in ACOs for purposes of the shared savings program. State-Recognized Legal Entity Under the PPACA, an ACO must have a formal legal structure that would allow the organization to receive and distribute payments for shared savings to participating providers of services and suppliers. Each ACO would need to be a legal entity recognized and authorized to conduct business under applicable state law that is capable of receiving and distributing shared savings; repaying shared losses; establishing, reporting, and ensuring ACO participant and ACO provider/supplier compliance with program requirements, including the quality performance standards; and performing the other ACO functions identified in the statute, the rule said. Thus, under the proposal, a hospital employing ACO professionals could be eligible to participate in the shared savings program as an ACO with its current legal structure, so long as it was recognized under state law, and would not have to develop a separate new entity. CMS made clear, however, that existing ACOs will not automatically be accepted into the shared savings program. Shared Governance The proposed rule would require the ACO to demonstrate a mechanism of shared governance that provides all ACO participants with an appropriate proportionate control over the ACO s decision making process. CMS is proposing that an ACO must establish and maintain a governing body such as a board of directors or board of managers with adequate authority to execute the ACO's statutory functions. Under the proposed rule, the governing body must include representatives from ACO providers and suppliers and Medicare beneficiaries. ACO participants would have to control at least 75% of the governing body. This proposal ensures that ACOs remain provider-driven, but also leaves room for both nonproviders and small provider groups to participate in the program, CMS said. Beneficiary Assignment CMS is proposing to assign beneficiaries to an ACO based on primary care services rendered by physicians in general practice, internal medicine, family practice, and geriatric medicine. 5

6 The agency is seeking comments on other options that may better address the delivery of primary care services by specialists. According to CMS, assignment as used in the PPACA is an operational process by which Medicare will determine whether a beneficiary has chosen to receive a sufficient level of the requisite primary care services from physicians associated with a specific ACO so that the ACO may be appropriately designated as exercising basic responsibility for that beneficiary's care. CMS emphasized that the term assignment... in no way implies any limits, restrictions, or diminishment of the rights of Medicare FFS beneficiaries to exercise complete freedom of choice in the physicians and other health care practitioners and suppliers from whom they receive their services. Under the PPACA, an ACO must have a minimum of 5,000 beneficiaries assigned to it to participate in the shared savings program. CMS would issue a warning and corrective action plan to an ACO whose assigned population fell below 5,000 during the course of the three-year agreement period. The ACO would remain eligible for shared savings for the performance year for which the warning was issued. If the ACO continued to miss the 5,000 mark by the completion of the next performance year, then CMS would terminate the ACO's participation and it would not be eligible to share in savings for that year. Two-Track Payment Model Under the proposed rule, CMS would develop a performance benchmark for each ACO to assess whether it qualifies to receive shared savings, or to be held accountable for losses, according to agency fact sheets. The proposed rule would allow ACOs to opt for either a one-sided risk payment model (sharing of savings only for the first two years and sharing of savings and losses in the third year) or a two-sided risk model (sharing of savings and losses for all three years). CMS believes this approach would have the advantage of providing an entry point for organizations with less experience with risk models, such as some physician-driven organizations or smaller ACOs, to gain experience with population management before transitioning to a risk-based model, while also providing an opportunity for more experienced ACOs that are ready to share in losses to enter a sharing arrangement that provides a greater share of savings, but at the risk of repaying Medicare a portion of any losses, according to a CMS fact sheet. CMS also is proposing to establish a minimum sharing rate (MSR) that would account for normal variations in healthcare spending, so that the ACO would be entitled to shared savings only when savings exceeded the minimum sharing rate (MSR). Under the proposed rule, ACOs in the one-sided risk program that have smaller populations (and having more variation in expenditures) would have a larger MSR, while ACOs with larger populations (and having less variation in expenditures) have a smaller MSR. Under the two-sided approach, CMS is proposing a flat 2% minimum sharing rate. Once the ACO surpasses the minimum savings rate, it may share in savings if it is eligible to receive shared savings based on its quality performance score, CMS said. Under the 6

7 proposed rule, ACOs in the two-sided model would have a higher maximum sharing percentage of 60%, compared to 50% in the one-sided model. In addition, CMS explained, under the two-sided model, ACOs would receive shared savings for the first dollar after achieving the minimum savings rate, while under the one-sided model, ACOs would share in savings after a 2% threshold is met, with an exemption for small ACOs in rural or underserved communities. Under both models, shared savings would be linked to quality and performance scores. The proposed rule also provides a methodology for determining shared losses, which also would be based in part on the ACO s quality performance score. CMS is proposing a shared loss cap of 5% of the benchmark in the first year of the program, 7.5% in the second year, and 10% in the third year. Quality Measures, Performance CMS is proposing 65 quality measures for the first year in five main areas: patient/caregiver experience of care; care coordination; patient safety; preventive health; and at-risk population/frail elderly health. CMS indicated that quality measures for the remaining two years would be proposed in future rulemaking. In several fact sheets, CMS indicated that these measures are aligned with those in other programs such as those for Electronic Health Records and the Physician Quality Reporting System. CMS is proposing to define the first quality performance period as beginning January 1, 2012 and ending December 31, ACOs that do not meet the quality performance thresholds for all proposed measures would be ineligible for shared savings, regardless of how much per capita costs were reduced, CMS said in the rule. ACOs that continue to underperform, or exhibit a pattern of incomplete or inaccurate reporting, will be subject to termination from the program. In the first year of the shared savings program, CMS proposes to define the quality performance standard at the reporting level, and to define it based on measure scores in subsequent years, according to the rule. Program Integrity CMS also proposed a number of program integrity provisions to guard against fraud and abuse in the shared savings program, including requiring ACOs to have a compliance plan, to meet certain certification requirements, and to put a conflicts of interest policy in place. CMS also is considering screening ACOs during the application process for any history of program exclusions or other sanctions and affiliations with individuals or entities that have a history of program integrity issues. Legal, Tax Implications Stakeholders have raised concerns that forming ACOs may run afoul of existing antitrust, tax, and fraud and abuse laws, including the Stark Law, the Anti-Kickback Statute, and the Civil Monetary Penalty Law. 7

8 In conjunction with the proposed rule, the HHS Office of Inspector General and CMS issued a joint notice and solicitation of public comments on potential waivers of certain fraud and abuse laws with respect to the shared savings program. In addition, the Department of Justice and the Federal Trade Commission issued a proposed antitrust policy statement and the IRS requested comments on the need for additional tax guidance for tax-exempt organizations participating in the shared savings program. Federal Agencies Move To Address Antitrust, Fraud And Abuse Concerns For ACOs As the Centers for Medicare and Medicaid Services (CMS) unveiled the long-awaited proposed regulations on the Medicare Shared Savings Program, the administration also moved to address concerns that accountable care organizations (ACOs) could run afoul of federal antitrust, tax, and fraud and abuse laws. Stakeholders have said certain federal laws could pose significant barriers to ACO formation, indicating that in the absence of further guidance from the agencies, ACOs and other similar integration strategies may present too great of a regulatory risk for providers. [CMS] has worked closely with agencies across the Federal government to ensure a coordinated and aligned inter- and intra-agency effort to address these legal and tax implications, according to an agency fact sheet posted March 31, In conjunction with the proposed rule, CMS and the Department of Health and Human Services (HHS) Office of Inspector General (OIG) issued a joint notice seeking comments on potential fraud and abuse law waivers for ACOs participating in the shared savings program. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) also released a proposed antitrust policy statement regarding ACOs. Finally, the IRS issued a notice seeking comments regarding the need for guidance on tax-exempt organizations participating in ACOs. Fraud and Abuse Law Waivers The CMS/OIG notice outlines proposals for waivers of certain fraud and abuse laws the physician self-referral law, the anti-kickback statute, and the civil monetary penalty law (CMP) for the shared savings program and solicits comments on further waiver design considerations, according to the fact sheet. At the outset, the agencies noted that a waiver is not needed for all arrangements to the extent the ACO does not implicate the fraud and abuse laws or fit within existing safe harbors and exceptions. The agencies are proposing waivers in three circumstances: The distribution of shared savings payments received by an ACO to or among qualified ACO participants and ACO providers/suppliers. 8

9 An ACO s distribution of shared savings payments to other individuals or entities for activities necessary for and directly related to the ACO s participation in the shared savings program. For the anti-kickback statute and CMP only, certain financial relationships that are necessary for and directly related to the ACO s participation in the program and fully comply with an exception to the physician self-referral law. The waivers related to the distribution of shared savings would apply to the distributions of shared savings earned by the ACO during the term of agreement with CMS to participate in the Medicare Shared Savings Program, even if the actual distributions occur after the expiration of the agreement, the notice said. The notice also seeks comments on exercising HHS' waiver authority to address start-up costs, operating expenses, and non-shared savings relationships between ACO members or outside entities, the fact sheet said. Comments on the notice are due June 6. The notice will be published in the April 7 Federal Register. Antitrust Policy The FTC s and DOJ s Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program is intended to ensure that health care providers have the antitrust clarity and guidance needed to form procompetitive ACOs that participate in both the Medicare and commercial markets. The proposed policy is applicable to collaborations, not including mergers, that were formed after March 23, 2010 for purposes of participating in the shared savings program. ACOs using the same governance structure and the same clinical and administrative processes in the commercial market as they used to participate in the program would be subject to rule of reason treatment, which will apply for the duration of their participation in the shared savings program, the agencies said. The Agencies further note that CMS s proposed regulations allow an ACO to propose alternative ways to establish clinical integration, and the Agencies are willing to consider other proposals for clinical integration as well, the policy statement said. The proposed antitrust policy provides a Safety Zone for certain ACOs that participate in the program, which would not be subject to antitrust scrutiny absent extraordinary circumstances. To fall within the Safety Zone, independent ACO participants that provide a common service must have a combined share of 30 percent or less for each common service in each participant s Primary Service Area ("PSA ), wherever two or more ACO participants provide that service to patients from that PSA, the fact sheet said. According to the policy statement, the higher the PSA share, the greater the risk the ACO will be anticompetitive. An ACO with high PSA shares may reduce quality, innovation, and choice for Medicare and commercial patients, in part by reducing the ability of competing equally or more efficient ACOs to form. High PSA shares also may allow the ACO to raise prices to commercial health plans above competitive levels. On the other hand, if there are already other competing ACOs, or sufficient suitable unaffiliated 9

10 physicians and hospitals to form competing ACOs, it is less likely that the ACO would raise significant competitive concerns. An ACO applicant with a combined share above 50% for any common service would fall outside the safety zone and will be subject to a mandatory antitrust review. To be eligible for the shared savings program, the ACO subject to the mandatory review must obtain a letter from DOJ or the FTC indicating the agency has no present intent to challenge the ACO. The agencies have pledged a 90-day expedited review of the ACO applicant. ACOs between the 30% safety zone and the 50% mandatory review threshold that do not impede competition and engage in pro-competitive activities may participate in the shared savings program without antitrust agency review. ACOs in this category may still seek agency review for added certainty, the fact sheet said. The agencies are seeking comments on the proposed policy through May 31. Issues for Tax-Exempt Organizations The IRS issued Notice asking whether additional guidance is needed for taxexempt organizations that plan to participate in the program through ACOs, the fact sheet said. A primary concern for tax-exempt organizations is whether their participation in the ACO results in prohibited inurement or impermissible private benefit. According to the fact sheet, given CMS regulation and oversight, the IRS expects that a tax-exempt organization s participation in the Shared Savings Program through an ACO generally would not result in prohibited inurement or impermissible private benefit to the private party ACO participants. The IRS also said shared savings received by tax-exempt organizations from ACOs that complies with program requirements generally would not result in unrelated business taxable income. The IRS also is soliciting comments on whether guidance is needed regarding the tax implications for tax-exempt organizations participating in activities unrelated to the program, including shared savings arrangements with commercial health insurance payors, through an ACO. Comments on the notice were due May 31, Antitrust Enforcement FTC Says Discounted Pharmaceuticals Furnished To In-Home Hospice Patients Would Not Violate Robinson-Patman A provider s proposal to provide pharmaceuticals purchased at a discount to in-home hospice patients is exempt from the Robinson-Patman Act, the Federal Trade Commission (FTC) staff said in a July 2, 2010 advisory opinion. 10

11 Community CarePartners, Inc., the opinion requestor, is a nonprofit corporation that offers a full range of post-acute care services, including inpatient rehabilitation, inpatient and in-home hospice and palliative care, home health, and adult day care services. The Robinson-Patman Act is an antitrust law that prohibits anticompetitive price discrimination, the opinion letter explained. The Non-Profit Institutions Act (NPIA) exempts from the Robinson-Patman Act purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit. CarePartners asked FTC if it could provide discounted pharmaceuticals available to eligible nonprofit entities to hospice patients receiving treatment in their homes and still qualify for the exemption. According to FTC staff, the discounted drugs would qualify for the exemption. First, CarePartners is an eligible institution under the NPIA, the letter said. In addition, consistent with existing case law, the use of the NPIA-discounted pharmaceuticals in connection with treatment of in-home hospice patients admitted to CarePartners Hospice Program falls within the own use requirement of the statute, FTC said. The extension of CarePartners use of the NPIA-discounted pharmaceuticals to the inhome hospice setting contributes directly to its ability to fulfill its central institutional function and is consistent with both prior case law and prior staff advisory opinions, the letter noted. DOJ, Michigan Sue Blue Cross Blue Shield Of Michigan Alleging Use Of MFN Clauses Anticompetitive The Department of Justice (DOJ), along with the state of Michigan, filed a civil antitrust lawsuit October 18, 2010 against Blue Cross Blue Shield of Michigan (BCBSM) alleging its use of most favored nation (MFN) clauses in its contracts with hospitals raises prices, prevents other insurers from entering the marketplace, and discourages discounts. According to the suit, which was filed in the U.S. District Court for the Eastern District of Michigan, the challenged provisions likely resulted in Michigan consumers paying higher prices for their healthcare services and health insurance. MFN provisions generally refer to contractual clauses between health insurance plans (buyers) and healthcare providers (sellers) that guarantee no other plan can obtain a better rate than the plan wielding the MFN. Some of the MFNs in this case guarantee the plan an even better rate than given to any other plan or purchaser. According to the complaint, BCBSM has used MFNs or similar clauses in its contracts with at least 70 of Michigan s 131 general acute care hospitals, including many major hospitals in the state. The MFNs at issue require a hospital either to charge BCBSM no more than it charges BCBSM s competitors, or to charge the competitors a specified percentage more than it charges BCBSM, in some cases between 30% and 40%, DOJ said. 11

12 DOJ alleges BCBSM s use of MFN provisions has reduced competition in the sale of health insurance in Michigan by raising hospital costs to BCBSM s competitors, which discourages other health insurers from entering into or expanding within markets throughout the state. In addition, the complaint alleges BCBSM agreed to raise the prices that it pays to hospitals to obtain the MFNs, thus buying protection from competition by increasing its own costs. BCBSM's efforts to secure the lowest rates in hospital agreements are designed to benefit the people of Michigan consistent with BCBSM's statutory obligations, the company said in a statement. "Negotiated hospital discounts are a tool that Blue Cross uses to protect the affordability of health insurance for millions of Michiganders, said Andrew Hetzel, BCBSM vice president for corporate communications. "Through this lawsuit, the federal government seeks to deny millions of Michigan residents the lowest cost possible when they visit the hospital." Hetzel said the lawsuit was "without merit" and vowed to "vigorously defend our ability to negotiate the deepest possible discounts for our members and customers with Michigan hospitals." "It does not make good business sense for Blue Cross Blue Shield of Michigan to reimburse a provider at a higher rate than we can otherwise negotiate," Hetzel added. "These kinds of low cost guarantees are widely used in a variety of contracts in a number of industries. In fact, the federal government routinely requires its own vendors to abide by these same low cost requirements." Proposed Settlement Bans Texas Hospital From Entering Into Anticompetitive Contracts With Insurers, DOJ Says The Department of Justice (DOJ) announced February 25, 2012 a proposed settlement with United Regional Health Care System of Wichita Falls, TX prohibiting the hospital from entering into contracts with health insurers that undermine competition from competing hospitals. According to DOJ, United Regional unlawfully used contracts with insurers to maintain its monopoly for hospital services in violation of Section 2 of the Sherman Act, causing consumers to pay more for healthcare services than they otherwise would have. DOJ said the lawsuit, filed in the U.S. District Court for the Northern District of Texas, is the first since 1999 that challenges a monopolist with engaging in traditional anticompetitive unilateral conduct. The proposed settlement, if approved by the court, would resolve the civil antitrust case, DOJ added. As a must have hospital in the Wichita Falls area, DOJ alleged, United Regional systematically required most commercial health insurers to enter into contracts that effectively prohibited them from contracting with United Regional s competitors. According to DOJ, because the penalty for contracting with United Regional s rivals was so significant, almost all insurers offering health insurance in Wichita Falls entered into exclusionary contracts with United Regional, DOJ contended. 12

13 The proposed settlement, which would expire in seven years, prohibits United Regional from conditioning the prices or discounts that it offers to commercial health insurers based on whether those insurers contract with other health-care providers and from inhibiting insurers from entering into agreements with United Regional s rivals. In addition, under the settlement, United Regional may not take any retaliatory actions against an insurer that enters into an agreement with a rival provider. FTC, Georgia AG Move To Block Hospital Acquisition The Federal Trade Commission (FTC) and the Georgia Attorney General (AG) filed a complaint seeking to halt Phoebe Putney Health System, Inc. s proposed acquisition of rival Palmyra Park Hospital, Inc. in Albany, GA from its owner HCA, according to an FTC press release. The complaint asks a Georgia federal district court to block the deal until the FTC concludes an administrative challenge, including appeals, to the transaction. FTC announced April 20, 2011 its administrative complaint, which alleges the transaction would violate federal law by significantly reducing competition and allowing the combined Phoebe/Palmyra to raise prices for general acute-care hospital services charged to commercial health plans. We have challenged this transaction for one very simple reason, said Richard Feinstein, FTC s Bureau of Competition Director. By eliminating vigorous competition between Phoebe and Palmyra, this merger to monopoly will cause consumers and employers in the Albany region to pay dramatically higher rates for vital health care services, and will likely reduce the quality and choice of services available in the community as well. According to the FTC complaint, the transaction is a merger to monopoly because Phoebe and Palmyra are the only two competing hospitals in the Albany, GA area. After the acquisition, FTC says, Phoebe would have a market share of more than 85%. The combination also would harm non-price competition that has spurred the two rivals to increase the quality of patient care, FTC contends. State Action FTC and the Georgia AG also have raised concerns that the proposed transaction is being structured to skirt federal antitrust scrutiny. The Hospital Authority of Albany-Dougherty holds title to the assets of Phoebe, a 443-bed hospital in Albany, which operates under a long term lease entered in Under the proposed transaction, the Authority would acquire Palmyra, which also operates in Albany, from its owner HCA and then lease it to a nonprofit corporation that Phoebe controlled. FTC says it expects Phoebe, the Authority, and HCA to assert the transaction is exempt from federal antitrust liability under the state action doctrine, which provides a narrow exception to the antitrust laws for anticompetitive conduct if it is an act of government. FTC alleges the transaction was motivated and planned exclusively by Phoebe, acting in its own independent, private interests, and not in the interest of patients. 13

14 FTC also contends that rather than acting in the State of Georgia s interests, the Authority served only as a strawman in an attempt to shield an overly anticompetitive transaction from antitrust scrutiny. Specifically, FTC alleges the Authority conducted no independent analysis of the deal, which it was only informed of at the last minute. FTC contends the state action doctrine is inapplicable because the Authority has not actively supervised Phoebe nor made any efforts to review the hospital s recent price increases. Cases Third Circuit Affirms Dismissal Of Antitrust, RICO Claims Against Orthopedic Device Makers The Third Circuit affirmed June 1, 2010 the dismissal of a lawsuit alleging five of the nation s largest manufacturers of orthopedic devices harmed competition by paying bribes and kickbacks to surgeons to use defendants products in violation of federal antitrust law. Plaintiffs Richard and Holly McCullough sued defendants Zimmer, Inc., Depuy Orthopaedics, Inc., Bioment, Inc., Smith & Nephew, Inc., and Stryker Orthopedics, Inc., under the Clayton Act for violating Section 1 of the Sherman Act and Section 2 of the Robinson-Patman Act. Plaintiffs also asserted claims under the Racketeer Influenced and Corrupt Organizations Act (RICO). Defendants are competing manufacturers of surgical orthopedic devices that together account for roughly 95% of the U.S. market in such products. According to government investigators, each defendant individually paid kickbacks and bribes to orthopedic surgeons to induce them to use its products. To avoid criminal liability, the companies agreed to implement corporate compliance plans, submit to federal monitoring, and pay a fine totaling $311 million. Plaintiffs contended they competed directly with defendants because they had exclusive contracts with defendants competitors to demonstrate, distribute, and service surgical orthopedic devices. According to plaintiffs, the bribes and kickbacks harmed their business and eventually excluded them from the surgical orthopedic device market in violation of the federal antitrust laws and RICO. The district court dismissed their antitrust and RICO claims, finding plaintiffs lacked standing because they had not suffered a cognizable antitrust injury attributable to defendants alleged conduct and failed to show a RICO enterprise. The Third Circuit affirmed in a non-precedential ruling. With respect to the antitrust standing issue, the appeals court noted the main deficiency in plaintiffs complaint was that they failed to establish they were competitors or consumers in the relevant market. According to the appeals court, plaintiffs only established they did business with defendants' competitors and consumers in the relevant market, but were not competitors or consumers themselves. 14

15 As mere intermediaries in the supply chain, the McCulloughs suffered no cognizable antitrust injury as a result of Defendants alleged anticompetitive conduct, the appeals court said. Nor did plaintiffs show any harm to their business inextricably intertwined with Defendants alleged conduct, the appeals court observed. Thus, the appeals court held the antitrust claims were properly dismissed for lack of standing. The appeals court also concluded the district court properly dismissed plaintiffs RICO claim for failing to show a RICO enterprise. Plaintiffs argued the surgeons, hospital administrators, and other entities that allegedly received bribes and kickbacks from defendants comprised the relevant enterprise for RICO purposes. Simply listing a string of individuals or entities that engaged in illegal conduct, without more, is insufficient to allege the existence of a RICO enterprise, the appeals court said. Finally, the appeals court declined to remand the action to the district court, holding that any additional amendments to plaintiffs complaint would be futile. McCullough v. Zimmer, Inc., No (3d Cir. June 1, 2010). California Supreme Court Says Pharmacies May Continue With Antitrust Suit Against Drug Makers The California Supreme Court held July 12, 2010 that a group of pharmacies could proceed with their far-reaching antitrust action under state law against major drug makers for allegedly conspiring to artificially inflate drug prices. In so holding, the high court rejected the manufacturers contention that the pharmacies suit should be barred because they were able to pass on the alleged overcharges to consumers. The high court s decision reverses an appeals court ruling that the defendant drug makers could mount a pass on defense and that such a defense entitled them to summary judgment on the price-fixing allegations. Instead, the high court opted to follow a U.S. Supreme Court decision holding antitrust violators in most instances could not assert as a defense that any illegal overcharges were passed on by a plaintiff direct purchaser to indirect purchasers. Hanover Shoe v. United Shoe Mach., 392 U.S. 481 (1968). Thus, the high court concluded that under California s Cartwright Act, as under federal law, generally no pass-on defense is permitted. In the high court s view, adopting the Hanover Shoe rule in the state context was most in accord with the legislature s overarching goals of maximizing effective deterrence of antitrust violations, enforcing the state s antitrust laws against those violations that do occur, and ensuring disgorgement of any ill-gotten proceeds. 15

16 Price-Fixing Conspiracy Plaintiff pharmacies sued a number of major drug manufacturers under Section 1 of the Cartwright Act alleging they agreed to set artificially high prices for their drugs by blocking reimportation of lower-priced drugs from abroad and limiting generic competition. According to the complaint, this concerted action allowed manufacturers to maintain prices for their drugs in California and nationally at levels 50% to 400% higher than they otherwise would have been. As a result, the pharmacies contended they were forced to pay an overcharge i.e., the differential between the inflated prices and the prices of a competitive marketplace. The pharmacies sought treble damages, restitution, and injunctive relief. The drug makers asserted an affirmative defense that the claims were barred because the pharmacies suffered no compensable injury as they passed on any alleged overcharge to consumers and third-party payors. The trial court held defendants could assert the pass-on defense to avoid liability and defeat plaintiffs claims. The appeals court affirmed, finding the defense was available to the drug makers under state law and was fatal to the suit because plaintiffs could show no damages sustained. Damages Sustained The California Supreme Court reversed, holding, on an issue of first impression, that under the Cartwright Act an antitrust defendant cannot defeat liability by asserting a pass-on defense. The Cartwright Act allows those injured in his or her business or property by actions forbidden under the law to recover three times the damages sustained. The high court rejected defendants argument that damages sustained evinced legislative intent that the pass-on defense be available to rebut claims under the Cartwright Act. The question we face is how to measure damages sustained, and nothing in the Cartwright Act s language as enacted in 1907 or thereafter amended, resolves that question, the high court said. The high court also found no evidence in the legislative history that in enacting the Cartwright Act, the legislature had any specific intent as to how to measure damages in antitrust lawsuits by direct purchasers. Hanover Shoe Rule Consistent with Legislative Intent Without any specific textual guidance or legislative history on point, the high court turned to subsequent statutory amendments to shed light on whether to adopt the Hanover Shoe rule. The high court highlighted two specific actions by the legislature indicating that given a choice, it would prefer an enforcement regime in which Hanover Shoe is the law. 16

17 First, after Congress passed the Hart-Scott-Rodino Antitrust Improvements Act, which authorizes state attorneys general to file suits on behalf of injured consumers for antitrust violations, the California legislature quickly moved to amend the Cartwright Act to incorporate the remedial framework of the Hart-Scott-Rodino Act. The Hart-Scott-Rodino Act, the high court said, reflected Congress belief that it was better to overdeter antitrust violations and maximize the likelihood violators would be required to fully disgorge price-fixing profits. The Hart-Scott-Rodino Act also expressly contemplated antitrust lawsuits by direct and indirect purchasers, with the potential for duplicative recoveries addressable by offsetting damages already paid. Second, the high court found significant the fact that the legislature repudiated a subsequent U.S. Supreme Court decision holding that, just as defendants could not raise a pass-on theory as a defense, so indirect purchasers could not use a pass-on theory to sue for overcharges arising from antitrust violations. Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Shortly after that decision, the California legislature passed an Illinois Brick repealer bill, repudiating for purposes of the Cartwright Act any ban on indirect purchaser suits. These two actions by the legislature, the high court said, indicated acceptance of the Hanover Shoe rule and the notion that maximizing deterrence and the probability of full disgorgement of illegal gains are of paramount importance. To allow defendants universally to assert a pass-on defense, even in cases such as this that present no risk of duplicative recovery, would hamper enforcement by reducing incentives to sue and police antitrust violations, the high court wrote. In addition, [a]llowing a pass-on defense would plunge parties and courts into minitrials attempting to trace every penny of any initial overcharge, as well as seeking to measure the further ramifications that an overcharge might have in the form of lost sales and other tertiary consequences. The high court also noted that even though pharmacies may have in fact passed on overcharges, they could have been damaged in other ways such as lost profits or sales. Exceptions to Hanover Shoe The high court did single out two exceptions to the Hanover Shoe rule, namely for cost plus contracts and in instances where multiple levels of purchasers have sued. As to the latter, the high court said, if damages must be allocated among the various levels of injured purchasers, the bar on consideration of pass-on evidence must necessarily be lifted; defendants may assert a pass-on defense as needed to avoid duplication in the recovery of damages." Unfair Competition Plaintiff pharmacies also asserted claims against the manufacturers under the state s unfair competition law (UCL). The manufacturers asserted that plaintiffs lacked standing and were ineligible for relief. The lower courts also granted summary judgment to the manufacturers on this claim. 17

18 Reversing, the high court found the pharmacies had established standing, saying the manufacturers argument that the pharmacies suffered no compensable loss because they mitigated any injury by passing on the overcharges conflates the issue of standing with the issue of the remedies to which a party may be entitled. Finally, the high court noted that even if the pharmacies were not entitled to restitution, they were still entitled to seek an injunction under the UCL. Clayworth v. Pfizer, Inc., No. S (Cal. July 12, 2010). Third Circuit Allows Hospital To Proceed With Antitrust Action Alleging Conspiracy Between Hospital System And Insurer The Third Circuit reversed November 29, 2010 a federal district court decision dismissing antitrust claims brought by West Penn Allegheny Health System, Inc. alleging the University of Pittsburgh Medical Center (UPMC) and Highmark, Inc. conspired to protect one another from competition in their relevant markets to the detriment of the community s employers, consumers, and patients. The Third Circuit found West Penn adequately alleged a conspiracy between UPMC and Highmark that resulted in an unreasonable restraint of trade causing antitrust injury to West Penn. West Penn s Claims West Penn, Pittsburgh s second-largest hospital system, asserted claims against UPMC and Highmark under Sections 1 and 2 of the Sherman Act for entering into an illegal conspiracy, monopolization, and attempted monopolization. West Penn Allegheny also alleged state law claims of tortious interference and employee raiding. According to the opinion, UPMC is the dominant hospital in the Pittsburgh, PA metropolitan area, with a 55% share of the hospital services market and an over 50% market share in every tertiary and quaternary care service line. Highmark is the dominant insurer in the area with 60%-80% of the commercial market. Highmark s second-largest competitor is an affiliate of UPMC. West Penn Allegheny alleged that, beginning at least in summer 2002, UPMC agreed to protect Highmark by refusing to contract on reasonable terms with any competing health insurer or to sell its health insurance affiliate to any competing health insurer. In turn, Highmark agreed to restrict UPMC s hospital primary competitor, West Penn Allegheny, by shuttering its low-cost Community Blue product, attempting to block West Penn Allegheny s efforts to refinance its debt, and paying inflated reimbursement rates to UPMC while maintaining depressed rates for UPMC s competitors, especially West Penn Allegheny, the complaint said. West Penn also contended UPMC engaged in a ruthless and predatory campaign of physician raiding... to thwart the formation of West Penn Allegheny and to cripple, if not destroy, West Penn Allegheny as a viable competitor. According to West Penn, because of the alleged conduct, it lost millions of dollars in additional reimbursement, which has restricted its access to the necessary capital to invest in and expand its service lines. 18

19 During the years of the alleged conspiracy, the opinion said, UPMC and Highmark reaped record profits, with UPMC s net income rising from $23 million in 2002 to over $618 million in 2007, and Highmark s net income increasing from $50 million in 2001 to $398 million in UPMC s increased revenue came largely from the sweetheart reimbursements it received from Highmark, and Highmark increased its earnings by raising premiums, the opinion said. District Court Decision UPMC and Highmark moved to dismiss the action, relying on two Supreme Court decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S.Ct (May 18, 2009), which allowed dismissal of a complaint if it failed to allege enough facts to state a claim to relief that is plausible on its face. The U.S. District Court for the Western District of Pennsylvania granted the dismissal motion, emphasizing its gatekeeper function under the cited Supreme Court cases to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed. The court found West Penn had failed to adequately allege an illegal market allocation agreement between UPMC and Highmark for purposes of the conspiracy claims. In addition, the court held West Penn had not alleged an antitrust injury that the antitrust laws were designed to protect. The court also rejected the attempted monopolization claim under Section 2 based on UPMC s hiring of physicians from West Penn Allegheny. Plausibility Standard As an initial matter, the Third Circuit rejected the heightened pleading standard applied by the district court, finding it squarely at odds with Supreme Court precedent. We concluded that it is inappropriate to apply Twombly s plausibility standard with extra bite in antitrust and other complex cases, the appeals court said. Agreement to Protect Against Competition Next, the appeals court found West Penn adequately alleged direct evidence that UPMC and Highmark agreed to protect each other from competition. Specifically, the complaint alleged that in 2005 Highmark refused to refinance a loan it had made to West Penn, citing concerns that UPMC would retaliate against the insurer for violating their agreement. Similarly, the complaint alleged that in 2005 and 2006, West Penn asked Highmark to increase its reimbursement rates, which the insurer acknowledged were too low but refused to raise, again citing concerns that UPMC would retaliate. Unreasonable Restraint Likewise, the appeals court held West Penn sufficiently alleged the conspiracy unreasonably restrained trade by producing anticompetitive effects in the relevant markets. 19

20 According to the appeals court, at least at this stage of the litigation, West Penn plausibly suggested that by denying West Penn capital, the conspiracy caused West Penn to cut back on its services and to abandon expansion projects. The complaint also plausibly suggests that by shielding Highmark from competition, the conspiracy resulted in increased premiums and reduced output in the market for health insurance, the appeals court said. Antitrust Injury The appeals court also concluded that West Penn had alleged an antitrust injury in the form of artificially depressed reimbursement rates. Here, the complaint alleged Highmark had substantial monopsony power, with a 60%- 80% share of the Allegheny County market for health insurance. The complaint also alleged Highmark paid West Penn depressed reimbursement rates, not because of independent decision making, but pursuant to a conspiracy with UPMC. In these circumstances, it is certainly plausible that paying West Penn depressed reimbursement rates unreasonably restrained trade, the opinion said. Attempted Monopolization Finally, the appeals court reversed the lower court s dismissal of West Penn s attempted monopolization claim against UPMC. The complaint alleged UPMC tried to lure a number of employees away from West Penn even though UPMC could not absorb them; UPMC pressured community hospitals to stop referring oncology patients to West Penn by threatening to build competing facilities nearby; and UPMC made false statements about West Penn s financial health to potential investors, causing West Penn to pay artificially inflated financing costs on its debt. Viewed as a whole, these allegations plausibly suggest that UPMC has engaged in anticompetitive conduct, the Third Circuit held. Thus, the appeals court reversed in part and vacated in part the district court s judgment and remanded for further proceedings. West Penn Allegheny Health Sys., Inc. v. UPMC, No (3d Cir. Nov. 29, 2010). In subsequent developments, the U.S. District Court for the Western District of Pennsylvania granted motions to stay the proceedings while the defendants petitioned for writs of certiorari before the U.S. Supreme Court. The district court in granting the motion to stay noted that it must consider whether: (1) it was reasonably likely that the Supreme Court will grant Highmark and/or UPMC s petition(s), and if so, whether there is a fair prospect that a majority of the Court would decide that the Third Circuit s decision was incorrect; (2) Highmark or UPMC would suffer irreparable injury if a stay were to be denied; (3) West Penn would suffer substantial injury if a stay were to issue; and (4) a stay would be in the public interest. Regarding the first factor, the court agreed with defendants that it was at least reasonably likely that the Supreme Court would grant the defendants petitions, given that the decision of the Third Circuit appears to create a conflict between the First, Third, and Ninth Circuit Courts of Appeal on the issue of whether a plaintiff can maintain a 20

21 federal antitrust action based on allegations of lost profits and lost market shares stemming from an alleged vertical pricing agreement, without any allegations of predatory pricing. In addition, the court agreed that there was a fair prospect that a majority of the Court would decide that the Third Circuit s decision was incorrect, given the history of the Court s antitrust decisions. Regarding the third factor, the court again agreed with defendants that given the fact that plaintiff waited nearly seven years to file its claims against defendants, requiring the parties to wait a few more months would not cause plaintiff substantial injury. As for the fourth factor, the court found that a stay would further the public interest. West Penn Allegheny Health Sys., Inc. v. UPMC, No. 09cv0480 (W.D. Pa. Jan. 31, 2011 Supreme Court Again Denies Review Of Pay-For-Delay Patent Settlements The U.S. Supreme Court denied review March 7, 2011 of the Second Circuit s ruling that cash payments to settle Hatch-Waxman patent infringement suits do not generally violate the antitrust laws. Arkansas Carpenters Health and Welfare Fund v. Bayer AG, Nos cv(L), cv(CON) (2d Cir. Sept. 7, 2010), review denied No (U.S. Mar. 7, 2011). According to the appeals court, the settlements do not run afoul of federal antitrust laws as long as: (1) the settlement excludes no more competition than would the patent itself, and (2) the claim for patent infringement and/or validity is not a "sham," or "objectively baseless." The Second Circuit s September 2010 order denies a petition for en banc rehearing brought by a class of direct purchaser plaintiffs who claimed that a patent settlement involving Bayer's former blockbuster antibiotic, Cipro, violated the Sherman Act. The Court's order lets stand a decision by a panel of the Second Circuit in April 2010 affirming a lower court's conclusion that the settlement did not violate the antitrust laws. Federal Court Preliminarily Enjoins Ohio Hospital Consolidation A federal district court in Ohio agreed March 29, 2011 to preliminarily enjoin ProMedica Health System, Inc. from consolidating its operations with rival St. Luke s Hospital in Lucas County, OH, pending a full administrative trial on the merits of the acquisition. We are gratified that Judge Katz has issued a preliminary injunction to preserve competition between ProMedica and St. Luke s. In a time of rapidly escalating health care costs, we believe that consumers in Lucas County, Ohio, are the true beneficiaries of this decision, said Federal Trade Commission (FTC) Bureau of Competition Director Richard Feinstein. The transaction closed August 31, 2010 but has been subject to a limited hold-separate agreement (HSA) since then. The FTC filed an administrative complaint January 6, 2011 alleging the merger would reduce competition and allow ProMedica to raise prices for general acute-care and 21

22 inpatient obstetrical services, significantly harming patients and local employers and employees, in violation of Section 7 of the Clayton Act. The complaint alleged the acquisition would reduce the number of general acute-care hospital competitors in Lucas County from four to three leaving ProMedica with a market share approaching 60% for general acute-care services in Lucas County. In the market for inpatient obstetrical services in Lucas County, FTC charged the acquisition would leave only one competitor to ProMedica, increasing ProMedica s market share to more than 80%. A full administrative trial on the merits is scheduled to start May 31, 2011 before an administrative law judge. FTC filed a separate complaint with the court January 7, 2011 seeking an order requiring ProMedica to preserve St. Luke s as a separate, independent competitor during the administrative proceeding and appeals process. In a 115-page opinion, the U.S. District Court for the Northern District of Ohio granted the FTC s motion to temporarily block the consolidation. The court identified general acute-care inpatient hospital services and inpatient obstetrical services as separate product markets, with Lucas County the relevant geographic market. In its lengthy findings of fact, which the court cautioned were preliminary, the opinion said the combination of the two hospitals significantly increases concentration in the already highly-concentrated Lucas County markets for general acute-care inpatient hospital services and inpatient obstetrical services. By a wide margin,... the Acquisition is presumptively anticompetitive in both relevant markets based on these high levels of market concentration, and is presumed likely to enhance ProMedica s market power in both markets, the court found. The court also noted that St. Luke s and ProMedica hospitals were significant competitors prior to the acquisition. According to the court, the acquisition would enable ProMedica to raise rates for St. Luke s and ProMedica s other Lucas County hospitals, which both companies were aware of in consummating the deal. Already dominant and high-priced, ProMedica becomes a must-have system with the acquisition, which will lead to higher rates that existing competitors cannot keep in check, the court said. The court also found the acquisition would harm residents and employers in Lucas County. In addition, the court said the asserted merger-specific efficiencies were not credible to rebut the presumption of competitive harm. Moreover, ProMedica cannot meet its burden to demonstrate that St. Luke s faced imminent failure and that St. Luke s adequately pursued less harmful alternatives, nor has ProMedica asserted a failing-firm defense in this proceeding, the court observed. 22

23 The court concluded: The strong public interest in the effective enforcement of the antitrust laws weighs in favor of a preliminary injunction in the instant case. A preliminary injunction, continuing the HSA, is necessary to maintain the status quo and ensure availability of relief, if warranted, after the full administrative proceeding on the merits. Absent a preliminary injunction, ProMedica will be free to implement its plans to increase hospital rates, terminate employees at St. Luke s, and eliminate important clinical services currently offered at SLH. These actions will cause immediate harm to the community and will make it difficult, if not impossible to restore competition to pre-acquisition levels should the FTC ultimately prevail in its administrative challenge. To ensure the case is treated "fairly and expeditiously," the court said it would "entertain taking additional steps" if the FTC failed to complete the administrative process by November 30, Arbitration New Jersey Appeals Court Says FAA Trumps State Anti- Arbitration Law In Nursing Home Agreements, But Invalidates Certain Provisions As Unconscionable A New Jersey appeals court held the Federal Arbitration Act (FAA) preempts a provision of the state s Nursing Home Responsibilities and Rights of Residents Act (Act) rendering void and unenforceable arbitration provisions in nursing home agreements. Reversing a trial court ruling on the issue, the New Jersey Superior Court, Appellate Division, found the FAA applied to the nursing home agreements at issue in the consolidated action because they involved interstate commerce. At the same time, the appeals court agreed with the trial court that the agreements constituted contracts of adhesions and that certain provisions restricting discovery, limiting compensatory damages, and prohibiting punitive damages were substantively unconscionable and therefore void as against public policy. The appeals court thus ordered these provisions severed from the otherwise valid arbitration agreement. The consolidated appeal involved two negligence actions against assisted living facilities operated by Alterra Healthcare Corporation and owned by Brookdale Living Communities, Inc. (collectively, defendants). At issue was whether the state s public policy, as expressed in the Act, voiding [a]ny provision or clause waiving or limiting the right to sue between a patient and a nursing home, was preempted by the FAA, which expresses a national policy favoring arbitration. The nursing home agreements contained identical arbitration provisions, as well as limitation of liability clauses significantly restricting discovery, limiting compensatory damages, and prohibiting punitive damages. Defendants sought to compel arbitration pursuant to the agreements. 23

24 The trial court ruled the arbitration provisions were void as against public policy, the FAA was inapplicable because the transactions between the parties did not involve interstate commerce, and, in any event, the arbitration agreements were part of a contract of adhesion and therefore unenforceable under the common law defense of unconscionability. The appeals court first held the FAA preempted the Act s anti-arbitration provision, finding the economic activities performed by these nursing facilities, including procuring materials from out-of-state suppliers and admitting out-of-state residents, involved interstate commerce. [A]lthough plaintiffs individual residency agreements may not have had a specific affect upon interstate commerce, the facilities economic activities, in the aggregate, represent a general practice subject to federal control, rendering the arbitration provisions subject to the FAA, the appeals court ruled. The state s prohibition of arbitration agreements in nursing home contracts is irreconcilable with the national policy favoring arbitration and therefore is preempted by the FAA, the appeals court said. But the appeals court went on to find the liability restrictions in the arbitration provision of the residency agreements were unenforceable as substantively unconscionability. The appeals court agreed with the trial court that the residency agreements were contracts of adhesion because they were presented on a take-it-or-leave-it basis. At issue were the provisions limiting discovery, capping compensatory damages to a seemingly arbitrary figure, and the outright prohibition of punitive damages. The appeals court said the plain language of the Act clearly showed these types of provisions ran counter to the state s public policy of protecting nursing home residents. Although the FAA preempts the application of this statute to bar arbitration as a contractually provided means of dispute resolution, the statute otherwise continues to protect these consumers right to sue, the appeals court found. In the appeals court s view, the restrictive provisions, when considered together, form an unconscionable wall of protection for nursing home operators seeking to escape the full measure of accountability for tortious conduct that imperils a discrete group of vulnerable consumers. Thus, the appeals court ordered these provisions severed from the agreement and remanded one of the cases for further consideration by an arbitrator without the discovery and damages restrictions. The appeals court remanded the other negligence action to the trial court to first determine whether a valid contract was formed between the parties requiring enforcement of the arbitration provision. Estate of Ruszala v. Brookdale Living Communities, Inc., No. A TI (N.J. Super. Ct. App. Div. Aug. 10, 2010). 24

25 U.S. Court In Kentucky Orders Arbitration Of Contract Dispute Between Hospital And Physician A federal court in Kentucky held recently that a physician and hospital must arbitrate their contract dispute and enjoined the physician from proceeding with his state court action against the hospital. Greenview Hospital, Inc. and Dr. Eric Wooten entered into a purported contract on October 8, Several months later, Wooten sued Greenview asking a state court to find the arbitration provision of the purported contract void, to enforce the contract, and to award damages for breach. Wooten also alleged the contract was void as against public policy and was unconscionable. Greenview subsequently filed the instant action in federal district court seeking to compel arbitration and enjoin Wooten from pursuing his state court action. Wooten moved to dismiss, or alternatively, to stay the proceedings because of the pending state court action. The U.S. District court for the Western District of Kentucky found the balance of factors strongly counsels against staying the case, citing in particular the nature of the significant federal rights at issue i.e., the Federal Arbitration Act (FAA) and the Anti- Injunction Act. Greenview argued the court should grant its motion to compel arbitration and enjoin Wooten from proceeding with his state court action. According to Wooten, however, the contract s choice-of-law provision required the application of Kentucky law. Because the arbitration agreement was unenforceable under Kentucky law, the court could not compel arbitration, Wooten contended. Rejecting Wooten s argument, the court noted Supreme Court precedent finding a general choice-of-law provision does not override an arbitration clause. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). Examining the instant contract, the court found as in Mastrobuono, the choice of law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration, neither [clause] intrudes upon the other. Thus, [w]hile Kentucky law may otherwise govern the contract between the parties, it does not govern the arbitration clause or make it unenforceable, the court held. The court went on to find arbitration should be compelled. Wooten did not dispute the existence of an agreement to arbitrate or that the claims raised by both parties were within the scope of that agreement. The court also enjoined Wooten from proceeding with his state court action, finding such action was not barred by the Anti-Injunction Act and would serve to protect or effectuate this Court s judgment. Greenview Hosp., Inc. v. Wooten, No. 1:10-cv TBR (W.D. Ky. July 15, 2010). 25

26 California Supreme Court Says Heirs Must Arbitrate Wrongful Death Action Against Physician The non-signatory heirs of a patient must arbitrate their claims against a physician where the agreement signed by the patient manifested an intent to bind such claimants, the California Supreme Court ruled August 23, In so holding, the high court reversed an appeals court decision, which found that because California s wrongful death statute creates an independent, rather than derivative, action, a medical patient lacks authority to bind his surviving heirs to a physician-patient arbitration agreement he signed to receive treatment. The high court acknowledged a split of authority in the state as to whether a patient who signs an agreement to arbitrate all medical malpractice claims could bind non-signatory heirs to that agreement with respect to a subsequent wrongful death action. The high court concluded that Cal. Civ. P. Code 1295 contemplates all medical malpractice claims, including wrongful death claims, may be subject to arbitration agreements between a healthcare provider and a patient. Thus, to carry out the intent of the legislature, the high court held all wrongful death claimants are bound by the arbitration agreements entered into pursuant to section 1295, at least when, as here, the language of the agreement manifests an intent to bind these claimants. Rafael Ruiz s wife and four adult children sued orthopedic surgeon Anatol Podolsky (defendant) alleging wrongful death and medical malpractice after Ruiz died following a hip fracture. Defendant moved to compel arbitration pursuant to an agreement Ruiz signed before treatment. Ruiz s wife conceded she was subject to the arbitration agreement but argued because the adult children were not, the case should proceed to trial to avoid multiple actions. Defendant contended the adult children were swept up into the arbitration agreement along with the wife due to the one action rule for wrongful death suits (i.e., generally, under the statute, there is a single action for wrongful death that all heirs must join). The trial court refused to compel arbitration of the adult children s claims, but granted defendant s petition to arbitrate the wife's action. The California Court of Appeal, Fourth Appellate District, affirmed, holding because the adult children had not consented to the arbitration, they were not required to arbitrate. Ruiz v. Podolsky, No. G (Cal. Ct. App. June 24, 2009). In reversing the appeals court ruling, the high court found Section 1295, construed in light of its purpose to help control rising medical malpractice premiums, is designed to permit patients who sign arbitration agreements to bind their heirs in wrongful death action." Among other things, the high court noted (1) Section 1295 contemplates arbitration of any dispute as to professional negligence of a health care provider, where professional negligence is defined to include injury or wrongful death; (2) it would be impractical to expect a patient to obtain the signatures of all his or her heirs before receiving medical treatment; and (3) requiring a patient to obtain such signatures would compromise the patient s constitutionally protected privacy. 26

27 The high court also was not persuaded to change its ruling by the fact that the wrongful death statute creates an independent, rather than derivative, cause of action. Although a wrongful death claim is an independent action, wrongful death plaintiffs may be bound by agreements entered into by a decedent that limits the scope of the wrongful death action, the high court said. A dissenting opinion argued the majority failed to cite any statutory authority for its conclusion that the legislature intended to allow patients to give up the jury trial rights of their family members by agreeing on their behalf to arbitrate. According to the dissent, Section 1295 approves the use of arbitration agreements but also reflects the legislature s concern for protecting the rights of patients. In the dissent s view, the majority s conclusion raises serious constitutional questions. That parallel proceedings might defeat some of the savings associated with arbitration has never been a reason to force arbitration upon parties that did not agree to it. Ruiz v. Podolsky, No. S (Cal. Aug. 23, 2010). U.S. Court In Ohio Upholds Arbitration Agreement In Employment Contract, Finds Provision Did Not Restrict FCA Remedies A federal district court in Ohio held August 23, 2010 that an arbitration agreement in an employment contract was not substantively unconscionable, finding the clause did not limit relief that would otherwise be available to a plaintiff under the anti-retaliation provision of the False Claims Act (FCA). While the arbitration agreement prohibited the award of punitive damages, such a remedy was not available in FCA retaliation cases, the court noted. The court declined to find the agreement's failure to affirmatively authorize other types of remedies permitted under the FCA, such as double backpay, reinstatement, and special damages, as restricting an arbitrator s power to award such relief. Thus, the arbitration agreement did not prevent the claimant, a former chief operating officer for a medical staffing company, from obtaining relief he could achieve in a judicial forum had he pursued his FCA retaliation action there, the court held. Plaintiff Tony L. Gilchrist sued his former employer, Inpatient Medical Services, Inc. (IMS), asserting FCA retaliation claims under 31 U.S.C. 3730(h) and breach of contract. According to Gilchrist, IMS terminated his employment in retaliation for his investigation and complaints regarding allegedly improper Medicare billing practices. Gilchrist s employment contract included an arbitration provision, which he asked the court to declare null and void because its terms prohibited the arbitrator from awarding him the same relief available under the FCA for retaliation claims. The U.S. District Court for the Northern District of Ohio found the dispute at issue was arbitrable because the arbitration provision was not procedurally or substantively unconscionable and the dispute fell within the scope of the agreement. 27

28 After quickly dispatching with the issue of procedural unconscionability, noting no assertions that Gilchrist lacked bargaining power or did not understand the contract, the court determined the agreement was not unenforceable on substantive unconscionability grounds either. The arbitration provision at issue prohibited the award of punitive damages altogether and specifically authorized the arbitrator to award back-pay, severance compensation, reimbursement of costs, including those incurred to enforce this Agreement, and interest thereon. Gilchrist attempted to contrast this provision with the relief available under the FCA for retaliation claims namely, reinstatement with the same seniority status,... 2 times the amount of back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys fees. 31 U.S.C. 3730(h)(2). The court noted that even if the remedial limitations of the arbitration provision were unenforceable, the contract s severability clause prevented invalidating the agreement to arbitrate altogether. Thus, the court granted IMS motion to dismiss and compel arbitration. The court went on to find that the remedial limitations only banned punitive damages, which were not otherwise available under an FCA retaliation action. Here, the Arbitration Provision does not expressly bar the arbitrator from awarding any of the relief set forth in 31 U.S.C. 3730(h)(2), and thus Gilchrist s contention that the arbitrator will construe the agreement in the restrictive manner he suggests amounts to sheer speculation, the court concluded. Gilchrist v. Inpatient Med. Servs., Inc., No. 5:09CV02345 (N.D. Ohio Aug. 23, 2010). Florida Appeals Court Says Non-Economic Damages Cap In State Arbitration Statute Applies Per Incident, Not Per Defendant The Florida District Court of Appeal affirmed October 13, 2010 an arbitration panel s award of damages under a state statute that allows for voluntary arbitration of medical malpractice claims. The appeals court agreed with the panel that the $250,000 statutory non-economic damages cap applied to all defendants in the arbitration together and did not apply separately to each defendant, as plaintiffs had argued. Spencer Deno and Elizabeth D. Deno, as Co-Personal Representatives of the Estate of William S. Deno, filed a notice of intent alleging medical malpractice against Lifemark Hospital of Florida, Inc., Dr. Abdul-Rahman Jaraki, and Jaraki Medical Care, P.A. Lifemark made an offer to arbitrate under Fla. Stat , which provides for voluntary binding arbitration of medical negligence claims. Dr. Jaraki and Jaraki Medical Care, P.A., made a separate offer to arbitrate. Plaintiffs accepted the offers and the two arbitration proceedings were consolidated. Section limits non-economic damages to $250,000 per incident. 28

29 The arbitration panel awarded $250,000 in non-economic damages to each of the three claimants for a total non-economic damages award of $750,000. Plaintiffs challenged the award, arguing the statute allows a $250,000 non-economic damage award per claimant per defendant. Thus, according to plaintiffs, there should be a $750,000 non-economic damage award against Lifemark and a separate $750,000 noneconomic damage award against Dr. Jaraki, for a total of $1.5 million. The appeals court agreed with the arbitration panel that such a reading of the statute was impermissible, noting the text of the statute says nothing of a per defendant calculation. Under the plaintiffs interpretation of the statute, the amount of non-economic damages would fluctuate, depending on the number of defendants in the case, the appeals court said. Such a result would be inconsistent with the idea of a uniform cap, according to the appeals court. The appeals court also summarily dismissed plaintiffs argument that the statute is unconstitutional. Deno v. Lifemark Hosp. of Fla., Inc., No. 3D (Fla. Dist. Ct. App. Oct. 13, 2010). Texas Appeals Court Finds McCarren-Ferguson Act Reverse Preempts FAA Regarding State Law Notice Requirements A Texas appeals court ruled October 29, 2010 that an arbitration provision in a nursing home admissions contract was unenforceable because it failed to comply with state law notice requirements. In so holding, the appeals court found the McCarren-Ferguson Act reverse preempted the Federal Arbitration Act (FAA) because the state law notice provisions at issue were enacted for the purpose of regulating the business of insurance. Thus, the appeals court held the trial court abused its discretion by ordering the plaintiff s individual claims against the nursing home to arbitration, as the agreement at issue did not comply with the state notice requirements. Plaintiff Etta Sthran sued Forest Lane Healthcare Center and THI of Texas at Forest Lane, LLC (Forest Lane) after the death of her husband, Sam Sthran Jr., who resided at a Forest Lane facility. Upon his admission to the nursing home, plaintiff signed an admissions agreement containing an arbitration clause. Following Mr. Sthran s death, plaintiff filed a lawsuit against Forest Lane asserting the nursing home s negligent acts and omissions caused damages to her husband and were a proximate cause of his death. Plaintiff asserted claims individually and as the surviving spouse and representative of Mr. Sthran. Forest Lane moved to compel arbitration pursuant to the admissions agreement. The trial court granted the motion to arbitrate as to plaintiff s individual claims. 29

30 Plaintiff sought a writ of mandamus ordering the trial court to vacate its order, arguing the arbitration agreement was unenforceable because it failed to comply with the mandatory notice requirements of Tex. Civ. Prac. & Rem. Code Ann , which require a written notice in 10-point boldface type stating that an arbitration agreement is invalid unless signed by an attorney. According to plaintiff, the MFA reverse preempted the FAA because Section regulated the business of insurance. The MFA prohibits federal preemption of any state law which was/is enacted for the purpose of regulating insurance. The Texas Court of Appeals, Fifth District, agreed. Because Forest Lane did not contend it complied with the notice requirements, the arbitration agreement was unenforceable, and the trial court abused its discretion in ordering plaintiff s individual claims to arbitration, the appeals court said. The appeals court also found mandamus relief was appropriate because plaintiff lacked an adequate remedy by appeal if she was forced to proceed with arbitration as it was unclear that the fees and expenses incurred as a result of arbitration would be recoverable. In re Sthran, No CV (Tex. Ct. App. Oct. 29, 2010). California Appeals Court Says Trial Court Erred In Denying Arbitration Of Nursing Home Dispute A trial court did not have discretion to deny arbitration of a cause of action alleging statutory and common law negligence claims against a nursing home and several related entities, a California appeals court held November 9, The appeals court found the trial court erred in determining that a limited exception to the enforcement of a valid arbitration agreement where certain defendants are not party to the agreement applied in the instant case. Because no defendant in this case is a third party to the arbitration agreement, the discretion afforded by Code of Civil Procedure section , subdivision (c), does not come into play and thus the trial court erred as a matter of law in denying defendants petition to compel arbitration, the appeals court held. Ninety-three-year-old Louise Laswell, by and through her daughter Susan Lyons, sued County Villa Seal Beach Healthcare Center and various other entities alleging she received improper care and treatment at the nursing home facility. Defendants named in the complaint were AG Seal Beach, LLC, the licensee and operator of Country Villa; AG Facilities Operations, LLC, the owner of AG Seal Beach and Country Villa; and Country Villa Service Corporation, the management company of Country Villa in charge of the center s day-to-day operations. Laswell asserted claims for elder abuse, negligence, and willful misconduct. Laswell also asserted a separate statutory claim against AG Seal Beach, LLC as the licensee of the healthcare facility. Defendants moved to compel arbitration. The trial court concluded defendants had made a prima facie case for arbitration, but denied the petition, finding it had discretion to do so because there were parties who would not participate in the arbitration given that they were not part of the agreement; there were some causes of action not subject to arbitration; the trial date was less than 30

31 two months away and the case would proceed just as quickly in court as in arbitration; Laswell was 93 years old and terminally ill and there need not be two proceedings under the circumstances; and the question of arbitration should have been raised more promptly. Noting the state s strong public policy favoring arbitration, the California Court of Appeal, Second Appellate District, held the trial court erred in concluding it had discretion to deny arbitration and therefore reversed the decision below. One of the limited exceptions to the enforcement of contractual arbitration provisions, the appeals court said, is where [a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact, see Cal. Code Civ. P , subdiv. (c). The exception does not apply, the appeals court added, when all defendants, including a nonsignatory to the arbitration agreement, have the right to enforce the arbitration provision against a signatory plaintiff. Although the trial court did not specifically cite Section , subdivision(c), the appeals court determined the lower court at least implicitly concluded the provision applied. This conclusion, the appeals court continued, was in error because AG Facilities Operations, LLC and Country Villa Service Corporation were not third parties for purposes of the third-party exception. Although the arbitration agreement defined facility as Country Villa Seal Beach Healthcare Center and the agreement was signed by a representative of the facility, AG Facilities Operations, LLC and Country Villa Service Corporation were equally bound by the agreement and thus entitled to enforce it against Laswell, the appeals court held. Moreover, the substance of Laswell s allegations is that all defendants are responsible for the improper care that she received while she resided at Country Villa Seal Beach Healthcare Center, demonstrating her claims against all defendants are based on the same facts and theory and are inherently inseparable, the appeals court observed. The appeals court also held that Laswell s inclusion of a nonarbitrable cause of action i.e., the separate claim against AG Seal Beach, LLC as the licensee of the healthcare facility was not grounds to deny arbitration under the third-party exception. That claim can be litigated in court after the completion of arbitration, the appeals court said. Finally, Laswell s advanced age had no relevance as to whether the third-party exception applied. The appeals court did instruct the trial court, the parties, and the arbitrator to consider Laswell s advanced age when scheduling proceedings on remand. Laswell v. AG Seal Beach, LLC, No. B (Cal. Ct. App. Nov. 9, 2010). U.S. Court In Alabama Finds Arbitration Agreement Signed By Decedent Patient Does Not Bind Her Personal Representative The U.S. District Court for the Middle District of Alabama found January 19, 2011 that an arbitration agreement, which was signed by a decedent patient, did not bind the patient s personal representative to arbitration in a wrongful death claim. 31

32 After suffering a myocardial infarction, Edith Entrekin entered into an Admission Agreement with Westside Terrace Health and Rehabilitation Center (Westside Terrace) for physician, nursing, and hospital services in exchange for compensation. Within this Admission Agreement was a Dispute Resolution Agreement (DRA) that required all tort claims or claims for violation of any law to be subject to arbitration. Mrs. Entrekin died as a result of a myocardial infarction caused by a blood clot. In his suit seeking the statutory punitive award for the wrongful death of his wife, Mr. Entrekin alleged that Mrs. Entrekin s death was the result of the negligent adjustment of her Coumadin regime while receiving care at Westside Terrace. Westside Terrace contended that Mr. Entrekin was bound by the arbitration agreement signed only by Mrs. Entrekin. The court noted a presumption of arbitrability in the presence of an arbitration clause due to the strong policy in favor of arbitration. However, the court ultimately held that an arbitration agreement is a contract. Thus, a party cannot be required to submit to arbitration for any dispute that he has not agreed to submit. In this case, Mr. Entrekin did not sign the Admission Agreement, the court noted. It is well-settled law that a decedent s estate is bound to the choices a decedent makes with respect to a particular claim that belonged to him, including his decision to submit that claim to arbitration. But that is not the case with a wrongful death action, the court explained. A wrongful death claim is not a claim asserted on behalf of the decedent s estate. To the contrary, the right to bring a wrongful death action accrues and belongs to the personal representative of the decedent. Therefore, the court held that because Mr. Entrekin never signed the arbitration agreement, he is not bound by the agreement in his own claim against Westside Terrace. Entrekin v. Internal Med. Assocs. of Dothan, No. 2:10-CV-557-WKW (M.D. Ala. Jan. 19, 2011). U.S. Court In Mississippi Finds Nursing Home Resident Bound To Arbitration Agreement As Third-Party Beneficiary A federal trial court in Mississippi ruled April 14, 2011 that a negligence action against a nursing home by a deceased resident s estate was arbitrable pursuant to an agreement that her daughter signed as part of the admissions process. Although the daughter did not have a power of attorney and the arbitration agreement was not a healthcare decision under state law, the U.S. District Court for the Northern District of Mississippi found, the resident was a third-party beneficiary to the agreement under Mississippi contract law. According to the court, the arbitration agreement became part of the admissions agreement under its express terms. The resident did not sign the admissions agreement, but she was a third-party beneficiary of the agreement given that her care was its essential purpose. 32

33 As such, [the resident] is bound by the terms of the contract, including the arbitration agreement, the court said. Willie Adkins was admitted to defendant GGNSC Ripley, LLC d/b/a Golden Living Center Ripley following a stroke. Adkins had a history of mental health issues and was institutionalized for most of her life. Patricia Cook, Adkins daughter, executed arbitration and admissions agreements on her mother s behalf. Adkins died while a resident at the nursing home and Cook initiated the instant negligence action on behalf of her mother s estate. Defendant moved to enforce arbitration pursuant to the agreement Cook signed on her mother s behalf. Cook argued that no valid arbitration agreement existed because she lacked the legal authority to waive Adkins right to a jury trial. Specifically, Cook contended she lacked a power of attorney and therefore could not bind her mother to the arbitration agreement. Defendant countered that Cook executed an Appointment of Health Care Agent that give her authority to make healthcare decision on her mother s behalf or that Cook was serving as Adkins healthcare surrogate under the state s Uniform Health Care Decisions Act. But the court said even if Cook was her mother s healthcare agent or surrogate, Adkins admission to the facility was not contingent upon the signing of an arbitration agreement and therefore the agreement was not a healthcare decision under Mississippi law. Defendant s apparent agency theory also failed, the court added, because there was no evidence Adkins as the principal gave any indication that Cook was her agent. The court did agree, however, with defendant s argument that Cook had the authority to bind Adkins because she was a third-party beneficiary to the agreement under Mississippi contract law. Finally, the court rejected Cook s contention that the arbitration was unenforceable due to unconscionability. Specifically, the court noted Cook never inquired about the arbitration provision, even though it was prominently displayed in the admissions agreement, nor did she contend that the dispute fell outside the scope of the agreement. Cook v. GGNSC Ripley, LLC, No. 3:10CV018 (N.D. Miss. Apr. 14, 2011). California Appeals Court Confirms Arbitrator s Award To Physician In Contract Dispute With Hospital A California appeals court refused April 27, 2011 to disturb an arbitrator s award to a physician, which included economic, emotional distress, and punitive damages, in his contract dispute with the hospital where he formerly held medical staff privileges. The appeals court emphasized that an arbitration award is final and conclusive with judicial review limited to specific circumstances, including if the arbitrator exceeded her powers under the arbitration agreement. 33

34 The defendant hospital, Cedars-Sinai Medical Center, argued the arbitrator did just that in the instant case by finding the hospital summarily suspended and substantially restricted plaintiff Hrayr Shahinian s clinical privileges without a fair hearing, and then awarding him damages instead of ordering a peer review hearing per well-established public policy. But the appeals court disagreed, characterizing the action as a business dispute between a hospital and a physician unrelated to the physician s competence for which peer review proceedings would not be appropriate. Dysfunctional Relationship Defendant recruited plaintiff to bring his skull base surgery practice from New York to Los Angeles in Plaintiff and defendant, however, developed a contentious relationship, with plaintiff frequently complaining the hospital was not providing sufficient support and resources for the skull base division, which he characterized as a threat to patient care. Specifically, plaintiff raised concerns about insufficient instruments and equipment, and also about the hospital s cleaning and sterilization procedures. In September 2002, defendant notified plaintiff his professional services relationship as a faculty physician and director of the skull base institute would be terminated in one year. Plaintiff continued to complain about instrumentation and equipment and, following the termination of his faculty relationship with defendant, drafted a civil complaint, which the parties eventually settled. In the settlement, defendant agreed not to retaliate or discriminate against plaintiff in any unlawful manner with respect to his continued status as a medical staff member. Despite the settlement, the problems between plaintiff and defendant continued, with defendant ultimately sending plaintiff a series of letters, the first of which imposed a 90- day moratorium on his performing surgery at the hospital. Another letter agreed to permit plaintiff to perform five previously scheduled surgeries during the moratorium, so long as plaintiff provided his own custom instruments and had his nurse certify they were cleaned to her satisfaction. Following the letters, plaintiff sued defendant for various contract and tort causes of action and sought compensatory and punitive damages, as well as injunctive relief. Defendant moved for arbitration pursuant to an agreement between the parties. The court granted the motion. Arbitrator s Award The arbitrator made a number of detailed findings, including that defendant breached the settlement agreement because it failed to handle plaintiff s medical privileges in a nondiscriminatory manner (i.e. by imposing the moratorium and other conditions on his surgical practice that were not applicable to other physicians). The arbitrator also found the letters resulted in a summary suspension of plaintiff s medical privileges without a fair hearing and defendant had retaliated against him for 34

35 complaining about inadequate cleaning and sterilization protocols, a protected activity, in violation of public policy. Based on these findings, the arbitrator awarded plaintiff $508,124 in economic damages, $1.6 million in emotional distress damages, and $2.6 million in punitive damages. Defendant petitioned the trial court to vacate the award, arguing it violated public policy and therefore exceeded the arbitrator s powers. The trial court entered judgment in plaintiff s favor and confirmed the award. Business Dispute In upholding the award, the California Court of Appeal stressed that it had no authority to review the arbitrator s reasoning in reaching the conclusions that she did. The appeals court also emphasized defendant agreed to final and binding arbitration and that is what they got. Defendant argued the arbitrator violated public policy, which would be a basis for vacating the award, by finding the hospital had summarily suspended plaintiff s privileges but not ordering a peer review hearing. The appeals court noted this argument was at odds with defendant s position throughout the arbitration proceeding that the 90-day moratorium and additional conditions did not constitute a summary suspension of plaintiff's privileges. While recognizing the state s policy to protect patient safety through peer review evaluation, the appeals court found the instant dispute had nothing to do with the doctor s competence or the doctor s professional conduct that puts patient care and safety at risk. Rather, the case involved a business dispute between defendant and plaintiff. When the dispute arises from business aspects of the doctor s and hospital s relationship, there is no need to submit the dispute to a panel of expert medical peers for determination. That is exactly what defendant argued to the arbitrator. Here, the dispute concerned which party was obligated to buy, clean and sterilize delicate and costly custom instruments... and whether defendant damaged plaintiff by the positions it asserted during the course of their dispute. Punitive Damages Finally, the appeals court held the arbitrator s award of punitive damages did not violate public policy. The arbitration agreement gave the arbitrator broad authority to grant remedies available in court, and made no reference to punitive damages or to any limitation on such an award. Moreover, even if the award was excessive, such an error would be no different from other errors of law, which generally are not reviewable absent an express provision in the arbitration agreement, which was not present here. Defendants also argued the punitive damages award was constitutionally excessive, but the appeals court again found no basis for reviewing the award, pointing out that the 35

36 case involved a private arbitration, not state action, to which defendant agreed to be bound. Shahinian v. Cedars-Sinai Med. Ctr., No. B (Cal. Ct. App. Apr. 27, 2011). Employment and Labor Seventh Circuit Says Nursing Home s Policy Honoring Residents' Racial Preferences Violated Title VII A federal appeals court held July 20, 2010 that a nursing home s policy of acceding to residents racial biases violated Title VII of the Civil Rights Act of 1964 by creating a hostile work environment for a certified nursing assistant (CNA) who was instructed not to treat a patient who demanded white-only healthcare providers. The Seventh Circuit reversed a district court decision granting summary judgment to the nursing home, also finding issues of fact remained over whether the discharge of the nursing assistant was racially motivated. Brenda Chaney, who is African-American, worked as a nurse aid at Plainfield Healthcare Center. Plainfield s policy was to honor the racial preferences of its residents in assigning healthcare providers. According to Plainfield, it believed such a policy was necessary to avoid violating state and federal laws that grant residents the right to choose their healthcare providers, to privacy, and to bodily autonomy. One of its residents expressly indicated that she did not want assistance from black nurses aids. As a result, the daily assignment sheet included a noted that the resident Prefers No Black CNAs. According to the opinion, in addition to the racial preference policy, Chaney was faced with racially tinged comments and epithets from co-workers. Chaney reported the comments to a supervisor, and the racial epithets ceased at that point, although Chaney said fellow workers continued to remind her that she was not allowed to treat certain patients. Three months after her employment began, Plainfield fired Chaney allegedly for using profanity in front of a resident. Plainfield later said Chaney also was fired for not responding immediately to call lights from residents, although another white nurse who similarly did not respond immediately to a call in her unit was not disciplined. Chaney sued under Title VII, asserting claims for a racially hostile workplace and discriminatory discharge. The district court granted summary judgment to Plainfield on both claims. In the district court s view, Plainfield avoided liability for a hostile work environment claim because it responded promptly to Chaney s complaints about the comments from her coworkers and because its racial preference policy was reasonable in light of its good faith belief that ignoring residents preferences violated state law. Reversing, the appeals court had no trouble finding that a reasonable person would find Plainfield s work environment hostile or abusive. 36

37 In particular, the appeals court highlighted that Plainfield acted to foster and engender a racially-charged environment through its assignment sheet that unambiguously, and daily, reminded Chaney and her co-workers that certain residents preferred no black CNAs. Moreover, the appeals court noted, [i]t is now widely accepted that a company s desire to cater to the perceived racial preferences of its customers is not a defense under Title VII for treating employees different based on race. Plainfield argued this reading of Title VII should not apply in the long term care setting, citing in support cases permitting sex discrimination in the healthcare setting. But the appeals court said while gender may be a legitimate reason for accommodating patients privacy interests, the same did not hold true for honoring patients racial preferences. The appeals court also rejected Plainfield s argument that the race-based work assignments was a reasonable and good faith effort to comply with an Indiana regulation giving residents the right to choose their providers. Even if this was the correct reading of the regulation, the Seventh Circuit said, it would conflict with Title VII and therefore, under the Supremacy Clause, federal law would prevail. Moreover, the appeals court added, the regulation only requires Plainfield to allow residents access to healthcare providers of their choice, not that a patient s preference for white aides trumps an employer s duty to abstain from race-based work assignments. The appeals court also reversed the district court s grant of summary judgment to the nursing home on Chaney s discriminatory discharge claim, finding sufficient factual issues regarding whether her termination was racially motivated. Specifically, the appeals court noted the cursory nature of the investigation into her alleged misconduct and other circumstantial evidence that a similarly situated coworker was treated more favorably as raising genuine issues of material fact that could not be decided on summary judgment. Chaney v. Plainfield Healthcare Ctr., No (7th Cir. July 20, 2010). Sixth Circuit Finds Hospital Did Not Fail To Accommodate Disabled Medical Resident Who Could Not Perform Essential Functions Of Job The Sixth Circuit affirmed a lower court s grant of summary judgment to a hospital on claims by a medical resident that he was terminated in violation of the Americans with Disabilities Act (ADA). The appeals court agreed with the lower court that the resident was not a qualified individual under the statute, finding that he was unable to show he could perform the essential functions of the job with a reasonable accommodation. Plaintiff Martin Jakubowski suffers from Asperger s Disorder and was formerly employed as a family practice medical resident at The Christ Hospital, Inc. 37

38 After his termination, plaintiff sued the hospital and the director of his program Dr. Philip Diller (defendants) claiming they failed to accommodate his Asperger s disability, in violation of the ADA, 42 U.S.C , the Rehabilitation Act, 29 U.S.C. 794, and Ohio Revised Code The district court granted defendants summary judgment and plaintiff appealed. Under the ADA, an employer may not discriminatorily terminate an otherwise qualified individual on the basis of his disability, the appeals court first explained. The district court found, and neither party disputed, that Jakubowski s Asperger s was a disability for purposes of the ADA; therefore the issue on appeal was whether Jakubowski was an otherwise qualified individual. Under the ADA, [t]he term qualified individual means an individual who, with or without reasonable accommodation, can perform the essential functions of the employment position that such individual holds or desires. Christ Hospital identified communicating with professional colleagues and patients in ways that ensure patient safety as an essential function that Jakubowski must be able to perform. Because Jakubowski admittedly had difficulty performing these functions, some kind of accommodations would be necessary for him to continue his work. Turning to whether plaintiff s proposed accommodation was reasonable, the appeals court noted that the accommodations that Jakubowski proposed were for knowledge and understanding of the hospital physicians and staff. He argued that he would be capable of communicating with them effectively if they knew of his condition and its symptoms and triggers. However, the proposed accommodation did not address communication with patients, the court noted. Because the accommodations that Jakubowski had the burden to propose do not address a key obstacle preventing him from performing a necessary function of a medical resident, he has not met his burden under the Act of proving he is an otherwise qualified individual for the position, the appeals court held. Jakubowski v. The Christ Hosp., Inc., No (6th Cir. Dec. 8, 2010). Eighth Circuit Affirms Summary Judgment For Hospital On Independent Contractor Physician s Due Process, Tortious Interference Claims The Eight Circuit held February 1, 2011 that a physician does not have a legitimate Due Process claim for a protected property interest when his independent contractor agreement gives the professional association the power to terminate the agreement with reasonable cause. Further, the appeals court held, the physician does not have a legitimate claim against a hospital for tortious interference with a contract when the hospital had a plenary right to request the physician s removal. Drew Memorial, a county hospital, contracted with a professional association, agreeing that the professional association would be the sole provider of emergency room staffing 38

39 for Drew Memorial. In this agreement, Drew Memorial was given sole discretion to request immediate removal of any physician at any time from further service. Steven C. Schueller, M.D. was not a party of this emergency service agreement, but he entered into an independent contractor agreement with the professional association. In this independent contractor agreement, Schueller agreed to provide services as an emergency room physician at Drew Memorial on behalf of the professional association. As a result of patient complaints about Schueller, the CEO of Drew Memorial asked the professional association to remove Schueller from service at Drew Memorial. The professional association notified Schueller that he would no longer be scheduled for emergency room service at Drew Memorial. Schueller sued Drew Memorial, alleging violation of his constitutional right not to be deprived of property without due process of law as well as tortious interference with the independent contractor agreement. The district court granted summary judgment for Drew Memorial on both claims. The appeals court affirmed. The Due Process Clause of the Fourteenth Amendment entitles a person to procedural due process when a protected property interest is at stake. A protected property interest exists only where a plaintiff has a legitimate claim of entitlement to a benefit. Here, the appeals court found that Schueller did not have a valid expectation of continued employment due to the express terms of the emergency service agreement and the independent contractor agreement. The plenary discretion to terminate Schueller s status as an independent contractor at Drew Memorial was not consistent with having a legitimate claim of entitlement to continued employment, the appeals court said. Further, the express terms in the emergency service agreement, allowing Drew Memorial to remove any physician at any time, prevented Schueller from establishing tortious interference with his independent contractor agreement. Schueller v. Goddard, No (8th Cir. Feb. 1, 2011). HHS Partially Rescinds Rule On Healthcare Conscience Objections, But Retains Enforcement Process The Department of Health and Human Services (HHS) has opted not to scrap completely a 2008 final rule (73 Fed. Reg ) issued in the waning days of the Bush Administration concerning discrimination or retaliation against healthcare providers who refuse to perform (or participate in performing) abortion-related services based on their conscience objections. While rescinding certain definitions and terms the agency said were overly broad and caused confusion, HHS, in a final rule published in the February 23, 2011 Federal Register (76 Fed. Reg. 9968), retained the enforcement process established by the 2008 regulation. The 2008 final rule, effective January 20, 2009, clarified that non-discrimination protections apply to institutional healthcare providers as well as to individual employees working for recipients of certain HHS funds. 39

40 The 2008 rule, which also required recipients of such funds to certify their compliance with laws protecting provider conscience rights, drew fire from some provider and other groups as well as lawmakers who argued the regulation could limit access to care, particularly in rural or underserved areas. HHS in March 2009 issued a proposal to rescind the 2008 rule in its entirety, noting no statutory requirement that the agency promulgate regulations to implement the Weldon Amendment and the so-called Church Amendments, which were enacted in the 1970s to make clear that recipients of federal funds were not required to perform abortions or sterilizations. HHS said 97,000 of the 300,000 comments on its proposed rule favored rescission. These comments, among other things, raised concerns that ambiguities in the 2008 final rule could expand provider conscience protections beyond those established in existing federal law. Nearly 187,000 comments opposed rescinding the rule, arguing such a move would leave no regulatory enforcement scheme to protect the rights afforded to healthcare providers under the federal healthcare provider conscience protection statutes, according to HHS. In the final rule, HHS decided to maintain and build on provisions of the Bush Administration rule that established an enforcement process for federal conscience laws, while rescinding the definitions and terms of the previous rule that caused confusion and could be taken as overly broad, according to an HHS statement. Strong conscience laws make it clear that health care providers cannot be compelled to perform or assist in an abortion. Many of these strong conscience laws have been in existence for more than 30 years. The rule issued today builds on these laws by providing a clear enforcement process, the statement said. Specifically, the final rule retains the provision of the 2008 regulations authorizing the Office for Civil Rights (OCR) to receive and investigate complaints on violations of the federal healthcare provider conscience statutes. In addition, HHS announced a new OCR-led awareness initiative about the protections provided by the healthcare provider conscience statutes, and the resources available to those who believe their rights have been violated. Third Circuit Affirms Decision Vacating Arbitrator s Award Finding Hospital Smoking Policy Unreasonable The Third Circuit affirmed March 14, 2011 a Pennsylvania federal trial court s decision vacating an arbitrator s award that found a hospital s tobacco free campus policy was unreasonable because it failed to accommodate employees who previously had a designated location to smoke. Agreeing with the U.S. District Court for the Western District of Pennsylvania s opinion, the Third Circuit in a not precedential opinion found the arbitrator s award did not draw its essence from the collective bargaining agreement (CBA) between the hospital and the union challenging the change in policy. The CBA explicitly provided that the hospital retained exclusive authority to execute all matters of inherent managerial policy and to establish, revise and administer reasonable polices and procedures,... to control and regulate the use of facilities 40

41 regardless of existing employee expectations or prior practices, the appeals court observed. Armstrong County Memorial Hospital previously banned smoking within its buildings but allowed employees to smoke outside in designated smoking areas and in their personal vehicles. In November 2008, the Hospital informed the union representing its employees that it intended to implement a tobacco free campus policy, effective January 1, Pursuant to its CBA with the hospital, the union filed a grievance, which went unresolved. After the hospital implemented the new policy as scheduled, the union submitted the grievance to arbitration. The arbitrator determined that in his considered opinion, a past practice had been established regarding employees having a designated location to smoke. The arbitrator thus concluded the hospital s no-smoking policy was unreasonable because it failed to accommodate this past practice, which rose to the level of a protected local working condition. The hospital initiated a lawsuit pursuant to the Labor Management Relations Act and asked the court to vacate the award. The union counterclaimed seeking to enforce the award. Despite applying a highly deferential standard of review, the lower court agreed to vacate the award because it directly conflicted with the CBA regarding the hospital s management rights. On appeal, the Third Circuit affirmed. According to the appeals court, the arbitrator s opinion effectively rewrote the parties agreement in finding that a past or existing practice created a protected local working condition a term not used in the CBA and that any policy unilaterally adopted by the Hospital which eliminates a protected local working condition could not be considered reasonable under the CBA. Although we are aware that the scope of our review of a labor arbitration award is very narrow,... we find that this interpretation... is so untethered from and contrary to the language of [the CBA] that we cannot say that the arbitrator was even arguably construing the agreement, the Third Circuit said. Armstrong County Mem l Hosp. v. United Steel Paper and Forestry, Rubber, Manufacturing, Energy, Allied Ind. and Serv. Workers Int l Union, No (3d Cir. Mar. 14, 2011). Sixth Circuit Says Terminated Nurse Received Correct Jury Instructions On ADA Claim The Sixth Circuit refused March 17, 2011 to overrule current precedent establishing the standard for jury instructions under the Americans with Disabilities Act (ADA). According to the appeals court, it is a well-established rule of the Sixth Circuit that one panel cannot overrule the holding of another panel, absent an intervening inconsistent opinion from the U.S. Supreme Court. 41

42 Plaintiff Susan Lewis, a registered nurse, began working in July 2004 at Humboldt Manor Nursing Home. At some time in September 2005, she alleged that she developed a medical condition that made it difficult to walk. Lewis was terminated on March 20, 2006 allegedly for an outburst at the nurses station that occurred on March 15. Lewis sued in federal district court for wrongful termination under the ADA. In her proposed jury instructions, Lewis requested that the jury must determine whether her perceived disability was a motivating factor in the termination decision. The district court, however, following Sixth Circuit precedent in Monette v. Electronic Data Systems Corp., 90 F.3d 1173, 1178 (6th Cir. 1996), instead instructed the jury that Lewis could recover only if her disability was the sole reason for the decision to terminate. The jury determined that her disability was not the sole reason for Lewis termination, and the district court entered judgment in favor of Humboldt Manor. Lewis appealed the jury instruction. The appeals court noted that although most circuits follow the motivating factor test, current law in the Sixth Circuit is that a plaintiff must prove that his disability was the sole reason for the adverse employment action as put forth in the Monette case. Lewis challenged the district court s use of the solely standard in its instructions to the jury, in essence, asking the current panel to overrule Monette and join sides with the supermajority of the circuits. However, the appeals court explained, it is a well-established rule of the circuit that one panel cannot overrule the holding of another panel, absent an intervening inconsistent opinion from the U.S. Supreme Court. Accordingly, Lewis jury instructions, which were based on Monette, were proper, the appeals court held. Lewis v. Humboldt Acquisition Corp., No (6th Cir. Mar. 17, 2011). U.S. Court In Colorado Dismisses FCA Retaliation Claims, But Allows State Law Claims Against Hospital A federal district court in Colorado dismissed a former hospital employee s retaliation claims under the federal False Claims Act (FCA), but allowed the plaintiff to proceed with her state law claims that she was wrongly terminated against public policy. According to the U.S. District Court for the District of Colorado, the plaintiff raised a genuine issue of fact regarding the reasons for her termination under state law. Plaintiff Angela Haynes is a licensed respiratory therapist who worked at Poudre Valley Health Care, Inc., doing business as Poudre Valley Hospital, from December 8, 2003, until her termination on or about January 29, During her employment, plaintiff was disciplined with several "verbal counselings" as well as first and final warnings for various performance issues. 42

43 On October 19, 2008, another hospital employee discovered an anonymous complaint letter that plaintiff had attempted to fax to the Colorado Department of Regulatory Agencies (DORA) alleging unethical and unsafe conduct by another respiratory therapist. The letter identified a patient by name and described circumstances concerning the deaths of two babies. The hospital began an investigation into whether plaintiff violated the Health Insurance Portability and Accountability Act (HIPAA) and suspended plaintiff for a suspected violation of HIPAA and of the hospital s internal confidentiality policies based on the confidential patient information included in the complaint letter. When plaintiff returned to work following her suspension, she was immediately terminated. Plaintiff then sued the hospital, asserting retaliation claims under the FCA and state law. The hospital moved for summary judgment. According to the hospital, it was entitled to summary judgment on plaintiff's FCA retaliation claim because plaintiff could not demonstrate that her actions were taken "in furtherance of" an FCA suit. Plaintiff contended that the basis for her FCA retaliation claim was her attempt to report Medicare and Medicaid fraud in the complaint letter that she eventually faxed to DORA. However, the court found, plaintiff s letter does not mention Medicare or Medicaid, nor does it provide any specific information about false charges other than a single incident involving a patient who was not on Medicare or Medicaid. Thus, the court held, Plaintiff's suggestion that her statement that the respiratory therapist named in the complaint letter had previously made false charges and that it is likely that over half of these involved Medicare or Medicaid patients is not sufficient to put Defendants on notice that Plaintiff was either taking action in furtherance of a private qui tam action or assisting in an FCA action brought by the government. Accordingly, the court granted the hospital summary judgment on plaintiff s FCA claim. Turning to plaintiff s claim under state law, the court disagreed with the hospital s argument that plaintiff failed to articulate a particular statute or clearly expressed public policy in support of her claim, and could not demonstrate any causal connection between her termination and her alleged reporting. According to the court, plaintiff may proceed with her wrongful discharge claim under her theory that she was terminated for sending the complaint letter. Although the hospital argued that previous behavioral issues supported plaintiff s termination, the court found plaintiff has raised a genuine issue of material fact with respect to the motivation for her discharge. Haynes v. Poudre Valley Health Care, Inc., No. 09-cv WYD-BNB (D. Colo. Mar. 31, 2011). U.S. Court In Illinois Refuses To Stay Physician s Termination Pending Outcome Of Suit Against Hospital Employer The U.S. District Court for the Central District of Illinois refused April 29, 2011 to stay a physician s termination pending her due process and breach of contract suit against the hospital at which she was employed. 43

44 According to the court, the plaintiff physician failed to show she had a likelihood of success on the merits, failed to show that no adequate remedy at law existed, and also failed to show irreparable harm. Plaintiff Colette R. Whitby, M.D. in November 2009 entered into a three-year written contract of employment (Agreement) with Dr. John Warner Hospital. A year after plaintiff s employment commenced, defendant Earl Sheehy, the chief executive officer of the Hospital and a member of the Hospital's Board of Directors, told plaintiff he was likely not going to include her services in the hospital budget for fiscal year , unless she agreed to a number of changes to the Agreement. Plaintiff was later notified that her last day of work would be April 29, She sued pursuant to 42 U.S.C. 1981, 1983, and 1985, alleging (1) she was denied due process; (2) the members of the Hospital Board conspired to deprive her of her due process; and (3) the commissioners of the City Council conspired to deprive her of her due-process rights. Plaintiff also brought two pendent state claims, one for breach of contract and one for retaliatory discharge. Plaintiff then filed her Motion for a Temporary Restraining Order and Preliminary Injunction to stay her termination. The court noted that a party seeking a preliminary injunction must initially demonstrate (1) some likelihood of succeeding on the merits; (2) no adequate remedy at law exists; and (3) irreparable harm if preliminary relief is denied. The court found plaintiff failed to demonstrate any of these factors. First, she failed to show she had a likelihood of success on the merits because her contract specifically stated that employment could be terminated in the event that no funds or insufficient funds were appropriated or budgeted. In addition, the court found money damages provided an adequate remedy at law and that the harm plaintiff asserted she would suffer was merely speculative. Whitby v. Dr. John Warner Hosp., No (C.D. Ill. Apr. 29, 2011). EMTALA CMS Solicits Comments On Whether It Should Revisit EMTALA Policies Regarding Inpatients The Centers for Medicare and Medicaid Services (CMS) issued an advance notice of proposed rulemaking December 23, 2010 (75 Fed. Reg ) soliciting comment on the need to publish a proposed rule to address certain policies related to the Emergency Medical Treatment and Labor Act (EMTALA). The notice concerns the applicability of EMTALA to individuals who are determined in the hospital s dedicated emergency department to have an emergency medical condition (EMC) who, prior to being stabilized, are subsequently admitted to the hospital as inpatients, and then need to be transferred to another hospital with specialized capabilities for stabilizing treatment. The EMTALA Technical Advisory Group in September 2007 recommended that CMS revisit its policy regarding that situation, according to the notice. 44

45 To further clarify its position on the applicability of EMTALA and the responsibilities of hospitals with specialized capabilities to accept appropriate transfers, CMS in the April 30, 2008 Inpatient Prospective Payment System (IPPS) proposed rule proposed that when an individual originally covered by EMTALA is admitted as an inpatient at that hospital and continues to have an unstabilized EMC, a hospital with specialized capabilities has an EMTALA obligation to accept a transfer of that individual, assuming that the transfer of the individual is an appropriate transfer and that the participating hospital with specialized capabilities has the capacity to treat the individual. After that proposal, CMS received numerous comments opposing its implementation and accordingly in the IPPS final rule it finalized a policy that if an individual with an unstable EMC is admitted as an inpatient, the EMTALA obligation has ended, even if the individual s EMC remains unstabilized and the individual requires treatment only available at a hospital with specialized capabilities. Because there continues to be a range of opinions even at the Circuit Court level on the topic of EMTALA s application to inpatients, CMS said it is interested in receiving comments regarding whether it should revisit its policies. Comments were due to CMS by February 22, U.S. Court In Nevada Denies Plaintiffs Summary Judgment On EMTALA Disparate Screening Claim A federal court in Nevada refused June 30, 2010 to rule, as a matter of law, that plaintiffs should recover on a disparate screening claim under the Emergency Medical Treatment and Labor Act (EMTALA) against a hospital. According to the U.S. District Court for the District of Nevada, questions of material fact existed as to whether the hospital failed to conduct a proper screening, whether any failure to screen was the proximate cause of any damages, and the proper amount of damages to attribute to any failure to screen as opposed to other potential causes. Plaintiffs attempt to use their version of events, together with their conclusions about the physical, medical and psychological conditions they claim existed, as the basis for their claims for damages. Their version of the events at the hospital presents disputed questions of fact that must be weighed by a jury, the court held. Plaintiff Roshunda Abney went to an urgent care facility with severe abdominal pain lasting for two days and vaginal bleeding. The physician who examined Abney recommended she go to the hospital for higher care. Abney went to University Medical Center of Southern Nevada s (UMC s) emergency room (ER). According to Abney, UMC personnel asked her if she could be pregnant and she answered yes. Abney said she indicated to staff that she was in extreme pain, but they told her there was no certain time when she would be seen by a physician. Abney waited for treatment in UMC s ER for over five hours while her pain intensified and then decided to go to another hospital. After being told at that hospital that she would not be seen any sooner, Abney went home. 45

46 Her water broke while she was in the shower and she began to deliver a baby, who did not survive. The baby s gestational age was estimated to be around 26 weeks. Abney and her fiancé sued both hospitals for violating EMTALA. Plaintiffs sought summary judgment on their disparate screening claim and a ruling that they were entitled to damages of at least the statutory cap of $75,000. The court in a May 2010 opinion determined that the state s cap on noneconomic damages in medical malpractice actions did not apply to the disparate screening claim under EMTALA but that the statutory cap on damages in tort actions brought against a state actor was implicated. The court, in denying plaintiffs second motion for summary judgment, noted that this is not a case that can be tried piecemeal, by addressing selective issues of fact and law seriatim against the various Defendants. In particular, the court added the factual questions about proximate cause loom large in this case. The court also rejected plaintiffs attempt to use conclusions reached by an administrative body that UMC had violated the screening protocol in one out of 55 instances. According to the court, plaintiffs argued because the administrative body was required to investigate, its findings were not only admissible but also dispositive of the issues in the case. Were that true, every police report of an investigation into a crime or an accident would be both admissible and dispositive of guilt or liability. That is not the law, the court commented. Abney v. University Med. Ctr. of Southern Nev., No. 2:09-cv-2417 (D. Nev. June 30, 2010). U.S. Court In Alabama Says Plaintiff May Proceed With EMTALA, Discrimination Claims A federal district court in Alabama refused November 8, 2010 to dismiss a patient s claims for racial discrimination and violations of the Emergency Medical Treatment and Labor Act (EMTALA) against a group practice following the stillbirth of her son. Doris Williams, who is African American, sued Women s Healthcare of Dothan, P.C. asserting claims under 42 U.S.C for racial discrimination in contractual relations or the execution [of] contracts, violations of EMTALA, violation of her constitutional right to privacy, and violation of the Alabama Medical Liability Act (AMLA). Women s Healthcare moved to dismiss for failure to state a claim for relief. The U.S. District Court for the Middle District of Alabama refused to dismiss the Section 1981, EMTALA, and AMLA claims. The court granted the motion as to Williams right to privacy claim. To assert a Section 1981 claim in the non-employment context, a plaintiff must show that (1) he or she is a member of a racial minority; (2) that the defendant intended to 46

47 discriminate on the basis of race; and (3) that the discrimination concerned one or more of the activities enumerated in the statute. In the instant case, only the second and third elements were at issue, the court noted. According to the court, Williams allegations that she was subjected to numerous racial slurs and racially rude treatment while being treated at Women s Healthcare constitute[] direct evidence of discriminatory intent. Moreover, Williams satisfied the third element by pleading the basis of her discrimination claim as a written contract she signed as a prerequisite to receiving medical treatment from Women s Healthcare. Ms. Williams predicates her contractual relationship with Women s Healthcare on an express written agreement, and interference with a contract is one of the rights specifically enumerated in 1981, the court observed. The court said the contract need not be incorporated or attached to the pleadings and, instead, Williams should be permitted to conduct discovery on her claim. The court also refused to dismiss Williams EMTALA claim on the ground that Women s Healthcare is not a participating hospital with Medicare. In her amended complaint, Williams alleged that Women s Healthcare appear[s] to be [a] participating hospital[], that is known to accept Medicaid and Medicare, noting that at her first appointment, Women s Healthcare encouraged her to apply for federal Medicaid or Medicare assistance. Whether Women s Healthcare actually entered into a Medicare agreement is a fact uniquely within its knowledge and control, the court observed. At the pleading stage, Ms. Williams will not be penalized for her lack of direct knowledge of this fact, but will be given the opportunity to determine through discovery if there is such an agreement, the court said. The court also found it reasonable to assume that an agreement did in fact exist given that Women s Healthcare allegedly told Williams to apply for Medicare and Medicaid and her belief that it accepted Medicare reimbursement. After dismissing Williams claim for violating her constitutional right to privacy, the court held she could continue with her state law medical malpractice claims under the AMLA as well. Williams v. Women s Healthcare of Dothan, P.C., No. 1:09-CV-873-WKW [WO] (M.D. Ala. Nov. 8, 2010). U.S. Court In Tennessee Rejects EMTALA Screening When No Improper Motive Alleged A federal trial court in Tennessee granted defendant hospital summary judgment on claims that it violated the Emergency Medical Treatment and Labor Act (EMTALA) after a patient it discharged committed suicide. 47

48 The U.S. District Court for the Middle District of Tennessee noted that in the Sixth Circuit a plaintiff must show an improper motive to support a claim under EMTALA for failing to conduct an appropriate medical screening. Plaintiff in this case failed to make such a showing, the court said. In addition, the plaintiff did not demonstrate the hospital had actual knowledge of an emergency medical condition; thus, could not assert a claim for failing to stabilize under EMTALA. Jason Ashley Burd was admitted to defendant Lebanon HMA, Inc., d/b/a, University Medical Center s (UMC s) emergency room after he attempted to commit suicide by hanging himself. He was involuntarily committed and transferred to a state mental health facility where a psychiatrist evaluated him and determined he posed no suicide risk and did not require admission to the facility. Police returned Burd to UMC s emergency room based on concerns that he might harm himself. Dr. Michael Crane and Heather Tomlinson, RN saw Burd and determined he was suffering from acute anxiety rather than experiencing an emergency medical condition. After concluding that he was stable, Burd was discharged from UMC. Burd committed suicide the next morning. The executor of Burd s estate (plaintiff) sued UMC alleging it violated EMTALA s screening and stabilization requirements. According to plaintiff, during Burd's second visit to UMC, he was advised that he could not afford treatment and that he should return when he made financial arrangements to pay for care. Plaintiff did not, however, offer any other supporting evidence for this assertion. Plaintiff also suggested that hospital staff knew Burd did not have health insurance and failed to give him a psychiatric consultation per regular UMC policy. The hospital moved for summary judgment. Granting the motion, the court first found that, in the Sixth Circuit, plaintiff had to show UMC had an improper motive to succeed on an EMTALA screening claim. Viewing the facts in the light most favorable to plaintiff, the court agreed with UMC that evidence of an improper motive was lacking. While plaintiff alleged that Burd was told he could not afford treatment and should return when he had made financial arrangements, plaintiff provided no other support of this allegation, or any other evidence of UMC s improper motivation, the court said. Crane and Tomlinson both testified that they had no animus or improper motive toward Burd and believed he was not suicidal. Their credibility on this point was not enough to send the claim to a jury, the court concluded. The court also was not convinced that UMC s policy requiring a psychiatric consultation for patients known or suspected to be suicidal created a genuine issue of material fact as to improper motive. 48

49 When Burd was initially seen in the UMC emergency room for actually attempting suicide, he was involuntarily committed and provided a psychiatric consultation. At his subsequent visit, however, he was assessed as suffering from acute anxiety, and already had been evaluated by a psychiatrist in relation to the initial attempt, the court observed. While Plaintiff has established a genuine issue of material fact as to whether Mr. Burd s treatment was substandard, he has not put forward evidence or otherwise demonstrated that a dispute exists as to UMC s improper motive, the court wrote. The court also rejected plaintiff s EMTALA stabilization claim, finding no genuine issue of material fact as to whether anyone at UMC had actual knowledge that Burd presented with an emergency medical condition on his second visit to the hospital, which is a prerequisite to such a claim. Again looking to Sixth Circuit precedent, the court concluded that only actual knowledge of an emergency medical condition on the part of UMC s staff not simply the existence of facts that should have put Defendant on notice triggers a duty to stabilize a patient pursuant to EMTALA. Although UMC may have been aware of factors that might have led to the conclusion that Burd was suicidal, [w]ithout proof of actual knowledge, as opposed to proof of what was perhaps poor judgment, Plaintiff has not supported a claim of liability under EMTALA, the court held. Burd v. Lebanon HMA, Inc., No. 3:09-cv-0262 (M.D. Tenn. Nov. 23, 2010). Fifth Circuit Upholds Dismissal Of EMTALA Claims Against Hospital The Fifth Circuit affirmed February 1, 2011 a lower court s dismissal of Emergency Medical Treatment and Labor Act (EMTALA) claims against a hospital, agreeing that the hospital had conducted an adequate medical screening of the plaintiff s son. Plaintiff Wendy Guzman, individually and on behalf of her son T sued Memorial Hermann Hospital System (Memorial Hermann) asserting claims under EMTALA for failing to provide an appropriate medical screening, failing to stabilize his condition before discharging him, and failing to provide an appropriate transfer following a second emergency room visit. Guzman also asserted state law negligence claims against Memorial Hermann, Philip Haynes, M.D., Ph.D, the emergency room physician who saw T, and his practice group, Memorial Southeast Emergency Physicians, LLP. Guzman took T to Memorial Hermann s emergency room on the morning of February 12, He was evaluated by a nurse and seen by Haynes who ordered various tests including a white blood cell differential test. About two-and-a-half hours after his arrival in the emergency room, T s condition had improved. Haynes believed T had a virus. Although Haynes had not reviewed the results of T s white blood cell differential test, which would have signaled a possible bacterial infection, Haynes decided to discharge T after determining he was clinically stable. T s parents brought him back to Memorial Hermann s emergency room the next day, where physicians diagnosed him with pneumonia. 49

50 T s condition worsened and physicians decided to transfer T to a hospital with a pediatric intensive care unit. The transfer took longer than expected, however, because the pediatric transport unit was not immediately available. By that time, T was in septic shock and suffered organ damage requiring follow-up medical care and therapy. Memorial Hermann moved for summary judgment. Guzman moved for a continuance to conduct discovery under Fed. R. Civ. P. 56(f). The U.S. District Court for the Southern District of Texas granted the hospital summary judgment on the EMTALA claims and denied Guzman's motion. On appeal, Guzman argued that a genuine issue of material fact existed as to whether Memorial Hermann violated EMTALA by failing to follow a symptom-specific screening policy, namely the Triage Guidelines, in screening T. However, the appeals court agreed with the lower court that the guidelines did not apply when a patient saw a doctor promptly as was the case here. Guzman also argued that a question of material fact was raised as to whether T was screened differently from other patients. Rejecting this argument, the appeals court noted that Guzman presented no evidence that it was Memorial s policy that physicians would not discharge patients with symptoms like T s until after the physician read all the results of ordered tests. Guzman s next EMTALA claim alleges that Memorial Hermann disparately screened T by failing to order a urinanalysis for T even though Haynes circled UTI on T s diagnosis. However, the appeals court said it need not address the question of whether Memorial screened T differently from other patients by not ordering an urinanalysis because the Guzmans did not raise a question of material fact on whether T was directly harmed by Haynes s failure to order the test. The appeals court also rejected Guzman s argument that Memorial Hermann violated EMTALA when its hospital staff failed to take a full set of T s vital signs within one hour of his discharge, as required by its Nursing Guidelines. Memorial undisputedly took all of T s vitals when he was admitted into the emergency room, two-and-one-half hours before he was discharged, the appeals court noted, adding that T s heart rate was taken and found to be normal less than an hour before his discharge. Noting that Guzman has not presented any evidence that T s other vital signs, temperature and blood pressure, might have changed in the hour-and-one-half hours after they were first taken, the appeals court concluded that when viewed in context, Memorial effectively followed the Nursing Policy. Guzman v. Memorial Hermann Hosp. Sys., No (5th Cir. Feb. 1, 2011). 50

51 U.S. Court In Nevada Grants Summary Judgment To Hospital On EMTALA Claims Of Patient With Premature Labor A federal district court in Nevada rejected March 21, 2011 a patient s claims that a hospital violated the Emergency Medical Treatment and Labor Act (EMTALA) when she presented with symptoms of premature labor. Latricia Richard, who was 22-weeks pregnant, arrived at the University Medical Center of Southern Nevada s (UMC s) emergency department complaining of pain in her back, sides, and stomach. A labor and delivery triage nurse evaluated Richard for possible labor but noted no contractions. Richard was then moved to the labor and delivery department where she was placed on a fetal monitor. After a urinalysis came back negative, Richard was discharged with instructions to followup with her physician. Her physician determined she had symptoms of premature labor. Richard later delivered a premature fetus that was not viable. Richard sued UMC alleging it violated EMTALA s screening and stabilization requirements. The U.S. District Court for the District of Nevada granted summary judgment to UMC on Richard s claims. As an initial matter, the court rejected UMC s argument that Richard s failure to screen claims failed as a matter of law because she was admitted to the hospital s labor and delivery department. According to the court, while the EMTALA stabilization requirement ends when an individual is admitted for inpatient care, UMC s authorities do not make clear that an inpatient admission necessarily satisfies the EMTALA screening requirement. In any event, the court found it debatable whether Richard was admitted to the labor and delivery department as an inpatient for purposes of the EMTALA analysis. The court agreed, however, with UMC s argument that Richard did not allege sufficient evidence to show the hospital violated EMTALA s appropriate medical screening requirement. First, Richard did not allege her examination differed from those offered to other patients presenting with similar symptoms. Nor did Richard allege the hospital failed to provide her with any medical screening. According to the court, the question of whether Richard received an appropriate medical screening for purposes of EMTALA seemed to rest on her allegations that UMC failed to provide a physical gynecological or obstetrical examination. Richard argued that a presumption of labor applies to pregnant women; but the court noted the presumption of true labor only applies to pregnant women who are experiencing contractions. 51

52 Here, a labor and delivery nurse took Richard s vital signs, medical history, and symptoms, and specifically noted she was not contracting. She was placed on an external fetal heart monitor and discharged following a negative urinalysis. The mere suggestion that a hospital could have conducted additional testing does not alone support the conclusion that the examination Richard received was not an appropriate medical screening, the court said. The court rejected the assumption that a plaintiff raises a genuine issue of material fact regarding an appropriate medical screening whenever additional procedures, treatments, or examinations were possible. Therefore, the court granted summary judgment to the hospital on Richard s EMTALA screening claim, finding no genuine issue of material fact that her exam was so cursory that it failed to constitute an appropriate medical screening under the statute. The court also granted UMC summary judgment on Richard s failure to treat claims, agreeing that the hospital never determined she had an emergency medical condition. Again, the court noted, the presumption of true labor only applies to women who are experiencing contractions, which Richard failed to allege she was at the relevant time. Richard v. University Med. Ctr. of S. Nevada, No. 2:09-cv-0244-LDG-PAL (D. Nev. Mar. 21, 2011). U.S. Court In Pennsylvania Rejects EMTALA Screening Claim Against Hospital-Affiliated Clinic A federal trial court in Pennsylvania granted summary judgment March 31, 2011 to the Cleveland Clinic in an action claiming it was liable for an affiliated hospital s alleged violation of the Emergency Medical Treatment and Labor Act s (EMTALA s) screening requirement. The U.S. District Court for the Eastern District of Pennsylvania held the Clinic could not be held directly liability under the EMTALA screening claim because pro se plaintiff William Byrne never physically entered the Clinic s emergency department; the treatment in question was provided exclusively on the premises of the Chester County Hospital. The court also rejected the plaintiff s contention that the Clinic could be held vicariously liable for the alleged EMTALA screening violation because of its affiliation agreement with the Hospital. Because there is no indicia of a principal-agent relationship in Mr. Byrne s exhibits, nor an evidentiary basis to find that the Clinic could be held liable for the Hospital s rendering care to Mr. Byrne, there is no sufficient evidence upon which a reasonable jury could conclude that the Clinic could be held vicariously liable for Mr. Byrne s screening claim, the court said. According to the complaint, Byrne went to the Hospital s emergency room complaining of severe chest pain and shortness of breath. Byrne alleged he was seen by a nurse 20 minutes after his arrival but did not see a physician until [h]ours later. He eventually underwent a catheterization procedure at the Hospital. Byrne sued the Hospital and the Clinic asserting violations of the EMTALA screening and stabilization requirements. Byrne contended the Hospital at all times acted as an agent 52

53 and/or representative for the Cleveland Clinic. In an earlier decision, the court agreed to dismiss his EMTALA stabilization claim, but allowed his screening claim to go forward. The Clinic sought summary judgment, which the court granted. Even assuming the Clinic qualified as a participating hospital and was a hospital for purposes of the statute, it could not be held directly liable for the alleged screening violation because Byrne, admittedly, never went to, nor received any, medical care there. Byrne also argued an affiliation agreement between the Hospital and Clinic created an agency relationship under which liability could be imputed to the Clinic for the medical care provided by the Hospital. But the court disagreed, noting the evidence Byrne presented concerning the alleged affiliation, including a Hospital web page describing a cooperative arrangement between the two institutions for information sharing purposes, did not show a sufficient link to support his vicarious liability claim. Moreover, the court pointed to evidence that the Clinic s affiliation with the Hospital was limited to its cardiac surgery program, and did not include the Hospital s emergency department. Byrne v. Cleveland Clinic, No. 2:09-cv GP (E.D. Pa. Mar. 31, 2011). First Circuit Finds Hospital Transfer Did Not Violate EMTALA The First Circuit affirmed April 8, 2011 summary judgment a hospital' favor in an action alleging its transfer of a patient who later died violated the Emergency Medical Treatment and Labor Act (EMTALA). In so holding, the appeals court rejected plaintiffs contention that an EMTALA violation arises when a hospital fails to deliver the best treatment, whatever it may be in a given case, before transfer. Calling the plaintiffs position on this point untenable, the First Circuit said such an interpretation would create a federal malpractice cause of action that would allow an unstabilized patient to sue in federal court any time he or she did not receive the correct care prior to transfer. Similar to the appropriate medical screening context, a hospital violates EMTALA if it fails to follow its standard procedures, not by providing allegedly faulty treatment. In the instant case, plaintiffs sued Centro Medico del Turabo d/b/a Hospital HIMA San Pablo Fajardo arguing it improperly transferred their son Jose Ramos Lopez, who later died, to another hospital in violation of EMTALA. Ramos presented to the hospital with a history of abdominal problems and anemia. He was experiencing abdominal pain, subsequently vomited blood, and was diagnosed with gastrointestinal bleeding. The hospital did not have a gastroenterologist so the emergency room physician arranged transfer to another hospital. The emergency room physician cited gastroenterologist as the reason for the transfer. 53

54 The district court granted summary judgment to Centro Medico, finding the hospital complied with EMTALA s transfer requirements. The First Circuit affirmed. Under EMTALA, a physician must certify that the benefits of the transfer outweigh the risks. The appeals court held the hospital satisfied this requirement because the transferring physician s gastroenterologist summary statement indicated that the benefit of providing Ramos with specialized treatment than was unavailable at the hospital outweighed the risk of transport. In addition, for an appropriate transfer: (1) the transferring hospital must provide the medical treatment within its capacity which minimizes the risks to the individual s health, (2) the receiving facility must have available space and qualified personnel and agree to the transfer, (3) the transferring hospital must send all medical records related to the condition and available at the time of transfer, and (4) the patient must be transported through qualified personnel and transportation equipment. The appeals court only discussed the first factor, as the other requirements were not disputed. The appeals court noted the requirements for pre-treatment transfer was an issue of first impression. The district court, relying on Tenth Circuit precedent, held a hospital violates this provision only where it fails to follow regular hospital procedures. The appeals court agreed with this approach, concluding the hospital provided for the transfer in the best interests of the patient. Ramos-Cruz v. Centro Medico Del Turabo, No (1st Cir. Apr. 8, 2011). ERISA Third Circuit Affirms Dismissal Of ERISA Lawsuit Based On Drug s Placement In Formulary s Highest Tier The Third Circuit affirmed June 10, 2010 in an unpublished opinion the dismissal of a lawsuit under the Employee Retirement Income Security Act of 1974 (ERISA) to recover benefits in the form of prescription drug copayment charges. Plaintiffs Mark Saltzman and Jan Meister sued defendants Independence Blue Cross, QCC Insurance Company, and Keystone Health Plan East under ERISA, asserting that defendants re-characterization of the drug Plavix to a higher tier on the plan s formulary resulted in plaintiffs paying too much for the drug. According to plaintiffs, the classification of Plavix amounted to a denial of benefits due under the terms of the plan. Defendants covered both plaintiffs under the Select Drug Program, which included an open formulary. The formulary initially listed Plavix as a Tier 2 drug, subject to a $20 copayment, as Plavix had no generic equivalent. Following the release of a generic version of Plavix, defendants re-classified Plavix as a Tier 3 drug with a $35 copayment. Although the production of the generic version was later enjoined for patent infringement, Plavix remained a Tier 3 drug. 54

55 Plaintiffs contended that defendants failure to re-categorize Plavix as a Tier 2 drug deprived them of the benefit of lower copayments and violated the terms of their Select Drug Program, pursuant to 502(a)(1)(B) of ERISA, 29 U.S.C. 1132(a)(1)(B). The district court held defendants had discretion under the terms of the Select Drug Program to determine what copayment would apply to which drugs. Specifically, the district court, applying an arbitrary and capricious standard of review, decided that defendants did not abuse their discretion when they placed Plavix in Tier 3 of their formulary. The district court further acknowledged that plaintiffs could only enforce the terms of the plan documents, which according to the court included defendants formulary. In their appeal to the Third Circuit, plaintiffs asserted that the district court mischaracterized the formulary as a plan document. Plaintiffs also argued that, even applying an arbitrary and capricious standard, the district court erred because the exclusion of Plavix from the formulary was in fact arbitrary. Finally, plaintiffs maintained that the plan was ambiguous, and thus not subject to a final interpretation on a motion to dismiss. Rather, the plan must be interpreted in light of extrinsic evidence. Defendants conversely noted that employers may amend welfare plans when rights are not vested. Moreover, defendants countered the terms of the plans were unambiguous and they were within their discretion when placing Plavix in Tier 3. The Third Circuit affirmed the district court s decision. The appeals court found the formulary was essential to administration of the plan, and therefore, a part of the plan and controlling for purposes of ERISA. The appeals court also held that while plaintiffs had a right to prescription coverage based upon the plan documents, plaintiffs did not have a vested right as to the amount of the copayments. As to the appropriate standard of review, the appeals court noted that, when analyzing a challenge to a denial of benefits, a court must determine whether the plan grants the plan administrator discretionary authority. If the plan administrator has such discretion, then the arbitrary and capricious standard of review applies. Finding unambiguous language in defendants plan granting such authority, the appeals court indicated that the plan administrator s interpretation would not be overturned unless it was unreasonable. The appeals court noted that plaintiffs failed to demonstrate that defendants placement of Plavix in Tier 3 was without reason, unsupported by the evidence, or erroneous as a matter of law. Therefore, defendants exercise of discretion was neither arbitrary nor capricious. Plaintiffs thus failed to state an ERISA claim and the district court's dismissal was affirmed. Saltzman. v. Independent Blue Cross, No (3d Cir. June 10, 2010). 55

56 U.S. Supreme Court Denies Review Of ERISA Challenge To San Francisco Ordinance Mandating Employer Healthcare Expenditures The U.S. Supreme Court let stand June 28, 2010 a Ninth Circuit decision finding the Employee Retirement Income Security Act (ERISA) does not preempt a San Francisco ordinance enacted in 2006 that sets new healthcare spending mandates for employers. The closely watched case has received national attention following a four-year legal battle by the Golden Gate Restaurant Association (GGRA) to have the employer spending mandates blocked on ERISA preemption grounds. The case went up the Supreme Court after a three-judge panel, later upheld by the full Ninth Circuit, ruled in September 2008 that the ordinance's employer spending mandates did not establish an ERISA plan, nor did they have an impermissible connection with employers ERISA plans or make an impermissible reference to such plans. GGRA argued the case was appropriate for High Court review because it created a split with a Fourth Circuit decision striking down a similar employer spending mandate in Maryland as preempted by ERISA. See Retail Industry Leaders Ass n v. Fielder, 475 F.3d 180 (2007). The administration and San Francisco City Attorney Dennis Herrera filed separate briefs with the Court maintaining that the recently enacted healthcare reform law largely rendered the ERISA preemption issue in the case obsolete. In a 26-page brief filed May 28, Acting Solicitor General Neal K. Katyal argued the enactment of the Patient Protection and Affordable Care Act (PPACA) in March 2010 significantly changed the legal landscape governing health care spending requirements. According to Katyal, the "federal legislation significantly reduces the importance of the question whether and when such requirements are preempted by ERISA. In his supplemental brief, Herrera echoed the administration s arguments, saying the dramatic steps in the PPACA to cover the uninsured removed the incentive of state and local governments to adopt programs like San Francisco s. On May 28, 2010, GGRA also filed a supplemental brief with the Court, arguing the PPACA does not exempt state and local play or pay laws from ERISA preemption, leaving the question presented in the case intact and still in need of Court review. The San Francisco Health Care Security Ordinance requires medium and large employers (those with over 20 employees) and nonprofits with over 50 employees to make certain levels of healthcare expenditures for individuals employed for more than 90 days who work over 10 hours per week. The ordinance, which went into effect January 1, 2008, also establishes a cityadministered Health Access Program for uninsured residents funded through contributions from private employers, individuals, and the city. I am extremely grateful to [the] high court for allowing to stand a model of health care reform that works not just for thousands of San Franciscans who would otherwise go without coverage, but for the vast majority of employers, Herrera said in a June 28, 2010 statement. 56

57 Golden Gate Restaurant Ass'n v. San Francisco, No (U.S. review denied June 28, 2010). D.C. Circuit Strikes Portion Of D.C. Law Regulating PBMs On ERISA Preemption Grounds In a decision hailed by the Pharmaceutical Care Management Association (PCMA) as a major victory for consumers and payers, the D.C. Circuit found the Employee Retirement Income Security Act (ERISA) preempted certain major provisions of a District of Columbia (District) law that attempted to regulate pharmaceutical benefit management companies (PBMs). After a long procedural history, the case was taken up for the second time by the appeals court, which affirmed most of the U.S. District Court for the District of Columbia ruling (Pharmaceutical Care Management Ass n v. District of Columbia, No (RMU) (D.D.C. Mar. 19, 2009)) that Title II of the Access Rx Act of 2004 touch upon a central matter of plan administration and also have an impermissible effect upon employee benefit plans (EBPs). The appeals court did reverse, however, the lower court s decision as to two specific provisions of the Act concerning usage pass back and confidentiality requirements. According to the appeals court, because each of these provisions could be waived by an EBP in its contract with a PBM, they are not preempted by ERISA. The appeals court remanded to the district court for further consideration of PCMA s constitutional challenges to these provisions. This ruling from one of the most respected Federal Appeals Courts in the country allows PBMs to continue to work aggressively to reduce the costs and improve the quality of prescription drug benefits for the 200 million Americans they serve, said PCMA President and Chief Executive Officer Mark Merritt in a press release. According to PCMA, [d]ozens of states have rejected legislation imposing similar requirements on PBMs upon realizing that such proposals inadvertently raise, not reduce, prescription drug costs. Title II of the Act, which has never gone into effect, regulates PBMs by imposing fiduciary duties on them in relation to covered entities, as well as by requiring disclosure of certain financial information. PCMA sued the District in 2004, seeking to enjoin enforcement of the Act. In 2007, the court dismissed PCMA s challenge, finding the First Circuit s decision in PCMA v. Rowe, 429 F.3d 294 (1st Cir. 2005), which upheld a similar statute in Maine, barred PCMA s action by collateral estoppel. On appeal, the D.C. Circuit reversed the dismissal and remanded to the court for further consideration. The district court ruled on remand that ERISA preempted Title II of the Act in its entirety and granted PCMA summary judgment. Affirming, the D.C. Circuit agreed with PCMA that Title II intrudes into areas of express ERISA concern because it regulates PBMs' administration of employee benefits by 57

58 requiring them to follow specific practices and adhere to certain standards of conduct (i.e., that of a fiduciary). Indeed the obvious purpose of Title II, as effectuated through these provisions, is to prescribe the way PBMs decide which pharmaceuticals to provide to plan beneficiaries and to prevent PBMs from inflating the price the plan pays for those pharmaceuticals, the appeals court said. The District did not dispute that the administration of employee benefits is an area of core ERISA concern but argued that Congress did not intend federal law to preempt state law that regulates relationships among ERISA entities. But the appeals court said the key issue is not whether the state law regulates a third party, but whether the third party at issue administers employee benefits on behalf of a plan. Next, the appeals court concluded, excepting the provisions involving usage pass through and confidentiality, that Title II has an impermissible constraining effect upon EBPs. The two excepted provisions in Title II are waivable and therefore are in essence voluntary provisions for the covered entity, which are not preempted by ERISA. The balance of Title II, however, constrains an EBP by forcing it to decide between administering its pharmaceutical benefits internally upon its own terms or contracting with a PBM to administer those benefits upon the terms laid down in the Act. These provisions, the appeals court continued, bind plan administrators because the choice they leave an EBP between self administration and third-party administration of pharmaceutical benefits is in reality no choice at all. According to the appeals court, it would be largely impractical for EBPs to internally administer pharmaceutical benefits and lose the economies of scale, purchasing leverage, and pharmacy network access that PBMs provide. Thus, the appeals court concluded that the provisions at issue have a connection with and therefore relate to an EMP and are preempted by ERISA. Pharmaceutical Care Management Ass n v. District of Columbia, No (D.C. Cir. July 9, 2010). Fifth Circuit Vacates Decision Limiting Health Plan Participant's Discovery In ERISA Lawsuit To Administrative Record The Fifth Circuit vacated December 29, 2010 a lower court's grant of summary judgment to an insurance company, finding that the magistrate judge presiding over the case erred in limiting the plaintiff-health plan participant's discovery from the insurance company to the administrative record. The appeals court then remanded the case to the U.S. District Court for the Eastern District of Louisiana to allow the plaintiff to proceed with further discovery. Jete Crosby, the plaintiff-health plan participant, was insured in 2006 under an employee health benefit plan (Plan) governed by the Employee Retirement Income Security Act of 58

59 1974 (ERISA).The plan was issued by defendant Louisiana Health Services and Indemnity Co. (Blue Cross). In late 2006, Crosby s periodontists diagnosed her with severe idiopathic root resorption, which placed her at risk of losing her teeth. The periodontists performed several procedures to prevent the loss of her ability to chew, speak, and swallow. Crosby then sought benefits under the Plan to cover the costs of these procedures. When Blue Cross denied coverage for the procedures, Crosby internally appealed the adverse benefit determination in accordance with the Plan. In two separate internal appeals, the appeals adjudicator or committee upheld the adverse benefit determination, finding the Plan's dental care and treatment provision excluded from coverage the services that had been performed by the periodontist. Crosby then filed a lawsuit against Blue Cross, seeking to recover wrongfully denied benefits. The parties exchanged their initial disclosures, and Blue Cross subsequently sent Crosby a copy of the administrative record. When Crosby sought additional discovery, however, Blue Cross objected, arguing the scope of discovery was limited to the administrative record. Blue Cross then filed for summary judgment on this basis. After Crosby moved to compel discovery, a magistrate judge conducted a hearing, and ultimately issued a written order denying Crosby's request. The district court then granted summary judgment for Blue Cross. On appeal, Crosby argued that the district court erred in granting summary judgment in favor of Blue Cross because the evidence in the record indicated that Blue Cross violated ERISA's procedural requirements and abused its discretion in denying Crosby's claim for benefits. In addition, Crosby asserted that the magistrate judge erred by refusing to grant Crosby's motion to compel further discovery. The appeals court noted it would only vacate a decision to limit discovery if the lower court abused its discretion, and if that abuse of discretion affected the substantial rights of the appellant. The appeals court noted that, before the district court, Crosby sought extensive discovery concerning the compilation of the administrative record, the proceedings at the administrative level, and Blue Cross' past coverage determinations in similar situations, i.e., cases involving similar jaw, teeth, and mouth treatments. Blue Cross refused, however, to produce the requested information, arguing that it was inadmissable. Citing Fifth Circuit precedent of Vega v. National Life Insurance Services, Inc., 188 F.3d 287 (5th Cir. 1999), Blue Cross concluded that the only admissible evidence in an ERISA action was the administrative record, evidence involving interpretation of the Plan, and evidence explaining medical terms and procedures. The magistrate judge agreed with that argument in denying Crosby's motion to compel further discovery, the appeals court explained. Finding that the magistrate judge "too narrowly" defined the scope of discovery in ERISA actions, the appeals court explained that Vega "prohibits the admission of evidence to resolve the merits of the coverage determination i.e., whether coverage should have been afforded under the plan unless the evidence in the administrative record relates to 59

60 how the administrator has interpreted the plan in the past, or would assist the court in understanding medical terms and procedures." However, "Vega does not...prohibit the admission of evidence to resolve other issues that may be raised in an ERISA action," the appeals court said. "For example, in an ERISA action under 29 U.S.C. S1132(a)(1)(B), a claimant may question the completeness of the administrative record; whether the plan administrator complied with ERISA's procedural regulations; and the existence and extent of a conflict of interest created by a plan administrator's dual role in making benefits determinations and funding the plan." The appeals court then concluded that Crosby's case fell within these parameters, noting that Crosby sought to discover evidence to assess whether the administrative record was complete, whether Blue Cross complied with ERISA's procedural requirements, and whether Blue Cross had previously covered similar claims related to the jaw, teeth or mouth. Finding abuse of discretion, the appeals court highlighted that the lower court's decision relied upon a magistrate judge's erroneous view of the scope of admissible and discoverable evidence in ERISA actions. The appeals court then found that this abuse of discretion prejudiced Crosby s ability to demonstrate that Blue Cross failed to comply with ERISA s procedural requirements, that the administrative record compiled by Blue Cross failed to contain all relevant information made available to Blue Cross prior to the filing of this suit, and that Blue Cross had afforded coverage in similar situations. Crosby v. Louisiana Health Serv. and Indemnity Co., No (5th Cir. Dec. 29, 2010). Second Circuit Finds Providers Contract Claims Completely Preempted By ERISA The Second Circuit April 21, 2011 found a healthcare provider s breach of contract and quasi-contract claims against an Employee Retirement Income Security Act (ERISA) benefit plan were completely preempted under the two-pronged test for ERISA preemption established in Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004). Plaintiff Montefiore Medical Center, a nonprofit hospital, provided services to beneficiaries of defendant Local 272 Welfare Fund (Fund), an employee benefit plan governed by ERISA. At all relevant times, Montefiore was an in-network provider of the Fund. Plaintiff sued the Fund seeking payment for over $1 million in medical services provided to beneficiaries that the Fund had allegedly failed to reimburse stating state law claims for breach of contract and unjust enrichment. The Fund removed the action to federal court based on ERISA preemption. Plaintiff moved to remand, but the district court denied the motion. On appeals, the court evaluated the case under the two-pronged test for ERISA preemption established in Davila. 60

