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AMERICAN HEALTH LAWYERS ASSOCIATION Year in Review 2008-2009 American Health Lawyers Association Year in Review 2008-2009 Table of Contents……………………………………………..................................2 Antitrust…..…………………………………………………………………………….4 Arbitration/Mediation………………………………………………………………..18 EMTALA………………………………………………………………………………..23 ERISA…………………………………………………………………………………..35 Food and Drug Law/Life Sciences………………………………………………..46 Fraud and Abuse…………………………………………………………………….76 Health Reform……………………………………………………………………….131 Health Spending…..………………………………………………………………...142 Health Information Technology.………………………………………………….143 Healthcare Access….………………………………………………………………151 Hospitals and Health Systems…………………………………………………...152 Insurance/Managed Care………………..………………………………………...166 Long Term Care……………………………………………………………………..178 Medicaid………………………………………………………………………………187 Medical Malpractice………………………………………………………………...201 Medical Records…………………………………………………………………….214 Medicare……………………………………………………………………………...216 Patient Safety………………………………………………………………………..255 Privacy/Security…………………………………………………………………….258 Physicians……………………………………………………………………………270 Quality of Care……………………………………………………………………....294 RICO…………………………………………………………………………………..303 SCHIP…………………………………………………………………………………305 Tax…………………………………………………………………………………….306 3 Antitrust U.S. Court In Arkansas Rejects Cardiology Clinic’s Antitrust Action Against Hospital, Insurer The U.S. District Court for the Eastern District of Arkansas dismissed August 29, 2008 an antitrust action brought by the Little Rock Cardiology Clinic (clinic) against Baptist Health and Arkansas Blue Cross and Blue Shield (Arkansas Blue Cross). The court said the claims against Arkansas Blue Cross were time-barred and held the claims against Baptist Health failed to define a valid relevant product or geographic market. The clinic and certain cardiologists (plaintiffs) initially sued Baptist Health, which operates five hospitals in Arkansas, in November 2006. Plaintiffs amended the complaint in 2007 to add Arkansas Blue Cross and certain related affiliates. The complaint alleged claims against defendants under Sections 1 and 2 of the Sherman Act, seeking treble damages and injunctive relief under the Clayton Act. The alleged wrongdoing began after the 1997 opening of the Arkansas Heart Hospital in Little Rock, whose part owners were cardiologists who practiced at the clinic. Before that time, these cardiologists participated in the Arkansas FirstSource network and were on staff at the Baptist Hospital in Little Rock. According to plaintiffs, after Arkansas Heart Hospital opened, the clinic and the physicians who practiced there were excluded from the FirstSource network, allegedly to protect Baptist Health from competition. In May 2003, Baptist Health adopted an “economic credentialing policy” to prohibit any physician from having or maintaining staff privileges at any of its facilities if they held an interest in a competing hospital. A court enjoined enforcement of that policy in February 2004. See Baptist Health v. Murphy, 226 S.W.3d 800 (2006). Defendants moved to dismiss on statute of limitations grounds and because the relevant market alleged was incoherent and therefore incapable of forming the basis to adjudicate the antitrust claims. The district court agreed that all the claims against Baptist Health and Arkansas Blue Cross should be dismissed. The court held the claims against Arkansas Blue Cross were time-barred because the action was brought more than four years after the initial termination of their contracts with the FirstSource network. In so holding, the court rejected plaintiffs’ argument that Blue Cross’ refusal to reimburse the cath lab the clinic opened in 2003 was a new and independent act showing a continuing conspiracy. According to the court, this action merely represented the unabated initial consequences of Blue Cross' 1997 decision not to deal with the clinic and its physicians; therefore, no new actions occurred within the four-year statute of limitations period before the filing of the complaint. 4 The court did find, however, that Baptist Health’s adoption of the economic credentialing policy in 2003 could be regarded as an overt act in furtherance of the alleged monopolization of a market for hospital services for cardiology patients. Thus, the court concluded that the antitrust claims against Baptist Health were not time-barred. But the court went on to hold that plaintiffs failed to allege a valid relevant market to support its Section 1 and 2 claims. The court said plaintiffs’ relevant market allegations could be interpreted in two ways: (1) as defined in terms of cardiologists’ services, or (2) as including both cardiologists’ services and hospital services. As to the first definition, the court said the Section 2 claim must be dismissed because no defendant offered the same services that the cardiologists did, i.e. the hospital did not compete in the market for cardiology services. Likewise, the Section 1 claim failed because, where as here Baptist Health lacked market power, plaintiffs failed to allege any adverse effect on competition among cardiologists such as increased prices or a decline in the quality or quantity of cardiology services. As to the alternative interpretation of plaintiffs’ market allegations, the court refused to find the services offered by a hospital and the services offered by a cardiologist to hospitalized cardiology patients could be lumped into one product market for purposes of antitrust analysis. “Assuming . . . that hospitalized cardiology patients require services from both a cardiologist and a hospital, what follows is not that both sets of services are in the same product market but rather the opposite—the two sets of services are complements, not substitutes and therefore are not in the same product market,” the court said. The court also noted one overarching problem with plaintiffs' market definition—i.e. its attempt to limit the relevant market to services provided to privately insured individuals. The relevant market is all persons who need cardiologists' services, including those with coverage through Medicare, Medicaid, and other public programs, the court said. Finally, the court took issue with the complaint’s definition of the relevant geographic market as the cities of Little Rock and North Little Rock, finding the area too narrow and undermined by other factual allegations in the complaint. Little Rock Cardiology Clinic, P.A. v. Baptist Health, No. 4:06CV01594 JLH (E.D. Ark. Aug. 29, 2008). U.S. Court In California Allows Physician To Pursue Sherman Act Claims Alleging Conspiracy To Deny Hospital Privileges The U.S. District Court for the Northern District of California allowed September 22, 2008 a physician to pursue Sherman Act antitrust claims against several hospital board members and those who served on various hospital committees for allegedly conspiring to cause the denial of plaintiff's privileges. Although the court found the pleading sufficient to withstand a motion to dismiss the antitrust claims, it granted the motion with respect to the plaintiff’s state law claim for breach of the implied covenant of good faith and fair dealing. 5 Plaintiff Richard B. Fox is a pediatrician with a specialty in the care of critically ill children who require mechanical ventilation. He practiced at Good Samaritan Hospital (GSH). In 1999, GSH adopted a rule requiring any physician seeking practice privileges at the hospital to designate two physicians with identical privileges to serve as backups in the event of the first physician's unavailability. Fox refused to designate the back-ups and GSH denied him pediatric intensive care privileges. Fox contended the rule change was part of an anticompetitive scheme designed to favor a competing group of physicians with whom defendants had a relationship. Fox sued several defendants alleging their actions violated the Sherman Act and state law. In their motion to dismiss, defendants argued that claims under the Sherman Act are barred unless commenced within four years after a defendant commits an act that injures a plaintiff. Fox filed suit on March 18, 2008, so any claim that accrued before 2004 would otherwise be time-barred unless a new injury intervened. Defendants argued Fox's alleged injuries would have been caused when GSH adopted the initial identical privilege rule in April 1999 and subsequently suspended Fox's privileges for failing to comply with that rule in June 1999. The court agreed, however, with Fox’s argument that he was entitled to apply for new privileges every two years and was then subject to a new adverse decision denying those privileges in response. Under those facts if proven, there was a continuing conspiracy characterized by new and independent acts occurring within the 2004 to 2008 period, the court said. Turning to Fox’s claims for unreasonable restraint of trade in violation of Sherman Act Section 1, the court found that in construing the complaint in the light most favorable to Fox, his pleading sufficiently raised issues of fact as to whether GSH and defendants conspired to exclude Fox from offering pediatric intensive care services at GSH. The court also found Fox adequately set forth the requisite impact on interstate commerce. The court next addressed Fox’s monopolization and attempt to monopolize in violation of Sherman Act Section 2 claims. A claim for monopolization under Section 2 has two elements: (1) the possession of monopoly power in the relevant market; and (2) the willful acquisition or maintenance of that power. The court rejected defendants’ argument that Fox had not adequately alleged defendants' monopoly power in the relevant market. Instead, the court found Fox adequately pled that GSH, with its unique pediatric intensive care program, is a separate geographic market because children born at GSH, where they receive pediatric care from Fox and other physicians, use that facility’s services exclusively. 6 The court also agreed with Fox that defendants have the power to control prices and to exclude competition in these pediatric intensive care markets because it is difficult for physicians, such as Fox, to obtain the necessary pediatric certification and privileges from GSH. However , the court did agree with defendants that Fox could not pursue his state law claims for breach of the implied covenant of good faith and fair dealing under a tort theory. California courts have “unanimously refused to extend tort remedies outside the insurance arena,” the court said. Thus, the court dismissed Fox's claim for breach of the implied covenant of fair dealing with prejudice. Turning to Fox’s breach of contract claim, the court noted that Fox only alleged he had a contract with GSH, not with the defendants individually. Accordingly, the court granted Fox leave to amend “to plead facts, if he can do so in good faith, regarding how [certain individual defendants] as corporate officers, are liable for an alleged breach of contract between GSH and Fox.” Fox v. Piche, No. C 08-1098 RS (N.D. Cal. Sept. 22, 2008). BMS Agrees To Pay States $1.1 Million For Failing To Meet CourtOrdered Reporting Requirements Bristol-Myers Squibb (BMS) agreed to pay $1.1 million to the states for failing to comply with court-ordered reporting obligations that arose from prior settlements of charges that the company unlawfully deprived consumers of cheaper generic versions of its drugs Buspar and Taxol, according to Wisconsin Attorney General J.B. Van Hollen. BMS also agreed to revised court orders extending its reporting obligations and establishing monetary penalties for any future violations, the release said. Under the two prior settlements concerning Buspar and Taxol, BMS paid the states $150 million and agreed to two federal court orders requiring the company to notify the states of patent litigation settlements with generic drug competitors and also to supply yearly compliance reports. In March 2006, BMS reached a settlement with generic drug manufacturer Apotex, Inc. in a patent infringement lawsuit involving BMS’ drug, Plavix. According to the states, the Plavix settlement provided by BMS was inaccurate and incomplete, as were the company’s 2007 and 2008 compliance reports, which did not disclose “side” arrangements that a company official made with Apotex, the release said. Bristol-Myers Squibb Agrees To Pay $2.1 Million Penalty For Failing To Disclose Full Details Of Plavix Deal Bristol-Myers Squibb (BMS) will pay a $2.1 million civil penalty to resolve a Federal Trade Commission (FTC) complaint that it failed to disclose certain critical statements it made to the generic manufacturer Apotex, Inc. as part of a patent settlement involving BMS’ blockbuster blood thinner Plavix. 7 BMS was required to make full disclosures regarding its dealings with generic drug manufacturers under a 2003 FTC order, and under new reporting requirements included in the Medicare Modernization Act of 2003 (MMA). The complaint is the first to be brought under the MMA provisions, and the fine is the largest allowed by the statute, FTC said in a press release. According to the FTC, Apotex during patent settlement negotiations agreed not to launch its generic version of Plavix for several years and BMS made certain oral statements that in exchange it would not market an “authorized generic” version of Plavix for the first 180 days after Apotex’s generic entry. The proposed settlement agreement between Bristol-Myers Squibb and Apotex was related to Plavix patent litigation pending in a federal trial court in New York. BMS did not disclose the oral statements to the FTC as required by a 2003 order settling charges that BMS had entered into agreements with generic drug manufacturers to delay their entry into the market and by the MMA, which requires the accurate reporting of certain drug company agreements to the FTC and the Department of Justice (DOJ). “Filing firms must understand that they can’t reach oral understandings and simply omit them from their required MMA filings. Otherwise, the very goal of the MMA would be undermined,” said the FTC’s Acting Bureau of Competition Director David P. Wales. In May 2007, BMS agreed to plead guilty to two counts of perjury for, among other things, failing to disclose its oral statements to Apotex and to pay $1 million in criminal fines, the maximum amount allowed by statute. FTC Alleges Drug Companies Agreed To Unlawfully Delay Entry Of Generic AndroGel The Federal Trade Commission (FTC) announced February 2, 2009 that it filed suit in federal district court challenging agreements in which Solvay Pharmaceuticals, Inc. paid generic drug makers Watson Pharmaceuticals, Inc. and Par Pharmaceutical Companies, Inc. to delay generic competition to Solvay’s testosterone-replacement drug AndroGel. Both generic companies had sought regulatory approval from the Food and Drug Administration (FDA) to market generic versions of AndroGel. In those filings, they certified that their products did not infringe the only patent Solvay had relating to AndroGel, and that the patent was invalid. According to FTC, Solvay agreed to pay the generic companies to abandon their patent challenges and agree not to market a generic version of AndroGel until 2015. As a result of these agreements, the complaint alleges, defendants are cooperating on the sale of AndroGel and sharing the monopoly profits, rather than competing with Solvay. The suit seeks a final court judgment declaring that Solvay’s agreements with Watson and Par violate Section 5(a) of the FTC Act, and injunctive relief restoring competitive conditions and barring the defendants from engaging in similar or related conduct in the future. The complaint was filed in the U.S. District Court for the Central District of California. 8 FTC Says Legislation Banning “Pay-For-Delay” Payments Is Needed To Prevent Higher Drug Costs The Federal Trade Commission (FTC) gave its resounding support March 31, 2009 to legislation that would ban so-called “pay to delay” payments as part of patent settlements between brand and generic drug companies. In testimony before the House Energy and Commerce Subcommittee on Commerce, Trade, and Consumer Protection, FTC Commissioner J. Thomas Rosch said a recently introduced bill (H.R. 1706) to prohibit such anticompetitive settlements “can provide a comprehensive solution to a problem that is prevalent, extremely costly, and subverts the goals of the Hatch-Waxman Act.” Subcommittee Chairman Bobby Rush (D-IL) introduced the bill along with Committee Chairman Henry Waxman (D-CA) to ban the practice of “exclusion” or “reverse” payments in which a brand-name company pays or provides value to the generic company to abandon a patent challenge if the generic company agrees to delay marketing its generic drug. In his opening statement, Rush said “the intent of Hatch Waxman is being undermined by these uncompetitive legal settlements and consumers are losing out on the considerable savings from generic drugs.” Rush emphasized the bill does not ban all settlements in drug patent cases, but rather prohibits the brand-name manufacturer from giving something of value to the generic manufacturer to delay generic entry on the market. These types of deals have increased in prevalence, Rush noted, after various court decisions made it more difficult for FTC to bring antitrust suits to stop exclusion payments. For example, in March 2005, the Eleventh Circuit vacated the FTC’s decision that settlement agreements between Schering-Plough Corporation and two generic drug manufacturers were anticompetitive. See Schering-Plough Corp. v. Federal Trade Commission, 402 F.3d 1056 (11th Cir. 2005). Rosch said in his testimony that settlements with payments to generic patent challengers “had essentially stopped” in the wake of antitrust enforcement between 2000 and 2004. But following appellate court decisions upholding the legality of pay-to-delay settlements, these types of agreements are on the rise. Rosch cited an analysis finding that in 2007 almost half of all final patent settlements involved compensation to the generic challenger and an agreement to delay generic entry. Diane E. Bieri, Executive Vice President and General Counsel for the Pharmaceutical Research and Manufacturers of America, argued before the panel that a “case by case” approach in analyzing patent settlements instead of an across-the-board ban “serves the best interests of patients, health care, and competition.” Bieri said blanket prohibitions on certain types of settlements could divert valuable resources from research and development to expensive litigation. “In the face of these 9 alternatives, it is better for companies, the courts and consumers if the parties are permitted to negotiate settlements that could bring the generic product to consumers before the patent expires and save considerable litigation costs.” Ninth Circuit Affirms Judgment That Agreement Did Not Delay Generic Entry, But Says Monopolization Claim Against BrandName Drug Maker May Proceed The Ninth Circuit affirmed January 13, 2009 a jury verdict finding Kaiser Foundation Health Plan Inc. could not maintain a restraint-of-trade claim under Section 1 of the Sherman Act against Abbott Laboratories Inc. and Geneva Pharmaceuticals Technology for entering into an agreement that allegedly delayed the market entry of a generic version of Abbott’s brand-name drug Hydrin (terazosin hydrochloride). The appeals court reversed, however, summary judgment to Abbott on Kaiser’s monopolization claim under Section 2 of the Sherman Act. According to the appeals court, Kaiser raised a genuine issue of material fact as to whether the brand-name drug maker obtained one of its patents on terazosin hydrochloride by fraudulently omitting certain relevant information in its patent application. Abbott began selling terazosin hydrochloride in tablet and capsule form beginning in 1987. Over the years, Abbott held a number of patents covering various terazosin hydrochloride formulations. Of particular interest to this litigation was the '207 patent, which was issued in April 1996 on a crystalline polymorph of terazosin hydrochloride (Form IV) and a related process. Generic drug manufacturer Geneva entered the picture in the 1990s when it filed Abbreviated New Drug Applications (ANDAs) for generic versions of terazosin hydrochloride. Pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch Waxman Act, Geneva’s ANDAs included “Paragraph IV” certifications that either the Abbott patents at issue were invalid or would not be infringed by its generic version. See 21 U.S.C. § 355(j)(2)(A)(vii). As permitted under the Hatch-Waxman Act, Abbott filed various patent infringement suit and received an automatic 30-month stay of the Food and Drug Administration’s (FDA's) approval of the ANDAs. Two days after FDA approved Geneva’s capsule ANDA, Abbott and Geneva entered into a contract in which Geneva agreed to keep its generic capsule off the market subject to various conditions and Abbott agreed to pay Geneva $4.5 million dollars per month during this period. According to the opinion, between 1993 and 1998, seven generic drug manufacturers filed ANDAs seeking FDA approval of generic terazosin hydrochloride. Abbott filed 17 patent infringement suits during this time period. The Federal Circuit eventually ruled Abbott’s '207 patent was invalid. Abbott then terminated its contracts with Geneva. Once Geneva’s generic entered the market, Abbott lowered the price of brand-name terazosin hydrochloride that it had previously offered to Kaiser from between 67 and 70 cents per tablet to 10 cents per tablet. 10 Kaiser, a large purchaser of prescription drugs, sued Abbott and Geneva in the U.S. District Court for the Central District of California under Sections 1 and 2 of the Sherman Act and analogous provisions of California law. Kaiser’s suit was transferred to the Southern District of Florida as part of multi-district litigation. That court granted summary judgment to Abbott on Kaiser’s monopolization claim but then transferred the case back to the California federal district court. Kaiser’s Section 1 claim went to a jury, which determined that Abbott and Geneva had not caused any delay in generic entry of terazosin hydrochloride on the market. On appeal, the Ninth Circuit affirmed the jury’s verdict in Abbott's and Geneva’s favor. At trial, Abbott and Geneva presented evidence that their agreement did not delay Geneva’s marketing of its generic terazosin hydrochloride because Geneva did not want to risk bringing its product to market without the protection of a court decision holding the ‘207 patent was invalid. According to Kaiser, Geneva’s defense was based on the advice of counsel and therefore the district court erred in not allowing discovery of the attorneys' privileged opinions. But the appeals court disagreed, saying Geneva did not rely on an “advice-of-counsel” defense at trial; rather, Geneva asserted its Board of Directors did not want to undertake the business risk of marketing its generic terazosin hydrochloride so long as the validity of the ‘207 patent was in question. This decision was made despite advice from counsel that Geneva would likely prevail in the ‘207 patent litigation, the appeals court observed. The appeals court reversed, however, the Florida federal district court’s grant of summary judgment to Abbott on Kaiser’s Section 2 Sherman Act monopolization claim. The district court concluded that Abbott was entitled to immunity under the NoerrPennington doctrine as it was exercising its First Amendment rights to petition the government without fear of antitrust liability. Kaiser asserted two exceptions to the Noerr-Pennington framework applied—that Abbott engaged in “sham” litigation in bringing the 17 patent infringement lawsuits and that Abbott obtained its ‘207 patent fraudulently, so-called Walker Process fraud. See Walker Process Equip., Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965). The appeals court concluded the “sham” litigation exception did not apply, noting Abbott prevailed in seven of the 17 patent infringement lawsuits and had plausible arguments in all of the lawsuits. But the Ninth Circuit found Kaiser had raised a material issue of fact as to whether Abbott knowingly omitted certain information in its ‘207 patent application that may have affected the issuance of the patent. Thus, the appeals court said the action should not have been decided on summary judgment. Kaiser Found. Health Plan Inc. v. Abbott Labs., Inc., Nos. 06-55687, 065578 (9th Cir. Jan. 13, 2009). 11 Sixth Circuit Finds Group Boycott Allegations Insufficient Under Either Per Se Or Rule Of Reason Test The Sixth Circuit affirmed December 22, 2008 a district court's dismissal of antitrust claims alleging a group boycott by a group of related insurers. The appeals court found the district court did not err in finding the complaint failed to adequately plead a violation of Section 1 of the Sherman Act based on a per se analysis or rule-of-reason test. Total Benefits Planning Agency maintained contracts with Anthem Blue Cross and Blue Shield; Anthem Life Insurance Company, Inc.; Anthem Health Plans of Kentucky, Inc.; Anthem Insurance Company, Inc. (collectively Anthem); and Cornerstone Broker Insurance Services Agency for the sale of group life and health insurance policies in Ohio, Indiana, and Kentucky. Total Benefits developed "an innovative strategy for controlling health care costs" by utilizing "a 51-year old federal tax law to ‘refinance’ health-care costs by raising deductibles on existing group insurance policies and administering benefits through a medical expense reimbursement plan." In September 2004, Anthem advised Total Benefits that the strategy "was not in the best interest of Anthem or the more traditional insurance agencies," and in June 2005, Anthem severed its agency relationship with Total Benefits. Total Benefits and four of its insurance agents (collectively, Total Benefits) sued Anthem and Cornerstone (collectively, defendants) alleging they conspired to blacklist and organize an industry boycott against Total Benefits in violation of the Sherman Act, 15 U.S.C. § 1, after Total Benefits refused to relinquish the strategy. Total Benefits also alleged defamation, libel, tortious interference with contract, conspiracy, and breach of contract under state law. Defendants moved to dismiss and the trial court initially denied the motion. However, following two subsequent Supreme Court decision, Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1974 (2007), the trial court eventually agreed to dismiss the action. The appeals court first addressed Total Benefits' argument that the district court erred in failing to find the complaint adequately pled a violation of Section 1 of the Sherman Act based on a per se violation. The appeals court noted that when the case was originally filed, there were two possible grounds for the application of a per se antitrust claim: (1) a "group boycott" alleging a horizontal agreement among competitors, and (2) a vertical price fixing conspiracy. However, in Leegin, the Supreme Court held that all vertical price restraints are to be judged under the rule-of-reason standard, thus leaving a horizontal agreement as the only way a per se violation could have occurred here. The appeals court found that Total Benefits failed to plead in their amended complaint the necessary factual allegations to prove a horizontal agreement. The appeals court pointed out that the Supreme Court has held that a parent company and its wholly owned subsidiaries are incapable, as a matter of law, of conspiracy. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 769 (1984). 12 Here, the "sister" relationship between each of the Anthem defendants made them incapable, as a matter of law, of conspiring to form a horizontal group boycott in violation of Section 1 of the Sherman Act, the appeals court held. The appeals court also found no merit in Total Benefits' "hub and spoke" conspiracy argument, finding the complaint still must show some horizontal relationship between competitors. Next, the appeals court turned to Total Benefits' argument that the court erred in dismissing its claims under the rule-of-reason test. In order to state a claim under the rule-of-reason test, a plaintiff must include in the complaint allegations demonstrating: (1) the defendants "contracted, combined or conspired among each other"; (2) "the combination or conspiracy produced adverse, anticompetitive effects within relevant product and geographic markets"; (3) "the objects of and conduct pursuant to that contract or conspiracy were illegal"; and (4) "the plaintiff was injured as a proximate result of that conspiracy." Crane & Shovel Sales Corp. v. Bucyrus-Erie Co., 854 F.2d 802, 805 (6th Cir. 1988). The first element requires a plaintiff to allege the existence of the conspiracy in more than "vague and conclusory" terms, a fact that the Supreme Court reiterated in Twombly, the appeals court said. However, the appeals court found that the "allegations in the amended complaint fall significantly short of the required pleading threshold." The court noted that the complaint failed to allege when defendants "joined the Anthem conspiracy, where or how this was accomplished, and by whom or for what purpose." "Generic pleading, alleging misconduct against defendants without specifics as to the role each played in the alleged conspiracy, was specifically rejected by Twombly," the appeals court held. Total Benefits also failed to identify a relevant product market, the appeals court noted. Total Benefits Planning Agency, Inc. v. Anthem Blue Cross Blue Shield, No. 07-4115 (6th Cir. Dec. 22, 2008). Healthcare System Resolves Allegations It Tried To Exclude Competitors From Managed Care Networks, Texas AG Says Memorial Hermann Healthcare System has settled allegations it engaged in practices that discouraged health insurers from entering into contracts with certain competing hospitals in violation of state antitrust laws, Texas Attorney General (AG) Greg Abbott announced January 26, 2009. The AG’s complaint, filed in Texas state court, alleged that beginning in 2005 Memorial Hermann unreasonably restrained competition among acute care inpatient hospitals by trying to prevent competing physician-owned hospitals from being added to area managed care networks. Memorial Hermann is the largest hospital system in the Houston area with about 20% of the market share. According to the complaint, one Memorial Hermann competitor, Houston Town and Country Hospital (Town and Country), was unable to obtain an in-network contract with any major health insurer in the Houston market except CIGNA. 13 After learning of Town and Country’s agreement with CIGNA, Memorial Hermann indicated it intended to terminate its contract with the insurer. The health system later renegotiated its contract with CIGNA and obtained substantial rate concessions “far in excess of any reasonably foreseeable economic impact on Memorial Hermann from CIGNA’s inclusion of Town and Country within its network,” the complaint alleged. The same scenario played out with Aetna, resulting in Memorial Hermann imposing a 25% rate increase on the insurer, according to the complaint. Town and Country Hospital eventually closed, the complaint said. Pursuant to a final court order, Memorial Hermann is permanently enjoined for five years from engaging in any practices with any health plan to boycott or refuse to deal with competitor hospitals. The health system also agreed to pay the AG $700,000 in partial reimbursement of the reasonable and necessary costs and fees associated with the investigation of its business practices. Memorial Hermann did not admit any liability or wrongdoing in agreeing to the settlement and final court order. Rather, it decided to resolve the antitrust allegations “[t]o avoid the time, uncertainty and expense of protracted litigation.” U.S. Court In Illinois Rejects Omnicare Antitrust Claims Alleging UnitedHealth-PacifiCare Merger Violated Sherman Act A federal court in Illinois granted summary judgment to UnitedHealth Group (UnitedHealth) and PacifiCare Health Systems (PacifiCare) in an antitrust action brought by institutional pharmacy Omnicare Inc. alleging the merger of the two insurers violated the Sherman Act. Although the court had previously denied defendants’ motion to dismiss, Omnicare, Inc. v. UnitedHealth Group, Inc. No. 06-Omnicare-6235 (N.D. Ill. Sept. 28, 2007), it found on summary judgment that OmniCare had failed to raise a genuine issue of material fact that the insurers conspired to coordinate their negotiations with the pharmacy so as to fix and depress prices concerning their Medicare Part D contracts. Plaintiff Omnicare Inc. is the nation’s largest provider of drugs and services to long term care facilities, according to the opinion. In July 2005, UnitedHealth entered into an agreement with Omnicare in which UnitedHealth would act as a Medicare Part D prescription drug plan, with Omnicare agreeing to accept reimbursement from UnitedHealth for providing pharmacy services to its enrollees. PacifiCare also entered into discussions with Omnicare but the negotiations were unsuccessful and PacifiCare ultimately broke off negotiations During this time, PacifiCare and UnitedHealth began merger discussions and finalized a merger agreement in July 2005. Omnicare and PacifiCare eventually resumed negotiations and reached an agreement. According to Omnicare, it felt compelled to accept PacifiCare’s below-market offer and other terms favorable to the insurer. Once the merger was completed, UnitedHealth, now the owner of PacifiCare, notified Omnicare that it was withdrawing the UnitedHealth plans from its original agreement with 14 Omnicare, and then switched them to the PacifiCare plan, with its lower reimbursement rate. Omnicare filed a complaint against UnitedHealth, PacifiCare, and RxSolutions, Inc. (collectively, defendants), alleging they violated the Sherman Act’s prohibition on contracts or conspiracies in restraint of trade, as well as parallel state law prohibitions. Omnicare also alleged state law claims of conspiracy to defraud, fraudulent misrepresentation, and unjust enrichment. Defendants moved for summary judgment. The U.S. District Court for the Northern District of Illinois granted the motion, finding Omnicare failed to establish a genuine issue of material fact that defendants engaged in a contract, combination, or conspiracy in restraint of trade. While the court recognized some circumstantial evidence that defendants may have acted in concert, it found that none of the evidence tended to exclude the possibility the alleged conspirators acted independently. The court rejected Omnicare’s contention that the merger agreement by its own terms established the existence of a conspiracy in restraint of trade. A provision requiring UnitedHealth to approve any PacifiCare transaction in excess of $3 million specifically excluded PacifiCare’s Part D contract. Moreover, such a provision is relatively common in merger agreements to ensure the acquired company does not assume any major liabilities for which the acquirer would be responsible. Omnicare also argued PacifiCare’s bargaining strategy, i.e. walking away from the initial negotiations, made no economic sense because it compromised PacifiCare's ability to receive Part D certification. But the court disagreed, emphasizing that PacifiCare’s strategy in fact succeeded—given that it still obtained its Part D certification and, ultimately, more favorable terms in its agreement with Omnicare. “At its core Omnicare’s theory would require the court to hold that a bargaining strategy that was ultimately successful and saved PacifiCare money was nevertheless illogical and contrary to its economic interest,” the court observed. The court also was not convinced that Omnicare was compelled to accept the lower reimbursement rate with PacifiCare. Omnicare made no attempt to bargain further with PacifiCare and was a “sophisticated” party, the court said. Finally, the court rejected Omnicare’s view that premerger communications and information exchanges between UnitedHealth and PacifiCare raised a genuine issue as to the existence of a conspiracy. While acknowledging that UnitedHealth “did not scrupulously enforce the segregation of its due diligence team,” the court nonetheless found “that fact alone cannot alter the generally benign nature of the information exchanged.” The court noted the information was exchanged late in the merger process and consisted of averages and ranges rather than specific bargained-for rates. The court also granted summary judgment to defendants on Omnicare’s state law claims. 15 Omnicare, Inc. v. UnitedHealth Group, Inc., No. 06 C 6235 (N.D. Ill. Jan. 16, 2009). Amgen Will Pay $200 Million To Ortho Biotech To Settle Antitrust Litigation Pharmaceutical manufacturer Amgen will pay Ortho Biotech Products L.P. $200 million to settle litigation alleging that Amgen violated antitrust laws by offering discounts to oncology clinics on Amgen's Neupogen, Neulasta, and Aranesp products, Amgen said in a July 11, 2008 press release. Ortho Biotech, a subsidiary of Johnson & Johnson, will agree to dismiss its pending litigation in New Jersey district court under the terms of the settlement. Amgen did not admit to any wrongdoing as part of the settlement agreement. "We are pleased to have reached a settlement that puts this litigation behind us. We believe eliminating the expense and uncertainty of this suit is in the best interest of shareholders," said Kevin Sharer, Amgen's chairman and chief executive officer. Health Systems Reaches Preliminary Settlement Of Lawsuits Alleging Conspiracy To Depress Nurse Wages Two health systems have reached preliminary settlements of respective class actions alleging they conspired with hospitals in their area to keep nurses’ wages at artificially low levels. According to documents filed in the U.S. District Court for the Northern District of New York, Northeast Health Inc. of Troy, N.Y. and its subsidiary entities Samaritan Hospital and Albany Memorial Hospital reached a $1.25 million preliminary settlement of the class action pending against it there. In March 2009, St. John Health struck a $13.6 million preliminary deal to end a similar lawsuit against it in the U.S. District Court for the Eastern District of Michigan. The cases are part of five class actions filed in federal courts in Albany, Chicago, Memphis, San Antonio, and Detroit alleging that hospitals violated federal antitrust laws by regularly exchanging detailed and non-public information about the compensation each was paying or was willing to pay its RN employees. According to the lawsuits, which seek treble damages for class members as well as fees and costs, absent such conspiracy, hospitals in the areas where the suits were filed would have substantially increased RN compensation in order to attract a sufficient number of nurses to their facilities. Instead a nationwide nursing shortage remains, the complaints said. Both health systems denied the plaintiff nurses’ allegations and did not concede or admit any liability in agreeing to the preliminary settlement. Instead, the health systems said they agreed to settle “to avoid further expense, inconvenience, and the distraction of burdensome and protracted litigation.” Shortly before St. John’s preliminary settlement, the Michigan federal district court found that Mount Clemens General Hospital, another defendant in the suit, was not entitled to summary judgment in the nurses’ class action. Mount Clemens argued that its largely unionized nurse workforce could not establish the requisite antitrust injury because their wages were not set through a competitive process. 16 However, the court distinguished cases cited by the defendant hospital, noting in those decisions the defendant entities did not compete with each other. Here, the defendant Detroit-area hospitals “compete among themselves for the services of RNs—or, at least, those RNs who are not union members—and the Court likewise must assume, for present purposes, that Defendants have reduced this competition by agreeing among themselves on the compensation they will pay these RNs.” “To the extent that some members of the plaintiff class of RNs might also have reduced or eliminated the competition among themselves for wages by electing to participate in the collective bargaining process,” the court continued, “does nothing to alter the anticompetitive nature of Defendants’ alleged collusion—at most, it mitigates the impact of this anticompetitive conduct upon these union member RNs.” Cason-Merenda v. Detroit Med. Ctr., No. 06-15601 (E.D Mich. Mar. 24, 2009). FTC Says It Won’t Challenge Proposed Clinical Integration Program The Federal Trade Commission (FTC) said April 14, 2009 that it did not plan at this time to raise an antitrust challenge to a clinical integration program proposed by physicianhospital organization (PHO) TriState Health Partners, Inc. (TriState). FTC said it determined the clinical integration program, which would include joint contracting by its members with health plans and self-insured employers, had the potential to lower healthcare costs and improve quality of care. The Maryland-based PHO asked for the FTC advisory opinion on its proposal to integrate and coordinate the provision of medical care services to patients by its 200-plus physicians and Washington County Hospital. The April 13, 2009 staff opinion letter, signed by Assistant Director of the Health Care Division of the FTC’s Bureau of Competition Markus H. Meier, found the program, if implemented as proposed “would be a bona fide effort to create a legitimate joint venture among its physician and hospital participants that has the potential to achieve significant efficiencies in the provision of medical and other health care services that could benefit consumers.” The program, among other things, would subject physicians to a variety of performance standards, involve the extensive use of a web-based health information technology system, and be non-exclusive so purchasers and payors could contract directly with TriState’s individual participants if they wanted to. FTC said it would evaluate the price agreements and joint contracting in the program under the rule of reason, rather than as per se illegal price fixing, because the activities appeared to be “subordinate and reasonably related” to integration and achieving potential efficiencies. In addition, the program if operated as proposed “is unlikely to be able to attain, increase, or exercise market power for itself or its participants as a result of implementing the proposed program,” the FTC opinion said. FTC warned, however, that any evidence of exercise of market power or other anticompetitive activities by TriState would raise antitrust concerns and could result in the revocation of the opinion. 17 Arbitration/Mediation Bills Banning Arbitration Clauses In Nursing Home Admission Agreements Gain Traction Legislation to prohibit mandatory pre-dispute arbitration clauses in nursing admissions contracts had some momentum in 2008 in both the House and Senate. The House Judiciary Committee approved July 30, 2008 the Fairness in Nursing Home Arbitration Act of 2008 (H.R. 6126), while the Senate Judiciary Committee cleared a similar bill (S. 2838) on September 11, 2008. Proponents of the legislation argue that arbitration agreements are often buried in complicated contracts and consumers in many instances do not understand that they are waiving their legal options. Proponents also point to unequal bargaining power between facilities and potential residents as another reason to enact federal legislation on pre-dispute arbitration agreements. But the long term care industry says such legislation would undermine the Federal Arbitration Act, which was intended to favor arbitration, and unfairly singles out long term care providers. A coalition of senior, caregiver, and taxpayer and business advocacy groups sent a letter to leaders of the Senate Judiciary Committee objecting to the bill. “We believe [such legislation] . . . would establish a dangerous precedent for the entire U.S. business community by eliminating the reasonable, intelligent use of arbitration agreements,” the letter said. The letter also argued the courts have been effective in invalidating arbitration agreements that were coercive or lacked adequate consumer protections. Signatories to the letter included the Alliance for Quality Nursing Home Care, the American Association for Long Term Care Nursing, and the U.S. Chamber of Commerce. Mississippi High Court Finds Liability Claims Against Nursing Home Not Subject To Arbitration Absent Post-Injury Agreement Healthcare liability claims against a nursing home were not subject to arbitration because there was no agreement to arbitrate after the injury occurred, the Mississippi high court said in an August 7, 2008 en banc ruling. The arbitration provision in the nursing home admissions agreement at issue specified that claims arising out of the contract or services provided by the facility would be resolved exclusively by binding arbitration “in accordance with the American Health Lawyers Association [AHLA] Alternative Dispute Resolution Service Rules of Procedure for Arbitration” incorporated into the agreement. Those rules specify that the AHLA Alternative Dispute Resolution Service will administer a consumer healthcare liability claim on or after January 1, 2004 only if the parties have reached a written agreement to arbitrate the claim after the injury has occurred. 18 Because the complaint at issue sought remedies for injuries occurring on January 15, 2005 and June 17, 2005, and the parties did not agree post-injury to arbitrate, the high court concluded that there was no valid agreement to arbitrate. The case involved Barbara Jean Barnes, who was an adult with the mental capacity of a three-year old, and grew up with, and was cared for by, her grandmother. Later, Barnes moved in with her cousin, Atwood Grigsby, and his wife, Shirley, who became her primary caretakers. When Atwood became seriously ill, Shirley admitted Barnes into Magnolia Healthcare, Inc., d/b/a Arnold Avenue Nursing Home (defendant). Two-and-a-half years later, Shirley Grigsby (plaintiff), acting as the next friend and conservator of Barnes’ estate, filed a complaint in state court alleging that Barnes was negligently treated, abused, and sexually assaulted while she was a resident at the nursing home. Defendant moved to compel arbitration pursuant to the arbitration provision in the admissions agreement signed by plaintiff. The trial court denied defendant’s motion, finding plaintiff did not possess the statutory or agency authority to bind Barnes to the arbitration agreement. In a January 2008 ruling, the Mississippi Supreme Court reversed, holding plaintiff qualified as the resident’s healthcare surrogate under Mississippi law, and therefore could bind the resident to the arbitration provision. Following plaintiff's motion for rehearing, however, the latest decision affirmed the trial court’s refusal to compel arbitration, albeit on different grounds. Two concurring opinions agreed with the result, but argued that plaintiff had no authority, as a healthcare surrogate or otherwise, to bind Barnes to an arbitration agreement. Magnolia Healthcare, Inc. v. Barnes, No. 2006-CA-00427-SCT (Miss. Aug. 7, 2008). Nonparty To Arbitration Proceeding Entitled To Full Judicial Review Of Arbitrator’s Discovery Order, California High Court Says A discovery dispute involving a nonparty to an arbitration proceeding must be submitted first to the arbitrator, rather than a judicial forum, but the nonparty is then entitled to full judicial review of the arbitrator’s discovery order, the California Supreme Court ruled July 17, 2008. Affirming an appeals court decision, the state high court held the arbitration proceeding was the proper forum for a nonparty to challenge the discovery sought by a party to the arbitration, and that the limitations on judicial review of arbitration decisions involving parties to the arbitration were not applicable to an arbitrator’s discovery order against nonparties. Daniel L. Berglund filed a complaint in state court against a number of physicians and organizations that had provided him medical care, including defendant Arthroscopic & Laser Surgery Center of San Diego, L.P. (ALSC). Berglund asserted claims for battery, breach of fiduciary duty, and negligence, alleging, among other things, that one of his treating physicians was impaired by abuse of narcotics. 19 The state court subsequently granted a motion by defendants other than ALSC to compel contractual arbitration. Because ALSC was not a party to any arbitration agreement, Berglund’s case against ALSC remained pending in state court. Berglund later filed in state court a motion to compel ALSC’s production of certain documents, including medication logs pertaining to “missing medications, prescriptions and/or other chemical substances” over the period of time he was treated at ALSC. In denying the motion, the court held that the documents were statutorily privileged under Cal. Health & Safety Code § 1370. Berglund and ALSC subsequently settled the court action, but in later arbitration proceedings against other defendants, Berglund filed with the arbitrator a motion to compel ALSC to produce documents pertaining to “missing” narcotic medications over a specified time period. The arbitrator ruled that he had jurisdiction to rule on the motion, and directed ALSC to produce the requested documents for in camera review. The state court denied ALSC’s request for a protective order to prevent the arbitrator from forcing it to produce documents that had previously been found by the court to be statutorily privileged. ALSC appealed. A divided three-justice appellate panel reversed the lower court’s order denying ALSC’s motion for a protective order, and remanded for further proceedings. Berglund then petitioned California’s high court for review on the issue of whether an arbitrator’s discovery order against a nonparty is subject to full judicial review. The state high court began its analysis by pointing out that, under state statutes [Cal. Civ. Proc. Code §§ 1283.1 and 1283.05], arbitrators are granted authority over discovery in certain arbitration proceedings, and are permitted to order discovery from nonparties. The high court agreed with the majority of the appellate panel that all discovery disputes arising out of the arbitration must be submitted first to the arbitral, not the judicial forum. “That conclusion follows logically from section 1283.05, which grants parties to an arbitration proceedings the right to discovery, including discovery from nonparties; authorizes arbitrators to order discovery; and expressly gives arbitrators the power to enforce discovery rights and obligations,” the high court explained. Next, the high court noted that an arbitrator’s decisions in a dispute between parties to an arbitration agreement is generally subject to only limited judicial review. Unless the arbitrator’s award falls into one of the few applicable exceptions outlined in Cal. Civ. Proc. Code § 1286.2(a), the arbitrator’s award is conclusive and final as to the parties, the court said. However, this finality does not extend to nonparties, the court explained, because without consent a nonparty to an arbitration agreement cannot be compelled to arbitrate a dispute. To construe Cal. Civ. Proc. § 1283.05 as “severely restricting a nonparty’s right to judicial review of an arbitrator’s discovery orders would raise serious separation-of-powers concerns insofar as it vested in a nongovernmental body (the arbitrator), and removed 20 from the judicial branch, the authority to determine the legal rights of a person who had never agreed, contractually or otherwise, to be bound by the nonjudicial body’s decisions,” the high court explained. The court also found such a statutory construction would implicate the nonparty’s constitutional rights to due process under federal and state constitutions. The high court therefore concluded that Section 1283.05 allows parties to arbitration to seek discovery and submit discovery disputes to the arbitrator, but also calls for arbitrator discovery decisions against nonparties to be subject to full judicial review. Berglund v. Arthroscopic & Laser Surgery Ctr. of San Diego, No. S144813 (Cal. July 17, 2008). Sixth Circuit Refuses To Increase Arbitration Award Against Hospital In Physicians’ Action The Sixth Circuit refused December 24, 2008 two physicians’ request to more than double an arbitration award they won in an action against the hospital where they used to work. Affirming a lower court decision, the appeals court said the Federal Arbitration Act (FAA) supplies the exclusive grounds for modifying an arbitrator’s award. Here, plaintiff physicians asserted only complaints about the merits of the award, rather than a clear computation error or other “simple mistake” as contemplated by the FAA. Physicians Peter Grain and his wife Annette Barnes sued their former employer Trinity Health, Mercy Health Services Inc., d/b/a/ Mercy Hospital, and others (collectively, defendants) for allegedly improperly interfering with their medical practices. The district court found certain state law claims asserted by plaintiffs were subject to arbitration. Plaintiffs prevailed in the arbitration and were awarded over $1.6 million. They then asked the district court to confirm the merits of the arbitration decision and to increase the size of the award to roughly $3.2 million. The district court upheld the arbitrators’ liability ruling, but refused to increase the award. Plaintiffs appealed. As a threshold matter, the Sixth Circuit found the FAA provided specific jurisdiction for the appeal of the district court’s refusal to modify the arbitration award. See 9 U.S.C. § 16(a)(1)(d). The appeals court next upheld the lower court’s refusal to modify the award under the FAA, 9 U.S.C. §§ 10 and 11, which provides “exclusive” grounds for a “disappointed party” to obtain relief from an arbitration decision. Hall St. Assocs. v. Mattel, Inc., 128 S. Ct. 1396, 1406 (2008). Specifically at issue in this case was 9 U.S.C. § 11(a) and (c), which allows a court to modify an arbitration award based on “an evident material miscalculation of figures” and “where the award is imperfect in matter of form not affecting the merits of the controversy.” 21 The Sixth Circuit found plaintiffs were not entitled to relief under either provision, however, because their complaints—concerning how the arbitrators refereed a dispute between the appropriate dates for calculating the interest award and the sufficiency of attorneys’ fees—were “merits-based” rather than a computational or scrivener’s error. According to the appeals court, plaintiffs’ principal argument was really that the award constituted a “manifest disregard of the law.” But this is not a ground enumerated in the FAA for modifying an arbitrator’s award, the appeals court said. The appeals court acknowledged some precedent applying a “manifest disregard of the law” standard, but called into question the continued viability of those cases in light of the Supreme Court's Hall decision and noted, moreover, those instances involved vacating, not modifying, an award. While other cases in dicta may have suggested a reviewing court could vacate or modify an arbitration award based on manifest disregard, the Sixth Court characterized such language as “casual remarks” where the outcome of the case did not hinge on the issue. Grain v. Trinity Health, No. 08-1410 (6th Cir. Dec. 24, 2008). Eighth Circuit Finds Arbitration Agreement Valid After Unlawful Provisions Severed The Eighth Circuit held February 5, 2009 that an insured under an Employee Retirement Income Security Act (ERISA)-governed health plan had to arbitrate claims that arose under the plan even though the arbitration agreement contained provisions that were unlawful under ERISA. Because the offending provisions could be severed from the rest of the agreement, the parties must arbitrate the claims, the appeals court said in reversing a lower court’s holding that the agreement was invalid. Plaintiff James G. Franke was enrolled in the Poly-America Medical and Dental Benefits Plan (Plan) through his employment at Up-North Plastics Inc., an affiliate of PolyAmerica, L.P. During each year of his employment, Franke acknowledged in writing his agreement to arbitrate any claims associated with his enrollment in the Plan. After suffering a myocardial infarction, Franke submitted his medical bills to the Plan for payment, but the Plan refused to pay. Franke appealed to the Plan administrator who upheld the denial. Franke then filed suit in federal district court and the Plan moved to compel arbitration. Although acknowledging that certain portions of the arbitration agreement at issue were unlawful under ERISA, the Plan argued that those provisions should be severed and the agreement to arbitrate should be enforced. The district court disagreed, finding the arbitration agreement unenforceable. The Eighth Circuit explained that “[w]hen reviewing the enforcement of an arbitration agreement, we determine only whether there is a valid arbitration agreement and whether the dispute at issue falls within the terms of that agreement.” If there is a valid agreement and the dispute is properly within the terms of the agreement, then the agreement must be enforced, the appeals court added. 22 Here, Franke conceded that the dispute fell within the agreement, but argued that the unlawful provisions undermined its validity. The appeals court distinguished cases relied upon by Franke, finding the provisions here were not so biased as to render the arbitration process a sham. Instead, the appeals court found that under the severability clause in the agreement, the parties agreed that arbitration proceed once any invalid terms were severed. The appeals court accordingly reversed the district court’s holding and remanded for entry of an order compelling arbitration. Franke v. Poly-America Med. and Dental Benefits Plan, No. 08-1637 (8th Cir. Feb. 5, 2009). EMTALA U.S. Court In Virginia Declines To Dismiss Patient’s EMTALA Claim Alleging Hospital Failed To Provide Appropriate Screening A hospital patient who was triaged as “non-urgent” by an emergency department nurse and subsequently waited nearly 12 hours before being examined by a physician alleged facts sufficient to establish his claim that the hospital failed to provide him an appropriate and prompt medical screening examination in violation of the Emergency Medical Treatment and Labor Act (EMTALA), the U.S. District Court for the Western District of Virginia ruled September 5, 2008. Plaintiff, Everett Wayne Scruggs, arrived at the Danville Regional Medical Center (DRMC) emergency department in the early morning hours of September 3, 2006. He complained of severe nausea and prolonged dry heaves over the past two days. A nurse on staff in DRMC's emergency department triaged Scruggs as “non-urgent” based on her screening examination. Scruggs was then told to wait in the waiting area until his name was called. The nurse’s triage report did not include any information on Scruggs’ diabetic ketoacidosis condition or his history of diabetes. Nearly 12 hours later, Scruggs was finally examined by Dr. Ramon Gomez, who conducted a full examination and made several orders, including intravenous fluids, oxygen, cardiac monitor labs, and a blood sugar test. An hour later, another emergency department nurse found Scruggs unresponsive and in cardiac and respiratory arrest. Scruggs was resuscitated and then admitted to DRMC where he was treated until his discharge on September 18. In February 2008, Scruggs sued DRMC in federal district court alleging “failure to screen” in violation of EMTALA and medical negligence. DRMC moved to dismiss, arguing Scruggs’ complaint did not set forth facts sufficient to establish that DRMC failed to provide an appropriate screening examination as required under EMTALA. 23 The district court concluded Scruggs’ allegations were sufficient to establish an EMTALA claim against DRMC. The district court focused on language in Baber v. Hospital Corp. of Am., 977 F.2d 872 (4th Cir. 1992), stating “[w]hether the hospital’s screening is ‘appropriate’ is inherently a factual determination and is not a candidate for determination on a motion to dismiss.” In Baber, the Fourth Circuit explained that, under EMTALA, hospitals must apply an “appropriate” medical screening examination within the capability of the individual hospital’s medical screening standard, but noted that "hospitals could theoretically avoid liability by providing very cursory and substandard screenings to all patients, which might enable the doctor to ignore an emergency medical condition." The district court distinguished cases on which DRMC's relied, noting in those cases the hospital provided a higher degree of medical screening at the time the patient presented himself to the hospital’s emergency department. While acknowledging that "triage is a necessary part of emergency care utilized to determine the priority by which patients are examined," the court emphasized that “triage is not the equivalent to a medical screening examination and merely determines the order by which patients are seen in the emergency department. “Plaintiff clearly has outlined a claim within the realm of EMTALA by asserting he did not receive an ‘adequate’ medical screening based on the 12 hour time period prior to receiving medical treatment,” the district court said. “This is clearly more than a claim for negligent triage as proposed by defendant at oral argument.” Scruggs v. Danville Reg'l Med. Ctr., No. 4:08CV00005 (W.D. Va. Sept. 5, 2008). U.S. Court In California Finds State's Noneconomic Damages Cap Does Not Apply To EMTALA Claim The $250,000 non-economic damages cap in the California Medical Injury Compensation Reform Act (MICRA) does not apply to a plaintiff's Emergency Medical Treatment and Labor Act (EMTALA) claim against a hospital, the U.S. District Court for the Eastern District of California held October 10, 2008. The case arose out of three visits to Fresno Community Hospital and Medical Center’s (FCH's) emergency room by minor plaintiff Christina Romar. Romar sued FCH under EMTALA alleging a disparate screening claim. According to the court, MICRA's damages cap applies to claims "based on professional negligence" by healthcare providers. In applying MICRA to EMTALA claims, the court noted that California courts have adopted the Fourth Circuit's framework, which involves examining the legal theory underlying the particular claim and the nature of the conduct challenged to determine whether, under California law, it would constitute "professional negligence." After reviewing extensively the relevant case law, the court concluded that Romar's disparate screening claim was not a negligence claim "because it is based on disparate treatment and does not involve the professional medical standard of care/how a reasonable hospital in FCH’s position would act." "Although the MICRA cap has been applied to conduct that may not necessarily be viewed as traditional medical malpractice . . . FCH has cited no cases that apply the MICRA cap 24 where 'the professional standard of care' was something other than 'that degree of skill of knowledge, and care ordinarily possessed by members of [the] profession.'" Accordingly, the court found that the MICRA non-economic damages cap did not apply to Romar's disparate screening claims under EMTALA. Romar v. Fresno Community Hosp. and Med. Ctr., No. 1:03-cv-6668 AWI SMS (E.D. Cal. Oct. 10, 2008). U.S. Court In Louisiana Upholds Jury’s Verdict That Hospital Did Not Violate EMTALA The U.S. District Court for the Eastern District of Louisiana refused to resurrect a patient’s claims that a hospital violated the Emergency Medical Treatment and Labor Act (EMTALA), which led to the loss of his eye, finding the jury’s verdict in favor of the hospital was supported by sufficient evidence. Vincent Smithson presented to Northshore Regional Medical Center with an injury to his eye that he said he obtained 10 to 15 minutes earlier while cutting the hospital’s lawn. Smithson was seen immediately by the emergency room physician, Dr. Ernest Hansen, who diagnosed plaintiff with an “open globe injury.” After an ophthalmology consult, Smithson received a CAT scan to see if there was a foreign body in his eye. Dr. Terrell Hemelt, the on-call ophthalmology consultant, later told Smithson he needed surgery for urgent repair on his eye; however, later that afternoon Smithson was transferred to another hospital. Smithson eventually received surgery later that evening at the second hospital, but the eye was subsequently removed because of an infection. Smithson sued NorthShore Regional Medical Center, Inc. and NorthShore Regional Medical Center, LLC (Northshore) alleging violations of EMTALA. After a trial, the jury returned a verdict for Northshore. Smithson then moved for judgment as a matter of law, or in the alternative, for a new trial. Smithson asserted the verdict went against evidence provided by his experts that Northshore violated its own hospital policies. But the court noted the jury “could have reasonably rejected this evidence.” “For one thing, plaintiff provided no evidence of how other patients with similar injuries are treated at Northshore,” the court said. Accordingly, “there is ample evidence to support the jury’s finding that the hospital did not screen the plaintiff disparately and thus did not violate the screening requirement of EMTALA,” the court held. The court next turned to Smithson’s argument that the great weight of the evidence established he was not provided stabilizing treatment before his transfer. 25 The court noted the experts of both parties disputed whether Smithson was stable for transfer. Thus, the court found the jury could have reasonably accepted the testimony of the physicians who actually treated plaintiff over the testimony of plaintiff’s retained expert witnesses. Alternatively, the court explained, the jury could have decided that even if Smithson was unstable for transfer, his transfer met the conditions for unstabilized transfer under EMTALA, noting some evidence in the record showing that Smithson had requested the transfer. Smithson v. Tenet Health Sys. Hosps., Inc., No. 07-3953 (E.D. La. Oct. 10, 2008). First Circuit Affirms Dismissal Of EMTALA Screening, Stabilization Claims Against Hospital A lower court properly dismissed claims under the Emergency Medical Treatment and Labor Act (EMTALA) against a hospital that treated a plaintiff’s spouse for a fatal coronary condition but did not prescribe a certain treatment in the emergency room (ER) or after the patient was transferred to its intensive care unit (ICU), the Fifth Circuit ruled November 13, 2008. The appeals court found plaintiff Nivia Fraticelli Torres’ action against the hospital may be viable as state law medical malpractice claims, but did not amount to violations of EMTALA screening or stabilization requirements. The appeals court also rejected plaintiff’s alternative argument that EMTALA imposes an obligation on a hospital when it cannot provide necessary treatments to transfer a critical patient to obtain stabilization at another hospital that can do so. Plaintiff’s husband, Guillermo Bonilla Colon, went to Hospital Hermanos Melendez’s ER complaining of intermittent severe chest pains and arrhythmia over the course of two days. ER physicians concluded Bonilla likely suffered a myocardial infarction from nine hours to two days earlier. The physicians said the infarction had passed and they did not order thrombolytic treatment, which involves injecting drug agents to break down blood clots. Bonilla was then admitted to the hospital’s ICU. His condition continued to deteriorate and roughly a week later he was transferred to another hospital. Several weeks after his initial ER visit, Bonilla died. Plaintiff sued the hospital and its physicians (collectively, defendants) under EMTALA, alleging, among other things, that they failed to provide Bonilla an adequate cardiac screening in accordance with hospital protocols, failed to transfer him immediately to another hospital capable of providing the necessary medical care, and failed to stabilize him before transfer. The district court granted defendants’ motion for summary judgment. The Fifth Circuit affirmed. The appeals court rejected plaintiff’s EMTALA screening claim that defendants provided Bonilla disparate treatment because hospital protocol called for thrombolytic treatment within 12 hours of the onset of a myocardial infarction. 26 The hospital protocol in question applied to the ICU unit, not patients in the ER, the court found. Moreover, thrombolysis is not a diagnostic tool, but a treatment option and therefore defendants’ decision not to order thrombolysis would implicate only EMTALA’s stabilization requirement. But whether defendants decided to provide Bonilla thrombolytic treatment was immaterial to EMTALA’s stabilization requirement, given that defendants did not transfer him until a week after his admission to the ER. The First Circuit acknowledged other court decisions that defendants’ duty of stabilization continued even after Bonilla was transferred from the ER to the ICU. Plaintiff’s claim, however, relied on the disputed issue of whether Bonilla’s myocardial infarction was ongoing, and therefore an appropriate candidate for thrombolysis, or completed, for which the treatment was contraindicated. This disputed issue may be relevant to a medical malpractice action, but would not normally trigger liability under the EMTALA stabilization requirement, the appeals court said. “Even if one could conceive of a hypothetical case in which a defendant’s diagnosis was so unfounded or groundless that it reasonably might be interpreted as a ruse intended to conceal its unlawful intent to ‘dump’ a critical patient unable to pay for his healthcare, that record presents no such case.” Finally, the appeals court found no positive obligation on hospitals under EMTALA to transfer a critical patient under particular circumstances to obtain stabilization at another hospital. While a decision not to transfer a critical patient promptly to another hospital for necessary treatment may trigger medical malpractice liability, it does not constitute an EMTALA anti-dumping violation, the appeals court said. Fraticelli-Torres v. Hospital Hermanos, No. 07-2397 (1st Cir. Nov. 13, 2008). Kentucky Appeals Court Upholds Finding Of Liability Against Hospital Under EMTALA A Kentucky appeals court upheld December 5, 2008 a jury’s finding that a hospital that twice discharged a patient exhibiting symptoms of an emergency medical condition was liable under the Emergency Medical Treatment and Labor Act (EMTALA). The appeals court concluded, however, that a new trial on the issue of punitive damages was warranted, finding the $1.5 million awarded by the jury to the patient’s estate was clearly excessive. James Milford Gray arrived at St. Joseph Hospital’s emergency room complaining of abdominal pain, constipation for four days, nausea, and vomiting. He was given pain medication and other treatment. Lab tests were ordered, but either Gray refused to cooperate or they were never conducted. He was discharged but returned five hours later after vomiting blood. Lab tests and x-rays were conducted on this subsequent visit and Gray was discharged later the same day. Gray died shortly thereafter at a family member’s home from a ruptured peptic ulcer. 27 Gray’s estate sued the hospital and various treating physicians and hospital personnel for negligence. The estate also alleged the hospital violated EMTALA by failing to stabilize Gray before discharge. A jury returned verdicts in the estate’s favor on both the medical negligence and EMTALA claims, apportioning fault 15% to the hospital, 60% to various medical personnel involved in Gray’s treatment, and 25% comparative fault to Gray. The jury awarded compensatory damages of $25,000, of which the hospital’s share was $3,750. The jury also assessed punitive damages against the hospital in the amount of $1.5 million. The trial court denied the hospital’s motions for a judgment notwithstanding the verdict or for a new trial on the jury’s findings of liability and the award of compensatory damages. The court did conclude the punitive damages award was clearly excessive and ordered a new trial on that issue. The Kentucky Court of Appeals affirmed. The appeals court first rejected the hospital’s argument that the estate could not simultaneously pursue a claim under EMTALA and for medical negligence. While these claims are separate and have different elements of proof, “a failure to provide appropriate medical screening and stabilization of an emergency medical condition may amount to both a violation of EMTALA and medical negligence,” the appeals court said. Turning to the merits of the estate’s failure to stabilize claim under EMTALA, the appeals court agreed with the hospital that its liability did not rest on its negligence for failing to detect and treat a specific condition. At the same time, the appeals court found the duty to stabilize under EMTALA did not require that the hospital had actual knowledge of a specific condition. Rather, the linchpin of an EMTALA failure to stabilize claim is whether the hospital was aware the patient had an emergency medical condition and failed to act accordingly. Based on Gray’s symptoms and other vital signs, the appeals court found a jury could conclude that, particularly by the second emergency room visit, “the Hospital released Gray even though the doctors knew his condition was not stable and was likely to deteriorate.” Thus, the trial court properly submitted the issue to the jury and also properly instructed them on the EMTALA claim. After denying the hospital’s other arguments regarding alleged errors at trial, the appeals court addressed the issue of punitive damages, agreeing with the trial court that the award was clearly excessive. The appeals court found error in the trial court’s failure to instruct the jury that punitive damages could not be assessed against the hospital without showing it ratified the grossly negligent conduct of its employees. The appeals court acknowledged that, with the proper instructions, a jury could still find the hospital displayed reckless disregard for the health and safety of others. 28 But the appeals court also concluded a new trial on punitive damages was warranted because the amount awarded by the jury was excessive given the lack of evidence that the hospital engaged in an ongoing course of conduct, the jury apportioned 25% of the fault to Gray, the large disparity between the award of compensatory damages and punitive damages, and the substantial difference between the punitive damages award and the civil penalties authorized under EMTALA (i.e. a maximum of $100,000). Thomas v. St. Joseph Healthcare, Inc., No. 2007-CA-001192-MR (Ky. Ct. App. Dec. 5, 2008). U.S. Court In Virginia Says United States Did Not Waive Sovereign Immunity From EMTALA Claims A former patient of the U.S. Naval Medical Center in Portsmouth could not pursue a claim under the Emergency Medical Treatment and Labor Act (EMTALA) because the United States had not waived sovereign immunity from suit, a federal trial court ruled January 7, 2009. Hoffman was pregnant when she presented to the Naval Medical Center with abdominal pain. According to Hoffman, the hospital discharged her prematurely and her baby ultimately died as a result. Plaintiffs Hoffman and her husband sued the United States under the Federal Tort Claims Act (FTCA) for medical malpractice and under EMTALA. The United States moved to dismiss the EMTALA claim on the ground it had not waived sovereign immunity. The U.S. District Court for the Eastern District of Virginia granted the motion, noting EMTALA “lacks an ‘unequivocally expressed’ waiver of sovereign immunity.” The court rejected plaintiffs’ argument that EMTALA violations can be considered torts grounded in Virginia law, offering an alternate basis for waiver of sovereign immunity under the FTCA. Before EMTALA, hospitals had no legal duty to provide patient stabilization or treatment under traditional state tort law. Thus, “Congress enacted EMTALA to require that hospitals maintain this practice.” The court also said plaintiffs could not “tenably equate” a physician’s duty under Virginia law not to “abandon” their patients with a hospital's duties arising under EMTALA. Virginia law does not require physicians to treat patients in the first instance; rather, it establishes a common-law duty to continue treating an existing patient, the court explained. Accordingly, the court held the United States had sovereign immunity from plaintiffs’ EMTALA claims. Hoffman v. United States, No. 2:08cv376 (E.D. Va. Jan. 7, 2009). 29 EMTALA Penalty Upheld By ALJ, OIG Reports An Administrative Law Judge (ALJ) upheld the Department of Health and Human Services Office of Inspector General’s (OIG’s) imposition of a $50,000 civil monetary penalty under the Emergency Medical Treatment and Labor Act (EMTALA) on a hospital, the agency said February 17, 2009. OIG assessed the penalty, the maximum allowable, against St. Joseph’s Medical Center after an 88 year-old man died in its emergency room without having been examined by a physician after three hours. The man’s condition deteriorated steadily in the emergency room while his family repeatedly pleaded unsuccessfully with the emergency room staff for help. Ultimately, the man went into cardiopulmonary arrest and died without receiving the medical screening examination or stabilizing treatment required by EMTALA, OIG said. According to the release, in sustaining the $50,000 penalty, ALJ Steven T. Kessel found St. Joseph’s failures “shocking” and characterized St. Joseph’s treatment of the patient as “constituting a complete collapse of the system of care it purported to offer emergency patients.” U.S. Court In Michigan Says Physician May Proceed With EMTALA Retaliation Claim Against Hospital A federal court in Michigan denied a hospital summary judgment on a physician’s retaliation claim under the Emergency Medical Treatment and Labor Act (EMTALA) that it summarily suspended his privileges after he argued against transferring a patient he believed was in labor. The court also found the hospital defendant Lapeer Regional Medical Center (LRMC) and its chief executive officer and president Barton P. Buxton were not entitled to immunity under the Health Care Quality Improvement Act (HCQIA) for obstetrician/gynecologist Gary M. Ritten’s initial suspension. Immunity also did not extend to the board of trustees’ (board’s) decision to reinstate that suspension after the Medical Executive Committee (MEC) had determined Ritten’s privileges should be reinstated, but that his work should be monitored. The court did conclude, however, that HCQIA immunity applied to a hearing committee’s decision to suspend Ritten’s privileges following a lengthy review process. Summary Suspension Buxton summarily suspended Ritten’s clinical privileges in September 2005 citing preliminary reports that Ritten had a high rate of vacuum delivery compared to other physicians and that his patients’ medical records failed to justify use of this technique. The MEC concluded a few days later that Ritten’s privileges should be reinstated, but that a preceptor should be appointed to supervise his deliveries. At Buxton’s urging, the board then called a special meeting and voted to reinstate the suspension. 30 Following an extensive hearing process where Ritten was allowed to present testimony and expert evidence, a hearing committee voted 3-2 to suspend Ritten permanently. A few weeks before his initial summary suspension, an incident arose with a patient identified as Patient “L.” Patient L arrived at LRMC’s emergency department (ED) and was promptly sent to the hospital’s labor and delivery unit. She was 20 weeks pregnant and experiencing vaginal bleeding and light cramping. Ritten saw Patient L and concluded she was in labor and that the proper course was to evacuate the uterus since the baby was not viable at 20 weeks. Another physician, however, disagreed and concluded Patient L was not in labor. Buxton suggested transferring Patient L to another facility. According to Ritten, Buxton threatened Ritten that he would lose his job unless he transferred the patient. Ritten said he protested the transfer, because he believed she was not stable and could deliver at any time. Before the transfer was arranged, Patient L delivered her baby. EMTALA Retaliation Claim In his complaint against LRMC and its parent company, Ritten alleged his staff privileges were suspended in retaliation for his refusal to transfer a patient with an emergency condition that had not been stabilized in violation of EMTALA, 42 U.S.C. § 1395dd(i). The U.S. District Court for the Eastern District of Michigan refused to grant summary judgment to LRMC on Ritten’s EMTALA claim. Although Patient L was admitted to the hospital’s labor and delivery unit shortly after she presented to the ED, this did not end the hospital’s EMTALA obligations, the court said. In so holding, the court cited “clarifying policies” issued by the Department of Health and Human Services that caution against treating pregnant women, who are routinely sent from the ED to the labor and delivery unit for admission, as inpatients. The question of whether Patient L in fact had an emergency medical condition, as Ritten contended, or was not in labor, as defendants argued, was irrelevant to the EMTALA retaliation claim, the court said. Moreover, “[a] hospital is not free to discount a physician’s reasonable evaluation and then retaliate against the physician with impunity, on the ground that it did not accept or agree with the physician’s stated finding of an emergency medical condition,” the court observed. Direct Evidence of Retaliation The court also cited direct evidence that could support an inference of retaliation—i.e. Ritten’s allegations that Buxton threatened to fire him unless he transferred Patient L. The court found significant the closeness in time (three weeks) between the incident and the point when Buxton summarily suspended Ritten. According to the court, taking the allegations as true, “no inferences would be required to conclude that Plaintiff’s refusal to transfer the patient ‘was a motivating factor’ in Buxton’s decision to suspend his privileges.” The court also rejected defendants’ argument that Ritten’s direct evidence of retaliatory motive only extended to Buxton’s decision to suspend Ritten’s privileges, saying a 31 reasonable jury could conclude Buxton influenced the board’s subsequent decision to reinstate the suspension. The final hearing process took over a year and defendants offered no authority that such an extended suspension of privileges would not qualify as a “penal[ty]” or “adverse action” under EMTALA’s anti-retaliation provision. HCQIA Immunity The court held Buxton’s initial decision to suspend Ritten’s privileges was not entitled to HCQIA Immunity. The court noted evidence that Buxton’s decision was motivated by Ritten’s refusal to transfer Patient L and was imposed before a review of Ritten’s patient files had been completed. The court likewise found the board’s decision to reinstate the suspension of Ritten’s privileges was not protected by HCQIA. While the factual record may have been somewhat more developed at that time, the court said the board still failed to conduct any further inquiry into potential explanations for Ritten’s higher rate of vacuum deliveries. Nor did the board describe its rationale for rejecting the MEC’s recommendation that a preceptor be appointed to monitor Ritten’s cases. The court also cited as significant the lack of evidence that Ritten posed a substantial risk to patients. Although a “close call,” the court concluded the hearing committee’s decision to suspend Ritten’s privileges was entitled to HCQIA immunity. Specifically, the court said, Ritten had a chance to present facts and witnesses and argue his side. The court emphasized that whether Ritten did in fact provide deficient care was irrelevant; rather, the key inquiry was whether an objective view of the record disclosed a sufficient basis for the committee’s decision. Based on its ruling regarding HCQIA immunity, the court dismissed some of Ritten’s state law claims regarding tortious interference and defamation related to the hearing committee’s decision. The court said Ritten could still pursue equitable relief—i.e. reinstatement of his privileges—in connection with his EMTALA retaliation claim, but damages would be limited to any harm suffered as a result of the summary suspension of his staff privileges, first by Buxton and then by the board. Ritten v. Lapeer Reg’l Med. Ctr., No. 07-10265 (N.D. Mich. Mar. 11, 2009). Sixth Circuit Says Third-Party May Sue Under EMTALA The Sixth Circuit held April 6, 2009 that a non-patient third-party has standing under the Emergency Medical Treatment and Labor Act (EMTALA) to sue a hospital for alleged violations. 32 According to the appeals court, EMTALA's civil enforcement provision contains broad language regarding who may bring a claim, and nothing in the statute limits its reach to patients treated at the hospital. Other circuits have held that the relatives of a patient who suffers an EMTALA harm cannot sue a hospital in their individual capacities, the appeals court noted; however, here the plaintiff was the estate of a person who—while not the patient—suffered a direct personal harm caused by the alleged EMTALA violation. Marie Moses-Irons on December 13, 2002, took her husband Howard to the emergency room at Providence Hospital and Medical Centers, Inc. (hospital) because he was suffering from severe headaches, muscle soreness, high blood pressure, vomiting, slurred speech, disorientation, hallucinations, and delusions. Howard was admitted and was examined by several doctors. Dr. Paul Lessem, a psychiatrist, determined that Howard was not “medically stable from a psychiatric standpoint,” and decided that Howard should be transferred to the hospital’s psychiatric unit However, Howard was never transferred to the psychiatric unit and was instead released on December 19. The next day, he murdered Moses-Irons. Plaintiff Johnella Richmond Moses filed suit on behalf of the estate of Moses-Irons against the hospital and Lessem (defendants) alleging violations of EMTALA and various negligence claims. Defendants filed a motion to dismiss the complaint, which the district court granted, and the plaintiff appealed. The appeals court first addressed whether, as a non-patient, plaintiff had standing under EMTALA. The appeals court said cases holding the relatives of a patient who suffers harm could not sue a hospital in their individual capacities were not on point, since in this case the action was brought on behalf of the estate of a person (Moses-Irons) who had personally suffered a harm caused by the alleged EMTALA violation. The plain language of EMTALA's civil enforcement provision is broad with respect to who may bring a claim, the appeals court noted. Under EMTALA “any individual who suffers personal harm as a direct result” of a hospital’s EMTALA violation may sue. In arguing that only harmed patients may sue, defendants contended the phrase “any individual” in Section 1395dd(d)(2)(A) must be read in the context of other parts of the statute that refer to an “individual” who “comes to the hospital.” The appeals court disagreed, however, finding Congress could have included such language in the enforcement provision, but did not. The appeals court looked at the legislative history, but found none directly addressing the instant issue. Accordingly, the appeals court concluded ”the civil enforcement provision, read in the context of the statute as a whole, plainly does not limit its reach to the patients treated at the hospital.” 33 Turning next to plaintiff’s failure to stabilize claim, the appeals court found the act of admitting Howard did not end the hospital’s EMTALA obligations. “EMTALA requires a hospital to treat a patient with an emergency condition in such a way that, upon the patient’s release, no further deterioration of the condition is likely,” the appeals court explained. The appeals court went on to find that a Centers for Medicare and Medicaid Services rule—42 C.F.R. § 489.24(d)(2)(i)—which effectively ends a hospital’s obligations under EMTALA after a patient is admitted, “appears contrary to EMTALA’s plain language.” Giving no deference to the rule, the appeals court instead emphasized that under EMTALA a “hospital may not release a patient with an emergency medical condition without first determining that the patient has actually stabilized, even if the hospital properly admitted the patient.” The appeals court next held the district court erred in granting summary judgment on the basis that there was no emergency medical condition, finding “that whether Howard had an emergency medical condition that the hospital recognized upon screening him is an issue of fact that the court should have left for a jury to decide.” The appeals court noted that a mental health emergency could qualify as an “emergency medical condition” under the plain language of the statute and evidence presented by plaintiff established an issue of fact on this point. The appeals court also rejected defendants’ argument that they believed Howard’s condition to be stable when he was discharged, finding issues of fact existed on this point as well. Lastly, the appeals court affirmed the district court’s grant of summary judgment to Lessem, saying EMTALA does not provide a right of action against individual physicians. Moses v. Providence Hosp. and Med. Ctrs., Inc., No. 07-2111 (6th Cir. Apr. 6, 2009). Plaintiff Entitled To View Medical Records Of Similarly Situated Patients For EMTALA Claims, Federal Court In New Jersey Finds The U.S. District Court for the District of New Jersey found April 15, 2009 that a hospital must produce certain medical records of similarly situated patients sought by a plaintiff in an Emergency Medical Treatment and Labor Act (EMTALA) suit. The court agreed with the plaintiff in the case that the records were necessary to prove she received an inadequate medical screening compared with other patients with similar symptoms. Plaintiff Grisselle Gonzalez went to the emergency room at defendant South Jersey Healthcare Regional Medical Center (hospital) for chest pain and shortness of breath. According to plaintiff, she was examined by defendant Ilmia Bono Choudhary, who diagnosed Gonzalez with extra-pyramidal symptoms and dystonia and discharged her. Two days later, plaintiff arrived again at the emergency room and suffered cardiac arrest while waiting to be seen. 34 Plaintiff sued the hospital and Choudhary arguing the hospital violated EMTALA by failing to give her an appropriate medical screening examination during her first hospital visit. During discovery, plaintiff sought redacted records of other patients who presented at the same hospital with a chief complaint of chest pain within a two-week period of her February 1 visit. Because the hospital at the time of plaintiff’s visit purportedly had no written policies or procedures for the treatment of a patient who presented to the emergency department with a chief complaint of chest pain, plaintiff maintained the only means of determining the hospital's screening policies or procedures was to review contemporaneous medical records of other patients who presented to the emergency department with similar symptoms. The court noted that the “key requirement” of a hospital's duty under EMTALA “is that a hospital apply its standard of screening uniformly to all emergency room patients, regardless of whether they are insured or can pay.” Davis v. Twp. of Paulsboro, 424 F. Supp. 2d 773, 779 (D.N.J. 2006). The court held plaintiff's discovery request seeking medical records of other patients presenting at the emergency department with similar injuries and symptoms was relevant to her EMTALA claim. The court found no merit in the hospital’s argument that the medical records were not relevant because plaintiff was asserting a claim for "faulty medical screening" rather than an "inadequate medical screening." “[T]o the extent [the hospital] screens patients presenting in the emergency department with a chief complaint of chest pain by conducting certain cardiac tests, the failure to perform such tests on Plaintiff may support both a malpractice claim and a disparate screening claim under EMTALA,” the court held. The court also rejected the hospital's argument that the medical records of other patients were not relevant because no two patients present with identical symptoms. Instead, the court held that under EMTALA a plaintiff is not required to identify patients with identical symptoms; rather the statute says hospitals must treat patients with “similar symptoms” in a standard manner. Gonzalez v. Choudhary, No. 08-0076-JHR-AMD (D.N.J. Apr. 15, 2009). ERISA U.S. Supreme Court Says Conflicts Issue Must Be Weighed As A Factor In Reviewing Benefits Denial A conflict of interest arises when a professional insurance company serves the dual role of administrator and insurer of an employee benefit plan governed by the Employee Retirement Income Security Act (ERISA) that a reviewing court should consider in deciding whether the plan administrator has abused its discretion in denying benefits, a divided U.S. Supreme Court ruled June 19, 2008. The majority opinion, written by Justice Breyer, said the significance the conflict will play in the review of the benefits denial depends on the facts of the case. 35 The instant dispute arose after Metropolitan Life Insurance Company (MetLife) denied disability benefits to Wanda Glenn, who has a heart disorder, under her Sears, Roebuck & Company’s long term disability plan. MetLife is both the administrator and insurer of the plan. As the plan administrator, MetLife has discretionary authority to determine the validity of an employee’s benefits claim and, as insurer, is responsible for paying those claims. Glenn eventually sought judicial review of MetLife’s denial of benefits, and the district court refused to grant her relief. But the Sixth Circuit set aside the denial of benefits, relying on a number of factors, including the “conflict of interest” arising out of the fact that MetLife was “authorized both to decide whether an employee is eligible for benefits and to pay those benefits.” Citing its decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, in which the Court addressed “the appropriate standard of judicial review of benefit determinations by fiduciaries or plan administrators” under ERISA, the majority concluded that a conflict, though "less clear" than in the context of a self-insuring employer, nonetheless exists when a professional insurance company acts as the plan administrator and insurer. MetLife argued that market forces provide a greater incentive for commercial insurers, as opposed to self-insuring employers, to provide accurate claims processing. But Justice Breyer wrote that “ERISA imposes higher-than-marketplace quality standards on insurers.” Moreover, “a legal rule that treats insurance company administrators and employers alike in respect to the existence of a conflict can nonetheless take account of the circumstances to which MetLife points so far as it treats those, or similar, circumstances as diminishing the significance or severity of the conflict in an individual case.” According to the Court majority, the conflict should be weighed as a “factor in determining whether there is an abuse of discretion.” This does not imply a change in the standard of review from deferential to de novo, the opinion emphasized. Thus, the significance of the conflict of interest factor will depend on the circumstances of the particular case, the majority concluded. Finding this was the framework employed by the Sixth Circuit, the Court majority affirmed the decision below. In a concurring opinion, Chief Justice Roberts agreed that a third-party insurer’s dual role as a claims administrator and plan funder gives rise to a conflict. Roberts parted ways, however, with the majority’s “indeterminate” approach to how such a conflict should matter, saying the majority's decision would “increase the level of scrutiny in every case in which there is a conflict—that is in many if not most ERISA cases—thereby undermining the deference owed to plan administrators when the plan vests discretion in them." Instead, Roberts said, the conflicts issue should only be a factor where evidence exists that the benefits denial was motivate or affected by the administrator’s conflict. Although he saw no evidence of this motivation here, Roberts nonetheless affirmed the Sixth Circuit's decision, finding the appeals court was justified in finding an abuse of discretion on the facts of the case regardless of whether a conflict existed. Justice Kennedy concurred with the majority’s framework for evaluating the conflicts issue, but dissented as to the result, saying the case should be remanded to the Sixth 36 Circuit to give MetLife an opportunity to defend its decision under the standards articulated by the Court. A dissenting opinion written by Justice Scalia, and joined by Justice Thomas, rejected the majority’s so-called “totality-of-the-circumstances” test for weighing the significance of the conflict. “This makes each case unique, and hence the outcome of each case unpredictable. . . .” According to the dissent, under the law of trusts, “a fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision.” The dissent found no evidence of that in the instant case and therefore would remand to the Sixth Circuit for further examination as to the reasonableness of the denial. Metropolitan Life Ins. Co. v. Glenn, No. 06-923 (U.S. June 19, 2008). Seventh Circuit Finds Provider’s Claims Not Preempted By ERISA The Seventh Circuit held July 31, 2008 that the Employee Retirement Income Security Act (ERISA) did not preempt a healthcare provider’s action for negligent misrepresentation against a health plan. In so holding, the appeals court found the provider’s claims did not arise under the plan or its terms, but rather arose from duties imposed under state law. Plaintiff healthcare provider Franciscan Skemp Healthcare, Inc. (FSH) treated Sherry Romine, a participant in Central States Joint Board Health and Welfare Trust Fund, an employee benefits plan. Before providing treatment, FSH called Central States to confirm coverage and was told the relevant services were covered. After the treatment was provided, FSH billed Central States, but the claim was denied because Romine lost her benefits before her admission to FSH for failing to pay COBRA premiums. FSH sued Central States in state court alleging claims of negligent misrepresentation and estoppel. Central States removed the case under ERISA. The district court concluded that ERISA completely preempted the state law claims, thus, establishing exclusive federal jurisdiction. The court then dismissed FSH’s claims for failure to state a claim. On appeal, the Seventh Circuit noted the lower court found that FSH could have brought its state law claims of negligent misrepresentation and estoppel under ERISA § 502(a)(1)(B) because FSH took an assignment of benefits from Romine. However, the appeals court said, “[w]hat the district court and Central States too easily overlook” is that FSH is bringing these claims “not as Romine’s assignee, but entirely in its own right.” The claims arise not from the plan or its terms, but from the alleged oral representations Central States made, the appeals court held. In fact, the appeals court continued, FSH does not dispute Central States’ decision to deny Romine coverage and acknowledges that Romine is not entitled to benefits. 