61 For the first prong, the appeals court considered, under Section 502(a)(1)(B) of ERISA, whether the plaintiff is the type of party that can bring a claim; and whether the actual claim that the plaintiff asserted can be construed as a colorable claim for benefits. Section 502(a)(1)(B) provides that a civil action may be brought by a participant or beneficiary of an ERISA plan to enforce certain rights under that plan pursuant to ERISA. Courts also typically grant standing to healthcare providers to whom a beneficiary has assigned his claim in exchange for health care, the appeals court explained. Although plaintiff here disputed that it obtained assignments of benefits, the appeals court found that Montefiore is a health care provider to whom beneficiaries of the Plan have assigned their claims, and therefore is the type of party that can bring a claim against the Fund regarding benefits pursuant to 502(a)(1)(B). Turning to whether the actual claim could be construed as a colorable claim for benefits, the appeals court rejected plaintiff s argument that its claims were simply contract and quasi-contract claims that had nothing to do with ERISA. Instead, the appeals court found the claims appear to implicate coverage determinations under the relevant terms of the Plan. Having found the first prong of the Davila test satisfied, the appeals court turned to the second prong that a claim is completely preempted only if there is no other independent legal duty that is implicated by [the] defendant s actions. Rejecting plaintiff s argument that its claims sound separately and independently in quasi-contract law, the appeals court found the pre-approval process that formed the basis for the contract claims was inextricably intertwined with the interpretation of Plan coverage and benefits. Finally, the appeals court found that supplemental jurisdiction over any remaining state law claims was proper as they would arise from the same common nucleus of operative fact. Montefiore Med. Ctr. v. Teamsters Local 272, No cv (2nd Cir. Apr. 21, 2011). Fraud and Abuse Settlements, Convictions, and Pleas St. Jude Medical Inc., a heart device manufacturer, Parma Community General Hospital (PCGH); and Norton Healthcare (Norton) paid the federal government approximately $3.89 million to resolve false claim allegations that St. Jude paid illegal kickbacks to the two hospitals to secure heart-device business, the U.S. Department of Justice (DOJ) announced June 4, The government alleged these kickbacks caused false claims to be submitted to Medicare and other federal healthcare programs in violation of the False Claims Act. According to the government, the kickbacks included alleged rebates that were "retroactive" and paid based on a hospital s previous purchases of St. Jude heart-device equipment and rebates that St. Jude paid for purchases of heart-device equipment sold by its competitors to induce purchases of similar equipment from St. Jude in the future. Under the settlement agreement, St. Jude will pay $3,725,000, PCGH will pay $40,000, and Norton will pay $133,300. This case was initiated by a whistleblower filing a qui tam action, and the federal government subsequently intervened. 61

62 The Health Alliance of Greater Cincinnati, two of its member hospitals (The Fort Hamilton Hospital (FHH) and The University Hospital), and physician group University Internal Medicine Associates Inc. (UIMA) agreed to pay the federal government $2.6 million to settle claims that they engaged in an illegal kickbackfor-referral scheme, the Department of Justice (DOJ) announced June 15, The alleged scheme involved FHH s plans to expand the scope of its cardiology services to include certain interventional cardiology procedures. However, under state law, FHH could only perform the interventional cardiology procedures if it participated in a particular clinical trial involving those procedures. According to DOJ, UIMA, a physician group based at The University Hospital, offered to provide the interventional cardiology coverage that FHH needed for the clinical trial, but only if the hospital agreed to refer cardiology patients and procedures to the physician group on a preferential basis. The government contended that the preferential referral arrangements sometimes resulted in patients being transferred to The University Hospital, or being seen by cardiologists with UIMA, rather than the hospital or cardiologist that the patient chose. These arrangements, according to the government, violated the federal Anti-Kickback Statute, and therefore the related claims submitted to Medicare violated the False Claims Act. The case was initiated as a qui tam lawsuit brought by whistleblower Dr. Deborah Hauger, a former cardiologist at FHH. As part of the settlement, Dr. Hauger will receive $468,000, DOJ said. DOJ announced June 4, 2010 that Metropolitan Ambulance & First Aid Corp. (now known as SEZ Metro Corp.), Metro North Ambulance Corp. (now known as SEZ North Corp.) and Big Apple Ambulance Service Inc. (formerly known as United Ambulance) paid the federal government $2.85 million to resolve allegations that they submitted millions of dollars in false claims to the Medicare program. As part of the settlement, the government stipulated to the dismissal of the False Claims Act qui tam suit against the companies, including their president, Steve Zakheim. According to the government, the companies and Zakheim used, or caused the use of, falsified records to appeal a Medicare program refund demand. Medicare had demanded the companies return millions of dollars they were paid for medically unnecessary ambulance trips. Under Medicare rules, the companies could bill for these expensive non-emergency transports only if the patient could not be transported by any other means, such as by car or by wheelchair van. Medicare audited the companies past billings and concluded that the companies had charged Medicare tens of millions of dollars for ambulance trips that did not meet this standard. Medicare demanded a refund and afforded the companies an extensive informal and formal appeals process to prove that their billings were proper. The government also alleged that, rather than contesting the refund demand fairly, the companies resorted to fraud when they could not otherwise prove an ambulance was medically needed. The companies, in pursuing their appeals, used hundreds of letters attesting to the need for an ambulance that were forged or otherwise purported to come from some neutral, disinterested healthcare provider when they in fact did not, the government alleged. The case was initiated as a qui tam suit by whistleblower Larry Kaplan, who formerly was a Chief Financial Officer for one of the companies. Under the settlement, Mr. Kaplan will receive $618,450 as his share of the recovery. Drug maker AstraZeneca has agreed to pay $103 million to settle allegations that it inflated the Average Wholesale Price for some of its drugs asserted in a class action brought on behalf of consumers and third-party payors, consumer-rights class-action law firm Hagens Berman Sobol Shapiro announced June 19, The proposed settlement, filed June 18 in the U.S. District Court for the District of Massachusetts, provides $13 million for TPPs who paid some or all of their insured 62

63 Medicare co-insurance for Zoladex and/or Pulmicort Respules in Massachusetts and consumers and TPPs who paid cash or a co-payment for these drugs outside of Medicare in the state, according to Hagens Berman. In addition, AstraZeneca has agreed to pay $90 million to class members in the U.S. but outside of Massachusetts who purchased these drugs and fit the same class description. The proposed settlement still requires court approval. AstraZeneca denied any liability or wrongdoing and said it agreed to settle to avoid further expense, burden, and inconvenience of protracted litigation. A physician-owned enterprise based in the Chicago, IL area has agreed to a $7.3 million Civil Monetary Penalty (CMP) settlement to resolve allegations of antikickback violations, the Department of Health and Human Services Office of Inspector General (OIG) announced in a July 8, 2010 press release. The government alleged that United Shockwave Services, United Prostate Centers, and United Urology Centers (collectively, United) and certain of its physicianowners, leveraged patient referrals to obtain contract business from hospitals in Illinois, Indiana, and Iowa. OIG also alleged that United caused certain hospitals to submit claims for designated health services that resulted from prohibited referrals in violation of the Physician Self-Referral Law, the release said. In addition to the monetary settlement, United entered into a five-year Corporate Integrity Agreement (CIA) with OIG, which requires the enterprise to hire an Independent Review Organization. The independent reviewer will monitor lithotripsy and laser arrangements between United and any hospital in Illinois, Iowa, and Indiana that receives referrals from United or its physician investors, according to the release. The joint DOJ-HHS Medicare Fraud Strike Force announced charges July 16 against 94 individuals for their alleged participation in schemes to collectively submit more than $251 million in false claims to the Medicare program. The operation was the largest federal healthcare fraud takedown since Medicare Fraud Strike Force operations began in 2007, DOJ said in a press release. The charges are based on a variety of fraud schemes, including physical therapy and occupational therapy schemes, home healthcare schemes, HIV infusion fraud schemes, and durable medical equipment (DME) schemes. According to court documents, the various defendants participated in schemes to submit claims to Medicare for treatments that were medically unnecessary or were never provided. Teva Pharmaceuticals and its corporate affiliates entered into a $27 million settlement agreement with the state of Florida to resolve claims of allegedly engaging in a practice of knowingly setting and reporting inflated prices for medications dispensed by pharmacies and other providers who were then reimbursed by the Medicaid program, announced Florida Attorney General Bill McCollum on July 20, Under that settlement agreement, Teva must pay the states of Texas, Florida, and California, and the federal government a total of $169 million. The Medicaid program sets the reimbursement rates it pays to Medicaid providers based upon the prices reported by drug manufacturers. By allegedly reporting inflated prices, Teva and its corporate affiliates caused Medicaid to overpay millions of dollars in pharmacy reimbursements. The case was originally filed as a qui tam lawsuit by whistleblower Ven-A-Care of the Florida Keys, Inc., and the state subsequently intervened. Allergan Inc. will pay $600 million to resolve allegations that it illegally marketed Botox Therapeutic from 2000 to 2005 for uses not approved by the Food and Drug Administration (FDA), DOJ announced September 1, Under the 63

64 settlement, Allergan will plead guilty to criminal misdemeanor misbranding in violation of the Food, Drug, and Cosmetic Act and pay a fine of $375 million, including forfeiting assets of $25 million. In addition, Allergan will pay $225 million to the federal government and the states to resolve three whistleblower actions alleging its marketing practices caused the submission of false claims to public healthcare programs. The civil lawsuits, filed in a Georgia federal district court, alleged, among other things, that Allergen illegally promoted Botox for offlabel uses, paid physicians kickbacks to prescribe Botox, and instructed physicians on coding Botox claims so as to obtain Medicare and Medicaid reimbursement. The whistleblowers who initiated the qui tam lawsuits under the False Claims Act stand to receive $37.8 million of the settlement amount, with $210,250,000 going to the federal government and $14,750,000 to states that opt to participate in the agreement. In a September 1 press release, Allergan specifically denied liability for the civil allegations and said it did not believe there is merit to them factually or legally. The FDA has approved Botox, which is commonly known as a wrinkle treatment, for use in treating crossed eyes, involuntary eyelid spasms, involuntary neck spasms, excessive underarm sweating, and most recently adult upper-limb spasms. But the government alleged Allergan actively promoted Botox for a number of unapproved indications, including to treat headaches, pain, and juvenile cerebral palsy. Allergan also agreed to enter into a five-year corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. Saint John s Health Center (St. John s), located in Santa Monica, CA, agreed to pay the United States $5.25 million to resolve allegations that the hospital submitted false, inflated claims to the Medicare program over a seven-year period for outlier payments, which are designed to compensate hospitals for high-cost patients, announced U.S. Attorney for the Central District of California André Birotte Jr. on August 25, The federal government alleged that St. John s engaged in turbocharging, defined in the case as dramatically increasing the charges billed to Medicare for care provided to hospital inpatients far in excess of any increase in the costs associated with that care. The government alleged this billing practice enabled St. John s to obtain significant amounts of Medicare outlier payments that it was not entitled to receive. In the settlement agreement, St. John s agreed to resolve the allegations through payment of the $5.25 million without an acknowledging any wrongdoing. WellStar Health Systems (WHS) reached a $2.74 million civil settlement with the state of Georgia to resolve allegations that it overbilled Medicaid for inpatient and outpatient services provided at five area hospitals, announced Georgia Attorney General Thurbert E. Baker August 30, State investigators conducted an audit focusing on WHS billing practices in relation to cross-over claims, which are claims made for patients who are enrolled in both Medicare and Medicaid. Medicare acts as the primary coverage, with Medicaid functioning as the secondary insurance, and Medicaid has a cap on the amount of reimbursement that a hospital can receive. According to the release, the investigation found WHS filed claims that did not reflect the full amount of Medicare prior payments, allowing WHS to receive excessive Medicaid reimbursements. Under the terms of the settlement agreement, WHS and the five hospitals denied any wrongdoing, but agreed to pay the Georgia Department of Community Health a lump sum of $2,728,318 to settle all possible claims related to the billing errors. North Shore-Long Island Jewish Health System, Inc., North Shore University Hospital, and Long Island Jewish Medical Center (collectively, North Shore-LIJ), which is the largest integrated healthcare network in New York, agreed to pay the federal government $2.95 million to settle false claims allegations based on billing Medicare Part A for costs that were not incurred in providing Medicare Part A 64

65 services, announced U.S. Attorney for the Southern District of New York Preet Bharara on September 7, According to the complaint, the government alleged that, over a six-year period, North Shore-LIJ, among other things, billed Medicare for expenses associated with operating private physician offices and a pre-school. However, Medicare Part A only reimburses hospitals for the costs of care for Medicare patients, such as the elderly and the disabled. In addition, the federal government alleged that, to obtain reimbursement for costs that were not incurred in providing Medicare Part A services, North Shore-LIJ provided the government with false information and falsely certified compliance with Medicare rules and regulations. Forest Pharmaceuticals Inc., a subsidiary of Forest Laboratories Inc., agreed to pay more than $313 million to settle potential civil and criminal liability stemming from alleged false claims related to its drugs Levothroid, Celexa, and Lexapro, DOJ announced September 15, Forest also agreed to plead guilty to one criminal felony count of obstructing justice, one criminal misdemeanor count of distributing an unapproved drug in interstate commerce, and one criminal misdemeanor count of distributing a misbranded drug in interstate commerce, DOJ said. Under the plea agreement, Forest Pharmaceuticals will pay a criminal fine of $150 million and will forfeit an additional $14 million in assets. According to the criminal information, orally administered levothyroxine sodium drugs have been on the market to treat hypothroidism since the 1950s without Food and Drug Administration (FDA) approval. In 1997, FDA announced that these drugs were new drugs under the Food, Drug and Cosmetics Act and needed the agency s approval. Eventually, to meet continuing patient demand, FDA announced that, as a matter of enforcement discretion, the agency would permit manufacturers of unapproved levothyroxine sodium drugs to continue distributing their unapproved drugs under certain conditions. One of those conditions was that any manufacturer that had not obtained approval for its levothyroxine sodium drug product needed to comply with a two-year, gradual distribution phase-down of its unapproved drug until it obtained FDA approval to distribute the drug. DOJ alleged Forest Pharmaceuticals made a deliberate decision to continue distributing its unapproved Levothroid product in quantities far exceeding the amounts permitted by the FDA s distribution phase-down plan. The government further alleged the company submitted inaccurate information to the FDA as part of its New Drug Application (NDA) submission for Levothroid and that it obstructed an FDA regulatory inspection concerning the data submitted in the Levothroid NDA. The settlement also resolves civil False Claims Act (FCA) allegations related to Forest s continued distribution of unapproved Levothroid and for failing to advise the Centers for Medicare and Medicaid Services that the drug no longer qualified for coverage by government healthcare programs, thereby causing false claims to be submitted to those programs, DOJ said. Other charges alleged Forest promoted the drug Celexa which was approved only for adult depression for unapproved pediatric use. The government alleged, among other things, that Forest s off-label promotion consisted of various sales techniques, including directing its sales representatives to promote pediatric use of Celexa in sales calls to physicians who treated children and adolescents, and hiring outside speakers to talk to pediatric specialists about the benefits of prescribing Celexa to children and teens. DOJ further alleged that Forest also marketed its drug Lexapro for pediatric uses, although it lacked FDA approval for such uses. According to DOJ, Forest used illegal kickbacks to induce physicians and others to prescribe Celexa and Lexapro. The settlement covers various lawsuits filed under the qui tam provisions of the FCA, DOJ noted. More than $88 million of the total settlement amount will be distributed to the federal government and more than $60 million will be distributed to and shared by the states. In addition, private whistleblowers will receive approximately $14 million from the federal share of the settlement amount. Forest Laboratories also signed a five-year Corporate Integrity 65

66 Agreement (CIA) with the Department of Health and Human Services Office of Inspector General. In a statement, Forest Laboratories, Inc. noted that [n]either misdemeanor charge includes as an element false or deceptive conduct. In addition, the company said it expressly denies the allegations made in connection with the civil claims being settled. Covington, KY-based Omnicare, Inc. agreed to pay over $21 million to settle a whistleblower action alleging the long term care pharmacy defrauded the Medicaid programs of Massachusetts and Michigan by knowingly charging more for certain prescriptions than it charges private insurers. Michigan Attorney General Mike Cox announced September 21, 2010 that Omnicare, the owner of Specialized Pharmacy Services, will pay the state $11.6 million to resolve the fraud allegations under the Michigan False Claims Act. Omnicare also will pay Massachusetts $9.45 million for allegedly overcharging its Medicaid program, MassHealth, for prescription drugs, said Massachusetts Attorney General Martha Coakley. Vogel, Slade & Goldstein, the law firm that represented whistleblower Richard Krammerer, a former Omnicare financial analyst, said in a statement that Michigan and Massachusetts are among a select group of states that expressly require drug providers like Omnicare to give the Medicaid program... their 'most favored customer price' for pharmaceuticals. These states, the firm s press release said, go the extra step to protect taxpayer funds and require pharmacies to give Medicaid their best available price. According to the complaint, filed in March 2007 in the U.S. District Court for the Northern District of Illinois, Omnicare charged Medicaid far higher prices than private insurers. The whistleblower will receive a share of the settlement in both states. Novartis Pharmaceuticals Corporation agreed to pay $422.5 million to resolve criminal and civil liability arising from the illegal marketing of certain pharmaceuticals, DOJ announced September 30, Under the settlement agreement, Novartis will plead guilty to a misdemeanor and pay a $185 million combined criminal fine and forfeiture related to the off-label promotion of its drug Trileptal, which was approved by the Food and Drug Administration (FDA) as an anti-epileptic drug for the treatment of partial seizures but not for any other use. In addition, Novartis will pay $237.5 million to resolve civil allegations under the False Claims Act that the company unlawfully marketed Trileptal and five other drugs, and thereby caused false claims to be submitted to government healthcare programs. The government alleged that Novartis illegally promoted Trileptal for a variety of uses, including psychiatric and pain uses, which were not medically accepted indications and therefore not covered by federal healthcare programs. The agreement also resolves allegations that the company paid kickbacks to healthcare professionals to induce them to prescribe Trileptal, Diovan, Zelnorm, Sandostatin, Exforge, and Tekturna, DOJ said. The federal share of the civil settlement is $149,241,306, and the state Medicaid share of the civil settlement is $88,258,694. In addition, because the civil settlement resolves four lawsuits filed under the qui tam provisions of the False Claims Act, the whistleblowers, all former Novartis employees, will receive payments totaling more than $25 million from the federal share of the civil recovery, DOJ said. Novartis also signed a Corporate Integrity Agreement (CIA) with the Department of Health and Human Services Office of Inspector General (OIG) under which it will be subject to exclusion from federal healthcare programs, including Medicare and Medicaid, for a material breach of the CIA and subject to monetary penalties for less significant breaches. Among other things, the CIA requires: the board of directors (or a committee of the board) to annually review the company s compliance program with the help of an outside expert and certify its effectiveness; that certain senior executives annually certify that their departments or functional areas are 66

67 compliant; that Novartis send doctors a letter notifying them about the settlement; and that the company posts on its website information about payments to doctors, such as honoraria, travel, or lodging. Wright Medical Technology, Inc. (Wright) executed a deferred prosecution agreement (DPA) with the federal government, consenting to institute and comply with corporate compliance procedures and federal monitoring over a 12-month period, announced U.S. Attorney for the District of New Jersey Paul J. Fishman on September 30, In addition to the DPA, Wright reached a civil settlement with the federal government, under which it will enter into a five-year Corporate Integrity Agreement with the Department of Health and Human Services Office of Inspector General, and pay $7.9 million to settle claims that the company s fraudulent marketing practices caused false claims to be submitted to the Medicare program. The company also faces a pending criminal case alleging that, over a five-year period, it used consulting agreements with orthopaedic surgeons as an inducement to use its artificial hip and knee reconstruction products. International medical device makers Synthes, Inc. and Norian Corporation agreed October 4, 2010 to plead guilty to a superseding information filed by DOJ in connection with shipping adulterated and misbranded bone cement products as part of an unauthorized clinical trial, U.S. Attorney for the Eastern District of Pennsylvania Zane David Memeger announced. The superseding information charges Norian with one felony count of conspiracy to impair and impede the lawful functions of the Food and Drug Administration (FDA) and to commit crimes against the United States, and 110 misdemeanor counts of shipping adulterated and misbranded Norian XR in interstate commerce. Norian s parent company, Synthes, is charged with one misdemeanor count of shipping adulterated and misbranded Norian XR in interstate commerce. According to the government, from May 2002 until fall 2004, Norian conspired with others, including Synthes and several former Synthes executives, to conduct unauthorized clinical trials of Synthes medical devices, Norian XR and Norian SRS, in surgeries to treat vertebral compression fractures of the spine (VCFs). Notwithstanding knowledge that the bone cement could cause adverse reactions, the company allegedly proceeded to market the product for VCFs without putting it through FDA required testing. The information further alleges that after the death of the third patient in January 2004 from these procedures, Norian and Synthes did not recall Norian XR from the market which would have required them to disclose details of the three deaths to the FDA but, instead, compounded their crimes by carrying out a cover-up in which they made false statements to the FDA during an official inspection in May and June The resolution also includes a civil settlement under the False Claims Act totaling $138,000, to resolve allegations of causing the submission of 31 false claims to various federal healthcare programs resulting from the use of the Norian XR and Norian SRS devices in VCFs when the use of those devices was not reasonable and necessary, and when such an unapproved use was, on the Norian XR label, explicitly warned against, Memeger said. Norian s parent, Synthes, also entered a Divestiture Agreement with the Department of Health and Human Services Office of Inspector General (OIG) under which it agreed to sell all Norian's assets within a limited period of time. In addition to the Divestiture Agreement, Synthes signed a five-year corporate integrity agreement (CIA) with OIG. If Synthes fails to comply with the terms of either the Divestiture Agreement or the CIA, OIG could initiate an action to exclude Synthes, Memeger noted. A federal jury in Massachusetts reached a verdict September 30, 2010 finding a former subsidiary of Merck & Co. defrauded the state s Medicaid program by systematically reporting false and inflated prices for generic versions of the 67

68 asthma medicine albuterol. The state filed the complaint in 2003 in the U.S. District Court for the District of Massachusetts against various drug companies including Warrick Pharmaceuticals Corp., a former subsidiary of Schering-Plough Corp., which merged with Merck in The complaint alleged violations of the Massachusetts False Claims Act and Medicaid False Claims Act and common law fraud. The jury found the state proved the now-defunct Warrick violated the Massachusetts FCA by knowingly causing materially false or fraudulent claims for payment to be presented to the state s Medicaid program, MassHealth. According to the verdict, Warrick caused over 989,000 fraudulent claims to be submitted to MassHealth for payment. The jury also concluded Warrick had violated the Massachusetts Medicaid False Claims Act and committed common law fraud. The jury awarded the state nearly $4.6 million in compensatory damages. The company intends to vigorously pursue a reversal of the verdict in the trial court and on appeal, if necessary, said Bruce N. Kuhlik, executive vice president and general counsel of Merck, in a statement. We strongly believe the evidence showed that the Commonwealth made informed choices about amounts it paid to Massachusetts pharmacists, and that Warrick was in no way responsible for those choices. According to the statement, U.S. District Judge Patti Saris has deferred a decision on how penalties should be calculated under Massachusetts state law. Seventy-three individuals, including a large number of alleged associates of an Armenian-American organized crime enterprise, were charged in an indictment alleging more than $163 million in fraudulent billing related to various healthcare fraud crimes, DOJ announced October 13, In what DOJ called the largest Medicare fraud scheme ever perpetrated by a single criminal enterprise, defendants allegedly stole the identities of doctors and thousands of Medicare beneficiaries and operated at least 118 different phony clinics in 25 states for the purposes of submitting Medicare reimbursements. With the stolen identities of the doctors and patients, the organization is alleged to have billed Medicare for over $100 million for treatments no doctor ever performed, and no patient ever received. Medicare paid out more than $35 million on these allegedly phony claims, according to Preet Bharara, the U.S. Attorney for the Southern District of New York, where many of the defendants were charged. In addition to the Medicare fraud scheme, the organization also allegedly operated a multimilliondollar scheme to defraud insurance companies in the New York area by submitting millions of dollars in claims for medically unnecessary treatments, Bharara said. According to the indictment in New York, the criminal enterprise, known as the Mirzoyan-Terdjanian Organization, is based in Los Angeles and New York, and its operations extend throughout the United States and internationally. A Louisiana jury found October 15, 2010 that Janssen Pharmaceutica, Inc. and its parent company Johnson & Johnson violated the state s Medical Assistance Programs Integrity Law (MAPIL) by playing down the risks of its antipsychotic drug Risperdal. The jury returned a $257,679,000 verdict after finding 35,542 violations of the MAPIL, according to a press release posted by Louisiana Attorney General Buddy Caldwell. The state alleged J&J and Janssen sent Dear Doctor letters to more than 7,500 Louisiana healthcare providers, and made 27,000 similar marketing calls, stating that Risperdal was safer than other competing brand name antipsychotic drugs. In addition, according to the state, the Food and Drug Administration previously warned J&J that it made false and misleading claims that minimized the risk of diabetes associated with Risperdal and overstated its supremacy to rival medicines. SB Pharmco Puerto Rico Inc., a subsidiary of GlaxoSmithKline, PLC (GSK), agreed to plead guilty to charges relating to the manufacture and distribution of certain adulterated drugs and pay a total of $750 million in civil and criminal penalties, 68

69 DOJ announced October 26, The settlement represents the fourth largest amount ever paid by a pharmaceutical company to the United States, Tony West, Assistant Attorney General for the Civil Division of DOJ, said in a statement. The criminal information filed by the government alleged that SB Pharmco s manufacturing operations failed to ensure that its drugs Kytril and Bactroban were free of contamination from microorganisms. The information also alleged SB Pharmco s manufacturing process caused Paxil CR two-layer tablets to split, which caused the potential distribution of tablets that did not have any therapeutic effect and tablets that did not contain any controlled release mechanism. The government further alleged Avandamet tablets manufactured by SB Pharmco did not always have the Food and Drug Administration (FDA)-approved mix of active ingredients, and, as a result, potentially contained too much or too little of the ingredient with the therapeutic effect. Finally, the criminal information alleged SB Pharmco s facility suffered from long-standing problems of product mix-ups, which caused tablets of one drug type and strength to be commingled with tablets of another drug type and/or strength in the same bottle. SB Pharmco will plead guilty to a criminal felony for releasing into interstate commerce adulterated Kytril, Bactroban, Paxil CR, and Avandamet, in violation of the Food, Drug, and Cosmetic Act. Under the plea agreement, the company will pay a criminal fine of $150 million, DOJ said. In addition, the company will pay a civil settlement of $600 million to the federal government and the states to resolve claims that it caused false claims to be submitted to government healthcare programs for certain quantities of adulterated Kytril, Bactroban, Paxil CR, and Avandamet. The civil settlement resolves a lawsuit filed in federal court in the District of Massachusetts under the qui tam provisions of the False Claims Act. The whistleblower in that suit will receive approximately $96 million from the federal share of the settlement amount, DOJ noted. The Christ Hospital of Cincinnati, OH (TCH) has entered into a five-year corporate integrity agreement (CIA) to resolve the Department of Health and Human Services Office of Inspector General's (OIG s) possible exclusion of TCH from participation in federal healthcare programs, according to an October 27, 2010 agency release. The Health Alliance of Greater Cincinnati and its former member hospital TCH previously had agreed to pay the federal government $108 million to settle allegations they engaged in a pay-to-play scheme that violated federal fraud and abuse laws, DOJ announced May 21, But at the time of the settlement, TCH declined to enter into a CIA acceptable to OIG. OIG has maintained throughout negotiations with TCH that independent monitoring was needed to oversee the hospital s compliance with Federal health care program requirements, said Inspector General Daniel R. Levinson in the release. Under the CIA, TCH must implement compliance measures, hire an outside reviewer of its financial relationships with physicians, and be monitored by OIG. The TCH Board of Trustees also must annually review the company s compliance program and certify its effectiveness. The May 2010 settlement resolved a qui tam action brought under the False Claims Act (FCA) by cardiologist Harry F. Fry, M.D., who used to work for TCH. Fry alleged the Alliance and TCH violated the Anti-Kickback Statute by assigning time to cardiologists in the hospital s heart station in proportion to the volume of referrals of cardiac procedures made by cardiologists to TCH. The government intervened in the action. The lawsuit also alleged the claims TCH submitted to Medicare and Medicaid as a result of the illegal kickback scheme violated the FCA. TCH and the Alliance denied any liability in agreeing to the settlement. Simi Valley Hospital (SVH) agreed to pay the federal government $5.15 million to resolve allegations that it violated the False Claims Act by submitting, over a seven-year period, false claims to the Medicare program for psychiatric patient 69

70 services, announced the offices of U.S. Attorney for the Central District of California Andre Birotte Jr. on November 3, The case was initiated as a qui tam lawsuit brought by a former employee of SVH who alleged the hospital s behavioral medicine services unit knowingly submitted false claims to Medicare for chemical dependency and psychiatric patient services allegedly performed between 1991 and The federal government subsequently intervened in the lawsuit, alleging that SVH, among other improper billing practices, submitted false claims to the Medicare and Medicaid programs for: psychiatric care, even though the patients were receiving chemical dependency detoxification services; and psychiatric overnight stays and inpatient services, even though the patients did not meet the criteria for inpatient hospitalization. In addition, the federal government alleged that SHV improperly paid one of its medical directors $12,000 per month to establish, and to get patients admitted into, a non-existent program for women dealing with post-traumatic stress disorder. Although SVH has already paid the settlement amount, it has not admitted any wrongdoing. St. Joseph Medical Center (SJMC), located in Towson, MD, has agreed to pay the United States $22 million to settle allegations that it paid unlawful remuneration under the Anti-Kickback Statute (AKS) and violated the Stark Law when it entered into a series of professional services contracts with the Pikesville, MD-based cardiology group, MidAtlantic Cardiovascular Associates (MACVA), DOJ announced November 9, The original lawsuit, which was filed in the U.S. District Court for the District of Maryland by several whistleblowers, alleged that SJMC violated the AKS, Stark Law, and the False Claims Act by paying various forms of illegal remuneration to MACVA to induce referrals of patients insured by federal healthcare programs for cardiac procedures. Specifically, the government alleged SJMC paid kickbacks to MACVA under the guise of professional services agreements, in return for MACVA s referrals to the medical center of lucrative cardiovascular procedures, including cardiac surgery and interventional cardiology procedures, from January 1, 1996, to January 1, Under the agreement, SJMC also agreed to settle allegations that it received payment from federal health benefit programs for medically unnecessary stents performed by Mark Midei, M.D., a one time partner in MACVA who was later employed by SJMC, DOJ said. SJMC also signed a Corporate Integrity Agreement (CIA) with the Department of Health and Human Services Office of Inspector General (OIG) that requires SJMC to engage in activities to help ensure accurate billing and appropriate relationships with referral sources. SJMC did not admit liability in agreeing to the settlement. A Pennsylvania-based pharmaceutical manufacturer, Mylan Inc., entered into a $2.6 million settlement with the state of Massachusetts to resolve allegations that it reported false and inflated prices to drug industry price reporting services, which caused the state Medicaid program to pay inflated prices on drug prescriptions for Medicaid recipients, announced Massachusetts Attorney General Martha Coakley on November 8, The settlement resolves the state s lawsuit with respect to drugs that Mylan manufactured and sold during the years 1998 to 2003, including Clozapine, Phenytoin Sodium, and Lorazapam. In agreeing to the settlement, Mylan did not admit any wrongdoing. The state previously reached similar settlements with ten other large pharmaceutical manufacturers, including Dey, Inc., Barr Laboratories, Inc., and Teva Pharmaceuticals USA, Inc. As with the other settlements, the monies recovered from the settlement with Mylan Inc. will be returned to the state Medicaid program. Ameritox, Ltd., a clinical laboratory based in Midland, TX, that markets drug testing services to physicians who prescribe strong narcotic medications for their patients, agreed to pay $16.3 million to resolve allegations that, over a four-year period, it provided cash kickbacks to its physician clients to induce the referral of 70

71 drug testing services, announced U.S. Attorney for the Middle District of Florida Robert E. O Neill on November 16, The case was initiated as a qui tam lawsuit filed by a former Ameritox sales representative. Of the total settlement amount, the federal government will receive roughly $15.5 million, with the balance of $814,000 to be split among the affected states. The whistleblower will receive $3.4 million out of the federal government s share of the recovery. As part of the settlement, Ameritox also agreed to entered into a five-year Corporate Integrity Agreement with the Department of Health and Human Services Office of Inspector General. Abbott Laboratories Inc., B. Braun Medical Inc., and Roxane Laboratories Inc. n/k/a Boehringer Ingelheim Roxane Inc. and affiliated entities have agreed to a $421 million settlement of False Claims Act allegations, DOJ announced December 7, According to DOJ, defendants engaged in a scheme to report false and inflated prices for numerous pharmaceutical products knowing that federal healthcare programs relied on those reported prices to set payment rates. The difference between the resulting inflated government payments and the actual price paid by healthcare providers for a drug is referred to as the spread. Here, the government alleged that Abbott, Roxane, and Braun created artificially inflated spreads to market, promote, and sell their drugs to existing and potential customers. Because payment from the Medicare and Medicaid programs was based on the falsely inflated prices, the government alleged defendants caused false claims to be submitted to federal healthcare programs, and as a result, the government paid millions of claims for far greater amounts than it would have if the prices had been truthfully reported. Under the settlement, Roxane is paying $280 million to resolve allegations against it and related entities that false prices were reported for: Azathioprine, Diclofenac Sodium, Furosemide, Hydromorphone, Ipratropium Bromide, Oramorph SR, Roxanol, Roxicodone, and Sodium Polystyrene Sulfonate. Abbott is paying $126.5 million under the agreement to resolve the claims against it originally brought in two qui tam cases alleging false price reporting of: dextrose solutions, sodium chloride solutions, sterile water, vancomycin, and erythromycin. B. Braun Medical Inc., a U.S. subsidiary of German pharmaceutical company, B. Braun Melsungen AG, will pay $14,744,000 under the agreement to resolve allegations that it caused the Medicaid program to pay inflated amounts for 49 of its drug products, DOJ said. Kos Pharmaceuticals, a subsidiary of Abbott Laboratories, will pay more than $41 million to resolve allegations that it paid illegal kickbacks to medical professionals and promoted the sale of one of its drugs for off-label uses, according to a December 7, 2010 DOJ press release. Kos Pharmaceuticals also entered into a deferred prosecution agreement (DPA) and agreed to the filing of a criminal information in the U.S. District Court for the Middle District of Louisiana charging the company with one count of conspiracy to violate the Anti-Kickback Statute, the release said. The company will pay a $3.36 million criminal fine as a condition of the DPA. According to the release, DOJ agreed to the DPA in part because Kos cooperated in the agency s investigation and implemented certain remedial measures. Under the agreement with the government, Delaware-based Kos Pharmaceuticals will pay over $38 million to resolve two qui tam actions under the False Claims Act alleging it violated the Anti-Kickback Statute by paying kickbacks to physicians, other medical professionals, physician groups, and managed care organizations in exchange for prescribing or recommending its drugs Niaspan and Advicor. The government also contended Kos promoted the sale and use of its drug Advicor for off-label uses. The whistleblowers, former Kos employees, will receive payments totaling more than $6.4 million from the federal share ($33.7 million) of the civil recovery, the release said. The state Medicaid share is $4.45 million. 71

72 Woodhaven Pharmacy Services, Inc. d/b/a Remedi Seniorcare (Remedi), a long term care pharmacy company located in Baltimore, MD, agreed to pay the federal government $1,279,575 to settle claims that it violated the FCA by failing to credit Medicare, Medicaid, and other federal health benefit programs for medications that were dispensed to patients in long term care facilities and then returned and re-dispensed to other nursing homes, announced U.S. Attorney for the District of Maryland Rod J. Rosenstein on December 1, According to the allegations, Remedi submitted false claims to these federal programs over a twoyear period by billing for prescriptions that were returned by assisted living facilities without giving credits to the programs. In addition to the monetary settlement, Remedi agreed to enter into a five-year corporate integrity agreement with the U.S. Department of Health and Human Services Office of the Inspector General. The case was initiated by a whistleblower, who will receive $191,000 of the recovery. St. John s Mercy Health System and St. John s Health System, Inc. (collectively, St. John s) reached a $2.2 million settlement with the federal government to resolve allegations that it improperly billed Medicare for routine foot care provided by clinics at six St. John s hospitals, announced U.S. Attorney for the Eastern District of Missouri Richard G. Callahan on November 30, Under federal regulations, Medicare does not pay for routine foot care services unless certain medical conditions exist. According to the release, over a five-year period, six St. John s hospitals in Missouri St. John s Hospital (Lebanon), St. Francis Hospital (Mountain View) St. John s Regional Health Center (Springfield), St. John s Hospital (Aurora), St. John s Hospital (Cassville), and St. John s Mercy Medical Center (St. Louis) maintained a foot clinic that received Medicare payments for routine toenail trimmings and toenail debridements given to Medicare beneficiaries. The federal government alleged that these services were not medically necessary or covered under Medicare regulations. St. John s closed all of the foot clinics as a result of the investigation and settlement. Irish pharmaceutical manufacturer Elan Corporation, PLC (Elan) and its U.S. subsidiary, Elan Pharmaceuticals, Inc. (EPI) agreed to pay over $203.5 million to resolve criminal and civil liability arising from the illegal promotion of the epilepsy drug Zonegran, DOJ announced December 15, Under the agreement, Elan will plead guilty to misdemeanor misbranding of Zonegran, in violation of the Food, Drug and Cosmetic Act and will pay a criminal fine of $97,050,266. Elan will also forfeit $3.6 million in substituted assets, DOJ said. According to DOJ, Zonegran was only approved by the Food and Drug Administration (FDA) as an adjunctive therapy for the treatment of partial seizures in epilepsy for adults over the age of 16. However, the government alleged that Elan promoted the sale of Zonegran for a wide variety of improper off-label uses, such as psychiatric disorders including mood stabilization for mania and bipolar disorder; migraine headaches; chronic daily headaches; eating disorders; obesity/weight loss; movement disorders (i.e. Parkinson s Disease); monotherapy (not using it in combination therapy but alone); and for a variety of seizures in children under the age of 16. DOJ also said the company paid illegal kickbacks to physicians in an effort to persuade them to prescribe Zonegran for these off-label uses. Under the settlement, a $102,890,517 penalty will resolve civil allegations under the False Claims Act (FCA) that the company illegally promoted Zonegran and caused false claims to be submitted to government healthcare programs for a variety of uses that were not medically accepted indications and therefore not covered by those programs. Elan also agreed to enter into a corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. The case was originally filed by a whistleblower under the qui tam provisions of the FCA. The whistleblower will receive payments totaling more than $10 million from the federal share of the civil recovery, DOJ noted. In a separate civil settlement, 72

73 Japanese drug marketer Eisai, Inc., which purchased the drug and its sales force from Elan in 2004, has already paid $11 million to resolve civil liability for offlabel marketing of Zonegran, DOJ said. Seven hospitals located in Florida, Mississippi, Texas, South Carolina, North Carolina, and Alabama agreed to pay the federal government a total of more than $6.3 million to settle allegations that they submitted false claims to Medicare, DOJ announced January 4, The settling facilities (and their respective share of the settlement payment) include the following: Lakeland Regional Medical Center, Lakeland, FL ($1,660,134.49); The Health Care Authority of Morgan County City of Decatur dba Decatur General Hospital, Decatur, AL ($537,892.88); St. Dominic-Jackson Memorial Hospital, Jackson, MS ($555,949.35); Seton Medical Center, Austin, TX ($1,232,955.91); Greenville Memorial Hospital, Greenville, SC ($1,026,764.01); Presbyterian Orthopaedic Hospital, Charlotte, NC ($637,872.57); and The Health Care Authority of Lauderdale County and the City of Florence, AL, dba the Coffee Health Group, fka Eliza Coffee Memorial Hospital ($676,038.00). The settlements resolve allegations that the hospitals overcharged Medicare between 2000 and 2008 when performing kyphoplasty, a minimallyinvasive procedure used to treat certain spinal fractures that often are due to osteoporosis. In many cases, the procedure can be performed safely as a less costly outpatient procedure, but the government contends that the hospitals performed the procedure on an inpatient basis in order to increase their Medicare billings. The government previously reached settlements with 18 other hospitals for kyphoplasty-related Medicare claims, as well as with Medtronic Spine LLC, corporate successor to Kyphon Inc., which paid $75 million under its settlement. The government alleged that Kyphon Inc/Medtronic Spine LLC defrauded Medicare by counseling hospital providers to perform kyphoplasty procedures as an inpatient procedure. The case was initiated as a qui tam lawsuit by two former Kyphon employees. They will receive $1.1 million as their share of the proceeds from the settlements reached with the hospitals in the aforementioned seven states. John D. Archbold Memorial Hospital Inc. (Archibold Memorial), located in Thomasville, GA, paid the federal government $13.9 million to settle allegations that the hospital submitted false claims to the Medicaid program, announced DOJ, in conjunction with the offices of U.S. Attorney for the Northern District of Georgia Sally Quillian Yates on December 22, The settlement resolves allegations that, over a nearly a six-year period, the hospital made false representations to the Georgia Department of Community Health, the state agency that administers the Medicaid program in Georgia, that it was a public hospital for Medicaid purposes in order to increase the amount of Medicaid funds provided to the hospital. Under Medicaid rules, only public hospitals may participate in the Medicaid Upper Payment Limit (UPL) program. In addition, public hospitals receive additional Disproportionate Share Hospital (DSH) program funds that are not available to private hospitals. Contrary to its representations, however, Archbold Memorial is in fact a private hospital, and therefore, it received millions of dollars in UPL and DSH funds to which it was not entitled, the government alleged. The case was initiated as a qui tam suit brought by Dr. Wesley Simms, who will receive $695,151 as his share of the settlement amount. Detroit Medical Center (DMC), a nonprofit company that owns and operates hospitals and outpatient facilities in Detroit, agreed to pay the federal government $30 million to settle allegations that it violated the False Claims Act, the Anti- Kickback Statute, and the Stark Statute, by engaging in improper financial relationships with referring physicians, announced DOJ, along with U.S. Attorney for the Eastern District of Michigan Barbara L. McQuade, on December 30, DMC is currently in the process of selling its facilities to Vanguard Health Systems 73

74 Inc., a company headquartered in Nashville, Tenn., that owns and operates healthcare facilities in five states. In the process of preparing for the sale, DMC discovered improper financial relationships with a number of physicians, and then disclosed these issues to the federal government, the release said. More specifically, the violations at issue involved restrictions under the Stark Statute and the Anti-Kickback Statute against financial relationships that hospitals may have with physicians who refer patients to them. Most of the relationships at issue in this case involved office lease agreements and independent contractor relationships that were either inconsistent with fair market value or not memorialized in writing, contrary to restrictions set forth in these statutes, the release said. Vanguard also signed the settlement agreement. St. Mary's Medical Center (St. Mary's) agreed to pay the federal government over $3.2 million to resolve claims raised by St. Mary's voluntary disclosure that it improperly billed Medicare, over a six-year period, for one-day inpatient hospital admissions that should have been coded as observations or outpatient visits, announced U.S. Attorney for the Eastern District of Pennsylvania Zane David Memeger on December 28, Although St Mary's had some compliance and auditing procedures in place during the period in question, the federal government found that these procedures did not prevent the improper overbilling from occurring and also did not allow St. Mary's to immediately identify and return the overpayments. Because St. Mary's brought the improper billing to the government's attention through voluntary disclosure, the Office of Inspector General did not require St. Mary's to enter into a Corporate Integrity Agreement. The government indicated that it would, nonetheless, continue to work with St. Mary's to improve the structure of hits compliance program and its self-auditing procedures. Drug manufacturer Actavis Mid-Atlantic, LLC was ordered by a jury to pay $170.3 million to the government and Texas for defrauding Medicaid, Texas Attorney General Greg Abbott announced February 1, The state s action against Actavis stems from a whistleblower lawsuit that was filed by Ven-a-Care alleging that Actavis reported artificially inflated prices to Medicaid for its drugs. Although the AG s Office has investigated multiple fraudulent drug pricing cases and successfully recovered hundreds of millions of dollars through pre-litigation settlements, the case against Actavis is the first to go to trial, Abbott noted. The Medicare Fraud Strike Force charged 111 defendants, including doctors, nurses, healthcare company owners, and executives, for their alleged participation in Medicare fraud schemes involving more than $225 million in false billing, Attorney General Eric Holder, Department of Health and Human Services (HHS) Secretary Kathleen Sebelius, and other federal officials announced February 17, The agencies said the operation was the largest-ever federal health care fraud takedown, with more than 700 law enforcement agents from the Federal Bureau of Investigation (FBI), HHS Office of Inspector General (OIG), multiple Medicaid Fraud Control Units, and other state and local law enforcement agencies participating. The 111 defendants allegedly were involved in various fraud schemes including conspiracy to defraud the Medicare program, criminal false claims, violations of the anti-kickback statutes, money laundering, and aggravated identity theft, according to the agencies press release. According to court documents, the defendants participated in schemes to submit claims to Medicare for treatments that were medically unnecessary and often never provided. In addition, patient recruiters, Medicare beneficiaries, and other coconspirators allegedly were paid cash kickbacks in return for supplying beneficiary information to providers, so that the providers could submit fraudulent billing to Medicare for services that were medically unnecessary or never provided, the release said. Collectively, the doctors, nurses, healthcare company owners, executives, and others charged in the indictments and complaints are accused of conspiring to submit a total of more than $225 million in fraudulent billing. 74

75 Catholic Healthcare West (CHW) agreed to pay the United States $9.1 million to settle allegations that seven of its hospitals submitted false claims in their Medicare cost reports, U.S. Attorney for the Eastern District of California Benjamin B. Wagner announced February 18, The agreement resolves allegations that three CHW hospitals received overpayments due to Medicare processing errors but did not return the funds when they discovered the erroneous payments. Three other hospitals allegedly submitted inflated costs for their home health agencies and were overpaid, Wagner said. The settlement also resolves Medicare overpayment claims against a seventh hospital for claiming entitlement to additional funds for treating a high percentage of patients with end-stage renal disease for several years, including two years for which it was not eligible. CHW did not admit any wrongdoing or liability in agreeing to the settlement. BlueCross BlueShield of Illinois (BCBSIL), a division of Health Care Services Corporation, agreed to pay the federal government and state of Illinois $25 million to settle civil allegations that it wrongly terminated insurance coverage for private duty, skilled nursing care for medically fragile, technologically dependent children to shift them to a Medicaid program that provides home care for children at risk of institutionalization, U.S. Attorney for the Northern District of Illinois Patrick J. Fitzgerald announced February 24, Under the settlement agreement, BCBSIL will pay $14.25 million to the state of Illinois and $9.5 million to the federal government. BCBSIL also will pay the state $1.25 million to settle allegations under the state consumer fraud statute. BCBSIL admitted no liability and agreed to the settlement to avoid the delay, uncertainty, and expense of protracted litigation. AstraZeneca Pharmaceuticals LP agreed to a $68.5 million multi-state settlement to resolve claims that it marketed its anti-psychotic drug Seroquel for unapproved uses. Thirty-seven states and the District of Columbia entered into the settlement, which involves allegations the company promoted Seroquel for unapproved uses, failed to adequately disclose the drug's potential side effects to healthcare providers, and withheld scientific studies that called into question the drug s safety and efficacy, said California Attorney General Kamala D. Harris in a press release, whose state will receive the largest share of the settlement, $5.2 million. According to Harris, the settlement is the largest multi-state settlement with a pharmaceutical company in history. The Food and Drug Administration (FDA) originally approved Seroquel in September 1997 for the treatment of manifestations of psychotic disorders, and later expanded approval for some bipolar disorders in adults. However, according to the states, AstraZeneca promoted Seroquel to psychiatrists and other physicians for certain uses that were not approved by the FDA, including for children and for the treatment of a variety of medical conditions, such as anxiety, depression, post traumatic stress disorder, Alzheimer s disease, and dementia. The states said a three-year investigation by the attorneys general of Florida and Illinois also revealed the company failed to adequately disclose Seroquel s side effects, including weight gain, hyperglycemia, diabetes, and cardiovascular complications. Marc S. Hermelin, former Chief Executive Officer and Chairman of the Board of drug manufacturer KV Pharmaceutical, pled guilty March 10, 2011 to two federal charges of misbranding drugs, Richard G. Callahan, U.S. Attorney for the Eastern District of Missouri, said in a press release. Hermelin was sentenced to one month of imprisonment and a fine of $1 million, in addition to paying the United States $900,000 in forfeiture. According to court documents, KV manufactured a variety of generic prescription drugs under Hermelin s leadership, including morphine sulfate, an analgesic pain relief drug and opiate. During the years 2006 to 2008, Hermelin decided to increase the company s production of drugs on a daily and annual basis, the release said. KV s drug production increased approximately 182% during that time period, from a daily average production of 4.1 million 75

76 doses in 2006 to 10.6 million doses in April During that same time frame, KV s internal manufacturing controls repeatedly discovered oversized and irregular tablets of several different types of drugs, according to the release. KV also received complaints from consumers reporting their receipt of oversized and irregularly shaped drug tablets, according to the release. In the plea agreement, Hermelin admitted that during the summer of 2008, KV shipped two oversized morphine tablets to retailers in San Francisco, CA and Canada. The drugs labeling was false and misleading because it stated that the drugs were of uniform strength when the tablets of the drugs were oversized and contained more of the active ingredient of the drug than what was specified on the labels. Since March 2009, KV has been under a civil consent decree that was filed in federal court regulating the company s ability to manufacture drugs, according to the release. Hermelin previously resigned from KV s Board of Directors after receiving a notice of exclusion from participation in the Medicare and Medicaid programs. The same investigation also resulted in Ethex Corporation, a subsidiary of KV, pleading guilty to two felony counts of failing to file two field alerts with the Food and Drug Administration regarding manufacturing problems related to oversized tablets of propafenone and dextroamphetamine sulfate that failed to meet product specifications, the release noted. Drug makers Alpharma USPD, Inc. and Purepac Pharmaceutical Co. agreed to a $10.2 million settlement with Kentucky resolving allegations that the companies reported inflated average wholesale prices (AWPs) for their drugs. The Kentucky Medicaid program relies on AWPs to calculate Medicaid drug reimbursement rates, state Attorney General Jack Conway said in a statement. The inflated prices allegedly reported by the pharmaceutical companies created an artificial "spread" between the inflated published prices and the real prices, some of which exceeded 3,200%, Conway said. A settlement is not an admission of liability in a civil case, Conway noted. Alpharma and Purepac were both purchased by the global pharmaceutical company Actavis in Rex Healthcare, a 655-bed hospital in Raleigh, N.C., agreed to pay the federal government $1.9 million, plus interest, to settle allegations that it submitted false claims to Medicare over a three-year period, DOJ, HHS, and U.S. Attorney for the Eastern District of North Carolina George E.B. Holding announced April 4, According to the release, the government alleged that the hospital routinely submitted claims to Medicare for kyphoplasty procedures and a variety of other minimally invasive procedures, but then classified these services as inpatient admissions in order to increase its reimbursement from Medicare. The government alleged that this billing practice was done on a frequent basis, despite the absence of medical necessity justifying the more expensive inpatient admissions. The case was initiated as a qui tam action under the False Claims Act, and was brought in federal district court in Buffalo, N.Y., by two former Kyphon employees. These whistleblowers will receive a total of approximately $80,000 as their share of the settlement proceeds for those claims related to kyphoplasty. Johnson & Johnson agreed April 8, 2011 to a $70 million global settlement with DOJ and the Securities and Exchange Commission (SEC) resolving alleged violations of the Foreign Corrupt Practices Act (FCPA). According to DOJ, which collected a $21.4 million criminal penalty as part of a deferred prosecution agreement, J&J subsidiaries were alleged to have made improper payments in connection with the sale of medical devices to government officials in Greece, Poland, and Romania in violation of the FCPA. Today, Johnson & Johnson has admitted that its subsidiaries, employees and agents paid bribes to publiclyemployed health care providers in Greece, Poland and Romania, and that kickbacks were paid on behalf of Johnson & Johnson subsidiary companies to the 76

77 former government of Iraq under the United Nations Oil for Food program, Principal Deputy Assistant Attorney General Mythili Raman of DOJ s Criminal Division said in a statement. However, Raman added that J&J has also cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry. Due to J&J s pre-existing compliance and ethics programs, extensive remediation, and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, J&J was not required to retain a corporate monitor, DOJ noted, but it must report to the agency on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement. Rikco International, doing business as Dr. Comfort in Mequon, WI, as well as the company s former Chief Executive Officer, Rickey Kantor, has agreed to a $27 million civil settlement resolving allegations of Medicare fraud, announced U.S. Attorney for the Eastern District of Wisconsin James L. Santelle on April 11, The investigation in this case focused on the selling of shoe inserts for diabetic patients by Dr. Comfort that allegedly were falsely represented and marketed by the company as conforming to Medicare s requirements for those products. However, according to the allegations, these inserts actually failed to conform to Medicare s requirements. Pursuant to a plea agreement, Kantor has agreed to plead guilty to mail fraud, and the federal government has recommended a sentence of 18 months imprisonment. The civil settlement was initiated via two separate qui tam lawsuits. The two whistleblowers are both former Dr. Comfort employees and will receive payments totaling more than $4.8 million from the civil recovery. CVS Pharmacy Inc. has agreed to a $17.5 million settlement with DOJ and 10 states to resolve False Claims Act (FCA) allegations, DOJ announced April 15, DOJ had alleged that CVS submitted inflated prescription claims to the government by billing the Medicaid programs in Alabama, California, Florida, Indiana, Massachusetts, Michigan, Minnesota, New Hampshire, Nevada, and Rhode Island for more than what CVS was owed for prescription drugs dispensed to Medicaid beneficiaries who were also eligible for benefits under a primary third party insurance plan (excluding Medicare as the primary payor). According to DOJ, rather than billing the government for what the insured would have been obligated to pay had the claims been submitted solely to the third party insurer (typically the co-pay), CVS billed and was paid a higher amount by Medicaid. Whistleblower Stephani LeFlore, a CVS pharmacist in St. Paul, MN, will receive a total of $2,595,460, DOJ noted. Of the total settlement, DOJ will receive $7,993, and the states will receive $9,506, plus interest. Dublin, OH-based pharmaceutical distributor Cardinal Health Inc. will pay the federal government $8 million to resolve claims that it violated the False Claims Act by making payments to induce referral orders for its prescription drugs in violation of the Anti-Kickback Statute, the Justice Department announced April 21, The settlement arose from a whistleblower lawsuit filed by a former pharmacy owner R. Daniel Saleaumua and pharmacy consultant Kevin Rinne, alleging that Cardinal paid Saleaumua $440,000 in exchange for an agreement that he purchase prescription drugs from Cardinal for his pharmacies, the release said. Saleaumua and Rinne will receive $760,000 as their relators share of the recovery. Pharmaceutical manufacturers Serono Laboratories Inc., EMD Serono Inc., Merck Serono S.A, and Ares Trading S.A. (Serono) will pay $44.3 million to resolve False Claims Act allegations of improperly paying healthcare providers to promote or prescribe the multiple sclerosis drug Rebif, the Department of Justice announced 77

78 May 4, Under the settlement agreement, the proceeds will be split between the federal government ($34.6 million) and the states ($9.7 million). Serono admitted no liability in agreeing to the settlement. DOJ said the settlement resolves allegations that, from roughly January 2002 through December 2009, Serono paid healthcare providers for hundreds of speaker training meetings and programs, and for attending consultant, marketing, and advisory board meetings at upscale resorts and other locations. According to the government, Serono s actions allegedly resulted in the submission of false claims to federal healthcare programs for the payment of Rebif, i.e., claims that were tainted by kickbacks. The settlement also extends for three years Serono s existing corporate integrity agreement and adds enhanced provisions such as specifically requiring that company directors and senior executives take responsibility for ensuring and monitoring compliance with federal law, said Daniel R. Levinson, Inspector General of the Department of Health and Human Services. If we can alter the cost-benefit calculus of some directors and executives, OIG can influence corporate behavior without putting access to government health care benefits at risk, he added. The Departments of Justice (DOJ) and Health and Human Services (HHS) announced May 3, 2011 that two Miami-based companies, American Therapeutic Corporation (ATC) and Medlink Professional Management Group Inc., pled guilty to a massive Medicare fraud scheme that resulted in the submission of $200 million in claims to the program for medically unnecessary services. A superseding indictment unsealed in February charged ATC and Medlink with conspiracy to commit healthcare fraud. ATC also was charged with healthcare fraud and conspiracy to defraud the federal government and to pay and receive illegal kickbacks. ATC operated purported partial hospitalization programs (PHPs), a form of intensive treatment for severe mental illness, in seven different locations in the state. Medlink purported to act as a management company for healthcare businesses, but, in reality, its only clients were ATC and a related company, the American Sleep Institute (ASI), according to DOJ s press release. ATC s president Marianella Valera and Medlink s president Lawrence S. Duran entered the guilty pleas on behalf of the two corporations before a federal magistrate in Miami. Valera and Duran each pleaded guilty in April 2010 to all counts charged against them individually for their roles in the alleged scheme, including conspiracy to commit healthcare fraud, healthcare fraud, conspiracy to pay and receive illegal healthcare kickbacks, conspiracy to commit money laundering, money laundering and structuring to avoid reporting requirements, DOJ said. As part of the guilty plea, the companies admitted to executing a scheme to defraud Medicare beginning in 2002 until October According to the superseding indictment, Duran, Valera, and others caused the alteration of patient files and therapist notes and instructed employees and physicians to alter diagnoses and medication types and levels to make it falsely appear ATC patients qualified for PHP services. According to court filings, Duran, Valera, and others paid kickbacks to owners and operators of assisted living facilities and halfway houses and to patient brokers in exchange for delivering ineligible patients to ATC and ASI so the companies could bill Medicare for medically unnecessary services, DOJ said. Court documents also indicated the conspirators used Medlink to conceal the healthcare fraud and kickbacks and launder the proceeds of the illegal activities, the release said. The now defunct corporations are scheduled for sentencing on July 13, The companies, whose assets were frozen in October 2010, face maximum financial penalties of more than $80 million, the amount Medicare paid by as a result of the scheme. 78

79 Criminal Law Fifth Circuit Says District Court Failed To Find Requisite Willfulness Before Applying Obstruction Enhancement To DME Owner s Sentence The Fifth Circuit affirmed May 12, 2010 a district court s imposition of a sentencing enhancement for abuse of a position of trust on the owner of a durable medical equipment (DME) company who pled guilty to healthcare fraud charges, but concluded the findings were insufficient to support an enhancement for obstruction of justice. The appeals court remanded for resentencing, or further development of the record if necessary on the issue of whether defendant willfully obstructed justice when she failed to disclose certain financial information. Brenda Davis Miller, who owned AA Better Medical Supply in Houston, TX, pled guilty to one count of conspiracy to commit healthcare fraud and one count of conducting a financial transaction with criminally derived property valued at over $10,000. Miller admitted to submitting false and fraudulent claims to Medicare and Medicaid for power wheelchairs and scooters that were either never supplied or more costly than the equipment actually delivered to beneficiaries. As part of the scheme, according to the opinion, physician Dr. Walter Long provided preauthorized certifications of medical necessity (CMN), which Miller or her employees filled in with information from Medicare and Medicaid patients, none of whom had an actual certified need for a wheelchair or scooter. The district court sentenced Miller to 97 months imprisonment after applying enhancements for her role as an organizer or leader of criminal activity, abuse of a position of trust, and obstruction of justice. The district court also granted a two-level downward adjustment for acceptance of responsibility. The district court ordered Miller to pay $1.18 million in restitution. Miller argued on appeal that the district court erred in applying the enhancements for abuse of a position of trust and obstruction of justice. The Fifth Circuit affirmed as to the abuse of a position of trust enhancement, but vacated the district court s application of the obstruction of justice enhancement. The appeals court applied a two-part test to determine whether the district court correctly applied the abuse of a position of trust enhancement: (1) whether the defendant occupies a position of trust and (2) whether the defendant abused her position in a manner that significantly facilitated the commission or concealment of the offense. As to the first issue, Miller argued she was merely a vendor in an arm s length commercial relationship with the government and it was instead the physician, who participated in the scheme by signing the CMNs, who was in the position of trust. Rejecting this argument, the appeals court noted that under the scheme, Miller assumed the position of the certifying physician by knowingly completing CMNs for patients who lacked a legitimate need for the equipment. 79

80 Moreover, as the owner of AA Better Medical Supply, Miller exercised substantial managerial discretion, which the [sentencing] guidelines recognize as an independent basis for occupying a position of trust. As to the second element of the enhancement, Miller offered no argument that her position did not facilitate the commission of the offense; nor could she, since it was her position as the owner of a DME provider that enabled her to defraud the government insurance programs with such ease, the appeals court observed. On the obstruction of justice enhancement, however, the appeals court said the district court made no explicit finding that Miller willfully omitted two pieces of information from her personal financial statement as part of the presentence investigation. While the district court concluded Miller provided some incorrect information, this finding did not mean Miller knew the correct information and intentionally withheld it in attempt to frustrate the investigation. Therefore, the Fifth Circuit vacated the enhancement and remanded for resentencing or, in the district court s discretion, further development of the record on the willfulness issue. United States v. Miller, No (5th Cir. May 12, 2010). Eighth Circuit Upholds Conviction, Sentence Of Individual For Defrauding Long Term Care Insurer The Eighth Circuit affirmed June 4, 2010 the conviction of an individual on three counts of mail fraud for misrepresenting to a long term care insurer that his mother was receiving care from a qualified home healthcare provider. The appeals court held the identity of the caregiver was a material misrepresentation even if the mother was otherwise eligible for benefits under the policy, which specified that reimbursement was only for services provided by a licensed nurse, a certified nurse s aide, or a qualified home care provider. The appeals court also affirmed the district court s sentence and restitution order, finding no procedural or substantive error. In January 2005, Eleanor J. Bryant was diagnosed with Alzheimer s disease and became eligible for benefits totaling $70 per day under her long term care insurance policy, which was issued and administered by John Hancock Life Insurance Company. Weldon Bryant hired a certified nurse s assistant, Jesse White, to provide home healthcare for his mother and began submitting Custodial Nursing Care Questionnaire (CNCQ) forms to John Hancock, which were required to obtain reimbursement under the policy. In October 2005, White stopped providing home healthcare services for Eleanor, but Weldon later convinced him to sign a number of blank CNCQ forms by claiming some of the earlier forms had been lost, according to the opinion. Weldon then proceeded to fill out the forms and mail them to John Hancock for reimbursement in connection with his mother's care. Following an investigation by John Hancock, Weldon was indicted and later convicted on three counts of mail fraud. 80

81 At sentencing, the district court applied a four-level enhancement for causing a loss in excess of $10,000 and, with a criminal history category of III based on Weldon s 2004 Missouri drug conviction, imposed 18 months imprisonment to run consecutive to his three-year state sentence for possession of a controlled substance. Weldon had received a suspended sentence for the drug conviction, but his probation was revoked when he committed the instant offense, triggering the three-year prison sentence. The court also ordered Weldon to pay John Hancock restitution of $24,444. The appeals court upheld the conviction, rejecting Weldon s argument that the identity of the caregiver was not a material term to receiving reimbursement under the long term care insurance policy and therefore could not serve as a basis for the mail fraud charges. John Hancock, influenced by Weldon s false claims of care, relied on Weldon s misrepresentations to send Weldon reimbursement checks for care John Hancock believed was being provided, although John Hancock was only obligated to reimburse the actual charges Ms. Bryant incurred for care provided by qualifying providers, the appeals court said. The appeals court also upheld Weldon s sentence, finding no significant procedural or substantive errors. Finally, the appeals court rejected Weldon s argument that part of the restitution award should be paid to his mother s estate because she would now qualify for fewer benefits as a result of his fraud. [I]f the restitution was paid to Ms. Bryant s estate, Weldon could inappropriately benefit as a potential beneficiary of his mother s estate. This would defeat the purpose of the MVRA [Mandatory Victim Rights Act], which is to restore the injured party, not to benefit the wrongdoer, the appeals court observed. United States v. Bryant, No (8th Cir. June 4, 2010). Tenth Circuit Affirms Conviction Of Physician For Illegally Dispensing Controlled Substances, Healthcare Fraud The Tenth Circuit affirmed June 29, 2010 the convictions of a physician on 51 counts of knowingly and intentionally dispensing a controlled substance outside the usual course of professional medical practice without a legitimate medical purpose, one count of healthcare fraud, and one count of altering records in a federal investigation. Can D. Phung, M.D. argued on appeal that the evidence at trial was insufficient to support his convictions, and instead established nothing more than poor recordkeeping and isolated mistakes in good faith. The appeals court disagreed. As to the convictions regarding the unlawful distribution of controlled substances in violation of 21 U.S.C. 841(a)(1), the appeals court noted testimony from a number of Phung s patients about how they obtained large quantities of narcotic painkillers and other controlled substances following little or no examination. In addition, two medical experts testified that Phung s conduct fell outside the usual course of medical practice. This evidence was sufficient to support Phung s convictions, the appeals court held. 81

82 The appeals court also found the evidence supported his healthcare fraud conviction under 18 U.S.C. 1347(1). Phung argued that although he submitted improper billing codes that resulted in higher Medicaid payments than he was otherwise entitled to, the evidence only showed that he misunderstood the Medicaid billing system. But the appeals court said evidence the government presented demonstrated that Phung routinely submitted claim forms to Medicaid with billing codes indicating visits from new patients, lengthy examinations, and medical decisionmaking of moderate to high complexity for brief visits from existing patients that involved simple medical analyses. A Medicaid billing expert also testified that a doctor who had been practicing as long as Phung would be familiar with the appropriate billing codes. Thus, the jury acted reasonably in rejecting his version of events and concluding he knowingly and willfully entered higher billing codes as part of a scheme to defraud Medicaid. The appeals court also said the evidence was sufficient to convict Phung for altering records in a federal investigation, noting testimony that patient records obtained by the state differed from those later subpoenaed by the Department of Health and Human Services, which included substantial additional information indicating Phung had conducted more detailed examinations than initially recorded. Finally, the appeals court rejected Phung s claims of evidentiary error and challenge to the lower court s refusal to admit medical records of other doctors who treated his patients. United States v. Phung, No (10th Cir. June 29, 2010). Eleventh Circuit Affirms Nine-Month Prison Sentence For Healthcare Fraud The Eleventh Circuit affirmed July 15, 2010 the nine-month prison sentence of a defendant for healthcare fraud offenses. The plaintiff challenged two aspects of the lower court s loss calculation in regard to her sentencing. But the appeals court found that if any errors occurred, they were harmless because the lower court indicated its sentence would have been the same regardless of its loss calculation. Bonnie Faye Webb pled guilty to one count of conspiracy to commit healthcare fraud and five counts related to the illegal dispensing of prescription drugs. She was sentenced to nine months in prison. Webb appealed challenging on two grounds the district court s calculation of the loss amount used to determine her total offense level. Webb argued the district court erred by calculating intended loss with reference to the total amount fraudulently billed to benefits programs and that the district court erred by failing to reduce the loss amount by the value of the services rendered to patients. Under the sentencing guidelines, the amount of loss is the greater of actual loss or intended loss, the appeals court noted. 82

83 The appeals court explained that the district court estimated intended loss based on the amount billed to patients benefits programs. Webb argued, however, that her clinic did not intend or expect to collect more than what the health benefits programs actually paid following submission of fraudulent claims. Given the evidence presented by Webb, the district court s use of the billed amount to calculate loss might constitute erroneous speculation, the appeals court said. However, the appeals court held, even if we assume, arguendo, that the court erred by concluding that the intended amount of loss was the total amount billed by the clinic, any such error was harmless because the lower court indicated that Webb s sentence would have been the same regardless of its loss amount rulings. The appeals court next turned to Webb s argument that the lower court erred by not reducing the loss amount by the value of the services rendered to patients. The appeals court likewise found that if any error occurred, such error was harmless because the district court indicated it would have imposed the same sentence regardless of its loss amount decisions. United States v. Webb, No (11th Cir. July 15, 2010). Sixth Circuit Vacates Physician s Sentence For Healthcare Fraud Finding Lower Court Erred In Applying Vulnerable-Victim Enhancement A lower court erred in applying a vulnerable-victim sentencing enhancement to a physician s healthcare fraud sentence based solely on the physician-patient relationship, the Sixth Circuit found in an unpublished August 16, 2010 opinion. Instead, for such an enhancement to apply, the court must find that the victim-patient was more vulnerable to the crime than the average patient upon whom the doctor could prey, the appeals court explained. Accordingly, the appeals court vacated the sentence imposed by the lower court and remanded for resentencing. The Sixth Circuit did reject, however, the physician s other basis for appeal in finding that the lower court did not err in admitting certain correspondence and audit notifications from insurers. Dr. Robert W. Stokes was a licensed, board-certified dermatologist when an investigation into Stokes billing practices determined that he was up-coding certain outpatient surgical procedures. Based on the results of this investigation, a federal grand jury returned an indictment charging Stokes with multiple counts of healthcare fraud. After a trial, Stokes was convicted of 31 counts of healthcare fraud, and sentenced to 126 months of imprisonment. During the trial, the government presented certain correspondence and audit notifications (audit evidence) to show Stokes knowledge of relevant billing rules and specific intent to defraud. 83

84 Stokes appealed, arguing the district court erroneously admitted the audit evidence and erred in applying the Sentencing Guidelines 250-victim and vulnerable-victim enhancements to his sentence. The appeals court first rejected Stokes argument that the audit evidence was inadmissible hearsay. Noting that an out-of-court statement is not hearsay if it is offered only to show that a party had knowledge of its contents, the appeals court found that the audit evidence fell into this category. Contrary to appellant s argument, the jury did not need to accept the truth of the auditors assertions to conclude that Stokes had relevant knowledge, the appeals court said. [T]he jury could have concluded that Stokes, having read the auditors statements, was aware of questions concerning his billing practices and had received guidance that contradicted his current methodology, the appeals court continued. Turning next to Stokes sentence, the appeals court reviewed the district court s application of the 250-victim enhancement under the Sentencing Guidelines. Stokes argued it was improper for the district court to count his patients among his victims, as the only victims of healthcare fraud are healthcare benefit programs. The appeals court observed that the Guidelines define victim to include any person who sustained any part of the reasonably foreseeable pecuniary harm that results from the offense. The district court concluded that the definition was broad enough to include patients who pay excessive copays and fees as a result of healthcare fraud, and the appeals court agreed. The appeals court rejected Stokes argument that a de minimis exception should be applied because of the negligible pecuniary harm suffered by the patients. No dollar minimum applies the 250-victim enhancement concerns itself entirely with the number of individuals victimized, not with the degree to which each victim suffered harm, the appeals court explained. To the extent that the resulting enhancement overstates the seriousness of the offense, the Guidelines address the problem not by creating a de minimis exception, but by authorizing the district court to depart downward, which the court did, the appeals court said. To the extent that Stokes demonstrated such willingness to harm a large number of his patients, a six-level enhancement and, by implication, the four-level enhancement actually imposed by the court was proportionate to the wrong done, the appeals court concluded. Stokes next argued, and the appeals court agreed, that the court should not have applied the vulnerable-victim enhancement. According to the appeals court, the district court s conclusion that Stokes patients were vulnerable victims because the nature of the doctor-patient relationship rendered them particularly susceptible to fraud was clearly erroneous. 84

85 The traditional doctor-patient relationship, on its own, provides an insufficient basis for applying the vulnerable-victim enhancement, the appeals court held. Instead, for the enhancement to apply, the district court must find that the victim-patient was more vulnerable to the crime than the average patient upon whom the doctor could prey, the appeals court said. Accordingly, the appeals court vacated Stokes sentence and remanded to the district court for resentencing. United States v. Stokes, No (6th Cir. Aug. 16, 2010). Sixth Circuit Upholds Clinic Owner s Conviction For Money Laundering In Medicare Fraud Scheme The Sixth Circuit upheld August 26, 2010 a jury verdict convicting a physical therapy clinic owner of money laundering and conspiracy to commit money laundering in relation to his involvement in a scheme to unlawfully bill Medicare for in-home physical therapy services performed by unlicensed technicians without the direct physician supervision required for reimbursement. Affirming a lower court decision denying the defendant s motion for judgment of acquittal, or in the alternative, for a new trial, the appeals court found a reasonable juror could conclude defendant knew the two clinics at issue in the case were committing Medicare fraud. Defendant Robert Prince, III and several family members were charged with various fraud and money laundering offenses arising out of the operation of two physical therapy clinics Brittsen Rehabilitation, Inc. and Tender Loving Rehabilitation, Inc. located in Memphis, TN. According to the indictment, the two named companies billed for in-home physical therapy services performed by unlicensed physical therapy technicians without direct over-the-shoulder physician supervision that was required for reimbursement under Medicare Part B. The indictment alleged Brittsen received $2.9 million and TLR received $600,000 in payments from Medicare on fraudulent claims for physical therapy services. A jury acquitted Prince of the fraud charges, but found him guilty of conspiracy to commit money laundering, 38 counts of money laundering, and criminal forfeiture. Prince filed a consolidated motion for judgment of acquittal, or in the alternative, for a new trial. Prince argued that, pursuant to Fed. R. Crim. P. 29(c), the jury s verdict should be set aside because the government s evidence presented at trial was insufficient to sustain his conviction. The district court denied the motion and sentenced defendant to a 63-month prison term and ordered him to pay $420,000 in restitution. On appeal, Prince disputed the evidence was sufficient to establish that healthcare fraud was in fact occurring at Brittsen and TLR, or that the financial transactions at issue actually involved the proceeds of that fraud. 85

86 According to Prince, the evidence was not sufficient to establish that he knew that healthcare fraud was being committed or that he knowingly joined in the money laundering conspiracy or engaged in the specific financial transactions knowing they involved proceeds of the fraud. The Sixth Circuit disagreed, finding ample evidence that Brittsen and TLR were engaged in Medicare fraud in the delivery of and payment for physical therapy services. Moreover, while Prince, who served as the clinics bookkeeper, was not directly involved in the provision of physical therapy services, or the actual submission of Medicare claims, there was sufficient evidence he knew that Brittsen and TLR were committing Medicare fraud. The strongest evidence, although circumstantial, is defendant s participation as a principal or bookkeeper in the successive and overlapping physical therapy businesses that had roughly the same operational structure and utilized uneven ratios of doctors to technicians, which would not allow for direct physician supervision, the appeals court observed. According to the appeals court, defendant knew by September 1999 that Medicare had suspended payment where the same structure was used because of the direct supervision issue. After rejecting his remaining claims of error, the appeals court affirmed his conviction. United States v. Prince, No (6th Cir. Aug. 26, 2010). U.S. Court In West Virginia Upholds Physician s Exclusion From Federal Healthcare Programs The U.S. District Court for the Southern District of West Virginia dismissed September 15, 2010 a physician s appeal of his exclusion from federal healthcare programs after he pled guilty to one count of fraud for acquiring a controlled substance for his personal use. In so holding, the court rejected the physician s argument that under the relevant statute, he may not be excluded unless he received a pecuniary gain from his misconduct. A federal grand jury indicted plaintiff physician Breton Lee Morgan on 29 counts relating to fraudulent actions he conducted within the scope of his medical practice. Morgan pled guilty to one count of violating 21 U.S.C. 843(a)(3), which provides that it is unlawful for any person knowingly or intentionally... to acquire or obtain possession of a controlled substance by misrepresentation, fraud, forgery, deception, or subterfuge. According to the government, plaintiff obtained free samples of hydrocodone from pharmaceutical representatives for his personal use by misleading them to believe that the samples would be given to his patients for medical purposes. Plaintiff was sentenced to 30 days in prison and three months of supervised release and was excluded from participating in federal healthcare programs for five years under Section 1128(a)(3) of the Social Security Act. Plaintiff appealed his exclusion to an administrative law judge (ALJ) who found the exclusion reasonable. The Departmental Appeals Board affirmed, and plaintiff appealed. 86

87 Section 1128(a)(3) states that an individual must be excluded from participation in federal healthcare programs if they have been convicted of an offense under Federal or State law, in connection with the delivery of a healthcare item or service or with respect to any act or omission in a health care program (other than those specifically described in paragraph (1)) operated by or financed in whole or in part by any Federal, State, or local government agency, of a criminal offense consisting of a felony relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct. (Emphasis added). Plaintiff argued the phrase other financial misconduct modifies the preceding four alternative listed offenses of fraud, theft, embezzlement, and breach of fiduciary responsibility therefore mandating an independent and additional requirement that the felony implicating the statute include an underlying showing that the individual obtained some type of illicit pecuniary benefit in completing the crime. According to plaintiff, he was not guilty of financial misconduct in carrying out his offense. The court, applying a Chevron analysis, disagreed. Section 1128(a)(3) is clear that the Secretary must exclude individuals convicted of certain criminal offenses relating to fraud in connection with the delivery of federally-sponsored health care benefits, the court found. The court rejected plaintiff s argument that the term other financial misconduct modifies the preceding offenses. [T]his Court reads it to be an independent catchall phrase creating five separate and independent categories of offenses implicating the Secretary s mandatory exclusion responsibilities under section 1128(a)(3), the court said. The court further noted that its reading of the statute is consistent with its policy and purpose and said plaintiff s reading of the statute would limit the deterrent effect intended by Congress. Morgan v. Sebelius, No. 3: (S.D.W.V. Sept. 15, 2010). Eleventh Circuit Affirms Convictions, Sentence Of Medical Company Owner Involving Medicare Fraud The Eleventh Circuit affirmed October 7, 2010 in an unpublished opinion the convictions and 140-month prison sentence of one of the owners of a medical company that defrauded Medicare by accepting payments without providing any actual healthcare products or services. A jury convicted Jimmy A. Soto, part owner of Med-Pro Miami, of one count of conspiracy to commit healthcare fraud and seven counts of healthcare fraud in violation of 18 U.S.C and 1349 and one count of conspiracy to commit money laundering and four counts of money laundering in violation of 18 U.S.C. 1915(a)(1)(B)(i) and (h). Soto challenged his convictions on several grounds, alleging among other things that the government failed to present sufficient evidence that he came to an agreement with at least one of the other alleged co-conspirators to commit an illegal act. According to Soto, his mere presence and participation in various meetings and telephone conversations was insufficient, even if he knew of the criminal conduct. 87

88 But the appeals court disagreed, finding overwhelming evidence that Soto knew of the fraudulent claims and was a co-conspirator in the Medicare fraud scheme, for which the program paid Med-Pro roughly $1.35 million of the $5.4 million it submitted in false claims for medical equipment and services never ordered or provided. The appeals court also rejected Soto s challenge to various evidentiary rulings made by the trial court and his argument that the prosecutor improperly shifted the burden of proof to him during its closing argument to the jury. Reviewing Soto s 140-month prison sentence under an abuse of discretion standard, the appeals court found the district court s ruling both procedurally sound and substantively reasonable. Soto contended the district court erred in calculating the loss amount at $4.3 million, rather than the actual loss amount of $1.3 million. The appeals court noted that under the U.S. Sentencing Guidelines, the proper loss amount is the greater of actual loss or intended loss. [A]s a member of the conspiracy he was responsible for Med-Pro s reasonably foreseeable actions taken in furtherance of the conspiracy and the larger intended loss amount of $4.3 million, the appeals court said. The appeals court also rejected Soto s argument that the trial court improperly applied a two-level enhancement for use of sophisticated means, saying the scheme itself was not complex or intricate. According to the appeals court, evidence presented at trial showed Soto tried to conceal his involvement in the scheme by appointing a nominee owner of Med-Pro and recruiting several individuals to cash Med-Pro checks. Soto also argued the court erred by applying a three-level increase for being a manager or supervisor and he should instead have been granted a minor role reduction. Again, the appeals court found the evidence sufficient to support the enhancement. Finally, the appeals court held the sentence was not substantively unreasonable, finding it fell within the Guidelines sentencing range and the fact that Soto's prison term was substantially longer than his co-conspirators did not amount to any unwarranted sentencing disparity. Because he is not similarly situated to the other conspirators or defendants in other health care fraud cases, he cannot establish any unwarranted sentencing disparity, the appeals court said. United States v. Soto, No (11th Cir. Oct. 7, 2010). Fifth Circuit Upholds Loss Calculation Based On Amount Falsely Billed To Medicare The Fifth Circuit upheld October 20, 2010 in an unpublished opinion a district court s loss calculation in imposing a 73-month prison sentence on a healthcare provider, finding no clear error in the determination that the amount of intended loss was the amount falsely billed to Medicare rather than the amount actually reimbursed. 88

89 A jury convicted Allan K. Hearne of one count of conspiracy to defraud Medicare by obtaining the payment of false claims, four counts of healthcare fraud, one count of falsifying documents with the intent of impeding or obstructing a federal investigation, and one count of making a false statement to the Social Security Administration. The district court sentenced Hearne to 73 months of imprisonment and three years of supervised release. Hearne appealed his conviction, arguing the government failed to timely produce the grand jury testimony of one of its witnesses, and sentence, asserting the district court erred in its loss calculation. The appeals court upheld the conviction, finding the government s failure to turn over the grand jury transcript was harmless error. As to the loss calculation, the Fifth Circuit found no clear error in the district court s determination that the intended loss was the total amount of the claims Hearne falsely filed with Medicare, rather than the amount he was actually reimbursed. Hearne argued that, as a highly educated health care provider, he understood Medicare reimbursement procedures and knew the program would not reimburse him for the amount billed, but rather would reimburse him only a fixed rate. The appeals court noted evidence that Hearne lacked knowledge of Medicare billing procedures and therefore did not understand the amounts that Medicare likely would pay. While Hearne at sentencing showed some knowledge of the difference between the amounts he would bill to Medicare and the amounts that Medicare would pay, the district court found this self-serving testimony not to be credible, the appeals court observed. In the district court s view, Hearne was not focused on the mechanics of the program, but on maximizing the number of claims for which he billed. Thus, even if he has some notion about caps and understood that full reimbursement was unlikely or impossible, the defendant still submitted claims with the intent that they would be paid, the district court concluded. The appeals court found this factual finding supported by substantial evidence. Thus, the appeals court held there was no clear error in the district court s determination that the amount of intended loss was the amount Hearne falsely billed to Medicare. United States v. Hearne, No (5th Cir. Oct. 20, 2010). The following is an excerpt from an article written by Francis J. Serbaroli, Greenberg Traurig, LLP Court Upholds Medicare Exclusion Of Drug Company Lawyer And Executives A recent decision by a federal district court in Washington, D.C. offers a stark warning about how far the federal government is prepared to go to hold corporate executives including in-house lawyers individually accountable for corporate wrongdoing. The case involved the government s successful use of the so-called responsible corporate officer doctrine not only to obtain criminal convictions, but also to exclude the convicted executives from Medicare, Medicaid, and other government health benefit programs, thereby barring them from most employment opportunities in the healthcare industry. 89

90 Investigation And Convictions The case stems from the government s investigation into the Purdue Frederick Company s marketing of its prescription pain medication Oxycontin. Purdue Frederick is a subsidiary of drug giant Purdue Pharma. Oxycontin is a Schedule II controlled substance that is a controlled-release form of Oxycodone. Physicians prescribe it to treat moderate to severe pain when a patient requires a continuous round-the-clock painkiller. The extended use of Oxycontin can lead to severe psychological and/or physical dependence. In 2001, the U.S. Attorney for the Western District of Virginia began investigating Purdue s marketing of Oxycontin, and over the next several years, accumulated substantial evidence that the company had illegally marketed the drug as less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medication. Purdue had no clinical studies backing up these claims, and provided no evidence supporting these claims to the Food and Drug Administration (FDA) when it submitted Oxycontin for FDA approval. In 2007, the government brought criminal charges against Purdue Frederick, Purdue Pharma, and three senior executives: Michael Friedman, the company s president and chief executive officer, Dr. Paul D. Goldenheim, its executive vice president of medical and scientific affairs, and Howard R. Udell, its executive vice president and chief legal officer. Purdue Frederick was charged under the Food, Drug and Cosmetic Act (FDCA) with felony misbranding of a drug with intent to defraud or mislead, while the three executives were charged as responsible corporate officers with misdemeanor drug misbranding. During the time period involved, Purdue had received approximately $2.8 billion in Oxycontin revenue. The Purdue Frederick company and the three executives entered into a global settlement in which they all pleaded guilty to the charges. Purdue Frederick and its parent paid a total of $600 million in monetary sanctions. Although their conviction could have resulted in a sentence of up to a year in prison, the corporate executives and general counsel were each sentenced to three years probation, 400 hours of community service, and a $5,000 fine. They were also required to disgorge a significant portion of the compensation they were paid during the period involved: Mr. Friedman paid $19 million, Mr. Udell $8 million, and Dr. Goldenheim $7.5 million, all of which went to Virginia s Medicaid Fraud Control Unit. As part of the settlement, each of the three executives submitted an Agreed Statement of Facts (ASF) containing the legal basis for their guilty pleas. In their ASFs, each executive acknowledged that the company s supervisors and employees did in fact misrepresent Oxycontin s addictiveness and abuse potential. While the ASF specified that none of the three executives had personal knowledge of the wrongdoing, it did acknowledge that they were responsible corporate officers with responsibility and authority either to prevent in the first instance or to promptly correct certain conduct resulting in the misbranding of Oxycontin. Exclusion After the conclusion of the criminal case, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) then moved to exclude all three executives from participation in Medicare, Medicaid, and other federal healthcare programs under the permissive and mandatory exclusion provisions of 42 U.S.C. 1320a-7(b), based upon their criminal convictions. The executives contested the exclusion but in March of 2008, the OIG issued formal notices of exclusion for all three 90

91 executives for a period of 20 years, instead of the usual three years. The OIG increased the discretionary exclusion period based upon the fact that the corporate wrongdoing: was committed over more than one year; had a significant adverse financial impact upon program beneficiaries; and had a significant adverse physical or mental impact on program beneficiaries or others. The three executives appealed their exclusion to an HHS Administrative Law Judge (ALJ). During the appeal, the OIG considered mitigating evidence that the three had cooperated with federal and state law enforcement officials in the course of the investigation, and the OIG issued revised notices reducing the exclusion period from 20 to 15 years. The 15- year exclusion was upheld by the ALJ. They then appealed to HHS Departmental Appeals Board, which reduced the exclusion period to 12 years but upheld the exclusions, finding that the three executives had, but failed to exercise, the duty and responsibility, and the power and authority, to learn about and curtail the fraudulent activities of Purdue employees. Court Upholds Exclusion The three executives each filed suits in federal court seeking a declaratory judgment voiding the exclusion or remanding it to HHS for further review. Their suits were consolidated in the U.S. District Court for the District of Columbia. They based their challenge on several grounds. First, they argued that their criminal convictions were based solely on their executive positions during the time of the corporate wrongdoing, and were not based upon any evidence of personal wrongdoing. The court rejected this argument, pointing out that the statute authorizes the exclusion of any individual convicted of a misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service. The court noted that in enacting the statute, Congress did not intend to limit the exclusion penalty only to those convicted of actual fraud or financial misconduct, and that courts have consistently interpreted the words relating to as encompassing a broader range of conduct than the actual commission of an offense. The court also rejected the argument that their status as corporate officers but not actual wrongdoers made them ineligible for exclusion. The court reviewed the responsible corporate officer doctrine established by the Supreme Court in cases such as United States vs. Park and United States vs. Dotterweich. Normally in a criminal case, the government must prove that the defendant intended to commit a crime, or at least acted recklessly. Under the responsible corporate officer doctrine, however, the defendant need not have participated in or even have known about the corporate wrongdoing. Under this doctrine, a corporate official can be convicted of a crime under the FDCA (and certain other statutes) if he or she had a responsible share in furtherance of the transaction which the statute outlaws... A conviction of a responsible corporate officer can be based upon the fact that a defendant had the power to prevent or correct prohibited conduct but failed to do so, i.e., failed to exercise the authority and supervisory responsibility reposed in them by the business organization [that] resulted in the violation complained of. The court explained that a conviction cannot be based solely upon one s position in the corporate hierarchy, but upon what the Park decision described as evidence demonstrating that the individual s position vested in him responsibility and authority either to prevent in the first instance, or promptly to correct the violation complained of, and that he failed to do so. It then pointed to the ASFs, in which the executives specifically acknowledged that they had served as responsible corporate officers of 91

92 Purdue, had responsibility and authority to prevent in the first instance or to promptly correct certain conduct resulting in the misbranding of a drug introduced or delivered for introduction into interstate commerce, and had failed to do so. The executives next argued that excluding them from participation in all federal healthcare programs did not serve the remedial purposes of the exclusion statute. The court disposed of this argument by noting that while one purpose of the statute was to protect these programs from fraud and abuse, it was also intended to provide a clear and strong deterrent against the commission of criminal acts. Here, the executives had admitted in their ASFs that they had, but failed to exercise, power or authority to prevent or promptly correct the five-and-a-half years of misbranding of Oxycontin by Purdue s employees. Lastly, the executives argued that the 12 year period of exclusion was unreasonable, that the aggravating factors applied in extending the exclusion period were not supported, and that their cooperation during the investigation had not been given sufficient consideration. The court rejected all of these arguments. It pointed out that the statute sets the financial losses to federal programs that trigger the discretionary application of additional exclusion time at $5,000 or more, and that the global settlement reached with Purdue included $575 million to state and federal governments, $160 million of which was described as restitution, as well as disgorgement of $34.5 million of the executives compensation. Their own ASFs documented extensive efforts on the part of Purdue employees to misbrand Oxycontin in an effort to boost sales, and the court noted there was substantial evidence in the record supporting the finding that the acts underlying the executives convictions caused or reasonably could have been expected to cause financial losses of more than $5,000. Similarly, the court rejected the executives argument that the aggravating factor of one year or more should not apply because they themselves had not engaged in any acts. Once again, the court pointed to their own admissions in their ASFs that they had responsibility and authority to prevent or promptly correct the misbranding by Purdue employees and had failed to do so. Lastly, the court rejected their argument that their cooperation had not been sufficiently weighed in mitigation, noting that the original 20 year exclusion period had been reduced to 15, and then 12 years. The court then granted summary judgment and affirmed the exclusion order. Friedman et al v. Sebelius et al., No (ESH) (D.D.C. Dec. 13, 2010). Federal Judge Acquits Former GSK Lawyer In Obstruction Case A Maryland federal district court judge acquitted May 10 a former attorney for GlaxoSmithKline (GSK) of all charges in a criminal case alleging she obstructed a federal investigation and made false statements to the Food and Drug Administration (FDA). U.S. District Court for the District of Maryland Judge Roger W. Titus granted the motion for acquittal after 10 days of hearing evidence from federal prosecutors, before the defense had presented its case, saying allowing the action to proceed to the jury would be a miscarriage of justice. According to Titus, no rational trier of fact could find Stevens guilty beyond a reasonable doubt, even viewing the evidence in the light most favorable to the government. Titus previously had dismissed without prejudice the indictment of Lauren Stevens, who was charged in November 2010 with one count of obstructing an official proceeding, one 92

93 count of concealing and falsifying documents to influence a federal agency, and four counts of making false statements to the FDA. The indictment alleged Stevens, a former vice president and associate general counsel with GSK, signed and sent a series of letters from the company to the FDA that falsely denied the company had promoted the drug Wellbutrin for off-label uses, even though she knew, among other things, that the company had sponsored numerous programs where the drug was promoted for unapproved uses, according to the Department of Justice (DOJ). Stevens asserted, as her primary defense, that she relied in good faith on the advice of counsel in responding to the FDA s inquiry, which negated the requisite intent to obstruct the FDA s investigation or make false statements. The U.S. District Court for the District of Maryland found March 23, 2011 that prosecutors erroneously instructed the grand jury on the advice of counsel defense in response to a question from a juror. Specifically, the court noted that, unlike an affirmative defense, the advice of counsel defense negates the wrongful intent element of the charges at issue. The instruction prosecutors gave to grand jurors erroneously indicated advice of counsel was not relevant at the charging stage, the court said. The grand jurors were thus instructed erroneously that the advice of counsel was irrelevant to a determination of whether there was probable cause to indict Stevens, the court said. The court therefore expressed grave doubts as to whether the decision to indict was free from the substantial influence of the improper advice of counsel instruction. A proper instruction, the court explained, would have informed grand jurors that if Stevens relied in good faith on the advice of counsel, after fully disclosing to counsel all relevant facts, then she would lack the wrongful intent to violate the law and could not be indicted for the crimes charged in the proposed indictment. Because prosecutors did not affirmatively mislead the grand jury, but rather merely misinstructed them on the law, the court dismissed the indictment without prejudice, which allows the government to seek another indictment before a different grand jury. DOJ re-indicted Stevens on essentially the same charges in April United States v. Stevens, No. RWT 10cr0694 (D. Md. Mar. 23, 2011). Fifth Circuit Says District Court Must Clarify Loss Amount In DME Fraud Case The Fifth Circuit affirmed March 7, 2011 a defendant s conviction on multiple counts of healthcare fraud and conspiracy to pay kickbacks in connection with a Medicare/Medicaid fraud scheme involving power wheelchairs, but vacated his sentence, saying the district court needed to clarify its method for determining the loss amount attributable to the fraud. The appeals court said it was uncertain whether the district court considered potential evidence that the defendant intended to receive only a lower capped amount in billing for the durable medical equipment (DME) at issue, rather than the full amount actually billed to Medicare. 93

94 The indictment alleged defendant Enitan Isiwele, who owned a DME supply company, worked with a recruiter to obtain billing information from Medicare/Medicaid beneficiaries, which he then used to claim reimbursement from those programs for unnecessary power wheelchairs under relaxed documentary requirements instituted after Hurricanes Katrina and Rita. The recruiter and certain Medicare/Medicaid beneficiaries testified at trial that they did not need power wheelchairs and never had such equipment prior to the hurricanes. A jury found defendant guilty on all counts. The district court sentenced defendant to 97 months imprisonment and ordered him to pay a $1,700 special assessment and restitution in the amount of $201,397. For sentencing purposes, the district court calculated the loss amount as $587,382, which was the amount defendant had billed to Medicare/Medicaid, rather than the $297,381 he was actually reimbursed by the programs. In addition, the court applied mass marketing and abuse of trust enhancements in calculating his sentence. After affirming the conviction, concluding the district court s improper exclusion of certain documents offered as prior inconsistent statements of three witnesses was harmless error, the Fifth Circuit vacated the sentence and remanded to the district court for further clarification on how it calculated the loss amount. Under the U.S. Sentencing Guidelines, loss is defined as the greater of actual loss or intended loss. Defendant argued the district court overstated the loss amount because Medicare/Medicaid have a fixed fee schedule for DME and does not reimburse suppliers for any amount billed over those fixed allowances. According to defendant, he knew that he would receive the lower capped amounts and therefore did not have the subjective intent to cause a loss equal to the amount billed. The appeals court noted the issue of intended loss for sentencing purposes is a factspecific, case-by-case inquiry. The Fifth Circuit said in determining intended loss it was adopting the approach taken by the Fourth Circuit in United States v. Miller, 316 F.3d 495 (4th Cir. 2003), that the amount fraudulently billed to Medicare/Medicaid is prima facie evidence of the amount of loss [the defendant] intended to cause, but the amount billed does not constitute conclusive evidence of intended loss; the parties may introduce additional evidence to suggest that the amount billed either exaggerates or understates the billing party s intent. The appeals court said it was uncertain, based on the record, whether the district court engaged in this analysis. There is some evidence in the record on the basis of which the court could have concluded that Isiwele intended to receive only the lower capped amount, the appeals court said. The appeals court affirmed, however, the district court s application of the mass marketing and abuse of trust enhancements. 94

95 United States v. Isiwele, No (5th Cir. Mar. 7, 2011). Sixth Circuit Says Court May Determine Sentence, Restitution Amount Based On Charges For Which Defendant Was Indicted But Not Convicted A trial court may properly base a healthcare fraud defendant s sentence and restitution amounts on conduct described in the indictment, but for which the defendant was not convicted, the Sixth Circuit held April 12, As long as the accused conduct has been proven by a preponderance of the evidence, it is properly considered by a court in determining sentencing, the appeals court said. Courts also may determine the restitution amount based on any loss caused under the scheme as defined by the indictment, the appeals court found. Harold Jones, a podiatrist, was indicted on 27 counts of mail fraud, 23 counts of healthcare fraud, and four counts of aggravated identity theft. The trial court dismissed two counts of healthcare fraud and all of the identity theft counts. Jones then proceeded to trial and was convicted on two counts of mail fraud and one count of healthcare fraud. The court sentenced Jones to one-and-a-half years of imprisonment followed by three years of supervised release, based in part on conduct underlying the acquitted counts. Although the loss from Jones convicted counts totaled only $120.76, the court also ordered Jones to pay a $300 special assessment and $224,133 in restitution for the conduct associated with his acquitted counts. Jones appealed. After finding sufficient evidence to support Jones conviction of healthcare and mail fraud, the appeals court turned to the reasonableness of his sentence. The lower court added 12 levels to Jones base offense level under the Sentencing Guidelines after finding he had caused more than $200,000 of loss to Medicare and Medicaid through the conduct underlying his acquitted charges. After adding two more levels because Jones had abused a position of trust, the court then came up with a sentencing range of three years and one month to three years and ten months of imprisonment. However, the court deviated downward from this range in imposing its sentence because it was so largely a product of Jones acquitted conduct. Jones argued that his sentence was procedurally and substantively unreasonable because the court calculated his total offense level incorrectly by applying the 12-level enhancement for the amount of loss associated with his acquitted conduct. Turning to the loss calculation, the appeals court noted that the lower court found Jones had caused a loss of approximately $224,133 by adopting the statistical extrapolation evidence presented by the United States at trial. 95

96 Although a statistical estimate may provide a sufficient basis for calculating the amount of loss caused by a defendant, the appeals court said, here, the government s statistical analysis was flawed. According to the appeals court, the government s statistician identified a representative statistical sample encompassing 357 bills contained throughout 264 patient files, but the United States found only 210 of those files. Thus, the amount of loss calculation was clearly erroneous, the appeals court held and remanded to the lower court for recalculation. The appeals court turned next to Jones claims that being sentenced for his acquitted counts without having been convicted of them violated his Fifth Amendment due process rights and his Sixth Amendment right to a trial by jury. The appeals court first noted that the Guidelines permit a sentencing court to consider[] conduct underlying... acquitted charge[s], so long as that conduct has been proved by a preponderance of the evidence. United States v. Watts, 519 U.S. 148, 157 (1997). Accordingly, the district court could properly consider Jones acquitted conduct in determining his prison sentence, the appeals court held. However, the appeals court found the United States did not establish by a preponderance of the evidence that Jones caused more than $200,000 in loss through his acquitted conduct. Nevertheless, the appeals court determined it need not address such claims in light of its decision to remand for resentencing. Lastly, the appeals court addressed Jones argument that his restitution amount was in error as it was also based on acquitted claims and was incorrectly calculated. Noting that its findings about the government s faulty statistical analysis addressed Jones claims regarding the amount of the loss, the appeals court turned to whether the court may order restitution for Jones acquitted charges. The appeals court noted that Jones healthcare fraud and mail fraud convictions contain as elements schemes to defraud. The district court may, therefore, order restitution for any loss suffered by a victim of Jones s scheme, the court held. As is the case here, when a defendant is convicted by a jury, the scope of the scheme is defined by the indictment for purposes of restitution, the appeals court held. Here, the scheme described in the indictment included not only the acts of which Jones was convicted, but also the ones of which he was acquitted. Thus, the court may properly order Jones to pay restitution for both his convicted and acquitted conduct under the indictment, the appeals court held. United States v. Jones, No (6th Cir. Apr. 12, 2011). 96

97 False Claims Act Seventh Circuit Holds Relator Should Be Allowed To Refile Complaint After Related Qui Tam Actions Settled A lower court should not have dismissed a relator s complaint with prejudice because, although it was related to two other qui tam actions, those cases had settled and were no longer pending, the Seventh Circuit held May 19, According to the appeals court, the instant complaint was related to two other qui tam actions and therefore fell within the 31 U.S.C. 3730(b)(5) bar, which provides that [w]hen a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action. But at the time the relator asked the court to reconsider the dismissal of her complaint, the related actions had settled and were no longer pending. For this reason, the district court should have dismissed the instant complaint without prejudice, giving the relator a chance to frame a new complaint that could be viable. Relator Christine Chovanec brought the qui tam action under the False Claims Act against Apria Healthcare Group Inc., alleging the company fraudulently billed the Medicare and Medicaid programs for medical devices like oxygen tanks and related services that were unnecessary or should have been recorded under less expensive reimbursement codes. Chovanec alleged the fraud took place at Apria s office in Morton Grove, IL from 2002 through At the time Chovanec filed her complaint, two other qui tam actions against Apria also were pending United States ex rel. Costa v. Apria Healthcare Group, Inc., filed in California in 1998, and United States ex rel. Wickern v. Apria Healthcare Group, Inc., filed in Kansas in Both actions included similar allegations of miscoding and upcoding. The district court dismissed Chovanec s action with prejudice, saying it was related to Costa and Wickern and was therefore barred under Section 3730(b)(5). Four days later, the Costa and Wickern actions settled, with Apria agreeing to pay the federal government $17.6 million for reimbursement submitted from June 1995 through December 31, Chovanec moved for reconsideration, arguing the settlement ended the prior actions and established a different time frame for the fraud than her action. The district court denied the motion. The Seventh Circuit agreed that the three actions overlapped, even though the facts were not identical. The appeals court found the Costa and Wickern cases alleged a nationwide fraud scheme involving inappropriate billing. The Costa and Wickern complaints alleged an ongoing fraud orchestrated by Apria s national staff, the decision of any given office to participate in the scheme is related to the allegations, the appeals court said. 97

98 But the appeals court went on to hold that because Costa and Wickern were no longer pending when the district court denied the motion to reconsider, Chovanec was entitled to file a new qui tam complaint. The appeals court acknowledged the subsequent complaint may be barred for other reasons, such as if the allegations in the two related cases constituted public disclosures. In any event, the appeals court said, Chovanec should be given the chance to establish events in Illinois entirely unrelated to the national scheme of the 1990s, or a recurrence after the national fraud ended. United States ex rel. Chovanec v. Apria Healthcare Group Inc., No (7th Cir. May 19, 2010). U.S. Court In Illinois Allows Ex Parte Interviews In FCA Case A qui tam plaintiff may conduct ex parte interviews with patients of a physician alleged to have committed fraud, the U.S. District Court for the Northern District of Illinois held July 7, Defendant Danilo Del Campo, M.D. is a physician who practices dermatology and is the president of Chicago Skin Studio. Plaintiff Renata Block is a physician assistant who was employed by Del Campo. Block brought a qui tam action under the False Claims Act (FCA) alleging Del Campo and Chicago Skin Clinic knowingly and intentionally submitted false claims and otherwise sought reimbursement for services allegedly provided to Medicare and Medicaid patients that were based on fraudulently generated and false documentation. During discovery, defendant sought a protective order and the court placed significant limits on discovery of patient records. Plaintiffs later sought ex parte contacts with present and former patients and defendant objected. The court allowed the ex parte interviews. The court first rejected the defendant s contention that Block had not sufficiently demonstrated any factual support for her claims in order to proceed with further patient discovery. There is no requirement in the Federal Rules of Civil Procedure that Ms. Block support her claims with factual proof before being permitted to engage in further discovery, the court noted. Under Rule 26(b)(1), Block is entitled to discover any non-privileged matter that is relevant to her claims, the court held, finding the information Block seeks from Del Campo s patients meets this standard. The court also rejected defendant s argument that such interviews are prohibited by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA does not prohibit ex parte communications with nonparty patients and former patients about their alleged medical care and treatment, the court said. Further, the court noted, the protective order prohibits the parties from using or disclosing protected health information for any purpose other than in this litigation and 98

99 requires protected health information be returned to the covered entity or destroyed at the end of the litigation. Lastly, while the court acknowledged that it may well be distressing and even embarrassing for patients to participate in this bitterly contested lawsuit, the defendants have not shown that such concerns outweigh Plaintiffs need for the requested patient information. Block v. Del Campo, No. 08 C 2624 (N.D. Ill. July 7, 2010). Ninth Circuit Says FCA Suit May Be Based On Implied Certifications, But Dismisses For Failure To Plead Fraud With Particularity The Ninth Circuit joined several other federal appeals courts in recognizing an implied certification theory as a basis for an action under the False Claims Act (FCA), but affirmed the dismissal of a complaint brought against a clinic, home health agency, hospice, and their owner for failing to plead fraud with the particularity required under Fed. R. Civ. P. 9(b). Sadek Ebeid, a private physician in Arizona, filed the FCA action against Theresa Lungwitz, alleging she submitted false certifications to the federal government in connection with Medicare payments for three healthcare businesses Health Resource Center, LLC, Home Health Resources, Inc., and The Crossing Hospice Care, Inc. Ebeid alleged Lungwitz engaged in the unlawful corporate practice of medicine and that referrals among the healthcare businesses violated the Stark law and other Medicare requirements. According to Ebeid, who was not an insider in any of Lungwitz s businesses, all of the Medicare billing submitted by the companies was unlawful under a theory of implied false certification. Joining the Second, Sixth, Tenth, and Eleventh Circuits, the Ninth Circuit endorsed the implied certification theory of FCA liability. Implied false certification occurs when an entity has previously undertaken to expressly comply with a law, rule, or regulation, and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required in the process of submitting the claim, the Ninth Circuit explained. Like express false certification, implied false certification of compliance creates liability when a certification is a prerequisite to obtaining a government benefit. The appeals court nonetheless went on to affirm the district court s dismissal of the action, finding Ebeid failed to plead fraud with the required particularity. The appeals court rejected the district court s categorical approach requiring a relator to identify representative examples of false claims to support every allegation, and instead followed the Fifth Circuit in finding Rule 9(b) was satisfied provided the complaint alleged particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted. But the appeals court refused to jettison the particularity requirement altogether as urged by Ebeid, who argued for a relaxed pleading standard because the alleged fraud 99

100 was of an extended duration and the billing information is solely in Lungwitz s possession. To do so simply because it would facilitate a claim by an outsider is hardly grounds for overriding the general rule, especially because the FCA is geared primarily to encourage insiders to disclose information necessary to prevent fraud on the government, the appeals court commented. Turning to the merits, the appeals court found Ebeid s claims based on the businesses alleged violations of the corporate practice of medicine could not support an implied false certification theory of liability. Specifically, the appeals court noted Ebeid cited no statute, regulation, rule, or contract conditioning payment from Medicare on compliance with state law governing the corporate practice of medicine. The appeals court agreed violations of the Stark Law could provide a valid basis from which to imply certification because it expressly conditions payment on compliance, but found Ebeid only made general allegations that the businesses physicians had improper financial relationships that tainted referrals among them. These general allegations lacking any details or facts setting out the who, what, when, where, and how of the financial relationship or alleged referrals are insufficient under Rule 9(b)," the appeals court said. Ebeid v. Lungwitz, No (9th Cir. Aug. 9, 2010). Eighth Circuit Dismisses FCA Action, Says Medicaid Contractors Reasonably Believed State Law Banned Recovery Of Medical Costs In Malpractice Cases The Eighth Circuit affirmed July 30, 2010 the dismissal of a False Claims Act (FCA) qui tam lawsuit against two companies that contracted to perform work for Iowa s Medicaid program, finding relators could not show the contractors had the requisite knowledge to trigger liability under the statute. According to the appeals court, the companies reasonably concluded they were not obligated to seek reimbursement in medical malpractice lawsuits for which Medicaid had paid a portion of the plaintiff s medical costs under a state statute eliminating the collateral source rule in such cases. See Iowa Code [W]e need not decide whether the defendants correctly interpreted since a statement that a defendant makes based on a reasonable interpretation of a statute cannot support a claim under the FCA if there is no authoritative contrary interpretation of that statute, the appeals court observed. That is because the defendant in such a case could not have acted with the knowledge that the FCA requires before liability can attach, the appeals court explained. Attorneys J. Russell Hixson and Terrence Brown (relators) filed the qui tam action against Health Management Services and ACS State Healthcare, contractors with Iowa s Medicaid program, and two state employees (collectively, defendants). 100

101 Relators alleged defendants violated the FCA by obtaining federal funds to pay for medical care resulting from medical negligence without seeking reimbursement from the tortfeasors as required by federal law. Defendants moved to dismiss. The district court granted the motion for failure to state a claim. As a threshold matter, the appeals court, agreeing with the district court, rejected defendants jurisdictional challenge i.e., that relators complaint relied on publicly disclosed information. While certain state administrative documents showed defendants did not pursue reimbursement of Medicaid funds from tortfeasors in medical malpractice cases, these materials did not disclose the essential elements of what the relators sought to prove. Specifically, the appeals court observed, relators not only had to show defendants failed to seek reimbursement, but also that they participated in claiming federal funds without deducting the money they should have obtained from the tortfeasors. Because the administrative documents that the defendants relied on did not disclose this essential element the false claim itself we cannot say that their claims were 'based upon... public disclosure of allegations or transactions' under the FCA, the appeals court held. But the appeals court found defendants were successful on their challenge to the merits of relators claims. Federal law requires that states seek reimbursement for medical expenses from third parties to the extent of their legal liability. Defendants interpreted Section as precluding Medicaid recipients from recovering those costs, and Medicaid s right to reimbursement wholly depended on the recovery right of its recipients. Section provides that in actions against medical care providers based on medical negligence, the defendant is not liable to the plaintiff for medical expenses if they have been replaced by another source, such as another program. Defendants therefore concluded they had no basis for pursuing reimbursement. The appeals court said even if this interpretation was incorrect, it was still a reasonable one based on the plain language of the statute and the legislature s apparent intent. Thus, defendants lacked the requisite knowledge to trigger FCA liability. The appeals court also rejected relators argument that federal law preempted Section [T]o succeed on their preemption theory the relators would have to show that the defendants could not reasonably believe that was not preempted, the appeals court said. United States ex rel. Hixson v. Health Management Sys., Inc., No (8th Cir. July 30, 2010). 101

102 First Circuit Rejects Whistleblower Action Against Spinal Surgeons, Medical Device Distributors A whistleblower action alleging 18 medical device distributors and various physician defendants (collectively, defendants) violated the False Claims Act (FCA) was jurisdictionally barred because the complaint was based on information publicly disclosed in a prior civil action and the relator was not an original source, the First Circuit held September 8, 2010 in affirming the complaint s dismissal. In 2007, Jacqueline Kay Poteet, a former employee of Medtronic Sofamor Danek USA, Inc. (MSD), brought the action in a Massachusetts federal district court under the FCA s qui tam provision alleging defendants defrauded the federal government by unlawfully promoting the medical products of MSD and its parent Medtronic Inc. Poteet previously brought a qui tam action in a Tennessee federal district court against Medtronic, alleging it provided physicians with kickbacks in exchange for the use of its spinal implants and other surgical devices. MSD allegedly provided physicians with numerous kickbacks, including sham consulting research, sham royalty agreements, and lavish trips, in exchange for the use of its spinal implants and other surgical devices. Before Poteet initiated her first qui tam action in 2003, Scott Wiese, also a former MSD employee, filed a wrongful termination suit against Medtronic and MSD in California state court, alleging he was fired because he refused to pay illegal kickbacks and bribes to physician customers in exchange for their business. Also before Poteet s action, a former MSD attorney, identified as John Doe, filed a qui tam action in 2002 making similar allegations that MSD violated the FCA and Anti- Kickback Statute by providing monetary and in kind compensation to physicians as an inducement to use its surgical products. The government moved to dismiss Poteet s 2003 qui tam action, arguing it was barred by the FCA s public disclosure provision, 31 U.S.C. 3730(e)(4)(A). Dismissal of Poteet s and Doe s action was a condition of a prior $40 million settlement the government reached with Medtronic and MSD. The district court granted the motion, and the Sixth Circuit affirmed, finding the public disclosure provision barred Poteet s action. United States ex rel. Poteet v. Medtronic, Inc., No (6th Cir. Jan. 14, 2009). In the instant action, the Massachusetts federal district court likewise granted defendants motion to dismiss. As to the physician defendants, the court held the public disclosure bar applied and, as to the distributor defendants, that the complaint did not meet the requirements of Fed. R. Civ. P. 9(b). On appeal, the First Circuit agreed that the public disclosure bar applied to Poteet s complaint. The disclosures at issue came from media reports and the prior civil complaints filed in state and federal court. In particular, the appeals court held a civil complaint filed in state or federal court qualifies as a public disclosure. 102

103 The appeals court refused to make a distinction between federal and state proceedings, even though the FCA has now been amended to specify that only disclosures in federal criminal, civil, or administrative hearings constitute a public disclosure. [S]tate court complaints, on the whole, are just as accessible to members of the public as federal court complaints and thus equally likely to provide fodder for parasitic qui tam actions, the appeals court observed. Finally, the appeals court found the instant allegations were based upon the prior disclosure of fraud, even if they involved a previously identified Medtronic device and described in greater detail how the defendant physicians improperly influenced other third-party doctors to use the device. Because the jurisdictional defect was incurable, the district court properly dismissed Poteet s complaint with prejudice. The appeals court also found no error in the district court s dismissal of Poteet s claims against the device distributors with prejudice, as she admitted that she was unable to offer any further specifics regarding the alleged fraud they committed. United States ex rel. Poteet v. Bahler Med., Inc., No (1st Cir. Sept. 8, 2010). U.S. Court In Massachusetts Dismisses Claims That Maker Of Growth Hormone Violated FCA By Promoting Off-Label Uses The U.S. District Court for the District of Massachusetts granted September 14, 2010 summary judgment in favor of a pharmaceutical manufacturer in a whistleblower action alleging unlawful promotion of the growth hormone Genotropin for off-label pediatric uses. In so holding, the court rejected relator Dr. Peter Rost s allegations that defendants Pfizer, Inc. and Pharmacia Corp. provided illegal kickbacks to physicians to prescribe Genotropin and ultimately caused pharmacies that filled the prescriptions to submit false claims to the Kentucky and Indiana Medicaid programs. The court found Rost could not proceed on an implied certification theory of liability as a matter of law where, as here, the pharmacies that submitted the alleged false claims were innocent of wrongdoing and the claims were not factually false, the claims were not legally false due to an express certification of compliance with the Anti-Kickback Statute (AKS), and compliance with the federal statute was not an expressly stated precondition of payment. Rost was employed by Pharmacia in June 2001 as Vice President in charge of the Endocrine Care Unit in Peapack, NJ. Pfizer acquired Pharmacia in According to Rost, beginning in 1997 the drug Genotropin, a recombinant human growth hormone, was promoted for off-label indications. In June 2003, Rost brought a qui tam action against Pharmacia and Pfizer claiming they violated the federal False Claims Act (FCA) by unlawfully promoting the off-label use of Genotropin. 103

104 The U.S. declined to intervene in the case. The court dismissed the original complaint. The First Circuit agreed that Rost did not plead fraud with the required particularity but remanded with instructions to allow him to amend his complaint. On remand, Rost asserted two theories of recovery that defendants caused a single physician to prescribe Genotropin off label because she only used one diagnostic test rather than two and that defendants gave physicians kickbacks to prescribe the drug onlabel and off-label by providing them with free conference trips in nice locations and by paying them to participate in certain studies involving the growth hormone. Defendants moved for summary judgment, which the U.S. District Court for the District of Massachusetts granted. The court rejected Rost s first claim that defendants violated the FCA by causing the physician to prescribe Genotropin with only one diagnostic test noting the drug s Food and Drug Administration-approved label did not require two stimulation tests for the administration of Genotropin. Relator has produced no evidence suggesting that one of Genotropin s on-label indications is transformed to an off-label indication when both stimulation tests are not administered, the court found. Even if two tests were required, there is no evidence that defendants encouraged or influenced doctors to do only one test through any promotional materials, the court said. The court also granted defendants summary judgment on Rost s kickback claims based on an implied certification theory. The difficult legal question in this case is whether or not the claims submitted by the innocent third parties, the pharmacies, can be false or fraudulent under a theory of implied certification when the drug manufacturer allegedly violated the Anti-Kickback Statute, the court observed. The court declined to stretch[] an implied certification theory to reach back to impose FCA liability on a payer of kickbacks in a situation where the person who submitted the claim, i.e., the pharmacies, was innocent and the claim itself was not factually false, neither the pharmacies nor the prescribing physicians falsely certified compliance with the AKS, and compliance with the federal statute was not an expressly stated precondition of payment. On this last point, the court noted the Patient Protection and Affordable Care Act recently amended the federal AKS to include language stating that a claim including an item or service resulting from a violation of the statute constitutes a false or fraudulent claim for purposes of the FCA. However, this language was not effective at the time the claims in question were submitted to the state Medicaid agencies. Because the court rejected Rost s implied certification theory of liability as a matter of law, it did not reach the difficult and important question of whether the payments to physicians to attend certain conferences, which may have had some educational aspects, constituted illegal kickbacks under the AKS. United States ex rel. Rost v. Pfizer, Inc., No PBS (D. Mass. Sept. 14, 2010). 104

105 U.S. Court In New York Rejects FCA Claims Against Accounting Firm Alleging False Certification Of Hospital s Medicaid Cost Reports The U.S. District Court for the Southern District of New York dismissed September 14, 2010 a relator s lawsuit against accounting firm Ernst & Young, LLP alleging it falsely certified a hospital s Medicaid cost reports and falsely represented in its opinion letters that it believed the information to be free of material misstatements and fairly presented in all material respects. The court found the relator sufficiently alleged the hospital falsely allocated faculty practice plan capital costs to reimbursable rather than non-reimbursable cost centers, but held the complaint did not adequately plead Ernst & Young s certifications and opinion letters were false statements or records that caused the submission of false claims to Medicaid. The court also noted the complaint did not make out a plausible allegation of knowledge on any theory actual, reckless, or deliberate ignorance. Specifically, the court found no facts were alleged to support relator s claim that Ernst & Young either intentionally assisted the hospital in the alleged fraudulent concealment or it must not have done the audits as claimed, because if it had, it necessarily would have detected the falsity of the cost reports. The complaint does not point to any facts indicating that an audit performed in conformity with professional guidelines necessarily would have uncovered the falsehoods allegedly contained in the cost reports, the court said. Najmuddin Pervez filed a qui tam action against Beth Israel Medical Center (BIMC), where he formerly worked as an executive, and Ernst & Young alleging they defrauded the government of millions of dollars in Medicaid reimbursement to which BIMC was not entitled for non-reimbursable capital costs. The United States intervened to assert and then settle its claims against BIMC. It declined to take over the claims as to Ernst & Young. Pervez claimed Ernst & Young, as BIMC s outside auditor, had violated the federal and New York False Claims Acts by causing false claims and statements to be made and presented in connection with the preparation and submission of BIMC s Medicaid cost reports for the years 1991 through During this time period, Ernst & Young had audited, certified, and provided an opinion letter for each of the allegedly false cost reports. Ernst & Young moved to dismiss. The court granted the motion. Pervez has alleged no facts from which the Court reasonably might infer that E&Y did not perform the audits it claimed to have performed, or did not perform them in compliance with professional standards, as it certified to the New York Department of Health. Rather, the complaint included only a bald assertion that Ernst & Young must not have performed the audits in compliance with professional standards because if it had, it would have discovered the misrepresentations in the cost reports. 105

106 But relator did not point to any facts indicating that an audit performed in conformity with professional guidelines necessarily would have uncovered the alleged falsehoods in the cost reports, the court observed. The complaint also failed to allege the factual falsity of Ernst & Young s opinion letter. Nor did Pervez adequately plead that the opinion letters were false on either an express or an implied certification theory. The letters did not attest to [hospital s] regulatory compliance as Pervez claims. They certified only that E&Y believed the statements and related audited information to be fairly presented in all material respects and in conformity with the EICR software s instructions, the court said. For similar reasons, the court also concluded relator failed to allege Ernest & Young had knowledge that the claim and/or statement at issue was false. [I]t seems particularly important here, where the allegedly culpable conduct at issue is at a somewhat greater remove, that the complaint describe adequately a plausible basis for attributing knowledge or deliberate ignorance to the party facing secondary liability, i.e., an outside auditor, rather than the provider that actually submitted the allegedly false claims. United States ex rel. Pervez v. Beth Israel Med. Ctr., No. 01 Civ (S.D.N.Y. Sept. 13, 2010). Court Grants DOJ s Motion To Intervene In Whistleblower Action Alleging Wyeth Promoted Drug For Off-Label Uses A federal district court judge in Pennsylvania granted October 13, 2010 the U.S. Department of Justice s motion to intervene in a qui tam action under the False Claims Act alleging Wyeth Pharmaceuticals, which was acquired by Pfizer in October 2009, improperly marketed its kidney transplant drug for treatments not approved by the Food and Drug Administration (FDA). The amended complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, asserts FCA violations on behalf of the United States and a number of states in connection with Wyeth s promotion of the immunosuppressant drug Rapamune. In granting the motion, U.S. District Court Judge John R. Padova found the government had established good cause to intervene. According to the complaint, Wyeth systematically engaged in illegal off-label marketing of Rapamune, unlawfully transformed ostensibly independent and unbiased educational and scientific programs... into promotional vehicles for Rapamune ; and unlawfully promoted Rapamune in violation of the Anti-Kickback Statute and the Stark Law by providing cash and other incentives to induce doctors to promote and prescribe the drug. The FDA approved the drug only to help prevent rejection after a kidney transplant, not for use in connection with other transplanted organs, nor following the administration of other immunosuppressive drugs. The complaint alleged Wyeth marketed Rapamune for a number of off-label uses including in liver, lung, and heart transplant patients. 106

107 The drug costs between $8,000 and $20,000 a year per person, a substantial portion of which is borne by federal healthcare programs, the complaint said. Federal Magistrate Refuses To Compel Production Of Documents Concerning Unnamed Entities In FCA Suit A federal magistrate judge in Mississippi denied October 13, 2010 the government s motion to compel production of documents identifying other nursing home chains that did business with the defendant durable medical equipment (DME) suppliers in a False Claims Act (FCA) lawsuit. Defendants in the case include McKesson Corporation, its subsidiary Medical-Surgical MediNet Inc. (MediNet), nursing home chain Beverly Enterprises Inc., and CERES Strategies Medical Services Inc. (Ceres), an alleged sham DME supplier created by Beverly but managed by MediNet. According to the government, defendants violated the FCA by submitting false claims to Medicare arising from illegal kickbacks paid to Beverly through the alleged sham DME supplier Ceres. Beverly received a portion of the Medicare payments to which it had no legitimate claim, MediNet received a portion through contract billing, and McKesson received a portion for supplying the equipment, the government alleged. The government asked the court to compel MediNet and McKesson to produce documents and answer interrogatories related to their relationships with other nursing home chains. The magistrate judge denied the motion, saying to hold otherwise would contradict the court s previous dismissal of the government s allegations involving other unnamed nursing home chains that potentially were engaged in similar kickback schemes on the grounds the allegations did not meet Fed. R. Civ. P. 9(b) pleading standards. The previous order made it clear that the plaintiff would not be allowed to proceed against unnamed entities even in light of the government s response that it planned to investigate through discovery in this case similar kickback schemes, the judge said. In the end, it is difficult if not impossible to grant the plaintiff s motion to compel and somehow reconcile such a ruling with the previous order, the judged added. The judge also found the government failed to produce evidence sufficient to convince the court that it is on anything other than a fishing expedition. Despite the liberal bounds of discovery, the court is not willing to allow the plaintiff to engage [in] wholesale discovery with nothing more than a similar act and an assumption, the judge said. United States v. McKesson Corp., No. 2:08CV214-SA-DAS (N.D. Miss. Oct. 13, 2010). U.S. Court In Illinois Dismisses FCA Action Alleging Fraudulent Billing For Overlapping Surgeries The U.S. District Court for the Northern District of Illinois dismissed November 2, 2010 a qui tam action under the False Claims Act (FCA) alleging a teaching hospital and several 107

108 physicians fraudulently billed Medicare and Medicaid for overlapping surgeries performed by unsupervised medical residents. The court found the allegations in the complaint were based on public disclosures and the relators in the case did not qualify as original sources. See 31 U.S.C. 3730(e)(4). Relators Robert S. Goldberg, M.D. and June Beecham initiated the action under the FCA and Illinois Whistleblower Reward and Protection Act against Rush University Medical Center (Rush), Midwest Orthopaedics at Rush, LLC, Rush Surgi Center, and various individual physicians (collectively, defendants). Relators alleged defendants between 1996 and 2004 violated Medicare rules and regulations by failing to meet supervision requirements for overlapping surgeries involving medical residents. In addition, relators alleged certain leasing arrangements violated the Stark Law. The government and the state of Illinois intervened and settled the Stark claims in March Defendants moved to dismiss the remaining claims, arguing relators allegations were based on public disclosures of government investigations of similar conduct in teaching hospitals across the country (i.e., the physicians at teaching hospitals (PATH) initiative). The nationwide PATH initiative focused on whether teaching physicians who billed Medicare Part B for services furnished by residents provided sufficient supervision in the delivery of services and whether physicians had inflated their Part B claims by upcoding. The court held the PATH initiative constituted an industry-wide public disclosure and that defendants in this case, a teaching hospital and attending physicians associated with Rush Medical College, were directly identifiable from the PATH audits. The court also found the critical elements of Relators allegations are encompassed by the scope of the PATH audits and related news coverage. The court rejected relators arguments that their claims were based solely on the overlapping surgery issue, which was not the subject of the PATH audits. Although the overlapping surgeries provisions of the teaching physician regulations were promulgated after the initiation of the PATH audits, these regulations were drafted in response to the same concerns that led the audits, the court said. While focusing on the specific rules regarding overlapping surgeries, the crux of Relators claims still mirrors the allegations of fraud exposed in the PATH audits that attending physicians are failing to provide the required direct supervision of residents to bill Medicare under Part B, the court noted. Next, the court held relators allegations were based upon the public disclosure as they were substantially similar to those revealed through the PATH audits. Finally, relators had both conceded that they were not original sources, the court said. Goldberg ex rel. United States v. Rush Univ. Med. Ctr., No. 04 C 4584 (N.D. Ill. Nov. 2, 2010). 108

109 U.S. Court In Pennsylvania Finds Arrangement Violated Stark, But Says Fact Finder Must Determine Knowledge For FCA Purposes A federal trial court in Pennsylvania held November 10, 2010 that a medical center s equipment sublease with two physicians and their practice group violated the Stark law as it "took into account" referrals. At the same time, the court said it was unable at the summary judgment stage to conclude that defendants violation of the Stark Law was done knowingly for purposes of the False Claims Act (FCA). The court likewise held it was unable to conclude as a matter of law that defendants knowingly and willfully paid and received remuneration under the sublease and other arrangements for referrals of services in violation of the Anti-Kickback Statute (AKS). Instead, this issue must be left to the fact-finder to decide, the court said. Sublease Arrangement A group of physicians (relators) initiated a qui tam action against Bradford Regional Medical Center (BRMC), V&S Medical Associates, LLC, and two individual physicians, Peter Vaccaro, M.D., and Kamran Saleh, M.D.(collectively, defendants) alleging FCA violations for claims made seeking reimbursement for services rendered to patients who allegedly were unlawfully referred to BRMC. According to relators, the scheme arose out of BRMC s equipment sublease of a nuclear camera from V&S Medical, which was owned by Vaccaro and Saleh, two medical staff physicians at BRMC. Under the arrangement, BRMC would sublease the equipment from V&S Medical, and then use it to provide diagnostic tests for patients of BRMC. V&S in turn agreed not to compete with the provision of nuclear cardiology services by BRMC for the term of the agreement. Relators alleged the sublease was intended to gain patient referrals in violation of the Stark Law and AKS. Stark Law Violation The court found a direct financial relationship existed between BRMC and Saleh and Vaccaro individually for the period of time the sublease arrangement was in effect because the physicians received the benefit of BRMC s guaranty that relieved them of a personal liability they owed of $200,000 on the lease. We find that this is not an incidental benefit, but rather a substantial benefit that qualifies as remuneration under the Stark Act and regulations, the court said. The court also held that an indirect financial relationship existed between BRMC and the two physicians. Specifically, the court found sufficient evidence to show that the aggregate compensation received by the physicians takes into account the volume or value of referrals generated by the referring physicians for BRMC. 109

110 We also find that BRMC had actual knowledge, or acted in reckless disregard or deliberate ignorance of, the fact that the aggregate compensation BRMC paid to the doctor s took into account the volume or value of anticipated referrals, the decision said. Defendants could not establish that an exception applied, the court continued, noting the compensation received by Saleh and Vaccaro was not fair market value because it was determined in a manner that took into account the volume or value of referrals. Thus, after finding the physicians had a financial relationship with BRMC, that they made referrals to BRMC, and that BRMC submitted claims to Medicare and Medicaid pursuant to those referrals, the court concluded that defendants violated the Stark Law. The court deferred ruling on damages, however, saying it was unable to hold, at this stage of the litigation, that defendants violation of the Stark Law was done knowingly for purposes of the FCA. Anti-Kickback Statute While the court held defendants violated the Stark Law because the arrangement took into account anticipated referrals, it was unable to conclude the same with respect to the AKS, noting much of the evidence in support of establishing the requisite intent of Defendants implicates credibility decisions that are the province of the fact-finder at trial. The Anti-Kickback Act requires proof of intent, whereas the Stark Act prohibits Defendants from taking into account referrals regardless of the intent of the parties, the court observed. False Claims Act The court also found genuine issues of material fact that precluded a determination that defendants acted knowingly for purposes of the FCA, even though the evidence showed defendants and their attorneys were aware the arrangements they were contemplating entering into implicated the Stark Law and AKS. While the record evidence did not strongly favor defendants, a fact-finder could conclude they did not act knowingly based on the fact that they carefully sought to avoid requiring referrals and attempted to make a business decision based on the fair market value assessment of the arrangements, the court observed. Thus, the court denied defendants motion for summary judgment, and granted in part and denied in part relators motion for summary judgment. United States ex rel. Singh v. Bradford Reg l Med. Ctr., No Erie (W.D. Pa. Nov. 10, 2010). U.S. Court In California Refuses To Dismiss Lawsuit Alleging Healthcare Company And Two Executive Officers Violated FCA In Submitting HHS Grant Applications The U.S. District Court for the Eastern District of California December 20, 2010 denied a motion to dismiss a qui tam lawsuit brought under the False Claims Act (FCA) against a California healthcare company and two of its executive officers (collectively, defendants), 110

111 finding the complaint adequately pled violations of the FCA in alleging the defendants fraudulently conspired to obtain two grants from the Department of Health and Human Services' Health Resources and Services Administration (HRSA). The defendant healthcare company, Family Healthcare Network (FHCN), is a private healthcare center that provides primary care services at clinical facilities located throughout Tulare County, CA. At the time that the two grant applications at issue were submitted, defendants Harry L. Foster and Tony M. Weber were FHCN's President/Chief Executive Officer (CEO) and Chief Financial Officer (CFO), respectively. Foster and Weber submitted in 2003 two grant applications to HRSA seeking funds to increase the level of services at two separate FHCN clinics. The first application, submitted in February 2003, requested funds for expanding the staff and extending the operating hours at FHCN's clinic in Ivanhoe, CA. The second application, submitted in April 2003, requested funds for the purpose of hiring additional staff needed to establish a new FHCN clinic in Goshen, CA. For both grant applications, Foster and Weber prepared and attached proposed staffing and budget figures, representing that additional staff was needed, that recruitment for the positions proposed in the applications was underway, and that all proposed positions would be filled within 90 days of the grant award. In 2003, HRSA ultimately awarded FCHN a grant of $1.98 million for the Ivanhoe facility (Ivanhoe grant), and a grant of over $4.2 million for the new Goshen facility (Goshen grant). Plaintiff Sharman Wood, whose relationship with the defendants is never disclosed in the court's decision, alleged in his complaint that, at the time FHCN submitted the Ivanhoe and Goshen grant applications, Foster and Weber did not intend to hire the staff proposed and knew that such staff would not be hired. In addition, Wood alleged that, after the grants had been awarded, FHCN submitted progress reports prepared by Foster and Weber that the defendants knew contained fraudulent data showing an inflated number of "new users" serviced at the Ivanhoe and Goshen facilities. Wood alleged in his complaint that, in submitting the fraudulent grant applications, the defendants submitted, and conspired to submit, false claims in violation of 31 U.S.C. S3729(a)(1)&(a)(3). In addition, the complaint alleged that the filing of progress reports constituted the submission of reverse false claims under 31 U.S.C. 3729(a)(7). After the federal government declined to intervene in Wood's lawsuit in May 2010, the defendants moved to dismiss the claims, asserting that Wood had not alleged sufficient facts to support his FCA claims and that the complaint failed to allege fraud "with particularity" as required by Fed. R. Civ. P. 9(b). In denying that motion, the district court found Wood's complaint contained sufficient allegations to state claims for violations of 31 U.S.C. S3729(a)(1). The complaint stated that "Foster certified the grant applications for the Ivanhoe and Goshen grants on behalf of FHCN with knowledge that both applications falsely proposed to create new staff positions that Foster never intended to fill," the court noted. In addition, the complaint alleged that Webber provided proposed staffing and budget figures for the grant applications with knowledge that the proposed staff positions would not be filled. 111

112 "The complaint's allegations that Foster and Weber did not intend to hire the additional staff proposed in the grant applications are supported by inference drawn from [other] facts alleged in the complaint," the court concluded. The court highlighted the complaint's allegations that the staff proposed in the grant application for the Ivanhoe facility were never hired, that recruitment efforts were never undertaken to fill the proposed positions, and that the hours of operation at the facility were never increased as proposed in the grant application. With respect to the Goshen facility, the court noted that, despite representations in the related grant application that staff recruitment was underway and ongoing, the number of full-time employees at the facility eight months after the grant award had decreased. The complaint also contained sufficient allegations to state a claim of conspiracy to submit false claims in violation of 31 U.S.C. 3729(a)(3), the court found. "Here, the complaint alleges an agreement between Foster and Weber to submit misleading grant applications," the court said. "The complaint also identifies the false representations made in the applications, the reasons such representations were false, and the purpose of the false representations." The court next found the complaint contained sufficient allegations to state a claim for violation of the FCA's reverse false claims provision, 31 U.S.C. 3729(a)(7), which prohibits knowingly making, using, or causing the use of, a false record or statement to conceal or avoid an obligation to pay the federal government. "The complaint alleges that Foster and Weber knowingly caused to be submitted progress reports and yearly uniform data system reports that contained false material information, and that the reports were submitted for the purpose of concealing, avoiding, or decreasing an obligation to the government," the court found. Finally, the court briefly addressed the issue of FHCN's potential liability for the alleged FCA violations. "The extent to which an entity is liable under the FCA for the acts of its employees presents an unsettled question in the Ninth Circuit," the court said. However, under an analysis allowing for every reasonable inference in favor of the plaintiff, "the allegations in the complaint are sufficient to hold FHCN liable for the fraudulent acts of Foster, whether under a intent-to-benefit, apparent-authority, or managerial-capacity theory," the court concluded. United States ex rel. Wood v. Family Healthcare Network, No. 1:07-cv-700 (E.D. Cal. Dec. 20, 2010). New Jersey Court Allows Stark And False Claims Action To Proceed Against Cardiologist A federal district court refused to enter summary judgment against a cardiologist facing claims of violating the False Claims Act and Stark Law, finding that whether the physician acted "knowingly" should not be decided on summary judgment. The U.S. District Court for the District of New Jersey also ruled that the physician could not maintain a thirdparty claim against hospital leaders who assured him the contract was lawful. For several years, the University of Medicine and Dentistry of New Jersey (UMDNJ) University Hospital failed to perform the number of cardiac procedures required to maintain its Level 1 Trauma Center license. To remedy this shortcoming, UMDNJ entered into employment contracts with local cardiologists to work part-time as Clinical Assistant Professors. Joseph Campbell, M.D. was offered such a position in

113 Under the contract, he would perform specified activities including lecturing, attending weekly conferences, and teaching fellows on a part-time basis. In exchange, he would be compensated at an annual rate of $75,000. UMDNJ's Interim Director of the Catheterization Laboratory informed Campbell that UMDNJ attorneys confirmed the arrangement was lawful. Campbell claimed that he relied on this assurance and accepted the contract without consulting independent legal counsel. During that year, Campbell received about $70,000 from UMDNJ. The government alleges that, "the primary service Defendant Campbell performed under his employment contract was to refer patients from his private cardiology practice to UMDNJ for inpatient and outpatient hospital services," many of which were paid for by Medicare and Medicaid. As a result of a federally appointed monitor's investigation into UMDNJ's cardiology program, in 2009 UMDNJ entered into a settlement agreement under which it paid approximately $8.33 million to the United States. In the instant case, the government filed a complaint against Campbell, who in turn filed a third-party complaint against UMDNJ (and others) citing his reliance on assurances that the contract was lawful. The court first considered whether the government was entitled to summary judgment on its claims that Campbell violated the Stark and False Claims Acts when he "knowingly caused false claims to be submitted by referring Medicare patients to UDMNJ, an entity with which [he] had a financial relationship." Rejecting Campbell's argument that he did not submit or cause the false claims to be submitted, the court reasoned that Campbell knew that UMDNJ would charge a facility and service fee to Medicare for the patients he referred to the hospital. The court also disagreed with Campbell's argument that the patients were not referred because he personally treated them, finding "there would still be a referral of any hospital service, technical component, or facility fee billed by the hospital." Next, examining the employment relationship in this case, the court noted that Campbell did not perform all of the duties listed in his employment contract. "If there was no requirement to actually perform the duties... then the compensation could not be fair market value for those services, and thus would serve some other purpose, such as compensation for referrals," according to the court. Thus, the record did not demonstrate that Campbell qualified for the bona fide employee exception to the Stark Law. Turning to Campbell's argument that the United States was not entitled to summary judgment because it did not prove that he "knowingly" submitted false claims, the court ruled that "the analysis of whether Campbell acted knowingly is a determination regarding his state of mind, "and thus should not be decided on summary judgment. Thus, the court agreed with Campbell on this point and denied the government's motion. The court also considered whether Campbell was entitled to summary judgment against UMDNJ and others on his third-party claims, which focused on assurances that the parttime employment contract was lawful. Finding no Third Circuit cases addressing whether False Claims Act defendants can pursue third-party claims for indemnification and contribution, the federal trial court looked to other courts and found "substantial law on the issue." Such third-party claims are permitted only if they do not provide for indemnification or contribution, the court determined. The cause of action for damages must be independent of the defendant's False Claims Act liability, and not effectively offsetting 113

114 that liability. Here, Campbell's claims against UMDNJ, "although worded to include allegations of fraud and misrepresentation, seek indemnification and contribution that obviously requires damage to Defendant Campbell that is based on a finding that he is liable under the [False Claims Act]." Noting that if Campbell is not found liable, he may bring additional arguments and claims later, the court dismissed the cardiologist's third-party claims in this case without prejudice. United States v. Campbell, No (D.N.J. Jan. 4, 2011). Seventh Circuit Revives FCA Claims, Finding Whistleblower Had Personal Knowledge Of Questionable Billing Practices The Seventh Circuit reversed February 18, 2011 a lower court s dismissal of False Claims Act (FCA) claims lodged by a whistleblower against her former employer. The lower court concluded that reports finding a large amount of claims for services not covered by Medicare and miscoded claims amounted to a public disclosure bar of the instant suit. However, the appeals court disagreed, holding that reports documenting a significant rate of false claims by an industry as a whole without attributing fraud to particular firms do not prevent a qui tam suit against any particular member of that industry. The claims at issue instead were based on the qui tam plaintiff s personal knowledge of the defendant s billing practices, the appeals court concluded. Whistleblower Kelly Baltazar worked for four months as a chiropractor at Advanced Healthcare Associates. During this time, she noticed that staff added to her billing slips services that had not been rendered and changed the codes for services that had been performed. Baltazar filed suit under the qui tam provisions of the FCA against Advanced Healthcare and Lillian Warden, the firm s owner (collectively, defendants). Defendants moved to dismiss, arguing that several governmental reports have documented false claims submitted to the Medicare and Medicaid programs by chiropractors and thus the instant suit is based on publicly disclosed information and Baltazar is not an original source of the information. The district court relied on one report finding that 57% of chiropractors claims (in a sample of 400) were for services not covered by the Medicare program, and another 16% were for covered services that had been miscoded. According to the lower court, that report established such prevalent fraud, that it was unnecessary to give private relators a piece of the action in order to locate wrongdoers. Thus, the court dismissed the suit. Baltazar appealed. The appeals court reversed the lower court. According to the appeals court, [a] statement such as half of all chiropractors claims are bogus does not reveal which half and therefore does not permit suit against any particular medical provider. It takes a provider-by-provider investigation to locate the wrongdoers. 114

115 Here, the allegation underlying the claims was not based on public reports; it was based on Baltazar s knowledge about defendants practices, the appeals court noted. According to the appeals court, other courts of appeal have concluded that reports documenting a significant rate of false claims by an industry as a whole do not prevent a qui tam suit against any particular member of that industry. As far as we can tell, no court of appeals supports the view that a report documenting widespread false claims, but not attributing them to anyone in particular, blocks qui tam litigation against every member of the entire industry, the appeals court said. The appeals court distinguished United States ex rel. Gear v. Emergency Medical Associates of Illinois, Inc., 436 F.3d 726 (7th Cir. 2006), in which it affirmed the dismissal of a suit where the qui tam plaintiff had no independent knowledge, finding Baltazar s suit, by contrast, supplied vital facts that were not in the public domain. Based on its conclusion that Baltazar s suit was based on her own knowledge rather than the published reports, the appeals court said it was unnecessary to decide whether those reports disclosed the allegations or transactions underlying the suit. It is similarly unnecessary to decide whether Baltazar qualifies for the original-source exception, the appeals court said. If the complaint is accurate, Baltazar was the original source of the information that defendants committed fraud. United States v. Warden, No (7th Cir. Feb. 18, 2011). Fifth Circuit Says Government May Proceed With Reverse False Claim Against Caremark The Fifth Circuit held February 24, 2011 that Caremark Inc. could be liable under the False Claims Act (FCA), specifically 31 U.S.C. 3729(a)(7), for causing state Medicaid agencies to make false statements to the government. Relator Janaki Ramados, a former Caremark employee, initiated the qui tam action against the pharmacy benefit manager (PBM), alleging it violated the FCA by unlawfully denying requests for reimbursement made by state Medicaid agencies for dual-eligible individuals. Several states and the federal government subsequently intervened in the action. Reverse False Claims Reversing the lower court s grant of summary judgment in Caremark s favor, the appeals court revived the federal government s allegations that Caremark made false statements to state Medicaid agencies, which receive funding from the federal government, that allowed the company to fraudulently avoid making payments to the state Medicaid agencies. Section 3729(a)(7) imposes FCA liability on a defendant that knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government. A Texas federal district court concluded that Caremark did not have any obligation to the government for denials of reimbursement requests that Caremark submitted to state Medicaid agencies. 115

116 But the government argued, and the Fifth Circuit agreed, that even if Caremark did not owe a direct obligation to the government, it could still be liable for causing the states to impair their obligations to the government. Under federal law, states have a legal duty to return federal funds if they are able to recover from third parties and to seek reimbursement from a third party for dual eligible individuals. If Caremark made false statements that an individual is not covered by a plan, these false statements would cause the state Medicaid agencies to pay for the prescription and seek reimbursement from the Government rather than from Caremark, the appeals court observed. This, in turn, would cause the States to receive and to keep federal funds to which they would not otherwise be entitled. Caremark s actions therefore could have impaired the States obligation to the Government, the appeals court explained. Plan Restrictions Plaintiffs also argued the district court erred in its interpretation of the Sixth Circuit s decision in Caremark, Inc. v. Goetz, 480 F.3d 779 (2007), which held that thirdparty claims by TennCare, Tennessee's Medicaid program, were not subject to certain card presentation and timely filing restrictions contained in the PBMs Caremark administered. In Goetz, the Sixth Circuit distinguished between procedural restrictions, which deal only with the manner or mode of requesting coverage, and substantive restrictions, which deal with the type or quantum of benefits available to a beneficiary under the plan. While substantive restrictions could be applied to a state Medicaid agency, procedural restrictions that discriminated against Medicaid could not. The appeals court here agreed with the district court that Caremark did not make false statements under the FCA when it denied reimbursement requests based on certain plan restrictions. Citing Goetz, the government and the states countered that a factually true statement can still be false if it is legally impermissible. The district court found that preauthorization was a substantive restriction and therefore granted summary judgment to Caremark on this issue. But the government contended that because Medicaid could not comply with a preauthorization requirement (i.e., it has no control over whether a dual eligible complies), Caremark cannot lawfully apply the restriction to deny reimbursement requests. The Fifth Circuit said further factual development on this issue was necessary to determine whether the preauthorization requirement functions as a procedural roadblock[] to reimbursement, or a substantive limitation on coverage. Thus, the appeals court affirmed summary judgment in Caremark s favor on claims that it made false statements when it cited restrictions contained in a client s plan as the reason for rejecting reimbursement requests. The appeals court reversed, however, the district court s conclusions that the government could not bring a claim under Section 116

117 3729(a)(7). Finally, the appeals court remanded the action for further consistent proceedings. United States v. Caremark, Inc., No (5th Cir. Feb. 24, 2011). U.S. Court In New York Says General Counsel Could Not Bring Whistleblower Action Against Former Client A federal trial court in New York dismissed April 5, 2011 a whistleblower action against Quest Diagnostics Inc. brought by several former executives, including one who served as general counsel, of its wholly owned subsidiary Unilab Corp. The U.S. District Court for the Southern District of New York found the general counsel and the two other executives, who formed the litigation partnership Fair Laboratory Practices Associates (FLPA), were disqualified from the qui tam lawsuit and any subsequent action based on the same facts. According to the redacted opinion, the general counsel violated New York ethics rules in bringing the FCA action against his former client because he relied on confidential information that he was privy to while working there as their attorney. Andrew Barker, Richard Michaelson, and Mark Bibi, three former senior Unilab executives, formed FLPA to prosecute a qui tam action alleging defendants Quest and related entities violated the Anti-Kickback Statute (AKS) by offering medical testing services for manage care patients at a substantial discount or below cost in exchange for Medicare and Medicaid referrals. Baker served as Chairman and Chief Executive Officer of Unilab from 1993 to 1996; Michaelson served as Chief Financial Officer from 1993 until about 1997, and then as Director until 1999, while Bibi served as General Counsel from 1993 through spring of 2000 and was solely responsible for all of the company s legal affairs. Quest acquired Unilab in The second amended complaint alleged defendants violated the AKS from at least January 1, 1996 through the present by operating an ongoing pull through scheme where they charged independent physician associations and managed care organizations below cost rates for laboratory tests to induce Medicare and Medicaid referrals. Defendants moved to dismiss, arguing Bibi, as Unilab s former general counsel, breached his duty of loyalty to his former client to its disadvantage and for his own personal benefit. While FPLA did not contest that some of the information at issue was confidential, plaintiff asserted that Bibi s disclosure fit within the future crime exception to the duty of confidentiality. The court first determined that the FCA did not trump New York s ethics rules, which applied here, after balancing the federal government s interests in encouraging qui tam actions versus its interest in preserving the attorney-client privilege. The court found Bibi, in disclosing the confidential information to his FLPA partners for purposes of the litigation, violated New York ethics rules DR and DR

118 DR prohibits an attorney from representing another person in the same or a substantially related matter in which that person s interests are materially adverse to the interests of the former client. Plaintiff argued that DR was inapplicable here because Bibi was not representing the relator (i.e. FPLA) as counsel. But the court disagreed, noting first that a qui tam plaintiff represents the United States within the meaning of DR Here, Bibi, as a member of FLPA, is representing another person, the United States, in a matter substantially related and materially adverse to his former representation of Unilab, without his client s consent, resulting in a direct violation of DR Moreover, the court said, Bibi could not escape violating DR by appearing as a party, rather than as counsel against Unilab, citing the legal maxim that one cannot do directly that which he cannot do indirectly. To hold otherwise, would allow counsel to skirt the protections afforded to clients under DR by simply hiring counsel to represent them in any action substantially related and materially adverse to a former representation, the court observed. The court also found Bibi s disclosures did not fit within the future crime exeption of DR DR allows an attorney to reveal a client s intention to commit a crime and the information necessary to prevent the crime. While Bibi may have reasonably believed that Defendants had the intention to commit a crime in 2005, his disclosure went beyond the scope authorized by DR such that his actions were in violation of his ethical obligation under that rule, the court said. Plaintiff argued that Bibi s participation in the qui tam action was justified because the information he possessed supported the belief that defendants intended to violate the AKS. But the court noted that the strictly construed DR is limited to information necessary to prevent the continuation or commission, of a crime, it does not allow former counsel to disclose client confidences regarding completed conduct which satisfies all elements of a crime. Here, Bibi s disclosure of confidential information dated back to 1996, which was beyond the scope of information that Bibi could have reasonably believed was necessary to prevent a crime in Finally, the court held that dismissing Bibi alone from the qui tam action was an insufficient remedy. This approach fails to consider that Bibi has violated his ethical obligations and would allow Baker and Michaelson to profit from Bibi s breaches of Unilab confidences, the court said. Moreover, because the scope of Bibi s disclosures to his FPLA partners was unknown, allowing Baker and Michaelson to go forward with the lawsuit would allow that taint to proceed into trial. 118

119 The court s added that nothing in its opinion prevented the federal government from intervening in this action and from bringing an action against the defendants. United States ex rel. Fair Lab. Practices Assocs. v. Quest Diagnostics Inc., No. 1:05-cv RPP (S.D.N.Y. Apr. 5, 2011). U.S. Court In Mississippi Dismisses False Claims Allegations Based On Failure To Comply With DMEPOS Supplier Standards A federal trial court granted March 28, 2011 partial summary judgment to an enteral nutrition supplier for nursing homes on the government s allegations that the company submitted, or caused to be submitted, false claims because it was not in compliance with the durable medical equipment (DME) supplier standards. The U.S. District Court for the Northern District of Mississippi found the government failed to prove non-compliance with any particular supplier standard and defendants had shown good faith reliance on the Centers for Medicare and Medicaid Services (CMS ) and Medicare contractor s previous determinations of compliance when submitting claims under the company s supplier number. Defendants in the case include McKesson Corporation, its subsidiary Medical-Surgical MediNet Inc. (MediNet), nursing home chain Beverly Enterprises Inc., and CERES Strategies Medical Services Inc. (CSMS), an alleged sham DME supplier created by Beverly but managed by MediNet. In June 2003, Medicare contractor Palmetto GBA National Supplier Clearinghouse (NSC) found CSMS had satisfied the relevant 21 DME supplier standards and declared it eligible to receive a DME supplier number. NSC again found CSMS compliant with the supplier standards in October 2006 upon reenrollment of its supplier number. Medicare requires a medical equipment supplier to renew its Medicare application every three years. Beginning in 2007, however, NSC notified CSMS that it was in violation of several supplier standards, including that it comply with licensing rules in all states where it did business. CMS eventually revoked CSMS supplier number, but later reinstated it. In 2009, NSC again notified CSMS that it was not in compliance with the supplier standards. Its supplier number was revoked, but reinstated after further administrative proceedings. Meanwhile, the government initiated the False Claims Act (FCA) action against defendants. According to the government, defendants violated the FCA by submitting false claims to Medicare arising from illegal kickbacks paid to Beverly through the alleged sham DME supplier CSMS. The government contended all claims presented under CSMS supplier number were false as it did not comply with the supplier standards. Defendants sought partial summary judgment on the government s claims that were based on CSMS alleged non-compliance with the supplier standards. The government also moved for partial summary judgment on the allegations that CSMS was knowingly created as a sham DME supplier that violated the conditions of payment under Medicare. Granting summary judgment to defendants, the court held the government failed to prove defendants submitted a false claim as a matter of law. 119

120 In so holding, the court noted the following sequence of events: CMS awarded CSMS a supplier number in 2003 and honored claims submitted by the company as a DME supplier from that date; NSC found CSMS in compliance with the supplier standards in 2003 and 2006; CSMS was investigated and confirmed to be acting in accordance with the supplier standards in 2007 and 2009; and although CSMS supplier number was revoked twice, its number was later reinstated retroactive to the date of revocation. Thus, CSMS was, at all times relevant, a valid DMEPOS supplier and entitled to payment under Medicare, the court found. Moreover, the court continued, the Government s contention here rests not on an objective falsehood, as required by the FCA, but rather on its subjective interpretation of Defendants regulatory duties. Here, NSC determined CSMS was in compliance with the 21 supplier standards in 2003 and The government failed to point to any change in circumstances between October 2006, when CSMS was recertified, and March 2007, when the Department of Justice instituted a complaint to NSC against CSMS. This suggests, the court said, that NSC interpreted the 21 Supplier Standards... differently than the Department of Justice. [A] finding by NSC that CSMS complied with those 21 Supplier Standards provides a basis for reasonable reliance on that determination by the supplier, the court added. Finally, the court concluded that the government had failed to prove defendants actually violated the supplier standards. Defendants cannot be held to have submitted false claims where the governmental agency charged with compliance certified that CSMS was in compliance with the regulations, the court said. United States ex rel. Jamison v. McKesson Corp., No. 2:08CV214-SA-DAS (N.D. Miss. Mar. 28, 2011). Anti-Kickback Statute OIG Says No Sanctions For Charity s Proposal To Help Financially Needy Pay For Their Medicines The Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted June 3, 2010 that it would not impose sanction in connection with a charitable organization s proposal to help financially needy individuals, including Medicare and Medicaid beneficiaries, with certain diseases afford their medicines. According to OIG, the design and administration of the requestor's proposal would interpose an independent, bona fide charitable organization between Donors and patients in a manner that would effectively insulate beneficiary decision-making from information attributing the funding of their benefit to any Donor. Thus, OIG continued, it appears unlikely that Donor contributions would influence any beneficiary s selection of a particular provider, practitioner, supplier, test, or product. At the same time, it appears unlikely that the Donor contributions would improperly influence referrals by Requestor. 120

121 The requestor is a nonprofit, tax-exempt, charitable organization that will use grant programs to provide aid to financially needy patients who have been diagnosed with Multiple Sclerosis, cancer, or rheumatoid arthritis. The grants would be used to help patients with cost-sharing amounts related to certain prescribed medications, or to cover up to 100% of the cost of a genetic test that a physician orders to determine an effective course of treatment for a specified disease. Donors to the grant program would include foundations and corporations, such as pharmaceutical manufacturers. OIG said these types of arrangements require scrutiny under the Anti-Kickback Statute and the prohibition against inducements to beneficiaries. As to the Anti-Kickback Statute, although the proposal could potentially generate prohibited remuneration if the requisite intent to induce or reward referrals of federal healthcare programs were present, OIG said it would not impose administrative sanctions because the arrangement posed minimal risk that the donor contributions would improperly influence referrals by the requestor. OIG based its conclusion on a number of factors related to the proposal s structure, including that no donors would exert direct or indirect control over the program and the requestor would award assistance to individuals based on objective, financial criteria to those already under the care of a healthcare provider and without regard to an applicant s choice of provider, supplier, test, or product. OIG did not find problematic the fact that requestor would permit the donor to earmark donations for particular diseases or for genetic testing because donors would not have any input on identifying the specified diseases, or the medications for which the program would provide cost-sharing assistance. For similar reasons, OIG said the proposal was not likely to influence improperly any beneficiary s selection of a particular provider, practitioner, supplier, product, or test. Specifically, OIG emphasized, among other things, that requestor would assist all eligible, financially needy patients on a first-come, first-served basis to the extent of available funding; an applicant s qualification for assistance would be based solely on his or her financial need; and requestor s assistance would in no way limit beneficiaries freedom of choice as to provider, product, or supplier. Finally, OIG noted the charitable organization s own interest in maximizing use of its scare resources to fulfill its charitable mission as an incentive to monitor utilization to keep expenditures to a minimum. Advisory Opinion No (Dep t of Health and Human Servs. Office of Inspector Gen. June 3, 2010). OIG Says Free Dietician And Social Worker Services At Cancer Center Does Not Violate Anti-Kickback Statute A proposal whereby two affiliated corporate entities that each own and operate a freestanding radiation oncology center would provide the services of a dietitian and social worker at no additional charge to each center s Medicare cancer patients as part of the patients treatment would not generate prohibited remuneration under the Anti-Kickback 121

122 Statute, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted June 17, Standing alone, free dietitian and social worker services offered or provided to Medicare beneficiaries would implicate Section 1128A(a)(5) of the Social Security Act and the Anti- Kickback Statute, OIG noted. However, OIG said it has been advised by the Centers for Medicare and Medicaid Services (CMS) that, if dietitian and social worker services are provided in the freestanding radiation oncology center setting, the expenses of such services are included in the Medicare payment for radiation oncology services. Accordingly, the Medicare patients applicable cost-sharing obligations include a portion attributable to the costs of the dietitian and social worker services, the opinion noted. Because the costs of the services would be reimbursed by Medicare and because the Requestors would not waive otherwise applicable cost-sharing obligations, the Requestors would not be providing free goods or services to Medicare beneficiaries under the Proposed Arrangement, OIG concluded. Advisory Opinion No (Dep t of Health and Human Servs. Office of Inspector Gen. June 10, 2010). OIG OKs Health Service District s Proposal To Transfer Funds To County In Which It Owns Hospital For New Emergency Communications Center A state and county health services district's proposal to transfer funds to the county in which it operates a hospital to support construction of a new communications and emergency operations center would not run afoul of federal fraud and abuse laws, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion issued June 18, While the arrangement could implicate federal fraud and abuse laws if the requisite intent to induce or reward referrals of federal healthcare program business were present, the OIG said, under the circumstances presented by the arrangement, the risk of fraud and abuse is low. The requestor, a health services district, operates an acute care hospital whose patients include federal healthcare program beneficiaries, the opinion noted at the outset. It is the only hospital in the county. The county operates an Emergency Medical Services (EMS) transport service and an emergency operations center. The county is considering constructing a new $7.5 million communications and emergency operations center, of which $2.5 million of the cost would be funded by the requestor, the opinion said. A monetary grant by an entity that operates a hospital to an entity that provides EMS ambulance services that may take patients to that hospital implicates the anti-kickback statute, if an intent to induce referrals of services or other business for which payment may be made under a Federal health care program is present, the OIG said. 122

123 Here, however, several factors mitigate the risk of federal healthcare program fraud or abuse, while providing significant benefits to the community, the opinion found. In support of its finding, the OIG said the transfer of funds amounts to an intragovernmental shifting of resources that are already part of the public fisc. In addition, the $2.5 million in grants will inure to the public, and not private, benefit. Third, the opinion noted that the proposed arrangement presents little risk of overutilization, steering, or increased costs to any Federal health care program. The frequency and volume of emergency calls are inherently unpredictable, and the number of patients requiring EMS transport services therefore will be unrelated to the grant, the OIG said. County policies governing emergency services also ensure a low risk of inappropriate steering, according to the OIG. Finally, the opinion highlighted that the arrangement promises to offer significant benefits to the residents of the County. Advisory Opinion No (Dept. of Health and Human Servs. Office of Inspector Gen. June 11, 2010). OIG Clears Municipalities Reciprocal Waiver Of Cost-Sharing For Backup EMS Transport The Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted June 18, 2010 that it would not impose administrative sanctions in connection with a mutual aid agreement between two municipalities to waive otherwise applicable cost-sharing obligations when providing backup emergency medical services (EMS) to each other s residents. The OIG said the insurance only billing under the proposed arrangement triggered longstanding concerns under the Anti-Kickback Statute about potentially abusive waivers of Medicare cost-sharing obligations for reasons unrelated to financial hardship. But the OIG found the arrangement as proposed would not be grounds for administrative sanctions because it posed a minimal risk of generating prohibited remuneration. The requestors are a county and a city located within the county as a distinct enclave, each of which provides EMS to their residents operated by their respective fire departments. The municipalities engage in insurance only billing whereby they waive any cost-sharing obligations for bona fide residents. Under a mutual response arrangement, the requesting municipalities provide backup EMS within each other s boundaries on a limited basis for non-routine emergency services. Pursuant to the arrangements, requestors, on a reciprocal basis, would honor the insurance only billing policy of the other when providing backup EMS for bona fide residents of the other jurisdiction. 123

124 First, the OIG noted, the arrangement did not involve routine waivers of cost-sharing obligations because the requestors would provide the backup EMS transportation on an unscheduled and sporadic basis. Since the arrangement would not involve the provision of routine, non-emergency transportation services, there was no increased risk of overutilization and little chance of increased costs to federal healthcare programs, the OIG said. Moreover, the OIG observed, each requester already waived cost-sharing obligations for their residents and therefore individuals receiving the backup EMS transportation had no expectation that they would have cost-sharing obligations. Advisory Opinion No (Dep t of Health and Human Servs. Office of Inspector Gen. June 11, 2010). OIG OKs Charitable Contributions To Encourage Providers To Use Online Scheduling Program With Drug Makers A company s proposal to encourage healthcare providers to use its online program for scheduling meetings with manufacturer representatives by offering the provider an opportunity to select a public charity to which the company would make a monetary, charitable contribution in the provider s name would not generate prohibited remuneration under the Anti-Kickback Statute, the Department of Health and Human Services Office of Inspector General (OIG) concluded in an advisory opinion posted July 30, The opinion requestor is a corporation that provides marketing services to pharmaceutical, medical, and diagnostic product manufacturers. The requestor has developed an online scheduling website that pharmaceutical, medical, and diagnostic product manufacturers could use to schedule time with healthcare providers (including physicians) to educate them about new products. Under the proposed arrangement, the manufacturers would pay the requestor an enrollment fee and a fee per five minute interval of time scheduled with each healthcare provider. Healthcare providers would not pay to participate in the arrangement, nor would they be paid anything in connection with it. In order to secure their participation, the requestor is proposing to offer providers the opportunity to designate a public charity to which the requestor would make a monetary, charitable contribution in the name of the healthcare provider. OIG first noted it is mindful that the majority of donors who make contributions to charitable organizations involved in health care and the majority of organizations who accept them are motivated by bona fide charitable purposes. However, the opinion said, in some circumstances, payments characterized as charitable donations are nothing more than disguised kickbacks intended to induce referrals, directly or indirectly. After highlighting some potentially problematic contributions, OIG found the proposal could potentially implicate the Anti-Kickback Statute if the charitable contributions would result in any actual or expected economic or other actionable benefit, whether direct or indirect, for the healthcare providers. 124

125 However, OIG concluded the proposed arrangement would be structured to prevent health care providers from receiving any actual or expected economic or other actionable benefit from the charitable donations. The opinion noted that [n]o funds would be transmitted to any health care provider, and no provider would be entitled to any tax deduction or other monetary benefit from the donation. Among other safeguards, the opinion said, charities designated by the requestor would be 501(c)(3) organizations that are public charities, and would meet the public support test under the Internal Revenue Code. These restrictions minimize the risk that the donations would be made to private foundations or other organizations subject to the direction or control of the designating health care providers, OIG said. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. July 23, 2010). Organization May Establish PAP To Defray Costs Of Drugs, Devices For Needy Brain Tumor Patients, OIG Says A nonprofit, tax-exempt, charitable organization may provide financially needy brain tumor patients with grants to defray their cost-sharing obligations for drugs and/or devices, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted August 30, Although the arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute if the requisite intent to induce or reward referrals of federal healthcare program business were present, OIG concluded that the risk of fraud was low and thus it would not impose administrative sanctions. The opinion requestor is a nonprofit, tax-exempt foundation dedicated to funding brain tumor research, education, and patient services. Under the proposed arrangement, OIG explained, the Foundation would establish a patient assistance program (PAP) to help financially needy brain tumor patients pay for their drugs and/or devices to treat brain tumors as well as conditions incident to brain tumor treatment. Such patients would include Medicare beneficiaries under Part B, Part D, Medicare Supplementary Health Insurance(Medigap), and Medicare Advantage. Much of the funding under the proposed arrangement would be provided by manufacturers of drugs and devices used to treat brain tumors, with the remainder coming from individual donors, corporations, and foundations, the opinion said. OIG noted long-standing guidance makes clear that industry stakeholders can effectively contribute to the healthcare safety net for financially needy patients, including beneficiaries of federal healthcare programs, by contributing to independent, bona fide charitable assistance programs. Here, the Foundation s particular design and administration of the Proposed Arrangement will interpose an independent, bona fide charitable organization between donors and patients in a manner that effectively insulates beneficiary decision-making from information attributing the funding of their benefit to any donor, OIG said. 125

126 Pointing to numerous specific facts in the proposed arrangement, OIG concluded that it would be unlikely that donor contributions would influence any Federal health care program beneficiary s selection of a particular provider, practitioner, supplier, or product, or the selection of any particular insurance plan. Similarly, OIG said, there would appear to be a minimal risk that donor contributions would improperly influence referrals by the Foundation. OIG cautioned that if the PAP failed to operate independently in any manner from the Foundation s other programs and services, or should any aspect of the PAP be influenced directly or indirectly by the other programs and services, this opinion would be without force and effect. Turning next to the way grants are awarded to beneficiaries, OIG found such grants not likely to influence improperly any beneficiary s selection of a particular provider, practitioner, supplier, product, or plan. Among the factors OIG considered were that the Foundation would assist all eligible, financially needy patients on a first-come, first-served basis; and that the Foundation s determination of an applicant s financial qualification for assistance would be based solely on his or her financial need, without considering the identity of any of his or her healthcare providers, practitioners, suppliers, products, or the identity of any donor that may have contributed to the support of the applicant s condition. In addition, OIG noted that the Foundation s subsidies for the patient populations it would serve would expand, rather than limit, beneficiaries freedom of choice. Patients will have already selected a provider, practitioner, or supplier of items or services and drugs or other products will have been prescribed for the patient prior to his or her application for the Foundation s financial assistance, the opinion highlighted. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Aug. 20, 2010). OIG Says Hospital May Provide Free Insurance Pre-Authorization Services To Patients And Physicians A hospital may provide insurance pre-authorization services free of charge to patients and physicians without running afoul of federal fraud and abuse laws, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted August 31, Although the arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute if the requisite intent to induce or reward referrals of federal healthcare program business were present, OIG concluded that it would not impose sanctions in this instance. The opinion requestor is a hospital that provides diagnostic imaging services, among other things. According to the requestor, many commercial insurers have begun requiring that providers obtain pre-authorization for the insurer to cover diagnostic imaging services. Under the proposed arrangement, the requestor would provide free pre-authorization services for all patients referred to it for imaging services. 126

127 OIG noted that under its 2005 Supplemental Compliance Program Guidance for Hospitals, Arrangements under which hospitals... provide physicians with items or services for free or less than fair market value... [or] relieve physicians of financial obligations they would otherwise incur... pose significant risk. In general, obtaining pre-authorization from insurers is an administrative service with potential independent value to physicians; however, whether that service confers a benefit upon a particular referring physician depends on the facts and circumstances, OIG said. Here, OIG concluded that the proposed arrangement presented a low level of fraud and abuse risk. First, OIG explained, the proposed arrangement would not target any particular referring physicians. This fact, together with the fact that the pre-authorization service would be made available on an equal basis to all patients and physicians, without regard to any physician s overall volume or value of expected or past referrals, significantly lowers the risk that Requestor could use the Proposed Arrangement to reward referrals, the opinion said. OIG also noted that the requestor has a legitimate business interest in offering uniform pre-authorization services. Whereas insurers may place responsibility for pre-authorization on imaging providers, referring physicians, or patients, only Requestor s payments are at stake. Requestor s financial interest in ensuring that pre-authorization is diligently pursued provides a rationale for the Proposed Arrangement wholly distinct from a scheme to curry favor with referral sources, OIG said. OIG also noted the proposed arrangement contained safeguards that further lowered the risk of fraud and abuse and that the Pre-Access Department handling the preauthorizations would operate transparently. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Aug. 24, 2010). OIG Says Arrangement Between Sleep Testing Provider, Hospital Poses Low Risk Of Kickback Violation An arrangement in which a sleep testing provider supplies certain testing equipment and services for a hospital-owned sleep testing facility poses an acceptably low risk of violating the Anti-Kickback Statute, the Department of Health and Human Services Office of Inspector General (OIG) concluded in an advisory opinion posted September 8, While the arrangement between the requestor, a corporate entity with no physician ownership that provides sleep disorder diagnostic testing and related services, and the hospital could potentially generat prohibited remuneration under the Anti-Kickback Statute, OIG said it would not impose administrative sanctions based on the facts and circumstances outlined in its opinion. Under the arrangement, the requestor contracted with the hospital to provide equipment, technology, supplies, and staff necessary to operate a sleep testing facility at the hospital. The hospital owns and maintains the space for the sleep testing facility, including utilities, housekeeping, communications, pharmacy, and other support services. 127

128 The hospital also provides a medical director for the sleep testing facility through a separate, unrelated agreement. The requestor charges the hospital a set per-test fee, which the requestor certified is consistent with fair market value in an arm s length transaction, without taking into account the volume or value of any referrals or other business generated by the hospital. The hospital bills patients or third-party payors for the sleep testing services, including Medicare in compliance with "under arrangement" regulations. OIG noted first that the safe harbors for equipment rental and for personal services and management contracts were inapplicable because aggregate compensation is not set in advance but paid on a per-test basis. According to OIG, sleep testing services provided under arrangement may be particularly susceptible to the risk of overutilization, and this concern is heightened for arrangements involving a per-click fee structure, which is inherently reflective of the volume or value of services ordered and provided. Despite these reservations, however, OIG found the instant arrangement posed a low risk of improperly influencing or rewarding referrals. OIG said the arrangement did not appear to include the suspect characteristics of the problematic under arrangements transactions outlined in the opinion. For example, compensation under the arrangement is fair market value and the requestor, the under arrangement supplier, is not owned by the hospital or any physicians and provides no supplemental services like marketing to the hospital. OIG also noted the structure of the contractual arrangement between the requestor and the hospital reduced the risk of improper kickbacks. For example, neither the referring physicians nor the hospital had a direct or indirect ownership interest in the requestor that might otherwise create the potential for selfdealing in the awarding of the under arrangement contract or an undue incentive to generate sleep testing referrals, OIG said. OIG again noted that the per-test fees were based on arm s length negotiations and consistent with fair market value and did not take into account the volume or value of referrals. In addition, the requestor charges and collects the per-test fee regardless of whether the hospital ultimately receives reimbursement, meaning the arrangement does not operate as a reimbursement guarantee that confers additional financial benefit on the hospital by immunizing it against collections risk. Finally, the hospital assumes business risk and contributes substantially to furnishing the sleep testing services for which it bills, OIG noted. Advisory Opinion No (Dep t of Health and Human Servs., Office of Inspector Gen. Aug. 30, 2010). 128

129 OIG OKs Physician Organization, Health System Joint Venture For Ambulatory Care Center A joint venture between two components of an academic medical center (AMC) a physician organization and a health system to build and own an ambulatory care center (center) on an equal basis would not trigger administrative sanctions under the Anti- Kickback Statute, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted September 8, Under the proposed arrangement, the health system and physician organization (collectively, requestors) would replace and consolidate several healthcare facilities and services currently located and provided on the AMC s campus into the center. The new center would offer larger exam rooms and devote space to research and other administrative and teaching activities. According to requestors, the AMC s current clinics serve roughly five times more patients than originally anticipated and the existing space is not well-suited for teaching. The new center, requestors said, would ease overcrowding, provide easier access for patients, and enhance research and educational opportunities. Requestors would contribute equal assets to the joint venture to achieve a ownership split. Requestors also have certified that neither the physician organization nor the health system could finance the center alone. Any net distributions would be directly proportional to each party s capital contribution. No distributions would go to the physicians because neither affiliated requestor have physician owners or make distributions to their employed physicians. OIG noted the proposed joint venture would not qualify for safe harbor protection because more than 40% of the investment interests are held by investors who are in a position to make or influence referrals for the entity and more than 40% of the entity s gross revenue related to healthcare items or services is likely to come from business generated by the investors. Joint ventures with 100% interested investors pose a significant risk of fraud and abuse, OIG said, but found the proposed arrangement as structured would not likely result in a kickback violation. The requestors are all components of an academic medical center with longstanding institutional relationships that integrate clinical, research, and teaching missions, OIG observed. The joint venture would allow requestors and the AMC to continue their clinical, research, and teaching missions in a more efficient way. OIG also pointed out that the joint venture would be structured in accordance with a fair market value analysis conducted by a healthcare valuation expert and the investors would make equal contributions and receive proportional distributions thus sharing the risk of losses equally. In addition, OIG emphasized the requestors employed physicians would not be compensated in a way that reflected the volume or value of referrals and would receive 129

130 no net distributions from the center as they have no ownership interest in either the physician organization or health system. Finally, the joint venture would further the mission of the AMC by eliminating duplicative technology, equipment, and supplies; better accommodating patients; and permitting greater access to educational opportunities for students and residents. Advisory Opinion No (Dep t of Health and Human Servs. Office of Inspector Gen. Aug. 31, 2010). Cochlear Implant Maker s Proposal To Reimburse Providers For Certain Services In Connection With Faulty Devices May Trigger Sanctions, OIG Says A cochlear implant manufacturer s proposal to reimburse providers for certain services rendered in connection with faulty external components while the product is still under warranty may potentially generate prohibited remuneration under the Anti-Kickback Statute and trigger administrative sanctions, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted September 10, According to the opinion, any definitive conclusion regarding the existence of an Anti- Kickback violation would require a determination of the parties intent, which is beyond the scope of the advisory opinion process. OIG did find, however, that the proposed arrangement would not constitute grounds for the imposition of civil monetary penalties under Section 1128A(a)(5) of the Social Security Act. The opinion requestor is a manufacturer of cochlear implants. If an external component of the cochlear implant fails, requestor s warranty generally covers replacement of the component. To replace the part, the customer must complete a return material authorization (RMA) and ship the component back to the requestor. However, the requestor has noticed that its customers often seek support from the clinics where the implants are adjusted when the device malfunctions rather than follow the warranty procedures. According to requestor, third-party payors do not provide reimbursement for RMA services associated with troubleshooting faulty external components, such as a broken cable or a bad headpiece microphone, if the customer does not require sound processor programming services. In addition, for the purposes of the opinion, the requestor certified that it has received requests for reimbursement from multiple providers for RMA services, but that at this point, it does not reimburse providers for these services. Under the proposed arrangement, requestor would reimburse the clinics for RMA services. 130

131 Each time one of requestor s customers seeks and receives RMA services from a clinic (rather than following the warranty instructions and submitting the RMA directly to requestor), requestor would reimburse the clinic $37 under the proposed arrangement. OIG concluded that the arrangement presented more than a minimal risk of fraud and abuse under the Anti-Kickback Statute. According to OIG, [i]f Requestor were to pay the Clinics for warranty-related services, including RMA Services, the Clinics could be influenced to recommend Requestor s product over a competitor s product. The opinion noted that the requestor has not proposed any safeguards to deter such steering of patients arising from the financial incentives built into the Proposed Arrangement. Moreover, there appears to be no compelling need to pay the Clinics to perform these services, because Requestor has taken measures to ensure that it has a process in place for customers to complete this transaction directly with Requestor, including establishing a toll-free line for troubleshooting services and for assisting customers with the RMA process. OIG further expressed concern over whether the requestor s method of establishing fair market value is sufficient to ensure that Requestor will not be overpaying a referral source for the RMA Services. In sum, OIG said, the Proposed Arrangement would result in Requestor paying the Clinics, which have solicited compensation from Requestor (by requesting reimbursement for RMA Services) and are referral sources for products reimbursable under Federal health care programs, on a per-occurrence basis, for a warranty service that Requestor itself provides to its customers at no additional cost. Accordingly, such an arrangement may involve prohibited remuneration under the antikickback statute and thus potentially be subject to sanctions, OIG said. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Sept. 3, 2010). OIG OKs Proposed Donations To Health System Programs As Part Of Private Settlement The Department of Health and Human Services Office of Inspector General (OIG) issued September 20, 2010 a favorable advisory opinion for a proposed arrangement in which a children s health system would donate funds to another health system s programs for children and families as part of a private settlement of an administrative dispute involving the issuance of a certificate of need (CON). OIG found while the two requesting health systems were potential referral sources, the arrangement posed a low risk of violating the Anti-Kickback Statute. Both entities are nonprofit, tax-exempt, charitable organizations that operate hospitals and programs to improve children s health, OIG noted. In 2007, the children s health system applied for, and received preliminary approval of, a CON to establish a full-service children s hospital and two neonatal intensive care units. 131

132 The health system, which operates in the same area, challenged the CON and petitioned for an administrative hearing. To avoid a lengthy and potentially costly formal appeals process, the requestors negotiated a settlement agreement to resolve the administrative dispute. As part of the settlement, the health system withdrew its challenge to the CON and the children s health system agreed to donate certain specified sums over a defined period of time to two children s health programs operated by the health system. The settlement agreement specified that the funds would not be paid unless and until OIG issued a favorable advisory opinion. OIG said the structure of the proposal posed limited risk of fraud and abuse given a number of factors. First, OIG noted, while the health system occasionally referred patients to the children s health system for certain specialty services not offered by the health system, neither party is, or has an incentive to be, a significant referral source for the other. Moreover, the children s health system must pay the agreed-upon sums regardless of whether the funds go to the health system or an unrelated party who is not a potential referral source. For example, since the settlement agreement s execution, the health system transferred one of the programs to the county, which would now receive the funds. In addition, OIG continued, the donations would be for a fixed amount and duration and the terms of the settlement were not subject to renegotiation. Finally, the donations would go towards programs that serve children and their families, many of whom are uninsured, and therefore would provide a benefit to that community, OIG said. OIG emphasized, however, that its review was limited to the Anti-Kickback Statute, and that the settlement agreement could implicate other state or Federal concerns that fall outside the scope of this advisory opinion. Advisory Opinion, No (Dep t of Health and Human Servs. Office of Inspector Gen. Sept. 20, 2010). Health System May Provide Free Night Hotel Stay To Pediatric Tonsillectomy Patients, OIG Says A health system s proposal to provide pediatric patients who undergo a tonsillectomy at its outpatient surgery center and their families a free night s stay in a nearby hotel following the procedure would not trigger administrative sanctions, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted September 27, While such a program could potentially implicate both the civil monetary penalty (CMP) provision prohibiting beneficiary inducements and the Anti-Kickback Statute, OIG found the proposal posed a low risk of fraud and abuse. 132

133 OIG noted the hotel accommodation program would improve access to post-surgical services and improved quality of care to pediatric tonsillectomy patients located in the mostly rural geographical area served by the health system. The health system is comprised of three affiliated hospitals and an outpatient surgery center. These facilities are staffed by ear, nose, and throat (ENTs) specialists employed by a health system clinic. The outpatient center is located three miles from the main hospital campus. The health system currently offers its non-federal healthcare program patients and their guardians a one-night free hotel stay following a tonsillectomy at the outpatient center. The health system pays the entire cost of the program, it does not bill any third-party payor. The health system would like to extend this program to federal healthcare program beneficiaries, most of whom are enrolled in Medicaid. In approving the proposal, OIG emphasized the program presented minimal anticompetitive effects because the health system is a fully integrated care model with respect to tonsillectomies performed by clinic ENTs. A patient s parent or guardian is only informed of the hotel accommodation program after selecting a clinic ENT, who only have privileges at health system hospitals. Thus, the proposal would not damage competing providers since patients using a clinic ENT would only have the choice of health system facilities to undergo the procedure. Moreover, the ENTs are employed by the clinic and their salaries are unaffected by the volume or value of surgeries performed at the outpatient clinic, OIG observed. Participation in the program is not conditioned on the use of any other goods or services from the health system the complication rate for the procedure is low (1-3%). While the program may generate some goodwill toward the health system, which could influence some patients choice of provider in the future, we believe any such influence under these particular set of facts would be speculative and attenuated by circumstances beyond the Hospital s control. Finally, OIG noted the program is beneficial because it is designed to help overcome access barriers in the predominantly rural community that it serves. Advisory Opinion No (Dep t of Health and Human Servs. Office of Inspector Gen. Sept. 17, 2010). OIG OKs Proposal For Nonprofit To Receive Donations Of Cash And DME For Distribution To Entities That Serve Patients With Coagulation Disorders A nonprofit organization s proposal to receive donations of cash and durable medical equipment (DME) to provide funding grants and DME to entities that serve individuals suffering from coagulation disorders and to provide DME directly to certain financially needy individuals could potentially generate prohibited remuneration under the Anti- Kickback Statute if the requisite intent to induce or reward referrals of federal healthcare program business were present. 133

134 But the Department of Health and Human Services Office of Inspector General (OIG) said it would not impose administrative sanctions in this instance because the risk of fraud and abuse was low, according to an advisory opinion posted September 27, OIG emphasized, however, that its opinion did not extend to any ancillary agreements or arrangements disclosed or referenced in [the] request letter or supplemental submissions. The opinion requestors are a nonprofit public benefit corporation (Council) organized to provide education, information, and psychological services and advocacy to individuals with hemophilia and its member organizations. Under the proposed arrangement, the requestors would form an independent, nonprofit, tax-exempt charitable organization (Foundation) that would provide: (1) financial grants to entities that provide services to individuals suffering from coagulation disorders; and (2) DME to such entities as well as directly to individuals suffering from coagulation disorders. The requestors anticipate that Foundation donors would include pharmaceutical manufacturers that make drugs for the treatment of coagulation disorders, pharmacies dispensing such drugs, and providers that furnish items and services to individuals who have coagulation disorders, as well as the general public. Cash Contributions The Proposed Arrangement involves a mechanism by which donors to the Foundation are insulated from decisions about the use of their contributions and the recipients of the Foundation s financial grants, the opinion said. According to OIG, several aspects of the program supported its determination that the risk donations to the Foundation would serve as remuneration for referrals of federal healthcare program business was minimal. First, OIG observed, no donor or affiliate of any donor would exert direct or indirect control over the Foundation or its programs, and the Foundation would award financial grants in a truly independent manner that severs any connection between donors and recipients of grants. Further, the Foundation would make financial grants without regard to any donor s financial interest and without regard to whether the recipient refers patients for a donor s products, services, or supplies, the opinion noted. In addition, neither the Foundation nor any of the requestors would provide donors with any information that would enable a donor to correlate the amount or frequency of its donations with the amount or frequency of referrals or use of its products, services, or supplies. OIG also noted that grants would only be awarded for operational and administrative purposes and the Foundation itself would not make any referrals to physicians or other service providers and would not provide any recommendations with regard to any particular drug, supply, or DME item used to treat coagulation disorders. 134

135 In-Kind Donations OIG also determined that the Anti-Kickback Statute would not be applicable because the requestors certified that it would not provide donated DME to federal healthcare program beneficiaries if the item or equipment would be reimbursable by the applicable federal healthcare program. Advisory Opinion No (Dep't Health and Human Servs. Office of Inspector Gen. Sept. 17). OIG Says Radiology Group May Offer Free Insurance Pre- Authorization Services To Referring Physicians A radiology group may offer free insurance pre-authorization services to referring physicians, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted September 28, Although OIG said the proposed arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute, if the requisite intent to induce or reward referrals of federal healthcare program business were present, OIG said it would not impose administrative sanctions in this instance. The opinion requestor is a physician-owned provider of professional radiology services. Under the proposed arrangement, the requestor would offer to obtain any required preauthorization from insurers for radiology services it provides. The pre-authorization services would be free and made available on an equal basis to all patients and referring physicians using the requestor without regard to any physician s overall volume or value of expected or past referrals, the opinion noted. The opinion highlighted that OIG s position on the provision of free or below-market goods or services to actual or potential referral sources is longstanding and clear: such arrangements are suspect and may violate the anti-kickback statute. Obtaining pre-authorization from insurers is an administrative service with potential independent value to physicians, OIG said; however, whether that service confers a benefit upon a particular referring physician depends on the facts and circumstances. Here, while the proposed arrangement could result in some remuneration to physicians who have been expending administrative resources to obtain pre-authorizations for their patients, OIG concluded that in the context of the proposed arrangement the risk of fraud and abuse was low. OIG first pointed out that the arrangement would not target any particular referring physicians. In the majority of cases given the multitude of insurance plans and plan requirements Requestor is unlikely to know a physician s obligations with respect to an order for a particular patient, the opinion observed. Second, the arrangement contains safeguards that further lower the risk of fraud and abuse, including that requestor would not make payments to physicians under the arrangement, and has no ancillary agreements with referring physicians that would otherwise reward referrals. In addition, OIG noted the arrangement would operate transparently, with the requestor s representatives identifying themselves to insurers, disclosing to insurers the 135

136 nature of the program, and providing each physician with a copy of all the information it submits to insurers. Finally, OIG said, the requestor has a legitimate business interest in offering uniform preauthorization services. Whereas insurers may place responsibility for pre-authorization on imaging providers, referring physicians, or patients, only Requestor s payments are at stake, OIG said. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Sept. 21, 2010). OIG Allows Use Of Preferred Hospital Network As Part Of Medigap Policy The use of a preferred hospital network as part of a Medicare Supplemental Health Insurance (Medigap) policy would not run afoul of federal fraud and abuse laws, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted September 27, The opinion requestor is a licensed offeror of Medigap policies who wants to contract with one or more preferred provider organizations (PPOs) for inclusion in the PPOs hospital networks. Under the contracts, network hospitals would provide discounts of up to 100% on Medicare inpatient deductibles incurred that would otherwise be covered by the requestor. The requestor would pay the PPOs a fee for administrative services each time it receives this discount from a network hospital. In addition, the requestor would return a portion of the savings resulting from the proposed arrangement directly to any policyholder who has an inpatient stay at a network hospital, with such individuals receiving a $100 credit off their next renewal premium. OIG first noted that both prongs of the proposed arrangement implicate federal fraud and abuse laws. The law is clear that prohibited remuneration under the anti-kickback statute may include waivers of Medicare cost-sharing amounts, the opinion said. Likewise, relief of a financial obligation may constitute a prohibited kickback. Second, the proposed premium credit implicates not only the Anti-Kickback Statute, but also the civil monetary prohibition on inducements to beneficiaries, OIG noted. However, OIG concluded that the discounts offered on inpatient deductibles by the network hospitals would present a low risk of fraud or abuse. In support of its finding, OIG observed that the waivers would not increase or affect per service Medicare payments, would not increase utilization, should not unfairly affect competition among hospitals, and would not likely affect professional medical judgment. 136

137 OIG also concluded that the premium credit for patients who have inpatient stays in network hospitals similarly would present a low risk of fraud or abuse. OIG acknowledged that the premium credit would implicate the prohibition on inducements to beneficiaries because it would be premised on a patient choosing a particular provider from a broader group of eligible providers. However, OIG explained, there is a statutory exception for differentials in coinsurance and deductible amounts as part of a benefit plan design, if the differential has been properly disclosed to affected parties and otherwise meets any requirements of corresponding regulations. While the premium credit is not technically a differential in a coinsurance or deductible amount, it would have substantially the same purpose and effect, the opinion concluded. OIG lastly highlighted that the proposed arrangement as a whole has the potential to lower Medigap costs for the Requestor s policyholders who select network hospitals. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Sept. 21, 2010). Ambulance Company With Exclusive Contract May Reimburse Town For Cost Of Providing Dispatch Services, OIG Says A town s proposal to enter into an exclusive three-year contract for basic life support ambulance transport services with an ambulance company that would reimburse the municipality for the costs of providing emergency dispatch services would not trigger administrative sanctions, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted October 14, The opinion requestor is a town that operates an emergency 911 communication center to monitor and manage calls requesting assistance from local police, fire, and emergency medical services (EMS). After the town issued a request for proposals (RFP), it awarded an exclusive three-year contract to an ambulance company for basic life support ambulance transport services. Under the proposed arrangement, the company agreed to remit an annual dispatch fee to the town for the first contract year, payable in monthly installments. Many recipients of the company s services are Medicare and Medicaid beneficiaries. The town does not pay the ambulance company any fee for the services; rather, the company bills patients and payors, the opinion explained. OIG first noted the arrangement implicates the Anti-Kickback Statute because it requires the ambulance company to bear the costs of ambulance dispatch as part of the exclusive contract with the town, some of which will be reimbursable under federal healthcare programs. In finding that it would not impose sanctions, OIG took note of several factors in the arrangement that mitigate the risk of fraud or abuse. Among these factors are that the arrangement is part of a comprehensive regulatory scheme by the town to manage the delivery of EMS; and that the arrangement involves 137

138 no substantive change in the town's dispatch procedures, making it unlikely to increase the risk of overutilization or to increase costs to federal healthcare programs. In addition, the ambulance company certified that the arrangement provides compensation for the approximate costs of the town s call dispatch services connected with the company s basic life support ambulance transport services. As a result, OIG said, the Ambulance Company is not overpaying the sources of the referrals, which represents the typical anti-kickback concern. OIG also noted that the annual dispatch fee will not be tied directly or indirectly to the volume or value of referrals between the parties and that contract exclusivity should not have an adverse impact on competition in this case. Another factor mitigating the risk of fraud or abuse is that the annual dispatch fee inures to the public, and not private, benefit, OIG added. Lastly, OIG highlighted that the arrangement does not represent a fundamental change in the delivery of emergency ambulance services in the town as the town has maintained an exclusive EMS contract for nine years. The opinion warned, however, that OIG might have reached a different result if the Ambulance Company had paid the Town remuneration not directly related to the Ambulance Company s provision of the emergency medical transports covered by the contract including, by way of example, by providing the Town with free or reduced cost equipment. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Oct. 6, 2010). OIG Approves One Sleep Testing Provider-Hospital Arrangement, But Finds Other Proposal Could Trigger Sanctions A sleep testing provider s proposal to provide certain sleep testing equipment and services, including marketing services, for a hospital-owned sleep testing facility may potentially generate prohibited remuneration under the Anti-Kickback Statute, depending on the parties intent, the Department of Health and Human Services Office of Inspector General (OIG) said in a pair of Advisory Opinions issued November 4, 2010 In one opinion, OIG refused to protect the arrangement from the imposition of sanctions, but in the other, OIG concluded it would not impose sanctions. Advisory Opinion The opinion requestor, a corporate entity with no physician ownership, provides sleep disorder diagnostic testing and related services in both freestanding facilities and in hospital-owned facilities in multiple states. The requestor contracts with a hospital to provide the equipment, technology, supplies, and staff necessary to operate a sleep testing facility at the hospital. Under the arrangement, the requestor also provides the hospital with marketing services, including part-time services of a marketing manager who visits offices of physician referral sources to educate the physicians and their staffs about the hospital s sleep testing services and the test ordering process. 138

139 The requestor charges the hospital a per-test fee that covers all items and services furnished in connection with the sleep test, including marketing services, the opinion explained. OIG noted that [c]areful scrutiny is especially warranted in this case because, in our experience, sleep testing services may be particularly susceptible to the risk of overutilization. In addition, the arrangement involves a per-click fee structure, which is inherently reflective of the volume or value of services ordered and provided, and the Arrangement includes marketing by a party with a direct financial stake in the success of the promotional efforts, OIG said. According to OIG, the requestor provides sleep testing services under arrangements to the hospital. And even though the requestor has certified that the arrangement is in full compliance with all under arrangements requirements, such an arrangement may still run afoul of the Anti-Kickback Statute, the opinion said. Although the arrangement does not appear to include many of the suspect characteristics of problematic under arrangements transactions, it still must be carefully reviewed since the requestor is in a position to generate referrals for the hospital s sleep services because of the marketing aspect of the proposed arrangement, OIG said. Finding this aspect of the arrangement troubling, OIG noted that [m]arketing fees paid on the basis of successful orders for items or services are inherently subject to abuse because they are linked to business generated by the marketer. Because the Requestor receives a fee each time its marketing efforts are successful, the Requestor s financial incentive to arrange for or recommend the Hospital s sleep testing facility is heightened, the opinion concluded. Although the requestor did include certain safeguards against fraud and abuse in the arrangement, OIG found such safeguards insufficient to offset... the risk posed by the provision of sporadic, variable marketing services in exchange for opaque success-based compensation. Advisory Opinion No The opinion requestor in this opinion also is a corporate entity with no physician ownership that provides sleep disorder diagnostic testing and related services in both freestanding facilities and hospital-owned facilities in multiple states. Under the proposed arrangement, the requestor would contract with a hospital to provide the equipment, technology, supplies, and staff necessary to operate a sleep testing facility. Requestor also would provide marketing and education services for the benefit of the hospital by supplying a full-time marketing specialist, the opinion noted. The fee structure would include: (1) a fixed, annual fee for the use of requestor s equipment that would not take into account the volume of value of referrals or other business generated between the parties; (2) a fee for marketing services that would be an aggregate, annual, set-in-advance, fixed fee, which would not take into account the volume or value of referrals or other business generated between the parties; and (3) an 139

140 aggregate, annual, set-in-advance, fixed fee for the other services and supplies specified in the agreement to be provided on an as-needed basis. According to OIG, although the arrangement did not qualify for safe harbor protection, it contained many of the safeguards enumerated in the equipment lease and personal services and management contracts safe harbors. Although certain clinical and other services needed for the sleep center would be provided on an as-needed basis without resort to a predictable schedule, such services would not be separately billable by the Hospital and would be reasonably necessary to accomplish the purpose of an under arrangements sleep center, OIG said. OIG further noted the arrangement lacked the characteristics of a suspect under arrangements transaction. The only troublesome aspect of the arrangement, OIG said, was the marketing aspect. However, even though the Requestor would be in a position to influence the generation of under arrangements business, the provision of full-time services combined with the aggregate, set in advance, fair market value fee structure of the Proposed Arrangement (including the fees for the equipment rental, as-needed services and supplies, and marketing), which does not vary based on the value or volume of referrals or tests performed, would mitigate against any undue or additional incentive to generate unnecessary or an increased volume of sleep tests, OIG concluded. The OIG further found the arrangement contained an acceptably low risk of improperly influencing or rewarding referrals, highlighting that: the sleep testing services would be ordered and interpreted by physicians without a direct or indirect financial interest in requestor; remuneration under the arrangement would be consistent with fair market value in an arm s-length transaction; the hospital would assume business risk and contribute substantially to furnishing the sleep testing services for which it bills; and the fees requestor would charge for equipment, marketing, and other services and supplies would be set in advance. Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Oct. 28, 2010). Advisory Opinion No (Dep't of Health and Human Servs. Office of Inspector Gen. Oct. 28, 2010). OIG Says Ambulance Company May Reimburse City For Dispatch, Quality Monitoring Services In an advisory opinion posted November 10, 2010, the Department of Health and Human Services Office of Inspector General (OIG) said it would not impose administrative sanctions in connection with an arrangement pursuant to which an ambulance company reimburses a municipality for the costs of providing emergency dispatch services and for monitoring the quality of the ambulance operation. OIG said while the arrangement implicated the Anti-Kickback Statute by requiring the ambulance company to bear the cost of the dispatch and quality services as part of its exclusive contract with the city to provide emergency ambulance transportation, a number of factors mitigated the risk of federal healthcare program fraud and abuse. 140

141 The city in 2002 entered into an exclusive contract, which has been extended several times since then, with the ambulance company following an open and competitive bidding process that met government contracting laws. The arrangement modified the exclusive contract such that the ambulance company reimburses the city for its annual costs of operating an emergency dispatch center that handles ambulance transport calls. Thus, the arrangement established an annual remittance from the company to the city of $228,156, the approximate cost of the dispatch and quality monitoring services, to be increased on a yearly basis thereafter by 6.5% to reflect anticipated cost increases based on historical trends. The opinion noted that many of the ambulance company s services are provided to Medicare and Medicaid beneficiaries. OIG determined that it would not impose sanctions in connection with the arrangement based on a number of factors, including that the arrangement was part of the city s comprehensive regulatory scheme to manage the delivery of emergency management services; the compensation paid by the company approximated the city s costs of providing the dispatch and monitoring services and therefore decreased the likelihood that the company was overpaying a referral source; and the annual remittance was not tied to the volume or value of referrals between the parties, with the 6.5% annual increase based on historical cost trends. In addition, the arrangement was unlikely to increase the risk of overutilization because it was limited to emergency medical services and involved no substantive change in the city s existing dispatch services. Finally, OIG noted that the putative prohibited remuneration inured to the public, and not private benefit. Advisory Opinion No (Dep t of Health and Human Servs. Office of Inspector Gen. Nov. 3, 2010). Ambulance Payment Plans For Medicaid Transport Services To SNFs May Violate Anti-Kickback Statute, OIG Concludes Payment plans for emergency and non-emergency transportation services provided for Medicaid-covered residents of skilled nursing facilities (SNFs) could potentially generate prohibited remuneration under the Anti-Kickback Statute and be grounds for the imposition of administrative sanctions, according to an Advisory Opinion posted December 28, 2010 by the Department of Health and Human Services Office of Inspector General (OIG). The opinion requestor is a nonprofit Medicare and Medicaid certified ambulance supplier who provides emergency and non-emergency transportation services, which include services for Medicaid-covered residents of SNFs. Under a new state law, payment for Medicaid transport services to ambulance suppliers must now be paid by SNFs, as those services are included in the per resident per day rate paid by the state Medicaid program for ancillary and support costs. The Requestor proposed to offer SNFs two types of payment plans for its transport services: under one, the requestor would offer the SNFs a capitated rate per resident 141

142 day, and under the other, the SNF would sign a contract under which it would pay on a fee-for-service basis for any services ordered for their Medicaid-only residents. OIG first noted that in its 2003 Compliance Program Guidance for Ambulance Suppliers, it stated that [a]ny link or connection, whether explicit or implicit, between the price offered for business paid out of the purchaser s pocket and referrals of federal program business billable by the ambulance supplier will implicate the anti-kickback statute. Here, under the first payment plan, the requestor would charge the SNFs a capitation amount that would be below the requestor s total costs of providing Medicaid transport services if all residents were Medicaid-only residents. Under the second payment plan, the requestor would charge SNFs flat, below-cost rates, the opinion noted. Thus, the circumstances surrounding both plans in the Proposed Arrangement suggest that a nexus may exist between the below-cost payment rates offered to the SNFs for Medicaid Transport Services for Medicaid-only residents and referrals of other Federal health care program business, OIG concluded. In support of its conclusion, OIG highlighted that the SNFs are in a position to direct business to the requestor that is not covered by the payment plans, such as services covered by Medicare Part B or other payers. In addition, OIG said, both parties have obvious motives for agreeing to trade belowcost payment rates for Medicaid Transport Services for Medicaid-only residents for referrals of other Federal health care program business. Prices offered to the SNF that are below the supplier's total costs of providing the services as in the facts presented here give rise to an inference that the supplier and the SNF may be swapping the below-cost rates on business for which the SNF bears the business risk in exchange for other profitable non-discounted Federal business, the opinion said. Advisory Opinion No (Dept. Health and Human Servs. Office of Inspector Gen. Dec. 20). OIG Says Pediatric Charity Care Hospital Network May Institute Insurance-Only Billing Program; Provide Transportation, Lodging Assistance To Financially Needy Patients The Department of Health and Human Services Office of Inspector General (OIG) in an advisory opinion posted January 10, 2011 said several proposals by a long-standing network of hospitals that provide charity care to sick children would not run afoul of federal fraud and abuse laws. The opinion related to a request by the network of pediatric charity hospitals to: (1) begin billing third-party payers, including federal healthcare programs, for services rendered, and waive all cost-sharing amounts without regard to patients financial need; (2) adopt a new financial need-based policy of providing lodging assistance, in limited circumstances, to patients, including federal healthcare program beneficiaries, and their families; and (3) adopt a new financial need-based policy of providing transportation assistance, in limited circumstances, to patients, including federal healthcare program beneficiaries, and their families. 142

143 The opinion requestors, a hospital network and its wholly owned subsidiary, are nonprofit, tax-exempt corporations that provide free, charitable, pediatric care for certain catastrophic and intractable injuries and medical conditions. Insurance Only Billing OIG first analyzed the requestor s proposal to institute an insurance-only billing policy. The opinion noted that such a policy implicates the Anti-Kickback Statute to the extent that it would constitute a waiver of federal healthcare program cost-sharing amounts. However, OIG would not seek to impose administrative sanctions in this case due to a number of factors. First, the opinion noted that the insurance-only billing policy represents a singular vestige of the Requestors founding and continuing charitable care mission. Because of a combination of diminution of the Requestors ability to raise funds and increases in the cost of providing care, the Requestors must choose to either begin billing third-party payers for services or take actions that are counter to their mission, such as closing facilities, the opinion further noted. The question of cost-sharing waivers would not be relevant to the Requestors, but for their desire to continue providing cost-free services to pediatric patients in need of the Hospitals specialized care and the Requestors need to seek alternate funding sources to continue their mission. This institutional history merits deference to the Insurance-Only Billing Policy that would be inappropriate for an identical proposal to provide routine costsharing waivers implemented by other institutions today, the opinion said. OIG also pointed to several factors that would reduce the risk that the insurance-only billing policy would result in overutilization or unnecessary services, including among other things: the highly specialized nature of the services offered at the hospitals; that the policy would be discussed with patients only after they were already admitted for care; compensation for employed physicians is fixed, and does not, directly or indirectly, take into account or vary based on the volume or value of services the physicians provide or order; the cost-sharing waiver would neither be advertised nor marketed; and the public benefits obtained from the specialized care provided at the Hospitals in aiding very sick and injured children. Transportation/Lodging Assistance Turning next to the requestor s proposal to provide free lodging and transportation for certain financially needy patients and their families, OIG concluded that such programs would promote access to care. In addition, the proposal would pose a low risk of harm to federal healthcare programs, OIG said, in part because services would only be provided in the context of a financial need determination and would not be advertised or marketed. OIG also observed, as with the other programs proposed by the requestor, that the costs related to the programs would not appear on any cost report or claim, and would not be otherwise shifted to any federal healthcare program. Advisory Opinion No (Dept. of Health and Human Servs. Office of Inspector Gen. Jan. 3, 2011). 143

144 OIG Says Hospital May Provide Free Transport For Patients From Nearby Physician Offices To Hospital The Department of Health and Human Services Office of Inspector General (OIG) will not impose sanctions on a hospital that proposes to provide free transport to patients from physician offices located on, or contiguous to, the hospital s campus to the hospital if the patients require further treatment and cannot transport themselves, OIG said in an advisory opinion published March 24, While the proposed arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute, if the requisite intent to induce or reward referrals of federal healthcare program business were present, it presented a low risk of fraud and abuse, the opinion concluded. The opinion Requestor is a nonprofit, tax-exempt corporation that operates an acute care hospital and provides outpatient services. The Requestor proposed to provide complimentary transport to patients from physician offices located on, or contiguous to, the hospital s campus to the hospital if the patients require further treatment and cannot transport themselves. The opinion noted that 37 physicians or physician group practices maintain offices on the Requestor s campus, and four physicians or physician group practices maintain offices contiguous to the Requestor s campus, all of whom are on the Requestor s medical staff. According to OIG, the proposed arrangement potentially implicates the Anti-Kickback Statute and the civil monetary penalties law, prohibiting inducements to Medicare and state healthcare program beneficiaries, including Medicaid, because the transportation could be offered to induce federal healthcare program beneficiaries to obtain federally payable items or services from the Requestor. However, OIG said it would not impose sanctions, pointing to several factors including that the proposed arrangement would not selectively limit eligibility to targeted populations of federal healthcare program beneficiaries. In addition, patients would only be transported about a quarter mile in a reasonable, non-extravagant form of transportation (i.e., a van), OIG noted. Among other reasons the arrangement presented a low risk of fraud and abuse, OIG highlighted that the Requestor would not advertise the transport services and noted that the cost of the transportation would not be claimed, directly or indirectly, on any federal healthcare program cost report or claim, nor otherwise be shifted to any federal healthcare program. Advisory Opinion No (Dept. of Health and Human Servs. Office of Inspector Gen. Mar. 17, 2011). OIG Can t Rule Out Sanctions In Connection With LTC Pharmacy Joint Venture The Department of Health and Human Services Office of Inspector General (OIG) issued April 14, 2011 an unfavorable advisory opinion in connection with a proposal in which a long term care (LTC) pharmacy would form a new business that would be owned in part by one of its employees and one or more LTC facilities. 144

145 OIG said the proposed arrangement could generate prohibited remuneration under the Anti-Kickback Statute and result in administrative sanctions, depending on intent, an issue that was beyond the scope of the advisory opinion. [T]here is a significant risk that the Proposed Arrangement would be an improper joint venture that would be used as a vehicle to reward the LTC Facility owners for their referrals, OIG said. The opinion requestor is an existing LTC pharmacy that provides products and services to skilled nursing facilities, intermediate care facilities, and residential care facilities. Under the proposal, the requestor s employee, a pharmacist, would form a new long term care pharmacy (Newco) that he would own along with one or more LTC Facility owners in the requestor s market area. Newco would engage in the exact same business as the requestor. Newco and the requestor would enter into a management agreement under which the requestor would provide all personnel and day-to-day services necessary for Newco to serve its LTC facility customers. In return, Newco would pay the requestor a management fee based on fair market value. OIG noted its longstanding concerns about certain problematic joint venture arrangements between those in a position to refer business, such as the LTC Facilities here, and those furnishing items or services for which Medicare or Medicaid pays, especially when all or most of the business of the joint venture is derived from one or more of the joint venturers. According to OIG, the instant arrangement shared several characteristics of suspect joint ventures outlined in its Special Advisory Bulletin. Specifically, OIG noted the LTC facility owners would be expanding into a related line of business long term care pharmaceutical products and services that would be dependent on referrals from the LTC facilities. Newco, however, would be operated in large part by the requestor. In addition, the requestor s employee would be an owner of Newco. [B]ased on the facts presented here, we are unable to exclude the possibility that the Proposed Arrangement is designed to permit the Requestor to do indirectly what it cannot do directly; that is, to pay the LTC Facility owners a share of the profits from their pharmaceutical products and services referrals, OIG concluded. Advisory Opinion No (Dep t of Health and Human Servs. Apr. 7, 2011). Stark Law CMS Issues Voluntary Self-Referral Disclosure Protocol The Centers for Medicare and Medicaid Services (CMS) issued September 23, 2010 the statutory self-disclosure protocol for actual or potential violations of the physician selfreferral prohibitions as called for under the healthcare reform law. Section 6409 of the Patient Protection and Affordable Care Act (PPACA) mandates a selfreferral disclosure protocol (SRDP) for violations of the Stark Law. The PPACA also grants the Department of Health and Human Services (HHS) Secretary the authority to reduce penalties for violations of the physician self-referral statute. The 145

146 SDRP lists the following factors as relevant to CMS consideration of whether to reduce the amounts otherwise owed: the nature and extent of the improper or illegal practice, the timeliness of the disclosure, the cooperation in providing additional information about the disclosure, the litigation risk, and the financial position of the disclosing party. While CMS may consider these factors in determining whether reduction in any amounts owed is appropriate, CMS has no obligation to reduce any amounts due and owning, the SRDP notes. A provider or supplier s electronic submission of a disclosure under the SRDP suspends the PPACA requirement that any potential overpayment be returned within 60 days. The suspension is in effect until a settlement agreement is reached or the provider or supplier is withdrawn or removed from the SRDP. The SRDP cannot be used to obtain a CMS determination as to whether an actual or potential violation of the physician self-referral law occurred. A disclosure submission under the SRDP must include the name, address, national provider identification numbers, CMS Certification Number(s), and tax identification number(s) of the disclosing party; a description of the nature of the matter being disclosed, including the type of financial relationship(s), the parties involved, the specific time periods of potential non-compliance, and the type of designated health service at issue; a statement describing why the disclosing party believes a violation of the Stark Law may have occurred; and a statement identifying whether the disclosing party has a history of similar conduct or has any prior enforcement actions against it. The disclosing parties also are expected to conduct a financial analysis and report the findings to CMS as part of the submission, including identifying the total amount that is actually or potentially due and owing during the period of non-compliance with the physician self-referral law. Maryland High Court Finds Prohibition Against Physician Self- Referrals Applies To Orthopedic Surgeon s MRI Or CT Scan Referral To Provider In Same Practice Group The Maryland Court of Appeals found January 24, 2011 that under the Maryland Self- Referral Law, the prohibition against physician self-referrals applies to an orthopedic surgeon s referral of a patient to another healthcare provider in the same group practice for a MRI or a CT scan that will involve the use of an imaging or scanning machine in which the referring physician has a financial interest. Further, the high court held that the group practice and the direct supervision exemptions to the Maryland Self-Referral Law are not applicable to such a referral. The case arose out of a declaratory ruling issued by the Maryland State Board of Physicians (Board) and affirmed by a Maryland circuit court. The issue is one of statutory interpretation of the Maryland Self-Referral Law (Subtitle 3 of Title 1 of the Health Occupations Article) in the context of a common factual scenario among Maryland orthopedic practice groups with respect to referrals for MRI services. Specifically, orthopedic practices asked that the group practice and direct supervision exemptions be interpreted to include in-office MRI referrals. Notably, the standard of review for a Board declaratory decision is simply determining if the administrative decision was premised on an erroneous conclusion of law. 146

147 The high court agreed with the Board s determination that the legislative intent of the Maryland Self-Referral Law was to substantially restrict the practice of self-referring, especially self-referrals of MRI scans, CAT scans, and radiation therapy services, to address two problems plaguing the healthcare system in Maryland: access to health insurance and escalating healthcare costs. Within the context of that legislative intent, the court agreed with the Board s statutory interpretation. First, the Board held that the group practice exemption simply was meant to allow the transfer of the professional responsibility for a patient s continued care. The exemption was meant to deal with a patient referral within a group practice in the event a physician is simply going out of town or unavailable. Thus, the exemption did not exempt referrals for specific services or tests already chosen by the referring physician. The Board came to that conclusion through examining the legislative intent, the omission in the exemption of the words services or tests, and the context of the exemption while read with the rest of the statute. Next, the court agreed with the Board s determination that the direct supervision exemption applying to in-house service referrals specifically excludes MRI, CAT scan, and radiation therapy services from the exemption. In addition to agreeing with the Board s interpretation, the court also noted that the Board s interpretation was consistent with several recent Attorney General opinions and a review of the legislative history. Finally, the high court also noted that the conclusion was confirmed by the Maryland General Assembly s rejection of several legislative attempts to amend the Self-Referral Law to adopt the result urged in this case. Therefore, the court upheld the Board s Declaratory Ruling that prohibits an orthopedic surgeon from referring a patient to in-office MRI services. Potomac Valley Orthopaedic Assocs., v. Maryland State Bd. of Phys., No. 18-Maryland- September 2008 (Md. Jan. 24, 2011). Other Items of Interest DOJ Memo Considers Department s Role In Addressing Independent Monitor Issues Acting Deputy Attorney General Gary G. Grindler issued May 25, 2010 a memorandum providing additional guidance to prosecutors on the use of corporate monitors in any deferred or non-prosecution agreements (DPAs, or NPAs). The memo, posted June 1 on the Department of Justice s (DOJ's) website, supplements an earlier memo issued on March 7, 2008 by then-acting Deputy Attorney General Craig S. Morford. The Morford memo was issued following scrutiny focused on the process used by federal prosecutors to award often lucrative contracts for oversight and monitoring of companies that enter into DPAs or NPAs to avoid criminal prosecutions. The Morford memo supplied nine basic principles for drafting monitor-related provisions in DPAs and NPAs. 147

148 The Grindler memo adds a tenth principle that a DPA or NPA should explain what role [DOJ] could play in resolving disputes that may arise between the monitor and the corporation, given the facts and circumstances of the case. The memo was prompted by a Government Accountability Office report that found some companies subject to agreements wanted more information on DOJ s potential role in addressing questions about a monitor s cost and the scope of the work he or she performs. Clearly communicating to companies the role of the Department in addressing companies disputes with monitors should better position the Department to be notified of potential issues relating to monitorships and monitor performance, Grindler s memo said. The Grindler memo includes a number of caveats for prosecutors to consider, including a reminder that DOJ is not a party to the contract between the company and the monitor and therefore dispute resolution language should not imply the Department will arbitrate any contractual disputes. In addition, the memo says, DOJ s role in resolving disputes should be limited to questions about the company s compliance with the terms of the agreement. The memo also recommends the Department and company representatives meet at least annually to discuss the monitorship and any issues regarding its scope or costs. OIG OKs Waiver Of Beneficiary Cost-Sharing Amounts Due To Retroactive Increases In Payment Rates Resulting From New Federal Law Or Regulations Providers, practitioners, and suppliers that waive beneficiary cost-sharing amounts attributable to retroactive increases in payment rates resulting from the operation of new federal statutes or regulations will not be subject to administrative sanctions, the Department of Health and Human Services Office of Inspector General (OIG) said in a June 25, 2010 policy statement. According to OIG, the operation of new federal statutes or regulations will sometimes result in payment rate increases that apply retroactively during the period from the effective date of those payment rate increases until the date on which the Centers for Medicare and Medicaid Services (CMS) implements the new, increased payment rates. Beneficiary liability for cost-sharing amounts for the affected items and services furnished during the Retroactive Period also increase on a retroactive basis. As a result, OIG has been asked whether providers affected by the retroactive payment rate increases must collect the retroactive beneficiary liability to comply with OIG's fraud and abuse authorities. According to the policy statement, although routine waivers of Medicare cost-sharing amounts potentially implicate federal fraud and abuse laws, providers will not be subject to OIG administrative sanctions if they waive retroactive beneficiary liability, subject to certain conditions. According to OIG, the following conditions must be met: 148

149 The policy statement applies only to waivers of retroactive beneficiary liability owed by beneficiaries for items and services furnished during the retroactive period. The policy statement applies only to waivers of retroactive beneficiary liability, which is the increase in the beneficiary's cost-sharing amount attributable to the commensurate increase in payment rates by operation of new federal statutes or regulations. The policy statement applies only to waivers of retroactive beneficiary liability if: providers uniformly offer the waivers to all of their affected beneficiaries; and providers do not offer the waivers as part of any advertisement or solicitation. The policy statement also does not apply to waivers of retroactive beneficiary liability if the waivers are conditioned in any manner on the provision of items, supplies, or services, OIG cautioned. CMS Proposes New Screening Tools Including Background Checks, Fingerprinting To Thwart Fraud The Centers for Medicare and Medicaid Services (CMS) unveiled a proposed rule aimed at enhancing measures to prevent fraud and abuse in federal healthcare programs that ties various screening tools to the level of risk associated with different provider and supplier types. The proposed rule, published in the September 23, 2010 Federal Register (75 Fed. Reg ), implements provisions of the Patient Protection and Affordable Care Act, as amended, intended to help ensure only legitimate providers and suppliers are enrolled in Medicare, Medicaid, and the Children s Health Insurance Program. According to CMS, the provisions addressed in the proposed rule would transition CMS antifraud efforts from the traditional pay and chase approach to a focus on fraud prevention. While pay and chase works reasonable well for legitimate providers, the same is not true for sham operations that exist for the sole purpose of stealing from Medicare or Medicaid, the rule said. The rule proposes a variety of screening measures based on three risk categories for various provider and supplier types limited, moderate, and high. For example, limited risk providers would have enrollment requirements and license and database verifications. Moderate risk providers would be subject to these verifications plus unscheduled site visits. Providers in the high risk category would face the toughest scrutiny: verifications, unscheduled site visits, criminal background checks, and fingerprinting, the rule said. CMS said it generally considers physicians, nonphysician practitioners, and medical clinics and group practices to pose limited risk because these professionals are state licensed. Other provider and supplier types that would fall into the limited risk category under the proposed rule include entities that are publicly traded; ambulatory surgical centers; end-stage renal disease facilities; federally qualified health centers; hospitals, including critical access hospitals; rural health clinics; radiation therapy centers; and skilled nursing facilities. 149

150 According to the proposed rule, those provider and supplier types in the moderate risk category include hospice organizations; independent diagnostic testing facilities; independent clinical laboratories; nonpublic, nongovernment owned or affiliated ambulance services suppliers; currently enrolled home health agencies; and currently enrolled suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). The high risk category would include newly enrolling home health agencies and DMEPOS suppliers. In addition, under the proposed rule, CMS and the states would impose moratoria on the enrollment of new providers when the situation warrants to protect against a high risk of fraud. CMS, in collaboration with the Department of Health and Human Services and states, also would suspend payments to providers pending an investigation of a credible allegation of fraud. PPACA requires the Secretary to impose a fee on each institutional provider of medical or other items or services or supplier to pay for the enhanced program integrity efforts. CMS asked for comments on the proposed assignment of specific provider and supplier types to established risk levels, including what criteria should be considered in making such assignments, whether such assignments should be released publicly, whether they should be subject to agency review and updated according to an established schedule, and the extent to which they should be updated according to evolving risks. Comments on the proposed rule were due November 16, Pharmaceutical Manufacturers That Fail To Timely Report Drug Pricing Data Will Face CMPs, OIG Warns The Department of Health and Human Services (HHS) Office of Inspector General (OIG) issued September 28, 2010 a Special Advisory Bulletin notifying pharmaceutical manufacturers that it intends to pursue enforcement actions against those that fail to comply with drug pricing and product information reporting requirements. OIG is authorized to impose civil money penalties of $10,000 per day for manufacturers that are non-compliant with the statutorily mandated reporting obligations. The Centers for Medicare and Medicaid Services (CMS) also has the authority to terminate from the Medicaid drug rebate program manufacturers that fail to meet price reporting requirements. HHS s past approach of promoting voluntary compliance has not been fully effective. OIG will now impose CMPs on manufacturers that fail to comply with their drug product and price reporting obligations, the advisory bulletin said. The advisory bulletin was released at the same time as a new OIG report (OEI ), which found that in 2008, 53% of manufacturers did not fully comply with quarterly submission requirements for average manufacturer price (AMP) data, while 78% did not fully comply with monthly AMP submission requirements. Manufacturer-reported AMPs are used to calculate the rebate amounts owed to states under the Medicaid drug rebate program and the ceiling prices in the 340B program. Pricing data also is used to establish Federal Upper Limit (FUL) amounts and in setting payment amounts under Medicare Part B. 150

151 In its report, OIG found CMS took action against some manufacturers for failure to comply with quarterly AMP reporting requirements, but took no action against manufacturers that did not comply with monthly reporting requirements. Because AMP data currently play such a critical role in Government payments for prescription drugs and may play an even greater role in the future, CMS should ensure that action is taken against noncompliant manufacturers, OIG said. According to the special advisory bulletin, OIG and CMS are working together to identify and penalize noncompliant manufacturers through the CMS process. OIG Issues Guidance On Permissive Exclusions The Department of Health and Human Services Office of Inspector General (OIG) posted October 20, 2010 guidance for implementing its permissive exclusion authority under Section 1128(b)(15) of the Social Security Act. The guidance sets forth nonbinding factors OIG will consider in deciding whether to permissively exclude an officer or managing employee of a sanctioned entity. In the guidance, OIG stresses the factors are subject to modification at any time and are not intended to limit its discretionary authority to exclude individuals or entities. The factors are intended to help enforcers develop effective investigations, establish and publicize a framework that serves as a basis for OIG s permissive exclusion decisions, allow for the appropriate allocation of OIG s finite resources to actions that have the most remedial and deterrent effect, and positively influence individuals future behavior and compliance with federal healthcare program requirements. The factors include: the circumstances of the misconduct and seriousness of the offense; the individual s role in the sanctioned entity; the individual s actions in response to the misconduct; and information about the entity (its previous history of misconduct, its size, its corporate structure). For example, OIG will consider, among other things, the nature and scope of the misconduct and the level at which the misconduct occurred. OIG also will take note of the criminal sanctions, fines, or penalties imposed against the entity or any individuals, whether the misconduct resulted in actual or potential harm to beneficiaries or financial harm to the federal healthcare programs, and whether the misconduct was an isolated incident or part of a pattern of wrongdoing over a significant period of time. In addition, OIG will consider an individual s position in relation to the underlying misconduct and the degree of managerial control or authority involved in that individual s position. Other considerations include whether an individual took corrective action to stop the misconduct or mitigate its effects and whether the individual disclosed the misconduct to appropriate federal or state authorities. Under Section 1128(b)(15), OIG may exclude an individual owner of a sanctioned entity if he or she knew or should have known of the conduct that led to the sanction. OIG also may exclude an officer or manager under that section based solely on their position within the entity. 151

152 In the guidance, OIG notes the statute sets a higher bar for excluding an owner by including a knowledge element that is absent with respect to an officer or manager. OIG said the factors set forth in the guidance will be taken into account in deciding whether to exclude an officer or a managing employee in the absence of evidence the individual knew or should have known of the misconduct. Health Information Technology ONC Issues Final Rule For HIT Temporary Certification Program The Department of Health and Human Services (HHS) Office of the National Coordinator for Health Information Technology (ONC) published in the June 24, 2010 Federal Register (75 Fed. Reg ) a final rule establishing a temporary certification program for electronic health record (EHR) systems. EHR technology must be certified for providers to receive incentive payments under Medicare and Medicaid for the adoption and meaningful use of EHRs as contemplated by the Health Information Technology for Economic and Clinical Health Act. EHR technology certification assures health care providers that the EHR technology they adopt has been tested and includes the required capabilities they need in order to use the technology in a meaningful way to improve the quality of care provided to their patients, ONC said in a press release announcing the rule. The Centers for Medicare and Medicaid Services (CMS) published a proposed rule in the January 13, 2010 Federal Register (75 Fed. Reg. 1844) defining meaningful use for purposes of the EHR incentives. The proposed rule on EHR certification issued by ONC in March covered both the temporary and permanent certification programs. As expected, the agency issued the final rule for the temporary certification program separately, with the final rule for the permanent program expected in the fall. The permanent certification program will eventually replace the temporary one. Under the final rule, which is effective June 24, 2010, the National Coordinator will authorize organizations to test and certify Complete EHRs and/or EHR Modules, thereby assuring the availability of Certified EHR Technology before the reporting period for the Medicare and Medicaid incentives. ONC Issues Rule Finalizing Certification Program For Health Information Technology The Office of the National Coordinator for Health Information Technology (ONC) January 3, 2011 issued a final rule increasing the comprehensiveness, transparency, reliability, and efficiency of the current processes used for the certification of electronic health record (EHR) technology. Meaningful use of certified EHR technology is a core requirement for eligible healthcare providers who seek to qualify to receive incentive payments from Medicare and Medicaid under the Health Information Technology for Economic and Clinical Health (HITECH) Act. ONC noted that the temporary certification program, which was established in a June 2010 final rule, will continue to be in effect until it sunsets on December 31, 2011, or at a 152

153 later date when the processes necessary for the permanent certification program to operate are completed. ONC said it will establish the permanent certification program during 2011 and highlighted that the transition from the temporary certification program to the permanent certification program will have no impact on the certifications issued to EHR technology. Under the final rule, the National Institute of Standards and Technology (NIST) through its National Voluntary Laboratory Accreditation Program (NVLAP) will be responsible for accrediting organizations to test health information technology. ONC said in a fact sheet that it plans to continue to collaborate with NIST to develop test tools and test procedures as needed for the testing of new and/or revised certification criteria adopted by the Secretary in the future. In addition, under the rule, one accreditation organization (ONC-Approved Accreditor or ONC-AA) will be approved through a competitive process to accredit certification bodies. All certification bodies will have to apply to ONC for ONC-Authorized Certification Body or ONC-ACB) status and an ONC-ACB will have to renew its status every three years, ONC said. An ONC-ACB may also be accredited by NVLAP to perform testing under the permanent certification program in order to serve as a one-stop-shop. ONC-ACBs are also permitted to perform gap certification, an agency press release said. CMS And ONC Finalize Regulations Defining Meaningful Use Of EHR The Centers for Medicare and Medicaid Services (CMS) and the Office of the National Coordinator for Health Information Technology (ONC) issued final regulations July 13, 2010 finalizing the definition of meaningful use of electronic health record (EHR) incentives under the American Recovery and Reinvestment Act of 2009 (ARRA) and setting initial standards, implementation specifications, and certification criteria for EHR technology. Under the Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009, eligible healthcare professionals and hospitals can qualify for Medicare and Medicaid incentive payments when they adopt certified EHR technology and use it to achieve specified objectives. With meaningful use definitions in place, EHR system vendors can ensure that their systems deliver the required capabilities, providers can be assured that the system they acquire will support achievement of meaningful use objectives, and a concentrated fiveyear national initiative to adopt and use electronic records in health care can begin, HHS said in a press release. The agency noted that the final rule includes modifications that address stakeholder concerns over the January 13, 2010 proposed rule while retaining the intent and structure of the incentive programs. 153

154 Definition of Meaningful Use Under the final rule, for Stage 1, which begins in 2011, the criteria for meaningful use focus on electronically capturing health information in a coded format, using that information to track key clinical conditions, communicating that information for care coordination purposes, and initiating the reporting of clinical quality measures and public health information. The proposed rule s requirement for physicians and other eligible professionals (EP) to meet 25 objectives (23 for hospitals) in reporting their meaningful use of EHRs was strongly criticized by stakeholders as well as numerous members of Congress. In response to that criticism, the final rules divides the requirements into a core group of requirements that must be met, plus an additional menu of procedures from which providers may choose. This two track approach ensures that the most basic elements of meaningful EHR use will be met by all providers qualifying for incentive payments, while at the same time allowing latitude in other areas to reflect providers needs and their individual path to full EHR use, CMS said in a fact sheet. Another item from the proposed rule that came under fire was the definition of hospitalbased physicians. Providers expressed concern that hospital-based providers in ambulatory settings would be unable to qualify for incentive payments. In response, CMS noted that the final rule conforms to the Continuing Extension Act of 2010, which addressed such concerns by defining a hospital-based EP as performing substantially all of his or her services in an inpatient hospital setting or emergency room only. Although also criticized, the rule makes final a proposed rule definition that would make individual payments to eligible hospitals identified by their individual CMS Certification Number. The final rule retains the proposed definition of an eligible hospital because that is most consistent with policy precedents in how Medicare has historically applied the statutory definition of a subsection (d) hospital under other hospital payment regulations, CMS said. The final rule also includes critical access hospitals (CAHs) in the definition of acute care hospital for the purpose of incentive program eligibility under Medicaid. Requirements for meaningful use incentive payments will be implemented over a multiyear period, phasing in additional requirements that will raise the bar for performance on IT and quality objectives in later years, CMS noted. CMS also said in an additional fact sheet that it expects to begin approving the organizations that will certify EHR systems as qualifying for meaningful use before the end of the summer and that certified EHR systems will be available later in the fall. ONC Final Rule The ONC final rule establishes the required capabilities and related standards and implementation specifications that certified EHR technology will need to include to, at a 154

155 minimum, support the achievement of Stage 1 meaningful use by eligible healthcare providers, ONC said in a fact sheet. ONC further noted that [d]evelopers of EHR technology who design their EHR technology in accordance with the final rule and subsequently get their EHR technology tested and certified by an ONC authorized testing and/or certified entity are assured that their EHR technology can be adopted by eligible healthcare providers who seek to achieve meaningful use. ONC Removes EHR Implementation Specification From Regulations The Department of Health and Human Services (HHS) Office of the National Coordinator for Health Information Technology (ONC) has revised its final rule implementing electronic health record (EHR) standards and specifications to remove a particular adopted implementation specification. The revision was implemented in an interim final rule published in the October 13, 2010 Federal Register (75 Fed. Reg ). On July 28, 2010, HHS published a final rule (75 Fed. Reg ) (Standards and Certification Criteria Final Rule) adopting an initial set of standards, implementation specifications, and certification criteria for EHR adoption under the Health Information Technology for Economic and Clinical Health Act, enacted as part of the American Recovery and Reinvestment Act of 2009, under which eligible healthcare professionals can qualify for incentive payments when they adopt and meaningfully use certified EHR technology. That rule set out the final standards and aimed to more closely align such standards, implementation specifications, and certification criteria with final meaningful use Stage 1 objectives and measures. The Standards and Certification Criteria Final Rule also adopted two content exchange standards for electronic submission to public health agencies for surveillance and reporting. However, since the publication of the Standards and Certification Criteria Final Rule, HHS noted, various stakeholders and state public health agencies have made numerous inquiries and expressed concerns about the appropriateness of the implementation specifications adopted in that rule. They noted that these implementation specifications do not appear to be appropriate for implementing the adopted standard, HL , for public health surveillance purposes, the interim final rule explained. After further review, the rule said, HHS determined that the implementation specifications were adopted in error. Accordingly, the interim final rule with comment period removes the erroneous specifications. 155

156 Report Finds Only 2% Of Hospitals Report Having EHRs That Meet Meaningful Use Criteria Only 2.1% of U.S. hospitals reported having electronic health records (EHRs) that would allow them to meet the federal government s "meaningful use" criteria, according to a study published in the online journal Health Affairs. In looking at the American Hospital Association s survey of 4,493 acute care, nonfederal hospitals, of which 3,101 responded, the report noted modest gains in electronic health record adoption between 2008 and The report found the proportion of hospitals that met all of the criteria for a basic record rose from 7.2% in 2008 to 9.2% in In total, the report said, 11.9% of U.S. hospitals had either a basic or a comprehensive EHR in The report also noted wide variation in the rate of adoption of individual health information technology (IT) functions Critical-access, small, medium-size, public, nonteaching, and rural hospitals were the least likely to have adopted at least a basic EHR in the 12 months before the survey, the report said. However, the report noted that 53% of U.S. hospitals are likely to meet five or more of the nine core meaningful-use criteria and 21% need to add only one or two functions to be able to meet the core criteria. Going forward, [i]t is unclear whether the implementation of the Medicare and Medicaid meaningful-use incentive payments will help close these gaps or further widen them, the report said. This potential gap could have important implications for the health of the nearly 60 percent of Americans who receive care in small or medium-size hospitals and for the sizable proportion who receive care in public or rural hospitals, the report concluded. Policy makers need to consider ways to make it easier for hospitals to adopt electronic health records and meet the criteria for their meaningful use especially in the case of smaller, rural, and public hospitals, the study authors suggested. HHS Issues Proposed Rule, Guidance Aimed At Helping States Develop And Upgrade IT Systems To Support Impending Exchanges The Department of Health and Human Services (HHS) unveiled November 3, 2010 efforts to help states develop and upgrade information technology (IT) systems to prepare for health insurance exchanges under the healthcare reform legislation. A proposed rule provides federal funding for Medicaid eligibility determinations and enrollment activities. 156

157 Under the rule, Medicaid eligibility systems will potentially be eligible for an enhanced federal matching rate of 90% for design and development of new systems and 75% for maintenance and operations. This represents a significant increase above the 50 percent match rate currently available for these systems, HHS said in a press release. To qualify for the enhanced matching funds, states must meet a set of performance standards and conditions, including seamless coordination with the exchanges, the agency said. HHS Office of Consumer Information and Insurance Oversight also issued initial technical guidance that will help states decide how to design, develop, and implement new or improved IT systems for the health insurance exchanges. Individuals will seek health care coverage without necessarily knowing whether they are looking for an exchange plan, a Medicaid or a CHIP plan, said Joel Ario, director of the Office of Health Insurance Exchanges. Effective and efficient data exchange between state and federal health programs is critical to achieving this one stop shopping experience and today s guidance establishes the framework and approach that will make this seamless coordination possible. Obama Signs Legislation Limiting Application Of Red Flags Rule President Obama signed into law December 18, 2010 legislation limiting the application of the Federal Trade Commission s (FTC's) Red Flags Rule, which imposes new obligations on creditors to detect, prevent, and mitigate identity theft. The Red Flag Program Clarification Act of 2010 excludes from the definition of creditor those who advance[] funds on behalf of a person for expenses incidental to a service provided by the creditor to that person. The measure was passed in the Senate November 30, 2010 by unanimous consent and was cleared by the House December 7, The Red Flags Rule is the subject of two legal challenges, one by the American Bar Association (ABA) and one by several medical groups. The lawsuits argue the FTC overstepped its authority by applying the regulation to attorneys and physicians who extend credit. The FTC has delayed enforcement of the rule, which was originally set for November 1, 2008, on numerous occasions, most recently until the end of this year. Identity theft is a serious issue, and we need to have the correct tools to make sure protections are in place. But this law makes sure the rules don t go too far and businesses are clear on where and how it works, Senator John Thune (R-SD), an original sponsor of the bill, said in a December 20 statement. Citing the legislation, the D.C. Circuit declared moot March 4, 2011 the ABA s lawsuit challenging the Red Flags Rule. Notably, the appeals court explained, the Act clarifies the right to purchase property or services and defer payment is no longer enough to subject an individual or entity to the Red Flags Rule; rather, there must now be an explicit advancement of funds. 157

158 Thus, the FTC s assertion that the term creditor includes professionals such as lawyers and healthcare providers who defer billing for their services is no longer viable, the appeals court said. In a statement following the appeals court s ruling, the American Medical Association also said its lawsuit against the FTC will now formally end. American Bar Ass n v. Federal Trade Comm n, No (D.C. Cir. Mar. 4, 2011). Healthcare Reform U.S. Court In California Dismisses Challenge To Healthcare Reform Law, Says Organization Lacked Standing The U.S. District Court for the Southern District of California dismissed August 27, 2010 a lawsuit challenging the healthcare reform law that was brought by an education and legal defense organization that primarily represents Christians and Christian organizations. The court found the plaintiffs, the Pacific Justice Institute, and Steve Baldwin, a former member of the California Assembly, lacked standing to challenge the law. As with other, similar lawsuits, plaintiffs argued a government mandate for individuals to buy insurance exceeded Congress powers under the Commerce Clause. Pacific Justice also objected to the employer responsibility provisions of the law, which require employers of a certain size to provide health insurance to their employees or pay a penalty. In addition, according to plaintiffs, the penalty imposed on individuals who fail to purchase health insurance amounts to a direct tax for which Congress acted outside its powers to tax and spend for the general welfare. Plaintiffs also alleged the Department of Health and Human Services failed to comply with a provision of the healthcare reform law requiring the Secretary, within 30 days of enactment, to publish on the agency s website a list of all of the authorities provided to the Secretary under this Act as amended. Plaintiff Baldwin, who has health issues related to his prostate, also asserted an equal protection claim, alleging the Act is discriminatory because it creates and funds several offices of women s health, without creating similar offices for men. Baldwin also alleged several provisions of the law require him to provide a broad range of personal and private information thus violating his privacy rights and physician-patient privilege. Finally, plaintiffs raised concerns that under the law public funds would be used for abortions. After filing the lawsuit, plaintiffs sought a preliminary injunction. The government moved to dismiss for lack of subject matter jurisdiction and failure to state a claim. The court denied the preliminary injunction and granted the government s motion to dismiss, finding plaintiffs lacked standing to sue because they failed to adequately allege an injury-in-fact. 158

159 First, the court found plaintiffs failed to allege any particularized injury, noting no indication from the complaint that the employer responsibility provisions or individual mandate would apply to Pacific Justice or Baldwin, respectively, especially given that those provisions do not go into effect until While Plaintiffs state they do not consent to being compelled to comply with the Act, they cannot manufacture standing by withholding their consent to the law, the court said. Plaintiffs are simply airing generalized grievances that the Court is precluded from adjudicating, the opinion said. As to Baldwin s claims that the law violates his privacy rights and the physician-patient privilege, the court found no provision of the law cited by plaintiffs that forces Baldwin to submit to unwanted medical treatment. Nor did plaintiffs allege any injury stemming from the HHS Secretary s failure to publish on the agency s website the information mandated by the law. Baldwin s equal protection claim also failed as he failed to demonstrate the law caused him any specific injury. Finally, plaintiffs did not allege that any public funds have in fact been used for abortions. Baldwin v. Sebelius, No. 10CV1033 DMS (WMC) (S.D. Cal. Aug. 27, 2010). The U.S. Supreme Court denied review November 8 of a district court decision finding an education and legal defense organization lacked standing to challenge the healthcare reform law. Baldwin v. Sebelius, No (U.S. Nov. 8, 2010 cert denied). U.S. Court In Michigan Denies Injunction Blocking Healthcare Reform Law The U.S. District Court for the Eastern District of Michigan refused October 7, 2010 to grant an injunction blocking the individual mandate under the healthcare reform law. Instead, the court held the individual mandate enacted as part of the Patient Protection and Affordable Care Act (PPACA), as amended, was a proper exercise of Congress Commerce Clause authority. Ann-Arbor, MI-based Thomas More Law Center, a conservative public interest law firm, filed the action on March 23, 2010, the same day the PPACA became law. The lawsuit sought a preliminary and permanent injunction to block enforcement of the healthcare reform law s individual mandate, which starting in 2014 requires individuals to purchase insurance or pay a penalty. The individual plaintiffs do not have private healthcare insurance and objected to being compelled by the federal government to purchase coverage. The lawsuit asked the court to find, among other things, that Congress lacked authority under the Commerce Clause to require individuals to buy insurance, that the penalty provision for those that fail to do so is an unconstitutional tax, and that the healthcare reform law violates the First Amendment by forcing private individuals to fund abortions. 159

160 The lawsuit named President Barack Obama, Department of Health and Human Services Secretary Kathleen Sebelius, U.S. Attorney General Eric H. Holder, Jr., and Department of Treasury Secretary Timothy F. Geithner as defendants. Economic Impact Plaintiffs contended the individual mandate violated the Commerce Clause because it seeks to regulate economic inactivity, rather than economic activity. The government argued, however, that Congress had a rational basis to conclude that economic decisions not to purchase insurance to pay for [healthcare] services, taken in the aggregate, substantially affect interstate commerce by, among other things, shifting costs to third parties. Moreover, the government said, the individual mandate is integral to the comprehensive regulatory scheme for the interstate markets in healthcare and health insurance. The court found a rational basis to conclude that, in the aggregate, decisions to forego insurance coverage in preference to attempting to pay for health care out of pocket drive up the cost of insurance. In the court s view, the decision whether to purchase health insurance is plainly economic. The court said that [f]ar from inactivity, the decision to forego health insurance collectively shifts billions of dollars, $43 billion in 2008, onto other market participants. Broader Regulatory Scheme The PPACA includes extensive insurance market reforms, including prohibiting insurers from denying coverage to individuals with pre-existing conditions. Proponents of the insurance reforms have argued the individual mandate is necessary to ensure that people do not delay obtaining coverage until they become sick, which would drive up premiums. The court noted the individual mandate is aimed at addressing cost-shifting and operates as an essential part of a comprehensive regulatory scheme. According to the court, the PPACA s guaranteed issue provision benefits plaintiffs and makes imposing the individual mandate appropriate. The minimum coverage provision, which addresses economic decisions regarding health care services that everyone eventually, and inevitably, will need, is a reasonable means of effectuating Congress s goal. Thus, the court concluded Congress had the power under the Commerce Clause to enact the individual mandate. The court said based on this finding it need not address the government s alternative argument that Congress acted pursuant to its authority to tax and spend for the general welfare. But, in any event, the court noted Congress could impose the penalty incidental to the valid exercise of its Commerce Clause power. 160

161 Thus, the court held plaintiffs challenge to the constitutionality of the penalty as an improperly apportioned direct tax without merit. Standing and Ripeness Notably, the court did find the individual plaintiffs had standing to challenge the individual mandate because of the advance financial planning they would have to undertake to comply with the law, even though the requirement to buy insurance does not take effect until According to plaintiffs, a basic healthcare policy will cost roughly $8,832 annually, and adding one child will increase the cost to $9,914 per year. Plaintiffs decisions to forego certain spending today, so they will have the funds to pay for health insurance when the Individual Mandate takes effect in 2014, are injuries fairly traceable to the Act for the purposes of conferring standing, the court wrote. The court also found the case ripe for review given the imposition of the individual mandate is highly probably, as is the penalty provision, pending the outcome of the various legal challenges to the law. Anti-Injunction Act No Bar In addition, the court rejected the government s argument that the Anti-Injunction Act, which prohibits suits restraining the assessment or collection of any tax, barred the action. Under the healthcare reform law, those individuals who fail to purchase insurance will be assessed a penalty reportable on their tax returns. The court noted that the Internal Revenue Service (IRS) has not yet taken any steps to assess or collect a tax. Defendants have advanced no authority for applying the Anti- Injunction Act to bar lawsuits when no attempt to collect, or otherwise act affirmatively, has been taken by the IRS, the court said. Thomas More Law Ctr. v. Obama, No. 10-CV (E.D. Mich. Oct. 7, 2010). U.S. Court In Virginia Dismisses Constitutional Challenge To Reform Law A federal court in Virginia held November 30, 30 that Congress acted in accordance with its constitutionally delegated powers under the Commerce Clause when it passed the employer and individual coverage provisions of the Patient Protection of Affordable Care Act (PPACA). In so finding, the U.S. District Court for the Western District of Virginia dismissed a challenge brought by religious groups to the healthcare reform law. According to the court, there was a rational basis for Congress to conclude that individuals' decisions about how and when to pay for health care are activities that in the aggregate substantially affect the interstate health care market. 161

162 The court found that by choosing not to purchase insurance, Plaintiffs are making an economic decision to try to pay for health care services later, out of pocket, rather than now, through the purchase of insurance. As Congress found, the court said, the total incidence of these economic decisions has a substantial impact on the national market for health care by collectively shifting billions of dollars on to other market participants and driving up the prices of insurance policies. The court further found the PPACA's requirement that employers provide insurance is a proper exercise of Congress Commerce Clause power. A rational basis exists for Congress to conclude that the terms of health coverage offered by employers to their employees have substantial effects cumulatively on interstate commerce, the opinion said. The lawsuit is one of a number of challenges to the healthcare reform law pending across the country, including one brought by Virginia Attorney General Kenneth T. Cuccinelli, II in the U.S. District Court for the Eastern District of Virginia. The federal district court judge in that case refused August 2, 2010 to dismiss the lawsuit, finding the state had stated a claim that the individual mandate exceeded Congress Commerce Clause power. In the U.S. District Court for the Northern District of Florida, Senior U.S. District Court Judge Roger Vinson allowed October 14, 2010 certain claims brought by 20 states and the National Federation of Independent Business to move forward in the challenge to the reform law pending before him. Judge Vinson refused to dismiss claims that the individual mandate and Medicaid expansion contemplated under the law are constitutionally infirm. An Ohio federal district court also refused in a November 22, 2010 opinion to dismiss claims challenging the reform law's constitutionality. The U.S. Supreme Court recently denied review of another district court s decision finding an education and legal defense organization lacked standing to challenge the healthcare reform law. Baldwin v. Sebelius, No (U.S. Nov. 8, 2010 cert denied). In that case, the U.S. District Court for the Southern District of California found the plaintiffs, the Pacific Justice Institute, and Steve Baldwin, a former member of the California Assembly, lacked standing to sue because they failed to adequately allege an injury-in-fact. Baldwin v. Sebelius, No. 10CV1033 DMS (WMC) (S.D. Cal. Aug. 27, 2010). Parties Plaintiffs in the instant suit described themselves as a Christian organization and Christian individuals holding religious beliefs that most or all forms of abortion are immoral. According to plaintiffs, the reform law does not protect against mandatory insurance payments being used to fund abortion coverage. In addition, plaintiffs claimed provisions requiring certain large employers to offer health insurance and requiring individuals to buy insurance violate the constitution and statutory law. 162

163 Defendants, various government officials named in their official capacity, moved to dismiss, arguing, among other things, that the court lacked subject matter jurisdiction because plaintiffs did not have standing, on ripeness grounds, and because the Anti- Injunction Act withdraws jurisdiction over the suit. Court Has Jurisdiction Although the court ultimately rejected plaintiffs' claims, it refused to dismiss the lawsuit on standing and ripeness grounds. According to the court, Plaintiffs' allegations of injury in fact and causation are within the realm of factual plausibility and sufficient to establish standing at this stage of the litigation. Similarly, the court said the claims were ripe for adjudication, noting [t]he challenged provisions create a direct and immediate dilemma, forcing Plaintiffs to choose between extensively reorganizing their financial affairs before the provisions go into effect, or risking heavy civil penalties. In addition, like several other courts to consider the issue, the court found the Anti- Injunction Act did not divest it of jurisdiction. Other Constitutional Claims In addition to the Commerce Clause claims, the court also dismissed plaintiffs claim that the PPACA violates the Tenth Amendment, finding the law plainly constitutional in that regard. The court similarly found all of plaintiffs other claims including those involving the Establishment Clause, the Free Exercise Clause, equal protection, and freedom of speech and association without merit. Liberty Univ., Inc. v. Geithner, No. 6:10-cv nkm (W.D. Va. Nov. 30, 2010). U.S. Court In New Jersey Holds Physician, Patient Lack Standing To Challenge Healthcare Reform Law A federal district court judge in New Jersey agreed December 8, 2010 to dismiss a challenge to the healthcare reform law, finding the plaintiffs in the case lacked standing to bring the suit. U.S. District Court Judge for the District of New Jersey Susan D. Wigenton held physician Mario A. Criscito, M.D. and patient Roe could not show an immediate injury to support standing. Wigenton distinguished the action from other pending challenges that found in favor of the plaintiffs on the standing issue. Those cases, Wigenton, said, either involved a state plaintiff or included allegations that the plaintiffs suffered an injury because they had to reorder their economic affairs at present. Criscito, a cardiologist, Roe, an uninsured patient, and New Jersey Physicians, Inc. (NJP) brought the action seeking a declaration that the Patient Protection and Affordable Care Act, as amended, (PPACA) is unconstitutional. 163

164 Specifically, plaintiffs contended Congress overstepped its powers under the Commerce Clause in enacting the individual mandate, which requires individuals to buy insurance starting in 2014 or face a penalty. Plaintiffs also alleged the PPACA violated their Fifth Amendment rights. Roe asserted standing as an uninsured individual who did not plan to purchase insurance in the future. But Wigenton held he failed to allege sufficiently an immediate injury for purposes of establishing standing. Roe s argument fails to account for the fact that even if he does not purchase qualifying insurance, there is a possibility that he may not have to pay a penalty when the Act takes effect in 2014 because he may obtain insurance through his employer, the opinion noted. Moreover, even if Roe did not obtain insurance, he may not have sufficient income in 2014 to be liable for any penalty. Hence, his claims are conjectural and speculative, at best, Wigenton concluded. While the individual mandate is certain to take effect in 2014, whether Roe specifically will have to purchase insurance or pay the resulting penalty is purely hypothetical. Wigenton distinguished several other federal district court cases that found the plaintiffs had standing to challenge the individual mandate. For example, litigation in the Northern District of Florida and the Eastern District of Virginia involved states as plaintiffs, which are usually given special solicitude in the standing analysis under Supreme Court precedent due to their need to protect their sovereign interests. In addition, in the Florida case, the individual plaintiffs alleged they were being forced to comply with [the Act and]... it will force them... to divert resources from their business endeavors and reorder their economic circumstances to obtain qualifying coverage. In the instant case, plaintiffs did not allege they would be forced to reorder their economic affairs, Wigenton noted. Wigenton likewise rejected that Criscito had standing based on his allegation that the PPACA will affect the manner in which he may, or may not seek payment for his professional services and the manner in which he may render treatment to his patients. According to Wigenton, plaintiffs argument that Criscito would no longer be able to accept direct payments from his patients once the PPACA is effective has no basis. The PPACA does not prohibit physicians from accepting direct payments from their patients, Wigenton noted. Even if patients stop paying directly, that will suggest they have obtained insurance, and the physician will still be paid for his or her services. In addition, while the complaint alleged the PPACA placed new regulatory and tax burdens on small employers like Criscito and Roe, it failed to indicate either plaintiff had 50 or more employees for purposes of triggering certain requirements. 164

165 Finally, Wigenton held the NPA lacked standing to sue because its individual members did not have standing. New Jersey Physicians, Inc. v. Obama, (SDW) (MCA) (D.N.J. Dec. 7, 2010). Virginia Judge Finds Individual Mandate Provision In Healthcare Reform Law Unconstitutional Judge Henry E. Hudson of the U.S. District Court for the Eastern District of Virginia found unconstitutional December 13, 2010 the portion of the healthcare reform law that requires individuals to purchase health insurance or pay a penalty. According to Hudson, Section 1501 of the Patient Protection and Affordable Care Act, which sets out the individual mandate (referred to in the opinion as the Minimum Essential Coverage Provision), exceeds the constitutional boundaries of congressional power under the Commerce Clause. In a statement issued December 13, 2010, the White House said it disagree[s] with the ruling issued today in Virginia and the Department of Justice is considering its appeal options. According to the statement, the administration is confident that when it s all said and done, the courts will find the Affordable Care Act constitutional. History and the facts are on our side, the statement noted. Similar legal challenges to major new laws including the Social Security Act, the Civil Rights Act, and the Voting Rights Act were all filed and all failed. The case, initiated by Virginia Attorney General Kenneth T. Cuccinelli, II, was brought in part to defend the recent legislative enactment of the Virginia Health Care Freedom Act, which the state argued was in direct conflict with the federal reform law. The state and the government both moved for summary judgment. The state also requested prohibitory injunctive relief barring the government from enforcing the Minimum Essential Coverage Provision within its territorial boundaries. The state argued that: requiring an otherwise unwilling individual to purchase a good or service from a private vendor is beyond the boundaries of congressional Commerce Clause power; the individual mandate cannot be sustained as a legitimate exercise of the congressional power of taxation under the General Welfare Clause; and that the provision is in direct conflict with the Virginia Health Care Freedom Act. In an August 2, 2010 opinion, Hudson found the state had standing to bring its suit based on the state statute. The mere existence of the lawfully-enacted statute is sufficient to trigger the duty of the Attorney General of Virginia to defend the law and the associated sovereign power to enact it, Hudson wrote. Commerce Clause Power The Department of Health and Human Services Secretary argued that Congress properly exercised its powers under the Commerce Clause, or alternatively, the Necessary and Proper Clause, to adopt a regulatory mechanism to effectuate healthcare market reform measures. 165