37 “It would be odd indeed, then, to conclude that Franciscan Skemp is standing in Romine’s shoes as a beneficiary seeking benefits when Franciscan Skemp acknowledges that Romine is not actually entitled to any benefits,” the appeals court said. Accordingly, the appeals court concluded that FSH’s claims were not preempted because they could not have been brought under ERISA § 502(a)(1)(B). The appeals court also found that FSH’s claims did not meet the second test in the seminal Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004) preemption test—whether an independent legal duty is implicated by the defendant’s actions. Here, the “claims of negligent misrepresentation and estoppel derive from duties imposed apart from ERISA and/or the plan terms,” the appeals court said. Thus, the appeals court returned the case to the district court to enter an order of remand to state court. Franciscan Skemp Healthcare Inc. v. Central States Joint Bd. Health and Welfare Trust Fund, No. 07-3456 (7th Cir. July 31, 2008). Fifth Circuit Holds ERISA Completely Preempts Pharmacy’s Claim Under Texas AWP Law The Employee Retirement Income Security Act (ERISA) completely preempts a pharmacy’s action under the Texas Any Willing Provider (AWP) law because the claims essentially were for benefits due under the plan and therefore were within the scope of ERISA’s civil enforcement provision, the Fifth Circuit ruled August 13, 2008 in a consolidated action of two cases with similar facts. The two cases involved Quality Infusion Care, Inc. (QIC), which provided prescription home infusion therapy to Eric Carstens and Mary Williby, both of whom were participants in the ERISA-governed Humana Health Plan of Texas, Inc. (Humana). QIC provided the prescribed drugs to Carstens at the cost of $8,114.48 and to Williby at the cost of $31,921.59. In both cases, Humana refused to pay the amounts submitted by QIC, which had claimed it had been assigned Carstens’ and Williby’s respective rights under the plan. Humana cited QIC’s status as a non-network provider as the reason for the denials. QIC sued Humana in state court asserting a discrimination claim under the Texas AWP law, which provides that a healthcare plan may not prohibit a pharmacy from participating “as a contract provider under the . . . plan” if it otherwise meets “all terms and requirements . . . under the policy or plan.” Humana removed the action to federal court citing ERISA preemption and moved to dismiss. The district court in both cases refused to remand the actions, finding complete preemption under the U.S. Supreme Court’s decision in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), and granted Humana’s motions to dismiss. On appeal, the Fifth Circuit affirmed. QIC argued that its AWP claims were independent of, and did not duplicate, ERISA’s civil enforcement provision, § 502(a), and therefore were subject only to conflict (not complete) preemption under § 514. 38 Citing Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003), QIC went on to argue its claims were saved from conflict preemption as state laws regulating insurance. Humana asserted, however, that QIC’s AWP claims depended on interpretation of an ERISA plan and therefore were subject to complete preemption (with no saving clause) under Davila. The appeals court agreed with Humana, finding complete, not conflict, preemption applied. “In essence, QIC’s AWP claims are for benefits under the Plan and, thus, are completely preempted and subject to removal,” the appeals court said. The Fifth Circuit also rejected QIC’s argument that it lacked standing to bring a claim under ERISA as a healthcare provider. Although not statutorily designated as an ERISA beneficiary, QIC nonetheless could obtain standing to sue derivatively through an assignment of benefits, which it asserted it had in both cases. The appeals court distinguished cases cited by QIC that found similar AWP statutes acted as independent sources of rights outside of the plan at issue. The disputes in those cases, the appeals court said, centered on the amount or level of payment that depended on entirely separate provider agreements, not the right to payment, which depended on patients’ benefit assignments. “Here, the claims not only involve participants and assignments, they also rely on Plan ‘terms and requirements,’” the appeals court observed. Finally, the appeals acknowledged that the Miller decision cited by QIC did find a similar AWP statute in Kentucky was saved from preemption as a state law regulating insurance. But the issue in that case, the Fifth Circuit emphasized, involved conflict preemption, not complete preemption where ERISA’s “saving clause” does not apply. Quality Infusion Care Inc. v. Humana Health Plan of Tex. Inc., Nos. 07-20703 and 0720887 (5th Cir. Aug. 13, 2008). Ninth Circuit Finds No ERISA Preemption Of San Francisco Ordinance Mandating Employer Healthcare Expenditures In a closely watched decision, the Ninth Circuit ruled September 30, 2008 that the Employee Retirement Income Security Act (ERISA) does not preempt a San Francisco Ordinance setting new healthcare spending mandates for employers. Reversing a December 2007 lower court decision, a three-judge panel of the Ninth Circuit held 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. “There may be better ways to provide health care than to require employers in the City of San Francisco to foot the bill. But our task is a narrow one, and it is beyond our province to evaluate the wisdom of the Ordinance now before us,” the Ninth Circuit said. The appeals court rejected the suggestion that by upholding the Ordinance it was creating a split with the Fourth Circuit, which found ERISA preempted a similar Maryland law. See Retail Industry Leaders Ass’n v. Fielder, 475 F.3d 180 (2007). 39 Even assuming “the panel majority in Fielder was correct,” the San Francisco Ordinance is valid because it “offers employers a meaningful alternative that allows them to preserve the existing structure of their ERISA plans,” the Ninth Circuit said. San Francisco City Attorney Dennis Herrera praised the appeals court's ruling. "Unlike a more sweeping tax or fee, 'Healthy San Francisco' gives the vast majority of eligible employers credit for the health care coverage they already provide to their workers. At the same time, it gives those employers who don't offer health coverage the flexibility to either add the benefit or pay a reasonable amount to enable the City to provide coverage," Herrera said. Employer Spending Mandates The San Francisco Health Care Security Ordinance, passed in 2006, 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. Qualifying healthcare expenditures include contributions to health savings accounts, direct reimbursement to employees for healthcare expenses, payments to third parties for healthcare services, costs incurred in the direct delivery of healthcare services, or payments to the City “to be used on behalf of covered employees.” Covered employers would have to maintain “accurate records of health care expenditures” and “proof of such expenditures” and allow “reasonable access” by City officials. The Ordinance, which went into effect January 1, 2008, also establishes a Cityadministered Health Access Program (HAP) for uninsured residents funded through contributions from private employers, individuals, and the City. ERISA Challenge Golden Gate Restaurant Association (GGRA), representing the interests of the restaurant industry, sought declaratory and injunctive relief that ERISA preempted the Ordinance’s spending requirement. The U.S. District Court for the Northern District of California granted summary judgment in GGRA's favor, finding ERISA preempted the ordinance’s healthcare expenditure requirements because they had an impermissible "connection with" and made "unlawful reference to" employee welfare benefit plans. A three-judge panel of the Ninth Circuit in a January 9, 2008 order agreed to stay the federal trial court’s decision, allowing the Ordinance to go into effect pending the appeals court’s decision on the merits. GGRA subsequently filed an application with Supreme Court Justice Anthony Kennedy to vacate the Ninth Circuit stay. Kennedy denied the application. No ERISA Preemption In its latest decision, the appeals court emphasized that the Ordinance did not require employers to establish or alter existing ERISA plans. Rather, employers had the option to make payments directly to the City to satisfy their obligations under the Ordinance. 40 The Ninth Circuit also said the Ordinance did not focus on healthcare benefits an employer provides its employees. “The Ordinance does not look beyond the dollar amount spent, and it does not evaluate benefits derived from those dollars.” The appeals court went on to address specific arguments made by GGRA and the Department of Labor (DOL), which in April 2008 submitted an amicus curiae brief arguing the lower court correctly found ERISA preempted the Ordinance’s spending mandates. First, the appeals court held the City-payment option did not create an ERISA plan. According to the appeals court, an employer’s administrative responsibilities under the Ordinance to make the required payments for covered employees and to retain adequate records did not make the City-payment option an ERISA plan. “Many federal, state and local laws, such as income tax withholding, social security, and minimum wage laws, impose similar administrative obligations on employers; yet none of these obligations constitutes an ERISA plan,” the appeals court said. Moreover, the Ninth Circuit noted, the HAP is funded mostly with taxpayer dollars and “will continue to exist, whether or not any covered employer makes a payment to the City under the Ordinance.” In addition, employers have no control over eligibility or the kind and level of benefits provided by the HAP. “In short, the City, rather than the employer, establishes and maintains the HAP, and the City is free to change the kind and level of benefits as it sees fit.” Next, the appeals court rejected GGRA’s and DOL’s argument that Section 514(a) of ERISA preempted the Ordinance because it “relates to” employers’ ERISA plans. The appeals court again stressed that the Ordinance did not require any employer to adopt an ERISA plan or other health plan, nor did it require any employer to provide specific benefits through an existing ERISA plan or other health plan. "Any employer covered by the Ordinance may fully discharge its expenditure obligations by making the required level of employee health care expenditures, whether those expenditures are made in whole or in part to an ERISA plan, or in whole or in part to the City. The Ordinance thus preserves ERISA’s 'uniform regulatory regime,'" the Ninth Circuit said. Nor did the Ordinance have an impermissible “reference to” ERISA plans, as the district court found. In this regard, the appeals court distinguished between employer obligations that are measured by reference to the level of benefits provided by an ERISA plan to employees, and those, as with the Ordinance, that are measured by reference to the payments provided by the employer to an ERISA plan or to another entity such as the City. Finally, the appeals court disputed the contention that upholding the Ordinance was inconsistent with the Fourth Circuit’s decision in Fielder. According to the Ninth Circuit, the Fielder court based its decision on the fact that the rational choice for Wal-Mart, the only employer affected by the Maryland law, was to structure its ERISA healthcare benefit plans so as to meet the minimum spending threshold. 41 “In contrast to the Maryland law, the San Francisco Ordinance provides tangible benefits to employees when their employers choose to pay the City rather than to establish or alter ERISA plans,” the Ninth Circuit noted. “Unlike the Maryland law, the San Francisco Ordinance provides employers with a legitimate alternative to establishing or altering ERISA plans,” the appeals court said. En Banc Review Denied The Ninth Circuit rejected March 9, 2008 GGRA’s petition for rehearing en banc of the panel decision. In its petition, GGRA asked the full court to review the panel decision based on two issues: the national importance of the case and the conflict with previous rulings in the Fourth and Ninth Circuits and the U.S. Supreme Court. Eight judges from the Ninth Circuit dissented from the majority’s decision not to grant en banc review. In his dissenting opinion, Circuit Judge Smith argued that the case creates a circuit split with the Fourth Circuit’s decision in Fielder. The dissent disputed the panel’s conclusion that the Ordinance was distinguishable from the Maryland law at issue in Fielder because the Ordinance creates a municipally funded health alternative as opposed to a tax on employers that was not earmarked towards their employees’ insurance. “Covered employers under San Francisco’s Ordinance must coordinate their non-ERISA payments with their ERISA plans in the very manner the Fielder court deemed impermissible,” the dissent said. According to the dissent, the decision also conflicts with Supreme Court precedent establishing ERISA preemption guidelines and, “most importantly, flouts the mandate of national uniformity in the area of employer-provided healthcare that underlies the enactment of ERISA.” The dissent predicted that as a result of the decision “similar laws will become commonplace . . . with significant adverse consequences to employers and employees alike.” Circuit Judge Fletcher, concurring in the denial of rehearing en banc, disputed the dissent's contention that the panel’s decision created a circuit conflict with Fielder. According to the concurring opinion, the San Francisco Ordinance differs sharply from the Maryland law in Fielder because the former offers employers a “meaningful choice” rather than “imposing a de facto obligation” to establish or alter an ERISA plan. Judge Fletcher also refuted the dissent’s opinion that allowing the Ordinance to stand would undermine the national uniformity envisioned by ERISA. “Nothing in the Ordinance requires the employer to establish an ERISA plan or alter an existing ERISA plan, and nothing in the Ordinance interferes in any way with the uniformity of ERISA regulations,” the concurring opinion said. 42 U.S. Supreme Court Justice Kennedy denied March 30, 2008 GGRA’s request to suspend the Ordinance while it seeks Supreme Court review. Golden Gate Restaurant Ass’n v. City and County of San Francisco, No. 07-17370 (9th Cir. Sept. 30, 2008), reh’g en banc denied (9th Cir. Mar. 9, 2009). Sixth Circuit Says Insurer Should Have Been Aware Of Potential Fraud Concerning Preexisting Condition An insurer’s action involving an insured’s alleged failure to disclose a preexisting condition on her application for health coverage was barred by the limitations period in the applicable group health insurance contract, the Sixth Circuit held. According to the appeals court, the action was filed more than three years after the insurer should have realized it was paying claims for the preexisting condition. Thus, the action was barred since the contract set forth a three-year limitations period for such disputes. On April 14, 2005, Medical Mutual of Ohio (MMO) sued Loan A. Tran and Khanh B. Luu for failing to disclose that their dependent son had a preexisting medical condition, hemophilia, on their application for health insurance coverage. MMO also sued Tran’s employer, k. Amalia Enterprises Inc., and its Chief Financial Officer, which contracted with MMO to provide group health insurance to the company’s employees. The group policy at issue began in November 2001 and ended in 2004. According to information provided in the opinion, MMO began paying claims related to Tran’s son’s hemophilia in February 2002. MMO alleged defendants breached the insurance contract, made negligent misrepresentations, and engaged in fraudulent behavior. MMO sought compensatory damages for these claims totaling in excess of $500,000 and partial rescission of the contract. The district court granted summary judgment in defendants’ favor finding MMO’s claims were barred by the contractual limitations provision. Affirming, the Sixth Circuit first concluded that it had subject matter jurisdiction because MMO asserted a claim under the Employee Retirement Income Security Act’s (ERISA) civil enforcement provision for partial rescission of the contract. While assuming, without deciding, that MMO’s partial rescission claim stated an “equitable” claim cognizable under ERISA, the appeals court nonetheless held the claim was barred by the limitations provision of the contract between MMO and k. Amalia. The contract provided a somewhat ambiguous limitations period of two or three years seemingly depending on whether a dispute involved a “legal” action or equitable claims. Regardless of which limitations period applied, the appeals court found the ERISA claim was barred because MMO brought suit more than three years after it should have discovered the fraud—i.e. in February 2002 when it first started paying claims related to Tran’s son’s hemophilia. 43 “MMO had access to information more than three years before it filed suit that, in the exercise of due diligence, should have allowed it to discover that Hiep Luu had a preexisting condition,” the appeals court said. The appeals court noted that within a few months of the contract’s formation, on February 1, 2002, MMO had paid over $8,000 worth of hemophilia treatments for Tran’s son. In the appeals court’s view, MMO, as a “sophisticated insurance company,” had information in-hand that put it on notice of potential fraud long before it filed suit. The appeals court applied a similar analysis under Ohio law to MMO’s remaining claims for fraud, negligent misrepresentation, breach of contract, and unjust enrichment. Medical Mut. of Ohio v. k. Amalia Enters., No. 07-4422 (6th Cir. Dec. 2, 2008). Sixth Circuit Holds Michigan Regulation Banning “Discretionary Clauses” Saved From ERISA Preemption The Employee Retirement Income Security Act (ERISA) does not preempt Michigan regulations that prohibit insurers from issuing, delivering, or advertising insurance policies that contain “discretionary clauses,” the Sixth Circuit held March 18, 2009. Affirming a lower court decision, the appeals court found the rules issued by the Michigan Office of Financial and Insurance Services (OFIS) regulated insurance and therefore were saved from preemption under ERISA, 29 U.S.C. § 1144(b)(2)(A). The rules at issue ban discretionary clauses in insurance contracts and policies. These clauses provide that courts will give deference to a plan administrator’s decision to award or deny benefits or interpretation of plan terms in any court proceeding challenging such decisions or interpretations. Several insurance industry groups—the American Council of Life Insures, America’s Health Insurance Plans, and Life Insurance Association of Michigan—sued the OFIS Commissioner Ken Ross (defendant), arguing ERISA preempted the rules, which took effect June 1, 2007. The district court granted summary judgment in defendant’s favor. Applying the two-prong test set forth by the U.S. Supreme Court in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003), the appeals court found the Michigan rules fell under the ERISA saving clause because they were directed toward entities engaged in insurance and substantially affected the risk-pooling arrangement between the insurer and the insureds. As to the first prong of the Miller test, the appeals court noted the rules regulated only those entities in the insurance business, even though they may have some collateral effects on fiduciaries who administer health plans. The appeals court rejected the insurance industry’s argument that the Michigan rules failed the second prong of the Miller analysis because they only had an effect after risk had been transferred. The Supreme Court has never ruled the Miller test depends on the timing of when a law substantially affects the risk-pooling arrangement, the appeals court said. 44 Here, Michigan’s rules had a substantial effect on the insured-insurer relationship because the rules directly control the terms of insurance contracts by prohibiting the inclusion of discretionary clauses and they prevent insurers from investing the plan administrator with unfettered discretionary authority to determine benefit eligibility or to construe ambiguous plan terms, the appeals court said. The appeals court also rejected the insurance industry’s argument that the Michigan rules could not be saved from ERISA preemption because they conflicted with ERISA’s civil enforcement provision, 29 U.S.C. § 1132(a)(1)(B). The Michigan rules do no implicate ERISA’s civil enforcement provision; they do not authorize any form of relief in state courts and they do not grant a plan participant the ability to recover benefits due under the plan or enforce his rights, the appeals court said. Finally, the Eighth Circuit rejected the insurance industry's contention that the regulations conflicted with ERISA’s policy of ensuring a set of uniform rules for adjudicating cases under the statute. The statute says nothing about the standard of review in cases brought under its civil enforcement provisions, the appeals court observed. Moreover, in Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002), the Supreme Court held a statute mandating that benefit denials are subject to de novo review did not conflict with ERISA. The appeals court also cited the Court’s more recent decision in Metropolitan life Insurance Co. v. Glenn, 128 S.Ct. 2343 (2008), which found that courts reviewing a benefits decision by an insurer with discretion over assessing and paying benefits may consider that conflict as a factor in deciding whether the plan administrator’s decision amounted to an abuse of discretion. Given the Court’s holding in Glen, “it is difficult to understand why a State should not be allowed to eliminate the potential for such a conflict of interest by prohibiting discretionary clauses in the first place,” the appeals court said. American Council of Life Insurers v. Ross, No. 08-1406 (6th Cir. Mar. 18, 2009). U.S. Court In D.C. Strikes Portion Of Law Regulating PBMs Finding Law Preempted By ERISA In a decision hailed by the Pharmaceutical Care Management Association (PCMA) as “a clear victory for consumers and payers,” the U.S. District Court for the District of Columbia found March 19, 2009 that the Employee Retirement Income Security Act (ERISA) preempted a D.C. law attempting to regulate pharmaceutical benefit management companies (PBMs). After a long procedural history, the case was taken up for the second time by the court, which found the Access Rx Act of 2004 “impermissibly intrudes upon a field exclusively reserved for federal regulation.” Title II of the Act, the portion at issue here, regulates PBMs by imposing fiduciary duties on them in relation to "covered entities," as well as by requiring disclosure of certain financial information. 45 According to PCMA President and CEO Mark Merritt, the “fiduciary-disclosure requirement would have been a recipe for higher drug prices and is exactly what consumers don’t need during these tough economic times.” Merritt noted in a March 20, 2009 statement that “more than 30 states have considered and ultimately rejected similar legislation because it would lead to increased costs without any benefit for consumers.” The case began when 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 by collateral estoppel PCMA’s action. On appeal, the D.C. Circuit reversed the dismissal and remanded to the court for further consideration. Both parties moved for summary judgment. PCMA argued ERISA preempted Title II of the Act and the District countered that the law did not relate to ERISA. In finding the law preempted by ERISA, the court noted that PBMs, among other things, process prescription drug claims on behalf of "insurance companies, health maintenance organizations and private and public health plans and programs," including ERISA plans. “By managing the relationship between an ERISA plan and a third-party service provider instrumental to the administration of the plan, the defendants, through the Act, improperly inject state regulation into an area exclusively controlled by ERISA,” the court held. The court found additional support for its conclusion in ERISA's statutory framework and in a proposed regulation by the Department of Labor that would require PBMs to make certain disclosures to ERISA plans. Pharmaceutical Care Management Ass’n v. District of Columbia, No. 04-1082 (RMU) (D.D.C. Mar. 19, 2009). Food and Drug Law/Life Sciences Pharmaceuticals Second Circuit Affirms Preliminary Injunction Blocking Implementation Of FDA’s Pedigree Rule The Second Circuit affirmed July 10, 2008 a New York federal district court’s 2006 issuance of a preliminary injunction blocking the Food and Drug Administration (FDA) from implementing its pedigree rule, 21 C.F.R. § 203.50. The Prescription Drug Marketing Act (PDMA), at 21 U.S.C. § 353(e)(1)(A), requires each person engaged in the wholesale distribution of a prescription drug to provide a statement (or pedigree) “identifying each prior sale, purchase, or trade of such drug.” The statute does not specifically state whether this identification must extend back to the manufacturer, or whether it must only extend to the last authorized distributor. 46 FDA had previously placed a hold on the chain of custody requirements contained in regulations issued in 1999 to implement the PDMA because of concerns about the impact on small wholesalers and to allow the industry time to adopt electronic technology for tracking drugs through the supply chain. The agency later withdrew the hold and scheduled the regulations to go into effect December 1, 2006. However, plaintiff RxUSA Wholesale Inc., along with other independent smaller wholesalers, challenged the pedigree rule in a lawsuit filed in the U.S. District Court for the Eastern District of New York. The district court granted plaintiffs’ request for a preliminary injunction in December 2006. FDA appealed. “Because this case came before the District Court in the context of a preliminary injunction, the court was not required to determine with certainty whether the FDA’s actions were arbitrary or capricious, but merely whether [plaintiffs] had a 'better than 50 percent' chance of proving them so,” the Second Circuit said at the outset of its summary order. The Second Circuit concluded that the district court had not abused its discretion in finding plaintiffs demonstrated a likelihood of success on the question of whether the FDA’s pedigree rule was “arbitrary and capricious” under the Administrative Procedure Act. “Under the PDMA, all authorized distributors are exempted from the statue’s pedigree requirements,” the appeals court said. “Thus, if the FDA’s regulation were put into effect as written, all lower-level distributors would be required to provide pedigree information that is currently held only by authorized distributors.” “The [district] court determined that this would effectively make it impossible for lowerlevel distributors to comply with the law,” the appeals court explained. The district court also took into consideration that the “FDA’s regulation is inconsistent with the position taken by the agency in its original 1988 guidance letter, and it runs directly counter to the 20-year history of industry reliance on the FDA’s initial position,” the appeals court said. These reasons were sufficient to support the district court’s finding that plaintiffs had a 50% or greater chance of showing the pedigree rule was arbitrary and capricious, the Second Circuit held. “The [district court] also construed [plaintiffs'] challenge to the regulation as a question of whether the FDA’s regulation is potentially arbitrary and capricious in light of the PDMA’s exemption of authorized distributors and the current practice in the industry and concluded that [plaintiffs] had demonstrated a likelihood of success on the merits of this argument,” the appeals court noted, adding that it found “no reason to disturb these conclusions.” The Second Circuit also rejected FDA’s argument that the district court’s preliminary injunction was overbroad because it enjoined subsections within the challenged statute’s implementing regulations (21 C.F.R. § 203.50(a)) to which plaintiffs did not specifically object. The appeals court explained that the drug distribution industry has been operating for the past 20 years on the basis of guidelines issued by FDA in 1988, and that these guidelines 47 contain requirements that are similar to the unchallenged subsections of the enjoined regulation. “[G]iven the District Court’s intention of merely ‘maintaining the status quo’ until it could determine the constitutionality of the regulation, it was not an abuse of discretion for the court to refuse a piecemeal enforcement of the FDA’s regulation in favor of reliance on the prevailing industry practice,” the appeals court said. U.S. Dep’t of Health and Human Servs. v. RxUSA Wholesale Inc., No. 07-0453 (2d Cir. July 10, 2008). FDA Finalizes Rules On Label Changes The Food and Drug Administration (FDA) issued a final rule (73 Fed. Reg. 49603) amending its regulations to codify “the agency’s longstanding view” on when a pharmaceutical manufacturer may change the labeling of an approved drug, biologic, or medical device in advance of FDA review of such changes. Under the rule, effective September 22, 2008, a supplemental application submitted under certain provisions would be appropriate to amend the labeling for an approved product only to reflect newly acquired information. The final rule clarifies the definition of “newly acquired information” as data of a “different type or greater severity or frequency than previously included in submissions to the FDA” derived from new clinical studies, reports of adverse events, and new analyses of previously submitted data. In addition, the final rule clarifies that such a supplemental application may be used to add or strengthen a contraindication, warning, precaution, or adverse reaction only if there is sufficient evidence of a causal association with the drug, biologic, or device. FDA issued a proposed rule in January 2008 (73 Fed. Reg. 2848), drawing sharp criticism from consumer advocacy groups and some lawmakers that the proposal would make it more difficult for drug sponsors to warn about new risks. In the final rule, FDA disputed these concerns, emphasizing that the rule is intended to spell out the agency’s existing labeling standards and policies, not amend the standards under which sponsors must provide warnings about potential risks. “FDA does not agree that this rule will make it more difficult to provide appropriate warnings regarding hazards associated with medical products,” the final rule said. FDA also declined suggestions to set different standards for when a sponsor must warn, as opposed to when it may warn, of a particular risk or adverse events. American Association for Justice (AAJ) President Les Weisbrod called the FDA final rule, “irrational and designed to assist the manufacturers.” According to AAJ, an association of trial lawyers, “[t]he rule allows drug and device companies to claim complete immunity for failing to warn.” AAJ also argued the FDA rule contradicted congressional intent under the Food and Drug Administration Amendments Act of 2007 that drug companies must update prescription drug labels to warn consumers of drug hazards at the earliest sign of a problem. 48 Under the new proposal, AAJ said, drug companies would only have to update a label after they establish a "causal association" between the drug and the hazard, which could take years. FDA Posts List Of Drugs With Potential Safety Problems The Food and Drug Administration (FDA) made available on its website September 5, 2008 its first statutorily required listing of prescription drugs with potential safety concerns. A new federal law signed September 2007, the Food and Drug Administration Amendments Act, mandates that FDA post, on a quarterly basis, new safety information or potential signals of serious risk associated with prescription drugs on the market. The information is based on reviews of FDA's Adverse Event Reporting System (AERS) that flag drugs where the seriousness or frequency of reports justify further examination of potential risks. “My message to patients is this: Don't stop taking your medicine. If your doctor has prescribed a drug that appears on this list, you should continue taking it unless your doctor advises you differently,” said Janet Woodcock, M.D., director of FDA's Center for Drug Evaluation and Research. Woodcock’s statement reflects the agency’s concern that making this information public may prompt some patients to stop taking needed medication despite an unclear picture of the precise risks involved. Among the 20 drugs, along with associated risks or new safety information, on the list, which covers the time period from January 2008 through March 2008, are Duloxetine (Cymbalta) for Urinary retention, Heparin for anaphylactic-type reactions, and Insulin U500 (Humulin R) for dosing confusion. California Appeals Court Says FDA Labeling Regulations Do Not Preempt State Law Failure-To-Warn Claim Against Drug Manufacturer Food and Drug Administration (FDA) prescription drug labeling regulations do not preempt a plaintiff’s state law tort action alleging a drug manufacturer failed to provide adequate warnings about the generic drug it manufactured, a California appeals court ruled September 25. 2008. Overturning a lower court decision, the California Court of Appeal, Fifth Appellate District, allowed the plaintiff to pursue her state law tort claims against the drug manufacturer. Plaintiff Carylyne McKenney brought her action in state court against Purepac Pharmaceutical Co. (Purepac) and other defendants, alleging she was injured after using the prescription generic drug metoclopramide, which was manufactured by Purepac. Metoclopramide is the primary active ingredient in the brand name drug Reglan. McKenney’s complaint alleged the labeling of Purepac's generic drug contained false and/or misleading statements and that the labeling substantially understated and downplayed the risks of developing “tardive dyskinesia,” a condition McKenney had as a result of her treatment with the drug. 49 The state trial court ultimately sustained Purepac's demurrer and rendered judgment in its favor. The trial court concluded that federal law preempted all of plaintiff’s state law claims against Purepac, which is not the original manufacturer of Reglan. In reaching this conclusion, the court emphasized that Purepac is a generic manufacturer of metoclopramide and, as such, must obtain FDA approval before issuing any label on metoclopramide that deviates from the labeling previously approved by the FDA for Reglan. McKenney appealed. In reversing the lower court’s decision, the state appeals court concluded the federal requirement that a generic drug have the same labeling as a “reference listed” drug does not necessarily result in federal preemption of a state tort action against the generic manufacturer for failure to adequately warn of the drug's dangers. The appeals court rejected Purepac’s argument that, under FDA regulations (21 C.F.R. §§ 201.56, 201.80), Purepac could not deviate from the FDA-approved labeling for metoclopramide, and therefore any civil liability to plaintiff under state law for failure to adequately warn of the dangers of taking the drug was barred on conflict preemption grounds, i.e., impermissibly conflicting with the FDA’s authority over drug labeling. The appeals court said it saw “no indication [in the applicable regulations] that the FDA itself has ever taken the position that its labeling requirements for generics would invoke federal preemption principles so as to exempt manufacturers of generic drugs from tort liability.” Further, in Carlin v. Superior Court, 13 Cal.4th 1104 (Cal. 1996), the state high court expressly stated that “‘Congress evinced no intention of preempting state tort liability for injuries from prescription drugs,’” the appeals court said. McKenney v. Purepac Pharmaceutical Co., No F052606 (Sept. 25, 2008). First Circuit Upholds State Law Regulating Use Of Prescribing Data The First Circuit held November 18, 2008 that a New Hampshire law regulating the use of prescription data did not amount to an unconstitutional restriction on commercial speech. The appeals court ruling reverses an April 2007 decision by the U.S. District Court for the District of New Hampshire finding the law unconstitutional and enjoining its enforcement. Plaintiffs IMS Health Inc. and Verispan, LLC acquire prescription data from billions of prescription transactions per year throughout the U.S. They then de-identify patient information and sell the data to their clients, mostly pharmaceutical companies. The pharmaceutical companies use the information to market to specific prescribers. On June 30, 2006, the Prescription Information Law became effective in New Hampshire. N.H. Rev. Stat. Ann. §§ 318:47-f, 318:47-g, 318-B:12(IV) (2006). The law expressly prohibits the transmission or use of both patient-identifiable data and prescriberidentifiable data for certain commercial purposes. Plaintiffs sued, claiming the law impermissibly restricts their First Amendment right to free speech. 50 “Because the Prescription Information Law restricts constitutionally protected speech without directly serving the State’s substantial interests and because alternatives exist that would achieve the State’s interests as well or better without restricting speech,” the law cannot stand, the district court concluded. Describing the New Hampshire law as an “innovative” approach to address the “spiraling cost of brand-name prescription drugs,” the First Circuit disagreed with the lower court’s conclusion. According to the appeals court, the New Hampshire law regulates conduct, not speech. The appeals court wrote: Unlike stereotypical commercial speech, new information is not filtered into the marketplace with the possibility of stimulating better informed consumer choices (after all, physicians already know their own prescribing histories) and the societal benefits flowing from the prohibited transactions pale in comparison to the negative externalities produced. This unusual combination of features removes the challenged portions of the statute from the proscriptions of the First Amendment. Moreover, even if the law amounted to a regulation of protected speech, the appeals court said it still passed constitutional muster. “In combating this novel threat to the cost-effective delivery of health care, New Hampshire has acted with as much forethought and precision as the circumstances permit and the Constitution demands,” the appeals court said. In a statement, IMS Health said it was “disappointed” by the First Circuit decision and was considering potential next steps. Similar laws in Maine and Vermont also currently are being challenged. In December 2007, a federal district court agreed to preliminarily enjoin the enforcement of the Maine statute that restricts the collection and disclosure of physician prescribing information for marketing purposes that was set to go into effect January 1, 2008. Plaintiffs are petitioning the Supreme Court to review the decision. IMS Health Inc. v. Ayotte, No. 07-1945 (1st Cir. Nov. 18, 2008). U.S. Court In Vermont Upholds State Law Regulating Use Of Prescribing Data A federal trial court refused April 23, 2009 to strike down as unconstitutional a Vermont law that regulates the collection and use of data identifying healthcare providers’ prescribing patterns. The U.S. District Court for the District of Vermont found the law, which was passed in 2007 and is slated to go into effect July 1, 2009, did regulate protected commercial speech, but held it withstood scrutiny under the First Amendment. 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." 51 Plaintiffs IMS Health Inc., Verispan, LLC, and Source Healthcare Analytics, Inc. acquire prescription data from billions of prescription transactions per year throughout the U.S. They then de-identify patient information and sell the data to their clients, mostly pharmaceutical companies. 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.” The law also creates an evidence-based education program for healthcare professionals about the cost-effective utilization of prescription drugs that is funded by fees paid by drug manufacturers. In addition, the law creates a consumer fraud cause of action for advertisements distributed in the state that violate federal advertising law. Plaintiffs alleged the law violated the First Amendment, was vague and overbroad, and violated the Dormant Commerce Clause. The Pharmaceutical Manufacturers of America (PhRMA) also challenged the fee and advertising provisions. The district court upheld the law, finding it passed constitutional muster. As an initial matter, the court held prescriber identifiable data is protected “speech” and therefore the law must comply with the First Amendment. The court found the law was subject to intermediate scrutiny under the Central Hudson framework. Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n 447 U.S. 557 (1980). Applying this analysis, the court held the law was constitutional. First, the court found the legislature’s stated purpose of containing healthcare costs and protecting the public interest were substantial government interests. The court also concluded the legislature’s determination that prescription data “is an effective marketing tool that enables detailers to increase sales of new drugs” was supported in the record and therefore the law could help curb prescription drug costs. Likewise, the court said evidence supported the legislature’s finding that new drugs often provide little or no benefit over older drugs and unrestricted use of prescription data in marketing may contribute to over-prescription of new drugs. Thus, the legislature’s decision to restrict the use of prescription data in marketing to further their substantial interest in protecting public health was sufficiently direct and material, the court concluded. Finally, the court held the law was narrowly tailored because it did not prohibit the practice of detailing altogether, it just restricted the use of prescriber-identifiable data. The court also rejected plaintiffs’ other constitutional challenges, including that the law violated the Dormant Commerce Clause because it impermissibly affected interstate commerce. While acknowledging the law would affect data vendors like plaintiffs located out of state, the court said the regulation would be limited only to their activities in Vermont, not in other states. 52 “Vermont prescription records are perfectly distinguishable from other states’ records, and the Court sees no risk that [the law] will control [prescription] data sales for states other than Vermont.” The court went on to reject PhRMA’s First Amendment and Commerce Clause challenges to the fee and advertising provisions of the law, saying they were too speculative and premature. The court also denied PhRMA’s contention that the provision regarding consumer advertising conflicted with federal law—i.e., the Food and Drug Administration’s regulation of drug advertising—and therefore was preempted. The court saw no conflict with federal drug advertising law. Instead, the court said, on its face the law “simply creates an additional remedy for violations of federal prescription drug advertising law.” IMS Health Inc. v. Sorrell, No. 1:07-CV-188 (D. Vt. Apr. 23, 2009). Pfizer Announces $894 Million Settlement Of Bextra, Celebrex Claims Pfizer, Inc. announced October 17, 2008 that it has agreed to a global $894 million settlement to resolve “substantially all of the personal injury cases, consumer fraud cases and state attorneys general claims” involving its non-steroidal anti-inflammatory (NSAID) pain medications Bextra and Celebrex. The agreement covers “more than 90 percent of the known personal injury claims brought by law firms” alleging that Pfizer’s NSAID pain medications were the cause of a heart attack, stroke, or other injury, Pfizer said in a press release. In addition, the settlement resolves payor class action consumer fraud cases involving Bextra and Celebrex in which the plaintiffs alleged economic loss relating to the promotion of the drugs. The settlement also covers claims brought by 33 states and the District of Columbia regarding Bextra promotional practices. Although the company voluntarily withdrew Bextra, its press release emphasized that “Pfizer stands by the safety and efficacy profile of Celebrex.” Celebrex “is one of the most rigorously- and continuously-studied drugs in the world, as evidenced by its approval and use in 111 countries during the past 10 years across several different pain indications,” said Joseph M. Feczko, chief medical officer for Pfizer. The $894 million settlement will be broken down as follows: $745 million for personal injury claims; $60 million for state attorneys general settlements; and $89 million for consumer fraud class action claims. Connecticut Attorney General Richard Blumenthal said October 22 that his state will receive $1.7 million under the settlement with Pfizer. According to Blumenthal's press release, the $60 million overall settlement with the states also imposes strict reforms to prevent deceptive promotion of Pfizer products. "Our five-year investigation into Pfizer revealed that the company aggressively and deceptively promoted Celebrex and Bextra with misleading marketing about the safety and efficacy of both drugs, which cause serious potential side effects, including risk of heart attacks and strokes," Blumenthal said. 53 The state lawsuits alleged that, although the Food and Drug Administration rejected a request to market high-dose Bextra for acute and surgical pain, Pfizer conducted a systematic off-label promotion campaign. As part of the settlement with the states, according to Blumenthal's press release, Pfizer is prohibited from, among other things, distributing samples with the intent to encourage off-label prescribing; distributing off-label studies and articles in a promotional manner; using "mentorships" to pay physicians for time spent with Pfizer sales reps; and using patient testimonials to misrepresent a drug's efficacy. In an October 22, 2008 statement, Pfizer denied the allegations in the complaints that its promotional practices violated state laws. Supreme Court Finds No Federal Preemption Of State Failure-ToWarn Claims Against Drug Maker The Supreme Court held March 4, 2009 in the closely watched Wyeth v. Levine case that federal law does not preempt state failure-to-warn claims involving the labeling of prescription drugs regulated by the Food and Drug Administration (FDA). The 6-3 opinion, authored by Justice Stevens, rejected drug maker Wyeth’s argument that state tort claims like those at issue obstruct the federal regulation of drug labeling. According to the majority, Congress has repeatedly declined to preempt state law in this area. The majority also gave no weight to the FDA’s position in recently promulgated regulations that state tort suits interfere with its statutory mandate, saying this stance represents a dramatic shift from the agency's long-standing view that state actions complement the FDA’s role in protecting consumers. In a statement, Wyeth called the ruling disappointing. “Patients are best served by a national standard for the labeling of prescription medications—set by the medical and scientific experts at the U.S. Food and Drug Administration (FDA). When lay juries are permitted to second-guess the experts at FDA on the benefits and risks of particular medicines, the result is uncertainty for patients and doctors alike about how and when to use prescription drugs,” the company said. Consumer groups, however, hailed the opinion. “We are extremely gratified that the U.S. Supreme Court today in Wyeth v. Levine upheld the traditional right of patients harmed by defective and mislabeled drugs to sue drug companies to recover compensation for their injuries,” Public Citizen said in a statement. “[L]egal immunity for drug manufacturers—as called for by the drug companies and the Bush administration—would have been a huge mistake,” the group said. Failure-to-Warn Claims In the case, a jury awarded plaintiff Diane Levine a substantial judgment against Wyeth, which the trial court and later the Vermont Supreme Court affirmed. See Levine v. Wyeth, 944 A.2d 179 (Vt. 2006). Levine, a musician, lost her arm to gangrene after an intravenous arterial injection of Wyeth’s drug, Phenergan. In her Vermont state court suit, Levine alleged Wyeth was negligent when it failed to adequately warn of the known dangers associated with the drug’s intravenous administration and the risk of inadvertent arterial injection. 54 Phenergan, an antihistamine used to treat nausea, generally is injected into the muscle, but, in its FDA-approved label, provides directions for intravenous use as well. A jury found that Wyeth should have provided a warning against the drug’s administration through intravenous injection, known as “IV push.” Wyeth argued that it was immune from liability in the state negligence suit because the FDA had previously approved Phenergan’s label. According to Wyeth, federal law impliedly preempted Wyeth’s failure-to-warn claims. The Vermont Supreme Court found no preemption of the state tort claims, saying they did not conflict with FDA’s labeling requirements for the drug because Wyeth could have warned against IV-push administration without prior agency approval and because federal labeling requirements create a floor not a ceiling. Court Rejects Impossibility Argument The Court majority in its opinion affirming the Vermont Supreme Court decision rejected Wyeth’s argument that it would be impossible for it to comply with both the state law duties underlying the negligence claims and its duties under federal labeling regulations. While Wyeth contended that it was constrained from changing its label without first obtaining FDA approval, the majority disagreed with Wyeth's analysis of the agency’s “changes being effected” (CBE) regulation. The CBE regulation initially provided that a manufacturer could “add or strengthen” a warning if it filed a supplemental application with the FDA, but could make the changes without the agency’s approval. FDA amended the CBE regulation in 2008 to indicate that a manufacturer may only change a drug label “to reflect newly acquired information.” The Court sidestepped the question of whether the 2008 CBE regulation was consistent with the Federal, Food, Drug, and Cosmetic Act (FDCA) and the FDA’s previous version of the regulation, concluding Wyeth could have revised Phenergan’s label even in accordance with the amended regulation. Levine presented evidence of at least 20 incidents prior to her injury in which a Phenergan injection resulted in gangrene and an amputation, the Court noted. As these incidents continued over the years, Wyeth could have analyzed the accumulating data and added a stronger warning about IV-push administration without first obtaining FDA approval. Moreover, “the very idea that the FDA would bring an enforcement action against a manufacturer for strengthening a warning pursuant to the CBE regulation is difficult to accept—neither Wyeth nor the United States has identified a case in which the FDA has done so,” the Court wrote. Statutory Purpose Wyeth argued that the FDCA established both a floor and a ceiling for regulating a drug’s label, but the Court said the evidence of Congress’ purposes in enacting and amending the statute pointed to the contrary. For example, the Court said, Congress failed to provide a federal remedy for consumers harmed by unsafe or ineffective drugs under the FDCA. 55 The Court also highlighted that Congress did not include an express preemption provision “at some point during the FDCA’s 70 year history.” In this regard, the Court contrasted the FDCA with the Medical Device Amendments of 1976 (MDA), which do include an express preemption provision with respect to medical devices. The Supreme Court ruled last year that the MDA preempts state common law claims challenging the safety and effectiveness of a medical device that has received FDA premarket approval. Riegel v. Medtronic, Inc., No. 06-179 (U.S. Feb. 20, 2008). Majority Affords No Weight To Recent FDA Regulatory Stance In the preamble of the 2006 amendments to the drug labeling regulations, FDA stated that “under existing preemption principles, FDA approval of labeling . . . preempts conflicting or contrary State law.” 71 Fed. Reg. 3922. While Wyeth relied on the preamble to advance its preemption argument, the Court said the agency’s views on state law expressed in the regulation “reverse[d] the FDA’s own longstanding position without providing a reasoned explanation.” According to the Court, “[n]ot once prior to Levine’s injury did the FDA suggest that state tort law stood as an obstacle to its statutory mission.” Rather, the agency had previously disclaimed that federal labeling standards preempted state failure-to-warn claims. Thus, the majority affirmed the judgment of the Vermont Supreme Court, finding Levine’s common law claims did not stand as an obstacle to the statutory purposes of the FDCA. Far-Reaching Implied Preemption Justice Thomas agreed with the judgment but wrote a separate concurrence objecting to “the majority’s implicit endorsement of far-reaching implied pre-emption doctrines.” Thomas said he has become “increasingly skeptical of the Court’s ‘purposes and objectives’ pre-emption jurisprudence” under which the Court “routinely invalidates state laws based on perceived conflicts with broad federal policy objectives, legislative history, or generalized notions of congressional purposes that are not embodied within the text of federal law.” Dissent In his dissent, Justice Alito said the case “illustrates that tragic facts make bad law.” The dissent argued the majority framed the issue of the case too narrowly and said the real question was whether a state jury “can countermand the FDA’s considered judgment that Phenergan’s FDA-mandated warning label renders its intravenous use ‘safe.’” According to the dissent, the FDA had long known the risk associated with IV push and, wisely or not, concluded the drug was “safe” and “effective” when used in conjunction with its approved label. “[T]urning a common-law tort suit into a ‘frontal assault’ on the FDA’s regulatory regime for drug labeling upsets the well-settled meaning of the Supremacy Clause and our conflict preemption jurisprudence,” Alito wrote. 56 Wyeth v. Levine, No. 06-1249 (U.S. Mar. 4, 2009). Third Circuit Says Vaccine Act Preempts Design Defect Claims Against Vaccine Manufacturer The National Childhood Vaccine Injury Act (Vaccine Act) expressly preempts all design defect claims against the manufacturer of a vaccine, the Third Circuit ruled March 27, 2009. In so holding, the appeals court rejected a different result reached by the Georgia Supreme Court in American Home Prods. Corp. v. Ferrari, 669 S.E.2d 236 (Ga. 2008), which called for a case-by-case analysis of whether particular vaccine side effects are avoidable. This approach, according to the Third Circuit, would essentially swallow the Vaccine Act's express preemption provision because it would subject every design defect claim to court review. The case involved 17-year old Hannah Bruesewitz who allegedly suffers a number of adverse side effects stemming from the third of a five-dose series of the diphtheriapertussis-tetanus (DPT) she received as an infant. Her parents (plaintiffs) brought an action against Wyeth, Inc. and its predecessors (Wyeth), which manufactured the vaccine Hannah received. As required under the Vaccine Act, plaintiffs filed a petition in the Vaccine Court (part of the U.S. Court of Federal Claims) in 1995, alleging her residual injuries were caused by the Wyeth vaccine. The court dismissed their claim with prejudice. Plaintiffs then brought an action in state court against Wyeth alleging, among other things, negligent design because the manufacturer knew of a safer alternative and failed to produce it and strict liability for a design defect. Wyeth removed the action to federal court based on diversity and moved for summary judgment. The federal district court granted Wyeth’s motion, finding the Vaccine Act preempted all design defect claims arising from a vaccine-related injury or death. The Third Circuit affirmed, concluding the Vaccine Act’s express preemption provision encompassed the claims at issue here. The Vaccine Act, enacted in 1986, includes an express preemption provision stating that “[n]o vaccine manufacturer shall be liable in a civil action for damages arising from a vaccine-related injury or death . . . if the injury or death resulted from side effects that were unavoidable.” Plaintiffs argued that because the provision qualifies the scope of preemption based on whether the injury or side effect was “unavoidable,” the issue of “avoidability” must first be addressed on a “case-by-case” basis as part of examining a design defect claim. This was essentially the conclusion reached by the Georgia Supreme Court in Ferrari, which found that by including the word “unavoidable” in the preemption provision Congress made the language conditional and implied that some vaccine-related injuries and deaths could be avoided. 57 But the Third Circuit did not find the interpretation in Ferrari compelling. “[W]hile we recognize that the language is conditional, such a reading does not foreclose the preemption of some claims,” the appeals court wrote. “More importantly, we think the Ferrari court’s construction is contrary to the structure of the Act because it does not bar any design defect claims,” the appeals court said. In reaching its conclusion, the appeals court relied heavily on legislative history, after noting that the statute did not define the term “unavoidable.” Specifically, the appeals court cited a relevant committee report that stressed the importance of vaccine development and availability, expressed serious concern over the withdrawal of even a single vaccine manufacturer from the marketplace, and set forth a regime to compensate individuals that sought to reduce and stabilize litigation costs while also enabling manufacturers to estimate the costs associated with compensation. “Each of [these] objectives,” the appeals court said, “would be undermined if design defect claims were permitted under the statute.” The appeals court also took care to distinguish the instant case from the Supreme Court’s recent decision in Wyeth v. Levine, No. 06-1249 (2009), which held that federal law did not preempt state tort law claims alleging a drug manufacturer failed to adequately warn of the dangers associated with a drug. The Third Circuit said here the statute at issue included an express preemption provision that was prompted by the prevalence of state tort litigation. Moreover, under federal law, a drug manufacturer can strengthen a drug’s label without preapproval from the Food and Drug Administration. Bruesewitz v. Wyeth Labs., No. 07-3794 (3d Cir. Mar. 27, 2009). Medical Devices U.S. Court In Texas Finds Claims Against Device Manufacturer Not Preempted By MDA The U.S. District Court for the Northern District of Texas held August 13, 2008 that a plaintiff’s strict liability and breach of warranty claims against a cochlear implant manufacturer were not preempted by the Medical Devices Amendments of 1976 (MDA) because the claims were based solely on violations of federal law. Plaintiff B.P. is a deaf minor. To improve B.P.’s hearing, surgeons implanted a cochlear ear device, the HiRes90k, manufactured by Defendant Advanced Bionics Corporation (Bionics). Bionics issued a voluntary recall of all HiRes90k devices containing Astro Seal feed-thrus, which B.P.’s device contained. Although the recall covered only non-implanted devices, plaintiffs elected to have B.P. undergo surgery to remove his two cochlear implants. Bionics tested those units and determined that the moisture levels in them were well above the maximum moisture level provided in the manufacturing specifications and approved by the Food and Drug Administration (FDA). Plaintiffs sued Bionics alleging negligence, strict liability, fraud, and breach of warranty. Plainitffs alleged that after obtaining premarket approval from FDA on the device, Bionics contracted with a different company to manufacture the feed-thrus. 58 According to plaintiffs, Bionics failed to notify the FDA of its new supplier, and Astro Seal altered the device's mechanical configuration and made changes to the length, composition, and "firing" process for the glass used in the feed-thrus. Plaintiffs also pointed to inspection reports and warning letters issued by the FDA to Bionics which document multiple violations of Current Good Manufacturing Practices (CGMP) requirements and notes that FDA took in an enforcement action against Bionics for violations of CGMP and premarket approval requirements. The court first turned to defendant’s argument that plaintiffs' strict liability and implied warranty claims were preempted by the MDA. In determining whether Texas law regarding strict liability imposes duties "different from, or in addition to" those imposed by the MDA, the court noted that plaintiffs claims were “predicated solely on violations of federal law.” The court explained that in Medtronic, Inc. v. Lohr, the Supreme Court concluded that state law claims predicated on violations of federal law were not preempted. See 518 U.S. 470 (1996). The court further noted that in Riegel v. Medtronic, 128 S.Ct. 999 (2008), the High Court affirmed this part of the holding in Lohr. Accordingly, the court found the MDA did not preempt plaintiff’s strict liability claims. Turning next to plaintiff’s claim for breach of the implied warranty of merchantability, the court found that claim also was predicated solely on violations of federal law. “Although the duties underlying Plaintiffs' implied warranty claims potentially differ from the relevant federal requirements, enforcement of those claims would not interfere with the federal regulatory scheme for medical devices, since Defendants' compliance with the applicable federal requirements would preclude liability under state law, as was the case in Lohr,” the court found. “Because dismissal of Plaintiffs' claims for breach of the implied warranty of merchantability would not serve the policies underlying preemption, preemption is not warranted here,” the court held. Purcel v. Advanced Bionics Corp., No. 3:07-CV-1777-M (N.D. Tex. Aug. 13, 2008). U.S. Court In Minnesota Finds MDA Preempts Claims Against Device Manufacturer The U.S. District Court for the District of Minnesota held August 18, 2008 that the Medical Device Amendments (MDA) to the Food, Drug, and Cosmetic Act preempted a plaintiff's claims against the manufacturer of his implantable cardioverter-defibrillator (ICD). According to the court, the plaintiff offered no direct evidence of the device manufacturer's negligence and his reliance on res ipsa loquitor failed because the device could have malfunctioned for a variety of reasons unrelated to negligence. Plaintiff Demetrus Claude Clark received a Medtronic 7278 Maximo ICD on September 8, 2004. The device was implanted after plaintiff was diagnosed with non-ischemic cardiomyopathy, a disease of the heart muscle. 59 After the implantation, plaintiff returned to the hospital six times complaining that the ICD was delivering "inappropriate shocks." Eventually, hospital staff determined that the shocks were caused by T-wave oversensing, and removed the ICD. Plaintiff sued Medtronic (defendant) alleging multiple state tort claims including strict liability, breach of warranty, negligence, misrepresentation, and violation of Minnesota's consumer protection laws. Plaintiff claimed defendant was negligent in the design and manufacture of the ICD Model 7278 and/or failed to warn him, his doctor, or the Food and Drug Administration (FDA) of unreasonable risks in its manufacture or reliability. Defendant moved for summary judgment based on federal preemption because Class III medical devices are regulated under the MDA. The district court first explained that in Riegel v. Medtronic, Inc., 128 S.Ct. 999 (2008), the Supreme Court established a two-part test to decide whether the MDA preempts a state claim. According to the court, it must first determine whether "the Federal Government has established requirements applicable to" the particular medical device and second, it must determine whether the state law claims are based on requirements "different from, or in addition to" the federal requirements relating to safety and effectiveness or any requirement under the MDA. Plaintiff argued that Medtronic violated the premarket approval requirements of the MDA when it manufactured a defective ICD, or, alternatively, that premarket approval was fraudulently obtained by Medtronic's having concealed known defects in its ICD's design or manufacture. According to the court, however, plaintiff offered "no evidence to support his assertions." Instead, plaintiff relied on the doctrine of res ipsa loquitur for the proposition that full compliance with the premarket approval requirements would have resulted in a problemfree device, the court said. In finding that a res ipsa loquitor argument failed here, the court noted that Medtronic's ICD is a complex device that "can fail for a variety of reasons," all of which may occur without someone acting in a negligent manner. "Because defendant's negligence is not the only possible explanation for this device's failure, plaintiff's reliance on res ipsa loquitur cannot be sustained," the court held. Clark v. Medtronic, No. 06-CV-4078 (JMR/AJB) (D. Minn. Aug. 18, 2008). Wisconsin Supreme Court Says Supplemental Premarket Approval Does Not Affect Riegel Preemption Analysis The Medical Device Amendments of 1976 (MDA) preempt state tort claims against Medtronic Inc. even though the device giving rise to the negligence and strict liability allegations was implanted after the Food and Drug Administration (FDA) gave supplemental premarket approval to correct a problem with the original device, the Wisconsin Supreme Court ruled February 17, 2009. The high court said the decision was governed by the U.S. Supreme Court’s ruling in Riegel v. Medtronic, Inc., 128 S.Ct. 999 (2008), which held that the MDA preempts state common law claims challenging the safety and effectiveness of a medical device that received FDA premarket approval. 60 According to the high court, the Riegel framework applied because the original premarket approval was ongoing despite the FDA's subsequent approval of changes to the device to correct a faulty battery. At issue in the instant action was a Medtronic Marquis 7230 defibrillator, which received the FDA’s device-specific premarket approval in 2002. Medtronic later uncovered a potential shorting problem with the defibrillator’s battery that could cause the device to malfunction. Medtronic submitted a premarket approval supplemental application to address the issue and the FDA approved the changes in October 2003. Following the supplemental premarket approval, Medtronic continued to market and distribute the original defibrillator, including the one implanted in plaintiff Joseph Blunt in May 2004. Blunt later had the potentially faulty defibrillator removed. He then sued Medtronic alleging negligence and strict liability based on the second surgery. Both the lower court and the appeals court, before the Riegel decision, granted summary judgment to Medtronic. A unanimous Wisconsin Supreme Court affirmed, relying specifically on Riegel to conclude the MDA preempted Blunt’s state law tort claims. In Riegel, the majority of the Court held the “premarket approval” process imposes device-specific requirements under the MDA and that state “tort duties” constitute “requirements” pursuant to the statute that are “different from, or in addition to federal requirements.” The Wisconsin high court found Blunt’s claims fit squarely within the parameters outlined in Riegel and therefore were preempted by the MDA. Most notably, the high court said the preemption analysis was not altered by the FDA’s supplemental premarket approval of the defibrillator in 2003. Blunt argued his claims were not preempted because the supplemental premarket approval superseded the FDA’s premarket approval of the original device, which was the one he received in 2004. But the high court disagreed, saying nothing in the MDA “advises that a device-specific approval once given is diminished by a supplemental approval for changes to that device without a further act by the FDA.” The FDA had not affirmatively withdrawn or recalled Medtronic’s approval to manufacture and sell the original defibrillator, the high court noted. Rather, the FDA’s approval of the original device remained ongoing. Thus, the high court concluded “the supplemental premarket approval that Medtronic received did not affect the federal requirement of premarket approval granted to the original Marquis 7230 defibrillator.” A concurring opinion agreed the result reached in the decision was mandated by the Riegel holding, but criticized the Supreme Court’s decision in that case. The concurrence said the rationale underlying the Riegel decision “may be meritorious if the premarket approval process provided at least minimum assurances of safety.” 61 The opinion pointed to a January 2009 letter from nine FDA scientists that the current FDA approval process is “a clear and silent danger to the American public.” “The preemption doctrine should not be employed to allow for the normal standard of care to be substandard care,” the opinion warned. Blunt v. Medtronic, Inc., No. 2006AP1506 (Wis. Feb. 17, 2009). Bill Would Allow State Law Tort Claims Involving Medical Devices With FDA Approval House lawmakers Frank Pallone Jr. (D-NJ) and Henry A. Waxman (D-CA) introduced March 5, 2009 legislation to reverse the U.S. Supreme Court’s decision in Riegel v. Medtronic, Inc., No. 06-179 (U.S. Feb. 20, 2008), which held that the Medical Device Amendments of 1976 (MDA) preempt state common law claims challenging the safety and effectiveness of a medical device that received Food and Drug Administration (FDA) premarket approval. Waxman, House Energy and Commerce Committee Chairman, and Pallone, Subcommittee on Health Chairman, said in a joint statement that the Court’s decision “ignores both congressional intent and 30 years of experience in which federal regulation, through the U.S. Food and Drug Administration, and tort liability played complementary roles in protecting consumers from device risks." The Medical Device Safety Act of 2009 would explicitly clarify that state product liability lawsuits are not preempted by federal law. The lawmakers introduced similar legislation last year. Health, Education, Labor and Pensions Committee Chairman Edward Kennedy (D-MA) and Judiciary Committee Chairman Patrick Leahy (D-VT) have introduced a companion bill in the Senate. In the Riegel decision, the Court majority concluded the “rigorous” premarket approval process results in federal device-specific requirements and that state tort claims are preempted because they would allow a jury to impose “different” or “additional” safety and effectiveness standards on the device manufacturer than those mandated under federal law. At issue in the case was the interpretation of the express preemption provision in the MDA to the federal Food, Drug, and Cosmetic Act, which provides that states may not establish “any requirement” for medical devices that is “different from, or in addition to” those under federal law and that “relates to the safety or effectiveness of the device . . .” 21 U.S.C. § 360k(a). According to Pallone and Waxman, the Riegel decision “has left consumers without any ability to seek compensation for their injuries” and also “removed one of the industry’s most important incentives to maintain product safety after approval and disclose newlydiscovered risks to patients and physicians.” AdvaMed issued a statement criticizing the legislation, saying the bill “does not in any way improve patient safety” but would “restrict patient access to essential medical technologies, produce a chilling effect on medical innovation, create more lawsuits and ultimately result in higher health care costs for all Americans." 62 Industry Interactions with Healthcare Professionals PhRMA Adopts Revised Marketing Code With New Provisions On Interactions Between Sales Reps And Healthcare Professionals The Pharmaceutical Research and Manufacturers of American (PhRMA) Board of Directors announced July 10, 2008 that it has adopted a revised PhRMA Code on Interactions with Healthcare Professionals to ensure that pharmaceutical marketing practices comply with the highest ethical standards, according to a press release issued by PhRMA. The voluntary Code, which becomes effective January 2009, “reaffirms that interactions between company representatives and healthcare professionals should be focused on informing the healthcare professionals about products, providing scientific and educational information, and supporting medical research and education,” the release said. Among several changes in the revised Code are new provisions prohibiting the distribution of non-educational items (such as pens, mugs and other “reminder” objects adorned with a company or product logo) to healthcare providers and their staff. The revised Code notes that such items are often “of minimal value,” but nonetheless recognizes they “may foster misperceptions that company interactions with healthcare professionals are not based on informing them about medical and scientific issues,” the release said. Another new provision prohibits company sales representatives from providing restaurant meals to healthcare professionals. Sales representatives are allowed, however, to provide occasional meals in healthcare professionals’ offices in conjunction with informational presentations. In addition, the revised Code reaffirms PhRMA’s position that companies should not provide any entertainment or recreational benefits to healthcare professionals. The revised Code also includes new provisions that require companies to ensure that their sales representatives are sufficiently trained about applicable laws, regulations, and industry codes of practice that govern interactions with healthcare professionals. Another provision recommends that companies assess their representatives periodically and take appropriate action if they fail to comply with relevant standards of conduct. Companies opting to follow the revised Code must state their intentions to abide by the Code’s provisions, and each company’s chief executive officer and compliance officer must certify each year that they have processes in place to meet compliance requirements. The revised Code includes several other important additions, including more detailed standards regarding the independence of continuing medical education and more comprehensive guidance regarding speaking and consulting arrangements with healthcare professionals. There are also new disclosure requirements in the revised Code for healthcare providers who are members of committees that set formularies or develop clinical practice guidelines and who serve as speakers or consultants for a pharmaceutical company. 63 PhRMA referred to its recent acceptance of the revised Physician Payments Sunshine Act (S. 2029), which was released by Senators Herb Kohl (D-WI) and Charles Grassley (R-IA) in May 2008. The bill would require manufacturers of pharmaceutical drugs, devices, and biologics to disclose all gifts or other “transfers of value” over $500 a year given to physicians. AdvaMed Issues Revised Code Of Ethics On Interactions With Healthcare Professionals On December 18, 2008, the Advanced Medical Technology Association (AdvaMed)—the national trade association of medical technology manufacturers—issued a revised Code of Ethics on Interactions with Health Care Professionals (HCPs) (the AdvaMed Code or Code). The revised AdvaMed Code, which becomes effective July 1, 2009, contains several changes that will significantly impact the medical device industry. These include: • The addition of guidelines for the payment of royalties to HCPs; • The inclusion of a new section on the provision of evaluation and demonstration products to customers at no charge; • More comprehensive guidelines for furnishing reimbursement and health economics information to HCPs; • A prohibition on the provision of entertainment and recreation; • A prohibition on the provision of non-educational branded promotional items such as pens, notepads, mugs and similar items; and • Increased restrictions on the provision of restaurant meals or meals at other offsite venues. More generally, the revisions to the AdvaMed Code seek to strike the appropriate balance between encouraging beneficial, productive interactions between device manufacturers and HCPs and establishing safeguards to ensure that such arrangements meet high ethical standards and are conducted in a manner that is consistent with fraud and abuse authorities. It is also important to note that the revised AdvaMed Code applies to all medical device “Companies”—the prior version, by its plain terms, applied only to AdvaMed “Members.” Thus, while each device manufacturer must make its own decision regarding whether to comply with the AdvaMed Code, irrespective of that decision, the revised Code’s provisions extend to all medical device manufacturers, and, as such, arguably establish industry standards. Grassley, Kohl Introduce Bill Requiring Disclosure Of Financial Ties Between Drug Companies And Physicians Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) introduced January 22, 2009 the Physician Payments Sunshine Act of 2009, which would require manufacturers of pharmaceuticals, medical devices, and biologics to publicly report money given to physicians over $100 every year. The payments would be reported to the Department of Health and Human Services and would be posted online for the public. The bill would impose penalties as high as $1 million for knowingly failing to report the information, Grassley said. 64 The Senators introduced a similar bill in 2007, but that measure (S. 2029) was never considered by Congress. This new version incorporates recent recommendations made by the Medicare Payment Advisory Commission (MedPAC). "Since we first introduced the bill, there has been a groundswell of support from every corner," Kohl said. "Patients want to know that they can fully trust the relationship they have with their doctor. I am confident this legislation will pass during the 111th Congress." Both Grassley and Kohl have pushed for years for greater public accountability of financial relationships between physicians and the drug, device, and biologic industry. "The goal of our legislation is to lay it all out, make the information available for everyone to see, and let people make their own judgments about what the relationships mean or don't mean," Grassley said. "If something's wrong, then exposure will help to correct it. Like Justice Brandeis said almost a century ago, 'sunshine is the best disinfectant.'" Massachusetts Finalizes Regulations Governing Sales And Marketing Practices Of Pharmaceutical, Device Firms The Massachusetts Public Health Council (PHC) passed March 11, 2009 final regulations to implement a state law enacted in 2008 governing gift-giving and other sales and marketing practices of pharmaceutical and medical device firms. According to Massachusetts officials, the new rules, which mandate broad public disclosure of fees, payments, and other compensation by companies to healthcare providers, will be some of the toughest in the nation. PHC issued proposed regulations in 2008 to implement legislation enacted in August of that year requiring pharmaceutical and device companies to adopt a state-authored marketing code of conduct and publicly disclose any economic benefits provided to physicians and other healthcare providers in excess of $50. In a press release, Department of Public Health (Department) Commissioner John Auerbach said the rules generated more than one thousand pages of testimony and commentary from the public, healthcare advocates, and the industry. “I believe the enormous amount of feedback, and the thorough consideration by the Public Health Council, has resulted in a strict but balanced regulation,” Auerbach said. Under the new regulations, which the PHC approved in a 10 to 0 vote, Massachusetts also will be the first state to require disclosure of industry payments by medical device firms. In a memo discussing the comments on the proposed rules, the Department said the final regulations include some minor edits and “language changes to increase clarity and ensure the consistent use of terminology,” as well as “substantive changes that respond to the testimony received.” For example, consumer groups had raised concerns that an exemption from disclosure payments made to healthcare providers for research projects and clinical trials could be used to circumvent the rules. In response, the Department amended the definition of “sales and marketing activities” to specifically include research projects that are designed or sponsored by marketing departments, known as “seeding trials,” to promote sales. 65 The Department declined, however, to include an across-the-board gift ban, recognizing “that some industry interactions are beneficial and should be allowed to continue.” The Department also made a number of amendments in response to industry concerns, including explicitly providing for exemptions from disclosure for the provision of price concessions such as rebates and discounts, prescription drugs provided to a covered recipient solely and exclusively for use by patients, and demonstration and evaluation units. In light of industry comments, “the Department determined that requiring disclosure of price concessions such as rebates and discounts may lead to a restraint of trade in violation of Federal Trade Commission requirements,” the memo said. The regulations set a July 1, 2009 compliance deadline for adopting the marketing code of conduct. Drug and device must begin making annual disclosure reports starting July 1, 2010 under the regulations. Eli Lilly, Merck Announce Planned Online Registry Of Payments To Physicians Eli Lilly and Company will become the first pharmaceutical research company to disclose its payments to physicians in an online registry, Eli Lilly president and chief executive officer, John Lechleiter, Ph.D., said September 24, 2008. In a speech before the Economic Club of Indiana, Lechleiter said the company plans to launch the registry in 2009. Eli Lilly also was the first pharmaceutical manufacturer to endorse federal legislation, known as the Physician Payments Sunshine Act. The legislation would establish a national registry of payments to physicians by medical device, medical supply, and pharmaceutical companies. "Though we remain hopeful that the Sunshine Act will be passed by Congress at some point, Lilly is taking action independently," Lechleiter added. Under Lilly's plan, the public will have access to an Internet database listing its payments to physicians, including 2009 payments to physicians who serve the company as speakers and advisors. By 2011, Lilly plans to expand the reporting capabilities of the registry to resemble the Sunshine Act legislation. On September 25, 2008 Merck and Co., Inc. announced that it also will publish its grants to patient organizations, medical professional societies, and other organizations on its website in order to enhance transparency. According to a company press release, Merck will make available grants made by its Global Human Health division to U.S. organizations for independent professional education initiatives, including accredited continuing medical education. The company also said that it is "committed to begin disclosure in 2009 of payments to physicians who speak on behalf of our company or our products." 66 Pfizer Announces Physician Payment Disclosure Program Pfizer Inc. announced February 9, 2009 that it will publicly disclose payments made to U.S. physicians for consulting services, speaking engagements, and conducting clinical trials. According to Pfizer, its disclosure will include payments made to practicing U.S. physicians and other healthcare providers, as well as principal investigators, major academic institutions, and research sites for clinical research. “This makes Pfizer the first biopharmaceutical company to commit to reporting payments for conducting Phase I-IV clinical trials in addition to disclosing payments for speaking and consulting . . . [and] demonstrates Pfizer’s commitment to increased transparency and public candor,” the company said in a press release. Pfizer said it plans to publish its first annual online update on its website in early 2010 and will include payments made from July 1, 2009, going forward. “We are committed to taking the steps necessary to achieve greater transparency in our interactions with U.S. healthcare professionals,” said Jeffrey B. Kindler, Chairman and Chief Executive Officer of Pfizer. “By disclosing payments to physicians, we are breaking down a major barrier and increasing the trust healthcare providers must have when prescribing our medicines. To be viewed as an open, candid and transparent company, we must address the concerns of our customers and take action. This new initiative does just that,” Kindler added. On January 22, 2009 Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) introduced the Physician Payments Sunshine Act of 2009, which would require manufacturers of pharmaceuticals, medical devices, and biologics to publicly report money given to physicians over $100 every year. Pfizer said in its release that its plans “reflect the spirit” of that legislation “in that it includes payments to practicing physicians and other healthcare providers as well as to principal investigators and institutions for Phase I-IV clinical trials sponsored by Pfizer.” IOM Joins Call For More Transparency Of Medical Community’s Ties To Industry The Institute of Medicine (IOM) added its voice to the growing number of policy makers, lawmakers, and groups calling on the medical community to strengthen conflict-ofinterest policies and broaden their disclosure of financial dealings with pharmaceutical, biotechnology, and medical device firms. IOM released a report April 28, 2009 arguing voluntary and, if necessary, regulatory measures should be taken to reduce conflicts of interest in medical research, education, and practice. “It is time to end a number of long-accepted practices that create unacceptable conflicts of interest, threaten the integrity of the medical profession and erode public trust while providing no meaningful benefits to patients or society,” said Bernard Lo, chair of the committee that wrote the report. 67 “This report spells out a strategy to protect against financial conflicts while allowing productive relationships between the medical community and industry that contribute to improved medical knowledge and care,” he said. The relationships between pharmaceutical and device companies and healthcare professionals has continued to receive intense scrutiny from enforcement agencies, lawmakers, and the media fueled by concerns about conflicts of interest and the potential for illegal kickbacks. A number of groups, including the Association of American Medical Colleges, the Pharmaceutical Research and Manufacturers of America, and AdvaMed, have pressed for strengthening ethical standards governing vendor gift-giving and marketing practices through adoption of voluntary codes and policies. Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) have introduced a bill (S. 301), the Physician Payments Sunshine Act of 2009, which would establish a nationwide standard requiring drug, device, and biologic makers to report payments to physicians to the Department of Health and Human Services for posting online. "It's a shot in the arm to the reform movement to have the prestige and policy heft of the Institutes of Medicine on the side of transparency," Grassley said in an April 28, 2009 statement. In its report, IOM acknowledges that collaborations between physicians or medical researchers and pharmaceutical, device, and biotechnology companies does help achieve scientific advancements that benefit the public. At the same time, IOM notes that financial ties between medicine and industry may create conflicts that improperly interfere with professional judgment and ultimately negatively impact patient care. IOM recommends, as a first step, disclosure of financial relationships with the industry in a standardized format to help “assess the severity of conflicts and to determine whether the relationship needs to be eliminated or actively managed.” Congress also should create a national reporting program that requires the industry to disclose their financial dealings with the medical community on a public website as a means of deterring inappropriate interactions and undue influence. The report also calls on researchers, medical school faculty, and physicians in private practice to forgo any vendor gifts, to decline to publish or present “ghostwritten” materials, and to limit consulting arrangements to “legitimate expert services” formalized in contracts and paid for at a fair market rate. In addition, physicians should limit the use of free drug samples, except for patients who cannot otherwise afford the medications, the report says. The report also recommends groups that develop clinical practice guidelines do not accept direct industry funding and generally exclude individuals with conflicts of interest from the panels that draft guidelines. Industry support also plays too big a role in continuing medical education, the report notes, saying an overhaul of the system is needed to eliminate “industry influence and provide high-quality education.” 68 The report stresses that voluntary efforts by the industry and the medical community would be most effective in addressing concerns but recognizes that legislative solutions may be necessary if these efforts fall short. Medical Research Study Says Vioxx Clinical Trial Driven Mostly By Marketing Aims A clinical trial conducted in 1999 to test the gastrointestinal safety of Merck & Co.’s pain medication Vioxx was driven by the company’s marketing division and primarily intended to help promote the drug, according to a new study published in the Annals of Internal Medicine. Merck voluntarily withdrew Vioxx from the marketplace on September 30, 2004 after a monitoring board overseeing a long term study of the painkiller recommended that the study be halted because of an increased risk of heart attacks and strokes. The study was conducted by consultants to the attorneys representing plaintiffs in various lawsuits against Merck related to the cardiovascular safety of Vioxx. According to the authors, the study was based on Merck’s internal and external correspondence, reports, and presentations produced by the company in the litigation. The study focused on the ADVANTAGE trial. According to the authors, Merck’s marketing division handled both the scientific and the marketing data, including collection, analysis, and dissemination. At the same time, the study said, “Merck hid the marketing nature of the trial from participants, physician investigators, and institutional review board members.” The authors said to their knowledge the confidential internal communications they examined “provide the first strong documentary evidence of how a pharmaceutical company framed a marketing effort as a clinical trial.” So-called “seeding trials”—those designed to appear they answer a scientific question but primarily fulfill marketing objectives—can be harmful to science and the public because they inhibit full informed consent, compromise good research practice, and may have little scientific merit, the authors observed. The authors acknowledged that identifying seeding trials is challenging without access to internal documents and even then study intent may be hard to prove. The authors also cautioned that their findings could not be generalized to ascertain how common such practices are among the pharmaceutical industry and that their search may have missed some relevant information about the clinical trial’s process and purpose. “[G]reater transparency into the clinical trial process, including public clinical trial registration and requirements for study protocols to be included with institutional review board submissions, may help to better illuminate this practice,” the study concluded. 69 Fifth Circuit Says Clinical Investigators Can Be Criminally Liable For Violating FDA Record-Keeping Requirements A clinical investigator may be held criminally liable for violating record-keeping requirements under Food and Drug Administration (FDA) regulations (see 21. C.F.R. § 312.62(b)), the Fifth Circuit ruled February 6, 2009 in reversing a lower court decision. The case involved Dr. Maria Carmen Palazzo, a psychiatrist, who was indicted by a federal grand jury on various counts of healthcare fraud and violations of § 312.62(b), which sets forth record-keeping requirements pursuant to 21 U.S.C. § 355(i). In October 2000 and February 2001, Palazzo entered into contracts with SmithKline Beechman Corporation (SKB) as a clinical investigator to carry out certain clinical studies evaluating the efficacy and safety of Paxil in children and adolescents. According to the opinion, Palazzo failed to comply with requirements to provide satisfactory research records and her contracts to participate in the drug studies were terminated. A grand jury subsequently indicted Palazzo with 40 counts of healthcare fraud and 15 counts of violating § 355(i) and § 312.62(b). Palazzo moved to dismiss the 15 counts for failure to properly prepare and maintain records with intent to defraud and mislead. According to Palazzo, § 355(i) only provides criminal sanctions for manufacturers and sponsors of clinical investigational studies. The district court granted Palazzo’s motion, dismissing the counts based on the nondelegation doctrine, i.e. that § 355(i) did not permit the FDA to promulgate regulations making clinical investigators criminally liable for failure to properly keep records and report accurate information. The Fifth Circuit reversed. The appeals court concluded the nondelegation doctrine was not implicated in the instant case and instead examined the relevant statutory framework, finding that clinical investigators could be subject to criminal liability for violating the record-keeping and reporting requirements. In so holding, the appeals court rejected the frameworks used by the Ninth and Eighth Circuits to analyze the issue. See United States v. Smith, 740 F.2d 734 (9th Cir. 1984) and United States v. Garfinkel, 29 F.3d 451 (8th Cir. 1994). Palazzo conceded the FDA had authority to impose record-keeping requirements on clinical investigators and properly did so through § 312.62, the Fifth Circuit noted. Thus, the sole issue on appeal was whether the statutory framework allows the imposition of criminal penalties on clinical investigators who violate § 312.62. Answering this question in the affirmative, the Fifth Circuit noted that § 355(i) allows the Secretary, at his or her discretion, to issue regulations regarding clinical drug testing to “protect[] the public health.” Accordingly, the appeals court said, the FDA properly promulgated § 312.62 pursuant to that unambiguous authority. 70 The appeals court then examined the broader statutory scheme under the Food, Drug, and Cosmetics Act, which prohibits at 21 U.S.C. § 331(e) a failure to establish or maintain any record, or make any report required under § 355(i). Penalties for violating § 331(e) are described at 21 U.S.C. § 333 and specifically provide for imprisonment for not more than one year, a fine of not more than $1,000, or both. “Thus, reviewing § 312.62(b) in conjunction with §§ 355(i), 331(e), and 333(a)(1) makes it apparent that the scope of the statute allows clinical investigators to be subjected to criminal liability,” the Fifth Circuit held. United States v. Palazzo, No. 07-31119 (5th Cir. Feb. 6, 2009). Obama Reverses Limits On Federal Funding For Stem Cell Research President Barack Obama signed an Executive Order March 9, 2009 lifting the ban on federal funding for embryonic stem cell research. The move revokes the Executive Order signed by President George Bush on June 20, 2007 and the Bush Presidential statement of August 9, 2001 that limited federal funding of research involving human embryonic stem cells. Following the Executive Order, the National Institutes of Health (NIH) issued draft guidelines April 17, 2009 to establish specific policies and procedures for federal funding of embryonic stem cell research. The draft guidelines, which are subject to 30 days of public comment, would allow funding for research using human embryonic stem cells that were derived from embryos created by in vitro fertilization (IVF) for reproductive purposes and were no longer needed for that purpose. The guidelines would prohibit funding, however, for research using human embryonic stem cells derived from other sources, as well as for IVF embryos creased for research purposes. The NIH draft 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. GAO Says Vulnerabilities In IRB System Elevate Risks For Human Subjects The Government Accountability Office (GAO) told a House panel March 26, 2009 that the system used to review and monitor clinical trials involving human subjects is “vulnerable to unethical manipulation” increasing the risk that experimental products are approved for testing “with little or no substantive due diligence.” 71 Gregory D. Kutz, GAO’s Managing Director of Forensic Audits and Special Investigations, appeared before the House Energy and Commerce Subcommittee on Oversight and Investigations to present the results of a sting operation GAO devised that involved creating a bogus medical company and approaching several institutional review boards (IRBs) for approval to test a fictitious medical device on human subjects. Kutz said the phony device, a post-surgical healing device for women, had fake specifications and matched several examples of “significant risk” devices from Food and Drug Administration (FDA) guidance. GAO succeeded in obtaining approval from an actual IRB to test the bogus device, Kutz reported. The two other IRBs rejected the research protocol. According to GAO, the two IRBs that did not approve the bogus device protocol called it “awful” and a “piece of junk,” the “riskiest thing I’ve ever seen,” and placed the odds of approval at “zero percent.” GAO noted a search of the FDA’s online database would have shown no evidence that FDA ever cleared the device for marketing. The sting operation was prompted by concerns that commercial review boards may not always exercise effective due diligence in reviewing research protocols. GAO performed the undercover investigation of the IRB review process at the Subcommittee's request. Lawmakers Slam IRB Approval In his opening statement, Subcommittee Chairman Bart Stupak (D-NJ) said the evidence suggested Coast IRB, LLC, which approved the phony product, “was more concerned with its financial bottom-line than protecting the lives of patients.” Stupak noted a coupon sent by Coast, based in Colorado Springs, CO, offering a free IRB review so researchers could “coast through your next study.” “GAO’s findings raise serious questions not only about the specific IRB involved in this investigation, but with the entire system for approving experimental testing on human beings,” Stupak said. According to Committee Chairman Henry Waxman (D-CA), information provided by Coast indicated that over the past five years, Coast’s board has reviewed a total of 356 proposals for human testing and approved all of them. During this timeframe, Waxman said, “Coast’s revenues have more than doubled, increasing from $4.4 million in 2005 to more than $9.3 million in 2008.” Appearing before the Committee, Coast IRB CEO Daniel S. Dueber said the government had “perpetrated an extensive fraud against my company.” “It did so without probable cause that Coast had committed any crime. Indeed, no one at Coast has committed any crime,” Dueber said in his written statement. Dueber said the GAO investigation violated federal and state criminal laws, amounting to mail fraud, wire fraud, and forging a medical license among other things. Dueber added that Coast has asked law enforcement to investigate GAO’s actions. 