166 "[B]ecause the Act regulates health care financing [it] is quintessential economic activity," the Secretary argued in a court brief. The Secretary also argued that the Minimum Essential Coverage Provision is a valid exercise of Congress' independent authority to lay taxes and make expenditures for the general welfare. According to Hudson, the provision appears to forge new ground and extends the Commerce Clause powers beyond its current high water mark. The court rejected the Secretary s argument that the individual mandate falls under Congress power to regulate activities that substantially affect interstate commerce. The court noted that [e]very application of Commerce Clause power found to be constitutionally sound by the Supreme Court involved some form of action, transaction, or deed placed in motion by an individual or legal entity. Neither the Supreme Court nor any federal circuit court of appeals has extended Commerce Clause powers to compel an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market, Hudson held. In doing so, enactment of the Minimum Essential Coverage Provision exceeds the Commerce Clause powers vested in Congress under Article I, the opinion said. Despite the laudable intentions of Congress in enacting a comprehensive and transformative health care regime, the legislative process must still operate within constitutional bounds. Salutatory goals and creative drafting have never been sufficient to offset an absence of enumerated powers, Hudson noted. Hudson also rejected the Secretary s theory that the mandate is valid under the Necessary and Proper Clause, finding the Minimum Essential Coverage Provision is neither within the letter nor the spirit of the Constitution. Therefore, the Necessary and Proper Clause may not be employed to implement this affirmative duty to engage in private commerce. Penalty Not A Valid Tax Hudson next turned to whether the Minimum Essential Coverage Provision is a valid exercise of Congress' independent taxation power under the General Welfare Clause. In finding that the provision was clearly meant to be regulation of what Congress misperceived to be economic activity, Hudson said the notion that the generation of revenue was a significant legislative objective is a transparent afterthought. In rejecting the Secretary s argument that a tax and a penalty are the same thing, Hudson said the use of the term tax appears to be a tactic to achieve enlarged regulatory license. Hudson highlighted that the term "penalty" was substituted for the politically unpopular word "tax" in the final version of Section A logical inference can be drawn that the substitution of this critical language was a conscious and deliberate act on the part of Congress, Hudson noted. 166

167 Injunctive Relief Denied After finding the Minimum Essential Coverage Provision was severable from the rest of the reform law, Hudson turned to the state s request for injunctive relief enjoining implementation of Section Hudson declined to award injunctive relief. According to the opinion, its declaratory judgment is sufficient to stay the hand of the Executive branch pending appellate review. Hudson noted that Section 1501 does not take effect until 2013 at the earliest. Therefore, the likelihood of any irreparable harm pending certain appellate review is somewhat minimal, Hudson said. Virginia v. Sebelius, No. 3:10CV188-HEH (E.D. Va. Dec. 13, 2010). The government subsequently appealed the case to the Fourth Circuit. Virginia state officials, however, petitioned the U.S. Supreme Court to sidestep appellate review and instead take up the case directly. The Court denied the state s petition on April 25, Florida District Court Declares Healthcare Reform Law Void Judge Rodger Vinson of the U.S. District Court for the Northern District of Florida declared January 31, 2011 the Patient Protection and Affordable Care Act (PPACA) unconstitutional. Florida v. U.S. Dept. of Health and Human Services, No. 3:10-cv-91- RV/EMT (N.D. Fla. Jan. 31, 2011). According to Vinson, the law s requirement that individuals purchase insurance or face a penalty exceeds Congress authority under the Commerce Clause. The court did, however, in its 78-page opinion, reject the plaintiffs argument that the Medicaid expansion provisions in the PPACA were coercive. Nonetheless, finding the individual mandate provision not severable, Vinson declared the law void in its entirety. In contrast, two other of the pending cases challenging the reform law have held that the individual mandate is a proper exercise of the commerce power, Liberty Univ., Inc. v. Geithner, No. 6:10-cv nkm (W.D. Va. Nov. 30, 2010) and Thomas More Law Center v. Obama, 720 F. Supp. 2d 882 (E.D. Mich. 2010). And one other court agreed with Judge Vinson that the individual mandate violates the Commerce Clause. Virginia v. Sebelius, 728 F. Supp. 2d 768 (E.D. Va. 2010), though that court found the provision severable from the law as a whole. Individual Mandate After finding plaintiffs 26 states, two private citizens, and the National Federation of Independent Business had standing to pursue their claims, the court moved on to evaluate the claims in the context of the Commerce Clause. Never before has Congress required that everyone buy a product from a private company (essentially for life) just for being alive and residing in the United States, Vinson commented after a lengthy examination of the history of the Commerce Clause. 167

168 Turning first to the question of whether activity is required before Congress can exercise its power under the Commerce Clause, Vinson noted that the Supreme Court has never spoken directly on this issue. In all previous Commerce Clause cases, some sort of activity was at issue, the opinion said, noting [i]t would be a radical departure from existing case law to hold that Congress can regulate inactivity under the Commerce Clause. If it has the power to compel an otherwise passive individual into a commercial transaction with a third party merely by asserting --- as was done in the Act --- that compelling the actual transaction is itself commercial and economic in nature, and substantially affects interstate commerce... it is not hyperbolizing to suggest that Congress could do almost anything it wanted, Vinson said. Holding that activity is required under the Commerce Clause, the opinion next turned to whether the failure to buy insurance is an activity, as urged by the defendant, the Department of Health and Human Services. Finding that the failure to buy insurance is not an activity that may be regulated, the court first rejected defendant s argument that the healthcare market is unique. According to defendant, the healthcare market is unique because people cannot opt out of the healthcare market; hospitals are required by law to provide care, regardless of inability to pay; and if the costs incurred cannot be paid (which they frequently cannot, given the high cost of medical care), they are passed along (cost-shifted) to third parties, which has economic implications for everyone. However, according to the court, such factors could apply in different combinations to a whole host of markets. Under United States v. Lopez, 514 U.S. 549 (1995), the causal link between what is being regulated and its effect on interstate commerce cannot be attenuated and require a court to pile inference upon inference, which is, in my view, exactly what would be required to uphold the individual mandate, Vinson wrote. The court turned next to defendant s argument that the uninsured have made the decision to engage in market timing and try to finance their future medical needs out-ofpocket rather than through insurance, and that this economic decision is tantamount to activity. The problem with this legal rationale, however, is it would essentially have unlimited application. There is quite literally no decision that, in the natural course of events, does not have an economic impact of some sort, the opinion said. Accordingly, the court held that because activity is required under the Commerce Clause, the individual mandate exceeds Congress commerce power. Necessary and Proper Clause The defendant also argued in the alternative that the individual mandate is a valid exercise of Congressional power under the Necessary and Proper Clause. Rejecting this argument, Vinson said the Necessary and Proper Clause cannot be utilized to pass laws for the accomplishment of objects that are not within Congress enumerated powers. 168

169 After finding the mandate exceeds Congress Commerce Clause power, the court said, upholding the provision via application of the Necessary and Proper Clause would authorize Congress to reach and regulate far beyond the currently established outer limits of the Commerce Clause and effectively remove all limits on federal power. Severability After having determined that the individual mandate provision in the reform law is unconstitutional, the court turned to whether the provision is severable. According to Vinson, the defendant acknowledged that the individual mandate is not severable in a brief saying that the mandate provision and the Act s health insurance reforms, including the guaranteed issue and community rating, will rise or fall together as these reforms cannot be severed from the [individual mandate]. Vinson said the relevant inquiry is not whether the other provisions in the reform law can function as a technical or practical matter; instead, the more relevant inquiry is whether these provisions will comprise a statute that will function in a manner consistent with the intent of Congress. Looking at the intent of Congress, the opinion said the record seems to strongly indicate that Congress would not have passed the Act in its present form if it had not included the individual mandate. This is because the individual mandate was indisputably essential to what Congress was ultimately seeking to accomplish. Vinson also noted that the PPACA does not contain a severability clause, a fact which he said was significant because one had been included in an earlier version of the legislation, but it was removed in the bill that subsequently became law. Practically speaking, [i]t would be impossible to ascertain on a section-by-section basis if a particular statutory provision could stand (and was intended by Congress to stand) independently of the individual mandate, Vinson further noted. Injunctive Relief The court only briefly addressed injunctive relief, finding that its declaratory judgment that the PPACA is unconstitutional is the functional equivalent of an injunction and thus a separate injunction is not necessary. Medicaid Expansion Along with the individual mandate, the plaintiffs challenged the PPACA provisions expanding the Medicaid program. The state plaintiffs contended that this provision violates the Spending Clause of the Constitution because it significantly expands and alters the Medicaid program to such an extent that the states cannot afford the newly-imposed costs and burdens. According to the states, the provision is coercive to the extent that it violates the spending power of Congress. Finding that the Medicaid provisions meet the four prongs of the traditional spending power test set out in South Dakota v. Dole, 483 U.S. 203 (1987), Vinson focused on the coercion argument. 169

170 Vinson first noted numerous genuine disputed issues of material fact with respect to this claim that cannot be resolved on summary judgment. Regardless, Vinson rejected plaintiffs argument that they would have no choice but to participate in the Medicaid program, finding no support for the state plaintiffs coercion argument in existing case law. Participation in the Medicaid program is as it always has been voluntary, the opinion reasoned. Further, Vinson highlighted that every single federal Court of Appeals called upon to consider the issue has rejected the coercion theory as a viable claim. In further developments, Judge Vinson March 3, 2011 stayed pending appeal his January 31 judgment declaring the PPACA void. The federal government on February 17, 2011 filed a motion asking Vinson to clarify that his ruling does not, pending appellate review, relieve the parties to the action of any rights or obligations under the healthcare reform law. Vinson treated the motion like a motion to stay, and then granted the stay, giving the government seven days to file an appeal seeking an expedited appellate review either with the Eleventh Circuit or the Supreme Court. While granting the stay, Vinson criticized the government for effectively ignor[ing] the order and declaratory judgment for two and one-half weeks, continu[ing] to implement the Act, and only then fil[ing] a belated motion to clarify. This declaratory judgment was expected to be treated as the practical and functional equivalent of an injunction with respect to the parties to the litigation, Vinson said. Nevertheless, after applying a four-factor test to determine whether to grant a stay pending appeal, Vinson found the factors weighed in favor of granting the stay. In deciding a stay, courts should generally examine four factors: (1) whether the applicants have made a strong showing that they are likely to prevail; (2) whether the applicants will be irreparably injured if a stay is not granted; (3) whether granting the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies. Hilton v. Braunskill, 481 U.S. 770, 776 (1987). Here, Vinson found the litigation presents a question with some strong and compelling arguments on both sides. Thus, he found defendants have some likelihood of success on appeal. Weighing the injury to the defendants if the stay is not entered, and the injury to the plaintiffs if it is, Vinson found the factor weighs in favor of granting a stay. For instance, Vinson pointed out that the state of Michigan is one of the parties to the litigation. However, a federal district court in Michigan has already upheld the PPACA and the individual mandate. See Thomas More Law Center v. Obama, 720 F. Supp. 2d 882 (E.D. Mich. 2010). Vinson also noted that there is disagreement both among the plaintiff states and even within the plaintiff states as to whether implementation should continue pending appeal. Lastly, Vinson found that the public interest lies in an expeditious resolution of the issue. 170

171 The sooner this issue is finally decided by the Supreme Court, the better off the entire nation will be, Vinson wrote. The case is now on appeal to the Eleventh Circuit. U.S. Court In Mississippi Dismisses PPACA Challenge For Lack Of Standing The U.S. District Court for the Southern District of Mississippi dismissed February 3, 2011 yet another challenge to the individual mandate in the healthcare reform law. The court found that plaintiffs, the Lieutenant Governor and ten residents of Mississippi, lacked standing to challenge the Patient Protection and Affordable Care Act (PPACA). The plaintiffs allege that the minimum essential coverage provision: (1) exceeds Congress power under the Commerce Clause of Article I of the United States Constitution; (2) constitutes an unconstitutional taking pursuant to the Fifth Amendment to the United States Constitution; (3) violates substantive due process rights guaranteed by the Fifth and Fourteenth Amendments to the United States Constitution; and (4) violates the Tenth Amendment of the United States Constitution. After reviewing the holdings of the other courts that have ruled on the constitutionality of the reform law s provisions, the court turned to the standing of the individual plaintiffs. The ten individual plaintiffs argued that the minimum essential coverage provision will injure them by forcing them to expend financial and personal resources in preparation and in response to its enforcement. [W]hile it is clear that a future injury may, in some circumstances, be sufficiently certain or imminent to satisfy Article III s standing requirements, it is likewise clear that there is an outer limit as to how far a plaintiff may reach, the court said. Here, the court found the allegations of Plaintiffs First Amended Petition are insufficient to show a certainly impending injury, and, therefore, insufficient to establish their standing to challenge the minimum essential coverage provision of the PPACA. The court reasoned that the plaintiffs failed to show they would not qualify for the law s exemptions or that they would certainly be applicable individuals who must comply with the minimum coverage provision. The court next turned to the Lieutenant Governor s claims that he will be injured because the state of Mississippi will be forced to offer health insurance plans that conform to the PPACA s requirements, thereby forcing state employees such as himself to choose from health insurance options that they may not desire. Employing a similar analysis as it applied to the individual plaintiffs, the court found that the complaint lacks sufficient facts to show that plaintiff will certainly be injured by any purported limitations placed on the health insurance options available to state employees by the PPACA. In addition, [t]o whatever extent Plaintiff Bryant alleges an injury to the sovereign interests of the state of Mississippi, he does not have standing to air such grievances insofar as he appears in his private and individual capacity, the court said. 171

172 Bryant v. Holder, No. 2:10-CV-76-KS-MTP (S.D. Miss. Feb. 3, 2011). U.S. Court In D.C. Dismisses Challenge To Healthcare Reform Law A federal district court in the District of Columbia dismissed February 22, 2011 a challenge to the healthcare reform law brought by individual plaintiffs who alleged the individual mandate provision of the Patient Protection and Affordable Care Act (PPACA) is unconstitutional and violates their religious freedom. The challenge is one of several pending before federal courts across the country contending Congress exceeded its Commerce Clause powers in enacting the individual mandate, which, beginning in 2014, requires individuals to buy health insurance or face a penalty. U.S. District Court for the District of Columbia Judge Gladys Kessler s decision joins two other recent federal district courts that also found the individual mandate was a valid exercise of Congress Commerce Clause power. Two other district courts, however, have struck down the individual mandate on constitutional grounds. Granting the government s motion to dismiss, Judge Kessler rejected plaintiffs' "economic inactivity" argument as a basis for asserting Congress violated the Commerce Clause by attempting to regulate the decision not to buy health insurance. "It is pure semantics to argue that an individual who makes a choice to forgo health insurance is not 'acting,'" Kessler wrote. "More importantly," Kessler said, "the premise underlying Plaintiffs' activity/inactivity distinction--that individuals can, in the absence of Section 1501's individual mandate, remain outside of the health care market altogether--is erroneous." Standing As a threshold matter, Judge Kessler concluded that plaintiffs individuals who say they have chosen not to purchase health insurance in the past and do not want to purchase it in the future had standing to challenge the PPACA. Judge Kessler found plaintiffs alleged two distinct injuries: a future injury fairly traceable to the enforcement of the PPACA in 2014, when they have to pay the penalty for failing to obtain health insurance, and a present injury resulting from their needing to rearrange their finances now in anticipation of those mandatory payments. For similar reasons, Judge Kessler also concluded the challenge was ripe for judicial review. Commerce Clause Plaintiffs alleged the individual mandate violates the Commerce Clause because the decision not to buy insurance amounts to economic inactivity. In Judge Kessler s view, the decision whether to purchase health insurance is clearly an economic one because it relates to the consumption of a commodity i.e., a health insurance policy. 172

173 Judge Kessler also found decisions not to purchase health insurance, in the aggregate, substantially affect the national healthcare market, citing the roughly $43 billion in uncompensated costs that are shifted to purchasers of health insurance through higher premiums. In addition, Judge Kessler emphasized that the individual mandate must be viewed not as a stand-alone reform, but as one piece of a larger package of reforms meant to revamp the national health care market by creating new procedures and institutions to reduce overall costs. For this reason, the individual mandate provision is an appropriate means which is rationally related to the achievement of Congress s larger goal of reforming the national health insurance system, the opinion said. Moreover, Judge Kessler noted, the vast majority of individuals will require medical care at some point and that, in contrast to other markets, medical providers may not refuse basic medical services under federal law, regardless of the individual s ability to pay. [A]s inevitable participants in the health care market, individuals cannot be considered inactive or passive, " Kessler said. General Welfare Clause Judge Kessler rejected, however, the government s other basis for dismissing the lawsuit i.e., that Congress enacted the individual mandate pursuant to the General Welfare, or Tax and Spending, Clause. Agreeing with the other courts to consider the issue thus far, Kessler held the penalty provision associated with the minimum coverage requirement was not intended as a revenue-raising tax but as a punitive measure. Religious Freedom Restoration Act (RFRA) Finally, Judge Kessler rejected plaintiffs argument that the individual mandate violated their rights under the RFRA, which prevents the federal government from substantially burdening a person s exercise of religion, even if the burden results from a rule of general applicability. Plaintiffs argued the individual mandate conflicts with their Christian faith because it requires them to perform an act purchase health insurance that implies they doubt God s ability to provide for their health, according to the opinion. But Kessler held the alleged conflict did not rise to the level of a substantial burden, noting plaintiffs could pay the penalty instead of purchasing health insurance and pointing out that plaintiffs routinely contribute to other forms of insurance, such as Medicare, Social Security, and unemployment taxes. Mead v. Holder, No (D.D.C. Feb. 22, 2011). 173

174 U.S. Court In Texas Finds Plaintiffs May Challenge Constitutionality Of PPACA Provision Amending Stark Law Without Exhausting Administrative Remedies The U.S. District Court for the Eastern District of Texas found February 18, 2011 that a challenge to the healthcare reform law provisions that amended the Medicare Act could go forward even though the plaintiffs did not exhaust their administrative remedies. The court denied the Department of Health and Human Services (HHS) Secretary s motion to dismiss, finding it had jurisdiction under a judicially crafted exception to the exhaustion requirements. Section 6001 of the Patient Protection and Affordable Care Act (PPACA) made amendments to the section of the Medicare Act known as the Stark Law. The Stark Law prohibits physician-owned facilities from billing Medicare for services to patients referred by a physician owner. Since its inception, the Stark Law has included a number of exceptions, including when a physician has an ownership interest in an entire hospital, and not just a subdivision of the hospital. 42 U.S.C. 1395nn(d)(3) (whole hospital exception). Section 6001 of the PPACA eliminated the whole-hospital exception, but it grandfathered in existing facilities and new facilities that met certain requirements before September 23, Section 6001 also prohibits existing physician-owned hospitals from billing Medicare for self-referrals if the hospital expands. Plaintiff Texas Spine & Joint is a physician-owned hospital that is grandfathered under Section But at the time the law passed, TS&J had already invested considerable time and money in a planned expansion. The hospital argues that Section 6001 unconstitutionally restricts it from continuing with the expansion. Plaintiff Physician Hospitals of America is a 501(c)(6) organization representing the interests of its physician-owned hospital members. Plaintiffs claim that Section 6001 violates a number of their constitutional rights. Plaintiffs requested a declaration that Section 6001 is unconstitutional and an injunction that would prevent HHS Secretary Kathleen Sebelius from enforcing Section The Secretary moved to dismiss, arguing that the court lacks jurisdiction because plaintiffs failed to first channel their claim through Medicare s administrative review process. Plaintiffs argued that an exception applies because of the hardship they face if forced to comply with the exhaustion requirement. According to the court, an exception described by the Supreme Court in Shalala v. Illinois Council on Long Term Care, Inc. 529 U.S. 1 (2000), allows for direct resort to the courts when requiring presentment and channeling through the agency would mean no review at all. 174

175 In other words, the court explained, if enforcing the administrative presentment requirement would cause the challenging party to endure a hardship so severe that they would never pursue it, then it would qualify as essentially no review at all. Here, plaintiffs would have to construct or expand a hospital at a significant expense, file a Medicare reimbursement claim with the Secretary, and wait for it to be denied before they could bring their claims before the court as a challenge to the Secretary s finding, the court noted. It is inconceivable that a hospital would gamble millions of dollars in construction and expansion costs with the hope that it would ultimately prevail in having Section 6001 deemed unconstitutional by the Court, the court observed. Finding the Illinois Council exception was intended to embrace this very situation, the court held it had jurisdiction in the case and denied the Secretary s motion to dismiss. Physician Hosps. of Am. v. Sebelius, No. 6:10-cv-277 (E.D. Tex. Feb. 18, 2011). U.S. Court In Texas Upholds Constitutionality Of PPACA Provision Affecting Specialty Hospitals The U.S. District Court for the Eastern District of Texas upheld March 31, 2011 the constitutionality of a provision of the healthcare reform law that dramatically limits the availability of the whole hospital exception to the Stark Law for physician-owned hospitals. In granting summary judgment in favor of the Department of Health and Human Services (HHS) Secretary, the court found the provision did not violate due process, equal protection, or constitute an unlawful taking. The Stark Law generally prohibits hospitals from billing Medicare for services to patients referred by a physician owner, but includes an exception for when a physician has an ownership interest in an entire hospital, and not just a subdivision of the hospital. 42 U.S.C. 1395nn(d)(3) (whole hospital exception). Section 6001 of the Patient Protection and Affordable Care Act (PPACA) eliminated the whole-hospital exception, but it grandfathered in existing facilities and new facilities that met certain requirements before September 23, All new projects also had to be completed by December 31, 2010 in order to bill Medicare for services. Section 6001 also prohibits existing physician-owned hospitals from billing Medicare for self-referrals if the hospital expands. Plaintiff Texas Spine & Joint is a physician-owned hospital that is grandfathered under Section But at the time the law passed, TS&J already had invested considerable resources in a planned expansion. The hospital argued that Section 6001 unconstitutionally restricts it from continuing with the expansion. Plaintiff Physician Hospitals of America is a 501(c)(6) organization representing the interests of its physician-owned hospital members. Plaintiffs requested a declaration that Section 6001 is unconstitutional and an injunction that would prevent HHS Secretary Kathleen Sebelius from enforcing Section According to plaintiffs, Section 6001 violates their due process and equal protection rights 175

176 under the Fifth Amendment; effects an unconstitutional and retroactive taking of their real and personal property; and is void for vagueness. The court rejected plaintiffs arguments and uphold the constitutionality of Section As an initial matter, the court reiterated a previous holding that it had subject matter jurisdiction even though plaintiffs did not exhaust their administrative remedies under the exception to the exhaustion requirements set forth by the Supreme Court in Shalala v. Illinois Council on Long Term Care, Inc. 529 U.S. 1 (2000), which allows direct resort to the courts when requiring presentment and channeling through the agency would mean no review at all. See Physician Hosps. of Am. v. Sebelius, No. 6:10-cv-277 (E.D. Tex. Feb. 18, 2011). Next, applying rational basis review, the court rejected plaintiffs substantive due process and equal protection claims. According to the court, the justifications for Section 6001 that physician-owned hospitals lead to overutilization of services, higher costs, undermine community hospitals that provide uncompensated care, and provide inadequate emergency care were not so unfounded as to be arbitrary. Plaintiffs attempted to offer evidence that some facts on which Congress and the Secretary relied lacked support and appeared to be made up. But the court found that [a]lthough Plaintiffs present considerable evidence that questions the wisdom and judgment of the legislature, all of the evidence, even when viewed in favor of Plaintiffs, cannot support a finding that Congress acted arbitrarily when passing Section Plaintiffs also argued the proposed justifications were pretextual and that Section 6001 was the product of a backroom deal brokered to gain the support of hospital groups for the healthcare reform legislation. While acknowledging case law striking down laws as arbitrary that were based on allegedly illegitimate protectionist purposes, the court concluded that plaintiffs had failed to refute all the asserted justifications for the provisions. The court also rejected plaintiffs claim that Section 6001 amounts to a regulatory taking of their real property and of their capital investment, including their anticipated revenue source of Medicare claims from patients treated in new or expanded physician-owned hospitals. After finding the takings claim ripe for review, the court found no regulatory takings of real property, noting Section 6001 merely limits the availability of the whole hospital exception and does not impose any restrictions on Plaintiffs use of their real property. The only value Plaintiffs have lost under the law, is the ability to bill Medicare for selfreferred patients, the court observed. The court also found no regulator taking of plaintiffs capital investment. The court acknowledged plaintiffs demonstrated a substantial financial hardship as a result of Section 6001 (i.e. forfeiting resources already expended for expansion plans and losing Medicare as a revenue stream). 176

177 But given that Medicare is a voluntary program that the government can alter at any time, and that Congress in the past considered and almost enacted previous versions of Section 6001, plaintiffs cannot claim to have had a reasonable expectation that the statute would remain unchanged, the court said. Moreover, Section 6001 is more analogous to a public program adjusting the benefits and burdens of economic life to promote the common good than a physical invasion of Plaintiffs property rights, the court added. Finally, the court rejected plaintiffs contention that Section 6001 should be void for vagueness. Specifically, the court held Section 6001 s various deadlines were not conflicting and that the provision establishing exceptions for some physician-owned hospitals to expand was not overly vague even though it gives the Secretary nearly two years to develop an application process. Physician Hosps. of Am. v. Sebelius, No. 6:10-cv-277 (E.D. Tex. Mar. 31, 2011). U.S. Court In Oklahoma Says Uninsured Plaintiffs Have Standing To Challenge Healthcare Reform Law A federal court in Oklahoma ruled April 26, 2011 that three uninsured patients had standing to raise certain constitutional challenges to the healthcare reform law. As with several other federal courts to consider the issue, the U.S. District Court for the Western District of Oklahoma found the need to investigate and plan financially for health insurance coverage was a sufficient injury-in-fact for standing purposes The court did hold, however, that the insured plaintiffs participating in the challenge did not have standing because their argument that future insurance costs could result as a result of the Affordable Care Act (ACA) was too speculative and depended on the actions of third parties, i.e., insurers. Plaintiffs Claims Plaintiffs alleged the following claims: 1. Congress lacked authority under the Commerce Clause to enact the provision requiring individuals to buy insurance or face a penalty; 2. Congress lacked constitutional authority to impose a capitation tax to enforce the individual mandate; 3. The power to enact such legislation is specifically reserved to the states pursuant to the Tenth Amendment; 4. The ACA forces plaintiffs to contribute to the funding of abortions, thereby violating their First Amendment rights of conscience and the free exercise of religion; 5. The ACA violates equal protection under the Fifth and Fourteenth Amendment by, among other things, funding and benefiting certain special interest organizations, including unions, through tax exemptions and other mechanisms, based on their political viewpoints, and [b]y providing for earmarks, or special interest expenditures, while denying similar funding and benefits to other individuals who don t share similar viewpoints"; 6. The ACA s individual mandate violates due process under the Fifth Amendment; and 177

178 7. The ACA requires individuals to provide private medical information to the federal government in violation of the Fourth Amendment. Not Too Speculative The court found the three uninsured plaintiffs in the action had established standing for their first, second, third, and sixth causes of action. Specifically, the court held these plaintiffs had alleged two injuries that were fairly traceable to the ACA: the future injury of being compelled to purchase healthcare coverage they did not want and the present injury of having to investigate and plan their finances for the future requirement to buy health insurance. According to the court, plaintiffs alleged future and present injuries were sufficiently concrete and particularized to constitute an injury-in-fact for standing purposes. Based on similar reasoning, the court also held these claims were ripe for review. Injury Not Fairly Traceable to ACA The court refused, however, to find standing for those plaintiffs who currently have insurance. These Plaintiffs have failed to allege an injury that is fairly traceable to the challenged action of the Defendants and not the result of some independent action of some third party not before the Court or of Plaintiffs own actions. Plaintiffs argued the ACA will cause the cost of healthcare insurance to rise because the law bans insurers from denying coverage based on pre-existing conditions. But the court characterized this assertion as too speculative to constitute and injury-infact. Moreover, the ACA does not require insurance companies to raise their premiums; and if insurers did so, any injury to Plaintiffs would be the result of the insurance companies independent actions and not the challenged actions of the Defendants, the court observed. In other words, the court concluded, Plaintiffs injury would not be fairly traceable to the ACA or the Defendants. No Standing for Remaining Claims The court held none of the plaintiffs had standing as to the remaining claims, largely for failing to identify any specific ACA provisions that require or put into effect the complained of actions; for example, providing earmarks or special interest expenditures for some groups but not others, requiring the disclosure of private medical information to the government, and requiring plaintiffs to contribute to the funding of abortions. Calvey v. Obama, No. CIV R (W.D. Okla. Apr. 26, 2011). 178

179 Healthcare Spending Fiscal Responsibility Commission Recommends Cuts To Health Spending The National Commission on Fiscal Responsibility and Reform issued November 10, 2010 a draft co-chairs proposal to reduce the deficit, which included several recommendations on cuts to health spending. The co-chairs of the Commission are Alan Simpson, the former Republican Senator from Wyoming, and Erskine Bowles, a former Chief of Staff to President Clinton. President Obama created the Commission to address the nation's fiscal challenges. The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Specifically, the Commission is tasked with proposing recommendations designed to balance the budget, excluding interest payments on the debt, by Along with such recommendations as comprehensive tax reform and reforming Social Security, the Commission proposed to reduce health spending as one mandatory budget option. The proposal aims to permanently fix the problematic sustainable growth rate formula for physician payment and to [f]ully offset the cost of the Doc Fix by asking doctors and other health providers, lawyers, and individuals to take responsibility for slowing health care cost growth. Offsets mentioned in the proposal include: paying doctors and other providers less, improving efficiency, and rewarding quality by speeding up payment reforms and increasing drug rebates; increasing cost sharing in Medicare; and paying lawyers less and reducing the cost of defensive medicine. The proposal also identified expanding successful cost containment demonstrations and identifying an additional $200 billion savings in federal health spending such as cutting Medicare payment for bad debt, cutting federal spending on graduate and indirect medical education, and reforms to Tricare and the Federal Employees Health Benefits program. In terms of long term savings, the proposal recommended setting a global target for total federal health expenditures after 2020 and reviewing costs every two years. In addition, the Commission recommended keeping growth to GDP plus one percent. If costs have grown faster than targets, the proposal recommended the President submit and Congress consider reforms such as increasing premiums, overhauling the fee-forservice system, and adding a robust public option. In later developments, the Commission subsequently voted 11 to 18 in favor of revised recommendations for trimming the nation s deficit. The vote fell short of the 14 needed to prompt consideration by the House and Senate. The Commission s revised recommendations were issued December 1, 2010 updating the November 10, 2010 draft proposal. 179

180 The revised proposal mostly followed the earlier plan s recommended steps for cutting health spending, with some minor tweaks. Bipartisan Task Force Recommends Measures To Control Medicare, Medicaid Costs The Debt Reduction Task Force of the Bipartisan Policy Center issued November 17, 2010 a series of recommendations for improving the economy and tackling the nation s deficit, including reducing healthcare spending by $756 billion through Among the recommendations for achieving these savings are gradually raising Medicare Part B premiums, transitioning Medicare to a premium support program, reforming medical malpractice laws, and gradually phasing-out the tax exclusion of employerprovided health benefits. The task force is co-chaired by former Senator Pete V. Domenici (R-NM) and Dr. Alice M. Rivlin, former Office of Management and Budget Director during the Clinton administration. Slowing the growth of health spending is realistic, the task force said, noting other advanced countries have substantially lower health spending as a share of Gross Domestic Product (GDP). Preserving Medicare The task force said controlling Medicare costs in the short term could be accomplished by gradually raising Medicare Part B premiums from 25% to 35% of total program costs over five years. In addition, Medicare should use its buying power to increase rebates from pharmaceutical companies, modernize the program s benefits package (including its copayment structure), and bundle payments for post-acute care to reduce costs. Over the long term, the task force recommended that Medicare be transitioned to a premium support program that limits growth in per-beneficiary federal support to GDP plus 1%, versus the current projections of GDP plus 1.7%. The new system maintains traditional Medicare as the default, but will charge higher premiums if costs rise faster than established limits, the task force said. As an alternative, beneficiaries could opt to purchase a private plan through a health insurance exchange. The task force also recommended a permanent fix to the sustainable growth rate formula for physician Medicare payments. Controlling Medicaid Costs The task force also set forth a number of proposals for containing rising Medicaid costs. For example, in the short term, the task force recommended applying managed care principles in all states to aged Supplementary Security Income beneficiaries. 180

181 In the long term, Medicaid should reduce annual per-beneficiary cost growth by 1% beginning in The task force said one option for achieving this reduction would be reforming the shared financing arrangement between the federal and state governments, which has led to gaming of the matching payment system and rising healthcare costs. Other Recommendations The task force also recommended incentivizing employers and employees to select more cost-effective health plans by capping the exclusion of employer-provided health benefits in 2018, and then phasing it out over 10 years. The task force also said states should be required to cap awards for noneconomic and punitive damages in medical malpractice actions. House Clears GOP FY 2012 Budget Plan With Medicare, Medicaid Overhaul The House approved April 15, 2011 by a vote a Republican-offered fiscal year 2012 budget plan that would make substantial changes to the Medicare and Medicaid programs. Under the budget blueprint, released April 5 by Budget Committee Chairman Paul Ryan (R-WI), the current Medicare fee-for-service structure would be transformed into a premium support model starting in 2022 for new beneficiaries. At that time, existing beneficiaries could remain in traditional Medicare or opt in to the new system. The budget proposal also would convert the federal share of Medicaid spending into a block grant program. The budget plan passed the House with no Democratic votes. Four Republicans also voted against the budget proposal. In discussing the proposal, which aims to trim $6 trillion in spending from the President s budget over 10 years, Ryan likened the Medicare changes to the current healthcare program available to federal workers, emphasizing the proposal is not a voucher program. Instead, Medicare would pay a premium support payment to a health plan chosen by the beneficiary, subsidizing its cost, Ryan said. According to Ryan, the budget proposal also addresses Medicaid s flawed financing structure, which he said creates perverse incentives and encourages the program s heedless growth. In a statement, House Speaker John Boehner (R-OH) said the GOP budget plan will help job creation today, lift the crushing burden of debt that threatens our children s future and protect programs like Medicare and Medicaid. But in a speech at the Atlanta Press Club, Department of Health and Human Services Secretary Kathleen Sebelius said the Republican plan was a blunt approach that simply cut Medicare without addressing what is driving program costs the growing cost of health care generally. 181

182 According to Sebelius, the GOP s solution for rising costs in Medicare is to turn it into a voucher program and have the size of those vouchers grow more slowly than the cost of care. The result is that ten years from now, a 65-year-old who s eligible for Medicare will have to pay nearly $6,400 more for coverage than they would today." Sebelius acknowledged the need to address the rising costs in Medicare as part of deficit reduction efforts, but advocated President Obama s plan to reduce costs by improving care through innovation. Meanwhile, Senate Majority Leader Harry Reid (D-NV) said the Republican plan to end Medicare and immediately raise prescription drug costs for seniors in order to pay for millionaire tax breaks will never pass the Senate. HIPAA Regulations HHS Withdraws Final Breach Notification Rule The Department of Health and Human Services (HHS) has withdrawn the breach notification final rule, which it sent to the Office of Management and Budget (OMB) for review in May, according to an announcement posted on the Office for Civil Rights (OCRs ) website. HHS issued in August 2009 an interim final rule on breach notification requirements for unsecured protected health information, which became effective September 23, The interim final rule remains in effect. According to the OCR posting, HHS received roughly 120 comments on the interim final rule. HHS said it decided to withdraw the final rule from OMB review to allow further consideration, given the Department s experience to date in administering the regulations. This is a complex issue and the Administration is committed to ensuring that the individuals health information is secured to the extent possible to avoid unauthorized uses and disclosures, and that individuals are appropriately notified when incidents do occur, the OCR announcement said. The interim final rule issued in August 2009 pursuant to the Health Information Technology for Economic and Clinical Health Act applies to healthcare providers, health plans, and other entities covered by the Health Insurance Portability and Accountability Act. Cases Georgia Supreme Court Finds HIPAA Allows Ex Parte Contact, But Order Here Was Too Broad The Georgia Supreme Court held June 1, 2010 that the Health Insurance Portability and Accountability Act of 1996 (HIPAA) allows for ex parte communication with a patient s physician in a medical malpractice action, as long as the procedural requirements for protecting information disclosed during such interviews are satisfied. 182

183 In the instant case, however, the qualified protective order granted by the trial court allowing ex parte interviews with the patient s physicians was too broad, the high court found. Russell Baker sued Wellstar Health Systems, Inc. individually and d/b/a Wellstar Kennestone Hospital for medical malpractice. Wellstar filed a motion for a qualified protective order under HIPAA requesting that it be allowed to conduct ex parte interviews with Baker s healthcare providers. The trial court granted the motion and Baker filed an interlocutory appeal. The high court explained that Moreland v. Austin, 670 S.E.2d 68 (Ga. 2008), governs this appeal. In Moreland, the high court held that under Georgia law, once a plaintiff puts his medical condition in issue, defendant can seek plaintiff's protected health information by formal discovery, or informally, by communicating orally with a plaintiff's physicians. However, the Moreland court, said HIPAA preempts Georgia law with regard to ex parte communications between defense counsel and plaintiff's prior treating physicians because HIPAA affords patients more control over their medical records when it comes to informal contacts between litigants and physicians. Thus, the Moreland court concluded that ex parte interviews may be conducted under HIPAA, if the procedural requirements for protecting information disclosed during these interviews have been satisfied. One manner of complying with the provisions of HIPAA is to obtain a qualified protective order, as Wellstar did here, the court noted. The high court found the order here incorporates the procedural safeguards mandated by HIPAA. The high court rejected Baker s contention that the order creates bad public policy, instead finding that ex parte interviews serve a beneficial purpose in malpractice litigation. But looking at the order under Georgia law, the high court found it was substantively too broad. [T]he qualified protective order should have limited Wellstar s inquiry to matters relevant to Baker s medical condition which is at issue in this proceeding, the high court found. Accordingly, the court reversed the trial court s grant of the qualified protective order. Baker v. Wellstar Health Sys., Inc., No. S10A0994 (Ga. Jun. 1, 2010). U.S. Court In Kansas Allows Ex Parte Contact With Malpractice Plaintiff's Treating Physicians The U.S. District Court for the District of Kansas agreed to issue a disclosure order to the physician defendants in a medical malpractice case allowing ex parte contact with the plaintiff s treating physicians. 183

184 Seeing no problems with such contact under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the court allowed the order, but required defendants to submit a more specific list of plaintiff s relevant healthcare providers. The court refused, however, to allow defendants access to records related to treatment for drug and alcohol dependency, finding defendants failed to show good cause for such disclosure. Plaintiff Cleoretta Brigham sued Defendants Jeffrey W. Colyer, M.D. and Plastic Surgical Arts, P.A. after a breast reduction surgery left her breasts misaligned, misshapen, and horribly scarred and disfigured. Plaintiff alleged Colyer deviated from the accepted standard of care in the performance of the surgery and that his employer was vicariously liable. Defendants moved for a qualified protective order pursuant to HIPAA allowing the disclosure of plaintiff s relevant medical history and seeking ex parte communications with her treating physicians. After determining defendants were actually seeking a disclosure order, as described in 45 C.F.R (e)(1)(i), the court addressed the issue of physician-patient privilege. Because plaintiff has placed her medical condition at issue, she cannot claim that the physician-patient privilege prohibits her treating physicians from disclosing information concerning her medical condition to defendants counsel, the court held. Plaintiff next argued defendants requested order was overbroad. The court noted that in their reply brief, defendants clarified what they meant by relevant medical history and significantly limited the scope of their proposed disclosure order. In addition, the court noted it would require defendants to include a more specific list of plaintiff s relevant healthcare providers before issuing the disclosure order. Turning next to the requested ex parte communication, the court found such contact permissible under HIPAA as defendants had complied with the procedural requirements to obtain such an order. The court rejected plaintiffs request to have advance notice of the ex parte communication, saying that it sees no reason to require Defendants counsel to inform Plaintiff s counsel of the date, time or location of any ex parte communications, and Plaintiff provides no support for this request. However, the court denied defendants request for a disclosure order seeking records related to the diagnosis and treatment of alcoholic and drug dependency. Disclosure is permitted for such records if authorized by an order of a court of competent jurisdiction after good cause is shown for such an order, including the need to avert a substantial risk of death or serious bodily harm, the court explained. But here defendants failed to show good cause, the court held. Brigham v. Colyer, No JWL-DJW (D. Kan. May 27, 2010). 184

185 Michigan Supreme Court Rules HIPAA Permits Ex Parte Interviews With Treating Physicians The Health Insurance Portability and Accountability Act of 1996 (HIPAA) permits ex parte interviews by defense counsel with treating physicians under a qualified protective order, the Michigan Supreme Court held July 13, 2010 in affirming an appeals court decision. We hold that ex parte interviews, which are permitted under Michigan law, are also consistent with HIPAA regulations, provided that reasonable efforts have been made... to secure a qualified protective order that meets the requirements of [45 C.F.R (e)(1)(v)], the high court said. Plaintiff brought a wrongful-death medical-malpractice action alleging defendant failed to properly diagnose or treat decedent Linda Clippert s medical condition, causing her death. Defendant sought to interview Clippert s treating physician, but plaintiff refused to waive Clippert s confidentiality rights under HIPAA with respect to oral communications. Defendant sought a qualified protective order to permit an ex parte interview with Clippert s treating physician, but the trial court denied the motion, finding the HIPAA provision regarding protective orders only pertained to documentary evidence and that HIPAA did not authorize ex parte oral interviews. The appeals court reversed the trial court s ruling. A majority of the Michigan high court affirmed the appeals court s decision. Under Michigan law, defense counsel in a medical malpractice action may seek an ex parte interview with a plaintiff s treating physician once the plaintiff has waived the physician-patient privilege. The high court found HIPAA did not preempt Michigan law permitting ex parte interviews because Michigan law was not contrary to HIPAA. Michigan law is not contrary to HIPAA because HIPAA does not specifically prohibit, or even mention, ex parte interviews, the high court noted. Because it is possible for defense counsel to insure that any disclosure of protected health information by the covered entity complies with 45 C.F.R (e) by making reasonable efforts to obtain a qualified protective order, HIPAA does not preempt Michigan law concerning ex parte interviews, the high court held. Michigan law also does not stand as an obstacle to the accomplishment and execution of the full purposes and objectives of HIPAA given the balance the federal statute strikes between the protection of individual privacy and the necessity of disclosure in some contexts, the high court observed. Finally, the high court added, nothing in HIPAA or Michigan law requires a covered entity to agree to an informal ex parte interview, or to disclose protected health information during that interview. A lengthy dissenting opinion argued, among other things, that HIPAA preempts Michigan law because it is contrary to and not more stringent than HIPAA. I conclude that ex parte interviews are not allowed in Michigan because HIPAA does not specifically authorize ex parte interviews, and the court rules and statutes relied on to authorize the interviews have been preempted, the dissent said. 185

186 Holman v. Rasko, No (Mich. July 13, 2010). Missouri Supreme Court Says Informal Ex Parte Communications Not Permitted Under HIPAA The Missouri Supreme Court held August 31, 2010 that a trial court could not issue an order purporting to permit a plaintiff s non-party treating physicians to engage in informal ex parte communications with defense counsel. According to the high court, the Health Insurance Portability and Accountability Act (HIPAA) allows a healthcare provider to disclose otherwise protected health information (PHI) in the course of any judicial or administrative proceeding in response to a formal process i.e. a court order, subpoena, discovery request, or other lawful process. 45 C.F.R (e)(1). The high court acknowledged that neither HIPAA nor its implementing regulations expressly define in the course of or judicial proceeding, but said a narrow definition was implicit in Section (e)(1) given its reference to a court order, subpoena, discovery request, or other lawful process. In other words, such disclosure must be under the supervisory authority of the court either through discovery or through other formal court procedures, the high court said. Under Missouri s civil procedure rules, the trial court has no authority to issue an order directing or authorizing a physician to engage in ex parte communications, the high court observed. Missouri case law is clear that while Missouri law has not prohibited a party from engaging in voluntary ex parte communications with a treating physician, the trial courts have never supervised these communications nor exercised authority over them, and the trial courts have not had authority to compel a plaintiff to expressly authorize ex parte discussions with her physicians, the high court said. Nor can a trial court force a physician to engage in informal ex parte discussions with an attorney during discovery under Missouri law. Thus, the meeting at which ex parte communications occur is not a judicial proceeding because the court has no general oversight of the meeting or any control over it, the high court concluded. Missouri rules of discovery provide the trial court discretion to issue orders relating to the perimeters of interrogatories, dispositions, production of documents, requests for admission, physical and mental examinations, and discovery sanctions. The defense in the case concedes that there is no discoverable information that they could obtain from an informal ex parte discussion with the treating physician that they could not obtain by use of these rules of discovery, the high court added. Likewise, HIPAA does not authorize a trial court in Missouri to issue an order permitting a physician to divulge a patient s PHI outside the confines of a judicial proceeding over which the trial court has direct supervision. [B]y issuing a purported formal order that was directed to non-party medical providers and, essentially, providing an advisory opinion to said non-party medical providers about the trial court s understanding of the law on informal ex parte communications, the trial 186

187 court exceeded its authority, the high court held, making permanent a preliminary writ of prohibition issued by the appeals court. The case involved a personal injury action against a physician s group, physician, and medical center (defendants) stemming from alleged medical negligence. Defendants sought a formal order from the court specifically authorizing informal ex parte communications with the plaintiff s treating physicians and other healthcare providers. The trial court issued a formal order purporting to authorize the non-party medical providers to engage in informal ex parte communications with defendants attorneys. The order specified that the medical providers were free to ignore the order absent an authorization from their patients to engage in such ex parte communications. Plaintiffs sought a writ of prohibition, which the appeals court granted. In the course of its opinion, the high court initially considered the issue of whether HIPAA preempted Missouri law regarding ex parte communications. The high court said pre-hipaa case law found only that no specific statutory basis prohibited voluntary ex parte communications between defense counsel and plaintiff s treating physicians, but did not compel the plaintiff or his treating physicians to authorize, or participate in, such ex parte communications. According to the high court, HIPAA did not preempt Missouri law on this issue because common law precedent merely confirmed that no federal or state law prohibited such informal communications with plaintiff s physicians. State ex rel. Proctor v. Messina, No. SC90610 (Mo. Aug. 31, 2010). U.S. Court In Kentucky Remands To State Court Negligence Claims Against Hospital Involving Missing Patient Data Filed After HITECH-Required Notice State law claims against a hospital based on the disappearance of a flash drive containing patient medical data belong in state court, a federal court in Kentucky said September 8, 2010 in remanding the case. The U.S. District Court for the Western District of Kentucky rejected the hospital s argument that the case implicated substantial questions of federal law because the patient found out about the breach pursuant to a notice required under the federal Health Information Technology for Economic and Clinical Health (HITECH) Act. The suit was initiated after plaintiff Marryellen McIntyre and about 24,000 other patients of Our Lady of Peace Hospital were notified that a flash drive containing certain personal information was missing from the facility. Defendant Jewish Hospital & St. Mary's Healthcare, Inc. advised its patients that they should contact one of three major credit reporting bureaus and place a fraud alert in their credit report. Plaintiff's lawsuit in circuit court asserted state law claims of (1) negligence per se, (2) negligence, (3) negligent supervision, (4) invasion of privacy, (5) intentional infliction of emotional distress, and (6) punitive damages. 187

188 Plaintiff s negligence per se claim was based on Kan. Rev. Stat A-555, which provides that all patients in Kentucky have a right to privacy of their patient records and communications. Defendant removed the case to federal court, arguing the case implicated the Health Insurance Portability and Accountability Act (HIPAA) and the HITECH Act. Plaintiff moved to remand. Although plaintiff pled only state law claims in her complaint, under the substantialfederal-question doctrine, a state law cause of action can actually arise under federal law where the vindication of a right under state law depends on the validity, construction, or effect of federal law, the court noted. Defendant argued plaintiff only found out about the breach because it provided the HITECH-required notice. Rejecting this argument, the court pointed out that, [r]egardless of how Plaintiff learned of the potential problems, she asserted only state law claims. Plaintiff's complaint fails to raise or implicate federal concerns at any level, the court observed. Plaintiff's claim did not raise or depend upon the construction of a federal statute. Nor did the case involve a federal agency or require a decision as to a federal question that would control other cases. Finally, the exercise of jurisdiction by state courts would not appear to disturb any balance of federal-state judicial responsibilities in the field of personal medical data protection, the court said. McIntyre v. Jewish Hospital & St. Mary's Healthcare, Inc., No. 3:10-CV-487-H (W.D. Ky. Sept. 8, 2010). Georgia Supreme Court Says Ex Parte Contact Permitted Under HIPAA, But Order Was Too Broad Under State Law The Georgia Supreme Court held November 1, 2010 that a defendant in a medical malpractice action had secured a qualified protective order and therefore certain ex parte contact with a plaintiff s treating physicians was permitted under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). At the same time, the high court, reaffirming a previous holding in June (Baker v. Wellstar Health Sys., Inc., No. S10A0994 (Ga. Jun. 1, 2010)), found the qualified protective order granted by the trial court was too broad under state law. Russell Baker sued Wellstar Health Systems, Inc. individually and d/b/a Wellstar Kennestone Hospital for medical malpractice. Wellstar filed a motion for a qualified protective order under HIPAA requesting that it be allowed to conduct ex parte interviews with Baker s healthcare providers. The trial court granted the motion and Baker filed an interlocutory appeal. 188

189 In Moreland v. Austin, 670 S.E.2d 68 (Ga. 2008), the high court held that under Georgia law, once a plaintiff puts his medical condition in issue, defendant can seek plaintiff's protected health information by formal discovery, or informally, by communicating orally with a plaintiff's physicians. However, the Moreland court, said HIPAA preempts Georgia law with regard to ex parte communications between defense counsel and plaintiff's prior treating physicians because HIPAA affords patients more control over their medical records when it comes to informal contacts between litigants and physicians. Thus, the Moreland court concluded that ex parte interviews may be conducted under HIPAA, if the procedural requirements for protecting information disclosed during these interviews have been satisfied. One manner of complying with the provisions of HIPAA is to obtain a qualified protective order, as Wellstar did here, the court noted. The high court found the order met HIPAA-mandated procedural safeguards because it limited disclosure to the instant litigation and required the return or destruction of the information received at the conclusion of proceedings. But looking at the order under Georgia law, the high court found it was substantively too broad regarding the scope of information that may be disclosed. Rather than allowing Baker s healthcare providers to discuss [his] medical conditions and any past, present, or future care and treatment with [Wellstar s counsel], the order should have limited Wellstar s inquiry to matters relevant to the medical condition Baker has placed at issue in this proceeding, the high court observed. According to the high court, the situation presented in this case in which a court signs off on a broad, blanket order authorizing ex parte contacts with any number of unnamed physician-witnesses without further notice to the patient-plaintiff exposes a gaping loophole in the procedural protections afforded by HIPAA in the context of litigation. The high court cited a number of dangers associated with ex parte interviews of healthcare providers, including the potential for unwarranted probing into matters irrelevant to the litigation yet highly sensitive and possibly prejudicial to the patientplaintiff ; the potential for disclosure of information, such as mental impressions not documented in the medical record, that the health care provider has never actually communicated to the patient-plaintiff ; and the potential for defense counsel to influence the health care provider s testimony, unwittingly or otherwise. To address these concerns, the high court recommended that trial courts in issuing qualified protective orders state with particularity the names of the healthcare providers who may be interviewed; the medical conditions at issue that may be the subject of those interviews; the fact that the interview is at the defendant s, not plaintiff s, request; and the fact that the healthcare provider s participation in the interview is voluntary. Baker v. Wellstar Health Sys., Inc., No. S10A0994 (Ga. Nov. 1, 2010). 189

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191 Enforcement Rite Aid To Pay $1 Million To Resolve Alleged HIPAA Violations Rite Aid Corporation, one of the nation s largest drug store chains, has agreed to pay the federal government $1 million to settle potential violations of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy rule, the Department of Health and Human Services (HHS) announced July 27, The resolution agreement and corrective action plan that Rite Aid entered into to, which applies to all of the company s nearly 4,800 retail pharmacies, follows an extensive investigation by the HHS Office for Civil Rights (OCR) and the Federal Trade Commission (FTC) into media reports that pharmacies were disposing of prescriptions and labeled pill bottles containing individuals identifiable information in publicly accessible trash receptacles. Rite Aid also signed a separate consent order with the FTC resolving allegations that it violated the FTC Act by failing to protect the sensitive financial and medical information of its customers and employees. Companies that say they will protect personal information shouldn t be tossing patient prescriptions and employment applications in an open dumpster, said FTC Chairman Jon Leibowitz in a press release. The FTC consent order, in effect for the next two decades, requires Rite Aid to establish a comprehensive information security program designed to protect the security, confidentiality, and integrity of the personal information collected from consumers and employees, the press release said. According to OCR and FTC investigators, Rite Aid failed to implement adequate policies and procedures to safeguard patient information during the disposal process, failed to adequately train employees on proper disposal practices, and did not maintain a sanction policy for employees who failed to properly dispose of patient information. Under the three-year resolution agreement, Rite Aid must implement a strong corrective action program in addition to the $1 million payment. HHS Imposes First CMP For HIPAA Privacy Rule Violations The Department of Health and Human Services (HHS) Office for Civil Rights (OCR) has imposed the first civil monetary penalty (CMP) on a covered entity for violating the Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy rule. OCR issued February 4, 2011 a notice of final determination to Cignet Health Center of Prince George s County, MD, imposing a CMP of $4.3 million for denying patients access to their medical records in accordance with HIPAA-specified timeframes and failing to respond to, and cooperate with, OCR s investigation of the matter. The U.S. Department of Health and Human Services is serious about enforcing individual rights guaranteed by the HIPAA Privacy Rule, said HHS Secretary Kathleen Sebelius in a February 22 agency press release. The CMP reflects the increased penalty amounts authorized under the Health Information Technology for Economic and Clinical Health Act.

192 Of the $4.3 million CMP, $1.3 million stems from OCR s finding in an October 2010 notice of proposed determination that Cignet violated 41 patients rights by failing to provide them with their medical records as requested between September 2008 and October HIPAA requires covered entities to provide patients with a copy of their medical records within 30 days, and no later than 60 days, of their request. OCR initiated its investigation after these patients filed complaints with the agency. The remaining $3 million of the CMP is based on Cignet s failure to cooperate with OCR s investigation as required by HIPAA. According to OCR, during its subsequent investigation, Cignet did not respond to the agency s demands to produce the medical records. After Cignet failed to respond to a June 2009 OCR-issued subpoena duces tecum, the agency sought a court order, which was granted, directing Cignet to produce the requested medical records. In its notice of proposed determination, OCR cited Cignet s willful neglect in failing to comply with the agency s investigation per its obligations under HIPAA. Covered entities and business associates must uphold their responsibility to provide patients with access to their medical records, and adhere closely to all of HIPAA s requirements, said OCR Director Georgina Verdugo. The U.S. Department of Health and Human Services will continue to investigate and take action against those organizations that knowingly disregard their obligations under these rules. Massachusetts Hospital Agrees To $1 Million Settlement Of Potential HIPAA Violations The General Hospital Corporation and Massachusetts General Physician Organization Inc. (Mass General) will pay the federal government $1 million to settle claims that they violated the Health Insurance Portability and Accountability Act (HIPAA) by failing to safeguard the records of 192 patients, announced the Department of Health and Human Services Office for Civil Rights (OCR). As part of a resolution agreement with OCR, Mass General also agreed to a Corrective Action Plan (CAP) for safeguarding the privacy of its patients records. OCR s investigation was prompted by an incident that occurred on March 9, 2009 in which a Mass General employee left records containing protected health information (PHI) of 192 patients on a subway train while commuting to work. The records were never recovered. The documents consisted of billing encounter forms containing the name, date of birth, medical record number, health insurer and policy number, diagnosis and name of provider of 66 patients and the practice's daily office schedules for three days containing the names and medical record numbers of 192 patients, according to the resolution agreement. We hope the health care industry will take a close look at this agreement and recognize that OCR is serious about HIPAA enforcement. It is a covered entity s responsibility to protect its patients health information, said OCR Director Georgina Verdugo. 192

193 According to OCR, Mass General failed to implement reasonable, appropriate safeguards to protect the privacy of PHI when removed from its premises and impermissibly disclosed PHI potentially violating the HIPAA Privacy Rule. Under the CAP, Mass General must develop and implement a comprehensive set of policies and procedures that ensure PHI is protected when removed from Mass General s premises; train workforce members on these policies and procedures; and designate the Director of Internal Audit Services of Partners HealthCare System Inc. to serve as an internal monitor who will conduct assessments of Mass General s compliance with the CAP and render semi-annual reports to HHS for a three-year period. The resolution agreement is not an admission of liability or wrongdoing by Mass General. Hospitals and Health Systems CMS Proposes Rules On Hospital Visitation The Centers for Medicare and Medicaid Services (CMS) issued a proposed rule June 23, 2010 that would require hospitals to allow patients to designate their own visitors, including those who are same-sex domestic partners. President Obama asked the Secretary of the Department of Health and Human Services (HHS) April 15, 2010 to initiate rulemaking to ensure that hospitals participating in Medicare and Medicaid allow patients to request visitation from persons other than immediate family members. The Presidential Memorandum noted visitation policies that allow only immediate family members uniquely affect gay and lesbian Americans. Under the proposed rule, every hospital would be required to maintain written policies and procedures detailing patients visitation rights, as well as instances when the hospital may restrict patient access to visitors based on reasonable clinical needs, according to an HHS press release. The rules would update hospital Conditions of Participation to specify that visitors chosen by the patient must enjoy visitation privileges that are no more restrictive than those for immediate family members. CMS Finalizes Rule Requiring Equal Hospital Visitation Rights The Centers for Medicare and Medicaid Services (CMS) issued a final rule in the November 19, 2010 Federal Register (75 Fed. Reg ) requiring hospitals to protect patients right to choose their own visitors during a hospital stay. The rule updates the Medicare and Medicaid Conditions of Participation (CoPs), which are the health and safety standards all Medicare- and Medicaid-participating hospitals and critical access hospitals must meet, and are applicable to all patients of those hospitals regardless of payor source. Basic human rights such as your ability to choose your own support system in a time of need must not be checked at the door of America s hospitals, Department of Health and Human Services (HHS) Secretary Kathleen Sebelius said in a press release. 193

194 Today s rules help give full and equal rights to all of us to choose whom we want by our bedside when we are sick, and override any objection by a hospital or staffer who may disagree with us for any non-clinical reason, Sebelius added. Among other things, the rule imposes new requirements on hospitals to explain to all patients their right to choose who may visit them during their inpatient stay, regardless of whether the visitor is a family member, a spouse, a domestic partner (including a same-sex domestic partner), or other type of visitor, as well as their right to withdraw such consent to visitation at any time, HHS noted. The rule specifies that all visitors chosen by the patient (or his or her representative) must be able to enjoy full and equal visitation privileges consistent with the wishes of the patient. CMS Issues Final Rule Revising Credentialing Process For Telemedicine Services The Centers for Medicare and Medicaid Services (CMS) issued in the May 5, 2011 Federal Register (76 Fed. Reg ) a final rule revising the process hospitals and critical access hospitals (CAHs) use for credentialing and granting privileges to physicians and practitioners providing telemedicine services. The final rule streamlines how hospitals and CAHs partner with hospitals and non-hospital telemedicine entities (such as teleradiology facilities) to deliver care to their patients, CMS said in a press release. The final rule is aimed at improving care provided to all patients, particularly those in rural or remote areas. Under current CMS regulations, hospitals and CAHs must grant practice privileges to remote-site doctors who already were credentialed in distant-site facilities, CMS explained. In other words, hospitals and CAHs using telemedicine services had to apply the same credentialing and privileging process as if the practitioners were onsite. To reduce this burdensome process, the final rule allows a hospital or CAH that furnishes telemedicine services to its patients pursuant to an agreement with a distant hospital or telemedicine entity to rely on the credentialing and privileging process of the distant hospital or telemedicine entity for practitioners at the distant site who will furnish the services. The final rule updates the conditions of participation for hospitals and CAHs. The removal of unnecessary barriers to the use of telemedicine may enable patients to receive medically necessary interventions in a more timely manner. It may enhance patient follow-up in the management of chronic disease conditions. These revisions will provide more flexibility to small hospitals and CAHs in rural areas and regions with a limited supply of primary care and specialized providers, the final rule said. The final rule makes some revisions to the proposed rule, which was issued in the May 26, 2010 Federal Register (75 Fed. Reg ), based on comments that the proposal did not go far enough in restructuring privileging and credentialing requirements for telemedicine providers. 194

195 U.S. Court In Louisiana Denies Class Certification In Actions Against Hospitals Following Hurricane Katrina A federal court in Louisiana refused June 4, 2010 to grant class certification in actions brought against two hospitals in the state by patients and their relatives for negligence, intentional misconduct, and premises liability following Hurricane Katrina. The court issued nearly identical opinions in the two separate cases, finding, among other things, that plaintiffs could not show common issues of law or fact predominated over questions affecting individual class members. Specifically, the court noted, the duties and responsibilities a hospital owes to a patient requires a highly individualized inquiry. For example, the court contrasted a patient with a broken arm and a patient on a ventilator, noting the standard of care varied significantly between the two. One case involved Charlmette Medical Center Inc. (CMC) and the other case was brought against Pendleton Memorial Methodist Hospital (Methodist). Both hospitals opted not to fully evacuate before Katrina and experienced flooding, loss of power, and elevated temperatures in the wake of the hurricane. Plaintiffs filed the putative class actions alleging they sustained injuries as a result of defendants failure to evacuate, failure to have a sufficiently designed and maintained emergency power system to provide electricity and air conditioning, and/or failure to have an adequate plan to care for patients and visitors in the event of a power outage. Plaintiffs at oral arguments agreed to narrow the class to only those individuals who were at the hospital when Hurricane Katrina hit, excluding defendants employees. In the case of CMC, the class was comprised of roughly 250 individuals, including 49 patients. In the case of Methodist, the class constituted approximately 666 individuals, including 164 patients. The U.S. District Court for the Eastern District of Louisiana found plaintiffs in both cases satisfied some of the class certification requirements namely, numerosity, commonality, and adequacy. But the court held plaintiffs, even considering only the patient subclass, could not satisfy the other requirements of predominance, typicality, and superiority. On the predominance element, the court noted it must apply a more rigorous standard than for the commonality element of Fed. R. Civ. P. 23. The court examined plaintiffs theories of liability and in each instance found common questions of law and fact did not predominate because of the varying needs of each specific patient. While a hospital may owe a baseline duty to all persons on its premises at the time of the storm, plaintiffs failed to account for the fact that the duty a hospital owes to its patients is unique and varies by patient depending on their individual conditions. 195

196 According to the court, after establishing the hospitals baseline duty, a large number of mini-trials would be required just to determine exactly what heightened duty was owed to each patient. The court said similar problems would arise in connection with determining breach, causation, and damages for the negligence cause of action, and for evaluating the causes of action for intentional misconduct and premises liability. Moreover, defendants may have affirmative defenses regarding comparative fault and contributory negligence that would prevent a uniform liability analysis. Thus, the court denied class certification in both cases. Rivers v. Chalmette Med. Ctr., Inc., No (E.D. La. June 4, 2010) and Samuel v. United Health Servs., No (E.D. La. June 4, 2010). U.S. Court In Michigan Finds Physician s Employer Not Vicariously Liable For Alleged Sexual Assault Of Patient The U.S. District Court for the Western District of Michigan dismissed June 7, 2010 a patient s claims of vicarious liability for negligence against a physician s employer and parent company based on an alleged sexual assault by the physician during a cardiac exam. The court found the employers were not liable because the sexual assault was not foreseeable and also because the negligence claim was really a medical malpractice claim for which the plaintiff did not follow proper filing procedures. Bellin Memorial Hospital, Inc., a wholly owned subsidiary of Bellin Health Systems, Inc., employed Dr. Eric Rosenkrantz as a cardiologist at its clinic in Iron Mountain, MI. Plaintiff Trudy Sparks alleged that during an examination at Iron Mountain she was sexually assaulted by Rosenkrantz. Sparks sued Rosenkrantz, Bellin Health, and Bellin Memorial Hospital (BMH) (collectively, defendants) alleging causes of action for negligence, battery, and violation of the Michigan Civil Rights Act, Mich. Comp. Law (a). Bellin Health and BMH moved for summary judgment on all claims against them. The court first dismissed all claims against BMH, finding it was added as a defendant after the statute of limitation had run. The court then turned to Sparks allegations against Bellin Health. Bellin Health first argued that it could not be liable for Rosenkrantz s actions because it was not his employer, as BMH, its wholly-owned subsidiary, was his employer. While the court found some indications that BMH and Bellin Health were closely aligned entities, it declined to rule on the issue of whether Bellin Health is absolved from liability due to the fact that it was not Rosenkrantz s employer, finding alternate bases for granting it summary judgment. Bellin Health also argued that it was not responsible for Rosenkrantz s actions because his alleged sexual assault of plaintiff was not foreseeable. 196

197 Michigan courts have emphasized that employers are not generally liable for the tortious acts of their employees that are committed outside the scope of their employment. Here, the court agreed that Rosenkrantz s actions were not foreseeable. Although the record was replete with instances of Rosenkrantz s problems interacting with staff, the court pointed out that it appears there was very little knowledge of even his tendency to make sexually inappropriate comments. In addition, the court said, there is nothing in the record to suggest he attacked any other specific patients in an inappropriate manner and plaintiff does not provide any evidence indicating that Rosenkrantz had a criminal history or a history of sexual harassment. The court noted that other courts have held that merely because an employee has a tendency to make crude comments or verbally harass others does not mean that an employer is on notice that the employee has a proclivity to commit a sexual assault. Accordingly, the court dismissed plaintiff s negligence claims against Bellin Health. In support of its decision, the court found the claims also must be dismissed because while plaintiff asserted them under a theory of ordinary negligence, they actually involved questions of medical judgment that fell within the realm of medical malpractice. The court noted at least some of the actions plaintiff found objectionable may be explained by resort to medical testimony regarding an appropriate cardiology examination. While a layperson may not generally believe a cardiologist needs to examine a patient s feet or ask about her sexual activity, when viewed in the light of [defendants expert] affidavit, it appears that there may be legitimate medical reasons for probing such areas during a cardiology examination, the court said Thus, because plaintiff failed to comply with medical malpractice filing requirements, her negligence claims also must be dismissed, the court held. The court lastly dismissed plaintiff s claims under the Michigan Civil Rights Act, finding no evidence creating a genuine issue of material fact regarding whether submission to sexual assault by Dr. Rosenkrantz was made a condition of her receipt of medical services. Sparks v. Bellin Health Sys. Inc., No. 2:09-cv-14 (W.D. Mich. Jun. 7, 2010). Nevada Supreme Court Finds Hospitals Do Not Owe Patients Nondelegable Duty To Provide Competent Medical Care Through Independent Contractor Physicians Hospitals do not owe an absolute nondelegable duty to provide competent medical care to their emergency room patients through independent contractor physicians, the Nevada Supreme Court held July 1, However, hospitals may be held liable under a theory of ostensible agency if certain conditions are met, the high court said. 197

198 Plaintiff Betty Vanderford's minor son Christopher Wall was taken to Renown Health s emergency room on four occasions. Each time he was seen and then discharged. The fourth visit occurred after plaintiff found Christopher unconscious. He was finally diagnosed with basilar meningitis and complications including abscesses. As a result of his illness, Christopher suffered permanent, debilitating injuries, including brain damage. Vanderford sued Renown in her individual capacity and on behalf of Christopher. The district court granted partial summary judgment for Vanderford, finding Renown owed Christopher an absolute nondelegable duty such that it was liable for the acts of the emergency room doctors, who were independent contractors. Renown appealed the partial summary judgment. The district court based its decision to impose an absolute nondelegable duty on Renown on Nevada's statutory scheme, Joint Commission standards, public policy, and the common law. The high court looked first at Nevada law. While we have recognized some exceptions to the general rule that hospitals are not vicariously liable for the acts of independent contractor doctors, see, e.g., Schlotfeldt v. Charter Hosp. of Las Vegas, 112 Nev. 42, 910 P.2d 271 (1996), there is no legal or policy basis for imposing an absolute nondelegable duty on Renown, the high court held. The provisions in the state statute create a scheme under which a hospital is a policysetter and overseer, and the provisions contemplate the delegation of medical care to qualified professionals, the high court found. The high court noted the Joint Commission standards similarly envision delegation of medical care with the hospital as overseer. The high court next declined to impose an absolute nondelegable duty on hospitals based upon public policy, saying it may refuse to decide an issue if it involves policy questions better left to the Legislature." Lastly, the high court found the common law relied upon by the district court and Vanderford does not support the imposition of an absolute nondelegable duty. After examining the cited case law, the high court concluded that the cases actually require an ostensible agency approach. According to the high court, a nondelegable duty that is not absolute veers away from the concept of strict liability, and creates a duty that is not actually nondelegable. A nonabsolute nondelegable duty is much closer to the ostensible agency approach and is not truly a nondelegable duty at all. Thus, the high court examined whether the ostensible agency doctrine provided a basis for holding hospitals liable for the acts of their independent contractor emergency room doctors. Relying on its holding in Schlotfeldt, the high court concluded that Renown could be held liable under the ostensible agency theory. Whether it is called a nonabsolute nondelegable duty or ostensible agency, the result remains the same: hospitals may be held liable for the acts of independent contractor 198

199 emergency room doctors if the hospital selects the doctor and it is reasonable for the patient to assume that the doctor is an agent of the hospital, the high court observed. Accordingly, the high court reversed the lower court s finding that a hospital owes patients an absolute nondelegable duty to provide competent medical care through its independent contractor physicians. Renown Health, Inc. v. Vanderford, No (Nev. July 1, 2010). U.S. Court In New Hampshire Allows Hospital s Claims For Damages After Physicians Allegedly Improperly Accessed Hospital s Computers The U.S. District Court for the District of New Hampshire declined to dismiss July 28, 2010 a hospital s claims against a group of physicians and their professional association for damages caused by the physicians alleged unauthorized access and removal of data from the hospitals computers. In so holding, the court found the hospital adequately pled its claims under the Computer Fraud and Abuse Act (Act), 18 U.S.C The case began when plaintiff Wentworth-Douglas Hospital sued several physicians and their professional association under the Act. According to the hospital, after it declined to renew a contract with defendants to provide pathology services, defendants allegedly appropriated and erased important computer data belonging to the hospital. Defendants moved to dismiss. The Act provides a private right of action for compensatory damages and equitable relief to any person who suffers damage or loss because another "intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains... information from any protected computer." 18 U.S.C. 1030(a)(2)(C). According to plaintiff, by connecting removable storage devices to three Wentworth- Douglas computers and downloading data to those devices, defendants obtained information from those computers in a manner that exceeded their authorized access, because the hospital's policy prohibited them from connecting external hardware to Wentworth-Douglas computers. Defendants contended the complaint failed to allege they were not authorized to access Wentworth-Douglas' computers and failed to allege, with adequate particularity, they accessed the hospital's computers in a way that exceeded their authorization to do so. According to the court, defendants' argument addressed matters beyond the scope of a motion to dismiss. Defendants are of course free to argue, in a motion for summary judgment, for example, that they were not subject to the [hospital s] policy. But, taking the well-pleaded allegations of the complaint as true, as the court must at this point, the hospital has stated a cognizable legal claim upon which relief can be granted under 18 U.S.C. 1030(a)(2)(C), the court held. Turning to the claims under Section 1030(a)(5)(A), the court noted the hospital claimed defendants damaged three Wentworth-Douglas computers, and the hospital's computer network, by installing DriveScrubber 3 software and/or issuing 199

200 commands that deleted information from the C Drives of those three computers as well as the H, K, and P Drives of the hospital's computer network. The court rejected defendants contention that a person who has authorization to access a computer cannot violate this section. Unauthorized damage and/or unauthorized transmission are elements of a cause of action under 1030(a)(5)(A); unauthorized access to the protected computer is not, the court said. After finding the hospital adequately pled damages that met the damages threshold in the law, the court denied defendants motion to dismiss. Wentworth-Douglas Hosp. v. Young & Novis Prof'l Ass'n, No. 10-cv-120-SM (D.N.H. July 28, 2010). U.S. Court In Maryland Says State Would Recognize Negligent Credentialing Claim Against Hospital A federal district court in Maryland held August 12, 2010 that the state would recognize a claim against a hospital for negligent credentialing in an action brought by the former patients of a cardiologist who allegedly performed unnecessary cardiac procedures. In the diversity action, the U.S. District Court for the District of Maryland rejected the defendant hospital s argument that negligent credentialing was not a viable cause of action in Maryland because of the state s medical review privilege and immunity statutes. These same arguments have been raised and rejected by courts that have recognized a negligent credentialing cause of action in states with similar laws, the court observed. Thirteen patients sued cardiologist John R. McLean and the hospital where he had privileges, Peninsula Regional Medical Center, alleging McLean was performing a vast number of unnecessary cardiac catheterization and stent placement surgeries at Peninsula s Cardiac Catheterization Lab. According to plaintiffs, McLean dramatically overstated the findings from cardiac stress tests and diagnostic imaging studies to convince his patient to undergo the unnecessary procedures. Plaintiffs also alleged Peninsula s nurses, technicians, and staff who worked closely with McLean knew or should have known what he was doing, participated in the unnecessary and non-indicated procedures, and failed to prevent or report his actions. As part of their negligent credentialing claim, plaintiffs contended Peninsula continued to extend McLean privileges and reward him with large blocks of favorable scheduling time despite the fact that its employees knew, or should have known, he was performing the unnecessary and non-indicated procedures. Peninsula moved to dismiss. Duty to Protect Patients From Harm Peninsula first argued the hospital nurses, technicians, and staff did not owe a duty to future, unidentified, and as yet unknown patients of McLean. 200

201 The court found this argument flawed on several grounds, including that plaintiffs alleged Peninsula s employees actively participated in procedures involving plaintiffs when they knew, or should have known, the procedures were unnecessary. In support of their negligence theory, plaintiffs cited Section 318 of the Restatement (Seconds) of Tort as the source of the duty Peninsula owed them to prevent McLean from doing them harm. Section 318 governs the duty of a landowner to control the conduct of a licensee. According to plaintiffs, if the hospital allowed McLean the continuing use of its facilities in a manner harmful to his patients, while knowing that he was likely to use those facilities in a harmful manner, it could not then escape liability for his actions. While certainly not the typical case that might arise under Section 318, the court held plaintiffs negligence claims could go forward, at least at this stage in the litigation. Negligent Credentialing The court noted negligent credentialing is a separate tort with separate elements, which it outlined as follows: (1) the hospital granted privileges to a physician; (2) the physician was unqualified or incompetent; (3) the hospital knew or should have known the physician was unqualified or incompetent; (4) the physician was negligent when treating the patient; and (5) the physician s negligence was a substantial factor in producing harm to the patient. The court said the vast majority of states that have considered the issue have concluded that negligent credentialing is a valid cause of action. Peninsula argued such a cause of action would not be recognized in Maryland because of a statute shielding from discovery and admissibility at trial credentialing and peer review information, which would be needed to support or defend a claim of negligent credentialing. In addition, Peninsula argued the hospital could not be held liable for credentialing decisions because of a state statute granting partial immunity from civil liability to those who participate in medical review committees. But the court disagreed, noting other states with similar laws have nonetheless recognized negligent credentialing as a cause of action. [W]hile the privilege would prevent the introduction of what was actually produced to the credentialing committee, the same information, provided it is available from the original source, can be presented to the jury to aid it in determining what should have been known by the committee, the court wrote. The court also found the partial immunity extended to individuals on the credentialing committees was not extended to the hospital, noting the general rule that the master remains liable for the servant s conduct even if the servant is not liable because of personal immunity. Thus, the court held Maryland would recognize a cause of action for negligent credentialing and that Plaintiffs have sufficiently alleged such a cause of action." Baublitz v. Peninsula Reg l Med. Ctr., No. WMN (D. Md. Aug. 12, 2010). 201

202 U.S. Court In Texas Allows Plaintiff To Add Negligence Claims Against Hospital Based On Hospital s Higher Than Average Infection Rate A federal court in Texas allowed September 3, 2010 a plaintiff leave to amend her complaint to add negligence claims against the hospital where she contracted a postsurgical infection based on the hospital s failure to inform her of its higher than average infection rates. The U.S. District Court for the Southern District of Texas did refuse, however, to allow plaintiff to add a claim of premises liability against the hospital, finding it was in substance a healthcare liability claim. According to plaintiff Margo Yates-Williams, after Dr. Ibrahim El Nihum performed spinal surgery on her at the College Station Medical Center (hospital), she developed a severe infection within her spine. Her Methicillin-resistant staphylococcus epidermis (MRSE) infection was not diagnosed for several weeks even after several follow-up visits to Nihum and other doctors. Plaintiff eventually sued three physicians, the College Station Family Medical Center, and the hospital alleging the infection and the delay in treatment left her with permanent pain and weakness. Plaintiff then sought to amend her complaint asserting newly discovered evidence indicating the 2007 and 2008 surgical-site infection rate for laminectomies--one of the surgeries performed on Yates-Williams--in the hospital's neurosurgical operating room exceeded national averages. Plaintiff sought to add allegations and claims that the hospital breached the following duties: (1) to maintain reasonably safe premises; (2) to provide a reasonably safe operating room; (3) to inform Yates-Williams of the hospital's surgical-site infection rate for laminectomies; (4) to inform the hospital staff of the surgical-site infection rates; (5) to close the neurosurgical operating room; (6) to carry out the hospital's Infection Control Plan; and (7) to take corrective measures to reduce the surgical-site infection rate. The hospital argued the court should deny leave to amend because plaintiff had not demonstrated "good cause" under Fed. R. Civ. P. 16 and because the motion was frivolous, futile, in bad faith, and would cause undue burden. Rule 16(b) states that scheduling orders "may be modified only for good cause and with the judge's consent," the court noted. The court here found Yates-Williams had shown good cause under Rule 16 to amend her complaint based on newly discovered evidence regarding the hospital s infection rate. The hospital also argued that plaintiff s motion was futile and in bad faith because the proposed amended complaint alleged her infection may have been either MRSA or MRSE, while her present complaint alleged only MRSE. The hospital attached an affidavit of a physician stating that laboratory results demonstrated Yates-Williams had MRSE, not MRSA. 202

203 However, the court held such evidence was outside of the pleadings in applying the standard used in a Rule 12(b)(6) motion. The affidavits and other documents attached to the Hospital's response are not properly considered in deciding whether the proposed amended complaint states a claim or instead would be futile, the court continued. Instead, these materials are properly considered on a motion for summary judgment under Rule 56. The hospital next argued that any claim based on the hospital's duty to inform the patient of surgical-site infection rates was futile as a matter of law because under Texas law, a hospital--as opposed to a physician--has no duty to obtain informed consent. The court disagreed, finding that [w]hile a Hospital has no duty under Texas law to inform a patient of the risks of a specific surgery, it may have a duty to inform the patient of the risk of any surgery in that hospital or in an identifiable part of that hospital. The court similarly rejected the hospital's argument that finding a duty to disclose surgical-site infection rates would negate the Texas privilege for investigations by hospital committees. [A]lleging a general duty to inform a patient of an increased risk of surgery in all or part of a hospital is not necessarily inconsistent with enforcing this privilege, the court said. The court did agree, however, with the hospital that plaintiff s proposed premises liability claim is in substance a healthcare liability claim and thus she may not amend her complaint to assert such a claim. Williams v. Nihum, No. H (S.D. Tex. Sept. 3, 2010). Ohio Appeals Court Dismisses Plaintiffs Negligent Credentialing Claim Against Hospital Where Physician Was Not Found Negligent A plaintiff cannot maintain a negligent credentialing claim against a hospital where there was no admission or finding of negligence against the physician, the Ohio Court of Appeals, Sixth Appellate District, held October 8, Relying on precedent, the appeals court noted that plaintiffs chose to settle their malpractice claims against the physician without obtaining an admission of negligence and therefore their negligent credentialing claim against the hospital must be dismissed. Plaintiffs Mary and Raymond Boggia filed a medical malpractice action against Frances E. Webb-Smith, M.D. and her medical group, All About Women, Inc., for her negligence related to a TVT-O procedure she performed on Mary. Plaintiffs also asserted claims against Wood County Hospital for negligent credentialing and for allowing Webb-Smith to perform the TVT-O procedure at a hospital where she no longer had privileges. Defendants Webb-Smith and All About Women, Inc. filed separate motions to bifurcate and stay the negligent credentialing claim against the hospital. 203

204 The court granted the motion. Subsequently, after receiving notice that defendants Webb-Smith and All About Women, Inc. had settled their claims with plaintiffs, the court dismissed those claims with prejudice. Wood Hospital then moved to dismiss the negligent credentialing claim, arguing that because there was no admission of negligence or finding of negligence against Webb- Smith, the negligent credentialing claim must be dismissed as a matter of law. Relying on Schelling v. Humphrey, 6th Dist. No. WM , 2007-Ohio-5469 (Schelling I), the court denied the motion. Schelling I was then affirmed by the Supreme Court of Ohio. See Schelling v. Humphrey, 123 Ohio St.3d 387, 2009-Ohio-4175 (Schelling II). The Schelling II case held that when the physician was no longer amenable to suit (he had filed for bankruptcy) "and the plaintiffs, through no fault of their own," could not maintain their malpractice suit against that doctor, those plaintiffs could proceed on their negligent credentialing claim. Wood Hospital filed a second motion to dismiss and this time, the court granted the motion. Plaintiffs appealed. The appeals court agreed with the dismissal, noting that plaintiffs settled their malpractice claim against Webb-Smith and All About Women, Inc. without obtaining any concession from the doctor as to her alleged negligence or liability. Thus, while it may seem a harsh result, it was appellants who agreed to enter into the settlement agreement thereby precluding any opportunity to prove malpractice on the part of Dr. Webb-Smith, the appeals court noted. Boggia v. Wood County Hosp., No. WD (Ohio Ct. App. Oct. 8, 2010). Oregon Appeals Court Rejects Patients Negligence, Unfair Trade Practices Claim Against Health System After Data Breach The Oregon Court of Appeals held October 6, 2010 that a class action asserting negligence and unfair trade practices claims against a health system after unencrypted patient records containing their personal, medical, and financial information were stolen failed to state a claim for relief. Affirming the lower court s dismissal of the action, the appeals court found plaintiffs, who brought the class action on behalf of the roughly 365,000 patients whose records were stolen from the car of a health system employee, had failed to show a present physical injury, or that defendant owed them a special duty, beyond the general duty of reasonable care, to safeguard the records from theft. The appeals court also concluded plaintiffs could not maintain a claim under the Oregon Unfair Trade Practices Act (UTPA) because their alleged loss, i.e. out-of-pocket expenses to monitor their credit and prevent potential identify theft, did not amount to an ascertainable loss of money or property under the statute. 204

205 Failure to Safeguard Data A medical provider employed by defendant Providence Health System-Oregon took computer disks and tapes home with him containing unencrypted patient records that included names, addresses, phone and social security numbers, and medical information. The employee left the disks and tapes in his car and they were stolen. Three-and-onehalf weeks later, defendant notified the patients via letter about the theft, urging them to take precautions to protect themselves. Plaintiffs filed a class action on behalf of all people whose information was contained on the disks and tapes (approximately 365,000 individuals) for negligence and violation of the UTPA. Plaintiffs alleged loss of privacy, past and future out-of-pocket losses associated with monitoring credit reports and placing and maintaining fraud alerts, and credit injuries inherent in credit monitoring. According to plaintiffs, defendant was negligent per se because it failed to comply with federal and state privacy and security law regarding medical records, including failing to encrypt the data and to have in place policies protecting such data from theft and disclosure. Plaintiffs also contended defendant violated the UTPA by representing that the patient records would be kept confidential when it knew it lacked adequate means to safeguard the information. Plaintiffs sought injunctive relief requiring defendant to pay for ongoing credit monitoring and the future cost of possible loss and damages due to identify theft. Plaintiffs also sought economic damages for out-of-pocket expenses associated with credit monitoring services and noneconomic damages for emotional distress associated with the initial disclosure and the risk of subsequent identity theft. None of the plaintiffs alleged they were the actual victims of identity theft, a fact the high court emphasized in rejecting their negligence and UTPA claims. Negligence Claim The appeals court agreed with the trial court that plaintiffs had failed to state a negligence claim because they failed to allege a present physical injury. In so holding, the appeals court found the economic cost of ongoing credit monitoring was an insufficient injury on which to base a negligence case, absent identifying a duty that defendant owed them beyond the common law duty to exercise reasonable care. The appeals court concluded plaintiffs failed to allege a heightened duty arising out of the patient-healthcare relationship, rejecting their argument that such a duty flowed from federal and state laws protecting the confidentiality of health information. Although we agree that those statutes and rules establish standards of conduct, any violation of those standards does not give rise to a negligence per se claim for economic damages in the absence of a special relationship that protects against that type of injury, the appeals court wrote. 205

206 Similarly, the appeals court rejected plaintiffs claim for negligent infliction of emotional distress, noting no allegations that defendant affirmatively disclosed their confidential information, nor that the relationship between a medical provider and its patient gives rise to a duty on behalf of that provider to protect patient information from disclosure beyond the generic common-law duty to take reasonable steps to protect against foreseeable harm. Unfair Trade Practices Claim Finally, the appeals court affirmed the dismissal of plaintiffs UTPA claim, agreeing with the trial court that plaintiffs failed to state a compensable injury under Oregon law. Specifically, the appeals court held the out-of-pocket expenses associated with credit monitoring services did not constitute an ascertainable loss under the statute. In so holding, the appeals court emphasized the difference between incurring expenses to prevent potential future harm, rather than as the result of an existing harm. Plaintiffs have directed us to no authority and we are aware of none for the proposition that such a once removed loss is a loss under the UTPA, the appeals court said. Paul v. Providence Health Sys. Or., No ; A (Or. Ct. App. Oct. 6, 2010). Tennessee Supreme Court Holds Statutory Hospital Lien Does Not Extend To Medical Payment Benefits Under Auto Insurance Policy Medical benefits paid under an automobile insurance policy to third-party service providers are not subject to a statutory hospital lien, the Tennessee Supreme Court ruled October 13, Reversing an appeals court s judgment in a hospital's favor against an insurer for impairment of the hospital's lien, the high court found medical benefits paid pursuant to an insurance policy cannot be counted as damages recovered as a judgment, settlement, or compromise as contemplated by Tennessee s Hospital Lien Statute (HLS). Given its holding that the benefits were not subject to the lien, the high court declined to address the hospital s argument that the auto insurer impaired its lien when it paid medical benefits to third-party service providers who also had rendered medical assistance to the insured. Kevin L. Holt was injured in an automobile accident and taken by ambulance to the Regional Medical Center of Northwest Arkansas. He was later transferred to the Regional Medical Center in Memphis, which is operated by plaintiff Shelby County Health Corporation (the Med). Holt was covered by an insurance policy issued by defendant Nationwide Mutual Insurance Company, which included medical payment benefits up to $5,000. The Med subsequently filed a statutory lien pursuant to the HLS in the amount of $33,

207 After the filing of the lien, Nationwide made two medical benefit payments for medical care related to the accident $1,290 to the ambulance provider and $3,710 to Regional Medical Center of Northeast Arkansas, thus exhausting the policy s medical benefits. The Med sought to recover the full amount of Holt s hospital care costs (i.e., $38,823.02), asserting Nationwide had impaired its statutory lien by making the medical benefit payments and therefore it was entitled to the full cost of its services, regardless of the policy limit. The trial court concluded the Med had a valid lien, which Nationwide had impaired, but that the Med was entitled to recover only the policy limit of $5,000. The appeals court, relying on a prior unpublished opinion, agreed Nationwide had impaired the lien but found the Med was entitled to recover the full reasonable cost of... hospital care, treatment and maintenance. Reversing, and overruling the prior decision on which the appeals court relied, the high court held the HLA did not extend hospital liens to medical benefits provided for in an automobile insurance policy. According to the high court, the HLA only authorizes the attachment of hospital liens to damages obtained by persons to whom care, treatment or maintenance is furnished, or to their legal representatives in the case of death. The high court agreed with Nationwide that its medical benefit payments to medical providers did not constitute a payment of damages to a patient or their representative obtained or recovered as a judgment, settlement, or compromise. Shelby County Health Care Corp v. Nationwide Mut. Ins. Co., No. W SC-R11- CV (Tenn. Oct. 13, 2010). Tennessee High Court Says Plaintiffs May Pursue Vicarious Liability Claims Against Hospital Even Though Claims Against Physician Barred Plaintiffs may pursue a vicarious liability claim against a hospital even though their claims against the treating physician on which the hospital s liability is based were extinguished by operation of law, the Tennessee Supreme Court held October 20, Because the plaintiffs had timely filed their vicarious liability claims against the hospital before the claims against the agent were barred, they may still pursue those claims, the high court said. In so holding, the high court reversed both the trial court s and the appeals court s grant of summary judgment to the hospital. Joann Abshure was taken by ambulance to Methodist Healthcare-Memphis Hospitals after experiencing difficulties following a colonoscopy. Abshure received various treatments for a perforation of the sigmoid colon and eventually was discharged with a colostomy. 207

208 Abshure and her husband (plaintiffs) sued the hospital and two physicians. Plaintiffs voluntarily dismissed their suit against the two physicians, and the hospital then moved to dismiss. The hospital argued plaintiffs only claim against the hospital was premised on its vicarious liability for the acts of Abshure s treating physicians and those claims were now barred. The trial court granted the hospital s motion for summary judgment. The appeals court initially determined the Abshures had adequately pled their vicarious liability claim, but affirmed the lower court s grant of summary judgment, finding the hospital could not, as a matter of law, be held vicariously liable for the physician s actions. Plaintiffs appealed. The hospital first argued the appeals court erred by reversing the trial court s conclusion that the Abshures had not sufficiently pled their vicarious liability claim. The high court agreed with the appeals court that the complaint sufficiently put Methodist Hospital on notice that plaintiffs were holding the hospital liable for the conduct of its agents and that the physician who saw Abshure in the emergency room was potentially one of those agents. The high court then turned to the central issue in the case: whether plaintiffs complaint against Methodist Hospital asserting vicarious liability for the conduct of the hospital s agents must be dismissed because the Abshures direct claims against the physician became barred after they filed their complaint against Methodist Hospital. Under Tennessee law, a plaintiff may sue a principal based on its vicarious liability for the tortious conduct of its agents without suing the agent, the high court noted. However, four circumstances exist under which a plaintiff may not proceed solely against a principal: (1) when the agent has been exonerated by a finding of non-liability; (2) when the plaintiff has settled its claim against the agent; (3) when the agent is immune from suit, either by statute or by the common law; and (4) when the plaintiff s claim against the agent is procedurally barred by operation of law before the plaintiff asserts a vicarious liability claim against the principal. The appeals court based its finding that plaintiffs should not be allowed to sue the hospital on two bases, the high court explained. First, the appeals court said the Abshures second voluntary dismissal of their claims against the physician was the substantive equivalent of a covenant not to sue and, therefore, plaintiffs should be barred from suing the hospital based on the limitation on a principal s liability that arises when the injured party extinguishes the agent s liability by conferring an affirmative, substantive right upon the agent that precludes assessment of liability against the agent. However, the high court ruled, this limitation applies only to settlements between the plaintiffs and agent and here the record does not reflect that the Abshures reached a settlement with [the physician] when they voluntarily dismissed their claims against him. 208

209 The appeals court also held that plaintiffs should not be permitted to pursue vicarious liability claims against Methodist Hospital because their right of action against the physician had been extinguished by operation of law. However, the high court held, plaintiffs had filed a proper vicarious liability claim against Methodist Hospital before their claims against the physician were extinguished by operation of law. Accordingly, the subsequent procedural bar of their claims against Dr. Ogle does not prevent the Abshures from pursuing their timely filed vicarious liability claim against the hospital, the high court held. The high court thus reversed the appeals court's decision and remanded to the trial court for further consistent proceedings. Abshure v. Methodist Healthcare Memphis Hosps., No. W SC-R11-CV (Tenn. Oct. 20, 2010). Tennessee Supreme Court Says Hospital Liable For Failing To Enforce Its Policies The Tennessee Supreme Court held October 20, 2010 that state law permits a cause of action against a hospital for failing to enforce its policies and procedures in patient care. In so holding, the high court reversed an appeals court s decision that such a direct action against the hospital was not permitted. Accordingly, the high court reinstated the jury verdict against the hospital for its negligence. Wayne Barkes went to the emergency room at River Park after he experienced arm and wrist pain while working in his garden. He was not seen by a physician at any time. Instead, Barkes was diagnosed by a nurse practitioner with a sprain and was discharged. Less than two hours later, Barkes suffered a heart attack and died. Barkes wife brought a wrongful death action against River Park and several other defendants. In her claim against River Park, Mrs. Barkes asserted that the care and treatment provided to her husband in the hospital s emergency room fell below the standard of reasonable care under the circumstances. Specifically, plaintiff alleged that had Barkes been triaged by a registered nurse instead of a paramedic, and had he been seen and examined by a physician instead of a nurse practitioner, the appropriate inquiries would have been made and the potential warning signs of a heart attack would have been observed. At trial, plaintiff s experts agreed that the failure of River Park to follow its own written policy requiring a physician to see and examine every patient who presented at the emergency room was evidence of River Park s breach of its duty to provide reasonable care. The jury returned a verdict finding River Park 100% at fault for the death of Mr. Barkes. River Park appealed, and the appeals court reversed the trial court s judgment on the jury verdict, holding that Tennessee law does not recognize a theory of corporate liability under which the hospital could be found responsible to a patient absent a finding of vicarious liability for negligence by a treating healthcare professional. Plaintiff appealed. 209

210 In reversing the appeals court, the state high court relied on its prior decisions permitting direct negligence actions against hospitals that have failed to exercise reasonable care in discharging duties owed directly to patients. Tennessee law clearly recognizes that hospitals owe a duty of reasonable care to their patients and may be directly liable to patients independent of any liability based on the hospital s employees or agents, the high court held. After reviewing the record, the high court also found sufficient evidence supporting the jury s verdict that River Park was 100% at fault. Based on the material evidence presented at trial, the jury was entitled to draw the reasonable conclusion that the hospital s failure to inform the emergency room health care providers of its policies and its failure to effectively implement a system of oversight and enforcement of its policies was negligence that caused Mr. Barkes death, the high court said. Barkes v. River Park Hosp., Inc., No. M SC-R11-CV (Tenn. Oct. 20, 2010). The Tennessee Supreme Court subsequently denied a petition to reconsider its ruling. In its petition for rehearing, River Park Hospital, Inc. argued that the court failed to address the issue of whether the jury s verdict was inconsistent and irreconcilable. The hospital also argued the high court s opinion failed to address the situation where a hospital could be found liable when none of the individual healthcare providers were found to have committed medical malpractice. According to the high court s November 30, 2010 opinion denying the petition for rehearing, River Park s arguments essentially addresses the same point can a hospital be liable to its patients for breach of its duty of care absent any liability of other health care providers? The high court said this question was answered affirmatively in its previous opinion based on prior well-settled precedent in Tennessee. Barkes v. River Park Hosp., Inc., No. M SC-R11-CV (Tenn. Nov. 30, 2010). Tennessee Appeals Court Says Hospital Must Turn Over Requested Documents The Tennessee Court of Appeals held October 28, 2010 that a hospital must turn over documents related to its settlement with the Department of Health and Human Services Office of Inspector General (OIG) pursuant to a public records request. The hospital could point to no specific provision in federal or state law that explicitly protected such documents, the appeals court found. Chattanooga-Hamilton County Hospital Authority (Hospital) entered into settlement agreements with both the U.S. Department of Health and Human Services OIG and the state of Tennessee to resolve allegations that it submitted false claims to Medicare and Medicaid and improperly paid remuneration to physicians for patient referrals. In connection with those settlements, the Hospital entered into a Corporate Integrity Agreement (CIA). In March 2008, plaintiff John P. Konvalinka served a request for access to public records on the Hospital seeking access to 53 separate groups of documents. 210

211 The Hospital refused to provide three of the groups of documents, and plaintiff sued, claiming the Hospital lacked a good faith basis upon which to deny the public records request. The trial court initially held the documents were exempt from disclosure under state law. The appeals court found, however, the records were not protected from disclosure by state law and remanded for a determination of whether they were protected from disclosure by federal law. The trial court on remand concluded federal law did not protect the documents at issue from disclosure and ordered the Hospital to produce them. The Hospital again appealed. In determining whether federal law intended the disputed documents to be public, the appeals court considered the terms of the CIA as the document that controls the relationship between the Hospital and the federal government. The appeals court noted the term confidential was only used three times in the 39-page CIA. In addition, the trial court found, and the appeals court agreed, that the Hospital did not designate any of the documents submitted to the OIG as confidential until after they were requested by plaintiff. Thus, the appeals court concluded, the outcome in this case will not have the chilling effect nationwide that the Hospital asserts because other hospitals can avoid the result in this case by carefully reading its CIA and asserting any claims of confidentiality contemporaneously with its submissions to the OIG. Konvalinka v. Chattanooga-Hamilton County Hosp. Auth., No. E COA-R3-CV (Tenn. Ct. App. Oct. 28, 2010). Illinois High Court Holds Lien-Holding Hospital Not Obligated To Share Legal Fees The Illinois Supreme Court held March 24, 2011 that a hospital holding a statutory lien on the proceeds of an injured party s tort settlement was not responsible for a one-third share of the plaintiffs' attorneys fees. Reversing an appeals court decision, the high court in the consolidated action found the common fund doctrine inapplicable to statutory lien holders under the Health Care Services Lien Act (Act) per long-standing precedent. See Maynard v. Parker, 75 Ill.2d 73. Under the Act, healthcare liens filed with respect to an individual plaintiff are limited to 40% of the judgment or settlement. Healthcare providers have the right to seek payment of the amount of their reasonable charges that remain unpaid after the satisfaction of their liens. According to the high court, the appeals court misinterpreted recent case law as expanding the common fund doctrine, which provides that a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney s fee from the fund as a whole, to hospitals holding statutory liens. Specifically, the court noted the hospital was not unjustly enriched by the attorney s services because its claims existed irrespective of the outcome of the personal injury litigation. 211

212 The benefit to the Hospitals by having their liens paid under the Act was merely an incidental benefit because the Hospitals claims were primarily against the plaintiffs rather than the fund. Thus, the hospital did not have to contribute to the cost of the litigation. Plaintiffs Sherry D. Wendling and Nancy J. Howell were injured in separate automobile accidents and treated at hospitals owned by Southern Illinois Hospital Services. The hospitals filed statutory liens pursuant to the Act against the proceeds of plaintiffs lawsuits against their tortfeasors. Both plaintiffs settled and filed petitions to adjudicate the hospitals liens, seeking additional attorney fees equal to one-third of the amount of the hospitals liens pursuant to the common fund doctrine. The trial court granted the petitions, finding plaintiffs attorneys were entitled to 30% of the total settlement, plus one-third of the amount of the hospitals liens. The appeals court affirmed, holding the hospitals directly benefited from the work of plaintiffs attorneys in creating the fund and therefore were responsible for their prorated share of the plaintiffs legal expenses. The high court declined to overturn Maynard and made clear that the case law on which the appeals court relied did not expand the common fund doctrine to healthcare liens. Here, the Act expressly allows a hospital to pursue collection, through all available means, of its reasonable charges that remain unpaid after satisfaction of the lien... Therefore the Hospitals did not directly benefit from, and were not unjustly enriched by, the efforts of the plaintiffs attorneys, the high court said. The high court also distinguished the instant action from other common fund cases, noting that the hospitals had no standing to participate in the plaintiffs personal injury lawsuits, nor could they bring independent causes of action against the tortfeasors. In addition, plaintiffs attorneys obtained the funds for plaintiffs benefit, regardless of the hospitals interest. Wendling v. Southern Ill. Hosp. Servs., Nos , (Ill. Mar. 24, 2011). Hospital Not Shielded From Liability For Guard s Disclosure Of Patient Health Information Under State Statute, Maine High Court Finds The Maine Supreme Judicial Court found April 12, 2011 that a hospital was not shielded from liability under state law after a security guard reported information to police that he overheard from a patient during the patient s treatment at the hospital. The law in question protects a hospital from disclosure of confidential health information of a victim relayed to law enforcement for the purpose of prosecuting a crime, the high court said. Such circumstances were not present in the instant case and as such the hospital was not protected by the statute, according to the opinion. Dwayne and Debbie Bonney went to Stephens Memorial Hospital after being attacked in their home. 212

213 A hospital security guard overheard a conversation between the Bonneys and emergency room nurses attending to them and then reported information from that conversation to local law enforcement officials. As a result, law enforcement came to the hospital and spoke to the Bonneys. After that conversation, the police obtained a warrant to search the Bonneys home for evidence of the assault and found evidence of marijuana cultivation that led to the Bonneys indictment and subsequent conviction for drug trafficking. The Bonneys sued the hospital and the security guard alleging the guard violated their privacy rights under both state law and the federal Health Insurance Portability and Accountability Act (HIPAA). The hospital moved for summary judgment on the Bonneys state law claims, arguing that 30-A M.R.S. 287(3) immunizes healthcare providers who report assaults to law enforcement when serious bodily injury has been inflicted, even when no written authorization from the patients is obtained. The hospital also moved to dismiss the Bonneys federal claim, arguing that HIPAA does not authorize a private cause of action. The trial court granted the motions and the Bonneys appealed. The state high court affirmed the lower court s dismissal of the plaintiffs HIPAA claims, agreeing that the statute does not provide a private cause of action. However, the high court vacated the lower court s grant of summary judgment to the hospital based on state law, finding the law does not shield health care providers from liability for the unauthorized reporting of confidential health care information when the reporting involved is not related to an examination of a victim performed to obtain evidence for the prosecution. Bonney v. Stephens Mem l Hosp., No ME 46 (Me. Apr. 12, 2011). Individual/Patient Rights Florida Appeals Court Reverses Trial Court Order Compelling Pregnant Woman To Accept Medical Treatment A trial court s order compelling a pregnant woman to enter the hospital and undergo a surgical delivery of her baby was in error, the Florida District Court of Appeal, First District, held August 12, Reversing, the appeals court found the trial court applied the wrong legal standard in the case. Instead of considering what is in the best interests of the child, the law is clear that when the rights of a pregnant woman are at stake, the state s interest in preserving the life of an unborn child becomes compelling only upon viability, the appeals court held. Samantha Burton refused medical treatment while pregnant. The State Attorney took legal action. The trial court concluded Burton failed to follow her doctor s instructions and recommendations, rendering her pregnancy high-risk, and found a substantial and unacceptable risk of severe injury or death to the unborn child if the appellant continued to fail to follow the recommended course of treatment. 213

214 Thus, the trial court compelled Burton to comply with the physician s orders including, but not limited to bed rest, medication to postpone labor and prevent or treat infection, and eventual performance of a cesarean section delivery. Burton was hospitalized and her baby was delivered stillborn. The appeal in the case, although moot as to the parties, went forward. According to the appeals court, mootness does not preclude appellate jurisdiction if the issue is capable of repetition yet evading review, as in the case of medical issues which require immediate resolution. Addressing the merits, the appeals court first noted that under the Florida Constitution, every person has the right to be let alone and free from government intrusion into the person s private life. The Florida Supreme Court has specifically recognized that a competent person has the constitutional right to choose or refuse medical treatment, and that right extends to all relevant decisions concerning one s health, the appeals court pointed out. However, a patient s fundamental constitutional right to refuse medical intervention can be overcome if the state has a compelling interest great enough to override this constitutional right, the appeals court said. The appeals court explained that the state s interest in the potentiality of life of an unborn fetus becomes compelling at the point in time when the fetus becomes viable, defined as the time at which the fetus becomes capable of meaningful life outside the womb, albeit with artificial aid. Roe v. Wade, 410 U. S. 113, 163 (1973). Here, the appeals court held, even if the state had made the threshold showing of viability and the court had made the requisite determination, the legal test recited in the order on appeal was a misapplication of the law. The case relied on by the trial court, M. N. v. Southern Baptist Hosp. of Florida, 648 So. 2d 769 (Fla. 1st DCA 1994), holding that as between parent and child, the ultimate welfare of the child is the controlling factor, did not apply to the instant action, the appeals court said. In that case, parents were refusing treatment for an eight month old child, and no rights of a pregnant woman were involved, the appeals court said. Instead, the correct test to overcome a woman s right to refuse medical intervention in her pregnancy is whether the state s compelling state interest is sufficient to override the pregnant woman s constitutional right to the control of her person, including her right to refuse medical treatment, the appeals court said. In re Dubreuil, 629 So. 2d 819 (Fla. 1994). A dissenting opinion disagreed with the majority view that the case is "capable of repetition yet evading review." Accordingly, the dissenting Judge said he would dismiss the appeal as moot. Burton v. Florida, No. 1D (Fla. Dist. Ct. App. Aug. 12, 2010). Insurance 214

215 Market Reforms Health Plans That Significantly Cut Benefits, Increase Costs Will Forfeit Grandfathered Status Under Interim Final Rule The administration issued June 15, 2010 an interim final rule that would allow existing health plans that make routine changes to maintain their grandfather status exempting them from certain new requirements of the recently enacted Patient Protection and Affordable Care Act (PPACA). Under the rule, issued by the Departments of Health and Human Services (HHS), Labor, and Treasury, plans would lose their grandfather status if they significantly cut benefits or increased out-of-pocket expenses for consumers, including raising copayments or deductibles above certain levels specified in the regulation. The rule, which was published in the June 17, 2010 Federal Register (75 Fed. Reg ), implements a provision of the PPACA exempting plans in existence on March 23, 2010, the day the healthcare reform law was enacted, from certain requirements. All health plans, however, regardless of their grandfathered status must provide certain benefits for their customers starting on or after September 23, For example, plans may not place lifetime limits on coverage, may not rescind coverage when people get sick, and must extend parents coverage to young adults under 26 years old, according to an HHS fact sheet. Democrats touted the rule as making good on President Obama s pledge that those who like their current plans will be able to keep them, while at the same time extending important protections to consumers until the PPACA's state-based exchanges get underway in This rule allows individuals and families to keep their existing plans if they like them, and protects consumers with important benefits we included in the new health reform law, said Senate Finance Committee Chairman Max Baucus (D-MT) in a statement. But Republicans blasted the new rule, noting projections that a significant number of plans would lose their grandfathered status by Today s new rules from the federal government on grandfathering, which were crafted without any opportunity for public input, are just more proof that despite all the promises made by the President and other supporters, you actually can t keep what you like under the new partisan health reform law, said Senate Finance Committee Ranking Member Charles Grassley (R-IA). Routine Changes In a statement, Department of Labor Secretary Hilda Solis said the rule will allow employers to make routine and modest adjustments to co-payments, deductibles and employer contributions to their employees premiums without forfeiting grandfather status. According to the fact sheet, plans that make cost adjustments to keep pace with medical inflation, add new benefits, make modest adjustments to existing benefits, voluntarily adopt new consumer protections under the new law, or make changes to comply with state or other federal laws will not risk losing grandfather status. 215

216 Changes That Would Jeopardize Grandfather Status Under the rule, plans would forfeit their grandfather status if they make significant changes that reduce benefits or increase costs for consumers. For example, according to the fact sheet, plans wishing to maintain their grandfather status could only raise copayments by no more than the greater of $5 (adjusted annually for inflation) or a percentage equal to medical inflation plus 15 percentage points. Grandfathered plans also are prohibited from raising deductibles more than a percentage equal to medical inflation plus 15 percentage points, the fact sheet said. The new rule also restricts grandfathered plans from decreasing the percent of premiums born by the employer by more than 5 percentage points. Impact on Plan Status According to the agencies estimates, most of the 133 million Americans with employersponsored health insurance through large employers will maintain the coverage they have today. The agencies expect to see more movement for the roughly 42 million people insured through small businesses over the next few years. The agencies attribute the difference to the fact that small plans usually make substantial changes to cost-sharing employer contributions and health insurance issuers more frequently than large plans. The agencies project that by 2013, 66% to 36% of large employer plans will remain grandfathered, while 51% to 20% of small employer plans will retain that status by that time. Amendment Allows Employers to Change Issuers Without Losing Grandfather Status In further developments, the agencies issued November 17, 2010 (75 Fed. Reg ) an amendment to interim final regulations permitting all group health plans to change issuers without losing their grandfather status, as long as the change does not result in significant cost increases, a reduction in benefits, or other changes described in the original rules, according to a fact sheet. The original rules only allowed self-funded plans to change third-party administrators without necessarily losing their grandfather plan status. The agencies said they received numerous comments on this aspect of the original grandfather rules and decided to issue the amendment based on several reasons. First, the agencies recognized that circumstances could arise where a group health plan would need to make administrative changes, for example if an insurer stopped offering coverage in a market, that would not affect the benefits or cost of a plan. In addition, locking an employer into staying with a particular insurance company could interfere with healthcare cost containment and prevent employers from shopping around for the better coverage/price options. 216

217 Finally, the fact sheet noted, the amendment gives all employers, including those that do not self-insure, the same flexibility to keep their grandfathered plan but change insurance company or third-party administrator. Administration Issues Rules On New Patient s Bill Of Rights Under PPACA The administration released June 22, 2011 interim final rules implementing certain consumer protections under health insurance reform provisions of the Patient Protection and Affordable Care Act (PPACA). The Departments of Health and Human Services (HHS), Labor, and Treasury jointly issued the new patient s bill of rights rules, which are effective for most plans starting on or after September 23, Among other things the new rules, slated for publication in the June 28, 2010 Federal Register, prohibit insurance companies from imposing pre-existing condition exclusions on children; ban policy rescissions for unintentional mistakes on an insured s application; stop insurers from setting lifetime limits on coverage; and restrict the use of annual limits on coverage, according to an administration fact sheet. The rules also make clear that health plan members are free to designate any available participating primary care provider as their provider and prohibit insurers and employer plans from requiring a referral for obstetrical or gynecological care, the fact sheet explained. In remarks following a meeting with insurance industry Chief Executive Officers and state insurance commissioners, President Obama said the new rules will put an end to some of the worst practices in the insurance industry, and put in place the strongest consumer protections in our history. Obama said the rules are not intended to punish insurers but rather to provide a greater level of accountability and fairness and security. Obama also praised steps many insurers have taken in advance of the compliance deadline mandated under the PPACA to end some of the abusive practices banned by the law. At the same time, Obama criticized some insurance companies for trying to raise rates before the healthcare reform law was passed. The point is that there are genuine cost-drivers that are not caused by insurance companies. But what is also true is we ve got to make sure that this new law is not being used as an excuse to simply drive up costs, Obama said. Children-Only Policies Responding to concerns that some insurers may stop offering children-only policies as a result of the new ban on pre-existing exclusions, the administration clarified July 27, 2010 that plans may restrict enrollment of kids under 19, whether in family or individual coverage, to specific open enrollment periods in accordance with state law. HHS posted a questions and answers document (an updated version was posted October 13, 2010) to help ensure children have access to care, while not disrupting the insurance 217

218 marketplace, said White House Office of Health Reform Director Nancy-Ann DeParle in a July 26, 2010 blog post. Some state insurance commissioners expressed concerns that, without an open enrollment period that was widely communicated, people might wait until their children got sick to enroll them in coverage, DeParle noted. DeParle said some insurance companies indicated they would stop offering child-only policies altogether. The new guidance document makes clear that the regulations do not preclude insurers from limiting enrollment of children to specific enrollment period as allowed under state law. But DeParle cautioned that the Administration will not hesitate to issue regulations if insurance companies unfairly limit access to insurance for children who need it most. According to DeParle, some companies that reportedly planned to stop offering childrenonly policies have now reversed course and agreed to continue issue such policies. DeParle said Blue Cross Blue Shield of Florida indicated they would establish a process to resume the sale of child-only policies in the wake of the administration s recent guidance on annual open enrollment periods. But HHS Secretary Kathleen Sebelius rejected October 13, 2010 a proposal by the insurance industry that would allow companies to restrict access to new child-only policies for those with pre-existing conditions to certain open enrollment periods, while allowing healthy children to enroll year round. In a letter to National Association of Insurance Commissioners President Jane L. Cline, Sebelius called such an approach legally infirm and inconsistent with the PPACA. Nor would it be lawful for a state to allow denials of coverage for children based on preexisting conditions outside of an open enrollment period, Sebelius said. At the same time, the letter, which follows a number of announcements from insurers that they may stop offering new child-only policies altogether, attempted to outline other options for addressing industry concerns that individuals will wait until they are sick to obtain coverage. While we recognize industry concerns about adverse selection, we believe that there are options other than abandoning families who seek coverage, as evidenced in state laws already in place, Sebelius said in the letter to Cline, who is West Virginia s Insurance Commissioner. For example, Sebelius noted that insurers may still adjust rates for health status as permitted by state law; the PPACA bans this practice for all new insurance plans in Sebelius also encouraged states to take other actions to help preserve options for children with pre-existing conditions. California recently enacted legislation that bans insurers in the state from offering policies in the individual market for five years if they fail to offer child-only coverage, Sebelius observed. 218

219 Other states, like Maine, Massachusetts, New Jersey, New York, and Vermont already require individual market insurers to guarantee issue all their policies. Meanwhile, Sebelius pointed to a recent agreement between the Maryland Insurance Administration and Kaiser Permanente of the Mid-Atlantic and CareFirst BlueCross Blue Shield for those companies to offer child-only policies. The agreement, which still requires the Maryland General Assembly s approval, followed a decision by Acting Maryland Insurance Commissioner Beth Sammis to establish a uniform open enrollment period in the state for policies covering children under 19. In an ed statement, America s Health Insurance Plans Press Secretary Robert Zirkelbach continued to express concerns that [i]n the small but critically important niche market for child-only policies the regulation has created a powerful incentive for parents to defer purchasing coverage until after their children need it which could significantly raise costs and cause disruptions for families whose children are currently covered by child-only policies. Plans are therefore having to make very difficult decisions about offering new child-only coverage, Zirkelbach said, adding that the industry will continue to work with regulators to try and find workable solutions to stabilize the market for child-only coverage. Annual Limits In further developments, the HHS Office of Consumer Information and Insurance Oversight (OCIIO) issued September 3, 2010 subregulatory guidance on the process for health plans to obtain waivers of the restricted annual limits set forth in the interim final regulations. The PPACA, as amended, requires the HHS Secretary to impose restrictions on annual limits on the dollar value of essential health benefits in a new or existing group health plan or a new policy in the individual market for plan or policy years beginning on or after September 23, 2010 and prior to January 1, The interim final regulations establish the restricted annual limits $750,000 for plan or policy years beginning on or after September 23, 2010; $1.25 million for plan or policy years beginning on or after September 23, 2011; and $2 million for plan or policy years beginning September 23, 2012 until January 1, Under the PPACA, no annual limits on essential health benefits are permitted after January 1, 2014, except in the case of grandfathered individual market policies. The regulations contemplated a waiver of the restricted annual limits where compliance would result in a significant decrease in access to benefits or a significant increase in premiums. Such a scenario may arise with limited benefit or mini med plans, which often have annual limits well below the restricted annual limits in the regulations, according to the guidance. The guidance outlines the waiver process for existing plans and policies for the plan or policy year beginning between September 23, 2010 and September 23, Waiver applications must be submitted not less than 30 days before the beginning of such plan or policy year, or in the case of a plan or policy year beginning before 219

220 November 2, 2010, not less than ten days before the beginning of such plan or policy year. The application must include, the terms of the plan or policy for which a waiver is sought; the number of individuals covered by the plan or policy; the annual limit(s) and rates applicable to the plan or policy; a brief description of why compliance with the annual restricted limits would significantly decrease access to benefits or significantly increase premiums; and an attestation, signed by the plan administrator or Chief Executive Officer, certifying the plan was in force before September 23, 2010 and that the annual limits would significantly decrease access to benefits or significantly increase premiums. Group health plans or health insurance issuers would have to reapply for a waiver for any subsequent plan or policy year prior to January 1, 2014 subject to future HHS guidance. In further developments, OCIIO issued supplemental guidance November 5, 2010 on the process for health plans to obtain waivers of the restricted annual limits. Since publishing the September 3, 2010 Bulletin, we have received questions regarding the scope and applicability of the waiver program implemented in that guidance, who can apply for a waiver, and whether some similar process might be available with respect to the medical loss ratio (MLR) provisions of the Affordable Care Act with respect to minimed plans, OCIIO said in the supplemental guidance. The agency noted that some plans with low annual limits have asked that they also be exempted from the MLR requirements if they fail to spend on health benefits and quality improving activities at least 80 cents of each premium dollar (85 cents of each premium dollar for issuers in the large group market) as required under the PPACA. Such plans have argued that their premium base is low relative to other types of plans, resulting in low MLRs by definition. According to the guidance, HHS intends to promulgate, in the near future, regulations implementing the MLR provisions that will include a special methodology that takes into account the special circumstances of mini-med plans in determining how administrative costs are calculated for MLR purposes. The special methodology for mini-med plans would apply at least for the first year for which the MLR provisions are effective, the guidance said. Going forward, HHS intends to collect data on an accelerated basis to inform its determination whether mini-med plans should be accorded similar treatment for the second and third years preceding HHS issued December 9, 2010 new requirements that mini-med plans notify consumers of benefit limits and direct them to for more information on other coverage options. HHS also issued guidance restricting the sale of new mini-med plans. Because mini-med plans often are the only type of private insurance available to some workers, HHS has issued temporary waivers from rules that restrict the level of annual limits to some group health plans and health insurance issuers. Under the HHS guidance, mini-med plans with waivers must tell consumers if their healthcare coverage is subject to annual dollar limits that are lower than what is required 220

221 by law. The notice must include the dollar amount of the annual limit along with a description of the plan benefits to which the limit applies. Additional guidance also provides new rules on when mini-med plans can continue to be sold to new employers and individuals. Agencies Issue Rule Requiring Coverage Of Preventative Care And Prohibiting Cost-Sharing For Such Services The Departments of Health and Human Services (HHS), Labor, and Treasury issued July 14, 2010 an interim final rule requiring new private health plans to cover evidence-based preventative services and provides that the plans may no longer charge a patient a copayment, coinsurance, or deductible for these services when they are delivered by a network provider. Chronic diseases, such as heart disease, cancer, and diabetes, are responsible for 7 of 10 deaths among Americans each year and account for 75% of the nation s health spending, HHS said in a press release. However, nationally, Americans use preventative services at only about half the recommended rate, the release said. Getting access to early care and screenings will go a long way in preventing chronic illnesses like diabetes, heart disease, and high-blood pressure, said First Lady Michelle Obama in a speech announcing the rules. And good preventative care will also help tackle an issue that is particularly important to me as First Lady and as a mother and that is the epidemic of childhood obesity in America today. These are important tools, and now it s up to us to use them. The interim final rule focuses on evidence-based preventative services, routine vaccinations, and prevention for women and children. HHS Issues Rules On Temporary High-Risk Pools For Individuals With Pre-Existing Conditions The Department of Health and Human Services (HHS) Office of Consumer Information and Insurance Oversight issued in the July 30, 2010 Federal Register an interim final rule (75 Fed. Reg ) setting forth the rules for the new Pre-Existing Condition Insurance Plan Program called for under the healthcare reform law. The Patient Protection and Affordable Care Act set aside $5 billion in funding for the creation of temporary high-risk pools for people with pre-existing conditions as an interim measure to ensure affordable health insurance coverage before the new state-based exchanges get underway in The interim final rule with comment period is effective as of July 30, The rule addresses administration of the program, eligibility and enrollment, benefits, premiums, funding, and appeals and oversight requirements. Most states have opted to participate in the high-risk pool program, with a majority of those opting to operate their own programs, as opposed to having HHS do so for them. 221

222 In a blog posting, White House Office of Health Reform Director Nancy DeParle said coverage under the high-risk pool program will be available at the same rate as it is for an average person who does not have a pre-existing condition. Beginning in 2014, discrimination against anyone with a pre-existing condition will be illegal under the PPACA, DeParle noted. Under the rule, DeParle said, covered benefits include hospitalization, outpatient care, maternity care, and, hospice, and home healthcare. According to DeParle, the list of services not covered parallels that of the Federal Employees Health Benefit Plan. The rule also prohibits the use of federal funds for abortions, except in cases of rape or incest, or where the life of the woman would be endangered. Agencies Issue Regulations Giving Consumers New Appeals Rights For Health Plan Decisions The Departments of Health and Human Services (HHS), Labor, and Treasury published interim final regulations in the July 23, 2010 Federal Register (75 Fed. Reg ) giving consumers in new health plans broad appeals rights provided for under the healthcare reform law. Consumers will have the right to appeal decisions, including claims denials and rescissions, made by their health plans. Individuals also have the right under the regulations to appeal decisions made by a health plan through the plan s internal process and, for the first time, the right to appeal decisions made by a health plan to an outside, independent decision-maker, no matter what state a patient lives in or what type of health coverage they have, HHS said in a press release. The Affordable Care Act puts patients in control of their healthcare, HHS Secretary Kathleen Sebelius said. Today, if your health plan tells you it won t cover a treatment your doctor recommends, or it refuses to pay the bill for your child s last trip to the emergency room, you may not know where to turn. The Affordable Care Act provisions announced today will provide patients with important new rights and resources that will help ensure they get the care they need. Next year, an estimated 31 million people in new employer plans and 10 million people in new individual plans will benefit from the appeals rights, HHS said in a fact sheet. The fact sheet also noted that the regulations do not apply to grandfathered plans. Under the rules, new health plans beginning on or after September 23, 2010 must have an internal appeals process that: allows consumers to appeal when a health plan denies a claim for a covered service or rescinds coverage; gives consumers detailed information about the grounds for the denial of claims or coverage; requires plans to notify consumers about their right to appeal and instructs them on how to begin the appeals process; ensures a full and fair review of the denial; and provides consumers with an expedited appeals process in urgent cases. Consumers also will have external appeal rights under the new rules, which ensure access to a standardized process. The administration urged states to make changes in their external appeals laws to adopt standards established by the National Association of Insurance Commissioners and said 222

223 that if states do not meet those standards, consumers will be protected by comparable federal external appeals standards. The administration also announced the availability of grant applications from the $30 million Consumer Assistance Program to help states and territories establish consumer assistance offices or strengthen existing ones. Guidance on Federal External Review Process The agencies issued a notice in the Federal Register on August 26, 2010 (75 Fed. Reg ) announcing the availability of guidance detailing interim procedures for the federal external review process under the healthcare reform law. Under the PPACA, plans and issuers in states without an applicable state external review process must implement an effective external review process that meets certain minimum standards. The preamble to the interim final regulations provided that the agencies would issue additional guidance on the federal external review process. The guidance issued by the Department of Labor s (DOL s) Employee Benefits Security Administration (EBSA) as a technical release sets forth an interim enforcement safe harbor for non-grandfathered self-insured group health plans not subject to a state external review process that are, therefore, subject to the federal external review process. The safe harbor applies for plan years beginning on or after September 23, 2010 and until superseded by future guidance on the federal external review process. Self-insured group health plans that comply either with the procedures set forth in the technical release for standard/expedited external review or voluntarily comply with state external review processes will not be subject to enforcement action during the period that the safe harbor is in effect. The procedures described in the technical release are based on the Uniform Health Carrier External Review Model Act promulgated by the National Association of Insurance Commissioners on July 23, The release said more guidance on the federal external review process is forthcoming. Also posted on EBSA s website are model notices for plans for notifications of adverse benefit determinations, final adverse internal benefit determinations, and final external review decisions. Enforcement Grace Period EBSA subsequently issued Technical Release setting forth an enforcement grace period until July 1, 2011 for compliance with certain new internal claims and appeals process requirements under the recently issued regulations. The PPACA revised Section 2719 of the Public Health Services Act to require nongrandfathered group health plans and health insurance issuers to provide an internal claims and appeals process that initially incorporates the existing DOL claims procedure regulation, 29 C.F.R

224 The interim final rule includes the following additional standards for internal claims and appeals processes not set forth in the DOL regulation: (1) providing that any rescissions of coverage are eligible for internal claims and appeals; (2) shortening the time period for notification of a benefit determination in the case of urgent care claims (whether adverse or not) from not later than 72 hours to not later than 24 hours; (3) clarifying that plans and issuers must provide a claimant (free of charge) with new or additional evidence considered, relied on, or generated in connection with the claim, as well as any new or additional rationale for a denial at the internal appeals stage, and a reasonable opportunity for the claimant to respond to such new evidence or rationale; (4) clarifying, regarding conflicts of interest, that decisions on hiring, compensation, termination, promotion, or other similar matters with respect to an individual such as a claims adjudicator or medical expert must not be based on the likelihood that the individual will support the denial of benefits; (5) requiring that notices be provided in a culturally and linguistically appropriate matter; (6) requiring additional content requirements for notices of adverse benefit determinations; and (7) providing that failure to strictly adhere to all the new requirements results in deemed exhaustion of the internal claims and appeals process, regardless of a plan or issuer s assertion of substantial compliance, and allowing the claimant to initiate any available external review process or remedies available under the Employee Retirement Income Security Act or under state law. According to the September 20, 2010 technical release, [s]ince publication of the interim final regulations, some plans and issuers have stated that they did not anticipate some or all of the additional standards and more time is needed to come into compliance. For that reason, the technical release provides an enforcement grace period until July 1, 2011 with respect to some of the additional standards outlined above namely, standards 2, 5, 6, and 7. The departments will not take any enforcement action during the grace period against health plans working in good faith to implement such additional standards. HHS also is encouraging states to provide similar grace periods with respect to issuers, and the agency will not cite a state for failing to substantially enforce the additional standards in these situations, the release said. In August 2010, EBSA also issued a technical release setting forth an interim enforcement safe harbor for non-grandfathered self-insured group health plans not subject to a state external review process that are, therefore, subject to the federal external review process. Self-insured group health plans that comply either with the procedures set forth in the technical release for standard/expedited external review or voluntarily comply with state 224

225 external review processes will not be subject to enforcement action during the period that the safe harbor is in effect. In further developments, EBSA issued March 18, 2011 Technical Release extending, for the most part, the enforcement grace period until January 1, 2012 for compliance with certain new internal claims and appeals process requirements under interim final regulations. According to the most recent Technical Release, the Departments are planning to amend the 2010 interim final regulations based on stakeholder feedback and therefore want to avoid enforcing standards that will be modified in the near future. The initial enforcement delay applied to standards regarding the timeframe for making urgent care claims decisions, providing notices in a culturally and linguistically appropriate manner, requiring broader content and specificity in notices, and involving substantial compliance with the new requirements. The Technical Release extends, unaltered, the enforcement delay to all of the above standards except the one requiring broader content and specificity in notices. For that standard, the Technical Release extends the enforcement grace period to certain disclosure requirements only until the first day of the first plan year beginning on or after July 1, Specifically, enforcement regarding the following provisions will take effect on a rolling plan year basis, starting on the first day of the first plan year beginning on or after July 1, 2011: the disclosure of information sufficient to identify a claim (other than the diagnosis and treatment information), the reasons for an adverse benefit determination, the description of available internal appeals and external review processes, and for plans and issuers in states in which an office of health consumer assistance program or ombudsman is operation, the disclosure of the availability of, and contact information for, such program. The Technical Release also removes a previous requirement under the original enforcement grace period that health plans work[] in good faith to implement such additional standards. Under the Technical Release, the good faith requirement does not apply to either the extended or the original enforcement grace period. NAIC Releases Draft Regulations On MLR Calculation The National Association of Insurance Commissioners (NAIC) released for comment September 23, 2010 long-awaited draft regulations concerning the calculation and payment of medical loss ratio (MLR) rebates. Under the draft regulation, insurers would be able to deduct nearly all federal taxes from their calculation and would have to exclude only federal income taxes on investment income and capital gains. Congressional Democrats have urged that more federal taxes be excluded from revenue calculations. In a letter August 10 to Department of Health and Human Services (HHS) Secretary Kathleen Sebelius, several Democrats argued Congress intended the term federal taxes 225

226 and fees to refer only to taxes and fees that relate specifically to revenue derived from the provision of health insurance coverage that were included in the PPACA. The NAIC was tasked by the healthcare reform law with establishing uniform definitions and standardized methodologies for determining what services constitute clinical services, quality improvement, and other non-claims costs for carrying out Section 2718 of the Public Health Service Act, which was added by Sections 1001 and of the Patient Protection and Affordable Care Act (PPACA). Section 2718 requires health insurance issuers offering individual or group coverage to submit annual reports to the HHS on the percentages of premiums spent on reimbursement for clinical services and activities that improve healthcare quality, known as the MLR. Under these provisions, insurers must provide rebates, beginning not later than January 1, 2011, to enrollees if their spending does not meet minimum standards 85% for coverage in the large group market and 80% in the individual and small group market for a given plan year. NAIC Approves Model MLR Regulations, Tells HHS Issues Remain The National Association of Insurance Commissioners (NAIC) Health Insurance and Managed Care Committee approved October 14, 2010 the model regulation containing the definitions and methodologies for calculating Medical Loss Ratios (MLR). Once the model has been approved by NAIC s Executive/Plenary Committees, which plan to meet next week, NAIC will forward the model regulation to the Department of Health and Human Services (HHS) for certification, the group said in a press release. The NAIC was tasked by the healthcare reform law with establishing uniform definitions and standardized methodologies for determining what services constitute clinical services, quality improvement, and other non-claims costs for carrying out Section 2718 of the Public Health Service Act, which was added by Sections 1001 and of the Patient Protection and Affordable Care Act (PPACA). Section 2718 requires health insurance issuers offering individual or group coverage to submit annual reports to the HHS on the percentages of premiums spent on reimbursement for clinical services and activities that improve healthcare quality, known as the MLR. Under these provisions, insurers must provide rebates, beginning not later than January 1, 2011, to enrollees if their spending does not meet minimum standards 85% for coverage in the large group market and 80% in the individual and small group market for a given plan year. Issues Remain In connection with the model regulation, NAIC sent a letter October 13 to HHS Secretary Kathleen Sebelius pointing out several remaining issues that came to light during NAIC s consideration of the MLR. In the letter, NAIC reiterated its previous concern that the medical loss ratio and rebate program in PPACA have the potential to destabilize the marketplace and significantly limit consumer choices. 226

227 While the reforms also may enhance the value of plans for consumers and improve carrier accountability for spending and pricing decisions, improper or overly strident application of the MLR and rebate program could threaten the solvency of insurers or significantly reduce competition in some insurance markets, NAIC said. The letter also addressed phase-in issues, stating that [h]ealth insurance companies in some markets will need a transitional period to comply with the 80 percent MLR limit. NAIC urged HHS to give deference to the analysis and recommendations of state regulators when determining how the new requirements will be phased-in. The letter also noted that insurance companies that sell expatriate and international policies have argued that they should be exempt from the MLR limit because the nature of the benefits provided under these plans makes it all but impossible for them to comply with the 80% limit. NAIC noted that, while it agrees with this argument, this determination is ultimately the responsibility of HHS to make. Lastly, NAIC highlighted several issues related to the payment of rebates that HHS must address. Rockefeller Letter Senator John D. Rockefeller IV, (D-WV) sent a letter October 14 to NAIC urging them to resist what he called the health insurance industry s last minute attempt to water down key consumer protections included in the health care reform bill. Requiring insurers to report their medical loss data and pay rebates at the state level which is currently what the model regulations require means that the consumers of your state will receive the benefits Congress intended when it passed this law better value for their health care premium dollars, Rockefeller said. According to Rockefeller, large insurers would prefer to aggregate their large group medical loss ratio data across state lines and business entities. However, such an approach deprives the consumers of individual states of the new medical loss ratio law s most important protections, the letter said. AHIP Letter America s Health Insurance Plans (AHIP) President Karen Ignagni also weighed in on the model regulations, with an October 13 letter to NAIC. The letter expressed AHIP s concern that the current draft proposal will create unintended consequences and not achieve the expected goals. The letter pointed to three particular issues that it urged NAIC to consider further: the need for a transition to prevent full scale market disruption across the country; the importance of ensuring that the proposed credibility adjustments work as expected; and the risk of potentially turning back the clock on quality improvement initiatives. NAIC Approves Model MLR Regulations Without Changes Sought By Insurers 227

228 The Executive and Plenary Committees of the National Association of Insurance Commissioners (NAIC) voted October 21, 2010 to adopt the model regulation containing the definitions and methodologies for calculating Medical Loss Ratios (MLRs). America s Health Insurance Plan President Karen Ignagni blasted the MLR proposal in an October 21, 2010 statement, saying it would reduce competition, disrupt coverage, and threaten patients access to health plans quality improvement services. Ignagni sent a letter October 13, 2010 to NAIC urging them to make a number of changes to the model regulation adopted late last week by NAIC s Health Insurance and Managed Care Committee. But the NAIC s Executive/Plenary Committee approved the model regulation at a joint meeting with only technical amendments from the October 14, 2010 version. In a statement, Department of Health and Human Services (HHS) Secretary Kathleen Sebelius called the NAIC recommendations reasonable [and] achievable for insurers. According to Sebelius, the recommendations help ensure consumers receive better value for their health care dollar and recognize the special circumstances in different markets to preserve market stability and employee coverage as we transition to the new marketplace in Sebelius said the next step will be for HHS to issue a MLR regulation. We will work quickly to promulgate this regulation, using the NAIC recommendations as a basis, Sebelius pledged. The NAIC was tasked by the healthcare reform law with establishing uniform definitions and standardized methodologies for determining what services constitute clinical services, quality improvement, and other non-claims costs for carrying out Section 2718 of the Public Health Service Act, which was added the Patient Protection and Affordable Care Act, as amended. Section 2718 requires health insurance issuers offering individual or group coverage to submit annual reports to HHS on the percentages of premiums spent on reimbursement for clinical services and activities that improve healthcare quality, known as the MLR. Under these provisions, insurers must provide rebates, beginning not later than January 1, 2011, to enrollees if their spending does not meet minimum standards 85% for coverage in the large group market and 80% in the individual and small group market for a given plan year. HHS Releases Final MLR Rule The Department of Health and Human Services (HHS) issued November 22, 2010 final regulations on definitions and methodologies for calculating Medical Loss Ratios (MLRs). The regulations certify and adopt the recommendations submitted last month by the National Association of Insurance Commissioners (NAIC). The NAIC was tasked by the healthcare reform law with establishing uniform definitions and standardized methodologies for determining what services constitute clinical services, quality improvement, and other non-claims costs for carrying out Section 2718 of the Public Health Service Act, which was added by Sections 1001 and of the Patient Protection and Affordable Care Act (PPACA). 228

229 Section 2718 requires health insurance issuers offering individual or group coverage to submit annual reports to HHS on the percentages of premiums spent on reimbursement for clinical services and activities that improve healthcare quality, known as the MLR. The final regulations require health insurers to spend 80% to 85% of consumers premiums on direct care for patients and efforts to improve care quality, HHS said. Specifically, beginning in 2011, insurance companies in the individual and small group markets must spend at least 80% of the premium dollars they collect on medical care and quality improvement activities and insurance companies in the large group market must spend at least 85% of premium dollars on such activities. Following NAIC recommendations, the regulation specifies a comprehensive set of quality improving activities that allows for future innovations that may be counted toward the MLR requirement, HHS said in a fact sheet. According to the fact sheet, [q]uality improving activities must be grounded in evidencebased practices, take into account the specific needs of patients and be designed to increase the likelihood of desired health outcomes in ways that can be objectively measured. If insurers do not meet the MLR requirement, the companies will be required to provide a rebate to their customers starting in According to HHS, estimates indicate that up to 9 million Americans could be eligible for rebates starting in 2012 worth up to $1.4 billion. These rules were carefully developed through a transparent and fair process with significant input from the public, the States, and other key stakeholders, Jay Angoff, Director of the HHS Office of Consumer Information and Insurance Oversight (OCIIO) said in a press release. As we build a bridge to 2014, when better, more affordable options are available to consumers, these rules will help make health insurance fairer for consumers now. The regulations also aim to ensure greater transparency by requiring that insurance companies publicly report how they spend premium dollars, the fact sheet said. Under the rules, insurers will report aggregate premium and expenditure data for each market, except for so-called expatriate and mini-med plans. For these plans, insurers will be allowed to report their data separately, the fact sheet said. In addition, consistent with NAIC recommendations, the regulation allows insurers to deduct federal and state taxes that apply to health insurance coverage from an insurer s premium revenue when calculating its MLR. Taxes assessed on investment income and capital gains will not be deducted from premium revenue, according to the fact sheet. America s Health Insurance Plans President and CEO Karen Ignagni in a statement said the regulations acknowledge the potential for individual insurance market disruption and take a first step toward minimizing such disruptions," but added that the "potential for disruption to employer-provided coverage should also be acknowledged and addressed." "In addition, more consideration needs to be given to the cost of federally mandated investments in modernizing claims coding and the value of health plans programs to prevent fraud, Ignagni said. 229

230 HHS Issues Proposed Rule Requiring More Transparency For Insurance Rate Hikes The Department of Health and Human Services (HHS) issued a proposed regulation December 21, 2010 implementing the insurance rate review provisions of the Patient Protection and Affordable Care Act (PPACA). Under the proposal, starting in 2011, all insurers seeking rate increases of 10% or more in the individual and small group market will be required to publicly disclose the proposed increases and the justification for them. Such increases are not presumed unreasonable, but will be analyzed to determine whether they are unreasonable, HHS noted. After 2011, a state-specific threshold will be set for disclosure of rate increases, using data and trends that better reflect cost trends particular to that state. Under the rule, states with effective rate review systems would conduct the reviews, but if a state lacks the resources or authority to do thorough actuarial reviews, HHS would conduct them. Information about the outcome of all reviews for increases above 10%, along with justification provided by insurance companies for those increases determined to be unreasonable, will then be posted on the HHS website and the insurance company s website. Disclosing proposed increases, along with the insurer s justification, would shed light on industry pricing practices that some experts believe have led to unnecessarily high prices, HHS said in a fact sheet. In a companion letter to state insurance commissioners, HHS Secretary Kathleen Sebelius said the proposed regulation recognizes and builds upon the traditional role the states have played in regulating insurance rates and complements existing State-based rate review processes. Sebelius noted in the letter that the proposed disclosure form required of issuers filing rates subject to review reflects the input given to HHS by the National Association of Insurance Commissioners (NAIC). Sebelius also invited the insurance commissioners to give their input on the rule. The reform law provided for $250 million in funding for states to take action against insurers seeking unreasonable rate hikes, HHS highlighted. On August 16, 2010 the agency awarded $46 million to 45 states and the District of Columbia to help them improve their oversight of proposed health insurance rate increases. Beginning in 2014, the reform law empowers states to exclude health plans that show a pattern of excessive or unjustified premium increases from the new health insurance exchanges, HHS said. 230

231 CMS Proposes Consumer Disclosure Notices For Insurance Rate Hikes The Centers for Medicare and Medicaid Services (CMS) posted March 7, 2010 proposed consumer disclosure notices detailing the information insurers must provide the public when they seek rate increases over 10%. The notices, mandated by the Patient Protection and Affordable Care Act (PPACA), will spell out for consumers what the insurer believes is driving the rate hike and how much of the increase is going to profit versus administrative expenses. Consumers will have access to this information via the Department of Health and Human Services (HHS') website while the rate increase is under review. People have been kept in the dark when it comes to the reasons behind their health insurance rate increases, Steve Larsen, Director of the Center for Consumer Information and Insurance Oversight, said in an agency press release. The information reported by insurers would provide an unprecedented level of transparency in the health insurance market, promoting competition, encouraging insurers to do more to control health care costs, and discouraging insurers from charging rates that are unreasonable. The notices are related to an HHS proposed rule issued in December 2010 to implement the PPACA's insurance rate review provisions. Under the proposed rule, starting in 2011, all non-grandfathered plans seeking rate increases over a certain threshold in the individual and small group market would be subject to rate reviews by the state or HHS if the state lacks an effective review system. After 2011, a state-specific threshold will be set for disclosing rate increases based on data and trends that better reflect cost trends particular to that state, CMS said. According to CMS, rate reviews under the regulation could begin as early as July Cases U.S. Court In Oklahoma Holds Statute Defining Actual Charges Applies To Renewable Cancer-Only Policy An Oklahoma statute defining actual charges as the amount actually paid by or on behalf of the insured and accepted by a provider applies to a renewable cancer-only insurance policy, a federal court in the state ruled June 16, The U.S. District Court for the Western District of Oklahoma held the statute, Okla. Stat. tit. 36, 3651, was not ambiguous and clearly applied to all insurance policies issued or renewed after November 1, 2006 that did not include a definition of actual charges. The court also found the statute did not run afoul of the Contracts Clause of the U.S. Constitution. Thus, the court held plaintiffs in the case, brought as a putative class action, could not maintain a breach of contract action against the insurance company that issued their cancer-only policy. 231

232 The court did, however, allow the plaintiff to proceed with a bad faith claim against the insurer for reduced payments under the policy before the statute s November 1, 2006 effective date. Plaintiffs Kenneth and Myra McLaughlin and Thomas Wayne Butler sued defendant American Fidelity Assurance Company, which sells, issues, and administers limited benefit cancer insurance policies, for breach of contract, unjust enrichment, and bad faith. The dispute centered on the term actual charges in their insurance policies. Plaintiffs contended the term was ambiguous and should be construed in their favor to mean the provider s billed charge. Defendant argued, however, that actual charges means the provider s discounted charge, reflecting a reduction based on negotiated steerage. On November 1, 2006, a new statute in Oklahoma took effect that defines actual charges to mean the provider s discounted charge. The statute was not intended to apply retroactively to any insurance policy that had been fully executed, and applies only to insurance policies delivered, issued for delivery, or renewed on or after November 1, Plaintiff argued the statute was ambiguous and therefore should not be construed to apply to their policies, which were executed before the statute s effective date. But the court disagreed, holding the statute was clearly intended to apply to renewable policies like the one at issue. The court also rejected plaintiffs argument that the statute violated the Contracts Clause because they had a vested contractual right to receive the higher billed amount. According to the court, plaintiffs failed to show that the insurer of a renewable insurance policy may not incorporate new legislative enactments defining previously undefined and ambiguous terms. In addition, the court found the statute did not substantially impair plaintiffs rights under the cancer policy. [T]he Court fails to see how denying plaintiffs additional funds not owed to medical providers deprives them of substantial rights under the cancer policies, the opinion said. Even assuming the statute substantially impaired plaintiffs of substantial rights, the court continued, there would be no Contracts Clause violation because of the legitimate purpose of the state in protecting the economic interest of the public s ability to obtain insurance at reasonable rates as well as preventing insureds from receiving windfall profits unforeseen when the contract was executed. The court also agreed that plaintiffs could not maintain a bad faith claim against defendant for underpaying their benefits under the policy after the statute s effective date. The court did conclude, however, that plaintiffs could proceed with their pre-november 1, 2006 bad faith claims. The court found if plaintiffs prove the term actual charges was ambiguous, then that ambiguity should have been construed in plaintiffs favor prior to the statute s enactment. 232

233 McLaughlin v. American Fidelity Assurance Co., No. 5:09-cv M (W.D. Okla. June 16, 2010). U.S. Court In D.C. Rejects Bid To Block Mental Health Parity Regulations The U.S. District Court for the District of Columbia dismissed June 21, 2010 a lawsuit brought by a coalition of managed behavioral healthcare organizations (MBHOs) seeking to invalidate the recently issued implementing regulations for mental health parity legislation. The court held the Departments of Health and Human Services, Labor, and Treasury (defendants), which jointly issued the interim final rule at issue on February 2, 2010 (75 Fed. Reg. 5410), had properly invoked the good cause exception to the notice and comment rulemaking requirements of the Administrative Procedure Act. In reaching its decision, the court weighed the facts that Congress, in enacting the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (Act), specifically authorized the issuance of interim final rules; the need for the agencies to provide prompt regulatory guidance given the statute s compliance date one-year from enactment; the interim nature of the interim final rule; and the lack of evidence that defendants were dilatory in issuing the rule. The Act requires insurance companies and employers offering mental health coverage to provide it on par with the coverage offered for physical illnesses. Plaintiff, the Coalition for Parity, Inc., sought injunctive relief and also filed for a temporary restraining order (TRO) to block the interim final rule. MBHOs contract with managed care organizations, employers, and states to manage behavioral healthcare benefits on behalf of group health plans. In an opinion issued April 1, 2010 the U.S. District Court for the District of Columbia refused to issue the TRO, finding that although the regulations had an April 5, 2010 effective date, they are generally applicable to group health plans and group health insurance issuers for plan years beginning on or after July 1, The underlying complaint alleged the agencies failed to engage in required notice and comment rulemaking before issuing the interim final rules in violation of the Administrative Procedure Act. According to the complaint, the rules are so ambiguous that they preclude uniform compliance and will likely lead to higher costs, administrative delays, and the risk of dropped or reduced mental health coverage. The group specifically took issue with a requirement that plans provide parity for nonquantitative limitations and implement a single deductible for behavioral and physical health benefits. Requirements the group said were not found in the statute. The group contended that these perceived problems would have been raised to the agencies if they had conducted notice and comment rulemaking. But the court agreed with defendants that they had good cause for not going this route. 233

234 Among other things, the court emphasized that Congress indicated the statute would go into effect within one year of enactment regardless of whether the agencies had promulgated regulations. The court wrote: Because of the novel and complex issues presented by the [Act], Defendants believed it would be important to solicit information from the public before developing proposed rules to implement the statute. Based on their experience with prior rulemakings coordinated between the three Departments, Defendants realized that it would take significantly longer than one year to issue a request for information with a comment period, review the comments, draft and issue proposed final rules with a comment period, and then draft final rules based on the comments to the proposed rules. Therefore, there was a serious risk that the [Act] would go into effect without the regulatory guidance for the affected industry. Indeed, this ultimately occurred even despite the expedited procedures because of delays associated with the change in presidential administrations. Thus, the statutory deadlines imposed by Congress created the need for prompt guidance, and combined with other factors, this can support a finding of good cause. Coalition for Parity, Inc. v. Sebelius, No (D.D.C. June 21, 2010). Tenth Circuit Rejects Breach Of Contract Claim Against Insurer For Denying Coverage Of Child s Pre-Existing Condition The Tenth Circuit held September 28, 2010 that an insurer was entitled to summary judgment on a breach of contract claim against it for denying coverage of a medical procedure involving a covered child s pre-existing condition. The appeals court reversed a lower court ruling in favor of plaintiffs Ross and Laura Oldenkamp, who argued Oklahoma law prohibited United American Insurance Company from excluding coverage of pre-existing congenital anomalies in children. According to the appeals court, a limited benefit policy like the one at issue here was not subject to the cited state regulation on pre-existing conditions, but rather a later enacted statute distinguishing between limited benefit policies and accident and health insurance policies applied. The appeals court also affirmed the district court s ruling in favor of United on plaintiffs bad faith denial of coverage claim. Plaintiffs had purchased a Limited Benefit Hospital and Surgical Expense Policy from United with an August 1, 2006 effective date. Plaintiffs infant son, who was covered under the policy, was born with a congenital defect, a cyst on his eyelid, that was first noted in late April Plaintiffs son had the cyst removed in September United refused to pay for the procedure after determining that the cyst was a pre-existing condition excluded under the policy. After exhausting their administrative appeals, plaintiffs sued United for breach of contract and bad faith denial of their medical claims. 234

235 The diversity action was removed to federal district court, which granted summary judgment to plaintiffs on their breach of contract claim. The court granted summary judgment in United s favor on the bad faith claim. Plaintiffs contended the exclusion of pre-existing conditions was contrary to an Oklahoma regulation that did not allow coverage denials for congenital anomalies of dependent children. United argued the regulation was inapplicable because the policy at issue was not a health insurance policy, but a limited benefit policy. Reversing the district court, the appeals court agreed with United that limited benefit policies are distinct from accident and health insurance policies under a statute enacted after the regulation was promulgated. The subsequently enacted Oklahoma statute distinguishes between the two types of policies and specifically provides that a limited benefit policy may include a waiting period for coverage. The regulation, as applied by the district court in this context, is contrary to the more recent statute. It therefore may not be applied here to invalidate the policy provision that is specifically authorized by statute, the appeals court said. The appeals court left open for the district court to consider on remand plaintiffs argument that the policy at issue was not actually a limited benefits policy. The Tenth Circuit affirmed the ruling below rejecting plaintiffs bad faith claim. [B]ecause we have held that United did not breach the insurance contract by denying coverage under these circumstances, it follows that we necessarily agree that United s denial of coverage was reasonably based, the appeals court wrote. Oldenkamp v. United Am. Ins. Co., Nos and (10th Cir. Sept. 28, 2010). Third Circuit Holds Nurse s Malpractice Insurance Not Obligated To Indemnify Hospital The Third Circuit affirmed October 22, 2010 a district court s grant of summary judgment to a nurse s malpractice insurer, finding it was not obligated to indemnify a hospital after the hospital defended itself and the nurse in a separate malpractice claim. The policy at issue expressly stated that its coverage was secondary to the hospital s selfinsured retention, the appeals court found. After it expended $425,000, plus legal fees and costs, defending and settling an underlying medical malpractice action brought against Warren Hospital and nurse Tracy Lee, Warren sued defendant American Casualty Company of Reading, Pennsylvania (ACC) for indemnification. The hospital, which was sued under a theory of vicarious liability, had insurance coverage of $1 million per incident that was a self-insured retention, and excess insurance above that. Lee had malpractice insurance with defendant ACC for up to $1 million per claim. 235

236 When Lee inquired about her insurance, ACC took the position that its insurance was excess to the hospital s self-insured retention. The hospital sued and the case was removed to federal court. The court held that the ACC Policy expressly included self-insured retentions as coverage that would precede its own payment and granted summary judgment to ACC. On appeal, the hospital argued the district court focused on the reference to self-insured retentions in the ACC policy, but failed to consider the qualifying clause that applies to any amount payable under this Policy. According to the hospital, its own self-insured retention does not apply to any amount payable under Lee s policy with ACC. The hospital argued its claims against ACC involved indemnity and equitable subrogation and not the patient s underlying malpractice claims. Under New Jersey law, an insurance policy is interpreted like any other contract, the appeals court noted. Applying this standard, we must conclude that the ACC Policy, which expressly states that it will only pay after any other... self-insured retentions... that appl[y] to any amount payable under this policy expressly excludes coverage where, as here, Warren s own self-insured retention also applies to acts of Lee within the scope of [her] employment, the appeals court held. The appeals court also rejected the hospital's argument that its own insurance did not cover the same risk as the ACC Policy, therefore the excess insurance clause did not apply. In so holding, the appeals court noted that one of the hospital s excess insurance policies expressly included nurses as Insureds for acts committed in performance of their duties for Warren Hospital. As such, Warren did insure against the same risks covered by the ACC Policy, risks resulting from the negligent acts of Lee, the appeals court found. Warren Hosp. v. American Casualty Co. of Reading, No (3d Cir. Oct. 22, 2010). Tenth Circuit Finds Insurer May Exclude Coverage Of Residential Mental Health Treatment Without Violating Parity Statute An insurance plan that completely excluded from coverage stays at residential mental health treatment facilities did not run afoul of a state statute requiring parity between coverage of physical and mental health with respect to specified categories of limits, the Tenth Circuit held November 5, In so holding, the appeals court found the statute does not mandate coverage for mental health treatment, it merely requires parity with respect to the enumerated categories of limits. Plaintiffs Douglas S., Ann C.S., and Laura S. were covered by a family health insurance plan issued by Altius through Douglas employer. The plan had previously covered various inpatient and outpatient treatments for depression and eating disorders for Douglas minor daughter, Laura. 236

237 After one of Laura s doctors recommended a residential treatment facility, Douglas contacted Altius to inquire about coverage and was told that residential treatment was not a covered benefit. After Laura attempted suicide, she was admitted to inpatient treatment, which was covered by Altius. After the inpatient stay, Laura went to a residential treatment facility at a cost of approximately $92,000. Altius denied coverage and plaintiffs sued. The district court granted summary judgment to Altius, and plaintiffs appealed. Plaintiffs argued the lower court erred in finding that the complete exclusion of residential treatment programs from the Altius health insurance policy did not constitute an inpatient or outpatient service limit for mental health conditions and contended Utah s catastrophic mental health coverage statute, Section 31A of the Utah Code (Section 625), required Altius to provide coverage for residential treatment. The appeals court first noted that the plan at issue specifically excluded from coverage residential treatment programs, but made clear that it must be construed to conform with Utah law. Section 625 requires insurers to offer large employers catastrophic mental health coverage that does not impose a heavier financial burden for mental health conditions than for physical health conditions with respect to specified categories of limits, the appeals court explained. The appeals court noted that [w]hile Section 625 restricts insurers from imposing different limits for mental and physical health conditions, it is completely silent on the question of whether an insurance company may exclude from its coverage certain treatment options. Consequently, the appeals court found, the plain language of the statute only required the plan to provide financial parity with respect to inpatient or outpatient service limits for mental and physical health conditions. The statute did not, as plaintiffs argued, require across-the-board parity between treatment options for mental and physical health conditions; it merely required parity with respect to the enumerated categories of limits. Because Altius completely excluded residential treatment as an option, it conformed with the statute, the appeals court held. In support of its finding, the appeals court noted that if the Utah legislature intended to mandate coverage for a certain type of treatment, the Utah legislature was fully aware of how to accomplish this goal. The appeals court refused to consider the legislative history as urged by plaintiffs, finding that it is only appropriate to turn to legislative history and relevant policy considerations when the statutory language is ambiguous or unclear. Douglas S. v. Altius Health Plans Inc., No (10th Cir. Nov. 5, 2010). Minnesota Appeals Court Says Insurer Must Pay Claims Despite Corporate Practice Of Medicine Violation 237

238 A medical company that provided MRI scans on doctor-referred patients did not knowingly violate the corporate practice of medicine doctrine (CPMD) and therefore an insurer was still obligated to pay claims for services rendered by the company to its insureds, a Minnesota appeals court held November 30, Stand Up Mid-America MRI Inc., whose sole shareholder is Wayne Dahl, D.C., a licensed chiropractor, was incorporated in November 2003 under the Minnesota Business Corporation Act. The business services include both technical and professional components. A technologist performs MRI scans on referred individuals and then sends them to an independent chiropractor or radiologist for a professional radiologic interpretation and findings. These findings are included in a report to the referring physician. According to Dahl, the chiropractors or radiologists do not analyze what they find and do not offer any diagnoses, but rather simply report their findings. Before incorporating, Dahl sought legal advice on the appropriate corporate structure for Stand Up Mid America. He incorporated as a general business and was never advised of a potential CPMD violation. In September 2005, the Minnesota Supreme Court recognized that the CPMD exists in Minnesota, specifically with respect to the corporate employment of chiropractors. See Isles Wellness, Inc. v. Progressive N. Ins. Co., 703 N.W.3d 513 (Minn. 2005). The state high court held that a chiropractic clinic organized as a general business and owned by a layperson violated the CPMD, but that a massage-therapy clinic and physical-therapy clinic, also with layperson ownership, did not. After the Isles Wellness decision, Dahl sought further legal advice about the decision s implications for Stand Up Mid-America, which was owned by a licensed chiropractor, had no chiropractor employees, and did not directly diagnose or treat patients. Given these distinctions, Dahl was advised that Stand Up Mid-America was not subject to the CPMD. Subsequently, Stand Up Mid-America performed services for 14 doctor-referred individuals whose claims were submitted to their insurer, Western National Mutual Insurance Co., for payment. Western National paid about $13,400 of the claims, but refused to pay the remaining $31,000 owed to Stand Up Mid-America, asserting that the company was in violation of the CPMD and therefore the claims were void as a matter of public policy. Dahl has since reincorporated as a professional corporation under state law. Western National sued for a declaration that the outstanding bills from Stand Up Mid- America were void because of the CPMD violation and for the return of the $13,400 already paid. Dahl counterclaimed to collect on the unpaid bills. The trial court ruled in favor of Stand Up Mid-America. The Minnesota Court of Appeals held that under Isle Wellness, Western National was still obligated to pay the bills because Stand Up Mid-America did not knowingly and intentionally violate the CPMD. Here, the company did not challenge the trial court s conclusion that it violated the CPMD. But the fact that it violated the CPMD does not necessarily void its right to collect from 238

239 an individual s insurer under an assignment of insurance benefits, the appeals court said. Instead, according to the state supreme court, such a contract is not void unless the corporation s actions show a knowing and intentional failure to abide by state and local law. Permitting insurance companies to avoid liability under their insurance contracts does little to protect patients from the specter of lay control over professional judgment, which is the purpose underlying the CPMD, the appeals court noted, again quoting Isle Wellness. Even if the company should have been on notice following Isle Wellness, only actual knowledge of the CPMD violation would void the bills at issue, the appeals court held. The appeals court went on to find undisputed evidence that Stand Up Mid-America did not knowingly and intentionally violate the CPMD, distinguishing the chiropractic clinic in Isle Wellness from the instant company, which was owned by Dahl, a licensed professional, did not provide diagnosis or treatment, and did not directly employ chiropractors. Moreover, Dahl twice sought legal advice and was told Stand Up Mid-America was not subject to the CPMD. Western Nat l Mut. Ins. Co. v. Stand Up Mid-Am. MRI Inc., No. A (Minn. Ct. App. Nov. 30, 2010). Fifth Circuit Upholds Summary Judgment In Favor Of Blue Cross Blue Shield Plans' Method Of Setting Off Overpayments To Providers The Fifth Circuit affirmed December 23, 2010 a federal district court's grant of summary judgment to three Blue Cross Blue Shield (BCBS) plans finding the plans had a contractual and statutory right to set off overpayments to a home infusion therapy services provider for certain patient claims by underpaying subsequent patient claims, without regard to whether the subsequent claim was from the same patient or under the same health insurance plan. In so holding, the appeals court upheld a take-nothing judgment rendered by the U.S. District Court for the Southern District of Texas against Quality Infusion Care, Inc. (QIC), a non-contracted provider to BCBS plan subscribers. The court reasoned that the three BCBS plans at issue all had a contractual right to privately deduct overpayments they had previously made to QIC from subsequent claims they was obligated to pay QIC. After certain patients were treated at QIC and assigned their benefits to QIC, the company filed reimbursement claims with BCBS, which then submitted payments to QIC. On a number of claims, BCBS later discovered that it overpaid QIC, and then requested refunds.qic, however, did not provide a refund for any of the requests by BCBS, which then set off the overpaid amounts from subsequent payments to QIC. QIC sued BCBS, claiming that it was entitled to the amounts that BCBS set off from its payments. 239

240 In entering a take-nothing final judgment against QIC, the district court held that BCBS' set offs were allowed under both the Texas Insurance Code and the contractual language of the plans at issue. On appeal, QIC argued that BCBS is not entitled to the set offs that it made because the debts are not mutual. Under this argument, QIC reasoned that the debts could not be mutual because for each patient claim, QIC could only act with the capacity granted by that particular patient's assignment of the claim to QIC. BCBS, on the other hand, argued that mutuality does exist and that the parties acted in the same capacity. In addition, BCBS argued that it has a statutory right under the Texas Insurance Code, as well as a contractual right under the plans at issue, to set off its payment obligations to QIC by the amount it overpaid previous claims. Finding in favor of BCBS, the Fifth Circuit held that, because the contractual provisions of the three plans at issue allow BCBS to privately deduct an overpayment amount paid on one patient's claim against the subsequent benefit payment owed on another patient's claim, BCBS is entitled to the take-nothing judgment summary judgment as a matter of law. The appeals court declined to address whether there is a statutory or common law right to privately execute a set off under these circumstances. "No language in any of the three plans require BCBS to confine its contractual set off rights to deductions from subsequent benefit payments to the same patient or under the same plan," the Fifth Circuit said. "Additionally, QIC does not point to any statutory or common law prohibition against such contractually created setoff rights, nor can we find one." The appeals court therefore found that, when QIC did not submit a refund in response to BCBS' overpayment refund requests, BCBS was within its rights to recover the amount it overpaid QIC by deducting previous overpayment amounts from future payments due to QIC. Quality Infusion Care, Inc. v. Health Care Service Corp. d/b/a Blue Cross and Blue Shield of Texas, No (5th Cir. Dec. 23, 2010). Eighth Circuit Says Claims Administrator Unreasonably Concluded Primary Focus Of Hospitalization Was Treatment For Mental Health A plan administrator improperly denied medical benefits for a policy holder s minor daughter who was hospitalized for over a month for malnutrition stemming from an eating disorder, the Eighth Circuit ruled March 2, Reversing the district court s judgment upholding the denial of benefits, the appeals court found, regardless of the standard of review, the administrator unreasonably determined the primary focus of the hospitalization was treatment for mental health, rather than for her physical condition. Fifteen-year old S.W., who was covered under her father s group health plan, was admitted to a pediatric hospital on an emergency basis suffering from severe malnutrition. 240

241 Weighing 77 pounds, lab work indicated S.W. had an abnormal EKG, hypoglycemia, and a low blood platelet count. Forty days after her initial admission, she was discharged after reaching a target weight. She subsequently began treatment at an outpatient program for eating disorders. Principal Life Insurance Company and Principal Financial Group Inc. (Principal), both the insurer and claims administrator of the Employee Retirement Income Security Actgoverned health plan, found the primary focus of S.W. s hospitalization was mental health treatment. Principal therefore refused to pay for medical services beyond the 10-day limit for mental health inpatient services specified in the policy. After exhausting his administrative remedies, S.W. s father sued Principal in federal district court. Noting the policy granted Principal discretionary authority to determine eligibility for benefits, the district court reviewed Principal s decision under an abuse of discretion standard, considering as a factor its conflict as both insurer and plan administrator. The district court rejected plaintiff s argument that procedural irregularities in the manner Principal handled the claim triggered a less deferential standard of review. The district court ultimately ruled in Principal s favor. The Eighth Circuit reversed, noting that regardless of which standard of review the court applied, Principal had abused its discretion in denying plaintiff s claim. While there is certainly evidence that mental health treatment was one focus of S.W. s hospitalization, we conclude there is insufficient evidence to support the determination that S.W. s mental health was the primary focus of the hospitalization, the appeals court said. The presence of evidence directly connecting S.W. s initial and continued admission and her discharge to objective measurements of her physical health, coupled with the absence of evidence connecting S.W. s discharge decision to improvements in her mental health, clearly indicate Principal unreasonably concluded the primary focus of S.W. s hospitalization was treatment for mental health, the appeals court held. Wrenn v. Principal Life Ins. Co., No (8th Cir. Mar. 2, 2011). U.S. Court In New Hampshire Says Insurer Not Obligated To Cover Experimental, Unproven Treatment The U.S. District Court for the District of New Hampshire granted summary judgment March 16, 2011 to an insurer on Employee Retirement Income Security Act (ERISA) claims, finding the insurer correctly determined the medical procedure at issue was experimental, unproven, or investigational, and therefore, the insurer need not cover the treatment. Plaintiff Cheryl Lees suffered from migraine headaches. Her physician recommended implantation of a peripheral nerve stimulator. Her insurer, Harvard Pilgrim Health Care of New England (HPHC), provided coverage for a temporary trial of the stimulator based on the billing codes entered by Lees physician. 241

242 The temporary trial implantation was successful and Lees surgeon then requested coverage from HPHC for a permanent implantation. HPHC denied coverage, saying the treatment was not covered under Lees plan, because it is excluded a procedure that is Experimental, Unproven, or Investigational. Lees sued HPHC under ERISA. In a de novo review of the administrative decision, the court agreed that HPHC is not obligated to cover the procedure. HPHC argued that it denied coverage under the exclusion for experimental, unproven, or investigational procedures because there is insufficient evidence in the published peer review literature supporting the long-term effectiveness and safety of this procedure. Lees pointed to her success with the temporary trial as proof that the procedure should be covered. However, the court said. Lees s individual experience with the occipital neurostimulation treatment and the opinions of her treating physicians do not show that the treatment has been shown by generally accepted medical standards to be safe and effective. Lees also argued that the nerve stimulator was medically necessary in her case. But the court found it unnecessary to reach this argument, in light of its finding that the experimental, unproven, or investigational procedures exception applies to the treatment at issue. Lees v. Harvard Pilgrim Health Care of New England, No. 10-cv-084-JD (D.N.H. Mar. 16, 2011). Life Sciences Judge Blocks Federal Funding For Stem Cell Research A federal trial court judge in the District of Columbia granted August 23, 2010 a preliminary injunction blocking the administration from implementing new guidelines that establish the policies and procedures for federal funding of embryonic stem cell research. U.S. District Court for the District of Columbia Judge Royce C. Lamberth in a 15-page opinion ruled the guidelines, finalized by the National Institutes of Health (NIH) in July (74 Fed. Reg ), violated a federal law, known as the Dickey-Wicker Amendment, which he said unambiguously prohibits the expenditure of federal funds on research in which a human embryo or embryos are destroyed. The decision comes following remand from the D.C. Circuit, which in July reversed the earlier dismissal of the action after finding plaintiffs, researchers who specialize in adult stem cell research, had competitor standing to bring the action. The administration unsuccessfully argued for a distinction between the derivation of embryonic stem cells, which results in destruction of the embryo and therefore violates the Dickey-Wicker Amendment, and the subsequent research involving embryonic stem cell lines. But Lamberth rejected this interpretation, saying the Dickey-Wicker Amendment is an unambiguous, broad prohibition on federal funding of all research in which an embryo is destroyed, not just the piece of research in which the embryo is destroyed. 242

243 In a briefing August 24, Deputy Press Secretary Bill Burton said the administration was reviewing the decision and exploring all possible avenues to make sure that we can continue to do this critical lifesaving research. Burton added that the decision also would seem to block the research that President Bush allowed to go forward during his presidency. Guidelines NIH issued the guidelines to implement a March 9 Executive Order issued by President Obama that lifted the ban on federal funding for embryonic stem cell research. Under a previous Executive Order signed by former President Bush, federal funding was limited to embryonic stem cell lines derived before August 9, The final guidelines, like the previous draft, allow funding for research using human embryonic stem cells that were derived from embryos created by in vitro fertilization (IVF) for reproductive purposes that were no longer needed for that purpose. The NIH guidelines also detail specific requirements for human embryonic stem cells to be eligible for federal funding, including documenting that all options pertaining to use of embryos no longer needed for reproductive purposes was explained to potential donors; that no inducements were offered for the donation; and that there was a clear separation between the prospective donor s decision to create human embryos for reproductive purposes and the donor s decision to donate human embryos for research purposes. In addition, researchers must obtain written informed consent from the donor. Broad Prohibition Dr. James L. Sherley and Theresa Deisher, along with several other plaintiffs who were later dismissed on standing grounds, sought declaratory and injunctive relief to prevent the NIH guidelines from taking effect. The district court initially dismissed the case, finding plaintiffs lacked standing to bring the challenge. But the D.C. Circuit disagreed, holding Sherley and Deisher had standing as researchers of adult stem cells who competed for limited federal funding. Unlike adult stem cells, embryonic stem cells can divide into approximately 200 types of human cells, which some researchers believe makes them particularly valuable for studying and treating disease. In 1996, Congress enacted the Dickey-Wicker Amendment, included in every appropriations bill since then, which prohibits the use of federal funds for research in which a human embryo or embryos are destroyed, discarded, or knowingly subjected to risk of injury or death greater than that allowed for research on fetuses in utero under federal regulations. The Department of Health and Human Services (HHS) in 1999 determined the amendment did not apply to research on embryonic stem cells because it did not result in the destruction of an embryo. Lamberth refused to afford deference to HHS interpretation, saying the plain meaning of the Dickey-Wicker Amendment was unambiguous and did not support such a limited definition of research. 243

244 Had Congress intended to limit the Dickey-Wicker to only those discrete acts that result in the destruction of an embryo, like the derivation of [embryonic stem cells], or to research on the embryo itself, Congress could have written the statute that way, Lamberth commented. According to Lamberth, embryonic stem cell research is clearly research in which an embryo is destroyed. To conduct [embryonic stem cell research], [embryonic stem cells] must be derived from an embryo. The process of deriving [embryonic stem cells] from an embryo results in the destruction of the embryo. Thus [embryonic stem cell] research necessarily depends upon the destruction of a human embryo, Lamberth wrote. Immediate Injury After concluding the NIH guidelines violated the amendment, and thereby holding plaintiffs had established a likelihood of success on the merits, Lamberth went on to find the other requisite elements for granting a preliminary injunction had been met. Plaintiffs, as researchers themselves, had demonstrated the increased competition for limited federal funding was an actual, imminent injury that could not be addressed by an after-the-fact remedy, Lamberth said. In addition, Lamberth held the balance of hardships tipped in plaintiffs favor because the injunction would simply preserve the status quo for researchers who use embryonic stem cells. Finally, Lamberth found the public interest weighed in favor of a preliminary injunction to enjoin defendants from implementing the Guidelines in violation of federal law. Sherley v. Sebelius, No. 1:09-cv-1575 (RCL) (D.D.C. Aug. 23, 2010). D.C. Circuit Temporarily Stays Ban On Federal Funding For Stem Cell Research A three-judge panel of the D.C. Circuit agreed September 9, 2010 to temporarily stay a preliminary injunction barring the implementation of new guidelines that establish the policies and procedures for federal funding of human embryonic stem cell (hesc) research. The Justice Department filed an emergency motion with the appeals court on September 8 after the federal judge who put the federal funding ban in place refused to stay his order pending appeal. The appeals court agreed to lift the ban for the time being, but made clear that it had not yet considered the merits of the motion. "The purpose of this administrative stay is to give the court sufficient opportunity to consider the merits of the emergency motion for stay and should not be construed in any way as a ruling on the merits of that motion," the panel's order said. In an August 31 memorandum filed the same day as a notice of appeal to the D.C. Circuit, the Department of Justice (DOJ) argued the district court judge's sweeping order issued August 23 could dismantle many ongoing research projects involving hescs, 244

245 negating years of scientific progress toward finding new treatments for devastating illnesses such as diabetes, Parkinson s disease, and blindness, as well as crippling spinal cord injuries. Numerous ongoing projects will likely not survive even a temporary gap in funds, DOJ argued. U.S. District Court for the District of Columbia Judge Royce C. Lamberth declined to stay the preliminary injunction, discounting the parade of horribles cited by the Justice Department. Lamberth ruled in a 15-page opinion, Sherley v. Sebelius, No. 1:09-cv-1575 (RCL) (D.D.C. Aug. 23, 2010), that the hesc guidelines, finalized by the National Institutes of Health (NIH) in July (74 Fed. Reg ), violated a federal law, known as the Dickey- Wicker Amendment, which he said unambiguously prohibits the expenditure of federal funds on research in which a human embryo or embryos are destroyed. DOJ argued the preliminary injunction applied to a number of ongoing research projects, including those underway since the Bush Administration, which permitted research only on existing stem cell lines. Plaintiffs agree that this Court s order does not even address the Bush administration guidelines, or whether NIH could return to those guidelines, Lamberth said in denying the government's motion to stay the preliminary injunction. Plaintiffs also agree that projects previously awarded and funded are not affected by this Court s order, he wrote. According to Lamberth, a stay would flout the will of Congress, as the Court understands what Congress has enacted in the Dickey-Wicker Amendment. In granting the preliminary injunction, Lamberth rejected the government s reliance on the NIH's long-standing interpretation of the Dickey-Wicker Amendment, which distinguishes between research that involves the destruction of a human embryo directly and the subsequent research that occurs after the embryo already is destroyed. According to Lamberth, the Dickey-Wicker Amendment is an unambiguous, broad prohibition on federal funding of all research in which an embryo is destroyed, not just the piece of research in which the embryo is destroyed. The case was brought by Dr. James L. Sherley and Theresa Deisher who said they compete with hesc research for limited federal funding as researchers of adult stem cell lines. In their memorandum opposing DOJ s motion to stay the preliminary injunction filed in the district court, plaintiffs argued defendants claims of irreparable harm... rest on speculation, misinformation, and hyperbole. According to plaintiffs, the preliminary injunction frees up millions in limited grant dollars that [NIH] can now award to projects that promise more tangible medical benefits, raise fewer ethical issues, and comport with the law, including adult and induced pluripotent stem cell research. In the motion requesting the emergency stay from the D.C. Circuit, DOJ argued Lamberth's order "is at odds with the express intent of Congress in enacting the funding 245

246 restrict at issue, and with the longstanding interpretation of that restriction by NIH, of which Congress was fully away." According to DOJ, the judge's order "necessarily precludes federal funding for any and all embryonic stem cell research." "Disruption of ongoing research will result in irreparable setbacks and, in many cases may destroy a project altogether," DOJ argued. D.C. Circuit Stays Ban On Federal Funding For Stem Cell Research A three-judge panel of the D.C. Circuit agreed September 28, 2010 to stay a preliminary injunction barring the implementation of new guidelines that establish the policies and procedures for federal funding of human embryonic stem cell (hesc) research. The appeals court on September 9, 2010 agreed to temporarily lift the ban until it could further consider the merits of the government s motion to stay the preliminary injunction issued by U.S. District Court for the District of Columbia Judge Royce C. Lamberth in August pending the outcome of the appeal. In its latest decision, the appeals court dissolved the prior administrative stay and granted the government's motion for a stay pending appeal. In a statement, White House Press Secretary Robert Gibbs said: President Obama made expansion of stem cell research and the pursuit of groundbreaking treatments and cures a top priority when he took office. We re heartened that the court will allow NIH [the National Institutes of Health] and their grantees to continue moving forward while the appeal is resolved. The Department of Justice (DOJ) filed an emergency motion with the appeals court on September 8 after Lamberth refused to stay his order. DOJ has argued the district court judge's sweeping order could irreparably harm many ongoing research projects involving hescs, negating years of scientific progress toward finding new treatments for devastating illnesses such as diabetes, Parkinson s disease, and blindness, as well as crippling spinal cord injuries. Lamberth ruled in a 15-page opinion, Sherley v. Sebelius, No. 1:09-cv-1575 (RCL) (D.D.C. Aug. 23, 2010), that the hesc guidelines, finalized by the NIH in July (74 Fed. Reg ), violated a federal law, known as the Dickey-Wicker Amendment, which he said unambiguously prohibits the expenditure of federal funds on research in which a human embryo or embryos are destroyed. DOJ argued the preliminary injunction applied to a number of ongoing research projects, including those underway since the Bush Administration, which permitted research only on existing stem cell lines. In granting the preliminary injunction, Lamberth rejected the government s reliance on the NIH's long-standing interpretation of the Dickey-Wicker Amendment, which distinguishes between research that involves the destruction of a human embryo directly and the subsequent research that occurs after the embryo already is destroyed. 246

247 According to Lamberth, the Dickey-Wicker Amendment is an unambiguous, broad prohibition on federal funding of all research in which an embryo is destroyed, not just the piece of research in which the embryo is destroyed. The case was brought by Dr. James L. Sherley and Theresa Deisher who said they compete with hesc research for limited federal funding as researchers of adult stem cell lines. The D.C. Circuit panel said in its September 28, 2010 order that its consideration of the appeal will be expedited. D.C. Circuit Vacates Injunction Banning Federal Funding For Stem Cell Research A panel of the D.C. Circuit vacated April 29, 2011 a preliminary injunction barring the implementation of new guidelines that establish the policies and procedures for federal funding of human embryonic stem cell (hesc) research. The 2-1 decision said plaintiffs, two researchers of adult stem cell lines, were unlikely to prevail on their argument that the National Institutes of Health (NIH) guidelines, finalized in July 2010 (74 Fed. Reg ), violated a federal appropriations rider, known as the Dickey-Wicker Amendment, which prohibits the expenditure of federal funds on research in which a human embryo or embryos are destroyed. Contrary to the lower court s decision, the appeals court held the Dickey-Wicker Amendment was ambiguous and found NIH seemed to reasonably interpret the provision as barring funding only for the destructive act of deriving a hesc from an embryo, not as prohibiting funding for all research in which a hesc will be used. Guidelines NIH promulgated the guidelines to implement a March 9, 2010 Executive Order issued by President Obama that lifted the ban on federal funding for hesc research. Under a previous Executive Order signed by former President Bush, federal funding was limited to embryonic stem cell lines derived before August 9, The final guidelines, like the previous draft, allow funding for research using hesc that were derived from embryos created by in vitro fertilization (IVF) for reproductive purposes that were no longer needed for that purpose. The guidelines also detail specific requirements for hescs to be eligible for federal funding. Unlike adult stem cells, hescs can divide into approximately 200 types of human cells, which some researchers believe makes them particularly valuable for studying and treating disease. Injunction Dr. James L. Sherley and Theresa Deisher, who say they compete for limited federal funding as researchers of adult stem cell lines, sought declaratory and injunctive relief to prevent the NIH guidelines from taking effect. In August 2010, U.S. District Court for the District of Columbia Judge Royce C. Lamberth, in a 15-page opinion, ruled the guidelines violated the Dickey-Wicker Amendment. Sherley v. Sebelius, No. 1:09-cv-1575 (RCL) (D.D.C. Aug. 23, 2010). 247

248 The administration unsuccessfully argued for a distinction between the derivation of embryonic stem cells, which results in destruction of the embryo and therefore violates the Dickey-Wicker Amendment, and the subsequent research involving embryonic stem cell lines. But Lamberth rejected this interpretation, saying the Dickey-Wicker Amendment is an unambiguous, broad prohibition on federal funding of all research in which an embryo is destroyed, not just the piece of research in which the embryo is destroyed. The Department of Justice (DOJ) filed an emergency motion with the appeals court after Lamberth refused to stay his order, arguing the sweeping order could irreparably harm many ongoing research projects involving hescs, negating years of scientific progress toward finding new treatments for devastating illnesses such as diabetes, Parkinson s disease, and blindness, as well as crippling spinal cord injuries. The D.C. Circuit in September 2009 granted the government's motion for a stay of the injunction pending appeal. The case has continued in the lower court, where the parties have cross-moved for summary judgment. Amendment Is Ambiguous Applying the Chevron two-step analysis, the appeals court majority first disagreed with Lamberth s holding that the Dickey-Wicker Amendment was unambiguous in banning funding of all research involving hescs. For one thing, the appeals court noted, the statutory language is written in the present tense, addressing research in which embryos are destroyed, not research for which embryos were destroyed. According to the appeals court, the use of the present tense in a statute strongly suggests it does not extend to past actions, noting that NIH funding decisions are forward-looking to determine whether what is proposed to be funded meets with its requirements. Plaintiffs argument that the derivation of the hesc is an integral part of the research at best shows Dickey-Wicker is open to more than one possible reading. Reasonable Interpretation The appeals court majority next held the NIH s interpretation of the amendment as not barring funding for a project using an hesc that was previously derived because a stem cell is not an embryo seemed reasonable. Plaintiffs argued the NIH was not entitled to deference because it never offered an interpretation of the term research. But the appeals court said NIH made the agency s narrow interpretation of research clear, even without a specific definition of the term. The plaintiffs objection that the NIH has not explicitly defined a word in the statute an important word, to be sure is mere cavil; it disregards the agency s use of the term, which implicitly but unequivocally gives research a narrow scope, thus ensuring no federal funding will go to a research project in which an embryo is destroyed, the appeals court said. According to the appeals court, given the present tense wording of the statute, [i]t is entirely reasonable for the NIH to understand Dickey-Wicker as permitting funding for 248

249 research using cell lines derived without federal funding, even as it bars funding for the derivation of additional lines. The appeals court also found significant that Congress has continued to enact the appropriations rider year after year without change. Under plaintiffs interpretation, even research conducted pursuant to the Bush Administration s stem cell policy, which limited funding to already derived stem cell lines, would be prohibited. Upend the Status Quo Contrary to Lamberth s finding that the balance of hardships weighs in favor of an injunction, the appeals court majority said the preliminary injunction would in fact upend the status quo. Plaintiffs have been competing for federal funding with hesc researchers since 2001, and while the 2009 Guidelines may impose an incremental handicap on their ability to secure NIH funding, the appeals court did not see a significant additional burden on their access to federal funds. The hardship a preliminary injunction would impose upon ESC researchers, by contrast, would be certain and substantial, including preventing further disbursements for ongoing research projects. Because the plaintiffs have not shown they are likely to succeed on the merits, we conclude they are not entitled to preliminary injunctive relief, the appeals court held. Dissent A dissenting opinion argued the district court did not abuse its discretion in granting the preliminary injunction because plaintiffs were likely to succeed on the merits. In the dissent s view, in addition to the derivation of ESC stem cell lines, the succeeding sequences of hesc research are likewise banned by the Amendment because, under the plain meaning of research, they continue the systematic inquiry or investigation. According to the dissent, the Amendment bans research, not simply the destruction of human embryos for research purposes. Sherley v. Sebelius, No (D.C. Cir. Apr. 29, 2011). Long Term Care CMS Releases Proposed Revisions To CMP Rules For Nursing Homes As Mandated By Reform Law The Centers for Medicare and Medicaid Services (CMS) released a proposed rule July 9, 2010 that would revise and expand current Medicare and Medicaid regulations regarding the imposition and collection of civil money penalties against nursing homes not in compliance with federal participation requirements. The changes were mandated by the Patient Protection and Affordable Care Act of

250 We believe that through these new statutory provisions, Congress has expressed its intent to improve efficiency and effectiveness of the nursing home enforcement process, particularly as it relates to civil money penalties imposed by CMS, the rule said. Specifically, the proposed rule would allow for civil money penalty reductions when facilities self-report and promptly correct their noncompliance, as provided for under the reform law. In addition, in cases where civil money penalties are imposed, the rule would offer an independent informal dispute resolution process where interests of both facilities and residents are represented and balanced. The rule would provide for the establishment of an escrow account where civil money penalties may be placed until any applicable administrative appeal processes have been completed. The proposal also aims to improve the extent to which civil money penalties collected from Medicare facilities can benefit nursing home residents. Under the rule, while 50% of the collected civil money penalty funds from Medicare facilities will continue to be deposited with the Treasury, the other 50% will be directed back into the program to be invested in activities that benefit residents. CMS Finalizes Revisions To CMP Rules For Nursing Homes The Centers for Medicare and Medicaid Services (CMS) published March 18, 2011 (76 Fed. Reg ) a final rule that would revise and expand current Medicare and Medicaid regulations regarding the imposition and collection of civil money penalties (CMPs) against nursing homes not in compliance with federal participation requirements. The changes were mandated by Section 6111 of the Patient Protection and Affordable Care Act (PPACA). The rule is effective January 1, We believe that through these new statutory provisions, Congress has expressed its intent to improve efficiency and effectiveness of the nursing home enforcement process, particularly as it relates to civil money penalties imposed by CMS, the rule said. Specifically, the final rule allows CMP reductions of up to 50% when facilities self-report and promptly correct their noncompliance, as provided for under the reform law. To qualify for the 50% reduction, facilities must self-report the noncompliance before identified by CMS or the state and the deficiency must be corrected within 10 days of the deficiency s identification. The rule also indicates that any attempted self-reporting of noncompliance by a facility that occurs after it was already identified by CMS will not be considered for any reduction. A reduction is not available, per the PPACA, for noncompliance that constitutes immediate jeopardy to resident health and safety or that constitutes either a pattern of harm or widespread harm to facility residents, or that resulted in a resident s death. Also, no reduction is available for repeated deficiencies that resulted in a CMP reduction in the previous year, the rule said. 250

251 In cases where CMPs are imposed, the rule offers an independent informal dispute resolution process where interests of both facilities and residents are represented. The rule also provides for the establishment of an escrow account where CMPs may be placed until any applicable administrative appeal processes are completed. According to the rule, under existing procedures, facilities are able to avoid paying a civil money penalty for years because it can often take a long time for administrative appeals to be completed. CMS said it would collect and place CMPs in an escrow account the earlier of (1) the date when a requested independent informal dispute resolution process is completed or (2) 90 days after the CMP is imposed. CMS Issues Proposed Rule Aimed At Clarifying Roles Of LTC, Hospice Providers The Centers for Medicare and Medicaid Services (CMS) published in the October 22, 2010 Federal Register (75 Fed. Reg ) a proposed rule that would require long term care (LTC) facilities that choose to provide hospice care to residents to have a written agreement in place with the Medicare-certified hospice provider specifying the roles and responsibilities of each entity. The proposed rule would revise the requirements that an LTC institution would have to meet to qualify as a skilled nursing facility in Medicare or as a nursing facility in Medicaid. We believe there is a lack of clear regulatory direction regarding the responsibilities of providers in caring for LTC facility residents who receive hospice care from a Medicarecertified hospice provider, which could result in duplicative or missing services, CMS said in the proposed rule. According to CMS, a written agreement requirement would help remedy concerns that beneficiary health and safety may be compromised without adequate coordination specifying what services each provider will provide. For example, an agreement between providers would specify that the LTC facility must furnish room and board and meet personal care and nursing needs, while the hospice must provide services that are necessary for the care of the resident s terminal illness, such as counseling and palliation of pain. Under the written agreement, the LTC facility would be required to ensure the timeliness of the services and that the hospice meets professional standards and principles. CMS said the written agreement would be required even if the hospice and the LTC facility were under common control and/or ownership. For those LTC facilities that decline to arrange for the provision of hospice services through an agreement with a hospice provider, CMS also is proposing that such facilities would be required to assist a resident in transferring to a facility that would arrange for the provision of these services when the resident requested such a transfer. The proposed rule sets forth requirements consistent with a June 5, 2008 final rule (73 Fed. Reg ) on conditions of participation for Medicare-certified hospice providers. 251

252 The final rule set forth the requirements for a written agreement between a hospice provider and an LTC facility. CMS said the language in the proposed rule was crafted to mirror the hospice final rule as much as possible to ensure that both entities are held equally responsible for the written agreement. California Jury Awards $671 Million Verdict Against Nursing Home For Alleged Staffing Violations A California jury awarded a $671 million verdict against Skilled Healthcare Group, Inc. in a lawsuit alleging staffing violations at its 22 nursing facilities in the state, according to a July 7, 2010 company press release. We are deeply disappointed in the verdict, and continue to firmly believe that our facilities are appropriately staffed and that our caregivers work hard every day to provide the care and services our residents need and deserve, said Boyd Hendrickson, Chairman and Chief Executive Office of Skilled Healthcare Group, Inc. We strongly disagree with the outcome of this legal matter, and we intend to vigorously challenge it. The jury verdict, which came down July 6, awarded the plaintiffs $613 million in statutory damages, the maximum amount allowed under Cal. Health and Safety Code 1430(b), and $58 million in restitution. Section 1430(b) mandates that nursing homes maintain 3.2 nursing hours per-patient per-day. The jury has not yet considered the issue of punitive damages, the company said. The company said it will pursue post-trial motions and appeal if necessary. Pennsylvania Appeals Court Says Nursing Home And Its Owners May Be Directly Liable For Resident Neglect A Pennsylvania appeals court held July 15, 2010 that a nursing home and its owners may be held directly liable for corporate negligence in a lawsuit brought by a resident s estate alleging she died because of substandard care related to chronic understaffing at the facility. The appeals court upheld a trial court s ruling that a nursing home, like a hospital, health maintenance organization, or medical corporation, could be subject to direct liability under a corporate negligence theory, as opposed to only vicarious liability, which requires a finding of negligence on the part of a third-party. [W]e conclude that a nursing home is analogous to a hospital in the level of its involvement in a patient s overall health care.... a nursing home provides comprehensive and continual care for its patients, the appeals court said. Thus, the doctrine of corporate liability was appropriately applied in the case. The appeals court also agreed with the trial court that an allegation of understaffing could support a corporate negligence cause of action. If a health care provider fails to hire adequate staff to perform the functions necessary to properly administer to a patient s needs, it has not enforced adequate policies to ensure quality of care, the appeals court observed. 252

253 The appeals court parted ways with the trial court in its dismissal from the lawsuit of the nursing home s owners, finding instead that they could be subject to both vicarious and corporate liability. Plaintiff Richard Scampone, in his capacity as executor of the estate of his mother, Madeline Scampone, sued nursing home Highland Park Care Center (Highland), its owner and manager Grane Healthcare Company (Grane), and various affiliated entities. Madeline was a resident of Highland and died from a heart attack after being diagnosed with dehydration, malnutrition, and bed sores. Plaintiff alleged the heart attack was triggered by her dehydration and malnutrition due to defendants substandard care. Plaintiff asserted defendants were liable based upon both vicarious and corporate liability, the latter of which resulted from chronic understaffing that prevented the facility s employees from performing appropriate care to the nursing home residents. The trial court granted nonsuit as to the Grane defendants and found insufficient evidence to submit the question of punitive damages to the jury. The jury went on to return a verdict in plaintiff s favor and award $193,500 in damages, finding Highland both corporately and vicariously liable for Madeline s death. After holding a nursing home could be liable under a corporate negligence theory, a three-judge panel of the Pennsylvania Superior Court upheld the jury s determination that Highland breached the industry standard of care by not having sufficient staff to meet the needs of its residents. Specifically, the appeals court noted testimony from various employees of the nursing home and a nursing expert that the facility s chronic understaffing led to substandard care in violation of its duty of care to its patients. Next, the appeals court reversed the trial court s judgment granting nonsuit as to Grane. As a review of the [] evidence establishes, Grane actually was in charge of managing the nursing home and its employees oversaw the quality of patient care, the appeals court found. Although Highland set staffing levels, Grane had budget approval and, according to Plaintiff s evidence, Grane s nurse consultants were told by Highland nurses they lacked sufficient personnel to perform all the functions that patients needed. Thus, Grane had a direct supervisory role in the hands-on care rendered to Madeline. Grane actually controlled the care, the appeals court concluded. The appeals court therefore concluded Grane was subject to vicarious and corporate liability since it managed all aspects of the operation of the nursing facility. Finally, the appeals court held the evidence established that both Highland and Grane acted with reckless disregard to the rights of others and created an unreasonable risk of physical harm to the residents of the nursing home. According to the appeals court, the record was replete with evidence that the facility was chronically understaffed and complaints from staff went unheeded. The appeals court also pointed to evidence that employees, at the direction of Grane and Highland, altered 253

254 or falsified certain records and that staffing levels were increased only during state inspections. Deliberately altering patient records to show care was rendered that was actually not is outrageous and warrants submission of the question of punitive damages to the jury, said the appeals court. Scampone v. Grane Healthcare Co., No WDA 2007 (Pa. Super. Ct. July 15, 2010). Fifth Circuit Affirms Civil Monetary Penalty Imposed On Nursing Home The Fifth Circuit dismissed September 13, 2010 a nursing home s appeal from a Department of Health and Human Services decision affirming a $5,000 per-instance civil monetary penalty on the home. The appeals court found reasonable the findings below that the nursing home was in violation of Medicare regulations requiring a nursing facility to ensure the resident environment remains as free of accident hazards as is possible and that each resident receives adequate supervision and assistance devices to prevent accidents. The case arose after a 92 year-old woman suffering from a variety of ailments wandered away from Cedar Lake nursing home and was later discovered walking alone along a highway. Cedar Lake s alarm system, designed to prevent such elopements by residents, did not sound during the incident. After the incident, surveyors affiliated with the Centers for Medicare and Medicaid Services (CMS) conducted a survey of Cedar Lake and determined the facility to be in violation of several Medicare-related regulations. Specifically, the surveyors found Cedar Lake violated 42 C.F.R (h) with respect to the elopement incident. In response to these findings, CMS imposed a $5,000 perinstance civil monetary penalty on Cedar Lake. Cedar Lake appealed this decision to an administrative law judge (ALJ), where CMS moved for summary judgment. The ALJ determined that Cedar Lake failed to take all reasonable steps to prevent the elopement in violation of Section (h), granted CMS motion for summary judgment, and upheld the $5,000 per-instance civil monetary fine. Cedar Lake appealed the ALJ s grant of summary judgment to the Departmental Appeals Board, which affirmed. Cedar Lake again appealed. After determining the correct standard of review was abuse of discretion even though the ALJ did not hold an evidentiary hearing, the court turned to the merits. Section (h)(1)-(2) requires a nursing facility to ensure that the resident environment remains as free of accident hazards as is possible and that each resident receives adequate supervision and assistance devices to prevent accidents. 254

255 The appeals court found the ALJ s conclusion that Cedar Lake did not take all reasonable steps to prevent the resident from wandering out of the facility was not an abuse of discretion. The appeals court noted that Cedar Lake was aware of the resident s propensity to wander and that the home had previously developed a plan of care that included measures designed to prevent wandering. Cedar Lake argued below that a contractor had turned off its alarm, but did not notify Cedar Lake that it was doing so. But, the appeals court found, the ALJ reasonably held such facts did not demonstrate the elopement was unforeseeable nor that Cedar Lake s actions were reasonable under the statute. Accordingly, the appeals court concluded the ALJ s decision was not arbitrary, capricious, not in accordance to the law, or unsupported by substantial evidence. Cedar Lake Nursing Home v. Department of Health and Human Servs., No (5th Cir. Sept. 13, 2010). Illinois Supreme Court Says Punitive Damages Not Available In Nursing Home Negligence Case For Deceased Resident The Illinois Supreme Court held March 24, 2011 that common law punitive damages are not recoverable in a Nursing Home Care Act (Act) negligence case where the nursing home resident is deceased. Affirming an appeals court decision, the high court found the right to recover common law punitive damages abates on the death of the injured party, a general rule that was not altered by the state s Survival Act. For a punitive damages claim to survive, the award of such damages must be expressly authorized by the statute on which the cause of action is predicated, the high court said. Here, the high court agreed that punitive damages are available for willful and wanton violations of the Act, and that causes of action based on the Act survive the death of the nursing home resident. But the high court concluded the right to punitive damages did not survive the resident s death because the statute did not expressly authorize such relief. We have never held... that a claim for punitive damages based on a statutory cause of action will survive simply because the Survival Act allows the underlying statutory cause of action to proceed. For a punitive damages claim to survive, the award of such damages must be expressly authorized by the statute on which the action is predicated, the high court wrote. Marjorie Vincent died in December 2006 while a resident of Alden-Park Strathmoor, a long term care facility in Rockford, IL. Following her death, the legal representative of her estate (plaintiff) sued the nursing home for negligence under the Act. 255

256 Plaintiff sought to reserve the right to seek punitive damages on his claim that the nursing home willfully and wantonly violated the Act in caring for Vincent. Alden-Park Strathmoor moved to block plaintiff s attempt to seek punitive damages, arguing that, as a matter of Illinois law, punitive damages do not survive the death of the person whose injuries serve as the basis for a cause of action brought pursuant to the state s Survival Act. The trial court agreed with the nursing home, and the appeals court affirmed. Also affirming, the high court recognized the substantial policy arguments in favor of both positions in this case, but added that such arguments are properly directed to the state legislature. Vincent v. Alden-Park Strathmoor, Inc., No (Ill. Mar. 24, 2011). U.S. Court In New York Holds Resident May Sue Facility For Alleged Violations Of Federal Nursing Home Law The Federal Nursing Home Reform Amendments (FNHRA) confer federal rights that may be vindicated by a private action brought under 42 U.S.C. 1983, a federal trial court in New York ruled April 15, In so holding, the U.S. District Court for the Northern District of New York found the purpose of the FNHRA was to improve the quality of care that nursing home residents receive. By enacting the statute, Congress sought to protect nursing home residents many of whom could not protect themselves from the very type of negligence alleged by [plaintiff]. To prevent residents from enforcing the rights afforded to them by the FNHRA would be contrary to legislative intent, the court wrote. Plaintiff Daniel J. Pantalone, who was wheelchair bound, suffered a fall in the shower while a resident of the Fulton County Residential Health Care Facility. Facility employees were with him when he fell, but according to the opinion, plaintiff was provided no specific medical treatment until several days later when an x-ray revealed a non-displaced fracture of the left femur. Plaintiff, through his attorneys in fact, sued Fulton County and the facility pursuant to Section 1983, alleging his rights under the FNHRA had been violated. Plaintiff also brought a pendent state claim for negligence. Defendants moved to dismiss, arguing the FNHRA does not provide a federal right enforceable under Section The court denied the motion, holding plaintiff could sue to enforce his rights under the FNHRA through Section The court noted that FNHRA does not provide a private cause of action to be brought under the statute directly, but could create a right enforceable under Section 1983 if Congress intended to confer such a right upon a class of beneficiaries. 256

257 Defendants argued that Second Circuit case law has held that the FNHRA does not confer a right to sue. But the court disagreed, pointing out that the decision at issue was nonbinding and that the Second Circuit had yet to analyze[] and conclusively rule on the issue. As the instant action involved state actors, the court examined the three Blessing factors to determine whether Congress intended to create a federal right under the FNHRA. See Blessing v. Freestone, 520 U.S. 329 (1997). First, the court said it was undisputed that plaintiff, as a resident of the facility, was an intended beneficiary of the FNHRA and that the statute focuses on the individual resident rather than systemwide policies. Second, the court found the FNHRA provisions made clear what level of service nursing facilities are required to provide to their residents, using mandatory must care and must provide language. Third, also pointing to the mandatory must language, the court held the obligations outlined in the FNHRA were binding on the states and nursing facilities. Finding all three Blessing factors were met, the court next determined Congress did not specifically foreclose a remedy under Section Moreover, while the statutory scheme includes an array of enforcement options, nothing in these provisions can be said to bar individuals from also enforcing rights through States must investigate allegations of abuse and/or neglect, but the FNHRA does not characterize this as the exclusive avenue for residents to seek redress for violations of the statute. Instead, the court said, this remedy complements, rather than supplants, Pantalone v. County of Fulton, No. 6:10-cv-93 (N.D.N.Y. Apr. 15, 2011). Ninth Circuit Affirms Dismissal Of Nursing Home s Retaliation Claims A lower court correctly dismissed the plaintiff nursing home s constitutional claims against state regulators for enforcement of fire sprinkler requirements, the Ninth Circuit held April in an unpublished opinion. In so holding, the appeals court found no merit in the home s assertion that the regulations were enforced in retaliation for failed lobbying efforts. CarePartners, which operates boarding homes in Washington, had to shut down a facility until it complied with state requirements to install fire sprinklers. CarePartners argued that state regulators retaliated against it in violation of the First Amendment because of its owner Joseph Kilkelly s lobbying efforts to obtain exemption from the sprinkler regulations. 257

258 The district court found that Kilkelly s protected speech was not a substantial or motivating factor behind the regulatory enforcement and granted summary judgment for the defendant state employees. The appeals court agreed with the lower court that discovery had demonstrated plaintiffs case of retaliation was entirely speculative and that there was no specific, admissible evidence in the voluminous record that the plaintiffs can cite to support their claims that any of the defendants sought to enforce the law on account of a retaliatory animus against Kilkelly or CarePartners. The appeals court also agreed with the district court s evidentiary ruling excluding evidence that the regulators were aware of Kilkelly and his past encounters with them on hearsay grounds. Likewise, the appeals court found the district court properly dismissed the plaintiffs state law claim for tortious interference, finding no specific evidence in the record indicating that CarePartners or Kilkelly were improperly singled out as Washington law requires. Finally, the appeals court found no merit in plaintiffs procedural due process claim, concluding the post-deprivation hearing was adequate in this case. The government interest of protecting the lives of elderly residents who are physically or mentally incapable of evacuating in case of a fire is obviously high and could justify a pre-deprivation suspension, the appeals court said. CarePartners, LLC v. Lashway, No (9th Cir. Apr. 21, 2011). Medicaid Regulations CMS Issues Final Rule Implementing Upgrades To Payment Error Rate Measurement The Centers for Medicare and Medicaid Services (CMS) issued in the August 11, 2010 Federal Register (75 Fed. Reg ) a final rule implementing improvements to the Medicaid Eligibility Quality Control (MEQC) and Payment Error Rate Measurement (PERM) for Medicaid and the Children s Health Insurance Program (CHIP). PERM measures improper payments in Medicaid and CHIP and produces national-level error rates for each program. These reviews are conducted to determine whether the sampled cases meet applicable Medicaid and CHIP fee-for-service, managed care, and eligibility requirements, CMS explained in a press release. The rule implements provisions from the Children s Health Insurance Program Reauthorization Act of 2009 and makes other operational changes to the programs based on stakeholder feedback. CMS said it received comments from states, advocacy groups, and educational institutions. According to the agency, the rule changes the process for reviewing cases in which states have used simplified enrollment efforts such as self-declaration for eligibility cases; eliminates duplication of effort between eligibility reviews administered in the same fiscal 258

259 year; extends the timeframe for providers to submit documentation; and provides states additional time to submit corrective action plans. Like other large federal programs, Medicare, Medicaid and CHIP are susceptible to errors or improper payments, said CMS Administrator Donald Berwick, M.D. in a statement. Reducing payment errors in federal programs is a key goal of the entire Obama Administration and the rules we are issuing today-- developed with feedback and input from states and other stakeholders--allow us to implement strategies for reducing the rate of errors in Medicaid and CHIP more effectively. The regulations are effective September 10, CMS Proposes Withdrawal Of Challenged Provisions Of Medicaid AMP Rule The Centers for Medicare and Medicaid Services (CMS) issued a proposed rule in the September 3, 2010 Federal Register (75 Fed. Reg ) to withdraw certain challenged provisions of a Medicaid rule pertaining to the calculation of Average Manufacturer Price (AMP) and the federal upper limits (FULs) for multiple source drugs. In the proposed rule, CMS noted the challenged regulations have been superseded in significant part by the healthcare reform law and the FAA Air Transportation Modernization and Safety Improvement Act. Specifically, CMS proposed to withdraw the portions of the rule for determining AMP and FULs and the definition of multiple source drug, which instead would be defined in accordance with statutory changes. The withdrawn provisions were the subject of a November 2007 lawsuit brought by the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA), which argued the AMP rule s impact on Medicaid reimbursements of generic drugs would spell dire consequences for community pharmacies. According to the lawsuit, the regulations would reduce reimbursement rates below the level permitted by law. CMS issued the AMP final rule in July 2007 (72 Fed. Reg ), defining a multiple source drug as one sold or marketed in the United States, as opposed to the state. On December 14, 2007, the district court judge in the case issued a preliminary injunction halting implementation of the rule to the extent it affected Medicaid pharmacy reimbursement rates until a final decision on the merits of the lawsuit. National Ass n of Chain Drug Stores v. Health and Human Servs., No. 1:07-cv (RCL). CMS subsequently issued in October 2008 a final rule (73 Fed. Reg ) revising the definition of multiple source drug for Medicaid purposes to conform with statutory language and address concerns raised in the NACDS and NCPA lawsuit that all drug products are not generally available in every state. CMS said at that time the revised definition indicated a multiple source drug is one that is sold or marketed in the state during the rebate period, in line with the relevant statutory language. 259

260 But NACDS and NCPA continued to maintain the revised definition and implementation procedures were inconsistent with the statute. Congress then stepped in and blocked implementation of certain provisions of the AMP final rule until October 1, Section 2503(a) of the Patient Protection and Affordable Care Act (PPACA) revised the FULs to be no less than 175% of the weighted average (determined based on utilization) of the most recently reported monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drugs available for purchase by retail community pharmacies nationwide. The PPACA also revised the definitions of AMP, multiple source drug, and wholesaler; added a definition of retail community pharmacy ; and eliminated the term retail pharmacy class of trade. CMS said it expects to develop regulations that will implement Section CMS Issues Final Rule Withdrawing Challenged Provisions Of Medicaid AMP Rule The Centers for Medicare and Medicaid Services (CMS) issued a final rule to withdraw certain challenged provisions of a Medicaid rule pertaining to the calculation of Average Manufacturer Price (AMP) and the federal upper limits (FULs) for multiple source drugs. In the final rule, slated for publication in the November 15, 2010 Federal Register, CMS noted the challenged regulations were superseded in significant part by the healthcare reform law and the FAA Air Transportation Modernization and Safety Improvement Act. The final rule will be effective 30 days after publication. Specifically, CMS is withdrawing the portions of the rule for determining AMP and FULs and the definition of multiple source drug, which instead would be defined in accordance with statutory changes. The final rule also responds to comments on the proposed rule issued September 3, 2010 (75 Fed. Reg ). The withdrawn provisions were the subject of a November 2007 lawsuit brought by the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA), which argued the AMP rule s impact on Medicaid reimbursements of generic drugs would spell dire consequences for community pharmacies. According to the lawsuit, the regulations would reduce reimbursement rates below the level permitted by law. CMS issued the AMP final rule in July 2007 (72 Fed. Reg ), defining a multiple source drug as one sold or marketed in the United States, as opposed to the state. On December 14, 2007, the district court judge in the case issued a preliminary injunction halting implementation of the rule to the extent it affected Medicaid pharmacy reimbursement rates until a final decision on the merits of the lawsuit. National Ass n of Chain Drug Stores v. Health and Human Servs., No. 1:07-cv (RCL). 260

261 CMS subsequently issued in October 2008 a final rule (73 Fed. Reg ) revising the definition of multiple source drug for Medicaid purposes to conform with statutory language and address concerns raised in the NACDS and NCPA lawsuit that all drug products are not generally available in every state. CMS said at that time the revised definition indicated a multiple source drug is one that is sold or marketed in the state during the rebate period, in line with the relevant statutory language. But NACDS and NCPA continued to maintain the revised definition and implementation procedures were inconsistent with the statute. Congress then stepped in and blocked implementation of certain provisions of the AMP final rule until October 1, Section 2503(a) of the Patient Protection and Affordable Care Act (PPACA) revised the FULs to be no less than 175% of the weighted average (determined based on utilization) of the most recently reported monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drugs available for purchase by retail community pharmacies nationwide. The PPACA also revised the definitions of AMP, multiple source drug, and wholesaler; added a definition of retail community pharmacy ; and eliminated the term retail pharmacy class of trade. CMS has said it expects to develop regulations that will implement Section CMS Proposes Transparency And Public Notice Procedures For Medicaid And CHIP Demos Under Section 1115 The Centers for Medicare and Medicaid Services (CMS) issued a proposal September 17, 2010 to increase the transparency of Medicaid and Children s Health Insurance Program (CHIP) demonstration applications and approved demonstration projects. The proposed rule (75 Fed. Reg ) sets forth transparency and public notice procedures for Medicaid and CHIP experimental, pilot, and demonstration projects approved under section 1115 of the Social Security Act. The proposal reflects Patient Protection and Affordable Care Act provisions requiring transparency in the process of developing and approving demonstrations. We welcome public comment on the balance this rule strikes between ensuring input and minimizing unnecessary administrative burden or delay, as well as the extent to which the rule ensures meaningful public comment at the State and Federal levels, the rule said. Comments on the proposal are due by November 16. The procedures set forth in the rule include those for submitting, publishing, and issuing public notices, applications, annual reports, and other documents. In many cases, the rule noted, these procedures would allow for electronic documents, either as an alternative or a supplement to a printed document. CMS OKs California s $10 Billion Medicaid Waiver 261

262 The federal government approved November 2, 2010 California s five-year, $10 billion Medicaid waiver proposal to strengthen the state s hospital safety net and delivery system and expand coverage and care for low-income populations, Governor Arnold Schwarzenegger announced. This agreement is great news for the people of our state because we will be able to expand coverage, improve the delivery of care and build a strong bridge to federal health care reform with increased federal resources, said Schwarzenegger. The Section 1115 waiver follows more than a year of negotiations with the Centers for Medicare and Medicaid Services and will bring the state roughly $2 billion annually, more than double existing waiver levels, in federal Medicaid support for the next five years, Schwarzenegger said. California s Bridge to Reform waiver proposal advances the state s healthcare goals in four specific areas: Expanding coverage to more uninsured adults by allowing all counties to participate in the county-based Health Care Coverage Initiative offering coverage to those adults ineligible for Medi-Cal, the state s Medicaid program; Expanding the existing safety net care pool to provide payment for uncompensated care and ensure support for safety net hospitals and other state health programs that deliver services to the uninsured; Improving care coordination for vulnerable populations; and Improving quality of care by establishing a Delivery System Reform Incentive Pool to support the state s public hospitals in transforming their delivery systems. According to the state, the waiver will help California transition to the federal reforms that will take effect in January 2014 under the healthcare reform law. Changes under the new waiver involve expanding coverage today for those who will become newly eligible in 2014 under health care reform, implementing models for more comprehensive and coordinated care for some of California s most vulnerable residents, and testing various strategies to strengthen and transform the state s public hospital health care delivery system to prepare for the additional numbers of people who have access to health care once health care reform is fully implemented, according to a California Department of Health Care Services (DHCS) fact sheet. Of the $10 billion in federal funds made available under the waiver, $3.3 billion will be invested in California s public hospital safety net, $2.9 billion will be used for additional coverage of low-income individuals, and $3.9 billion will go to uncompensated care costs, the fact sheet said. As many as 500,000 low-income uninsured residents are expected to gain healthcare coverage as a result of the waiver. We believe this waiver will help provide more effective and efficient health care to California s most vulnerable populations and strengthen the capacity of our public hospitals to meet increasing demands for care, said DHCS Director David Maxwell-Jolly. CMS Issues Guidance To States On Five-Year Approval Or Renewal Period For Certain Medicaid Waivers, Political Subdivisions 262

263 The Centers for Medicare and Medicaid Services (CMS) sent a letter November 9, 2010 to state Medicaid Directors regarding the five-year approval or renewal period for certain Medicaid waivers provided for under the Patient Protection and Affordable Care Act, as amended. The waivers apply to demonstration programs under Section 1115 of the Social Security Act and waivers under Sections 1915(b) and 1915(c) of the Act, through which a state serves individuals who are dually eligible for Medicare and Medicaid. The Affordable Care Act expands CMS authority to allow a waiver that provides medical assistance for dually eligible beneficiaries to be approved for an initial period of up to five years and renewed for up to five years, at the state s request. In order for a State to apply for the extended approval periods, the waiver or demonstration must include a focus on the dual-eligible population and provide delivery system options or services that could not typically be provided to dually eligible individuals under the State plan, the guidance said. CMS also highlighted that the five-year approval period is subject to the discretion of the Department of Health and Human Services Secretary. According to the guidance, coverage-related demonstrations generally will not be approved for five years in cases where the provisions of the demonstration are not consistent with the coverage provisions in the Affordable Care Act. In addition, CMS emphasized that extended approval period will also not be granted if the Secretary determines that one or more conditions of the waiver or demonstration have not been met, that the waiver would no longer be cost neutral (for 1915(c) waivers), cost-effective (for 1915(b) waivers) or budget neutral (for 1115 demonstrations), that it would not be efficient to extend the waiver, or that it would no longer be consistent with the purposes of the Medicaid program or the Affordable Care Act. Political Subdivisions In another letter issued to state Medicaid Directors the same day, CMS clarified that determination of compliance with the political subdivision provisions in Section 5001(g)(2) of the American Recovery and Reinvestment Act of 2009 should be consistent with the provisions of Section 1905(cc) of the Social Security Act (Act), which was added by Section 10201(c)(6) of the Affordable Care Act. The provisions at issue deal with the increase in the Federal Medical Assistance Percentage provided for under the Affordable Care Act. Under Section 5001(g)(2), a prerequisite for receipt of the increased federal funding is that states not increase the percentage of the non-federal share of Medicaid expenditures that political subdivisions are required to pay from the percentage required under the state plan on September 30, CMS Issues Proposed Rules On Medicaid RACs The Centers for Medicare and Medicaid Services (CMS) published in the November 10, 2010 Federal Register (75 Fed. Reg ) proposed regulations on new Medicaid Recovery Audit Contractors (RACs) required under the healthcare reform law to help reduce fraud, waste, and abuse in the federal-state program. 263

264 Under the Patient Protection and Affordable Care Act (PPACA), as amended, states must establish Medicaid RAC programs by submitting state plan amendments to CMS by December 31, 2010, according to an agency press release. As permitted by the PPACA, the proposed regulations describe the processes for providing extensions or exceptions to states, if necessary, regarding the implementation of RAC programs. In the proposed rule, CMS said states must fully implement their RAC programs by April 1, 2011, but specifically requested comments on the proposed implementation date. The proposed rule also outlines the requirements that states must meet in establishing their programs, as well as the federal contribution CMS will provide to assist in funding the state RAC programs. RACs, which already are being used in the Medicare program, are contractors that audit healthcare provider payments to determine whether any overpayments or underpayments have occurred. Similar to the Medicare RAC program, Medicaid RACs also will be tasked with recovering overpayments or correcting underpayments, CMS said. We are using many of the lessons that we learned from the Medicare RAC program in the development and implementation of the Medicaid RACs, including a far-reaching education effort for health care providers and state managers, said CMS Administrator Donald Berwick, M.D. Under the proposed regulations, states must pay Medicaid RACs on a contingency basis to review provider claims and identify and recover overpayments. The proposed regulations give states the option of paying Medicaid RACs on a contingency basis or under some other fee structure for identifying underpayments, CMS said. In addition, the proposed regulations would allow states to use their current administrative appeals process, or a modified version of their current process, for Medicaid RAC-related appeals. All fees paid to the Medicaid RACs must come from amounts recovered after all available appeals have been exhausted, CMS said. According to the proposed rule, the Medicaid RAC programs have the potential to result in net federal savings ranging from an estimated $80 million in 2011 to $330 million by CMS Guidance CMS said it is providing states with a number of educational opportunities so they can get up to speed quickly on implementing their RAC programs. For example, CMS on October 1 issued a state Medicaid Director letter providing initial guidance on RAC implementation. The letter noted that states may not supplant existing State program integrity or audit initiatives or programs with Medicaid RACs ; rather, they must maintain those efforts uninterrupted with respect to funding and activity. CMS Delays April 1 Deadline For Implementing Medicaid RACs 264

265 The Centers for Medicare and Medicaid Services (CMS) indicated in a recent informational bulletin that states will not be required to implement their Medicaid Recovery Audit Contractor (RAC) program by April 1, 2011 as previously indicated. CMS published in the November 10, 2010 Federal Register (75 Fed. Reg ) proposed regulations on new Medicaid RACs, which are required under the healthcare reform law to help reduce fraud, waste, and abuse in the federal-state program. In the proposed rule, and earlier in an October 1, 2010 State Medicaid Directors letter, CMS said states had to fully implement their RAC programs by April 1, 2011, but specifically requested comments on the proposed implementation date. RACs, which already are being used in the Medicare program, are contractors that audit healthcare provider payments to determine whether any overpayments or underpayments have occurred. Out of consideration for State operational issues and to ensure States comply with the provisions of the Final Rule, we have determined that States will not be required to implement their RAC programs by the proposed implementation date of April 1, Instead, when the Final Rule is published, it will indicate the new implementation deadline, the bulletin said. According to the bulletin, the final rule is expected to be issued later this year. CMS Issues Proposed Rule Prohibiting Medicaid Payment For HACs The Centers for Medicare and Medicaid Services (CMS) published a proposed rule in the February 17 Federal Register (76 Fed. Reg. 9283) that would bar federal payment to states for amounts expended in providing medical assistance for healthcare-acquired conditions (HACs). The rule implements section 2702 of the Patient Protection and Affordable Care Act, which prohibits such payments. The proposal would also authorize states to identify other provider-preventable conditions for which Medicaid payment would be prohibited. "This flexibility would extend to applying nonpayment provisions to service settings beyond the inpatient hospital setting," the rule said. "We believe that establishing Medicare as the minimum for the application of this policy is appropriate at this point." CMS Issues Guidance To States On MOE Provisions In PPACA; Several Groups Issue Letters In Support Of Provisions In a February 25, 2011 letter to state Medicaid Directors, the Centers for Medicare and Medicaid Services (CMS) provided additional guidance on the maintenance of effort (MOE) provisions in the Patient Protection and Affordable Care Act (PPACA). The MOE provisions are meant to ensure that states coverage for adults under the Medicaid program remains in place pending implementation of coverage changes that become effective in January Included in the letter were a series of frequently asked questions (FAQs). 265

266 According to one series of FAQs, the MOE rules do not apply to certain adults during the period January 1, 2011 through December 31, 2013, if the state submits a certification to the Department of Health and Human Services (HHS) Secretary that it has or projects a budget deficit for the current or following state fiscal year. Specifically, this exception to the MOE provision may be applied to adults who are not eligible for coverage on the basis of pregnancy or disability and whose incomes are above 133 percent of the Federal poverty level (FPL), CMS said. According to the letter, the state would need to submit a Medicaid state plan amendment (or amendment to a waiver/demonstration under section 1115 of the Social Security Act, as appropriate) to implement any reduction in eligibility. The guidance goes on to describe what conditions a state must meet for nonapplication of the MOE requirements as well as the applicable dates and whether states have flexibility. The FAQs also clarified that the MOE provisions apply to Medicaid section 1115 waivers and demonstrations and described how the termination or modification of a section 1115 demonstration is affected by the MOE provisions. The letter also discussed treatment of premiums under the MOE provisions. Hospital Group Letter Meanwhile, on March 1, 2011 a coalition of seven organizations representing hospitals and health systems sent a letter to HHS Secretary Kathleen Sebelius strongly supporting the MOE requirements and urging continued resistance to efforts to erode the important coverage protections that this provision is intended to ensure. A relaxation of the MOE provisions will push many low-income Americans off Medicaid rolls, thereby increasing the number of uninsured moving us backwards rather than forward towards the ACA s goal of expanded health coverage, the letter said. The letter also emphasized that shifting people off Medicaid moves the burden of their care from states and the federal government largely onto the nation s hospitals. Families USA Letter Also, on March 1, 2011 as the House Energy and Commerce Committee heard testimony from three state governors on the effect of the healthcare reform law, a large coalition of 130 diverse organizations issued a letter urging House members to stand firm and vigorously oppose any efforts to weaken the law s provisions regarding Medicaid and the Children s Health Insurance Program (CHIP). To date, these stability protections have worked exactly as intended, preventing states from reducing Medicaid and CHIP eligibility as well as from adding red-tape barriers to enrollment just when people need help the most, the letter, which was spearheaded by consumer group Families USA, said. The letter warned that some of our nation s Governors are seeking to eliminate this important protection in the face of budget challenges. While there is no doubt that these state budget problems are serious and warrant attention, taking health care away from millions of American seniors and children is the wrong response, the organizations said. 266

267 OIG Proposal Would Allow Federal Matching Funds For MFCUs Data Mining Efforts The Department of Health and Human Services Office of Inspector General (OIG) published a proposed rule in the March 17, 2011 Federal Register (76 Fed. Reg ) that would allow state Medicaid Fraud Control Units (MFCUs) to use federal matching funds for certain data mining activities. OIG said the change is aimed at support[ing] and moderniz[ing] MFCU efforts to effectively pursue Medicaid provider fraud. Federal financial participation (FFP) currently is prohibited for data mining by MFCUs, which OIG defines as the practice of electronically sorting Medicaid claims through statistical models and intelligent technologies to uncover patterns and relationships... to identify aberrant utilization and billing practices that are potentially fraudulent. Because FFP is not available for MFCU data mining activities, they are limited to relying on referrals from state Medicaid agencies, according to the proposed rule. We believe that amending the existing regulation to permit FFP in data mining activities will be an efficient use of available resources, OIG said, noting that analyzing claims data at the federal level has helped target law enforcement resources and head-off potential fraud. According to the proposal, OIG expects that data mining by MFCUs at the State level could enhance the MFCU s ability to counter new and existing fraud schemes by more effectively identifying early fraud indicators. OIG also said data mining would equip MFCUs with more modern tools that have been shown at the Federal level to help increase the numbers of credible investigative leads, pursue recoveries, and detect emerging fraud and abuse schemes and trends. Under the proposed rule, to claim FFP in costs of data mining, the MFCU would have to meet a number of conditions, including identifying the methods of cooperation between the MFCU and relevant Medicaid agency, and between the MFCU and review contractors selected by the Centers for Medicare and Medicaid Services Medicaid Integrity Group. MFCU employees also would have to receive specialized training in data mining techniques. FFP would only be available to the states that satisfied these conditions and received OIG approval. In addition, the proposed rule would require MFCUs to report annually the costs and results of approved data mining activities to OIG. Comments on the proposed rule are due May 16. CMS Rule Provides Enhanced Federal Matching For States To Upgrade Medicaid IT Systems The federal government will pay 90% of the cost for states to overhaul their Medicaid information technology (IT) systems to handle the changes in Medicaid enrollment under the Affordable Care Act, according to a rule issued April 14, 2011 by the Centers for Medicare and Medicaid Services (CMS). 267

268 Federal assistance will ease the financial stressors many states are facing and smooth the transition to the more inclusive Medicaid eligibility rules and the significantly streamlined Medicaid enrollment procedures ushered in by the Affordable Care Act, the agency said in a fact sheet on the rule. Under the reform law, most Americans whose income is up to 133% of the federal poverty level will be eligible for Medicaid in 2014; thus, [d]ramatic system transformations will likely be needed in most states to accommodate the new and expanded availability of health care to millions of currently uninsured Americans, CMS said. Under the rule, states can receive a 90% federal matching rate for the design, development, installation, or enhancement of eligibility determination systems through December 31, After that, states may be able to continue to receive enhanced federal support at the 75% match rate for maintenance and operations of the new systems, the fact sheet said. CMS Proposed Rule Offers Guidance On Ensuring Access To Health Services For Medicaid Beneficiaries The Centers for Medicare and Medicaid Services (CMS) published in the May 6, 2011 Federal Register (76 Fed. Reg ) a proposed rule providing guidance to states on how to assure that people with Medicaid have the same access to healthcare services as people with other types of health insurance in the face of state budget troubles. According to CMS, federal law requires that Medicaid provider payment rates be consistent with efficiency and economy and set at levels sufficient to assure that Medicaid beneficiaries have equal access to services. Tight State budgets coupled with increased demand for services during the recession have led many States to propose reductions in Medicaid provider payments, without clear Federal guidance on how to assure access, CMS noted in a press release. The rule proposes that states conduct periodic reviews of data for all covered services using a three-part framework recommended by the Medicaid and CHIP Payment and Access Commission (MACPAC). The three-part framework consists of: (1) enrollee needs; (2) the availability of care and providers; and (3) utilization of services. Under the rule, states should first determine whether patients needs are being met. CMS then proposes a range of data that states could use to evaluate the sufficiency of access to care. In addition, the proposed rule aims to ensure transparency by requiring that states publish the results of the reviews annually and requires public comment before any changes to a payment methodology or rate. The rule also recognizes, as States have requested, electronic publication as an optional means of communicating State plan amendments (SPAs) proposed rate-setting policy changes to the public. 268

269 Legislation President Signs Bill Extending FMAP Boost For State Medicaid Programs President Obama signed into law August 10, 2010 a measure that includes $26 billion in funding for education and an extension to the increase in the federal medical assistance percentage (FMAP) for state Medicaid programs. The House, which was called back from its August recess, approved the measure the same day in a vote. The Senate approved the bill August 5 by a margin, with support from two Republican Senators, Olympia Snowe (ME) and Susan Collins (ME). The additional funding, which was included in an aviation safety bill (H.R. 1586), allocates $10 billion to the states to prevent teacher layoffs and $16.1 billion to maintain a boost in the FMAP percentage for state Medicaid programs through June 30, Enhanced FMAP funds originally were authorized by the American Recovery and Reinvestment Act (ARRA) but were set to sunset by the end of this year. ARRA provided an across-the board 6.2% boost in FMAP for states; those with high unemployment could qualify for an additional increase. A number of governors have warned that without an extension of the increase, their states would be forced to make steep cuts in essential services. The amendment to H.R phases down the 6.2 percentage bump in the second quarter of fiscal year (FY) 2011 to 3.2 percentage points and in the third quarter of FY 2011 to 1.2 percentage points. Cases Ninth Circuit Again Upholds Injunction Blocking Medi-Cal Rate Cuts The Ninth Circuit May 27, 2010 once again upheld a preliminary injunction barring the California Department of Health Care Services (DHCS) from implementing a planned Medi-Cal 10% rate cut against certain providers. The appeals court found the plaintiffs in the instant case showed a likelihood of success on the merits based on the court s previous reasoning in California Pharmacists Association v. Maxwell-Jolly, 563 F.3d 847 (9th Cir. 2009) and Independent Living Center of Southern California, Inc. v. Maxwell-Jolly, 572 F.3d 644 (9th Cir. 2009). In those cases, the appeals court held that DHCS had no discretion to alter the rate reductions imposed by the legislature under Section 30(A) of the Medicaid Act. On September 16, 2008, the California Legislature passed AB 1183, which provided that, effective March 1, 2009, Medi-Cal reimbursement payments to some fee-for-service providers would be reduced by 1% or 5%, depending on provider type. 269

270 In the instant case, DHCS Director David Maxwell-Jolly, appealed a preliminary injunction issued by the district court prohibiting him from implementing the scheduled 10% Medi- Cal rate reduction against plaintiffs. According to the appeals court, the case is controlled by California Pharmacists Association, where the court held that AB 1183 gives the [Department of Health Care Services] no discretion to alter the rate cuts based on the Department s own analysis, and, therefore, the cuts were not based on the Department s consideration of the relevant factors, but instead constituted a post-hoc rationalization for a legislative decision that had already been made. The appeals court also noted that plaintiffs were likely to suffer irreparable harm absent an injunction. The district court also did not abuse its discretion in finding the equities and public interest weighed in favor of plaintiffs, the appeals court found. Quoting Independent Living Center of Southern California, the appeals court said there is a robust public interest in safeguarding access to health care for those eligible for Medicaid, whom Congress has recognized as the most needy in the country. Santa Rosa Mem'l Hosp. v. Maxwell-Jolly, No (9th Cir. May 27, 2010). Tenth Circuit Remands For Recalculation Of State Medicaid Agency s Lien On Tort Recovery The Tenth Circuit ruled June 17, 2010 that a lower court must hold further proceedings on the allocation of the proceeds of a $1.1 million medical malpractice settlement for purposes of determining the appropriate amount of the Oklahoma Health Care Authority s (OHCA's) Medicaid lien. OHCA had asserted a lien of $544,282 against the proceeds of the settlement, but the district court allocated only $67, Plaintiffs Stacy Price and the father of her baby, Chad James, individually and as next friends of K.J., sued the physician who delivered K.J. after she was born with severe brain damage and other disabilities requiring significant medical care. Price, on behalf of K.J., applied for and received Medicaid benefits, assigning to OHCA Oklahoma s Medicaid agency the right to receive any payments from a third party for K.J. s medical care. Plaintiffs and the physician agreed to settle the medical malpractice lawsuit for $1.1 million, proposing allocating $37, to OHCA in full satisfaction of its lien. Citing one of their expert witnesses estimates, plaintiffs argued K.J. s lifetime care would cost roughly $12 million, and Medicaid is only entitled to its proportionate share of the settlement proceeds versus what the overall damages were that could have been claimed in the case. OHCA objected to the allocation, arguing no evidence has been submitted regarding valuation of their case. 270

271 The district court held plaintiffs had proved the propriety of their proposed allocation by clear and convincing evidence, as required by Oklahoma law. The court ultimately agreed to allocate $67, in satisfaction of OHCA s lien. The Tenth Circuit found the district court articulated the correct legal standard in addressing the propriety of the proposed reduction in OHCA s recovery (i.e. clear and convincing evidence), but found it erred in applying that standard. Oklahoma amended its Medicaid-recovery statute in 2007 after the U.S. Supreme Court held a state s recovery of Medicaid payments out of a tort settlement is limited to the portion of the settlement that represents medical costs paid by Medicaid. See Arkansas v. Department of Health and Human Servs. v. Ahlborn, 547 U.S. 268 (2006). At issue, therefore, was whether the settling parties had presented clear and convincing evidence that the portion of the $1.1 million settlement attributed to K.J. s expenses paid by Medicaid was no more than $67, But the appeals court found no evidence whatsoever relating to the reduction during the hearing to approve the settlement. Aside from a reduction necessary to compensate counsel, a reduction in a Medicaid lien can be justified only by showing a reason why the plaintiff would agree to allow the defendant to pay less than the full amount of the Medicaid lien, the appeals court said. The usual reasons would be that the liability of the settling defendant is uncertain, or that the defendant lacks the money to pay for his full liability (or both); so the plaintiff would be willing to take a proportionate reduction in each component of the damages that she would expect the jury to award if the defendant were found liable, the appeals court observed. Here, the settling parties presented no evidence of how the settlement amount was computed, nor was there any evidence of the probability of finding the physician liable or the expected damages award. In short, we cannot affirm a finding that there was clear and convincing evidence to support a claim when nothing relevant was offered into evidence during the proceeding to resolve the claim, the appeals court concluded. Price v. Wolford, Oklahoma Health Care Auth., No (10th Cir. June 17, 2010). U.S. Court In North Carolina Finds State Medicaid Lien Statute Constitutional The U.S. District Court for the Western District of North Carolina denied June 28, 2010 a plaintiff s motion for summary judgment and granted the state s cross-motion, finding the state s Medicaid lien statute comports with federal law as interpreted by the U.S. Supreme Court in Arkansas Dep t. of Health and Human Servs. v. Ahlborn. Unlike the statute at issue in that case, the North Carolina statute simply provides a method for calculating what portion of a settlement represents the recovery of medical expenses and then limits the state s recovery to that amount, the court found. The case began when a personal injury action was filed on behalf of Emily M. Armstrong, a minor child, against James A. Barnes, Jr., M.D., Newton Women s Care, P.A., and Catawba Valley Medical Center. 271

272 Plaintiffs requested a declaratory judgment finding: (1) that defendant Lanier M. Cansler, in his official capacity as secretary of the North Carolina Department of Health and Human Services, does not have a lien on the proceeds arising from the minor child s personal injury action; (2) that N.C. Gen. Stat. 108A-57 and 108A-59 are unconstitutional to the extent that the statutes allow defendant to assert a lien on compensation for damages other than medical expenses pursuant to the Supremacy Clause; and (3) that defendant be enjoined from enforcing the state statute in a manner that violates 42 U.S.C (known as the Federal Medicaid Anti-Lien Provision). The parties eventually filed cross-motions for summary judgment. Plaintiffs argued that the holding of the U.S. Supreme Court in Arkansas Dep t. of Health and Human Servs. v. Ahlborn, 547 U.S. 268 (2006) is controlling on this matter. In Ahlborn, the Court held that a state may demand as a condition of Medicaid eligibility that the recipient assign in advance any payments that may constitute reimbursement for medical costs. However, to the extent that the Arkansas statute at issue allowed the state to impose a lien beyond the portion of the settlement allocated to medical care, it violated the anti-lien provision in section 1396p(a), the Court held. The defendants argued that the court here should give the contrary decision of the North Carolina Supreme Court in Andrews v. Haygood, 362 N.C. 599 (2008) (holding that the Medicaid recovery statutes comport with Ahlborn) dispositive effect. In Andrews, the state high court held that the state may adopt a statutory method of determining the portion of a settlement that represents the recovery of medical expenses. The court agreed with defendants. In addition to the analysis in Andrews, this Court s independent examination of the North Carolina scheme governing Medicaid reimbursement reveals that Plaintiffs argument of a conflict between the State s statutes and federal law is without merit, the court said. The statute at issue provides a means of calculating [the portion of a settlement allocated to medical care], and then forbids the State from imposing a lien on the remainder of the settlement, the court found. Accordingly, the court concluded that the North Carolina Medicaid recovery statutes comport with federal law as interpreted in Ahlborn. Armstrong v. Cansler, No. 5:07-CV-37-RLV (W.D.N.C. Jun. 28, 2010). Indiana Supreme Court Finds Medicaid Beneficiaries May Sue State For Low Transportation Reimbursement Rates The Indiana Supreme Court found August 30, 2010 that a group of Medicaid recipients had standing to sue the state after the state lowered the rate at which it reimburses for transportation services. Finding no proof of what relief the recipients were entitled to in the record below, the high court remanded for further consistent proceedings. The high court also summarily affirmed an appeals court decision that transportation providers, who were part of the original group of plaintiffs, did not have standing to sue the state. 272

273 In 1992, federal officials audited Indiana s Medicaid program and determined the state s transportation costs for transport of Medicaid recipients were high. The federal officials suggested that, among other things, the state lower the rate it paid to companies that make Medicaid transports. A group of transportation providers and Medicaid recipients filed a complaint against the state challenging the new, lower rates and seeking an injunction, a writ of mandamus, and a declaratory judgment. A state trial court granted the state summary judgment on the state law claims. The federal law claims were ultimately remanded to the state trial court as well. Before the trial court, the providers claimed the Medicaid transportation reimbursement rates are now so low they violate the federal Medicaid statute. Plaintiffs asserted that they have a right to sue for relief pursuant to 42 U.S.C The court ruled that both providers and Medicaid recipients had a right to sue under Section 1983, and determined that the reimbursement rates were too low. The court ordered the state to increase the mileage reimbursement rate from $1.25 per mile to $1.85 per mile, but ordered the higher rate be applied prospectively. The state appealed. The appeals court affirmed in part and reversed in part and remanded, but the state petitioned for transfer to the Indiana high court. The high court first summarily affirmed the appeals court s holding that the providers did not have a private right to sue the state. The high court then turned to whether the Medicaid recipients had a right to sue. Looking at the record, the high court noted the state apparently conceded that the recipients had a private right of action in this case. Under all the circumstances of this protracted dispute over Medicaid reimbursement rates, we conclude the State invited any court error with respect to the right of Recipients to sue for relief in this case, the high court held. Turning to the relief warranted, the high court said the trial court ordered no relief for the Medicaid recipients, except attorneys fees. The recipients claim rested on the contention that they were denied the transportation services to which they were entitled under Medicaid, the high court explained. But no recipient argued below that transportation was unavailable due to a lack of providers, the high court observed. Accordingly, the high court remanded to the trial court with instructions to allow the recipients to present evidence establishing the transportation to which they may be entitled, that they have been or will be denied the services to which they are entitled, and what relief they are due. Inasmuch as Recipients claim remains alive as a result of the equitable doctrine of invited error, we balance the equities and conclude that any relief, injunctive or otherwise, be prospective only, the high court added. 273

274 Murphy v. Fisher, No. 49S CV-463 (Ind. Aug. 30, 2010). Supreme Court Will Review Ninth Circuit Decisions Barring Implementation Of Medicaid Rate Cut The U.S. Supreme Court will review a trio of cases decided by the Ninth Circuit barring the California Department of Health Care Services (DHCS) from implementing a planned 10% Medi-Cal rate cut against certain providers. The Court s January 18, 2011 grant of certiorari consolidated three petitions: Maxwell- Jolly v. Independent Living Ctr. of Southern Cal. (No ); Maxwell-Jolly v. California Pharmacists Assn. (No ); and Maxwell-Jolly v. Santa Rosa Mem l Hosp. (No ). The lengthy litigation began after a special session of the California Legislature passed AB 5 in February Several plaintiffs sued DHCS alleging AB 5 violated the federal Medicaid Act, specifically 42 U.S.C. 1396a(a)(30)(A), and therefore was invalid under the Supremacy Clause of the U.S. Constitution. Under Section 30(A), a state Medicaid plan must provide payments that are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area. DHCS argued Section 30(A) did not confer a private right of action that plaintiffs could sue to enforce. The district court eventually granted a preliminary injunction to most of the plaintiffs (physicians, dentists, pharmacists, adult day healthcare centers, clinics, health systems, and other providers) blocking the 10% cut in Medi-Cal rates for services provided on or after July 1, The Ninth Circuit upheld this ruling, finding that DHCS violated Section 30(A) under the standards articulated in Orthopaedic Hosp. v. Belshe, 103 F.3d 1491 (9th Cir. 1997), when it implemented the rate reductions mandated by AB 5. According to the appeals court, the district court did not abuse its discretion in granting the preliminary injunction based on DHCS failure to rely on responsible cost studies, its own and others, in determining the effect of the rate cuts called for under state law (AB 5) on the statutory factors of efficiency, economy, quality, and access to care. U.S. Court In California Halts Implementation Of Rate Freeze On Medi-Cal Payments To Hospitals The U.S. District Court for the Eastern District of California granted a temporary injunction that invalidates and halts a rate freeze on Medi-Cal payments to hospitals for inpatient services by the California Department of Health Care Services (the Department). The rate freeze was scheduled to begin on January 31, The California Hospital Association (CHA), a trade association representing the interests of California hospitals, sought the temporary injunction. 274

275 In order to grant a temporary injunction, the CHA had to demonstrate that it would likely succeed on the merits, that it would likely suffer irreparable harm in the absence of an injunction, that the balance of equities tips in its favor, and that an injunction is in the public interest. CHA argued that it would succeed on the merits because the rate freeze impairs the state s contractual obligations by retroactively reducing the payments and by nullifying rate increases in binding contracts between the Department and hospitals; the rate freeze was being implemented without required federal approval; and that the rate freeze violated the federal Medicaid Act. The court agreed that CHA would likely succeed on the merits because federal approval was required. The court also found that because hospitals cannot recover damages in federal court, hospitals would suffer irreparable harm. Further, the court held that the balance of hardships tipped in the hospitals favor, as the significant financial losses may affect the quality of care provided to Medi-Cal patients. Finally, the court held that the public interest favored the enforcement of federal law, and thus, the issuing of an injunction. The temporary injunction issued in the case expired on February 11, California Hosp. Ass n. v. Maxwell-Jolly, No. S (E.D. Cal. Jan. 28, 2011). U.S. Court In Alabama Finds CMS Guidance On Medicaid Fraud Recoveries Violates APA A federal court in Alabama vacated February 18, 2011 guidance issued by the Centers for Medicare and Medicaid Services (CMS) concerning state Medicaid fraud recoveries, finding the letter to state health officials was an invalid substantive regulation because it was not subject to notice-and-comment rulemaking. The state of Alabama initiated the action against CMS, the Department of Health and Human Services, and various government officials (collectively, defendants) after CMS issued the Dear State Health Official letter (SHO letter) in October The letter s purpose, according to CMS, was to explain agency policy regarding the refunding of the Federal share of Medicaid overpayments when a state recovers from fraud-and-abuse defendants, including the amount that must be returned and the timeframe for returning it. Among other things, the SHO letter indicates that states may not seek to recover merely the State share of computed fraud damages absent agreement with appropriate federal and state authorities to proceed separately. The SHO letter also requires states to pay the federal government the applicable federal medical assistance percentage rate of all amounts recovered including double and treble damages not just amounts equivalent to the actual damages suffered by the Medicaid program. According to the SHO letter, states must pay the federal government its share before deducting the costs of the litigation. 275

276 The state alleged six causes of action related to the SHO letter, five of which the court dismissed in an earlier ruling. See Alabama v. Centers for Medicare and Medicaid Servs., No. 2:08-cv-881-MEF-TFM (M.D. Ala. Mar. 30, 2010). The court allowed the state to proceed, however, with its claim that the letter was an illegal regulation not subject to notice-and-comment rulemaking as required by the Administrative Procedure Act (APA). In the instant action, the U.S. District Court for the Middle District of Alabama held the SHO letter constituted final agency action and therefore subject matter jurisdiction existed to review the state s claim. Turning to the merits, the court concluded the SHO letter was not an interpretative rule, as CMS contended, but a legislative rule requiring notice-and-comment rulemaking. Although CMS characterized the SHO letter as an interpretative rule during the litigation, this characterization was not dispositive, the court said. Rather, the key difference between interpretative and legislative rules is how tightly the rule is linguistically tied to the statute it purports to interpret, the court noted. Examining the text of the SHO letter, the court highlighted numerous instances that in its view went beyond the statutory language. Based on this analysis, the court held the SHO letter was an invalid regulation. Finally, the court determined vacatur of the agency rule was appropriate in this case. The seriousness of CMS s failure to engage in notice and comment rulemaking a failure for which no explanation has been provided counsels in favor of vacatur, the court said. Moreover, the court observed, vacating the SHO letter would cause minimal disruption to CMS administration of the Medicaid program. Alabama v. Centers for Medicare and Medicaid Servs., No. 08-CV-881-MEF (M.D. Ala. Feb. 18, 2011). Fifth Circuit Finds State Withholding Of Medicaid Reimbursements To Provider Suspected Of Fraud Does Not Violate Provider s Civil Rights The Fifth Circuit affirmed March 3, 2011 a lower court s dismissal of a Medicaid provider s civil rights suit against the Texas health department, finding that the provider did not have a property right to reimbursement being withheld to offset prior reimbursements that were suspected of being fraudulent. Personal Care Products, Inc. (PCP) furnishes incontinence supplies to Medicaid recipients. During the course of a Medicaid fraud investigation, the Texas Health and Human Services Commission withheld a series of reimbursements from PCP. PCP eventually filed suit against state officers, alleging civil rights violations under 42 U.S.C and seeking damages and injunctive relief. 276

277 After the district court dismissed the case on the basis that PCP did not have a protected property interest in the reimbursement payments, PCP appealed. The appeals court first observed that [n]othing in Texas or federal law extends a property right in Medicaid reimbursements to a provider that is the subject of a fraud investigation. However, PCP argued that it had a property interest in legitimately earned, current reimbursements that were not subject to investigation. The appeals court disagreed, finding Texas regulations plainly permit current reimbursements to be withheld pending investigation on prior payments. According to the statute, payments for future claims may be withheld and payment holds are used to withhold payments to providers that may be used subsequently to offset the overpayment or penalty amount when [an] investigation is complete. Thus, the statutory scheme did not give PCP a property interest in its present reimbursement claims while past claims were under investigation for fraud, the appeals court held. Personal Care Prods., Inc. v. Hawkins, No (5th Cir. Mar. 3, 2011). Third Circuit Finds HHS Properly Denied Evidentiary Hearing In State s Challenge To Medicaid Disallowance The Third Circuit held March 21, 2011 that the Department of Health and Human Services (HHS) did not abuse its discretion in refusing to grant an evidentiary hearing in a dispute challenging the disallowance of some $15.1 million in federal Medicaid reimbursement to the state of Pennsylvania. Affirming the lower court s decision, the Third Circuit in a not precedential opinion agreed that a hearing would not have significantly aided in the resolution of the matter. At issue in the case was Pennsylvania s Department of Public Welfare s (DPW s) methodology for calculating family planning expenditures between October 2000 and February 2004 for its Medicaid managed care program, which the state operated in 25 of its 67 counties. During that time period, the federal government reimbursed the state roughly 54% of its Medicaid expenditures generally, but provided 90% funding for family planning services. In an April 2001 letter to the Centers for Medicare and Medicaid Services (CMS), DPW detailed the calculation for determining the proportion of managed care premiums related to the provision of family planning services and therefore entitled to the 90% federal reimbursement. According to DPW, the letter described a family planning factor ratio that would use state-wide data in the numerator, rather than limiting the data to the 25 counties with mandatory managed care programs, while including only beneficiaries from the 25 counties in the denominator. A subsequent HHS Office of Inspector General (OIG) audit found DPW erred in its calculation by including ineligible beneficiaries from all 67 counties in the numerator of 277

278 the family planning factor, an error that was compounded by the failure to include these ineligible beneficiaries in the denominator. As a result of this error, OIG concluded that DPW had overstated its family planning costs and therefore had received $15.1 million in unwarranted reimbursements. CMS then notified DPW that it was disallowing this amount in federal funds that the state had improperly claimed. DPW appealed the disallowance to the HHS Departmental Appeals Board, arguing its methodology was reasonable because CMS had approved the proposed family planning factor described in the April 2001 letter. The Board affirmed the disallowance and denied DPW s request for an evidentiary hearing. DPW sought judicial review of the Board s refusal to grant an evidentiary hearing. The district court affirmed the Board s decision and granted summary judgment to HHS. Also affirming, the Third Circuit noted that pursuant to the relevant regulation, 45 C.F.R (a), the Board must approve a hearing request when two conditions are met (1) that there are complex issues of material facts in dispute and (2) that the resolution of these disputed complex issues or material facts would be significantly aided by a hearing. The appeals court noted DPW requested the evidentiary hearing so it could crossexamine three CMS declarants regarding whether they approved the family planning factor. But a hearing on this issue would not significantly aid the resolution of the dispute because the Board had struck the three CMS declarations from the record, rendering DPW s request moot, the appeals court said. Moreover, even assuming CMS approved DPW s methodology by not objecting to the April 2001 letter, the Board did not abuse its discretion in denying DPW s request for an evidentiary hearing in light of the fact that DPW s family planning claim methodology was on its face unreasonable. According to the appeals court, DPW never disputed the calculation was flawed and its argument that CMS s implicit approval of DPW s faulty calculation overrides the Medicaid Act s statutory mandate of providing an enhanced 90% federal reimbursement rate only for state expenditures attributable to family planning expenditures, 42 U.S.C. 1396b(a)(5), is simply without merit. The appeals court also found an evidentiary hearing to elicit testimony from OIG auditors was unnecessary. DPW did not identify any specific errors during the audit process that would require further testimony from OIG to significantly aid the resolution of any disputed material fact, the appeals court said. Pennsylvania v. United States, No (3d Cir. Mar. 21, 2011). Fourth Circuit Finds Ambulance Services Are Emergency Services Under Medicaid Statute Ambulance services provided under contract to a health insurer s Medicaid managed care plan members fall under emergency services as defined by the Medicaid statute, the Fourth Circuit held April 25,

279 Accordingly, an ambulance authority was not able to set its own rates and instead must be paid the rates established by the state of Virginia. Healthkeepers is a private, for-profit corporation that offers a managed care plan to Medicaid beneficiaries under contract with the Virginia Department of Medical Assistance (DMAS). The Richmond Ambulance Authority, which was empowered by the City of Richmond to be the sole provider of ambulance emergency services, provides emergency services to Healthkeepers Medicaid-eligible enrollees in its ambulances. A dispute arose between the parties as to what rate Healthkeepers would have to pay for the services. Healthkeepers asserted that it should pay the rates established by DMAS because the Authority is a provider of "emergency services" under 42 U.S.C. 1396u (2011); the Authority claimed it could charge its own rates. The district court granted summary judgment in favor of the Authority, reading the definition of emergency services in Section 1396u-2(b)(1)(D) as not encompassing ambulance services. Healthkeepers appealed and the Fourth Circuit reversed. The appeals court, as a threshold question, looked at whether the definition in Section 1396u-2(b)(2)(B) applies to all references to emergency services within the text of the statute. Weighing the various canons of interpretation and reading the statute for plain meaning, we find that applying different definitions to a single term of art within this one statute would be both cumbersome and illogical, the appeals court held. After finding that emergency services in Section 1396u-2(b)(2)(D) is defined by Section 1396u-2(b)(2)(B), the appeals court turned to whether the services provided by the Authority fit that definition. Answering that question in the affirmative, the appeals court found ambulance services are encompassed in the term outpatient emergency services by looking at the plain meaning of the term. The appeals court also noted that a contrary finding would have an inconsistent result and this Court has an obligation to construe statutes as being reasonable. Healthkeepers, Inc. v. Richmond Ambulance Auth., No (4th Cir. Apr. 25, 2011). Medical Devices FDA Witdraws Rule Requiring Device Makers To Include Information On Pediatric Patients The Food and Drug Administration (FDA) issued a notice in the July 20, 2010 Federal Register (75 Fed. Reg ) withdrawing a previously published direct and final rule requiring device manufacturers to provide readily available information in certain premarket applications (PMA) on pediatric patients who suffer from the disease or condition that the device is intended to treat, diagnose, or cure. 279

280 FDA said it decided to withdraw the direct and final rule, published April 1, 2010 (75 Fed. Reg ), because of the significant adverse comments the agency received. Comments were due June 15, The rule was mandated by the Food and Drug Administration Amendments Act of 2007 to help ascertain whether devices developed for use in adults should be assessed or modified for use in pediatric populations. FDA had said the new reporting requirements also would help it track the number of approved devices that pediatric subpopulations could benefit from and the number of approved devices labeled for pediatric use. Pediatric subpopulations include neonates, infants, children, or adolescents. Pediatric patient was defined under the direct and final rule as patients who are 21 years of age or younger at the time of the diagnosis or treatment. Requests for a humanitarian device exemption, any premarket approval application or supplement to a PMA, and any product development protocol would have been subject to the rule. Under the rule, manufacturers would have had to include a description of any pediatric subpopulations that suffer from the disease or condition that the device was intended to treat, diagnose, or cure and also include the number of affected pediatric patients. The rule was slated to go into effect August 16, FDA Unveils Plans To Streamline 510(k) Process The Food and Drug Administration (FDA) released January 19, 2011 a new plan to streamline its 510(k) process. The 510(k) approval process is the most common path to market for medical devices. Under 510(k) device makers must demonstrate that a proposed product is substantially equivalent to another, legally marketed medical device that is also lower-risk. After much criticism of the 510(k) process, FDA s Center for Devices and Radiological Health (CDRH) received recommendations on improving the program from two committees the 510(k) Working Group and the Task Force on the Utilization of Science in Regulatory Decision Making. The 25 actions listed in FDA s new plan will implement those and other recommendations received by the agency. Among the key actions to be taken by FDA are: streamlining the de novo review process for certain innovative, lower-risk medical devices; clarifying when clinical data should be submitted in a premarket submission; guidance that will increase the efficiency and transparency of the review process; and establishing a new Center Science Council of senior FDA experts to assure timely and consistent science-based decision making. These actions will result in a smarter medical device program that supports innovation, keeps jobs here at home, and brings important, safe, and effective technologies to patients quickly, said Jeffrey Shuren, M.D., J.D., CDRH director. FDA Proposes New Pathway For Innovative Medical Devices 280