72 Dueber said he was confident Coast would have discovered the fraud before its next scheduled review of the trial. Legislation Representative Diana DeGette (D-CO), Vice Chair of the Committee, introduced a bill March 26, 2009 aimed at strengthening federal regulation and oversight of human subjects research. “Research is the key to innovation and discovery, including curing deadly diseases. But, as this whole panel agrees, that research must be conducted ethically so that participants understand the risks and make informed decisions about volunteering. That’s why we need to upgrade our entire patient protection system in this country,” DeGette said. DeGette has introduced the Protection for Participants in Research Act in every Congress in the last six years. Among other reforms, the legislation would make federal regulations applicable to all research that is in or affects interstate commerce; strengthen the education and monitoring of IRBs; harmonize the two major sets of federal regulations governing research participation (i.e., the Common Rule and FDA regulations); and strengthen protections against conflicts of interest by investigators or institutional review boards. Bogus IRB As part of the investigation, GAO also created a fictitious IRB that it registered with the Department of Health and Human Services (HHS) using an online registration form. GAO said it went on to advertise the phony IRB as “HHS approved.” GAO said its bogus IRB received a research protocol from a real company seeking IRB approval. “Our bogus IRB could have authorized human subjects testing to begin at this new test site without needing to register with any federal agency, since the transaction involved a company conducting privately funded research and did not involve any FDAregulated products.” HHS also approved GAO’s application for an assurance of its fictitious medical device, using the bogus IRB to obtain the approval. An assurance is needed for researchers to receive federal funding from HHS for research involving human subjects testing. Testifying at the hearing, Jerry Menikoff, the Director of HHS’ Office for Human Research Protections (OHRP), said the institution seeking an assurance “has a responsibility to ensure that the IRBs designated in its assurance are appropriately constituted to review and approve human subjects research covered by the institution’s assurance.” Menikoff also said the current registration process was developed in 2000 in response to an HHS Office of Inspector General report raising concerns that registering with OHRP “might become an inappropriate burden to the research process." Menikoff explained that the registration process is designed to provide only minimal descriptive information, such as location and contact information, to allow OHRP and the FDA to communicate more effectively with IRBs. Post-Hearing Developments 73 After the hearing, Coast IRB, LLC voluntarily agreed April 14, 2009 to suspend new clinical trial oversight activities after the Food and Drug Administration (FDA) raised “serious concerns” about its ability to protect human subjects. According to an FDA announcement, Coast could continue oversight of ongoing clinical trials, but would halt review of any new medical studies involving drugs and devices. Coast also was prohibited from allowing any new subjects to be added to the ongoing studies it currently was monitoring. FDA sent a warning letter to the company indicating the IRB had violated regulations intended to protect the rights and welfare of human research subjects in clinical trials. Coast IRB initially indicated a comprehensive overhaul of its policies and procedures was underway and that it had hired a nationally recognized consulting firm to help “reinvent” the company. It later decided, however, to cease operations entirely. Other Developments FDA Issues Guidance On Distribution Of Articles Discussing Unapproved Uses Of Drugs And Devices The Food and Drug Administration (FDA) issued a notice in the January 13, 2009 Federal Register (74 Fed. Reg. 1694) finalizing industry guidance on "Good Reprint Practices" in the distribution of medical or scientific journal articles and reference publications that involve unapproved uses of FDA-approved drugs and medical devices. Under Section 401 of the Food and Drug Administration Modernization Act, which was passed in 1997, companies had to submit medical journal articles involving off-label uses to the FDA before distribution. The statute sunset on September 30, 2006 and FDA said the guidance document represents the agency’s “current views” on the dissemination of medical journal articles and publications that involve unapproved uses. In the guidance document, FDA said it recognizes “the important public health and policy justification supporting dissemination of truthful and non-misleading medical journal articles . . . on unapproved uses of approved drugs and . . . medical devices.” “These off-label uses or treatment regimens may be important and may even constitute a medically recognized standard of care,” the guidance notes. To that end, the guidance document sets forth recommended practices that, if followed, would allow manufacturers to distribute articles and publications about off-label uses without fear the FDA would consider such distribution as promoting the product for an unapproved new use. Some of the principles recommended by the draft guidance include ensuring that the article or reference be published by an organization that has an editorial board and that the organization should fully disclose any conflicts of interest or biases for all authors, contributors, or editors associated with the journal article. The guidance also states that articles should be peer-reviewed and published in accordance with specific procedures. 74 In addition, the guidance recommends against distribution of special supplements or publications that have been funded by one or more of the manufacturers of the product in the article, and articles that are not supported by credible medical evidence are considered false and misleading and should not be distributed. Based on comments on the draft guidance, which was issued in February 2008, FDA says the final document “include[s] a specific reference encouraging manufacturers to seek approvals and clearance for new indications and intended uses for medical products.” FDA also notes that its “legal authority to determine whether distribution of medical or scientific information constitutes promotion of an unapproved ‘new use,’ or whether such activities cause a product to violate the [Food Drug and Cosmetic] Act has not changed.” In comments on the draft guidance, consumer group Public Citizen said the agency’s decision “to once again permit the promotion of off-label uses of drugs contrasts the current recklessness of the agency with the more consumer-protective FDA of 10 years ago.” Lawmakers Offer Competing Legislation For Follow-On Biologics A number of lawmakers have introduced legislation in both the House and Senate over the last year seeking to establish a clear regulatory pathway for approving generic versions of biotech drugs. Biotech drugs, which are produced from living cell cultures rather than synthesized chemically, are among the fastest growing and most expensive components of the nation’s drug bill. Without a statutory pathway, lawmakers have raised concerns that manufacturers of biotech drugs, which are often prohibitively expensive and include medications used to treat cancer, diabetes, and AIDS, can charge monopoly prices indefinitely. Lawmakers seem to agree that FDA needs clear statutory authority for approving generic versions of costly biotech drugs, but the period of exclusivity to afford the brand-name, or reference product, has been the key sticking point. The Promoting Innovation and Access to Life-Saving Medicines Act (H.R. 1427), introduced by Representatives Henry A. Waxman (D-CA), Frank Pallone, Jr. (D-NJ), Nathan Deal (R-GA), and Jo Ann Emerson (R-MO) would grant the original product five years of exclusive marketing, while a modification of a previously approved product would be entitled to three years of exclusivity. The exclusivity periods could be extended by up to one year if the applicant establishes that the product can be used for new disease indications or conducts pediatric studies, according to a summary of the bill. Senators Charles E. Schumer (D-NY), Susan Collins (R-ME), Sherrod Brown (D-OH), Mel Martinez (R-FL), Debbie Stabenow (D-MI), and David Vitter (R-LA) introduced a similar bill in the Senate, which also contemplates a five-year period of exclusivity. In a press release announcing their bill this week, the Senate lawmakers said the “fiveyear window” envisioned under their legislation would start from the time the brandname drug was first approved, not the time of the bill’s enactment. 75 This would mean, the lawmakers said, that generic firms would not have to wait to seek approval to market cheaper versions of biologic drugs that have been on the market well beyond five years. The legislation is backed by a number of consumer and business groups including AARP, Consumers Union, the National Business Group on Health, and the AFL-CIO. In a statement, AARP said the bill “will ensure that consumers have greater access to many of the biologic therapies that may be currently financially out of reach and, in doing so, will improve the quality of life for millions of Americans." But the Biotechnology Industry Organization (BIO) panned the proposal. While supporting the development of a pathway for approving biosimilars, BIO argued the legislation introduced in the House would “jeopardize[] the continued development of new breakthrough therapies and potential cures for debilitating diseases.” BIO instead threw its support behind a competing bill (H.R. 1548), introduced in the House on March 17, 2009 by Representatives Anna G. Eshoo (D-CA), Jay Inslee (D-WA), and Joe Barton (R-TX), which provides a 12-year period of exclusivity for brand-name biotech drugs, with the potential for an additional two years for “medically significant” new indications approved during the eight-year period following licensure of the reference product. “Biotechnology can lead to cures for cancer, diabetes, and AIDS, and prevent the onset of deadly and debilitating diseases like Alzheimer’s heart disease, and Parkinson’s,” said Eschoo. “But we need to preserve incentives to innovate and ensure that these therapies are safe and effective. Our bill accomplishes this.” According to BIO, H.R. 1538 strikes the right balance between establishing a reasonable and safe pathway to biosimilars without dampening innovation. The Generic Pharmaceutical Association (GPhA), however, criticized the Eschoo-InsleeBarton bill, saying it “will only benefit brand companies by erecting barriers including an unprecedented and unjustifiable 14 years of market exclusivity.” Fraud and Abuse Settlements and Jury Awards UnitedHealth Group Agrees To $895 Million Settlement Of Public Pension Fund’s Federal Securities Class Action UnitedHealth Group has agreed to pay $895 million and institute certain corporate governance reforms to resolve a federal securities class action involving the company’s stock option grant practices, according to press releases issued by UnitedHealth and lead plaintiff the California Public Employees’ Retirement System (CalPERS). The agreement, which still requires the approval by the CalPERS Board of Administration, the UnitedHealth Board of Directors, and the court, would resolve a class action filed in July 7, 2006 in a federal district court in Minnesota. The lawsuit, brought by public pension fund CalPERS and several other investors, alleged discrepancies between UnitedHealth’s public statements about its profits, which were related to stock option grants to executives. 76 According to CalPERS, the proposed settlement is thought to be the largest options backdating recovery in a class action. Under the settlement, UnitedHealth agreed to a number of corporate governance changes, including a process for electing a shareowner-nominated director, enhanced standards for director independence, a mandated holding period for option shares acquired by executives, shareowner approval of any stock option re-pricing, and that incentive compensation consider the company’s performance compared to its peer group. The settlement does not cover UnitedHealth’s former chief executive officer or former general counsel. “The corporate governance reforms achieved in the settlement are a major step forward in our broader effort to ensure that directors are responsible to shareowners, and I look forward to presenting it in the weeks ahead to our Board for action,” said CalPERS General Counsel Peter Mixon. “The settlement provides UnitedHealth Group with certainty and closure on this lawsuit, avoids potentially costly and protracted litigation and allows us to continue to focus on providing Americans with high-quality, affordable health care solutions,” said Thomas L. Strickland, chief legal officer of UnitedHealth Group. UnitedHealth Group also announced a separate, proposed settlement to pay $17 million to resolve class action litigation under the Employee Retirement Income Security Act relating to the company’s historical stock option practices. The company did not admit any wrongdoing as part of the proposed settlement. Alabama Jury Finds GlaxoSmithKline, Novartis Liable For Over $100 Million For Overcharging Medicaid, Companies Will Appeal Verdict An Alabama jury July 1, 2009 returned a verdict finding drug makers GlaxoSmithKline and Novartis Pharmaceutical Corporation liable for a total of $114,247,233. Alabama Attorney General Troy King had alleged that numerous drug companies misreported and inflated the average wholesale price (AWP) of prescription drugs leading to massive overcharges to the Alabama Medicaid Agency. On February 21, 2008, the first of the AWP cases to be tried resulted in a verdict of $215 million against AstaZeneca, King said. The GlaxoSmithKline and Novartis case is the second of the AWP cases to come to trial in the state. Novartis and GlaxoSmithKline both said they will appeal the verdict. Novartis said allegations were “unfounded” because the company “reported true and accurate prices, based on terms that have been known and used by all participants in pharmaceuticals markets, including Alabama Medicaid, for more than 30 years.” GlaxoSmithKline also maintained that it did not misrepresent price information to the state. 77 “We have said from the beginning that GSK reported true and accurate prices to the state of Alabama,” said Chilton Varner, an attorney with King & Spalding of Atlanta who represented GSK. “We believe the evidence shows the State made informed choices about how and how much to pay Alabama pharmacists,” Varner said. “Evidence also shows that, although the State now says it was not being fairly treated, the State has not changed the rules since it filed the lawsuit more than three years ago.” Amerigroup Finalizes $225 Million Settlement Of FCA Case Amerigroup Corp. will pay $225 million to the federal government and the state of Illinois to resolve a False Claims Act (FCA) qui tam case involving the company’s former Illinois health plan under a final settlement agreement. The company had unveiled a tentative settlement in July 2008, but according to a press release posted by U.S. Attorney for the Northern District of Illinois Patrick J. Fitzgerald, the 22-page agreement was not signed by the parties until August 13, 2008. In October 2006, a federal jury found that Amerigroup Corp., a Medicaid health maintenance organization, and Amerigroup Illinois Inc. violated the FCA and its state counterpart, the Illinois Whistleblower Reward and Protection Act, by systematically avoiding enrolling pregnant women and other individuals with expensive health conditions while continuing to receive state and federal dollars. A federal district court judge in March 2007 imposed civil penalties of more than $190 million against Amerigroup Illinois Inc. and its parent company, Amerigroup Corp., raising the insurance companies’ total liability to more than $334 million. Fitzgerald’s press release noted that the settlement replaces the judgment. In exchange, Amerigroup agreed to dismiss its appeal of the judgment that was before the Seventh Circuit. The company admitted no wrongdoing in agreeing to the proposed settlement. “We are concluding this litigation now to remove a source of significant legal and financial uncertainty for our organization,” said Amerigroup’s Chairman and Chief Executive Officer James G. Carlson. As part of the settlement, Amerigroup also has entered into a corporate integrity agreement (CIA) with the Department of Health and Human Services Office of Inspector General. The CIA requires Amerigroup to adopt a code of conduct and policies and procedures designed to prevent improper discrimination against federal healthcare program beneficiaries in its marketing and enrollment practices, according to the press release. The company also must hire an independent review organization to annually review its marketing practices and enrollment initiatives, and its Board of Directors must annually certify to the effectiveness of its compliance program. Missouri Healthcare System Agrees To Pay $60 Million To Settle FCA Case Alleging Improper Medicare Billing CoxHealth, a nonprofit healthcare organization consisting of three hospitals and over 50 physician clinics in the Springfield, Missouri region, agreed to pay $60 million to the 78 federal government to resolve charges it violated the False Claims Act (FCA) by improperly billing Medicare, according to a July 22, 2008 press release issued by the Department of Justice (DOJ). DOJ also alleged CoxHealth entered into prohibited financial arrangements with a physician group and paid physicians based on their referrals to CoxHealth hospitals in violation of the Stark and antikickback laws. The settlement also resolves claims that Cox included non-reimbursable costs on its Medicare cost reports and improperly billed for services provided to dialysis patients. As part of the settlement, CoxHealth will pay $35 million immediately, followed by five yearly payments of $5 million (plus 4% interest), the release said. DOJ emphasized the settlement amount of $60 million was a compromise, and was “considerably less that the alleged improper Medicare payment to Cox.” This amount took into account CoxHealth’s ability to pay with an underlying objective of allowing CoxHealth to continue operating as a healthcare system, according to DOJ. “The government began its settlement negotiations by taking the position that Cox should repay every claim the government alleges we improperly billed to Medicare . . . [which] exceeded the amount Cox could pay,” commented John Squires, Chairman of CoxHealth’s Board of Directors, in a press release. “Given the magnitude of the repayment if we were to go to trial and lose, which is always a possibility with jury trials, we negotiated with the government until we reached an amount we could pay and still continue to fulfill our mission to serve the community now and in the future,” Squires added. In addition to the monetary settlement, CoxHealth has agreed to enter into a comprehensive five-year Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General to ensure its continued compliance with federal healthcare benefit program requirements. “Because we already have a strong internal Corporate Integrity program here at CoxHealth—which includes extensive annual compliance education—we feel very confident that we as an organization will be able to honor this commitment,” said CoxHealth’s President and Chief Executive Officer Robert H. Bazenson. New York Attorney General Announces $27 Million Settlement With Express Scripts And CIGNA In Drug-Switching Case New York Attorney General Andrew M. Cuomo announced July 29, 2008 that Express Scripts Inc. (ESI)—the nation’s third largest pharmacy benefit manager—along with Cigna Life Insurance Company (CIGNA), have agreed to pay a total of $27 million as part of a settlement of a drug-switching lawsuit brought by the state. The lawsuit (New York v. Express Scripts Inc., No. 4669-04 (N.Y. Sup. Ct.)), filed by the state in August 2004, alleged that, from 1998 through 2005, ESI enriched itself at the expense of New York State Health Insurance Program’s Empire Plan and its members by inflating the cost of generic drugs and diverting to itself millions of dollars in drug manufacturer rebates that belonged to the Plan. The lawsuit alleged ESI engaged in fraud and deception to induce physicians to switch a patient’s prescription from one prescribed drug to another in order to receive a rebate 79 from the second drug’s manufacturer. These drug switches resulted in higher costs for the Empire Plan and its members while simultaneously enriching ESI, according to the settlement. The lawsuit also claimed that, as part of the scheme to divert and retain manufacturer rebates that belonged to the Empire Plan, ESI disguised millions of dollars in rebates as administrative fees, management fees, or fees for other professional services. The drug-switching charges are similar to those alleged in a previous lawsuit that ESI settled in May 2008. As part of that settlement agreement, reached between ESI and 28 states and the District of Columbia, ESI agreed to pay $9.5 million. Under the terms of the settlement, ESI (or any other CIGNA subcontractor) must notify individual plan members and prescribers when it has initiated a drug switch. In addition, plan members must be advised of their right to refuse a drug switch and continue taking their regularly prescribed drug. In addition, the settlement prohibits ESI from soliciting drug switches when: the net drug cost of the proposed drug exceeds the net drug cost of the originally prescribed drug; the originally prescribed drug has a generic equivalent and the proposed drug does not; the originally prescribed drug’s patent is expected to expire within six months; or the patient was switched from a similar drug within the past two years. Finally, the settlement requires ESI to make changes to increase the transparency of its drug pricing and payment methods. ESI said in a press release that it did “not admit any of the assertions” made in the lawsuit. “Express Scripts did not conduct brand-drug therapeutic interchange programs for the Empire Plan,” the release said. “The company also does not recommend switches to higher-cost drugs and does not accept pharmaceutical manufacturer funding for such programs.” ESI also said that its business practices were essentially already in compliance with the requirements of the settlement, and that therefore “[o]nly minor adjustments” in certain procedures would be necessary. CIGNA released a separate statement indicating that it had agreed to make a contribution to facilitate the settlement. “We believed at all times, CIGNA fulfilled its obligations to the State of New York,” the insurer said, but “[p]rolonged litigation is not in anyone’s best interest.” Abbott Labs Pays $28 Million To Texas To Settle False Price Reporting Charges Texas Attorney General (AG) Greg Abbott announced September 9, 2008 a $28 million civil settlement with Abbott Laboratories Inc., which resolves charges that the drug manufacturer falsely reported drug prices to the state and federal Medicaid programs. Of the $28 million in settlement funds, approximately $18 million are for damages and $10 million will reimburse attorneys’ fees and costs, the AG said in a press release. 80 State and federal law requires that drug manufacturers report the prices at which they sell their products to various providers, which is then used by the states to determine Medicaid providers’ reimbursement for the drugs. The difference between what a provider actually pays to purchase a drug and what is reimbursed by Medicaid is called the “spread.” “As a result of the illegal spreads created by Abbott Laboratories, Texas Medicaid overreimbursed providers for Abbott’s drugs,” the release said. Based on information provided by industry insider Ven-a-Care of the Florida Keys Inc., the Texas Attorney General has reached drug-pricing scheme settlements with numerous other pharmaceutical companies. Recent similar settlements include: Schering-Plough/Warrick Pharmaceuticals in May 2004 ($27 million); Dey Inc. in June 2003 ($18.5 million); Boehringer Ingelheim/Roxane Laboratories in November 2005 ($10 million); and Baxter Healthcare Corp. in June 2006 ($8.5 million). Enforcement actions against several other pharmaceutical manufacturers are pending. Staten Island University Hospital To Pay Nearly $89 Million To Settle Claims Of Defrauding Federal And State Healthcare Programs Staten Island University Hospital (SIUH) has agreed to pay a total of nearly $89 million to settle claims that it defrauded Medicare, Medicaid, and the military’s health insurance program, TRICARE, announced the U.S. Department of Justice (DOJ) and New York Attorney General Andrew M. Cuomo in two separate September 15, 2008 press releases. SIUH agreed to pay $74,032,565 to settle claims that it defrauded federal healthcare programs, and an additional $14,883,883 to New York representing damages sustained by the state’s Medicaid program. The settlement resolves, in part, qui tam suits filed in the U.S. District for the Eastern District Court of New York on behalf of the government by two individuals, Dr. Miguel Tirado and Elizabeth M. Ryan. Tirado, SIUH’s former Director of Chemical Dependency Services, alleged the hospital had violated federal and state False Claims Acts (FCAs) by fraudulently billing Medicaid and Medicare for inpatient alcohol and substance abuse detoxification treatment. The government’s investigation in this case established that, from July 1994 through June 2000, SIUH submitted claims for detoxification treatment provided to patients in beds for which SIUH had no certificate of operation from the state. According to DOJ, SIUH was authorized to provide inpatient detoxification care to patients in 56 beds, but "administered [such] treatment in 12 additional beds located in a locked, separate wing and concealed the existence of the wing" from the state. In the settlement approved by the district court, SIUH agreed to pay the federal government $11,824,056 and the State of New York $14,883,883. Tirado, as the relator, will receive $2.3 million and $2.97 million from the federal government and state government, respectively. 81 Ryan, the widow of a deceased cancer patient who was treated at SIUH, initiated the second lawsuit, alleging the hospital violated the federal FCA by fraudulently billing Medicare for stereotactic body radiosurgery treatment that was provided on an outpatient basis to cancer patients. The government’s investigation in this case established that, from 1996 through 2004, SIUH defrauded Medicare and TRICARE by knowingly using incorrect billing codes for cancer treatment performed at the hospital, and in doing so, obtained reimbursement for treatment that was not covered by either program. In the settlement approved by the district court, SIUH will pay the federal government $25,022,766, of which Ryan will receive $3.75 million, according to DOJ’s press release. Two other claims adding significant sums to SIUH’s total settlement amount with the federal government were resolved prior to the filing of the qui tam suits, DOJ explained. “The United States had determined that SIUH deliberately inflated its resident count from the 1996 cost report year through the 2003 cost report year,” and therefore received more that its share of Medicare Graduate Medical Education reimbursement, DOJ said. To resolve allegations pertaining to this fraudulent reporting, SIUH agreed to pay the government $35,706,754, according to DOJ. In addition, SIUH previously agreed to pay the federal government $1,478,989 to settle claims relating to SIUH’s billings, from July 2003 through September 2005, to Medicare and Medicaid for treatment of psychiatric patients in unlicensed beds. SIUH further agreed to enter into a five-year Corporate Identity Agreement (CIA) with the Department of Health and Human Services Office of Inspector General under which the hospital will maintain a compliance program to help ensure against a recurrence of fraud. Cephalon Finalizes $425 Million Settlement Of Off-Label Marketing Allegations, Reaches $6.85 Million Deal With States Biopharmaceutical company Cephalon, Inc. will enter a criminal plea and pay $425 million to settle allegations that it unlawfully promoted three of its drugs for off-label uses, the Department of Justice (DOJ) announced September 29, 2008. Cephalon had reached a tentative deal with prosecutors in November 2007 to resolve the off-label promotion allegations. DOJ charged the company with one count of Distribution of Misbranded Drugs: Inadequate Directions for Use, a misdemeanor. Under the plea agreement with the U.S., Cephalon will pay a $40 million criminal fine and $10 million as substitute assets to satisfy the forfeiture obligation, DOJ said. A separate civil settlement agreement requires Cephalon to pay $375 million, plus interest, to resolve False Claims Act allegations made in qui tam lawsuits that Cephalon marketed the drugs Gabitril, Actiq, and Provigil for uses not approved by the Food and Drug Administration (FDA) in violation of the Food, Drug, and Cosmetic Act. The four qui tam lawsuits, filed in the U.S. District Court for the Eastern District of Pennsylvania, alleged Cephalon’s off-label marketing campaign caused false claims for 82 payment to be submitted to federal insurance programs like Medicare, Medicaid, and TRICARE. In a statement, the company also announced separate settlement agreements with the state Attorneys General of Connecticut and Massachusetts to resolve related investigations into Cephalon’s marketing practices. Under the agreement with the Connecticut Attorney General, Cephalon will pay $6.15 million, including $3.8 million to the Connecticut Department of Public Health to fund state cancer initiatives and $200,000 to fund an electronic prescription monitoring program. In addition, the company will pay $700,000 to settle an investigation with the Massachusetts Attorney General of the Commonwealth of Massachusetts, the Cephalon statement indicated. According to DOJ, between 2001 and 2006 Actiq, a pain medication approved only for use in opioid-tolerant cancer patients, was allegedly promoted to treat conditions such as migraines, sickle cell pain crisis, and injuries. Gabitril, approved for use as an anti-epilepsy drug, was allegedly marketed as a remedy for anxiety, insomnia, and pain. Provigil, approved to treat excessive sleepiness from narcolepsy, sleep apnea, and shift work sleep disorder, was allegedly promoted as a nonstimulant drug to treat general sleepiness, tiredness, lack of energy, and fatigue, DOJ said. “These are potentially harmful drugs that were being peddled as if they were, in the case of Actiq, actual lollipops instead of a potent pain medication intended for a specific class of patients,” said Laurie Magid, Acting U.S. Attorney for the Eastern District of Pennsylvania. “This company subverted the very process put in place to protect the public from harm, and put patients’ health at risk for nothing more than boosting its bottom line,” Magid added. Under a five-year corporate compliance agreement (CIA) with the Department of Health and Human Services Office of Inspector General, Cephalon must send physicians a letter advising them of the resolution and post payments to physicians on its website. In addition, the Cephalon’s board and top management must regularly certify the company is in compliance with applicable requirements. “We believe our existing compliance policies and procedures already address the majority of the requirements outlined in the CIA and that the strong compliance infrastructure now in place has improved the accountability of our employees and the transparency of our actions,” said Valli Baldassano, Cephalon Executive Vice President and Chief Compliance Officer. Walgreens Pays $9.9 Billion To Settle Charges Of Medicaid Overbilling Retail pharmacy chain Walgreens has paid the federal government and four states $9.9 million to resolve allegations it falsely billed Medicaid for prescription drugs dispensed to persons covered by both Medicaid and private third-party insurers, the Department of Justice (DOJ) announced September 29, 2008. 83 According to DOJ, Walgreens allegedly charged the four state Medicaid programs the difference between what the private insurance companies paid for the drugs and what the state Medicaid programs would have paid for the drugs in the absence of private insurance. The government contended the drug chain was entitled to reimbursement from the Medicaid programs only for the amount the Medicaid beneficiary would have been obligated to pay the pharmacy had the claims been submitted solely to the private insurers, generally the co-payment amount. The government investigation was prompted by a qui tam action under the False Claims Act brought by two Walgreens pharmacists. The two relators will share over $1.4 million as a portion of the recovery, the release said. Eli Lilly Agrees To Multi-State Settlement Of $62 Million To Resolve Off-Label Marketing Charges Pharmaceutical manufacturer Eli Lilly and Company has agreed to pay a record $62 million multi-state settlement to resolve charges of improper marketing for off-label uses of the antipsychotic drug Zyprexa. According to California Attorney General Edmund G. Brown Jr., the settlement is the largest ever multi-state consumer protection-based pharmaceutical settlement. Brown noted in an October 7, 2008 press release that California will receive $5.6 million, the largest share of the award. The attorneys general of the 32 states involved in the settlement had alleged that Eli Lilly engaged in unfair and deceptive practices when it marketed Zyprexa for off-label uses and failed to adequately disclose the drug’s potential side effects to healthcare providers. According to Brown, beginning in 2001 Eli Lilly launched an aggressive marketing campaign that pushed Zyprexa for off-label uses including pediatric care, high-dosage treatment, treatment of symptoms rather than diagnosed conditions, and treatment of elderly patients suffering from dementia. Under the terms of the settlement, the drug company has agreed, among other things, to: refrain from making any false, misleading, or deceptive claims regarding Zyprexa; require its medical staff, rather than its marketing staff, to have ultimate responsibility for developing and approving content for all medical letters and references regarding Zyprexa; provide specific, accurate, objective, and scientifically balanced responses to unsolicited requests for off-label information from a healthcare provider regarding Zyprexa; contractually require continuing medical education providers to disclose Eli Lilly’s financial support of their programs and any financial relationship with faculty and speakers; and provide a list of healthcare provider promotional speakers and consultants who were paid more than $100 for promotional speaking and/or consulting by Eli Lilly. Robert A. Armitage, Eli Lilly's senior vice president and general counsel, noted in a statement that “there is no finding that Lilly has violated any provision of the state laws under which the investigations were conducted.” "Lilly's policies and practices already mirror most of the provisions included in the proposed consent decrees. This resolution reflects our commitment to continually build on a foundation of compliance, accuracy and transparency," Armitage said. 84 The 32 states participating in the agreement are Alabama, Arizona, California, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Washington and Wisconsin, as well as the District of Columbia. Bayer Agrees To Pay U.S. $97.5 Million To Resolve Kickback Allegations Bayer HealthCare LLC (Bayer) agreed to pay the United States $97.5 million plus interest to settle allegations that it paid kickbacks to 11 diabetic suppliers and caused those suppliers to submit false claims to Medicare, according to a Department of Justice (DOJ) announcement. The DOJ said November 25, 2008 the settlement resolves allegations that Bayer engaged in a cash-for-patient scheme through which the company paid the diabetic suppliers to convert their patients to Bayer’s products from supplies manufactured by its competitors. Under the terms of the settlement, Bayer agreed to enter into a corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. Bayer noted in a statement that the company "has cooperated fully with the DOJ’s civil investigation that commenced in 2003, without acknowledging liability." According to Bayer, its "compliance processes have undergone continuous improvement in all areas of the company in the past years. In addition, employees receive regular training in order to promote understanding and compliance" with federal law. McKesson Announces $350 Million Settlement On Private Party AWP Litigation McKesson Corporation announced November 21, 2008 that it has agreed to a $350 million settlement to resolve allegations that it conspired with publishing company First DataBank to inflate the average wholesale price (AWP) of its pharmaceuticals. According to the company's press release, McKesson "will also record a reserve for outstanding and expected future AWP-related claims by public entities, which is currently estimated to be $143 million." The settlement terms include an express denial of liability of any kind, McKesson noted. “As we have consistently stated, we believe the plaintiffs’ allegations are without merit, and that McKesson adhered to all applicable laws,” said John H. Hammergren, McKesson chairman and chief executive officer. “Yet when faced with the inherent uncertainty of this litigation, we determined that entering into the settlement agreement was in the best interest of our shareholders, customers, suppliers, and employees.” Illinois Hospital To Pay $36 Million Following Voluntary Disclosure Of Improper Payments Condell Health Network, the parent corporation of Condell Medical Center, agreed to pay $36 million to the federal government and state of Illinois following its voluntarily 85 disclosure that it received improper Medicare and Medicaid payments for roughly five years, U.S. Attorney for the Northern District of Illinois Patrick J. Fitzgerald announced December 1, 2008. Condell brought the improper payments involving the 283-bed medical center, based in Libertyville, IL, to the government’s attention while in the process of being acquired by Advocate Health Care. The acquisition was scheduled to be completed December 1. The improper practices, according to Fitzgerald, stemmed from Condell’s relationship with its physicians from 2002 through 2007—specifically, leases of medical office space at rates below fair market value, improper loans to physicians, and hospital reimbursement to physicians who performed patient services without written agreements. “By voluntarily disclosing these improper practices, Condell avoided a Government lawsuit under the federal False Claims Act and was able to negotiate a settlement at a discount,” the release said. Under the settlement agreement, Condell will pay the federal government $33.12 million to resolve claims relating to Medicare and $2.88 million to Illinois regarding Medicaid. Condell admitted no liability in agreeing to the settlement. “We commend Condell for bringing these practices to our attention. We expect health care providers to come forward when they discover issues that could rise to the level of fraud without waiting for us to catch up to them, and when they do so, they may well benefit,” Fitzgerald said. Eli Lilly To Pay $1.415 Billion In Landmark Settlement Of Zyprexa Off-Label Promotion Allegations Eli Lilly and Company has agreed to pay $1.415 billion to settle criminal and civil allegations that the drug maker illegally marketed its antipsychotic drug Zyprexa (olanzapine) for unapproved uses, the Department of Justice (DOJ) announced January 15, 2009. Under the settlement, Eli Lilly agreed to plead guilty to a misdemeanor charge of misbranding in violation of the Food, Drug, and Cosmetic Act, pay a $515 million criminal fine, and forfeit assets of $100 million. According to DOJ, the criminal fine is the largest “for an individual corporation ever imposed in a United States criminal prosecution of any kind.” “We deeply regret the past actions covered by the misdemeanor plea,” said Eli Lilly Chairman, President, and Chief Executive Officer John C. Lechleiter, Ph.D. in a statement. The company also will pay up to $800 million to the federal government and the states to resolve civil allegations originally brought in four separate lawsuits under the qui tam provisions of the False Claims Act. The federal government will receive $438 million of the civil settlement, while the states that participate will share up to $361 million. Relators in the case will receive $78.8 million from the federal share. Eli Lilly did not agree with or admit the civil allegations. 86 The Food and Drug Administration (FDA) has approved the blockbuster drug Zyprexa for use in treating schizophrenia and bipolar mania. But according to the government’s criminal information, filed in the U.S. District Court for the Eastern District of Pennsylvania, from September 1999 through at least November 2003 Eli Lilly promoted Zyprexa for various other treatments, including for dementia or Alzheimer’s dementia, which are uses not approved by the FDA. The information also alleged that Eli Lilly executives began in October 2000 an off-label marketing campaign targeting primary care physicians, even while the company knew there was virtually no approved use for Zyprexa in the primary care market. The qui tam lawsuits claimed that between September 1999 and the end of 2005, Eli Lilly illegally promoted Zyprexa and caused false claims for payment to be submitted to federal healthcare programs for these off-label uses. Eli Lilly also entered into a five-year corporate integrity agreement (CIA) with the Department of Health and Human Services Office of Inspector General. In October 2008, the pharmaceutical giant agreed to a record $62 million, multi-state settlement to resolve various consumer protection lawsuits concerning its marketing of Zyprexa. In a statement, Eli Lilly said the company cooperated with the government’s investigation and has “a comprehensive compliance program that is designed to ensure [its] global business practices fully comply with laws and regulations.” Hospice Company To Pay $24.7 Million To Settle FCA Claims Alabama-based SouthernCare Inc. has agreed to pay the federal government $24.7 million to settle allegations it submitted false claims to Medicare for beneficiaries who were not eligible for hospice care, the Department of Justice (DOJ) announced January 15, 2009. Medicare beneficiaries are entitled to hospice care if they have decided to forego curative treatment of their illness and have a terminal prognosis of six months or less to live. Two former SouthernCare employees initiated a whistleblower action under the False Claims Act (FCA) against the hospice company. They will receive $4.9 million from the settlement proceeds. “Our investigation showed a pattern and practice to falsely admit patients to hospice care who did not qualify and to bill Medicare for that care,” said U.S. Attorney for the Northern District of Alabama Alice H. Martin. As part of the settlement, SouthernCare also will enter into a five-year corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. SouthernCare admitted no liability in agreeing to the settlement. “We are pleased to put this matter to rest so we can focus on what we do best—serving patients and families with compassion and dignity—rather than remain tangled in protracted legal issues,” said SouthernCare President and Chief Executive Officer Michael J. Pardy in a statement. 87 Wisconsin Jury Finds Pharmacia Committed Medicaid Fraud, Must Reimburse State $9 Million Wisconsin Attorney General J. B. Van Hollen announced February 17, 2009 that a jury found pharmaceutical manufacturer Pharmacia had violated the state Medicaid fraud law 1,440,000 times by reporting grossly inflated and fraudulent prices to the state Medicaid program. After a two-week trial in a case brought by the Wisconsin Department of Justice, the jury found Pharmacia should pay $9 million to compensate the state for its monetary losses, according to a press release issued by Van Hollen. Under Wisconsin's Medicaid fraud forfeiture statute, the court may award a minimum of $100 per violation up to a maximum of $15,000 per violation, the release said. A dispositional hearing will be scheduled to determine the forfeiture amount. The Wisconsin Department of Justice has filed similar claims against 35 other pharmaceutical manufacturers, Van Hollen said. Three of the manufacturers already have settled with the state, agreeing to pay over $3 million to resolve the claims. Jury Orders Sandoz To Pay State Almost $80 Million In AWP Litigation A Montgomery, Alabama jury found February 24, 2009 drug manufacturer Sandoz Pharmaceuticals, Inc. guilty of Medicaid fraud and ordered the company to pay $78.4 million in damages to the state. According to a press release posted by Beasley Allen, the law firm that represent the state of Alabama in its suit against a total of 72 pharmaceutical companies in Average Wholesale Price (AWP) litigation, the total fine imposed on Sandoz includes $28.4 million in compensatory damages and $50 million in punitive damages. The drug companies have been accused of reporting false prices to the state and this particular verdict “is significant because German-based Sandoz, a subsidiary of Novartis, manufactures and markets generic drugs,” the release said. "The fact that a generic drug is cheaper than a brand did not give Sandoz the right to cheat the state out of $28 million," Jere L. Beasley said, adding that "Sandoz knowingly reported false prices to the state." According to the release, Sandoz is the fourth company to go to trial. In the first trial in February 2008, a jury awarded Alabama a $215 million verdict against AstraZeneca PLC. The second trial resulted in a $114 million verdict in favor of the state against GlaxoSmithKline and Novartis in July 2008. Settlements have been reached with seven other companies and negotiations are ongoing with a number of others, the release noted. Court Approves Settlements Of Lawsuits Alleging Companies Fraudulently Marked Up Drug Prices A federal district court in Massachusetts approved March 17, 2009 settlements of class actions alleging drug wholesalers First DataBank, Inc. (FDB) and Medi-Span engaged in a 88 scheme with drug pricing publisher McKesson Corporation to fraudulently “mark up” the average wholesale price (AWP) for numerous prescription drugs. U.S. District Court for the District of Massachusetts Judge Patti B. Saris found the amended settlements, which require among other things that FDB and Medi-Span pay $2.7 million into a settlement fund for class members (third-party payors (TPPs) and consumers), “fair, reasonable and adequate.” The settlement also calls for rolling back the wholesale average cost (WAC) to AWP markup from 1.25 to 1.20 for 1,442 branded drugs. Judge Saris did modify, however, the settlement agreement to extend from 90 days to six months the effective date to make the price adjustments so as “to alleviate the impact on independent and rural pharmacies.” Judge Saris had rejected an earlier proposed settlement based on concerns that it provided only prospective relief with no money for consumers or TPPs. Saris also cited objections from pharmacy groups and other third parties that the initial proposal called for rolling back over 8,000 National Drug Codes (NCDs) for branded drugs, not just those 1,442 NCDs affected by the fraud. “[B]ecause of FDB’s limited finances and questionable insurance coverage, the $2.7 million cash payment, combined with the AWP rollback provisions constitutes a reasonable settlement of the claims,” Saris wrote. Despite the modifications to the earlier proposal, the National Association of Chain Drug Stores (NACDS) argued the settlement approved by the court would “unfairly hurt retail pharmacies.” “The AWP reductions will cut Medicaid reimbursement by about $68 million each year. In addition, pharmacies that are unable to renegotiate their private sector reimbursement contracts will face a net 4 percent reduction in AWP-based reimbursement,” NACDS said. NACDS added that it is considering “next steps regarding the ruling and will determine the course of action that best represents pharmacy for the benefit of the patients.” Responding to NACDS' objections, Saris said in the order that “after eight years of this [multi-district litigation], rolling back AWPs or phasing them out as a pricing benchmark is in the public interest and to the benefit of the class.” Moreover, Saris said many retail drug chains already had renegotiated their reimbursement contracts with pharmacies and were on notice for two years that a rollback was likely. “None of the pharmacies protested the windfalls they received when prices were unilaterally inflated by five percent,” Saris commented. At issue in the litigation was the so-called “spread,” i.e., the difference between WAC— what the retailers pay to acquire drugs—and the AWP—what consumers and TPPs pay to retailers for the drugs. The lawsuit alleged that in late 2001, McKesson and FDB entered into a “secret agreement” on how the WAC to AWP markup would be established for hundreds of brandname drugs. Specifically, McKesson and FDB raised the WAC to AWP spread from 20% to 89 25% for over 400 drugs that previously had received only the 20% markup, according to the lawsuit. As a result of this artificial increase in the markup of the WAC to AWP spread from 20% to 25%, thousands of TPPs, public entities, and consumers paid increased drug prices, plaintiffs contended. In November 2008, McKesson Corporation agreed to a $350 million settlement to resolve allegations that it conspired with FDB to inflate the AWP of its pharmaceuticals. New England Carpenters Health Benefits Fund v. First Databank, Inc., No. 05-11148-PBS and District Council 37 Health and Security Plan v. Medi-Span, No. 07.10988-PBS (D. Mass. Mar. 17, 2009). * NACDS and the Food Marketing Institute (FMI) announced April 29 that they are appealing to the First Circuit the court’s approval of the settlements. Quest Diagnostics To Pay $302 Million To Resolve Allegations That Subsidiary Sold Misbranded Test Kits The U.S. Department of Justice (DOJ) announced April 15, 2009 that Quest Diagnostics Incorporated (Quest) and its subsidiary, Nichols Institute Diagnostics (NID), have entered into a $302 million global settlement with the federal government to resolve criminal and civil claims that NID knowingly manufactured, marketed, and sold various test kits that produced materially inaccurate and unreliable results. “In order to safeguard public health, and when appropriate, to recover taxpayer dollars, the government will vigorously investigate allegations that a manufacturer knowingly sold medical devices, such as test kits, that were materially unreliable or provided significantly inaccurate results,” commented U.S. Attorney for the Eastern District of New York Benton J. Campbell. As part of the settlement, NID pled guilty to a felony misbranding charge in violation of the Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301 et seq. The charge relates to NID’s Nichols Advantage Chemiluminescence Intact Parathyroid Hormone Immunoassay (Advantage Intact PTH Assay), a test used to measure parathyroid hormone (PTH) levels in patients. In its guilty plea, NID admitted that, over approximately a six-year period commencing in May 2000, it knowingly caused the introduction into interstate commerce the Advantage Intact PTH Assay, which was misbranded within the meaning of 21 U.S.C. § 352(a). NID further agreed to pay a criminal fine of $40 million and enter into a nonprosecution agreement with the federal government, according to DOJ’s press release. Quest and NID also entered into a civil settlement agreement with the federal government under which Quest will pay $262 million to resolve federal False Claims Act (FCA) allegations relating to the Advantage Intact PTH assay, as well as other assays manufactured by NID that allegedly provided inaccurate and unreliable results. Federal and state governments undertook civil and criminal investigations in the case after a whistleblower filed a qui tam complaint in the Eastern District of New York, alleging that the Advantage Intact PTH Assay and another widely used PTH assay manufactured by NID, the Bio-Intact PTH Assay, provided elevated results. According to 90 the release, the whistleblower will share in the FCA recovery and receive approximately $45 million. The civil settlement resolves allegations that, over the same six-year period, NID manufactured, marketed, and sold the Intact PTH, the Bio-Intact PTH test kits, and certain other test kits despite knowing these kits produced results that were inaccurate and unreliable. As a result, the civil settlement alleges, clinical laboratories that purchased and used the test kits at issue submitted false claims for reimbursement to federal health programs. In addition, Quest agreed to pay various state Medicaid programs approximately $6.2 million to resolve similar civil claims, and to enter into a Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General. In a statement, Quest said "[w]hile the company disagrees with and does not admit to the government's civil allegations, it agreed to the settlement to put the matter behind it." New York AG Announces $35 Million Settlement With Healthfirst On Charges Of Violating Medicaid Managed Care Contract New York Attorney General (AG) Andrew M. Cuomo announced September 3, 2008 a $35 million settlement with Healthfirst, the largest Medicaid managed care provider operating in the state, to resolve allegations the company violated its contract by paying bonuses and other compensation incentives to its marketing representatives based on productivity. In May 2008, Healthfirst’s former Executive Vice President (EVP) and Chief Operating Officer (COO) James Booth was indicted on charges of enrollment fraud and insurance fraud for causing Healthfirst to submit false marketing plans to the state and to local government agencies that concealed the company's improper compensation practices, according to the AG's press release. “Medicaid providers engaged in prohibited compensation practices are committing an act of fraud against New York’s taxpayers,” Cuomo commented. “Marketing reps must not engage in a numbers game that could result in ineligible persons being enrolled in the Medicaid program and cost[ing] taxpayers more money.” The AG's office said an ongoing investigation uncovered the alleged improper compensation practices, which occurred with enrollments in 1999 through September 2003. During the course of the investigation, Healthfirst cooperated with the AG’s office and disclosed certain information concerning the improper compensation practices and enrollment fraud committed by certain former marketing representatives, the release said. In addition, both EVP/COO Boothe and Healthfirst’s President and Chief Executive Officer, Paul Dickstein, resigned from their positions in late 2007. Under new leadership, Healthfirst is undertaking an extensive review of past and current practices to ensure that it fully complies with its contractual obligations, according to the release. “Healthfirst’s new management is rightfully taking responsibility and correcting the mistakes of the past,” Cuomo said. 91 Criminal Law Seventh Circuit Vacates Individual’s Out-Of-Guidelines Sentence For Medicaid Fraud The Seventh Circuit vacated July 9, 2008 a 60-month prison sentence of a small business owner for Medicaid fraud, finding the judge’s substantial departure from the federal Sentencing Guidelines unjustified. Defendant William Higdon, who at age 23 took over his mother’s small business transporting Medicaid patients to and from medical facilities, pleaded guilty under 18 U.S.C. § 1347 to defrauding the Indiana Medicaid program of $294,000. The Sentencing Guidelines range was 18 to 24 months in prison. Although the prosecutor recommended that defendant be sentenced within the guidelines range, the district court judge imposed a 60-month sentence. Defendant appealed the prison sentence. The appeals court noted at the outset that, while United States v Booker, 125 S. Ct. 747 (2005), made the sentencing guidelines advisory rather than mandatory, “an individual judge should think long and hard before substituting his personal philosophy for that of the [Sentencing] Commission.” Here, the Seventh Circuit found the sentencing transcript “laced with apparent mistakes and misunderstandings by the district judge that may have been decisive in his imposing a sentence almost three times the length of the midpoint of the guidelines range (60 months versus 21 months).” For example, according to the Seventh Circuit, the district court judge appeared to base the upward variance on the belief that Medicaid fraud is more serious than other fraud because it involves the government and the poor. But the appeals court found “no suggestion that without prison sentences above the applicable guidelines range, fraud against the Medicaid program will reach a point at which benefits have to be cut.” Although the record indicated that the defendant was remorseful and would not commit another crime, the judge apparently ignored this factor believing that a longer sentence would enable him to obtain “needed educational, vocational training, medical care or other correctional treatment.” But the judge failed to provide a rationale why a guidelines sentence would not be long enough “to enable the defendant to reap whatever benefits one might expect from living in a federal prison,” nor did the judge consider 18 U.S.C. § 3582(a), which requires a court to recognize that “imprisonment is not an appropriate means of promoting correction and rehabilitation.” The appeals court also noted that the fraud involved was a “garden-variety” case of overbilling and not such a great amount as to warrant the out-of-guidelines sentence. “[D]efendant would have had to steal $20 million for a sentence of 60 months to be within the guidelines range,” the appeals court observed. 92 Finally, the judge did not point to any other sentences he imposed in cases under § 1347 to support his contention that the 60-month prison term was necessary to avoid sentence disparities. “We suggest that when a judge decides to impose an out-of-guidelines sentence . . . he write out his reasons rather than relying entirely on the transcript of his oral remarks to inform the reviewing court of his grounds,” the appeals court concluded. United States v. Higdon, No. 07-3951 (7th Cir. July 9, 2008). DOJ Revisions To Charging Guidelines For Corporate Fraud Focus On Cooperation Credit, Compliance Programs The Department of Justice (DOJ) issued August 28, 2008 revised guidelines that federal prosecutors must abide by in charging decisions concerning corporate criminal cases. The revised Principles of Federal Prosecution of Business Organizations, announced by Deputy Attorney General Mark R. Filip, will be committed for the first time to the U.S. Attorneys Manual, which is binding on all federal prosecutors, DOJ said. The guidelines in particular focus on what factors prosecutors can take into account when considering whether a corporation has cooperated with the government—i.e. cooperation credit. The guidelines explicitly state that credit for cooperation will not depend on the corporation’s waiver of attorney-client privilege or work product protection, but rather on the disclosure of relevant facts. The new guidelines forbid federal prosecutors from requesting disclosure of non-factual attorney-client privileged communications and work product except where an advice-ofcounsel defense has been asserted and with respect to communications between a corporation and corporate counsel that are made in furtherance of a crime or fraud. Concerns about the Department’s stance on privilege waiver stem from the Thompson Memorandum, which was issued in 2003 by then-U.S. Deputy Attorney General Larry D. Thompson. The Thompson Memorandum outlined nine factors for DOJ prosecutors to consider in deciding whether to bring criminal charges against a company, including the government’s willingness to cooperate in the investigation. This factor stated cooperation could include, “if necessary, the waiver of corporate attorney-client and work product protection.” The defense bar and others in the legal community have long argued that this policy posed significant ethical concerns. These concerns prompted then-U.S. Deputy Attorney General Paul J. McNulty to issue the so-called “McNulty Memorandum” in December 2006, which placed new restrictions on federal prosecutors that seek privileged information from companies under corporate charging guidelines. The newly revised principles, which supersede the previous memoranda, also instruct prosecutors not to consider a corporation’s advancement of attorneys’ fees to employees when evaluating cooperativeness and make clear that participating in a joint defense agreement does not by itself render a corporation ineligible for cooperation credit. 93 Another change included in the guidelines bars prosecutors from considering whether a corporation has sanctioned or retained culpable employees in evaluating cooperation credit. The guidelines also include a section on corporate compliance programs. “While the Department recognizes that no compliance program can ever prevent all criminal activity by a corporation’s employees, the critical factors in evaluating any program are whether the program is adequately designed for maximum effectiveness in preventing or detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives,” the guidelines state. The guidelines note that in evaluating compliance programs, prosecutors “may consider whether the corporation has established corporate governance mechanisms that can effectively detect and prevent misconduct.” “The changes that the Department announces today are in keeping with the longstanding tradition of refining the Department’s policy guidance in light of lessons learned from our prosecutors, as well as comments from others in the criminal justice system, the judiciary, and the broader legal community,” said Flip in a statement. False Claims Act U.S. Supreme Court Holds FCA Requires Intent To Defraud Government The U.S. Supreme Court unanimously held June 9, 2008 that the False Claims Act (FCA) requires proof the defendant “intended that the false statement be material to the Government’s decision to pay or approve the false claim.” The opinion, authored by Justice Samuel Alito, reversed a Sixth Circuit decision that held it was sufficient under the FCA for a plaintiff to prove merely that a false statement resulted in payment from the government. According to the Court, “the Sixth Circuit’s interpretation of § 3729(a)(2) [of the FCA] impermissibly deviates from the statute’s language, which requires the defendant to make a false statement ‘to get’ a false or fraudulent claim ‘paid or approved by the Government.’” Thus, a defendant must intend for the government to pay the claim, the Court held. “Eliminating this element of intent would expand the FCA well beyond its intended role of combating “fraud against the Government,’” Alito wrote. Allison Engine Co. v. United States ex rel. Sanders, No. 07-214 (U.S. June 9, 2008). Fifth Circuit Dismisses Qui Tam Suit Finding Relators Not Original Source Of Alleged Fraud A federal district court properly dismissed a False Claims Act (FCA) qui tam suit alleging Tenet Healthcare Corporation (Tenet) made false claims for outlier medical benefits against Medicare based on its conclusion that the relators did not qualify as original sources of the information underlying the alleged fraud, the Fifth Circuit ruled July 22, 2008. 94 The appeals court affirmed summary judgment in Tenet’s favor, agreeing with its argument that relators lacked direct and independent knowledge of information that would have qualified them as original sources, thereby allowing them to avoid the public disclosure bar, 31 U.S.C. § 3730(e)(4)(A). The relators in the case, Man Tai Lam and William Meshel, filed their qui tam suit in November 2002, alleging Tenet improperly manipulated Medicare’s outlier payment system by artificially inflating charges at two hospitals located in El Paso, Texas. Prior to August 2003, CMS regulations allowed outlier payments when a hospital’s charges multiplied by the hospital’s ratio of costs to charges in its most recent settled cost report, exceed a certain threshold, the appeals court explained. The relators’ qui tam suit alleged that, under these regulations, Tenet allegedly manipulated the system when its real costs did not increase in proportion to the charge increases, and even declined. As a result, Tenet was allegedly able to qualify more patients as outlier patients and receive reimbursements that it was not entitled to, according to the appeals court. After the qui tam suit was filed in 2002, it remained under seal until July 2005 when the government declined to intervene in the case. Five months later, relators filed their third amended complaint, which alleged Tenet artificially inflated its “cost-to-charge” ratio to obtain more than its proper share of funds from the Medicare/Medicaid outlier system. That complaint also alleged Tenet offered medical directorships and office-expense reimbursements as kickbacks to induce physicians to refer their patients to Tenet hospitals. Tenet moved to dismiss, and while the motion was pending, the federal government settled with Tenet for claims relating to 165 hospitals nationwide, including the two El Paso hospitals. In August 2006, the district court dismissed the relators’ kickback claims, but denied the motion with regard to their outlier claims. Finding the information concerning the “outlier manipulation theory" was publicly disclosed in a publication called the Weekly Report prior to the relators filing their qui tam suit, the district court said relators could bring their qui tam suit only if they were the “original source” of the information underlying the outlier claims. Nearly a year later, the federal government and Tenet moved for summary judgment on the issue of relators’ status as original sources. In response to the motion, relators appended two declarations to substantiate their knowledge of Tenet’s costs and increasing charges over the time period at issue. The district court granted the motion, finding relators could not be found to “have had direct and independent knowledge of the information on which the allegations are based.” “At no point do relators allege or prove knowledge of whether Tenet’s charges were rising, whether Tenet was artificially raising its charges, whether the charges were rising in relation to the hospital’s costs, and whether Tenet had knowledge that the claims it submitted were false—all of which are necessary components in a claim of outlier fraud,” the district court said. 95 Affirming, the Fifth Circuit found the evidence presented in the relators’ declaration fell short to qualify them as original sources. The relators’ information about rising charges at Tenet hospitals came primarily from patient complaints, the appeals court noted. Moreover, the relators’ information on the cost side was similarly indirect. Ultimately, the Fifth Circuit concluded the relators’ knowledge was not the type of firsthand, insider knowledge that was required to satisfy the original source standard. United States ex rel. Lam v. Tenet Healthcare Corp., No. 07-51042 (5th Cir. July 22, 2008). U.S. Court In D.C. Refuses To Dismiss FCA Action Against Diabetes Treatment Center, But Rejects Stark Law Claims The U.S. District Court for the District of Columbia refused July 21, 2008 to grant defendant Diabetes Treatment Centers of America (DTCA), a former business of Healthways, Inc., summary judgment on most of the claims against it in the long-running qui tam action dating back to 1994. The court found relator A. Scott Pogue had raised a genuine issue of material fact on his claims that DTCA caused false Medicare and Medicaid claims to be submitted in violation of the False Claims Act (FCA) and Anti-Kickback Statute (AKS) to survive summary judgment. The court did find, however, that relator failed to produce evidence to show a violation of the Stark Law. In the case, which was transferred to the federal district court in the District of Columbia as part of a multi-district litigation, relator claimed DTCA was involved in a kickback scheme for physicians to refer patients to diabetes treatment centers located in various hospitals with which it had contracts. At the center of the allegations was the relationship between DTCA and its medical director-physicians. According to relator, DTCA’s compensation to the medical directors was well above fair market value and intended to induce referrals to the centers in violation of the AKS and Stark Law. The district court criticized DTCA for once again arguing violations of the AKS and Stark Law could not support an FCA action, pointing to “two adverse rulings” on this issue in the instant litigation alone as well as “legion other cases” recognizing an “implied certification theory” of FCA liability. The court also found relator had presented more than enough evidence to proceed to the jury with his claim that DTCA violated the AKS by remunerating physicians with a purpose to induce referrals. Specifically, the court pointed to a consultant report submitted by the relator showing that DTCA paid its medical directors fees far in excess of the fair market value commensurate with their duties. Moreover, the “very foundation of DTCA’s business model was built chiefly on concerns of census—the number of patients treated on a particular day.” 96 The need for medical director referrals was great, the opinion explained, because DTCA’s contracts with hospital customers based DTCA’s remuneration on the number of discharges or Medicare patient days. The court also rejected DTCA’s argument that it lacked the requisite knowledge under the AKS because it relied in good faith on its counsel’s advice. “Relator’s evidence shows panoplied warnings from counsel to defendant about potential violations of the AKS,” said the court. While the court refused to grant DTCA summary judgment on the AKS claims, it did find the evidence insufficient to support relator’s Stark Law claim. “In stark contrast to the mountain of evidence produced with respect to defendant’s alleged AKS violations, relator produces almost no evidence to support a conclusion that the hospitals contracting with defendant (i.e. ‘the entit[ies] furnishing designated health services’) had knowledge of, or acted in reckless disregard or deliberate ignorance of, defendant’s compensation schemes,” the court wrote in dismissing the claim. United States ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., No. 99-3298 (RCL) (D.D.C. July 21, 2008). Subsequent to this decision, in March 2009, Healthways announced a $40 million settlement deal of the whistleblower lawsuit. According to the company’s announcement, the settlement, which still requires the approval of the Department of Justice, includes a $28 million payment to the government and an estimated $12 million for other costs and fees. Ben R. Leedle, Jr., Healthways Chief Executive Officer, said the settlement is not an admission of any wrongdoing. “We continue to believe that we conducted our DTCA business in full compliance with applicable law but ultimately concluded that the proposed settlement is in the best interest of the Company and its shareholders. U.S. Court In Michigan Finds Criminal Plea To Healthcare Fraud Precludes Defendant From Denying FCA Liability The U.S. District Court for the Eastern District of Michigan granted July 22, 2008 found an individual who had previously pled guilty to one count of healthcare fraud was estopped from denying civil liability under the False Claims Act (FCA). Defendants Iftakhar U. Khan, Amjad M. Khan, Maimunah N. Khan, and Shagufta Khan were indicted in 2003 on charges of healthcare fraud for their participation in a scheme to defraud the government by improperly filing for and receiving Medicare reimbursements. On October 24, 2003, the Government commenced a civil action against defendants for presenting false claims, presenting false statements, conspiracy to defraud the government, unjust enrichment, and money paid under mistake of fact. Defendant Iftakhar U. Khan pled guilty to one count of healthcare fraud. The United States then moved for partial summary judgment on its presenting false claims allegation. The government argued defendant was liable for filing four separate false claims and that, by virtue of his guilty plea, he was estopped from denying liability under the FCA. 97 The court first noted that the “preclusive effect of a guilty criminal plea on future civil proceedings is well established” and is specifically provided for in the FCA. After examining the evidence in the case before it, the court concluded that “Defendant is estopped from contesting liability for all four fiscal years” at issue. According to the court, there was “no question” that the defendant violated the FCA by filing the false report for which he admitted liability and “[g]iven the totality of the circumstances in this case, collateral estoppel should also apply to the false reports filed during” the other three fiscal years at issue. United States v. Kahn, No. 03-74300 (E.D. Mich. July 22, 2008). Fifth Circuit Reverses Attorneys’ Fees Award To Medical Device Company In Government’s FCA Action In an August 19, 2008 unpublished opinion, the Fifth Circuit affirmed a lower court order rejecting the government’s False Claims Act (FCA) and common law claims against a durable medical equipment rental company but reversed its award of attorneys’ fees. The case arose as a qui tam action under the FCA against Medica-Rents Co. alleging it overbilled the Medicare program between 1993 and 1995 for its anti-bedsore device. The government intervened and also alleged claims including unjust enrichment and payment by mistake. The dispute stemmed from how Medica-Rents coded its antibedsore device, which the government contended should have been billed under a code that paid much less. The U.S. District Court for the Northern District of Texas found Medica-Rents had not fraudulently billed Medicare and therefore dismissed the FCA claims. The district court also ordered the government to pay over $4.8 million in attorneys’ fees to Medica-Rents after finding the government acted in bad faith in pursuing the FCA case against the company. The Fifth Circuit agreed with the district court that the government’s FCA action could not stand given the “substantial confusion created by contradictory instructions and guidance” on the coding issue provided by the government and its contractors. The appeals court likewise affirmed the district court’s rejection of the government’s payment by mistake claims, noting one of the government’s contractors specifically authorized the use of the code Medica-Rents submitted for its anti-bedsore device. The appeals court reversed, however, the award of attorneys’ fees to Medica-Rents, disagreeing with the lower court’s assessment that the government brought claims that were either wholly unsupported or that were easily dispatched by cursory review. According to the appeals court, the government did have a “nonfrivolous argument regarding which code should have been used and which entities had the authority to issue guidance.” Thus, the appeals court rejected the conclusion that the government’s bad faith justified the award of attorneys’ fees. United States v. Medica Rents Co. Ltd., No. 03-11297 (5th Cir. Aug. 19, 2008). 98 U.S. Court In Texas Finds Hospital’s Use Of Intergovernmental Transfer Procedure Under State Medicaid UPL Program Did Not Violate FCA A private hospital that relied on an advocacy organization’s advice in claiming eligibility to use the intergovernmental transfer (IGT) procedure for the Texas Medicaid Upper Payment Limits (UPL) program and as a result received additional Medicaid matching funds from the federal government did not violate the federal False Claims Act (FCA), a district court in that state held August 25, 2008. The U.S. District Court for the Eastern District of Texas dismissed the FCA qui tam action alleging the hospital, East Texas Medical Center Athens (ETMCA), and its owner, hospital conglomerate East Texas Medical Center Regional Healthcare System (East Texas) (collectively, defendants) devised and implemented a scheme to receive additional federal Medicaid matching funds by illegally abusing the IGT procedure under Texas’ Medicaid UPL program. Under federal regulations, the Medicaid UPL program allows states to reimburse public rural hospitals for certain uncompensated care provided under Medicaid at an amount equal to what Medicare would have paid for the same services, the district court explained. “IGTs are used to fund, at least partially, the state’s contribution to the UPL payments, which can be used to claim additional federal funds,” the court said. “Federal regulations require states to separate UPLs by facility type because public hospitals are reimbursed at a higher percentage than private non-profit hospitals.” In this case, the defendant hospital system, East Medical, is a private nonprofit organization and operates ETMCA in Athens, Texas. ETMCA is owned, however, by Henderson County and leased to the Henderson County Hospital Authority (HCHA), which then subleases the facility to East Medical. In early 2002, the Texas Health and Human Services Commission (HHSC) solicited the Texas Organization of Rural and Community Hospitals (TORCH)—a statewide advocacy and leadership organization comprised of approximately 150 member hospitals located throughout Texas—to develop Texas’ Medicaid UPL program. Subsequently, in March 2002, TORCH notified ETMCA that it had been identified as a “potential benefactor of significant additional funding” under the state’s UPL program. TORCH also informed ETMCA that it was one of 27 rural hospitals that qualified under the program as a “transferring” hospital. At a subsequent HCHA board meeting, TORCH’s general counsel and other executives informed ETMCA that, in order to fund IGTs, it should transfer funds to a bank account owned by HCHA, and then those funds would be transferred to the state through an IGT. TORCH also advised ETMCA that the funds would be matched at 128% and then transferred back. ETMCA subsequently followed this advice in structuring several transactions. The arrangement had been in place for some time, according to the court, when relator Linnea Rose brought a qui tam action in June 2005 alleging ETMCA violated the federal FCA by knowingly submitting fraudulent claims to the federal government for over $15 million of federal Medicaid matching funds. 99 Among other claims, Rose asserted that “to participate in the UPL program and receive federal Medicaid matching funds, ETMCA masqueraded as a public hospital by first transferring its operating revenue to the [HCHA]’s bank account to fund the IGTs,” the district court said. After the government declined to intervene in the case, the district court ordered the complaint unsealed. East Texas moved for summary judgment, arguing that, because the IGT transactions at issue were based on HCHA’s public proceedings, they fell within the FCA’s public disclosure bar and therefore the court lacked jurisdiction over the case. In an earlier opinion, the district court rejected that argument and denied East Texas’ motion. The court concluded that, in the absence of evidence showing the transactions were discussed in extensive and ongoing proceedings HCHA conducted or that public comment was involved, there was no “public disclosure” under the FCA. Subsequently, defendants moved for summary judgment, arguing Rose had not raised a genuine issue of material fact that ETMCA knowingly made a false claim to the federal government. The district court this time granted defendants' motion, dismissing the case with prejudice. The central issue in dispute was whether ETMCA qualified as a "rural public hospital" and, if so, whether that made the funds it contributed necessarily "public." The court ultimately said it need not decide these issues, however, given that the conflicting state of the law made both parties' interpretations reasonable. Thus, ETMCA’s reliance on the advice of TORCH and its attorney did "not rise to the level of reckless disregard needed for an FCA claim," the court said. “Even though ETMCA knew that TORCH had a financial interest in establishing ETMCA’s participation [in Texas’s Medicaid UPL program], the evidence does not suggest that ETMCA’s reliance on that advice was reckless.” “At most, not seeking independent counsel was negligent,” the court said, noting that this was insufficient to assert a claim under the FCA. United States ex rel. Rose v. East Tex. Med. Ctr. Reg'l Healthcare Sys., No. 2:05-cv00216-TJW (E.D. Tex. Aug. 25, 2008). U.S. Court In Massachusetts Refuses To Dismiss Claims That Pharmaceutical Manufacturer Violated FCA By Promoting OffLabel Uses The U.S. District Court for the District of Massachusetts September 18, 2008 refused to dismiss whistleblower claims against a pharmaceutical manufacturer alleging unlawful promotion of off-label uses for one of its drugs. In so holding, the court found the qui tam plaintiff asserted sufficient facts to overcome a motion to dismiss under Fed. R. Civ. P. 12(b)(6) and 9(b). Whistleblower Dr. Peter Rost was employed by Pharmacia in June 2001 as Vice President in charge of the Endocrine Care Unit in Peapack, New Jersey. 100 Pharmacia was acquired in 2003 by Pfizer, Inc. According to Rost, beginning in 1997 the drug Genotropin, a recombinant human growth hormone, was promoted for off-label indications. In April 2007, Pharmacia and Pfizer pled guilty to one count of offering “kickbacks” in connection with their outsourcing contract for the administration and distribution of Genotropin. The plea agreement covered off-label uses of Genotropin in adults, but did not discuss any off-label promotion of the drug for pediatric uses. In June 2003, Rost brought a qui tam action against Pharmacia and Pfizer (collectively, defendants) claiming they violated the federal False Claims Act (FCA) and state law by unlawfully promoting the off-label use of Genotropin. The U.S. declined to intervene in the case. Defendants moved to dismiss for lack of subject matter jurisdiction arguing the action was barred by the FCA’s public disclosure provision as it was “based upon” defendants’ disclosure to the government and plaintiff was not an “original source.” Pfizer also moved to dismiss under Fed. R. Civ. P. 9(b). The court first addressed defendants’ argument that in the amended complaint, Rost failed to plead his FCA claims with particularity, as required under Rule 9(b). After his first complaint was dismissed for failure to plead with particularity, Rost added more than 200 alleged false claims that were submitted to both Medicaid and other federal programs from citizens of Indiana, the court explained. Rost alleged in his amended complaint that claims submitted to federal agencies for reimbursement were for off-label, non-FDA approved uses of Genotropin such as for “short stature” and “small for date.” Based on these allegations, the court found the amended complaint satisfied Rule 9(b)’s heightened pleading requirement. The court rejected defendant’s argument that DRUGDEX—one of the compendia on which the Medicaid program relies to determine whether to reimburse for a drug—supported the use of Genotropin to treat “small stature” in children. The court noted defendants had a stronger second argument that off-label claims approved by the Drug Utilization Review Board under Indiana law were not false. “Defendants have a compelling position that state approval undermines the assertion of a ‘false claim,’” the court said. Plaintiff also alleged, however, that the claims were false if they were caused by unlawful kickbacks, the court noted. Thus, if plaintiff could demonstrate the alleged financial incentives paid to physicians to prescribe Genotropin for off-label uses were unlawful kickbacks that foreseeably caused the submission of a false claim for federal reimbursement under the FCA, plaintiff could prevail on his FCA claim, the court concluded. Accordingly, the court allowed limited discovery on the kickback issue. Lastly, the court summarily dismissed plaintiff’s claims relating to off-label uses of Genotropin for adults. 101 United States ex rel. Rost v. Pfizer, Inc., No. 03-11084-PBS (D. Mass. Sept. 18, 2008). Alleged False Certifications In Medicare Cost Reports Do Not Constitute False Claims For Payment, Tenth Circuit Says The Tenth Circuit upheld October 2, 2008 the dismissal of a physician’s False Claims Act (FCA) qui tam action against a hospital, finding the hospital’s alleged false certifications in Medicare cost reports as to its compliance with all applicable Medicare statutes and regulations did not constitute false claims for payment under the FCA. The appeals court agreed with the district court that the FCA “cannot be stretched” so far as to allow a plaintiff to maintain a cause of action against a Medicare provider based on an allegation that the provider’s certification of compliance with Medicare statutes and regulations, contained in the annual cost report, rendered all claims submitted for reimbursement false within the meaning of the FCA. Plaintiff Brian E. Conner, an ophthalmologist and eye surgeon, worked as a member of the medical staff at Salina Regional Health Center Inc. (Salina), in Salina, Kansas, for 18 years. In the mid-1990s, Conner’s relationship with Salina became contentious when he began complaining that the hospital hired unqualified scrub staff, provided inadequate facilities and equipment, and failed to meet required standards of care. In 1995, as the result of a dispute over surgery performed on a particular patient, Salina suspended Conner’s privileges to perform certain ophthalmic procedures at its facilities. Subsequently, Salina’s chief executive officer sent Conner a letter indicating the hospital would restore Conner’s privileges if he agreed to contract with preferred scrub staff for his procedures when he felt the hospital’s staff did not meet his needs. The letter also said Salina would accept a prior offer from Conner to work with its surgery department in providing additional training to the hospital’s scrub staff. Conner would not sign the “ cooperation agreement,” and the hospital refused to lift Conner’s suspension. Conner continued, however, to perform other types of surgery until early 1997, when Salina declined to reappoint him to its medical staff. After a number of unsuccessful attempts to bring state law claims in state court against Salina, Conner filed his qui tam action in the U.S. District Court for the District of Kansas in June 2001. In his lawsuit, Conner alleged violations of the FCA, as well as pendant state law claims for breach of contract and tortious interference. The federal government declined to intervene in the case. The district court ruled that Conner had failed to state a claim under the FCA for Salina’s alleged failure to comply with Medicare statutes and regulation because the government’s payment for services rendered was not conditioned on such compliance. In addition, the court found Conner’s claim under the anti-kickback statute failed to allege that Salina had solicited a kickback in return for Medicare referrals. The court declined to dismiss the state law claims as time-barred under the applicable Kansas statute of limitations, but refused to exercise supplemental jurisdiction over them. The Tenth Circuit also rejected Conner’s assertion that the certifications contained in Salina’s annual Medicare costs reports, standing alone, explicitly conditioned Medicare payments on compliance with all applicable Medicare statutes and regulations. 102 “Although [the] certification [in the annual report] represents compliance with underlying laws and regulations, it contains only general sweeping language and does not contain language stating that payment is conditioned on perfect compliance with any particular law or regulation,” the appeals court said. “Nor does any underlying Medicare statute or regulation provide that payment is so conditioned.” “Based on the fact that the government has established a detailed administrative mechanism for managing Medicare participation, we are compelled to conclude that although the government considers substantial compliance a condition of ongoing Medicare participation,” the appeals court further explained, “it does not require perfect compliance as an absolute condition to receiving Medicare payments for services rendered.” The Tenth Circuit also noted that state agencies are responsible for conducting surveys to evaluate providers’ compliance with federal and state statutes and regulations. The “broad reading of the FCA” proposed by the plaintiff, according to the appeals court “would burden the federal courts with deciding whether medical services were performed in full compliance with a host of Medicare statutes and regulations.” In addition, the appeals court rejected Conner’s assertion that Salina violated the FCA by submitting claims while failing to comply with the anti-kickback statute (42 U.S.C. § 1320a-7b). Conner alleged that Salina violated the anti-kickback statute by “forcing” him to provide scrub staff at his own expense, “in exchange for the receipt of hospital privileges and the attendant lucrative right to receive Medicare referrals.” The appeals court held Conner's “refusal to use . . . allegedly subpar staff and Salina’s attempt to accommodate this refusal” did not amount to a kickback. Finally, the Tenth Circuit found the district court erred in concluding that Conner’s state law claims were not barred by the applicable Kansas statute of limitations. Those claims should have been dismissed with prejudice, the appeals court said. United States ex rel. Conner v. Salina Reg’l Health Ctr., No. 07-3033 (10th Cir. Oct. 2, 2008). CMS Clarifies Guidance Regarding State Repayment Obligation To Government For Money Recovered Under State FCAs; Alabama Challenges Policy In Court In an October 28, 2008 letter to state health officials, the Centers for Medicare and Medicaid Services (CMS) clarified that when a state recovers money pursuant to a legal action under its State False Claims Act (SFCA), the state must pay to the government not only the federal amount originally paid attributable to fraud or abuse, but also a Federal Medical Assistance Percentage (FMAP)-rate proportionate share of any other recovery. “Any State action taken as a result of harm to a State’s Medicaid program must seek to recover damages sustained by the Medicaid program as a whole, including both Federal and State shares,” the letter said. The letter also said that states “are required to return the FMAP percentage on State recoveries based upon actions brought against third parties, such as actions against pharmaceutical companies, alleging inappropriate Medicaid expenditures.” 103 Regarding whistleblower cases, CMS said states may not deduct the relator's share of the recovery, nor legal expenses or other administrative costs arising from the litigation, from the federal portion due the government. The letter did note, however, that “[t]o the extent attributable to Medicaid recoveries, these costs may be the basis for claims for reimbursement as an administrative cost that benefits the Medicaid program and reimbursed at the regular administrative percentage rate.” According to the letter, states must repay the government within a 60-day period from the discovery of the overpayment. The state of Alabama challenged CMS’ new policy in federal court in a suit filed November 3, 2008. According to a statement made by Alabama Attorney General Troy King, the government’s new policy is intended to lay claim to money recovered by the state’s successful litigation against 79 pharmaceutical companies for average wholesale price manipulation. The government “through illegitimate and heavy-handed bureaucratic processes” is trying “to now confiscate monies that are being contested on appeal and of which Alabama has yet to receive even one dime itself,” Troy said. Troy said in his statement that if the government prevails on its new policy it “would leave those for whom CMS was created to serve, Alabama's Medicaid patients, without health care and would bankrupt the State of Alabama's budget.” Ninth Circuit Finds District Court's Summary Judgment Order In FCA Case Is Final Despite Pending Claim By Relator In an issue of first impression, the Ninth Circuit found December 16, 2008 that a district court's order granting summary judgment in a False Claims Act (FCA) case is final and appealable even though the lower court retained jurisdiction over a pending claim by the qui tam relator who initiated the suit for a share of the award. Relator Jody Shutt originated an FCA action against Nida Campanilla, the sole owner and president of Community Home and Health Care Services. Subsequently, the United States pursued criminal charges against Campanilla who entered a guilty plea to one count of healthcare fraud. Under the plea agreement, Campanilla stipulated to making illegal payments to physicians, patients, and marketers; forging physician signatures on Medicare forms documenting the medical necessity of claimed services; submitting reimbursement claims to Medicare for home health services she knew were not medically necessary; and submitting reimbursement claims for services that were not performed as represented. The United States intervened in Shutt's FCA case, seeking a civil penalty of $5,500 and treble damages. The district court granted partial summary judgment to the government, awarding a civil penalty of $5,500 and treble the damages that Campanilla had admitted in her plea agreement. The district court dismissed the government’s remaining common law claims without prejudice while retaining jurisdiction over the relator’s claim for a share of the judgment. 104 Campanilla appealed the grant of summary judgment. Before reaching the merits of the appeal, the Ninth Circuit considered whether the order was final and appealable under 28 U.S.C. § 1291. The appeals court concluded that a relator’s pending claim against the United States for a share in the judgment did not interfere with the finality of the district court order. In so holding, the appeals court relied on White v. New Hampshire Dep’t of Employment Sec., 455 U.S. 445 (1982), in which the Supreme Court held that requests for attorneys' fees are collateral to the main action. "The determination of the relator’s share of an FCA award, like the award of attorney’s fees, raises factual issues 'collateral to the main action' because it involves a factual inquiry distinct from one addressing the merits," the appeals court said. Turning to the merits of Campanilla's appeal, the court held in an unpublished memorandum that Campanilla's challenge to the award on double jeopardy grounds was meritless because she voluntarily waived a double jeopardy challenge in her plea agreement with the United States. The appeals court also found the judgment against Campanilla and Community Home of a single civil penalty of $5,500 and treble damages of approximately $1.8 million was not constitutionally "excessive" as "grossly disproportionate" to the offense. In support of its conclusion, the appeals court noted "the district court found substantial evidence that the government’s actual damages due to false claims were considerably higher than the remuneration Campanilla agreed to pay in her criminal plea and might even exceed the treble damages award." United States ex rel. Shutt v. Community Hosp. and Healthcare Servs., Inc., No. 0756060 (9th Cir. Dec. 16, 2008). Sixth Circuit Holds Whistleblower Action Against Medtronic Barred Under FCA’s Public Disclosure Provision A whistleblower action alleging device manufacturer Medtronic Inc. and various physician 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 Sixth Circuit held in a January 14, 2009 opinion affirming the complaint’s dismissal. Jacqueline Kay Poteet, a former travel services senior manager for Medtronic subsidiary Medtronic Sofamor Danek USA, Inc (MSD), brought the action under the FCA’s qui tam provision alleging MSD 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. Poteet contended defendants violated the FCA by submitting numerous false, fraudulent, and ineligible claims for Medicare reimbursement of MSD products that stemmed from the illegal kickbacks. Before Poteet initiated her 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. 105 Also before Poteet’s action, a former MSD attorney, identified as “John Doe” in the opinion, 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 qui tam action, arguing it was barred by the FCA’s first to file-provision, 31 U.S.C. § 3730(b)(5), and 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, finding both the first-to-file and the public disclosure provisions applied to bar Poteet’s action. The Sixth Circuit affirmed, fholding while the first-to-file rule was not technically applicable, the public disclosure provision did bar Poteet’s action. The appeals court first noted that Wiese’s complaint was clearly a “public” disclosure and the allegations in his complaint were sufficient to put the government on notice of potential fraud by MSD and its physician customers. Although Wiese’s wrongful termination action did not directly allege fraud under the FCA, the details he provided “presented enough facts to create an inference of wrongdoing,” the appeals court said. The appeals court also held Poteet’s action was “based” on the disclosed fraud, saying while the details in the two complaints differed slightly the illegal kickback scheme described in Poteet’s complaint essentially mirrored Wiese’s allegations. Next, the appeals court found Poteet did not qualify as an “original source” of the allegations in her complaint. While in her former position as an MSD senior manager Poteet arguably had “direct and independent knowledge of most of the facts alleged in her complaint, she undisputedly failed to provide this information to the government before filing her complaint and before the filing of the Wiese complaint.” Despite finding the public disclosure provision barred Poteet’s action, the appeals court nonetheless went on to “clarify” why the first-to-file rule did not serve as an additional basis for dismissing her complaint. According to the appeals court, Doe’s FCA action, which also alleged the same fraudulent scheme, would otherwise bar Poteet’s action under the first-to-file rule. However, according to the appeals court, Doe’s action itself appeared to be jurisdictionally barred as it was based on the prior public disclosure made in the Wiese complaint and Doe was most likely not an “original source” because he never shared his information about Medtronic and MSD with the government before filing his qui tam complaint. United States ex rel. Poteet v. Medtronic, Inc., No. 07-5262 (6th Cir. Jan. 14, 2009). 