281 The Food and Drug Administration (FDA) announced February 8, 2011 the launch of a priority review program for new, breakthrough medical devices. The proposed Innovation Pathway program for pioneering medical devices is part of a broader effort underway in the FDA s Center for Devices and Radiological Health (CDRH) designed to encourage cutting-edge technologies among medical device manufacturers, the agency said in a press release. A brain-controlled, upper-extremity prosthetic device will serve as a pilot for the program, the release said. Under the submission, the Defense Advanced Research Projects Agency (DARPA), will review the device, which is designed to restore nearnatural arm, hand, and finger function to patients suffering from spinal cord injury, stroke, or amputation. Under the Innovation Pathway program products would have to be truly pioneering technologies with the potential of revolutionizing patient care or healthcare delivery, the release said. Selected products would receive an Innovation Pathway memorandum from CDRH containing a proposed roadmap and timeline for device development, clinical assessment, and regulatory review. Products would then be assigned a case manager, their important scientific issues would be identified and addressed earlier in the development process, and they might be able to qualify for flexible clinical trial protocols, FDA said. According to FDA, its initiative will also seek to strengthen the nation s research infrastructure for developing breakthrough technologies and advancing quality regulatory science. Actions proposed by the agency include: establishing a voluntary, third-party certification program for U.S. medical device test centers designed to promote rapid improvements to new technologies during a product s development and clinical testing stages; creating a publicly-available core curriculum for medical device development and testing to train the next generation of innovators; and using more device experience and data collected outside the United States. FDA Publishes Rule Exempting Certain Data Systems From Premarket Notification Requirements The Food and Drug Administration (FDA) published a final rule in the February 15, 2011 Federal Register (76 Fed. Reg. 8637) exempting Medical Device Data Systems (MDDSs) from premarket notification requirements. The rule reclassifies MDDSs from class III (premarket approval) into class I (general controls). According to the rule, MDDS devices are intended to transfer, store, convert from one format to another according to preset specifications, or display medical device data. Examples of MDDS products include: devices that collect and store data from a glucose meter for future use or that transfer lab results to be displayed at a nursing station for future use, FDA said. 281

282 This rule is a common-sense regulatory approach that provides clarity and predictability for manufacturers of these data systems, Jeffrey Shuren, M.D., director of the Center for Devices and Radiological Health, said in a press release. This shows our flexibility in applying regulations for medical device data systems that are not overly burdensome for manufacturers but continue to assure that data stored, transferred or displayed on these systems remain reliable, Shuren said. The final rule is effective April 18, Medical Malpractice Washington High Court Finds Unconstitutional Statute Requiring Plaintiffs To Give 90 Days Notice Before Filing Malpractice Suits The state statute that requires a plaintiff to provide healthcare providers with 90 days notice of the plaintiff s intention to file a medical malpractice suit is unconstitutional, the Washington Supreme Court held July 1, Accordingly, the high court reversed and remanded two consolidated cases in which plaintiffs medical malpractice suits were dismissed for failure to comply with the notice statute. The two suits began when plaintiff Nancy Waples sued her dentist, Peter Yi, DDS, PS for medical malpractice, but her suit was dismissed because of her failure to comply with the notice requirement. Likewise, plaintiff Linda Cunningham s medical malpractice suit against her radiologist, Dr. Ronald Nicol, was dismissed for failure to provide the required notice. The notice requirement is one of two statutes instituted by the legislature in an effort to provide potential medical malpractice plaintiffs with incentives to settle cases before resorting to court. The other statute, which required a certificate of merit, was found unconstitutional in 2009 by the high court for violating both the separation of powers and the right of access to courts. See Putman v. Wenatchee Valley Med. Ctr., 216 P.3d 374 (2009). Both Cunningham and Waples appealed the dismissal of their cases arguing the statute requiring the 90 days notice is unconstitutional under Putnam. In Putnam, the court held that the statute at issue conflicted with the pleading requirements of the high court s rules, that this conflict involved procedural law and not substantive law, and that the certificate of merit requirement thereby encroached upon the judiciary s power to set court rules. Plaintiffs in the instant case argued the notice requirement irreconcilably conflicts with the commencement requirements of the court s rules, that this conflict involves procedural law, and that the notice requirement thereby encroaches upon the judiciary s power to set court rules. The high court agreed, finding [r]equiring notice adds an additional step for commencing a suit to those required by the court rules. 282

283 If a statute and a court rule cannot be harmonized, the court rule will generally prevail in procedural matters and the statute in substantive matters, the high court noted. Because the statute here involves procedural law, the court rules will prevail, the high court held. A dissent argued that the 90-day notice before filing suit requirement does not irreconcilably conflict with the requirements to commence suit under the court s rules. According to the dissent, the two can be harmonized and thus the requirement does not violate separation of powers. Waples v. Yi, Nos , (Wash. July 1, 2010). Indiana High Court Finds Medical Malpractice Action Was A Continuation Of Negligence Suit For Statute Of Limitations Purposes A medical malpractice action against a hospital should have been deemed a continuation of a timely filed general negligence complaint and therefore the subsequent lawsuit was not barred by the statute of limitations, the Indiana Supreme Court held September 1, Reversing the decisions below dismissing the medical malpractice action as untimely, the high court found the Journey s Account Statute (JAS) saved the medical malpractice complaint, filed with the Indiana Department of Insurance (IDOI), as a continuation of the premise liability lawsuit filed in state superior court. Suzanne Eads leg was placed in a cast at Community Hospital. She was injured while leaving the hospital on crutches after her request for a wheelchair was denied. Eads filed a premise liability negligence action against the hospital in state trial court. The hospital moved to dismiss, arguing the complaint alleged medical malpractice and should have been filed with the IDOI as required by the Medical Malpractice Act (MMA). The trial court dismissed the complaint. Eads did not appeal. Two weeks before the dismissal, Eads submitted a proposed complaint to the IDOI based on the same set of facts. The hospital filed a motion in state trial court for a preliminary determination that the IDOI complaint was barred by the MMA s two-year statute of limitations. The trial court granted the hospital summary judgment, and Eads appealed. The appeals court affirmed, finding a medical malpractice claim is different from a general negligence claim so the IDOI complaint was not a continuation of the original action. The high court reversed. The JAS, under certain circumstances, permits a filing after the applicable limitation period to be deemed a continuation of an earlier claim, if the plaintiff fails in the original action from any cause except negligence in the prosecution of the action. 283

284 The hospital argued the JAS did not apply because the original action failed due to negligence in prosecuting the claim and because the IDOI complaint arose from a different claim than the trial court action. The high court rejected the hospital s contention that Eads failure to appeal the dismissal of her original complaint amounted to negligence in the prosecution of the action. [I]t is not negligent to fail to generate more delay and expense if the claimant reasonably concludes that the dismissal will likely be upheld, the high court observed. The high court also did not agree with the hospital s argument that Eads initial filing of a premise liability claim, instead of a medical malpractice action, was negligence in the prosecution. Given th[e] lack of clarity as to the precise boundaries of the MMA s application, it is not necessarily negligent to have failed to predict where the courts would come down on the application of the statute to a set of facts alleging negligence at the periphery of medical malpractice, the high court observed. Finally, the appeals court rejected the hospital s assertion that the IDOI complaint was not a continuation of the general negligence claim because the IDOI complaint sought different relief i.e., a determination of breach of the standard of care instead of requesting damages. The MMA does not create a new cause of action, the source of a medical malpractice claim remains basic tort law, the high court said. Eads v. Community Hosp., No. 45S CV-33 (Ind. Sept. 1, 2010). U.S. Court In Florida Upholds Cap On Non-economic Damages In Medical Malpractice Actions A Florida federal trial court upheld September 30, 2010 state law caps on noneconomic damages in medical malpractice actions, rejecting plaintiffs arguments that the limits violated the Florida and U.S. Constitutions. According to the U.S. District Court for the Middle District of Florida, the caps were rationally related to the legitimate legislative purpose of addressing the effect of rising medical malpractice insurance premiums on the availability of quality healthcare in Florida. Plaintiffs sought economic and non-economic damages from Central Florida Health Care Inc., an agency of defendant the United States, for medical malpractice. Defendant asserted as an affirmative defense Fla. Stat , which provides a cap on non-economic damages in medical malpractice actions. The legislature adopted the caps in 2003, the court noted, in an effort to address a statewide medical malpractice insurance crisis. Specifically, for practitioners providing non-emergency services, Section caps damages at $500,000 per claimant, per practitioner, and per occurrence. If the negligence involved death or a permanent vegetative state, or if the trial court otherwise 284

285 determines a manifest injustice would occur and there is a catastrophic injury, the limit increases to $1 million. For non-practitioner defendants providing non-emergency services, the limit is $750,000. The limit increases to $1.5 million if there is death, a permanent vegetative state, or a catastrophic injury and there would otherwise be manifest injustice. Plaintiffs argued the medical liability caps unconstitutionally infringed on their rights of access to the courts, equal protection, and due process. The court rejected each of plaintiffs constitutional challenges. The Florida Constitution grants a specific right to access the courts, which the state supreme court has held may not be abolished by the legislature without providing a reasonable alternative to protect the rights of the people... to redress injuries, unless the Legislature can show an overpowering public necessity for the abolishment of such right. In rejecting plaintiffs claim that the caps violated this provision by infringing their rights of access to the courts without offering a reasonable alternative, the court deferred to a legislative task force s determination that Florida s medical malpractice insurance crisis presented an overpowering public necessity requiring the adoption of the liability caps. The court also held the caps did not unconstitutionally infringe on plaintiffs right to a jury trial, noting claims under the Federal Tort Claims Act do not provide for a right to a jury trial anyway. As to plaintiffs equal protection claim, the court said because Section does not involve a suspect classification or fundamental right, only rational basis review was necessary. The fact that the challenged caps apply to medical malpractice claimants, but not to other tort victims does not violate equal protection. Instead, the court found the limitation on non-economic damages in medical malpractice actions was reasonably related to the permissive legislative objective of ensuring the availability of quality healthcare by controlling the cost of medical malpractice insurance. The court also found the use of an aggregate limit on non-economic damages applying to each incident regardless of the number of claimants served the same legitimate interest as individual caps. A cap applicable to each occurrence, in cooperation with caps individually applicable to each claimant, reduces damages awards as a matter of mathematical certainty, enhances needed predictability, places a calculable limit on the exposure of healthcare and insurance providers, reduces malpractice insurance premiums, and promotes the availability of quality healthcare, the court observed. The court also rejected plaintiffs due process claim, noting a Florida Supreme Court decision already holding the caps do not infringe a medical malpractice claimant s substantive or procedural due process rights. Thus, after disposing of plaintiffs other constitutional claims (violation of separation of powers and right to fair compensation and taking without just compensation), the court refused to strike down the caps. 285

286 M.D. v. United States, No. 8:09-cv-438-EAK-MAP (M.D. Fla. Sept. 30, 2010). U.S. Court In Tennessee Finds Malpractice Plaintiff May Recover Amounts Paid By Medicaid, Not Amounts Billed By Providers The U.S. District Court for the Western District of Tennessee held October 27, 2010 that a medical malpractice plaintiff may recover amounts already paid by Medicaid on her deceased son s behalf, but that her recovery is limited to amounts actually paid, as opposed to the amounts billed by providers. Plaintiff Cassie Nalawagan sued defendant Hai Dang, M.D. for negligence in the delivery of her now-deceased son Demario Nalawagan. Defendant argued the damages sought by plaintiff were barred by Tennessee s Medical Malpractice Act, Tenn. Code Ann According to defendant, plaintiff could not recover any expenses that Medicaid already paid on her son s behalf. Defendant also disputed plaintiff s proof of her damages. Plaintiff argued the statute did not preclude recovery of medical expenses already paid by a third-party if the third-party had a right of subrogation. The court agreed with plaintiff that under Tennessee law, she may recover the amounts paid or payable on behalf of her son by Medicaid as well as any amounts paid or payable by herself. The court next held, however, that plaintiff only could recover the amounts actually paid, not the amounts billed by her son s medical providers. The precise issue of whether a plaintiff may recover billed amounts exceeding Medicaid payments already made has not been addressed by the Tennessee state courts, the federal court noted. The court predicted the state courts would find the statute sufficiently clear that damages are limited to costs paid or payable. Based on the plain meaning of these terms, it is clear that medical expenses are limited to expenses already paid or such expenses yet to be paid, and not simply the amounts billed, the court said. Nalawagan v. Dang, No (W.D. Tenn. Oct. 27, 2010). Illinois Supreme Court Finds State Malpractice Four-Year Statute Of Repose Applies To Hospital s Implied Indemnity Claim The Illinois Supreme Court held January 21, 2011 that the proper statute of repose for a hospital s implied indemnity claim against physicians and their employer is the four-year medical malpractice statute of repose. Consequently, the court held that the defendant s counterclaim for implied indemnity was untimely filed and upheld the dismissal of the counterclaim. 286

287 In February 2003, Rudolph Uldrych underwent gastric bypass surgery at MacNeal Hospital. In February 2005, Uldrych timely filed a medical malpractice action against the physicians who performed the surgery, the physicians employer, and the hospital. In August 2008, the hospital filed a counterclaim seeking indemnification against the physicians and their employer for the $1 million the hospital agreed to pay Uldrych to settle the malpractice action. The circuit court dismissed the counterclaim because it was not timely filed within the four-year medical malpractice statute of repose. The appellate court affirmed. Recent Illinois precedent held that third-party actions for contribution were subject to the four-year statute of repose set forth in Section (a) of the Illinois Code of Civil Procedure. The high court here extended that ruling to third-party actions for implied indemnity. The Hospital argued for the application of the catchall statute that specifically addresses actions on unwritten contracts, expressed or implied, and all civil actions not otherwise provided for. This statute allows five years after the cause of action commenced. However, the high court found that the application of the medical malpractice statute of repose for implied indemnification better aligns with the intent of the Illinois legislature. According to the court, the legislature chose to exempt medical malpractice actions from the contribution and indemnity section of the code. In fact, the legislature chose to specifically address medical malpractice actions in their own section. A separate medical malpractice statute of repose is viewed as necessary to prevent extended exposure of physicians and other hospital personnel to potential liability for their care and treatment of patients, thereby increasing an insurance company's ability to predict future liabilities, the high court explained. The court found no reason to apply a generic catchall provision to a cause of action already specifically addressed in the code. Therefore, the court upheld the dismissal of the hospital s counterclaim due to lack of timely filing under the medical malpractice statute of repose. Uldrych v. VHS of Illinois, Inc., No Ill (Ill. Jan. 21, 2011). Fifth Circuit Dismisses FTCA Action For Lack Of Jurisdiction The Fifth Circuit February 3, 2011 affirmed the dismissal of a negligence action brought under the Federal Tort Claims Act (FTCA) finding the plaintiffs failure to name the United States as a party was fatal to their claim. According to the appeals court, the FTCA only confers jurisdiction in an action against the United States and not against its agencies or employees. After Lanny Walters allegedly received negligent medical care from defendants Dr. Donald Smith and Overton Brooks Veterans Affairs Medical Center, Walters and his wife (plaintiffs) sued Smith and Overton Brooks under the FTCA in federal court. The district court dismissed the action for lack of subject matter jurisdiction, and plaintiffs appealed. 287

288 Plaintiffs argued that the FTCA confers federal jurisdiction over the action. However, the appeals court agreed with the lower court that the FTCA does not confer jurisdiction here. It is well established that FTCA claims may be brought against only the United States, and not the agencies or employees of the United States, the appeals court said. See, e.g., 28 U.S.C. 2671, 2679(a), (b)(1). Further, the court noted that it has specifically found that the Department of Veterans Affairs and its doctors are not proper parties to an FTCA action. Carr v. Veterans Admin., 522 F.2d 1355, 1356 (5th Cir. 1975). Accordingly, because plaintiffs name only the Department of Veterans Affairs and a physician in their suit and do not name the United States as a party, their suit must be dismissed for lack of jurisdiction, the appeals court held. Walters v. Smith, No (5th Cir. Feb. 3, 2011). Delaware Supreme Court Finds Plaintiff Must Show Causation In Malpractice Claim Based On Lack Of Informed Consent The Delaware Supreme Court affirmed April 6, 2011 a lower court s ruling that proof of what a reasonable person would have done is required to establish causation in an informed consent medical malpractice case. In so holding, the state high court rejected the plaintiff s argument that the informed consent statute eliminated the causation requirement. Dr. John Goodill performed a bronchoscopy with a transbronchial biopsy on Muriel Stewart, as a result of which Stewart died. Plaintiff Lashanda Spencer, individually and as administratrix of Stewart's estate, sued Goodill alleging violation of Delaware s informed consent statute as Stewart was not told that there was a risk of death. Because breach of informed consent is a form of medical malpractice, plaintiff was required to prove that defendant's failure to obtain informed consent was a proximate cause of plaintiff s injury. In other words, plaintiff was required to prove that a reasonable person would not have undergone the medical treatment if properly informed of the risks and alternatives, the opinion explained. A jury found plaintiff failed to prove causation under the statute, and plaintiff appealed. To prevail on an informed consent claim, plaintiff must prove that: (1) the healthcare provider failed to provide information about risks and alternatives customarily given to patients; (2) a reasonable person would have considered the undisclosed information material; and (3) plaintiff was injured by a complication that should have been disclosed, the state high court explained. The sole issue on appeal was whether plaintiff also must prove that a reasonable person would have declined the procedure if that person had been properly informed of the risks and alternatives. The court rejected plaintiff s argument that the informed consent statute eliminated the need to establish proximate cause. 288

289 Although proximate cause is not specifically listed in the statute, by looking at the chapter in its entirety, the high court found its meaning clear. It would be inconsistent with the overall purpose of Chapter 68 to read the informed consent statute as having expanded a plaintiff's ability to recover damages by eliminating the need to prove proximate cause, the high court noted. Finally, the high court addressed plaintiff s contention that the pattern jury instruction for an informed consent claim does not list causation and thus provides support for her argument. In rejecting this argument, the high court highlighted that instructions are always subject to review, and that it assumes that the pattern jury instruction will be revised in accordance with this decision. Spencer v. Goodill, No. 411, 2010 (Del. Apr. 6, 2011). Ohio Supreme Court Says Emotional Distress Properly Considered As Part Of Malpractice Action Genuine issues of material fact existed as to whether a delayed cancer diagnosis deviated from the required standard of care, proximately causing plaintiffs physical and emotional injuries, the Ohio Supreme Court held April 20, Accordingly, the court affirmed the appeals court s reversal of the trial court s grant of summary judgment to the defendant physician and radiology provider. The high court also held that, in general, damages for emotional distress stemming directly from a physical injury are to be considered in a traditional medical malpractice claim and that emotional distress stemming directly from a physical injury is not the basis for an independent cause of action for the negligent infliction of emotional distress. Plaintiff Lonna Loudin went to Reflections Breast Health Center, owned and operated by Radiology & Imaging Services, Inc. (Radiology), to receive yearly mammograms. After Loudin detected a lump in her left breast during self-examination in 2004, she returned to Radiology and a mass was detected. Loudin underwent a lumpectomy, eight rounds of chemotherapy, six weeks of radiation therapy, and began hormone therapy. Loudin sued Radiology and Dr. Richard Patterson, who had reviewed her 2003 mammogram. She alleged that Radiology, as the employer and principal to its employee physicians, including Patterson, had caused and/or contributed to her injury ; that Patterson had breached the required standards of care when conducting Loudin s regular screenings for breast cancer; and that Radiology had negligently failed to supervise Patterson. Loudin alleged injuries in the form of a delayed diagnosis of cancer, the progression of untreated carcinoma to Stage IIA breast cancer, the loss of chance for a better outcome, emotional distress, acute physical, mental, and emotional pain and suffering, and a loss of the ability to enjoy a normal life. 289

290 Loudin alleged that defendants had breached the required standard of care by failing to detect and commence treatment for her cancer upon examination of her 2003 mammography films, which revealed a visible one-centimeter mass. Defendants moved to dismiss Loudin s complaint for failure to state a claim for which relief could be granted, and the trial court granted the motion. The appeals court reversed, holding the growth and metastasis of cancer is a compensable physical injury and that Loudin s medical-negligence claim should have survived summary judgment. In addition, the appeals court held that Loudin s fear of a cancer recurrence was a type of emotional injury for which Loudin could seek recovery. On appeal to the state high court, defendants challenged whether the evidence submitted by Loudin in support of her claims for medical negligence and resulting damages was sufficient to defeat their motion for summary judgment. The high court disagreed with the defendants argument that Loudin was not cognizant of the growth of her tumor from 2003 to 2004 and that the course of treatment for her cancer would have been no less intensive had it been detected in According to the high court, defendants contention that a plaintiff must physically perceive the cancer s progression in order for it to be a compensable injury is unfounded. In addition, the high court noted that Loudin presented expert testimony that she would not have undergone an identical course of treatment had the cancer been detected in The high court also specifically held the growth and metastasis of cancer was a cognizable physical injury. When the evidence is viewed in a light most favorable to Loudin, she has raised a genuine issue of material fact as to whether she would have sustained physical injuries greater than those that existed in 2003 but for the appellants negligence, the high court said. Turning next to the issue of emotional distress damages, the court found the inclusion of damages for emotional distress in a complaint alleging negligence does not automatically transform the claim into one alleging the negligent infliction of emotional distress, nor does it automatically create a cause of action separate and distinct from the negligence claim. Here, Loudin included a claim for damages for emotional distress within the context of her medical-negligence claim and she did not plead a separate cause of action for the negligent infliction of emotional distress, the high court found. Loudin v. Radiology & Imaging Servs., Inc., Slip Opinion No Ohio-1817 (Oh. Apr. 20, 2011). Psychotherapist-Patient Privilege Does Not Protect Records Of Malpractice Plaintiff Who Puts Mental Condition At Issue, Kentucky Supreme Court Finds 290

291 A medical malpractice plaintiff who asserts a claim implicating her mental condition waives the state law psychotherapist-patient privilege, the Kentucky Supreme Court said April 21, 2010 in an unpublished opinion. Plaintiff Sarah E. Dudley filed suit against her physician Erdagon Atasoy, M.D. and Kleinert Kutz and Associates (collectively, defendants) for alleged negligent diagnosis, care, and treatment related to her adverse reaction to a Marcaine injection in her shoulder. According to Dudley, as a result of the Maricaine injection, she has been unable to fully use her arms and legs, and has suffered from decreased strength, endurance, and functional mobility along with pain and spasms. During discovery, defendants sought plaintiff s medical records, including her psychiatric records. Dudley moved for a protective order, but the court denied the motion and an appeals court affirmed. Dudley then sought a writ of prohibition against the court s discovery order arguing her records were protected by the state s psychotherapist-patient privilege law (KRE 507). However, the high court agreed with the trial court s conclusion that plaintiff waived her psychotherapist-patient privilege per KRE 507(c)(3) by asserting a claim implicating her mental condition. Plaintiff s complaint stated that as a result of the defendants alleged negligence she incurred various damages "as well as mental, physical and emotional pain and suffering and a loss of the enjoyment of life." By requesting damages for her mental pain she has clearly asserted [her] mental condition as an element of [her] claim, the high court found. The high court rejected plaintiff s argument that the exception to the privilege should be narrowly construed to hold litigants only waives the privilege by alleging a specific mental condition or psychiatric diagnosis as a basis for their claim. The high court first noted other jurisdictions have held seeking damages for even "garden-variety" emotional distress waives the psychotherapist-patient privilege. It would be fundamentally unfair to permit Appellant to allege and prove mental anguish caused by the negligence while denying the [defendants] from reviewing her mental health records for the possibility of pre-existing mental conditions, the high court held. Dudley v. Stevens, No SC MR (Ky. Apr. 21, 2011). Medical Records U.S. Court In New York Says Patient Identifying Information Must Be Redacted From Records In Qui Tam Case The U.S. District Court for the Eastern District of New York in considering competing protective orders in qui tam actions involving substance abuse treatment records said patient identifying information must be redacted prior to disclosure. 291

292 In addition, the court held in its June 10, 2010 order that confidential communications contained in the records also must be redacted unless patient consent is obtained. The qui tam actions were originally brought by two different relators against several hospitals (defendants) alleging they filed more than 27,000 false claims for Medicare and/or Medicaid reimbursement for substance abuse services rendered to patients over a period of approximately five years. The United States and the state of New York intervened in the action. Defendants submitted a proposed protective order stating that all patients who were treated at their facilities for substance abuse during the time in question be provided notice that their patient records may be disclosed during the course of the litigation, and that such patients be provided with an opportunity to "opt out" of having their records disclosed. Defendants proposed protective order did not provide for the redaction of patient identifying information or of any "confidential communications" contained in the substance abuse records, the court noted. New York submitted a cross-motion for an alternative protective order stating similar terms, but providing for the redaction of patient identifying information. The United States endorsed the state s proposed order and added a request for the creation of a "filter team" by each party, which would be responsible for redacting the patient identifying information from the substance abuse records prior to disclosure. Defendants objected to the redaction, arguing it would be extremely costly, would result in undue delay, and would deprive them of information central to their defense. According to the court, confidential communications, some of which are contained in the substance abuse records at issue, in the absence of patient consent, may be disclosed by court order "only if": (1) the disclosure is necessary to protect against an existing threat to life or of serious bodily injury; (2) the disclosure is necessary in connection with investigation or prosecution of an extremely serious crime, such as one which directly threatens loss of life or serious bodily injury, including homicide, rape, kidnapping, armed robbery, assault with a deadly weapon, or child abuse and neglect; or (3) the disclosure is in connection with litigation or an administrative proceeding in which the patient offers testimony or other evidence pertaining to the content of confidential communications. 42 C.F.R. 2.63(a). Here, although the parties both agreed that none of the exceptions applied, they sought to have the nonparty patients' confidential communications disclosed, whether patient identifying information is redacted, as the state proposed, or left unredacted. All parties seem to assert that disclosure of confidential communications is permissible where patient identifying information is redacted. Yet none of the parties offer any legal support for this proposition, whether it be statute, regulation or case law, the court noted. Accordingly, the court granted the state s proposed protective order to the extent that it provides for the redaction of patient identifying information and commends the State for its diligence in the formulation and presentation of its position to protect the identities of those participating in the substance abuse programs that are the subject of this action. 292

293 The court then imposed a further restriction on the disclosure, holding that unless patient consent is received during the notice period, all confidential communications must be redacted prior to disclosure. The court rejected, however, the government s request for a filter team finding no reasons are evident why each party cannot be responsible for its own redaction responsibilities. United States ex rel. Gelfand v. Special Care Hosp. Management Corp., Nos. CV , CV (E.D.N.Y. Jun. 10, 2010). U.S. Court In Ohio Says Medication Error Reports Are Not Privileged, Discoverable In Lawsuit Against Nursing Home The U.S. District Court for the Northern District of Ohio held May 31 that certain Medication Error Reports (MERs) sought by a plaintiff in an action against an assisted living facility were not privileged under state law. The court granted plaintiff s motion to compel and ordered defendants to redact and produce the MERs. According to the court, the information gathered and reported after an incident involving a patient under defendants care is not privileged under Ohio s physician-patient privilege, codified at Ohio Rev. Code Plaintiff, Dennis J. Freudeman, individually and as Executor of the estate of the deceased Dorothy V. Freudeman, filed this diversity action against Emeritus Corporation and Wegman Companies, Inc., the owner and operator of The Landing of Canton, the assisted living facility where the decedent resided prior to her death. Alleging negligence, malpractice, and wrongful death, plaintiff moved the court to compel defendants to produce Any and all Medication Error Reports for errors and/or suspected errors made at The Landing of Canton from March 10, 2000 to July 5, 2007 with confidential information redacted. As no such MERs existed pertaining to the decedent, plaintiff requested MERs related to non-party residents who received medical care and treatment at The Landing of Canton. Plaintiff contended such documents would likely lead to admissible evidence supporting plaintiff s claim for punitive damages. Defendants argued that such information, provided by a patient to a nurse for the purposes of medical diagnosis and treatment, is undiscoverable and privileged. Defendants further asserted that while the MERs were not a part of the resident s medical record, the information was derived from the resident s medical chart, medication administration reports, nursing observations and physician orders/communication. Here, the court determined that the questions of whether the requested documents are privileged and whether they are relevant were of equal importance. As a threshold matter, the court found merit in plaintiff s argument that MERs of nonparty residents are relevant and reasonably calculated to lead to the discovery of admissible evidence. The court stated that punitive damages require a positive element of conscious wrongdoing, which can be shown through evidence of similar bad acts. 293

294 Regarding physician-patient privilege, the court noted that Ohio Rev. Code essentially provides that a communication necessary to enable a physician... to diagnose, treat, prescribe, or act for a patient is privileged. Here, because defendants used the MERs to document medication errors and prevent or reduce the reoccurrence of such errors, not to treat, diagnose, prescribe, or act for a patient, such documents fall outside of the purview of the physician-patient privilege, the court held. Lastly, the court declined to conduct an in camera review for determining whether to order production. The court decided that because defendants forecasted the types of forms and information at issue, such a review was not warranted in this case. Freudeman v. The Landing of Canton, No. 5:09-cv DDD (N.D. Ohio May 31, 2010). Florida Appeals Court Finds State Statute Allowing Law Enforcement Access To Pharmacy Records Not Unconstitutional A state statute allowing law enforcement access to pharmacy patient records without a warrant does not run afoul of the constitutional right to privacy, the Florida District Court of Appeal, Second District, held July 9, The appeals court reasoned that the state has a compelling interest in regulating controlled substances, the statute is narrowly tailored, and the records do not contain information about a patient s medical condition. Lori Tamulonis was charged with three counts of obtaining or attempting to obtain a controlled substance by fraud. She filed a motion to suppress, alleging that a detective obtained her patient profiles and prescriptions from two pharmacies without a subpoena or warrant in violation of sections (7)(a)(3) and (4)(d) of the Florida statutes. The detective testified that he had received information that Tamulonis was involved in a pattern of "doctor shopping." He then contacted various pharmacies and obtained Tamulonis' patient profiles, which are "computer printouts that show the date, the prescription medication, and the doctor who prescribed it." Based on the patient profiles, the detective determined that Tamulonis had visited multiple doctors within a 30-day period and had obtained prescriptions for oxycodone and Oxycontin. The trial court granted the motion to suppress, but the appeals court reversed. The appeals court first noted that section regulates healthcare practitioners, and pharmacists and pharmacies are expressly excluded from the definition of "health care practitioner." Further, section , also cited by Tamulonis does not support Tamulonis's position because the statute applies to licensed facilit[ies], which are defined as hospital[s], ambulatory surgical center[s], or mobile surgical facilit[ies], " the appeals court held. Tamulonis' records were obtained pursuant to chapter 893, the appeals court explained, which requires pharmacists to maintain controlled substance records, including prescription records, and to make the records "available for a period of at least 2 years 294

295 for inspection and copying by law enforcement officers whose duty it is to enforce the laws of this state relating to controlled substances." In State v. Carter, 23 So. 3d 798 (2009), the First District held that the statute does not require a subpoena, warrant, or prior notice to the patient, the appeals court said. Acknowledging that Florida provides a right to privacy that is broader in scope than that of the United States Constitution, the appeals court nonetheless found that right is not absolute. Here, the state has a compelling interest in regulating controlled substances and section is narrowly tailored, the appeals court held. In addition, the records at issue do not convey information about a patient's medical condition. Accordingly, the Second District adopted the First District's holding in Carter, reversed the lower court s order granting Tamulonis' motion to suppress, and remanded the case for further proceedings. Florida v. Tamulonis, No. 2D (Fla. Ct. App. July 9, 2010). Missouri Supreme Court Finds Medical Records Protected From Discovery By Physician-Patient Privilege The Missouri Supreme Court upheld July 16, 2010 a writ of prohibition, holding a trial court erred in compelling a defendant in a wrongful death suit to sign a medical records authorization allowing disclosure of certain medical records. The physician-patient privilege applies to such records, the high court said, and there was no evidence that the privilege was waived. William Stinson was involved in a high-speed automobile collision that resulted in the death of Ricky J. Young. Mr. Young s daughter, Shauna Young, filed a wrongful death suit against Stinson. The suit alleged Stinson was under the influence of alcohol at the time of the accident and that his parents knew or should have known their son was addicted to alcohol and drugs that impaired his driving ability, that he had received medical treatment for such addictions, and that he had been charged and convicted of numerous alcohol-related driving offenses prior to the collision. During the course of discovery, Young served Stinson with a request for production asking him to execute a medical records authorization permitting the disclosure of all medical and psychological records pertaining to treatment he had received for alcohol, drug, or substance abuse problems dating back to Stinson objected to the request, but the trial court overruled his objection and ordered him to execute the medical records authorization. Stinson then filed a petition for a writ of prohibition. After granting a preliminary order in prohibition, the court of appeals quashed its order and denied Stinson s writ petition. Stinson then petitioned the high court for a preliminary writ of prohibition. 295

296 Stinson argued he was entitled to a writ of prohibition to prevent the trial court from enforcing its order requiring execution of the medical records authorization because the documents at issue were protected by the physician-patient privilege, which he had not waived. Prohibition is an appropriate remedy when a party is ordered to produce material that is protected from discovery by some privilege, the high court noted. Here, the medical records sought by Young fell within the protective scope of the physician-patient privilege, the high court held. By its terms, the request seeks access to records containing information used to evaluate, diagnose, and treat Mr. Stinson, the high court said. The high court found no evidence in the record that Stinson placed any of his medical conditions in issue or took any other steps to affirmatively waive the privilege. The mere fact that Mr. Stinson has denied liability and is defending against the present suit does not constitute a waiver of the privilege, the high court held. Young argued the records were relevant because they helped to prove Stinson s parents knew or should have known that he was incompetent to drive a motor vehicle. However, the high court held, the mere fact that the privileged medical records may be relevant to Ms. Young s claim for negligent entrustment does not mean that the medical records are discoverable. Young next argued that because the medical records would be used only to prove the liability of Stinson s parents, and not against him personally, the public policy underlying the privilege was not implicated. Disagreeing, the high court found, the language of the statute does not limit the application of the privilege only to situations in which the confidential medical information will be used against the physician s patient. Moreover, contrary to Ms. Young s argument, the high court continued, the public policy underlying the physician-patient privilege is implicated when confidential information is disclosed, even if it will not be used against the patient. Accordingly, the high court made the preliminary writ of prohibition permanent. State ex rel. Stinson v. House, No. SC90364 (Mo. July 16, 2010). Massachusetts High Court Finds Medical Board May Not Access Patient Records Protected By Psychotherapist-Patient Privilege The Massachusetts Supreme Judicial Court held September 2, 2010 that a medical board may not subpoena patient records of a physician under investigation because those records were protected by the psychotherapist-patient privilege. In so holding, the high court rejected the board s argument that the privilege should yield to the public interest, finding the legislature did not enumerate such an exception. 296

297 The case began when the Board of Registration in Medicine (board) started an investigation into the treatment practices of John Doe, a board-certified psychiatrist who specializes in pain management. As part of its investigation, the board subpoenaed the treatment records of 24 of Doe's patients. Doe refused to comply with the subpoena and the board commenced an action to enforce it. The lower court ruled the records were not protected by the psychotherapist-patient privilege because Doe was not a "psychotherapist" within the meaning of the statute. Doe appealed. According to the high court, Mass. Gen. Laws c. 233, 20B, sets forth two requirements that a physician must meet in order to qualify as a psychotherapist within the meaning of the statute. First, a physician must be "licensed to practice medicine." And second, a physician must "devote[] a substantial portion of his time to the practice of psychiatry." The board argued that Doe did not meet the second requirement because the practice of pain management does not constitute the practice of psychiatry. However, the high court noted that at oral argument the board conceded that pain management is a subspecialty of psychiatry, but stated that it is also a subspecialty of neurology and internal medicine. That pain management may be a subspecialty of other fields in addition to psychiatry is irrelevant, and the board's appropriate concession resolves the issue, the high court found. Because it is now agreed that the practice of pain management is a subspecialty of psychiatry, it is evident that Doe's entire medical practice consists of the practice of psychiatry, the high court held. Accordingly, the high court found Doe satisfied both conditions set forth in the statute and therefore qualified as a psychotherapist. The board next argued that, even if Doe is a psychotherapist, the psychotherapist-patient privilege must give way to the board's need to review the records in furtherance of the public interest. However, the high court noted that the legislature in enacting the privilege set forth certain instances where the privilege would not apply. Thus, the high court is not empowered to extend the exceptions beyond what the Legislature enacted. Accordingly, the high court remanded the case to the superior court with instructions to enter an order quashing the subpoena issued by the board. Board of Registration in Med. v. Doe, No. SJC (Mass. Sept. 2, 2010). Medicare Regulatory Developments 297

298 CMS Issues Guidance Clarifying Policies On Physician Supervision Of Services Provided To Hospital Outpatients The Centers for Medicare and Medicaid Services (CMS) issued May 28, 2019 an update of the Hospital Outpatient Prospective Payment System (OPPS) that clarifies the agency s policies requiring physician supervision of diagnostic and therapeutic services provided to hospital outpatients. The transmittal further defines the term "immediately available," and clarifies the credentials, knowledge, skills, ability, and privileges that the supervisory practitioner must possess to be qualified to perform a given service or procedure. Specifically, according to the transmittal, while physician assistants, nurse practitioners, clinical nurse specialists, and certified nurse midwives only require physician supervision included in any collaboration or supervision requirements particular to that type of practitioner when they personally perform a diagnostic test, these practitioners are not permitted to function as supervisory physicians for the purposes of other hospital staff performing diagnostic tests. In addition, CMS specifies that immediate availability requires the immediate physical presence of the physician. The transmittal noted that CMS has not specifically defined the word immediate in terms of time or distance; however, an example of a lack of immediate availability would be situations where the supervisory physician is performing another procedure or service that he or she could not interrupt. Also, for services furnished on-campus, the supervisory physician may not be so physically far away on-campus from the location where hospital outpatient services are being furnished that he or she could not intervene right away. Further, the transmittal clarifies that the supervisory physician must have, within his or her State scope of practice and hospital-granted privileges, the knowledge, skills, ability, and privileges to perform the service or procedure. The supervisory responsibility is more than the capacity to respond to an emergency, and includes the ability to take over performance of a procedure and, as appropriate to the supervisory physician and the patient, to change a procedure or the course of care for a particular patient, CMS said. Diagnostic services furnished under arrangement in on-campus hospital locations, offcampus hospital locations, and in nonhospital locations must be furnished under the appropriate level of physician supervision according to the requirements of 42 C.F.R (e) and (b)(3), the transmittal also explained. Lastly, the transmittal provides some clarification on coverage of outpatient therapeutic services incident to a physician s service. CMS Proposes 6.1% Cut In Physician Reimbursement Rates Under Medicare Fee Schedule The Centers for Medicare and Medicaid Services (CMS) issued late June 25, 2010 a proposed Medicare physician fee schedule rule that would cut reimbursement rates by 6.1% starting January 1, 2011, as well as implement various provisions of the healthcare reform law. 298

299 On the same day, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962), which averted a 21% reduction in physician fee schedule rates through November 30, The law instead provides physicians with a 2.2% positive update, retroactive to June 1, 2010, when the 21% reduction took effect. We are very concerned about the impact the continuing uncertainty about payment rates and cash flow disruptions may have on physician practices and on beneficiary access to physicians services, said CMS Deputy Administrator and Director of the Center for Medicare Jonathan Blum in a press release announcing the proposed calendar year 2011 physician fee schedule. We are also concerned about the diversion of scarce Medicare resources as we have to adjust our payment operations to the constantly changing legislative landscape, added Blum. In addition to the payment update, the proposed rule also would implement changes included in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. For example, effective January 1, 2011, the new law mandates the waiver of the Medicare Part B deductible and 20% coinsurance that would otherwise apply to most preventative services, according to a CMS fact sheet. The proposed rule also would implement a provision providing incentive payments equal to 10% of a primary care practitioner s allowed charges for primary care services under Part B. Under the proposed rule, as required by the healthcare reform law, incentive payments equal to 10% of the fee schedule payment also would be available for surgical services furnished by a general surgeon in health professional shortage areas. The proposed rule further would require physicians referring CT, MRI, and PET services under the in-office ancillary services exception to the physician self-referral prohibition to notify patients that they may receive the same services from other suppliers in the area. The proposed rule also would implement a provision of the healthcare reform law expanding round 2 of the durable medical equipment competitive bidding program from 70 metropolitan statistical areas (MSAs) to 91 MSAs. CMS also is proposing a number of changes in the calendar year 2011 physician quality reporting initiative (PQRI), including adding 20 individual PQRI measures (such as new measures for reporting through registries and electronic health records) and one new measures group on which individual eligible professionals may report; making 12 additional individual PQRI measures available for reporting through electronic health records (EHRs) systems (in addition to the 10 measures already available for EHR reporting); and reducing the reporting sample requirements for claims-based reporting of individual measures from 80% to 50%. The proposed rule also would create a new Group Practice Reporting Option, which would be open to group practices with fewer than 200 eligible professionals. The proposed rule will be published in the July 13 Federal Register, with comments due by August

300 CMS Proposes Payment Updates, Policy Changes For Hospital Outpatient Departments, ASCs The Centers for Medicare and Medicaid Services (CMS) issued July 2, 2010 a proposed rule that would increase payments to hospital outpatient departments, though by a reduced percentage due to a provision of the healthcare reform law, and would keep payments to ambulatory surgical centers flat in calendar year (CY) Under the proposed rule, which also includes a number of policy changes required by the healthcare reform law, Medicare payments to hospital outpatient departments would rise by $3.9 billion to $40 billion next year, an agency fact sheet said. As mandated by the healthcare reform law, the proposed rule reduces the 2.4% market basket update for the 4,000 hospitals paid under the outpatient prospective payment system (OPPS) by.25 percentage points to 2.15%. Lower Out-of-Pocket Costs Under the proposed rule, CMS estimated that total beneficiary liability for copayments would decline from 22.4% in CY 2010 to 22.1% in CY The healthcare reform law waives beneficiary cost-sharing for most Medicare-covered preventative services, CMS noted in a press release. By eliminating the beneficiary s out-of-pocket costs for most preventive services, we are removing a barrier to access and paving the way for improved health for seniors and people with disabilities who rely on Medicare for their health coverage, said Jonathan Blum, CMS Deputy Administrator and Director of the Center for Medicare. Quality Measures CMS is proposing to add six quality measures to the current list of 11 measures to be reported by hospital outpatient departments, bringing to 17 the total number of measures that must be reported in CY 2011 for purposes of the CY 2012 payment determination. According to the CMS fact sheet, these new measures include one structural health information technology measure, four claims-based imaging efficiency measures, and one chart abstracted measure for the emergency department. CMS also is proposing adding seven measures to the list for reporting in CY 2012, bringing the total number of measures that must be reported for the CY 2013 payment determination to 24. Of the proposed new measures, the fact sheet said, one is a structural measure on use of electronic health records and six are chart-abstracted measures for the emergency department. Supervision Requirements CMS is proposing to change the current supervision policy for a limited set of nonsurgical extended duration services, including observation services, to allow general supervision after the initiation of a service. 300

301 The initiation of the service would still require direct supervision. Under current policy, direct supervision is required for the duration of all outpatient therapeutic services in both hospitals and critical access hospitals (CAHs), although CMS instructed contractors not to enforce the direct supervision requirement in CAHs for CY 2010, the fact sheet said. The proposal for direct supervision followed by general supervision for certain nonsurgical extended duration services would apply to both hospitals and CAHs for CY CMS said in response to CY 2010 rulemaking, CAHs, rural hospitals, and other small hospitals raised concerns about staffing their facilities to meet the requirement for direct supervision of all outpatient therapeutic services, in particular for services involving a significant amount of monitoring that may extend past regular business hours, and that typically are lower clinical complexity and risk. CMS said it is proposing to select, for purposes of allowing general supervision after direct supervision of the initiation of the service, therapeutic services that are nonsurgical, that can last a significant period of time, that have a substantial monitoring component, and that have a low risk of requiring the physician s or appropriate nonphysician practitioner s physical presence to furnish assistance and direction after the initiation of the service. Graduate Medical Education The proposed rule also would implement provisions of the healthcare reform law requiring CMS to identity unused residency slots and redistribute them to certain hospitals with qualified residency programs, with a special emphasis on increasing the number of primary care physicians. Under the law, CMS also must redistribute residency slots from hospitals that close down to other teaching hospitals, giving preference to hospitals in the same or a contiguous area as the closed hospital. The proposed rule also would incorporate changes regarding how CMS counts time spent by residents furnishing care in nonprovider settings, as well as resident time spent in didactic and scholarly activities and other activities not directly related to patient care. Ambulatory Surgical Centers The proposed rule also would keep payment rates flat for the roughly 5,000 Medicareparticipating ASCs in CY 2011 in accordance with healthcare reform law provisions. CMS projected the conversion factor for ASCs in CY 2011 to be 1.6%. But the healthcare reform act requires the annual update factor for the ASC payment system to be reduced by a productivity adjustment, which also is estimated to be 1.6% for CY Thus, CMS is proposing a 0% update to the ASC payment system for CY 2011, meaning payments will remain at about $4 billion next year. The proposed rule is slated for publication in the August 3 Federal Register. CMS will accept comments until August 31, with a final rule expected by November 1. CMS Proposal Cuts Medicare Payments To Home Health Agencies In CY

302 The Centers for Medicare and Medicaid Services (CMS) will pay Medicare home health agencies $900 million less in calendar year (CY) 2011 than they received in CY 2010 under a proposed rule published in the July 23, 2010 Federal Register (75 Fed. Reg ). The proposal, which decreases payments by 4.75%, includes the combined effects of a market basket update, a wage index update, reductions to the home health prospective payment system (HH PPS) rates to account for increases in aggregate case-mix that are unrelated to underlying changes in patients health status, and other provisions mandated by the Patient Protection and Affordable Care Act (PPACA) of 2010, CMS said in a press release. The PPACA mandates that CMS apply a 1 percentage point reduction to the CY 2011 home health market basket amount, which equates to a proposed 1.4% update for HHAs in CY 2011, CMS said. The PPACA also changes the existing home health outlier policy through a 5% reduction to HH PPS rates, with total outlier payments not to exceed 2.5 % of the total payments estimated for a given year, according to the release. HHAs also are permanently subject to a 10% agency-level cap on outlier payments. Another PPACA provision requires that prior to certifying a patient s eligibility for the Medicare home health benefit, the physician must document that the physician or a nonphysician practitioner has had a face-to-face encounter with the patient. Patient care and access are ultimately what CMS is looking to protect, while working aggressively to prevent fraud, said Jonathan Blum, director of the Center for Medicare and deputy administrator for CMS. The proposed rule establishes timeframes for these encounters and documentation requirements associated with the provision. CMS Proposes Changes To Medicare Part C And D To Implement Reform Law The Centers for Medicare and Medicaid Services (CMS) unveiled November 10, 2010 a proposed rule making changes to the Medicare Advantage (MA) and Medicare prescription drug programs to implement healthcare reform provisions. The proposed rule also would make other changes to the regulations based on our continued experience in the administration of the Part C and D programs, CMS said. The proposed rule is slated for publication in the November 22, 2010 Federal Register, with comments due January 11, CMS said it anticipates issuing a final rule in early spring 2011 to allow appropriate timing for the 2012 contract year bids. The changes in the proposed rule are expected to save the program over $78 billion from 2011 to Star Ratings Among other things, the proposed rule, in accordance with the Patient Protection and Affordable Care Act, as amended, (PPACA), would implement increases to MA plan benchmarks based on a plan s quality ranking. CMS five-star rating system ranks MA plans based on quality measures in five categories staying healthy; screenings, tests, and vaccines; managing chronic 302

303 conditions; responsiveness and care; member complaints and appeals; and telephone customer service, according to an agency fact sheet. Medicare prescription drug plans are rated on how well they perform in four different categories customer service; member complaints and staying with a drug plan; member experience; and drug pricing and patient safety. CMS said a low performer icon will be placed next to plans that have received less than three stars for the past three years. Under the PPACA, beginning in 2012, MA plans earning four or more stars on the five-star scale will receive quality bonuses. Quality Bonus Demo In the proposed rule, CMS also set forth a new three-year national demonstration project starting in 2012 that would link the quality bonuses to the plan s star rating the higher the plan s star rating, the greater the bonus payment percentage. Under the demo, bonus payments would be made to plans with at least three stars, though in lower amounts than four and five-star plans. CMS said the demo is designed to test whether providing scaled bonuses will lead to more rapid and larger year-to-year quality improvements in Medicare Advantage program quality scores, compared to the current law bonus structure. Appealing Ratings While the PPACA does not specify a process for MA plans to appeal low star ratings, the proposed rule would establish an administrative review process that would take effect either before or once the demonstration project is complete, CMS said. In the interim, CMS said it is establishing a two-step process through which MA organizations may seek review of their star rating for quality bonus payment determinations. The interim appeal process would first provide MA plans with a technical report explaining how their quality bonus payment determination was made. MA plans could then request an appeal by a CMS-designated hearing officer if they believe their quality bonus payment determination was incorrect. CMS plans to provide more detailed guidance on the interim appeals process soon. Other Provisions The proposed rule also would implement a number of other PPACA provisions relevant to MA and prescription drug plans, including codifying clarifications to CMS' authority to negotiate plan bids, expanding restrictions on charging higher cost sharing than traditional Medicare for certain services, and limiting long term care pharmacy waste by specifying efficient dispensing practices. CMS Issues Proposed Hospital Value-Based Purchasing Rule The Centers for Medicare and Medicaid Services (CMS) issued in the January 13, 2011 Federal Register (76 Fed. Reg. 2454) a proposed rule establishing a new hospital value- 303

304 based purchasing program for hospitals paid under the Medicare Inpatient Prospective Payment System (IPPS). Beginning in fiscal year (FY) 2013, the rule would apply to payments for discharges occurring on or after October 1, 2012, and would make value-based incentive payments to acute care hospitals, based either on how well the hospitals perform on certain quality measures or how much the hospitals' performance improves on certain quality measures from its performance during a baseline period. The higher a hospital s performance or improvement during the performance period for a fiscal year, the higher the hospital s value-based incentive payment for the fiscal year would be, CMS said. According to the agency, the financial incentives would be funded by a reduction in the base operating DRG payments for each discharge, which will be 1% in FY 2013, rising to 2% by FY The hospital value-based purchasing program continues a longstanding effort by CMS to forge a closer link between Medicare s payment systems and improvement in health care quality, including the quality and safety of care provided in the inpatient hospital setting, the agency said in a fact sheet on the proposal. CMS Proposes Rule Extending Beneficiary Notification Requirements To Most Care Settings The Centers for Medicare and Medicaid Services (CMS) issued February 2, 2011 a proposed rule (76 Fed. Reg. 5755) that would require most Medicare-participating providers and suppliers to give beneficiaries written notice about their right to contact a Medicare Quality Improvement Organization (QIO) with concerns about the quality of care they receive under the Medicare program. Currently, only beneficiaries admitted to hospitals as inpatients are required to receive such information. But under the proposal, the requirement would be extended to the following care settings: Clinics, rehabilitation agencies, and public health agencies that provide outpatient physical therapy and speech-language-pathology services; Comprehensive outpatient rehabilitation facilities; Critical access hospitals; Home health agencies; Hospices; Hospitals; Long term care facilities; Ambulatory Surgical Centers; Portable x-ray services; Rural health clinics and Federally Qualified Health Centers In addition, the rule proposes new requirements for certain Medicare providers and suppliers that would require facilities to inform all patients about state agency contact information. Today s proposed rule would ensure that beneficiaries know they have a voice in the care they receive under the Medicare program, CMS Administrator Donald Berwick, M.D. said in a press release. 304

305 By requiring providers and suppliers to furnish QIO contact information to all beneficiaries, we are protecting beneficiaries rights to bring their worries about quality of care to a third party for review, which can lead to better care not only for the beneficiary, but for all patients in a given care setting, Berwick said. CMS To Revise Physician Signature Requirement For Lab Requisitions The Centers for Medicare and Medicaid Services (CMS) said March 31, 2011 that it has decided to focus on changing the regulation that requires physician signatures on requisitions for clinical diagnostic laboratory tests. The requirement was included in the Calendar Year 2011 Physician Fee Schedule final rule, requiring a physician s or qualified non-physician practitioner s (NPP s) signature on laboratory paperwork identifying the test or tests to be performed for a patient. Because of concerns that some physicians, NPPs, and clinical diagnostic laboratories were not aware of, or did not understand, CMS focused its efforts in the first quarter of 2011 on developing educational and outreach materials to educate those affected by this policy, the agency said. CMS now has decided to change the regulation in response to concerns about difficulty complying with the policy. In the same notice, CMS also said it expects hospices to comply with new face-to-face encounter requirements as of April 1, The Patient Protection and Affordable Care Act requires a physician, or an NPP working with the physician, to have a face-to-face encounter with a patient to certify the individual is eligible for Medicare home health services. During the first quarter of CY 2011, CMS said it developed educational and outreach materials to help physicians and home health agencies comply with the new requirement. Compliance with these important requirements will ensure that home health agencies and hospices work in collaboration with physicians to promote the best possible care for beneficiaries, while also strengthening the integrity of the Medicare program, the agency said. CMS will continue to carefully monitor the implementation of this policy to ensure that there is no unintended disruption in access to care as providers comply with these requirements. CMS Issues Proposed Payment Updates For Hospitals In FY 2012 The Centers for Medicare and Medicaid Services (CMS) announced April 19, 2011 a proposed rule updating payment policies and rates for acute care hospitals paid under the Inpatient Prospective Payment System (IPPS) and hospitals paid under the Long Term Care Hospital Prospective Payment System (LTCH PPS) in fiscal year (FY) According to an agency fact sheet, CMS expects Medicare operating payments under the IPPS to decline by a projected $498 million, or 0.5%, in FY 2012 compared to FY

306 The projection includes a hospital update of 1.5% (based on a market basket update of 2.8, reduced by a multi-factor productivity adjustment of 1.2% and an additional 0.1%), increased by 1.1% in response to litigation, and a documentation and coding adjustment of percentage points. The negative 3.15 percentage points accounts for changes in documentation and coding following the adoption of the Medicare Severity Diagnosis Related Groups payment system that did not reflect actual increases in patients severity of illness, CMS said. Medicare payments to LTCHs in FY 2012 are projected to increase by $95 million, or 1.9%, CMS added. The payment updates would be effective for discharges on or after October 1, Proposals included in the rule would help support the Obama Administration s efforts to reform our health care delivery system by improving care quality and patient outcomes, addressing long-term health care cost growth, and supporting the goals of the recently announced Partnership for Patients, the agency said. The recently announced public-private Partnership for Patients is intended to help improve healthcare quality, safety, and affordability. One of the partnership s aims, CMS said, is to decrease hospital readmissions by 20% in 2014 compared to The Affordable Care Act (ACA) requires CMS to implement a Hospital Readmissions Reduction Program that will reduce payments beginning in FY 2013 to certain hospitals that have excess readmissions for certain selected conditions. The proposed rule includes measures for rates of readmissions for three conditions: acute myocardial infarction (or heart attack), heart failure, and pneumonia. CMS also is proposing a methodology to use in calculating excess readmission rates for the program, the agency said, noting that additional conditions may be added in the future. In addition, CMS makes proposals in the rule to align the existing Hospital Inpatient Quality Reporting (IQR) Program with a proposed new hospital value-based purchasing program mandated by the ACA. For example, the proposed rule would align the deadlines for submitting different types of data and reduce the time in which hospitals must submit requested records as part of the validation process to improve accuracy, according to the fact sheet. CMS also is proposing to increase the IQR measure set to 73 measures, streamline IQR processes, and align submission requirements, which will make the IQR process less burdensome and more transparent to hospitals and [Quality Improvement Organizations]. In addition, the proposed rule would add Acute Renal Failure after Contrast Administration to the list of hospital-acquired conditions in FY 2012 for which hospitals would not be paid. The proposed rule also includes the first measure set for a quality reporting program under the LTCH PPS. Under the proposal, reporting would begin in FY 2013 for payment determination in FY

307 Two Methods For FY 2012 Medicare Payments To SNFs Proposed By CMS The Centers for Medicare and Medicaid Services (CMS) is considering two different options for fiscal year (FY) 2012 Medicare payment rates for skilled nursing facilities (SNFs), the agency said in a proposed rule issued April 28, The first option under consideration reflects the standard rate update methodology that would provide an increase of $530 million, or 1.5 percentage points, CMS said in a press release. This increase is derived from applying the 2012 market basket index of 2.7% reduced by 1.2 percentage points to account for greater efficiencies in the operation of nursing homes as mandated by the Affordable Care Act. The second option adjusts for an unexpected spike in nursing home payments during FY 2011, the release said. Under this option, CMS would restore overall payments to their intended levels on a prospective basis, which would require reducing FY 2012 payments to Medicare SNFs by $3.94 billion, or 11.3% lower than payments for FY SNFs are paid under the SNF prospective payment system (PPS) which uses a case-mix classification system known as Resource Utilization Groups, version four (RUG-IV) that is used to determine a daily payment rate. Each RUG-IV group is assigned a case mix index (CMI) that reflects relative differences in patient acuity. In implementing RUG-IV, CMS adjusted the RUG-IV CMIs based on forecasted utilization under the refined case-mix system to ensure that the transition to RUG-IV did not trigger a change in overall payment levels, the agency explained. However, [a]lthough the CMI adjustment that accompanied the transition to the RUG-IV model was intended to ensure there would be no change in overall spending levels, it instead appears to have resulted in a significant increase in Medicare expenditures, CMS said. Pending confirmation of this preliminary assessment, CMS will be reviewing data from actual claims under the RUG-IV system as it becomes available, the agency said. It will then evaluate the necessity of recalibrating the case-mix weights in the FY 2012 final rule. In addition, the proposed rule implements an Affordable Care Act requirement that Medicare SNFs and Medicaid nursing facilities disclose certain information in a standardized format to the Department of Health and Human Services and other entities regarding the ownership and organizational structure of their facilities. CMS Proposed Hospice Payment Rule Implements Changes To Aggregate Cap Calculation Methodology The Centers for Medicare and Medicaid Services (CMS) issued April 28, 2011 the hospice wage index for fiscal year (FY) The proposed rule continues the phase-out of the wage index budget neutrality adjustment factor (BNAF), with an additional 15% BNAF reduction, for a total BNAF reduction in FY 2012 of 40%. 307

308 The BNAF phase-out will then continue with successive 15% reductions from FY 2013 through FY 2016, the rule said. CMS will again use the pre-floor and pre-reclassified hospital wage index data as the basis to determine the hospice wage index, which is then used to adjust the labor portion of the hospice payment rates based on the geographic area where the beneficiary receives hospice care. We believe the use of the pre-floor, pre-reclassified hospital wage index data, as a basis for the hospice wage index, results in the appropriate adjustment to the labor portion of the costs, CMS said. Hospice Aggregate Cap Calculation Methodology The proposed rule also would change the hospice aggregate cap calculation methodology as the existing method for counting Medicare beneficiaries in 42 C.F.R has been the subject of substantial litigation, the rule said. Numerous courts have concluded that CMS current methodology used to determine the number of Medicare beneficiaries used in the aggregate cap calculation is not consistent with the statute. Instead, CMS said it will use a patient-by-patient proportional methodology. After setting forth how hospices should go about changing the methodology by which their caps have previously been determined, CMS noted that it does not see these provisions as being impermissibly retroactive in effect. Going forward, CMS said that for the cap year ending October 31, 2012 and subsequent cap years, it proposes that the hospice aggregate cap be calculated using the patient-bypatient proportional methodology, but also proposes to allow hospices the option of having their cap calculated via the current streamlined methodology. Quality Reporting The proposed rule also would implement a new hospice quality reporting program as provided for under the Affordable Care Act. Under the program, beginning in FY 2014, any hospice that does not comply with the quality data submission requirements will see its market basket update reduced by 2 percentage points. IRFs Would See Medicare Payments Rise By $120 Million In FY 2012 Under CMS Proposed Rule Medicare payment rates for inpatient rehabilitation facilities (IRFs) would increase by a projected 1.8%, or $120 million, in fiscal year (FY) 2012 under a Centers for Medicare and Medicaid Services (CMS) proposed rule published in the April 29, 2011 Federal Register (76 Fed. Reg ). The projected update reflects a rebased and revised market basket currently estimated at 2.8% for FY 2012 less a 1.3 percentage point reduction mandated by the Affordable Care Act, plus 0.3 percentage points due to a proposed adjustment to the outlier threshold, CMS said in a press release. 308

309 The rule also proposed to establish a new quality reporting system that would align with the goals of the Partnership for Patients, a new public-private partnership initiative aimed at improving the quality, safety, and affordability of healthcare for all Americans. Initially, IRFs would submit data on two quality measures urinary catheter-associated urinary tract infection and pressure ulcers that are new or have worsened. IRFs that do not submit quality data would see their payments reduced by two percentage points beginning in FY 2014, CMS said. Among other provisions, the rule also proposes to allow IRFs to receive temporary adjustments to their full-time equivalent intern and resident caps if they take on interns and residents who are unable to complete their training because the IRF that had been training them either closed or ended its resident training program. CMS Finalizes PPS For Renal Dialysis Facilities, Proposes P4P Program As required by the Medicare Improvements for Payments and Providers Act of 2008 (MIPPA), the Centers for Medicare and Medicaid Services (CMS) issued a final rule establishing a new prospective payment system (PPS) for renal dialysis facilities that provide services to Medicare beneficiaries with end-stage renal disease (ESRD). At the same time, CMS also unveiled a proposed rule that would establish a new quality incentive program (QIP) linking Medicare payments to dialysis facilities with specific performance standards. In a press release, CMS noted the QIP is the first pay-forperformance, as opposed to pay-for-reporting, program in fee-for-service Medicare. The new payment system and quality incentive program for dialysis services have significant potential to improve patient outcomes and promote efficient delivery of health care services, said CMS Administrator Donald Berwick, M.D. Single, Bundled Payment Under the final rule, slated for publication in the August 12, 2010 Federal Register, Medicare would pay the roughly 600 hospital-based and 4,330 freestanding ESRD facilities a single, bundled payment that would cover the dialysis treatment as well as other items and services such as prescription drugs and clinical laboratory tests. Medicare currently pays for roughly 60% of dialysis services under a partial bundled rate, called the composite rate. The remainder of Medicare spending for dialysis services is for separately billed items like drugs, lab tests, and blood products. In 2007, Medicare paid about $9.2 billion for dialysis services and other ESRD-related items to nearly 330,000 Medicare patients. MIPPA required the new PPS to trim 2% of the estimated payments that would have been made under the previous payment system. In the final rule, CMS said this reduction would result in roughly a $200 million decrease in Medicare payments in calendar year Base Rate, Case-Mix Adjustments The final rule establishes a base bundled payment rate of $ for each dialysis treatment, which was derived from 2007 claims data for both composite rate and 309

310 separately billable items and services updated to reflect projected 2011 prices. The proposed rule, issued in September 2009, set a base rate of $ This base rate will be adjusted for patient- and facility-specific factors and also will be adjusted to reflect geographic differences in labor costs. In addition, CMS is proposing an outlier policy for certain high-cost cases. The final rule does not include case-mix payment adjustment factors for patient sex or race/ethnicity. CMS said it is updating the process for collecting and validating patientlevel race and ethnicity data from dialysis facilities and is considering whether to incorporate a case-mix adjustment factor for race and ethnicity in the future. CMS also said that, in response to public comments, it adopted a payment adjustment for home dialysis training when clinically appropriate. The final rule includes ESRD-related oral-only drugs in the definition of renal dialysis services, but postpones payment for such drugs under the ESRD PPS until January 1, 2014, according to a CMS fact sheet. The four-year phase-in for the new payment system would begin in January 1, 2011, but facilities could opt to choose payment entirely under the PPS at that time. Facilities must make this election by November 1, Pay for Performance Also as required by MIPPA, CMS issued a proposed rule, slated for publication in the August 12, 2010 Federal Register, that would establish performance standards and a scoring methodology for the QIP. Under MIPPA, starting on or after January 1, 2010, CMS must reduce payments to dialysis facilities by up to 2% if they fail to meet or exceed the performance benchmarks under the QIP. CMS adopted three quality measures to evaluate dialysis facilities in the initial implementation of the QIP, including one involving hemodialysis adequacy and one involving anemia management. Hospices Will See 1.8% Increase In Medicare Payments In FY 2011 Under CMS Notice Medicare hospices will see an estimated 1.8% increase in their payments for fiscal year (FY) 2011, according to a notice published in the July 22, 2010 Federal Register (75 Fed. Reg ) by the Centers for Medicare and Medicaid Services (CMS). The payment update reflects the ongoing efforts of CMS to support beneficiary access to hospice services while maintaining responsible financial stewardship of the Medicare Trust Fund, the agency said in a press release. According to CMS, the estimated hospice payment increase is the net result of a 2.6% increase in the hospital market basket, and an offset by an estimated 0.8% decrease in payments to hospices due to updated wage index data and the second year of CMS seven-year phase-out of its wage index budget neutrality adjustment factor (BNAF). 310

311 The BNAF was implemented in 1997 when CMS moved to a more current and accurate method for determining hospice payments. In FY 2010 rulemaking, CMS finalized a schedule to phase out the BNAF over seven years, reducing it by 10% in FY 2010 and by 15% each year from FY 2011 through FY 2016, the release explained. The notice also solicits public comments on two possible approaches to modernizing the hospice aggregate cap calculation. These approaches take advantage of new computing technologies to streamline the cap calculations, which may lead to a timelier provider notification of overpayments. CMS will consider the comments in future analyses and possible future rulemaking, the agency said. Hospices Will See 1.8% Increase In Medicare Payments In FY 2011 Under CMS Notice Medicare hospices will see an estimated 1.8% increase in their payments for fiscal year (FY) 2011, according to a notice published in the July 22, 2010 Federal Register (75 Fed. Reg ) by the Centers for Medicare and Medicaid Services (CMS). The payment update reflects the ongoing efforts of CMS to support beneficiary access to hospice services while maintaining responsible financial stewardship of the Medicare Trust Fund, the agency said in a press release. According to CMS, the estimated hospice payment increase is the net result of a 2.6% increase in the hospital market basket, and an offset by an estimated 0.8% decrease in payments to hospices due to updated wage index data and the second year of CMS seven-year phase-out of its wage index budget neutrality adjustment factor (BNAF). The BNAF was implemented in 1997 when CMS moved to a more current and accurate method for determining hospice payments. In FY 2010 rulemaking, CMS finalized a schedule to phase out the BNAF over seven years, reducing it by 10% in FY 2010 and by 15% each year from FY 2011 through FY 2016, the release explained. The notice also solicits public comments on two possible approaches to modernizing the hospice aggregate cap calculation. These approaches take advantage of new computing technologies to streamline the cap calculations, which may lead to a timelier provider notification of overpayments. CMS will consider the comments in future analyses and possible future rulemaking, the agency said. CMS Issues Final Drug Manufacturer Agreement For Coverage Gap Discount Program The Centers for Medicare and Medicaid Services (CMS) has posted the final agreement drug manufacturers of applicable Part D drugs must sign by September 1, 2010 to provide Medicare beneficiaries in the coverage gap a discount on their medications. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, mandated the drug discount program for Medicare Part D beneficiaries in the coverage gap. CMS expects Medicare beneficiaries enrolled in Part D plans to see 50% savings on their brand name drugs and biologics during 2011 when they enter the coverage gap, also called the donut hole. 311

312 CMS published in the May 26, 2010 Federal Register (75 Fed. Reg ) a draft model agreement for drug manufacturers to participate in the coverage gap program, which they must execute to continue to offer drugs under the Part D program. Based on comments to the draft, CMS said it revised the agreement to provide additional time for quarterly invoice payments by manufacturers to plan sponsors within 38 days of receipt through the Third Party Administrator. In addition, CMS is providing manufacturers with claims level data necessary to validate invoices, without sharing private patient information, according to an agency press release. The agreement outlines a dispute resolution and appeal process for manufacturers to raise payment inconsistencies or other conflicts. We believe our final language is responsive to the comments and we expect all brand name manufacturers to sign, said CMS Deputy Administrator for the Center for Medicare Jonathan Blum. Under the healthcare reform law, the coverage gap will begin to decrease incrementally in 2011 until it is eliminated altogether in Final FY 2011 IPPS Rule Includes 2.9% Reduction For Coding Changes The Centers for Medicare and Medicaid Services (CMS) issued July 30, 2010 a final fiscal year (FY) 2011 inpatient prospective payment system (IPPS) rule that reduces Medicare payments to inpatient hospitals by 2.9% as an offset for coding changes not related to the severity of patients illnesses. The controversial payment reduction was opposed by hospital groups as well as some members of Congress who asked CMS to nix the documentation and coding adjustment included in the proposed rule issued in April. CMS estimates that payments to the roughly 3,500 general acute care hospitals paid under the IPPS will decline by 0.4%, or $440 million, compared with FY 2010, under the final rule, according to an agency press release. The rule, slated for publication in the August 16 Federal Register, goes into effect beginning with discharges occurring on or after October 1, The final rule includes a 2.6% inflationary update, reduced by 0.25% as required by the healthcare reform law. CMS is further adjusting the 2.35% payment update by a negative 2.9 percentage points to recoup one-half of the estimated excess spending in FYs 2008 and 2009 aggregate payments, due to changes in hospital coding practices that did not reflect increases in patients severity of illness. Under legislation passed in 2007, CMS is required to recoup the entire amount of FY 2008 and 2009 excess spending from changes in hospital coding practices by FY 2012, according to an agency fact sheet. CMS said a 5.8% cut is necessary to recoup these overpayments in their entirety, but it has decided to phase-in the reduction carefully over time and therefore is implementing one-half of the total adjustment for FY

313 The final rule also makes changes to the outlier threshold. For acute care hospitals, CMS estimates that the total outlier payments in FY 2010 will be 4.7% of total payments under the IPPS 0.4 percentage points lower than the target rate of 5.1% thus the final rule raises the outlier threshold in FY 2011 to $23,075. In a July 30 statement, the American Hospital Association (AHA) warned that the rule s cuts in hospital payments comes at the worst possible time, with sicker patients, fragile economic conditions, and significant changes in the works because of healthcare reform. CMS failed to listen to concerns from members of Congress. A bipartisan majority of senators and representatives had expressed to CMS that the rule s coding offset would hurt their communities ability to access health care, AHA said. Several hospital groups, including AHA, sent a letter to CMS Administrator Donald Berwick June 20 urging CMS to change its methodology for determining documentation and coding change to better account for increasing patient severity. The letter pointed to recent studies concluding CMS methodology does not adequately isolate documentation and coding from other factors when calculating changes in casemix index. According to AHA, in issuing the final rule, CMS failed to acknowledge... what we all know: hospital patients are increasingly sicker. Quality Reporting, HACs Hospitals that successfully report quality measures included in the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program will receive the full update for FY Non-participating hospitals will get the update less two percentage points. In the final rule, CMS added 12 measures to the RHQDAPU set for FY 2011, but retires one current measure (mortality for selected surgical procedures (composite)), bringing the total to 55 for the FY 2012 market basket update. CMS added that only 10 of the new measures will be considered in determining a hospital s FY 2012 update, according to an agency fact sheet. The remaining two measures must be reported in 2011 but will not be used to determine a hospital s update until FY The FY 2011 final rule does not add any new conditions to the list of hospital-acquired conditions (HACs) for which Medicare will not pay unless documented by the hospital as present on admission. But the final rule does report on the progress to date of the policy s impact. According to a CMS analysis, the HAC policy resulted in payment adjustments for 3,416 discharges out of roughly 9.3 million total discharges for the 10 categories of conditions currently on the HAC list. These adjustments, CMS said, yielded a net savings of about $18.8 million. Long Term Care Hospitals The final rule also sets payment rates for the approximately 420 long term care hospitals paid under the Long-Term Care Hospital Prospective Payment System (LTCH PPS), beginning with discharges occurring on or after October 1,

314 The final rule adjusts LTCH rates by 2.5% for inflation, but reduces the update by a 0.5 percentage point as required by the healthcare reform law and by a negative 2.5 percentage points for the estimated increase in spending in FYs 2008 and 2009 due to documentation and coding. CMS estimates that payments to LTCHs would increase by 0.5%, or $22 million, in For LTCHs, CMS projects the total estimated outlier payments in rate year (RY) 2010 will be approximately 7.42% of total estimated LTCH PPS payments, 0.58 percentage points lower than the target rate of 8%. The final rule thus includes a slight increase to the LTCH outlier threshold for FY 2011 to $18,785. Healthcare Reform Provisions The final rule includes inpatient hospital-related provisions of the recently enacted reform law that the agency originally issued as a supplemental proposed rule in June. The reform law was enacted too late to include its provisions in the original IPPS proposed rule, CMS said. The final rule implements provisions in the Patient Protection and Affordable Care Act (PPACA), as amended, for supplemental payments totaling $400 million for FYs 2011 and 2012 for qualifying hospitals located in counties that rank, based on adjusted Medicare spending per beneficiary, among the lowest quartile in the country, CMS said in a fact sheet. The final rule adopts a hospital wage index that is not less than 1.0 for hospitals located in frontier states, beginning in FY 2011, pursuant to the PPACA. CMS said 51 IPPS hospitals in five states Montana, Nevada, North Dakota, South Dakota, and Wyoming, will benefit from this provision. In addition, the PPACA expands eligibility for the low-volume payment adjustment during FYs 2011 and 2012 to hospitals within 15 miles of other hospitals (instead of the current requirement of 25 miles) and with less than 1,600 discharges of individuals entitled to, or enrolled for, benefits under Part A (instead of the current statutory requirement of 800 total discharges). The law requires the Secretary to create a sliding payment scale, with larger payments (starting at a 25% adjustment) going to hospitals with 200 or fewer Medicare discharges and no payment adjustment for hospitals with greater than 1,600 Medicare discharges. CMS said it modified the formula used to determine these payments in response to comments on the proposed rule. Specific provisions of the final rule and notice also extend the Medicare Dependent Hospitals program, extend the Rural Community Hospital Demonstration Program, and extend for an additional two years certain requirements of the Medicare, Medicaid, and SCHIP Extension Act of 2007 affecting certain LTCHs and LTCH satellite facilities and the moratorium on establishing new LTCHs and LTCH satellite facilities or increasing hospital beds in existing LTCHs and LTCH satellite facilities, among other provisions. CMS Finalizes Tighter Enrollment Standards For DMEPOS Suppliers The Centers for Medicare and Medicaid Services (CMS) issued a final rule in the August 27, 2010 Federal Register (75 Fed. Reg ) setting forth more stringent enrollment standards for suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) to help reduce fraud and protect beneficiaries. 314

315 The final rule, which is effective September 27, requires DMEPOS suppliers to obtain oxygen from a state-licensed oxygen supplier (applies only in states that require oxygen licensure); requires suppliers to remain open to the public for at least 30 hours per week, excepting physicians/licensed non-physician practitioners (NPPs) who furnish services to their own patients as part of their practice and suppliers working with custom made orthotics and prosthetics; ensures that suppliers continue to maintain ordering and referring documentation from physicians or NPPs; and prohibits DMEPOS suppliers from sharing a practice location with certain other Medicare providers and suppliers, subject to certain exceptions, according to a CMS press release. The rule also clarifies and expands the existing enrollment requirements that DMEPOS suppliers must meet to establish and maintain Medicare billing privileges. Specifically, the final rule imposes new requirements to ensure the DMEPOS supplier maintains a physical facility on an appropriate site, including measuring at least 200 square feet, except for state-licensed orthotic and prosthetic personnel providing custom fabricated orthotics or prosthetics in private practice; be in a location accessible to the public and federal officials; be accessible and staffed during posted hours of operation; and be in a location that contains space for storing business records. The final rule also adds language to clarify that a DMEPOS supplier must be licensed to provide the licensed service(s) and cannot contract with an individual or entity to provided the licensed services. In fiscal year 2007, the Medicare program spent more than $10 billion for DMEPOS supplies, and in March 2008, there were 113,154 individual DMEPOS suppliers, the final rule noted. Because some individual DMEPOS suppliers were affiliated with chains, there were 65,984 unique billing numbers. The largest concentrations of DMEPOS suppliers were located in five states: California (9%), Texas (7%), Florida (7%), New York (6%), and Pennsylvania (5%). CMS received 208 comments on the proposed rule issued in January 2008 (75 Fed. Reg. 2008). We know the majority of medical equipment suppliers and health care providers want to improve the health of Medicare beneficiaries, but we also know there are those who look for any opportunity to take advantage of beneficiaries and Medicare, including sham operations who are not legitimate business, said CMS Deputy Administrator for Program Integrity Peter Budetti. The steps we are taking today provide us with additional tools to support our continuing efforts to reduce Medicare fraud by helping to ensure that only appropriately qualified suppliers are enrolled in the program, he added. In later developments, CMS issued a proposed rule in the April 4, 2011 Federal Register (76 Fed. Reg ) that would, among other things, remove the expansive definition of direct solicitation included in a final rule. Specifically, the final rule included a prohibition on direct solicitation, except in certain circumstances, that included in-person contacts, , instant messaging, and telephone solicitation. CMS said the intent of the provision was to inhibit the direct, coercive, and targeted solicitation of our nation s senior citizens. 315

316 According to CMS, since the final rule was published, it became apparent that the expanded portions of this provision as written is unfeasible. CMS noted criticisms that the expanded definition of direct solicitation is overly broad. Thus, CMS proposed removing the definition of direct solicitation and reverting to the previous regulatory prohibition against telephone solicitations. See 42 C.F.R (c)(11). At the same time, CMS said it remains concerned about the potential for abuse caused by direct solicitation by DMEPOS suppliers and will continue to evaluate DMEPOS supplier marketing practice to ensure our beneficiaries are protected from abusive practices. In the event we believe we need to take action to limit these types of communications, we will engage in further rulemaking to address this concern, the proposed rule said. In the proposed rule, CMS also would clarify that contracting with an individual or entity for licensed services is permissible in the absence of an express state law prohibition. According to CMS, the final rule sought to add an additional layer of review of contractual arrangements in the form of state law. But this led to confusion in areas without any governing state law provisions. In addition, CMS is proposing to remove a provision in the final rule requiring DMEPOS suppliers to comply with local zoning laws as part of the supplier standards. We believe that the task of ensuring suppliers comply with local zoning laws is best left to the States, CMS said. Our contractors do not have access to the information needed to verify each and every compliance requirement, nor are they aware of municipal code provisions, including zoning exceptions, needed to complete compliance verification. Finally, CMS proposed to add a provision to the enrollment standards that allows prosthetic and orthotic professionals to qualify for the minimum square footage exception if the state does not offer licensure for them. Under the current rules, only state-licensed orthotic and prosthetic professionals providing custom fabricated items in private practice qualify for an exception to minimum square footage requirements. CMS Delays Announcement Of Winning Bidders In DME Competitive Bidding Program Citing Fraud Concerns The Centers for Medicare and Medicaid Services (CMS), along with Palmetto GBA, said October 15, 2010 that it was taking time to review potential competitive bidding suppliers in its durable medical equipment (DME) competitive bidding program [g]iven the past history of fraud in the DME arena and new tools to detect it. CMS said it expects to move forward with implementation of the program soon, beginning with the announcement of the contract suppliers and continuing our aggressive education and outreach activities for our beneficiaries and other stakeholders. The statement added that there will be more than enough qualified suppliers in all of the 9 sites to assure beneficiary access to equipment and supplies. 316

317 Congress mandated the controversial competitive bidding program in the Medicare Prescription Drug, Improvement, and Modernization Act of CMS contracted with Palmetto GBA to administer the program. Michael Reinemer, Vice President, Communications and Policy, American Association for Homecare, said in an ed statement that the design of this particular system is so badly flawed that 166 economists and auction experts, including two Nobel laureates, have urged Congress to scrap the system and start over. Given the grave concerns about the bid program recently expressed by the 166 economists and by disability groups such as the ALS Association, the American Association for People with Disabilities, and the Muscular Dystrophy Association, among others, we re not surprised the CMS has been unable to get the program off the ground. This bidding program is a badly designed solution in search of problem, the statement continued. Since two major program integrity requirements for home medical equipment (accreditation and a surety bond) have been in place for a year now, since October 2009, it is surprising that CMS would cite program integrity as an issue at the eleventh hour of the bidding program. CMS Announces 24.9% Cut In Physician Reimbursement Rates Under Final Medicare Fee Schedule The Centers for Medicare and Medicaid Services (CMS) issued November 3, 2010 a final 2011 Medicare physician fee schedule rule that cuts reimbursement rates by a total of 24.9% between November 2010 and January According to CMS, physician payment rates will be reduced on December 1, when a congressionally mandated increase expires, and then again on January 1, 2011 under current law, which is based on the much-criticized sustainable growth rate (SGR) formula. These two reductions amount to the 24.9% cut set forth in the final fee schedule. In June, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which averted a scheduled 21% reduction in physician fee schedule rates through November 30, The law instead provided physicians with a 2.2% positive update, retroactive to June 1, 2010, when the 21% reduction took effect. Medicare needs to be a strong, dependable partner with physicians and that means the SGR must be fixed. The Administration supports permanently reforming the Medicare payment formula, said CMS Administrator Donald Berwick in a press release. The American Medical Association (AMA) in a statement urged Congress to take quick action this month to stop the cut before it begins in order to ensure there is no disruption in access to care for seniors. The AMA said Congress should stop the cut for at least 13 months to send a strong message that seniors and physicians can count on Medicare and providing time for Congress to fix the Medicare mess once and for all. In addition to the payment update, the final rule also implements changes included in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. 317

318 For example, effective January 1, 2011, the new law mandates the waiver of the Medicare Part B deductible and 20% coinsurance that would otherwise apply to most preventative services, according to a CMS fact sheet. The final rule also implements a provision providing incentive payments equal to 10% of a primary care practitioner s allowed charges for primary care services under Part B. Under the final rule, as required by the healthcare reform law, incentive payments equal to 10% of the fee schedule payment also will be available for surgical services furnished by a general surgeon in health professional shortage areas. The final rule further requires physicians referring CT, MRI, and PET services under the in-office ancillary services exception to the physician self-referral prohibition to provide patients with a list of five alternative suppliers within a 25-mile radius of the physician s office from whom they may receive the same services. The final rule also adopts a multiple procedure payment reduction policy for therapy services that will reduce by 25% the practice expense component of the second and subsequent therapy services furnished by a single provider to a beneficiary on a single date of service. CMS said the policy applies to all outpatient therapy services paid under Part B, including those furnished in office and facility settings. CMS also finalized a number of changes in the calendar year 2011 physician quality reporting initiative (PQRI), including adding 20 individual PQRI measures (such as new measures for reporting through registries and electronic health records) and one new measures group on which individual eligible professionals may report; making 10 additional individual PQRI measures available for reporting through electronic health records (EHRs) systems (in addition to the 10 measures already available for EHR reporting); and reducing the reporting sample requirements for claims-based reporting of individual measures from 80% to 50%. The final rule also creates a new Group Practice Reporting Option, which would be open to group practices with fewer than 200 eligible professionals. The final rule will be published in the November 29 Federal Register, with an effective date of January 1, 2011, unless otherwise noted. CMS said it will accept comments on certain aspects of the final rule until January 2, Congress subsequently passed, and the President signed, legislation blocking the reimbursement cut for one year (see Legislative Developments, below). CMS Unveils Winning Bidders In DMEPOS Competitive Bidding Program The Centers for Medicare and Medicaid Services (CMS) has awarded 356 suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) contracts under the Round One rebid of the new Medicare competitive bidding program, the agency said November 3, CMS had delayed announcing winning bidders in October 2010, citing long-standing concerns about fraud in the DME arena. 318

319 Each of these contract suppliers has met our stringent standards, so beneficiaries can be assured they will receive their equipment and supplies from legitimate and quality suppliers at prices that are more in line with the current market, said CMS Administrator Donald Berwick, M.D. in a press release. According to CMS, 76% of contracts were awarded to suppliers already furnishing contract items in the local area, while 97% of contract awards went to suppliers already established in the competitive bidding area, the product category, or both. As part of the rebid, CMS was required to include a 30% small supplier target in each competitive bidding area. CMS said small suppliers, those with gross revenues of $3.5 million or less, make up about 51% of the contract suppliers awarded in the rebid. CMS said the contract suppliers have 662 locations to serve Medicare beneficiaries in the nine competitive bidding areas: Charlotte, Cincinnati, Cleveland, Dallas, Kansas City, Miami, Orlando, Pittsburgh, and Riverside areas. The agency said it received 6,215 bids from 1,011 suppliers during a 60-day bidding period last year. CMS said bidders that were not awarded contracts will be notified by mail of the reasons they failed to qualify for the program. In addition, suppliers that did not win contracts may bid in Round Two in 2011 and in future rounds. Medicare beneficiaries in the nine areas will receive an introductory letter and a brochure explaining the program and also have access to a host of Internet-based and printed information, CMS said. In addition, CMS outlined a plan for monitoring the program s implementation, including beneficiary surveys, active claims analysis, a formal complaint process, and contract supplier reporting. Congress delayed implementation of the DMEPOS competitive bidding program, originally slated for July 1, 2008, and required a rebid of Round One in part over concerns that winning bidders in the initial Round One were not appropriately qualified to deliver on their bids. Under the new timeline, the competitive bidding program will begin January 1, Round Two of the competitive program will get underway in The healthcare reform law expanded the number of Round Two metropolitan statistical areas (MSAs) subject to the program from 70 to 91. The competitive bidding program is expected to save Medicare more than $17 billion over 10 years. Beneficiaries should see about $11 billion in savings as well over this time period, CMS added, as a result of lower coinsurance payments and premiums. Critics of the program have continued to argue, however, that savings are overstated and that the bidding process is flawed. Home Health Payments Will Decrease Almost 5% Under CMS Final Rule Home health agency payments will decrease by approximately 4.89% or $960 million in calendar year (CY) 2011, according to the Home Health Prospective Payment System (HH PPS) final rule issued November 3, 2010 by the Centers for Medicare and Medicaid Services (CMS). 319

320 The final rule promotes efficiency in payments, implements various Patient Protection and Affordable Care Act, as amended, (PPACA) provisions, and enhances Medicare s program integrity, the agency said in a press release. Under the healthcare reform law, the existing home health agency outlier cap becomes permanent and HH PPS rates are reduced by an additional 2.5%. The rule mandates that CMS apply a one percentage point reduction to the CY 2011 home health market basket amount, which results in a 1.1% market basket update for HHAs in CY 2011, the release explained. CMS had proposed reducing HH PPS rates by 3.79% in CY 2011 and an additional 3.79% in CY 2012 for additional growth in aggregate case mix that is unrelated to changes in patients health status. However, in response to comments, CMS finalized the reduction for CY 2011, but has postponed action for CY 2012 to allow for further analysis, the agency said. The rule also implements PPACA provisions requiring: a physician certifying a patient s eligibility for Medicare s home health benefit to document that the certifying physician or allowed non-physician practitioner has had a face-to-face encounter with the patient; and a hospice physician or nurse practitioner to provide a face-to-face encounter prior to the hospice physician re-certifying the patient s eligibility for hospice services at the 180th day recertification of care and for all subsequent certifications. The final rule will be published in the November 17 Federal Register and is effective January 1, OPPS Final Rule Provides Limited Exception To Physician Supervision Requirement For Outpatient Therapeutic Services Total payments for services furnished to Medicare beneficiaries in hospital outpatient departments during calendar year (CY) 2011 under the Outpatient Prospective Payment System (OPPS) will be approximately $39 billion, under a final rule with comment period issued by the Centers for Medicare and Medicaid Services (CMS) on November 2, Notably, the rule will eliminate beneficiary cost-sharing for most Medicare-covered preventive services and makes changes to the supervision requirements for outpatient therapeutic services. Physician Supervision Requirement In the final rule, CMS is providing for a limited exception to its general policy that requires direct supervision for the duration of all outpatient therapeutic services in both hospitals and critical access hospitals (CAHs). Under the exception, CMS will require direct supervision for the initiation of a service followed by general supervision after the initiation period for a limited set of non-surgical extended duration services, including observation services, effective January 1, CMS noted that it issued instructions to contractors to not enforce the direct supervision requirement for CAHs for CY 2010 and said it is extending through CY 2011 the notice of non-enforcement for CAHs and expanding it to include small rural hospitals with 100 or fewer beds. The supervision requirement has been controversial since proposed. Most recently, a bipartisan group of House lawmakers sent a letter September 17 to CMS saying that its 320

321 proposal did not go far enough to ensure continued access to the full range of outpatient therapeutic services in small and rural hospitals. CMS also said in a fact sheet that it is modifying the definition of direct supervision for all hospital outpatient services to require immediate availability without reference to the boundaries of a physical location, and will be establishing through future rulemaking an independent committee and a process to consider on an annual basis industry requests for supervision levels other than direct supervision for certain individual services, and to make recommendations to the agency. PPACA Provisions The final rule also implements several provisions of the Patient Protection and Affordable Care Act, as amended, (PPACA), including the waiver of the deductible and copayment for certain preventive services that are paid under the OPPS. We hope that by eliminating these out-of-pocket costs, more beneficiaries will make full use of their Medicare preventive benefits, CMS Administrator Donald Berwick, M.D. said in a press release. We know that prevention, early detection and early treatment of diseases can promote better outcomes for patients and lower long-term health spending. The rule also implements a PPACA provision that narrows access to the rural provider and whole hospital exceptions to the physician self-referral law by prohibiting their use by new physician-owned hospitals, and limiting the ability of existing physician-owned hospitals to expand their capacity. In addition, the rule implements direct and indirect graduate medical education (GME/IME) provisions in the reform law that requires CMS to identify unused residency slots and redistribute them to certain hospitals with qualified residency programs, with a special emphasis on increasing the number of primary care physicians. Ambulatory Surgical Centers CY 2011 is the first year the revised ASC payment system rates will be fully implemented based on the ASC standard rate-setting methodology, the agency noted. CMS projects total Medicare payments of approximately $4 billion to ASCs for CY The ASC provisions of the rule also: add six surgical procedures to the list of procedures for which Medicare would pay when performed in an ASC; designates two procedures as office-based procedures; and updates the list of covered ancillary services to reflect the OPPS update. SSA Issues Rule On Income-Related Monthly Adjustment Amounts For Medicare Part D The Social Security Administration (SSA) issued December 7, 2010 an interim final rule (75 Fed. Reg ) setting forth the additional Medicare Part D premiums higherincome beneficiaries will pay starting in January. The Patient Protection and Affordable Care Act (PPACA), as amended, established an income-related adjustment to Medicare prescription drug coverage premiums. 321

322 The Centers for Medicare and Medicare Services (CMS) sets the Medicare prescription drug coverage base beneficiary premium, which covers roughly 25.5% of the cost of the basic drug benefit. The federal government subsidizes about 74.5% of the basic coverage, the rule noted. Under the PPACA, beginning in January 2011, beneficiaries with higher earnings will have to pay a larger share of the premiums for Part D coverage. According to the rule, an estimated 1.05 million of the roughly 29.2 million beneficiaries enrolled in Medicare Part D will be assessed an income-related monthly adjustment amount. This assessment is in addition to the Part D plan sponsor s monthly premium and any applicable premium increase for late enrollment or reenrollment, the rule said. The income-related monthly adjustment amount will be based on a beneficiary s modified adjusted gross income for the applicable tax year, the rule said. For 2011 through 2019, the modified adjusted gross income threshold amount is $85,000 for individuals filing single, married filing separately, head of household, or qualifying widow(er) with dependent child. The threshold is $170,000 for individuals who file a joint income tax return with their spouse. CMS will use a sliding scale formula to establish four income-related monthly adjustment amounts annually beginning in 2011, the rule indicated. For example, individuals with a modified adjusted gross income above $85,000 but less than or equal to $107,000 will pay 35% of the cost of basic Part D coverage; above $107,000 but less than or equal to $160,000 will pay 50%; above $160,000 but less than or equal to $214,000 will pay 65%; and more than $214,000 will pay 80%. Those filing jointly with their spouse whose modified adjusted gross income is more than $170,000 but less than or equal to $214,000 will pay 35% of the cost of basic Part D coverage; above $214,000 but less than or equal to $320,000 will pay 50%; more than $320,000 but less than or equal to $428,000 will pay 65%; and above $428,000 will pay 80%. Beneficiaries who will be paying a higher Part D premium will be notified by letter at the end of 2010, SSA said. CMS Final Rule Implements ESRD QIP The Centers for Medicare and Medicaid Services (CMS) issued a final rule in the January 5, 2011 Federal Register (76 Fed. Reg. 628) establishing a Quality Incentive Program (QIP) for End-Stage Renal Disease (ESRD) facilities. ESRD QIP is designed to promote high-quality dialysis services at Medicare facilities by linking CMS payments directly to facility performance on quality measures, the agency said in a press release. The rule sets out QIP performance standards, sets out the scoring methodology CMS will use to rate providers quality of dialysis care, and establishes a sliding scale for payment adjustments based on the facility s performance. 322

323 Under the rule, CMS will assess each dialysis facility on how well its performance meets the standard for each measure and will then calculate each facility s Total Performance Score, up to a maximum score of 30 (10 points per measure). Facilities that do not meet or exceed performance standards will be subject to a payment reduction of up to 2% depending on how far their performance deviates from the standards, CMS said. The final rule also supports the transition of ESRD payments to a new ESRD Prospective Payment System (PPS). While the ESRD PPS will promote the efficient provision of care to patients with ESRD, the ESRD QIP will help ensure that facilities provide high quality, patient-centered care, the agency noted. According to a CMS fact sheet, the rule provides for public disclosure of individual dialysis facility performance scores. The agency said it will give providers and facilities the opportunity to review their scores and any resulting payment adjustments prior to releasing the ESRD QIP scores and payment reductions to the public. CMS Issues Interim Final Rule On GME Affiliated Groups For Purposes Of FTE Resident Cap Reductions The Centers for Medicare and Medicaid Services (CMS) issued an interim final rule March 11, 2011 affecting the treatment of teaching hospitals that are members of the same Medicare graduate medical education (GME) affiliated groups for purposes of determining possible full-time equivalent (FTE) resident cap reductions. The interim final rule was published in the March 14, 2011 Federal Register (76 Fed. Reg ) and is effective as of that date. CMS is accepting comments on the interim final rule until April 13. The interim final rule implements Section 203 of the Medicare and Medicaid Extenders Act of 2010 (MMEA), which allows the agency to determine the GME FTE cap reduction for teaching hospitals that are members of the same Medicare GME affiliated group in the aggregate, rather than only on an individual basis. The Patient Protection and Affordable Care Act (PPACA) made a number of changes to how a hospital s FTE resident court is determined for direct GME and indirect medical education (IME) payment purposes, CMS said. The calculation of both direct GME and IME payments is affected by the number of FTE residents that a hospital is allowed to count. In general, CMS explained, the greater the number of FTE residents a hospital counts, the greater the amount of Medicare direct GME and IME payments the hospital will receive. Section 5503 of the PPACA provided for the reduction in FTE resident caps for direct GME for certain hospitals and authorized the redistribution of these slots to other qualified hospitals. Medicare GME affiliation agreements allow teaching hospitals to temporarily transfer cap slots to other hospitals to facilitate resident cross training. But Section 5503 of the PPACA did not, as initially enacted, provide for determinations based on the aggregate experience of a Medicare GME affiliated group. 323

324 Section 203 of the MMEA amended this portion of the PPACA to allow CMS to consider hospitals that are members of the same Medicare GME affiliated group collectively, rather than individually, for purposes of determining a GME FTE cap reduction, the rule said. CMS Issues Final Rule On Medicare Advantage And Prescription Drug Plans The Centers for Medicare and Medicaid Services (CMS) issued April 5, 2011 its final contract year 2012 rule implementing provisions of the Patient Protection and Affordable Care Act (PPACA) that are related to the Medicare Advantage (MA, or Part C) and Prescription Drug Benefit (Part D) programs. The agency noted in a fact sheet that it released the final rule in time for plans to prepare their bids for the 2012 contract year. Taking into account both costs and savings estimated as a result of implementation of all 50 proposals in the final rule, CMS said it expects a net savings to the Medicare program of about $76 billion for fiscal years 2011 through Most of the savings are due to reforms to MA payments, CMS noted. The final rule codifies changes to the MA benchmark calculation and rebate amounts, limits MA costsharing for specified services to original Medicare levels, and prohibits MA plans from charging cost-sharing for in-network preventive services, among other things. In addition, the rule implements a host of other PPACA provisions, including: codifying changes to close the Part D coverage gap; clarifying that the Secretary is not required to accept all Part C and D bids and clarifying the Secretary s authority to deny bids that propose significant increases in cost-sharing or decreases in benefits; and eliminating Part D cost-sharing for Medicare beneficiaries who are eligible for full Medicaid benefits and who are receiving home- and community-based waiver services. The rule also includes several provisions that strengthen beneficiary protections and clarify program participation requirements. CMS Launches Medicare Hospital Value-Based Purchasing Program For the first time, hospitals across the country will be paid for inpatient acute care services based on care quality under the new Hospital Value-Based Purchasing (Hospital VPB) program launched April 29, 2011 by the Centers for Medicare and Medicaid Services (CMS). The program, beginning in October 2012, marks the beginning of a historic change in how Medicare pays health care providers and facilities, the agency said in a fact sheet. In fiscal year (FY) 2013, an estimated $850 million will be paid to hospitals under the program. The final rule establishing the Hospital VBP under the Medicare Inpatient Prospective Payment System (IPPS) adopts performance measures drawn from the measure set that hospitals have been reporting under the Hospital Inpatient Quality Reporting program. The Affordable Care Act requires CMS to fund the aggregate Hospital VBP incentive payments by reducing the base operating diagnosis-related group (DRG) payment 324

325 amounts that determine the Medicare payment for each hospital inpatient discharge, the fact sheet said. The reduction will be 1% in FY 2013, rising to 2% by FY Therefore, the Hospital VBP Program will not increase overall Medicare spending for inpatient stays in acute care hospitals, CMS said. Medicare will make incentive payments to hospitals beginning in FY CMS will score each hospital based on achievement and improvement ranges for each applicable measure, according to the fact sheet. A hospital s score on each measure will be the higher of an achievement score in the performance period or an improvement score, which is determined by comparing the hospital s score in the performance period with its score during a baseline period. By rewarding the higher of achievement or improvement on measures, Hospital Value- Based Purchasing gives hospitals the financial incentive to continually improve how they deliver care, according to a separate fact sheet. The agency plans to add additional outcomes measures in the future that focus on improved patient outcomes and prevention of hospital-acquired conditions, the fact sheet noted. CMS said it will then calculate a Total Performance Score for each hospital by combining the greater of its achievement or improvement points on each measure to determine a score for each domain, multiplying each domain score by the proposed domain weight and adding the weighted scores together. (In FY 2013, the clinical process of care domain will be weighted at 70% and the patient experience of care domain will be weighted at 30%). Those hospitals that receive higher Total Performance Scores will receive higher incentive payments than those that receive lower Total Performance Scores, the agency explained. CMS Issues Final Rule On Inpatient Psychiatric Facilities PPS With $120 Million Payment Increase Inpatient psychiatric facilities (IPFs) will see a net increase in Medicare prospective payment system (PPS) payments of $120 million in Rate Year (RY) 2012, according to a Centers for Medicare and Medicaid Services (CMS) final rule to be published in the May 6, 2011 Federal Register. The increase in payments reflects a $130 million increase from the update to payment rates and a $10 million decrease due to the update to the outlier threshold amount, which will decrease outlier payments from roughly 2.2% in RY 2011 to 2.0% in RY 2012, the rule said. The final rule also changes the IPF PPS payment rate update period to a RY that coincides with a fiscal year (FY). Accordingly, the changes in the final rule are applicable to IPF discharges occurring during the RY beginning July 1, 2011 through September 30, In addition, the rule implements policy changes affecting the IPF PPS teaching adjustment. 325

326 Legislative Developments House, Senate Pass One-Year Patch To Medicare Physician Rate Cuts The House and Senate approved in early December 2010 that avoids a 25% impending cut in physician reimbursement rates under Medicare and includes other extensions of expiring healthcare provisions. According to a summary of the Medicare and Medicaid Extenders Act of 2010 (H.R. 4994), the physician payment fix maintains current funding levels through December 31, 2011 at an estimated cost of $14.9 billion. The Senate cleared the measure December 8, 2010 by unanimous consent. The House followed suit December 9, 2010 with a vote. Stopping the steep 25 percent Medicare cut for one year was vital to preserve seniors access to physician care in Many physicians made clear that this year s roller coaster ride, caused by five delays of this year s cut, forced them to make difficult practice changes like limiting the number of Medicare patients they could treat, the American Medical Association (AMA) said in a statement. The AMA will be working closely with congressional leadership in the new year to develop a long-term solution to this perennial Medicare problem for seniors and their physicians, the group said. The legislation also includes extensions of other expiring healthcare provisions, including the exceptions process for Medicare therapy caps ($900 million); the Medicare work geographic adjustment floor ($500 million); the Transitional Medical Assistance program ($1 billion), and the Special Diabetes Program ($600 million). The roughly $19 billion package is paid for by modifying the policy regarding overpayments of the healthcare affordability tax credit, according to a Senate Finance Committee press release. Under current law there is a flat cap of $250 for individuals and $400 for families on the amount of the health care affordability tax credit people are required to pay back when they received an overpayment, the release explained. This payback cap is the same for people earning 160 percent of the federal poverty level and 360 percent of the federal poverty level. The legislation bases the pay back cap on a sliding scale tied to the income of the recipient of the tax credit, making the policy fairer to both recipients and all taxpayers, the release said. On November 30, President Obama signed into law a bill (H.R. 5712) that blocked for one-month a 23% cut in Medicare reimbursement rates to physicians that was set to take effect December 1. The one-month extension, which will cost about $1 billion, is paid for using the Medicare savings from a new policy that reduces payments for multiple therapy services provided to patients in one day. Without legislative intervention, physician payment rates would have been reduced on December 1, when a congressionally mandated increase expired, and then again on 326

327 January 1, 2011 under current law, which is based on the much-criticized sustainable growth rate formula. These two reductions amount to a 24.9% cut, according to a Centers for Medicare and Medicaid Services final physician fee schedule rule. In June 2010, President Obama signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which averted a scheduled 21% reduction in physician fee schedule rates through November 30, The law instead provided physicians with a 2.2% positive update, retroactive to June 1, 2010, when the 21% reduction took effect. President Obama signed the legislation December 15, Case Law U.S. Court In D.C. Upholds HHS Secretary s Exclusion Of State- Funded General Assistance Days From Hospitals Medicare DSH Adjustment The Department of Health and Human Services (HHS) Secretary properly excluded medically needy and medically indigent patient days that were funded entirely by the state of Arizona from several hospitals Medicare disproportionate share hospital (DSH) adjustment for cost years 1991 and , a federal district court in the District of Columbia ruled June 7, Plaintiff Banner Hospital operates four hospitals in Arizona: Good Samaritan Medical Center, Desert Medical Center, Thunderbird Medical Center, and Maryvale Hospital Medical Center. During the cost years at issue, Arizona covered three groups of patients under its Medicaid program: the medically needy/medically indigent, the eligible assistance to children, and the eligible low income children (collectively, MN/MI patient groups). During this time period, the hospitals received Medicaid DSH payments from the state, but Arizona did not seek or receive federal funding for the MN/MI patient groups. Plaintiff appealed the fiscal intermediary s exclusion of the MN/MI patient groups from the numerator of the Medicaid fraction for purposes of the hospitals Medicare DSH adjustment for the cost years at issue. The Provider Reimbursement Review Board (PRRB) found the MN/MI patient groups were expansion populations under a Section 1115 waiver and therefore should have been included in the Medicare DSH calculation. The Centers for Medicare and Medicaid Services Administrator reversed the PRRB s decision, finding the MN/MI patient days were properly categorized as general assistance days for which Arizona did not receive federal financial participation. Thus, the patients at issue were not eligible for Medicaid and could not be counted in the numerator of the DSH Medicaid fraction, which is the number of a hospital s patient days for those who were eligible for medical assistance under a state plan approved under Title XIX of the Social Security Act who were not entitled to benefits under Medicare Part A. 327

328 The Secretary also found the hospitals did not qualify for the hold harmless policy, which allowed hospitals that had received Medicare DSH payments based on the erroneous inclusion of ineligible patient days to retain those payments if they had been including such days before October 15, In this case, Arizona excluded MN/MI patient group days from data reported to the intermediary since 1990; therefore, the hospitals had no expectation of being paid for such days." Hospitals also could qualify for the hold harmless policy if they had filed a proper appeal to the PRRB on the issue of the exclusion of state-only patient days from the Medicare DSH formula before October 15, Here, the Secretary found while some of the hospitals had appeals pending with the PRRB, they did not raise the specific issue of inclusion of state-only patient days. The U.S. District Court for the District of Columbia upheld the Secretary s exclusion of the MN/MI patient groups for purposes of the Medicare DSH calculation. The court found adequate basis for the Secretary s conclusion that the days involved in this case are related to individuals that were not eligible for medical assistance' as that term is used under Title XIX. Specifically, the court noted evidence that, for the years at issue, the MN/MI patients groups were not eligible for federal Medicaid benefits under the Arizona system; rather, they were state-only groups not approved by the Secretary and included for payment under the Section 1115 waiver. The court also gave no weight to the fact that the hospitals received federal funding for the MN/MI population via the Medicaid DSH provision. [T]he Medicaid DSH provision specifically accounts for low income patients while the Medicare DSH provision at issue here does not, the court said. Therefore, the fact that the MN/MI patient groups were included when calculating the Medicaid DSH payment does not render the MN/MI patient groups beneficiaries of the Medicaid program, any more than Medicaid patients are beneficiaries of the Medicare program simply because they were included in the Medicare DSH calculation, the court wrote. Finally, the court rejected plaintiff s argument that the MN/MI patient groups could have hypothetically been made eligible for Medicaid under a state plan. [T]he logical conclusion of such an interpretation would require the Secretary to include in the Medicaid fraction days of anyone who could receive benefits under a hypothetical state plan, an anomalous result under the statute, the court observed. The court also agreed with the Secretary that the hold harmless policy did not apply to three of the hospitals Desert Medical Center, Thunderbird Medical Center, and Maryvale Hospital Medical Center since their practices during the cost years at issue was to not include the MN/MI patients groups in their cost reports. However, the court said, as to Good Samaritan Medical Center, the picture is somewhat less clear. 328

329 The court noted evidence in the record that the hospital received erroneous final Medicare DSH payments from 1986 to 1989 and from 1990 to 1992 received erroneous interim Medicare DSH payments that never became final payments. Thus, whatever their practice was after 1992, it is unclear what their earlier practice had been, the court said. [B]ecause the cost years Good Samaritan Medical Center is appealing include time periods prior to 1992, the Court finds the Secretary erred in her application of the hold harmless policy to those cost years prior to Accordingly, the court remanded to the Secretary for further proceedings on what Good Samaritan s practice was during the cost years it is appealing. Banner Health v. Sebelius, No (D.D.C. June 7, 2010). Ninth Circuit Holds Low-Income Patients Properly Excluded From DSH Adjustment The Ninth Circuit held September 21, 2010 that certain low-income patients covered under Arizona s state plan were properly excluded from the calculation of eight hospitals Medicare Disproportionate Share Hospital (DSH) adjustment. Affirming a lower court decision granting summary judgment in favor of the Department of Health and Human Services Secretary, the appeals court found the Arizona Health Care Cost Containment System (AHCCS) had two components Arizona s Medicaid plan and a state-funded program for providing healthcare to low-income persons who are not eligible for Medicaid. Because the AHCCS did not provide the groups of patients at issue were eligible for Medicaid benefits, they should not be included in the Medicare DSH calculation, the appeals court concluded. The appeals court also affirmed the district court s holding that the hospitals were not eligible for hold harmless treatment. The Medicaid Act requires that state plans cover categorically needy individuals, and allows states to elect to cover medically needy groups who have income above the poverty line, but who lack the means to pay for medical care. The AHCCS, which operates under a Section 1115 demonstration project waiver, covers the categorically needy, as required by Medicaid, and the medically needy specifically, the Medically Needy/Medically Indigent (MN/MI); Eligible Low Income Children (ELIC); and Eligible Assistance Children (EAC). Up until 1990, the eight plaintiff hospitals received DSH adjustment payments that were calculated by including all these patients days in the DSH reimbursement formula. In early 1992, however, the fiscal intermediary advised plaintiffs that it would not include MN/MI, ELIC, and EAC patient days in the DSH formula for fiscal years after At issue in this case, was the calculation of the Medicaid Proxy of the Medicare DSH calculation. 329

330 The Medicaid Proxy is the number of non-medicare hospital patients eligible for medical assistance under a State plan divided by the total number hospital patients for the given period. Plaintiff hospitals argued the medically needy patient days should have been included in the Medicaid Proxy. The Provider Reimbursement Review Board agreed, finding the MN/MI population fell under the state s plan regardless of how the programs were funded. The Centers for Medicare and Medicaid Services (CMS) Administrator reversed, holding the days at issue were not eligible for medical assistance under the state plan and therefore were properly excluded from the Medicaid Proxy. The district court affirmed this decision. On appeal, the Ninth Circuit also affirmed. Plaintiffs argued the MN/MI populations should be included in the DSH calculation because such individuals are eligible for medical assistance under a state plan approved through a Section 1115 waiver. The appeals court disagreed, noting none of the fourteen specific waivers granted by the Secretary to implement its demonstration project related to providing medical assistance to MN/MI patients. Moreover, in 1997, Arizona requested a specific waiver for approval to include MN/MI populations in its Medicaid plan, which the state said was 100% state-funded. In addition, Arizona received no federal reimbursement for these patients. Thus, the appeals court held, [d]uring the relevant time period, the MN/MI populations were part of the state-funded program and thus were not eligible for medical assistance under Arizona s Medicaid plan, even though they were eligible for medical assistance under AHCCS. Finally, the appeals court held the hospitals were not eligible for hold harmless treatment under Program Memorandum The program memorandum requires intermediaries to hold hospitals harmless for DSH payments that included general assistance days in cost periods beginning prior to January 1, As part of the hold harmless memorandum, CMS also instructed intermediaries to reopen cost reports for hospitals whose DSH payments were not calculated using the otherwise ineligible general assistance days if they had filed a jurisdictionally proper appeal of the issue before October 15, Here, none of the timely filed appeals indicated the hospitals were appealing the exclusion of general-assistance patient days. [A] blanket appeal of the DSH calculation before October 15, 1999 is not sufficient to preserve appellate rights on this issue, the appeals court said. Phoenix Mem l Hosp. v. Sebelius, No (9th Cir. Sept. 21, 2010). Third Circuit Affirms Ruling Rejecting Hospital s Challenge To Medicare DSH Calculation 330

331 In a non-precedential opinion issued October 12, 2010 the Third Circuit affirmed, with little additional comment, a federal district court decision upholding the Centers for Medicare and Medicaid Services (CMS) interpretation of the Medicare disproportionate share hospital (DSH) provision as excluding patient days under the New Jersey Charity Care Program (NJCCP) as a permissible construction of an ambiguous statute. The U.S. District Court for the District of New Jersey granted, in a September 2009 decision, summary judgment to defendant Department of Health and Human Services (HHS) Secretary Kathleen Sebelius in an action brought by Cooper University Hospital. Cooper Univ. Hosp. v. Sebelius, No (JBS/JS) (D.N.J. Sept. 28, 2009). At issue in the case was the Medicaid fraction of the disproportionate share percentage calculation. Cooper University Hospital (Cooper), a 550-bed urban hospital in Camden, NJ, sought to count its NJCCP patients in its Medicare DSH calculation. NJCCP covers some or all of the costs for uninsured hospital patients who are ineligible for any private or governmental sponsored coverage (such as Medicaid). NJCCP patients are included in the calculation of Medicaid DSH payments under New Jersey s state Medicaid plan. For fiscal years (FYs) 1996 through 1999, Cooper, which has one of the largest lowincome patient populations in the state, included NJCCP days in the Medicaid fraction of its Medicare cost report DSH calculation, which were accepted by the Medicare fiscal intermediary. In December 1999, however, CMS issued a program memorandum indicating that for a day to be counted in the Medicaid fraction, the patient must be eligible on that day for Medicaid. Cooper in protest claimed NJCCP days for FY 2000 in its Medicare DSH calculation. The intermediary removed the 5,518 NJCCP patient days from the Medicaid fraction, thereby reducing the hospital s Medicare reimbursement for that year by about $1.145 million. The Provider Reimbursement Review Board (PRRB) reversed the fiscal intermediary s decision. But the CMS Administrator reversed the PRRB, finding the NJCCP recipients were not eligible for medical assistance under a state plan. According to the Administrator, if a patient was not eligible for Medicaid, than the patient was not eligible for medical assistance under a State plan as defined in the Medicare statute. Applying Chevron, the New Jersey court found the relevant statute was ambiguous, because it did not make clear whether NJCCP patients who are not eligible for traditional Medicaid, but who receive care that is funded through the Medicaid DSH, are eligible for medical assistance under a State plan. In the second-step of the Chevron analysis, the court held the Secretary s interpretation of the ambiguous statute i.e. that only patients who are eligible for traditional Medicaid are included in the fraction was reasonable. On appeal, the Third Circuit affirmed. 331

332 Acknowledging the difficult legal issue presented by the case, and that [r]esolution of th[e] issue will affect hospitals well beyond the one hospital party to this case, the Third Circuit said the district court judge thoughtfully, thoroughly, and articulately decided what had to be decided. Thus, substantially for the reasons set forth in the district court s opinion, we will affirm, the appeals court said. Cooper Univ. Hosp. v. Sebelius, No (3d Cir. Oct. 12, 2010). U.S. Court In D.C. Finds Secretary s Interpretation Of DSH Provision Reasonable Following precedent set by the D.C. Circuit, the U.S. District Court for the District of Columbia granted summary judgment January 21 to the Department of Health and Human Services Secretary on claims that certain patients should be counted under the Medicare disproportionate share hospital (DSH) provision. In so holding, the court agreed with the Secretary that her interpretation of the DSH provision is in accord with the Medicare Statute. Plaintiffs, five Medicare-participating hospitals located in Ohio, challenge an interpretation of the DSH provision of the Medicare statute by the Secretary of the Department of Health and Human Services. The Medicare statute provides that any hospital serving a disproportionate share of lowincome patients is reimbursed at higher rates, subject to conditions. The Ohio Hospital Care Assurance Program (HCAP) ensures that indigent patients who are not recipients under the Ohio Medicaid plan receive basic, medically necessary hospital-level services at no charge. Ohio Rev. Code (B). Seeking to cover some of their HCAP expenses, plaintiffs assert that the Secretary should have included HCAP patients when calculating their DSH reimbursements under the Medicare statute. The Secretary argues, however, that she has reasonably interpreted the statutory phrase eligible for medical assistance under a State plan approved under [Title] XIX to mean eligible for Medicaid. Because HCAP patients are not eligible for benefits under the Medicaid statute or the Ohio Medicaid plan, the Secretary contends that she reasonably excluded HCAP patients when calculating plaintiffs DSH reimbursements under the Medicare statute. The court explained that the D.C. Circuit addressed the precise question at issue in Adena Reg l Med. Ctr. v. Leavitt, 527 F.3d 176 (D.C. Cir. 2008). In that case, the appeals court found the Secretary had correctly calculated plaintiffs DSH reimbursements and was entitled to summary judgment. According to the court in Adena, HCAP patients are not eligible for care under a State plan approved under subchapter XIX [Medicaid] within the meaning of the Medicare statute, 42 U.S.C. 1395ww(d)(5)(F)(vi)(II). 332

333 Accordingly, the court in the instant case granted summary judgment to the Secretary. Ashtabula Cty. Med. Ctr. v. Sebelius, No. 05-cv-2365 (D.D.C. Jan. 21, 2011). Ninth Circuit Upholds Secretary s Exclusion Of Certain Patients From Hospitals DSH Reimbursement The Ninth Circuit February 11, 2011 upheld the Department of Health and Human Services Secretary s decision not to include certain patients in the plaintiff hospitals Medicare disproportionate share hospital (DSH) reimbursement, finding that although the patients at issue are mentioned in Washington s Medicaid plan, they are not eligible for medical assistance under that plan. The state of Washington extends hospital care to two groups: the General Assistance- Unemployable (GAU) and the Medically Indigent (MI). These groups are needy, but are ineligible for traditional Medicaid because they are not aged, blind or disabled, and they do not have dependent children. Plaintiffs, the University of Washington Medical Center and 17 other hospitals from Washington State (Hospitals), sought to include their GAU and MI patients in their Medicare DSH reimbursement calculations. The Hospitals intermediary excluded the GAU and the MI populations for fiscal years and as a result, the Hospitals received a lower Medicare DSH reimbursement than they expected. The Hospitals administratively appealed the intermediary s decision to the Provider Reimbursement Review Board, which found in favor of the Hospitals. However, the Secretary reversed the Board s decision because she concluded that Washington s GAU and MI patients were not eligible for medical assistance under Washington s Medicaid plan and therefore should not have been included in the Medicare DSH calculation. The district court granted summary judgment to the Secretary and the Hospitals appealed. On appeal, the Hospitals argued that because the GAU and MI populations are mentioned in Washington s Medicaid plan and indirectly benefit from federal Medicaid dollars, they are eligible for medical assistance under Washington s plan. But the appeals court concluded that eligible for medical assistance under a State plan approved under subchapter XIX is unambiguously limited to those eligible for traditional Medicaid, and thus rejected this argument. According to the appeals court, the definition of medical assistance has four key elements: (1) federal funds; (2) to be spent in payment of part or all of the cost ; (3) of certain services; (4) for or to [p]atients meeting the statutory requirements for Medicaid. Here, even though federal Medicaid money indirectly subsidized the medical treatment received by Washington s GAU and MI populations, their care still does not meet this definition of medical assistance, the appeals court reasoned. 333

334 The appeals court further noted that the Hospitals conceded on appeal that the MI and GAU programs cover low-income persons who do not meet the categorical or status requirements for the Categorically Needy and Medically Needy programs, and therefore are considered ineligible for Medicaid. The Hospitals also argued that because Washington uses its Medicaid DSH allotment to reimburse the Hospitals for the care of the GAU and MI populations on a per patient basis, the federal government was spending its funds for the GAU and MI populations care. The appeals court rejected this argument, explaining that adopting this interpretation would ignore the different funding mechanisms Congress created within the Social Security Act for the Medicare and Medicaid DSH adjustments. University of Washington Med. Ctr. v. Sebelius, No (9th Cir. Feb. 11, 2011). U.S. Court In District Of Columbia Holds Hospital Not Entitled To DSH Adjustment Under Hold Harmless Rule A hospital was not entitled to additional disproportionate share hospital (DSH) payments from Medicare for its otherwise ineligible expansion waiver populations under the Centers for Medicare and Medicaid Services (CMS ) hold harmless policy, a federal court in the District of Columbia held February 28, The DSH adjustment is determined using two measures the Medicare and Medicaid fractions. The Medicaid fraction, at issue in the instant action, consists of hospital patient days for patients eligible for medical assistance under a state plan divided by the total number of hospital patient days for the given period. According to the opinion, since the inception of the Medicare DSH adjustment, CMS policy has been to exclude expansion waiver days in calculating DSH payments. But nonetheless there was confusion among hospitals as to which state-only days, such as those attributable to expansion waiver populations, that went beyond approved state Medicaid plans could be included in the DSH calculation. CMS ultimately issued Program Memorandum (PM) A to clarify that expansion waiver days, among others, were not to be included in the Medicaid fraction. At the same time, the PM also established a hold harmless policy for DSH payments that included the general assistance days in cost periods beginning prior to January 1, As part of the hold harmless memorandum, CMS also instructed intermediaries to reopen cost reports for hospitals whose DSH payments were not calculated using the otherwise ineligible general assistance days if they had filed a jurisdictionally proper appeal of the issue before October 15, Baptist Memorial Hospital--Memphis provided services to expansion waiver populations under Tennessee s Medicaid program, TennCare. It included these days in its initial fiscal year 1994 cost report, which sought a DSH adjustment of $3,414,608. At its fiscal intermediary s direction, however, Baptist Memorial submitted a revised listing of TennCare days that did not include the expansion waiver days. The fiscal intermediary audited the cost report and issued a Notice of Program Reimbursement reducing Baptist s as-filed DSH payment claim of $3,414,608 to $2,788,

335 Baptist appealed its DSH adjustment to the Provider Reimbursement Review Board on March 29, 1998, which ultimately concluded the hospital was entitled to hold harmless treatment. The CMS Administrator reversed, however, concluding Baptist had not filed a jurisdictionally proper appeal on the specific issue of expansion waiver days prior to October 15, 1999 and therefore did not qualify for hold harmless treatment under the PM. Baptist argued before the U.S. District Court for the District of Columbia that the Department of Health and Human Services Secretary's final decision on its DSH adjustment was not supported by substantial evidence and was arbitrary and capricious. But the court disagreed, finding the Secretary's conclusion that Baptist did not meet the PM s hold harmless requirements was reasonable and supported by substantial evidence. Baptist s March 1998 appeal simply stated that [t]he Intermediary incorrectly calculated the Disproportionate Share adjustment, without specifically mentioning the expansion waiver days, the court noted. The court found no indication on the face of the appeal or the hospital s associated work papers that Baptist intended to appeal the exclusion of expansion waiver days in its March 1998 appeal. In so holding, the court distinguished the instant action from its holding in St. Joseph s Hospital v. Leavitt, 425 F. Supp. 2d 94 (D.D.C. 2006), which addressed the similar issue of whether the hospital specifically raised the exclusion of general assistance (non- Medicaid) days in its appeal for purposes of hold harmless treatment. The court in St. Joseph s found the Secretary s decision arbitrary and capricious, saying it could not deny hold harmless treatment on the ground the hospital failed to use the magic words general assistance days in its appeal, without considering other evidence. The court concluded that St. Joseph s document trail demonstrated the exclusion of general assistance days provided at least one reason for the appeal of the DSH allowance. In the instant case, however, Baptist s appeal provided no document trail demonstrating that it specifically raised the exclusion of expansion waiver days, the court held Baptist Mem l Hosp. v. Sebelius, No. 07-cv-1938 (RCL) (D.D.C. Feb. 28, 2011). U.S. Court In Oklahoma Holds HHS Regulation For Calculating Medicare Hospice Provider Cap Is Invalid Joining several other federal district courts to consider the issue, the U.S. District Court for the Western District of Oklahoma held June 7, 2010 that a Department of Health and Human Services (HHS) regulation implementing a statutory cap on Medicare payments for hospice care is invalid and must be set aside. Several cases nationwide are pending over the same regulation, 42 C.F.R (b), at issue in the instant action. The court here found the regulation conflicted with the clear congressional directive for calculating the annual provider cap. See 42 U.S.C. 1395f(i)(2)(C). 335

336 The court enjoined HHS from enforcing overpayment determinations against plaintiff Compassionate Care Hospice calculated by using the invalid regulation and from further applying the regulation to calculate plaintiff s payment cap. The court remanded to the Provider Reimbursement Review Board (PRRB) to determine the amount of overpayment, if any, based on application of the statute rather than the regulation. Plaintiff sued the HHS Secretary after it received from Medicare a demand for repayment in connection with revenues allegedly exceeding its aggregate annual provider cap for the 2006 and 2007 fiscal year of $840,857 and $1,363,638 respectively. After finding that it had subject matter jurisdiction and that plaintiff had standing, the court held the hospice cap regulation could not be reconciled with the governing statute. Under the statute, the amount paid for hospice care for an accounting year is limited to a cap amount for the year multiplied by the number of Medicare beneficiaries in the hospice program in that year. The statute provides that the number of Medicare beneficiaries for purposes of this calculation should be reduced to reflect the proportion of hospice care that each such individual was provided in a previous or subsequent accounting year... The implementing regulation, Section (b), however, calculates each hospice s cap amount using the number of Medicare beneficiaries who elected to receive hospice care during the cap period. Applying Chevron, the court held the regulation was entitled to no deference because it was contrary to the plain language of the statute. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). [T]he regulation makes no attempt to determine an appropriate proportion of the amount of care provided in each fiscal year; rather, it simply assigns the entire amount of a beneficiary s allocation to a single year based solely on the date of admission, the court said. According to the court, the Secretary s arguments that its methodology achieves the same result and/or minimizes accounting or recordkeeping burdens simply misses the point. Here, the Secretary failed to promulgate regulations that follow the clear mandate of Congress. Thus, the court granted plaintiff s request for an injunction. The court refused, however, to award plaintiff a monetary judgment and instead remanded to the PRRB for a determination of plaintiff s overpayment liability, if any, as calculated under the statutory terms as opposed to the regulation. Compassionate Care Hospice v. Sebelius, No. CIV C (W.D. Okla. June 7, 2010). U.S. Court In D.C. Denies Hospice Providers Injunction Against HHS For Overpayment Demands 336