106 Third Circuit Holds FCA Action Against Hospital Based On Alleged Stark, AKS Violations Should Proceed A lower court erred in granting summary judgment to a hospital in a whistleblower action under the False Claims Act (FCA) that was based on allegations the hospital's arrangement with an anesthesiology practice group for pain management services violated the Stark Law and the Anti-Kickback Statute, the Third Circuit held January 21, 2009. The appeals court rejected the lower court’s conclusion that the defendant hospital had satisfied the personal services exception under Stark, finding an earlier agreement between the parties did not cover pain management services provided by the practice at a subsequently opened hospital clinic, nor did the agreement “by definition” reflect fair market value for compensation that included free office space, supplies, and support personnel. The Third Circuit said it was only specifically addressing the Stark Law exception in its opinion since the Anti-Kickback Act’s safe harbor provision was substantially identical. Ted D. Kosenske brought the qui tam action under the FCA against Carlisle HMA, Inc. (HMA) and its parent company Health Management Associates, Inc, alleging they submitted claims to federal healthcare programs falsely certifying compliance with the Stark Law and the Anti-Kickback Statute. In 1992, Kosenske’s former practice Blue Mountain Anesthesia Associations, P.C. (BMAA) entered into an exclusive service arrangement with Carlisle Hospital and Health Systems (CHHS) for anesthesia services at CHHS’ hospital in Carlisle, Pennsylvania. In 1998, the hospital built a new, stand-alone facility containing an outpatient ambulatory surgery center and a pain clinic (clinic), located roughly three miles from the hospital. From its inception, BMAA acted as the exclusive provider of pain management services to patients at the clinic. The hospital did not charge BMAA rent for the space and equipment, or a fee for the support personnel the hospital provided to the practice at the clinic. At the same time, BMAA physicians referred clinic patients to the hospital for further testing and procedures. The parties did not amend the 1992 agreement to encompass the pain management services provided at the clinic, the appeals court said. HMA purchased the hospital from CHHS in June 2001. For purposes of the opinion, the appeals court assumed, without deciding, that HMA was CHHS’ successor. According to the complaint, the pain management services BMAA provided at the HMA outpatient clinic resulted in illegal referrals under the Stark and Anti-Kickback Statutes for which the hospital submitted claims to federal healthcare programs. The district court found BMAA received numerous benefits—such as free use of office space, equipment, and staff and the exclusive right to provide anesthesiology and pain management services—that constituted “remuneration” and established a “compensation arrangement” and “financial relationship” between BMAA and HMA. 107 The court granted defendants summary judgment, however, after concluding they had satisfied the “personal services exception” under Stark. See 42 U.S.C. § 1395nn(e)(3)(A). Specifically, the court found the 1992 agreement adequately set forth in writing all of the anesthesiology and pain services to be rendered by BMAA at the hospital and pain management clinic. In addition, the court held the agreement “by definition” reflected fair market value as it resulted from a negotiation between unrelated parties. The Third Circuit agreed the arrangement between BMAA and HMA implicated the Stark Law, but rejected the district court’s conclusion that defendants had met their burden of showing the arrangement satisfied the personal services exception. The appeals court said the 1992 agreement clearly did not apply to services at a facility that was not even in existence at the time the contract was negotiated. “[E]ven if the 1992 Agreement could otherwise be read as reflecting the parties’ arrangement at the Pain Clinic, that Agreement said nothing about much of the consideration that BMAA was receiving for its services,” the appeals court wrote. The appeals court also rejected the district court’s conclusion that the parties’ agreement itself was a reflection of fair market value. “[A]s a factual matter, negotiations in 1992 could not possibly reflect the fair market value of the consideration given and received more than six years later under materially different circumstances,” the appeals court observed. In any event, the appeals court continued, the Stark Law is based on the recognition that “where one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of non-fairmarket-value compensation.” Finally, the appeals court rejected HMA’s argument that the patients BMAA physicians saw at the pain clinic already were de facto hospital patients and therefore there could have been no actual referrals. According to the appeals court, this argument was based on the regulation (42 C.F.R. § 413.65) for determining whether a facility has provider-based status and had no bearing on a Stark analysis concerning impermissible referrals. “While Pain clinic patients clearly must have access to all services provided by the Hospital in order for it to be considered a part thereof, we are unpersuaded that BMAA physicians at the Clinic have been deprived of the right to refer their patients in accordance with their best medical judgment,” the appeals court concluded. In reversing the lower court’s determination, the appeals court also highlighted the distinction between anesthesiology and pain management services in the context of the Stark Law. Saying the latter, as a traditional hospital-based service, was less likely to raise concerns under the Stark Law than the former, which frequently is provided in an outpatient facility by physicians in a position to refer substantial business to a hospital. United States ex rel. Kosenske v. Carlisle HMA, Inc., No. 07-4616 (3d Cir. Jan. 21, 2009). 108 U.S. Court In Texas Dismisses FCA Action Alleging Hospitals' Below-Market Leases With Physicians Rendered Medicare Claims Fraudulent A federal district court in Texas dismissed January 22, 2009 a qui tam action filed by a relator alleging False Claims Act (FCA) violations based on Medicare claims made for patients referred to defendant-hospitals’ facilities by physicians with below-market leases. Although finding that similar prior litigation did not trigger the FCA’s “public disclosure” jurisdictional bar, the district court nonetheless dismissed the case for failure to plead fraud with particularity as required under Fed. R. Civ. P. 9(b). Relator Danny Lynn Smart filed his initial complaint under seal in June 2005. After the federal government declined to intervene, the complaint was unsealed in May 2006. The relator subsequently filed an amended complaint in February 2008. Smart was a former employee of Christus Spohn Health System (Spohn), where he was the director of property management. Spohn and Christus Health System (collectively defendants) operate three hospital campuses in Corpus Christi, Texas. Defendant hospitals entered into below-market leases with physicians groups who would, in return, refer more patients to defendants’ facilities, according to Smart’s complaint. This conduct violated the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and the Stark Law, 42 U.S.C. § 1395nn, as well as similar state laws, the complaint contended. Smart also alleged defendants’ violations of these statutes subjected them to liability under the FCA because Medicare claims made for patients referred to their facilities by physicians with below-market leases were fraudulent. In addition, Smart alleged defendants unlawfully fired him in retaliation for filing his lawsuit. Defendants moved to dismiss, arguing the district court was barred by the “public disclosure” provision (31 U.S.C. § 3730(e)(4)(A)) from taking jurisdiction over the suit because Smart’s allegations had been made before in state litigation involving another defendant, Ross Physical Therapy and Rehabilitation. According to defendants, the Ross litigation was a “public disclosure” of the allegations made in the present qui tam action, and Smart was not an “original source” of the information relied upon in his qui tam action. In rejecting this argument, the district court noted the Ross litigation cited only a violation of the Stark Law, but made no mention of the FCA or Medicare fraud. “[T]here is no support for Defendants’ argument that the Ross litigation provides the basis for Relator’s suit,” the court said. “It is a difficult claim indeed to argue that one paragraph in a purely private litigation with an obscure reference to the Stark law. . . actually put the government on notice of the scheme alleged by Relator.” The district court then found, however, that dismissal of the case was warranted because of Smart’s failure to meet the “pleading particularity” requirements of Rule 9(b). 109 “Relator’s complaint is devoid of anything but general allegations that ‘illegal claims’ was submitted for payment under Medicare,” the district court said. “[W]hile Relator has perhaps alleged with particularity that the Stark and Anti-Kickback statutes were violated, this does not repair the key problem: Relator has not alleged a violation of the False Claims Act,” the court said. The district court also found Smart’s “false certification” claims failed to meet the particularity standards of Rule 9(b). “Relator fails to identify . . . when Defendants falsified certifications and what the contents of those certifications were,” the court said. The district court next dismissed Smart’s retaliation claim because the applicable 180-day statute of limitations (Tex. Health & Safety Code § 161.134(h)) had expired by the time he amended his qui tam complaint to add the claim. The district court allowed the relator 20 days to file an amended complaint to address the deficiencies identified in its opinion. United States ex rel. Smart v. Christus Health, Civ. Action No. C-05-287 (S.D. Tex. Jan. 22, 2009). Fourth Circuit Affirms Dismissal Of FCA Action Against Physician, Hospitals For Alleged Fraudulent Billing The Fourth Circuit upheld February 12, 2009 the dismissal of a False Claims Act (FCA) case against a physician and two hospitals he was associated with based on lack of jurisdiction under the public disclosure provision of the statute. The appeals court agreed with the lower court that relator Lokesh Vuyyuru’s claims were based on information publicly disclosed in various media reports and that he was not an “original source” of the allegations in his complaint. Relator brought the qui tam action, in which the federal government declined to intervene, against physician Gopinath Jadhav, Southside Gastroenterology Associates, Ltd., Petersburg Hospital Company, LLC, and Columbia/HCA John Randolph, Inc. for allegedly conspiring to fraudulently bill Medicare and Medicaid for unnecessary procedures. According to relator, Jadhav, a gastroenterologist, routinely did unnecessary biopsies during colonoscopies and then charged Medicaid, Medicare, and private insurers for the procedures. Defendants moved to dismissed on a number of grounds. The district court granted the motion finding it lacked subject matter jurisdiction under the FCA’s public disclosure provision. The district court also ordered relator to pay attorneys’ fees and costs in the amount of $68,228. Affirming, the appeals court first rejected relator’s argument that the jurisdictional issues were intertwined with the central merits of his FCA claims. 110 “The proof required to establish the substantive elements of Relator Vuyyuru’s claims . . . is wholly distinct from that necessary to survive Defendant’s jurisdictional challenge,” the appeals court said. Next, the appeals court upheld the lower court’s conclusion that relator’s allegations were derived from public disclosures—specifically a series of media reports concerning defendants’ alleged fraudulent practices that were published before he filed his complaint. Specifically, the appeals court noted that relator had denied under oath that he was the source of the articles at issue. The appeals court also concluded that relator was not entitled to original source status. Although relator had previously practiced medicine at one of the hospitals involved in the allegations; he no longer did so at the time the alleged false claims were discovered. According to the appeals court, relator offered “no more than a scintilla of evidence that he had direct and independent knowledge” of his FCA allegations. The appeals court also rejected relator’s contention that the district court erred in dismissing his action without affording him the chance to conduct discovery on the jurisdictional issues of fact. According to the appeals court, relator had ample notice of defendants’ jurisdictional challenge and, moreover, failed to identify any evidence he might have obtained through discovery that would be relevant to establish the jurisdictional facts in his favor. Finally, the appeals court affirmed the award of attorneys’ fees, finding no reasonable chance of success that Vuyyuru’s claim qualified as a proper relator under the FCA. A dissenting opinion argued “the evidence before the district court was sufficient to support a conclusion that Relator Vuyyuru had carried his burden of demonstrating that his knowledge of the alleged fraudulent acts was not 'based upon' public disclosure.” Specifically, the dissent pointed to relator’s allegations that he learned of the unnecessary biopsies by reviewing Jadhav’s medical records and from medical staff who observed his practices. The dissent also disagreed with the majority’s conclusion that relator was not an original source. United States ex rel. Vuyyuru v. Jadhav, No. 07-1455 (4th Cir. Feb. 12, 2009). Anti-Kickback Statute OIG Gives Green Light To Proposed Joint Ownership Of ASC By Healthcare Organization And Surgeon Group In an advisory opinion posted July 25, 2008 the Department of Health and Human Services Office of Inspector General (OIG) concluded that, while a proposed joint ownership of an ambulatory surgery center (ASC) by a healthcare organization and a group of orthopedic surgeons could potentially generate prohibited remuneration under the Anti-Kickback Statute, it would not impose administrative sanctions in connection with the proposed arrangement. 111 The OIG found the risk for fraud was low because of safeguards within the proposed arrangement that would minimize the possibility of improper referrals to the ASC. The healthcare organization requesting the advisory opinion is a nonprofit corporation that owns three hospitals and other healthcare-related entities, including a large physician group practice. The other requesting party, a surgeon partnership, is a limited liability company whose members (surgeon investors) are also members of a large multi-site physician group (surgeon group). Another party in the proposed arrangement is the company that would own and operate the ASC. Under the arrangement, this company would be owned 70% by the surgeon partnership and 30% by the healthcare organization, according to the opinion. The two requesting parties both made financial contributions to the company proportional to their ownership interests, in order to finance the development and operation of the ASC. Of 18 surgeons investors in the partnership, all but four meet the so-called “one-third requirement” under the anti-kickback safe harbor (42 C.F.R. § 1001-952( r)(4)) for hospital/physician-owned ASCs (42 C.F.R. § 1001-952( r)(4)), the opinion noted. That requirement states that the surgeon/owner must derive at least one-third of his or her medical practice income for the previous fiscal year (or 12-month period) from performing procedures payable by Medicare in the ASC setting. Requestors certified that the four surgeon investors (inpatient surgeons) rarely have occasion to refer patients to other physicians for ASC-qualified procedures (with the exception of pain management procedures). The OIG concluded the proposed arrangement would not qualify for the safe harbor. Among multiple reasons provided for this conclusion was that the surgeon investors would not hold their investment interests in the ASC either directly or through a group practice composed of qualifying physicians. Rather, the surgeon investors would hold their individual ownership interests in the surgeon partnership, which in turn would hold an interest in the company that owns the ASC. “We have previously expressed concern that intermediate investment entities could be used to redirect revenues to reward referrals,” the OIG said, “or otherwise vitiate the safeguards provided by direct investment, including distributions of profits in proportion to capital investment.” Given the facts of this case, however, the OIG concluded the use of a “pass-through” entity would not substantially increase the risk of fraud and abuse because each surgeon investor’s ownership in the surgeon partnership was proportional to his or her capital investment, and in turn, the surgeon partnership’s interest in the company that owns the ASC would be proportional to its capital investment. “Thus, the individual Surgeon Investors receive a return on their ASC investments that is exactly the same as if they had invested directly,” the opinion said. Another reason the arrangement did not qualify for protection under the safe harbor was the fact that four surgeon investors failed to meet the safe harbor’s “one-third” requirement, the OIG noted. Nonetheless, the OIG determined that, under the proposed arrangement, the ASC was “unlikely to be a vehicle” for generating profits from referrals for the four surgeons. 112 Specifically, the OIG said the requestors had certified that none of the surgeon investors would refer patients for pain management procedures to be performed at the ASC, unless the pain management procedure would be performed personally by the referring surgeon investor. In addition, the proposed arrangement did not qualify for the safe harbor because the healthcare organization was in a position to make or influence referrals to the ASC. However, the OIG concluded that there were sufficient safeguards to significantly constrain the ability of the healthcare organization to direct or influence referrals to the ASC. The requestors certified that the organization would refrain from any actions to require or encourage physicians who are employees, independent contractors, and medical staff members (hospital-affiliated physicians) to refer patients to the ASC or to its surgeon investors, the opinion said. In addition, requestors certified that the healthcare organization would not track referrals, if any, by hospital-affiliated physicians to the ASC or surgeon investors. Advisory Opinion No. 08-08 (Dep’t of Health and Human Servs. Office of Inspector Gen. July 18, 2008). OIG Approves Surgeon, Hospital Gainsharing Arrangement The Department of Health and Human Services Office of Inspector General (OIG) will not impose sanctions on a medical center that has agreed to share with groups of orthopedic surgeons and a group of neurosurgeons a percentage of its cost savings arising from the surgeons’ implementation of a number of cost reduction measures, OIG said in an Advisory Opinion posted August 7, 2008. The requestor is an academic medical center that is a participating provider in the Medicare and Medicaid programs. The orthopedic surgery groups and neurosurgery group (collectively, the groups) employ physicians that have active medical staff privileges at the medical center. The medical center has also engaged a program administrator to administer the arrangement. According to the opinion, under the arrangement, the medical center agreed to pay the orthopedic surgery groups and the neurosurgery group a share of the first-year cost savings directly attributable to specific changes made in the groups' operating room practices. The opinion noted the requestors have already implemented the arrangement, but the medical center has not yet paid any money to the groups. "Properly structured, arrangements that share cost savings can serve legitimate business and medical purposes," OIG said, noting, however, that such arrangements also can "potentially influence physician judgment to the detriment of patient care." The civil monetary penalty (CMP) provisions prohibit payments by hospitals to physicians that may induce physicians to reduce or limit items or services furnished to their Medicare and Medicaid patients. Thus, the threshold inquiry is whether the arrangement will induce physicians to reduce or limit items or services, OIG said. Noting that the cost saving measures "might have induced physicians to reduce or limit the then-current medical practice at the Medical Center," the OIG nonetheless found that 113 several features of the arrangement, in combination, provide sufficient safeguards so that OIG would not impose sanctions, the opinion said. Specifically, OIG pointed to eight aspects of the arrangement that would safeguard it against abuse, including: that the specific cost saving actions and resulting savings were clearly and separately identified; the requestors proffered credible medical support that implementation of the recommendations did not adversely affect patient care; the arrangement protected against inappropriate reductions in services by utilizing objective historical and clinical measures to establish baseline thresholds beyond which no savings accrued to the groups; the parties provided written disclosures of their involvement in the arrangement to patients whose care might have been affected and provided patients an opportunity to review the cost saving recommendations prior to admission to the medical center; and the financial incentives under the arrangement were reasonably limited in duration and amount. With regard to the Anti-Kickback Statute, the OIG noted the arrangement would not fall under the safe harbor for personal services and management contracts, 42 C.F.R. § 1001.952(d), because the payment owed to the groups was calculated on a percentage basis, and thus the compensation could not be set in advance. According to the opinion, the arrangement "could have encouraged the surgeons to admit Federal health care program patients to the Medical Center, since the surgeons would receive not only their Medicare Part B professional fee, but also, indirectly, a share of the Medical Center’s payment, depending on cost savings." However, OIG decided not to impose sanctions because: the circumstances and safeguards of the arrangement reduced the likelihood that it was used to attract referring physicians or to increase referrals from existing physicians; the structure of the arrangement eliminated the risk that it might be used to reward surgeons or other physicians who refer patients to the groups; and the arrangement set out with specificity the particular actions that generated the cost savings on which the payments will be based. Notwithstanding its decision not to impose sanctions, OIG warned that it still harbored "concerns regarding many arrangements between hospitals and physicians to share cost savings." "In short," OIG said, "this opinion is predicated on the specific arrangement posed by the Requestors and is limited to that specific arrangement. Other apparently similar arrangements could raise different concerns and lead to a different result." Advisory Opinion No. 08-09 (Dep’t of Health and Human Servs. Office of Inspector Gen. July 31, 2008). Physician Group’s Proposal To Lease Space, Equipment To Other Physicians May Result In Administrative Sanctions, OIG Says A physician practice group’s proposal to provide space, equipment, and personnel to other physician practice groups through block leases could potentially generate prohibited remuneration under the Anti-Kickback Statute and could potentially result in administrative sanctions under sections 1128(b)(7) or 1128A(a)(7) of the Social Security Act, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted August 26, 2008. 114 The physician group practice requestor provides cancer treatment services in a freestanding facility. One of the treatments offered at the facility is intensity-modulated radiation therapy (IMRT). Patients with prostate cancer who receive IMRT at the facility are referred to the requestor by urologists, the opinion said. The requestor wants to enter into an arrangement with some urology physician groups (the Urologist Groups) whereby the Urologist Groups would lease, on a part-time basis, the space, equipment, and personnel services necessary to perform IMRT. Specifically, the opinion explained, each Urologist Group would lease examination and treatment rooms at the facility for fixed periods of at least eight hours per week, in the same space where the requestor provides IMRT. According to the opinion, the series of agreements that would make up the proposed arrangement, in effect, establish a joint venture between the requestor and the Urologist Groups. “The OIG has longstanding concerns about certain problematic joint venture arrangements between those in a position to refer business, such as physicians, and those who furnish 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 of the joint venturers,” the OIG said in its opinion. As set forth in a Special Advisory Bulletin issued by the OIG, “suspect joint venture arrangements typically exhibit certain common elements, several of which are present in the Proposed Arrangement,” the opinion said. Under the proposed arrangement, the OIG noted, the Urologist Groups would be expanding into a related line of business, which is dependent on referrals from the Urologist Groups. “On the whole,” the OIG concluded, “the Urologist Group would commit little in the way of financial, capital, or human resources to the IMRT and, accordingly, would assume very little real business risk.” Other problematic elements of the proposed arrangement, according to the OIG, are: that the requestor is an established provider of the same services that a Urologist Group would provide under the proposed arrangement and is in a position to directly provide the IMRT in its own right; and that the aggregate income to the Urologist Groups under the proposed arrangement would vary with referrals from the Urologist Groups to the Facility, and, because the various agreements could be tailored to fit the historical pattern of referrals by the Urologist Groups, so might the income to the requestor. In addition, the OIG also flagged the facts that a Urologist Group would use the premises, equipment, and staff of the requestor to serve its own patient base and that the requestor and the Urologist Groups would share in the economic benefit of the IMRT. In finding that it could impose sanctions, the OIG highlighted that “the Requestor may be offering the Urologist Groups impermissible remuneration by giving them the opportunity to obtain the difference between the reimbursement received by the Urologist Groups from the Federal health care programs and the rent and fees paid by the Urologist Groups to the Requestor and the individual Radiologists.” 115 The OIG further noted that “[i]f the intent of the Proposed Arrangement were to give the Urologist Groups remuneration through the IMRT to induce referrals to the Requestor, the anti-kickback statute would be violated.” Advisory Opinion No. 08-10 (Dep't of Health and Human Servs. Office of Inspector Gen. Aug. 19, 2008). OIG Approves Company’s Proposal To Provide Administrative “Preauthorization” Services To Radiology/Imaging Centers A company’s proposal to create a new subsidiary to provide administrative insurance preauthorization processing services for radiology and imaging centers would not generate prohibited remuneration under the federal anti-kickback statute, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted September 26, 2008. Accordingly, OIG said it would not impose administrative sanctions on the company (requestor) under federal fraud and abuse laws in connection with the proposal. Under the proposed arrangement, the requestor would form and wholly own and manage a new legal entity (Newco), which would contract with various radiology and imaging centers (collectively, centers) across the nation to provide “purely administrative services consisting solely of the processing and submission of insurance preauthorizations” for certain procedures whenever an insurer of a patient at a center required such preauthorization, the opinion said. According to the requestor, the centers would provide Newco with the pertinent patient information required for Newco to process the preauthorizations. For Newco’s services, the centers would pay a “per service” fee for each preauthorization processed and submitted, regardless of whether the patient’s insurer ultimately granted the preauthorization for the particular procedure. The requestor certified the fee paid to all centers would be the same, and would represent “fair market value in an arm’s-length transaction” for the services performed. In addition, the requestor certified that neither it nor Newco (nor their affiliates) would have any other direct or indirect financial relationship with the centers or their affiliates. Under these factual circumstances, OIG concluded that the proposed arrangement would not result in illegal referrals of federal healthcare program business. First, OIG emphasized that neither the requestor nor its affiliates are or would be healthcare providers or suppliers or in any way affiliated with the healthcare industry. Second, the services to be provided by Newco would be “purely” administrative and therefore would not involve marketing to promote an item or service, OIG explained. Further, “[a]ll patient information would be supplied by the Centers, without any independent information by the [r]equestor or Newco . . . through contacts with Center referral sources (e.g., patients or physicians),” OIG said. These services “do not rise to the level of arranging for or recommending purchasing, leasing, or ordering items or services payable under a Federal health care program.” Newco’s services also do not involve coding, billing, or claims processing or review, “which are activities that can, in some circumstances, generate Federal health care program business,” OIG said. 116 OIG also distinguished the proposed arrangement from potentially problematic arrangements “where administrative services are provided by, or on behalf of, a supplier, such as an imaging company or a manufacturer, to an existing or potential referral source.” In these circumstances, a risk exists that at least one purpose of providing the services is to influence referrals to the party providing the services, OIG acknowledged. However, under the facts of the proposed arrangement, OIG concluded that such risk is not a concern because neither the requestor nor its affiliates are in a position to receive or influence referrals of federal healthcare program business. Advisory Opinion No. 08-12 (Dept. of Health and Human Servs. Office of Inspector Gen. Sept. 19, 2008). OIG Approves Gainsharing Arrangement Between Hospital And Cardiology Groups In an advisory opinion posted October 14, 2008, the Department of Health and Human Services Office of Inspector General (OIG) approved an existing gainsharing arrangement between an acute care hospital and two cardiology groups in which the hospital shares with the groups a percentage of the hospital’s savings arising from the cardiologists’ implementation of recommended cost-reduction measures. According to OIG, the arrangement could constitute an improper payment to a physician to induce reduction or limitation of services to Medicare or Medicaid beneficiaries under the physician’s direct care, thereby triggering the civil monetary penalty (CMP) set forth in §§ 1128A(b)(1)-(2) of the Social Security Act (Act). In addition, OIG said the arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute (§ 1128B(b) of the Act), which prohibits payments to physicians for referring federal healthcare program business to a facility. However, OIG said it would not impose sanctions because, given the factual circumstances and the safeguards certified by the requestors, the arrangement posed a low risk of fraud and abuse. OIG emphasized that its opinion was limited to the facts presented, and that other apparently similar gainsharing arrangements could raise different concerns and lead to a different result. Under the proposed arrangement, the hospital agreed to pay each of the two cardiology groups a share of three years of cost savings directly attributable to specific changes in that particular group’s cardiac catheterization laboratory (cath lab) practices. The requestors already have implemented the three-year arrangement (which is still ongoing) under which payments are owed to each of the cardiology groups at the end of each year, OIG explained. The 30 recommended cost-savings measures, which are the subject of the arrangement, fall into three categories: product standardization, use-as-needed cardiac medical devices, and product substitution, according to the opinion. 117 Under the arrangement, the hospital would pay each of the cardiology groups separately for 50% of the yearly savings achieved by the particular group when implementing the 30 measures. OIG concluded that, although the 30 recommended measures implicated the CMP, several features of the arrangement provided sufficient safeguards against fraud and abuse. Specifically, OIG noted that the cost-saving actions and resulting savings involved in the arrangement were clearly and separately identified, and that such transparency allowed for public scrutiny and individual physician accountability for any adverse effects on patient care caused by the arrangement. In addition, the requestors proffered credible medical support for the position that implementation of the 30 recommended measures has not adversely affected patient care, the opinion said, and also certified that the arrangement is periodically reviewed to confirm that it does not have an adverse impact on clinical care. Further, the amounts to be paid to physicians under the arrangement have been based on all procedures regardless of patients’ insurance coverage, subject to the cap on payment for federal healthcare program procedures, according to the opinion. Also, the procedures to which the arrangement applies have not been disproportionately performed on federal healthcare program beneficiaries. OIG also noted the product standardization portion of the arrangement protected against inappropriate reductions in services by ensuring that individual physicians still have available the same selection of devices and supplies they had before the arrangement became effective. OIG found the financial incentives under the arrangement have been reasonably limited in duration and amount. Moreover, “because each of the cardiology groups distributes its profits to its members on a per capita basis, any incentive for an individual cardiologist to generate disproportionate cost savings is mitigated,” OIG said. OIG said its decision not to impose sanctions on the requestors was consistent with its Special Advisory Bulletin (July 1999) entitled Gainsharing Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries. The requestors' arrangement "is markedly different from 'gainsharing' plans that purport to pay physicians a percentage of generalized cost savings not tied to specific, identifiable cost-lowering activities," OIG said. With regard to potential violations under the anti-kickback statute, OIG concluded that several safeguards mitigated against the risks that the arrangement would be used to attract referring physicians or to increase referrals from existing physicians. OIG highlighted that participation in the arrangement has been limited to cardiologists already on the hospital’s medical staff, and that potential savings derived from procedures for federal healthcare program beneficiaries have been capped based on the physicians’ prior year’s admissions of such beneficiaries. OIG also found the structure of the arrangement (i.e., groups’ physician members are the sole participants in the arrangement) effectively eliminated the risk that it would be used to reward other cardiologists or physicians who refer patients to the cardiology groups. 118 Advisory Opinion 08-15 (Dept. of Health and Human Servs. Office of Inspector Gen. Oct. 6, 2008). OIG Approves Hospital's Proposal To Share Percentage Of PayFor-Performance Program Bonuses With Physician-Owned Entity The Department of Health and Human Services Office of Inspector General (OIG) has given the green light to a hospital’s proposed arrangement to change its pay-forperformance program to share with a physician-owned entity a percentage of the bonus compensation it receives from a private insurer for meeting certain quality targets, according to an advisory opinion posted October 14, 2008. According to OIG, the proposed arrangement could constitute an improper payment to a physician to induce reduction or limitation of services to Medicare or Medicaid beneficiaries under the physician’s direct care, thereby triggering the civil monetary penalty (CMP) provision set forth in §§ 1128A(b)(1)-(2) of the Social Security Act (Act). In addition, OIG said that the proposed arrangement could potentially generate prohibited remuneration under the anti-kickback statute (§ 1128B(b) of the Act), which prohibits payments to physicians for referring federal healthcare program business to a facility. OIG concluded, however, that it would not impose sanctions because the arrangement as structured posed a low risk of fraud and abuse. The requesting hospital participates in a pay-for-performance program implemented by a private insurer, under which the insurer pays the requestor for the care of patients in a given year (i.e., base compensation), as well as an additional percentage of the base compensation (i.e., incentive payments) based on the extent to which the requestor meets certain standards of quality and efficiency established by the insurer. OIG explained that, to calculate the incentive payments to be received for complying with “quality targets,” the private insurer takes into account not just those insured under its plans, but all of the requestor’s inpatients (including Medicare and Medicaid beneficiaries) having a designated condition or procedure. Under the proposed arrangement, the requestor would enter into an agreement with a physician-owned entity whose members are on the requestor’s medical staff. Pursuant to that agreement the physician entity would require its members to undertake various tasks to ensure that the quality targets are achieved, including developing policies and procedures, conducting peer review, and auditing medical records. The requestor would then pay the physician entity a percentage, not to exceed 50%, of the incentive payments it receives from the private insurer for achieving the insurer’s quality targets. The physician entity would then distribute its earnings under the agreement to its members on a per capita basis. At the outset of its analysis, OIG reiterated its long-standing concerns about gainsharing programs or similar cost-savings arrangements such as the requestor’s pay-forperformance proposal. Nonetheless, OIG concluded that, although the incentive payments at issue implicated the CMP, several features of the proposed arrangement provide sufficient safeguards against patient and federal healthcare program abuse. 119 OIG first noted credible medical support that the proposed arrangement could improve patient care and was not likely to adversely affect it. Moreover, under the proposed arrangement, bonus compensation is not reduced for not meeting a specific quality standard in medically inappropriate circumstances (i.e., where applying the standard is contraindicated with regard to the particular patient). In addition, the requester certified that it would monitor the quality targets throughout the term of the agreement “to protect against inappropriate or limitations in patient care of services,” OIG said. The proposed arrangement also “clearly and separately” identifies the performance measures that could result in incentive payments to the physician entity, OIG noted, adding that such transparency allows for public scrutiny of and individual physician accountability for any adverse effects of the proposed arrangement. Turning to its anti-kickback concerns, OIG noted safeguards that mitigated against the risks that the proposed arrangement would be used to attract referring physicians or to increase referrals from physicians already on the requestor’s staff. Among other safeguards, OIG highlighted that membership in the physician entity would be limited to physicians who have been on the requestor’s medical staff for at least a year. In addition, OIG said that the per capita distribution of the incentive payments among the members of the physician entity would reduce the risk that the proposed arrangement might be used to reward individual physicians to refer patients to the requestor. Advisory Opinion 08-16 (Dept. of Health and Human Servs. Office of Inspector Gen. Oct. 7, 2008). OIG OKs Suppliers’ Proposal To Place DMEPOS Inventory Onsite At Hospitals, Provide Training, Education On Prescribed Equipment Two suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) would not be subject to administrative sanctions in connection with a proposal to place inventory of DMEPOS in consignment closets onsite at certain hospitals, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted November 26, 2008. The OIG also found no anti-kickback issues regarding the other aspect of the suppliers’ proposal to have licensed personnel on-call or onsite at the hospitals to train and educate patients who have been prescribed respiratory equipment and have selected one of the companies as their supplier upon discharge to their homes. According to the OIG, the proposal would not generate prohibited remuneration under the Anti-Kickback Statute. The suppliers proposed entering into written agreements with various hospitals allowing them to place inventory onsite at the hospitals. The suppliers certified that they would not pay any remuneration to the hospitals for the use of the consignment closets. 120 The suppliers would be identified as the DMEPOS supplier used by the hospitals, but patients would be free to select any supplier. For respiratory equipment, the suppliers also would provide licensed personnel, such as respiratory therapists or registered nurses, on-call or onsite at the hospitals to train and educate patients who had selected the suppliers. The suppliers indicated the licensed personnel would perform training, education, and coordination of care services to comply with final DMEPOS Quality Standards issued in October 2008 by the Centers for Medicare and Medicaid Services (CMS). The hospitals would provide the licensed personnel with a desk and telephone at no charge to the suppliers. The OIG acknowledged its long-standing concern about aggressive marketing by DMEPOS suppliers, and the potential these activities have for fraud and abuse. Notwithstanding these concerns, however, the OIG said the instant proposal did not implicate the Anti-Kickback Statute under the circumstances. The OIG highlighted that hospitals would provide the consignment closets to the suppliers at no cost, and no remuneration would flow from the suppliers to the hospitals, i.e. potential referral sources, for the desks or telephone services given to the licensed personnel. “In short, under the Proposed Arrangement, the remuneration (the free telephones, desks, and consignment closets) and the referrals run the same way.” Finally, the OIG noted the services provided by the licensed personnel would consist only of those necessary to comply with the quality standards issued by CMS. These individuals would not provide any services that the hospitals were otherwise obligated to provide such as discharge planning or case management. Advisory Opinion No. 08-20 (Dep’t Health and Human Servs. Office Inspector Gen. Nov. 19, 2008). OIG Greenlights Gainsharing Arrangement Between Hospital And Cardiology Groups Although an existing gainsharing arrangement between a hospital and four cardiology groups has the potential for resulting in improper payments to induce reduction or limitation of services or prohibited remuneration, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted December 8, 2008 that it would not impose sanctions because sufficient safeguards existed to mitigate fraud and abuse risks. Under the arrangement, the hospital agreed to pay each of four cardiology groups, as well as a radiology group, a share of cost savings directly attributable to specific changes in that particular group’s cardiac catheterization practices over two years. The hospital and groups in the arrangement (Requestors) began implementing the specific changes in these practices prior to requesting the advisory opinion. The changes were based on 27 recommendations from a study of historical practices of the groups with respect to cardiac catheterization procedures performed at the hospital. 121 The recommendations are grouped in three general categories: product standardization, “use as needed” devices, and product substitutions. In relation to product standardization, the report recommended that the groups standardize the types of cardiac catheterization devices and supplies (i.e., stents, balloons, guidewires and catheters, diagnostic devices, pacemakers, etc.) that they employ, and to identify preferred vendors and products. The arrangement also called for limiting the use of certain devices to an “as needed” basis for cardiac interventional and diagnostic procedures, and for substituting, as appropriate, less costly contract agents and anti-thrombotic medications for other products being used by the physicians. In determining that it would not impose sanctions, the OIG noted the arrangement contained several safeguards intended to protect against inappropriate reductions in services. “Importantly, with respect to the product standardization, use as needed recommendation, and product substitution, the Requestors certified that the individual physicians made a patient-by-patient determination of the most appropriate device or supply and the availability of the full range of devices and supplies was not compromised by the product standardization, use as needed recommendation, or product substitution,” the OIG said. The OIG listed other features of the arrangement that, in combination, amounted to sufficient safeguards to mitigate unlawful activity under fraud and abuse laws, including the Anti-Kickback Statute. First, the OIG said that specific cost-saving actions and resulting savings were clearly and separately identified in the arrangement, and that transparency of the arrangement allows for scrutiny and individual physician accountability for any adverse effects. In addition, the Requestors submitted credible medical evidence for the position that implementation of the recommendations did not adversely affect patient care, the opinion noted. With respect to compensation to the various groups in the arrangement, the opinion highlighted that the amounts to be paid were calculated based on all procedures performed, regardless of patients’ insurance coverage. In addition, the procedures to which the arrangement applied were not disproportionately performed on federal healthcare program beneficiaries. The OIG said the arrangement further protected against inappropriate reductions in services by ensuring that individual physicians still had access to the same selection of devices and supplies after implementation of the arrangement as before. In addition, the financial incentives under the arrangement were reasonably limited in duration (two years) and amount, and any incentive for an individual physician to generate disproportionate cost savings was mitigated because each of the groups distributes profits to its members on a per capita basis, the opinion said. The OIG also determined the structure of the arrangement eliminated the risks that it will be used to reward surgeons or other physicians who refer patients to the groups or their physicians. 122 “The Groups were the sole participants in the Arrangement and were composed entirely of cardiologists and interventional radiologists; no surgeons or other physicians are members of the Groups or will share in their profit distributions,” the OIG said. The OIG cautioned, however, that “[o]ther arrangements, including those that are longer in duration and more expansive in scope, are likely to require additional or different safeguards.” Advisory Opinion 08-21 (Department of Health and Human Servs. Office of Inspector Gen. Nov. 25, 2008). OIG Says Physician Group May Employ Part-Time Physicians For Endoscopies A physician group's proposal to employ part-time two physicians to perform endoscopies would not generate prohibited remuneration under the Anti-Kickback Statute, the Department of Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted December 15, 2008. The requestor of the opinion is a nonprofit, tax-exempt corporation that meets all the criteria of a "physician group" set out in 42 C.F.R. § 411.352, OIG explained. The requestor proposes to employ two physicians on a part-time basis to perform endoscopies on the requestor’s premises. Each of the proposed part-time physicians also has a separate medical practice, at separate premises, where he or she will continue to see patients outside the part-time employment relationship with the requestor. In addition, the requestor said it will pay each physician a salary that will be based on the fair market value of the professional services that he or she personally provides while employed by the requestor. OIG noted that the Anti-Kickback Statute does not prohibit payments made by employers to their bona fide employees for employment in the furnishing of items or services for which payment may be made under Medicare, Medicaid, or other federal healthcare programs. OIG said for the purposes of its opinion it would rely on the requestor's certification that the physicians are bona fide employees. According to the opinion, because the requestor also certified that the part-time physicians will be employed to perform endoscopies, which are services for which payment may be made in whole or in part under Medicare, Medicaid, or other federal healthcare programs, and that the compensation they will receive will be for professional services they personally perform, the Proposed Arrangement would satisfy the criteria set forth in section 1128B(b)(3)(B) of the Act and 42 C.F.R. § 1001.952(i). Therefore, the wages paid to the physicians by the requestor "would not constitute prohibited remuneration under the anti-kickback statute," OIG said. The opinion noted, however, that if the part-time physicians are not bona fide employees, its opinion "is without force and effect." Advisory Opinion No. 08-22 (Dept. Health and Human Servs. Office of Inspector Gen. Dec. 8, 2008). 123 Stark CMS Issues Advisory Opinion Finding Arrangement Satisfies Stark Rural Provider Exception The Centers for Medicare and Medicaid Services (CMS) issued a favorable advisory opinion finding an arrangement in which certain physician-owners of a diagnostic center refer patients to the center for designated health services (DHS) satisfies the rural provider exception to the physician self-referral prohibition. According to the facts set forth in the redacted opinion, the diagnostic center offers a variety of services, including physician consultation on a walk-in and urgent care basis, as well as ancillary services such as clinical laboratory services and diagnostic radiology services. The physician-investors have made and will continue to make referrals of Medicare patients to the center for these services, the opinion noted. CMS concluded that, under the facts certified by the requestors, the arrangement qualified for the rural provider exception to the Stark Law. See 42 C.F.R. § 411.356(c)(1). At the outset of its analysis, CMS emphasized that the rural provider exception applies only to ownership or investment interests in a DHS entity. CMS found the ownership-investment interest in the diagnostic center at issue met the two-part test to qualify for the rural provider exception—namely, that the DHS is furnished in a rural area and that “substantially all” (i.e., at least 75%) of the DHS furnished by the entity is to individuals residing in a rural area. Because the county where the center is located is not listed as a metropolitan statistical area (MSA), by definition, it is considered to be a rural area, CMS said. Moreover, requestors certified that, on an annual basis, at least 75% of the designated health services provided by the center have been, and will continue to be, furnished to individuals outside of a MSA. “We caution, however, that the ‘substantially all’ test is an ongoing requirement,” CMS noted. The agency also stressed that the rural provider exception would only apply to the extent the diagnostic center continued to furnish services outside the boundaries of a MSA. Advisory Opinion No. CMS-AO-2008-02. OIG Issues “Open Letter” Narrowing Scope Of Self-Disclosure For Self Referral Issues The Department of Health and Human Services Office of Inspector General (OIG) issued March 24, 2009 an “open letter” to healthcare providers indicating OIG will no longer accept into the Self-Disclosure Protocol (SDP) issues that involve only liability under the physician self referral (Stark) Law in the absence of a colorable Anti-Kickback Statute (AKS) violation. 124 The letter, signed by Inspector General Daniel R. Levinson, says the refinements are intended to focus OIG resources on kickbacks intended to induce or reward a physician's referrals. On April 24, 2006, OIG issued an open letter promoting the use of the SDP to resolve civil monetary penalty (CMP) liability under Stark and the AKS for financial arrangements between hospitals and physicians. The letter issued this week cautions that while OIG is narrowing the SDP’s scope for “resource purposes,” providers should not “draw any inferences about the Government’s approach to enforcement of the physician self-referral law.” The letter also establishes a minimum $50,000 settlement amount for kickback issues, effective March 24, 2009, to be accepted into the SDP. “We will continue to analyze the facts and circumstances of each disclosure to determine the appropriate settlement amount consistent with our practice, stated in the 2006 Open Letter, of generally resolving the matter near the lower end of the damages continuum, i.e., a multiplier of the value of the financial benefit conferred.” U.S. Court In Colorado Finds No Jurisdiction In Challenge To Revised “Entity” Definition Under Stark The U.S. District Court for the District of Colorado said it lacked subject matter jurisdiction to consider whether CMS’ broadened definition of when an “entity” furnishes designated health services (DHS) was an impermissible construction of the Stark Law. The court found plaintiffs in the case—physicians and physician-owned entities—could have their claim heard administratively, albeit indirectly, through the hospitals with which they contract “under arrangement.” Thus, federal question jurisdiction was barred under 42 U.S.C. § 405(h) because administrative channels were available to consider plaintiffs’ claim. At issue was a change in CMS’ interpretation of the Stark Law regarding when an “entity” furnishes DHS for purposes of the physician self-referral prohibition. Plaintiffs, which provide DHS under contract with hospitals in Colorado, include cath labs and their physician owners. Medicare rules permit only a hospital to bill for the cardiac catheterization services performed by the cath labs. As a result, the cath labs provide their services to hospitals "under arrangements" in which the hospitals contract with the cath labs to provide "nursing and technical personnel, equipment, drugs, and medical supplies." Under current regulations, only the hospital—i.e., the billing entity—is considered to be furnishing DHS; thus, individual physician plaintiffs can lawfully refer their Medicare patients to entities they own. 42 C.F.R. § 411.351. Effective October 1, 2009, however, physician-owned entities that provide DHS “under arrangements” with the hospitals also will be considered to be furnishing DHS and will be prohibited from making referrals to their own cath labs absent an applicable exception. See 73 Fed. Reg. 48434, 48751 (Aug. 19, 2008). 125 Plaintiffs filed an action in court seeking a declaration that CMS’ new interpretation of entities furnishing DHS is unlawful. Citing American Chiropractic Ass’n, Inc. v. Leavitt, 431 F.3d 812 (D.C. Cir. 2005), the court concluded that it lacked subject matter jurisdiction to consider the challenge. Plaintiffs argued that an exception to the requirement that all claims arising under the Medicare Act must be channeled through the administrative process applied--i.e., that they could only obtain judicial review through a federal question suit. Although plaintiffs could not bring an administrative challenge before CMS because they did not directly bill or receive payments from Medicare for DHS, the hospitals with which they contract could do so "if they so chose," the court observed. In American Chiropractic, the D.C. Circuit found an association of chiropractors could not challenge in court a Medicare regulation that permitted health maintenance organizations (HMOs) to require patients to obtain a referral from a doctor or osteopath to receive covered chiropractic services because the chiropractors could have their claim heard administratively indirectly through a patient filing a grievance with their HMO. “Like the chiropractors in American Chiropractic whose claims could be heard indirectly through their patients, the physicians and physician-owned Cath Labs here could have their claim heard indirectly through a hospital with which they contract,” the court reasoned. The court rejected plaintiffs’ attempt to distinguish American Chiropractic on the basis that the association of chiropractors could “get its claim heard” because its members had direct access to administrative review as the assignee of their patients. “Plaintiffs’ lack of a direct avenue to administrative review through an assignment does not mean that they could not get their claim heard,” the court said. Plaintiffs also contended the hospitals were not adequate proxies because they had no incentive to channel the claim administratively and faced other roadblocks in doing so. Again citing American Chiropractic, the court noted that the D.C. Circuit never considered whether the chiropractors’ patients were adequate proxies, only “that chiropractors could receive an administrative decision on the issue presented.” In any event, the court concluded the hospitals did have adequate incentives to file an administrative claim "because the Cath Labs provide the cardiac catherization services 'at a lower cost than could be provided by the hospitals' and 'the hospitals profit by having these services furnished under arrangement.'" Colorado Heart Inst., LLC v. Johnson, No. 08-1626 (RMC) (D.D.C. Apr. 20, 2009). Other Developments OIG Says Some Physicians Ordering Magnetic Resonance Services May Have Conflict One-quarter of magnetic resonance (MR) services paid under the Medicare physician fee schedule (MPFS) in 2005 were “connected service”—i.e. services ordered by physicians who were connected to the parties that provided them, the Department of Health and Human Services Office of Inspector General (OIG) said in a recent report. 126 The report, Provider Relationships and the Use of Magnetic Resonance Under the Medicare Physician Fee Schedule, details a study, based on 2005 Medicare Part B claims data and projections of data from a sample of MR services, to determine whether certain relationships among providers were associated with high use of services. According to the OIG, “[c]onnected services were associated with high use.” Specifically, high users of MR ordered 55% of connected services, the OIG reported, compared to 33% of services that were not connected. The OIG also found connected services were more likely to have been ordered by orthopedic surgeons. Specifically, orthopedic surgeons ordered 28% of connected services, compared to 15% of all other services. As more MR services are performed in settings covered by the MPFS, “doctors are increasingly in a position to order services from parties with which they have a medical practice or other business relationship,” the OIG noted. “In these circumstances, doctors may have conflicts of interest, financial or otherwise,” the OIG concluded. The OIG also said the report’s findings illustrate how the complexity in which MR services are performed and billed under the MPFS reduces transparency and ultimately warrants further oversight. “Although the analysis in this report was limited to MR, it is possible that such complexity extends to other types of high-cost imaging paid under the MPFS,” the OIG added. The Centers for Medicare and Medicaid Services (CMS) agreed that the complexity of MR services warranted continued attention. In commenting on the report, CMS outlined a number of regulatory steps it has taken to curb overutilization of diagnostic testing services, including expanding the antimarkup provision to the professional component of services and seeking public comment on the in-office ancillary exception to the physician self-referral law. DOJ Recovers $1.12 Billion In Healthcare Fraud Settlements And Judgments In FY 2008 The federal government recovered $1.12 billion in healthcare fraud settlements and judgments in fiscal year (FY) 2008, accounting for the vast majority of the $1.34 billion in total fraud and false claims recoveries (including defense procurement fraud) for that year, the U.S. Department of Justice (DOJ) announced in a November 10 , 2008 press release. Most of these recoveries, about 78%, stemmed from lawsuits generated by qui tam relators under the False Claims Act (FCA), DOJ said. For the fiscal year ending September 30, 2008, relators were awarded a total of $198 million, according to the release. As with the last several years, healthcare fraud represented “the lion’s share” of the federal government’s total fraud and false claims recoveries, with the Department of Health and Human Services (HHS) obtaining the biggest recoveries, the release said. DOJ indicated that since 1986, healthcare fraud recoveries have totaled nearly $4 billion. 127 The largest healthcare fraud recoveries this year involved pharmaceutical companies and related entities, according to the release. “Settlements with Cephalon Inc., Merck & Co. and CVS Caremark Corp. accounted for more than $640 million,” the release said. In addition, similar “fraud cases returned $430 million to state Medicaid programs.” Many significant recoveries involved so-called “off-label” marketing, which is the illegal promotion of drugs or devices that are billed to Medicare and other federal healthcare programs for uses not approved by the Food and Drug Administration. Other allegations involving pharmaceutical companies included paying kickbacks to physicians, wholesalers, and pharmacies to induce drug or device purchases; establishing inflated drug prices and then marketing the “spread” between federal reimbursement based on these inflated prices and the provider’s lower cost to induce drug purchases; and knowingly failing to report the true “best price” for a drug to reduce rebates to the Medicaid program. OIG, DOJ Release Annual Tally Of Antifraud Efforts The Department of Health and Human Services Office of Inspector General (OIG) and the Department of Justice (DOJ) released December 2, 2008 the Health Care Fraud and Abuse Control Program (HCFAC) Annual Report for fiscal year (FY) 2007. According to the report, in FY 2007, the government won or negotiated approximately $1.8 billion in judgments and settlements. In addition, the Medicare Trust Fund received transfers of roughly $797 million in FY 2007, while $266 million in federal Medicaid money was transferred to the U.S. Treasury as a result of antifraud efforts. U.S. Attorneys Offices opened 878 new criminal healthcare fraud investigations involving 1,598 potential defendants, the report said. Federal prosecutors had 1,612 healthcare fraud criminal investigations pending, involving 2,603 potential defendants, and filed criminal charges in 434 cases involving 786 defendants. A total of 560 defendants were convicted for healthcare fraud-related crimes during 2007. In addition, DOJ opened 776 new civil healthcare fraud investigations, and had 743 civil healthcare fraud investigations pending at the end of the fiscal year. DOJ opened 218 new civil healthcare fraud cases during the year, according to the report. The HCFAC, which was established by the Health Insurance Portability and Accountability Act, is under the joint direction of DOJ and the OIG. OIG Reports Over $20 Billion In Savings And Recoveries For FY 2008 The Department of Health and Human Services (HHS) Office of Inspector General (OIG) announced December 3, 2008 savings and expected recoveries of more than $20.4 billion for fiscal year (FY) 2008. 128 According to OIG’s Semiannual Report to Congress, the over $20 billion saved or recovered includes $16.72 billion in implemented recommendations to put funds to better use, $1.33 billion in audit receivables, and $2.35 billion in investigative receivables. Also in FY 2008, OIG excluded from participation in federal healthcare programs 3,129 individuals and organizations for convictions for healthcare-related crimes and for patient abuse or neglect or as a result of license revocation. Some notable settlements highlighted in the report include Cephalon, Inc., which agreed to pay $375 million plus interest to resolve its False Claims Act (FCA) liability for the offlabel marketing of the drugs Actiq, Gabitril, and Provigil; and Merck and Company, Inc., which agreed to pay more than $650 million to resolve claims of fraudulent price reporting and kickbacks. OIG noted that it allocates about 80% of its resources to work related to the Centers for Medicare and Medicaid Services (CMS), as CMS’ expenditures account for more than 80% of HHS’ budget. CMS Finalizes Surety Bond Regulation For DMEPOS Suppliers, Announces Other Steps To Curb Fraud Certain existing suppliers of durable medical equipment will have until October 2, 2009 to post a $50,000 surety bond to participate in Medicare under a final regulation announced by the Centers for Medicare and Medicaid Services (CMS) on December 29, 2009. The final regulation, mandated by the Balanced Budget Act of 1997, requires new suppliers of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) to comply with the surety bond requirement by May 4, 2009. Suppliers that have faced adverse legal actions in the past also may be required to post a higher amount, CMS said. An earlier proposal had set the baseline surety bond amount at $65,000. Some suppliers are specifically exempted from the surety bond requirement, including certain physicians and non-physician practitioners, physical and occupational therapists, state-licensed orthotic and prosthetic personnel, and government-owned suppliers. The move is the agency’s latest to crack down on fraud and abuse involving durable medical equipment, which has been the subject of significant scrutiny over the last several years. CMS also said it has revoked billing privileges of 1,139 DMEPOS suppliers as part of a demonstration focusing on suppliers in South Florida and Los Angeles, long considered a hotbed of fraudulent activities. According to CMS, the suppliers, who were paid a combined total of $265 million between calendar years 2005 and 2007, lost their billing privileges for not re-enrolling in the Medicare program and not meeting Medicare’s supplier standards. Meanwhile, CMS also announced payment suspensions to home health agencies in the Miami-Dade, Florida area. In addition to the payment suspensions, CMS indicated a number of other steps aimed at curbing fraud and abuse by home health agencies, including implementing extensive preand post-payment review of claims submitted by ordering/referring physicians; validating 129 claims by physicians who order a high number of certain items or services; and identifying and visiting high-risk beneficiaries to ensure they are receiving the services for which Medicare is billed. ALJ Affirms 15-Year Exclusion Of Top Executives In OxyContin Case An Administrative Law Judge (ALJ) recently upheld a 15-year exclusion from all federal healthcare programs imposed on three former executives of Purdue Frederick after they each pleaded guilty to misdemeanor misbranding of the drug OxyContin, the Department of Health and Human Services Office of Inspector General (OIG) announced January 23, 2009. The three former corporate officers, Michael Friedman, who served as Chief Operating Officer and then Chief Executive Officer, Dr. Paul Goldenheim, who served as Chief Scientific Officer, and Howard Udell, who served as General Counsel, entered into their guilty pleas at the same time Purdue Frederick and its affiliate Purdue Pharma pleaded guilty to felony misbranding of OxyContin. The companies agreed in 2007 to pay $600 million to resolve civil and criminal liabilities concerning claims that they trained their sales force to represent to healthcare providers that OxyContin did not cause euphoria and was less addictive than immediate-release opiates. As a result of the three executives’ guilty pleas, OIG excluded them from participating in federal healthcare programs for 15 years, citing their failure as responsible corporate officers to prevent misbranding and fraudulent distribution of OxyContin. In a January 9, 2009 decision upholding the exclusion, ALJ Carolyn Cozad Hughes noted the costs to government programs and individuals were “astronomical” and that Friedman, Goldenheim, and Udell’s offenses “endangered the health and safety of program beneficiaries and others.” New York State Announces $551 Million In Medicaid Recoveries New York State recovered $551 million in improperly paid Medicaid funds in federal fiscal year 2008, more than double the Medicaid fund recovery targets set under the FederalState Health Reform Partnership (F-SHRP), Governor David A. Paterson announced December 12, 2008. “To understand the significance of this success, consider this: the total that all 50 states recovered in 2007 was $305 million. New York is leading the way in fighting not only against Medicaid fraud but waste and abuse of the system as well,” said New York State Medicaid Inspector General James G. Sheehan, who joined Paterson in making the announcement. The Office of the Medicaid Inspector General (OMIG) works in partnership with the Department of Health, the New York State Office of the Attorney General Medicaid Fraud Control Unit, the Office of Temporary Disability Assistance, the Office of Mental Health, the Office of Alcoholism and Substance Abuse Services, and the Office of Mental Retardation and Developmental Disabilities. 130 The OMIG was established in the fall of 2006 and receives federal funding for some of its efforts under the F-SHRP, which required the state to meet a series of conditions, including a Medicaid recovery target of $215 million for federal fiscal year 2008. NY Medicaid IG Issues Self-Disclosure Guidance The New York Office of the Medicaid Inspector General (OMIG) issued March 12, 2009 guidance for providers that discover improper Medicaid payments and want to selfdisclose those issues to the OMIG. OMIG says it developed the self-disclosure approach “to encourage and offer incentives for providers to investigate and report matters that involve possible fraud, waste, abuse, or inappropriate payment of funds—whether intentional or unintentional—under the state’s Medicaid program.” The guidance replaces the existing Department of Health disclosure protocol and establishes the process for participating in the OMIG’s Self-Disclosure Program. In an introductory section, the OMIG says the guidance is intended to be significantly more expansive in scope than the U.S. Department of Health and Human Services Office of Inspector General’s (HHS OIG's) protocol. “The OMIG recognizes that situations which are subject to this guidance could vary significantly; therefore, this protocol is written in general terms to allow providers the flexibility to address the unique aspects of the matters disclosed.” In the guidance, OMIG says typical benefits associated with self-disclosure would include forgiveness or reduction of interest payments, extended repayment terms, and possible preclusion of subsequently filed qui tam actions under the state's false claims act based on the disclosed matters to providers who self-disclose in good faith. OMIG cites a number of issues that may be appropriate for disclosure such as substantial routine errors, systematic errors, patterns of errors, and potential violations of fraud and abuse laws. The guidance sets forth the process for self-disclosure, including specifying what an initial report should contain and potential next steps once a self-disclosure is made. OMIG also indicates its commitment to obtain relevant facts and evidence without interfering with a provider’s attorney-client privilege or work-product protection. OMIG provides a printable version of its self-disclosure form, which is available online. Healthcare Reform Baucus Issues Blueprint For Healthcare Reform Senate Finance Committee Chairman Max Baucus (D-MT) issued November 12, 2008 a comprehensive proposal for revamping the nation’s healthcare system. The “Call to Action,” set forth in a white paper that took a year to prepare, provides specific policy options for Congress to consider in 2009, with the underlying objective of achieving universal health coverage, reducing healthcare costs, and improving quality, according to a press release Baucus posted. 131 Although Baucus said the white paper is not intended as a legislative proposal, he indicated plans to introduce comprehensive health reform legislation in the first half of 2009. “We can’t get coverage to the 61 million who are either uninsured or underinsured without a major overhaul of the system, and there’s no way to really solve America’s economic troubles without fixing health care for the long term,” Baucus argued. While acknowledging that many components of the plan would require upfront investments, Baucus said in the paper that a comprehensive overhaul of the healthcare system would reap lasting benefits, including improving quality, reducing costs, and putting the system "on a more sustainable path." The white paper is divided into four chapters. After making the case for reform in the first chapter, the next three address increasing access to affordable health coverage; improving value by reforming healthcare delivery; and financing a more efficient healthcare system. Universal Coverage To achieve universal coverage, Baucus’ plan would create a nationwide insurance pool called the Health Insurance Exchange to help ensure individuals and small businesses can access affordable coverage. Private insurers offering coverage through the Exchange would be barred from discriminating based on pre-existing conditions. Citing healthcare reforms put in place in Massachusetts, the plan calls for an individual mandate to have health coverage. “This step is necessary for insurance market reforms to function properly and to end the cost-shifting that occurs within the system,” according to a summary of the proposal. Baucus’ plan also would require employers (except small firms) to contribute to a fund that would help cover the uninsured if the employers choose not to provide coverage themselves. According to the paper, the contribution would likely be based on a percentage of payroll that took into account the size and annual revenues of the firm. The Baucus plan also envisions a targeted tax credit that small firms could use towards the cost of purchasing healthcare coverage. Another key component of Baucus' proposal is expanding access to public healthcare programs. For example, the plan would make healthcare coverage immediately available to Americans aged 55 to 64 through a Medicare buy-in. According to the plan, the buy-in option would be temporary until the Exchange was up and running. The plan also would make Medicaid available to every American living below the poverty level. In addition, the plan would increase the federal medical assistance percentage for states facing economic crisis. Improving Quality and Value To improve quality and value, the plan calls for strengthening the role of primary care and chronic care management. 132 Baucus’ plan also emphasizes the need to realign payment incentives. Among the key steps in this process is “[f]ixing the unstable and unsustainable Medicare physician payment formula.” In addition, the plan calls for additional investments in new comparative effectiveness research and health information technology. Greater Efficiency In terms of achieving greater efficiency and sustainable financing, the Baucus plan endorses a number of steps aimed at: curbing fraud, waste, and abuse; addressing overpayments to private insurers in Medicare Advantage programs; increasing transparency and requiring disclosure of payments and incentives to providers by drug or device makers; reforming medical malpractice laws; considering policies to shift the focus in long term care from institutional to home and community-based settings; and exploring targeted reforms of the tax code. Reactions A number of groups and lawmakers reacted favorably to Baucus' proposal and signaled their willingness to play a role in the effort to overhaul the healthcare system. In a statement, House Ways and Means Committee Chairman Charles B. Rangel (D-NY) and Subcommittee on Health Chairman Pete Stark (D-CA) said Baucus’ plan “supports a number of principles we have pursued over time, including many of those on which President-Elect Obama campaigned.” Helen Darling, President of the National Business Group on Health, which represents more than 300 large employers, agreed that "health care reform goes hand-in-hand with addressing our nation's broader economic problems." Consumers group Families USA noted that “[t]here has never been a more auspicious opportunity to secure meaningful health care reform.” But others sounded a cautionary note. "Dramatically expanding government spending and putting additional pressure on employers already struggling to create jobs would have repercussions that need to be carefully considered," said Senate Finance Committee Ranking Member Charles Grassley (R-IA). "It's not a time for rosy scenarios," Grassley added, "paying for health care reform needs to be done in an intellectually honest way for the fiscal health of our country and the broader the support for any health policy changes, the more durable and effective they will be." CBO Issues Report On Budget Options For Healthcare The Congressional Budget Office (CBO) released December 18, 2008 a far-ranging report examining budget options related to healthcare within federal programs and the healthcare system. The 235-page report examines 115 specific options for reducing (or in some cases, increasing) federal spending on healthcare, altering federal healthcare programs, and making substantive changes to the nation’s health insurance system. 133 The options are organized in broad chapters addressing, among other things, the private health insurance market, the tax treatment of health insurance, changing the availability of health insurance through existing federal programs, the quality and efficiency of healthcare, geographic variation in Medicare spending, paying for Medicare services, and long term care. “Addressing healthcare issues will be crucial to closing the nation’s looming fiscal gap— which is caused to a great extent by rising healthcare costs,” CBO said in the report. According to CBO, without changes in federal law, spending on healthcare will rise from 16% of GDP in 2007 to 25% in 2025 and close to 50% in 2082. CBO also released a companion report, Key Issues in Analyzing Major Health Insurance Proposals, which focuses on large-scale proposals, rather than specific options, and their potential impact on the healthcare system. In the report, CBO projects that federal spending on Medicare and Medicaid will increase from 4% of GDP in 2009 to nearly 6% in 2010 and 12% by 2050. "Most of that increase will result from growth in per capita costs rather than from the aging of the population," CBO said. CBO noted that absent significant policy changes, an increasing number of nonelderly individuals are likely to be uninsured. "In considering such changes, policymakers face difficult trade-offs between the objectives of expanding insurance coverage and controlling both federal and total costs for health care," CBO observed. New Study Blasts Massachusetts Healthcare Reform Model, Calls For Single-Payor System Massachusetts' far-reaching overhaul of its healthcare system is “deeply flawed” and should not be used as a national model for reform, according to a study released February 18, 2009 by Physicians for a National Health Program and Public Citizen. The study advocated instead a single-payor system in which healthcare providers are paid from a single government-administered fund. The study said a single-payor system could save Massachusetts between $8 billion to $10 billion annually in reduced administrative costs. According to the study, Massachusetts’ Plan: A Failed Model for Health Care Reform, many low-income residents who previously received free care are now faced with copayments, premiums, and deductibles they cannot afford. The study also disputed that the healthcare reform initiative had achieved near universal coverage in the state. “We are facing a health-care crisis in this country because private insurers are driving up costs with unnecessary overhead, bloated executive salaries and an unquenchable quest for profits,” said Sidney Wolfe, M.D., director of Public Citizen’s Health Research Group. “Massachusetts’ failed attempt at reform is little more than a repeat of experiments that haven’t worked in other states. To repeat that model on a national scale would be nothing short of Einstein’s definition of insanity,” he said. 134 The groups sent a letter, signed by 500 Massachusetts physicians and health professionals, to Senate Health, Education, Labor and Pensions Committee Chairman Edward Kennedy (D-MA) urging him to consider “the simplicity, cost effectiveness and humanity of a single-payer plan,” saying it could be implemented fairly easily like Medicare. The letter asked Kennedy to introduce legislation based on the United States National Health Care Act (H.R. 676) introduced in the 110th Congress, which would implement single-payor financing of healthcare while maintaining a private delivery system. The groups also sent a letter to President Obama, signed by various labor leaders from Massachusetts, also urging national healthcare reform modeled on H.R. 676. “The chief problem with the Massachusetts plan is that it leaves private insurance companies at the center of the system through an individual mandate and expensive public subsidies supported by taxes for plans that still don’t provide enough coverage,” the letter said. President Obama’s Budget Includes $634 Billion Fund For Healthcare Reforms President Barack Obama released February 26, 2009 a summary of his fiscal year (FY) 2010 budget, which creates a $634 billion reserve fund over the next decade for financing healthcare reform. The new administration characterized the fund, which would be paid for through a combination of tax revenue and reductions in Medicare and Medicaid spending, as a “down payment” on comprehensive healthcare reform, acknowledging “additional funding will be needed.” The administration’s FY 2010 budget blueprint, with a more detailed plan anticipated in the spring, follows on the heels of President Obama’s remarks February 24, 2009 to a joint session of Congress in which he emphasized the importance of healthcare reform to the nation’s overall economic recovery. “[T]he cost of our healthcare has weighed down our economy and the conscience of our nation long enough. So let there be no doubt health care reform cannot wait, it must not wait, and it will not wait another year,” Obama said. In releasing his budget plan, Obama added that “crushing health care costs . . . represent the fastest-growth part of our budget” and that comprehensive reform is critical to a sustained financial recovery. The administration said about $318 billion of the reserve fund would come from tax increases on the country's top earners, defined as individuals making more than $200,000 annually or families making more than $250,000 per year. Another $316 billion would flow from savings in spending on Medicare and Medicaid, according to budget documents. In a statement, Senate Health, Education, Labor and Pensions Committee Ranking Member Mike Enzi (R-WY) expressed concern that the President's healthcare proposals in his budget outline could signal his intent to push through a specific agenda and could "undercut the will of Congress as it works to develop a bipartisan reform bill." 135 "Reform legislation must be about more than just expanding coverage; we need to get to the root of the problem by changing the health care delivery system to encourage better value and reduce costs," he said. But Senate Finance Committee Chairman Max Baucus (D-MT) viewed the President's budget proposal as a "launching pad to move forward" on vital healthcare reform efforts. Medicare Advantage A large chunk of the health savings under the plan, about $175 billion, would come from implementing a competitive payment system for Medicare Advantage (MA) plans. According to budget documents, the federal government pays MA plans 14% more on average than what it spends on beneficiaries in traditional fee-for-service Medicare. Under the competitive bidding model, payments would be based on an average of plans’ bids submitted to Medicare. While supporting the President’s “bold framework” for jump-starting healthcare reform, the America’s Health Insurance Plans (AHIP) said the administration’s proposal “would force seniors enrolled in Medicare Advantage to fund a disproportionate share of the costs to reform the health care system.” According to AHIP, “[a] cut of this scale would jeopardize the health security of more than ten million seniors enrolled in Medicare Advantage and would turn back the clock on innovative payment incentives to improve the quality of care that patients receive." Enzi also took aim at the President's proposal, saying it undercuts his campaign promise that Americans who are satisfied with their health insurance would be able to keep their existing plans. The Medicare Rights Center, however, lauded the proposed reductions in MA payments, saying Medicare, in recent years, "has become a cash cow for insurance companies, providing taxpayer subsidies that far exceed the cost of providing coverage through Original Medicare." Hospital Readmissions, Pay-for-Performance The budget plan also calls for roughly $26 billion in savings by reducing hospital readmission rates for Medicare beneficiaries, which the administration pegged at about 18%, through a combination of incentives and penalties. Specifically, the plan would bundle payments to hospitals that cover not just the initial hospitalization, but also care from certain post-acute providers the 30 days after the hospitalizations. In addition, hospitals with high rates of readmission would be paid less from Medicare if patients are re-admitted to the hospital within the same 30-day period. Another proposal, producing an estimated $12 billion in savings, would link a portion of Medicare payments for acute in-patient hospital services to hospitals’ performance on specific quality measures. 136 Drug Prices The administration said in its budget proposal that it supports efforts to create a clear regulatory pathway for approving follow-on generics of biotechnology products. According to budget documents, brand name manufacturers would still have a guaranteed period of exclusivity but would be prohibited from reformulating existing products to restart the exclusivity process. In a statement, Biotechnology Industry Organization (BIO) President and CEO Jim Greenwood said the group supports the President's call for a regulatory pathway for biosimilars, but emphasized the need to "preserv[e] the incentives necessary for the development of new therapies and treatment as well as research leading to significant second generation improvements in safety and efficacy to innovative products." The budget outline further signaled the administration's support for new efforts by the Food and Drug Administration "to allow Americans to buy safe and effective drugs from other countries" as a way to help lower costs. The budget also contemplates lowering Medicaid drug costs by increasing the Medicaid drug rebate for brand-name drugs from 15.1% to 22.1% of the Average Manufacturer Price and allowing states to collect rebates on drugs provided through Medicaid managed care organizations. Physician Payments The administration's budget expressed its support for "comprehensive, but fiscally responsible reforms to the [Medicare physician] payment formula” as part of healthcare reform efforts. According to the administration, Medicare needs “to move toward a system in which doctors face better incentives for high-quality care rather than simply more care." “President Obama’s budget proposal takes a huge step forward to ensure that physicians can care for seniors by rejecting planned Medicare physician payment cuts of 40 percent over the next decade. Looming widespread physician shortages coupled with aging baby boomers highlight the urgent need for permanent Medicare physician payment system reform to preserve seniors’ access to health care,” the American Medical Association said in a statement. Obama Lays Out Ambitious Agenda For Health Reform President Obama emphasized his commitment to healthcare reform at a March 5, 2009 White House Forum on Health Reform where he stressed his goal to enact healthcare reform by the end of the year. Obama said current healthcare reform efforts have a better chance of success than in the past because "the call for reform is coming from the bottom up." The White House forum was aimed at bringing together key stakeholders to hash out potential next steps for moving forward with healthcare reform. A number of Republicans, however, remained vocal critics of Obama’s healthcare reform proposal following the summit. House Republican leader John Boehner (R-OH) criticized 137 the plan outlined in the President's budget, saying "[t]axpayers cannot afford to subsidize a bureaucratic takeover of health care with a massive tax hike on all Americans . . . ." Some issues that were discussed in the breakout sessions included the need to simplify the system to reduce costs and medical errors and the need to make investments up front, such as in health information technology and comparative effectiveness. Other issues were more controversial. For example, the need to create a public plan option seems to be one of the major sticking point in the debate to overhaul the healthcare system. While Democrats maintain a public plan option is needed to reduce costs to consumers and save money within the system, Republicans argue a public plan would be an unfair competitor and would ultimate mean the demise of private health plans. The Department of Health and Human Services (HHS) released a report at the forum, Americans Speak on Health Reform: Report on Health Care Community Discussions, which summarizes comments from thousands of Americans who participated in Health Care Community Discussions across the country. The cost of health insurance was the top issue of concern for the participants in the community discussions, according to the report, with 31% citing this as their biggest worry. Cost of healthcare services came in a close second with 24% of the community discussion participants ranking this as their top concern. Lack of emphasis on prevention, pre-existing conditions limiting insurance access, and quality of care also were listed as key concerns, HHS reported. In terms of reforming the system, participants “called for a system that is fair, patientcentered and choice-oriented, simple and efficient, and comprehensive,” HHS said. The report also includes a series of testimonials from people who have struggled with the current healthcare system. Grassley Says Comprehensive Healthcare Reform Needs To Be Done This Year If comprehensive healthcare reform is not put in place this year, it probably will not be accomplished for four more years because of the election cycle, Senate Finance Committee Ranking Member Charles Grassley (R-IA) warned at a March 19, 2009 briefing with reporters. During the briefing, sponsored by the Kaiser Family Foundation, Families USA, and the National Federation of Independent Business, Grassley fielded questions on a number of contentious issues, most notably about whether comprehensive healthcare reform should include a public plan option. Grassley acknowledged both Republicans and Democrats likely view the exclusion or inclusion of a public plan option in healthcare reform legislation as a deal breaker, adding that at this point he does not see a workable compromise on the horizon. At the same time, Grassley said he was open to leaving all options on the table for further discussion, noting similar “deal breaker” issues arose with legislation to add a 138 prescription drug benefit to Medicare, albeit on a much smaller scale than the challenges involved in comprehensive healthcare reform. Grassley said Republicans are concerned that a public plan option could lead to substantial crowd-out of private insurance coverage that would eventually end up in a single-payor system. Grassley cited estimates that 118 million Americans would move to public coverage with a public plan option. This result, Grassley continued, runs contrary to President Obama’s campaign promises that Americans would be able to keep their existing insurance coverage. Democrats have argued, however, that a public health insurance plan would heighten competitive pressures and help contain costs. The major stumbling block to comprehensive healthcare reform, Grassley noted, is the extent to which we have market-based health insurance or government-based health insurance. Grassley said a potential compromise may take the form of legislating minimum baselines for health insurance that preempt state law or allowing insurers to sell policies across state lines. Another “800 pound gorilla” is how to fund healthcare reform, Grassley said in response to a question about proposals to limit healthcare deductions and tax healthcare benefits. Grassley said certain economic analyses have shown that higher priced health plans can result in overutilization and are a contributing factor to inflation of healthcare costs. But Grassley said any provision for capping itemized deductions would need “great, big consensus to get it done.” Grassley also acknowledged there may need to be some upfront investments in healthcare reform, but said the GOP consensus is that pay-as-you-go rules should be observed. As far as the timetable, Grassley told reporters he expects to see a bill on the Senate floor by June and added he had no reason to doubt this would be accomplished through regular order not the reconciliation process, which would mean Democrats would need only a simple majority, or 51 votes, rather than the 60 votes required to invoke cloture and end a Republican filibuster. “If we don’t set an aggressive timetable, it is not going to get done this year,” Grassley said. HHS Report Reflects Urgency For Healthcare Reform Healthcare costs are rising at an alarming rate, while access to quality care continues to decline, according to a report posted on the Department of Health and Human Services’ http://www.healthreform.gov/ website. The report, The Costs of Inaction, makes the case for prioritizing healthcare reform. The report noted that employer-sponsored health insurance premiums have more than doubled in the last nine years, as have overall healthcare costs. 139 The proportion of spending attributable to Medicare and Medicaid is expected to rise from 4% of Gross Domestic Product (GDP) in 2007 to 19% of GDP in 2082, making it the principal driving force behind rising federal spending in the decades to come, HHS said. In addition, half of all personal bankruptcies are at least partly the result of medical expenses, the report said. At the same time, the report found declining access to care, with an estimated 87 million people uninsured at some point in 2007 and 2008. More than 80% of the uninsured are in working families, the report noted. According to HHS, because of the current economic crisis, “even people with insurance are forgoing needed medical care, including prescription medications and doctor visits, because of inability to pay copayments and deductibles.” In addition, our health system has not achieved the quality that one might expect. The report found that across 37 performance indicators, the United States achieved an overall score of 65 out of a possible 100. DeParle Strikes Optimistic Outlook For Healthcare Reform This Year, Cites Policy Options For Overcoming Objections To Public Plan White House Office of Health Reform Director Nancy Ann DeParle during an April 15, 2009 briefing with reporters cited uniform agreement about the need to change the status quo and a willingness among lawmakers to work constructively toward that end as positive signs that healthcare reform legislation will be enacted this year. During the briefing, part of a series on healthcare reform sponsored by the Kaiser Family Foundation, Families USA, and the National Federation of Independent Business, DeParle said she has spent a significant amount of her time since taking office a month ago speaking with lawmakers about healthcare reform. Unlike the effort 15 years ago under the Clinton Administration, DeParle said this time around there has been significant engagement from relevant committee chairs to make healthcare reform a priority. DeParle said committee staffers already are working on drafting specifications and even in some cases bill language, and that the White House is providing “active technical assistance” to those efforts. DeParle responded to questions from reporters on a number of healthcare reform issues, but none took center stage more than the controversial question of a public plan option. While Democrats view a public plan option as key to lowering costs and expanding consumer choice, Republicans have argued a public plan will lead to crowd out and eventually the demise of private health plans. But DeParle emphasized that policy options exist to address many of the concerns raised about a public plan, although she conceded that underlying philosophical objections would make bridging the divide much more challenging. 