337 The U.S. District Court for the District of Columbia denied 15 hospice providers motion for a temporary restraining order prohibiting the Department of Health and Human Services (HHS) from demanding repayment for payments made above the statutory cap. The July 1, 2010 opinion found plaintiffs failed to show irreparable injury and thus were not entitled to injunctive relief. Plaintiffs are a group of 15 hospice care providers participating in Medicare. The Medicare statute caps the total amount the program may distribute to a hospice provider in a single fiscal year. Payments made in excess of the statutory cap are considered overpayments that must be refunded by the hospice care provider. HHS demanded repayment from the 15 plaintiffs for payments made above the statutory cap for fiscal years 2006 and Plaintiffs challenged these repayment demands on the grounds that 42 C.F.R , the regulation pursuant to which the demands were calculated, conflicts with 42 U.S.C. 1395f(i)(2), the statutory provision the regulation purports to implement. Plaintiffs asserted that whereas the Medicare statute requires HHS to allocate the cap amount across years of service by proportionally adjusting the "number of beneficiaries" in any given year to reflect hospice services provided to an individual in previous and subsequent years, the reimbursement regulation provides that an individual is counted as a beneficiary only in a single year, depending on when he or she first elects hospice benefits. Plaintiffs sought a temporary restraining order enjoining HHS from continuing to collect from the plaintiffs on its hospice cap repayment demands for fiscal years 2006 and The court first noted that to grant injunctive relief, it must find an irreparable injury. Plaintiffs submitted declarations from the administrators of four of the 15 plaintiff hospices describing the hardships caused by the repayment demands at issue to support their claim that they would suffer irreparable injury absent injunctive relief. Among other arguments, HHS countered that the four declarations plaintiffs submitted at best demonstrate hardship attributable to the existence of the statutory cap rather than the challenged regulation. The court agreed, finding that even assuming that the concerns expressed in these declarations are representative of the threat facing all the plaintiffs, there is no evidence of the extent to which these prospective injuries result from the application of the challenged regulation. At no point do the plaintiffs suggest that their success on the merits would relieve all, or even most, of their cap repayment obligations. According to the court, plaintiffs offer no indication whatsoever of the extent to which their repayment obligation for any fiscal year would be affected were they to succeed on the merits, beyond the bare allegation in the complaint that if HHS had properly applied the Medicare statute, their cap liability for fiscal years 2006 and 2007 would have been materially reduced. " Accordingly, the court denied the motion for a temporary restraining order. Affinity Healthcare Servs., Inc. v. Sebelius, No (D.D.C. July 1, 2010). 337

338 U.S. Court In D.C. Enjoins HHS From Applying Hospice Cap Regulation To Providers, Sets Aside Repayment Demands The U.S. District Court for the District of Columbia enjoined October 25, 2010 the Department of Health and Human Services (HHS) from continuing to use its regulation to calculate the plaintiff providers hospice cap liability. Citing a previous decision, Russell-Murray Hospice, Inc. v. Sebelius, No (RMU) (D.D.C. July 20, 2010), the court again found the regulation at issue, 42 C.F.R , clearly conflicted with the Medicare statute s provision for setting the hospice cap. Because the regulation was invalid, the court set aside HHS repayment demands issued to the plaintiff providers in 2006 and The court refused, however, to order HHS to return amounts plaintiffs already paid pursuant to the set-aside demands. Instead, the court remanded to the agency to recalculate plaintiffs cap repayment obligation using the proportional method called for in the statute. Earlier this year, the court had denied the hospice providers involved in the action a temporary restraining order prohibiting HHS from demanding repayment of payments above the statutory cap, finding plaintiffs failed to show irreparable injury. Affinity Healthcare Servs., Inc. v. Sebelius, No (D.D.C. July 1, 2010). Challenge to Hospice Cap Regulation Plaintiffs are a group of hospice care providers participating in Medicare. The Medicare statute caps the total amount the program may distribute to a hospice provider in a single fiscal year. Payments made in excess of the statutory cap are considered overpayments that must be refunded by the hospice care provider. HHS demanded repayment from the plaintiffs for payments made above the statutory cap for fiscal years 2006 and Plaintiffs challenged these repayment demands on the grounds that 42 C.F.R , the regulation pursuant to which the demands were calculated, conflicted with 42 U.S.C. 1395f(i)(2), the statutory provision the regulation purports to implement. Plaintiffs asserted that whereas the Medicare statute requires HHS to allocate the cap amount across years of service by proportionally adjusting the "number of beneficiaries" in any given year to reflect hospice services provided to an individual in previous and subsequent years, the reimbursement regulation provides that an individual is counted as a beneficiary only in a single year, depending on when he or she first elects hospice benefits. EJR Determination The Provider Review Reimbursement Board (PRRB) granted plaintiffs request for expedited judicial review (EJR) after finding the action involved a question of law that it lacked the authority to address. 338

339 The Centers for Medicare and Medicaid Services Administrator reversed the PRRB s decision granting plaintiffs request for EJR. The Administrator concluded plaintiffs failed to establish that the aggregate amount in controversy exceeded $50,000 as required to invoke PRRB review in the first place. Based on this determination, HHS moved to dismiss the judicial proceedings, arguing the court lacked jurisdiction because there had been no final agency action. Plaintiffs asserted, however, the Administrator s reversal of the PRRB s EJR determination was unlawful. The court spent the bulk of its opinion considering whether the Administrator had the authority to reverse and vacate on jurisdictional grounds the PRRB s grant of EJR. While the Medicare statute precludes further administrative review of EJR determinations, HHS argued it could still review the PRRB s initial determination that it had jurisdiction over the provider s challenge. The court found the applicable statute clearly expressed legislative intent for unimpeded judicial review following a no authority determination by the PRRB. Thus, the court agreed with plaintiffs that the Administrator s attempt to vacate the PRRB s jurisdictional determination was not consistent with the unambiguous EJR statutory provision. If permitted to stand, the Administrator s reversal of the PRRB s determination would deny the provider immediate judicial review of the fiscal intermediary s actions, despite the PRRB s determination that it lacked the authority to resolve the question of law underlying the challenge, the court wrote. Affinity Healthcare Servs., Inc. v. Sebelius, No. 1:10-cv RMU (D.D.C. Oct. 25, 2010). U.S. Court In D.C. Finds No Jurisdiction Over Provider s Repayment Demand Involving Hospice Cap Where Appeal Was Untimely The U.S. District Court for the District of Columbia agreed to dismiss a hospice provider s challenge to a Department of Health and Human Services (HHS) repayment demand for fiscal year 2006 for lack of subject matter jurisdiction because the provider failed to commence a timely administrative appeal. The provider did not file the appeal with the Provider Reimbursement Review Board (PRRB) within the statutory 180-day window and failed to show good cause for its noncompliance with the deadline. The PRRB s dismissal of an appeal on timeliness grounds is not a final agency decision subject to judicial review; therefore, the court lacked jurisdiction to review the provider s claim regarding the fiscal year 2006 repayment demand. At the same time, the court granted partial summary judgment to the provider on its challenge to a fiscal year 2007 HHS repayment demand, again concluding the regulation under which the repayment demands were calculated, 42 C.F.R , clearly conflicted with the Medicare statute s provision for setting the hospice cap. 339

340 The court prospectively enjoined HHS from applying the challenged regulation to plaintiff and remanded to the agency for a recalculation of the provider s cap liability for fiscal year The Medicare statute caps the total amount the program may distribute to a hospice provider in a single fiscal year. Payments made in excess of the statutory cap are considered overpayments that must be refunded by the hospice care provider. HHS demanded repayment from Russell-Murray Hospice, Inc. for payments made above the statutory cap for fiscal years 2006 and 2007 in the amounts of $946,732 and $398,630, respectively. The provider challenged these repayment demands in September 2009 on the grounds that Section (b)(1), the regulation pursuant to which the demands were calculated, conflicted with 42 U.S.C. 1395f(i)(2), the statutory provision the regulation purports to implement. The provider asserted that whereas the Medicare statute requires HHS to allocate the cap amount across years of service by proportionally adjusting the number of beneficiaries in any given year to reflect hospice services provided to an individual in previous and subsequent years, the reimbursement regulation provides that an individual is counted as a beneficiary only in a single year, depending on when he or she first elects hospice benefits. The PPRB denied the provider s appeal of the fiscal year 2006 repayment demand as untimely, but granted its request for expedited judicial review of the fiscal year 2007 repayment demand. At issue with respect to the fiscal year 2006 repayment demand was whether the PRRB s dismissal on timeliness grounds, stemming from its determination that no good cause existed for granting leave to late file, constituted a final agency decision subject to judicial review. Citing D.C. Circuit precedent, the court noted that a decision by the PRRB not to hear a case based on a provider s failure to file a timely appeal is, by definition, not a final decision for purposes of 42 U.S.C. 1395oo." Athens Cmty. Hosp., Inc. v. Schweiker, 686 F.2d 989, 994 (D.C. Cir. 1982). Thus, the court concluded that it lacked subject matter jurisdiction to consider the provider s appeal of the 2006 repayment demand. As to the 2007 repayment demand, the court rejected the agency s argument that the claim should be remanded to HHS for a determination regarding the extent to which the plaintiff s cap liability was overstated due to the challenged reimbursement regulation. According to the agency, such a determination was necessary for the provider to demonstrate injury and thereby satisfy the requirements of Article III standing. But the court disagreed, noting that generally plaintiffs are presumed to have constitutional standing when they are directly regulated by a challenged governmental action (in this case, a regulation). Moreover, the provider offered evidence that its cap liability would have been reduced by over $300,000 had the proportional allocation specified in the Medicare statute, rather than the reimbursement regulation, been applied. 340

341 The court also found no need to remand to the PRRB to determine whether plaintiff s request for expedited judicial review of the 2007 repayment demand exceeded the requirement for $10,000 in controversy. According to the court, extensive fact-finding is not necessary for determining the amount in controversy. Rather, the PRRB s estimate that the amount in controversy exceeded the statutory threshold was sufficient. Finally, following numerous other decisions on the same issue, the court concluded the challenged regulation was in fact invalid as it conflicted with Section 1395f(i)(2) by omitting and replacing the proportional allocation calculation expressly called for in the statute. Russell-Murray Hospice, Inc. v. Sebelius, No (RMU) (D.D.C. July 20, 2010). U.S. Court In Arkansas Grants Hospice Provider Temporary Restraining Order Staying HHS Enforcement Of Regulation For Calculating Medicare Hospice Provider Cap The U.S. District Court for the Eastern District of Arkansas, Western Division, granted August 17 plaintiff Southeast Arkansas Hospice, Inc. (SEARK) a temporary restraining order staying enforcement of the Department of Health and Human Services (HHS ) demand for repayment of amounts paid to SEARK that are alleged to have exceeded the annual provider cap established by 42 C.F.R (b)(1). Several cases nationwide are pending over the same regulation at issue in the instant action. District courts around the country have thus far consistently found that HHS regulation is invalid, so SEARK is likely to succeed on the merits of its claim, the court said. Recently, on June 7 the U.S. District Court for the Western District of Oklahoma found the regulation implementing a statutory cap on Medicare payments for hospice care is invalid and must be set aside. The court there held the regulation conflicted with the clear congressional directive for calculating the annual provider cap. See 42 U.S.C. 1395f(i)(2)(C). The U.S. District Court for the Northern District of Texas made the same finding in a February case, granting summary judgment to the plaintiff hospice provider. In the instant case, the court said it appears that SEARK could suffer an irreparable harm, the loss of its customer base and business, if DHHS withholds further payments. Accordingly, the court directed HHS to stay its demand for repayment from SEARK and to pay SEARK for claims that come due after the date of the order. Southeast Ark. Hospice, Inc. v. Sebelius, No. 4:10-CV (E.D. Ark. Aug. 17, 2010). U.S. Court In North Carolina Finds Hospice Cap Regulation Invalid 341

342 The U.S. District Court for the Eastern District of North Carolina became the latest federal court to rule the Department of Health and Human Services (HHS ) regulation for calculating providers hospice cap liability is invalid. The court found the regulation at issue, 42 C.F.R , clearly conflicted with the Medicare statute s provision for setting the hospice cap and therefore ordered the Secretary to recalculate the plaintiff hospice provider s cap liability for fiscal year (FY) Plaintiff Native Angels Home Care Agency, Inc. is a Medicare-certified hospice provider. During the 2007 fiscal year, Native Angels provided hospice care to 60 Medicare beneficiaries. The Medicare statute caps the total amount the program may distribute to a hospice provider in a single fiscal year. Payments made in excess of the statutory cap are considered overpayments that must be refunded by the hospice care provider. HHS, through its fiscal intermediary, later determined Native Angels exceeded the beneficiary-spending cap for FY 2007 in the amount of $3,897,750 based on Section HHS thus demanded repayment from Native Angels of this amount. After securing expedited judicial review from the Provider Reimbursement Review Board, Native Angels sued the HHS Secretary in court, challenging the validity of the hospice cap regulation. According to Native Angels, Section conflicted with 42 U.S.C. 1395f(i)(2), the statutory provision the regulation purports to implement. Specifically, whereas the Medicare statute requires HHS to allocate the cap amount across years of service by proportionally adjusting the "number of beneficiaries" in any given year to reflect hospice services provided to an individual in previous and subsequent years, the reimbursement regulation provides that an individual is counted as a beneficiary only in a single year, depending on when he or she first elects hospice benefits. The court first rejected the Secretary s argument that Native Angels lacked standing to challenge the regulation because it failed show it suffered concrete and actual harm attributable to the regulation. According to the court, Native Angels suffered sufficient adverse effects from the enforcement of the regulation, including a higher repayment for FY 2007 and increased costs to monitor its compliance with the cap. Next, the court agreed that Section was invalid because the method for calculating hospice cap liability under the regulation directly contravenes Congress express intent by not allocating Medicare benefits on an individual basis, by not allocating benefits across years of service, and by not providing benefits for years of care subsequent to the fiscal year during which a Medicare beneficiary elects to receive hospice care. The court therefore declared both the regulation and the Secretary s calculation of Native Angel s cap liability for FY 2007 invalid. The court enjoined HHS from using the regulation to calculate Native Angels' hospice cap liability and remanded to the agency to recalculate the provider s FY 2007 cap liability. 342

343 The court declined, however, to issue a nationwide injunction concerning the challenged regulation. Native Angels Home Care Agency, Inc. v. Sebelius, No. 7:09-CV-187-D (E.D.N.C. Oct. 29, 2010). U.S. Court In D.C. Denies Government s Motion To Dismiss Challenge To Hospice Cap On Jurisdictional Grounds Reaffirming its earlier holding in Affinity Healthcare Servs., Inc. v. Sebelius, No. 1:10-cv RMU (D.D.C. Oct. 25, 2010), the U.S. District Court for the District of Columbia ruled December 3 that the Centers for Medicare and Medicaid Services (CMS) Administrator lacked the authority to reverse a Provider Reimbursement Review Board determination granting expedited judicial review (EJR) of a provider s challenge to the regulation used to calculate its hospice cap liability. The court therefore denied the Department of Health and Human Services (HHS) Secretary s motion to dismiss the challenge on the ground that the hospice provider had yet to receive a final decision from the agency. Plaintiff Autumn Journey Hospice, Inc. challenged HHS demands for repayment of funds distributed to the provider purportedly in excess of the Medicare statutory cap on annual hospice payments. Plaintiff challenged HHS repayment demands on the grounds that 42 C.F.R , the regulation pursuant to which the demands were calculated, conflicted with 42 U.S.C. 1395f(i)(2), the statutory provision the regulation purports to implement. Plaintiff asserted that whereas the Medicare statute requires HHS to allocate the cap amount across years of service by proportionally adjusting the number of beneficiaries in any given year to reflect hospice services provided to an individual in previous and subsequent years, the reimbursement regulation provides that an individual is counted as a beneficiary only in a single year, depending on when he or she first elects hospice benefits. The PRRB granted plaintiff s request for EJR after finding the action involved a question of law that it lacked the authority to address. The CMS Administrator vacated the PRRB s decision granting EJR, concluding plaintiff failed to establish that the aggregate amount in controversy exceeded $10,000 as required to invoke PRRB review in the first place. Based on this determination, HHS moved to dismiss the judicial proceedings, arguing the court lacked jurisdiction because there had been no final agency action. Citing its decision in Affinity Healthcare, the court noted that Congress intended to establish[] a framework under which providers have recourse to immediate judicial review whenever the PRRB makes a no authority determination, without the obstacle of additional review at the administrative level, so long as they commence a civil action within sixty days of the PRRB s determination. The court also overruled the government s objection to plaintiff s related-case designation to another earlier ruling, Russell-Murray Hospice, Inc. v. Sebelius, No (RMU) (D.D.C. July 20, 2010). According to the HHS Secretary, the instant action did not involve common issues of fact and did not arise out of a common event or transaction as the 343

344 court s previous decision in Russell-Murray and therefore should be randomly reassigned to another judge. The court noted that since the Russell-Murray case, hospice providers had commenced six different actions challenging the hospice cap regulation, 42 C.F.R Each of these cases, the court said, presented identical issues i.e., whether the regulation impermissibly conflicts with the underlying statute and, if so, what relief should be afforded the plaintiff hospices. Given this substantial overlap, the court concludes that these hospice cap cases do indeed share common factual issues and arise out of a common event or transaction namely, the promulgation of the hospice cap reimbursement regulation and the calculation of the plaintiff hospices cap repayment obligations pursuant to that regulation such that judicial economy would be served by having these matters resolved the same judge. Autumn Journey Hospice, Inc. v. Sebelius, No (RMU) (D.D.C. Dec. 3, 2010). Fifth Circuit Agrees: HHS Hospice Cap Regulation Is Invalid Affirming a federal Texas trial court decision, the Fifth Circuit held March 11, 2011 that a Department of Health and Human Services (HHS) regulation implementing a statutory cap on Medicare payments for hospice care is unlawful and must be set aside. The appeals court also affirmed the lower court order enjoining HHS from enforcing overpayment determinations against the plaintiff hospice provider calculated using the invalid regulation and from using the regulation to calculate the plaintiff s payment cap for past, present, or future accounting years. Lion Health Servs., Inc. v. Sebelius, No. 4:09-CV-493-A (N.D. Tex. Feb. 22, 2010). The Fifth Circuit found, however, that the trial court abused its discretion in ordering HHS to refund plaintiff all payment obligations for the 2006 and 2007 fiscal years, saying the district court should have remanded to the agency for a recalculation. Several cases nationwide are pending over the same regulation, 42 C.F.R (b), at issue in the instant action, with various district courts concluding the regulation is contrary to the clear congressional directive for calculating the annual provider cap. See 42 U.S.C. 1395f(i)(2)(C). Most recently, the Ninth Circuit likewise ruled the regulation was unlawful, and enjoined HHS from enforcing the regulation as to the hospice provider in that lawsuit. See related item in this issue. Repayment Demand In the instant action, plaintiff Lion Health Services, Inc. sued the HHS Secretary after it received from Medicare a demand for repayment for revenues allegedly exceeding its aggregate annual provider cap for the 2006 and 2007 accounting year of $1,137,113 and $1,124,637, respectively. After the Provider Reimbursement Review Board found it was without authority to decide the legal question of Section (b) s validity, plaintiff challenged the regulation in court as contrary to the plan language of the governing statute. Under the statute, the amount paid for hospice care for an accounting year is limited to a cap amount for the year multiplied by the number of Medicare beneficiaries in the hospice program in that year. 344

345 The statute provides that the number of Medicare beneficiaries for purposes of this calculation should be reduced to reflect the proportion of hospice care that each such individual was provided in a previous or subsequent accounting year... The implementing regulation, Section (b), however, calculates each hospice s cap amount using the number of Medicare beneficiaries who elected to receive hospice care during the cap period. Plaintiff argued the regulation was invalid because it includes an individual in a single accounting year depending on when the individual filed an election to receive hospice care rather than requiring a proportional adjustment as the statute specifies. Statute Unambiguous After finding plaintiff had standing by demonstrating it suffered an actual and concrete financial injury due to the regulation, the Fifth Circuit held the regulation was invalid because it conflicted with the unambiguous statutory language requiring a proportional, rather than single-year, allocation method for purposes of the hospice cap. HHS acknowledged as much in proposing the regulation by noting the single-year allocation method was an alternative to the statute s proportional requirement, the appeals court observed. Prospective Relief The Fifth Circuit also rejected the Secretary s contention that the district court lacked jurisdiction to set aside the regulation and enjoin her from using it to calculate Lion s cap for future years. According to the Secretary, the district court did not have authority to provide prospective relief for non-administratively exhausted years, even if the underlying regulation was invalid. But plaintiff argued, and the Fifth Circuit agreed, that once the regulation s validity was properly before the district court, its review was governed by the Administrative Procedure Act (APA), notwithstanding other restrictions in the Medicare Act. Thus, the district court had authority under the APA to enjoin the Secretary from using the Regulation to calculate Lion s aggregate cap amount for any past, present, and future year, the Fifth Circuit said. The appeals court did find, however, the lower court s order requiring the Secretary to refund all monies paid by Lion for fiscal years 2006 and 2007 was broader and more burdensome than necessary to afford Lion full relief. Even using the proportional allocation method, the appeals court observed, Lion still owes a substantial amount of refund to the Secretary for the years at issue. Moreover, the determination of the amount of refund owed is a matter properly within the agency s authority. Thus, the district court abused its discretion in ordering a full refund rather than remanding to the agency for a recalculation. Lion Health Servs., Inc. v. Sebelius, No (5th Cir. Mar. 11, 2011). 345

346 Ninth Circuit Holds Hospice Cap Regulation Invalid, But Vacates Nationwide Injunction The Ninth Circuit upheld March 15, 2011 a lower court s ruling that a Department of Health and Human Services (HHS) regulation implementing a statutory cap on Medicare payments for hospice care was invalid, but vacated the nationwide injunction entered by the lower court. The appeals court agreed that the regulation at issue, 42 C.F.R (b), ran counter to the clear congressional directive for calculating the annual provider cap. See 42 U.S.C. 1395f(i)(2)(C). However, the appeals court found the U.S. District Court for the Central District of California should not have entered a nationwide injunction barring HHS from enforcing the cap regulation against all hospice providers. The lower court itself ultimately stayed the nationwide injunction pending appeal, acknowledging the potential for significant disruptions in the administration of the Medicare program if HHS was prohibited from enforcing the hospice cap as to over 3,000 hospice providers, the appeals court noted. An order declaring the hospice cap invalid, enjoining further enforcement against [the hospice provider], and requiring the Secretary to recalculate its liability in conformity with the hospice cap statute, would have afforded the plaintiff complete relieve, the appeals court observed. The hospice cap regulation has been challenged in numerous district courts across the country, most of which have declared the regulation invalid. The Fifth Circuit recently also considered the issue, affirming a lower court s determination that the cap was contrary to statute and should not be enforced as to the hospice provider that initiated the challenge in that case. See related item in this issue. $2.3 Million Repayment Demand In the instant action, plaintiff Los Angeles Haven Hospice, Inc. sued the HHS Secretary after it received from Medicare a $2.3 million repayment demand for revenues allegedly exceeding its aggregate annual provider cap for the fiscal year ending October 31, Under the statute, the amount paid for hospice care for an accounting year is limited to a cap amount for the year multiplied by the number of Medicare beneficiaries in the hospice program in that year. The statute provides that the number of Medicare beneficiaries for purposes of this calculation should be reduced to reflect the proportion of hospice care that each such individual was provided in a previous or subsequent accounting year... The implementing regulation, Section (b), however, calculates each hospice s cap amount using the number of Medicare beneficiaries who elected to receive hospice care during the cap period. The lower court ruled in plaintiff s favor and issued a nationwide injunction barring the regulation s enforcement (which it later stayed pending appeal). Los Angeles Haven Hospice, Inc. v. Sebelius, No. CV (C.D. Cal. July 13, 2009). No Net Increase in Liability Required for Standing 346

347 On appeal, the Ninth Circuit agreed with the lower court that plaintiff had standing to challenge the regulation, regardless of the extent to which invalidation of the challenged rule might ultimately affect the provider s repayment obligation. [T]he fact that the allegedly unlawful regulation was directly applied to Haven Hospice and exposed it to individual liability for the claimed overpayments, is sufficient to support its claim of Article III standing, the appeals court said. In so holding, the appeals court rejected HHS argument that plaintiff had to show a net increase in hospice cap liability under a hypothetical regulation that conformed with the hospice cap statute to establish an injury-in-fact. According to the appeals court, HHS at least implicitly recognized that its method of limiting cap allocations to the initial year of service would prejudice hospices that provided some care in one fiscal year with the bulk of care in the next fiscal year. Specifically, to address this issue, HHS established a shift under which the entire allowance for any patient admitted to hospice within the last 35 days of any accounting year would be moved into the next fiscal year. The shift assumed an average length of stay in hospice care of 70 days. HHS argued the hospice cap regulation was equally likely to harm a hospice provider in a given year as to help it. But the appeals court rejected this circular argument, disagreeing with HHS that a hospice provider must show it suffered a net increase in its overpayment liability within the accounting year at issue to establish standing. Moreover, while the shift might have been sufficient to ameliorate the resulting prejudice in 1983, when the average length of stay in hospice was only 70 days, it is plainly insufficient for providers with significantly higher average lengths of stay in recent years, the appeals court observed. The appeals court said it was satisfied that plaintiff established a substantial likelihood that application of the hospice cap regulation resulted in an unlawful increase in its fiscal year 2006 cap liability. Regulation Invalid Turning to the merits, the appeals court found the regulation did not pass muster under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The regulation is at odds with the plain language of the statute in that it omits the individualized proportional allocation calculation expressly called for in the statute, and substitutes an alternative that HHS considers more convenient and less burdensome, the appeals court said. Accordingly, the hospice cap regulation was properly declared invalid under the first step of Chevron. Nationwide Injunctive Relief Vacated The appeals court agreed, however, with the Secretary that the lower court s grant of nationwide injunctive relief as to all Medicare-certified hospice providers was improper. 347

348 At the same time, the appeals court found the district court had the authority and acted within its discretion to enjoin further application of the hospice cap regulation against plaintiff. [B]ecause the Secretary is apparently unwilling to give any assurance that she will voluntarily refrain from enforcing the invalid regulation against Haven Hospice and other hospice providers in the Ninth Circuit..., the district court had both the authority and discretion to enjoin future application of the invalid regulation... as against Haven Hospice, the Ninth Circuit concluded. Los Angeles Haven Hospice, Inc. v. Sebelius, No (9th Cir. Mar. 15, 2011). Second Circuit Holds Terminated Medicare Contractor Failed To Exhaust Administrative Remedies The Second Circuit affirmed June 22, 2010 a lower court s dismissal of an appeal by a terminated Medicare Part D contractor, finding the court lacked jurisdiction because the insurance company failed to exhaust administrative remedies. On March 9, the Centers for Medicare and Medicaid Services (CMS) terminated its contract with Fox Insurance Company, a provider of Medicare Part D prescription drug coverage. According to CMS, Fox was terminated because CMS determined that Fox has failed to provide their enrollees with prescription drug benefits in accordance with CMS requirements as well as in a manner consistent with professionally recognized standards of health care. On March 15, Fox challenged its termination by filing a complaint in the district court. The court granted, however, CMS motion to dismiss Fox s complaint for lack of subject matter jurisdiction, finding Fox had failed to appeal administratively before filing suit. On appeal, Fox argued the district court should have exercised jurisdiction because it challenged CMS s interpretation and implementation of its regulations as violating both the authorizing statute and the plain text of the regulations. The appeals court rejected this argument. Instead, the appeals court agreed with the district court s assessment that at bottom, [Fox] seeks to compel an officer of a United States agency to perform duties owed to the plaintiff. In addition, the appeals court said, the relief Fox sought belies its assertion that it only seeks to challenge the interpretation and implementation of CMS regulations. For instance, Fox asked the court to require CMS to withdraw its termination letter and to restore all beneficiaries enrolled with Fox back into Fox s plan. Any claims Fox may have challenging the agency s interpretation or implementation of its regulations are properly raised after it has exhausted the available administrative remedies, the appeals court commented. Fox Ins. Co. v. Sebelius, No cv (2d Cir. Jun. 22, 2010). 348

349 Tenth Circuit Dismisses Action Against Fiscal Intermediary, Says Medicare Provider Must Exhaust Administrative Remedies The Tenth Circuit affirmed August 4, 2010 the dismissal of an action brought by a Medicare provider against its fiscal intermediary (FI) for failure to timely process the provider s cost reports. The appeals court agreed with the lower court that the suit sought to recover Medicare reimbursements and therefore the proper defendant was the Department of Health and Human Services (HHS), not the FI. Because the provider had not exhausted its administrative remedies, the court lacked subject matter jurisdiction, the Tenth Circuit held. The bankruptcy trustee for Precedent Health Center Operations LLC (Precedent), which participated in both Medicare and Medicaid, sued its FI, Mutual of Omaha Insurance Company (Mutual), for all sums due from Medicare for reimbursement, as well as statutory penalties and exemplary damages for Mutual s alleged failure to comply with the applicable regulations and procedures of HHS. At issue were certain adjustments for net depreciation and related party transactions that Precedent contended Mutual failed to include in its 1999 Notice of Program Reimbursement (NPR) to Precedent. Precedent appealed the NPR to the Provider Reimbursement Review Board (PRRB), but before a decision was rendered, the parties reached a settlement. Precedent issued a final cost report on July 2, 2005 for fiscal year 1999 that included adjustments consistent with the settlement. Mutual failed, however, to accept or reject the cost report within 12 months as required by 42 C.F.R (a) and (c). Although Section (c) establishes appeal rights for providers when an FI fails to render a determination within a year, Precedent did not pursue an administrative appeal. Instead, it waited 18 months after the administrative appeal rights accrued to file the instant action against Mutual in federal bankruptcy court. HHS sought to be substituted as defendant or, alternatively, to intervene. The bankruptcy court denied the motion. The case was eventually transferred to federal district court because it required substantial application and interpretation of Medicare statutes and regulations. The district court reversed the bankruptcy court s denial of HHS motion to intervene and subsequently granted Mutual and HHS motion to dismiss based on Precedent s failure to exhaust administrative remedies. Affirming, the Tenth Circuit found Congress intent clear that the government, not the intermediary, is the real party in interest in lawsuits involving the administration of the Medicare program. The applicable regulations state that a provider has a right to a hearing before the PRRB if an intermediary s determination concerning the amount of reasonable cost reimbursement is not rendered within 12 months of receiving the provider s cost report, the appeals court observed. 349

350 42 U.S.C. 405(h) makes it clear that this review process, as set out by statute and regulation, must be followed in order to recover a claimed reimbursement. Precedent attempted to argue the suit was really a tort action against Mutual for intentional or gross negligence and therefore could be brought directly against the FI. The Tenth Circuit said it need not decide whether this was a viable cause of action because Precedent had not, in fact, pleaded a tort claim. Instead, the appeals court continued, the complaint bore the hall marks of a claim for Medicare reimbursement. Moreover, the appeals court said, Precedent presented no reason why its reimbursable costs could not be recovered through administrative channels despite Mutual s alleged intentional and improper application of the Medicare regulations. Permitting a provider to ignore the exhaustion requirement and instead proceed against the intermediary directly would have the practical effect of rendering the administrative process wholly ineffective, as a mere allegation that an intermediary s failure to pay amounted to gross negligence would allow a provider to circumvent HHS s review, the appeals court observed. Thus, even if Precedent did present a viable tort claim, it would still have to show defendant s conduct actually deprived the provider of utilizing the administrative review process. In re Precedent Health Ctr. Operations, LLC, No (10th Cir. Aug. 4, 2010). Fifth Circuit Finds Labs Not Entitled To Additional Interest On Medicare Reimbursement Ruling Texas Clinical Laboratories, Inc. and Texas Clinical Laboratories-Gulf Division, Inc. (collectively, TCLs) were not entitled to additional interest on the principal of a Medicare reimbursement ruling rendered in their favor against the Department of Health and Human Services (HHS), the Fifth Circuit ruled July 22, 2010 in affirming a district court decision. In 1986, HHS implemented a new formula for calculating reimbursement for travel expenses that, among other things, used (1) 35 miles per hour average speed as the standard for delivery of services and (2) a median cost per specimen. The TCLs objected to these two components of the new formula and in 1992 an Administrative Law Judge (ALJ) found both requirements not supported by substantial evidence. The Office of Health Affairs Appeals Council vacated the ALJ s ruling and remanded to the ALJ, who again found in favor of the TCLs. The Appeals Council again reversed and remanded to a different ALJ, who in 1995 rendered a third ruling in the TCLs favor. Following yet another reversal by the Appeals Council, the case went before a federal district court, which ruled in HHS favor. On appeal, the Fifth Circuit affirmed the dismissal of the TCLs median cost per specimen claim, but remanded the 35 mph claim. 350

351 On remand to the agency, HHS conceded that the 35 mph figure was not supported by objective evidence and in March 2003, an ALJ ruled in the TCLs favor for the fourth time, awarding $581,157 plus accrued interest. HHS did not appeal and issued the Medicare reimbursement to the TCLs, including interest calculated from the March 2003 ALJ s fourth ruling. The TCLs argued interest should have accrued as of January 1992, the date of the first ALJ ruling in their favor. A federal district court in Texas found in HHS favor and refused to award additional interest. The Fifth Circuit affirmed. The appeals court framed the issue as which of the four ALJ rulings rendered in the TCLs favor constituted a final determination for purposes of triggering the accrual of interest. Applying a Chevron analysis, the appeals court noted that neither the statute nor applicable regulation said what type of rulings constitute final determinations upon which interest should accrue. According to the appeals court, the regulation could be interpreted to fit the scenarios advanced by both the TCLs and HHS. Here, the Appeals Council concluded that interest did not accrue on a final determination that is subsequently reversed by an administrative or judicial ruling. Moreover, the instant case involved a mixed judgment where only part of the judgment (involving the 35 mph figure) was reversed. The TCLs urged the court, however, to treat the 20 years of litigation as a lengthy adjustment of the initial determination. Because they were eventually successful on their challenge to the 35 mph component, they argued interest accrued from the initial judgment. But the appeals court agreed with HHS that the 1992 ruling was not the final determination because in addition to being a mixed judgment that invalidated other components of the formula that were later upheld, the debt included inappropriate claims that were inseparably intertwined with the amount awarded for the m.p.h. component. It was not until the March 2003 decision that the amount of the debt specifically related to the 35 mph component was set by the ALJ. A dissenting opinion argued deference was not due the Medicare Appeals Council s unreasonable and inequitable interpretation of the regulations at issue. According to the dissent, after an incredible 22 years, HHS finally paid the TCLs judgment plus two months interest for some fifteen years use of the plaintiffs money. The majority, operating on automatic, nods to the Appeals Council s discriminatory and self-serving new interpretation of the regulations, the dissent argued. The dissent discounted the majority s acceptance of the Appeals Council s justification that the mixed nature of the 1992 administrative judgment justified interest not accruing from that date. 351

352 There is no reason established in the regulations as to why interest should not run on the favorable portion of the award, the dissent said. The majority s interpretation frustrates the purpose of interest accrual: to make sure plaintiffs are compensated for the time value of money owed to them. Texas Clinical Labs Inc. v. Sebelius, No (5th Cir. July 22, 2010). Ninth Circuit Finds PRRB Erred In Granting Expedited Judicial Review Of Rural Teaching Hospital s Challenge The Ninth Circuit held July 23, 2010 that the Provider Reimbursement Review Board (PRRB) should not have granted expedited judicial review (EJR) of five rural hospitals' challenge to the methodology used by the Department of Health and Human Services Secretary to determine their Medicare direct graduate medical education (DGME) payments. According to the appeals court, the methodology for calculating the hospitals base-year per resident amounts (PRAs), known as Sequential Geographic Methodology (SGM), was an ad hoc policy and not a regulation. Thus, the PRRB had authority to decide the question at issue because it did not involve a question of law or regulations. The district court therefore lacked subject matter jurisdiction, the appeals court held in vacating the decision below invalidating the SGM. The appeals court instead remanded to the district court with instructions to dismiss the hospitals challenge and remand to the agency for it to determine the validity of the SGM. The appeals court also affirmed the district court s determination that a 1989 regulation, which based the PRA for new graduate medical education programs on the lower of the hospital s actual costs or the mean value of per resident amounts of hospitals located in the same geographic wage area, was not procedurally or substantively invalid. PRA Determination The five plaintiff hospitals operate residency training programs in rural family medicine and receive DGME payments, which are based on a hospital-specific PRA calculated according to several formulas, including the 1989 regulation and SGM. For purposes of the 1989 regulation, the Health Care Finance Administration (HCFA) instructed intermediaries in areas with fewer than three amounts in the wage area to write the Central Office for a determination of the per resident amount to use. In a June 1997 letter, HCFA described the SGM formula as the one to use in calculating the PRAs for hospitals with fewer than three amounts in the wage area. Specifically, HCFA instructed intermediaries to include all hospitals in contiguous wage areas. If this failed to yield three amounts, intermediaries were to use a statewide average and, if necessary, a weighted average among all hospitals with teaching programs in contiguous states. Under its final rule, issued in 1997, the Secretary ultimately declined to adopt SGM as its methodology, relying instead on the regional weighted average per resident amounts determined for each of the nine census regions established by the Bureau of Census for areas with fewer than three hospitals in a given geographic wage area. In the instant case, however, the Secretary calculated the hospitals PRAs via the SGM. 352

353 The hospitals appealed the PRA determinations to the PRRB, contending their allowed Medicare DGME costs exceeded these determinations. They challenged both the Secretary s 1989 regulation and the SGM methodology as contrary to the Medicare law. The PRRB granted EJR of the challenge, finding it involved a question of law or regulations that the Board was without authority to decide pursuant to 42 U.S.C. 1395oo(f)(1). The district court agreed with the hospitals that the SGM lacked the force of law and was arbitrary and capricious, but declined to invalidate the 1989 regulation. Ad-hoc Policy The Ninth Circuit held the PRRB erred in granting EJR because the SGM was an ad hoc policy and not a regulation. The district court lacked jurisdiction to review SGM because SGM was not a regulation; no rule was promulgated as this was a case-by-case adjudication, and did not involve rulemaking of any kind, the appeals court held. Thus, the PRRB had authority to decide the question at issue because it did not involve a question of law or regulations, the appeals court said Regulation Valid The appeals court also rejected the hospitals cross-appeal arguing the district court erred in upholding the 1989 regulation. Applying Chevron, the appeals court found the relevant statute, 42 U.S.C. 1395ww(h)(2), was ambiguous regarding the Secretary s responsibility of establishing PRAs for post-1984 DGME programs. Section 1395ww(h)(2) states that the Secretary shall... provide for such approved FTE [full-time equivalent] resident amounts as the Secretary determines to be appropriate, based on approved FTE resident amounts for comparable programs. The statute does not define, however, any criteria for determining program compatibility. The appeals court found the Secretary s interpretation causing hospitals in wage areas with less than three teaching hospitals to be treated differently than other new programs as permissible given the statute s silence on this issue. The appeals court also held the statute was not arbitrary and capricious, finding reasonable the Secretary s apparent assumption that calculating a mean from a larger pool of hospitals would result in a more accurate result. Providence Yakima Med. Ctr. v. Sebelius, Nos , (9th July 23, 2010). RAC Reopening Decision Not Subject To Review, U.S. Court In California Finds A recovery audit contractor s (RAC s) reopening decision is not subject to review, the U.S. District Court for the Southern District of California held July

354 According to the court, two different regulations specify that such reopening decisions are nonappealable; therefore, the Department of Health and Human Services Secretary was entitled to summary judgment on a hospital s claims that the RAC did not establish good cause for its reopening decision. Palomar Medical Center underwent a RAC review and was notified that it had been overpaid $7, Palomar appealed the overpayment determination through three levels of appeal: redetermination by a fiscal intermediary (FI), reconsideration by a Qualified Independent Contractor (QIC), and a hearing before an administrative law judge (ALJ). At each level, the services provided to a patient referred to as John Doe were found not to be medically necessary. However, the ALJ, while agreeing the services rendered were not medically necessary, found the RAC had not established good cause to reopen the claim and concluded the reopening was procedurally invalid. The Medicare Appeals Council (MAC) reviewed the ALJ's decision and found neither the ALJ nor the MAC had jurisdiction to review the reopening because the decision to reopen is final and not subject to appeal. Palomar filed suit and both parties moved for summary judgment. The case was referred to a magistrate judge who recommended that Palomar's motion for summary judgment be denied and the Secretary's motion be granted. The court adopted the magistrate judge s report in its entirety, agreeing that the reopening of the claim was not subject to appeal. After first finding that it would apply a deferential standard of review under Chevron, U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984), the court noted two different regulations state the Secretary s decision to reopen is not subject to appeal. Under 42 C.F.R (a)(1), "Actions that are not initial determinations and are not appealable under this subpart include,... [a] contractor's, QIC's, ALJ's, or MAC's determination or decision to reopen or not to reopen an initial determination, redetermination, reconsideration, hearing decision, or review decision." And under 42 C.F.R (a)(5), "The contractor's, QIC's, ALJ's, or MAC's decision on whether to reopen is binding and not subject to appeal." Palomar essentially asks this Court to make a policy decision, that providers should have the right to appeal a decision to reopen for good cause if it is presented before an ALJ, despite regulations that explicitly say providers do not have a right to appeal the decision, the court explained. However, the court found that such decisions are not the Court's role, particularly when the agency's interpretation is entitled to deference. The court further held the Secretary's interpretation was consistent with the plain language of the regulations and the the intent behind them when they were promulgated. 354

355 Thus, the court found it lacked jurisdiction to consider the merits of Palomar's challenge to the reopening because it is not appealable under the plain language of the regulations and the Secretary's interpretation, to which the Court must give deference. Palomar Med. Ctr. v. Sebelius, No. 09cv605 (S.D. Cal. July 28, 2010). D.C. Circuit Finds PRM Provision Not Interpretive Rule, Reverses Lower Court A provision in the Provider Reimbursement Manual (PRM) limiting the investments of offshore captive insurance companies was not a valid interpretation of reasonable costs under the Medicare Act, the District of Columbia Circuit held August 13, In so holding, the appeals court rejected the Department of Health and Human Services Secretary s argument that the provision was an interpretive rule and reversed the lower court s grant of summary judgment in favor of the Secretary. Catholic Health Initiatives, a nonprofit charitable corporation, and a group of its affiliated nonprofit hospitals brought an action under the Medicare Act to recover premiums the hospitals had paid for malpractice, workers' compensation, and other insurance. In general, the Secretary considers malpractice, workers' compensation, and other liability insurance premiums to be part of a hospital's "reasonable costs" incurred in providing services to Medicare beneficiaries, and as such, the costs are reimbursable. The hospitals paid the premiums to First Initiatives Insurance Ltd., which is wholly owned by Catholic Health. First Initiatives at the time was not in compliance with the PRM s standard for captive insurance companies that limits investments. The hospitals disallowed their premium payments on the annual cost reports they submitted to Medicare's fiscal intermediaries, but then challenged the Manual provision, PRM A.4, at a hearing before the Provider Reimbursement Review Board (PRRB). The PRRB held that the investment limitations in Section A.4 of the Manual were a "valid extension" of the statute and the regulations governing "reasonable cost." The Centers for Medicare and Medicaid Services Administrator declined to review the PRRB s decision and the hospitals filed the instant action. The district court granted summary judgment to the Secretary and the hospitals appealed. On appeal, the Secretary argued the Manual's investment limitations is an "interpretative" rule that is consistent with the statute and regulations, supported by substantial evidence, and not arbitrary or capricious. The hospitals argued the rule regulates insurance investment decisions and therefore lies outside the scope of the Secretary's "reasonable cost" authority under the Medicare Act. The appeals court turned first to whether the Manual's investment limitation for offshore captives is an interpretive rule. Finding the rule not interpretive, the appeals court said there is no way an interpretation of reasonable costs can produce the sort of detailed--and rigid--investment code set forth in A

356 The connection between A.4 of the Manual and reasonable costs is simply too attenuated to represent an interpretation of those terms as used in the statute and the regulations, the appeals court held. Catholic Health Initiatives v. Sebelius, No (D.C. Cir. Aug. 13, 2010). Seventh Circuit Holds Hospital Entitled To $2.8 Million In Medicare Reimbursement For IME Expenses The Seventh Circuit upheld August 25, 2010 a lower court ruling that the University of Chicago Medical Center was entitled to roughly $2.8 million in Medicare reimbursements for indirect medical education (IME) expenses related to resident time spent on pure research, as opposed to patient care. Rather than resolve whether the applicable regulation allows the IME adjustment to reimburse teaching hospitals for the costs of their residents pure research activities, the appeals court found the Patient Protection and Affordable Care Act (PPACA) provided a clear statutory answer to this issue. The PPACA includes a provision, effective January 1, 1983, that the IME full time equivalent (FTE) count includes all the time spent by an intern or resident in an approved medical residency training program in non-patient care activities, such as didactic conferences and seminars... that occurs in the hospital. PPACA 5505(b). Congress also clarified that, for periods after October 1, 2001, all the time spent by an intern or resident in an approved medical residency training program in research activities that are not associated with the treatment or diagnosis of a particular patient... shall not be counted. PPACA Section 5505(b), (c)(3). According to the appeals court, Section 5505(b) indicates that, for periods after 1983, the IME FTE encompasses the separate category of non-patient-care activities, which includes pure research. Thus, the hospital should have received reimbursement as part of its IME adjustment for pure research activities in 1996, the appeals court said. While this holding conflicts with a First Circuit opinion, R.I. Hosp. v. Leavitt, 548 F.3d 29 (2008), on the issue, that court did not have the opportunity to consider Congress s health-care legislation, and we believe that legislation is dispositive, the Seventh Circuit found. The hospital sued Department of Health and Human Services Secretary Kathleen Sebelius, alleging the Secretary improperly calculated the hospital s Medicare payments for fiscal year 1996 by excluding residents involved in educational research from the IME FTE residents count. Both parties moved for summary judgment. The U.S. District Court for the Northern District of Illinois granted judgment in the hospital s favor. University of Chicago Med. Ctr. v. Sebelius, No. 07 CV 7016 (N.D. Ill. Aug. 3, 2009). According to the court, under 42 C.F.R (g)(1), a resident may be included in the IME FTE if (1) the resident is enrolled in an approved teaching program, and (2) the resident is assigned to a portion of the hospital subject to the prospective payment system. 356

357 In 2001, the Secretary amended the regulation to reiterate its longstanding policy excluding from the FTE count time spent by a resident in research not associated with the treatment or diagnosis of a particular patient. 42 C.F.R (f)(1)(iii)(B). The main dispute involved whether portion referred to a geographical location within the hospital, as the hospital contended, or a function a resident is performing within the hospital regardless of physical location, as the government argued. Joining all other district courts to consider the issue, the Illinois federal district court agreed with the hospital that the term portion unambiguously referred to a geographical location and rejected the Secretary s attempt to engraft a patient care requirement for a resident to be included in the hospital s IME FTE resident count under the regulation in effect for We agree that the plain language of the relevant part of the regulation, read in context, suggests that the Secretary should have been concerned only with the resident s location in calculating the IME FTE count, the Seventh Circuit said in its decision. But the appeals court acknowledged the issue was less than clear and that, if the regulation was ambiguous, the agency s construction would be entitled to deference. Luckily for us, however, Congress stepped into the fray and provided us with a clear, statutory answer, the appeals court said. The government argued pure research is not a subset of non-patient care activities and urged the appeals court to take heed of the PPACA's no inferences language. In the government s view... Congress declined to step on our toes and, instead, intended to let us resolve this appeal without any statutory inference, the appeals court said. We think, however, that this no-interference provision is unclear at best and, in any event, does not contradict the clear meaning of the earlier language allowing reimbursement for non-patient care activities during the time period relevant to the present appeal, the Seventh Circuit concluded. University of Chicago Med. Ctr. v. Sebelius, No (7th Cir. Aug. 25, 2010). Ninth Circuit Upholds PRRB Decision Rejecting Request To Adjust Hospital's Annual TEFRA Target Reimbursement Amount Affirming the decision of the U.S. District Court for the Central District of California, the Ninth Circuit ruled December 16, 2010 that the Secretary of the Department of Health and Human Services (Secretary) was not required under provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) to adjust upward the annual TEFRA target reimbursement amount set for a psychiatric hospital specializing in services for geriatric patients. The appeals court also held that the district court properly dismissed additional claims that were not brought by the healthcare company that operates the hospital in its appeal to the Provider Reimbursement Review Board (PRRB). Beacon Healthcare Services, Inc. operates Newport Bay Hospital, which is a 34-bed psychiatric hospital in California that provides care primarily for elderly patients. Because 357

358 of the long term chronic medical conditions prevalent in an elderly population, Beacon's expected annual expenses are higher than those of a typical psychiatric hospital. For the period ending April 30, 2001, and in accordance with TEFRA, the Centers for Medicare and Medicaid Services (CMS) capped Beacon's annual reimbursement at a target amount based upon the expected annual costs of all psychiatric hospitals. Beacon's TEFRA target amount is adjusted annually in accordance with a statutory index designed to take account of inflation. In 2003, Beacon made a claim to its fiscal intermediary, Mutual of Omaha Insurance Company (Mutual), for an increase in its annual TEFRA target amount in excess of its "inflation" increase. According to Beacon's claim, it was requesting the increase to compensate for the higher costs associated with serving the atypically geriatric population of patients. Mutual denied Beacon's claim for an increased TEFRA target amount. However, Mutual did allocate to Beacon an additional payment of $32,081, explaining that Beacon's 2001 costs had been below its 2001 TEFRA ceiling. Under TEFRA statutes, the Secretary is required to pay hospitals a bonus if their costs do not exceed their TEFRA annual ceiling for the year. Beacon appealed to the PRRB, which found that it lacked jurisdiction to decide the case. The PRRB reasoned that Beacon's claim for $164,000 in additional payments (under an adjusted TEFRA target amount) did not meet the statutory requirement that the amount in controversy equal "$10,000 or more" because Beacon's "calculation is based upon an adjustment to its TEFRA ceiling." The PRRB concluded that the Secretary was prohibited from making the adjustment that Beacon requested, and that, therefore, not only was Beacon's amount-in-controversy calculation inaccurate, but there was no Medicare reimbursement at issue. The PRRB then ordered the dismissal of Beacon's case. On appeal, the district court declined to resolve whether the issue on appeal was "jurisdictional or substantive," but held that, regardless, "the dispute... turns on whether a provider whose expenses do not exceed the TEFRA cap may seek an adjustment." The court then concluded that the PRRB was correct in finding that Beacon's claim did not meet the amount-in-controversy requirement. In addition, the court held that, even if the PRRB were mistaken in its jurisdictional decision, the error would be harmless because there was no substantive basis for an adjustment. First addressing the jurisdictional issues, the Ninth Circuit found that the district court erred in affirming the PRRB's decision that it lacked jurisdiction to hear Beacon's appeal. The appeals court noted that Beacon claimed in its pleadings approximately $164,000 as the amount in controversy, and concluded that this meets the requirements of the statute. However, the PRRB dismissed Beacon's suit on jurisdictional grounds because it concluded that Beacon was not in fact entitled to an adjustment of at least $10,000. The Ninth Circuit explained that the PRRB erred in first determining that Beacon was entitled to an adjustment of the TEFRA ceiling, and then dismissing the case for lack of jurisdiction because Beacon's adjustment amount did not meet the requisite amount in controversy. However, the Ninth Circuit agreed with the district court's holding affirming the PRRB's decision on the merits, i.e., that Beacon, which had annual operating costs that had not 358

359 exceeded its TEFRA target, was not entitled to a TEFRA target cost adjustment under Medicare regulations promulgated to implement TEFRA. The appeals court also concluded that the district court properly dismissed Beacon's additional claims that were not raised before the PRRB. Beacon was barred from joining claims it did not bring before the PRRB to its appeal of the Board's final decision, the court concluded. Beacon Healthcare Svcs., Inc. v. Leavitt, No (9th Cir. Dec. 16, 2010). U.S. Court In D.C. Upholds Secretary s Decision To Disallow Depreciation-Related Losses Following Hospital Consolidation The U.S. District Court for the District of Columbia held in a June 28, 2010 decision that a hospital system formed by the 1995 consolidation of two Pennsylvania hospitals was not entitled to reimbursement for depreciation-related losses. Following numerous other courts to consider the issue, the D.C. federal district court upheld the Department of Health and Human Services Secretary s application of a bona fide sale requirement to the consolidation in determining whether Medicare reimbursement for a depreciation adjustment was due. In granting summary judgment to the Secretary, the court also agreed that the consolidation at issue was not a bona fide sale. Two nonprofit hospitals in Harrisburg, PA, Harrisburg, Hospital/Seidle Memorial Hospital and Polyclinic Medical Center, consolidated in 1995 to form plaintiff Pinnacle Health Hospitals. Plaintiff acquired title to all of the consolidating hospitals assets and assumed responsibility for all of their liabilities. Each consolidating hospital appointed half of the plaintiff s initial governing board. Both of the consolidating hospitals claimed depreciation losses on their 1995 Medicare cost reports, which their fiscal intermediary denied. The Provider Reimbursement Review Board held the hospitals were due payment for their claims, but the Centers for Medicare and Medicaid Services Administrator reversed that decision, finding the consolidation was a related party transaction and the transfer of assets was not a bona fide sale. Plaintiff filed separate suits on behalf of each hospital, which the court consolidated into the instant action. Both parties moved for summary judgment. The court, which did not address the related party issue, granted summary judgment to the Secretary, holding that application of the bona fide sale requirement was not arbitrary and capricious and that substantial evidence supported a finding that the consolidation did not constitute a bona fide sale. Under 42 C.F.R (f), relating to disposals of depreciable assets, a provider may claim a loss and receive reimbursement for Medicare s share of that loss if the transaction is a bona fide sale in which the consideration received is worth less than the asset s net book value. 359

360 Under the consolidation regulation, specifically 42 C.F.R (k)(3), a provider may claim a loss on the disposal of depreciable assets so long as the transaction is not between related parties. Although the consolidation regulation does not reference Section (f), the court, applying substantial deference, found it reasonable for the Secretary to apply the bona fide sale requirement to determine whether a depreciation adjustment was warranted. The court noted numerous other decisions that reached the same conclusion regarding the bona fide sale requirement for consolidations. See, e.g., Via Christi Reg l Med. Ctr. v. Leavitt, 509 F.3d 1259 (10th Cir. 2007); Robert F. Kennedy Med. Ctr. v. Leavitt, 526 F.3d 557 (9th Cir. 2008), and Provena Hosps. v. Sebelius, 662 F. Supp. 2d 140 (D.D.C. 2009). Plaintiff argued the imposition of a bona fide sale requirement on consolidating providers was an impermissible reversal of position by the Secretary at the time of the transaction. Discounting this argument, the court said the interpretive materials plaintiff cited did not carry the force of law and, in any event, noted numerous other decisions holding the imposition of a bona fide sale requirement on consolidating providers did not reflect a reversal of position. Next, the court rejected plaintiff s argument that if a bona fide sale requirement applied, it did not require the payment of reasonable consideration, but rather that any consideration exchanged was sufficient. According to the court, applicable regulations at the time of the transactions reflect[ed] an understanding that a bona fide sale would involve a price that approximated market value. In addition, again relying on previous decisions, the court noted the consistent finding that a bona fide sale requires reasonable consideration. Finally, the court found substantial evidence that the transaction at issue was not a bona fide sale. According to the court, the record indicated that prior to the consolidation, Harrisburg/Seidle had a combined fair market value of $176,364,817, $101,420,796 of which was comprised of current assets and investments, with plaintiff assuming only $98,923,542 in liabilities. In addition, prior to the consolidation, Polyclinic had a fair market value of $115,116,356, $62,128,000 of which was comprised of current assets and investments, with plaintiff assuming $54,262,561 in liabilities. Although the plaintiff argues that it also assumed additional unknown contingent liabilities, the mere possibility of such liabilities does not invalidate the Administrator s conclusion under the deferential substantial evidence standard of review, the court said. Pinnacle Health Hosps. v. Sebelius, No (RMU) (D.D.C. June 28, 2010). D.C. Circuit Upholds HHS Secretary s Finding That Hospital Merger Not Bona Fide Sale The D.C. Circuit upheld July 6, 2010 the Department of Health and Human Services (HHS) Secretary s finding that a statutory merger was not a bona fide sale and thus the surviving entity could not recover a loss on the merged entity s depreciable assets. 360

361 The appeals court also affirmed the Secretary s application of a reasonable consideration requirement in determining whether a bona fide sale had occurred. After Allentown Osteopathic Medical Center, a Medicare provider, merged with St. Luke s Hospital, St. Luke s, the surviving entity, sought to recover from Medicare a loss on Allentown s depreciable assets that it asserted was recognized in the merger. St. Luke s submitted a cost claim to Medicare for $2.9 million, representing depreciation on Allentown s assets that had never been booked or claimed in annual depreciation allowances. Under the regulations in effect at the time (42 C.F.R (l)), when two unrelated entities combine pursuant to a statutory merger, the combined entity is subject to the provisions of 42 C.F.R (f) concerning the realization of gains and losses. Section (f) requires mergers and consolidations involving nonprofit providers to occur between unrelated parties and constitute a bona fide sale to trigger a gain or loss recognition by Medicare. The Secretary, through a guidance document, interpreted subsection (l) s cross reference to subsection (f) to require a bona fide sale requirement for purposes of statutory mergers. A bona fide sale requires an arm s length transaction, between unrelated parties, for reasonable consideration. The fiscal intermediary here denied St. Luke s depreciation claim on the ground that the merger was not a bona fide sale. St. Luke s appealed to the Provider Reimbursement Review Board, which reversed. The Centers for Medicare and Medicaid Services (CMS) Administrator, however, reversed again, noting Allentown never obtained an appraisal to ascertain the assets fair market value. CMS performed its own analysis and concluded the depreciable assets at issue essentially were transferred for no consideration. The U.S. District Court for the District of Columbia affirmed the agency s final decision, agreeing CMS properly applied the bona fide sale requirement to the statutory merger and that St. Luke s did not tender reasonable consideration for Allentown s assets. The D.C. Circuit affirmed, holding the Secretary reasonably interpreted the applicable regulations as requiring a bona fide sale to revalue the assets following a transfer. The appeals court also found the Secretary s decision to require reasonable consideration as part of the bona fide sale determination was appropriate. [N]ot only is the Secretary s a reasonable interpretation but, unlike St. Luke s, it leads to a reasonable result as well, the appeals court said. [U]sing St. Luke s approach, Medicare would reimburse costs the provider has not in fact incurred in contravention of the statutory goal to provide reimbursement only for the reasonable cost of healthcare services, the appeals court observed. Finally, the appeals court rejected St. Luke s arguments that the reasonable consideration requirement was inconsistent with prior agency authorities or that applying the requirement here constituted an impermissible retroactive imposition of a new standard. St. Luke's Hosp. v. Sebelius, No (D.C. Cir. July 6, 2010). 361

362 U.S. Court In Pennsylvania Holds Nonprofit Hospital Merger Was Not A Bona Fide Sale A nonprofit hospital s merger with a health system was not a bona fide sale because reasonable consideration was lacking, a federal trial court in Pennsylvania ruled September 29, Affirming the Centers for Medicare and Medicaid Services Administrator on this point, the U.S. District Court for the Eastern District of Pennsylvania found the large disparity between the sale price and the value of the assets sold strongly supports the conclusion that reasonable consideration was not exchanged, and as a result, the merger transaction was not a bona fide sale. Thus, the court held the hospital was not entitled to over $16 million in reimbursement from Medicare for a loss-on-sale in merger and depreciation payments for fiscal year Because of competitive pressure in the Philadelphia healthcare market, nonprofit Jeanes Hospital decided to affiliate with other hospitals and began discussions with several health systems. Jeanes Hospital eventually entered into a merger agreement with Temple University Health System, Inc. and various associated entities (Temple). The merger agreement called for members of Jeanes Hospital s Board to be appointed to a foundation that would name 20 directors to the new entity s board. The Jeanes Hospital Board members that transferred over to the surviving entity constituted 47% of the voting positions. At the time of the merger, Jeanes Hospital transferred $112 million in assets while the total value of Temple s assumption of the hospital s liabilities and additional consideration totaled $69,214,000. In its terminating cost report, Jeanes Hospital claimed reimbursement from Medicare for a loss-on-sale totaling $16,338,246 in depreciation payments. The fiscal intermediary determined the merger was a transaction among related parties, citing Jeanes Hospital s continued participation in the surviving entity, and that therefore it was not a bona fide sale of assets. The Provider Reimbursement Review Board (PRRB) disagreed, concluding Temple and Jeanes Hospital were unrelated before the merger and thus Medicare must recognize the loss. The Administrator reversed the PRRB s decision, finding the parties in this instance were related because of the hospital s continuing control in the surviving corporation. In a previous decision, the U.S. District Court for the Eastern District of Pennsylvania concluded that substantial evidence did not support the CMS Administrator s determination that the merger was a related-party transaction and remanded on the issue of whether the combination was a bona fide sale. Jeanes Hosp. v. Leavitt, No. 04- CV-395 (E.D. Pa. Sept. 29, 2006). On remand, the PRRB upheld Jeans Hospital s claim, but the Administrator again reversed, finding the transaction was not a bona fide sale. 362

363 Provider Reimbursement Manual Section defines a bona fide sale as an arm s length transaction for reasonable consideration. Program Manual A further explains that to evaluate whether a bona fide sale has occurred in the context of a merger or consolidation between or among nonprofits requires a comparison of the sales price with the fair market value of the assets (established using the cost approach ). Affording substantial deference to the agency s interpretation of its own regulation, the court rejected the Administrator s conclusion that the transaction was not at arm s length, citing the previous decision finding Temple and the hospital were unrelated entities. The court also found it significant that the hospital had negotiated with several other health systems before pursuing the underlying agreement with Temple, and was not swayed by the fact that the hospital may have had multiple or non-price objectives in the sale of its assets. Thus, the court held the Administrator s decision on this point was contradicted by substantial evidence in the record. The court ultimately upheld the Administrator s decision, however, agreeing that the merger did not include an exchange of reasonable consideration for the hospital s assets. According to the court, the hospital transferred assets valued at $112 million in exchange for roughly $69 million, approximately 62% of the reported value. In addition, the court pointed to the lack of pre-merger appraisal of the hospital s assets as evidence of a lack of reasonable consideration. The court discounted the finding of a post-merger analysis, noting it used the income approach method rather than the cost approach required under PM A and still only showed the exchange amounted to roughly 81% of the hospital s reported value. Jeanes Hosp. v. Sebelius, No. 04-cv-0395 (E.D. Pa. Sept. 29, 2010). U.S. Court In D.C. Says Nonprofit Hospital Merger Must Qualify As Bona Fide Sale For Party To Claim Medicare Depreciation Allowance The U.S. District Court for the District of Columbia held February 1, 2011 that in a statutory merger of nonprofit hospitals, the merger must qualify as a bona fide sale for the surviving hospital to claim an adjustment to its Medicare depreciation allowance. When the surviving hospital assumes the liabilities of the merged hospital for consideration, the liabilities must reasonably reflect the value of the merged hospital assets to qualify as a bona fide sale, the court said. The case arose from a merger of a nonprofit Medicare provider, Iowa Lutheran Hospital (Lutheran) into Iowa Methodist Medical Center (Methodist), which has since been renamed Central Iowa Hospital Corporation (Central Iowa). In the merger, Lutheran surrendered all of its assets, valued at $64.9 million to Central Iowa, and Central Iowa assumed Lutheran s liabilities in the amount of $28.1 million. 363

364 Central Iowa sought Medicare reimbursement of $5.4 million, the difference between the net book value of Lutheran s depreciable assets and the allowed consideration, for losses incurred by Lutheran in the merger. The Administrator of the Centers for Medicare and Medicaid Services (CMS) denied Central Iowa s claim, and Central Iowa appealed. A provider is entitled to compensation for the reasonable cost of Medicare services under the Medicare statute, the court explained. If an asset is disposed of through a bona fide sale, Medicare reimburses the provider for any losses incurred in the sale, while the provider reimburses Medicare for any gain. The court here held that the same provisions on gains and losses apply to statutory mergers. According to the court, Department of Health and Human Services Secretary Kathleen Sebelius issued a guidance document in 2000 that clarifies that these provisions apply to mergers involving both for-profit and nonprofit providers. (Program Memorandum A-00-76). Therefore, the provisions apply to the merger in this case, the court held. In its decision, CMS determined that the merger was not a bona fide sale as required for the realization of a loss on the disposition of depreciable assets. It found no arm s length bargaining, nor any attempt by Lutheran to seek fair value for its assets. In determining whether the CMS decision was arbitrary or capricious, the court held that there was substantial evidence to support the CMS finding. Relying on precedent in St. Luke s Hosp. v. Sebelius, the court looked at the sizeable disparity between Lutheran s assets ($64.9 million) and the consideration received ($28.1 million), and agreed that the transaction was not a bona fide sale. Responding to several procedural arguments from Central Iowa, the court held that the Secretary generally may lawfully interpret a regulation notwithstanding retroactive effect. The court also denied Central Iowa s motion for leave to amend its complaint, asserting that the Secretary failed to timely list Program Memorandum A in the Federal Register. According to the court, Central Iowa failed to show that it suffered any prejudice from the publication date. Central Iowa Hosp. Corp. v. Sebelius, No. 07-cv (D.D.C. Feb. 1, 2011). D.C. Circuit Upholds Finding That Statutory Hospital Merger Was Not A Bona Fide Sale The D.C. Circuit affirmed April 26, 2011 a lower court decision holding the Department of Health and Human Services Secretary properly disallowed reimbursement for the alleged loss that occurred on the depreciable assets of a merged hospital entity. The appeals court agreed that the statutory merger was not a bona fide sale and therefore reimbursement of the loss was prohibited. Prior to the merger, Carolina Medicorp, Inc. (CMI) controlled several hospitals Forsyth Memorial Hospital, Inc. (Forsyth), Medical Park Hospital, Inc., Foundation Health Systems, Corp., and Carolina Medicorp Enterprises, Inc. (collectively, plaintiffs) that treated Medicare patients. 364

365 CMI statutorily merged in June 1997 with Presbyterian Health Services Corporation (Presbyterian). Through the merger, Presbyterian received all of CMI s assets in exchange for assuming its liabilities. At the time, CMI s liabilities totaled approximately $230 million. Medicare had valued the assets at approximately $399 million. An appraisal conducted after the merger found CMI s land and depreciable assets were worth $215 million. Plaintiffs submitted their annual cost reports to Medicare for the fiscal year ending June 30, 1997, seeking reimbursement for roughly $11 million in losses from the disposal of depreciable assets through the merger. The fiscal intermediary, the Blue Cross Blue Shield Association (BCBSA), denied the reimbursement. Plaintiffs appealed to the Provider Reimbursement Review Board (PRRB), which reversed BCBSA s decision. The Centers for Medicare and Medicaid Services (CMS) Administrator then reversed the PRRB, finding plaintiffs were not entitled to reimbursement because the merger did not constitute a bona fide sale and the parties were related. Plaintiffs appealed. The U.S. District Court for the District of Columbia affirmed the final agency decision. Forsyth Mem l Hosp. Inc. v. Sebelius, No. 1:07-cv CCB (D.D.C. Nov. 5, 2009). Plaintiffs argued the district court should have set aside the CMS Administrator decision because it relied on Program Memorandum A-00-76, which applies the bona fide sale requirement to statutory mergers. But the appeals court summarily rejected this argument, noting its previous decision upholding PM A insofar as was relevant to the instant case. Next, the appeals court found substantial evidence supported the Administrator s finding that the CMI-Presbyterian merger was not a bona fide transaction because reasonable consideration was lacking. Specifically, the Administrator compared the book value of CMI s total assets ($399 million) to its known liabilities ($230 million); the appraised value of Carolina s land and depreciable assets ($215 million), as well as their net book value ($139 million), with the portion of the consideration Carolina assigned to those assets ($54 million); and the net book value of CMI s depreciable assets ($122 million) against the consideration Carolina allocated to those assets ($37 million). Based on these sizable disparities, the Administrator reasonably concluded a bona fide sale had not occurred. The appeals court rejected plaintiffs argument that PM A and case law required the Administrator to find that reasonable consideration was exchanged in a merger when the total consideration received by the merged entity (its liabilities) was more than the current monetary assets it sold. Although PM A clearly indicates that when current assets are more than the consideration received a bona fide sale has not occurred, this does not imply that the converse is true, the appeals court said. 365

366 When current and monetary assets are less than the consideration received, the Administrator must examine the merger to ensure that reasonable consideration was exchanged for all assets, the appeals court added. Moreover, plaintiffs had the burden of proof to show that a bona fide sale occurred, yet they did not introduce any evidence that reasonable consideration was indeed exchanged in the merger. Plaintiffs offered no evidence that CMI had substantial unknown liabilities or that the net book and appraised values of the assets did not reflect their true market value. Forsyth Mem l Hosp., Inc. v. Sebelius, No (D.C. Cir. Apr. 26, 2011). U.S. Court In Ohio Finds No Private Right Of Action To Sue Hospital Under Medicare Provision The U.S. District Court for the Southern District of Ohio ruled July 1, 2010 that 42 U.S.C. 1320c-5 does not create a private cause of action for a third-party physician to sue an employer hospital. The court therefore granted Mt. Carmel Health System s motion to dismiss physician Sunil Nayyar s cause of action under Section 1320c-5, which requires healthcare providers receiving Medicare payments to provide services economically and only when medically necessary, while assuring the quality of those services meet professionally recognized standards of healthcare. The court agreed with the hospital that the statute, which is primarily a fiscal measure targeting Medicare fraud, did not explicitly create a private cause of action. Applying the four-factor test from Cort v. Ash, 422 U.S. 44 (1975), the court also found no implied private cause of action under that provision of the Medicare statute. Nayyar, a resident physician, sued Mt. Carmel after it terminated his employment. According to the hospital, Nayyar was terminated following an investigation of a procedure he performed coupled with his past disciplinary record. Nayyar sued the hospital alleging wrongful termination of his employment, arguing that his termination was motivated by complaints he lodged with his superiors regarding the inadequacy of Mt. Carmel s critical care staffing. Among his eight causes of action was one asserting violations of Section 1320(c)(5). The court held that this claim must be dismissed because no private right of action arose under the provision. First, the court noted that Nayyar was not one of the class on whose behalf the statute was enacted namely, the government to protect against wasteful payments to those engaged in Medicare fraud and patients to ensure they receive appropriate medical care. To protect the interests of the government and patients, Congress leveled the statute against medical practitioners engaged in fraud... not... to protect the interests of individual medical practitioners from their employers, the court observed. 366

367 Second, and more significant, the court found no indication in the legislative history that Congress contemplated creating a private cause of action, a factor the Supreme Court has held to be determinative. Third, the statute creates a comprehensive administrative enforcement framework giving the Department of Health and Human Services Secretary, not private individuals, broad discretion to enforce the statute. Finally, the court said, the cause of action involves an issue traditionally relegated to state law i.e., the appropriate standard of medical care. Nayyar v. Mt. Carmel Health Sys., No. 2:10-cv (S.D. Ohio July 1, 2010). Sixth Circuit Upholds Finding That SNF Noncompliant With Minimum Standards Of Care The Sixth Circuit affirmed June 25, 2010 the Departmental Appeals Board s (DAB) findings that Claiborne-Hughes Health Center (Claiborne), a skilled nursing facility (SNF) in Franklin, TN, was noncompliant with certain minimum standards of care. Inspections completed in August and September of 2006 revealed that Claiborne violated a number of requirements. Consequently, the Centers for Medicare and Medicaid Services (CMS) imposed a civil money penalty and a denial of payment for new admissions. An administrative law judge (ALJ) and the DAB sustained these sanctions, basing their decision on the care provided to two of Claiborne s residents, Resident 4 (R4) and Resident 4a (R4a). Claiborne appealed four of the ALJ and DAB conclusions, contending that it did not fail to notify R4 s family and doctor when there was a significant change in his condition, as required by 42 C.F.R (b)(11); that its noncompliance with 42 C.F.R (b)(11) did not put R4 in immediate jeopardy; that it did not fail to provide sufficient fluid intake to R4a as required by 42 C.F.R (j); and that the ALJ did not have discretion to decline to address the other deficiencies found in the inspections. The Sixth Circuit affirmed. According to the appeals court, it was reasonable for the DAB to find a sharp decline in R4 s food intake persisting for over three weeks should have amounted to a significant change triggering the Section (b)(11) requirement to notify R4 s doctor and family. The appeals court also found substantial evidence in the record suggesting that R4 suffered serious harm when Claiborne failed to comply with Section (b)(11). Claiborne offered no testimony that a decrease in food consumption would not pose significant risks to R4 s health. Regarding standard of care violations for the other resident, the appeals court noted that R4a had been targeted for increased hydration. The fact that Claiborne did not follow its own policies as to monitoring residents hydration generally, resulting in R4a not receiving even her regular daily fluids, showed that it failed to substantially comply with Section (j), which states that [t]he facility must provide each resident with sufficient fluid intake to maintain proper hydration and health. Finally, the appeals court concluded that neither the ALJ, nor the DAB, were obligated to review each and every deficiency in order to uphold a civil money penalty and denial of 367

368 payment for new admissions. Rather, the agency, in the interests of judicial economy, may review only those deficiencies that have material impact on the outcome of the dispute. Thus, the appeals court found no error in the noncompliance decision and ruled that it would have been possible for a reasonable jury to reach the same conclusion. Claiborne-Hughes Health Ctr. v. Sebelius, No (6th Cir. June 25, 2010). U.S. Court In Georgia Rejects Challenge To Medicare Overpayment Determination, Finds Physician s Reliance On Carrier s Advice Was Unreasonable A federal district court in Georgia dismissed August 30, 2010 a physician s action challenging the Department of Health and Human Services (HHS ) determination that Medicare overpaid him $45,000 for hyperbaric oxygen therapy provided to beneficiaries. Glenn L. Goodhart, M.D. owns and operates a hyperbaric oxygen therapy facility that provides services to Medicare beneficiaries. According to Goodhart, Cahaba Government Benefit Administrators, his Medicare carrier, informed him that he could bill three units of the code, which covers physician attendance and supervision, for each therapy session. The Medicare Claims Processing Manual, however, specifically directs providers to bill only one unit of this code per session. Goodhart said he sought additional reimbursement because he could not bill the other code allowed under Medicare for such therapy, C1300, which covers technical fees but only in hospital outpatient facilities. Goodhart asserted only one unit of the code did not cover the cost of a session. Following Cahaba s guidance, Goodhart billed Medicare for three units of the code for each therapy treatment rendered to beneficiaries between February and November In 2007, Cahaba determined that Goodhart had received overpayments by billing three units of the code. According to Goodhart, a Cahaba employee told him he could pay $2, to resolve the overpayment, which he did. But several months later, following a formal audit, Cahaba demanded repayment of nearly $45,000. Goodhart appealed Cahaba s decision to an administrative law judge, who upheld the overpayment determination. After Goodhart s appeal to the Medicare Appeals Council also was unsuccessful, he filed an action in court, alleging breach of contract and unjust enrichment under Georgia common law. The U.S. District Court for the Northern District of Georgia found Goodhart s claim arose under the Medicare Act and therefore he was not entitled to relief under Georgia law. In any event, the court continued, Goodhart could not maintain an estoppel claim against the government because he could not show he reasonably relied on Cahaba s misrepresentation concerning the code. 368

369 As a participant in the Medicare program, Dr. Goodhart had a duty to familiarize himself with the regulations regarding [hyperbaric oxygen therapy] and with the limitations on Cahaba s role in interpreting these regulations, the court observed. Had he done so, he would have realized that Cahaba s guidance was inconsistent with the Medicare Claims Processing Manual and that Cahaba was required to comply with the Manual as a Medicare carrier, the court said. Moreover, Goodhart s estoppel claim failed because he could not show a sufficiently adverse change-in-position. According to Goodhart, repaying $45,000 would hurt his medical practice. Rejecting this argument, the court noted that Goodhart lost no rights but merely was induced to do something which could be corrected at a later time. Goodhart v. Department of Health and Human Servs., No. 1:09-CV-3299-TWT (N.D. Ga. Aug. 30, 2010). Eleventh Circuit Upholds Overpayment Determination, Recoupment Against Provider For Misrepresentations On Medicare Enrollment Application The Department of Health and Human Services Secretary properly concluded that Medicare payments to a provider that falsified its Medicare enrollment application were an overpayment subject to recoupment, the Eleventh Circuit held recently. Dr. Surindar S. Bedi was excluded from the Medicare program in 1990 for 10 years after being incarcerated for committing a Medicare-related crime. In a letter notifying Bedi of the exclusion, the Secretary explained that Medicare payments would not be made to any entity in which Bedi served in any capacity or to any supplier wholly owned by Bedi. While the exclusion was in effect, Bedi became President and majority owner of Florida Medical Center of Clearwater (FMC). FMC s office manager and part owner submitted a Medicare provider/supplier enrollment application that listed him as the sole owner and failed to disclose Bedi s involvement. Bedi and the manager later pled guilty to making a misrepresentation in a Medicare enrollment application. While Bedi owned a controlling stake in FMC, he was never involved in daily operations or in furnishing, ordering, or prescribing any of the services for which FMC submitted Medicare claims. The Centers for Medicare and Medicaid Services (CMS) subsequently notified FMC of a $311, Medicare overpayment during the two-year time period Bedi, an excluded provider, had been the majority owner. The money was recouped by withholding payment on other FMC claims. FMC appealed CMS overpayment determination, which an Administrative Law Judge (ALJ) upheld. The ALJ found (1) the Secretary excluded FMC under the mandatory exclusion section of the Social Security Act (Act) and (2) FMC s misrepresentations and 369

370 omissions on its Medicare enrollment application rendered it ineligible for Medicare payments. After the Medicare Appeals Council denied review, FMC appealed to the district court, which affirmed the Secretary s final decision. The Eleventh Circuit also affirmed on the ALJ s second ground i.e., the misrepresentations and omissions on FMC s Medicare enrollment form. The appeals court agreed with FMC that the ALJ erred in finding the Secretary s letter excluded it from the program under the mandatory exclusion provision. Bedi did not furnish or prescribe services provided by FMC, nor was it wholly owned by Bedi. Thus, the terms of the letter did not cover payments to FMC. But the appeals court, affording deference to the ALJ s legal conclusion, upheld the determination that FMC s misrepresentation on its enrollment form resulted in an automatic, as opposed to permissive, exclusion. Given that 1833 of the Social Security Act provides that '[n]o payment may be made... for items or services furnished by any disclosing Part B provider unless such provider has provided the Secretary with full and complete information, it was clearly permissible for the ALJ to conclude the FMC s misrepresentations automatically excluded it from the Medicare program and that payments to FMC were therefore subject to recoupment, the appeals court wrote. Florida Med. Ctr. of Clearwater, Inc. v. Sebelius, No (11th Cir. Aug. 19, 2010). Fifth Circuit Rejects CMS Calculation Of Medicare Reimbursement For Psychiatric Services Following Expiration Of Statutorily Mandated Cap The Centers for Medicare and Medicaid Services (CMS ) method for calculating Medicare reimbursement for five acute-care hospitals that provided psychiatric services was inconsistent with the governing regulation, the Fifth Circuit ruled recently in reversing a lower court s grant of summary judgment in CMS favor. Plaintiff hospitals sought court review of how CMS determined their target amount for purposes of Medicare reimbursement for psychiatric services rendered to Medicare beneficiaries in fiscal years 2003, 2004, and Before 1998, base year targeted amounts were derived from a hospital s allowable operating costs for the preceding 12-month cost reporting period, and thereafter on the target amount from the previous year updated by the applicable percentage increase specified by statute. In the Balanced Budget Act of 1997 (BBA), Congress added a cap to hospitals target amounts. Under the BBA and CMS implementing regulations, the target amount was the lower of (1) a hospital specific target amount (i.e., the amount of allowable expenses from the base period year adjusted forward to the current year), or (2) the capped amount under the BBA (i.e., an amount not to exceed the 75th percentile of target amounts for all hospitals in the class). 370

371 In 2002, the BBA cap provision expired. The instant litigation involved CMS method for calculating the plaintiff hospitals target amounts between 2003 and 2005, after which a prospective payment system (PPS) was implemented. For these years when the BBA provision had expired, the hospitals argued CMS should have calculated their target amounts using their hospital-specific target amounts, rather than the previous capped target amounts. However, CMS calculated their reimbursements using the target amounts actually applied to the providers in 2002, which for these providers was the BBA capped amount. According to CMS, when a provider is subjected to the cap provisions, the capped amount actually becomes that hospital s target amount for purposes of calculating its subsequent year s reimbursement. Under CMS method, providers received substantially smaller reimbursement than they would have absent the continued effect of the cap provisions. The U.S. District Court for the District of Mississippi upheld CMS method for determining the hospitals target amounts, finding it a permissible interpretation of both the ambiguous statute and regulations. The Fifth Circuit reversed, holding CMS interpretation conflicted with the unambiguous regulation at issue. Applying the two-step Chevron analysis, the appeals court agreed that the statute was ambiguous as Congress did not speak to how CMS was to calculate a hospital s target amount in the event there was a delay between the expiration of the BBA s cap provisions and the implementation of a new PPS. Affording deference to CMS interpretation as required under Chevron, the appeals court held basing the 2003 to 2005 reimbursements on the capped amounts rather than the providers individual costs was not manifestly contrary to the statutory language nor arbitrary and capricious, even if the providers may offer a better interpretation of the statute. But the appeals court went on to find that CMS interpretation was contrary to the unambiguous governing regulation. The regulation instructed fiscal intermediaries to calculate the target amount based on the hospital s allowable net inpatient operating costs increased by the update factor subject to the provision setting forth the BBA caps. Providers argued once the BBA caps expired, the remainder of the regulation was still in force and required reimbursements to be based on their reasonable costs, not the capped amounts. The court found the regulation unambiguously specified that the target amounts were to be calculated based on the hospital-specific target amount subject to the caps. Once the cap provision expired in 2002, the only way to calculate reimbursements was the hospital-specific target amount, the appeals court concluded. As the regulation was not ambiguous, CMS interpretation was not entitled to deference. The appeals court found CMS reading of the regulation contrary to its plain language, which only imposed a time limit on the section pertaining to the BBA caps. 371

372 CMS subsequent attempt to clarify the regulation and impose time limits on the other sections amounted to an impermissible substantive change, the appeals court held. Hardy Wilson Mem l Hosp. v. Sebelius, No (5th Cir. Aug. 19, 2010). Ninth Circuit Finds MMA Preempted Claims Against Part D Sponsor The Ninth Circuit held August 30, 2010 that the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and its implementing regulations preempted state law fraud and consumer protection claims against a Medicare Part D sponsor and its parent company for failing to timely provide prescription drug plan benefits to beneficiaries. The appeals court also concluded the plaintiff beneficiaries had failed to exhaust their administrative remedies with respect to their breach of contract and unjust enrichment claims and therefore the district court lacked jurisdiction to consider those causes of action. The Ninth Circuit first ruled in the case in 2008 (Uhm v. Humana Inc., No (9th Cir. Aug. 25, 2008)), affirming the district court s dismissal of the action solely on preemption grounds. The appeals court withdrew that opinion, granted plaintiffs petition for a rehearing, and asked the Centers for Medicare and Medicaid Services to weigh in on the case. According to the opinion, CMS filed an amicus brief with the appeals court in support of the Part D sponsor s position. Plaintiffs Do Sung Uhm and Eun Sook Uhm enrolled in Humana's Medicare Part D prescription drug program, based in part on the representations Humana made in its marketing materials. Despite Humana's assurances that the Uhms would receive coverage for their prescription drugs beginning January 1, 2006, the first day Part D sponsors could provide benefits under the MMA, the Uhms never received any information or documentation from Humana. Thus, as January 1, 2006 passed, the Uhms had to pay out-of-pocket for their prescriptions even though they had paid their premium. On February 6, 2006, the Uhms sued Humana Health Plan, Inc. and Humana, Inc. (collectively Humana) claiming breach of contract, violation of several state consumer protection statutes, unjust enrichment, fraud, and fraud in the inducement. Plaintiffs filed the complaint on behalf of themselves and a putative class consisting of all persons who paid, or agreed to pay, Medicare Part D prescription drug coverage premiums to Humana and who did not receive those prescription drug benefits in either a timely fashion or at all. Humana moved to dismiss under Fed. R. of Civ. P. 12(b)(6), and the district court granted the motion finding the MMA preempted the plaintiffs' claims. Plaintiffs appealed. The Ninth Circuit found plaintiffs breach of contract and unjust enrichment claims arose under the Medicare Act and therefore they were required to exhaust the administrative process before seeking redress in court. 372

373 In so holding, the appeals court rejected plaintiffs argument that their claims did not arise under the Act because they sought return of their premiums, not reimbursement for benefits owed under the Act. After a careful review of these claims, we conclude that they are, at bottom, merely creatively disguised claims for benefits, the appeals court said. Plaintiffs next argued Humana failed to actually enroll them in the prescription drug plan and therefore the Act did not apply to them. But the appeals court said the key issue was not whether they were enrolled but whether they were enrollees. Plaintiffs were enrollees as soon they elected... a Part D plan. Under the applicable regulations, an eligible individual elects a Part D plan as soon as he or she submits an enrollment form to a Part D sponsor, which is precisely what plaintiffs did. Thus, plaintiffs contract and unjust enrichment claims were subject to the exhaustion requirements. Next, the appeals court held the MMA preempted plaintiffs remaining claims, which did not arise under the Medicare Act, asserting Humana made material misrepresentations and engaged in other systematic deceptive acts in the marketing and advertising of their Part D plan. The appeals court noted that under the MMA s preemption provision, CMS standards supersede state law or regulations insofar as the state law or regulation is with respect to a prescription drug plan offered by a PDP sponsor. We hold that the Uhms claims are preempted by the extensive CMS regulations governing [prescription drug plan] marketing materials, the appeals court found. Uhm v. Humana, Inc., No (9th Cir. Aug. 30, 2010). Eleventh Circuit Limits Medicare Recovery To Probate Court's Allocation Of Wrongful Death Settlement The Eleventh Circuit reversed September 29, 2010 a district court decision finding Medicare was entitled to recover $22,480 in medical expenses under the Medicare Secondary Payer Statute (MSP) from a $52,000 wrongful death settlement with the children of a deceased nursing home resident. On an issue of first impression, the appeals court found the Florida Wrongful Death Act (FWDA) contemplates that damages allowed an estate are separate and distinct from damages recoverable by the deceased s survivors for lost companionship and mental pain and suffering. Florida courts have repeatedly held that proceeds from a wrongful death action are not for the benefit of the estate, rather, that they are the property of the survivors and compensation for their loss, the appeals court said. In the instant case, the surviving children s right of action under the FWDA is an individuals property right, not derived from the estate, the appeals court noted. 373

374 Reversing the district court s decision in favor of the Department of Health and Human Services Secretary, the First Circuit held Medicare was only entitled to recover $788 from the settlement, the amount allocated by a Florida probate court to medical expenses. After living for 18 months at a Florida nursing home, Charles Burke died from multi-organ failure, secondary to sepsis and wound infection. During his three-month hospital stay, Medicare paid $38,875 for his medical care. After his death, one of Burke s surviving children, Carvondella Bradley, on behalf of his estate and his ten surviving children, presented a wrongful death claim in a demand letter to the nursing home and its liability insurance carrier, asserting abuse and neglect under Florida law. Bradley settled the wrongful death tort claim for $52,000, the full amount of the nursing home s liability insurance limits, executing a release of all the estate s and children s claims. Bradley notified the Secretary of the settlement proceeds and associated legal fees and costs. The Secretary refused to recognize the medical expense claim had been settled for less than 100% and asserted, under the MSP, that Medicare was entitled to a net amount of $22,480 of the settlement. The estate and children applied to the Florida probate court to adjudicate the rights of the estate and children in regard to the compromised sum received in settlement of their claims. Despite giving notice to Medicare of the probate court s proceedings, the Secretary declined to appear or participate. The court ultimately determined that Medicare was entitled to only $788 of the settlement. The Secretary refused to accept the probate court s determination, saying it was merely advisory in nature or superceded by federal law. The estate paid Medicare under protest, perfected its administrative appeal, and exhausted its administrative remedies. A federal trial court subsequently upheld the Secretary s interpretation of the MSP and relevant regulations, relying heavily on a Medicare field manual. The court found Medicare was entitled to reimbursement of $22,480 for conditional medical expense payments. The First Circuit reversed. The appeals court stressed that under Florida law, the estate s recovery of medical expenses and costs (which is subject to the MSP) is distinct from the non-medical, tort property claims of Burke s surviving children for lost parental companionship (which is not subject to the MSP). Here, the Secretary declined to take part in the probate court s deliberations regarding the allocation of the settlement, which set Medicare s recovery at $788, and refused to accept its decision without citing any statutory or regulatory basis for doing so. According to the appeals court, the Secretary s reliance on a Medicare field manual in rejecting the probate court's allocation was misplaced as the manual did not have the force of law. 374

375 Thus, the appeals court refused to allow the Secretary to now argue the allocation was improper. Moreover, the appeals court said, the Secretary s position would have a chilling effect on settlement, compelling plaintiffs to force their tort claims to trial, burdening the court system. A dissenting opinion argued that while the field manual was not entitled to the force of law, it was still entitled to some deference. Bradley v. Sebelius, No (11th Cir. Sept. 29, 2010). Ninth Circuit Remands Equal Protection Claims By California Counties Involving Medicare Reimbursement On remand, the district court must consider whether the Department of Health and Human Services (HHS) Secretary s decision not to revise the Medicare fee schedule areas in several California counties is supported by a rational basis, the Ninth Circuit held in an unpublished September 29, 2010 opinion. The lower court did not reach this issue because it concluded that the counties were not persons within the meaning of the Fifth Amendment, and thus lacked standing to pursue their constitutional claims. But the appeals court found the counties did qualify as persons, at least for the purposes of the instant litigation, and therefore remanded to the district court to reach the merits of the dispute. Various California counties sued the HHS Secretary raising constitutional and statutory claims in connection with their reimbursement under Medicare. According to the counties, the Secretary s failure to revise the fee schedule areas that determine the fees paid to the counties for providing Medicare services violated their equal protection and due process rights. The counties also argued 42 U.S.C w- 4(1)(2) and the regulation implementing this statute, 42 C.F.R , are unconstitutional as applied because they deprived them of property and equal protection. The counties statutory claims asserted the Secretary s failure to revise the fee schedule areas violated various provisions of the Administrative Procedure Act and the Medicare Act. The district court dismissed the counties constitutional claims on the ground they did not qualify as persons under the Fifth Amendment, and thus lacked standing. The court also dismissed the counties statutory claims as on the ground that they were barred by statute The Ninth Circuit affirmed the district court s dismissal of the counties statutory claims, noting the Medicare statute bars judicial review of the establishment of geographic adjustment factors. Because the challenge to the fee schedule necessarily involves a challenge to the geographic adjustment factors, the district court appropriately concluded that it lacked 375

376 jurisdiction over the statutory claims related to the fee schedule areas, the appeals court held. The appeals court also affirmed the dismissal of the counties due process claims. While concluding at least for purposes of the claim before us, the counties are persons, the appeals court nonetheless held the due process claims fail because the Counties do not have a property right to any particular payment by Medicare. Turning to the counties equal protection claims, the appeals court noted that because it concluded that the counties are persons, it must consider whether the Secretary s decision not to revise the fee schedule areas is supported by a rational basis. However, the district court did not reach this issue so the appeals court remanded for further proceedings. County of Santa Cruz v. Sebelius, No (9th Cir. Sept. 29, 2010). U.S. Court In Pennsylvania Says Medicare Must Cover Plaintiff s Skilled Nursing Care The U.S. District Court for the Western District of Pennsylvania reversed September 28, 2010 the Department of Health and Human Services Secretary s decision that Medicare does not cover a plaintiff s skilled nursing care. The Secretary s determination was in direct conflict with evidence that plaintiff was benefitting from skilled nursing care, the court found. Accordingly, the court granted plaintiff s motion for summary judgment and ordered the Secretary to award benefits to the plaintiff. Plaintiff Wanda Papciak, an 81-year old woman, was discharged from the hospital to ManorCare to receive skilled nursing care, physical therapy, and occupational therapy. Medicare Part C paid for the skilled care plaintiff received from June 3 through July 9, Medicare determined, however, that effective July 10, 2008, plaintiff no longer needed skilled care because she had made only minimal progress in some areas, had regressed in other areas, and had been determined to have met her maximum potential for her physical and occupational therapy. As a result, Medicare denied payment from July 10 through July 19 because it determined plaintiff was only receiving custodial care, not the skilled nursing services required for Medicare coverage. Plaintiff appealed the decision denying coverage and an administrative law judge (ALJ) upheld the denial. Plaintiff then appealed that decision to the Medicare Appeal Counsel (MAC), which upheld the ALJ s decision. The instant appeal followed. Both parties moved for summary judgment. The court first noted that during the time period in question, plaintiff was insured by Keystone Health Plan West/Highmark Security Blue, a Medicare Advantage plan. 376

377 Under Medicare, the beneficiary must require skilled nursing or skilled rehabilitation services, or both, on a daily basis and the daily skilled services must be ones that, as a practical matter, can only be provided in a SNF, on an inpatient basis. 42 C.F.R (b). Personal care services, such as general supervision and maintenance, which do not require the skills of qualified technical or professional personnel are not skilled services; however, special medical complications can render personal care services to be considered skilled nursing care, the court noted. According to plaintiff, the Secretary s determination that plaintiff did not require skilled nursing care lacked the support of substantial evidence in the record. Plaintiff argued the Secretary must consider whether she needed skilled nursing care to maintain her level of functioning, as required by the Skilled Nursing Facility Manual Chapter (A)(1). The court agreed with plaintiff that neither the ALJ nor the MAC addressed this issue; instead they focused on plaintiff s progress or lack of ability to achieve a higher level of functioning. As a result, the decision denying Plaintiff Medicare coverage cannot be affirmed, the court held. The court also agreed with plaintiff that the Secretary ignored evidence that plaintiff was improving in her functional capacity. The court found that no consideration was given as to the treatment of Plaintiff s depression and anxiety and whether her physical capacity was being limited by her mental impairments. Such evidence was not discussed by the Secretary in the decision denying plaintiff Medicare coverage, the court noted. Accordingly, the court found the Secretary s conclusion that plaintiff could not reasonably have been expected to reach a higher level of function from further skilled therapy, is in direct conflict with the evidence that plaintiff s physical capacity did improve subsequent to her stay at ManorCare. Thus, the court reversed and remanded the case to the Secretary with instruction to award plaintiff benefits. Papciak v. Sebelius, No (W.D. Pa. Sept. 28, 2010). U.S. Court In Florida Says RAC Reopening Decision Not Reviewable The Department of Health and Human Services Secretary s decision that it cannot review a recovery audit contractor s (RAC s) reopening decision was reasonable, the U.S. Court for the Middle District of Florida held October 6, In granting the Secretary summary judgment on the regulatory and constitutional claims, the court held the Secretary had full discretion and authority to promulgate such regulations. In addition, the Secretary's interpretation that it may not review whether 377

378 good cause existed for a reopening was reasonable and consistent with the regulations granting the Secretary such authority. In 2004, Morton Plant Hospital provided services to three Medicare beneficiaries. Morton Plant submitted the claims to Medicare and its intermediary paid Morton Plant $16, for these three claims In August 2007, HealthDataInsights, a Florida RAC, reviewed Morton Plant s records for the three patients at issue and reopened the favorable initial determinations relating to the claims to determine whether improper payments had been made. The RAC determined that Morton Plant should have billed Medicare on an outpatient basis, rather than an inpatient basis and thus, that the services provided were not medically necessary and reasonable. The RAC then reversed the claims and notified the Secretary of the overpayments. Morton Plant appealed the revised determinations to the intermediary arguing, among other things, that the RAC did not have the required good cause to reopen the claims because such claims were reopened after the passage of a year. After the intermediary upheld the overpayment determination, Morton Plant appealed to an administrative law judge (ALJ). The ALJ upheld the determination as did the Medicare Appeals Council and Morton Plant filed suit. The complaint contained four counts: two declaratory relief counts and two Fifth Amendment due process counts. Both parties moved for summary judgment. The court first noted the Secretary s determination was entitled to substantial deference and then moved on to Morton Plant s regulatory arguments. The court rejected Morton Plant s argument that the Secretary may review whether a RAC has good cause to reopen a claim. [T]he unambiguous language of the regulations indicates that a Recovery Contractor s decision to reopen a claim is simply not appealable, the court said. The right of appeal attaches only to the result of the reopening, and not to the decision of whether to reopen the claim, the court noted. The court further found the Secretary s interpretation of the regulations at issue was reasonable and consistent with the applicable statutes and regulations. Morton Plant next argued that the Secretary s interpretation of the reopening regulations was unconstitutional, both facially and as applied to Morton Plant. The court found Morton Plant s facial challenge failed because Morton Plant had shown neither a protected property interest at stake nor a deprivation of any procedural due process guarantee. Morton Plant argued that the non-reviewability of reopening decisions deprives providers of due process. 378

379 The court rejected this argument, finding that [a]lthough the provider cannot contest the fact that the claim was reopened, that provider is not left without due process because it can appeal the substantive portion of the determination. Also, Morton Plant had not shown any protected property interest at stake, the court said. Morton Plant argued it has an interest in the continued receipt of social welfare benefits, but the court noted that the Secretary has not denied Morton Plant the opportunity to participate in the Medicare reimbursement program. The Secretary simply determined that Morton Plant was overpaid as to three claims, the court found, and Morton Plant could not demonstrate that it was entitled to the funds at issue. The court also rejected Morton Plant s as applied due process challenge. In this claim, Morton Plant attacked the substantive grounds for the finding that it was overpaid as to the three claims at issue. However, Morton Plant did not appeal the ALJ s decision as to the substance of the overpayment determination to the Council, and thus the court lacked jurisdiction over this issue. Morton Plant Hosp. Ass n v. Sebelius, No. 8:09-cv-1999-T-33AEP (M.D. Fla. Oct. 6, 2010). U.S. Court In Texas Finds Secretary s Overpayment Determination Not Supported By Substantial Evidence The U.S. District Court for the Southern District of Texas found October 14, 2010 the Department of Health and Human Services (HHS) Secretary s $336, overpayment determination involving a durable medical equipment (DME) supplier was not supported by substantial evidence. In so holding, the court held the Administrative Law Judge (ALJ) failed to properly develop the administrative record and failed to grant a continuance to the DME company s counsel. Plaintiff Dafyik Healthcare Services was a DME supplier, in particular, of power-operated wheelchairs. An audit determined that Medicare claims Dafyik submitted did not support the medical necessity of the electric wheelchairs for some beneficiaries. According to HHS, Dafyik was overpaid $336, After a hearing, an ALJ affirmed the overpayment amount. Dafyik appealed to the Medicare Appeals Council, which denied its request for review. On appeal, both parties cross-moved for summary judgment. Dafyik argued the Secretary s determination was unsupported by substantial evidence. 379

380 After examining the lengthy record in the case, the court agreed. According to the court, the ALJ failed to develop the record to show that substantial evidence existed, pointing to several instances where a full investigation was not completed. The court also found substantial evidence of the specific overpayment amount also was lacking. Plaintiff argued, and the court agreed, that there appears to be duplication in beneficiaries when considering the amount of overpayments; amounts that were previously refunded to the Secretary were never taken into account; and amounts that have not yet been paid for the time period in question have not been considered in calculating (or offsetting) the total amount of overcharge. The court also held the ALJ erred in failing to grant plaintiffs counsel a requested continuance to more fully investigate the claims. According to the court, it cannot help but conclude that had Dafyik s attorney been granted the continuance, he would have had the opportunity to investigate and contact some, if not all, of the 78 beneficiaries to whom the electric wheelchairs were provided and to expose the errors in the ALJ s decision. Thus, while the Court does not make this decision lightly, it cannot help but conclude that the ALJ abused his discretion in failing to grant the limited continuance in this case. Accordingly, the court remanded the case to the Secretary for further proceedings. Dafyik Healthcare Servs. v. Sebelius, No. H (S.D. Tex. Oct. 14, 2010). U.S. Court In Vermont Reverses Decision Denying Medicare Beneficiary Coverage Of Home Healthcare The U.S. District Court for the District of Vermont found October 25, 2010 that an administrative law judge (ALJ) improperly denied plaintiff coverage for skilled observation and assessment services under Medicare Part A by applying a stability presumption in determining the services did not meet program coverage criteria. In so holding, the court rejected part of a magistrate judge s Report and Recommendation filed in August, which concluded the ALJ did not apply an improper presumption in denying coverage for the home healthcare at issue. Sandra Anderson began receiving home health services from the Visiting Nurse Association on June 7, She suffered from a number of cognitive impairments and immobility, requiring 24-hour supervision for her to remain at home. Her treating physician certified a variety of skilled nursing services for Anderson for six, 60-day certification periods. The fiscal intermediary allowed coverage of the services provided to Anderson for the first period, but denied coverage for the remaining five periods. The ALJ agreed with the intermediary s determination, finding [t]he home health services... did not meet Medicare coverage criteria. 380

381 After receiving a final agency decision affirming the ALJ s decision, Anderson brought an action in court, alleging the Department of Health and Human Services Secretary improperly applied a stability presumption i.e., automatically denied coverage for patients whose conditions are stable during the covered period. The magistrate judge found the ALJ did not apply a stability presumption in denying Anderson s Medicare coverage. The judge nonetheless reversed and remanded to the ALJ based on other legal errors and factual findings not supported by substantial evidence. As a threshold matter, the court rejected the Secretary s argument that the case was moot and therefore subject matter jurisdiction was lacking. Although the ALJ waived Anderson s financial responsibility for the services in question, a beneficiary retains his or her injured status when the Secretary refuses to pay providers for Medicare benefits the beneficiary has received, the court noted. Moreover, the court continued, Anderson retains an injury-in-fact because she will be presumed to have knowledge that the denied services will not be covered in the future. Turning to the merits, the court noted the issue before the ALJ was whether the skilled nursing services provided to Anderson were reasonable and necessary. The touchstone for determining whether skilled services are reasonable and necessary is from the forward-looking vantage point of the physician, the court observed. A patient s chronic or stable condition does not provide a basis for automatically denying coverage for skilled services, the court added. Here, the magistrate judge erroneously interpreted applicable regulations in concluding that skilled services for observation and assessment of a plaintiff s condition are not covered when a patient s condition is stable and unlikely to change. Pursuant to the regulation, stabilization determines the duration of skilled services. It does not, however, negate the possibility that skilled care may, depending on the unique condition of the patient, continue to be necessary for patients whose condition is stable, the court said. The court was not convinced that the ALJ s evaluation was free from the taint of a retrospective stability presumption. Thus, the court remanded to the ALJ to reexamine the need for the services at issue from the perspective of Anderson s condition at the time the services were ordered, free from any presumption that if hindsight reveals Plaintiff s condition was stable throughout the covered period, coverage for skilled services should be denied. Anderson v. Sebelius, No. 5:09-cv-16 (D. Vt. Oct. 25, 2010). U.S. Court In Texas Dismisses Home Health Agency s Claims For Failure To Exhaust Administrative Remedies The U.S. District Court for the Northern District of Texas dismissed December 8, 2010 claims by a home health agency that a Medicare contractor violated its constitutional rights by failing to properly issue an overpayment notice and failing to extend appeal rights within a reasonable time. 381

382 In so holding, the court found that it lacks subject matter jurisdiction and mandamus jurisdiction because the agency failed to exhaust its administrative remedies prior to filing suit. The court further found it lacked jurisdiction under the Administrative Procedure Act because the action arose under the Medicare Act. Plaintiff Citadel Healthcare Services Inc., is a home health agency providing services to Medicare beneficiaries. Health Integrity, LLC, a Medicare contractor handling Part A reimbursements, notified plaintiff that its records would be reviewed to ensure that Medicare claims had been billed and paid appropriately in relation to services provided between July 1, 2007, and June 3, Health Integrity subsequently notified plaintiff by letter that it was suspending all Medicare payments owed to it based on reliable information that an overpayment or fraud or willful misrepresentation existed or that the payments to be made might not be correct. From a random sample of Medicare claims involving 36 beneficiaries and 55 home health episodes, the letter identified five beneficiaries that were not homebound during the sample episodes and five out of five beneficiaries that did not meet Medicare requirements for skilled care during the sample episode. Plaintiff eventually filed suit alleging that Health Integrity had failed to issue an overpayment notice and had failed to extend appeal rights within a reasonable time. Plaintiff claimed violations of constitutional due process rights, the Medicare Act, and the Administrative Procedure Act (APA). Health Integrity moved to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction and Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. Health Integrity argued that federal question jurisdiction under 28 U.S.C is precluded in this case by 42 U.S.C. 405(h) and 1395ii. Section 1395ii of the Medicare Act incorporates section 405(h) to preclude federal question jurisdiction of all claims arising under the Medicare Act, the court noted. Here, because any claimed violations and the relief sought clearly arise under the Medicare Act, plaintiff cannot rely on section 1331 for subject matter jurisdiction, the court held. Therefore, the court found, section 405(g) is the sole avenue for judicial review in this case. Under section 405(g), an individual may obtain judicial review of a final decision of the Secretary made after a hearing to which he was a party, the court explained. Health Integrity argued, and the court agreed, that plaintiff has not exhausted its administrative remedies here. The court rejected the plaintiff s contention that the exhaustion requirement should be waived because its constitutional claims are collateral to a demand for benefits. 382

383 Although Plaintiff has framed the claim in constitutional terms by alleging a denial of appeal rights and overpayment notice, it essentially seeks to prevent improper recoupment and suspension of its Medicare payments, which is clearly an administrative remedy, the court found. In addition, the court noted that defendant s alleged refusal to issue an overpayment notice and extend appeal rights has not deprived plaintiff of its administrative remedies because plaintiff can seek judicial review of any procedural non-compliance by the government after a final determination regarding its claims has been made by the agency. Lastly, the court concluded that there is no reasonable basis to conclude that Plaintiff will suffer irreparable harm pending exhaustion. Citadel Healthcare Servs. Inc. v. Sebelius, No. 3:10-CV-1077-BH (N.D. Tex. Dec. 8, 2010). U.S. Court In Pennsylvania Dismisses MSP Action Finding Plaintiff Must Be Current Employee To Sue The U.S. District Court for the Western District of Pennsylvania granted October 29, 2010 summary judgment to an employer that was sued under the Medicare as Secondary Payer (MSP) statute. Although the court initially found the plaintiff had standing to sue, the court dismissed the action because the MSP applies only to current employees and the plaintiff was a retiree. Plaintiff William E. Brown sued defendants United States Steel Corporation and United States Steel and Carnegie Pension Fund for alleged violations of the MSP, 42 U.S.C. 1395y(b). According to Brown, defendants violated the MSP by refusing to repay Medicare for its payments made on his behalf during a period when they were primarily obligated to pay his medical bills by virtue of his enrollment in their employer group health plan. Brown sought damages for double the amount he claimed defendants were obligated to reimburse Medicare for its payments made on his behalf. Defendants moved to dismiss on several grounds or, alternatively, for summary judgment. The court first denied defendants motion to dismiss under Fed. R. Civ. P. 12(b)(1) on grounds that plaintiff lacked standing. Defendants argued plaintiff had not set forth facts showing he suffered an injury, but the court disagreed. Pointing to correspondence from the Medicare Secondary Payer Recovery Contractor notifying him of Medicare s priority right of recovery for conditional payments of $71, made on his behalf, the court found plaintiff has standing to bring this suit, as he does so to vindicate his own interests concerning unresolved conditional payments made on his behalf by Medicare that he claims the defendants must repay. 383

384 But the court granted defendants' alternative motion for summary judgment, noting that the MSP only applies to active employees. Thus, plaintiff cannot prevail on his MSP claim, as he is a retiree, not an active employee, the court concluded. Brown v. United States Steel Corp., No (W.D. Pa. Oct. 29, 2010). U.S. Court In D.C. Grants Motion To Dismiss Urologist Association s Lawsuit Challenging Certain Stark II Regulations The U.S. District Court for the District of Columbia ruled December 10, 2010 in favor of the Department of Health and Human Services (HHS ) motion to dismiss for lack of subject matter jurisdiction in a lawsuit brought by a urologist association alleging that certain Stark II regulations promulgated by the Centers for Medicare and Medicaid Services (CMS) wrongly prevent joint ventures that allow urologists to provide laser treatments to Medicare patients. The lawsuit, which was brought by the Council for Urological Interests (CUI) sought declarative relief as well as an order enjoining enforcement of the new regulations at issue, and HHS moved to dismiss for lack of jurisdiction. In granting HHS motion, the court found that under 42 U.S.C. 405(h), which precludes federal question jurisdiction over any claims arising under the Medicare Act that were not first channeled through CMS administrative claims process, it lacked jurisdiction over CUI s claims. With the evolution of laser surgery, many urologists and urologist groups have formed joint ventures with hospitals under which the urologists purchase expensive laser equipment and then provide various procedures that used to be provided via traditional invasive surgery in hospitals. Under CMS regulations, however, the joint ventures may not be directly reimbursed for their technical costs under Medicare, which covers over 75% of the patients who receive laser surgery. As a result, many urologist joint ventures entered into contractual relationships with hospitals, otherwise known as operating under arrangement with the hospital, through which the hospital acted as a billing agent for Medicare, and transferred fees to the joint venture on a per-procedure ( so called per-click ) basis while retaining some portion of each payment. The statutes known as Stark II, prohibit physician self-referrals for 11 designated health services, (DHS) including urological laser procedures under contract with hospitals. Under Stark II, physicians may not refer patients for any urological laser procedures to entities with which they have either an ownership or compensation arrangement. The statutes, however, do allow for exceptions for certain compensation arrangements that set rates in advance, comport with fair market value, and do not take into account the volume or value of referrals. In subsequent regulations promulgated in 2001, CMS clarified certain Stark II exceptions, specifically allowing physician joint ventures to be paid under arrangement with hospitals on a per-click basis. Under those regulations, only the hospital was considered to furnish the DHS, so referrals to joint ventures were not prohibited by Stark s ban on physician self-referrals. 384

385 Later, however, CMS promulgated new regulations, which took effect in October 2009, which expanded the class of entities considered to furnish DHS, and concluded that per click payments should be banned. In its lawsuit, CUI alleged that the revised regulations have the effect of precluding physician-owned joint ventures from providing urological laser treatments and invalidating the contracts with hospitals under which they have provided such treatments in the past. CUI further argued that the revisions in these regulations are contrary to the language and intent of the Stark II statutes. In response, HHS filed a motion to dismiss, arguing that the court lacks jurisdiction over CUI s claims because CUI failed to exhaust administrative remedies. Although CUI acknowledged that its claims arise under the Medicare Act, it nonetheless argued that its claims are exempt from section 405(h) because it cannot present its claims directly to CMS under Medicare regulations that restrict that option to Medicare providers and suppliers and therefore it has no feasible alternative through which to pursue administrative and judicial review. The court analyzed the feasibility of hospitals presenting CUI s claims to CMS, noting that in order for that to happen, first a physician must refer a patient to an entity in which he or she has a financial interest for a treatment that constitutes a DHS, and then a hospital must submit a claim for reimbursement for that service to CMS. CUI argued that this scenario was effectively impossible, because under the Stark law (42 U.S.C. 1320a-7a & 1395nn(g)(3)), both the hospital and the referring physician would be subject to severe sanctions, including monetary penalties and disbarment from Medicare. HHS, on the other hand, argued that neither the physician nor the hospital would be subject to Stark s penalties if a no payment option were used. Under this option, HHS, explained, Medicare providers can, for the purpose of commencing the administrative review process, submit claims to CMS that do not seek payment by attaching a particular administrative code to the claim. The court agreed with HHS argument that the Stark sanctions do not prohibit the submission to CMS of a no payment test claim by a hospital. CUI next argued, however, that even if the no payment option insulates hospitals from liability, it does not provide the same benefit to referring physicians because the Stark law prohibits not only the submission of claims based on a disallowed referral, but also the act of the referral itself. Although the court found that CUI was correct that both acts are proscribed, it determined that the sanctions for both flow from 42 U.S.C. 1395nn(g)(3), which makes no separate discussion of referrals. A no payment claim does not constitute a bill or claim for the purposes of the submitting hospital, the court reasoned, and therefore the same is true as to the doctor who caused the hospital to submit the claim. As such, the court concluded that a physician who provided a referral that served as a basis for a no payment claim would not be exposed to the Start sanctions at issue. CUI also argued that extension of Stark arising from CMS new regulations will ultimately result in prohibiting all referrals from CUI s members to hospitals they have contracted with through their joint ventures because its members would be prohibited from making all referrals (other than for test cases) to the hospitals for the duration of their under 385

386 arrangement contracts. This would further lead to the termination of under arrangement contracts, according to CUI, and ultimately to denial of review because there would be no way for CUI s members to make a test case referral challenging the changed status of those very contracts. In rejecting this argument, the court explained that Stark only penalizes paymentseeking referrals made pursuant to such contracts, and not the contracts themselves. As such, the court determined that CUI failed to demonstrate that its members would be forced to expose themselves to Stark sanctions in order to challenge the new regulations, or that such sanctions create an effective denial of judicial review. Council for Urological Interests v. Sebelius, No. 1:09-cv HHK (D.D.C. Dec. 10, 2010). Ninth Circuit Upholds Secretary s Denial Of IDTF Payment For Claims That Did Not Comply With Documentation Requirements An Independent Diagnostic Testing Facility is not entitled to payment for claims that do not comply with Medicare documentation requirements, the Ninth Circuit held February 14, 2011 in an unpublished opinion. KGV Easy Leasing Corporation (KGV), a Medicare designated Independent Diagnostic Testing Facility (IDTF), appealed a district court s decision upholding the Secretary of the Department of Health and Human Services determination that KGV s testing services were not reimbursable by Medicare because KGV failed to demonstrate that the tests were medically reasonable and necessary. The appeals court noted that Medicare pays only for medical tests that are reasonable and necessary for the diagnosis or treatment of a patient and the Secretary has broad discretion to determine what documentation is required to establish such medical necessity. Here, KGV s preprinted physician order forms, submitted in support of its reimbursement claims, did not conform to the documentation requirements for IDTFs found at 42 C.F.R (d), the appeals court found. KGV never presented evidence that supplemented the information contained on its order forms or otherwise established medical necessity, such as medical records or signed declarations from the physicians named on the forms, the appeals court noted. The appeals court rejected KGV s contention that various federal laws including the Health Insurance Portability and Accountability Act (HIPAA) prohibited it from obtaining the patient medical information necessary to substantiate its claims. HIPAA provides a means for obtaining patient medical information when used for treatment, payment, or health care operations, the appeals court highlighted. The court also rejected KGV s argument under the waiver provisions of Section 1879 of the Social Security Act, which provide that even when tests are not deemed medically necessary, Medicare may nevertheless reimburse if the provider did not know or could not reasonably have been expected to know that payment for services would be denied. Here, the Secretary properly found that KGV knew or should have known that its claims would be denied, and, therefore, KGV was not entitled to a waiver under Section 1879, the appeals court held. 386

387 KGV Easy Leasing Corp. v. Sebelius, No (9th Cir. Feb. 14, 2011). Third Circuit Upholds CMS Calculation Of Medicare Reimbursement For Psychiatric Services In a not precedential opinion issued February 17, 2011 the Third Circuit affirmed a district court decision upholding the Centers for Medicare and Medicaid Services (CMS ) method for calculating Medicare reimbursement for various New Jersey psychiatric hospitals after the expiration of a statutorily mandated cap but before a new prospective payment system (PPS) was in place. The decision creates a circuit split with a recent Fifth Circuit ruling, see Hardy Wilson Mem l Hosp. v. Sebelius, 616 F.3d 449 (5th Cir. 2010), which, in reversing a lower court s judgment, held CMS method was inconsistent with the governing regulation. Plaintiff hospitals in this case argued CMS erroneously determined their Medicare reimbursement for psychiatric services rendered to Medicare beneficiaries between 2004 and From 1982 through 2005, Medicare reimbursement for psychiatric services were limited under the Tax Equity and Fiscal Responsibility Act to a target amount, which was calculated based on a hospital s allowable operating costs for the preceding 12-month cost reporting period updated in subsequent years by an inflation factor. In the Balanced Budget Act of 1997 (BBA), however, Congress added a cap to hospitals target amounts. Under the BBA and CMS implementing regulations, the target amount was the lower of (1) a hospital specific target amount (i.e., the amount of allowable expenses from the base period year adjusted forward to the current year), or (2) the capped amount under the BBA (i.e., an amount not to exceed the 75th percentile of target amounts for all hospitals in the class). The BBA cap provision expired in 2002, when a new PPS for Medicare reimbursements was supposed to take effect. CMS did not, however, fully implement the PPS until The instant litigation involved CMS method for calculating the plaintiff hospitals target amounts during the time period between the expiration of the caps and the implementation of the PPS. For these years when the BBA provision had expired, the hospitals argued CMS should have calculated their target amounts using their hospital-specific target amounts, rather than the previous capped target amounts. However, CMS calculated their reimbursements using the target amounts actually applied to the providers in 2002, which for these providers was the BBA capped amount. According to CMS, when a provider is subjected to the cap provisions, the capped amount actually becomes that hospital s target amount for purposes of calculating its subsequent year s reimbursement. Under CMS method, providers received substantially smaller reimbursement than they would have absent the continued effect of the cap provisions. The U.S. District Court for the District of New Jersey upheld the agency s interpretation and application of the statutory scheme. 387

388 Applying Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc. 467 U.S. 837 (1984), the district court found the statutory language clear and CMS interpretation compelled by law. While the statute clearly contemplates the expiration of the BBA caps, CMS use of the previous year s target amount, with the inflationary adjustment, satisfied the statutory requirement. Congress deliberately implemented a statutory structure where each hospital s target amount had to be calculated by making reference to the prior year s target amount, the district court said. The fact that the BBA caps would continue to have lingering effects was not contrary to congressional intent. The district court went on to find that even if the statute was ambiguous, CMS interpretation was reasonable. After carefully reviewing the record and the submissions of the parties, we find no basis for disturbing the District Court s thorough and thoughtful opinion and judgment, the Third Circuit held. The District Court was undoubtedly correct to defer to the Agency s interpretation of the statutes and its regulations, the Third Circuit added in affirming, without further comment, the lower court s decision. In the Hardy case, the Fifth Circuit found the statute was ambiguous, but CMS interpretation was not manifestly contrary to the statutory language nor arbitrary and capricious. The appeals court concluded, however, that CMS interpretation was contrary to the unambiguous governing regulation. According to the Fifth Circuit, the regulation unambiguously specified that the target amounts were to be calculated based on the hospital-specific target amount subject to the caps. Once the cap provision expired in 2002, the only way to calculate reimbursements was the hospital-specific" target amount. Ancora Psychiatric Hosp. v. Leavitt, No (3d Cir. Feb. 17, 2011). Eighth Circuit Finds HHS Properly Denied Reimbursement For Medical Resident Training Costs The Eighth Circuit held February 25, 2011 that two hospitals should be denied reimbursement for shared training costs for certain medical residents because they lacked a written agreement, which was required by law for the years at issue. In so holding, the appeals court reversed a lower court s grant of summary judgment for the hospitals, finding the lower court erroneously held the government waived the written agreement issue. Plaintiff hospitals Medcenter One Health Systems and St. Alexius Medical Center had agreements with the University of North Dakota to rotate medical residents through a jointly-operated nonhospital family practice facility. 388

389 The Medicare statute in effect at the time reimburses a hospital when its residents care for patients in a nonhospital setting, but only if the hospital incurs all, or substantially all, of the costs for the training program in that setting. 42 U.S.C. 1395ww(d)(5)(B)(iv), 1395ww(h)(4)(E). Further, a Department of Health and Human Services (HHS) rule requires identification of these costs in a written agreement between the hospital and the nonhospital site. 42 C.F.R (f)(4)(ii) (1998) (direct costs), applied to indirect costs by 42 C.F.R (f)(1)(ii)(C) (1998). The hospitals requested reimbursement for their shared training costs at the nonhospital facility for After the fiscal intermediary denied reimbursement, the hospitals mounted a successful appeal to the Provider Reimbursement Review Board (PRRB). However, a Deputy Administrator of the Centers for Medicare and Medicaid Services reversed the PRRB, finding the hospitals failed to meet the written agreement requirement. After the hospitals filed suit, the district court ruled that the statute permitted the hospitals cost-sharing arrangement and that HHS had conceded reliance on the written agreement regulation. It granted the hospitals motion for summary judgment, and the HHS Secretary appealed. The appeals court reversed. The Eighth Circuit first pointed out that for the years at issue, a regulation conditioned reimbursement on a written agreement with certain features and the Hospitals have not pointed to any complying written agreement. The appeals court rejected the hospitals argument that HHS waived the written agreement issue because the intermediary appeared to concede the issue before the PRRB. [T]he intermediary s position before the PRRB does not bind HHS, which was not a party to the PRRB proceedings, the appeals court found. Accordingly, the appeals court reversed and remanded for entry of judgment for the Secretary. Medcenter One Health Systems v. Sebelius, No (8th Cir. Feb. 25, 2011). U.S. Court In Kentucky Allows Fraud Claim Against MA Plan To Move Forward, Says Exhaustion Not Required A federal trial court in Kentucky refused February 15, 2011 to dismiss a fraud claim brought by enrollees of a Medicare Advantage (MA) private fee-for-service plan against Humana Insurance Co., Inc., the plan s administrator. The court found the claim did not arise under the Medicare Act and therefore plaintiffs did not have to exhaust their administrative remedies before proceeding in court. Plaintiffs alleged Mark Reeder, a Humana agent, fraudulently misrepresented the premium structure of the insurance contract. According to plaintiffs, Reeder guaranteed them premiums would not increase more than $3 a month, but subsequently they rose by $50. Plaintiffs also alleged Humana failed to disenroll them from the plan despite several requests to do so. 389

390 Plaintiffs sued Humana for fraud and breach of contract. Humana moved to dismissed, arguing, among other things, that plaintiffs had failed to exhaust their administrative remedies. The U.S. District Court for the Western District of Kentucky denied the motion to dismiss. The court first found that plaintiffs allegations regarding Humana s failure to disenroll them from the plan did arise under the Medicare Act and therefore plaintiffs had to meet the exhaustion requirements. Enrollment procedures are specifically regulated, monitored, and controlled by the Centers for Medicare and Medicaid Services (CMS). If Plaintiffs attempted to disenroll within the allowable window and otherwise complied with the CMS rules, and Defendants nevertheless denied the request, the standing and substantive basis for the claim would be the Medicare Act, the court said. Moreover, the court said, the claim is inextricably intertwined with a claim for benefits because it is a substantive claim to... participation in the plan. But the fraud claim, i.e. that plaintiffs would not have enrolled in the plan absent Reeder s alleged misrepresentations, was not inextricably intertwined with a claim for benefits nor did the Medicare Act provide the standing for this claim, the court concluded. The court also found the exhaustion requirement was inapplicable to plaintiffs breach of contract claim because it involved allegations that Humana promised more than to abide by the Medicare Act s requirements i.e., to apply a special premium rate beyond what appeared in the Act. The court also considered whether plaintiffs state law fraud claim was preempted by the provisions regulating MA marketing materials. Finding Reeder s alleged misrepresentations did not qualify as marketing materials, the court concluded the Medicare Act did not preempt plaintiffs fraud claim. In so holding, the court distinguished the instant case from Uhm v. Humana, Inc., 620 F.3d 1134 (9th Cir. 2010), which found that fraud allegations involving oral misrepresentations were preempted by federal law. Unlike in Uhm, the plaintiffs here did not allege the misrepresentations were made systematically and to the entire class. Rather, the alleged misrepresentations in this case appear to be ad hoc enrollee communications which are specifically excluded from the definition of marketing materials. Viewing the facts in plaintiffs favor, the court said it could not at this stage of the litigation conclude that Reeder s alleged misrepresentations constituted marketing under the Medicare Act. The court cautioned, however, that if Reeder s representations later are determined to be consistent with or identical to the CMS approved marketing materials, the fraud claim will likely be preempted. Mann v. Reeder, No. 1:1-CV JHM (W.D. Ky. Feb. 15, 2010). 390

391 U.S. Court In New York Rejects HHS Compendium Requirement For Part D Coverage The Department of Health and Human Services (HHS) improperly denied Medicare Part D coverage of medications prescribed "off-label" to two Medicare beneficiaries based on the requirement that the drugs at issue be listed in certain drug compendia, a federal trial court in New York ruled March 7, The U.S. District Court for the Southern District of New York held the compendium requirement imposed by the HHS Secretary was inconsistent with the Medicare Act s definition of a Part D drug. Medicare beneficiaries Judith M. Layzer and Ray J. Fischer challenged the Secretary s final decision denying them reimbursement for certain prescription drugs they use to treat their rare conditions. Layzer suffers from ovarian cancer while Fischer has a degenerative form of muscular dystrophy. Both were denied coverage for the off-label uses of the drugs prescribed by their physicians because they were not listed in any Part D compendia. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 includes in the definition of covered Part D drug the term medically accepted indication, which means any use for a covered outpatient drug which is approved under the Federal Food, Drug, and Cosmetic Act... or the use of which is supported by one or more citations included or approved for inclusion in any of [three compendia]. The court found the Secretary s interpretation of the statute to include a compendium requirement contrary to the Medicare Act. The Secretary s interpretation would create arbitrarily fine and unreasonable distinctions between uses that are covered in the compendia and those that are not, the court observed. Significantly, the court said, the Compendia Requirement precludes coverage of effective yet newly discovered prescription drug treatments particularly for rare diseases because FDA [Food and Drug Administration]-approved uses often lag behind knowledge about actual effective treatment. The statutory language that Congress used to define what is meant by "covered part D drug, along with the cannons of statutory construction, make clear that the Act does not impose a Compendia Requirement, the court held. In a statement, the Medicare Rights Center, which filed suit on behalf of Layzer and Fischer more than three years ago, applauded the court's ruling. This is a victory for our plaintiffs and sets an important precedent for all people with Medicare, said Joe Baker, president of the Medicare Rights Center, in a press release. Since the start of the Medicare drug benefit, the Medicare Rights Center has received calls from consumers who have struggled to obtain coverage of off-label, medically necessary drugs. This ruling brings us closer to removing a sizeable obstacle to coverage of these drugs. Layzer v. Leavitt, 07 Civ (HB) (S.D.N.Y. Mar. 7, 2011). 391