140 Asked to define a public plan, DeParle explained that it would be sponsored by the government, would have low or non-existent administrative costs, and would not require brokers for selling. DeParle said it could be operated under the same rules that apply to other plans, could have similar payment rates, or could have payment rates that are tied to Medicare. DeParle also noted as one potential model state employee health plans that are sponsored by the government but operated by private plans. DeParle said the President included a public plan option as part of his healthcare reform proposal as a mechanism to lower costs and keep private plans “honest” by increasing choice and competition. Responding to a question about whether President Obama would sign healthcare reform legislation that did not include a public plan option, DeParle noted that the President was focused on achieving lower costs and increased competition, but remained open to considering other avenues that are suggested to reach those goals. DeParle also fielded questions about how to finance healthcare reform, including proposals to eliminate current tax exclusions. According to DeParle, this approach prompts “serious concerns” within the administration about undermining the current system of employer-based coverage, which Obama pledged during his campaign should remain intact. DeParle added, however, that the White House is open to working with Congress on the financing issue. DeParle also faced questions about whether the administration supported using the budget reconciliation process to pass healthcare reform legislation. DeParle said the administration wanted to see a bipartisan bill and that reconciliation would not be its “preferred method” of moving forward. At the same time, DeParle reiterated the administration’s commitment to enacting healthcare reform this year. Congress Passes FY 2010 Budget Resolution Both the House and the Senate approved along party-lines the conference report on President Obama’s fiscal year 2010 budget plan. The Senate approved the measure by a vote of 53 to 43 and the House by a vote of 233 to 193, with all Republicans in the House voting no. The approved report contains reconciliation instructions aimed at moving health reform through Congress faster by preventing a Senate filibuster. According to House Budget Committee Chairman John Spratt, if legislation for healthcare reform cannot be achieved through regular procedures, “the budget’s reconciliation instructions requiring committees to report legislation by October 15 provide a fall-back to ensure that these initiatives can move through Congress.” Senator Mike Enzi (R-WY) said the $3.6 trillion budget spends too much and the inclusion of the budget reconciliation provision can be used to bypass “a full and fair legislative process” on upcoming healthcare and higher education bills. “Reconciliation is intended for meaningful deficit reduction or budgetary issues, not for a bill with as many moving parts that affect as many people as education and health care 141 reform. Reconciliation is a slippery slope that ties the hands of the minority party,” said Enzi. “Health care reform is too big of an issue to advance with procedural shortcuts." The conference agreement also retains, as requested by President Obama, a deficitneutral reserve fund to allow for major health reform. Healthcare Spending Obama Signs Stimulus Bill With Funding For HIT, Medicaid President Obama signed into law February 17, 2009 a massive $787 billion economic recovery package that included a number of significant healthcare-related provisions. The package included subsidies for COBRA premiums, new investments in health information technology (HIT), and a temporary across-the-board increase in the federal medical assistance percentage (FMAP) to help state Medicaid programs weather the economic downturn. The House passed the American Recovery and Reinvestment Act of 2009 (H.R. 1) on February 13, 2009 by a 246-183 margin, the Senate followed suit on the same day in a 60-38 vote. “Because we know that spiraling health care costs are crushing families and businesses alike, we're taking the most meaningful steps in years towards modernizing our health care system,” said Obama in remarks at the bill signing. “It's an investment that will take the long overdue step of computerizing America's medical records to reduce the duplication and waste that costs billions of health care dollars, and medical errors that cost thousands of lives each year,” Obama added. The bill includes $17.2 billion in payment incentives to Medicare and Medicaid providers who adopt electronic health records and $2 billion for affiliated grants and loans through discretionary funding. But Republican lawmakers blasted the bill, including the healthcare-related provisions. “Unfortunately, Democrats shut out Republican ideas to produce a trillion dollar spending package that could restrict patient access to life-saving therapies, drive up health insurance premiums for employees and small businesses, and waste billions of hardearned taxpayer dollars,” said Senate Health, Education, Labor and Pensions Committee Ranking Member Mike Enzi (R-WI). COBRA, Medicaid The bill includes a 65% tax credit to help workers who lose their jobs retain health insurance through COBRA. According to a White House fact sheet, this measure will help 7 million Americans keep their healthcare coverage. The new law also provides $87 billion to states in the form of a temporary increase in the FMAP. The White House said the increase would help protect roughly 20 million people whose eligibility for Medicaid might otherwise be at risk. 142 Comparative Effectiveness One controversial provision allots $1.1 billion for comparative effectiveness research, which is intended to arm providers and patients with better information for evaluating the relative merits of different treatment options. In a statement, medical device group AdvaMed said it supports comparative effectiveness research and “appreciates that changes were made to the report language to express the intent of Congress—specifically that the funds under the program are to be used to study the medical effectiveness of different approaches to treating illness.” But Enzi called the comparative effectiveness provision “a Trojan horse for the federal government to develop ways to ration health care.” Privacy The bill also includes significant new expansions of privacy and security requirements under the Health Insurance Portability and Accountability Act. Privacy advocates argued the provisions were necessary to ensure consumer confidence in a nationwide health information exchange. But other stakeholders said the provisions did not strike the right balance between privacy concerns and overly burdensome requirements. Health Information Technology ONC Issues Health IT Strategic Plan The Department of Health and Human Services Office of the National Coordinator (ONC) issued June 3, 2008 its five-year strategic plan for achieving a national, interoperable health information technology (IT) infrastructure that supports the two goals of patientfocused healthcare and population health. The ONC-coordinated Federal Heath IT Strategic Plan (Plan) covers the timeframe of 2008-2012 and details four objectives related to privacy and security, interoperability, IT adoption, and collaborative governance as applied to the two, overarching goals. While these themes recur across the goals, they apply in very different ways, the Plan noted. The Plan describes 43 strategies for achieving each objective, with measurable milestones to assess progress and a set of illustrative implementation actions. Overall, the strategies detailed in the Plan seek to engage multiple stakeholders across the public and private sector; emphasize privacy and security protections, and focus on the healthcare consumer as a critical participant. “Consistent with ONC’s mission and role, the Plan is not limited to the activities and tasks that ONC directly sponsors. This Plan is primarily federally focused with many of the strategies proposed in the Plan designed to harmonize activities in the public and private sectors,” according to the Executive Summary. 143 Few Physicians Have Adopted EHR, Study Finds Only 4% of 2,758 physicians responding to a recent survey reported having an extensive, fully functional electronic health records (EHR) system, and 13% reported having a basic system, according to a study published June 18, 2008 in the New England Journal of Medicine. Among the 83% of respondents who did not have EHR, 16% reported that their practice had purchased but not yet implemented such a system at the time of the survey. The study, Electronic Health Records in Ambulatory Care—A National Survey of Physicians, was supported by the Department of Health and Human Services Office of the National Coordinator for Health Information Technology. According to the survey, physicians who were younger, worked in large or primary care practices, worked in hospitals or medical centers, and lived in the western region of the United States were more likely to use EHR. Of the 4% of physicians with fully functional EHR systems, most physicians reported the system had a positive effect on the quality of clinical decisions (82%), communication with other providers (92%) and patients (72%), prescription refills (95%), timely access to medical records (97%), and avoidance of medication errors (86%). In addition, the survey found most physicians with fully functional systems reported averting a known drug allergic reaction (80%) or a potentially dangerous drug interaction (71%), being alerted to a critical laboratory value (90%), ordering a critical laboratory test (68%), and providing preventive care (69%). Physicians with basic systems reported having the same effects but less commonly than those with fully functional systems, the article said. The survey also found that 93% of physicians with fully functional systems and 88% with basic systems reported being satisfied with their EHR systems. Of the survey respondents that did not adopt EHR, the most commonly cited barriers to adoption were capital costs (66%), not finding a system that met their needs (54%), uncertainty about their return on the investment (50%), and concern that a system would become obsolete (44%). According to the study, its findings "suggests that the U.S. health care system faces major challenges in taking full advantage of electronic health records to realize its health care goals." In addition, improving the usability of electronic health records may be critical to the continued successful diffusion of the technology, the study said. The study warned that "the cost of achieving widespread adoption of electronic health records in the United States could be high, probably in the tens or hundreds of billions of dollars." 144 HHS Moves To Implement New Incentives For E-Prescribing The Department of Health and Human Services Secretary Michael Leavitt outlined July 21, 2008 the agency’s plan for implementing new incentive payments Medicare will make to physicians who adopt and use e-prescribing. Under the Medicare Improvements for Patients and Providers Act of 2008, successful electronic prescribers will be eligible for a 2% bonus payment in 2009 and 2010, a 1% incentive payment in 2011 and 2012, and a one-half percent bonus in 2013. Beginning in 2012, physicians who fail to adopt e-prescribing will see a reduction in payments, Leavitt said. Leavitt predicted in a call with reporters that the incentive payments would have a “profound effect” on the adoption and use of e-prescribing. Centers for Medicare and Medicaid Services (CMS) Acting Administrator Kerry Weems said widespread use of e-prescribing could save Medicare up to $156 million over five years in avoided adverse drug events. The e-prescribing incentive payments will be part of the Physician Quality Reporting Initiative, which provides eligible healthcare professionals with bonus payments of up to 2% in 2009 and 2010 for reporting on certain quality measures. Weems said further details of the e-prescribing incentive payments would be set forth in the 2009 Medicare Physician Fee Schedule final rule. James King, President of the American Academy of Family Physicians, said the incentive payments would help lessen one of the barriers to widespread adoption of e-prescribing— implementation costs. King added, however, that state laws preventing e-prescribing across state lines also pose an obstacle. Hospitals Cautious About Subsidizing EMR Adoption Despite Relaxed Federal Rules Hospitals have been slow to help physicians purchase electronic medical records (EMRs), despite regulatory exceptions allowing them to do so without running afoul of federal fraud and abuse laws, according to a study issued September 18, 2008 by the Center for Studying Health System Change (HSC). “While some hospitals are committed to taking advantage of the regulatory changes by offering direct financial subsidies to promote physician adoption of EMRs, the other common strategies, such as offering IT support and extending vendor discounts to physicians, if properly structured, could have been pursued without regulatory changes,” noted the HSC issue brief detailing the study's findings. The Department of Health and Human Services issued in August 2006 exceptions to the federal physician self-referral and anti-kickback laws that opened the door for hospitals to subsidize up to 85% of the upfront and ongoing costs of EMR software and related information technology support services for physicians. 145 The regulatory exceptions/safe harbors are set to sunset on December 31, 2013. The study, funded by the Robert Wood Johnson Foundation, was based on site visits to 12 nationally representative metropolitan communities in 2007. According to the study, “a few hospitals have begun small-scale, phased rollouts of EMRs, but the burden of other hospital information technology projects, budget limitations and lack of physician interest are among the factors impeding hospital action.” Of 24 hospitals interviewed by HSC, seven reported pursuing a strategy to provide financial or other support to physicians to purchase EMRs, with four of those at the implementation stage. The remaining 17 hospitals were at different stages of planning and evaluation, but none expected to implement a program before the start of 2009, the study said. Many of the hospitals expected to provide some form of IT support to physicians, but only 11 of the 24 hospitals were considering subsidizing a portion of EMR costs as allowed under the regulatory changes, the study noted. “While hospitals have strategic incentives to provide support, particularly to tie referring physicians to their institution, the effects of the regulatory changes on physician EMR adoption will ultimately depend both on hospitals’ willingness to provide support and physicians’ acceptance of hospital assistance,” said HSC senior researcher and co-author of the study Joy M. Grossman, Ph.D. Report Finds Substantial Uptick In State Legislation On Health IT States have dramatically increased the pace of enacting legislation to spur the adoption of health information technology (HIT) by the healthcare sector, according to a new report released December 10, 2008 by the National Conference of State Legislatures (NCSL). The report found lawmakers in state legislatures around the country introduced more than 370 bills related to HIT during an 18-month period between 2007 and 2008. During that timeframe, 44 states and the District of Columbia enacted 132 bills containing HIT provisions, three times as many bills that passed in the same period from 2005 to 2006. Meanwhile, six states enacted comprehensive measures to safeguard patient privacy while facilitating exchange of health data, the report said. Driving this flurry of legislative activity is the states’ view that HIT plays an integral part in healthcare reform and cost containment efforts, NCSL said. “This is a healthcare IT revolution in that state governments and their federal partners are moving toward a seamless, integrated system of information sharing ranging from patient medical records to insurance claims to filling a patient’s drug prescription,” said Massachusetts state senator Richard Moore, NCSL Vice President. HHS Issues Final ICD-10 Rule The Department of Health and Human Services (HHS) published in the January 16, 2009 Federal Register (74 Fed. Reg. 3328) a final rule that would replace the ICD-9-CM code sets as Health Insurance Portability and Accountability Act of 1996 (HIPAA) standards for reporting healthcare diagnoses and procedures with greatly expanded ICD-10 code sets. 146 HHS also finalized a separate rule (74 Fed. Reg. 3295) adopting the updated X12 standard, Version 5010, and Version D.0 for certain electronic healthcare transactions. For the ICD-10 code sets, the final rule sets the compliance date at October 1, 2013, providing nearly five years from the date of publication for industry implementation. The original implementation date in the proposed rule was two years earlier, "but a large majority of public comments stated that more time would be needed for effective industry implementation," the agency said in a fact sheet on the new rule. Under the transaction standards final rule, covered entities must comply with Version 5010 (for some healthcare transactions) and Version D.0 (pharmacy transactions) on January 1, 2012. "The new version of the standard for electronic health care transactions (Version 5010 of the X12 standard) is essential to the use of ICD-10 codes because the current X12 standard (Version 4010/4010A1), cannot accommodate the use of the greatly expanded ICD-10 code sets," the fact sheet said. According to HHS, adoption of the new standards will: • • • • • Support Medicare's value-based purchasing initiative and antifraud and abuse activities by accurately defining services and providing specific diagnosis and treatment information; Provide the precision needed for a number of emerging uses such as pay-forperformance and biosurveillance. Biosurveillance is the automated monitoring of information sources that may help in detecting an emerging epidemic, whether naturally occurring or as the result of bioterrorism; Support comprehensive reporting of quality data; Ensure more accurate payments for new procedures, fewer rejected claims, improved disease management, and harmonization of disease monitoring and reporting worldwide; and Allow the United States to compare its data with international data to track the incidence and spread of disease and treatment outcomes because the United States is one of the few developed countries not using ICD-10. Stimulus Bill Incentives For Eligible Professionals And Hospitals Using EHR The following is an excerpt of an article published in Health Lawyers Weekly by Jeffrey W. Short, Hall, Render, Killian, Heath & Lyman, PC. The American Recovery and Reinvestment Act of 2009 (the Act) includes among its provisions incentives for the adoption and use of electronic health records (EHR) technology by Medicare and Medicaid professionals and hospitals. Medicare offers incentive payments for a period of up to five years. Medicare will begin penalizing professionals and hospitals by reducing payments to professionals and hospitals who fail to adopt EHR technology by 2015. Medicaid professionals and hospitals are also eligible for incentive payments under the Act, with first-year payments available until 2016, and subsequent payments available no later than 2021. Medicare Incentives—Eligible Physicians Under the Act, eligible professionals may apply to receive Medicare incentive payments between the years 2011 and 2016. In addition, the Act calls for a reduction in payments 147 to eligible professionals if they do not adopt certified EHR technology by 2015. EHR technology includes an electronic record of health-related information on an individual that includes patient demographic and clinical health information and has the capacity to provide clinical decision support, support physician order entry, capture and query information relevant to healthcare quality, and exchange electronic health information with, and integrate such information from, other sources. EHR technology is "certified" when it meets standards and implementation specifications for health information technology as adopted by the Secretary of the Department of Health and Human Services (Secretary). Eligible professionals may apply to the Secretary beginning in 2011, but no later than 2014, to receive incentive payments. An eligible professional includes (1) a doctor of medicine or osteopathy, (2) a doctor of dental surgery or of dental medicine, (3) a doctor of podiatric medicine, (4) a doctor of optometry, and (5) a chiropractor. Eligible professionals who (1) are employed by a qualified Medicare Advantage (MA) organization (which is an MA organization organized as a health maintenance organization), or (2) are employed by or are partners of an entity that furnishes at least 80% of the entity's patient care services to enrollees of the MA organization through a contract with the MA organization, and (3) furnish at least 75% of professional services to enrollees of the MA organization and furnish on average at least 20 hours per week of patient care services, may also receive incentive payments under the Act. In general, hospital-based eligible professionals (such as a pathologist, anesthesiologist, or emergency physician, who furnishes substantially all covered professional services during the reporting period for a payment year in a hospital setting, whether inpatient or outpatient, through the use of the facilities and equipment, including qualified electronic health records, at the hospital) will not be eligible for incentive payments through this Section of the Act. Incentive payments will be given to eligible professionals for the meaningful use of certified EHR technology until year 2016. An eligible professional is considered a meaningful EHR user if he or she (1) demonstrates use of certified EHR technology in a meaningful way, including use of electronic prescribing, (2) demonstrates that the use of certified EHR technology is connected in a manner that provides for the electronic exchange of health information to improve the quality of healthcare, such as promoting care coordination, and (3) submits information on clinical quality measures and such other measures as selected by the Secretary. If an eligible professional has not become a meaningful user of certified EHR technology by 2015, that eligible professional's fee schedule amount for covered professional services during that and subsequent payment years will be equal to an applicable percent of the fee schedule amount that would otherwise apply to those covered professional services. There is an exception for those who would experience significant hardship by being required to adopt the certified EHR technology. The Secretary may, on a case-by-case basis, determine if eligible professionals are exempt from the payment reductions for failure to adopt certified EHR technology, subject to an annual review, if the requirement for being a meaningful EHR user would result in significant hardship. Such an example would be an eligible professional who practices in a rural area without sufficient internet access. However, in no case may an eligible professional be granted such exemption for more than five years. 148 Medicare Incentives—Eligible Hospitals Eligible hospitals will receive incentive payments for being EHR users starting in 2011 until 2015. Section 4102 also provides for the reduction in Medicare and Medicaid payments in the event the eligible hospital does not implement and use EHR after 2015. A hospital is eligible for incentive payments if it is either a subsection (d) hospital or a critical access hospital and uses EHR technology. A Subsection (d) hospital does not include: (1) rehabilitation hospitals, (2) hospitals where the patients are predominantly under age 18, (3) hospitals having average inpatient stays of greater than 25 days, or (4) hospitals involved extensively in the treatment of or research on cancer. If a hospital qualifies as an eligible hospital as set forth above, the hospital can receive incentive payments if it uses EHR technology. A hospital is considered to be using EHR technology if it: (1) actually uses the EHR technology during the 12 month period specified by the Secretary, (2) the EHR technology is connected in a manner to provide for the electronic exchange of health information to improve the quality of healthcare, such as promoting care coordination, and (3) the hospital uses the EHR to submit information on clinical quality measures and other measures selected by the Secretary and published in the Federal Register subject to public comment. The hospital will need to demonstrate its use of EHR through means specified by the Secretary including (1) attestation, (2) submission of claims with appropriate coding, (3) survey response, (4) submission of information on clinical quality measures and other measures selected by the Secretary, and (5) other means specified by the Secretary. If a hospital does not become a meaningful user of a certified EHR technology on or after 2015, the hospital may be subject to reductions in its annual market basket adjustment. This reduction is phased in over three years beginning in 2015 with a 25% reduction in 2015, a 50% reduction in 2016, and a 75% reduction in 2017. For Critical Access Hospitals that do not become meaningful users of certified EHR technology on or after 2015, the percentage of cost for which they will be reimbursed will be reduced from 101% to 100.66% in 2105, 100.33% in 2016, and 100% in 2017. Medicaid Incentives—Eligible Professionals and Hospitals Eligible professionals may receive Medicaid incentive payments up to 85% of the net allowable cost for certified EHR technology. For these Medicaid incentive payments, the term "eligible professional" includes physicians, dentists, certified nurse midwives, nurse practitioners, and physician assistants (PAs) in PA-led rural health clinics (RHCs) or federally qualified health centers (FQHCs). These professionals must waive their right to payment under sections of the Act related to Medicare professional incentives and MA organizations. This group of eligible professionals is further subdivided, and includes: (1) an eligible professional who is not hospital-based and who has at least 30% of the professional's volume attributable to Medicaid patients; (2) a pediatrician who is not hospital-based who has at least 20% of the professional's volume attributable to Medicaid patients; and (3) FQHCs and RHCs that have at least 30% of their volume attributable to needy individuals. The second group eligible for Medicaid incentive payments comprises children's hospitals and acute care hospitals (not included in the first group) that have at least 10% of their volume attributable to Medicaid patients. 149 See additional discussion about new privacy and security requirements under ARRA related to health information technology under the Privacy and Security heading. Few Hospitals Have Comprehensive EHR Systems, Study Finds Only 1.5% of U.S. hospitals have an electronic health records (EHRs) system present in all clinical units, according to a recent study published online in the New England Journal of Medicine. The study found an additional 7.6% of acute care hospitals have a basic system in place that included functionalities for physicians’ notes and nursing assessments in at least one clinical unit. This percentage went up to 10.9% without the requirement for clinical notes. For the study, Use of Electronic Health Records in U.S. Hospitals, researchers surveyed all acute care hospitals that are members of the American Hospital Association for the presence of 32 specific electronic-record functionalities in all major clinical units. The survey had a 63.1% response rate, or 3049 hospitals. Researchers then excluded federal hospitals for a total of 2952 institutions. According to the study, researchers found large variations in the implementation of key clinical functionalities across U.S. hospitals. For example, 12% of hospitals had electronic physicians’ notes across all clinical units and 17% had computerized provider-order entry for medications. More than 75% of hospitals, however, reported adopting electronic laboratory and radiologic reporting systems. As expected, researchers found larger hospitals, major teaching hospitals, and hospitals in urban areas were more likely to report having an electronic-records system. But somewhat surprisingly, the researchers also found no correlation between the rate of EHR adoption and whether a hospital was a public or private institution. Researchers noted, however, that they did not examine detailed indicators of the hospitals' financial health. The vast majority of surveyed hospitals (74%) cited lack of adequate capital as the most common barrier to adopting an EHR. Forty-four percent cited maintenance costs; 36% cited physician resistance, 32% cited unclear return on investment, and 30% cited not having staff with adequate expertise in information technology. Researchers concluded the low levels of adoption of EHRs mean policymakers face a daunting task in achieving healthcare performance goals that depend on health information technology. “A policy strategy focused on financial support, interoperability, and training of technical support staff may be necessary to spur adoption of electronic records systems in U.S. hospitals,” the report said. 150 Report Finds Significant Uptick In E-Prescribing Significant progress in the adoption and use of electronic prescribing has been accomplished over the last two years, according to a new report issued by Surescripts, which operates the country’s largest e-prescribing network. “In the past two years, the U.S. has gone from 19,000 to 103,000 prescribers routing prescriptions electronically—punctuated by 39 percent sequential growth in prescriber adoption in the first quarter of this year,” said Harry Totonis, president and CEO of Surescripts. According to the National Progress Report on E-Prescribing, total e-prescribing message volume doubled between 2007 and 2008 to over 240 million, while electronic requests for prescription benefit information grew from 37 million to 78 million during that time period. The report also found prescription histories delivered to prescribers grew from over 6 million in 2007 to over 16 million in 2008. Prescriptions routed electronically grew from 29 million in 2007 to 68 million in 2008. Surescripts, which was founded by pharmacies and pharmacy benefit managers, said only about 30% of electronic medical record (EMR) software was deployed for all three eprescribing services—prescription benefit, prescription history, and prescription routing— by the end of 2008, compared to about 80% of standalone e-prescribing software. To participate in the Surescripts network, the prescriber, pharmacy, and payor must use software that has completed the Surescripts certification process. Surescripts said it has certified more than 200 software applications to date. The report noted the number of prescribers routing prescriptions electronically grew to 12% of all office-based prescribers by the end of 2008. Also by the end of last year, Surescripts could provide access to prescription benefit and history information for 65% of U.S. patients, the report said. “Action is required, however, to ensure continued progress toward mainstream adoption and use of e-prescribing as a more informed, paperless prescribing process that reduces healthcare costs and improves safety and efficiency for all,” the report concluded. Healthcare Access Congress Enacts Mental Health Parity Legislation The House and Senate passed mental health parity legislation as part of the massive economic stabilization bill aimed at shoring up the nation’s troubled financial system. The Senate approved the bill (H.R. 1424) by a 74-25 margin on October 1, 2008. The House followed suit October 3, 2008 in a 263-171 vote. President Bush signed the bill into law on October 3, 2008. The mental health parity legislation requires insurance companies and employers offering mental health coverage to provide it on par with the coverage offered for other physical illnesses. 151 “Millions of Americans will now be assured greater access to mental and behavioral health coverage while continuing to benefit from the innovative programs health plans have developed to promote high-quality, evidence-based care,” said Karen Ignagni, President and Chief Executive Officer of America’s Health Insurance Plans. The American Medical Association also praised the legislation’s passage, saying it ends “more than ten years of gridlock on the issue of mental health parity.” “Thanks to congressional action, we can bring an end to insurance discrimination against patients with mental health needs,” the group said in a statement. Hospitals and Health Systems Florida Appeals Court Says Acute Care Hospitals Could Become Caregivers To Vulnerable Adults Under State Statute The Florida District Court of Appeal held June 10, 2008 that in certain circumstances acute care hospitals could be considered caregivers to vulnerable adults subject to liability under the “Adult Protective Services Act,” chapter 415, Fla. Stat. In the specific case, however, the appeals court rejected such a claim because there were no allegations that the hospital "abused" or "neglected" the comatose patient. The representatives of Scott Allan Gould’s estate (plaintiffs) sued Shands Teaching Hospital and Clinics (Shands), alleging Gould had been improperly intubated following a transplant surgery. As a result of the improper intubation, Gould entered into a persistent vegetative state, and the family elected to terminate life support after 79 days. Gould was unmarried and had no children, therefore damages available to his family under Florida law for medical malpractice (chapter 766) and wrongful death (chapter 768) were limited to medical expenses, funeral expenses, and loss of net accumulations of the estate. Rather than file under either chapter 766 or 768, the family asserted a claim under the “Adult Protective Services Act,” alleging Gould was a "vulnerable adult" victim of medical abuse and neglect that resulted in wrongful death. Under chapter 415, the family was entitled to damages stemming from breach of fiduciary duty, reckless infliction of emotional distress, and unjust enrichment. The trial court dismissed the case, finding it was properly characterized as a medical malpractice action, not one involving a vulnerable person and a caregiver. The court granted plaintiffs 30 days to file an amended complaint based on medical malpractice. Plaintiffs declined to do so and appealed. The appeals court rejected Shands' argument that an acute care hospital could never be a caregiver under the statute. According to the appeals court, the comatose Gould was a vulnerable adult under chapter 415 and the hospital arguably became a "caregiver" when it undertook his care following the improper intubation. At the same time, however, the appeals court concluded the chapter 415 claim was properly dismissed as plaintiffs asserted no allegations that the hospital "abused" or "neglected" Gould after he entered a persistent vegetative state. Thus, the appeals court agreed with the trial court that the complaint clearly alleged medical negligence, not a chapter 415 claim. 152 Bohannon v. Shands Teaching Hosp. and Clinics, Inc., No. 1D06-6594 (Fla. Ct. App. June 10, 2008). Third Circuit Upholds Dismissal Of Lawsuit Against Health System For Overcharging Uninsured A federal district court correctly dismissed a proposed class action against a health system and one of its hospitals alleging breach of contract and consumer fraud with respect to its uninsured billing practices, the Third Circuit ruled June 24, 2008. The appeals court affirmed the decision of the U.S. District Court for the District of New Jersey, adopting that opinion (DiCarlo v. St. Mary’s Hosp., No. 05-1665 (D.N.J. July 19, 2006)) as its own. Plaintiff Justin DiCarlo, who is uninsured, brought a proposed class action against Bon Secours Health System Inc. (BSHS), alleging he was billed far more than insured patients would have been charged for treatment he received at its St. Mary’s Hospital (St. Mary’s) in 2004. As a condition of treatment, DiCarlo was required to sign a form guaranteeing payment of unspecified charges. St Mary’s then billed DiCarlo $3,483.04, its full chargemaster rate. DiCarlo’s complaint alleged breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, violation of the New Jersey Consumer Fraud Act (N.J. Stat. § 56:8-1, et seq.), unjust enrichment, and breach of fiduciary duty. BSHS and St. Mary’s (collectively, defendants) moved for summary judgment, arguing DiCarlo’s claims failed on the merits for various reasons, including the unambiguous language in the consent form signed by DiCarlo and the fact that DiCarlo failed to allege actual damages—an essential element of a contract claim. The district court granted defendants’ motion and dismissed DiCarlo’s complaint with prejudice. The district court rejected DiCarlo's argument that the contract between him and St. Mary’s contained an open price term and that the charges he was required to pay were unreasonable on their face. In the context of this case, “the price term was not in fact open” and the contract unambiguously referred to St. Mary’s uniform charges set forth in its chargemaster. While the price term “all charges” in the contract at issue was “less precise” than price terms set forth in an “ordinary contract for goods and services, . . . [i]t is the only practical way in which the obligations of the patient to pay can be set forth, given the fact that nobody yet knows just what condition the patient has, and what treatments will be necessary,” the district court explained. In dismissing DiCarlo’s breach of contract claim, the district court said that courts “could not possibly determine what a ‘reasonable charge’ for hospital services would be without wading into the entire structure of providing hospital care and the means of dealing with hospital solvency.” The district court next dismissed plaintiff’s breach of the duty of good faith and fair dealing claims based on its earlier finding that the contract contained a clear price term. 153 In rejecting DiCarlo’s claim alleging that defendants’ billing practices violated New Jersey's Consumer Fraud Act, the district court concluded the statute did not apply to professionals or professional services (e.g., hospital services). The district court also found DiCarlo conferred no benefit on defendants that could give rise to an unjust enrichment claim against them. Finally, the district court summarily rejected DiCarlo’s argument that defendants somehow breached a fiduciary duty owed to uninsured patients. In adopting the district court’s opinion as its own, the Third Circuit said it was “sympathetic to the burdens on uninsured patients who need medical care,” but that it found the “rigorous and persuasive analysis” correctly stated the law with respect to DiCarlo’s claims. DiCarlo v. St. Mary’s Hosp., No. 06-3579 (3d Cir. June 24, 2008). Joint Commission Issues Alert On Disruptive Behavior Among Health Professionals Rude language and hostile behavior among healthcare professionals pose a serious threat to patient safety and the overall quality of care, the Joint Commission cautioned in a Sentinel Event Alert issued July 9, 2008. “Health care leaders and caregivers have known for years that intimidating and disruptive behaviors are a serious problem,” according to a Commission press release announcing the new Alert. “Verbal outbursts, condescending attitudes, refusing to take part in assigned duties and physical threats all create breakdowns in teamwork, communication and collaboration necessary to deliver patient care,” the release said. The Alert recommends that healthcare organizations take a number of specific steps to address bad behavior among healthcare workers, including • • • • educating all healthcare team members about professional behavior; enforcing a code of conduct consistently and equitably; establishing a comprehensive approach to addressing intimidating and disruptive behaviors, including a “zero tolerance” policy and strong support from physician leadership; and developing a system to detect and receive reports on unprofessional behavior. The Commission also has introduced new standards for 2009 “requiring more than 15,000 accredited healthcare organizations to create a code of conduct that defines acceptable and unacceptable behaviors and to establish a formal process for managing unacceptable behavior,” according to the release. “It is important for organizations to take a stand by clearly identifying such behaviors and refusing to tolerate them,” the Joint Commission’s President, Mark R. Chassin, M.D said. 154 CMS Revises Guidance On Use Of Standing Orders In Hospital The Centers for Medicare and Medicaid Services (CMS) released October 24, 2008 in a memorandum to state survey agency directors clarifications regarding use of standing orders in hospitals. According to the guidance, the “use of standing orders must be documented as an order in the patient’s medical record and signed by the practitioner responsible for the care of the patient, but the timing of such documentation should not be a barrier to effective emergency response, timely and necessary care, or other patient safety advances.” “We would expect to see that the standing order had been entered into the order entry section of the patient's medical record as soon as possible after implementation of the order (much like a verbal order would be entered), with authentication by the patient's physician,” the memo said. The memo also clarified that all qualified practitioners responsible for the care of the patient and authorized by the hospital in accordance with state law and scope of practice are permitted to issue patient care orders, not just a “community” physician who admitted the patient to the hospital. CMS also noted that it “strongly supports the use of evidence-based protocols to enhance the quality of care provided to hospital patients.” Thus, the agency intends “to engage with the professional community in consensusbuilding efforts to advance safe practices and develop a common understanding of both best practices and important operational definitions as they pertain to standing orders, pre-printed order sets, and effective methods to promote evidence-based medicine.” CMS also revised its guidance regarding the use of a preprinted order set. Lastly, the memo explained that Medicare Conditions of Participation “do not prohibit the use of rubber stamps in a hospital setting, when properly controlled, for authentication of medical record entries.” However, the memo noted, “some payers, including Medicare, may not accept such stamps as sufficient documentation to support a claim for payment.” Florida Supreme Court Says Hospital Law Giving Board Authority To Override Medical Staff Bylaws Is Unconstitutional The Florida Supreme Court struck down as unconstitutional a special law passed by the legislature in 2003 that the court said impermissibly altered the relationship between the board and medical staff of a private hospital located in St. Lucie County, Florida. The St. Lucie County Hospital Governance Law (HGL) gave the Lawnwood Medical Center, Inc. (Lawnwood) nearly unfettered authority in all matters related to medical staff privileges, quality assurance, peer review, and contracts for hospital-based services, according to the August 29, 2008 opinion. “[T]he previously existing Medical Staff Bylaws established a framework for cooperative governing in which the medical staff plays an important role in the recommendation of 155 candidates for appointment and credentialing, peer review, and decisions on contractbased services,” the high court noted. “The framework for governing and the medical staff’s important role in it pursuant to the bylaws is altered by the HGL in a manner favorable to the Board by the many rights conferred on the corporation, in which the HGL essentially gives the Board plenary power to take independent action in these areas,” the high court continued. Thus, the high court concluded the HGL amounted to a “special law” that granted a “privilege to a private corporation” in violation of the Florida Constitution. The American Medical Association (AMA), which submitted an amicus brief in the case, hailed the ruling. AMA Board member Cecil B. Wilson, M.D. said the high court’s decision “reaffirms that medical staff bylaws are a binding contract and lays out precisely why these documents are an important part of preserving patient safety.” “Hospital boards must work cooperatively with medical staffs to ensure that hospital policies related to financial management do not conflict with the best interests of patients,” he added. Lawnwood is a for-profit corporation that owns and operates two private hospitals in St. Lucie County, Florida. A dispute arose between Lawnwood and the medical staff regarding the board’s concern about two physicians. The board tried to suspend their privileges unilaterally, which the medical staff opposed. After several court actions, Lawnwood sought relief from the legislature, which in 2003 enacted the HGL as a special law. Lawnwood contended the law was promulgated in response to patient safety concerns. Both the trial court and the appeals court found the HGL constituted an unconstitutional special law because it granted Lawnwood an impermissible privilege and an impermissible impairment of contract—i.e. the medical staff bylaws. The high court affirmed, concluding a “grant of privilege to a private corporation” includes more than “economic favoritism over entities similarly situated,” as Lawnwood argued. According to the high court, a “privilege” in this context refers to any special benefit, advantage, or rights. “Because the HGL grants Lawnwood almost absolute power in running the affairs of the hospital, essentially without meaningful regard for the recommendations or actions of the medical staff, we conclude that the HGL unquestionably grants Lawnwood ‘rights,’ ‘benefits’ or ‘advantages’ that fall within the term ‘privilege’” in the Florida Constitution, the high court held. Lawnwood Med. Ctr., Inc. v. Seeger, No. SC07-1300 (Fla. Aug. 28, 2008). Ohio Appeals Court Says Hospitals May Withdraw From Health Alliance An Ohio appeals court upheld September 30, 2008 a trial court decision that The Christ Hospital (TCH) could withdraw from an integrated healthcare system it joined in 1995 with other Cincinnati-area hospitals based on its board's “good faith” determination that the alliance compromised TCH’s charitable mission. 156 The appeals court also agreed with the trial court that the Health Alliance of Greater Cincinnati (Alliance) breached its fiduciary duty to TCH and that this served as an additional ground for the hospital’s withdrawal. Because TCH properly withdrew from the Alliance based on an uncured event of default, St. Luke Hospitals, Inc. (SLH) also was within its rights under the joint operating agreement (JOA) that established the system to terminate its participation in the Alliance, the appeals court found. The JOA reserved certain powers to the participating hospitals so they could “continue to exercise ultimate responsibility for fulfilling their respective charitable missions and obligations.” The JOA also required the Alliance to “at all times operate the Alliance consistent with the charitable missions of the [Alliance] and the [participating hospitals].” In 2005, the Alliance attempted to convince the participating hospitals to give up many of their reserved powers. TCH and SLH both refused to approve such changes to the JOA. After that time, the TCH board became concerned with the hospital’s future in the Alliance based on remarks from the Alliance’s CEO regarding moving TCH from its Mt. Auburn location to the suburbs. TCH’s board hired a consultant to study the hospital’s future viability and options that would allow TCH to continue to carry out its charitable mission. Based on the report, TCH submitted a notice of withdrawal on January 12, 2006, citing purported uncured events of default. Without waiting for the conclusion of a mandatory 60-day cooling off period, the Alliance filed a declaratory judgment against TCH. TCH then sent a notice to the Alliance on March 8, 2006 citing additional events of default, including the allegation that the Alliance was preventing TCH from fulfilling its charitable mission. In addition, TCH asked the court to find it had properly withdrawn from the Alliance and sought a temporary restraining order to prevent the Alliance from binding TCH to $220 million in debt to finance a hospital the Alliance was building. SLH subsequently notified the Alliance of its intent to terminate its participation based on the uncured events of default regarding TCH and alleged breaches of fiduciary duty by the Alliance. The trial court granted the temporary restraining order and subsequently concluded that TCH’s March 8, 2006 letter provided a valid basis for withdrawal. The Ohio Court of Appeals, First District, affirmed, finding TCH and SLH properly terminated their participation in the Alliance. “The record shows that TCH’s board determined in good faith that the Alliance had jeopardized TCH’s ability to fulfill its charitable mission,” a responsibility that was specifically reserved to the hospital under the JOA, the appeals court said. Thus, the board exercised its reserved power under the JOA to declare an event of default, which was not cured. 157 The appeals court also rejected the Alliance’s contention that it owed no fiduciary duty to its member hospitals. “The hospitals reposed special confidence and trust in the Alliance, which resulted in a position of superiority on the part of the Alliance, the very essence of a fiduciary relationship,” the appeals court commented. The appeals court found the record “replete with evidence that the Alliance breached its fiduciary duty to TCH,” including using its superior position to improperly deny TCH access to its revenue stream and restricting its operational control, “while embarking on a campaign to pay bonuses to doctors who agreed to sign noncompetition agreements to restrict TCH’s access to those doctors in the future.” According to the appeals court, the “Alliance’s breaches of fiduciary duty were affecting the ability of TCH to carry out its charitable mission.” The Health Alliance of Greater Cincinnati v. The Christ Hosp., No. C-070426 (Ohio Ct. App. Sept. 30, 2008). Following the decision, TCH and the Alliance announced January 12, 2009 a final agreement concerning TCH's withdrawal from the integrated healthcare system. The settlement did not disclose any financial terms of the separation agreement. D.C. High Court Upholds $18 Million Award To Hospital Claiming Malpractice Insurer’s Actions Forced It To Close Down The District of Columbia Court of Appeals upheld October 2, 2008 a jury award of over $18 million in a lawsuit brought by a defunct hospital claiming a malpractice insurance company tortiously interfered with the hospital’s business relationship with its attending physicians and therefore forced it to close down. In so holding, the D.C. high court rejected the arguments of plaintiff NCRIC, Inc., formerly the National Capital Reciprocal Insurance Company, that the trial court had given the jury erroneous instructions, committed other errors during the trial, and improperly refused to reduce the jury’s award in favor of the hospital. The underlying litigation began in October 2000, when NCRIC, a provider of medical malpractice insurance to D.C. physicians, sued the Columbia Hospital for Women Medical Center, Inc. (Columbia) for breach of their insurance contract. NCRIC alleged Columbia owed it over $1.9 million in additional premiums under that contract, which expired in 2000. Columbia asserted counterclaims for breach of contract and tortious interference, along with several other counterclaims that were dismissed prior to trial. At trial, Columbia presented evidence and witness testimony supporting its allegations that, over a long period of negotiations and disputes between NCRIC and the hospital regarding the applicable terms and obligations of their recently expired malpractice insurance contract, NCRIC attempted to induce attending physicians at Columbia to leave the hospital, according to the appeals court. In addition, NCRIC allegedly encouraged these physicians to keep their insurance policies with NCRIC once they had relocated to other hospitals. “Over thirty attending physicians—forty percent of the medical staff—left Columbia in the summer and fall of 2000,” the appeals court noted. “Many of them went to other 158 hospitals where NCRIC provided them with equivalent insurance coverage at reduced rates.” The appeals court also noted that, during the time when NCRIC was allegedly encouraging physicians to leave Columbia, the hospital was already experiencing financial struggles following its February 1998 declaration of bankruptcy and its adherence to a February 1999 court-approved plan of reorganization. Beginning in September 2000, the appeals court explained, all of Columbia’s financial indicators (i.e., births, admissions, surgeries, inpatient days, referrals, etc.) dropped dramatically, and revenues fell by approximately $10 million per year. “Witnesses at trial attributed the plunge to the departure of so many members of the hospital’s medical staff,” the appeals court noted. Thus, in May 2002, “after fruitlessly exploring merger possibilities with three other nonprofit institutions, Columbia ceased operations and closed its doors,” the appeals court said. After the two-week trial, the jury returned a verdict in favor of Columbia, and awarded the hospital $220,002 on its breach of contract claim, and $18 million in damages on its claim of tortious interference with business relations. The trial court subsequently denied NCRIC’s motions for judgment as a matter of law, and in the alternative, for a new trial or a remittitur of damages. NCRIC argued on appeal that the trial court erred in failing to instruct the jury that, in order to impose liability for tortious interference, it had to find NCRIC’s actions “wrongful,” in addition to being intentionally disruptive of Columbia’s business relationships. The appeals court concluded that the lower court did not err in rejecting NCRIC’s request for such an instruction. “Wrongful conduct is not an element of a prima facie case of tortious interference under District of Columbia law,” the appeals court said. “Rather, the burden was on NCRIC to establish that its intentional interference was legally justified or privileged.” While “NCRIC might have been entitled to an affirmative defense instruction to that effect, . . . it never requested one,” the appeals court. “The trial court was under no duty to craft such an instruction for NCRIC sua sponte.” The appeals court next summarily rejected NCRIC’s argument that the trial court erred by allowing the jury to award $18 million in tort damages based on “speculative and logically incoherent damages evidence.” “On its face, Columbia’s evidence of its damages was sufficient to support the award,” the appeals court said. “The jury’s award will be upheld as long as it is a ‘just and reasonable estimate based on the relevant data,’ even if it is not proven with mathematical precision.” The appeals court also concluded that NCRIC had failed to preserve for appeal certain of its objections regarding the sufficiency of the evidence in support of the $18 million damages award, and that the lower court did not err in refusing NCRIC’s motion requesting a new trial or a remittitur. 159 NCRIC Inc. v. Columbia Hosp. for Women Med. Ctr., No. 05-CV-1269 (D.C. Oct. 2, 2008). Arkansas Supreme Court Finds Hospital Entitled To Charitable Immunity The Arkansas Supreme Court found November 6, 2008 that a hospital was entitled to charitable immunity from a wrongful death suit filed by a deceased patient’s husband. In so holding, the high court found the balance of factors weighed in favor of granting the hospital charitable immunity. Harvie Anglin and his wife Margie Anglin sued Johnson Regional Medical Center (JRMC) and others based on allegations of medical injuries sustained by Mrs. Anglin as a result of the JRMC’s alleged negligence. After Mrs. Anglin died, Mr. Anglin was eventually substituted as the party of interest and sued JRMC for wrongful death. JRMC moved for summary judgment, contending JRMC was entitled to both governmental and charitable immunity. The circuit court granted JRMC’s motion for summary judgment and dismissed Anglin’s complaint with prejudice. The circuit court concluded, among other things, that JRMC was entitled to charitable immunity. Anglin appealed. The high court first noted that to determine whether an organization is entitled to charitable immunity, courts consider the following factors: (1) whether the organization’s charter limits it to charitable or eleemosynary purposes; (2) whether the organization’s charter contains a “not-for-profit” limitation; (3) whether the organization’s goal is to break even; (4) whether the organization earned a profit; (5) whether any profit or surplus must be used for charitable or eleemosynary purposes; (6) whether the organization depends on contributions and donations for its existence; (7) whether the organization provides its services free of charge to those unable to pay; and (8) whether the directors and officers receive compensation. According to the high court factors 1, 2, and 7 favored JRMC. “The first and second are demonstrated by JRMC’s articles of incorporation, which state that the hospital provides health services on a charitable, not-for-profit basis,” the high court explained. The seventh factor was established by the hospital administrator’s affidavit that the hospital provides health services free of charge to those who cannot pay. JRMC also satisfied the fifth factor, the high court said, because the affidavit stated that any surplus shall be used to fund the hospital to fully perpetuate its charitable community benefit of providing medical assistance to the public. As to the fourth factor, the high court observed, the record showed that in some years, JRMC did earn a profit, and in others, it did not. Disagreeing with Anglin’s argument that JRMC was not a charity hospital because in some years it earned a profit, the high court said that factor was not dispositive and the fact that JRMC sued patients to collect unpaid medical bills was not determinative of its charitable status. 160 “Based upon a review of the totality of the relevant facts and circumstances, we hold that the circuit court did not err in concluding that JRMC meets the requirements of a charitable entity for purposes of asserting the defense of the charitable-immunity doctrine,” the high court held. One judge dissented, arguing he would reverse the grant of summary judgment because the issue of whether JRMC is a charitable organization entitled to charitable immunity “is contested by the parties and presents a genuine issue of material fact for the jury to resolve.” Anglin v. Johnson Reg’l Med. Ctr., No. 08-453 (Ark. Nov. 6, 2008). Iowa High Court Finds Hospital May Be Liable For Actions Of Independent Contractor Physicians Under Apparent Agency Theory The Iowa Supreme Court held December 5, 2008 that a hospital may be liable for the actions of its independent contractor physicians under the theory of "ostensible agency." In so holding, the high court said a reasonable jury looking at the facts of the case could infer an agency relationship between the physicians and the hospital based on the hospital’s actions. Plaintiff Jerald Wilkins was seen in the emergency room at Marshalltown Medical and Surgical Center (MMSC) September 23, 2001 by Dr. Lance Van Gundy. Because Wilkins complained of a variety of symptoms, Van Gundy requested a chest x-ray and urged follow up at the University of Iowa Hospitals and Clinics (UIHC). The next day, Dr. Kraig Kirkpatrick, a radiologist, compared Wilkins' x-ray with one taken five years ago and found a "diffuse increase in the density of a midthoracic vertebral body." Kirkpatrick wrote in his report that a common cause of such change would be prostate cancer. Dr. Mitchell Erickson approved the report and it was made part of Wilkins’ file. That same day, Wilkins came back to the ER complaining of worsening symptoms. A CT was taken and was read by Erickson, though he made no mention of Kirkpatrick's report in Wilkins' file at that time. Wilkins was transferred to UIHC that same day for follow-up studies, but Kirkpatrick's report was not included in the medical records forwarded to UIHC. Wilkins was subsequently discharged from UIHC two days later "without any symptomatic complaints." On February 27, 2002, Wilkins again presented to the MMSC ER and was diagnosed with a urinary tract infection. Over the next several months, Wilkins was seen in the ER numerous times for low back pain and received prescriptions for pain relief. Wilkins was eventually brought back to the ER by ambulance on August 14, 2002 when he was informed that doctors suspected prostate cancer. On February 27, 2004, Wilkins sued MMSC and several of the emergency room physicians alleging negligent medical care from February 27, 2002 onward. Plaintiff subsequently amended his complaint to add McFarland Clinic, P.C. as a co-defendant. 161 Defendants moved for summary judgment. MMSC additionally asserted that it had no legal responsibility for the actions of the emergency room physicians as they were employees of McFarland and not the hospital. The district court granted summary judgment to defendants on statute of limitation grounds and plaintiff appealed. Wilkins' wife was subsequently substituted as plaintiff after Wilkins' death. Turning first to the lower court's statute of limitations findings, the high court noted that Wilkins was not informed he had cancer until sometime after August 14, 2002, within two years of the commencement of the action. "Wilkins’s claim is thus not barred as a matter of law by the governing statute of limitations," the high court held. Addressing plaintiff's argument that MMSC was vicariously liable for any negligence through the doctrine of "ostensible" agency (otherwise known as apparent authority), the high court noted the actual status of the agent was immaterial. "Thus, the mere fact that the emergency room doctors were not MMSC employees is not dispositive," the high court held. The high court found that, "although the record does not demonstrate that MMSC ever expressly held out the emergency room doctors as employees, Wilkins has put forth circumstantial evidence from which an agency relationship can be inferred." Thus, "[u]nder the facts of this case," the high court concluded, a reasonable jury could find that "MMSC is vicariously liable for the negligence of the emergency room doctors on a theory of apparent authority or ostensible agency." Wilkins v. Marshalltown Med. and Surgical Ctr., No. 06-0641 (Iowa Dec. 5, 2008). Missouri Recognizes Negligent Credentialing Claims Against Hospital, Appeals Court Says Negligent credentialing is a viable claim in Missouri to assert against a hospital when a patient was allegedly injured by a physician during a surgery performed at the hospital where he had staff privileges, a state appeals court ruled December 9, 2008. The Missouri Court of Appeals, Western District, reversed the lower court’s decision granting the defendant hospital’s motion to dismiss and remanded the case for further proceedings. Plaintiff Dorothea LeBlanc filed a petition for damages against physicians Danny Carroll and John Gillen II (collectively, the physicians), their professional corporation Bone & Joint Specialists, P.C. (BJS), and Research Belton Hospital (Research Belton). In her petition, LeBlanc alleged the physicians and BJS were negligent in performing surgeries on her at Research Belton. LeBlanc also alleged Research Belton was negligent in assuring the physicians had the credentials to perform the surgeries at issue. 162 Specifically, LeBlanc claimed Research Belton negligently permitted the named physicians to perform such extensive surgeries on her when they were not qualified by education, training, or experience, and were not properly credentialed to perform the surgeries. Research Belton sought to dismiss the claim, alleging negligent credentialing was not recognized in Missouri. Research Belton also cited immunity under Mo. Rev. Stat. § 537.035.3, which provides that members of peer review committees and other specific individuals or entities are immune from civil liability if their negligence in granting staff privileges is based on their “good faith” reliance on a peer review committee’s recommendation, and when such reliance “lacks malice and reasonably relates to the scope of inquiry of the peer review committee.” The trial court granted the motion to dismiss without explanation. In overturning the lower court’s decision, the appeals court first clarified that Missouri courts have not rejected negligent credentialing as a cause of action against a hospital. According to the appeals court, “Missouri precedent does not bar a negligence claim against a hospital for injuries caused by independent doctors authorized to practice in that hospital.” With regard to Research Belton’s “immunity” argument, the appeals court clarified that Research Belton was not asserting immunity under Mo. Rev. Stat. § 537.035.3, but rather that the statute, which was enacted in 1973, effectively abrogated negligent credentialing claims. In rejecting this argument, the appeals court said the “qualifying language” in Section 537.035 suggests “the legislature . . . limited a cause of action based on actions taken in reliance on a peer review committee,” but did not abrogate negligence claims based on negligent credentialing. “The trial court erred in dismissing [LeBlanc’s] . . . sufficiently pleaded claim of negligent credentialing because it is essentially a corporate negligence action, which is viable in Missouri,” the appeals court concluded. LeBlanc v. Research Belton Hosp., No. WD69248 (Mo. Ct. App. Dec. 9, 2008). U.S. Court In Texas Holds State Privilege Law Applies To Peer Review Documents In Case Asserting State Negligence And EMTALA Claims A federal court in Texas refused to compel production of certain hospital peer review documents in an action asserting both state law negligence claims and violations of the Emergency Medical Treatment and Labor Act (EMTALA). The court found the peer review documents were only relevant to whether a physician’s treatment met the standard of care for purposes of the state law negligence claims, not whether it constituted an appropriate screening in accordance with EMTALA. Plaintiff Wendy Guzman, individually and on behalf of her son, Tristan, sued Memorial Hermann Hospital System (Memorial Hermann) asserting claims under EMTALA for failing 163 to provide an appropriate medical screening, failing to stabilize his condition before discharging him, and failing to provide an appropriate transfer. Guzman also asserted state-law negligence claims against Memorial Hermann, Philip Haynes, M.D., Ph.D, the emergency room physician who saw Tristan, and his practice group, Memorial Southeast Emergency Physicians, LLP. Guzman moved to compel Memorial Hermann to produce documents relating to its postincident peer review of Tristan’s emergency room care. Memorial Hermann sought a protective order asserting the peer review documents were confidential and privileged under Texas law and the federal Health Care Quality Improvement Act (HCQIA). Guzman did not dispute that the documents were privileged under Texas law, but argued that federal law—i.e. HCQIA—not state law applied. The U.S. District Court for the Southern District of Texas denied Guzman’s motion to compel production of the peer review documents at issue. Following an in camera review, the court determined the documents were relevant only to the state-law claims and, based on state privilege law, were protected from admissibility or discovery. The issue was significant because courts have repeatedly held HCQIA does not create a federal privilege protecting medical peer review records from discovery, the court noted. Under Fed. R. Evid. 501, the federal common law of privilege generally applies to cases in federal court, but the rule also provides that where state law supplies the rule of decision, the privilege of a witness, person, or government will be determined in accordance with state law. Here, plaintiff asserted both federal and state claims, but the court found the documents sought were only relevant to the state law negligence claims. Applying the approach of the majority of jurisdictions to consider the issue, the court held Texas privilege law applied. In so holding, the court said the “root cause analysis” at issue in the peer review documents was not relevant to Guzman’s federal claim under EMTALA because it is not a medical malpractice statute. “An EMTALA violation depends on whether Tristan was treated ‘equitably in comparison to other patients with similar symptoms,’” not whether there was a violation in the standard of care. Thus, the court held Texas state law privilege applied and precluded production of the peer review documents. Guzman v. Memorial Hermann Hosp. Sys., No. H-07-3973 (S.D. Tex. Feb. 20, 2009). Study Says Specialty Hospitals Not Compromising General Hospitals’ Ability To Provide Care To Financially Needy Although they faced some initial challenges when specialty hospitals entered their markets, general and safety net hospitals for the most part were able to compensate enough in other ways so as not to compromise their ability to provide care to financially 164 vulnerable populations, according to a new study by the Center for Studying Health System Change (HSC). The HSC study, funded by a Robert Wood Johnson Foundation Physician Faculty Scholars Program grant, examined whether specialty hospital competition in three markets— Indianapolis, Phoenix, and Little Rock, AK—made it more difficult for general hospitals to cross-subsidize less-profitable services and provide uncompensated care. Researchers found, while general and safety net hospitals encountered challenges related to recruiting staff and maintaining service volumes and patient referrals, they did not report limiting the provision of care for financially needy patients as a result of specialty hospital competition. Whether specialty hospitals “cream-skim” or “cherry-pick” more profitable service lines, such as cardiac and orthopedic care, and well-insured patients from general hospitals, thereby compromising their ability to cross-subsidize care for less profitable services, has been a long-standing debate among policymakers. The study, which researchers cautioned is limited to the three markets and not nationally representative, found several ways that specialty hospital competition affected the finances of general and safety net hospitals in those areas—namely, through competition for physicians and other staff, new challenges in providing emergency department on-call coverage, and decreases in volume. Respondents to the survey reported little change in patient acuity in general hospitals and attributed changes in payor mix to the rising rate of uninsured people in the market generally, rather than to the loss of patient volume to specialty hospitals. The study also noted that general hospitals were more likely than safety net hospitals to feel the effects of competition from specialty hospitals. According to the survey, some hospitals addressed these challenges by employing specialists or using contractual arrangements to encourage them to concentrate their practice at a particular hospital. General hospitals in all three communities and a safety net hospital in Little Rock saw a drop in service volume with specialty hospital entry, the study reported. Safety net hospitals, on the other hand, reported little impact on service volume since they generally do not compete intensely for patients with private insurance or Medicare. With respect to payor mix, respondents to the study observed little impact from the introduction of Medicare severity-adjusted diagnostic related groups under the inpatient prospective payment system, which allows higher reimbursements for sicker patients. “These reimbursement changes haven’t yet had the leveling effect between general hospitals and specialty hospitals (boosting reimbursement to general hospitals and reducing reimbursement to specialty hospitals) anticipated by policy makers, assuming the presence of cream skimming by specialty hospitals,” the study said. “[I]t will be important for policy makers to continue to track the impact of specialty hospitals on the ability of general hospitals—more so than safety net hospitals—to serve financially vulnerable patients and provide other less-profitable but needed services,” the study concluded. 165 Insurance/Managed Care Post-Claim Underwriting/Rescissions California Legislators Clear Bill Tightening Restrictions On PostClaim Rescissions But Governor Vetoes The California legislature passed August 31, 2008 legislation (AB 1945) addressing socalled post-claim rescissions by healthcare service plans and health insurers. Under the bill, both healthcare service plans licensed by the Department of Managed Health Care (DMHC) and health insurers regulated by the California Department of Insurance (Department) would have been required to complete medical underwriting prior to issuing a contract or policy. The bill also would have prohibited plans and insurers from canceling or rescinding an individual plan contract or policy unless specified conditions were met. In addition, the bill would have established in the DMHC and the Department an independent review process for the review of plans’ and insurers’ decisions to cancel or rescind plan contracts or policies. The legislature passed the bill amid growing scrutiny by courts and regulators of postclaims underwriting—i.e., rescinding health policies without proving that the applicant willfully misrepresented themselves on their health application. A California appeals court in December 2007 ruled that a health services plan must show a willful misrepresentation or omission or that it made reasonable efforts to ensure a subscriber’s application was accurate and complete as part of the precontract underwriting process in order to lawfully rescind the contract later. (Haley v. California Physicians’ Serv., No. G035579 (Cal. Ct. App. Dec. 24, 2007). Finding these issues in dispute, the California Court of Appeal, Fourth Appellate District, reversed the grant of summary judgment in favor of California Physicians’ Service, doing business as Blue Shield of California (Blue Shield), in plaintiffs Cindy and Steve Hailey’s lawsuit for breach of contract, breach of the covenant of good faith and fair dealing, and intentional infliction of emotional distress. The appeals court held that a plan has a duty under Cal. Health and Safety Code § 1389.3 to investigate the accuracy and completeness of a subscriber’s application before it issues a contract. A month later, however, California Governor Arnold Schwarzenegger vetoed AB 1945, citing concerns about the “fragile” individual insurance market. “Unfortunately, the provisions of the bill will only increase costs and further restrict access for over 2 million Californians that currently obtain coverage in the individual market,” according to the Governor. The California Medical Association, which sponsored AB 1945, called the Governor’s veto a “betrayal.” “The Governor’s veto betrays the promise he repeatedly made to Californians to protect them from insurance companies cancelling their health insurance when they need it 166 most,” said Dr. Richard Frankenstein, M.D. “Californians need health care coverage they can count on when they get sick. This veto denies them that security.” A bill to address so-called post-claim rescissions by healthcare service plans and health insurers is again being floated in the California legislature. Legislatures reintroduced a similar bill (AB 2) in December 2008. California Regulators Continue To Line-Up Settlements With Insurers Over Cancelled Policies Over the last year, most of California’s major health plans reached various settlement agreements with the Department of Managed Health Care (DMHC) or the California Department of Insurance (CDI) concerning certain rescinded policies. Recent settlements include the following: • In June 2008, PacifiCare of California agreed to provide health coverage to three consumers whose coverage was canceled over the last four years and offered to reimburse their past medical claims. In addition, PacifiCare will offer coverage to roughly 57 former members going forward and an expedited dispute resolution for claims. PacifiCare also must pay a $50,000 fine and faces a stiffer $500,000 penalty if it fails to take certain corrective action, including instituting clearer application forms and a fair, impartial grievance process, within the next year. • In July 2008, Blue Shield of California agreed to offer coverage to 400 former members whose coverage previously was rescinded and pay a total fine of $5 million. Under the agreement, Blue Shield will pay $3 million upfront, with the potential for an additional $2 million if certain corrective actions are not implemented, DMHC said. • Also in July 2008, DMHC announced that Anthem Blue Cross had reached a settlement agreeing to pay a $10 million fine and restore health coverage to 1,770 Californians. • California Insurance Commissioner Steve Poizner announced September 12, 2008 a settlement valued at $25 million between the California Department of Insurance (CDI) and Health Net Life Insurance Company to offer new healthcare coverage to 926 consumers whose individual and family plan policies were rescinded during the past four years and halt improper rescissions going forward. The settlement resolves allegations of unfair claims handling and improper rescission practices made after a market conduct examination of Health Net rescissions since 2004. The agreement includes $14.2 million in potential payments for legitimate, billed medical charges; $7.2 million in waived insurance premiums; and a $3.6 million penalty, Poizner said. • Poizner announced January 6, 2009 that Blue Shield of California Life & Health (Blue Shield) agreed to offer health insurance to 678 former policyholders to resolve allegations of unfair claims handling and improper rescission practices. According to the Department’s press release, Blue Shield rescinded the policies at issue between January 1, 2004 and May 31, 2008 without subjecting them to medical underwriting or exclusions for pre-existing conditions. Blue Shield also has agreed to reimburse the 678 consumers for all out-of-pocket medical expenses that would have been covered under the rescinded policies and implement significant changes to its underwriting and claims practices. Blue 167 Shield will establish an independent third-party review process for rescissions going forward. The insurer is subject to a $5 million penalty if it fails to comply with the terms of the settlement. • In February 2009, Anthem Blue Cross Life and Health Insurance Company (Anthem Blue Cross) agreed to offer new health coverage to more than 2,300 consumers whose policies were rescinded between January 1, 2004 and December 31, 2008. CDI said Blue Cross will reimburse the consumers an estimated $14 million in out-of-pocket medical expenses and pay a $1 million fine. CDI indicated that an independent arbitration process already was in place to resolve any disputes about consumers’ medical costs. Anthem Blue Cross also agreed to implement significant changes to its application forms, underwriting process, agent training, and claims handling practices. As part of the settlement, the company, which insures about half of all California consumers with individually purchased health insurance policies, also has established an independent third party review process for rescissions that is subject to CDI oversight. • Los Angeles City Attorney Rocky Delgadillo announced February 11, 2009 that Health Net, Inc. and two of its subsidiaries agreed to settle allegations that the company unlawfully rescinded more than 800 plan members’ policies. The settlement resolves the city's civil suit as well as a class action brought by attorney William Shernoff. Under the terms of the settlement, policy holders who had their coverage rescinded will receive $6.3 million in automatic payments. In addition, they will be able to submit claims for reimbursement for out-of-pocket medical expenses and will be held harmless for unpaid medical expenses that are in active collection, Delgadillo said. Health Net also will pay $2 million in civil penalties to the state; make $500,000 in charitable contributions to Padres Contra El Cancer (Parents Against Cancer) and the Children’s Health Fund; and adopt a new corporate compliance program and abolish any rescission-related bonus programs. Further, according to Delgadillo, Health Net agreed to a one-year moratorium, through January 31, 2010, during which the company will not rescind any plan members or policy holders, and will work to develop an independent third-party review process acceptable to its regulators and the City Attorney’s Office. California Appeals Court Holds Insurer Not Entitled To Summary Judgment On Unlawful Plan Rescission Claims An insurer who failed to take steps to verify the accuracy of information provided in an application for insurance may not have “completed medical underwriting” as defined in state insurance law and therefore was not entitled to summary judgment on claims of unlawful plan rescission, the California Court of Appeal, Second Appellate District, Division Four, found November 18, 2008 in an unpublished opinion. In January 2005, plaintiff Christiane Callil submitted an application for an individual health plan with defendant California Physicians’ Service d/b/a Blue Shield of California (Blue Shield). Because Callil had been covered by Blue Shield in the past, she checked the box on her application for a plan transfer. Her application was eventually accepted by Blue Shield. In August 2005, Blue Shield issued a conditional pre-authorization for a hysterectomy, but also referred the case to its Underwriting Investigative Unit (UIU). 168 After requesting Callil’s medical records, the UIU found out that Callil had an undisclosed history of uterine fibroids among other issues. It was determined that, based upon Blue Shield’s underwriting guidelines, Blue Shield would not have extended coverage to Callil had she disclosed her actual medical history. Accordingly, Blue Shield rescinded Callil’s health plan. In the meantime, Callil had the hysterectomy based on Blue Shield’s conditional preauthorization; she was discharged from the hospital five days before the rescission letter was sent, incurring more than $50,000 in hospital bills. Callil sued Blue Shield alleging claims for breach of contract, breach of the duty of good faith and fair dealing, and declaratory relief. Blue Shield moved for summary judgment, arguing among other things that Cal. Health and Safety Code § 1389.3 did not apply because there were no “reasonable questions” raised by Callil’s application that required resolution before issuance of the plan contract, and therefore Blue Shield did not engage in post-claims underwriting as defined by section 1389.3. The trial court granted the motion and Callil appealed. A few months after the notice of appeal was filed another California appeals court issued its decision in Hailey v. California Physicians’ Service, 158 Cal.App.4th 452 (2007). In that case, the appeals court concluded that “section 1389.3 precludes a health services plan from rescinding a contract for a material misrepresentation or omission unless the plan can demonstrate (1) the misrepresentation or omission was willful, or (2) it had made reasonable efforts to ensure the subscriber’s application was accurate and complete as part of the precontract underwriting process.” Further, the Hailey court explained that “An applicant for a health services plan has a responsibility to exercise care in completing an application. In light of the potentially catastrophic consequences of an applicant’s error in filling out an application, however, we believe the Legislature has placed a concurrent duty on the plan to make reasonable efforts to ensure it has all the necessary information to accurately assess the risk before issuing the contract, if the plan wishes to preserve the right to later rescind where it cannot show willful misrepresentation.” In the instant case, Callil argued the appeals court here should follow Hailey's reasoning and reverse the summary judgment on the ground that a disputed issue of fact existed on whether she willfully misrepresented or omitted facts about her medical health. The appeals court agreed, finding “the record discloses triable issues of fact regarding whether Callil’s misrepresentations or omissions were willful, and whether Blue Shield ‘complete[d] medical underwriting’ under section 1389.3, as interpreted in Hailey.” The appeals court found, in addition to Callil’s deposition testimony that she did not willfully withhold any medical information, a triable issue regarding whether Blue Shield satisfied its duty to take reasonable steps to confirm the accuracy and completeness of Callil’s application. In support of its conclusion, the appeals court pointed to Blue Shield’s failure to take steps to determine when Callil last saw her physician, even though her answers on her insurance applications were inconsistent. 169 The appeals court further refused to allow summary judgment on Callil’s bad faith and punitive damages claims, rejecting Blue Shield’s argument that a genuine issue over coverage precluded these claims. Instead, the appeals court found that “an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured’s claim only where the summary judgment record demonstrates the absence of triable issues [citation] as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.” Regarding punitive damages, the appeals court found that if “Callil can prove by clear and convincing evidence that Blue Shield not only rescinded her health plan contract unreasonably or in bad faith, but in doing so was guilty of malice, oppression or fraud, she may recover punitive damages.” Callil v. California Physicians’ Serv., No. B203085 (Cal. Ct. App. Nov. 18, 2008). Out-of-Network Reimbursement Health Net Of New Jersey Pays $39 Million To Resolve Charges Of Making Underpayments For Out-Of-Network Services Health Net of New Jersey (Health Net) has paid $26 million in restitution and interest to its members and a $13 million fine, for a total of $39 million, to resolve charges that it underpaid for out-of-network services for more than a decade, according to an August 26, 2008 press release issued by New Jersey Department of Banking and Insurance (DOBI) Commissioner Steven M. Goldman. Goldman indicated the restitution payments were paid out to over 88,000 affected Health Net members. After waiving its right to a hearing on DOBI’s restitution order, Health Net agreed to resolve the matter with the payment of $14 million in unpaid claims and $12 million in interest on those claims, for a total of $26 million. In addition, Health Net agreed to pay $2 million in examination fees. The additional $13 million fine “represents an appropriate penalty for this improper business practice,” Goldman said. DOBI first became aware of underpayments made by Health Net in 2002 through a consumer complaint, according to the release. After the agency conducted an investigation, it settled with Health Net in December 2002 for more than $800,000 in restitution for underpayments made from July 2001 - October 2002 to more than 4,700 Health Net members. When DOBI learned in 2005, however, that Health Net’s underpayments had begun even earlier than it had disclosed, it re-opened the investigation. DOBI focused on claims paid by Health Net, of Shelton, Connecticut, and its predecessors, First Option Health Plan of New Jersey and Physicians Health Services of New Jersey, between 1996 and 2006. The claims were for out-of-network services provided to Health Net members in New Jersey. During the investigation, DOBI also discovered that Health Net’s vendors for chiropractic services, dental services, and mental health services also made underpayments for outof-network services provided between 1999 and 2006, according to the release. 170 “Health Net has acknowledged its responsibility to comply with all applicable laws, and has overhauled the systems and practices that led to its misconduct,” the release said. Nonetheless, DOBI said it would continue to monitor Health Net to ensure full payment of its members for out-of-network services. New York AG Reaches Substantial Settlements With Insurers Over Use Of Igenix Database For Paying Out-Of-Network Claims New York Attorney General Andrew Cuomo over the last year reached a slew of big dollar settlements with some of the nation’s largest health insurers stemming from their use of the Ingenix, Inc. database to reimburse out-of-network claims. Ingenix, Inc., a wholly-owned subsidiary of UnitedHealth Group, is the largest provider of healthcare billing information in the country. United and the largest health insurers in the country rely on the Ingenix database to determine their “usual and customary” rates. The database uses the insurers’ billing information to calculate the “usual and customary” rates for individual claims by assessing how much the same, or similar, medical services would typically cost, generally taking into account the type of service and geographical location. Cuomo’s office investigated allegations that the database “intentionally skewed” these “usual and customary” rates downward through “faulty data collection, poor pooling procedures, and lack of audits.” The settlements reached by Cuomo in connection with his industry-wide investigation include: • United agreed to close the Ingenix database and pay $50 million to establish a new, independent database run by a qualified nonprofit organization. • In January 2009, Cuomo announced a settlement agreement with Aetna Inc. (Aetna) under which the insurer will pay $20 billion towards creating the new, independent database. “United and Aetna contributed seventy percent of the billing information that made up the Ingenix database,” commented Cuomo. • Cuomo announced in February 2009 an agreement with the Schenectady-based insurer MVP Health Care, Inc., under which it agreed to no longer use the "defective and conflict-of-interest ridden" Ingenix database to determine reimbursement rates for patients who use out-of-network physicians. • On February 2, 2009 Cuomo announced that Aetna also agreed to pay more than $5 million, plus interest and penalties, for claims involving out-of-network care to reimburse health insurance claims by over 73,000 students at over 200 colleges. According to Cuomo, an investigation revealed that Aetna Student Health underpaid in excess of $5.1 million in student health insurance claims nationwide between 1998 and April 1, 2008 by using outdated reimbursement rate information from the Ingenix database. • On February 10, 2009, Buffalo-area insurers, Independent Health and HealthNow NewYork, Inc. agreed to end their relationships with Ingenix. 171 • On February 17, 2009, Cuomo announced an agreement with CIGNA under which the insurer will end its use of the Ingenix database. The company also will pay $10 million to fund the new, independent database. • On February 18, 2009, Cuomo announced that he reached a similar settlement with WellPoint, Inc., which will pay $10 million toward the new database. • Guardian Life Insurance Company of America, Excellus Health Plan, and Capital District's Physician Health Plan (CDPHP) also reached settlements with Cuomo in March 2009. Guardian agreed to end its relationship with the Ingenix database and pay $500,000 to fund the new, independent database. Under separate agreements, Excellus will pay $775,000 and CDPHP will pay $300,000 toward the new, independent database. AMA Lawsuits Meanwhile, the American Medical Association (AMA) filed a number of lawsuits against insurers in connection with their reliance on the Ingenix database. In January 2009, United agreed to pay $350 million to resolve a class action filed by the AMA, the Medical Society of New York, other medical associations, and various individual subscribers and providers. “For far too long health insurers using the flawed Ingenix database have been able to increase revenue by underpaying patients’ medical bills,” commented Nancy H. Nielson, AMA President in a statement. “Insurers will now be held accountable for their payment obligations.” Nielson added that the AMA “fully supports” the creation of “a new, reliable database that is fair to patients and physicians.” In a statement, United said it did not admit any wrongdoing in agreeing to the settlements, which cover out-of-network reimbursement policies from 1994 to present. “UnitedHealth Group believes it is in the best interests of the company to resolve these matters and move forward.” AMA along with several state medical associations and a group of individual physicians also filed separate class actions against Aetna Health, Inc. and CIGNA Corporation alleging the companies relied on skewed data provided by the Ingenix database to set unfair reimbursement rates for out-of-network care. The two lawsuits were filed February 9, 2009 in a New Jersey federal court, alleging violations of federal antitrust laws and the Racketeer Influenced and Corrupt Organizations Act, among other claims. “Through our lawsuits, the AMA and our partner medical societies seek to reform the payment systems used by Aetna and CIGNA by ending their dependence on the Ingenix database,” Nielsen said. “The lawsuits also seek relief for physicians who were seriously harmed by Aetna and CIGNA through the insurers’ long-term use of the flawed Ingenix database.” In March 2009, AMA and several other medical societies filed a lawsuit against WellPoint, Inc., the largest health insurer in the United States. The suit, filed in Los Angeles federal court, alleges that WellPoint colluded with others to underpay physicians for out-ofnetwork medical services. 172 Senate Hearing On March 26, 2009 the Senate Committee on Commerce, Science, and Transportation held the first of two hearings on deceptive insurance industry practices, including those related to out-of-network reimbursement. According to Committee Chairman John D. Rockefeller, IV (D-WV), insurance companies "have been promising to pay a certain share of consumers’ medical bills, but then they have been rigging health charge data to avoid paying their fair share." As a result, "billions of dollars in health care costs have been unfairly shifted" to consumers, Rockefeller said. Chuck Bell, Programs Director, Consumers Union, told the panel that Cuomo's investigation and resulting settlements have been good for consumers. Bell said Consumers Union is now calling for "coordinated action by state and federal policymakers and regulators to help consolidate the investigation's gains, and ensure that the new database for calculating out-of-network charges will be broadly used across the entire marketplace." Balanced-Billing California Court Affirms Ban On Balance Billing The California Superior Court, Sacramento County, upheld November 21, 2008 in a tentative ruling California's promulgation of a regulation that would curb the practice of balance billing emergency care recipients enrolled in a health maintenance organization (HMO). The tentative ruling was affirmed by the court and made final on December 2, 2008. The California Medical Association (CMA) and others filed suit challenging the California Department of Managed Health Care's (DMHC's) promulgation of 28 CCR § 1300.71.39 (Balance Billing Regulation). Under Cal. Health and Safety Code § 1371.39, HMOs may report "instances in which the plan believes a provider is engaging in an unfair billing pattern" to DMHC. The Balance Billing Regulation defines "unfair billing pattern" to include a practice known as "balance billing," wherein a provider that receives less than the total amount billed from a patient’s HMO subsequently bills the unpaid balance directly to the patient. CMA argued that DMHC acted unlawfully in promulgating the Balance Billing Regulation and sought a writ of mandate ordering DMHC to repeal it, a declaration that the Balance Billing Regulation is invalid, and an injunction stopping DMHC from implementing and enforcing the Balance Billing Regulation. The court rejected CMA's argument that DMHC lacked statutory authorization to regulate balance billing by non-contracting providers. The court found that Section 1371.39(b)(1) expressly delegates authority to DMHC to define unfair billing practices and also authorizes DMHC to regulate providers with regard to unfair billing practices. The court also held that "DMHC’s conclusion that balance billing can constitute a demonstrable and unjust billing pattern is reasonable and not in conflict with § 1371.39." 173 The court found "substantial evidence in the record supports DMHC’s conclusion that the Balance Billing Regulation was reasonably necessary to effectuate the purposes of the Knox-Keene Act." In addition, contrary to CMA's argument, the court saw no conflict between the Balance Billing Regulation and another statutory provision requiring that HMO contracts "shall be fair, reasonable, and consistent with the objectives of this chapter." "While Petitioners assert that the Balance Billing Regulation will allow HMOs to unilaterally set provider rates, such an argument is premised on the assumption that HMOs will be able to underpay non-contracted providers and ignores the legal provisions mandating both full payment and a provider’s ability to obtain full payment through the dispute resolution mechanisms or the legal system," the court held. Lastly, the court found the regulation was not unconstitutionally vague. DMHC Director Cindy Ehnes said December 3, 2008 that the agency's "legal authority to protect consumers from bills they should never have received has now been confirmed, and we will continue to not only defend consumers from being caught in the middle of billing disputes but also work to ensure that providers are paid fairly and on time." California Med. Ass'n v. Department of Managed Health Care, No. 34-2008-80000059 (Cal. Sup. Ct. Nov. 21, 2008) (tentative ruling). California Supreme Court Says ER Physicians May Not “Balance Bill” Health Plan Subscribers Emergency room physicians may not “balance bill” patients when billing disputes arise with health maintenance organizations (HMOs) concerning the charges submitted for services provided to their enrollees, the California Supreme Court ruled in a unanimous decision January 8, 2009. “[W]e conclude that billing disputes over emergency medical care must be resolved solely between the emergency room doctors, who are entitled to a reasonable payment for their services, and the HMO, which is obligated to make that payment,” the high court found. “A patient who is a member of an HMO may not be injected into the dispute,” the high court added. The California Medical Association (CMA) criticized the high court’s ruling, saying it “forces physicians and hospitals to eat the cost of emergency medical care that HMOs refuse to cover.” “CMA supports a solution that protects doctors and patients by requiring HMOs to pay the bill for emergency services. By outlawing balance billing without a realistic remedy, however, the court has placed another strain on financially struggling emergency rooms and the physicians who work there,” according to the group’s statement. Plaintiffs Prospect Medical Group, Inc. (Prospect) are individual practice associations that contract with California healthcare service plans. Under these contracts, Prospect provides medical care to members of a health plan who select a Prospect physician. Under California law, Prospect also must pay for emergency services provided to those who have subscribed to the healthcare service plans. 