392 U.S. Court In D.C. Stays Medicare Reimbursement Case Pending Resolution Of Two Similar Cases The U.S. District Court for the District of Columbia stayed proceedings March 10, 2011 in a case challenging denial of Medicare reimbursement for certain graduate medical education and indirect medical education costs, pending the resolution of two similar cases. According to the court, the resolution of certain issues in the two prior cases would aid in the resolution of the instant case. Plaintiffs Bridgeport Hospital and Yale-New Haven Hospital sued the Department of Health and Human Services Secretary Kathleen Sebelius after she refused to reimburse the plaintiffs for graduate medical education and indirect medical education costs relating to discharges of Medicare beneficiaries between 1998 and 2001 who were enrolled in Medical Managed Care plans on the ground that the hospitals were late in furnishing claims to the fiscal intermediary. The Secretary moved for a stay pending the resolution of two cases, Cottage Health System v. Sebelius, 631 F. Supp. 2d 80 (D.D.C. 2009), and Hospital of Univ. of Pa. v. Sebelius, 634 F. Supp. 2d 9 (D.D.C. 2009). The plaintiffs in both of those cases, as well as the plaintiffs here, argued time limits set forth in 42 C.F.R applied to their disputed claims and asserted that Secretary's denial of their claims violated the public protection provision of the Paperwork Reduction Act (PRA). The two prior cases were remanded to the Secretary for further explanation of how and why the Secretary applied the time limits and for an analysis of the PRA claims. The plaintiffs opposed the stay, arguing it would harm their interests and would not promote efficiency or conserve judicial resources because a factual dispute existed that was absent from the remanded cases, making it unlikely that the Secretary's response to the questions presented by the court on remand would be useful in resolving the instant action. But the court disagreed, finding a stay of the proceedings in one case is justifiable even where the parallel proceedings may not settle every question of fact and law, but would settle some outstanding issues and simplify others. Here, the question of whether the plaintiffs filed their claims within the applicable time limits could be aided by the Secretary's further explanation in the remanded cases of her interpretation of the exception clause in Section , the court said. Bridgeport Hosp. v. Sebelius, No (D.D.C. Mar. 10, 2011). First Circuit Holds State May Not Recover Medicaid Expenditures On Dual Eligibles Directly From Medicare The First Circuit ruled March 11, 2011 that the Commonwealth of Massachusetts could not recover directly from Medicare funds it paid through Medicaid for the treatment of dual eligibles who were later found retroactively eligible for Medicare. 392

393 In the appeals court s view, the Medicare statute clearly does not allow non-providers to receive payments from Medicare and therefore forecloses the state s direct reimbursement claims. And even if the statute was ambiguous on whether the state may obtain reimbursement directly from Medicare in the cases of retroactive dual eligibility, the Centers for Medicare and Medicaid Services (CMS ) interpretation of it its regulations resolves this question and is entitled to deference, the appeals court said. The Commonwealth of Massachusetts claimed that it should be able to recover Medicaid expenditures directly from Medicare for the medical costs of individuals who were retroactively determined to be dually eligible for Medicare coverage. The Commonwealth argued that 42 U.S.C. 1396a(a)(25)(B) requires state Medicaid agencies to seek reimbursement from liable third parties. The Department of Health and Human Services (HHS) contended, however, that direct payment to the state was precluded by 42 U.S.C. 1395f(a), which states that, with exceptions not relevant here, payments be made only to providers. The district court held in HHS favor, finding the statute and regulations were clear and supported the agency s interpretation. The First Circuit affirmed, saying [a]lthough no statutory provision explicitly resolves the question presented here, the statutory scheme does not allow the interpretation advanced by the Commonwealth. Specifically, the appeals court noted, the Commonwealth was not included among any of the express allowances for non-providers to receive payments under the federal statute. According to the appeals court, its holding was consistent with both the Medicaid statute s requirement that state Medicaid agencies seek recovery of reimbursement and Congress intent that Medicaid generally be the payor of last resort. In the alternative, assuming the statute was ambiguous, the agency s interpretation of its regulations was entitled to deference. The appeals court found the regulations fill an express gap in the statutory scheme as to who may file claims, as opposed to who may receive payments. Moreover, the agency has long construed its regulations as to prevent state Medicaid agencies from recovering reimbursement directly from Medicare in cases of retroactive dual eligibility. The appeals court also pointed out that the Commonwealth was not without recourse. In a 2003 memo to state Medicaid agencies, CMS described a procedure whereby the state asks a provider to submit a claim for Medicare payment, which the provider must honor by submitting a demand bill to Medicare. Providers that fail to submit a timely demand bill violate their provider agreement with Medicare. The Commonwealth has no basis to argue that such requests will go unheeded or that there exists no lawful avenue by which compliance with such requests could be enforced, the appeals court said. Massachusetts v. Sebelius, No MLW (1st Cir. Mar. 11, 2011). 393

394 U.S. Court In D.C. Says Medicare Entitled To Reimbursement From Wrongful Death Settlement Medicare was entitled to reimbursement under the Medicare Secondary Payer Provision (MSP) for a deceased beneficiary s medical expenses from wrongful death settlement proceeds, the U.S. District Court for the District of Columbia held March 24, The court found Medicare could recover the medical expenses from the settlement under the MSP, which makes Medicare payments conditional and subject to reimbursement by any party that receives a primary payment, because the plaintiff had claimed his mother s medical costs in pursuing his wrongful death action. Plaintiff s elderly mother was hospitalized after falling in her home. She received treatment for various injuries during her hospital stay, for which Medicare paid costs totaling over $40,000. Ten days after the accident, plaintiff s mother died. As the survivor and administrator of his mother s estate, plaintiff initiated a wrongful death and survival action against his mother s landlord, which ultimately settled for $90,000. The Centers for Medicare and Medicaid Services (CMS) notified plaintiff that he was required to reimburse Medicare for his mother s medical costs from the settlement. Plaintiff paid the amount under protest. After exhausting his administrative remedies, plaintiff sued in court. Under Pennsylvania law, a wrongful death settlement is not part of the decedent s estate; therefore, plaintiff argued that Medicare could not seek reimbursement from the settlement. Plaintiff also argued that Medicare s reimbursement should be limited to only the medical costs associated with his mother s fall. According to plaintiff, only a small portion of the treatment his mother received during her hospitalization related to the fall. The court rejected both of these arguments, noting evidence that claimed medical expenses were taken into consideration in calculating and negotiating the ultimate wrongful death settlement award. Tellingly, as part of the resulting settlement, the plaintiff agreed to release his mother s landlord from any and all claims and rights, including those associated with medical liens, the court observed. Nor did the evidence indicate the settlement accounted for only those medical treatments associated with his mother s fall. The MSP is clear: if a third party is responsible for injuring a qualified individual and Medicare pays for the resulting medical treatment, the payment is considered conditional and repayment to Medicare is required, the court said. The court also rejected plaintiff s claim that he was deprived of due process because CMS obtained reimbursement under the threat of penalties and high interest. First, the court noted, plaintiff s private interest in the potential use of the settlement award money that he gave to CMS would be completely compensable by a postdepravation decision. 394

395 Moreover, CMS decision to seek reimbursement did not turn on a fact-intensive inquiry, but rather appears to have been a straightforward application of routine regulatory procedures allowing CMS to seek reimbursement under the MSP. Finally, given the government s interest in safeguarding taxpayer dollars and in maintaining Medicare s solvency, the public interest weighs against finding that the plaintiff was deprived of a hearing at a meaningful time and in a meaningful manner, the court concluded. Benson v. Sebelius, No (D.D.C. Mar. 24, 2011). U.S. Court In Alabama Remands To State Court Provider s Action Against Medicare Advantage Plan A federal trial court remanded March 22, 2011 to state court a skilled nursing facility s (SNF's) action against a Medicare Advantage plan that alleged breach of contract, intentional interference with business relations, negligence and wantonness, and unjust enrichment. The U.S. District Court for the Middle District of Alabama found it did not have subject matter jurisdiction, rejecting the plan s arguments that the unjust enrichment claim was essentially a claim under the False Claims Act (FCA); that all of the SNF s claims arose under the Medicare Act; or that the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) completely preempted the claims. Southern Springs Healthcare Facility sued Blue Cross Blue Shield of Alabama (BCBS) in state court, alleging BCBS, through its Medicare Advantage plan Blue Advantage, wrongfully and tortiously failed to provide coverage and benefits for Medicare-covered services that the SNF performed for Blue Advantage enrollees, despite having a legal and contractual duty to do so. According to Southern Springs, BCBS has not been providing the same coverage to Blue Advantage enrollees as they would have received under Medicare Part A. BCBS removed the action to federal court. Southern Springs moved for remand. Granting the motion, the court first rejected BCBS contention that removal was proper because the unjust enrichment claim was really a claim for wrongful retention of Medicare funds arising under the FCA. What this contention misses is that the Complaint is utterly devoid of any allegations that BCBS submitted false claims to the federal government or defrauded the federal government, the court observed. Next, the court denied BCBS argument that Southern Springs claims arise under the Medicare Act and the MMA because they are claims for Medicare benefits or are inextricably intertwined with claims for Medicare benefits. According to BCBS, Southern Springs claims ultimately rested on the issue of Medicare coverage of SNF services. In addressing this issue, the court considered two Supreme Court cases and their progeny: Heckler v. Ringer, 466 U.S. 602 (1984) (claim arises under the Medicare Act when both the standing and the substantive basis for the presentation of the claim is the Medicare Act, or if the claim is inextricably intertwined with a claim for Medicare 395

396 benefits), and Grable & Sons Metal Prods., Inc. v. Darue Eng g & Mfg., 545 U.S. 08 (2005) (state law claim raises a substantial question of federal law). With respect to its Heckler analysis, the court found the instant case was more akin to the Fifth Circuit decision, Rencare, Ltd. v. Humana Health Plan of Texas, 395 F.3d 555 (5th Cir. 2004), finding state law claims against a Medicare Advantage plan did not arise under federal law. Here, as in Rencare, the dispute involved a private provider and a Medicare Advantage plan neither the government nor any Medicare enrollees were parties to the action. Moreover, the instant action did not involve enrollees seeking benefits pursuant to the Medicare Act, and no government funds were at risk regardless of the outcome. Thus, the court held the case did not arise under Medicare Act nor was it inextricably intertwined with a claim for Medicare benefits. Considering the Grable analysis, the court agreed with the provider that the state law claims did not raise a substantial federal issue. The court noted Grable s limited application to a small class of cases. While acknowledging that Southern Springs allegations placed the interpretation and requirements of the Medicare Act at issue, the court nonetheless found the case did not raise a substantial issue of federal law. Unlike in Grable, this case examines the compatibility of the actions of a private actor and a federal statute. Moreover, unlike in Grable, where the issues were purely issues of law, the determination of the central issues here will be more fact-bound and situation specific, the court observed. Finally, the court rejected BCBS assertion of complete preemption, finding no clear congressional intent that the Medicare Act, as amended by the MMA, be the exclusive private federal remedy for the asserted claims. Main & Assocs., Inc. v. Blue Cross and Blue Shield of Ala., No. 2:10-cv-326-MEF (M.D. Ala. Mar. 22, 2011). Pharmaceuticals First Circuit Upholds Maine Law Limiting Use Of Prescriber- Identifying Data The First Circuit upheld August 4, 2010 a Maine law prohibiting certain entities from marketing prescriber-identifying data. Such data is routinely used by pharmaceutical sales representatives to personally market particular drugs to particular prescribers, a practice known as "detailing." Plaintiffs, companies that collect vast amounts of identifying data about individual prescribers and aggregate the data into reports and databases for use when marketing pharmaceutical products, mounted a constitutional challenge to the law. The law at issue, 22 Me. Rev. Stat. Ann. tit. 22, 1711-E(2-A), allows prescribers licensed in Maine to choose not to make this identifying information available for use in marketing prescription drugs to them. 396

397 The law also prohibits certain entities from licensing, using, selling, transferring, or exchanging this information for a marketing purpose if the prescriber has opted to protect the confidentiality of her prescribing data. Plaintiffs sued Maine's attorney general in federal district court, which granted plaintiffs a preliminary injunction and prohibited Maine from enforcing Section 1711-E(2-A) on the basis of plaintiffs' First Amendment claims. In the meantime, the First Circuit upheld a New Hampshire statute against plaintiffs' constitutional challenges, IMS Health Inc. v. Ayotte, 550 F.3d 42 (1st Cir. 2008), cert. denied, 129 S. Ct (2009). For the same reasons as it upheld the New Hampshire statute, the appeals court found the Maine law constitutional. First Amendment Not Violated The appeals court held plaintiffs First Amendment challenges failed because the statute regulates conduct, not speech. Even if the statute did regulate commercial speech, the regulation withstood constitutional scrutiny in that it directly advances the substantial purpose of protecting opted-in prescribers from having their identifying data used in unwanted solicitations by detailers, and thus Maine's interests in lowering healthcare costs. Vagueness The First Circuit also rejected plaintiffs claims that the law is impermissibly vague in its prohibition of the use of opted-in prescriber-identifying data "for any marketing purpose." Whatever ambiguity lurks in the phrase any marketing purpose, the law's lengthy definition of the term marketing,... surely provides enough of a benchmark to satisfy due process, the appeals court reasoned. Further, this purported ambiguity does not exist on the facts, the appeals court said. No Dormant Commerce Clause Problem The appeals court also rejected plaintiffs contention that the law is unconstitutional under the dormant Commerce Clause if applied to plaintiffs' out-of-state use or sale of opted-in Maine prescribers' identifying data. The statute constitutionally reaches plaintiffs' out-of-state transactions as a necessary incident of Maine's strong interest in protecting opted-in Maine prescribers from unwanted solicitations, a policy that Maine also rationally believes will lower its health care costs, the appeals court held. The Supreme Court's current dormant Commerce Clause jurisprudence is concerned with preventing economic protectionism and inconsistent regulation, not with enforcing geographical limits on states' exercise of their police power that necessarily regulate commerce, the appeals court noted. Here, Section 1711-E(2-A)'s context confirms that the Maine Legislature intended to reach plaintiffs' out-of-state conduct because of its substantial connections to Maine and because it causes harms exclusively in Maine, the appeals court found. 397

398 According to the appeals court, Plaintiffs have not shown any disproportionate burden on interstate commerce, and the law creates substantial in-state benefits for those Maine prescribers who have affirmatively asked Maine to protect their identifying data and for Maine in its efforts to lower health care costs. IMS Health Inc. v. Mills, No (1st Cir. Aug. 4, 2010). CMS, FDA Seek Comments On Program For Parallel Evaluations Of Premarket Drugs The Centers for Medicare and Medicaid Services (CMS) and the Food and Drug Administration (FDA) are considering establishing a process for parallel evaluations of premarket, FDA-regulated medical products, according to a September 17, 2010 Federal Register notice (75 Fed. Reg ). According to the notice, the process only would be used when the product sponsor and both agencies agree to such parallel review. The process will serve the public interest by reducing the time between FDA marketing approval or clearance decisions and CMS national coverage determinations (NCDs), the notice explained. Both agencies believe they should address the growing need to improve public health by speeding consumer access to and spurring the development of new, affordable, reliable, safer, and more effective medical products and services, according to the notice. The agencies noted CMS sometimes finds that developers of new technology fail to recognize the differences between the regulatory requirements of FDA and CMS. Thus, they may undertake clinical studies that are designed to address FDA questions but do not adequately address CMS questions concerning the impact of the technology on Medicare beneficiary health outcomes. This omission can slow the developer s quest for Medicare coverage, the notice explained. "We believe that a parallel review process can furnish an opportunity to educate developers regarding clinical study designs that are more likely to simultaneously address both FDA and CMS questions," the notice said. The agencies are seeking comments from the public on what products would be appropriate for parallel review, what procedures should be developed, how a parallel review process should be implemented, and other issues related to the effective operation of the process. The agencies are then planning a pilot program that would begin after review of the comments. Comments were due by December 16, HRSA Issues Pair Of Advance NPRMs On 340 B Program The Health Resources and Services Administration (HRSA) issued in the September 20, 2010 Federal Register a pair of advance notices of proposed rulemaking to solicit public comment on regulations to establish an administrative dispute resolution process for the 340B Drug Pricing Program and on the establishment of civil monetary penalties. 398

399 Section 340B of the Public Health Service Act (PHSA) implements a drug pricing program by which manufacturers who sell covered outpatient drugs to particular covered entities listed in the statute must agree to charge a price that will not exceed the amount determined under a statutory formula. The Patient Protection and Affordable Care Act (PPACA) tasked the Department of Health and Human Services (HHS) with promulgating regulations to establish and implement an administrative dispute resolution process. According to the notice on the administrative dispute resolution process (75 Fed. Reg ), HRSA is seeking comments on: (1) administrative procedures; (2) existing models; (3) threshold requirements; (4) hearings; (5) decision-making official or body; (6) appropriate appeals procedures; (7) deadlines; (8) discovery procedures; (9) manufacturer audits; (10) consolidation of manufacturer claims; (11) covered entity consolidation of claims; (12) claims by organizations representing covered entities; and (13) integration of dispute resolutions with other PPACA provisions. The PPACA also tasked HHS with developing and issuing regulations establishing standards for the imposition of sanctions in the form of civil monetary penalties for manufacturers that knowingly and intentionally overcharge a covered entity for a 340B drug. As HHS never has had civil monetary penalty authority that addresses manufacturing overcharging of the 340B Program, these regulations present a number of issues that have the potential to impact stakeholders, noted the notice on civil monetary penalties (75 Fed. Reg ). According to the notice, HRSA is expressly seeking comments on: (1) existing models; (2) threshold determination; (3) administrative process elements; (4) hearing; (5) appeals process; (6) definitions; (7) penalty computation; (8) payment of penalty; and (9) integration of civil monetary penalties with other PPACA provisions. Commenters are requested to specify as clearly as possible which statutory provision they are commenting on and provide a rationale for their proposals, the notice said. Comments on the advance notices are due by November 19. FDA Issues Final Rule On Reporting Safety Information During Clinical Trials The Food and Drug Administration (FDA) published a final rule in the September 29, 2010 Federal Register (75 Fed. Reg ) clarifying what safety information must be reported during clinical trials of investigational drugs and biologics. According to the rule, the revisions will improve the utility of Investigational New Drug (IND) safety reports, reduce the number of reports that do not contribute in a meaningful way to the developing safety profile of the drug, expedite FDA s review of critical safety information, better protect human subjects enrolled in clinical trials, subject bioavailability and bioequivalence studies to safety reporting requirements, promote a consistent approach to safety reporting internationally, and enable the agency to better protect and promote public health. The rule requires investigators to report findings from clinical or epidemiological studies that suggest a significant risk to study participants. 399

400 Under the rule, serious suspected adverse reactions that occur at a rate higher than expected also must be reported. In addition, serious adverse events from bioavailability studies which determine what percentage and at what rate a drug is absorbed by the bloodstream and bioequivalence studies which determine whether a generic drug has the same bioavailability as the brand name drug must be reported. All such events must be report to FDA within 15 days of when the investigator becomes aware of the occurrence. These revisions not only have an impact on which reports are sent to FDA and participating investigators, but also affect the reports that are sent by investigators to Institutional Review Boards (IRBs), the rule noted. The rule also revises definitions and reporting standards so that they are more consistent with two international organizations, the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use and the World Health Organization s Council for International Organizations of Medical Sciences. This final rule will expedite FDA s review of critical safety information and help the agency monitor the safety of investigational drugs and biologics, Rachel Behrman, M.D, associate director for medical policy in the FDA s Center for Drug Evaluation and Research said in a press release. These changes will better protect people who are enrolled in clinical trials. Along with the final rule, the FDA also issued a draft guidance (75 Fed. Reg ) for industry and investigators that is intended to help sponsors and investigators comply with the new requirements in the final rule. The final rule is effective March 28, Second Circuit Strikes Down Vermont Law Regulating Use Of Prescribing Data The Second Circuit ruled November 23, 2010 that a Vermont law regulating the collection and use of data identifying healthcare providers prescribing patterns was an unconstitutional restriction on commercial speech. In so holding, the appeals court panel reversed an April 2009 decision by the U.S. District Court for the District of Vermont finding the law, which was passed in 2007 and went into effect July 1, 2009, regulated protected commercial speech, but withstood scrutiny under the First Amendment. See IMS Health Inc. v. Sorrell, 631 F. Supp. 2d 434 (D. Vt. 2009). Vermont is one of three states (in addition to Maine and New Hampshire) that have enacted laws aimed at regulating so called data mining of physicians and other providers prescribing habits, which is then used by pharmaceutical manufacturers for their marketing activities, known as "detailing." The Second Circuit's 2-1 ruling striking down the Vermont law on constitutional grounds stands in contrast to two First Circuit decisions upholding the similar Maine and New Hampshire statutes. See IMS Health Inc. v. Ayotte, 550 F.3d 42 (1st Cir. 2008), cert. denied, 129 S. Ct (2009), and IMS Health Inc. v. Mills, 616 F.3d 7 (1st Cir. 2010). Vermont Law 400

401 The Vermont law, Act 80, prohibits pharmacies and other regulated entities from selling or using prescriber-identifiable data for marketing or promoting prescription drugs unless the prescriber consents i.e., opts-in. Plaintiffs IMS Health Inc., Verispan, LLC, and Source Healthcare Analytics, Inc. (a subsidiary of Wolters Kluwer Health, Inc.) acquire prescription data from billions of prescription transactions per year throughout the United States. They then de-identify patient information and sell the data to their clients, mostly pharmaceutical companies. The law does not ban the use of such data for other permitted purposes, including pharmacy reimbursement; prescription drug formulary compliance; the transmission of prescription data from prescriber to pharmacy; patient care management; utilization review; healthcare research; dispensing prescription medications; educational communications provided to a patient; and for certain law enforcement purposes. Plaintiffs sued in 2007 seeking to enjoin enforcement of the statute, alleging Act 80 violated the First Amendment and the Dormant Commerce Clause. The district court upheld the law, finding it passed constitutional muster. Impermissible Restriction on Commercial Speech Reversing, the Second Circuit held Act 80 did not survive intermediate scrutiny under the Central Hudson framework. Central Hudson Gas & Elec. Corp. v. Public Serv. Comm n, 447 U.S. 557 (1980). As an initial matter, the appeals court held, as did the lower court, that prescriberidentifiable data is protected speech and therefore the law must comply with the First Amendment. Disagreeing with the First Circuit s conclusion that the similar New Hampshire statute merely regulated conduct, the Second Circuit found the Vermont law was clearly aimed at influencing the supply of information, which is a core First Amendment concern. Analyzing the speech at issue under Central Hudson, the Second Circuit held the government failed to assert that its substantial state interest was directly advanced by the statute. The appeals court found the state advanced two substantial interests in enacting the Vermont statute: protecting public health and containing healthcare costs. According to the appeals court, the Vermont statute did not, however, directly advance these substantial interests. The statute did not restrict detailing, the appeals court noted, rather it banned the flow of information as a way to influence conduct i.e., the prescribing patterns of physicians. Thus, because the statute is an attempt to influence the prescribing conduct of doctors by restricting the speech of others namely data miners and pharmaceutical manufacturers it does not directly advance the state s interests in protecting public health and reducing health care costs, the appeals court said. Finally, the appeals court concluded the state s interest could be served as well by more limited restrictions on commercial speech. 401

402 Here, the regulation at issue applied to all brand-name prescription drugs, regardless of whether a generic alternative existed or whether an individual drug is effective or ineffective. It is the fact that the statute does not distinguish between brand-name drugs, no matter how unique and efficacious, that renders the statute a categorical ban. In the appeals court s view, the state had a number of other viable and more effective options for promoting the use of cheaper-priced generics. A dissenting opinion argued the majority misconstrued the Vermont law as a direct restriction on pharmaceutical marketing, rather than a restriction on access to otherwise private information. According to the dissent, the majority reached the wrong result because, while the statute restricts access to information the state requires pharmacies to collect, the law has very limited, if any, effects on First Amendment activity. IMS Health Inc. v. Sorrell, No (L) (2d Cir. Nov. 23, 2010). In later developments, the Supreme Court granted review of this decision and heard oral arguments in the case on April 26, High Court Says 340B Entities May Not Sue To Enforce HHS- Drug Manufacturer Price Agreements Section 340B entities may not sue as third parties to enforce ceiling-price contracts running between drug manufacturers and the Secretary of the Department of Health and Human Services (HHS), the U.S. Supreme Court held March 29, Noting that third parties have no right to sue under the statute governing the 340B program, the High Court said, [t]he absence of a private right to enforce the statutory ceiling price obligations would be rendered meaningless if 340B entities could overcome that obstacle by suing to enforce the contract s ceiling price obligations instead. The opinion, authored by Justice Ruth Bader Ginsburg, was unanimous, with the exception of Justice Elena Kagan, who took no part in the consideration of the case. Section 340B of the Public Health Services Act imposes ceilings on prices drug manufacturers may charge for medications sold to specified healthcare facilities (340B entities). The program is administered by HHS Health Resources and Services Administration (HRSA). Under the program, manufacturers sign Pharmaceutical Pricing Agreements (PPAs), under which they agree to charge 340B entities no more than predetermined ceiling prices, derived from the average and best prices and rebates calculated under the Medicaid Rebate Program. Santa Clara County, operator of several 340B entities, sued Astra and eight other pharmaceutical companies, alleging they were overcharging 340B entities in violation of the PPAs. 402

403 Asserting that the 340B entities and the counties that fund them are the intended beneficiaries of the PPAs, the County sought compensatory damages for the pharmaceutical companies breach of contract. The district court dismissed the complaint, concluding that the PPAs conferred no enforceable rights on 340B entities. However, the Ninth Circuit reversed, finding that, while 340B entities have no right to sue under the statute, they could proceed against drug manufacturers as third-party beneficiaries of the PPAs. Reversing the appeals court, the High Court held that suits by 340B entities to enforce ceiling-price contracts between drug manufacturers and the HHS Secretary are incompatible with the statutory regime. Addressing the County s argument that the PPAs are contracts enforceable by covered entities as third-party beneficiaries, the Court noted that the PPAs simply incorporate statutory obligations and record the manufacturers agreement to abide by them. The agreements themselves have no negotiable terms, Ginsburg wrote. A third-party suit to enforce an HHS-drug manufacturer agreement, therefore, is in essence a suit to enforce the statute itself, under which third parties have no right to sue, the Court explained. The High Court also disagreed with the Ninth Circuit s reasoning that suits like the County s would spread the enforcement burden instead of placing it entirely on the federal government. [S]preading the enforcement burden is hardly what Congress contemplated when it made HHS administrator of the interdependent Medicaid Rebate Program and 340B Program, the opinion said. That control could not be maintained were potentially thousands of covered entities permitted to bring suits alleging errors in manufacturers price calculations. If 340B entities may not sue under the statute, it would make scant sense to allow them to sue on a form contract implementing the statute, setting out terms identical to those contained in the statute, Ginsburg reasoned. Further, suits by 340B entities would undermine the agency s efforts to administer both Medicaid and 340B harmoniously and on a uniform, nationwide basis, according to the Court. As further support for its holding, the Court noted that the Medicaid Rebate Program s statute prohibits HHS from disclosing pricing information in a form that could reveal the prices a manufacturer charges for drugs it produces. If Congress meant to leave open the prospect of third-party beneficiary suits by 340B entities, it likely would not have barred the potential suitors from obtaining the very information necessary to determine whether their asserted rights have been violated, the opinion found. Astra USA, Inc. v. Santa Clara Cty., No (U.S. Mar. 29, 2011). 403

404 U.S. Court In Pennsylvania Allows Claims Against Drug Maker Alleging Damages Caused By Illegal Marketing The U.S. District Court for the Eastern District of Pennsylvania denied a drug maker summary judgment in a class action that alleged damages sustained as a result of the drug maker s illegal sales and marketing practices of its drug. According to the court s March 23, 2011 opinion, the plaintiffs in the case presented sufficient evidence to allow their claims to go forward. Cephalon, Inc. s drug Actiq, a Schedule II opioid, is approved by the Food and Drug Administration (FDA) for use by oncologists to treat persistent pain in cancer patients. In 2000, defendant generated $15 million in revenue from the sale of Actiq, but by 2005, sales reached $412 million, making Actiq the second largest selling drug manufactured by defendant. On September 6, 2006, the FDA narrowed the scope of Actiq by placing an additional warning on its label indicating the dangerousness of the drug, and its potential for abuse, misuse, or diversion. Plaintiffs Pennsylvania Turnpike Commission and the Indiana Carpenters Welfare Fund (ICWF) alleged that defendant Cephalon ignored FDA s warnings and engaged in marketing and sale of the drug for purposes other than those approved by the FDA. Plaintiffs noted that in 2007 defendant pled guilty and paid $425 million in settlement as a result of a government investigation into its sales and promotional practices for Actiq and two other drugs. As a result of these activities, plaintiffs alleged that as third party payors for prescriptions of Actiq, they suffered monetary losses through the payment of "excessive prescription costs for treatment of conditions not approved by the FDA and for whom a wide array of less expensive pain management drugs were appropriate." Plaintiffs initiated a class action against defendant. Defendant moved for summary judgment on Counts III and IV of the complaint, which set forth claims alleging violations of state consumer protection fraud laws, and unjust enrichment received as a result of such violations. The court explained that the following items must be satisfied for a plaintiff to have standing to bring a claim under the Indiana Deceptive Consumer Sales Act (IDCSA): (1) plaintiff must be a qualifying "person"; (2) plaintiff must bring a claim against a qualified "supplier"; (3) plaintiff must have relied upon the incurable or uncured deceptive act in question; (4) plaintiff must suffer damages as a result of supplier's deceptive acts; and (5) the deceptive acts alleged by plaintiff must involve a qualifying "consumer transaction." An issue of first impression before the court was whether a third-party payor may, under the IDCSA, assert a valid claim against a drug manufacturer defendant. Defendant argued that under the IDCSA, a plaintiff must prove its direct reliance on a defendant's allegedly deceptive act. 404

405 However, the court agreed with plaintiffs that the IDCSA does not require first-party reliance by the consumer. Such conclusion is supported by reviewing the statute in its entirety, the court noted. Based on its reading of the statute, it is evident that the Indiana legislature intended the law to encompass deceptive acts that cause damages not only to direct consumers, but also to third parties who would lack direct reliance on a supplier's deceptive acts, the court found. The court next rejected defendant s contention that the plaintiffs suffered no cognizable injury, finding a material issue of fact remained on that issue. The court also rejected the remainder of defendant s arguments regarding the IDCSA, finding among other things that plaintiff ICWF is a consumer for purposes of the IDCSA. Turning next to plaintiffs claims under the Pennsylvania's Unfair Trade Practices and Consumer Protection Law (UTPCPL), the court again found standing under the statute. The court further found that the issue of whether there was justifiable reliance on the defendant's alleged misrepresentations is a matter for which there remains a genuine issue of material fact based on the record. Lastly, addressing plaintiffs unjust enrichment claims under both Indiana and Pennsylvania unjust enrichment laws, the court found the plaintiffs put forth sufficient evidence to withstand dismissal of their claims. In re Actiq Sales and Marketing Practices Litig., Nos , (E.D. Pa. Mar. 23, 2011). Physicians Arkansas Supreme Court Dismisses Physician s Appeal After Voluntary Surrender Of Medical License, Finding No Final Agency Action The Arkansas Supreme Court dismissed May 20, 2010 a physician s appeal after the state medical board refused to rule on his request for a closed disciplinary hearing. According to the physician, the board s refusal to rule on his request and his subsequent voluntary surrender of his medical license before the scheduled hearing was a constructive revocation of his medical license and violated his constitutional rights. But the high court found instead that it lacked jurisdiction over the appeal because there was no final agency action. James R. Baber, M.D. notified the Arkansas State Medical Board that he failed a courtordered drug test in a letter dated April 25, Baber also stated that he had discontinued any and all drug use on February 5, 2008, and he was being drug tested by the court. 405

406 A disciplinary hearing was scheduled and Baber repeatedly requested a closed hearing, but the board refused to rule on the request. Baber eventually surrendered his license and refused to attend the hearing. Baber then filed a complaint against the board and its members in their official and individual capacities alleging that his constitutional rights were violated. The circuit court dismissed the appeal, stating it lacked jurisdiction because the board took no action on Baber s request for a closed hearing and because he voluntarily surrendered his license prior to his disciplinary hearing. Baber appealed, arguing the circuit court erred in finding that he did not suffer constructive revocation of his medical license, and in refusing to order the board to accept his request for a restricted license. Section of the Administrative Procedure Act (APA) governs judicial review of a board decision, the high court noted. That section states that [w]here there has been no adjudication before the administrative agency, there has been no final agency action to be reviewed.... According to Baber, the board s inaction on his request for a restricted license was a reviewable agency action because by forcing surrender of his license the request was deemed denied. However, the state high court agreed with the lower court that because Baber surrendered his license before the board could address his requests at the disciplinary hearing, the request was never before the board for consideration or vote as a final agency action. Thus, the court found it lacked jurisdiction and dismissed the appeal. Baber v. Arkansas State Med. Bd., No (Ark. May 20, 2010). Ninth Circuit Finds Physician s Appeal Of Removal From On-Call Schedule Moot After Privileges Terminated A physician s appeal of his removal from a hospital s trauma on-call schedule was rendered moot by the hospital s subsequent termination of the physician s privileges, the Ninth Circuit held May 25, Because the physician could not be reinstated to the on-call schedule without having privileges at the hospital, the appeals court was unable to grant effective relief in the case, and thus dismissed the appeal as moot. James Tate, M.D. is a board-certified general surgeon who was granted clinical privileges at University Medical Center (UMC). UMC and Tate then entered into a Trauma Services Agreement, by which UMC employed Tate as a surgeon on the trauma on-call schedule. However, Tate was subsequently removed from the on-call schedule after an altercation between Tate and a patient s family. 406

407 Tate sued UMC and others (defendants), arguing among other things, that UMC violated his Fourteenth Amendment due process right in his clinical privileges. Tate also asked the court for a preliminary injunction reinstating him to the on-call schedule. The district court granted defendants motion to dismiss his 42 U.S.C claim, but while Tate s appeal of that order was pending, UMC terminated all of Tate s clinical privileges because of his failure to comply with conditions placed upon their renewal. Defendants then moved to dismiss the appeal as moot, arguing the court could not grant effective relief because Tate could not be restored to the trauma on-call schedule now that he no longer had any clinical privileges at UMC. In the instant appeal, Tate sought reinstatement on the trauma on-call schedule at UMC, despite no longer having clinical privileges at the hospital, the appeals court noted. If Tate is ineligible to practice medicine at UMC, then he cannot be reinstated on the trauma on-call schedule at the hospital, the appeals court reasoned. The court rejected Tate s argument that his case was not moot because reinstating him on the on-call schedule would restore his clinical privileges. Because Dr. Tate s clinical privileges are distinct from his employment arrangement, reinstating his employment does not restore his clinical privileges, the appeals court said. Since we cannot order the reinstatement sought by Dr. Tate in his motion for a preliminary injunction, we cannot grant effective relief in his appeal of the denial of that motion, the appeals court concluded. Tate v. University Med. Ctr. of Southern Nev., No (9th Cir. May 25, 2010). U.S. Court In Pennsylvania Refuses To Recognize Federal Peer Review Privilege The U.S. District Court for the Middle District of Pennsylvania declined June 15 to recognize a federal peer review privilege for materials produced by medical peer reviews. Congress declined to do so in enacting the Health Care Quality Improvement Act of 1986 (HCQIA) and the court was likewise unwilling to find such a privilege, the opinion said. Plaintiff Karandeep Singh was hired as the Medical Director of Defendant Pocono Medical Center, (PMC) Cath Lab within the Department of Cardiology. According to Singh, he simultaneously contracted with PMC as a member of its medical staff, and member of various committees, including the peer review committee. Plaintiff said he became aware of medically unnecessary stent procedures being performed on patients at PMC by another cardiologist and raised concerns about this, though nothing was done. Subsequently, according to plaintiff, he was harassed and intimidated by PMC. Plaintiff sued claiming violations of various federal and state statutes related to whistleblower protection and asserting several state law claims. 407

408 Plaintiff then filed the instant discovery request for documents and testimony that defendants claimed were protected under the Pennsylvania Peer Review Privilege Doctrine. Defendants argued the court should recognize a federal peer review privilege. Although acknowledging precedent to the contrary, defendants contended other federal courts have adopted such a privilege. The court explained that all of the cases defendants cited predated the HCQIA's enactment, where Congress declined to extend the peer review privilege to materials produced by medical peer reviews. The court thus granted plaintiff s discovery request, saying it was unwilling to find a privilege where it appears that Congress had considered the competing concerns and did not establish such a privilege. Finally, the court noted that the parties should easily be able to agree upon language for an appropriate confidentiality agreement to protect the sensitive nature of this information while at the same time allowing relevant discovery to proceed in an orderly fashion. Singh v. Pocono Med. Ct., No. 3: (M.D. Pa. June 15, 2010). Tenth Circuit Rejects Neurosurgeons Due Process Claim Against Medical Center Alleging Constructive Discharge The Tenth Circuit held June 23, 2010 that a medical center was entitled to summary judgment on several neurosurgeons procedural due process claim based on a theory of constructive discharge. Affirming a lower court decision, the appeals court agreed that the neurosurgeons failed to establish that they were forced to resign their privileges at the medical center. The appeals court also upheld summary judgment in the medical center s favor on a claim that the hospital conducted a warrantless search of the neurosurgeons lockers. The appeals court found a reasonable basis for the search to look for operating room equipment that may have been removed by the neurosurgeons staff after they resigned their privileges. Plaintiffs Robert A. Narotzky, M.D., Thomas A. Kopitnik, Jr., M.D., and M. Debra Steele, M.D., all physicians at Central Wyoming Neurosurgery (CWN), had privileges at Wyoming Medical Center. In March 2004, the medial center cited Kopitnik for providing deficient care after receiving a complaint that he left a physician s assistant in charge of completing a surgical procedure. Kopitnik said he was called away to start another surgery of a patient who had already been anesthetized without his permission. CWN disputed the validity of the peer review process afforded Kopitnik on procedural and substantive grounds, claiming among other things that the process was a sham motivated by certain physicians biases. Three months after the citation, the medical center opted to end a staffing arrangement with CWN. 408

409 CWN claimed the staffing contract was terminated to force CWN physicians to resign their privileges. After CWN s staffing agreement was terminated, some of its staff began removing its equipment from the medical center. Based on surveillance tapes and reports from its employees, the medical staff decided to search the CWN lockers looking for allegedly missing instruments. No equipment or instruments was uncovered. Plaintiffs resigned their privileges at the medical center in November Plaintiffs then sued the medical center and various related entities and officials under 42 U.S.C. 1983, alleging their due process rights had been violated when they were constructively discharged from the medical center. Plaintiffs also alleged the search of their lockers violated their Fourth Amendment rights. The district court granted summary judgment to the medical center on both claims. The appeals court affirmed, agreeing that even assuming plaintiffs had a protected property interest in the medical staff privileges, they failed to show the medical center unconstitutionally deprived them of that interest. Specifically, the appeals court failed to show that a constructive discharge had in fact occurred. In so holding, the appeals court examined four factors: whether CWN was given some alternative to resignation, whether CWN understood the nature of its choice, whether it was given a reasonable time in which to choose, and whether CWN was permitted to select the effective date of its resignation. According to the appeals court, all these factors weighed in the medical center s favor. The district court aptly described the situation when it found that the resignation was not based on intolerable work conditions, as much as based on insurmountable disagreements for which both parties are responsible, the Tenth Circuit commented. The appeals court also rejected plaintiffs Fourth Amendment claim, finding the search of the CWN lockers was reasonable under the circumstances. Narotzky v. Natrona County Mem l Hosp. Bd. of Trustees, No (10th Cir. June 23, 2010). U.S. Court In Colorado Denies HCQIA Immunity On Certain Claims Against Hospital Defendants The U.S. District Court for the District of Colorado denied November 9, 2010 immunity under the Health Care Quality Improvement Act (HCQIA) to a hospital and certain individual defendants who served on its credentialing and medical executive committee in a physician s action alleging wrongful discharge in violation of public policy, intentional interference with contract, intentional interference with prospective business relations, and civil conspiracy. 409

410 In a separate order, however, the court found the plaintiff physician, Michael Ryskin, could not maintain his action for wrongful discharge against the hospital, Banner Health Inc., or his claim for intentional interference with prospective business relations against the individual defendants, Michelle Joy, Shirley Nix, Thomas Soper, Joseph Bonelli, and John Elliff. The court did allow Ryskin to proceed with his claim for intentional interference with contract and civil conspiracy against defendants Nix, Bonelli, Soper, Elliff, and Joy. Ryskin was employed by defendant Banner Health at the Sterling Regional MedCenter (SRMC) until he was terminated. Plaintiff sued Banner and the individual defendants related to actions taken during a peer review process that occurred in 2007, in October 2008 when the Credentials Committee recommended that he not be reappointed to SRMC s medical staff, and in November 2008 when the Medical Executive Committee (MEC) reappointed him and renewed his privileges for three months, as opposed to the standard two-year appointment. Defendants claimed immunity pursuant to the federal HCQIA and the similar Colorado Professional Review Act (CPRA). HCQIA Immunity The court examined the three challenged peer review activities separately to determine whether they qualified for HCQIA immunity. The court first considered the fall 2007 proceedings, which involved the sending out of two of plaintiff s cases for external review; the MEC considering the external review and other issues concerning plaintiff at a regular meeting, then referring the matters to the peer review committee, which gathered additional information and recommended further action by the MEC; the MEC meeting to review the peer review committee s recommendation; and the MEC considering plaintiff s input and explanations and determining the issues were closed. The court concluded that the 2007 proceedings did not amount to adverse review actions and instead were fact-finding activities not subject to the [HCQIA] reasonableness inquiry. Thus, the court held plaintiff failed to provide sufficient evidence that would allow a jury to conclude defendants engaged in professional review actions under HCQIA in the fall of 2007, which would necessitate an inquiry into the reasonableness of the actions. The court held all defendants therefore were immune from any damages arising from the fall 2007 proceedings. Next, the court found the 2008 Credentials Committee recommendation that plaintiff not be reappointed for medical staff membership and clinical privileges was a professional review action under HCQIA, and plaintiff had demonstrated disputed issues as to whether defendants met the requirements for immunity under HCQIA. Specifically, the court held a jury could conclude the committee failed to make a reasonable effort to obtain facts about plaintiff s application before making its recommendation and that plaintiff was not afforded fair and adequate process. 410

411 Similarly, the court held defendants were not entitled to HCQIA immunity with respect to the 2008 MEC recommendation to reappoint plaintiff only for three months, instead of the standard two years. The court found the MEC s recommendation was a professional review action because it reduced or restricted plaintiff s requested clinical privileges. The court concluded that plaintiff had again raised genuine issues of fact material to whether defendants had met certain standards necessary for HCQIA immunity i.e., that the MEC provided plaintiff with fair and adequate process under the circumstances. Thus, the court also denied defendants HCQIA immunity with respect to the MEC s action. Summary Judgment Motion In a separate order, the court granted defendant Banner summary judgment on plaintiff s wrongful discharge in violation of public policy claim. Plaintiff alleged Banner terminated him for insisting on the proper use of the proper review process, citing HCQIA and the CPRA as sources of public policy supporting his claim. But the court found neither statute could serve as a basis for a clear public policy mandate. [T]he Court discerns no clearly expressed public policy that would be adversely impacted if Plaintiff was terminated for his opposition to the hospital s peer review procedures, the opinion said. The court also granted the individual defendants summary judgment on plaintiff s intentional interference with prospective business advantage claim, concluding he could not show the requisite intent necessary to prove the tort. The court refused, however, to grant summary judgment to the individual defendants on plaintiff s intentional interference with contract claim, finding sufficient evidence to raise genuine issues of material fact concerning whether defendants intentions were proper and whether their actions interfered with plaintiff s employment. Likewise, the court denied summary judgment on plaintiff s claim that defendants conspired to interfere with his employment contract with Banner. Ryskin v. Banner Health, Inc., No. 1:09-cv MEH-KMT (D. Colo. Nov. 9, 2010). U.S. Court Holds Disciplinary, Peer Review Records Not Privileged, But Physician Must Show Relevance Disciplinary and peer review records of similarly situated physicians are not protected from discovery under state law privileges in an action brought by a physician alleging race discrimination under federal law, the U.S. District Court for the Southern District of Ohio held July 23, The court found, however, that the physician failed to show the relevance of all his discovery requests. Therefore, the court denied his motion to compel production without 411

412 prejudice so he could refile his motion and set forth particularized arguments as to relevance. Vincent L. Guinn, M.D. sued Mount Carmel Health (MCH), Mount Carmel Health Systems, Trinity Health Corporation, and various associated physicians for race discrimination under 42 U.S.C. 1981, 42 U.S.C. 1985, and applicable state law. According to the complaint, defendants summarily suspended various of Guinn s medical privileges without adequate investigation. Guinn also contended the suspension ultimately was upheld based on unsupported accusations of various defendants following a hearing process that found his implantation of a medical device into a patient fell below the standard of care. Guinn also alleged that, to the extent his treatment of the patient did fall below the standard of care, he was treated differently from similarly situated physicians because of his race. Guinn through 43 interrogatories and 34 requests for production of documents sought discovery from MCH of all similarly situated physicians with medical privileges, whether any of those physicians were ever disciplined, and the outcome of that discipline. MCH objected to the discovery requests based on the Ohio peer review privilege, the physician-patient privilege, and relevance. Guinn moved to compel. The court said the law in the Sixth Circuit is well-established that the privileges asserted by MCH (i.e., the state peer review and physician-patient privileges) do not exist in the federal context. Thus, the court granted Guinn s motion to compel to the extent MCH failed to respond to a particular discovery request based solely on a physician-patient or peer review privilege. The court went on to deny the motion, however, for those discovery requests that Guinn failed to make specific arguments as to why MCH s objection as to relevance was not justified. Moreover, Guinn did not address the issues of overbreadth or undue burden raised by MCH. Guinn s overly vague assertion that all of his discovery requests are narrowly tailored was insufficient, the court held. The court told Guinn he could refile his motion to assert particularized arguments as to each discovery request s relevance. Guinn v. Mount Carmel Health Sys., No. 2:09-cv-0226 (S.D. Ohio July 23, 2010). Seventh Circuit Affirms Dismissal Of Physician s Action Alleging Hospital s Settlement With Medical Malpractice Plaintiff To Damage His Reputation The Seventh Circuit affirmed August 13, 2010 the dismissal of a physician s action against the hospital where he worked and several co-workers alleging they had reached a settlement agreement with a prospective medical malpractice plaintiff without his knowledge for the purpose of damaging his reputation after he had complained about hospital procedures. 412

413 The appeals court rejected the physician s constitutional claims against the hospital and a number of its employees, finding defendants merely complied with legal requirements for filing notices of medical malpractice settlements with federal and state authorities and did not violate his free speech, equal protection, or due process rights. Herand Abcarian was the head of the surgical department at the University of Illinois College of Medicine at Chicago and served chief of the surgical department at the University of Illinois Medical Center at Chicago. According to the opinion, Abcarian routinely clashed with a number of the individual defendants, who were University employees, over issues such as risk management, faculty recruitment, compensation, and fringe benefits. In 2005, Abcarian learned of a potential medical malpractice lawsuit against him involving a former patient, Behzad, who had died. Abcarian alleged defendants, without his knowledge or consent, reached a nearly $1 million settlement with Behzad s son resolving a state wrongful death action as part of a conspiracy to damage Abcarian s reputation. As required by law, the settlement was reported to the Division of Professional Regulation of the Illinois Department of Financial and Professional Regulation and the National Practitioners Data Bank. Abcarian filed the instant action against defendants asserting various constitutional claims under 42 U.S.C. 1983, as well as a number of state law claims. Defendants moved to dismiss, which the U.S. District Court for the Northern District of Illinois granted. The court also denied Abcarian s requests to amend the judgment and to allow him to amend his complaint. The Seventh Circuit affirmed the district court s decision. As to the First Amendment retaliation claim, the appeals court agreed that the Supreme Court s decision in Garcetti v. Ceballos, 547 U.S. 410 (2006), foreclosed his claim because the speech in question was made as part of his official duties as a public employee, not as a private citizen. The appeals court rejected Abcarian s attempt to narrow Garcetti as applying only to claims against the employer as an entity, while still allowing claims against individual coemployees. The appeals court declined to decide whether Garcetti applies to all instances of coemployee retaliation, finding in this case the alleged retaliatory acts were ratified by the University and therefore advanced the interests of the employer. The appeals court also rejected Abcarian s argument that the speech was not pursuant to his official responsibilities, noting that Abcarian was not merely a staff physician with limited authority, but rather the head of the surgical department at the hospital and university. The subjects on which he spoke risk management, the fees charged to physicians, and surgeon abuse of prescription medications... directly affected both surgical departments and fell within the broad ambit of his responsibilities, the appeals court said. 413

414 The appeals court next found Abcarian could not maintain his equal protection claim because defendants had no discretion in deciding whether to report the Behzad settlement to federal and state officials. Absent any meaningful discretion on the defendants part to decide whether to report the settlement of a particular malpractice claim, we see little risk of the kind of discriminatory action addressed by the Fourteenth Amendment, the Seventh Circuit wrote. Finally, the appeals court affirmed the dismissal of Abcarian s due process claim i.e., that defendants defamed him and thereby infringed his liberty to pursue his chosen occupation. In particular, Abcarian could not show a serious deprivation of his employment prospects as he still had a job in his chosen profession. Abcarian v. McDonald, No (7th Cir. Aug. 13, 2010). Kentucky Supreme Court Remands Case Alleging Slander Against Hospital To Determine Whether Qualified Privilege Applied The Kentucky Supreme Court reversed and remanded a decision finding a hospital was entitled, as a matter of law, to a qualified privilege that shielded it from liability on a physician s claims of slander and intentional interference with contract. The high court agreed that the hospital was entitled to an instruction on the qualified privilege for a common business interest with the staffing agency that employed the physician regarding the hours the physician claimed to have worked. At the same time, the high court found the question of whether the hospital abused the privilege, and therefore was not entitled to its protection, was a question of fact that should have been considered by the jury. Mary Beth Calor, M.D., an anesthesiologist, sued Ashland Hospital Corporation, d/b/a King s Daughters Medical Center, and its Chief Financial Officer (collectively, KDMC) in state court, alleging slander per se and intentional interference with a contract. Calor was under contract with a medical staffing agency, Staff Care, Inc., with whom KDMC contracted for locum tenens anesthesiologists. Calor worked at KDMC from October 2001 through June According to the opinion, KDMC stopped paying for Calor s work after it became suspicious about the extraordinary number of hours she claimed to have worked. KDMC ultimately terminated the relationship with Calor, telling Staff Care, which pays medical malpractice insurance premiums for its contract physicians in proportion to the hours they work, that she had falsified timesheets regarding hours worked and overtime. KDMC did not pay Staff Care for Calor s services. Staff Care sued KDMC, but that action was settled prior to the instant trial. In her lawsuit against KDMC, Calor offered evidence that KDMC had not conducted a thorough investigation, that it made defamatory statements about her work, and that its 414

415 motives were to hire her on staff to cut locum tenens costs or to otherwise interfere with her Staff Care contract. Just before trial, KDMC raised a qualified privilege defense based on a common business interest with Staff Care, which KDMC had failed to plead affirmatively in its answer or amended answer. The trial court refused to instruct the jury on the qualified privilege. The jury returned a verdict in Calor s favor for $534,050. The appeals court reversed, holding KDMC was entitled to judgment as a matter of law based on the qualified privilege. As a threshold matter, the high court held KDMC was not precluded from asserting the qualified privilege even though it failed to plead the privilege as an affirmative defense. According to the high court, Calor would not have been prejudiced had the court allowed the hospital to assert the privilege since the proof would not have been significantly different. The high court said the privilege applied because KDMC and Staff Care clearly had a common interest in the accurate reporting of Calor s work hours. KDMC did not want to pay for hours Calor did not work and Staff Care did not want to pay malpractice premiums related to hours not worked, the high court noted. The high court added, however, that questions of fact remained as to whether KDMC abused the privilege. Calor contended that KDMC did not do a reasonable investigation of her timesheets and had improper motives for the actions it took. At the same time, the communication arguably was reasonably made as it was confined only to Staff Care and its employees concerning the shared interest of Calor s billing and not to the public at large. Consequently, the jury should have been instructed about the existence of the qualified privilege and instructed to determine whether KDMC abused the privilege, the high court held. Calor v. Ashland Hosp. Corp., Nos SC DG and 2008-SC DG (Ky. Aug. 26, 2010). Physicians Sue Blue Shield Of California Over Ratings Program The California Medical Association (CMA) is suing Blue Shield of California alleging its online quality ratings system for network physicians is based on a flawed methodology that leads to inaccurate and misleading results. The class action complaint, filed September 9, 2010 in California Superior Court in Alameda County, alleges Blue Shield s Blue Ribbon Recognition Program, which went live in June 2010, is in reality an economic profiling scheme designed to funnel patients to physicians who provide care at a lower cost to the insurer. This process is designed to interject HMOs or insurers squarely into the physician-patient relationship, so that physicians are pre-selected for patients based on economic criteria, the complaint says. 415

416 The Blue Ribbon Recognition Program is based on a methodology developed by the California Physician Performance Initiative (CPPI). According to the complaint, the CPPI is an inaccurate and faulty measure of physician performance because it did not review patient medical charts or patient outcomes, did not allow for whether any patient had more than one physician, used only limited claims data of five specific insurance products sold by three large health plans for patients who were eligible for 16 procedures, and gave rated physicians woefully inadequate opportunities to review and correct errors. In addition, the Blue Ribbon Recognition Program also fails to provide adequate explanations and disclosures regarding the basis for its ratings and the fact that not all physicians are even eligible to receive a blue ribbon. The complaint, which asserts, among other things, violations of the state s unfair competition law, breach of contract, and unjust enrichment, seeks injunctive and monetary relief, arguing Blue Shield s actions are misleading the public and causing significant harm to its network physicians, including CMA members and the Physician Class. The two named physician plaintiffs are Lisa M. Asta, M.D., a pediatrician who was not evaluated during the CPPI performance review and therefore had no opportunity to receive a blue ribbon under the rating program, and Richard S. Stern, M.D., a cardiologist, who participated in the process of correcting erroneous CPPI information, and showed clear evidence that CPPI data was inaccurate regarding his performance, according to the complaint. As reported in an L.A. Times article, Blue Shield of California defended the online rating program, saying it includes a disclaimer that ratings are only one measure of quality. According to the article, Blue Shield s Medical Director for Quality, Dr. Michael-Anne Browne said: "We understand that it can be very uncomfortable to be rated and ranked," but added "We stand by our methodology." Eleventh Circuit Finds HHS Properly Reported Physician s Suspension To Data Bank The Eleventh Circuit affirmed September 22, 2010 a Department of Health and Human Services (HHS) report to the National Practitioner Data Bank (NPDB), finding the physician s behavior and resulting summary suspension fit squarely within the category of reportable events. After being told at the end of a long day that his use of the operating room at Cape Canaveral Hospital was going to be delayed, Dr. Jorge J. Leal became so enraged that he broke a telephone, shattered the glass on a copy machine, shoved a metal cart into the doors of the operating suite so hard that it damaged one of them, and threw jelly beans down the hallway in the surgical suite, among other actions, according to the opinion. The hospital filed its report of the adverse action taken against Leal with the HHS Secretary, who reported it to the NPDB. Leal sought the Secretary s review of the report, arguing it was not factually accurate, and he asked that the report be removed from the NPDB because the hospital s action against him was not of the type that should be reported. 416

417 The Secretary rejected Leal s assertion that the report was not factually accurate and refused to remove the report. Leal filed an action under the Administrative Procedure Act seeking a court order requiring the Secretary to remove the report from the NPDB. The district court refused to issue such an order, and Leal appealed. On appeal, to show that the report was not factually accurate, Leal submitted his own affidavits in which he gave his version of the events that led the hospital to suspend his clinical privileges. He argued that a report is factually accurate only if the administrative record includes statements from eyewitnesses that substantiate the information in a hospital s report about a doctor s misconduct. However, the appeals court found, such an argument misunderstands the purpose of the Data Bank and the scope of the Secretary s review. Congress enacted the Health Care Quality Improvement Act, which led to the creation of the NPDB, after finding a national need to restrict the ability of incompetent physicians to move from State to State without disclosure or discovery of the physician s previous damaging or incompetent performance, the appeals court explained. See 42 U.S.C Because information in the Data Bank is intended only to fully notify the requesting hospital of disciplinary action against a physician and the charges on which that action was based, the Secretary s review of information in the Data Bank is limited in scope, according to the appeals court; thus, the factual dispute here was outside the scope of the Secretary s review. Leal also challenged the Secretary s determination that the hospital s 60-day suspension of his clinical privileges was a reportable event. Leal argued he was not suspended for conduct which... affects or could affect adversely the health or welfare of a patient or patients, because no patients were involved in the incidents described in the adverse action report. However, the appeals court found the plain language of the statute makes it clear that actual harm to a patient is not a prerequisite for a disciplinary action to qualify as a professional review action. It is enough that a physician is disciplined for conduct that could result in harm to a patient, the appeals court said. Disruptive and abusive behavior by a physician, even if not resulting in actual or immediate harm to a patient, poses a serious threat to patient health or welfare, the appeals court noted. Thus, the Secretary reasonably determined that Leal s reported violent and unprofessional actions, although not resulting in any known harm to a patient, is conduct that could affect adversely patient health or welfare, the appeals court held. Leal next argued that in order for a summary suspension to be reportable, it must have been imposed by the hospital to protect patients from imminent danger. But the appeals court disagreed with this interpretation, finding that imminent danger is not required before a summary suspension is reportable under the statute. 417

418 Leal v. Secretary, Dep't of Health and Human Servs., No (11th Cir. Sept. 22, 2010). Arkansas High Court Upholds Permanent Injunction Of Baptist Health s Economic Credentialing Policy The Arkansas Supreme Court upheld September 30, 2010 an Arkansas circuit court s decision finding Baptist Health s economic credentialing policy was unenforceable and permanently enjoining its application in a case brought by several cardiologists with ownership interests in competing facilities. The high court concluded the lower court did not clearly err in holding the plaintiff physicians proved by a preponderance of the evidence their tortious interference claim and therefore affirmed the judgment enjoining Baptist from denying the physicians professional staff appointment and clinical privileges on the basis of the economic credentialing policy. According to the high court, the evidence was sufficient to establish that Baptist Health interfered with patient-physician relationships and compromised the continuity of care. The high court rejected Baptist Health s argument that as a private hospital they had an absolute right to refuse to deal or to contract. The high court reiterated a previous holding in the case that a private hospital cannot insulate itself from suit where there are findings that its conduct violated state law, in this case tortious interference. The high court did reverse, however, the lower court s ruling that Baptist Health violated the Arkansas Deceptive Trade Practices Act (ADTPA), finding the statute did not provide for a private action seeking injunctive relief. Commenting on the closely watched case, Cecil B. Wilson, M.D., American Medical Association (AMA) President, called the ruling a key legal victory. Patients benefit when physicians have admitting privileges at multiple health care facilities. Free of Baptist s restrictive policy, physicians can now offer patients the benefit of choosing a facility that best suits their needs for costs, quality and convenience, Wilson said in the statement. Background The physician-partners of Little Rock Cardiology Clinic (LRCC), which owns a 14.5% interest in the Arkansas Heart Hospital (AHH), initiated the action in 2004 against Baptist Health, a private acute care hospital in Little Rock, AK providing cardiac care. At issue was the Economic Conflict of Interest Policy (Policy) Baptist Health s Board adopted in 2003 mandating the denial of initial or renewed professional staff appointments or clinical privileges to any practitioner who, directly or indirectly, acquires or holds an ownership or investment interest in a competing hospital. Plaintiff physicians alleged among other things that the Policy, which would prevent them from maintaining privileges at Baptist Health, tortiously interfered with the patientphysician relationship and with associated business expectancies, was contrary to public policy, and violated the ADTPA. 418

419 The court preliminary enjoined Baptist Health from enforcing the Policy against plaintiffs in The case twice went up to the Arkansas Supreme Court on appeal, during which time the preliminary injunction remained in place. LRCC also filed an antitrust lawsuit against Baptist Health in Arkansas federal district court, alleging violations of the Sherman Act. The federal lawsuit against Baptist Health was dismissed with prejudice in Little Rock Cardiology Clinic, P.A. v. Baptist Health, 573 F. Supp. 2d 1125 (E.D. Ark. 2008), aff d, 591 F.3d 591 (8th Cir. 2009). After denying Baptist s motion for a directed verdict on the ground that the dismissal of the federal lawsuit with prejudice had a res judicata effect on the pending state claims, the Arkansas Circuit Court of Pulaski County in February 2009 declared the Policy unenforceable, saying it impermissibly interfered with the patient-physician relationship, suppressed competition to the detriment of consumers, and was not justified by Baptist Health s concerns about its ability to remain profitable. Murphy v. Baptist Health, No. CV (Ark. Cir. Ct. Feb. 27, 2009). Res Judicata and Jury Trial As a threshold matter, the high court affirmed the lower court s ruling that the state action was not barred by res judicata and its refusal to grant Baptist Health a jury trial. According to the high court, Baptist Health waived its right to raise the res judicata defense by tacitly approving the claim split. Specifically, the high court noted Baptist Health was aware that both the state and federal cases were proceeding at the same time, but did not move to combine the cases nor raised res judicata until after the federal judge ruled in its favor, more than two years after the federal complaint was filed. The high court also held Baptist Health was not entitled to a jury trial because plaintiffs only sought equitable relief, not monetary damages. Finally, the high court rejected Baptist Health s argument that the rule of non-review, which provides that a private hospital s decision to exclude any physician from practicing at the hospital is not subject to review, precluded judicial consideration of the Policy. The high court reiterated its holding in an earlier decision that a private hospital may still be sued to the extent its conduct has violated state law. Tortious Interference Next, the high court upheld the lower court s decision that plaintiffs had proved all the elements of a tortious interference claim by a preponderance of the evidence. The high court found the lower court s specific findings, based on witness testimony, that contractual relationships existed between the physicians and their patients and that these relationships were long term were not clearly erroneous. In so holding, the high court declined to adopt the so-called stranger doctrine, i.e. that Baptist Health was not a stranger to the relationships between the physicians and the patients at issue and therefore should be immune to a tortious interference claim. 419

420 While the [physicians] often treat their patients at Baptist facilities, Baptist is not a party to those contracts or business expectancies under Arkansas law for purposes of tortious interference, the high court said. The high court also affirmed the lower court s conclusion that Baptist Health had actual knowledge that the physicians had long term relationships with their patients and those relationships would be disrupted by the Policy. Nor was the lower court s ruling that Baptist both knew and intended the consequences of its actions erroneous, the high court said. In addition, the evidence sufficiently established that the Policy caused plaintiffs actual injury by disrupting their relationships with patients and referral sources who may have chosen to obtain care from other physicians whose privileges at Baptist Health were not in doubt. The high court agreed with plaintiffs that they were not required to quantify monetary damages, only to show they were injured by Baptist Health s conduct. Finally, the high court upheld the lower court s determination that the interference resulting from Baptist Health s Policy offended public policy on a number of fronts including, limiting a patient s choice of physician, discouraging physician investment in specialty hospitals, and suppressing competition. In sum, the circuit judge made extensive findings on impropriety, which apart from its refusal-to-deal and competition-defense arguments, are largely unanswered by Baptist, the high court said. Deceptive Trade Practices The high court reversed the circuit court s finding that the Policy was an unconscionable trade practice in violation of the ADTPA, which constituted another basis for granting the permanent injunction. According to the high court, the ADTPA s plain language does not provide for a private action seeking injunctive relief. Baptist Health v. Murphy, No (Ark. Sept. 30, 2010). Florida Appeals Court Denies Physician Temporary Injunction Against Hospital That Refused To Renew His Privileges The Florida Court of Appeal, Third District, denied October 6, 2010 a physician s motion for a temporary injunction against a hospital that declined to renew his privileges after the physician failed to become board certified within seven years as required by the hospital s bylaws. In so holding, the court found the physician failed to meet the requirements for a temporary injunction. Victor Genchi, M.D. acquired medical staff privileges at Lower Keys Medical Center in

421 In 2009, the Medical Center s Medical Executive Committee recommended that Genchi s privileges not be renewed because he failed to comply with a provision of the bylaws that requires staff members to become board certified within seven years of the staff member s initial appointment. The Medical Center s Board of Trustees adopted the Executive Committee s recommendation and notified Genchi that his privileges would not be renewed. On February 4, 2010, Genchi filed a complaint arguing there are two applicable exceptions to the seven-year rule, but that these exceptions were never provided to the Executive Committee. Genchi argued that in concealing these exceptions, the Medical Center violated section of the Florida Statutes (Open Records Act). Genchi also filed a motion for a temporary injunction. On February 10, the Executive Committee reconvened and recommended that Genchi s medical staff privileges be immediately reinstated based on the exceptions to the sevenyear rule, which were not considered when making its initial recommendation in September The Medical Center s Board, however, denied the recommendation. Following a hearing, the trial court denied Genchi s temporary injunction and Genchi appealed. The appeals court affirmed, finding that Genchi failed to establish the prerequisites for entry of a temporary injunction. The appeals court first explained that a party seeking a temporary injunction must show: (1) the likelihood of irreparable harm if the temporary injunction is not entered; (2) the unavailability of an adequate remedy at law; (3) a substantial likelihood of success on the merits; and (4) entry of the temporary injunction will serve the public interest The court found that as to the first requirement, Genchi failed to show irreparable harm because he remains licensed to practice medicine in Florida. Looking at the second requirement, the appeals court found Genchi has an adequate remedy at law, in that he is seeking monetary damages in his suit. With respect to the fourth requirement, the court concluded that Genchi failed to establish that the public interest considerations weigh in his favor as the record demonstrates that the Medical Center has successfully recruited physicians to replace him. Addressing Genchi s likelihood of success on the merits, the appeals court observed that even if the exceptions to the seven-year rule are applicable to Genchi, the Board was not required to make an exception. Genchi v. Lower Florida Keys Hosp. District, No. 3D (Fla. Ct. App. Oct. 6, 2010). U.S. Court In Colorado Holds Quality Management Privilege Does Not Apply To Physician s Independent Investigation 421

422 Colorado s quality management privilege does not protect from discovery a physician s independent investigation of an incident that left a surgical patient paralyzed, a federal district court in Colorado held October 13, In so holding, the U.S. District Court for the District of Colorado found documents that exist regardless of any quality management functions undertaken pursuant to a state approved quality management program... are discoverable, but only from their original source.... The court did find the hospital in the case had met its burden of showing the privilege applied to certain documents withheld pursuant to its sentinel event plan. Karen S. Zander brought a negligence action against Dr. Rick Bayles, Ph.D., CNIM, alleging he breached the standard of care in monitoring and reporting her somatosensory-evoked potential waveforms during spinal surgery performed by Dr. Scott Falci, M.D. Zander also asserted a claim against Craig Hospital, which employed Bayles, under a theory of respondeat superior. According to Zander, she was rendered a paraplegic as a result of Bayles negligence. Falci testified that he conducted an investigation after Zander s surgery to try and determine what caused her paralysis. Craig Hospital instructed Falci not to answer questions about the investigation, asserting the quality assurance privilege under Colo. Rev. Stat Plaintiff then sought production of all documents related to the investigation of the occurrence or "sentinel event involving her surgery. The hospital produced a privilege log identifying six documents, which it claimed were protected by discovery pursuant to the quality management privilege. For the quality management privilege to apply, the hospital must establish that it has a state-approved quality management program and the information claimed to be privileged was obtained and maintained in accordance with the approved program. The court rejected the hospital s interpretation of the privilege as applying to all discussions that take place among healthcare professionals, facility administrators, and other unspecified persons concerning medical care. According to the court, such an interpretation does not comport with the plain meaning of the statute. Thus, the court held, conversations between or among health care providers about medical care before a qualifying management function is initiated or outside the operation of a qualifying quality management function are not privileged. Nonetheless, the court found the hospital had adequately asserted the privilege for the six specific documents withheld under its sentinel event plan. Falci s investigation, however, was undertaken outside the scope of the hospital s quality management program and therefore was not privileged. 422

423 Any documents prepared in connection with that independent investigation were not privileged and were subject to discovery, the court concluded. Zander v. Craig Hosp., No. 09-cv REB-BNB (D. Colo. Oct. 13, 2010). Fifth Circuit Finds Physician Association Has Standing To Challenge Actions By Texas Medical Board A physician-membership association has standing to pursue its claims that the Texas medical board violated its members constitutional rights, the Fifth Circuit found December 2, In finding associational standing in the case, the appeals court held that discovery would not entail a fact-intensive individual inquiry of all of the association s members. Instead, evidence from representative injured members could be used to support the equitable relief sought by the association, the court said. The Association of American Physicians and Surgeons (AAPS) sued the Texas State Board of Medical Examiners on behalf of its members for what it describes as pervasive and continuing violations of members constitutional rights. The Board contended AAPS lacked standing and the district court dismissed the claims on that basis. On appeal, the Fifth Circuit noted that an association has standing to bring suit on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit. See Hunt v. Wash. St. Apple Adver. Comm n, 432 U.S. 333, 343 (1977). The third prong of the Hunt test was at issue in the instant suit, the appeals court said. The district court held that AAPS allegations about anonymous complaints, conflicts of interest, arbitrary administrative rulings, breaches of privacy, and retaliation could not be sustained without the extensive participation of individual members and therefore rendered associational standing improper. But the appeals court disagreed, noting that other circuits considering similar issues have come to divergent conclusions. After reviewing the various courts holdings, the Fifth Circuit concurred with the Third and Seventh Circuits, ruling that as long as resolution of the claims benefits the association s members and the claims can be proven by evidence from representative injured members, without a fact-intensive individual inquiry, the participation of those individual members will not thwart associational standing. Finding that AAPS claims and its requested relief appear to support judicially efficient management if associational standing is granted, the appeals court vacated the dismissal below and remanded for further consistent proceedings. Association of Am. Phys. & Surg., Inc. v. Texas Med. Bd., No (5th Cir. Dec. 2, 2010). 423

424 Ohio Supreme Court Finds Physician-Patient Privilege Does Not Preclude Discovery Of Physician s Personal Medical Information The Supreme Court of Ohio found December 27, 2010 that the physician-patient discovery privilege does not apply to a physician when the information in question is the physician s personal medical information. Donald Ward underwent a procedure at Summa Health System (the Hospital). Five months later, the Hospital informed Ward that he may have contracted Hepatitis B during his procedure. Ward filed a medical malpractice suit and sought to discover the medical records of Ward s surgeon. According to Ward, the medical records were needed to identify the source of his exposure to the disease. The trial court granted a protective order under the physician-patient privilege that precluded the discovery of the medical records. The court of appeals reversed the protective order and the Supreme Court of Ohio upheld the court of appeals decision to reverse. Under the physician-patient privilege, a treating physician or dentist is prohibited from disclosing matters disclosed by the patient to the physician during consultations regarding treatment or diagnosis of the patient. This privilege is designed to create an atmosphere of confidentiality, which theoretically will encourage the patient to be completely candid with his or her physician, thus enabling more complete treatment, the high court explained. Here, however, it is the surgeon s status as a patient who may or may not have Hepatitis B, rather than his status as a physician, that applies, the high court observed. Nothing in the statute gives a patient the right to refuse to testify about his or her own medical information. Therefore, according to the court, the physician-patient privilege does not preclude the discovery of medical information from a patient. Ward v. Summa Health System, No Ohio-6275 (Ohio Dec.27, 2010). Fifth Circuit Finds Rational Basis For Exclusive Cardiology Contract A resolution enacted by the board of a county-owned nonprofit hospital, effectively excluding non-contracting cardiologists from exercising clinical privileges, was a legislative act with a rational basis, the Fifth Circuit has held in an unpublished January 6, 2011 opinion. Thus, the appeals court found the trial court improperly enjoined the hospital from preventing cardiologists without contracts from exercising clinical privileges. In 2007, Dr. Yusuke Yahagi, a cardiovascular surgeon, joined the staff at Citizens Medical Center (CMC). Yahagi had a contentious relationship with three cardiologists with clinical privileges at CMC (Cardiologists). Yahagi ultimately complained to the CMC chief of staff, who, in 2010, referred those complaints to CMC's county-appointed board of managers (Board) for resolution. In response, CMC negotiated a contract with Yahagi, under which he became the exclusive provider of cardiovascular surgery at CMC. The Board considered closing the 424

425 cardiology department so that only contracted cardiologists could care for CMC hospital patients, and drafted a resolution closing the department. After an outside consultant agreed with the Board that closing the cardiology department was a reasonable solution to the dispute among the physicians, the Board approved the resolution. The resolution cited disruptive operational problems that posed a threat to the viability of the heart program, and established that only physicians with contracts to provide on-call emergency coverage would be permitted to exercise clinical privileges in the cardiology department. The Cardiologists filed suit to prevent implementation of the resolution, seeking a temporary restraining order, preliminary and permanent injunctions, and damages. The Cardiologists alleged violation of their due process rights under the Fourteenth Amendment, among other claims. The federal district court issued a preliminary injunction preventing CMC from stopping the Cardiologists from exercising their clinical privileges. The court found that the Cardiologists had a property interest in their staff privileges, and that the Board based the resolution on "economic considerations rather than 'grounds that are reasonably related to the purpose of providing adequate medical care.'" On appeal, the Fifth Circuit reversed. Assuming that the Cardiologists have a property interest in their clinical privileges, the appeals court rejected the physicians' argument that the Board engaged in an individualized decision, rather than a legislative act. "A governmental action is legislative if it applies to a large group of interests," the court explained. Thus, even if the Board's decision was effectively individualized, the resolution constituted a legislative act because "on its face, [it] prohibits all physicians, not just the Cardiologists, from practicing in CMC's cardiology department unless the physician is contractually committed to CMC," the court ruled. Applying rational basis scrutiny, the appeals court cautioned that the rational basis need not be the only factor, a primary factor, or actually relied on to support the Board's decision. The resolution "would satisfy substantive due process if there were a conceivable reason for it that was 'reasonably related to the purpose of providing adequate medical care.'" Here, evidence indicated that Yahagi might leave CMC if the disruptions continued, which would end CMC's capability for cardiac surgery. This provided a conceivable rational basis for closing the cardiology department, the appeals court concluded. Finding that the Cardiologists' substantive due process claim lacked a substantial likelihood of success, the appeals court reversed, ruling that the trial court abused its discretion by granting a preliminary injunction against implementing the resolution. Gaalla v Citizens Med. Ctr., No (5th Cir. Jan. 6, 2011). California Appeals Court Upholds Peer Review Panel s Finding That Physician s Contract Termination Was Reasonable The California Court of Appeals upheld January 20, 2011 a peer review panel s finding that a medical group s decision not to renew a physician s employment contract was reasonable. 425

426 In so holding, the appeals court vacated a lower court s writ of administrative mandamus granted to the physician and instead instructed the court to deny the writ. Dr. Maria Berrones is a board-certified radiologist who was hired by Permanente Medical Group as an associate physician under a two-year contract. Within a few months, concerns about Berrones radiological competency surfaced. After receiving a negative performance review, she was placed on paid administrative leave. In March 2006, Berrones, who is a Latina, had complained to Permanente management that her superiors had subjected her to differential treatment. In March 2007, she demanded that her sex discrimination, racial discrimination, and retaliation claims be subjected to arbitration, pursuant to the terms of her employment contract. On March 20, 2007, Berrones was notified that she would be terminated and she requested a peer review hearing. Permanente selected Florence Di Benedetto to serve as hearing officer at the peer review panel hearing, over Berrones objection. Di Benedetto was to receive a fee from Permanente for her services as Berrones hearing officer, but Berrones motion to recuse her was repeatedly denied. Berrones objection to the physician peer review panel members was also rejected. In March 2008, the peer review panel unanimously concluded that Permanente s decision not to renew Berrones employment contract was reasonable and warranted. In May 2008, Berrones filed a petition for a writ of administrative mandamus, alleging that the unilateral appointment of the hearing officer and members of the peer review panel violated her due process rights. The trial court filed a statement of decision granting Berrones petition, based on the appearance of bias on the part of the hearing officer and the members of the peer review panel. The writ issued by the trial court ordered that the March 2008 decision be vacated and that Permanente conduct a new hearing. Meanwhile, in April 2009, an arbitrator denied Berrones discrimination and retaliation claims. Permanente appealed the writ of mandamus. First, Permanente contended that the trial court s finding of an appearance of bias in its selection of the hearing officer and the peer review panel members was not supported by substantial evidence. The appeals court first noted that, although Berrones asserts that her due process rights were implicated at the peer review hearing, in private hospital proceedings, fair procedure is required, rather than constitutional due process as is required for governmental entities. When the issue is hearing officer or peer review panel member bias, fair procedure requires that the physician be given a sufficient opportunity to explore the possibility of bias, the appeals court said, observing that Berrones was afforded her statutory right to voir dire Di Benedetto and the panel members to test their impartiality. 426

427 The court also found no evidence of actual bias. In addition, the court rejected Barrones argument that it was unfair to allow Permanente to select the hearing officer, noting that, in a private hospital context, the legislature intended the unilateral selection of hearing officers and peer review panel members by the peer review body. The appeals court next turned to the trial court s ruling that Di Benedetto s past earnings as hearing officer created an appearance of bias. Disagreeing with the lower court, the appeals court said the key inquiry is not whether Di Benedetto earned past income from work as a hearing officer, but whether she could expect that a decision in Permanente s favor might result in future employment for similar service. Here, the appeals court found the only evidence in the record of Di Benedetto s potential future income from hearing officer work was that there was no reasonable likelihood that she would ever earn any income from such work after the Berrones hearing was complete. The appeals court also found that the fact that Di Benedetto ruled on all of plaintiff s motions cannot support a finding of an appearance of bias, as the Legislature specifically authorizes the hearing officer to rule on such objections. ( 809.2, subd. (c).)" Lastly, the appeals court concluded that the hearing officer correctly determined that evidence of discrimination and retaliation was not relevant to the question before the peer review panel. Berrones v. Permanente Medical Group, Inc., No. A (Cal. Ct. App. Jan. 20, 2011). Maryland High Court Finds Medical Board May Reprimand, Fine Physician Who Refused to Produce Subpeonaed Documents The Maryland high court found January 21, 2011 that a physician must take appropriate action to challenge a subpoena such as a motion to quash or a motion for a protective order or timely produce the documents to be in cooperation of a Maryland State Board of Physicians investigation. In February 2001, the Board received a complaint from the estranged husband of a patient of Dr. Harold Eist, a psychiatrist. The complaint alleged that Eist over-medicated the complainant s wife and children. The Board wrote to Eist, informing him of the complaint and issuing a subpoena duces tecum that stated Eist had 10 days to produce the medical records of his patients. Eist responded to the letter, but did not produce the documents because they included confidential communications. Eist informed the wife of the subpoena, and she refused to consent to the release of her medical records. Further, a report filed by the children s court-appointed attorney stated that the court-appointed attorney refused to waive the "privilege" that existed between the children of the complainant and Eist. The Board responded to Eist and included another subpoena. The Board also informed Eist that the receipt of the medical records was not contingent on the consent of the patients. 427

428 Eist s attorney responded that because Dr. Eist was under the impression that he does not have his patients' permission to reveal their confidences, and that no court has weighed the necessity for violating their confidences based upon the unsupported allegations of someone with a clear conflict of interest, and a desire to violate those confidences. Eist did not produce the documents requested in the subpoena. The Board issued a reprimand and fine based upon the Board's conclusion that Eist had failed to cooperate with a lawful investigation conducted by the Board due to his failure to produce the medical records. The circuit court reversed the Board's decision, and the intermediate appellate court affirmed. The intermediate appellate court held that the Board was not entitled to the records and that, therefore, Eist did not fail to cooperate with a lawful investigation. According to the court, the Board was not entitled to the medical records because the patient s right to privacy was not outweighed by the Board s need for information in a lawful investigation. Further, the intermediate appellate court held that the Board bears the burden of instituting a judicial proceeding to enforce a subpoena. The Maryland high court reversed, finding the lower court s holding inconsistent with applicable statutes. In fact, Eist could not refuse to comply with the subpoena in a timely manner without a motion to quash or a motion for a protective order, the court said. Therefore, because the physician did not file a motion to quash or a motion for a protective order and refused to timely comply with a subpoena, the Board s decision that he failed to cooperate with a lawful investigation was correct. Maryland State Board of Physicians v. Eist, No. 110-Md (Md. Jan. 21, 2011). Texas Appeals Court Finds No Physician-Patient Relationship Where Physician Refused Consultation, Was Not On Call, Did Not Order Treatment, And Made No Diagnosis The Texas Court of Appeals ruled February 16, 2011 that when a physician does not accept a consultation appointment, is not on call, declines to receive detailed information from which he could diagnose the patient, makes no diagnosis, and does not order any treatment plans or tell the nurses how to proceed, then no physician-patient relationship exists. Here, because no physician-patient relationship existed, as a matter of law, the physician had no duty to the patient. The patient, Hilario Ortiz, was admitted to Del Sol Medical Center after complaining of fever, chills, sweats, and lower back pain. His physician ordered a neurological consultation with Dr. Stephen Glusman, and Del Sol staff contacted his answering service. Although not on call that day, Glusman answered the call and spoke with a nurse. Glusman informed the nurse that he was unavailable to see any patients that day, and could see the patient the next day. Neither the nurse to whom he spoke, nor Ortiz s physician, indicated that Ortiz s condition was an emergency. The information given over the phone was not detailed, and Glusman gave no diagnosis. 428

429 Ortiz was transferred to another hospital the next day before Glusman could see him where he was diagnosed with a spinal cord injury. Ortiz sued Glusman, alleging that Glusman knew or should have known that Oritz's neurological dysfunction required immediate evaluation and was negligent in failing to timely evaluate him. The lower court granted summary judgment in Glusman's favor, holding no physicianpatient relationship existed. A cause of action for negligence requires a duty, a breach of that duty, and damages proximately resulting from that breach, the appeals court explained. In medical malpractice cases, a physician-patient relationship is a prerequisite to the existence of any duty. When there is no prior relationship between a patient and a physician, there must be some affirmative action on the part of the physician to treat the patient to create this relationship, the appeals court said. Here, Glusman was not on call, and told the nurse that he was not available for a consultation, the appeals court noted. Further, Glusman had no details about Ortiz s condition and gave no suggestions for diagnosis. He simply stated that he would perform a consultation the next day, and that if Ortiz needed to be seen, Ortiz should be seen by another neurologist. As a result, the appeals court found, Glusman did not take any affirmative action to create this relationship and no duty existed to Ortiz. Ortiz v. Glusman, No CV (Tex. Ct. App. Feb. 16, 2011). U.S. Court In Nevada Finds HHS Not Proper Party To Suit Challenging Revocation Of Hospital Privileges The Department of Health and Human Services (HHS) is not a proper party to a physician s suit for improper revocation of his clinical privileges, the U.S. District Court for the District of Nevada held February 26, Plaintiff Steve Chung-Ming Wong, a board-certified anesthesiologist, had clinical privileges at Mountain View Hospital. Wong was the anesthesiologist for a case involving the death a 23 year-old, male patient. The hospital s Medical Executive Committee (MEC) determined that plaintiff had provided the patient with medical care and treatment below the applicable standard and that corrective action was warranted. After both a hearing and an appellate review of the MEC s recommendation, plaintiff s privileges were ultimately revoked. Plaintiff sued various defendants, including two claims against the HHS Secretary. HHS removed the case to federal court and moved to dismiss the claims against it pursuant to Fed. R. Civ. P. 12(b)(1) (asserting that the allegations contained in the complaint are insufficient on their face to invoke federal jurisdiction) and 12(b)(6) (asserting plaintiff failed to state a claim upon which relief could be granted). 429

430 The court first turned to plaintiff s claims that his clinical privileges at the hospital were improperly revoked. HHS argued that the claims against it should be dismissed pursuant to both Rules 12(b)(1) and (b)(6) because there was no subject matter jurisdiction under the Declaratory Judgment Act and because HHS was not a party to plaintiff s revocation proceedings. The court agreed, finding [p]laintiff has failed to demonstrate any evidence from which the Court may reasonably infer that HHS was a party to his revocation proceedings or decision. The court next refused to grant plaintiff leave to amend his complaint to bring a defamation suit against HHS. According to the court, any suit the Plaintiff may try to bring for defamation against the HHS is specifically excluded from the United States limited waiver of sovereign immunity. Addressing plaintiff s claim that the provision of the Health Care Quality Improvement Act (HCQIA) requiring reporting to the National Practitioner Data Bank was unconstitutional, the court noted that principles of due process apply only when there is a state action to deprive an individual of a constitutionally protected property interest. Here, there was no such state action, the court held. When a private actor, such as a hospital, revokes a physician s privileges through its internal processes, it is not considered to be a state action, the court noted. The court further found that plaintiff had not alleged any link between the hospital and HHS other than to aver that the hospital was required to report the revocation of plaintiff's privileges to the data bank. This allegation is insufficient to establish state action in revoking Plaintiff's privileges, and Plaintiff s due process claim fails, the court held. Wong v. Department of Health and Human Servs., No. 2:10-CV KJD-GWF (D. Nev. Feb. 26, 2011). Second Circuit Says State Official Has Qualified Immunity Against Claims Of Inadequate Process The Second Circuit March 9, 2011 affirmed in part and reversed in part a lower court s decision in a long-running case where a suspended physician brought numerous claims against state health officials. The appeals court, in an unpublished order, first reversed the lower court s denial of summary judgment on the qualified immunity of a state health official, finding the official was entitled to qualified immunity on a stigma-plus defamation claim. The appeals court then affirmed the judgment of the district court with respect to the plaintiff s claims challenging the constitutionality of New York Public Health Law Section 230. The New York Department of Health s (DOH s) State Board for Professional Medical Conduct (BPMC) found Dr. Mario DiBlasio and his supervisor, Dr. Steven Bier, engaged in flawed breast cancer screening practices, which resulted in an abnormally low rate of breast cancer detection. 430

431 BPMC unanimously recommended bringing charges against both radiologists, while a majority specifically found their conduct had created an urgent threat to the public health, necessitating an immediate, state-sponsored rescreening of the affected patients. DiBlasio sued the DOH and several state officials. After years-long litigation, the U.S. District Court for the Southern District of New York ruled on some of the claims. State health official Antonia C. Novello appealed the court s denial of summary judgment on the federal stigma-plus and state defamation claims. DiBlasio appealed the court s order granting summary judgment to Novello and fellow defendant Lisa Hampton on his facial and as-applied federal constitutional challenges to New York Public Health Law Section 230. Turning to Novello s appeal of the lower court s denial of qualified immunity, the appeals court first found that it had jurisdiction. [I]t is well settled that the rejection of the qualified immunity defense is immediately appealable under the collateral order doctrine, to the extent the defense may be established as a matter of law, and where the determination does not require resolution of disputed issues of material fact." See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1946 (2009). Turning to the merits, the appeals court explained that the elements of a stigma plus claim are injury to reputation, coupled with the deprivation of a tangible interest or property right, without adequate process. Here, though, the investigation report and the BPMC committee s recommendation provided Novello with sufficient competent evidence to support the belief that affording additional predeprivation process would be impractical in the face of the health emergency at hand, and that any further delay could result in the advancement of as-yet undiagnosed and untreated breast cancer in patients who required rescreening, the appeals court found. Thus, Novello was entitled to qualified immunity as a matter of law with respect to her public statements announcing, and explaining the bases for, DiBlasio s suspension and the rescreening program, including those statements that concerned DiBlasio s professional reputation and/or impeded his ability to practice, the appeals court held. In addition, Novello s statement that she had referred the matters concerning Bier and his associates for a possible criminal investigation could not form the basis for a stigma plus claim because it was a factual statement, the court held. Although it is possible that false or defamatory statements that are wholly irrelevant, gratuitous, or otherwise far beyond the scope of an emergency might in some circumstances rise to the level of violating rights of which a reasonable person would have known, the statements at issue here did not approach that extreme, the appeals court further held. The appeals court next affirmed the lower court s grant of summary judgment on DiBlasio s facial and as-applied challenges to Section 230 of the New York Public Health Law. DiBlasio argued, among other things, that there are material issues of fact with respect to whether exigent circumstances justified a summary suspension, and whether it was impractical to provide him with a predeprivation hearing. 431

432 But the court found no merit in this argument, noting it has held that a public official may invoke emergency procedures when competent evidence allow[s] the official to reasonably believe that an emergency does in fact exist, or that affording predeprivation process would be otherwise impractical. DiBlasio v. Novello, No cv(L) (2d Cir. Mar. 9, 2011). Physicians Third Circuit Upholds Grant Of Summary Judgment To Hospital On Physician s Racial Discrimination Claims In a November 22 non-precedential ruling, the Third Circuit affirmed a lower court s grant of summary judgment to a hospital on a physician s claims of discrimination and retaliation following its refusal to review his medical staff privileges. Plaintiff Subir Ray is a general surgeon of Asian-Indian race. Ray sued defendant Pinnacle Health Hospitals in Pennsylvania after the hospital decided not to renew his medical staff privileges. Ray was a member of Pinnacle's medical staff from 1992 through July In January 2007, Pinnacle notified Ray that it would renew his surgical privileges only for six months due to an ongoing quality assurance (QA) investigation into several of his patient case histories. The Credentials Committee ultimately voted to deny him privileges, a recommendation that the Medical Executive Committee approved. A subsequent fair hearing committee also unanimously recommended denying his reappointment application, finding Ray had exercised poor clinical judgment in pre-operative and post-operative care for certain patients. The appellate review committee and Pinnacle s board of directors also voted to deny reappointment to Ray. Ray sued Pinnacle alleging claims under 42 U.S.C for racial discrimination and for retaliation. The court granted summary judgment to Pinnacle on all Ray s claims. The Third Circuit affirmed. The appeals court first found that Ray had waived his retaliation claims and could not assert them on appeal. The appeals court said the Section 1981 discrimination claim, which generally requires the same elements as an employment discrimination claim under Title VII, should be analyzed under the McDonnell Douglas Corp. burden-shifting analysis. See McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973). Assuming for purposes of its opinion that Ray established a prima facie case of discrimination, the burden shifted to Pinnacle to establish a legitimate, non-discriminatory reason for denying his reappointment. Here, Pinnacle asserted that it declined to renew Ray s privileges following an extensive review of his professional performance consisting of a pre-existing, multi-level process involving at least 37 different staff members. 432

433 Pinnacle also presented the facts and supporting documents behind six separate incidents where Ray s professional expertise or judgment were called into question, the appeals court noted. Thus, Pinnacle met its burden of showing a legitimate, non-discriminatory reason for its actions. Ray, on the other hand, tendered little evidence that this reason was pretextual aside from his own general assertion that the whole review process was tainted by racial animus. Ray mostly pointed to evidence he said showed similarly situated Caucasian physicians were treated differently. But the court found this evidence insufficient in light of the voluminous record of quality assurance information produced by Pinnacle. Moreover, Ray failed to tender evidence raising an inference that the review process was designed to discriminate against him. Ray v. Pinnacle Health Hosps., Inc., Nos and (3d Cir. Nov. 22, 2010). U.S. Court In New York Orders Hospital To Produce Physician s Performance Review Material In Discrimination Action The U.S. District Court for the Eastern District of New York held February 3, 2011 that hospital defendants to a civil rights action must produce the peer review material sought by the plaintiff physician. According to the court, the material tending to show that the plaintiff physician received generally favorable performance reviews was essential to her claim of discrimination and that factor far outweighed any privilege claimed by the hospital. Plaintiff Satnam Sabharwal sued defendants Mount Sinai Medical Center (Hospital), Queens Hospital Center, and Dr. Won Chee alleging that she was subjected to a hostile work environment and unlawful discrimination in that she was not reappointed as Assistant Director of Anesthesia because of age, sex, and disability discrimination, in violation of federal, state, and local law. During discovery, plaintiff requested production of all records maintained by the Hospital's Medical Executive Committee relating to plaintiff, including all Peer Reviews of plaintiff during her employment, and the personnel files of Dr. Chee. The defendants did not produce the documents requested, instead arguing that many of the documents are protected by the "quality assurance" and "peer review" privileges. The court turned first to defendants argument that the request violates the peer review privilege in New York's Public Health Law. After noting some uncertainty about whether peer review law should be recognized in civil rights actions, the court said it need not address that issue because under the balancing test laid out in United States v. King, No. 73 F.R.D. 103 (E.D.N.Y. 1976) the plaintiff's need for this information to enforce an important federal substantive policy far outweighs any theoretical chilling effect that disclosure of these peer reviews may have. Having carefully reviewed the files in camera, the Court notes that whatever documents in Ms. Sabharwal's file that could be considered peer review documents all contain generally favorable reviews of plaintiff's performance, the court said. 433

434 Regarding defendants other privilege claims, the court concluded that "under the same balancing analysis applied to the claims of peer review privilege, plaintiff's need for these documents outweighs any countervailing state policy concerns. Finally, after reviewing the contents of Chee s files, the court finds that nothing in Dr. Chee's file is remotely relevant to plaintiff's claims or is likely to lead to the discovery of admissible evidence. Thus the court declined to order production of that file. Sabharwal v. Mount Sinai Med. Ctr., No. 09 CV 1950 (E.D.N.Y. Feb. 4, 2011). Seventh Circuit Affirms Dismissal Of Physician s Action Alleging Hospital s Settlement With Medical Malpractice Plaintiff To Damage His Reputation The Seventh Circuit affirmed August 13, 2010 the dismissal of a physician s action against the hospital where he worked and several co-workers alleging they had reached a settlement agreement with a prospective medical malpractice plaintiff without his knowledge for the purpose of damaging his reputation after he had complained about hospital procedures. The appeals court rejected the physician s constitutional claims against the hospital and a number of its employees, finding defendants merely complied with legal requirements for filing notices of medical malpractice settlements with federal and state authorities and did not violate his free speech, equal protection, or due process rights. Herand Abcarian was the head of the surgical department at the University of Illinois College of Medicine at Chicago and served chief of the surgical department at the University of Illinois Medical Center at Chicago. According to the opinion, Abcarian routinely clashed with a number of the individual defendants, who were University employees, over issues such as risk management, faculty recruitment, compensation, and fringe benefits. In 2005, Abcarian learned of a potential medical malpractice lawsuit against him involving a former patient, Behzad, who had died. Abcarian alleged defendants, without his knowledge or consent, reached a nearly $1 million settlement with Behzad s son resolving a state wrongful death action as part of a conspiracy to damage Abcarian s reputation. As required by law, the settlement was reported to the Division of Professional Regulation of the Illinois Department of Financial and Professional Regulation and the National Practitioners Data Bank. Abcarian filed the instant action against defendants asserting various constitutional claims under 42 U.S.C. 1983, as well as a number of state law claims. Defendants moved to dismiss, which the U.S. District Court for the Northern District of Illinois granted. The court also denied Abcarian s requests to amend the judgment and to allow him to amend his complaint. The Seventh Circuit affirmed the district court s decision. 434

435 As to the First Amendment retaliation claim, the appeals court agreed that the Supreme Court s decision in Garcetti v. Ceballos, 547 U.S. 410 (2006), foreclosed his claim because the speech in question was made as part of his official duties as a public employee, not as a private citizen. The appeals court rejected Abcarian s attempt to narrow Garcetti as applying only to claims against the employer as an entity, while still allowing claims against individual coemployees. The appeals court declined to decide whether Garcetti applies to all instances of coemployee retaliation, finding in this case the alleged retaliatory acts were ratified by the University and therefore advanced the interests of the employer. The appeals court also rejected Abcarian s argument that the speech was not pursuant to his official responsibilities, noting that Abcarian was not merely a staff physician with limited authority, but rather the head of the surgical department at the hospital and university. The subjects on which he spoke risk management, the fees charged to physicians, and surgeon abuse of prescription medications... directly affected both surgical departments and fell within the broad ambit of his responsibilities, the appeals court said. The appeals court next found Abcarian could not maintain his equal protection claim because defendants had no discretion in deciding whether to report the Behzad settlement to federal and state officials. Absent any meaningful discretion on the defendants part to decide whether to report the settlement of a particular malpractice claim, we see little risk of the kind of discriminatory action addressed by the Fourteenth Amendment, the Seventh Circuit wrote. Finally, the appeals court affirmed the dismissal of Abcarian s due process claim i.e., that defendants defamed him and thereby infringed his liberty to pursue his chosen occupation. In particular, Abcarian could not show a serious deprivation of his employment prospects as he still had a job in his chosen profession. Abcarian v. McDonald, No (7th Cir. Aug. 13, 2010). The U.S. Supreme Court declined to review this decision on March 21, Products Liability California Appeals Court Finds Pharmacies Not Liable Under State s Drug Dealer Liability Act Because They Did Not Have Requisite Knowledge The California Court of Appeal held June 22, 2010 that a plaintiff who bought black market drugs from a wayward employee at the defendant pharmacies could not hold the pharmacies liable for negligence under the Drug Dealer Liability Act because that statute applies only where the person or entity knowingly participates in the marketing of illegal controlled substances. 435

436 Here, however, the plaintiff did not allege that the pharmacies had any knowledge of the employee s actions, the appeals court said. For more than a year, plaintiff Melody Whittemore bought black market prescription pain medications, including OxyContin, from defendant Steven Correa, an employee of defendants Owens Healthcare-Retail Pharmacy and Omnicare, Inc. Between September 2005 and March 2007, Whittemore paid Correa over $330,000 in cash for pain pills. She became physically and emotionally addicted to them. Following a hospitalization related to her addiction, Whittemore cooperated with drug enforcement officers to expose and arrest Correa. Whittemore and her husband (plaintiffs) sued defendant pharmacies on the ground that the pharmacies had a legal duty under the Drug Dealer Liability Act (Act) to discover and report that the controlled substances had been stolen from them. The trial court sustained the pharmacies demurrer without leave to amend, ruling that the doctrine of unclean hands barred plaintiffs from maintaining causes of action based on Whittemore s illegal conduct in buying the drugs. Plaintiffs appealed, arguing they should be permitted leave to amend their complaint to allege that the Act creates a statutory exception to the doctrine of unclean hands. The appeals court initially agreed with plaintiffs that the doctrine of unclean hands does not preclude recovery in circumstances covered by the Act because the very purpose of the Act is to permit recovery of damages in specified circumstances by the user and others damaged by the use of the drugs. However, the appeals court held, the Act extends liability only to a person who knowingly participates in the marketing of illegal controlled substances within the state, and here the pharmacies did not knowingly market the controlled substances to Whittemore. Whittemore v. Owens Healthcare, No. C06873 (Cal. Ct. App. Jun. 22, 2010). U.S. Court In South Dakota Grants Drug Maker Summary Judgment On Failure To Warn Claims Based On Learned Intermediary Doctrine The U.S. District Court for the District of South Dakota found October 13, 2010 that the learned intermediary doctrine barred plaintiffs failure to warn claims against a drug manufacturer. According to the federal court, the state supreme court would likely adopt the doctrine, even though it had never directly addressed its applicability, in light of prior precedent. Sixteen year-old Peter Schilf was diagnosed with depression by his physician, Dr. Briggs, and was given samples of the drug Cymbalta by Briggs. Cymbalta, which was manufactured by Eli Lilly, was subject to a press release issued on October 15, 2004 by the Food and Drug Administration (FDA) that required drug manufacturers to add a "black box" warning to the prescribing information of all 436

437 antidepressant medications indicating an increased risk of suicidal thoughts and behavior in children and adolescents being treated with antidepressant medications. According to Briggs, he read this information and spoke to Schilf and his mother about the risk of suicidality. Schilf later committed suicide and his parents, as administrators of his estate, sued Eli Lilly. Lilly moved for summary judgment on plaintiffs failure to warn claims relying on the learned intermediary defense. In response, plaintiffs sought a statement from the court that the South Dakota Supreme Court which has never directly commented on the learned intermediary doctrine would not adopt the doctrine. The court found, however, that because South Dakota explicitly adopted the Restatement (Second) 402A it would likely adopt the learned intermediary doctrine. The court also found plaintiffs failed to prove that Lilly s alleged lack of adequate warnings caused Schilf s death. The court noted Briggs testified that he still believed the decision to prescribe Cymbalta was appropriate. The majority of cases governed by the learned intermediary doctrine turn on the prescribing physician's testimony as to what would have been done even if adequate warnings had been issued by the pharmaceutical company, the court said. Here, because Briggs' testimony that he still believes his decision to prescribe Cymbalta for Peter Schilf was appropriate is uncontradicted, there is not sufficient evidence of causation to allow the question to be submitted to the jury, and Defendants' motion for summary judgment on the failure to warn claims will be granted, the court held. The court also rejected plaintiffs argument that they were entitled to a rebuttable presumption, adopted by some states, that had there been an adequate warning, the doctor would have heeded it. Even if this Court were to predict that the South Dakota Supreme Court would adopt the heeding presumption and would apply it in a prescription drug case involving the learned intermediary doctrine, Defendants are entitled to summary judgment because they have rebutted the presumption with Dr. Briggs' unequivocal testimony that he still believes Cymbalta was appropriate for Peter Schilf, the court wrote. Schilf v. Eli Lilly and Co., No (D.S.D. Oct. 13, 2010). U.S. Court In Missouri Refuses To Dismiss Negligence Claims Against Drug Makers Alleging Inadequate Warnings The U.S. District Court for the Eastern District of Missouri found April 26, 2011 that it did not have enough evidence at the pleading stage to rule on pharmaceutical manufacturers learned intermediary doctrine defense. To make such a ruling, the court said, it would need additional evidence about whether the information the drug makers provided was sufficient to warn the physician about the dangers of the drug at issue. 437

438 Defendants Genetech and Biogen are pharmaceutical companies that jointly developed, market, and sell Rituxan a drug with serious side effects, according to the opinion. Plaintiffs are the children of the decedent, Mary Merrick, who died while taking Rituxan. Plaintiffs sued defendants for strict liability, negligence, and negligent misrepresentation, arising from the death of Merrick. Plaintiffs alleged their mother and her physician were not adequately warned about Rituxan's dangers. Defendants moved for judgment on the pleadings. With respect to the negligence claims, defendants asserted the warning provided to decedent's physician was adequate as a matter of law under the learned intermediary doctrine. But the court said it has neither subjective nor objective information regarding whether the warning provided to the Decedent and her physician was sufficient. The court found to rule on this claim requires additional evidence, usually in the form of expert testimony, that the warnings adequately informed the Decedent's physician of Rituxan's risks. The court did dismiss plaintiffs claim for punitive damages, noting that "[a] punitive damage claim is not a separate cause of action and any claim for punitive damages must be brought in conjunction with a claim for actual damages. Puricelli v. Gentech, Inc., 4:10CV01793 JCH (E.D. Mo. Apr. 26, 2011). Quality of Care CMS Announces Results Of Three Quality Demonstrations Results from three recent Medicare demonstration projects provide evidence that offering providers financial incentives for improving patient care increases quality and can reduce the growth in Medicare expenditures, the Centers for Medicare and Medicaid Services (CMS) said December 9, CMS announced the results of three key quality of care demos: the Hospital Quality Incentive Demonstration (HQID); the Physician Group Practice (PGP) Demonstration; and the Medicare Care Management Performance (MCMP) Demonstration. The HQID demonstration began in 2003 with hospitals in 38 states and was designed to test whether paying hospitals for performance on an array of quality metrics would shift the performance upward across the whole group of hospitals. According to CMS, results show that hospitals participating in the demonstration improved performance across the board. Although an independent evaluation suggests that the demonstration contributed to quality increases, CMS noted that quality also increased substantially for similar hospitals that were not participating in the demonstration but had reported quality information on Hospital Compare. 438

439 According to the agency, only 10% to 17% of the increase in quality for hospitals that did participate in the demonstration can be attributed to the pay-for-performance incentives. Participants that received incentive payments raised their quality score by an average of 18.3 percentage points over five years, but participating hospitals that did not meet their benchmarks and did not receive incentive payments improved their average quality score by 18 percentage points. CMS noted that it will continue to test new models. Under the PGP demonstration, all 10 of the physician groups participating achieved benchmark performance on at least 29 of the 32 measures reported in year four of the demonstration, CMS said. Over the first four years of the demonstration, the physician groups increased their quality scores an average of 10 percentage points on 10 diabetes measures, 13 percentage points on the seven heart failure measures, six percentage points on the seven coronary artery disease measures, nine percentage points on two cancer screening measures, and three percentage points on three hypertension measures. Five physician groups will receive performance payments totaling $31.7 million as part of their share of $38.7 million of savings generated for the Medicare Trust Funds in performance year four, CMS noted. In the second year of the MCMP Demonstration which is aimed at promoting the use of health information technology to improve the quality of care for beneficiaries with chronic conditions over 500 participating small and solo physician practices are being rewarded for performance on 26 quality measures, CMS said. The demonstration also provides an additional bonus to practices that report data using an electronic health record (EHR) certified by the Certification Commission for Health Information Technology, CMS noted. According to the agency, 26% of practices were able to submit at least some of the measures from a certified EHR. Tax Hospitals Ask IRS To Allow Consolidated Reporting On Schedule H Several hospital associations are asking the Internal Revenue Service (IRS) to allow hospital systems on Schedule H of IRS Form 990 the option of reporting community benefit on a consolidated basis, rather than in the current disjointed manner. [W]e believe hospital systems should be able to report on community benefit activities and the new Code 501(r) exemption requirements for all the hospitals in the system, the groups said in a July 26, 2010 letter to IRS Commissioner Douglas H. Shulman. According to the letter, consolidated reporting on Schedule H is the optimal way to get reliable data [for] the nearly 60% of tax-exempt hospitals that are part of a hospital system. Citing an Urban Institute study, the letter said the current Schedule H reporting method undervalues system contributions to the communities they serve. 439

440 For example, the letter noted, cross-subsides among organizations within a system will not necessarily be captured on Schedule H, resulting in a distorted picture of community benefit spending. A consolidated Schedule H would include a listing of all Employer Identification Numbers (EIN) included in the hospital system, the letter said, which refers to affiliated hospitals and other entities, exemptions for which are covered under more than one EIN. The letter was signed by the American Hospital Association, the Association of American Medical Colleges, the Healthcare Financial Management Association, and VHA Inc. Wisconsin Appeals Court Finds Doctor s Office Not Entitled To Tax-Exemption The Wisconsin Court of Appeals reversed August 10, 2010 a trial court s finding that an outpatient medical center should be entitled to a tax-exemption. According to the appeals court, the center is operated as a doctor s office and is therefore not qualified for tax-exemption under applicable state law. St. Joseph Outpatient Center is a freestanding outpatient medical facility located in the City of Wauwatosa. The Center was owned and operated by St. Joseph Hospital Regional Medical Center, Inc., a Wisconsin nonprofit corporation. St. Joseph s sole member was Covenant, an Illinois nonprofit corporation. Covenant sought tax-exemption for the first, third, and fourth floors of the building it owned that space was leased to the Center. In 2003, 2004, 2005, and 2006 the City of Wauwatosa Assessor denied tax-exempt status to Covenant. Covenant sued the City under Wis. Stat (3)(d) in an attempt to recover the taxes it paid. The trial court found in favor of Covenant and the City appealed. The City argued, and the appeals court agreed, that the Clinic is a doctor s office and therefore not qualified for a tax exemption under the statute. The trial court found that Covenant qualified for a tax-emption pursuant to Section 70.11(4m)(a), which provides a property tax exemption for real property, owned and used exclusively for the purposes of any hospital. However, Section 70.11(4m)(a) prohibits giving a tax exemption to property used as a doctor s office, the appeals court noted. Applying the test enunciated in St. Clare Hosp. of Monroe, Wis., Inc. v. City of Monroe, 563 N.W.2d 170 (Ct. App. 1997), that whether a building is used as a doctor s office depends on the nature of services provided and the manner in which these services are delivered to the patient, the appeals court here determined that the Center was a doctor s office. Among other things, the appeals court noted that the Clinic: (1) did not provide inpatient services; (2) provided the doctors with a space to do paperwork; and (3) saw most patients by appointment, during business hours. 440

441 The appeal court rejected the Clinic s attempt to distinguish St. Clare based on its 24- hour urgent care center, finding the types of conditions treated at the Urgent Care and the recovery time for those conditions are comparable to those treated at a doctor s office. The appeals court also rejected the Clinic s argument that it is a hospital because it shares billing with a related hospital entity. Nothing in the statute or our case law necessarily prohibits a doctor s office from sharing recordkeeping and billing files with a hospital, the appeals court commented. After distinguishing another case relied on by the Clinic, the appeals court reversed and remanded the case back to the trial court. A dissent argued the Clinic should be found tax-exempt as an adjunct to the near-by related hospital that supports and enhances the efficient functioning of the hospital. Covenant Healthcare Sys., Inc. v. Wauwatosa, Nos. 2009AP1469, 2009AP1470 (Wis. Ct. App. Aug. 10, 2010). Eighth Circuit Upholds Limited Attorney s Fee Award In Action Seeking FICA Tax Refunds A district court properly granted only partial attorney s fees to a medical school in its action seeking a refund of Federal Insurance Contributions Act (FICA) taxes paid on stipends to medical students, the Eighth Circuit ruled recently. The appeals court held while the government was not substantially justified in advocating a bright line rule that the student exception did not apply to medical students, its position in a subsequent motion reasonably attempted to outline why the specific residents at issue did not qualify for the exception. The Center for Family Medicine and the University of South Dakota School of Medicine Residency Corporation (collectively, plaintiffs) sued the federal government for a refund of FICA taxes assessed and collected on stipends plaintiffs paid to medical students for all tax years from 1995 to According to plaintiffs, the stipends were exempt from FICA taxes under the student exception pursuant to 26 U.S.C. 3121(b)(10). The government moved for summary judgment, arguing that, as a matter of law, the student exception did not apply to medical residents. Relying on Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998), the district court denied the government s motion, finding Eighth Circuit precedent prohibited the bright-line rule urged by the government that medical residents could never qualify for the student exception. The Apfel court instead called for a case-by-case examination to determine whether a medical resident qualified for the student exception. The government then filed a second motion for summary judgment, arguing this time that the student exception did not apply to the medical students, not as a matter of law, but because of the circumstances specific to the residents at issue (i.e., they performed up to 70 hours per week of patient care services unrelated to the purpose of pursuing a 441

442 course of study and because they were employed by hospitals, clinics, and individual physicians practices, which funded the cost of their stipends and benefits). The district court denied the government s first and second motions for summary judgment, and granted in part plaintiffs cross-motion for summary judgment, finding they were entitled to a refund of erroneously collected FICA taxes. Plaintiffs moved for attorney s fees from the government pursuant to 26 U.S.C. 7430, which allows an award of reasonable litigation costs to a prevailing party in a lawsuit concerning tax refunds. The district court found plaintiffs were entitled to attorney s fees with respect to the government s first summary judgment motion because its position was not substantially justified since it was directly contrary to the binding Apfel decision. But the district court refused to award attorney s fees on the government s second motion for summary judgment, saying there was a reasonable basis to argue plaintiffs were not employers, that [plaintiffs] were not schools, and that the medical residents were not students. The Eighth Circuit affirmed, holding the district court did not abuse its discretion in determining the government s position in the second motion for summary judgment was substantially justified. Contrary to plaintiffs argument, the appeals court found the government in its second motion did not continue to apply its bright-line rule, but instead engaged in the case-bycase factual analysis required by Apfel. Plaintiffs also contended the government was not substantially justified in arguing hospitals, rather than plaintiffs, were the medical residents employers based on a federal district court ruling in United States v. Mayo Found. For Med. Educ. & Research, 282 F. Supp. 2d 997 (D. Minn. 2003). The fact the government was unsuccessful in arguing the hospitals employed the residents in the Mayo Foundation residency program did not preclude the government from making a similar argument about a different residency program in a different case before a different district court, the appeals court said. Centers for Family Med. v. United States, No (8th Cir. July 30, 2010). Ohio Supreme Court Finds Nonprofit Dialysis Clinic Was Not Entitled To Property Tax Exemption The Ohio Supreme Court held October 26 that a nonprofit dialysis clinic providing dialysis services for patients with end-stage renal disease (ESRD) was not entitled to a charitable-use property tax exemption for its facility in West Chester, OH. Affirming the Ohio Board of Tax Appeals (BTAs ) decision to deny the exemption, the high court found Dialysis Clinic, Inc. (DCI) did not qualify as a charitable institution for purposes of Ohio Rev. Code or that the use of the West Chester facility s real property was exclusively charitable pursuant to Ohio Rev. Code (B). While rejecting the BTA s conclusion that the clinic had to meet a threshold level of charity care to qualify for the property tax exemption, the high court agreed that DCI s status as a 501(c)(3) organization under federal tax law, its donation of profits to kidney 442

443 research, and its assertion that it provided care to patients regardless of their ability to pay was not sufficient to establish the charitable nature of its activities. Instead, the court focused on the fact that DCI s written policy expressly reserved the right to deny a patient treatment based on their inability to pay, and thus did not meet Ohio s nondiscrimination requirement to qualify for a charitable use exemption. Exemption Application DCI is a nonprofit Tennessee corporation that operates numerous outpatient dialysis clinics in 26 states. It is certified by the Internal Revenue Service as a Section 501(c)(3) tax-exempt entity. DCI sought a property tax exemption for its dialysis clinic in West Chester, OH for tax year In its application for the tax exemption, DCI stated that it bills Medicare, Medicaid, insurers, and patients for the services provided at the facility, but that patients who are unable to pay are not turned away." The Tax Commissioner denied the exemption. The BTA affirmed, noting DCI provided no free or charitable services at the West Chester facility and that DCI was not a charitable institution, pointing to its written indigency policy that no gift of service is intended and that DCI retains all rights to refuse to admit and treat a patient who has no ability to pay. BTA also discounted the fact that DCI donates a substantial portion of its revenue to kidney research, saying that DCI could not claim charitable status vicariously based on the charitable nature of those to whom it contributed. Finally, BTA noted the record showed no unreimbursed free or charity care at the subject clinic. BTA Decision Reasonable and Lawful The Ohio Supreme Court affirmed BTA s decision. First, the high court found BTA acted reasonably and lawfully in determining that DCI did not qualify as a charitable institution. In so holding, the high court rejected DCI s contention that it should qualify as a charitable institution under Ohio law because of its status as a Section 501(c)(3) organization under the Internal Revenue Code. According to the high court, Ohio law concerning the charitable use exemption requires services be provided on a nonprofit basis to those in need, without regard to race, creed, or ability to pay. Federal tax law, however, affords a charitable exemption on a less restrictive basis, the high court said. In addition, the high court agreed with the BTA that DCI could not claim its core activities were charitable based on the fact that it donated its surplus revenue to kidney research. The high court pointed to prior case law expressly rejecting such a vicarious exemption based on another entity s charitable activities. 443

444 The high court also emphasized that DCI s indigency policy, which expressly reserved the right to refuse to treat a patient who was unable to pay, contradicted DCI s assertion that it was committed to providing services on a nondiscriminatory basis, which is an essential prerequisite for a healthcare provider to qualify property for exemption. Next, the high court agreed with the BTA s finding that DCI failed to prove the West Chester property was exclusively used for charitable purposes. Nothing about the operation of the clinic in West Chester differs from the core activities of DCI that were reasonably and lawfully found not to qualify DCI as a charitable institution, the high court said. Rejects Charity Care Threshold Although it affirmed the BTA s decision denying the exemption, the high court rejected the finding that an institution needed to demonstrate a specific percentage of unreimbursed care to qualify for the exemption. Because of the existence of Medicare and Medicaid, which reimburse providers for the provision of dialysis services to the indigent, few patients actually receive free care that is wholly unreimbursed. A threshold amount of unreimbursed care is not required, the high court wrote. In the age of Medicare and Medicaid, the usual and ordinary indigent patient may have access to government benefits, and the modern healthcare provider is not required to forego the pursuit of those benefits to qualify for charitable status, the high court added. A dissenting opinion disagreed with the majority s conclusion that DCI was not entitled to a property tax exemption on the ground that it did not meet the non-discrimination requirement because it reserved the right to refuse treatment to indigent patients. According to the dissent, reserving the right to deny treatment should not be equated with denying treatment or collecting payment from indigent individuals. DCI did in practice provide care to patients who were unable to pay and therefore the West Chester facility should qualify for the property tax exemption, the dissent argued. Dialysis Clinic, Inc. v. Levin, No OHIO-5071 (Ohio Oct. 26, 2010). IRS Issues Guidance On Reform Law s Small Business Tax Credit The Internal Revenue Service (IRS) released December 2, 2010 final guidance for small employers eligible to claim the new small business healthcare tax credit under the Patient Protection and Affordable Care Act for the 2010 tax year. Along with the guidance, the agency posted to its website the new Form 8941, instructions to Form 8941, and Notice , which are designed to help small employers correctly figure and claim the credit. The reform law created the small business tax credit to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have. 444

445 The guidance clarifies that a broad range of employers meet the eligibility requirements, including religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multi-employer health and welfare plans, and employers that subsidize their employees healthcare costs through a broad range of contribution arrangements. Small businesses can claim the credit for 2010 through 2013 and for any two years after that, IRS said. For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small businesses and 25% of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible tax-exempt organizations, the agency said. According to the guidance, tax-exempt organizations first will use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T will also be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax, IRS noted. FAQs IRS also updated a lengthy list of frequently asked questions (FAQs) on its website addressing the small business tax credit. Among the topics covered by the FAQs are: how to determine which employers are eligible for the credit; how to calculate the credit; how to determine the number of employees and average annual wages for purposes of the credit; and how to claim the credit. Supreme Court Upholds Treasury Regulation Subjecting Medical Residents To FICA Taxes The U.S. Supreme Court in a unanimous January 11, 2011 opinion held the Treasury Department s rule providing that medical residents who work 40 hours per week are not students within the statutory student exception under the Federal Insurance Contributions Act (FICA) was a reasonable construction of the statute. The opinion, authored by Chief Justice John Roberts, thus affirmed the Eighth Circuit s decision upholding the regulations and finding that, for the tax periods in question, the residents compensation for healthcare and patient services was subject to FICA taxes. At issue in the case is the exception under FICA for service performed in the employ of... a school, college, or university... if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university. 26 U.S.C. 3121(b)(10). The Mayo Foundation for Medical Education and Research (Mayo) filed claims with Treasury for refunds of FICA taxes paid for medical residents. The Internal Revenue Service (IRS) paid the refunds and then sued to recover them. Subsequently, in response to litigation over the student exemption, the IRS issued a final regulation in 2004 interpreting the student exception statute, that included as an 445

446 example of services not excepted under 26 U.S.C. 3121(b)(10) a person employed by a university to provide patient care services at an affiliated teaching hospital if the employee works at least 40 hours per week, even if the services have an educational or training aspect. After the IRS promulgated the full-time employee rule, Mayo filed suit seeking a refund of the money it had withheld and paid on its residents stipends during the second quarter of The district court held the regulations invalid and the government appealed. The Eighth Circuit reversed the lower court s holding, finding instead that the statute is silent or ambiguous on the question of whether a medical resident working for the school full-time is a student for purposes of the exemption and thus the Treasury Department may promulgate a reasonable interpretation of that term. Mayo Foundation for Medical Education and Research v. United States, Nos , (8th Cir. June 12, 2009). Because the appeals court determined that such regulations are entitled to substantial deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), the court concluded that the full-time employee regulation is a permissible interpretation of the statute. Beginning its analysis, the High Court agreed with the appeals court that under the first step of the two-part framework announced in Chevron, Congress has not directly addressed the precise question at issue. The Court rejected Mayo s argument that the dictionary definition of student plainly encompasses residents, finding such a reading does not eliminate the statute s ambiguity as applied to working professionals. The district court interpreted section 3121(b)(10) as unambiguously foreclosing the Treasury Department s rule by mandating that an employee be deemed a student as long as the educational aspect of his service predominates over the service aspect of the relationship with his employer. We do not think it possible to glean so much from the little that 3121 provides, the Court held. The Court next refused to apply a less deferential standard to Treasury Department regulations, as urged by Mayo. The principles underlying our decision in Chevron apply with full force in the tax context, the Court noted. Although some Treasury regulations had been analyzed under a less deferential standard in the past, the Court explained that it would not look at whether the rule was adopted under a general authority or a specific grant of authority; instead, the Court said, the ultimate question is whether Congress would have intended, and expected, courts to treat [the regulation] as within, or outside, its delegation to the agency of gap-filling authority. Next addressing step two of its Chevron analysis, the Court found the full-time employee rule easily satisfies the requirement that the rule be a reasonable interpretation of the enacted text. Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way to distinguish between workers who study and students who work, the Court found. 446

447 The Treasury Department did not act irrationally in concluding that these doctors who work long hours, serve as highly skilled professionals, and typically share some or all of the terms of employment of career employees are the kind of workers that Congress intended to both contribute to and benefit from the Social Security system, Roberts wrote. The opinion also noted that the rule takes into account the SSA s concern that exempting residents from FICA would deprive residents and their families of vital disability and survivorship benefits that Social Security provides. Mayo Found. for Medical Education and Research v. United States, No (U.S. Jan. 11, 2011). IRS Grants Certain Tax-Exempt Hospitals Three-Month Extension For Filing Form 990 The Internal Revenue Service (IRS) is granting tax-exempt organizations that operate one or more hospital facilities that would otherwise be required to file Form 990 including Schedule H, for the 2010 tax year before August 15, 2011, an automatic three-month extension. IRS announcement directs these hospital organizations not to file the 2010 Form 990 before July 1, IRS said it is delaying the start of the 2010 filing season for these hospitals [i]n order to complete implementation of changes to IRS forms and systems that are required to reflect additional requirements for charitable hospitals enacted by Section 9007 of the Patient Protection and Affordable Care Act of Hospital Groups Urge IRS To Issue Further Guidance On Revised Schedule H Recent revisions to Schedule H create onerous and redundant reporting requirements, hospital groups said in an April 20, 2011 letter to Sarah Hall Ingram, Commissioner of the Internal Revenue Service s (IRS ) Tax-Exempt and Government Entities Division. On February 23, IRS released a revised Schedule H with Instructions, and announced a mandatory three-month extension for filing IRS Form 990 for certain filers. According to the letter, the new Schedule H vastly expands the paperwork required of hospitals beyond what is called for by the statute. The letter was sent by the American Hospital Association, the Healthcare Financial Management Association, VHA Inc., and 10 state hospital associations. Among other issues, the letter also highlights that guidance from IRS is needed regarding the mandatory filing extension to August 15, According to the groups, the provision has been a source of confusion for many hospitals. The letter also notes that the revisions were developed outside of the normal IRS process for implementing new statutory requirements for tax exemption. 447

448 By failing to promptly initiate a meaningful notice and comment opportunity in connection with the new 501(r), the IRS has produced a reporting tool that will be more difficult for hospitals and less useful to communities than we hoped or expected, the groups said. Obama Signs Into Law Repeal Of 1099 Provision President Barack Obama signed April 14, 2011 legislation repealing the 1099 reporting provisions. The Senate cleared the measure (H.R. 4) by a vote on April 5, while the House passed the legislation March 3 by a margin. The 1099 provision that was enacted in the healthcare reform law would require small business owners to file an Internal Revenue Service form 1099 for each vendor from whom they make purchases of $600 or more. The provision has been widely criticized as creating too much red tape for small businesses. One of the key sticking points in repealing the provision was how to offset an estimated $19-$22 billion in lost revenue. To address this issue, H.R. 4 increases, for taxable years ending after December 31, 2013, the advance applicable dollar amount of the tax credit for healthcare premium assistance for taxpayers whose income is less than 400% of the poverty line, according to a summary of the bill. Today, I was pleased to take another step to relieve unnecessary burdens on small businesses by signing H.R. 4 into law, President Obama said in a statement. Small business owners are the engine of our economy and because Democrats and Republicans worked together, we can ensure they spend their time and resources creating jobs and growing their business, not filling out more paperwork. I look forward to continuing to work with Congress to improve the tax credit policy in this legislation and I am eager to work with anyone with ideas about how we can make health care better or more affordable, the statement said 448