174 Prospect brought an action against two non-contracting emergency providers, defendants Northridge Emergency Medical Group and Saint John’s Emergency Medicine Specialists, Inc., seeking a judicial determination that the practice of balance billing health plan subscribers is unlawful. The trial court sustained the emergency physicians’ demurrers without leave to amend. The California Court of Appeal concluded that balance billing is not statutorily prohibited. Prospect petitioned the high court for review. Under the Knox-Keene Act, HMOs are required to reimburse emergency room physicians for emergency services rendered to their subscribers or enrollees. See Cal. Health and Safety Code § 1371.4. California law, Cal. Health and Safety Code § 1379, bans healthcare providers who contract with a health plan from balance billing the health plan’s enrollees for any amount not paid by the plan. The ban under Section 1379 applies even if the contract “has not been reduced to writing.” Prospect argued while it did not have an express contract with defendants, there was an implied contract that had not been reduced to writing pursuant to Section 1379. The appeals court rejected this argument, but the high court reversed. While conceding that Section 1379 did not “readily apply to the precise situation here,” the high court emphasized that the provision, which the legislature passed in 1975, should not be viewed in isolation but examined as part of other statutory provisions and policies, which “strongly suggest that doctors may not bill patients directly when a dispute arises between doctors and HMO’s.” For example, the high court noted that Section 1371 requires HMOs to pay for emergency care and Section 1367 requires HMOs to have dispute resolution mechanisms for noncontracting providers to resolve billing disputes. “Interpreting the statutory scheme as a whole, we conclude that the doctors may not bill a patient for emergency services that the HMO is obligated to pay,” the high court wrote. The high court agreed with defendants that emergency room physicians are entitled to reasonable payments for emergency services rendered to HMO patients. “All we are holding is that this entitlement does not further entitle the doctors to bill patients for any amount in dispute.” The high court specifically declined to rule on a recent regulation adopted by the California Department of Managed Health Care defining balance billing as “an unfair billing pattern.” In the high court’s view, it owed little deference to the regulation since it was not contemporaneous with the statutory scheme. The California Superior Court, Sacramento County, upheld at the end of 2008 the socalled balanced billing regulation, which CMA had challenged in court. Prospect Med. Group, Inc. v. Northridge Emergency Med. Group, No. S142209 (Cal. Jan. 8, 2009). 175 Silent PPOs U.S. Court In Illinois Questions Breach Of Contract Claim In “Silent PPO” Case A federal district court in Illinois ordered June 30, 2008 a healthcare provider to show cause why her breach of contract action against an indemnity plan should not be dismissed. The provider in the case alleged the plan was not entitled to discounted rates for treatment she provided to one of its insureds because it never established a preferred provider network that steered the patient to her practice. The case arose after plaintiff Kathleen Roche, a healthcare provider, treated a patient who was covered under an indemnity plan offered by defendant Liberty Group (Liberty). Roche was a participating provider with the First Health Preferred Provider (PPO) network. Liberty had signed a payor agreement with First Health but had not established a preferred provider or exclusive provider program for its claimants or beneficiaries. Thus, Liberty did nothing to steer or direct the patient to Roche. Roche subsequently submitted a bill for her usual and customary rate to Liberty. After discovering that Roche was a First Health PPO provider, Liberty tendered payment at the PPO discounted rate. Roche sued Liberty, alleging breach of contract, unjust enrichment, and violation of the Illinois Consumer Fraud Act. Liberty moved to dismiss the breach of contract action. The U.S. District Court for the Southern District of Illinois said the case fell under the “silent PPO” scenario because Liberty paid the discounted PPO rates even though, as an indemnity plan, it did not by definition “steer” patients to Roche. The court said the express terms of Roche’s provider agreement with First Health seemed to preclude her breach of contract claim because it specifically included indemnity plans like Liberty in the definition of “Health Care Payors” entitled to the discount even if they were not a PPO-type plan. According to the court, implying a “steerage obligation” in the contract as Roche urged would likely contradict the express terms in the provider agreement. Roche alternatively argued that without an implied steerage term the contract would fail for lack of consideration. But the court discounted this claim, noting the provider agreement’s requirement for prompt payment would constitute adequate consideration. The court ultimately concluded, however, that the parties had not adequately briefed these issues and ordered Roche to show cause why her breach of contract action should not be dismissed. Roche v. Liberty Mut. Managed Care, Inc., No. 07-cv-331-JPG (S.D. Ill. June 30, 2008). 176 U.S. Court In Illinois Refuses To Certify Class In Healthcare Provider’s Action Alleging “Silent PPO” Scheme A federal court in Illinois denied class certification in a healthcare provider’s action alleging a preferred provider organization (PPO) administrator and various payors engaged in a fraudulent scheme that breached the provider's PPO contract. The action was initiated by plaintiff Christie Clinic P.C. against defendants MultiPlan Inc., a PPO Administrator, Unicare Life and Health Insurance Company (Unicare), and United Health Care Insurance Company (United). Plaintiff sought to bring the complaint on behalf of physicians, hospitals, and patients who entered into agreements to participate in the MultiPlan PPO network. According to plaintiff, MultiPlan agreed to market its provider networks to payors that offered patients financial incentives for using in-network providers like plaintiff. In return for discounted rates, payors would "steer" their members to the participating preferred providers thereby increasing the volume of the providers’ business. Plaintiff claimed that MultiPlan secretly contracted with Unicare and United to create a socalled “silent PPO”—i.e., allowing these payors access to the discounted reimbursement rates without having to offer financial incentives and other policies aimed at steering patients to those providers. Plaintiff alleged numerous claims including civil conspiracy, breach of contract, and unjust enrichment and moved for class certification of an estimated 500,000 healthcare providers who through the MultiPlan PPO Provider Agreement were allegedly defrauded by the silent PPO scheme. The U.S. District Court for the Central District of Illinois refused to certify the class and also dismissed plaintiff’s claims for injunctive relief and punitive damages. The court found plaintiff had not satisfied a number of requirements for class certification, including typicality, adequate representation, predominance, and superiority. First, the court held plaintiff’s fraud-based claims were not typical of the claims of the putative class members because plaintiff’s contract with MultiPlan expressly permitted “complimentary network” clients like United and Unicare to provide reimbursement for plaintiff’s services to its members at out-of-network benefit levels. “This unique feature of Plaintiff’s contract requires Plaintiff to base its claim on allegedly fraudulent misrepresentations made by Defendants to Plaintiff,” the court observed. Moreover, defendants pointed to “course of dealing” evidence that plaintiff had submitted claims directly to United and received payments reflecting the “complimentary network” discounts but had not previously complained about the payor’s participation. There was no evidence that other PPO providers would face similar obstacles in pressing plaintiff’s theory, the court said. 177 The court found similar reasons prevented plaintiff from showing that it would fairly and adequately protect the interests of the class given the unique burdens and defenses plaintiff faced on its individual claims. In addition, the court agreed with defendants that plaintiff’s claims of fraud would require proof from each class member. The court also concluded defendants had shown the contracts between MultiPlan and the proposed class members were materially different from the contract between MultiPlan and plaintiff such that the issues common to the class members did not predominate over questions affecting individual class members. Finally, the court concluded that in this case, a class action was not superior to other means of addressing class members’ alleged claims, noting class members had an important interest in bringing individual actions. Christie Clinic, P.C. v. MultiPlan, Inc., No. 08-CV-2065 (C.D. Ill. Jan. 26, 2009). Long Term Care CMS Final Rule Requires Sprinkler Systems In All Long Term Care Facilities Long term care facilities will have five years to comply with a new rule requiring them to install sprinkler systems throughout their buildings to continue to serve Medicare and Medicaid beneficiaries, the Centers for Medicare and Medicaid Services (CMS) said in June 2008. The final rule was published in the August 13, 2008 Federal Register (73 Fed. Reg. 47075). Under current rules, all newly constructed facilities and all facilities that undergo major renovations must install automatic sprinkler systems. Existing facilities, however, are not required to install automatic sprinkler systems provided they meet certain construction standards. Also, renovated facilities are only required to install sprinklers in the renovated portion of the facility. “In the past, certain older facilities were exempt from having an automatic sprinkler system, but we now will hold all 16,000 nursing homes in the nation to this standard,” CMS Acting Administrator Kerry Weems said. CMS said all new sprinkler systems installed as a result of its final rule will have to meet National Fire Protection Association technical specifications. To comply with the rule, facilities must have sprinkler coverage in all areas, including resident rooms; kitchen, dining, and activity areas; corridors; attics; canopies; overhangs; offices; waiting areas; closets; storage areas for trash and linen; and maintenance areas. "By publishing final regulations on sprinkler systems in nursing homes, CMS has solidified an important effort to better safeguard the nation's most vulnerable citizens in the event of a fire at their nursing residence," Senate Finance Committee Ranking Member Charles Grassley (R-IA) said in a statement. 178 CMS noted in the final rule that it received a large number of comments regarding the appropriate phase-in period for the rule. While suggestions ranged in length from 18 months to 15 years, "the most frequently suggested phase-in period was 3-5 years." "A 5-year phase-in period balances our dual goals of improved fire safety and feasibility," the final rule said. CMS Posts Quality Ratings For Nation’s Nursing Homes Consumers will now be able to compare nursing home quality and safety based on a new “five-star” rating system, the Centers for Medicare and Medicaid Services (CMS) announced December 18, 2008. CMS this week posted ratings of the nation’s 15,800 nursing homes on its Nursing Home Compare website. According to CMS, in the first round of quality ratings about 12% of nursing homes received a five-star rating, while 22% were assessed one star. CMS announced in June 2008 plans for the rating system, which is part of the agency’s efforts to give patients and families better tools to compare nursing home quality. Facilities are assigned star ratings from a low of one star (“much below average”) to a high of five stars (“much above average”) based on health inspection surveys, staffing information, and quality of care measures, CMS explained. Ratings, which will be updated monthly, are given in each area and then totaled for a composite score. “With this new rating system, CMS is improving the ability of consumers to readily obtain critical information which should be used in conjunction with in-person visits to a facility,” said Senate Special Committee on Aging Chairman Herb Kohl (D-WI). CMS Acting Administrator Kerry Weems cautioned that the ratings system is only a snapshot of a nursing home at a particular point in time and should not be used as a substitute for visiting a nursing home. “Nursing homes can make dramatic improvements between rating periods, just as a previously highly-rated home could see its quality of care deteriorate,” Weems observed. CMS previously published on its website a list of the nation’s underperforming nursing homes, or “Special Focus Facilities.” OIG Finalizes Supplemental Compliance Program Guidance For Nursing Facilities The Department of Health and Human Services Office of Inspector General (OIG) issued September 30, 2008 in the Federal Register (73 Fed. Reg. 56832) final supplemental compliance program guidance for nursing facilities. The voluntary guidance, which was issued in draft form in April 2008, is intended to supplement, rather than replace, OIG nursing facility compliance guidance issued in 2000. 179 The OIG said it received seven comments, all from trade associations, on the draft guidance and the final document reflects certain suggested clarifications and modifications made by those stakeholders. In the draft guidance, the OIG also sought suggestions regarding specific measures of compliance effectiveness tailored to nursing facilities. “We did not receive suggestions proposing such measures, and therefore did not include an effectiveness measures section in the final supplemental [compliance program guidance],” the OIG said. “The new guidance reflects the OIG’s increased focus on quality of care for nursing home residents, as well as our longstanding commitment to safeguarding Medicare and Medicaid program funds and beneficiaries through fraud and abuse prevention efforts,” said Inspector General Daniel R. Levinson in a press release. Reflecting the emphasis on quality concerns, the new guidance focuses on areas such as staffing, resident care plans, medication management, appropriate use of psychotropic medications, and resident safety. The guidance also stresses claims accuracy and discusses issues related to reporting resident case-mix data, therapy services, screening for excluded individuals and entities, and restorative and personal care services, the OIG said. The supplemental guidance includes sections on fraud and abuse risk areas that are particularly relevant to nursing facilities, recommendations for establishing an ethical culture and for assessing and improving an existing compliance program, and actions nursing facilities should take if they discover potential misconduct. Over 91% Of Nursing Homes Cited For Deficiencies, OIG Says In each of the last three years, over 91% of nursing homes were cited for deficiencies, with private nursing homes receiving more citations than not-for-profit and government nursing homes, according to a memorandum report issued September 29, 2008 by the Department of Health and Human Services Office of Inspector General (OIG) to Centers for Medicare and Medicaid Services (CMS) Acting Administrator Kerry Weems. According to the report, Trends in Nursing Home Deficiencies and Complaints (OEI-0208-00140), quality of care, resident assessment, and quality of life were the most common deficiency categories cited. The OIG also reported that 17% of nursing homes surveyed in 2007 were cited for actual harm or immediate jeopardy deficiencies, and 3.6% were cited for substandard qualityof-care deficiencies—up slightly from 2005. The report was based on nursing home surveys conducted in 2005, 2006, and 2007 and complaints for those years that were included in CMS’ Online Survey and Certification Reporting System (OSCAR). The OIG said deficiency rates varied widely among states, ranging in 2007 from 76% in Rhode Island to 100% in Alaska, the District of Columbia, Idaho, and Wyoming. Also in 2007, 94% of for-profit nursing homes surveyed were cited for deficiencies, compared to 88% of not-for-profit and 91% of government nursing homes. 180 “We note that many factors in addition to quality of care may affect deficiency rates. These factors may include an increase in enforcement, additional guidance or training from States and CMS, legislative changes, and State surveyor practices,” the OIG said. Florida High Court Rules Patient Right To Know Amendment Does Not Apply To Nursing Homes A constitutional amendment passed by Florida voters that gives patients the right to access information from healthcare providers about adverse medical incidents does not apply to nursing homes, the Florida Supreme Court ruled December 23, 2008. The high court found “nursing homes” or “skilled nursing facilities” do not fall within the definition of “healthcare facility” or “healthcare provider” as used in the “Patients Right To Know Amendment,” or Amendment 7. Florida voters in 2004 approved Amendment 7, which provides that “patients have a right to have access to any records made or received in the course of business by a health care facility or provider relating to any adverse medical incident.” In a March 2008 decision, the Florida high court held the amendment applies retroactively to existing medical records, trumping any previous statutory protections limiting discovery during litigation, (Florida Hosp. Waterman, Inc. v. Buster, Nos. SC06688, SC06-912 (Fla. Mar. 6, 2008)). The instant case came to the high court on a certified question from the Fourth District Court of Appeals. Jodi Benjamin, as personal representative of Marlene Gagnon’s estate, sued nursing home Tandem Healthcare, Inc. alleging Gagnon received negligent care. Benjamin sought from Tandem adverse incident reports involving Gagnon, as well as peer review documents and quality assurance records. Benjamin contended Amendment 7 abrogated the nursing home’s peer review and quality assurance privileges. While the trial court granted Benjamin’s request, the Florida Fourth District Court of Appeals concluded Amendment 7 did not encompass nursing homes because it defined “healthcare facility” and “health care provider” in terms of the “general law related to patient’s rights and responsibilities." According to the appeals court, the term “patient’s rights and responsibilities” was a specific reference to Fla. Stat. § 381.026, titled “Florida Patient’s Bill of Rights and Responsibilities.” This section, the appeals court said, does not apply to nursing homes. In its analysis, the high court agreed with the appeals court’s reasoning, finding the amendment’s specific use of the phrase “patient’s rights and responsibilities” was an intentional reference to Section 381.026, which therefore excluded the amendment’s application to nursing homes. As further support, the high court noted the amendment’s use of the term “patient” and not “resident” in light of the long-standing distinction between the two. Moreover, the high court observed, nursing home residents have their own enumeration of rights in a separate chapter of the Florida Statutes. Benjamin v. Tandem Healthcare, Inc. No. SC07-243 (Fla. Stat. Dec. 23, 2008). 181 U.S. Court In Louisiana Blocks Termination Of Nursing Home’s Medicare And Medicaid Provider Agreements A federal court in Louisiana granted nursing home Oak Park Health Care Center, LLC a temporary restraining order (TRO) preventing the federal government from terminating its Medicaid and Medicare provider agreements on February 11, 2009 as scheduled. The court in a February 10, 2009 opinion rejected the government’s argument that Oak Park could not seek judicial review because it had failed to exhaust its administrative remedies. Here, Oak Park argued the government would violate the nursing home’s procedural due process rights by terminating the provider agreements before an administrative law judge (ALJ) hearing could take place. The court noted other decisions holding similar procedural due process claims were “wholly collateral to the determination of benefits” and therefore justified waiving administrative exhaustion requirements. Moreover, the court said the fact Oak Park would likely have to close following the termination of its provider agreements posed a sufficient threat of irreparable harm to current residents, many of whom suffer from serious mental and physical impairments. “Terminating provider benefits to a nursing home would require an extremely vulnerable population to undergo the trauma of moving to a new facility,” the court noted. The court also took into account the impact on family members to relocate residents as well as the effect a closure would have on Oak Park employees “in today’s fragile economic climate.” According the court, the government would not incur harm from the TRO, nor would it disserve the public interest. Finally, the court concluded Oak Park had presented a sufficiently substantial case that it could prevail on the merits after exhausting its administrative remedies. The case arose after the Centers for Medicare and Medicaid Services (CMS) found Oak Park, which operates a 177-bed skilled nursing facility in Lake Charles, Louisiana, was not in substantial compliance with federal requirements over the course of an initial survey and three re-visits. Following the fourth visit, CMS informed the nursing home on January 27, 2009 that it was recommending the termination of its Medicare provider agreements in 15 days—later extended to February 11, 2009. On February 5, 2009, Oak Park allegedly received notice that its Medicaid provider agreement would be terminated on February 11 as well. Oak Park appealed the decision to the ALJ and filed for expedited review, but the review was not scheduled before the February 11, 2009 termination date. Oak Park Health Care Ctr., LLC v. Johnson, No. 09-CV-217 (W.D. La. Feb. 10, 2009). 182 Seventh Circuit Affirms Dismissal Of Claims Against Nursing Home Inspectors The Seventh Circuit affirmed February 19, 2009 a lower court’s grant of summary judgment to survey inspectors from the Indiana health department after they were sued by a nursing home that was initially cited for 17 violations, 16 of which were dismissed after administrative review. Although the inspectors were perhaps overzealous or unprofessional, the appeals court found, the nursing home could not sufficiently prove the inspectors acted with malice. Golden Years Homestead, Inc. operates a licensed nursing facility and participates in the Medicaid program. Golden Years underwent a series of surveys in 2000 by the Indiana State Department of Health during which the inspectors were reportedly hostile and aggressive. Golden Years was cited for 17 Medicaid participation and state licensing violations. All but one of the citations were eventually dismissed after administrative and judicial review. Golden Years sued the inspectors and certain of their supervisors (collectively, defendants) asserting violations of its Fourth and Fourteenth Amendment rights, along with claims under Indiana law for abuse of process and malicious prosecution. Defendants moved for summary judgment and the district court granted the motion. Golden Years appealed. The appeals court first addressed Golden Years’ argument that the court improperly entered summary judgment on the state law claims sua sponte. The appeals court noted the basis for the inspectors’ motion was that Golden Years’ evidence was insufficient to establish that the inspectors had behaved unreasonably or arbitrarily, harbored any improper motive or personal animus, or otherwise engaged in behavior that shocked the conscience. While acknowledging defendants did not develop an argument on the substance of the malicious prosecution or abuse of process claims, the appeals court found defendants did specifically ask for dismissal of all the claims in the lawsuit. After finding the lower court’s exercise of jurisdiction over the state law claims procedurally proper, the appeals court also concluded the dismissal was substantively proper. As to its claim for malicious prosecution, the appeals court found Golden Years failed to offer sufficient evidence of personal animus, noting that the evidence presented may “suggest that the inspectors were overzealous, overbearing, and unprofessional, but not that they were motivated by personal animus.” The appeals court also held Golden Years’ evidence did not prove an ulterior motive as required to prove its abuse of process claim. Golden Years Homestead, Inc. v. Buckland, No. 07-1100 (7th Cir. Feb. 19, 2009). 183 U.S. Court In Minnesota Dismisses Action Against Nursing Home For Allegedly Misrepresenting Quality Of Care A federal court in Minnesota dismissed March 4, 2009 an action against nursing home operators asserting claims under state consumer protection laws for allegedly making false representations about the quality of care at their facilities. The court held statements regarding quality made by defendants Extendicare Health Services, Inc. and Extendicare Homes, Inc., which own and operate nursing homes in numerous states including Minnesota, on their website and in their admission agreements amounted to non-actionable “puffery.” Plaintiff Laura Bernstein is a resident of a Minnesota nursing home owned by defendants. Bernstein asserted claims under the Minnesota Prevention of Consumer Fraud Act, the Deceptive Trade Practices Act, and the False Statement in Advertisement law. According to Bernstein, defendants misrepresented the quality and character of the services provided at their nursing home facilities in violation of the consumer protection statutes. For example, plaintiff pointed to statements on defendants’ website that they have always “maintained quality standards above government regulations” and have “rigorous standards to ensure” they meet residents’ needs. Plaintiff argued defendants in fact do not operate their nursing homes in accordance with applicable legal standards, and that care is particularly poor for Medicaid patients. Plaintiff also asserted the action was appropriate for class action status. The U.S. District Court for the District of Minnesota granted defendants’ motion to dismiss, agreeing the statements at issue constituted non-actionable “puffery” rather than fraud. The court cited a Seventh Circuit decision finding a generic promise to provide high quality care was puffery and therefore not something a reasonable person would rely on. See Corely v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990 (7th Cir. 2004). The court contrasted general statements that care will be of high quality with those promising continuing care and services under a specifically identified program, which could support a consumer protection claim. Here, “[n]one of the statements references any particular standard or make any specific promise,” the court observed. Moreover, statements in admissions agreements that services will be provided “as required by law” are redundant since nursing homes must provide care under a comprehensive regulatory scheme. The court acknowledged that plaintiff could have other claims against defendants if they in fact failed to provide adequate care to residents. But a consumer protection action “simply is not the path to resolution of those issues,” the court held. The court also denied plaintiff leave to amend. 184 Bernstein v. Extendicare Health Servs., Inc., No. 08-5874 (Minn. Mar. 4, 2009). CMS Lacks Effective Oversight Of State Survey Activities, Senators Introduce Nursing Home Quality Bill The Government Accountability Office (GAO) recommended in a report that the Centers for Medicare and Medicaid Services (CMS) reexamine its oversight of state survey activities of Medicare and Medicaid participating facilities, including how such surveys are funded and conducted. The report, released March 19, 2009, was addressed to Senators Charles Grassley (R-IA) and Herb Kohl (D-WI). To ensure the quality of care at facilities participating in Medicare and Medicaid, CMS contracts with states to conduct periodic surveys and complaint investigations. Federal spending on such activities totaled about $444 million in fiscal year 2007, GAO said. Nonetheless, in inflation-adjusted terms, funding fell 9% from fiscal years 2002 through 2007, the report noted. The report found that for some facilities without statutory survey frequencies, CMS increased the time between surveys from six years to 10 years—“a schedule that may further increase the chance of undetected quality problems.” At the same time, the report said, CMS incorporated a risk-based system for prioritizing surveys of the most problematic facilities. However, about 13% of facilities had not been surveyed by states in six years or more as of September 30, 2007, GAO said. In addition, almost all states were unable to meet CMS survey priorities across the top tiers in fiscal years 2006 and 2007, the report found. GAO said that “several factors such as workload, funding, staffing, and management may have affected states’ ability to complete these priorities and the quality of the surveys conducted.” Further, GAO noted that it could not determine the extent to which funding has affected the states’ completion of top-tier surveys “because CMS and states disagree about whether funding is sufficient to complete surveys in these tiers and several states that spent more than their initial allocations still did not complete all such surveys.” The report also concluded that CMS’ oversight of states’ use of survey funds is limited because it relies on state-reported data, has inadequate information about non-Medicaid state funding, and does not require states to justify supplemental funding requests. Meanwhile, Senators Grassley and Kohl reintroduced March 19, 2009 the Nursing Home Transparency and Improvement Act. The bill would enable state and federal regulators to identify all persons and entities with a significant ownership interest in a nursing home, or that play an important role in the management, financing, and operation of a home, according to a summary of the bill. 185 In addition, the bill would require nursing homes to develop internal quality assurance and performance improvement standards to monitor and improve the quality of care provided to residents and improves and expands the Nursing Home Compare website. The legislation also would provide transparency in nursing homes' expenditures on direct care by modifying skilled nursing facility cost reports to require that they separately account for staffing, the summary indicated. U.S. Court In Washington Dismisses Suit Alleging Nursing Homes Violated Consumer Protection Law The U.S. District Court for the Western District of Washington dismissed March 24, 2009 claims against defendant nursing homes under the state’s consumer protection law, finding plaintiffs could not establish a compensable injury under the statute. In dismissing plaintiffs’ claims that misleading advertisements by the nursing homes violated state law, the court found plaintiffs suffered no monetary injury and could not prove that the advertisements caused them to choose defendants’ nursing homes. Howard Steele filed a class action complaint against defendants Extendicare Health Services, Inc., Extendicare Homes, Inc., and Fir Lane Terrace Convalescent Center, Inc. alleging they violated the Washington Consumer Protection Act (CPA) by failing to operate their nursing homes in conformity with their representations and advertisements made to the general public and prospective residents. According to Steele, defendants intentionally misrepresented that their nursing homes met the needs of their residents. Defendants removed the case to federal court. Steele then filed an amended complaint, which added former nursing home residents Janette Grieb and Sharon Gunderson as plaintiffs. Steele was subsequently voluntarily dismissed from the lawsuit, leaving Grieb and Gunderson as plaintiffs. Defendants moved for summary judgment. To establish a CPA violation, plaintiffs had to prove five elements: (1) an unfair or deceptive act or practice that (2) occurs in trade or commerce, (3) impacts the public interest, (4) and causes injury to the plaintiff in her business or property, and (5) the injury is causally linked to the unfair or deceptive act. At issue here were the fourth and fifth elements. The court explained that under the fourth element, the injury must be to business or property; personal injuries are not compensable under the CPA. Here, the court agreed with defendants’ argument that plaintiffs could not establish any injury that met the CPA standard. The court noted plaintiffs complained of exclusively emotional distress or psychological harm and neither plaintiff had shown that she suffered pecuniary losses of any sort. The court remained unconvinced that plaintiffs could establish, as they argued, that they had property rights in their insurance and Medicaid and disability benefits and that they lost part of the value of those property rights when they received lesser-quality services than they were promised. 186 In addition, the court found plaintiffs could not establish the causation element under the CPA. According to the court, the undisputed facts as established at plaintiffs’ depositions showed that defendants’ advertising and any other alleged misrepresentations actually played no role whatsoever in plaintiffs’ decisions to stay in defendants’ nursing homes and therefore could not be the cause of any alleged harm. The court also found no merit in plaintiffs’ argument that they were not told about defendants’ history of violating state health statutes and regulations as cited by the Department of Social and Health Services, and that if they had been aware of these violations, they would not have selected defendants’ facilities. Instead the court found defendants “satisfied any duty to disclose by making their regulatory history easily available to Plaintiffs and the general public pursuant to federal and state law.” Steele v. Extendicare Health Servs., Inc., No. C08-1332-JCC (W.D. Wa. Mar. 24, 2009). Medicaid Case Law U.S. Court In Pennsylvania Finds Medicaid “Freedom Of Choice” Provision Creates Enforceable Right Under § 1983 The Medicaid freedom of choice provision, 42 U.S.C. § 1396n(c)(2)(C), creates an enforceable right under 42 U.S.C. § 1983, a Pennsylvania federal district court ruled in an action brought by a mentally challenged woman and her parents against state Medicaid officials. Plaintiff Leah Zatuchni, a 22-year-old woman who suffers from multiple ailments, sued a county board of commissioners (board) and county health officials, alleging, among other things, violations of § 1396(c)(2)(C), which requires states to inform mentally retarded individuals who are likely to need the level of care provided in a hospital, nursing facility, or intermediate care facility “of the feasible alternatives . . . to the provision of . . . services in an intermediate care facility . . . .” The case arose after county health officials concluded that Medicaid would not cover plaintiff’s placement at a Delaware residential facility that her parents said best met her needs. Plaintiff contended the officials failed to advise her of any alternative care options. The officials argued that the freedom of choice provision did not create an enforceable right, but the U.S. District Court for the Eastern District of Pennsylvania disagreed. The court found the provision at issue easily met the test set forth by the Supreme Court in Blessing v. Freestone, 520 U.S. 329 (1997). Specifically, the court found that: Congress intended the provision to benefit individuals like plaintiff, the rights to be informed of feasible alternatives for their care and to choose the type of available services they will receive are clearly delineated and are not “vague or amorphous,” and the provision is couched in mandatory terms. 187 The court also found Congress used “rights-creating language” in the provision at issue. Although the provision informs the state of its compliance requirements, it does not focus solely on the state but also on the individuals it protects. "[W]e find that the specific entitlements conferred by the free choice provision—to be informed of feasible health care options and to choose from those options—could not be clearer,” the court held. Finally, the court found no indication Congress either expressly or by providing a comprehensive remedial scheme intended to preclude individual suits under the statute at issue. Thus, the court refused to dismiss this portion of the complaint. Zatuchni v. Richman, No. 07-cv-4600 (E.D. Pa. Aug. 12, 2008). Ninth Circuit Issues Opinion Explaining Earlier Order Allowing Suit To Enjoin 10% Reduction In Medi-Cal Payments The Ninth Circuit issued September 17, 2008 an opinion explaining its rationale for reversing the denial of a preliminary injunction to enjoin the California Department of Health Care Services (DHCS) from implementing a 10% reduction in Medi-Cal’s reimbursement rates for certain providers. The appeals court’s July 11, 2008 order had temporarily enjoined DHCS from implementing the Med-Cal reduction, finding the district court had committed legal error in denying plaintiffs a preliminary injunction to block the reduction in Medi-Cal payments called for under a state law (AB 5) passed by a special session of the California Legislature in February 2008. Independent Living Center of Southern California, the Gray Panthers of Sacramento and San Francisco, along with multiple pharmacies (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 § 1396a(a)(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 that § 1396a(a)(30)(A) did not confer a private right of action that plaintiffs could sue to enforce. According to established case law, the appeals court said, under the Supremacy Clause a plaintiff may “enjoin the implementation of a state law allegedly preempted by federal statute, regardless of whether the federal statute at issue confers an express ‘right’ or cause of action on the plaintiff.” In its September 17 opinion, the Ninth Circuit rejected the district court’s earlier conclusion that the Shaw Supremacy Clause doctrine did not apply to the case. See Shaw v. Delta Air Lines, Inc. 463 U.S. 85 (1983) (holding a plaintiff seeking injunctive relief from state regulation on the grounds of federal preemption under the Supremacy Clause presents a federal question). The appeals court found instead that Shaw’s reach was expansive, holding that “injunctive relief is presumptively available to remedy a state’s ongoing violation of federal law.” 188 The Ninth Circuit also found in its latest opinion that plaintiff medical providers and beneficiaries had Article III standing because they alleged a direct economic injury that was directly traceable to DHCS’ implementation of AB 5 and could be redressed by the court through an injunction blocking the 10% rate reduction. Following the appeals court’s July 11 order, the U.S. District Court for the Central District of California 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. Independent Living Ctr. of S. Cal., Inc. v. Shewry, No. 08-56061 (9th Cir. Sept. 17, 2008). California Appeals Court Finds Freeze On Hospital Medi-Cal Rates Violated Federal Medicaid Law A freeze on California’s Medi-Cal rates for certain noncontract hospital services during the state’s 2004-2005 fiscal year violated federal Medicaid law requiring public notice and comment when revising reimbursement rates, a state appeals court held November 19, 2008. The appeals court concluded federal Medicaid law applied to the state legislature’s action under the principle of “cooperative federalism.” The appeals court found in this case the “truncated” legislative process that resulted in the rate freeze did not satisfy the federal notice and comment requirements. Thus, the appeals court enjoined implementation of the rate freeze. In 2004, the California Legislature, as part of adopting a state budget after the constitutional budget deadline had expired, proposed and enacted over a three-day period a freeze on the Medi-Cal rates for certain “noncontract” hospital services during the state’s 2004-2005 fiscal year. The freeze was enacted July 29, 2004 and was effective retroactively to costs incurred beginning July 1, 2004. One legislative analysis pegged savings for the state as a result of the measure at $3.1 million, with a total estimated impact on noncontract hospitals projected at $6.2 million, counting the portion of Medicaid expenditures attributable to the federal government. A hospital reimbursement expert, however, estimated the freeze would actually reduce noncontract hospitals' reimbursement by more than $53 million, or about 14.5%. Over 100 California noncontract hospitals challenged the rate freeze, claiming the state’s action violated the federal Medicaid statute that requires a public notice and comment period as part of the process used when revising rates and rate methodologies. See 42 U.S.C. § 1396a(a)(13)(A). Section (13)(A) formerly imposed a substantive requirement on the states’ establishment of reimbursement rates (i.e. that the rates were “reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities"). This requirement, known as the Boren Amendment, was later repealed to allow states more flexibility in rate setting. 189 A regulation corresponding to this provision, 45 C.F.R. § 447.50, which remains in effect, imposes certain notice requirements the state must follow in developing reimbursement rates. Current section (13)(A) requires only that the state plan provide a “public process” for determining rates of payment. The trial court rejected the hospitals’ claims, except to the extent the rate freeze was applied retroactively. The California Court of Appeal, Third Appellate District, reversed. The California Department of Health Care Services (Department), which administers the state’s Medicaid program, known as Medi-Cal, argued that section (13)(A) did not apply to legislatively, as opposed to administratively, mandated rate changes. But the appeals court disagreed, finding the issue with respect to the Medicaid statute was one of “cooperative federalism,” not administrative law. “In short, by agreeing to participate in the Medicaid program, the state subjected itself under the supremacy clause to comply with all federal Medicaid laws,” the appeals court said. After concluding that section (13)(A) applied, the appeals court next considered whether the legislative process itself was sufficient to satisfy the notice requirement. Examining relevant case law, the appeals court noted that generally the legislative process meets the notice requirement if the mandate gave little discretion to the implementing agency, and “if actual public notice was given before the measure became effective.” In the instant case, however, the “truncated” legislative process did not provide notice and opportunity for review and comment. “Section 32 of Senate Bill No. 1103 appeared on July 27, was adopted by the full Assembly on July 28, and was adopted by the full Senate on July 29. Even the Department did not know of section 32 until it was enacted,” the appeals court observed. Given this holding, the appeals court did not reach the hospitals' other argument that the state also violated 42 U.S.C. § 1396a(a)(30)(A), which requires the state to make certain substantive findings when establishing rates. The appeals court said, however, that it would apply the same reasoning to its analysis of that section. Mission Hosp. Reg’l Med. Ctr. v. Shewry, No. C054868 (Cal. App. Ct. Nov. 19, 2008). U.S. Court In California Enjoins Planned Medi-Cal Pharmacy Reimbursement Rate Cuts The U.S. District Court for the Central District of California granted a preliminary injunction February 27, 2009 preventing the state from implementing planned Medi-Cal pharmacy reimbursement rate cuts. 190 The plaintiffs proved a sufficient likelihood of succeeding on the merits of their claim that the law calling for the rate cuts is preempted by Section 30(A) of the Medicaid Act, the court found in granting the injunction. On September 16, 2008, the California Legislature passed a bill (AB 1183), which provided that, effective March 1, 2009, Medi-Cal reimbursement payments to some feefor-service providers would be reduced by 1% or 5%, depending on provider type. The court noted the reductions mandated in AB 1183 replaced the 10% rate reduction put into place by AB 5, which was partially enjoined by the court in a related action, Independent Living Center of Southern California, Inc. v. Sandra Shewry, No. CV-083315 CAS (MANx) (C.D. Cal. Aug. 18, 2008). In the instant case, Managed Pharmacy Care and others (plaintiffs) sued defendant David Maxwell-Jolly, Director of the California Department of Health Care Services, challenging the 5% Medi-Cal reimbursement rate reduction to providers of pharmacy services under AB 1183. After finding plaintiffs had standing to bring the action and the action was not barred by the Eleventh Amendment, the court addressed plaintiffs’ likelihood of success on the merits of their claim that AB 1183 is preempted by Section 30(A) of the Medicaid Act. The court found that under Orthopaedic Hospital v. Kizer, 1992 WL 345652 (C.D. Cal. 1992), and its progeny, when California seeks to modify reimbursement rates for healthcare services provided under the Medi-Cal program, it must consider efficiency, economy, and quality of care, as well as the effect of providers’ costs on those relevant statutory factors. Here, the court agreed with plaintiffs’ argument that AB 1183 did not take into consideration all the relevant factors. The court noted “the legislative history shows no indication that the Legislature considered any of the relevant factors before implementing AB 1183 . . . . Instead, it appears that the Legislature enacted the rate reduction purely for budgetary reasons.” Accordingly, the court found plaintiffs had a strong likelihood of success on the merits. Next, the court found plaintiffs had shown they would suffer irreparable harm if the rate reduction went into effect. Declarations submitted by plaintiffs examining the impact of the 5% rate reduction on pharmacies made a sufficient showing of irreparable harm to warrant an injunction, the court said. The court rejected defendant’s argument that plaintiffs’ harm was speculative, saying defendant failed to refute “that many brand and generic drugs will be reimbursed at a level below cost, thereby preventing pharmacies from providing those drugs and limiting access for Medi-Cal patients.” “Furthermore,” the court continued, “if pharmacists are forced to curtail services or go out of business, there is no indication that all existing customers will have access to other pharmacies in which to obtain their medication and, in some cases, home-delivery services for such medication.” 191 In applying a balance of hardships analysis to its decision, the court explained that it is “mindful of the difficulty facing the State of California in light of its fiscal crisis,” but found “the significant threat to the health of Medi-Cal recipients,” was enough to tip the balance in favor of granting an injunction. Managed Pharmacy Care v. Jolly, No. CV 09-382 CAS (MANx) (C.D. Cal. Feb. 27, 2009). California ER Physicians Sue State Alleging Medi-Cal Reimbursement Rates Illegal California emergency room physicians filed a lawsuit against the state arguing its Medicaid program, Medi-Cal, is illegally reimbursing them at a rate far below the costs of providing care. According to the complaint, the state’s unreasonable reimbursement rates are unconstitutional and also violate federal and state laws. Plaintiffs Centinela Freeman Emergency Medical Associates, Valley Presbyterian Emergency Medical Associates, Sutter Emergency Medical Associates, and Valley Emergency Physicians Medical Group filed the class action complaint in Los Angeles County Superior Court. The complaint contends the “Medi-Cal reimbursement rate shifts the costs of providing emergency medical services from the state to emergency room physicians,” who are legally required to provide emergency care regardless of a patient’s ability to pay. These mounting costs, the complaint says, have reached a tipping point where emergency room physicians, particularly in rural and inner city areas, can no longer absorb them. “In 2007 alone, emergency room physicians lost over $100 million in services provided to Medi-Cal patients,” according to the complaint. California leads the nation in emergency department closures, with 85 hospitals and 55 emergency rooms shuttering their doors over the last decade, the complaint says. The complaint alleges the “inappropriately low Medi-Cal reimbursement rates” violates plaintiff physicians' equal protection rights and constitutes an unlawful taking of property under federal and state constitutions. Ninth Circuit Agrees To Stay Medi-Cal Rate Reductions For Hospitals The Ninth Circuit agreed April 6, 2009 to stay reductions in California’s Medi-Cal reimbursement rates for hospitals pending its decision on appeal of a district court’s refusal to grant the plaintiff hospitals a preliminary injunction blocking implementation of the cuts. Disagreeing with the district court, the appeals court found plaintiff hospitals had demonstrated irreparable harm in the form of reductions in their Medi-Cal revenue payments that could not be addressed in a subsequent action against the state because of sovereign immunity under the Eleventh Amendment. 192 The case was brought by a coalition of providers, including the California Pharmacists Association, the California Medical Association, the California Dental Association, the California Hospital Association (CHA), and the California Association for Adult Day Services, arguing the reductions in Medi-Cal payment rates under AB 1183 slated to go into effect March 1, 2009 would “drastically impair payments” and “create[] significant gaps in access” for the state’s most vulnerable populations. The hospital plaintiffs, comprised of the CHA and some individual hospitals, moved for a preliminary injunction to enjoin a reduction in the Medi-Cal fee-for-service rates to hospitals, arguing AB 1183 was enacted in violation of 42 U.S.C. § 1396a(a)(30)(A), which requires the state to consider efficiency, economy, quality of care, and access before setting reimbursement rates. See Orthopaedic Hosp. v. Belshe, 103 F.3d 1491 (9th Cir. 1997). The Ninth Circuit agreed with the district court’s finding that the hospital plaintiffs had shown a likelihood of success on the merits because the state legislature did not consider any of the factors under Orthopaedic before passing the rate cuts in AB 1183. But unlike the district court, the appeals court concluded the hospital plaintiffs also had shown irreparable harm. According to the appeals court, “[a] cause of action based on the Supremacy Clause obviates the need for reliance on third-party rights because the cause of action is one to enforce the proper constitutional structural relationship between the state and federal governments and therefore is not rights-based.” Thus, the hospitals could assert the harm to themselves or their members to obtain injunctive relief. The appeals court also held plaintiffs’ monetary injury—i.e., the reduction in their MediCal revenues—was irreparable because the Eleventh Amendment would bar the hospitals from recovering damages in federal court. Finally, the court concluded the equities and the public interest weighed in favor of granting the stay. “[I]t is clear that it would not be equitable or in the public’s interest to allow the state to continue to violate the requirements of federal law, especially when there are no adequate remedies available to compensate the Hospital Plaintiffs for the irreparable harm that would be caused by the continuing violation.” The reimbursement cuts, enacted as part of the state’s 2008-2009 budget, call for a 5% rate reduction for Medi-Cal fee-for-services benefits paid to certain hospitals, intermediate care facilities, skilled nursing facilities, and adult day healthcare centers; a 5% rate reduction in payments to pharmacies; and a 1% rate reduction for all other Medi-Cal fee-for-service benefits, including physician and dental care. In an earlier lawsuit, California providers sought to block a 10% reduction in Medi-Cal reimbursement rates under legislation enacted in February 2008 (AB 5). See Independent Living Ctr. of Southern Cal. v. Shewry). A preliminary injunction granted in federal court remains in effect in that case, which also is pending before the Ninth Circuit. California Pharmacists Ass’n v. Maxwell-Jolly, No. 09-55365 (9th Cir. Apr. 6, 2009). 193 New Hampshire High Court Says Nursing Home Operator’s Medicaid Provider Contract May Support Breach Of Contract Suit A New Hampshire nursing home operator could bring a breach of contract action against a state Medicaid agency based on the provider agreement, the state high court ruled November 20, 2008. The New Hampshire Supreme Court reversed a lower court’s decision holding the provider agreement was not a contract and remanded for further proceedings. In the mid-1990s, the nursing home operator, Bel Air Associates (Bel Air), was ordered by the state Medicaid agency, the New Hampshire Department of Health and Human Services (DHHS), to close, for safety reasons, one of the buildings in the nursing home it operated. Bel Air then received approval from the state to build a nursing home addition to replace the closed building. Construction of the addition ultimately cost Bel Air approximately $2 million. At the time Bel Air undertook its new construction, the Medicaid rate-setting process allowed nursing homes to recover most capital costs. In 2002, however, DHHS instituted a new cap on capital cost recoveries based on a budget neutrality factor that limited recoveries to 85% of allowable capital cost expenses. In 2003, Bel Air sued DHHS, challenging the use of the budget neutrality factor and the new cap. Subsequently, in a 2006 decision, the state high court found the capital cost cap and the budget neutrality factor to be rules adopted in violation of the New Hampshire Administrative Procedure Act (NHAPA), and therefore not valid against Bel Air. Bel Air then brought a second lawsuit against DHHS, alleging breach of contract based on its Medicaid provider agreement with the agency and seeking to recover what it would have been paid under the preexisting reimbursement rules. DHHS moved for summary judgment, arguing Bel Air’s claims were barred by res judicata, the statute of limitations, and the doctrine of sovereign immunity. In addition, DHHS asserted that the Medicaid provider agreement at issue was not a contract, and if it were found to be a contract, the agency had not breached it. Bel Air countered that the provider agreement was a contract and DHHS breached its implied terms by failing to adopt the capital cost cap and budget neutrality factor in accordance with NHAPA. A trial court granted summary judgment in favor of the state, ruling the Medicaid provider agreement at issue could not provide the basis for a breach of contract claim because the agreement was not a contract. The trial court reasoned that the agreement was limited to establishing Bel Air’s eligibility to receive payment from DHHS and did not establish an express contractual right to reimbursement. In reversing that decision, the state high court agreed with Bel Air that the provider agreement contained “all of the indicia of a contract,” i.e., offer, acceptance, consideration and a meeting of the minds. 194 “We hold that it is reasonably clear that pursuant to the . . . provider agreement, Bel Air and DHHS agreed that Bel Air would provide nursing home services to Medicaid-eligible individuals in exchange for reimbursement by DHHS” as required under the then existing provisions of Title XIX of the Social Security Act, which were “incorporated by reference in the agreement,” the high court said. Remanding the case for further proceedings, the high court did not address the state’s argument that the trial court was correct in granting summary judgment in DHHS’ favor on the grounds of res judicata or the expiration of the applicable statute of limitations. “The trial court may consider these issues on remand,” the high court said. Bel Air Assocs. v. New Hampshire Dep’t of Health and Human Servs., No. 2008-51 (N.H. Nov. 20, 2008). North Carolina Supreme Court Says State’s Framework For Recovering Medical Expenses From Tort Settlements Consistent With Federal Medicaid Law North Carolina’s statutory framework for recovering medical expenses from a Medicaid recipient’s tort settlement is consistent with federal law as interpreted by the U.S. Supreme Court’s decision in Arkansas Dep’t of HHS v. Ahlborn, 547 U.S. 268 (2006), the state’s highest court ruled December 12, 2008. According to the high court, Ahlborn did not mandate a judicial determination of the portion of a settlement from which the state could be reimbursed for prior medical expenditures. Instead, the Supreme Court left the door open for states to structure a reasonable statutory framework governing Medicaid subrogation claims. Here, the North Carolina legislature limited the state's Medicaid subrogation rights to one-third of the settlement “thus prevent[ing] excessive depletion of a plaintiff’s recovery,” the state high court observed. Katelyn Andrews, who was injured during her birth, sued her doctors and the hospital where she was delivered for medical malpractice. Katelyn and her parents settled with defendants and a trustee was appointed for the settlement account. Because Katelyn is a Medicaid recipient, North Carolina's Division of Medical Assistance (DMA) moved for reimbursement from the settlement account of monies it had paid for her care. The trial court granted the motion and the trustee appealed. Citing Ahlborn, the trustee argued the DMA was only entitled to the settlement funds that Katelyn received as compensation for medical expenses. In Ahlborn, the Court held a state’s ability to recover its Medicaid lien was limited to the pro-rata portion of the settlement representing compensation for past medical expenses only, not the entire settlement. The appeals court in its decision noted the state supreme court addressed the issue in Ezell v. N.C. Dep’t of Health & Human Servs., 631 S.E.2d 131 (2006), which held the DMA was subrogated to the entire amount of the settlement, regardless of whether the funds were for pain and suffering or medical expenses. 195 The appeals court said Ezell was controlling as it was decided after the Ahlborn case and Ahlborn was interpreting an Arkansas statute, not one from North Carolina. The North Carolina Supreme Court affirmed the rulings below. According to the high court, the Ahlborn holding was limited by the parties’ stipulations regarding the allocation of damages in the tort recovery and “did not require a specific method for determining the portion of a settlement that represents the recovery of medical expenses.” In contrast to Arkansas, the state at issue in Ahlborn, “North Carolina employs an alternative statutory procedure that we believe is permitted” under the Supreme Court precedent. Specifically, North Carolina law defines “the portion of the settlement that represents payment for medical expenses” as the lesser of the state’s past medical expenditures or one-third of the plaintiff’s total recovery. This one-third limitation, the high court reasoned, “comports with Ahlborn by providing a reasonable method for determining the State’s medical reimbursements, which it is required to seek in accordance with federal Medicaid law.” A dissenting opinion argued Ahlborn was binding and under that case, the North Carolina statutory framework, without further determination of how the settlement proceeds were allocated among the different types of damages plaintiff alleged, would be contrary to federal law. Andrews v. Haygood, No. 57A07-02 (N.C. Dec. 12, 2008). Fifth Circuit Holds Medicaid “Reasonable Promptness Provision” Applies To Payment, Not Provision Of Services The Fifth Circuit rejected a lawsuit arguing the Texas Medicaid program violated the Medicaid Act and the Supremacy Clause because it failed to ensure recipients received reasonably prompt medical services on par with the general population. Affirming a lower court’s dismissal of the action, the appeals court held the “Reasonable Promptness Provision,” 42 U.S.C. § 1396a(a)(8), applies only to payment for medical services received, not the provision of actual medical services. The action, brought pursuant to 42 U.S.C. § 1983 by Equal Access for El Paso Inc. on behalf of Medicaid recipients and medical service providers, alleged the Texas Medicaid program, as administered by the Texas Health and Human Services Commissioner, “deprived Medicaid recipients of their right to ‘medical assistance' . . . with reasonable promptness,” as guaranteed by Section 1396a(a)(8). But the Fifth Circuit found unavailing Equal Access’ argument that Section 1396a(a)(8) guarantees prompt medical care and services to Medicaid recipients. Instead, the appeals court said, “medical assistance” is used throughout the Medicaid Act to mean “payment” for various medical services. The Fifth Circuit cited decisions by the Sixth, Seventh, and Tenth Circuits in support of its conclusion. 196 Equal Access argued that construing “medical assistance” to refer to payments for medical services would render the language of the statute nonsensical. The Reasonable Promptness Provision states that “medical assistance . . . shall be furnished with reasonable promptness to all eligible individuals.” According to Equal Access “eligible individuals” can only refer to Medicaid recipients, not medical providers; thus, the provision, under the appeals court’s reading, would contemplate financial assistance being provided to Medicaid recipients. Texas law, however, prohibits Medicaid beneficiaries from receiving payment for medical services they obtain. Rejecting this argument, the appeals court noted the Medicaid Act does permit individual Medicaid recipients to receive payment for medical services, at the option of the state. “Thus, notwithstanding Texas’s prohibition on direct payments to Medicaid beneficiaries, construing 'medical assistance' to mean 'payments for financial services' does not give the Medicaid Act a nonsensical meaning,” the appeals court reasoned. The appeals court also rejected Equal Access’ argument that the Texas Medicaid program violated the Supremacy Clause. Equal Access for El Paso Inc. v. Hawkins, No. 08-50144 (5th Cir. Mar. 12, 2009). Regulatory Developments CMS Issues Final Rule Revising Definition Of “Multiple Source Drug” In Medicaid Rule The Centers for Medicare and Medicaid Services (CMS) issued October 7, 2008 a final rule (73 Fed. Reg. 58491) revising the definition of “multiple source drug” for Medicaid purposes to conform with statutory language and address concerns raised in a federal lawsuit brought by the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA). Under a July 2007 final Medicaid “drug rebate rule” (72 Fed. Reg. 39142), CMS defined a “multiple source drug” as one sold or marketed in the United States, as opposed to the state. The NACDS and NCPA lawsuit, which challenges several aspects of the final rule, raised concerns that all drug products are not generally available in every state. Accordingly, CMS said the revised definition indicates that 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. In November 2007, NACDS and NCPA filed a lawsuit to block the drug rebate rule, arguing its impact on Medicaid reimbursements of generic drugs would spell dire consequences for community pharmacies. According to the lawsuit, filed in the U.S. District Court for the District of Columbia, the regulations, which were slated to go into effect in January 2008, would reduce reimbursement rates below the level permitted by law. 197 The changes affect Medicaid payments to pharmacies for generic drugs and are expected to save $8.4 billion in state and federal funds over five years, CMS has said. On December 14, 2007, the district court judge in the case issued a preliminary junction halting implementation of the rule 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-02017 (RCL). CMS said the final rule, to the extent that it may affect Medicaid reimbursement rates for retail pharmacies, is subject to the district court’s injunction. NACDS and NCPA stressed that the revised definition does not address their two other major concerns about the Medicaid drug rebate rule, which involves the calculation and reporting of average manufacturer price (AMP) and best price and amends existing regulations on the calculation of the federal upper payment limits (FULs) for certain covered outpatient drugs. In their lawsuit, the pharmacy groups have argued that the rule does not comply with the Social Security Act’s definition of AMP and that the rule improperly applies FULs on reimbursement to non-equivalent drug products. The groups noted, while not a permanent solution, Congress this summer delayed implementation of the drug rebate rule until October 2009. “As we are hopeful for continued success in court, we will continue to encourage Congress to work with pharmacy to find more appropriate models for pharmacy reimbursement for generics under Medicaid,” they said. Subsequently, on February 20, 2009, the U.S. District Court for the District of Columbia issued an order delaying further proceedings challenging the ruling. The pharmacy groups applauded the ruling, saying the delay was jointly requested by the Department of Health and Human Services in light of the change in administration and “given that the Centers for Medicare and Medicaid Services (CMS) must resolve any regulatory issues related to yet another revised definition of ‘multiple source drug,’ and is not prepared to proceed with the case at this time.” The court agreed to postpone a scheduled February 25, 2009 hearing. The groups said no major new developments are expected in the case until after May 15, 2009. “This will be CMS’ fourth attempt to define ‘multiple source drug.' The prior attempt was rendered invalid because, in reviewing CMS documents in preparation for the case, NACDS and NCPA discovered that CMS failed to take into consideration an NACDS-NCPA economic report when developing that definition,” the groups said in their statement. CMS Issues Final DSH Auditing And Reporting Rule The Centers for Medicare and Medicaid Services (CMS) issued a final rule in the December 19, 2008 Federal Register (73 Fed. Reg. 77903) establishing new auditing and reporting requirements for Disproportionate Share Hospital (DSH) payments, which are intended to bring transparency to the use of DSH funds. The final rule implements Section 1001(d) of the Medicare Prescription Drug, Improvement, and Modernization Act, under which states were required, beginning in fiscal year 2004, to submit a report to CMS identifying each DSH payment and any 198 payment adjustments made to hospitals during the preceding fiscal year. States also were required to conduct independent audits to certify the extent to which hospitals have reduced the net uncompensated care costs they are claiming to reflect the DSH payments received. The proposed rule, published in the August 26 Federal Register (70 Fed. Reg. 50262), would have required each state receiving a DSH allotment to report the name of the hospital, Medicare and Medicaid provider numbers, type of hospital, type of hospital ownership, Medicaid inpatient and low-income utilization rate, DSH payments, regular Medicaid rate payments, and Medicaid Managed Care Organization payments, among other information. The final rule removes the following reporting requirements: Medicare provider number; Medicaid provider number; type of hospital; type of hospital ownership; transfers; Medicaid eligible and uninsured individuals. The final rule also adds or clarifies several data elements "which are necessary to fulfill the auditing and reporting requirements." In addition, the final rule includes a transition period related to audit findings for Medicaid state plan rate year 2005 through 2010 in response to "many comments regarding the potential immediate adverse fiscal impact of the DSH audit on States." The rule is effective January 19, 2009. Federal Government Approves Rhode Island Medicaid Waiver The federal government has given its stamp of approval to a controversial five-year demonstration that would provide Rhode Island unprecedented flexibility in structuring its Medicaid program, the state’s Governor Donald L. Carcieri announced December 19, 2008. As part of the deal, Rhode Island has agreed to limit its allotment of Medicaid funds from the federal government to $12.1 billion over the span of the demonstration. The demonstration, called the “Rhode Island Global Compact Waiver,” will allow the state to redesign its Medicaid program “to provide cost-effective services that better meet the changing needs of the individuals it serves,” according to the Governor’s press release. “This agreement will put us on a sustainable path for growth in Medicaid while also maintaining services for those most in need,” Carcieri said. The major features of the waiver call for reforming the way long term care is provided and implementing a prevention-based care system for all beneficiaries. The reforms under the compact are expected to save $358 million over the five-year period from 2009 through 2013. Under the waiver, the state will have added flexibility to bypass federal regulations regarding service design and delivery. Critics of the agreement are concerned the waiver could mean a cutback on services and limit beneficiary protections. 199 Administration Delays CMS Rules Giving States More Flexibility In Medicaid Program Design The Obama Administration announced the delay of two rules issued by the Centers for Medicare and Medicaid Services (CMS) at the tail-end of last year aimed at giving states more flexibility in designing their Medicaid benefit packages. In a January 27, 2009 Federal Register notice (74 Fed. Reg. 4888), CMS announced a 60day delay in the effective date of a final rule issued on November 25, 2008 that would have allowed states to impose premium and cost-sharing requirements on certain Medicaid recipients. The new effective date of the final rule is now March 27, 2009. According to the notice, the delay is necessary so agency officials can further review and consider new regulations. CMS also is requesting additional public comments on the rule by February 26, 2009. In a February 2 Federal Register notice (74 Fed. Reg. 5808), CMS also delayed for 60 days a related regulation issued December 3, 2008 that would allow states to offer certain Medicaid recipients healthcare that has the same value as plans that are being offered to other populations in the state through alternative benefit packages called “benchmark plans.” The new effective date of that final rule is April 3, 2009. Both rules implemented provisions of the Deficit Reduction Act of 2005. CMS subsequently decided to further delay the rules until December 31, 2009. Funding States’ Bleak Fiscal Outlook Means Deep Cuts To Safety Net Programs, Report Says With at least 43 states projecting budget shortfalls for 2009 or 2010, many states have cut or are planning cuts to Medicaid and the State Children’s Health Insurance Program, according to a report released December 11 by consumer group Families USA. According to the report, A Painful Recession: States Cut Health Safety Net Programs, more than one million people could lose health coverage and many more will see benefits reduced and out-of-pocket costs go up in the coming months. Families USA reported that eight states have enacted or are considering cuts to reduce eligibility or limit enrollment in Medicaid; 12 states and the District of Columbia have enacted or are considering reducing Medicaid benefits; five states have enacted or are considering increasing Medicaid recipient’s out-of-pocket costs; and 13 states and the District of Columbia have reduced or are considering reductions in payments to Medicaid providers. 200 The report urged that financial help for states in a federal economic recovery package would help them preserve the Medicaid and SCHIP healthcare safety net. “During economic downturns, the health care safety net is supposed to provide protection for families so they don’t lose needed health coverage,” said Ron Pollack, Executive Director of Families USA. “Unfortunately, for too many people in too many states, the health care safety net is fraying and allowing more and more families to fall through.” Stimulus Bill Bumps Federal Matching Rate For State Medicaid Programs To help state Medicaid programs weather the economic downturn, Congress enacted as part of stimulus legislation, the American Recovery and Reinvestment Act (ARRA), an across-the-board 6.2 percentage point bump in the federal medical assistance percentage (FMAP). States also are eligible for an additional increase based on their unemployment rates. The Department of Health and Human Services (HHS) published a notice in the April 21, 2009 Federal Register (74 Fed. Reg. 18235) setting forth the revised FMAPs)for the first two quarters of Fiscal Year (FY) 2009 pursuant to ARRA. ARRA set aside $87 billion in federal funds for state Medicaid programs through increases in FMAP. The recession adjustment period as defined in the statute is from October 1, 2008 through December 31, 2010. The notice sets forth the revised FMAPs HHS will use to calculate the amount of federal matching for state Medicaid programs from October 1, 2008 through March 31, 2009. Medical Malpractice Georgia High Court Finds Negligent Misdiagnosis Lawsuit Not Time-Barred Under “New Injury” Exception The Georgia Supreme Court ruled June 2, 2008 that the “new injury” exception to the two-year statute of limitations applied to a plaintiff’s claim that his metastatic colon cancer resulted from his physician’s misdiagnosis of rectal bleeding as hemorrhoids rather than pre-malignant polyps. The high court affirmed the determinations below that the statute of limitations had not yet run on the plaintiff's claim, even though more than four years had elapsed since the alleged misdiagnosed of his medical condition. In January 2000, plaintiff Wilbert Barnes visited his physician, Dr. Chuckwudi Bato Amu, and complained of rectal bleeding. Amu diagnosed a hemorrhoid condition and prescribed medication. Within two weeks, the bleeding stopped, and Barnes never returned to Amu for any other treatment. In 2002, Barnes began to see another physician, Dr. Bruce Ramsdell as his primary care physician. Although Barnes had several appointments with Ramsdell over the next year, none of these appointment revealed any colon problems. In Spring 2004, Barnes suffered a reoccurrence of rectal bleedings, as well as abdominal cramping and severe nausea. He consulted Ramsdell in June 2004, who referred him to a gastroenterologist after blood work showed some abnormalities. The gastroenterologist 201 performed a colonscopy that revealed a large tumor in Barnes’s colon. The tumor was later found to be metastatic, with spread to the lymph nodes and liver. In December 2004, Barnes sued Amu and his employer, Atlanta Medical Care, PC (collectively, defendants), for medical malpractice, alleging a claim for negligent misdiagnosis. According to the complaint, Amu should have performed a more thorough exam to rule out the possibility that colon polyps were the cause of Barnes’s rectal bleeding. Defendants raised the two-year statute of limitations under Ga. Code Ann. § 9-3-71(a) as an affirmative defense. In addition, at trial, defendants filed a motion in limine, contending the statute of limitations began to run from the date of the alleged misdiagnosis in January 2000, and therefore, had expired prior to the initiation of the lawsuit. In denying that motion, the trial court disagreed that the statute of limitations commenced on the date of the alleged misdiagnosis, instead holding the statute of limitations commenced when the symptoms of metastatic colon cancer first manifested themselves to Barnes in 2004. The appeals court affirmed, agreeing that the case fell within the “new injury” exception. Under that exception, the appeals court explained, when a misdiagnosis results in subsequent injury that is difficult or impossible to date precisely, the statute of limitation runs from the date symptoms attributable to the new injury are manifest to the plaintiff. Barnes appealed. While the “new injury” exception applies only “in the most extreme circumstances,” the state high court also agreed that this case fell within the exception. Under Georgia appellate court precedent, for the “new injury” exception to apply, “not only must there be evidence that the [patient] developed a new injury, but [he or she] also must remain asymptomatic for a period of time following the misdiagnosis,” the high court said. Quoting from one appellate court decision, Whitaker v. Zirkle, 374 S.E.2d 106 (Ga. Ct. App. 1988), the high court also noted that “‘a patient suffers a ‘new injury’ if he or she has a relatively benign and treatable precursor medical condition which, as a proximate result of being misdiagnosed, is left untreated and subsequently develops into a much more serious and debilitating condition.’” “The evidence here shows that Mr. Barnes did experience such a ‘new injury,’” the high court continued, “when, as a consequence of the misdiagnosis, he did not seek treatment for the pre-malignant polyp or very early malignancy from which he suffered in January 2000 and subsequently developed metastatic colon cancer which spread to his lymph nodes and liver.” Moreover, “the evidence . . . shows that, after being misdiagnosed, . . . Barnes was asymptomatic as to the medical complaints which led him to visit Dr. Amu,” the high court said. Therefore, in this case, “the trigger for the commencement of the statute of limitations is the date that the ‘new injury,’ which is determined to be an occurrence of symptoms following an asymptomatic period,” the high court explained. 202 “Barnes experienced the symptoms of his ‘new injury’ in June 2004,” the high court said, and the “two-year statute of limitations began to run at that time, even though he did not discover until some time later that his metastatic colon cancer was attributable to Dr. Amu’s misdiagnosis.” Amu v. Barnes, No. S07G1818 (Ga. June 2, 2008). Michigan Supreme Court Says Pharmacy Cannot Be Liable For Medical Malpractice, Finds Statute Of Limitations For Ordinary Negligence Applies The Michigan Supreme Court found June11, 2008 that an action against a pharmacy and one of its non-pharmacist employees concerning the filling of a prescription was one for ordinary negligence and therefore was not time-barred under the shorter, two-year statute of limitations applicable to medical malpractice. Affirming the lower courts’ denial of summary judgment on statute of limitations grounds, the high court held a pharmacy is not a licensed health facility or agency nor a licensed healthcare professional and therefore cannot be directly liable for medical malpractice. The case arose after non-pharmacist Valerie Randall refilled Judith Kuznar’s prescription for Mirapex, used to treat restless leg syndrome, at eight times the prescribed dose. Randall was an employee of Crown Pharmacy and was not acting under the supervision of a pharmacist, according to the opinion. Judith had an adverse reaction to the excessive dose and, along with her husband Joseph Kuznar, sued Randall and Crown Pharmacy (collectively, defendants) for negligence. The Kuznars also asserted a claim of vicarious liability against Crown Pharmacy. Among other claims, the Kuznars alleged Crown Pharmacy breached its duty to them by allowing persons other than a licensed pharmacist to refill prescriptions and failing to have a licensed pharmacist available onsite as required by statute. Defendants moved for summary judgment, arguing Randall was employed at a licensed health facility and therefore the action was time-barred under the two-year statute of limitations for medical malpractice. The trial court denied the motion and the appeals court affirmed. Also affirming, the Michigan Supreme Court held a pharmacy technician and pharmacy are not covered by the state’s medical malpractice statute, Mich. Comp. Laws. 600.5838a(1). Specifically, the high court noted that a “licensed health facility or agency,” the term used in the medical malpractice statute, is defined in a different article of the public health code than the article applicable to pharmacy licensing. Thus, a pharmacy is not a “licensed health facility or agency” subject to medical malpractice claims. The high court also declined to hold that a pharmacy is a licensed healthcare professional. State standards make clear that a license to operate a pharmacy can be issued to a nonpharmacist, although a pharmacy cannot open for business without a licensed pharmacist physically onsite. 203 “Because a pharmacy may be operated by a nonpharmacist, a pharmacy and a pharmacist are not the same thing. Whereas a pharmacist is a licensed health care professional, a pharmacy is not,” the high court reasoned. Crown Pharmacy itself is not a licensed healthcare professional; thus, its direct liability for statutory violations lies in ordinary negligence and is subject to the three-year statute of limitations. Randall likewise is not a licensed pharmacist and therefore cannot be liable in medical malpractice, rather she can be liable for ordinary negligence and Crown Pharmacy can be vicariously liable for the ordinary negligence of its employee. Kuznar v. Raksha Corp., No. 132203 (Mich. June 11, 2008). Massachusetts High Court Declines To Apply Ruling Recognizing Same-Sex Marriages Retroactively In Loss Of Consortium Case The Massachusetts Supreme Judicial Court denied July 10, 2008 recovery to a same-sex couple seeking loss of consortium when the alleged injury occurred prior to the court's ruling granting same-sex couples the right to marry. See Goodridge v. Department of Health, 798 N.E.2d 941 (Mass. 2003). Plaintiffs Cynthia Kalish and Michelle Charron started dating in March 1990. Although they jointly purchased a house, adopted a child, shared all household expenses, were on the same family health insurance policy, and executed documents granting each other certain legal authority, they were not legally married. Following the Goodridge decision, Kalish and Charron were married on May 20, 2004. Prior to their marriage, in July 2003, Charron was diagnosed with breast cancer. On May 21, 2004, in connection with a medical malpractice action, Kalish commenced a civil action for loss of consortium. Defendants in the medical malpractice action moved for a partial summary judgment on Kalish's loss of consortium claim, arguing the couple was not married at the time of the alleged injury. A Massachusetts Superior Court judge granted defendants summary judgment. On its own initiative, the high court transferred the case from the appeals court and affirmed the grant of summary judgment to defendants. The high court noted that under established case law an individual seeking loss of consortium must have a legal relationship with the injured party, and for an adult couple this relationship is established through marriage. In Goodridge, the high court found the state's marriage licensing statute unconstitutional because it limited the many "protections, benefits, and obligations" that flow from civil marriage, including the right to claim loss of consortium, to opposite sex couples. Kalish argued that because the licensing statute violated the Massachusetts Constitution, all the laws that required opposite-sex marriage were likewise unconstitutional. But the high court rejected this argument. "As Goodridge recognized, where a change in law is so radical that the consequences of that change realistically require time for the Legislature to act, a court may make the remedy for unconstitutional laws prospective only." 204 According to the court, Goodridge allowed same-sex couples the right to obtain marriage licenses after May 17, 2004, but it did not stand for the proposition that same-sex committed relationships would be considered married prior to that date. The high court also was concerned that allowing Kalish to recover for loss of consortium on proof she would have been married but for the ban on same-sex marriage could open the door to countless more cases. Charron v. Amaral, No. SJC-09942, (Mass. July 10, 2008). Texas Supreme Court Finds Hospital That Outsourced Echocardiogram Services Without Guaranteed Response Time Was Grossly Negligent A divided Texas Supreme Court affirmed August 29, 2008 a jury verdict finding a hospital grossly negligent in a medical malpractice action following the death of a patient whose echocardiogram (echo) was not competed until three hours after his physician ordered it "now." One of the key factors the high court relied on in reaching its decision was that the hospital had outsourced the performance of echo services to a third-party vendor but declined to exercise an option to guarantee an expedited response time, despite apparent knowledge that this could be critical. Bob Hogue was sent to the emergency room (ER) of Columbia Medical Center of Las Colinas (Columbia Medical) in severe respiratory distress and with a preliminary diagnosis of pneumonia. Hogue did not tell ER physicians that he was previously diagnosed with a heart murmur. While Hogue was experiencing some signs of cardiac distress, an electrocardiogram and blood tests came back negative. Hogue’s condition continued to falter and he was transferred to the hospital’s intensive care unit (ICU). After conferring with a cardiologist, the physician treating Hogue ordered an echo of his heart “now,” which the physician testified was equivalent to “stat.” The echo was not completed, however, until three hours after it was ordered. During the echo, a technician immediately identified a severe leakage of Hogue’s mitral valve. Hogue was transferred to another hospital for emergency surgery to repair the valve but died before the procedure could take place. Hogue’s wife and two sons (plaintiffs) sued Columbia Medical. A jury found the hospital grossly negligent, awarding over $9 million in actual damages and $21 million in punitive damages. The jury also found Hogue was not contributorily negligent for failing to tell treating physicians about his heart murmur. The actual and punitive damages awards were reduced to roughly $1.47 million and $3.36 million under applicable state law damages caps. On the issue of Hogue’s contributory negligence, the high court found no evidence that the hospital would have done anything differently if it had known of his heart murmur, citing the testimony of the treating physicians who said the information would not have changed their course of treatment. 205 The high court also affirmed the jury’s finding that Columbia Medical’s conduct deviated so far from the standard of care as to create an extreme risk and the hospital was subjectively aware of, but consciously indifferent to, this risk. The high court based its conclusion on the evidence that the hospital elected to outsource the echo services without a guaranteed response time while providing emergency services, failed to communicate this limitation to its medical staff so they could consider other options to treat critical patients, and delayed obtaining the echo despite the serious risk to Hogue’s health. The high court also noted testimony that the standard of care for stat echo response time is roughly 30 minutes and that Hogue would have had a 90% chance of survival if he had been diagnosed sooner. “We do not hold that Texas law requires all hospitals to provide all services to all patients,” the high court stressed. In this case, the high court continued, the hospital knew of the obvious necessity for potentially life-saving stat echo capabilities in connection with emergency medical services it decided to provide, but did not act accordingly. The high court did reverse a separate award of inheritance damages to plaintiffs, finding they failed to present sufficient evidence that Mrs. Hogue would have outlived her husband or as to Mr. Hogue’s life expectancy had he survived. A dissenting opinion disagreed with the majority’s conclusion about gross negligence. A finding of gross negligence requires clear and convincing evidence and also requires a higher level of review, the dissent noted. According to the dissent, although the majority articulated the correct standard, it failed to apply it in evaluating the evidence. Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, No. 04-575 (Tex. Aug. 29, 2008). Seventh Circuit Finds Malpractice Insurance Carrier Owes No Duty To Third-Party To Settle Lawsuit The Seventh Circuit held October 31, 2008 that a medical malpractice insurer only owes a duty to settle a lawsuit in good faith to its insured (a physician in this case) and not to the hospital policyholder. Iowa Physicians’ Clinic Medical Foundation d/b/a Iowa Health Physicians (IHP) runs a medical clinic where Dr. Randall Mullin works as a family doctor. While working at the clinic, Mullin treated Dennis Goetz, who needed antimalarial therapy in anticipation of his trip to Africa. However, the treatment apparently did not work as Goetz contracted malaria during his trip. Mullin then failed to timely diagnose Goetz’s condition upon his return. Goetz eventually died, and his wife sued Mullin for his negligent care and IHP on a theory of vicarious liability. 206 Mullin had a medical malpractice insurance policy issued by the Physicians Insurance Company of Wisconsin (PIC), which covered his liability up to $1 million and provided for the defense of claims made against him. IHP, though it paid insurance premiums on behalf of Mullin, was not covered under the policy. Accordingly, IHP retained its own attorney in the lawsuit. Because the facts of the case were not in their favor, both IHP and Mullin urged PIC to settle the case. PIC did not, however, settle the case and instead proceeded to trial where a jury awarded $3.5 million in damages. IHP and Mullin then sued PIC in state court claiming that PIC breached a duty owed to both of them to settle the claim in good faith. PIC removed the case to federal court and filed a motion for judgment on the pleadings. The judge found that PIC had no duty to IHP but held that Mullin’s claim could proceed. IHP appealed. While acknowledging that an insurer has a duty to settle in good faith on behalf of its insured, the appeals court refused to find that PIC owed IHP, the noninsured policyholder, a duty to settle in good faith. Because the Illinois courts have yet to decide the question presented in the appeal, the appeals court noted that it was tasked with predicting “whether the Illinois high court would stretch the duty to settle to cover the case before us.” The appeals court found that IHP’s reliance on its contractual relationship with PIC as a policyholder and customer was misplaced. “The duty to settle is designed to protect the bargain embodied in an insurance contract, not simply honor the relationship between contracting parties in general,” the appeals court found. In support of its finding, the appeals court noted IHP could have paid higher premiums to receive coverage from PIC but chose not to. “We doubt that the Illinois high court would extend the duty to settle to give IHP more than it bargained for,” the appeals court said. The appeals court also noted that IHP could have settled on its own. “If IHP is bristling because it’s on the hook for wrongs it didn’t commit, then its complaint is really against Dr. Mullin, not PIC, and it could, depending on the exact nature of their relationship, possibly pursue contribution or indemnification from Dr. Mullin to mitigate its injury.” Iowa Physicians’ Clinic Med. Found. v. Physicians Ins. Co. of Wis., No. 08-1297 (7th Cir. Oct. 31, 2008). Virginia Supreme Court Holds Parents Not Entitled To Recover For Wrongful Birth The Virginia Supreme Court reversed October 31, 2008 a judgment in favor of a mother in a wrongful birth action against her obstetricians. The appeals court found the evidence 207 was insufficient as a matter of law to prove to a reasonable degree of medical probability that had she undergone certain prenatal testing known as chorionic villus sampling (CVS), the result would have been positive for Down syndrome. The high court also affirmed a ruling that the father could not mount a separate claim for wrongful birth because he did not have a physician-patient relationship with the obstetricians nor did they engage in an affirmative act amounting to the rendering of healthcare. Julie Granata and Joseph Granata, the parents of twin daughters afflicted with Down syndrome, brought separate claims against Jan Paul Fruiterman, M.D., Eleni SolosKountouris, M.D., and their professional corporation (collectively, defendants) for wrongful birth. According to the Granatas, defendants breached the standard of care by failing to provide Julie with information about first trimester testing known as CVS, which they said would have revealed their twin fetuses were afflicted with Down syndrome. In separate verdicts, the jury found in favor of Julie and awarded damages of $4 million. The jury also found in favor of Joseph and awarded $500,000 in damages. The court reduced the damages award to Julie to $1.6 million per the statutory cap. The court also granted defendants’ motion to strike and dismiss Joseph’s case, concluding he was not a patient as defined by state law. On appeal, the Virginia Supreme Court reversed the lower court’s ruling as to Julie, and affirmed as to Joseph. According to the high court, Julie failed to prove to a reasonable degree of medical probability that, if she had undergone CVS, the result would have shown the chromosomal abnormality indicative of Down syndrome. “None of Julie’s medical expert witnesses opined about what the result of CVS would have been if Julie had undergone the procedure. Moreover, the Granatas acknowledged before the circuit court that no such evidence existed in the record,” the high court said. The high court also refused to draw the inference that the test would have been positive had she undergone CVS because her daughters unquestionably have Down syndrome. The high court noted that whether the result of CVS would have been positive for Down syndrome was a matter requiring expert testimony. The high court went on to affirm the ruling that Joseph could not bring a separate claim because no physician-patient relationship existed between him and defendants. The high court said the existence of a physician-patient relationship is a question of fact and focused on a specific visit where Joseph accompanied Julie to defendants. The high court examined the statutory definition of “patient” and concluded that during the visit in question Joseph did not qualify as such. The appeals court noted that Joseph was excluded from the initial portion of Julie’s appointment when defendants examined her and was only invited into the room to discuss a genetic questionnaire. 208 Moreover, as Julie was the only one who could consent to and undergo CVS, information about the test was not an “act . . . which should have been . . . furnished” to Joseph per the state law definition. The high court concluded that, in the context of pregnancy, a husband may be entitled to receive such information about a fetus’ risk of having genetic abnormalities, but in this case, the facts did not support a finding of a physician-patient relationship. Finally, the high court rejected Joseph’s argument that defendants affirmatively undertook to provide him healthcare, again finding the evidence insufficient as a matter of law. The high court saw no affirmative act by defendants during the appointment at issue that would amount to the rendering of healthcare to Joseph. Fruiterman v. Granata, Nos. 071894 and 071897 (Va. Oct. 31, 2008). West Virginia High Court Adopts Continuous Treatment Doctrine In Certain Malpractice Cases The continuous treatment doctrine should be adopted in certain medical malpractice cases where the date of injury is not identifiable due to the nature of the medical treatment received, the West Virginia Supreme Court of Appeals ruled November 19, 2008. Under the doctrine, as articulated by the high court, when a patient is injured due to negligence that occurred during a continuous course of medical treatment, and due to the continuous nature of the treatment is unable to ascertain the precise date of injury, the statute of limitation for purposes of medical malpractice statutes will begin to run on the last date of treatment. The underlying facts in the case involved malpractice claims brought against Dr. Theodore Jackson, a hand surgeon who performed carpal tunnel surgery on plaintiff Paul Forshey’s left hand in July 1995. After the surgery, Forshey complained during post-operative visits that he was experiencing continuing pain in his left hand. However, during each of multiple office visits that occurred until January 1997, Jackson did not order any x-rays to further explore the cause of the continuing pain. At the end of January, Jackson recommended exploratory surgery, but the planned surgery was subsequently cancelled at Forshey’s request. Forshey then discontinued his office visits with Jackson. It was not until eight years later, in the summer of 2005, that Forshey suffered an unrelated injury to a finger on his left hand and, as a result, received an x-ray that revealed a piece of a knife blade at the site of the carpel tunnel surgery. Forshey indicated that, over this eight-year period, he continued to endure severe pain in his left hand. In April 2006, nearly 11 years after the carpal tunnel surgery, Forshey and his wife (plaintiffs) sued Jackson for medical malpractice. Jackson moved to dismiss based on the statute of limitations requiring lawsuits asserting medical malpractice to be commenced within two years of the date of injury, or within two years of the date when the injury was or should have been discovered, and in no event more than 10 years after the date of the injury. 209 After a state trial court granted Jackson’s motion and dismissed the case, plaintiffs appealed. Among other arguments, plaintiffs urged the high court to adopt the continuous medical treatment doctrine and to apply that doctrine to find their cause of action accrued on January 31, 1997 (the day Forshey terminated his treatment under Jackson), and therefore was timely filed in August 2006. The high court concluded the continuous treatment doctrine should be applied to extend, under West Virginia law, the time allowed for filing a malpractice action when the date of injury was not clearly identifiable due to the continuous nature of the treatment involved. The high court explained that, under the continuous treatment doctrine, the statute of limitations “does not commence running until treatment by the physician or surgeon has terminated, where the treatment is continuing and of such nature as to charge the physician or surgeon with the duty of continuing care and treatment which is essential to recovery until the relationship ceases,” i.e., the last date of treatment. The high court also found, however, that the doctrine was not applicable to plaintiffs’ action. “Mr. Forshey’s injury did not result from a continuing course of treatment that rendered him unable to identify the precise date of his injury,” the high court said. “Rather, the alleged negligence in the instant case occurred on a date certain, the date that Dr. Jackson performed surgery on Mr. Forshey’s hand and allegedly left a scalpel blade in his hand.” The high court therefore affirmed the lower court’s decision granting Jackson’s motion to dismiss the case as untimely. “Because Mr. Forshey’s claim arose on July 6, 1995, the date on which Dr. Jackson performed the carpal tunnel surgery, the circuit court was correct in concluding that, pursuant to . . . W. Va. Code § 55-7B-4, ‘the absolute latest date that this action could have been filed would have been on July 6, 2005, which is [10] years after the date of the . . . alleged injury,” the high court said. The high court also rejected the plaintiffs’ claim that their action was timely because the additional visits Forshey had with Jackson in 1996 and 1997, wherein Jackson failed to order an x-ray of Forshey’s hand, amounted to a continuing tort. Plaintiffs’ complaint did not set out a cause of action for continuing tort therefore the circuit court did not err in failing to consider this theory prior to dismissing the case, the appeals court said. Forshey v. Jackson, No. 33834 (W. Va. Nov. 19, 2008). Maine High Court Rejects Continuing Course Of Treatment Doctrine The Maine Supreme Judicial Court refused December 9, 2008 to adopt the continuous course of treatment doctrine, saying to do so would conflict with the statute of limitations enacted by the legislature. Maetta Dickey was a regular patient of Gerald E. Vermette, D.D.S. In March 2000, a dental hygienist noticed a spot on an x-ray of Dickey’s teeth but did not express any serious concerns. 210 At subsequent routine appointments, the hygienist showed the spot to Dr. Robert E. Clukey, Jr., D.D.S., who said they should “keep an eye on it.” In March 2005, a second xray showed the spot in Dickey’s mouth had grown. Vermette, at this time, reviewed the two x-rays and referred Dickey to an oral surgeon who diagnosed her with oral cancer. Following extensive surgery to remove the tumor and reconstruct her jaw, Dickey and her husband (plaintiffs) sued Vermette on February 23, 2006, alleging medical or professional negligence and loss of consortium. Vermette sought partial summary judgment, arguing any claims based on acts or omissions before February 23, 2003 were time barred under the applicable three-year statute of limitations. See Me. Rev. State. § 2902. Plaintiffs argued the court should apply the continuing course of treatment doctrine to toll the statute of limitations until after Dickey’s relationship with Vermette ended in 2005. The trial court refused, saying the continuing course of treatment doctrine was inconsistent with Section 2902. The court did note that plaintiffs could still bring claims for acts or omissions that occurred after February 23, 2003. But in order to immediately appeal, the Dickeys stipulated that no act or omission occurring after February 23, 2003 was a proximate cause of their injuries. The high court in a 5-2 ruling affirmed the trial court’s decision, agreeing that the continuing course of treatment doctrine was inconsistent with Section 2902. According to the high court, the legislature by declaring in Section 2902 that a cause of action “accrues on the date of the act or omission giving rise to the injury” and carving out a specific exception for foreign objects “effectively declined to adopt the continuing course of treatment doctrine.” To allow the Dickeys to bring their claim for acts or omissions occurring before February 23, 2003 “would be imposing a judicially-created exception that is contrary to the plain meaning of section 2902,” the high court said. The high court also declined to address the Maine Trial Lawyers Association’s argument in an amicus brief to adopt the distinguishable “continuing negligent treatment” doctrine, which provides that the limitations period begins to run on the last act of negligence, as long as that act occurred within three years before the legal action was initiated. Here, plaintiffs stipulated that no act or omission occurring after February 23, 2003 was a proximate cause of their injuries; therefore, any discussion of this doctrine would be irrelevant and premature, the high court said. One dissenting opinion argued the majority’s conclusion sent a “don’t warn, don’t treat” message “that is contrary to good law, good medicine, and good common sense.” Another dissenting opinion said the majority should have reached the issue concerning the application of the continuing negligent treatment doctrine. In the dissent’s view, Section 2902 would not preclude the court from adopting the continuing negligent treatment doctrine since the accrual date would not be not extended beyond the final date on which negligent treatment occurs. Dickey v. Vermette, No. Som-08-143 (Me. Dec. 9, 2008). 211 Pennsylvania Supreme Court Finds Jury Must Decide Whether Medical Malpractice Case Was Time-Barred, But Rejects Broader Interpretation Of Discovery Rule The Pennsylvania Supreme Court reversed February 19, 2009 the grant of summary judgment in favor of a physician who alleged the medical malpractice action against him was time-barred under the two-year statute of limitations. The high court found the question of when the plaintiff had actual or constructive knowledge of her injury or its cause to toll the statute of limitations pursuant to the discovery rule was one that should be left to the jury. At the same time, the high court declined to adopt a more expansive reading of the discovery rule to find the action timely as a matter of law, the conclusion urged by the dissent. Specifically, the high court rejected any requirement of a definitive diagnosis to trigger the start of the limitations period. Plaintiff Mary Elizabeth Wilson filed the medical malpractice action in October 2003 against defendants Samir El-Daief, M.D. and Montgomery Hospital Medical Center, alleging El-Daief lacerated the radial nerve in her wrist during a surgical procedure performed in August 2000. Defendants sought summary judgment based on the two-year statute of limitations. Plaintiff argued the discovery rule tolled the statute of limitations until October 2001 when she learned from another physician about her injury. According to plaintiff, prior to that time, she had sought treatment with El-Daief and another orthopedic surgeon for some 13 months, but neither of them could pinpoint the cause of her pain and other symptoms. The trial court granted defendants summary judgment, noting plaintiff had experienced constant, excruciating pain shortly after the August 2000 surgery, her hand had contracted into a fist, her right elbow bent inward, and her right shoulder drew upward. According to the court, these symptoms, which plaintiff had not experienced following a similar May 2000 surgery, coupled with her acknowledgment in September 2001 that she believed “something was wrong” and had lost confidence in El-Daief, started the clock running on her medical malpractice action. A divided Pennsylvania appeals court affirmed, rejecting the suggestion that a definitive diagnosis was necessary to trigger the running of the limitations period since under Pa. R. Civ. P. 1042.3(a) a plaintiff in a professional liability action must file a certificate of merit (COM) simultaneously with her complaint or 60 days thereafter. The high court reversed the grant of summary judgment in defendants’ favor, saying a question of fact existed on the discovery rule issue given “evidence of potential sources of confusion, in the asserted unwillingness or inability on the part of Dr. El-Daief to recognize injury or cause.” At the same time, the high court went on to emphasize that Pennsylvania’s formulation of the discovery rule was a narrower approach than some other jurisdictions. “While we reiterate that knowledge of ‘injury’ and ‘cause’ does not require a precise medical diagnosis, we decline to hold as a matter of law, that a lay person must be 212 charged with knowledge greater than that which was communicated to her by multiple medical professionals involved in her treatment and diagnosis,” the high court said. Finally, the high court refused to “retool” the discovery rule in light of the procedural COM requirement in Rule 1042.3. The majority argued that the current discovery rule was adequate to ensure injured plaintiffs had their day in court, while at the same time protecting defendants from stale claims. A dissenting/concurring opinion said the majority should have found plaintiff’s action timely as a matter of law. According to the dissent, the COM requirement coupled with the narrow interpretation of the discovery rule placed plaintiffs “in the precarious position of being constrained to file a lawsuit before they know whether their resulting symptoms are linked to a physician’s malpractice.” Plaintiffs must supply a timely COM from a licensed professional indicating a defendant’s conduct caused their harm to support a medical malpractice action. But, under the current state of Pennsylvania jurisprudence, the statute of limitations commences in many cases before the plaintiff, despite the exercise of due diligence, is able to obtain such a professional opinion. “To avert this fundamental unfairness, we should construe the discovery rule so as to toll the statute of limitations until the plaintiff obtains, or with the exercise of due diligence should have obtained, medical evidence sufficient to enable the plaintiff to link her injury to the acts of the defendant,” the dissent argued. Wilson v. El-Daief, No. 39 MAP 2008 (Pa. Feb. 19, 2009). Texas High Court Says Exception To Liability Cap Applies Only To Negligent Insurers, Not To Physicians A divided Texas Supreme Court found March 6, 2009 that an exception to the state’s malpractice damages cap that allows further recovery when a liability insurer negligently fails to settle claims, applies only to insurers and does not apply to physicians. The high court explained that, under the Medical Liability and Insurance Improvement Act of 1977 (Act), one provision caps the liability of physicians above a fixed amount, and a second provision creates an exception to this cap when the physician’s insurer has negligently failed to settle a claim within the limits of the physician’s liability policy. After Vicki Bramlett, a healthy 36-year-old, died from post-operative complications following a hysterectomy, her survivors sued the physician who performed the operation, Dr. Benny Phillips, and the medical center where the surgery took place, alleging negligence in her care and treatment. The medical center settled the suit but the action against Phillips went to trial. A jury found the doctor and medical center negligent, awarding $11 million in damages and apportioning responsibility, 75% to the doctor and 25% to the medical center. The jury also found the doctor grossly negligent, and awarded $3 million in punitive damages. The trial court denied the doctor’s request to limit his liability under the Act. The appeals court affirmed and Phillips appealed. 213 The common law imposes a duty on liability insurers to settle third-party claims against their insureds when reasonably prudent to do so, the high court noted. Under the Act, if an insurer’s negligent failure to settle results in an excess judgment against the insured, the insurer is liable under the so-called “Stowers Doctrine” for the entire amount of the judgment, including that part exceeding the insured’s policy limits, the high court explained. Such claim is the physician's to bring, the high court said. The high court noted that appeals courts in Texas have disagreed as to whether the Act’s exception to the damages cap applies only to insurers or extends to physicians. After examining the plain meaning of the statute and its legislative history, the high court held that “[w]hen insurance coverage is below the cap, this Stowers-exception claim may be shared by the insured physician and the injured third party because both will potentially have excess claims when the damages finding exceeds the cap. When insurance coverage is above the cap, however, the physician is fully protected, and only the injured third party [i.e., the physician] has incentive to pursue the statutory Stowers exception.” Accordingly, the high court found that in this case, the judgment against the physician may not exceed the statutory damages cap. Thus, the high court concluded that the Stowers exception “expressly applies to insurers only and does not waive the liability cap” generally. A dissenting opinion argued the majority court’s interpretation “subjects insurers to liability beyond that which Stowers would allow.” Phillips v. Bramlett, No. 07-0522 (Tex. Mar. 6, 2009). Medical Records Attorney Who Shares Confidential Medical Records With Third Party May Be Held Liable For Unauthorized Disclosure, Ohio High Court Says A waiver of confidentiality for litigation purposes is limited to the specific case for which medical records are sought, and an attorney who violates such limited waiver by disclosing the records to a third party unconnected to the litigation may be held liable for these actions, the Ohio Supreme Court ruled July 9, 2008 in a 5-2 opinion. In reaching this conclusion, the majority of the Ohio high court ruled in favor of plaintiff Kenneth Hageman in his action against his ex-wife’s attorney, Barbara Belovich, alleging she improperly disclosed his psychiatric treatment records. The high court majority affirmed an appellate court ruling reversing the trial court’s decision to grant summary judgment in favor of the attorney, and remanded the case for further proceedings. The underlying case involves Hageman’s psychiatric treatment for bipolar disorder with Dr. Thomas Thysseril, which began in January 2003 and ended seven months later. During this time, Hageman admitted having homicidal thoughts about his wife. 214 Also during this treatment period, Hageman’s wife filed for divorce, retaining Belovich as her attorney. Hageman filed a counterclaim, in which he sought legal custody of the couple’s minor child. In addition, while Hageman was undergoing treatment, he allegedly assaulted his wife at their home, and criminal charges were brought against him. Under a civil domestic violence protection order, Hageman’s contact and visitation rights with his child were suspended pending a hearing. In preparation for that hearing, Belovich subpoenaed Thysseril, seeking production of Hageman’s medical records. Belovich concluded that, under Ohio law, Hageman had waived his physician-patient privilege to those records by filing his counterclaim for custody in the divorce action. In response to the subpoena, Thysseril faxed Hageman’s records to Belovich, even though Hageman never signed a release for this information. On the date of the hearing, Belovich met with the prosecutor in the criminal case against Hageman, and gave him a copy of Hageman’s psychiatric treatment records. Hageman ultimately entered into a separation agreement with his wife that was incorporated into a divorce decree entered by the trial court, and his records were never admitted into evidence in either the divorce case or the criminal matter (for which he was subsequently acquitted). Hageman then sued Belovich, along with other defendants (including his ex-wife, Thysseril, and Thysseril’s employer), on grounds of improper disclosure of his medical records. The trial court granted summary judgment to all of the defendants. The appeal court affirmed the trial court’s grant of summary judgment as to all defendants except Belovich, finding she had “overstepped her bounds” when she shared information regarding Hageman’s psychiatric condition with the prosecutor in Hageman’s criminal case. A majority of the Ohio Supreme Court agreed, finding a waiver of medical confidentiality for litigation purposes is limited to the specific case for which the records are sought. The majority opinion also found that an attorney may be held liable for violating this limited waiver by disclosing the records to a third party without authorization. In this case, Hageman waived his medical privilege for the purposes of determining child custody as part of divorce proceedings, the high court majority concluded. “Whatever discomfort arose form this disclosure of . . . confidential information was tempered by the possibility of success on his custody claim,” the majority opinion said. “However, there is neither a legal justification for nor a practical benefit to the proposition that a waiver for a specific, limited purpose is a waiver for another purpose.” The high court majority also concluded that Belovich’s actions in giving the psychological records she obtained in the divorce case to the prosecutor in the criminal case violated Hageman’s rights to keep that information confidential. “Allowing attorneys with such information obtained through discovery to treat the information as public would violate the policy of maintaining the confidentiality of individual medical records,” the majority opinion said. Moreover, “[c]reating an expansive 215 waiver would be inconsistent with the generally recognized confidentiality provisions in Ohio and federal law.” A dissenting opinion criticized the majority’s recognition of a new tort creating liability on the part of opposing counsel for using medical records received pursuant to a properly issued subpoena when a patient waived the physician-patient privilege. Under the facts of the case, “the attorney who lawfully came into possession of the records, which were no longer privileged, owned no duty to Hageman,” the dissenting opinion said. “Rather, in the proper representation of her client, who allegedly had been a victim of an assault, [the attorney] provided the information” to the prosecutor in Hageman’s criminal case. “While there may be compelling public policy reasons for imposing a duty to maintain the confidentiality of a patient’s medical records when they are produced by opposing counsel in the course of litigation, ‘the legislative branch is the ultimate arbiter of public policy,’” the dissenting opinion said. “The majority today invades the province of the legislature by judicially creating this new cause of action.” Hageman v. Southwest Gen. Health Ctr., No. 2008-Ohio-3343 (Ohio July 9, 2008). Medicare Program Integrity Contractors CMS Says RACs Recovered Nearly $700 Million In Improper Medicare Payments The recovery audit contractors (RACs) pilot program has returned $693.6 million in improper payments to the Medicare Trust Fund between 2005 and March 2008, according to a July 2008 report issued by the Centers for Medicare and Medicaid Services (CMS). Of the overpayments, 85% were collected from inpatient hospital providers, 6% from inpatient rehabilitation facilities, and 4% from outpatient hospital providers, CMS said. According to CMS, the RACs corrected over $1 billion of improper Medicare payments from 2005 through March 2008, with roughly 96% representing overpayments collected from providers and the remainder amounting to underpayments repaid to providers. The evaluation report also indicated that only 4.6% of the RACs' overpayment determinations were overturned on appeal. CMS said most of the improper payments the RACs identified occurred when healthcare providers failed to comply with Medicare’s coverage or coding rules. The pilot program, mandated by the Medicare Modernization Act of 2003, began in California, Florida, and New York in 2005, and was expanded in July 2007 to Arizona, Massachusetts, and South Carolina. Congress has since made the program permanent and required its expansion nationwide. “A key part of the future recovery audit contractor program will be to contract with a RAC validation contractor to conduct independent third-party reviews of RAC claim determinations,” said CMS Acting Administrator Kerry Weems. 216 Weems added that other changes will include limiting the claim review look-back period to three years, requiring each RAC to hire a medical director, and conducting further outreach to providers. Updated Report On RAC Demo Issued By CMS In a January 2009 update report on the recovery audit contractor (RAC) pilot program, the Centers for Medicare and Medicaid Services (CMS) said that RACs corrected more than $1.03 billion in Medicare improper payments. Approximately 96% of the improper payments were overpayments collected from providers, and 4% were underpayments repaid to providers, the report said. The new report includes updated appeals statistics through August 31, 2008. According to the new data, 22.5% of RAC determinations were appealed, with 7.6% being overturned on appeal. In the July 2008 report, CMS reported that only 4.6% of the RACs' overpayment determinations were overturned on appeal. CMS concluded that it would use the information in the report “to implement more provider education and outreach activities or establish[] new system edits, with the goal of preventing future improper payments.” CMS’ Weems Announces New RACs, Describes Other Program Integrity Strategies At AHLA Fraud Conference The Centers for Medicare and Medicaid Services (CMS) is intensifying and changing its strategies for curbing fraud and abuse in the Medicare program, CMS Acting Administrator Kerry Weems told attendees at the American Health Lawyers Association and Health Care Compliance Association annual Fraud and Compliance Forum in Baltimore, Maryland. During his October 6, 2008 remarks, Weems highlighted recent developments in the national Recovery Audit Contractor (RAC) program and more aggressive and targeted efforts to identify fraudulent activity in the home health agency and durable medical equipment (DME) settings. CMS this week named four permanent RACs for the program’s nationwide launch following a three-year demonstration, Weems said. According to a CMS fact sheet, the RACs, and the initial areas where they will be operating are: • • • • Diversified Collection Services, Inc. of Livermore, California (Region A—Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and New York); CGI Technologies and Solutions, Inc. of Fairfax, Virginia (Region B—Michigan, Indiana, and Minnesota); Connolly Consulting Associates, Inc. of Wilton, Connecticut (Region C, South Carolina, Florida, Colorado, and New Mexico); and HealthDataInsights, Inc. of Las Vegas, Nevada (Region D—Montana, Wyoming, North Dakota, South Dakota, Utah and Arizona). 217 Under the Tax Relief and Health Care Act of 2006, CMS must have a national RAC program in place by January 1, 2010. CMS indicated that additional states will be added to each RAC region in 2009. RACs review Medicare Parts A and B claims and are paid a contingency fee for any improper payments they identify, whether over or underpayments. They must return, however, any fees for payments that are later determined not to be improper. Weems told attendees that the nationwide rollout of the program reflects lessons learned from the demo in California, Florida, New York, Massachusetts, South Carolina, and Arizona, including requiring RACs to have a medical director, coding experts, and credentials of reviewers available on request. CMS said providers would not receive correspondence from the RAC until they had a faceto-face meeting with the agency, set to begin in November. Final Five Medicare Part A And Part B MACs Named By CMS The Centers for Medicare and Medicaid Services (CMS) has selected its last five Medicare Administrative Contractors (MACs) that will process and pay claims for healthcare services under the Medicare fee-for-service program. The new contractors will take over the claims payment that is currently performed by fiscal intermediaries and carriers, CMS said. The agency has now met its goal of awarding all 15 MAC contracts, which will fulfill the requirements of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) contracting reform provisions, CMS said. The final five Part A and B MAC contractors will immediately begin their implementation activities and will assume full responsibility for the claims processing work in their respective jurisdictions no later than March 2010, CMS said. According to CMS, all of the contracts include a base period and four one-year options and will provide the contractors with the opportunity to earn awards based on their ability to meet or exceed performance requirements set by CMS. The five new MACs are: Noridian Administrative Services, LLC; National Government Services; Cahaba Government Benefit Administrators, LLC; Palmetto Government Benefits Administrators, LLC; and Highmark Medicare Services. CMS Says National Rollout Of RAC Program Cleared To Get Underway The Centers for Medicare and Medicaid Services (CMS) said a bid protest that caused the agency to suspend contract work for the Recovery Audit Contractor (RAC) program has now been resolved, clearing the way for the national rollout to get underway. According to an update posted on CMS’ website, the bid protests, filed by two unsuccessful bidders Viant Inc. and PRG Schultz, USA, were settled on February 6, 2009. Under the settlement, Viant Inc. and PRG Schultz will serve as subcontractors to the permanent RACs, which the agency announced in October 2008. CMS said each subcontractor has negotiated different responsibilities in each region, including some claims review. 218 The two bidders filed their protests with the Government Accountability Office in November 2008, resulting in an automatic stay of contract work. CMS said over the next several months it will begin provider outreach sessions involving the RACs. Medical Center Sues Over RAC Overpayment Determination, Says Reopening Untimely Palomar Medical Center filed a complaint March 24, 2009 in California federal district court disputing a Recovery Audit Contractor’s (RAC’s) overpayment determination for medical services provided to a patient in the hospital’s inpatient rehabilitation facility (IRF). According to plaintiff Palomar Medical, a 320-bed acute care hospital in Escondido, California, the RAC, PRG-Schultz International, reopened the cost report at issue more than one year after payment without showing “good cause” as required by Medicare regulations. See 42 C.F.R. § 405.980(b)(1). The services had been paid in July 2005; PRG-Schultz, which participated in Medicare's three-year RAC demonstration, retroactively denied coverage of care in July 2007. Palomar Medical appealed the overpayment determination, amounting to $7,992.92, unsuccessfully to a Medicare fiscal intermediary and a qualified independent contractor, and then to an administrative law judge (ALJ), who found the rehabilitation services at issue should have been provided at a lower level of care than plaintiff’s IRF but agreed the RAC had not timely reopened the claim. Under Section 405.980(b)(1), the Secretary may reopen a Medicare claim more than one year after payment only on a showing of “good cause” based on “new and material evidence that was not available or known at the time of the determination” or that an obvious facial error was made at the time of payment. The Department of Health and Human Services (HHS) Secretary, through the Medicare Appeals Council, reversed the ALJ’s decision, saying ALJs lack jurisdiction to determine whether RACs lawfully reopen claims. The complaint, filed in the U.S. District Court for the Southern District of California, seeks reversal of the Secretary’s final adverse agency decision, alleging it violates Palomar Medical’s due process rights, violates the applicable Medicare statute and regulations, and is arbitrary, capricious, an abuse of discretion, and otherwise contrary to law. Medicare Advantage MA Organizations Had Lower Spending, Higher Profits In 2005 Than Initial Projections, GAO Finds Medicare Advantage (MA) organizations saw profits of $1.14 billion above their initial projections in 2005 while, on average, spending less on medical expenses (85% of total revenue) than they anticipated (90.2%), the Government Accountability Office (GAO) found in a recent report. The letter report, Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2005 (GAO-08-827R), was requested by House Ways and Means Subcommittee on Health Chairman Pete Stark (D-CA). 219 “Private plans in Medicare spend even less on medical care than they report to CMS—to the tune of over a billion dollars in one year alone. These funds go directly into the pockets of big insurance companies—not toward medical care for beneficiaries,” Stark said in a statement. But the Centers for Medicare and Medicaid Services (CMS) in commenting on the report said the 2005 figures should not be viewed as representative of the program due to notable changes in subsequent years, including a requirement that actuaries attest to the accuracy of projections and differences in the Adjusted Community Rate Proposal process. “The report does not fully recognize that the 2005 base year was vastly different from the current competitive bidding process mandated by the [Medicare Modernization Act of 2003]," CMS Acting Administrator Kerry Weems said. CMS also emphasized that the differences between projected and actual expenses and profits did not affect Medicare payments to MA organizations or the benefits they would have provided and that one outlier MA organization was responsible for nearly half the aggregate difference. GAO said, however, the “accuracy of MA organizations’ projections is important because, in addition to determining Medicare payments, these projections also affect the extent to which MA beneficiaries receive additional benefits not provided under FFS and the amounts beneficiaries pay in cost sharing and premiums.” According to GAO, nearly two-thirds of beneficiaries were enrolled in MA plans for which the percentage of revenue dedicated to profits was greater than projected, while expenditures fell below initial forecasts. “I should not have had to ask GAO for a report on the actual medical loss ratios of Medicare Advantage plans. CMS is required by law to conduct audits of these plans. They aren’t doing their job because the Bush Administration is perfectly happy to have billions of dollars going to insurance companies instead of Medicare beneficiaries,” Stark said. Eleventh Circuit Remands Claims Against Medicare Advantage Plan Administrator Finding No Federal Jurisdiction The Eleventh Circuit remanded to state court a case in which seven Medicare beneficiaries alleged several state law-based claims against the administrator of the Medicare Advantage program in which they were enrolled. In so holding, the appeals court disagreed with the plan administrator's argument that because at least one of the claims arose under the Medicare Act, the federal court would have jurisdiction. Instead, according to the appeals court, the Medicare Act strips federal courts of federal question jurisdiction. Seven individual beneficiaries of the federal Medicare program—Della Dial, A.C. Johnson, Nancy Porter Norfleet, Constance Taylor, Abraham Washington, Laura B. Washington, and Georgia M. Woods (collectively, plaintiffs)—were enrollees in a Medicare Advantage plan administered by Healthspring of Alabama, Inc. Plaintiffs filed a complaint in state court against Healthspring, which removed the action to federal court. The district court concluded that at least one claim for relief arose under federal law. Plaintiffs appealed. 220 Healthspring argued the Medicare Act expressly preempts state substantive law, see 42 U.S.C. § 1395w-26, and provides the exclusive remedy for at least some of the allegations in the complaint, thereby providing federal question jurisdiction. The appeals court said, however, that the Medicare Act "strips federal courts of primary federal-question subject matter jurisdiction" over claims that arise under the Act. See Cochran v. U.S. Health Care Fin. Admin., 291 F.3d 775, 779 (11th Cir. 2002). "In place of that primary federal-question jurisdiction, the Act provides for an administrative hearing before the Secretary of the Department of Health and Human Services," the appeals court explained. Thus, "[b]ecause the plaintiffs’ action is not a 'civil action of which the district courts have original jurisdiction,' the action is not removable," the appeals court held. See 28 U.S.C. § 1441(b); Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). Accordingly, the appeals court remanded to the district court with instructions to remand the case to the state court from which it was removed. Dial v. Healthspring of Ala., Inc., No. 07-15529 (11th Cir. Aug. 26, 2008). Humana Will Pay $750,000 To Settle Allegations Of Medicare Advantage And Part D Marketing Compliance Issues Humana Insurance Company will pay a $750,000 settlement to the Wisconsin Office of the Commissioner of Insurance (OCI) in connection with allegations of non-compliance with Medicare Advantage and Part D marketing rules, according to an agency press release posted September 10. The settlement comes after a market conduct examination conducted by the OCI revealed significant issues with Humana's compliance procedures and oversight of Medicare Advantage and Medicare Part D marketing practices. Humana had notified the OCI that it had developed procedures to prevent agents who were not properly certified and licensed from receiving commissions for Medicare Advantage and Medicare Part D products, the release noted. "However, the examination determined that Humana continued to accept applications and pay commissions," the release said. In agreeing to the settlement, Humana denies the allegations in the examination report, and any violation of law. CMS Issues Final Rules To Curb Abusive Marketing Tactics By Medicare Advantage, Part D Plans The Centers for Medicare and Medicaid Services (CMS) issued September 15, 2008 final rules intended to tighten restrictions on the marketing activities of Medicare Advantage (MA) and Medicare prescription drug plans and impose stiffer penalties for noncompliance. The two rules issued this week implement new prohibitions on door-to-door marketing and cold-calling and add requirements related to broker/agent commissions. 221 Medicare private plan marketing activities have come under increasing scrutiny of late with reports of “hard sell” tactics and concerns about the adequacy of federal oversight. “The regulations give insurers bright-line guidance on what types of marketing activities are acceptable and what types are not acceptable,” said CMS Acting Administrator Kerry Weems. CMS also plans to step up its oversight activities, Weems said, including tripling the number of “secret shopper” activities in which agency officials pose as potential enrollees and monitor sales agents’ practices. The new marketing requirements are effective October 1, 2008 with open enrollment for Medicare Part D beginning November 15, 2008. CMS proposed the new marketing restrictions in May 2008. The final rule (73 Fed. Reg. 54208) bans a number of practices, including providing meals to beneficiaries as part of marketing activities; telemarketing, door-to-door solicitation, and other sales contacts made without a beneficiary’s express invitation; cross-selling of non-healthcare related products during sales or marketing presentations; conducting sales presentations where healthcare services are delivered; and conducting sales activities at educational events. CMS also issued an interim final rule (73 Fed. Reg. 54226), which also goes into effect October 1 but is open to public comment until November 15, that defines a compensation structure for agents and brokers. The interim final rule is intended to reduce so-called “churning,” or moving a beneficiary from one plan to another plan based on financial incentives. The interim final rule establishes a six-year compensation structure that limits first-year compensation for an agent or broker to no more than 200% of the total compensation for each of the next five renewal years, according to an agency fact sheet. Under this structure, an agent or broker can only earn compensation in months four through 12 of the enrollment year. The interim final rule also contains a number of other provisions mandated under the Medicare Improvements for Patients and Providers Act (MIPAA), which Congress passed in July 2008. These provisions include expanding quality improvement program requirements for special needs plans, eliminating the late enrollment penalties for low-income beneficiaries, requiring plans to pay electronic claims within 14 days and paper claims within 30 days, and requiring private-fee-for-service plans and Medicare Medical Savings Account Plans to establish a quality improvement program meeting certain regulatory requirements beginning in 2011. In a statement, Senate Finance Committee Chairman Max Baucus (D-MT), who has led the investigation into abusive Medicare private plan marketing tactics, applauded the new regulations, which he said track the marketing safeguards included in the MIPAA. “CMS is moving in the right direction today, by following the new Medicare law’s call to draw clear lines that will weed out unscrupulous marketing agents who prey on seniors for profit,” Baucus said. Baucus also noted that CMS had not capped agent or broker compensation, but did set other rules to limit compensation to fair market value. Baucus said the Finance Committee would be monitoring how plans set compensation values for agents. 222 CMS Issues Additional Guidance On MA, Drug Plan Marketing The Centers for Medicare and Medicaid Services (CMS) has issued further guidance to help the industry implement new marketing regulations for Medicare Advantage (MA) and Part D plans. The latest implementation guidance was released in the form of two memos from CMS Center for Drug and Health Plan Choice Director Abby L. Block on October 8 and October 17, 2008. The October 8 memo said CMS had become aware of third-party organizations contacting plans and/or agents and offering services that would, if accepted, put the plan out of compliance with applicable federal regulations. CMS made clear in the memo that third-parties may not make unsolicited MA or prescription drug plan (PDP) marketing calls to beneficiaries to set up appointments with potential enrollees. “Any plan or its representative that accepts an appointment to sell an MA or PDP product that resulted from an unsolicited contact with a beneficiary regardless of who made the contact will be in violation of the prohibition against unsolicited contacts,” the memo said. The October 17 memo adds that not all third-party leads are prohibited—i.e. leads may still be generated through mailings, websites, advertising, and public sales events. The memo does stress that “[u]nsolicited third-party leads are prohibited” and proceeds to list what CMS considers illegal, unsolicited contacts, including the use of old lists or consents, referrals of beneficiaries and/or their contact information, and contacting members who are voluntarily disenrolling The October 17 memo also indicates that CMS is now requiring a new disclaimer when an educational event is organized, sponsored, or promoted by a plan—namely, “This event is only for educational purposes and no plan specific benefits or details will be shared.” The two memos also discuss the scope of appointments, meals, cross-selling, agent/broker compensation, payment of appointment fees, and application of the marketing provisions to employer/union group plans. On October 24, 2008, however, CMS announced that it was withdrawing the October 8 guidance on compensation structure requirements for MA agents and brokers. The decision to rescind the sub-regulatory guidance came in the form of a one-paragraph memorandum from CMS Center for Drug and Health Plan Choice Director Abby L. Block. “CMS is aware that there is significant concern about agent/broker commissions for benefit year 2009,” the memo said. The memo said CMS is working on ways to address those concerns and expects to take regulatory action soon. “We strongly suggest that you keep this in mind as you contemplate making any final arrangements regarding commission structures,” the memo said. Along with new marketing restrictions, CMS in September 2008 published rules intended to reduce so-called “churning,” or moving a beneficiary from one plan to another plan based on financial incentives. 223 The rules established a six-year compensation structure that limits first-year compensation for an agent or broker to no more than 200% of the total compensation for each of the next five renewal years. House Ways and Means Subcommittee on Health Chairman Pete Stark (D-CA) in a letter to CMS Acting Administrator Kerry Weems, said some MA plans had announced upcoming broker commissions “that far exceed any previous year’s commissions.” Stark said he was “gravely concerned” that without immediate action by CMS, “these elevated commissions will lead to an unprecedented amount of churning of beneficiary enrollment this year, in a way that is disruptive to their care and detrimental to their coverage.” One possible way to address this problem, Stark suggested, would be to cap commissions at a reasonable rate, for example, based on a percentage of what was offered in previous years. Senate Finance Committee Chairman Max Baucus (D-MT) also called on CMS to stop excessive commissions for MA agents. “Giving agents an incentive to switch Medicare beneficiaries into a new plan puts seniors at risk of having fewer benefits and higher costs,” said Baucus. “Medicare Advantage plans that have nearly quadrupled agent commissions are putting profits before patients and that’s wrong. If these insurance companies aren’t going to make sure they are looking out for seniors’ then I’m going to make sure CMS does it for them," Baucus said. Baucus said provisions in the Medicare Improvements for Patients and Providers Act (MIPPA) of 2008 limit the commissions insurers can offer sales agents. CMS Revises Rules For MA And PDP Agent Commissions The Centers for Medicare and Medicaid Services (CMS) issued an interim final rule with comment period (73 Fed. Reg. 67406) revising compensation requirements for agents and brokers selling Medicare Advantage (MA) and prescription drug plans (PDPs) to Medicare beneficiaries. The revisions modify rules CMS issued on September 18, 2008 (73 Fed. Reg. 54226). In addition to new marketing restrictions, those rules established a six-year compensation structure that limited first-year compensation for an agent or broker to no more than 200% of the total compensation for each of the next five renewal years. Although intended to reduce so-called “churning,” or moving a beneficiary from one plan to another plan based on financial incentives, House Ways and Means Subcommittee on Health Chairman Pete Stark (D-CA) and Senate Finance Committee Chairman Max Baucus (D-MT) said the rules in fact could have the opposite effect and lead to excessive agent/broker commissions. In an October 24 memorandum, CMS rescinded earlier sub-regulatory guidance on compensation structure requirements and signaled plans to take additional regulatory action before the start of open enrollment on November 15, 2008. According to an agency press release, the latest interim final rule, which is effective as of November 10, 2008 modifies the September 18, 2008 rules by: 224 • • • • Specifying all compensation paid to agents and brokers reflect fair-market value based on the commissions paid in the past, adjusted for inflation, for similar products in the same geographic area. Requiring renewal compensation be no more, or no less, than half of the compensation paid for that beneficiary in the initial year of the six-year compensation cycle established in the Sept. 18 rule. Imposing similar limits on payments to organizations such as Field Marketing Organizations, which help plans market and sell their Medicare products and train agents and brokers. Requiring plans to submit to CMS their compensation structures for the previous three years plus the compensation structure they are implementing for 2009. In addition, to prevent churning, plans must still initially pay renewal rate compensation in 2009 rather than the initial year compensation amounts for all plan changes, according to the press release. Once CMS identifies an initial commission was warranted, plans are to pay retrospectively agents and brokers an additional amount for a total payment of the initial compensation rate as filed with CMS. CMS Issues Revised Call Letter For 2010 The Centers for Medicare and Medicaid Services (CMS) issued February 23, 2009 a revised draft call letter for Medicare Advantage (MA) organizations and prescription drug plan (PDP) sponsors. CMS issued the original draft call letter on January 8, 2009 before President Bush left office. The Obama administration announced January 22, 2009 it was rescinding the 2010 draft call letter pending further review. House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) praised the revised draft call letter issued this week by CMS. “The differences between the call letters of the Bush and Obama Administrations are night and day,” said Stark. According to Stark, the new letter “strengthens protections to prevent private plans from discriminating against sicker beneficiaries; establishes new guidelines to prevent aggressive plan marketing to beneficiaries; and proposes to require plans to publicly identify their actual spending on benefits.” The draft call letter includes a number of items aimed at further protecting enrollees and informing them about their MA and Part D plan options, said CMS Center for Drug and Health Plan Choice Director Abby L. Block in a memorandum accompanying the call letter. CMS said it will separately issue technical and procedural clarifications regarding bid and formulary submissions, benefits, HPMS data, marketing models, and other operational issues. Block noted CMS does not currently publicize plans’ medical loss ratio, but that various stakeholders have expressed an interest in the agency doing so. “Before we reach a decision, we are interested in soliciting comments on how the Medical Loss Ratio should be calculated,” Block said in the memo. CMS issued the final call letter on March 30, 2009. 225 The final call letter asks MA organizations to eliminate plans with low enrollment that do not significantly differ from other plans they already offer. “These low-volume plans crowd the field and make selecting a plan much more difficult for Medicare beneficiaries,” CMS said in a press release. According to CMS, 27% of total MA plans have fewer than 10 enrollees. CMS said eliminating these plans should help beneficiaries make plan-to-plan comparisons more easily. To this end, CMS said it expected MA organizations to offer no more than three MA plans by plan type in a market area, "and ensure that each plan offered is readily distinguishable from the others based on plan type, benefits offered, access, or other features that permit beneficiaries to choose a health care plan most suitable to their needs." CMS said it received about 190 comments on the revised draft. One area where CMS specifically sought comments was on whether the agency should publicize plans’ medical loss ratio, as a number of stakeholders have urged CMS to do. “Given this issue’s complexity, we will continue evaluating methodologies for possible future implementation,” said CMS’ Center for Drug and Health Plan Choice Acting Director Jonathan Blum in the call letter. Blum also said CMS would continue to study the issue of its reassignment processes for low-income subsidy eligible individuals for potential future improvements that are consistent with the agency’s statutory authority. For 2010, CMS will be taking new steps to review MA plan cost-sharing to ensure sicker beneficiaries are protected from discriminatory out-of-pocket charges. CMS said it would specifically be reviewing plan benefits to ensure cost-sharing for renal dialysis, Part B drugs, or home health or skilled services are not higher than what they are under traditional Medicare. In addition, MA and PDP plan sponsors will be asked to conduct audits on the data provided to CMS about the operation of their plans. CMS also noted that its current financial and program compliance audits will become more targeted, data-driven, and focused on areas with the greatest potential for beneficiary harm such as enrollment operations, appeals and grievances, and marketing. DMEPOS CMS Moves To Restart DMEPOS Competitive Bidding Program The Centers for Medicare and Medicaid Services (CMS) issued January 16, 2009 in the Federal Register (74 Fed. Reg. 2873) an interim final regulation with comment period to implement statutory changes to the Medicare competitive bidding program for durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) that Congress temporarily put on hold. The Medicare Improvements for Patients and Providers Act (MIPPA), passed in July 2008, temporarily delayed for 18 months the controversial DMEPOS competitive bidding 226 program, which began in 10 metropolitan statistical areas on July 1, 2008, citing concerns about flaws in the program’s design. In a press release, CMS said the interim final rule issued this week, along with a new federal advisory committee, are the next steps to restarting the competitive bidding process. Under the MIPPA, CMS had to terminate existing contracts awarded in the first round of competitive bidding. The law instructed CMS to re-compete the contracts in 2009. As required by the MIPPA, the interim final regulation excludes certain areas and items and services from the competitive bidding program; establishes a “covered document” review process for providing feedback to suppliers regarding missing financial documents; requires DMEPOS suppliers that are awarded a contract under the program to disclose to CMS information regarding subcontracting relationships; and exempts hospitals that furnish certain types of DMEPOS items to their own patients from the competitive bidding program. According to CMS, the first round of the competitive bidding program was projected to save Medicare 26% in payments that would have been made under traditional fee schedules. CMS also announced the members of a new Program Advisory and Oversight Committee that will provide the agency with input on implementing competitive bidding for DMEPOS. The advisory committee includes representatives of beneficiaries and consumers, physicians, suppliers, and other experts, CMS said. CMS Delays DMEPOS Competitive Bidding Rule The Centers for Medicare and Medicaid Services (CMS) will delay the effective date of an interim final rule to implement statutory changes to the Medicare competitive bidding program for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) from February 17, 2009 to April 18, 2009. The rule was delayed pursuant to a January 20, 2009 memorandum from White House Chief of Staff Rahm Emanuel directing agencies to halt publication of all regulations until a department or agency head appointed by President Obama reviewed the regulation. CMS Says It Will Not Further Delay DMEPOS Competitive Bidding Rule The Centers for Medicare and Medicaid Services (CMS) announced April 17, 2009 that it will not further delay the Medicare competitive bidding rule for durable medical equipment, prosthetics, orthotics and supplies (DMEPOS). Based on its review and on "the need to ensure that CMS is able to meet the statutory deadlines contained in the Medicare Improvements for Patients and Providers Act (MIPPA), the Administration has concluded that the effective date should not be further delayed." Thus, the rule is effective as of April 18, 2009. CMS said it plans to issue further guidelines on the timeline for bidding requirements in the upcoming weeks. 227 Earlier in the week, the American Association for Homecare and 27 other DME providers sent a letter April 13, 2009 urging the withdrawal of the competitive bidding rule. The letter, addressed to Charles Johnson, Acting Secretary of the Department of Health and Human Services, Charlene Frizzera, Acting Administrator of the Centers for Medicare and Medicaid Services (CMS), and Nancy-Ann DeParle, Director of the new White House Office of Health Reform, warned that the rule if implemented “would reduce access to care and put thousands of DME providers out of business.” The letter argued that fundamental flaws remained in the program even after Round One of competitive bidding was delayed as part of MIPPA. “[T]houghtful and deliberate rulemaking by CMS was clearly expected by Congress, given the overwhelming level of congressional and stakeholder concern during initial implementation,” the letter said; however, “[t]his process did not take place and the flaws in the bidding program remain.” According to the letter, the program would actually reduce competition and lower quality. While proponents of the competitive bidding program argue that it will reduce Medicare spending, “the inevitable cutbacks in services will result in increased length and cost of hospital stays,” the letter said. “Home medical equipment and care is already the most cost-effective, slowest-growing portion of Medicare spending,” the letter argued. Case Law Developments U.S. Court In D.C. Says Secretary Violated Medicare Bad Debt Moratorium By Applying New Policy The U.S. District Court for the District of Columbia held May 30, 2008 that the Secretary of the Department of Health and Human Services (HHS) is bound, by a congressional moratorium, to pre-August 1987 polices for determining Medicare bad debt and therefore cannot refuse to reimburse a provider for debts on the ground they were referred to a collection agency as such action would constitute a change in policy. To be reimbursed for Medicare bad debt, providers must satisfy four criteria—namely, that the debt is related to the covered services, as well as derived from unpaid deductible and coinsurance amounts; that reasonable collection efforts have been made; that the “debt was actually uncollectible when claimed as worthless”; and that “sound business judgment” established no likelihood of future recovery. 42 C.F.R. § 413.89(e)(1-4). The question of when an unpaid account becomes “uncollectible” has been the subject of long-standing debate. On August 1, 1987, in an attempt to shield providers from radical changes in how this was determined, Congress enacted the so-called “Bad Debt Moratorium,” which essentially kept the government from enacting new restrictions. The current dispute arose after Foothill Hospital-Morris L. Johnson Memorial (Foothill) sought reimbursement for unpaid Medicare deductibles and coinsurance bills, which had been outstanding for more than 300 days on average, for its fiscal year ending September 30, 1995. At the same time that Foothill wrote off these bills as uncollectible, it sent them to an outside collection agency as it does with non-Medicare debt. When Foothill first sought reimbursement for the delinquent accounts the fiscal intermediary disallowed $60,993 of its bad debt claims on the ground that “collection 228 efforts do not come to an end until the provider makes a final decision to cease pursuing a bad debt item.” The intermediary found that this could only happen when the outside collection agency ceases collection efforts. The Provider Reimbursement Review Board (PRRB) reversed the intermediary’s decision, finding the presumption of collectability based on the outside collections account was contrary to established precedent. The CMS Administrator overruled the PRRB, saying “it was reasonable to conclude that the provider still considers the debt to have value and is not worthless.” In its subsequent federal district court action, Foothill argued a presumption of collectability based on outside collection account status constituted a change in policy that violated the Bad Debt Moratorium. The court agreed. Unlike other courts to consider the issue, the U.S. District Court for the District of Columbia focused its analysis, one apparently of first impression, on whether the Bad Debt Moratorium applies only to an individual Medicare provider’s polices or whether it also limited the Secretary’s own policies. Reviewing the statutory language, the court found the moratorium unambiguously stated that the Secretary “shall not make any change in policy in effect on August 1, 1987.” 42 U.S.C. § 1395f. Moreover, the moratorium was a response to the HHS Inspector General’s plan to make bad debt reimbursement more restrictive; thus, the focus was on the Secretary’s policies. The court next determined that a “blanket prohibition against reimbursement while collection efforts are ongoing constitutes a change in policy, for this policy did not exist prior to the effective date of the Moratorium.” The court found that at the time the Bad Debt Moratorium was enacted none of the policies that the CMS Administrator relied on were in use. Therefore, applying any of the newer policies would contradict the intent of the moratorium. Moreover, the several agency sources that predated the moratorium suggested that even when a delinquent payment is at a collection agency that payment can still be considered uncollectible. Therefore, the court vacated the CMS Administrator’s decision and remanded the case to the Secretary, saying it had no jurisdiction to order specific relief. Foothill Hosp.-Morris L. Johnson Mem’l v. Leavitt, No. 07-701, 2008 U.S. Dist. LEXIS 41816 (D.D.C. May 30, 2008). D.C. Circuit Finds Secretary Not Required Prior To DRA To Include Expansion Waiver Population In DSH Adjustment The D.C. Circuit held June 27, 2008 that the law prior to the passage of the Deficit Reduction Act of 2005 (DRA) did not require the Department of Health and Human Services (HHS) Secretary to include expansion waiver patients in the disproportionate share hospital (DSH) adjustment. Thus, the appeals court affirmed the district court’s finding that the DRA, which gave the Secretary explicit discretion to determine whether to include a demonstration project’s expansion waiver population, was not an illegal retroactive application. 229 The case involved two groups of Tennessee hospitals serving patients who participate in the state’s Medicaid plan, TennCare. TennCare is a non-standard Medicaid program, known as a demonstration. Individuals who receive federally reimbursable care under TennCare despite not meeting the normal Medicaid requirements are known as the “expansion waiver population.” According to the appeals court, before January 2000, the HHS Secretary’s policy was not to include expansion waiver patients in the Medicaid fraction, which is used to calculate the DSH adjustment. Despite this policy, some fiscal intermediaries included the expansion waiver population in the DSH adjustment, the appeals court said. In January 2000, the Secretary revised the policy and permitted hospitals to include the expansion waiver population in the Medicaid fraction (65 Fed. Reg. 3136, 3139); however, three years later the Secretary issued another revision, excluding the expansion waiver populations associated with certain demonstration projects likely to deal with higher-income individuals. The hospitals here filed cost reports prior to January 2000 and received notices of program reimbursement that did not take TennCare’s expansion waiver population into account in calculating the DSH adjustment. The hospitals appealed to the Provider Reimbursement Review Board (PRRB) and lost. The hospitals then sued in federal district court claiming the Secretary had unlawfully refused to count TennCare’s expansion waiver population in the DSH adjustment. The district court granted the hospitals’ motion for summary judgment. While the case was pending appeal, the DRA was passed. The law explicitly gave the Secretary discretion to determine whether to include a demonstration project’s expansion waiver population in the disproportionate share calculation. See DRA § 5002(a). The Act also purported to ratify the Secretary’s prior policies regarding the inclusion or exclusion of the expansion waiver population. Id. § 5002(b)(3)(A), (B). In light of these provisions, the Secretary moved to alter the judgment. The D.C. Circuit remanded the case and the district court granted the Secretary’s motion. The hospitals appealed. The appeals court turned first to the hospitals’ argument that the law prior to the DRA clearly required inclusion of the expansion waiver patients in the disproportionate share hospital adjustment. After an examination of the statutory text, the appeals court found “it was unclear, prior to the Deficit Reduction Act, whether the Secretary had discretion to exclude the expansion waiver population from the disproportionate share hospital adjustment.” The appeals court next rejected the hospitals’ argument that the DRA could not be applied retroactively consistent with Landgraf v. USI Film Products, 511 U.S. 255, 265 (1994), because Congress did not clearly indicate its intention to this effect. Because of the uncertainty of the law prior to the Act, the appeals court found, “no problem of retroactivity.” 230 “The Deficit Reduction Act did not retroactively alter settled law; it simply clarified an ambiguity in the existing legislation,” the appeals court held. Cookeville Reg’l Med. Ctr. v. Leavitt, Nos. 07-5252, 07-5269 (D.C. Cir. June 27, 2008). Ninth Circuit Finds Claims Against Part D Sponsor Preempted By MMA The Ninth Circuit held August 25, 2008 that claims against Humana related to its failure to provide timely Medicare Part D prescription drug plan benefits to Medicare beneficiaries are preempted by the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) and its implementing regulations. 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 plaintiffs' claims were preempted by the MMA. Plaintiffs appealed. The appeals court first noted that under the MMA, Centers for Medicare and Medicaid Services (CMS) "standards" supercede state law or regulations insofar as the state law or regulation is "with respect to" a "prescription drug plan" offered by a "PDP sponsor." After finding no field preemption here, the appeals court said that "State common law is preempted to the extent that there are federal standards." Humana contended that CMS had promulgated regulations or standards that govern each of the Uhms’ claims, and therefore all of their causes of action were preempted, the appeals court explained. According to Humana, CMS created two mechanisms to deal with disputes: "coverage determination" procedures and "grievance" procedures. Humana maintained that the Uhms’ complaints were actually grievances or requests for a coverage determination and therefore were preempted. According to the appeals court, the threshold question was whether the Uhms were "enrollees" as defined in the regulations. Answering in the affirmative, the appeals court found among other things that under the relevant regulation, an eligible individual 231 "enrolls" by "filing the appropriate enrollment form with the PDP." "That is precisely what the Uhms allege they did," the appeals court said. Having found that plaintiffs were enrollees of the plan, the appeals court then considered each claim individually, finding the MMA and related regulations preempted all alleged claims. Uhm v. Humana Inc., No. 06-35672 (9th Cir. Aug. 25, 2008). U.S. Court In D.C. Dismisses Suit Challenging CMS’ Policies Regulating Marketing Of Medicare Part D Plans For Lack Of Standing Medicare beneficiaries eligible for Medicare Part D drug benefits lacked standing to challenge, on First Amendment grounds, two of the Centers for Medicare and Medicaid Services’ (CMS’) policies regulating private entity marketing of the Part D drug benefit, a federal district court ruled August 25, 2008. The U.S. District Court for the District of Columbia granted the agency's motion to dismiss for lack of standing, concluding plaintiffs did not show their healthcare providers declined to provide them with needed advice regarding which Medicare prescription drug plan to choose based on the CMS marketing guidelines and nursing home policy at issue. The marketing guidelines provide that healthcare providers “cannot direct, urge, or attempt to persuade beneficiaries to enroll in a specific plan,” the district court noted. The guidelines also prohibit providers from marketing by “steering, or attempting to steer, an undecided potential enrollee towards a plan, or limited number of plans, and for which the individual or entity performing marketing activities expects compensation directly or indirectly from the plan for such marketing activities.” The nursing home policy, detailed in a May 2006 memorandum CMS issued to state regulatory agencies, provides that “[u]nder no circumstances should a nursing home require, request, coach, or steer any resident to select or change a [Medicare Advantage or Part D] plan for any reason.” The Washington Legal Foundation (WLF) filed the initial complaint in federal district court on behalf of its members. The court denied WLF’s motion for a preliminary injunction, finding WLF failed to show likelihood of success on the merits because it did not have “proper associational standing.” Subsequently, the WLF attorneys involved in the case amended the complaint to name their own parents—Rebecca Fox, Mary Samp, and Edward Samp, Jr.,—as plaintiffs. Mr. Samp died in November 2007. Plaintiffs asserted that CMS, via its limitations in the agency’s marketing guidelines and the nursing home policy on the information that healthcare providers may communicate to Medicare beneficiaries, violated the First Amendment rights of Medicare beneficiaries to receive information regarding insurance coverage. Plaintiffs moved for summary judgment, and CMS cross-moved to dismiss for lack of standing. The district court granted CMS’ motion. The district court first noted plaintiffs must show CMS prevented healthcare providers from giving them information they needed and the providers would have been willing to share “but for the challenged CMS policies.” 232 The court then found plaintiffs had failed to establish this “right to listen” claim. Regarding the conversation between Mrs. Fox and her pharmacist about prescription drug plans, the district court noted that Mrs. Fox testified that her pharmacist stated simply that he did not “know what to tell her." “There is no indication in this [statement] that the pharmacist did not ‘know’ what to tell Mrs. Fox due to the Marketing Guidelines' prohibition on steering,” the court said. Therefore, Mrs. Fox lacked standing because she did not establish that her pharmacist would have been willing to direct her to a particular Part D plan but for the marketing guidelines, the district court concluded. As for Mrs. Samp’s conversations with her pharmacist, the district court noted that Mrs. Samp testified that she had never asked the pharmacist whether to enroll in a Part D plan, or for a recommendation to a particular Part D plan. Mrs. Samp therefore lacked standing to bring a First Amendment claim based on CMS’ marketing guidelines because she failed to show “any injury in fact . . . traceable to the challenged . . . guidelines,” the court said. The district court next rejected plaintiffs’ argument that they had standing to bring their First Amendment claim based on CMS’ nursing home policy because, though not currently nursing home residents, a likelihood existed that they eventually would move into a nursing home. “The mere possibility that Plaintiff may someday live in a nursing home is speculative at best,” the district court said. “They do not have standing to bring a First Amendment claim based on [CMS’s] Nursing Home Policy unless and until they are in a nursing home and the Policy affects them.” Finally, the district court found the case was moot with regard to Mr. Samp. “Because Mr. Samp is no longer living, there is not reasonable expectation that the alleged violation of his First Amendment rights could be repeated,” the court said. Fox v. Leavitt, No. 1:06-cv-01490-RMC (D.D.C. Aug. 25, 2008). First Circuit Upholds HHS Secretary’s Exclusion Of Resident Research Time From FTE Count The First Circuit ruled November 17, 2008 that the Secretary’s decision to exclude resident research time in a hospital's full-time equivalent (FTE) count for purposes of the indirect medical education (IME) adjustment was a reasonable interpretation of the ambiguous governing regulation. The appeals court also held the Secretary’s interpretation was not at odds with the applicable statutory language and congressional intent to increase payments to teaching hospitals for teaching costs. The case arose after Rhode Island Hospital (hospital), an acute care facility in Providence with a large graduate medical education program, asked its fiscal intermediary to include 290 FTE residents in its calculation of the hospital’s IME adjustment. 233 The fiscal intermediary concluded that governing Medicare regulations precluded counting research time in a hospital’s FTE count, and therefore reduced the hospital’s FTE total by 12.06, decreasing the hospital’s IME adjustment by roughly $1 million. The Provider Reimbursement Review Board (PRRB) reversed, concluding the administrative regulation governing a hospital’s FTE count was unambiguous and did not exclude residents’ education research time. See 42 C.F.R. § 412.105(f)(1). Reviewing the PRRB decision, the Secretary determined the Medicare IME payment was only intended to reimburse teaching hospitals for increased patient care costs and that residents performing education research were not assigned to an eligible area of the hospital under Section 412.105(f)(1). On appeal, a federal district court in Rhode Island concluded the Secretary had misread the governing FTE regulation, or that the Secretary’s reading was unreasonable in light of congressional intent in establishing the IME adjustment. The First Circuit reversed. The Secretary argued that residents assigned to perform education research, i.e. research unrelated to patient care, are, by definition, not “assigned” to an “area” or “portion of the hospital subject to the prospective payment system [PPS]” as contemplated under Section 412.105(f)(1). According to the Secretary, residents “assigned” to a research rotation, as here, are not integrated into a unit of the hospital dedicated to patient care services reimbursable under the PPS and therefore do not count toward a hospital’s FTE count. The hospital, on the other hand, contended that, for purposes of the FTE count, the nature of a resident’s work is immaterial, as long as the resident is assigned to an area of the hospital not specifically excluded from PPS billing. The appeals court concluded that both readings of the applicable regulation were plausible, and therefore Section 412.105(f)(1) was ambiguous. Affording deference to the Secretary’s reading, the appeals court held his interpretation was not plainly erroneous or inconsistent with the regulatory language. The appeals court rejected the hospital’s argument that under the Secretary’s interpretation no resident would ever qualify as a full FTE because all residents must participate in activities that are unrelated to patient care. “What the hospital fails to mention is that a hospital’s Director of Graduate Medical Education, not Medicare, is the party empowered with determining the ‘total time necessary to fill a residency slot’ . . . . Presumable the director could limit this calculation to the number of work hours required to fill a single resident position on a hospital’s staffing calendar,” the appeals court observed. Next, the appeals court determined the Secretary’s interpretation did not impermissibly conflict with the relevant statutory language or congressional intent in enacting the IME adjustment to increase Medicare payments to teaching hospitals. The appeals court found no indication that Congress wanted to abrogate the Secretary’s authority to regulate the proper calculation of a hospital’s ratio of FTE to beds in the IME 234 equation, nor that it “even considered the nuances involved in determining the FTE eligibility of residents in teaching hospitals.” Thus, the appeals court concluded the Secretary’s interpretation of the FTE regulation was not “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” Rhode Island Hosp. v. Leavitt, No. 07-2673 (1st Cir. Nov. 17, 2008). U.S. Court In California Finds Reasonable Secretary's Disallowance Of Provider's Medicare Bad Debt The U.S. District Court for the Southern District of California upheld November 24, 2008 the Department of Health and Human Services' (HHS') refusal to allow a provider's Medicare bad debt. In so holding, the court concluded the Secretary's findings that the provider did not attempt to collect Medicare bad debt as vigorously as it attempted to collect nonMedicare bad debt was reasonable and supported by the evidence in the record. Plaintiff El Centro Regional Medical Center in 1999 and 2000 claimed reimbursement for certain unpaid deductible and coinsurance obligations of Medicare beneficiaries. The Administrator of the Centers for Medicare and Medicaid Services, acting on behalf of the HHS Secretary, disallowed reimbursement of plaintiff’s Medicare bad debts, finding plaintiff had not made "reasonable collection efforts" as required by Medicare regulations. Plaintiff sought judicial review of the decision and the parties cross-moved for summary judgment. Plaintiff argued the Secretary’s requirement that non-Medicare bad debts must be returned from a collection agency along with Medicare bad debts in order for the provider to obtain reimbursement for its Medicare bad debts was contrary to the law, regulations, and Manual provisions that govern Medicare reimbursement. The court noted 42 C.F.R. § 413.89(e) provides that bad debts may be reimbursed as reasonable costs only if four criteria are met. Three of those criteria were at issue here, the court said: "the provider must be able to establish that reasonable collection efforts were made"; "the debt was actually uncollectible when claimed as worthless"; and "sound business judgment established that there was no likelihood of recovery at any time in the future." The court noted interpretive guidance provided in Section 310 of the Provider Reimbursement Manual (PRM) specifically stated that "to be considered a reasonable collection effort, a provider’s effort to collect Medicare deductible and coinsurance amounts must be similar to the effort the provider puts forth to collect comparable amounts from non-Medicare patients." PRM § 310. Here, the Secretary concluded plaintiff’s efforts to recover amounts owed by Medicare patients through an outside collection agency were "significantly less vigorous than its efforts to collect comparable non-Medicare debts." The court found it was "neither arbitrary and capricious nor contrary to Medicare law and regulations for the Administrator to interpret PRM § 310 as being applicable to both in house and outside collection efforts." 235 Regarding the Secretary's other findings, the court noted the "Administrator cited to specific evidence from the record showing Plaintiff’s disparate treatment of Medicare and non-Medicare debt collection efforts." Thus, declining to "re-weigh the evidence," the court found the Secretary's decision was supported by substantial evidence and granted the Secretary's motion for summary judgment. El Centro Reg'l Med. Ctr. v. Leavitt, No. 07cv1182(PCL) (S.D. Cal. Nov. 24, 2008). Eighth Circuit Holds Medicare May Recover Medical Expenses From Third Party Settlement Proceeds The Eighth Circuit held January 30, 2009 that Medicare has a right to recover medical expenses it paid out on behalf of a now-deceased beneficiary from proceeds of a wrongful death settlement. After David Mathis died, plaintiffs filed a wrongful death suit against the parties they believed were responsible for his fatal injuries. When the parties agreed to settle the action, Medicare, which had paid $77,403.67 of Mathis' final medical expenses, claimed it had a right to reimbursement from the settlement funds. Plaintiffs then amended their petition to add a declaratory judgment claim against the Secretary of the Department of Health and Human Services (HHS), arguing the Missouri wrongful death statute did not provide for recovery of medical expenses and therefore plaintiffs had no duty to reimburse Medicare. After $77,403.67 was paid into the state court registry to be held pending resolution of the declaratory judgment action, HHS removed the action to federal court. The district court granted summary judgment to HHS and held the funds should be paid out to the agency. Plaintiffs appealed. The appeals court first observed that under federal law, 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 if the responsible party's liability insurer later makes a payment for those expenses. See 42 U.S.C. § 1395y(b)(2)(B)(i). In addition, the appeals court noted, Medicare may seek reimbursement from "any entity" that receives such a payment. See 42 U.S.C. § 1395y(b)(2)(B)(iii). The appeals court rejected plaintiffs' argument that the decedent's medical expenses were not damages recoverable in a state wrongful death action. In so holding, the appeals court said plaintiffs' reliance on Finney v. National Healthcare Corp., 193 S.W.3d 393, 395 (Mo. Ct. App. 2006), which held that damages recoverable under the Missouri wrongful death statute are not the same as the damages that a decedent would have been entitled to recover in a personal injury action, was misplaced. "Finney simply held that there were damages available in a wrongful death action that the decedent, had he lived, could not have recovered in a personal injury action, such as damages for loss of consortium," the appeals court explained. "That holding indicates that the damages recoverable in the two actions are different, but it is manifestly not a holding that they are mutually exclusive." 236 The appeals court further pointed out that the Missouri Supreme Court has said "damages incurred by the decedent before death, such as medical expenses and pain and suffering, are recoverable as part of the wrongful death claim," Powell v. American Motors Corp., 834 S.W.2d 184 (Mo. 1992). The appeals court also rejected plaintiffs' reliance on a case that involved a hospital lien on settlement proceeds. According to the appeals court, a hospital lien attaches only to proceeds of claims "brought on the part of the injured person," whereas Congress authorized Medicare to recover from "any entity" that receives payment for expenses conditionally paid for by Medicare. Mathis v. Leavitt, No. 08-1983 (8th Cir. Jan. 30, 2009). U.S. Court In D.C. Upholds Cost Containment Reductions To Medicare Reimbursement Of Hospital Ambulance Services The U.S. District Court for the District of Columbia upheld March 17, 2009 the Department of Health and Human Services Secretary’s calculation of Medicare reimbursement for ambulance services provided by two hospitals that included acrossthe-board cost reductions applicable to outpatient services. Applying Chevron deference to the Secretary’s decision, the court found the relevant statutory language plainly indicated Congress considered ambulance services as a type of hospital outpatient service. As hospital outpatient services, the court continued, the 5.8% and 10% across-the-board cost reduction factors enacted by Congress as part of the Balanced Budget Act of 1997 (BBA) clearly applied to ambulance services. Finally, the court said, the Secretary’s decision to apply these cost reduction factors to the base year costs used to calculate reimbursement for the hospitals’ ambulance services was a reasonable interpretation of the Medicare statute. Decatur County General Hospital and North Memorial Health Care initiated the action after the Centers for Medicare and Medicaid Services (CMS) Administrator found the hospitals’ fiscal intermediaries correctly calculated their Medicare reimbursement for ambulance services provided in fiscal years 2000 and 2001. As a way to reduce escalating costs, Congress mandated in the BBA an across-the-board reduction in all payments for outpatient hospital services—10% for capital-related costs and 5.8% for all other services. The Provider Reimbursement Review Board (PRRB) concluded the ambulance services were outpatient hospital services, but that the 5.8% and 10% reductions should not be applied to the base year costs used to determine Medicare reimbursement of ambulance services before the fee schedule went into effect. The CMS Administrator reversed, however, concluding the application of the reductions to the cost per trip base year was consistent with the statutory language and congressional concerns about rising costs of outpatient and ambulance services. The federal district court agreed that ambulance services are hospital outpatient services under the relevant statutory language. 237 The fact that Congress excluded ambulance services from the outpatient prospective payment system (OPPS) is consistent with this conclusion, the court said. Congress instead established a separate fee schedule for ambulance services. The inclusion of a special payment rule for ambulance services within a subsection related to the hospital OPPS would not make sense if ambulance services were not considered hospital outpatient services, the court observed. The court likewise found the plain language of the Medicare Act called for applying the cost reduction factors to ambulance services. The language states, without qualification, that the reduction factors apply to “outpatient hospital services,” with only two carveouts—payments to sole community hospitals or to critical access hospitals. Finally, the court held the Secretary’s decision to apply the cost reduction factors to the base year costs was a reasonable interpretation of the statute. Before the ambulance fee schedule was implemented, the BBA established a cost per trip limit based on reasonable costs for the previous fiscal year (i.e. base year costs). The Secretary determined the costs “recognized as reasonable” in the base year should reflect the further cost containment measures (i.e. the 10% and 5.8% reductions) in accordance with congressional concerns regarding escalating costs of outpatient and ambulance services. The court found this interpretation was not arbitrary, capricious, or an abuse of discretion under the Administrative Procedure Act, but a permissible construction of the statute. Decatur County Gen. Hosp. v. North Mem’l Health Care, No. 07-1544(JDB) (D.D.C. Mar. 17, 2009). U.S. Court In California Refuses To Dissolve Preliminary Injunction Blocking Clinical Lab Competitive Bidding Demo The U.S. District Court for the Southern District of California denied March 25, 2009 the government’s motion to dissolve a preliminary injunction imposed a year ago that enjoined the Department of Health and Human Services (HHS) from moving ahead with a competitive bidding demonstration for clinical laboratory services provided under Medicare Part B. The court granted the government’s motion to dismiss the case as moot given that Congress in July 2008 repealed HHS’ authority for the demo project as part of the Medicare Improvements for Patients and Providers Act. At the same time, the court agreed with plaintiffs Sharp Healthcare, Scripps Health, and Internist Laboratory that one important controversy potentially still existed between the parties—i.e., the government’s retention of confidential bid information that was obtained before the preliminary injunction was entered. In the preliminary injunction, issued April 8, 2008, three days before HHS was slated to select winners of the Medicare demo project, the court specifically protected from disclosure any data included in the bid applications. Despite the repeal of the competitive bidding demo, the government has retained possession of the bidding applications, the court observed. 238 “Plaintiffs persuasively contend that they will be harmed if Defendant decides to use the confidential information obtained during the bidding process prior to the statute’s repeal,” the court wrote. Specifically, according to the opinion, plaintiffs are concerned the government could use the confidential and proprietary data in the bid applications to set Medicare reimbursement rates for laboratory services, essentially achieving the underlying goal of the demo. Plaintiffs asked to amend their complaint to add a specific claim related to the HHS Secretary’s retention of the bid information. The court agreed, dismissing the case with leave to amend to allow plaintiffs to plead the additional claim. In so holding, the court found dissolving the preliminary injunction and vacating its prior orders “would suddenly give Defendants the discretion to attempt another use of the information.” The court said the government made persuasive arguments that the data at issue already was protected under the Trade Secrets Act and that the Secretary could only make rate changes through notice and comment rulemaking. But the court questioned why HHS “vehemently insists on maintaining possession of the information.” In an October 17, 2007 Federal Register notice (72 Fed. Reg. 58856), HHS announced the San Diego-Carlsbad-San Marcos metropolitan area as the first of two locations for the three-year demo, which was mandated by the Medicare Modernization Act of 2003. The demo was aimed at determining whether competitive bidding could be used to provide laboratory tests under Part B at fees below current payment rates without compromising quality and access to care. Plaintiffs alleged the HHS Secretary violated notice and comment requirements of the Administrative Procedure Act (APA) in developing certain demonstration project rules; that several of the rules violated the APA because they are arbitrary, capricious, an abuse of discretion or not otherwise in accordance with the law; that the rules cause a taking in violation of the Fifth Amendment; and that the rules violate the applicable statute by expanding the demo beyond laboratory tests to include the collecting and handling of specimens. In considering whether to grant the preliminary injunction, the court found plaintiffs had demonstrated the possibility of irreparable harm, both in terms of direct economic injury and an adverse effect on patient care. Sharp Healthcare v. Leavitt, No. 08-CV-0170 W (S.D. Cal. Mar. 25, 2008). U.S. Court In West Virginia Says Medicare May Recover Funds Spent On Beneficiary’s Care From Third-Party Settlement Proceeds In Attorney's Possession The Centers for Medicare and Medicaid Services (CMS) is entitled as a matter of law to recover funds it spent on the care of a Medicare beneficiary from the third-party 239 settlement proceeds he received in compensation for his injuries, the U.S. District Court for the Northern District of West Virginia held March 26, 2009. The court found the beneficiary’s attorney—who was sued by CMS—was personally liable to Medicare for the recovery amount because he received part of the funds from the settlement. Attorney Paul J. Harris was retained by a Medicare beneficiary who had sustained injuries in a fall from a ladder to sue the ladder retailer. As part of that settlement, the beneficiary and Harris received a sum of $25,000. Harris forwarded to Medicare details of the settlement payment, and based upon the information provided by Harris, Medicare calculated that it was owed approximately $10,253.59 out of the $ 25,000 settlement for payment it made for the beneficiary’s treatment. CMS informed Harris of this decision by letter. Harris never appealed and neither he nor his client ever paid CMS. CMS sued Harris in federal court for a declaratory judgment and money damages and then moved for summary judgment. The court first noted that under the Medicare Secondary Payer Statute (MSPS), when Medicare makes a conditional payment for medical services received as a result of an injury caused by another party, the government has a right of recovery for the conditional payment amount against any entity responsible for making the primary payment. Here, the government argued it was entitled to summary judgment because Harris waived any challenge to the amount or existence of the debt at issue since the time for administratively appealing that determination had passed. The court agreed, finding CMS was entitled to judgment as a matter of law. Further, Harris was individually liable for reimbursing Medicare because the government could recover "from any entity that has received payment from a primary plan," including an attorney, the court explained. The court also agreed with the government’s argument that Harris' failure to pursue available administrative remedies precluded him from challenging CMS' reimbursement determination. Accordingly, the court awarded the government its requested reimbursement amount plus interest. United States v. Harris, No. 5:08CV102 (N.D. W.Va. Mar. 26, 2009). U.S. Court In D.C. Says Disallowance Of Nursing Home’s “Bad Debt” Claims Was Arbitrary And Capricious The Department of Health and Human Services Secretary’s decision to deny 120-bed nursing facility Summer Hill Nursing Home LLC (Summer Hill) Medicare reimbursement of 240 “bad debt” it incurred for certain dual-eligible patients was arbitrary and capricious, the U.S. District Court for the District of Columbia ruled March 25, 2009. The Secretary based the decision on the agency’s “must bill” policy, which requires providers to submit evidence that they have billed state Medicaid programs for uncollectable deductible and co-insurance obligations and received a refusal to pay. But the court found the Secretary had ignored an undisputed fact—Summer Hill had billed and received “remittance advices” from the New Jersey Medicaid program refusing to pay the debts associated with certain “dual eligible” patients. Although Summer Hill received the remittance advices after it initially filed a claim with Medicare for bad debt reimbursement, the court found no rationale for disallowing the claim on that basis. Thus, the Secretary’s decision was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law” in violation of the Administrative Procedure Act. At issue was $170,537 in “bad debts” New Jersey nursing facility Summer Hill submitted to its fiscal intermediary for the fiscal year ending December 31, 2004. The intermediary disallowed most of this amount because Summer Hill wrote off the dual-eligible bad debt before billing New Jersey’s Medicaid program. Before filing an appeal of the disallowance, Summer Hill billed New Jersey Medicaid and received the required remittance advices refusing to pay the debts. The Provider Reimbursement Review Board (PRRB) reversed the intermediary’s disallowance but not on the basis of the subsequent receipt of the remittance advices. Instead, the PRRB found the agency had insufficient authority to enforce the “must bill” policy. The Secretary reversed the PRRB, finding “[t]he bad debts claimed by the Provider were not worthless when written off” because Summer Hill failed to bill the state Medicaid program and obtain the necessary remittance advices. The court found the Secretary had no basis for disregarding the undisputed fact that Summer Hill now had the appropriate remittance advices in hand. The court declined to rule on the validity of the “must bill” policy. Summer Hill Nursing Home LLC v. Johnson, No. 08-268 (D.D.C. Mar. 25, 2009). D.C. Circuit Says Physician Medicare Claims Data Exempt From FOIA Disclosure Request The Department of Health and Human Services (HHS) was not required to disclose certain Medicare claims data for physicians pursuant to a Freedom of Information Act (FOIA) request, the District of Columbia Circuit held January 30, 2009 in a 2-1 opinion. The appeals court said physicians have a substantial privacy interest in Medicare claims data, which, in connection with the publicly available fee schedule, could be used to calculate the total Medicare payments made to a particular physician. 241 Absent a significant public interest, which the requestor Consumers' Checkbook, Center for the Study of Services (CSS) failed to show, disclosure of the requested data “would constitute a clearly unwarranted invasion of personal privacy.” The American Medical Association (AMA) heralded the ruling as a "major victory" for physicians' privacy. “The court found that physicians have a significant right to privacy, and there is no public interest in the disclosure sought by Consumers’ Checkbook. The court clearly found that the release of personal physician payment data does not meet the standard of the Freedom of Information Act, which is to provide the public with information on how the government operates," AMA said in a statement. CSS submitted a FOIA request to the Centers for Medicare and Medicaid Services (CMS) seeking records for all Medicare claims submitted to the agency by physicians in the District of Columbia, Illinois, Maryland, Washington, and Virginia. The request did not encompass patient identities. Specifically, CSS sought data elements including the diagnosis, the type and place of service, and the Unique Physician Identifying Number of the Medicare claims submitted by physicians in these localities during 2004. CMS denied the FOIA request. CSS eventually filed an appeal in federal district court seeking injunctive relief. The court granted summary judgment in CSS’ favor. HHS argued the requested records were exempt from disclosure under FOIA Exemption 6, which provides that FOIA “does not apply to matters that are . . . personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.” The D.C. Circuit found the requested records were exempt from disclosure under FOIA. The appeals court noted the information at issue clearly fell into the category of material covered by Exemption 6, prompting it to consider whether a disclosure would compromise a substantial, rather than de minimis, privacy interest. Finding that it would, the appeals court said physicians have a “substantial privacy interest in the total payments they receive from Medicare for covered services.” CSS countered that disclosure of the requested records would serve the public interest by (1) revealing information about HHS’ performance in maintaining and enhancing the quality and efficiency of Medicare services; (2) the agency’s ability to root out fraud and waste; and (3) the agency’s compliance with various transparency initiatives. As to the first basis CSS cited, the appeals court did not view the material requested as helpful in assessing whether CMS/HHS was fulfilling their statutory requirements to undertake specific quality-promoting programs. The appeals court likewise rejected CSS’ second basis absent any evidence the requested data would reveal potential fraud. “[I]f an unsupported suggestion that an agency may be distributing federal funds to a fraudulent claimant justifies disclosure of private information, the agency would have no defense against FOIA requests for release of private information,” the appeals court observed. 242 Finally, the appeals court held the requested data would not assist the public in determining whether CMS was complying with its transparency initiatives to provide consumers with more information about service providers. While CMS has undertaken certain transparency initiatives, “at no point has it pledged, or been directed by the Congress, to disclose any information to the public that could possibly assist consumers in health care decisions without regard to any countervailing interest, including the FOIA-recognized privacy interest,” the appeals court said. Given these findings, the appeals court said it need not engage in any balancing of “nonexistent” public interests with “every physician’s substantial privacy interest in the Medicare payments he receives.” A dissenting/concurring opinion disagreed with the majority’s analysis of the public interest issue, finding disclosure of the requested information could shed light on HHS efforts to measure and improve healthcare quality and to combat fraud and abuse. The dissent also viewed physicians' privacy interest in the data at issue as much more limited given that it pertained to the receipt of government funds and would not reveal an individual’s take-home earnings. Although the dissent concluded FOIA Exemption 6 would not bar release of the requested data, it did find merit to HHS' alternative argument that an injunction issued by the U.S. District Court for the Middle District of Florida (an argument not reached by the majority) was implicated. In Florida Med. Ass’n v. Department of Health, Education and Welfare, 479 F. Supp. 1291 (M.D. Fla. 1979), the court enjoined HHS from disclosing any list of annual Medicare reimbursement amounts that would individually identify members of a recertified class of physicians. Thus, the dissent/concurrence would remand to the district court to determine the scope of that injunction. Consumers’ Checkbook v. Department of Health and Human Servs., No. 07-5343 (D.C. Cir. Jan. 30, 2009). U.S. Court In Georgia Says Ambulance Provider Properly Reimbursed Under “Reasonable Charge” Methodology In Dispute Over Fee Schedule An ambulance provider was properly reimbursed by Medicare under a “reasonable charge” methodology for services even though the statutory effective date to establish a national fee schedule had passed, a federal court in Georgia ruled March 30, 2009. Thus, the U.S. District Court for the Middle District of Georgia upheld the Department of Health and Human Services (HHS) Secretary’s final decision that the provider was not entitled to a retroactive adjustment of its Medicare reimbursement under the fee schedule before federal regulations were in place. The long-running dispute was initiated by various ambulance companies, including Lifestar Ambulance Service, Inc. (Lifestar), in several states that provide ambulance services to Medicare beneficiaries. 243 Plaintiffs initially sought injunctive relief in the form of a writ of mandamus to compel HHS to comply with the requirement in the Balanced Budget Act of 1997 (BBA) that it establish a national fee schedule for ambulance services by the statutory deadline of January 1, 2000, which it had failed to do. HHS instead issued final regulations and applied the new fee schedule only to services rendered on or after April 1, 2002. Plaintiffs said they were entitled to higher payments under the revised fee schedule from January 1, 2000 to March 31, 2002, instead of being paid under the previous “reasonable charge” methodology. The district court issued the writ directing HHS to implement the fee schedule for the disputed time period. But the Eleventh Circuit reversed, concluding the companies had other relief available to them under the Medicare statute and therefore had to first exhaust administrative remedies. Lifestar Ambulance Serv., Inc. v. United States, 365 F.3d 1293 (11th Cir. 2004) (Lifestar II). The court agreed to consider Lifestar’s claims because it had obtained a final agency decision, but dismissed the other providers’ claims for failing to exhaust administrative remedies. HHS then moved for summary judgment on Lifestar’s action. The court granted the motion, finding Lifestar was not entitled to relief. The court noted that because Lifestar II required plaintiff to channel its claim through the administrative process, it must review the action in light of the standards governing administrative appeals, rather than those governing mandamus jurisdiction. Applying a Chevron analysis to the instant case, the court upheld the agency's interpretation of the BBA. Although the BBA provided that the new fee schedule “shall apply to services furnished on or after January 1, 2000,” the court found the statute was ambiguous as to whether the agency was required to promulgate fee schedule regulations by that date. Moreover, the court said the BBA did not speak directly to whether the fee schedule regulations must apply retroactively to services provided after January 1, 2000 but before the fee schedule regulations were promulgated. “Courts have held . . . that a statutory effective date standing alone is insufficient evidence that Congress intended retroactive application of a regulation,” the opinion said. Thus, the court went on to consider the next prong of Chevron—i.e., whether the agency’s interpretation of the BBA was reasonable. Finding that it was, the court noted the agency’s interpretation permitted it to comply with other provisions of the BBA, including budget neutrality and the duty to phase in application of the payment rates in a fair and efficient manner, as well as comported with the general presumption against retroactive application of regulations. Lifestar Ambulance Serv., Inc. v. United States, No. 4:07-CV-89 (D. Ga. Mar. 30, 2009). 244 U.S. Court In Mississippi Upholds Secretary’s Decision To Apply “Blend Rate” For Reimbursing Hospital Outpatient Services The Department of Health and Human Service’s (HHS') decision to apply a “blend rate” to hospital outpatient services after its statutory sunset but before the agency had promulgated a new prospective payment system (PPS) was not arbitrary and capricious, a federal court in Mississippi ruled recently. Under the Balanced Budget Act of 1997 (BBA), Congress established a PPS for outpatient services to go into effect on January 1, 1999. Before the BBA, Congress had signaled a move toward an outpatient PPS by creating a “blend rate,” a hybrid between the previously used reasonable cost reimbursement and a PPS for outpatient surgical, radiological, and other diagnostic procedures. The blend rate was set to expire when the new PPS went into effect on January 1, 1999. HHS failed, however, to promulgate regulations establishing an outpatient PPS by that date. Instead, the outpatient PPS did not take effect until August 2000. During this interim period, the Secretary decided to continue paying hospitals for outpatient services using the “blend rate.” Plaintiff hospitals sued the Secretary arguing they should have been reimbursed under the reasonable cost rate for outpatient surgical, radiological, and other diagnostic procedures in 1999 and 2000. The U.S. District Court for the Southern District of Mississippi disagreed, holding the Secretary properly applied the “blend rate” during this interim period before the PPS was in place. The court employed the two-prong Chevron analysis, concluding first that Congress did not speak to the precise issue in dispute—i.e., the applicable reimbursement rate for outpatient services performed after January 1, 1999 but before the Secretary implemented the PPS. Next, under the second Chevron step, the court held the Secretary’s decision to apply the blend rate during this time period was “based on a permissible construction of the statute.” “[T]he sunset provisions were merely conforming amendments demonstrating Congress’s intent to discontinue the blend rate when the PPS became effective.” The court said it would make little sense to revert back to the reimbursement rate based on reasonable cost that Congress had specifically “abandoned a decade earlier in an effort to reduce costs.” Southwest Miss. Reg’l Med. Ctr. v. Leavitt, No. 3:08cv263 DPJ-JCS (S.D. Miss. Apr. 15, 2009). 245 Regulatory Developments Independent Labs May No Longer Bill Medicare For TC Of Pathology Services Furnished To Hospital Patients, CMS Says The Centers for Medicare and Medicaid Services (CMS) issued Transmittal 357 July 7, 2008 reminding Medicare Fiscal Intermediaries (FIs) and Carriers and Medicare Administrative Contractors (MACs) of the expiration of the moratorium that allowed independent laboratories to bill for the technical component (TC) of physician pathology services furnished to hospital patients. In the transmittal, CMS instructs FIs, carriers, and MACs “to conduct provider education activities to notify independent laboratories that those that qualify to bill under the aforementioned provisions may no longer bill the carrier for the TC of physician pathology services furnished to patients of a covered hospital, regardless of the beneficiary's hospitalization status (inpatient or outpatient) on the date that the service was performed effective with Date of Service on or after July 1, 2008.” In the final physician fee schedule regulation published in the Federal Register on November 2, 1999, CMS stated that it would implement a policy to pay only the hospital for the TC of physician pathology services furnished to hospital patients At the request of the industry to allow independent laboratories and hospitals sufficient time to negotiate arrangements, various statutory and administrative actions delayed the policy change proposed in the regulation, CMS explained. The moratorium on the rule’s implementation was further extended in the Medicare, Medicaid, and SCHIP Extension Act by another six months through June 30, 2008. Therefore, during this time, carriers have continued to pay for the TC of physician pathology services when an independent laboratory furnishes this service to an inpatient or outpatient of a covered hospital. That provision, however, has now sunset and independent laboratories may no longer bill for the TC of physician pathology services furnished to patients of a covered hospital, CMS said. CMS Issues IPPS Rule Containing Payment Provisions Aimed At Reducing “Never Events” In an acute care inpatient prospective payment system (IPPS) final rule issued July 31, 2008 by the Centers for Medicare and Medicaid Services (CMS), the agency took several steps to improve the quality of care provided in hospitals. As part of these quality of care incentives, the rule includes payment provisions to reduce so-called “never events” that occur in hospitals, CMS said in a press release. CMS also sent a letter to state Medicaid directors providing information about how states can adopt the same never events practices and encouraging states to adopt the same non-payment policies outlined in the final rule. CMS also announced the opening of a process to develop National Coverage Determinations (NCDs) addressing three never events: surgery on the wrong body part, surgery on the wrong patient, and wrong surgery performed on a patient. 246 “Evaluating coverage of these procedures is yet another important step for Medicare in addressing concerns regarding never events,” the release said. The rule finalizes three conditions that, if acquired during a hospital stay, Medicare will no longer pay the additional cost of the hospitalization. The three conditions that were identified in the final rule are: surgical site infections following certain elective procedures, including certain orthopedic surgeries, and bariatric surgery for obesity; certain manifestations of poor control of blood sugar levels; and deep vein thrombosis or pulmonary embolism following total knee replacement and hip replacement procedures. In addition, the final rule expands requirements for hospital quality reporting. CMS added 13 new quality measures, bringing the total number of measures for reporting in 2009 to 42. Currently, hospitals are required to report 30 quality measures on their claims for Medicare inpatient services to qualify for a full update to their FY 2009 payment rates. Overall, the final rule is estimated to increase Medicare payments to acute care hospitals by nearly $4.75 billion. CMS Final Payment Rule Aims To Improve Quality Of Care In Hospital Outpatient Departments The Centers for Medicare and Medicaid Services (CMS) issued a final rule October 30, 2008 establishing Medicare payment and policy changes for services in hospital outpatient departments (HOPDs) and ambulatory surgical centers (ASCs) for calendar year (CY) 2009. The Outpatient Prospective Payment System/Ambulatory Surgical Center Payment System (OPPS/ASC) final rule includes a 3.6% annual inflation update for HOPDs, but sets the ASC update for CY 2009 at 0%. CMS projects that the final CY 2009 payment rates under the OPPS will result in a 3.9% increase in Medicare payments for providers paid under the OPPS. Moreover, the agency projects that hospitals will receive $30.1 billion in CY 2009 for outpatient services furnished to Medicare beneficiaries, up from $28.5 billion in projected payments for CY 2008, and expects to make payments of almost $3.9 billion in CY 2009 to ASCs compared with $3.5 billion projected for CY 2008. According to CMS, it will develop and implement a policy to not pay hospitals for care related to illness or injuries acquired by a patient during a hospital outpatient encounter. "Such a policy, which we expect to propose in the future, would be known as hospital outpatient healthcare-associated conditions (HOP-HACs), and it would make adjustments to OPPS payments to ensure equitable and appropriate payment for care, similar to the quality adjustments applied to payment for hospital-acquired conditions in the inpatient setting," CMS said in a press release announcing the rule. In response to comments submitted on the proposed rule, which was published in the August 31, 2007 Federal Register, new conditions of coverage now define an ASC as "a distinct entity that operates exclusively for the purpose of providing surgical services to patients not requiring hospitalization and in which the expected duration of services would not exceed 24 hours following an admission." 247 This is a departure from the proposed rule, which would have provided that the patient’s treatment was not expected to require an overnight stay, defined as requiring active monitoring by qualified medical personnel, regardless of whether it is provided in the ASC, after 11:59 p.m. on the day of admission. Aiming to strengthen ties between payment and quality, the final rule adopts four new quality measures for imaging efficiency, increasing the number of quality measures that HOPDs must report in CY 2009 to receive the full update from the current seven measures to 11. The annual OPPS payment inflation update will be reduced by 2 percentage points for hospitals that do not meet quality reporting requirements. The final rule also makes changes to how CMS pays for imaging services when two or more imaging procedures from an imaging family are provided in one session in order to encourage greater imaging efficiency. Final Rule Increases SNF Payment Rates, Delays Recalibration Of RUGs Under a Centers for Medicare and Medicaid Services (CMS) final rule issued July 31, 2008 Medicare payment rates to nursing homes will increase by $780 million in fiscal year (FY) 2009 due to a 3.4% increase in the annual market basket calculation of the cost of goods and services included in a skilled nursing facility (SNF) stay. The SNF Prospective Payment System (PPS) uses a case-mix classification known as Resource Utilization Groups (RUGs) to help determine a daily payment rate. A recalibration of the RUGs, which had been proposed for FY 2009, “has been delayed while CMS continues to evaluate the data,” the agency said in a press release. “[I]n view of the widespread industry concern that a recalibration could potentially have adverse effects on beneficiaries, clinical staff, and the quality of SNF care, we will continue to evaluate the underlying data carefully as we consider implementing an adjustment in the future,” CMS Acting Administrator Kerry Weems explained. CMS Postpones 2009 Competitive Acquisition Program For Certain Physician-Administered Drugs The Centers for Medicare and Medicaid Services (CMS) announced September 10, 2008 that it was postponing the 2009 Competitive Acquisition Program (CAP) for certain Medicare Part B drugs and biologics administered in physicians’ offices. The Medicare Modernization Act of 2003 mandated the program, which gave physicians who administer certain drugs in their offices to Medicare beneficiaries the option of obtaining them from a single, competitively selected vendor that would then bill Medicare Part B. Physicians who elected to participate in the CAP, instead of purchasing the officeadministered drugs from distributors and then being reimbursed by Medicare, no longer had to collect coinsurance and deductibles from beneficiaries for these drugs. CMS said it received several qualified bids for the 2009-2011 CAP, but “contractual issues with the successful bidders resulted in CMS postponing the 2009 program.” CMS said the existing program will continue through December 31, 2008. 248 After that date, “CAP physician election for participation in the CAP in 2009 will not be held and CAP drugs will not be available from an approved CAP vendor," CMS said. CMS indicated it would provide additional guidance for participating CAP physicians on how to transition out of the program. The agency also is interested in feedback from physicians, potential vendors, and other interested parties before proceeding with another bid solicitation. Among the areas CMS is specifically interested in are the categories of drugs provided under the CAP, the distribution of areas that are served by the CAP, and procedural changes that may increase the program’s flexibility and appeal to potential vendors and physicians. CMS Issues Final Medicare Physician Fee Schedule With 1.1% Bump, Potential For Additional Payment Incentives The Centers for Medicare and Medicaid Services (CMS) issued a final rule October 30, 2008 that provides a statutorily mandated 1.1% update in the Medicare physician fee schedule for calendar year (CY) 2009, with the potential for an additional 4% in payment incentives for adopting electronic prescribing (e-prescribing) and reporting on certain quality measures. The final rule, which is effective January 1, 2009, implements the 1.1% positive update to the fee schedule that was required by the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), which Congress passed this summer to avoid the negative 5.4% cut that was otherwise called for under the existing statutory formula. CMS expects total Medicare spending under the fee schedule of roughly $61.9 billion to 980,000 physicians and non-physician practitioners (NPPs), up 4% from the $59.5 billion projected for 2008. The 2009 fee schedule allows physicians who adopt and use qualified e-prescribing systems to transmit prescriptions to pharmacies to earn an incentive payment of 2.0% of their total Medicare allowed charges during the year, CMS said. CMS has noted that e-prescribing could eliminate certain medication errors and reduce beneficiaries’ out-of-pocket costs. The final rule also includes several improvements to the Physician Quality Reporting Initiative, under which eligible professionals who satisfactorily report certain quality data can receive a 2.0% incentive payment. The final rule adds 52 new quality measures, bringing the total number of measures to 153 for 2009. In addition, the final rule contains a number of other important changes in enrollment and billing requirements for physicians and NPPs, as well as other changes mandated by the MIPPA. According to a CMS fact sheet, the agency opted not to finalize a provision in the proposed rule that would have created a targeted exception to the physician self-referral law to allow certain types of incentive payments or “shared savings programs.” “After reviewing comments, CMS has concluded that it needs additional information in order to finalize an exception that will allow the full array of beneficial, nonabusive 249 incentive payment and shared savings programs, such as pay-for-performance and other quality-focused programs,” the fact sheet said. CMS said it will reopen the comment period on this item for 90 days from the final rule’s publication in the Federal Register to request further input from stakeholders. The final rule also includes revisions to the anti-markup provision in 42 C.F.R. § 414.50. In the proposed rule for the CY 2009 Medicare physician fee schedule, CMS proposed that the anti-markup provisions would apply in all cases where the technical component or the professional component of a diagnostic testing service is either: (i) purchased from an outside supplier; or (ii) performed or supervised by a physician who does not share a practice with the billing physician or other supplier. CMS proposed two alternative approaches to determine whether the performing or supervising physician “shares a practice” with the billing physician or other supplier and solicited comments regarding other possible approaches to address concerns about overutilization. In the final rule, CMS said it was adopting a “flexible approach that incorporates both proposed alternatives.” “We believe that allowing billing physicians and other suppliers that cannot satisfy Alternative 1 to comply with the requirements of Alternative 2 on a case-by-case basis affords physicians flexibility while addressing our concerns regarding the ordering of unnecessary diagnostic tests,” according to the final rule. CMS opted not to move forward at this time with another proposal to apply most of the performance standards for independent diagnostic testing facilities (IDTF) in 42 C.F.R. § 410.33 to physicians and NPPs who furnish diagnostic testing services for Medicare beneficiaries. “With the enactment of section 135 of the MIPPA legislation [which requires the agency to establish an accreditation process for entities furnishing advanced diagnostic testing procedures] and after reviewing public comments, we are deferring the implementation of these proposals while we continue to review the public comments received on this provision and we will consider finalizing this provision in a future rulemaking effort if we deem it necessary,” according to the final rule. Thus, CMS said it was not adopting its proposal to require physicians and NPPs to meet those quality and performance standards when providing diagnostic testing services, except mammography services, within their medical practice setting. CMS Clarifies Definition Of "Negotiated Prices" Under Part D Medicare Part D beneficiaries will pay lower prices at the pharmacy beginning January 1, 2010 under a final rule issued by the Centers for Medicare and Medicaid Services (CMS). The rule, issued January 6, 2009, revises the definition of "negotiated prices" under Part D by requiring drug plan sponsors to use the amount paid to a pharmacy as the basis for determining cost sharing for beneficiaries and for reporting a plan’s drug costs to CMS, the agency said in a press release. "Negotiated prices" are the costs for prescription drugs agreed upon through direct negotiation between the Part D sponsor or an intermediary contracting organization, such 250 as a pharmacy benefit manager (PBM), and the pharmaceutical manufacturer, the agency explained. Under current law, Part D sponsors that contract with a PBM report to CMS the amount paid to the PBM (the lock-in price) or the amount the PBM paid to the pharmacy (the pass-through price). After the new rule takes effect, plans may continue to use the lock-in model with their PBMs, CMS said, but they must report to the agency the price actually paid to the pharmacy as the negotiated price. "For patients whose plan used the lock-in model, this regulation will reduce what they pay at the pharmacy counter because their copayment will no longer be based on a higher negotiated price," CMS Acting Administrator Kerry Weems said. "The current lockin approach also moves beneficiaries through the Part D benefit more quickly, bringing them to the ‘coverage gap’ sooner than under the pass-through pricing model." The final rule also contains provisions related to the Retiree Drug Subsidy (RDS) program, special needs plans, and Medicare Advantage, among other things. CMS Delays Again Final Rule On Medicare Claims Appeals Procedures The Centers for Medicare and Medicaid Services (CMS) announced February 27, 2009 an additional extension of the timeline for publication of a March 2005 interim final rule on changes to Medicare claims appeal procedures. CMS stated in a Federal Register notice (74 Fed. Reg. 8867) that it could not meet the timeline for publication of the final rule “due to the need to allow an opportunity for full consideration of issues of law and policy raised in the regulation.” In addition, CMS said it believes a delay is appropriate “in order to afford the President’s appointees and designees an opportunity to further review and consider the laws and policies that will be set forth in the final rule.” Accordingly, the notice delays the new timeline for publication of the final rule until March 1, 2010. The publication of the final rule has already been once delayed. On February 29, 2008, CMS published a notice (73 Fed. Reg. 11043) extending the timeline for publication of the interim final rule one year until March 1, 2009. CMS stated in the current notice that Section 1871(a)(3)(C) of the Social Security Act allows an interim final rule to remain in effect after the expiration of the regular timeline, if at the end of each succeeding one-year extension to the regular timeline, the Secretary publishes in the Federal Register a notice of continuation and explains why the regular timeline or any subsequent extension was not complied with prior to the expiration of the timeline. The interim final rule, published in March 2005 (70 Fed. Reg. 11420), will remain in effect until March 1, 2010 unless a final rule is issued before then, the notice said. 251 Medicare Payments To Hospices Projected To Decrease 1.1% In FY 2010 With Phase-Out Of Temporary Adjustment The Centers for Medicare and Medicaid Services (CMS) issued April 21, 2009 a proposed rule to update the Medicare Hospice Wage Index for fiscal year (FY) 2010. Under the proposed rule, published in the April 24, 2009 Federal Register (74 Fed. Reg. 18912), Medicare payments to hospices are expected to decline roughly 1.1% in FY 2010 to about $30 billion, according to a CMS fact sheet. The decrease, CMS said, is the net result of a 3.2% reduction in payments due to the phase-out of a temporary adjustment used in calculating the wage index, partially offset by an estimated 2.1% increase in the hospital market basket. According to CMS, the two-year phase-out will save Medicare $2.9 billion over five years and improve payment accuracy. The phase-out to the budget neutrality adjustment factor (BNAF), which was implemented in 1997, was slated to begin in FY 2009, but Congress suspended the reduction in the American Recovery and Reinvestment Act for this year. The legislation did not, however, affect FYs 2010 and 2011. CMS plans to reduce the BNAF by 75% in FY 2010 and ultimately eliminate it in FY 2011. CMS said the proposed rule “would bring the Medicare hospice wage index more in line with that used for home health agencies, while maintaining the fiscal integrity of Medicare and allowing continued access to services for its beneficiaries.” CMS also is proposing, per a Medicare Payment Advisory Commission recommendation, to require hospice physicians who certify or recertify a beneficiary as terminally ill to write a short narrative on the certification briefly describing the clinical evidence supporting a life expectancy of six months or less (as required to qualify for the Medicare hospice benefit). The proposal is intended to increase accountability in the physician hospice certification and recertification process. To this end, the proposal also seeks comments on whether a physician or nurse practitioner should be required to visit every hospice patient after 180 days on the benefit, and every benefit period thereafter. CMS Proposes 2.4% Update For IRFs In FY 2010 The Centers for Medicare and Medicaid Services (CMS) proposed April 28, 2009 a 2.4% market basket update to the inpatient rehabilitation facility (IRF) prospective payment system (PPS) for fiscal year (FY) 2010. CMS projects this payment rate, coupled with a proposed outlier threshold of $9,976, will mean a total increase in IRF payments under the proposed rule of $150 million. 252 The outlier threshold is the amount estimated to maintain outlier payments equal to 3% of total estimated payments under the IRF PPS for FY 2010, CMS explained in a press release. The new payment rates will be effective October 1, 2009. CMS is accepting comments on the proposed rule until June 29, 2009. CMS also is proposing changes to the framework for selecting and caring for Medicare patients in IRFs, which is more costly than other settings such as hospital outpatient departments, skilled nursing facilities, or home healthcare. In addition to the proposed rule, CMS also is posting draft revisions to the Medicare Benefit Policy Manual for public comment to make conforming changes based on the proposed rule and provide further detailed guidance on selecting patients for admission to IRFs and implementing individual treatment plans. “CMS is proposing updates to the current IRF coverage criteria that would better reflect industry-wide best practices, and improve understanding and consistency of medical necessity guidelines,” said CMS Acting Administrator Charlene Frizzera. Specifically, the proposed rule would clarify requirements for preadmission screening to determine whether a patient should receive rehabilitations services in an IRF or in another, less intensive setting; post-admission treatment planning; and ongoing care coordination throughout the inpatient stay. According to a CMS fact sheet, under the proposed rule, each candidate for IRF care would have to undergo a comprehensive preadmission screening conducted by a qualified clinician or clinicians designated by a rehabilitation physician no more than 48 hours prior to admission. The proposed rule also would require that IRF services be ordered by a rehabilitation physician and be coordinated by an interdisciplinary team, including at least a registered nurse with specialized training or experience in rehabilitation; a social worker or case manager; and a licensed or certified therapist from each therapy discipline involved in treating the patient. Under the proposed rule, this interdisciplinary care team would have to perform a postadmission evaluation within 24 hours of admission to determine whether the results of the preadmission screening were still accurate and to develop an overall plan of care tailored to the individual patient. Therapy treatments should begin within 36 hours after the patient’s admission to the IRF, CMS said. CMS is proposing that the individualized plan of care be in place within 72 hours of a patient’s admission to the IRF and that the interdisciplinary team meet at least once a week to ensure the appropriate establishment and achievement of treatment goals. CMS also is proposing that a rehabilitation physician conduct face-to-face visits with the patient a minimum of at least three days per week throughout the patient’s stay to assess the patient both medically and functionally, as well as to modify the treatment plan as necessary. 253 Other Developments Congress Overrides Bush Veto Of Medicare Bill, CMS Moves To Implement New Law In July 2008, the House and Senate voted by substantial margins to override President Bush’s veto of a Medicare package (H.R. 6331) that blocks the over 10% reimbursement cut to physicians that went into effect July 1, 2008. As promised, President Bush vetoed the measure July 15, 2008. Bush said he supported averting the physician payment cut, but objected to provisions that would “undermine Medicare Part D, reduce payments for [Medicare Advantage (MA)] plans, and restructure the MA program in a way that would lead to limited beneficiary access, benefits, and choices and lower-than expected enrollment in Medicare Advantage.” Bush also charged that the Medicare Improvements for Patients and Providers Act of 2008 “would imperil the long term fiscal soundness of Medicare by using short-term budget gimmicks that do not solve the problem.” Democratic lawmakers, however, blasted the veto. Before the vote, House Ways and Means Committee Chairman Charles Rangel (D-NY) said Congress would “send a strong message to the nation that the needs of millions of beneficiaries should come before the needs of the insurance industry.” A number of Republicans also voiced their disappointment in the President’s veto. “This bipartisan bill strikes the right balance between caring for our seniors by improving Medicare and ensuring doctors are available to treat them,” said Senator Gordon Smith (R-OR). Both houses of Congress voted convincingly to override the veto: the Senate by a 70-26 vote and the House by a 383-41 margin. As a result, Medicare will maintain the current 0.5% increase in physician reimbursement rates through the remainder of 2008 and provide a 1.1% update in 2009. The measure also puts in place an 18-month delay of the competitive bidding program for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS), which also went into effect July 1, 2008. In addition, the legislation reinstates the therapy caps exception process for medically necessary services as of July 1, 2008. CMS said claims submitted with the therapy cap exception modifier will be processed as soon as the payment rates have been activated, while those submitted without the modifier, and rejected or denied, can be resubmitted for reimbursement. Medicare Payments On Physician Imaging Services Down With OPPS Cap Medicare expenditures on physician imaging services declined in 2007 after payment caps mandated by the Deficit Reduction Act of 2005 (DRA) were put in place, the Government Accountability Office (GAO) found in a September 26, 2008 report. According to the report, Medicare: Trends in Fees, Utilization, and Expenditures for Imaging Services before and after Implementation of the Deficit Reduction Act of 2005, 254 Medicare expenditures on physician imaging services on a per-beneficiary basis declined 12.7% in 2007, compared to 11.4% increases from 2000 to 2006. At the same time, during 2007, per-beneficiary utilization continued to rise, albeit at a slower rate (3.2%) than for the 2000-2006 time period (5.9%). The report examined the implications of a DRA provision that capped Medicare fees for certain imaging services covered by the physician fee schedule at what the program pays for these services under the Medicare hospital outpatient prospective payment system (OPPS). The cap applies only to the fee physicians receive for performing—as opposed to interpreting—an imaging test, GAO explained. The Centers for Medicare and Medicaid Services (CMS) implemented the OPPS cap for imaging services performed on or after January 1, 2007, as required by the DRA. GAO found in 2007 the OPPS cap reduced the fee for about 25% of physician imaging tests overall, and fees for advanced tests (about 65%) were more likely than other imaging tests (about 13%) to be paid at the OPPS rate. Specifically, GAO noted that nearly all MRIs and CTs were paid at the OPPS rate, and that among advanced imaging tests fee reductions varied widely. CMS said GAO’s findings were in line with its own estimates. CMS also was encouraged that GAO’s findings seemed to suggest beneficiary access to imaging services was maintained, although it remains concerned about the high volume of imaging services. Patient Safety HHS Issues Final Rule Implementing Patient Safety Legislation The Department of Health and Human Services (HHS) published in the November 21, 2008 Federal Register (73 Fed. Reg. 70732) a final rule implementing patient safety legislation enacted in 2005 to promote medical error reporting. The Patient Safety and Quality Improvement Act of 2005, Pub. L. No. 109-41, set forth privilege and confidentiality protections in civil and criminal proceedings for “patient safety work product” (PSWP) reported by providers to new patient safety organizations (PSOs). The PSOs will collect, aggregate, and analyze the data to identify ways to prevent medical errors. The final rule, which is effective January 19, 2009, details the framework for confidential error reporting and specifies the requirements and procedures for entities to become PSOs. “By making it easier for clinicians and health care organizations to report and learn from adverse events without fear of new legal liability, we will be able to improve our Nation’s health care systems and minimize factors that can contribute to mistakes,” said HHS Secretary Michael Leavitt in a press release. The Agency for Healthcare Research and Quality (AHRQ) already has listed 15 PSOs pursuant to interim guidance issued in October 2008. These organizations will retain their 255 PSO status throughout the interim period and are expected to comply with the final rule once it takes effect. According to HHS, the final PSO rule, while generally consistent with the February 2008 proposal (73 Fed. Reg 8112), includes a number of changes or new requirements. For example, the final rule requires PSOs to notify providers if PSWP it submits is inappropriately disclosed or its security is breached. The final rule also adds flexibility to requirements for how a component PSO maintains separation between itself and its parent organizations. The final rule also includes changes from the proposed rule regarding the listing and delisting of PSOs and the ways PSOs must comply with statutory requirements. HHS said it modified the definition of PSWP to include information that, while not yet reported to a PSO, is documented as being within a provider’s patient safety evaluation system and that will be reported to a PSO. “This modification allows for providers to voluntarily remove, and document the removal of information from the patient safety evaluation system that has not yet been reported to a PSO, in which case, the information is no longer patient safety work product,” the final rule said. The final rule also expands the types of entities and organizations excluded from listing as PSOs and increases flexibility in how PSOs can store PSWP. Under the final rule, PSOs’ listings automatically expire after three years, unless specifically continued by the Secretary. In addition, the final rule provides an expedited delisting process for PSOs in certain serious circumstances. OIG Examines Key Issues Surrounding Reporting Of Adverse Events Nationally And For State Reporting Systems Twenty-six states currently have adverse event reporting systems, the Department of Health and Human Services Office of Inspector General (OIG) said in a report, Adverse Events In Hospitals: State Reporting Systems (OEI-06-07-00471). OIG found the states' reporting requirements varied, including the list of reportable events; criteria for determining whether events are reportable; and the extent to which adverse event details, such as the specific location in which the event occurred or key factors that contributed to the event, must be reported. OIG is mandated under the Tax Relief and Health Care Act of 2006 to report to Congress on the incidence of "never events" among Medicare beneficiaries, payment by Medicare or beneficiaries for services furnished in connection with such events, and the processes that the Centers for Medicare and Medicaid Services (CMS) uses to identify events and deny payment. "Never events" are specific adverse events that the National Quality Forum deemed "should never occur in a health care setting," the report explained. Twenty-three states had established their own lists of reportable adverse events, and three states used the National Quality Forum’s list of Serious Reportable Events, OIG said. 256 Although state officials were reluctant to estimate the extent to which adverse events go unreported, most states with reporting systems said they have mechanisms to identify underreporting and strategies to improve reporting, OIG said. In addition, 25 of the 26 states with event reporting systems indicated that information submitted to the system is kept confidential. The report found that state staff identified two major purposes for their adverse event reporting systems: to hold individual hospitals accountable for their patient care performance and to disseminate information more broadly with the goals of allowing hospitals to learn from others’ experiences and prevent adverse events. In this regard, 23 states reported using data to hold individual hospitals accountable and 18 reported using data to promote learning and prevent adverse events. OIG concluded that the differences it found among states "make event reporting systems data unsuitable for use in the aggregate to identify national incidence and trends." In another report issued the same day, Adverse Events In Hospitals: Overview Of Key Issues (OEI-06-07-00470), OIG identified seven key issues that are critical to the study of adverse events. According to the report, one issue is that estimates of the incidence of adverse events in hospitals vary widely and no optimal method for measuring events has been identified. Estimates range from less than 3% to greater than 20% of patients experiencing adverse events, the report found. Another issue to be aware of is nonpayment policies for adverse events. Such policies are gaining in prominence, OIG said, including CMS' 2008 policy to deny hospitals higher payment for admissions complicated by selected adverse events. Such policies are viewed as a powerful incentive to reduce incidences of events and lower healthcare costs, but they can also raise potential drawbacks, such as limiting access to care and increasing hospital costs while reducing revenue, the report said. OIG also found that although adverse events are reported to several different entities, stakeholders suspect substantial underreporting occurs. While the disclosure of adverse event information can assist patients in making decisions about care and pressure hospitals to improve patient safety, the report also noted such reporting can have legal implications for providers and patients. For example, when adverse event information is reported outside the hospital, legal protection may be lost and can increase the likelihood that individual cases are known and result in loss of patient confidentiality. Among other issues identified in the report are barriers to hospitals staff reporting of adverse events, and that some hospitals and clinicians may be slow to adopt or routinely apply practices for preventing adverse events. Some stakeholders, however, described the current environment "as being on the verge of accelerating progress and indicated that with continued focus, hospitals can reduce the overall incidence of adverse events and improve quality of care," OIG said. Adverse Events In Hospitals: State Reporting Systems (OEI-06-07-00471). 257 Adverse Events In Hospitals: Overview Of Key Issues (OEI-06-07-00470). Privacy/Security HHS Announces First-Ever Resolution Agreement Of Potential HIPAA Violations Seattle-based Providence Health & Services (Providence) has agreed to pay $100,000 and to implement a “robust” Corrective Action Plan to resolve potential violations of the Health Insurance Portability and Accountability Act (HIPAA) privacy and security rules, the Department of Health and Human Services (HHS) announced July 17, 2008. The first-ever Resolution Agreement imposed by HHS on a covered entity stems from potential privacy and security breaches that arose when unencrypted electronic backup media and laptop computers were removed from the Providence premises and were left unattended on several occasions between September 2005 and March 2006. The media and laptops were subsequently lost or stolen, compromising the protected health information of over 386,000 patients, HHS said. As part of the agreement, Providence must revise its polices and procedures regarding physical and technical safeguards (e.g. encryption) governing off-site transport and storage of electronic media containing patient information, subject to agency approval; train workforce members on the safeguards; conduct audits and site visits of facilities; and submit compliance reports to HHS for three years. According to an HHS press release, Providence’s cooperation with the Office for Civil Rights (OCR), which enforces the HIPAA privacy rule, and the Centers for Medicare and Medicaid Services, which oversees HIPAA security compliance, helped it avoid a civil money penalty. “We are committed to effective enforcement of health information privacy and security protections for consumers. Other covered entities that are not in compliance with the Privacy and Security Rules may face similar action,” said OCR director Winston Wilkinson. “The protection of patient information is a top priority for Providence Health & Services,” said Providence’s Chief Information Security Officer Eric Cowperthwaite. “Since these incidents occurred, we have reinforced our security protocols and implemented new data protection measures. Under the terms of the agreement we will continue to implement appropriate policies, procedures and training.” FTC Delays Red Flag Rules Enforcement The Federal Trade Commission (FTC) announced October 22, 2008 that it was delaying enforcement of key elements of its identity theft detection, prevention, and mitigation rules, also known as the “Red Flag Rules,” to allow “creditors” and financial institutions additional time to fully implement policies and procedures designed to thwart identity theft. The Red Flag Rules will be applicable, in many circumstances, to both for-profit and not-for-profit healthcare providers. The FTC stated that “some industries and entities within the FTC’s jurisdiction have expressed confusion and uncertainty about their coverage under the rule.” Recent outreach by the FTC to the healthcare industry and the industry’s response suggests that the applicability of the Red Flag Rules to healthcare enterprises has been less than obvious to many. 258 In its Enforcement Policy Statement, the FTC noted that “Given the confusion and uncertainty within major industries under the FTC’s jurisdiction about the applicability of the rule, and the fact that there is no longer sufficient time for members of those industries to develop their programs and meet the November 1 compliance date, the Commission believes that immediate enforcement of the rule on November 1 would be neither equitable for the covered entities nor beneficial to the public.” Duties regarding the detection, prevention, and mitigation of identity theft, codified as 16 C.F.R. § 681.2, now will become enforceable on May 1, 2009, a six-month reprieve from the original enforcement deadline of November 1, 2008. Healthcare providers subject to enforcement by the FTC (under Section 681.2) now have an additional 180 days to develop policies, implement procedures, and train their staff on the implications of the Red Flag Rules. The announcement does not delay the November 1, 2008 enforcement date for companion provisions within the Red Flag Rules (16 C.F.R. § 681.1, pertaining to duties of users of consumer reports who encounter discrepancies, and 16 C.F.R. § 681.3, pertaining to duties of card issuers regarding changes of address). The FTC’s Red Flag Rules are promulgated under authority of the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which amended the Fair Credit Reporting Act (FRCA), all of which is codified at 15 U.S.C. § 1681, Pub. L. No. 108-159, 117 Stat. 1952. Appendix A to the Red Flag Rules contains a number of specific guidelines designed to assist in detecting, preventing, and mitigating identity theft. See Appendix A to Part 681—Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation at 16 C.F.R. Part 681. * This item was contributed by Laird Pisto, MultiCare Health System (Tacoma, WA). **FTC April 30, 2009 decided to further delay enforcement of the Red Flag Rules for three months until August 1, 2009. OIG Criticizes CMS’ Oversight Of HIPAA Security Compliance The Centers for Medicare and Medicaid Services (CMS) needs to be more proactive in overseeing and enforcing implementation of the Health Insurance Portability and Accountability Act (HIPAA) Security Rule, the Department of Health and Human Services Office of Inspector General (OIG) said in a recent report. CMS’ complaint-driven enforcement approach to ensuring covered entities comply with HIPAA security requirements fails to address a number of “significant vulnerabilities” the OIG said it identified during its audits of various hospitals nationwide. “In fact, CMS has received very few complaints regarding potential HIPAA Security Rule violations,” the OIG said. The OIG recommended that CMS establish policies and procedures for conducting HIPAA Security Rule compliance reviews of covered entities rather than rely on complaints to identify cases of noncompliance. The OIG said after it completed its fieldwork, but before the report was issued, CMS executed a contract to conduct compliance reviews at covered entities. The OIG also acknowledged that, while ineffective as an exclusive mechanism to monitor compliance with the HIPAA Security Rule or to safeguard electronic protected health 259 information (ePHI), CMS’ complaint-driven review process is well developed and organized. The report is based on audits OIG conducted from July 25, 2008 through August 24, 2007 of hospitals nationwide. “Preliminary results of these audits show numerous, significant vulnerabilities in the systems and controls intended to protected ePHI at covered entities. These vulnerabilities place the confidentiality and integrity of ePHI at high risk,” the report said. CMS disagreed with the report's findings stating it believes the complaint-driven enforcement process has promoted voluntary compliance. At the same time, CMS acknowledged that compliance reviews are a useful enforcement tool as part of an overall enforcement strategy. According to the OIG, many of the vulnerabilities it identified would not have been flagged by HIPAA Security Rule complaints. As of October 31, 2005, CMS received only 413 potential Security Rule complaints out of more than 16,000 total HIPAA complaints. Nationwide Review of the Centers for Medicare & Medicaid Services Health Insurance Portability and Accountability Act of 1996 Oversight (A-04-07-05064). Georgia Supreme Court Say HIPAA Trumps State Law Concerning Defense Attorneys’ Ex Parte Contact With Prior Treating Physicians The Georgia Supreme Court held November 3, 2008 that a defendant’s attorneys in a medical malpractice action could not informally interview the plaintiff’s prior treating physicians unless Health Insurance Portability and Accountability Act (HIPAA) privacy rule requirements were met. Reversing an October 2007 appeals court decision, the high court said HIPAA, not Georgia law, governed such ex parte communications because the federal statute “affords patients more control over their medical records when it comes to informal contacts between litigants and physicians.” Thus, defense counsel may informally interview plaintiff’s treating physicians only after obtaining a valid authorization or a protective order or ensuring the patient was given notice and an opportunity to object to the ex parte contact in accordance with HIPAA. See 45 C.F.R. § 164.512(e). Plaintiff Amanda Moreland sued Dr. Michael Austin and his employers for medical malpractice after her husband died while in Austin’s care at the Coliseum Medical Center. Moreland produced her husband's medical records, including documents relating to his prior treatment by three cardiologists. Defense counsel contacted each physician and asked for “an assessment of Mr. Moreland's cardiovascular status and his prognosis” while under each physician’s care. Moreland objected to such contact, claiming that it violated the HIPAA privacy rule. 260 The trial court eventually held Austin could interview Mr. Moreland's prior treating physicians, but only after giving reasonable notice to Moreland so that her attorneys could be present during the discussions. The appeals court reversed, holding that as long as a physician discloses protected health information in compliance with HIPAA and Georgia law, defense counsel may continue to communicate with the physician in an ex parte fashion. The Georgia Supreme Court said the appeals court’s analysis missed the mark because it failed to recognize that HIPAA preempts Georgia law with regard to ex parte communications between defense counsel and plaintiff’s prior treating physicians. Under Georgia law, a plaintiff waives his right to privacy with regard to medical records that are relevant to a medical condition the plaintiff placed at issue in court proceedings. “HIPAA, on the other hand, prevents a medical provider from disseminating a patient’s medical information, whether orally or in writing, without obtaining a court order or the patient’s express consent,” the high court said. Thus, the high court concluded, HIPAA is more stringent than Georgia law and therefore preempts it. The high court added that defense counsel could still communicate informally with a patient’s treating physicians so long as the contact was not intended to elicit protected health information. With respect to meeting HIPAA’s requirements for such ex parte contact at issue in the instant case, the court said service of a request for production of documents was not sufficient notice and opportunity for Moreland to object as it related only to production of written documents, not oral contact and the discovery of the physicians’ recollections and mental impressions. Moreland v. Austin, No. S08G0498 (Ga. Nov. 3, 2008). IOM Says New Privacy Framework Needed For Health Research The Health Insurance Portability and Accountability of 1996 (HIPAA) does not protect privacy as well as it should and in fact actually impedes important health research, according to a report issued by the Institute of Medicine (IOM). The report, Beyond the HIPAA Privacy Rule: Enhancing Privacy, Improving Health Research, recommended that federal policymakers develop a new privacy framework apart from HIPAA for health research that standardizes ethical oversight and emphasizes strong security protections. This framework would apply to all of the nation’s health research regardless of funding source or the holder of the data, the report said. According to the report, privacy protections need to distinguish between informationbased research, involving medical records and stored samples, and interventional clinical research, involving human subjects. The IOM recommended extending the Common Rule, which generally applies to federally funded research in humans, to all interventional research regardless of funding source. 261 For information-based research, the IOM said the Department of Health and Human Services (HHS) and other federal agencies should implement new goal-oriented federal oversight that focuses on best practices in privacy, security, and transparency. The IOM called for expanding the use of de-identified data with legal sanctions for unauthorized re-identification. Where personally identifiable information is used in research without individual consent, IOM recommended two oversight mechanisms: a local ethical review board or federal certification of institutions that have policies and practices in place to protect data privacy and security. As an alternative to devising a new privacy approach, the IOM proposed amending the HIPAA Privacy Rule’s health research provisions to reduce variability in interpretation among Institutional Review Boards and Privacy Boards and standardize requirements. The report was produced by the IOM’s Committee on Health Research and the Privacy of Health Information. Stimulus Bill Includes Sweeping Expansion Of HIPAA And Data Breach Notification Requirements This item is an excerpt from an article written for Health Lawyers Weekly by James B. Wieland, Ober|Kaler. The American Recovery and Reinvestment Act of 2009 (ARRA), the “Stimulus Bill,” includes Title XIII—“Health Information Technology,” also known as the “Health Information Technology for Economic and Clinical Health Act” or “HITECH Act.” The HITECH Act contains significant expansions of the Health Insurance Portability and Accountability Act (HIPAA) Privacy and Security Rules and numerous other changes that will have a major impact on the healthcare information and technology sector. Virtually every healthcare provider and third-party service provider that stores or accesses individuals’ medical information will be affected by this new federal law. Effective Date Except where otherwise specifically provided, the effective date of the Improved Privacy Provisions and Security Provisions discussed in this article appears to be 12 months after enactment. However, as noted below, there are a number of provisions with different effective dates. Business Associates will be subject to HIPAA security provisions and to sanctions for violation of business associate requirements. The HIPAA requirements for administrative, physical, and technical information safeguards and written policies and procedures will apply directly to Business Associates, as well as civil and criminal penalties for violations. The Department of Health and Human Services (HHS) Secretary will publish annual guidance on “the most effective and appropriate technical safeguards” for this purpose. Other HITECH Act security provisions also apply. As discussed below, Business Associates must detect and report “security breaches” to Covered Entities. The HITECH Act also provides that a Business Associate that obtains or creates Protected Health Information (PHI) pursuant to a written contract or arrangement may use or 262 disclose PHI only “in compliance with each applicable requirement of [45 C.F.R.] 164.504 (e).” The cited section contains the detailed implementation requirements for a Business Associate Agreement as well as the requirement for action in the event of knowledge of a “pattern of activity or practice” that is a material breach of the Business Associate Agreement. In other words, whatever the Business Associate Agreement provides, Business Associates will be directly responsible for full compliance with the relevant requirements of the Privacy Rule itself, and subject to civil and criminal penalties if they fail to do so. This provision, in conjunction with the provisions regarding notification of security breaches discussed in the next section, will have a major, long term impact on service providers who work with PHI, the “non-covered entity” sector of the health information system. This provision closes what was perceived by regulatory authorities as a significant gap in the jurisdictional ambit of HIPAA. As originally written, HIPAA was limited to health plans, healthcare clearinghouses, and healthcare providers who conducted core “back office” transactions in electronic form. Third-party service providers were not initially subject to direct regulation. Federal law now requires consumer notification of data breaches involving “unsecured” PHI. Both Covered Entities and Business Associates must comply. The breach notification provisions are effective for breaches that occur 30 days after the Secretary of HHS publishes implementing interim final regulations. These regulations are due within 180 days after enactment. The notification protocol generally follows the “California model” of notification already adopted by the majority of states. However, the new federal notification requirements are more stringent than the notification laws of many states in several respects: • • The breach is deemed discovered on the first day that the breach is known or should reasonably have been known to the entity, including to any employee, officer, or “other agent” (other than the individual committing the breach). Individual notification must be provided within 60 days of discovery, absent a law enforcement official’s instructions to the contrary. In addition to notice to affected individuals, Covered Entities also must notify the HHS Secretary of a breach of security. This notice must be provided immediately if the breach involves 500 or more individuals. Covered Entities may maintain a log of breaches involving less than 500 individuals, and provide the log to the Secretary annually. The Secretary will post a list of Covered Entities providing a notice of breaches involving 500 individuals or more on its website. Business Associates must report a security breach to the Covered Entity within the same time frame. A Business Associate who fails to do so will be subject to direct enforcement and penalties. “Unsecured” PHI is PHI that is not protected by “technologies and methodologies that render Protected Health Information unusable, unreadable, or indecipherable to unauthorized individuals,” i.e., in lay terms, PHI that is not encrypted. The burden of proof of compliance, including compliance with the timeliness of notice, is explicitly on the Covered Entity or Business Associate. Vendors of personal health records and their service providers made subject to the same security breach notification requirement. 263 These provisions are captioned in the HITECH Act as “Temporary.” They have the same Effective Date as the parallel provision for Covered Entities and Business Associates. However, the Personal Health Record (PHR) Vendor provisions sunset if Congress enacts new legislation establishing requirements for security breach notification for entities that are not Covered Entities or Business Associates. A PHR vendor has the same obligations as to security breaches as a Covered Entity and a third-party service provider has the same obligations as a Business Associate. Breaches related to a PHR are initially reported to the Federal Trade Commission (FTC); the FTC will notify the Secretary of HHS. Failure of a PHR vendor or a service provider to comply with the requirements of this section is an “unfair and deceptive trade practice” enforceable within FTC jurisdiction. Individuals may require Covered Entities not to disclose certain self pay services to health plans. Under the Privacy Rule pre-HITECH Act, an individual has a right to request restrictions on disclosure of the individual’s PHI, but a Covered Entity is not required to grant that request, although the individual’s request is retained in the record. Under the HITECH Act, a Covered Entity is required to agree to an individual’s request for privacy protections as to the disclosure of PHI for payment or healthcare operations if the information pertains only to a healthcare item or service that the individual has paid for out of pocket in full, unless disclosure is otherwise required by law or is for treatment purposes. This provision answers one of the consumer privacy concerns about Health Care Information Exchanges (HIEs) (f/k/a Regional Health Information Networks (RHIOs))— that individuals might not want their insurance companies to know about certain healthcare services out of concern that the treatment would affect the individual’s insurance rates or insurability. The limited data set becomes a default minimum necessary standard. HIPAA regulates a Covered Entity’s uses and a Covered Entity’s disclosures of PHI. For non-treatment and most other disclosures, Covered Entities are required to use, disclose, and request only the “minimum necessary” amount of PHI. The HITECH Act provides that, in order to be treated as in compliance with the HIPAA minimum necessary requirements, a Covered Entity must limit its requests for and use or disclosures of PHI to (i) a “Limited Data Set” “to the extent practicable,” or (ii) “if needed by such entity,” (i.e. apparently, the Limited Data Set is not “practicable”) to the minimum necessary to accomplish the intended purpose of such use, disclosure, or request. The Limited Data Set has, to date, mainly been the concern of entities engaged in research. A Limited Data Set is still PHI under HIPAA, but all “direct identifiers” have been removed. The Secretary of HHS is directed to issue guidance on what constitutes the minimum necessary within 18 months of enactment. This provision sunsets after those regulations are issued. 264 Covered Entities using electronic health records (EHRs) are required to provide accounting of disclosures of PHI for treatment, payment, and healthcare operations. HIPAA, pre HITECH Act, exempted a Covered Entity from an obligation to provide individuals with an accounting of disclosures of their PHI if, among other things, the disclosure was for treatment, payment, or healthcare operations. Under the HITECH Act, this exception is eliminated as to Covered Entities that use EHRs. For disclosures by a Business Associate, the Covered Entity may provide the accounting or may direct the individual to its Business Associates, who must comply with the accounting requirements. In recognition of the burden that this is likely to impose, the period for which an accounting is required is limited to three years, not the six-year period otherwise required. The effective date of this provision is delayed, as follows: • • • For Covered Entities, insofar as they acquired an EHR as of January 1, 2009, the accounting requirement applies to disclosures made on or after January 14, 2014. For Covered Entities insofar as they acquired an EHR after January 1, 2009, the provision will be effective for disclosures on the later of January 1, 2011 or the date upon which the entity acquires the EHR. The Secretary of HHS can impose a later effective date but it can be no later than 2016 for the Covered Entities with EHR as of January 1, 2009 and 2013 for all other Covered Entities with EHR. Restrictions on the remuneration for “sale” of EHRs or PHI A Covered Entity or a Business Associate cannot “directly or indirectly” receive remuneration in exchange for any PHI of an individual except pursuant to a valid HIPAA authorization that includes specifics on any further exchanges of the PHI by its recipient. Presumably, consistent with earlier, unrelated comments of the Secretary of HHS, the federal fraud and abuse test for what constitutes direct or indirect remuneration will apply. The HITECH Act provides a number of exceptions to this prohibition, including transfers for public health activities, as defined by HIPAA; transfers for research purposes, subject to the limitations on the remuneration; and transfers for treatment, unless the Secretary of HHS determines otherwise. This provision of the HITECH Act is effective only for exchanges that occur six months after the Secretary of HHS promulgates implementing regulations. The Secretary is directed to promulgate those regulations within 18 months of enactment. The HIPAA healthcare operations exception for “marketing” communications is narrowed significantly, if direct or indirect remuneration is received. Pre-HITECH Act, a Covered Entity or Business Associate could provide communications that might otherwise be considered marketing without individual authorization if the 265 communication was to describe a healthcare item or service or third-party payment for the item or service, for treatment, or for case management or counseling about alternative treatments. These activities were considered healthcare operations. Under the HITECH Act, such communications are not healthcare operations, if the Covered Entity or Business Associate making the communication receives “direct or indirect remuneration” for making the communication. The relatively broad federal fraud and abuse definition of remuneration is likely to apply. Payment for treatment, however, is specifically not remuneration for this purpose. This change does not apply, if: • • • The communication is about a current drug or biological the recipient is taking, under certain circumstances, if the remuneration is “reasonable,” a term to be defined by the Secretary of HHS. The communication is made by the Covered Entity based on a valid HIPAA authorization. The communication is made by a Business Associate of the Covered Entity in accordance with a written Business Associate Agreement. The Act provides for “Improved Enforcement” The Act amends the Social Security Act to add a provision requiring the Secretary to “formally investigate any compliant of a violation of this part if a preliminary investigation of the facts of the complaint indicate such a possible violation due to willful neglect” (sic). The Act clarifies that for purposes of the definition of wrongful disclosure “a person (including any employee or other individual) shall be considered to have obtained or disclosed individually identifiable health information in violation of this part if the information is maintained by a covered entity . . . and the individual obtained or disclosed such information without authorization.” State AG Suits for HIPAA Violations In addition, under ARRA state attorneys general are authorized to bring a civil action on behalf of any resident in connection with an alleged HIPAA violation. The AG is authorized to seek an injunction, statutory damages, and attorneys’ fees in the lawsuit. Under the provisions, state AGs may outsource the lawsuits to private attorneys on a contingency fee basis. Business groups strongly opposed inclusion of the provision in the legislation. The U.S. Chamber of Commerce warned the provision allows private law firms to litigate HIPAA enforcement and will lead to “higher costs and increased regulatory complexity.” FTC Seeks Comments On Breach Notification Proposal; HHS Issues Guidance On Safeguarding Health Information The Federal Trade Commission (FTC) issued April 16, 2009 a notice seeking comments on a proposed rule requiring vendors of personal health records (PHRs) and related entities to notify consumers and the FTC when the security of their individually identifiable health information is breached. 266 FTC issued the notice to comply with the economic stimulus bill, the American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law on February 17, 2009. Under ARRA, FTC must promulgate, within 180 days of enactment, interim regulations on breach of security notification requirements included in the statute for entities not subject to the Health Insurance Portability and Accountability Act (HIPAA). ARRA also requires the Department of Health and Human Services (HHS) and the FTC to study potential privacy, security, and breach notification requirements and submit a report to Congress by February 2010. Until Congress enacts legislation implementing any recommendations contained in the joint report, the ARRA contains temporary requirements to be enforced by the FTC that such entities notify customers in the event of a security breach. The proposed rule implements these requirements. In the FTC’s notice of proposed rulemaking, the agency notes HHS, under the ARRA, also must promulgate interim final regulations related to breach notification requirements for HIPAA-covered entities and their business associates. “To the extent that FTC-regulated entities engage in activities as business associates of HIPAA-covered entities, such entities will be subject only to HHS’ rule requirements and not the FTC’s rule requirements,” the proposed rule says. According to FTC estimates, roughly 900 entities will be subject to the proposed rule’s breach notification requirements. The FTC’s breach notification rule, proposed 16 C.F.R. pt. 318, describes and clarifies ARRA requirements and indicates what triggers the notice requirement, and the timing, method, and content of the notice, among other things. Application and Scope The proposed rule applies the breach notification requirements to vendors of personal health records, PHR related entities, and third-party service providers (who must notify vendors or related entities of a breach so that they can, in turn, notify individual consumers and the FTC). FTC cites a number of examples of PHR related entities, including web-based applications that help consumers manage medications, websites offering online personalized health checklists, and companies advertising dietary supplements online. PHR related entities also include non-HIPAA covered entities “that access information in a personal health record or send information to a personal health record.” Under the proposed rule, third-party service providers, which was not defined by ARRA, include entities that provide billing or data storage services to vendors of PHRs or PHR related entities. Notice Requirement Triggers Tracking the statutory language, the proposed rule defines “breach of security” as the acquisition of unsecured PHR identifiable health information of an individual in a PHR without the individual’s authorization. 267 In the proposed rule, FTC emphasizes that the key requirement triggering the notification requirement is whether the data has been acquired, not merely whether there was unauthorized access. For example, FTC says breach notification would not be required in a scenario where an employee inadvertently accessed a database, realized his or her mistake, and logged off without reading, using, or disclosing anything. “[T]he Commission believes that the entity that experienced the breach is in the best position to determine whether unauthorized acquisition has taken place,” the proposed rule says. Thus, the proposed rule would create a presumption that unauthorized persons have acquired information if they have access to it, which can be rebutted “with reliable evidence showing that the information was not or could not reasonably have been acquired.” With respect to what constitutes “PHR identifiable health information,” the proposed rule includes in the definition information relating to past, present, or future payment, which would include a database containing names and credit card information. The definition also includes information that an individual has an account with a PHR vendor or related entity regarding particular health conditions; for example, a customer list directed to AIDS patients or people with mental illnesses. De-identified information as defined under HIPAA rules would not be considered “PHR identifiable health information” and therefore would not trigger the breach notification requirement. Breach Detection The notification requirement is triggered where the PHR vendor or related entities “reasonably” should have known of the breach through security measures aimed at detecting breaches in a timely manner. “The Commission recognizes, that certain breaches may be very difficult to detect, and that an entity with strong breach detection measures may nevertheless fail to discover a breach. In such circumstances, the failure to discover the breach would not constitute a violation of the proposed rule,” FTC says. Timing In accordance with ARRA, the proposed rule requires breach notifications to individuals and the media “without unreasonable delay” and in no case later than 60 calendar days after discovery of the breach. The FTC emphasizes that the 60-day period serves as an “outer limit,” meaning in some cases it may constitute unreasonable delay to wait 60 days before providing notification. Under the proposed rule, vendors of PHR and related entities must provide notice to the FTC “as soon as possible” and in no case later than five business days if the breach involves the unsecured PHR identifiable health information of 500 or more individuals. 268 Breaches involving less than 500 individuals may be accounted for in a breach log and submitted to the Commission on an annual basis from the date of the entity’s first breach. HHS Guidance Meanwhile, the Department of Health and Human Services (HHS) issued guidance April 17, 2009 on "technologies and methodologies to secure health information and prevent harm by rendering health information unusable, unreadable, or indecipherable to unauthorized individuals." ARRA required HHS to publish the guidance, which the agency says builds on existing HIPAA requirements. According to HHS, the guidance "provides steps entities can take to secure personal health information and establishes the trigger for when entities must notify that patient data has been compromised." HHS said the guidance is related to the breach notification regulations it will publish for HIPAA-covered entities as required under ARRA. CVS To Pay $2.25 Million To Settle Claims Its Disposal Practices Violated HIPAA The nation’s largest retail pharmacy chain CVS Caremark Corp. agreed to pay the federal government $2.25 million to resolve claims its disposal practices failed to safeguard patient privacy in accordance with the Health Insurance Portability and Accountability Act (HIPAA), the Department of Health and Human Services (HHS) announced February 18, 2009. In addition to the monetary settlement, CVS agreed to implement a “robust” corrective action plan to ensure compliance with HIPAA requirements. The settlement follows the first-of-its-kind joint investigation by HHS’ Office for Civil Rights (OCR) and the Federal Trade Commission (FTC) stemming from media reports that CVS pharmacies were disposing of trash such as pill bottle labels with identifying patient information in dumpsters accessible by the public. According to the agencies, the investigation also revealed that CVS was not training employees adequately about proper disposal methods. In its complaint, FTC alleged CVS’ claim that “nothing is more central to our operations than maintaining the privacy of your health information” was deceptive and the pharmacy chain’s security practices also were unfair in violation of the FTC Act. The FTC's proposed consent order requires CVS to establish, implement, and maintain a comprehensive information security program to safeguard personal information it collects from consumers and employees. As part of the settlement, CVS must engage a qualified independent third party to monitor its compliance with the corrective action plan and consent order and regularly report back to the two federal agencies. 269 The HHS corrective action plan will be in place for three years, while the FTC requires monitoring under its consent order for 20 years. In a statement, CVS said after the media reports surfaced in 2006, the company responded by “promptly enhancing its retail waste disposal polices and training programs, and instituted a chain-wide shredding program for confidential waste to further guard against inadvertent disposal of confidential information in the regular trash.” CVS said it was not aware of any consumer harm arising out of the alleged incidents. The company expressly denied any wrongdoing and said it agreed to the settlement “to avoid the time and expense of further legal proceedings." Physicians Minnesota Appeals Court Enjoins Hospital From Disciplining Physician, Finds Peer Review Action Motivated By Malice The Minnesota Court of Appeals affirmed June 3, 2008 a temporary injunction preventing a hospital from professionally disciplining a physician. The appeals court found the hospital’s peer review action was motivated by malice; thus, the hospital was not entitled to immunity under either federal or state law. The case arose when the hospital’s Vice President for Medical Services began an investigation of the physician for allegedly disruptive behavior. The hospital Vice President met with other hospital leaders and reported that the physician was disruptive and that discipline might be necessary. The hospital’s president, the chief of its medical staff, and another member of the hospital’s leadership subsequently wrote a letter to the Credentials Committee alleging disruptive behavior by the physician and requesting a peer-review investigation. The physician then met with the Credentials Committee and generally denied the allegations. The Committee, however, concluded the physician’s improper conduct had been established and showed a pattern of unacceptable behavior. The Committee recommended suspending the physician’s privileges for 120 days and requiring him to undergo anger-management training, followed by probation for one year. The hospital’s Medical Staff Executive Committee reviewed the Credentials Committee’s recommendation and suggested increasing the suspension to 180 days and the probation to two years. After a series of hearings and appeals, the hospital’s board of trustees imposed a 120day suspension and a five-year probationary period. The physician then sued to enjoin the hospital’s disciplinary action. The trial court granted a temporary injunction and the hospital appealed. The appeals court rejected the hospital’s argument that it was immune from suit under the Health Care Quality Improvement Act (HCQIA), 42 U.S.C. § 11111(a). HCQIA applies only to damages, the appeals court held, and not to injunctions. Thus, HCQIA did not protect the hospital from the physician’s suit seeking an injunction. 270 The appeals court also rejected the hospital’s argument that it was protected from the injunction under state law. The appeals court explained that "a hospital forfeits its state-law immunity if its peerreview process was motivated by malice toward the subject of a peer-review inquiry." Here, the appeals court agreed with the lower court’s finding of malice. The lower court based its conclusion on several findings of procedural irregularities, which taken together “clearly demonstrate that Hospital intentionally, and repeatedly, violated its own established procedural safeguards,” the appeals court said. “The objective evidence of how Hospital violated its procedures in the course of disciplining Physician is a sufficient basis to infer the conclusion of why the Hospital acted as it did—that it was motivated by malice,” the appeals court held. The appeals court next addressed an argument made in amici briefs that “characterize Physician’s suit as a dangerous invitation for courts to substitute their judgment for that of hospital peer reviewers and thereby undermine the peer-review process.” The appeals court explained that “[n]either the ruling of the district court nor our decision here implicates the judgment of the peer reviewers on the merits.” Instead, the appeals court argued that “[j]udicial review of peer-review actions is properly limited, as in this case, to only whether peer reviewers abided by their own established procedures.” Lastly, the appeals court found without merit the hospital’s argument that the physician contractually agreed not to challenge any of its peer-review decisions in court because a “contract cannot release a party from intentional or willful acts.” In re Peer Review Action, No. A07-0813 (Minn. Ct. App. June 3, 2008). Nevada Supreme Court Finds State May Not Discipline Physician For Single Act Of Negligence The Nevada Supreme Court held July 11, 2008 that under the relevant statutory law, the state may not discipline a physician for a single act of ordinary negligence. Accordingly, the high court affirmed a lower court's reversal on other grounds of the disciplinary action imposed on the physician. Steven Mahnke, M.D. worked as a family practice physician in Central City, Nevada. One of Mahnke's pregnant patients suffered a miscarriage. Mahnke performed a D&C, during which the patient began to bleed. Following the surgery, the patient suffered cardiac arrest and died. The state later filed an operative petition for disciplinary action against Mahnke alleging unprofessional conduct. Following a hearing, the director of the Department of Health and Human Services Regulation and Licensure (Department) found Mahnke’s conduct was unprofessional and was outside the normal standard of care in Nebraska. The director entered an order suspending Mahnke’s license for 90 days, requiring a refresher course in obstetrics, prohibiting him from performing D&C or dilation and evacuation procedures except to save the mother’s life or in an emergency, and imposing a two-year probation upon reinstatement. 271 Mahnke petitioned the district court for review. The court agreed with Mahnke that the locality rule should apply in determining whether his acts constituted unprofessional conduct for the disciplinary action, instead of a national standard of care as used in the hearing. Accordingly, the court concluded that the state failed to present clear and convincing evidence that Mahnke’s conduct was unprofessional and reversed the director's order. The state appealed. The Nevada Supreme Court first addressed the threshold question of whether the state may discipline a physician for a single act of negligence. After examining the statute at issue, Sections 71-147 and 71-148 of the Nevada Uniform Licensing Law, the high court found that the general definition contained in the statute "does not include as unprofessional conduct a single act of ordinary negligence." As a basis for its decision, the high court pointed to Section 71-147(5)(e), which was added as an amendment to the statute. Under that Section, the state may discipline a professional for "[p]ractice of the profession (a) fraudulently, (b) beyond its authorized scope, (c) with manifest incapacity, (d) with gross incompetence or gross negligence, or (e) in a pattern of negligent conduct." According to the high court, "pattern of negligent conduct" is defined as "a continued course of negligent conduct in performing the duties of the profession." Thus, the high court said, the legislature did not intend for the state to be able to discipline a medical professional for a single act of negligence. The high court further found that, as the Department's regulations did allow a physician to be subject to discipline for an act of ordinary negligence, they were invalid as inconsistent with the Uniform Licensing Law. Mahnke v. State, No. S-06-918 (Neb. July 11, 2008). Fifth Circuit Reverses Ruling For Physician In Closely Watched Peer Review Case Against Hospital The Fifth Circuit reversed July 23, 2008 a judgment awarding $33 million to a cardiologist who alleged a hospital’s temporary restriction of his catheterization lab privileges was improper and caused injury to his reputation and career. The appeals court found the hospital was immune under the Health Care Quality Improvement Act (HCQIA) from money damages for the abeyance of the physician’s privileges while it investigated concerns involving his handling of several patients. Dr. Lawrence R. Poliner and his professional association sued Presbyterian Hospital of Dallas and several other physicians, including cardiologists that served on various hospital peer review committees, (collectively defendants) after his privileges were summarily suspended. Poliner claimed defendants improperly and maliciously used the peer review process to interfere with his interventional cardiology practice. According to the facts described in the Fifth Circuit’s opinion, defendants initially asked Poliner to agree to an abeyance—or temporary restriction—on his cath lab privileges following a number of concerns about his treatment of several patients. The abeyance was later extended after an ad hoc committee concluded Poliner gave substandard care in more than half of the 44 cases they reviewed. 272 Subsequently, the committee agreed unanimously to suspend Poliner’s privileges. The suspension was in effect for roughly five months. The abeyance lasted less than 29 days. In a September 2003 opinion, the U.S. District Court for the Northern District of Texas granted defendants summary judgment on Poliner’s deceptive trade practice act and antitrust claims. The court also granted summary judgment to defendants on all claims related to Poliner’s suspension, finding them immune under HCQIA. The court concluded, however, that issues of fact precluded summary judgment on whether defendants were entitled to HCQIA immunity with respect to claims stemming from the abeyance. Thus, the court permitted Poliner’s claims of breach of contract, defamation, business disparagement, tortious interference with a contract, and intentional infliction of emotional distress to proceed to a jury. A jury found in favor of Poliner and awarded him compensatory and exemplary damages of over $366 million. The district court remitted the award to $22 million plus prejudgment interest, which amounted to $11 million. Reversing, the Fifth Circuit held the district court should have found defendants were entitled to HCQIA immunity in connection with the abeyance and the extension of the abeyance as a matter of law. As an initial matter, the appeals court noted that both the abeyance and the extension were professional review actions under HCQIA. Next, the appeals court found it clear that each peer review action was taken “in the reasonable belief that the action was in the furtherance of quality health care,” citing the specific concerns facing defendants about the care Poliner provided to certain patients. Although subsequent investigation may have revealed that Poliner did not affirmatively endanger his patients, this was irrelevant to the HCQIA inquiry, the appeals court explained. “If a doctor unhappy with peer review could defeat HCQIA immunity simply by later presenting the testimony of other doctors of a different view from the peer reviewers, or that his treatment decisions proved to be ‘right’ in their view, HCQIA immunity would be a hollow shield,” the appeals court commented. The appeals court also expressed serious doubts as to Poliner’s assertions that the restrictions resulted from anticompetitive motives, and in any event “roundly rejected that such subjective motivations overcome HCQIA immunity.” The appeals court next found no reasonable jury could conclude defendants failed to make a “reasonable effort to obtain the facts.” On this point, Poliner argued the evidence was insufficient to conclude he was a “present danger” to patients under the bylaws, which supported a finding that “reasonable effort” was lacking. But the appeals court stressed that “a failure to comply with hospital bylaws does not defeat a peer reviewer’s right to HCQIA immunity from damages.” The appeals court further clarified that this did not leave a physician without remedy when hospitals and peer review committees violate applicable bylaws and state law. 273 HCQIA immunity covers only money damages, and physicians still have recourse in the courts for appropriate injunctive and declaratory relief. The appeals court also held the peer review actions at issue satisfied HCQIA’s procedural requirements, finding Poliner was treated fairly under the circumstances, particularly given the restrictions imposed on him were temporary and limited in scope. Finally, the appeals court concluded the peer review action was taken “in the reasonable belief that the action was warranted by the facts known after such reasonable effort to obtain facts.” Again the appeals court emphasized that the restrictions were temporary and tailored to address specific concerns—i.e. Poliner’s performance of procedures in the cath lab. “Not only has Poliner failed to rebut the statutory presumption that the peer review actions were taken in compliance with the statutory standards, the evidence independently demonstrates that the peer review actions met the statutory requirements,” the Fifth Circuit concluded. Poliner v. Texas Health Sys., No. 06-11235 (5th Cir. July 23, 2008). Wisconsin Supreme Court Holds Peer Review Law Immunizes Third-Party Clinic From Physician’s Medical Misdiagnosis Claim The Wisconsin peer review statute, Wis. Stat. § 146.37, immunizes from liability for negligent misdiagnosis a third-party addictionology center that a hospital’s governing body asked to diagnosis and treat one of its surgeons based on concerns about his alcohol use, the state’s high court ruled July 16, 2008. The high court found the Hazelden center was eligible for immunity under the peer review statute because it “played an integral role” in the hospital’s medical peer review process. The Wisconsin Supreme Court held even if Hazelden negligently diagnosed Dr. Hans Rechsteiner’s condition as “alcohol dependence,” rather than “alcohol abuse,” immunity still attached because its diagnosis was made in good faith. Likewise, the high court said statutory immunity applied as to Rechsteiner’s claim that certain hospital board members defamed him in their communications with the treatment center. Rechsteiner worked as a general surgeon for Spooner Health System on a contract basis. From 1982 until July 2003, Rechsteiner was the only full-time surgeon at Spooner and was “on call” 24 hours per day, seven days per week, unless he made prior arrangements with other surgeons in the region. Following reports that Rechsteiner was consuming alcohol while on call, Spooner gave him the option in March 2003 of going on immediate leave or submitting to an alcohol assessment and, if necessary, treatment. Rechsteiner agreed to undergo the assessment at Hazelden treatment center, where he was diagnosed with “alcohol dependence.” Rechsteiner underwent the required treatment. He later sued Hazelden for negligence, claiming he was misdiagnosed and, as a result, underwent unnecessary treatment that cost him income and affected his practice. 274 Rechsteiner also sued Spooner, its board, and several of its directors (Spooner defendants) for defamation and negligent communication of false information to Hazelden about him. Hazelden and the Spooner defendants each moved for summary judgment, arguing the peer review statute provided them immunity from civil liability. The trial court granted the motion and the appeals court affirmed. The Wisconsin Supreme Court also affirmed. The high court found no dispute that Spooner’s board, acting on concerns about Rechsteiner’s future performance as a surgeon, particularly given his rigorous on-call schedule, qualified for immunity under Section 146.37. Likewise, the high court concluded Hazelden was eligible for immunity, rejecting Rechsteiner’s argument that the outside treatment center was too removed from Spooner’s peer review process. “We would defeat the purpose of Wis. Stat. § 146.37 if we held that the participation of an outside entity—enlisted by a reviewing committee to perform an assessment of the abilities of a physician to perform effectively while on call—is not eligible for immunity simply because the outside entity is not part of a formal ‘peer review’ program,” the high court wrote. When Rechsteiner chose to access and participate in the assessment option, rather than take a voluntary leave of absence, he effectively approved the scope and length of the peer review process with Hazelden, the high court said. After finding Hazelden eligible for protection under the peer review law, the high court next determined that its diagnosis, even if deemed negligent, still qualified for immunity so long as it was made in good faith because it was central to the peer review process. “We conclude that Hazelden’s diagnosis of Dr. Rechsteiner’s condition was indistinguishable from Spooner’s review, evaluation, and analysis of Dr. Rechsteiner’s ability to perform as an on-call surgeon,” the high court said. The high court declined to rule on whether treatment related to the peer review process also qualified for immunity. Instead, the high court granted summary judgment to Hazelden on the specific facts—i.e. that Rechsteiner failed to raise a genuine issue of material fact that his treatment would have or should have differed with a diagnosis of “alcohol abuse.” “Like the court of appeals, we are not prepared to say that the peer review statute would immunize medical negligence in all situations, irrespective of circumstances,” the high court commented. As to the defamation claims, the high court found the Spooner defendants immune under the peer review law, which does not distinguish between different classes of persons who enjoy immunity. The Spooner defendants’ statements to Hazelden, whether or not they were of a personal nature, were aimed at the treatment center review and to improve the performance of the hospital’s on-call surgeon. Rechsteiner failed to present facts to overcome the presumption that the Spooner defendants were not acting in good faith 275 “[I]nsight into a physician’s social and personal behavior is relevant to an inquiry of alleged alcohol abuse,” the high court said. Rechsteiner v. Hazelden, No. 2006AP1521 (Wis. July 16, 2008). Eighth Circuit Says Surgery Practice Must Pay Contribution To Physician In Dispute Over Recruitment Loan A surgery practice in Arkansas must contribute equally to a physician’s loan repayment obligation to a hospital that arose when he failed to meet the terms of a recruitment agreement, the Eighth Circuit ruled August 5, 2008. Affirming summary judgment to the physician, the appeals court found that because the surgery practice signed the loan agreement, it was jointly and severally liable with the physician for repayment of the loan. The Eighth Circuit also agreed with the district court that the surgery practice should pay a portion of the physician’s attorneys’ fees. Baptist Health and Central Arkansas Vascular Surgery (CAVS) jointly hired Dr. Todd Smith to offer medical services with both institutions. Baptist Health agreed to provide Smith a loan to start his practice, which it would forgive if Smith practiced in Arkansas for six years. After entering into the agreement, Smith practiced in Arkansas for two years and then left. Baptist Health sued Smith to recover the roughly $158,000 loaned to him. Smith filed a third-party complaint against CAVS and Dr. Robert Casali, alleging they had to indemnify him against any obligations owed to Baptist Health. In a 2007 decision, the Eighth Circuit rejected Smith’s indemnification claim, but remanded to the district court to consider the issue of contribution. On remand, the district court found that because Casali signed the loan agreement both individually and on behalf of CAVS, they were jointly and severally liable for a pro rata share of the roughly $158,000 Smith already had paid to Baptist Health. The district court also awarded Smith $12,000 in attorneys’ fees for the approximately $17,000 he expended in successfully defending against Casali’s and CAVS’ breach of contract claim, as well as contribution of two-thirds of the over $14,000 in attorneys’ fees Smith was ordered to pay in Baptist Health’s original breach of contract action. The Eighth Circuit agreed that Casali’s and CAVS’ signatures made them jointly and severally liable for the obligations created by the note and loan agreement. In so holding, the appeals court rejected their argument that the district court failed to consider the equities because Smith intentionally breached the loan agreement with Baptist Health by voluntarily moving to Texas. “Both parties presented their evidence on the equities, and the issue became largely a matter of credibility for the district court,” the appeals court said. The appeals court also affirmed both attorneys’ fees awards. While Casali and CAVS argued they were the prevailing parties because they won on Smith’s indemnification claim, which sought a greater amount than the contribution claim, the appeals court disagreed. 276 According to the appeals court, the case involved three claims—Smith’s indemnification and contribution claim and Casali’s and CAVS’ breach of contract claim against Smith. Because Smith prevailed on two of the three claims (the contribution and breach of contract claims), the district court correctly determined he was the prevailing party. Baptist Health v. Smith, No. 07-2684 (8th Cir. Aug. 5, 2008). Mississippi Supreme Court Holds Surgeon’s Allegedly Defamatory Statements Against Fellow Surgeon Protected By Qualified Privilege A surgeon could not sue another physician for defamation because the statements he allegedly made to fellow surgeons were protected under Mississippi’s qualified privilege, the state high court found in an en banc ruling. Dr. Hazem Barmada sued Dr. Ara K. Pridjian for alleged defamation arising out of their working relationship as heart surgeons at Memorial Hospital at Gulfport. When Barmada applied for privileges at Memorial, Pridjian, the medical director of cardiac surgery, inquired about Barmada’s background using sources identified in his resume. Memorial’s credentialing committee eventually accepted Barmada’s application. After he started work at the hospital, Barmada became the subject of criticism from doctors and staff. An independent review found Barmada’s work to be “adequate,” despite a higher mortality rate. In his lawsuit, Barmada presented testimony from a nurse that Pridjian had made “generally slanderous comments about [Barmada] in front of the heart team at Memorial.” The court granted summary judgment in Pridjian’s favor, finding defendant’s statements were protected by a qualified privilege and there was no evidence of malice. The Mississippi Supreme Court affirmed. Under Mississippi law, in addressing defamation claims the court must first determine whether a qualified privilege applies and, if one does, whether it is overcome by malice, bad faith, or abuse, the high court explained. The high court agreed with the lower court that the qualified privilege applied because Pridjian’s allegedly defamatory statements were made to Memorial administrators, doctors, the surgical staff, and an independent reviewer, all of whom had a direct interest in Barmada’s competency as a surgeon. The high court expressed some concern about Pridjian’s testimony that he could not remember whether he had made statements about Barmada’s competency to physicians who were not Memorial employees. Non-Memorial employees would not have a direct interest in protecting a common employer and therefore, in that scenario, the qualified privilege would not apply, the high court noted. But because no definitive evidence existed as to whether Pridjian made defamatory statements to anyone outside Memorial’s employment, the high court concluded the privilege applied. 277 Finally, the high court found no evidence of malice or bad faith by Pridjian to overcome the qualified privilege. In so holding, the high court said evidence that a supervising physician criticized a fellow physician as incompetent did not rise to the level of maliciousness absent other evidence. Barmada v. Pridjian, No. 2007-CA-00764-SCT (Miss. Aug. 14, 2008). Illinois Appeals Court Says Medical Journals, Action Plan Privileged Under Peer Review Law Medical journal articles gathered and considered by a hospital sentinel event analysis committee as well as its “action plan” containing recommended risk-reduction strategies were privileged under Illinois peer review law, an appeals court in that state ruled. The wrongful death action was brought by the husband and administrator of the estate of Judy Anderson, who died unexpectedly from broncho-pneumonia the same day she presented at Rush-Copley Medical Center’s (defendant’s) emergency room. At issue in the foregoing discovery dispute were various medical journal articles considered by defendant’s Sentinel Event Analysis Committee following Anderson’s death. In addition, plaintiff also sought discovery of the Committee’s “action plan” summarizing its conclusions and recommendations. Defendant claimed the documents were privileged under the Illinois Medical Studies Act (Act), which protects from disclosure “[a]ll information . . . used in the course of internal quality control . . . .” The trial court ultimately concluded the medical journal articles were discoverable because they were available to the general public and were not produced as a result of the committee’s internal investigation or study. The court also concluded the portions of the action plan recommending changes in hospital policy that were in fact implemented were not privileged because they constituted the “final result of a medical peer review committee.” Those recommendations that had not been implemented, however, were privileged, the court said. Defendant refused to produce the documents and the trial court found Rush-Copley in contempt. The Illinois Appellate Court, Second District, reversed the contempt order and found both the medical journal articles and the action plan privileged. While acknowledging the trial court’s rationale that the medical journal articles were not created or generated by the committee, the appeals court nonetheless concluded they were privileged because they reflected “the Committee’s internal review process, including information gathering and deliberations.” The appeals court noted defense testimony that the articles were “specific” to decedent’s case and therefore were part of the “information gathering” related to the peer review “mechanism.” 278 The appeals court recognized that its holding seemingly contradicted state court precedent that the Act does not protect information generated before the peer-review process begins. But the appeals court distinguished the instant action from those cases, which involved information generated by the defendant hospital’s medical staff about the patient at issue. Here, the appeals court noted, applying the privilege to the medical journal articles would not frustrate the Act’s goal of improved patient care because doing so would not conceal any “adverse facts” known to defendant’s medical staff about Anderson’s care. The appeals court also held the entire action plan was privileged, not just those portions that had not been implemented by the hospital. According to the appeals court, the evidence established that the action plan merely consisted of “recommendations or internal conclusions” that may or may not result in changes. Thus, the action plan was not discoverable because defendant established it was only for “internal quality control.” The result would be different, however, for “[a]ny actual changes, such as modifications to hospital policy or procedure, that were adopted as a direct result of the recommendations and internal conclusions in the Action Plan . . . .,” the appeals court explained. Anderson v. Rush-Copley Med. Ctr., Inc., Nos. 2-07-0717 & 2-07-1272 (Ill. App. Ct. Aug. 14, 2008). Montana Supreme Court Says State Medical Board Owed No Duty Of Care To Specific Patient In Licensing Physician The Montana Board of Medical Examiners (Board) was not entitled to quasi-judicial immunity for its actions in granting a medical license to a physician who was subject to disciplinary action for unprofessional conduct in other states, the Montana Supreme Court ruled October 6, 2008. Despite this finding, the high court nonetheless affirmed the trial court’s grant of summary judgment to the state in a medical malpractice action brought by the personal representative of a patient who died while under the physician’s care. According to the high court, the state owed no specific duty to the patient at issue under the statutes governing the licensing of healthcare providers. The case involved Dr. Thomas Stephenson, who in 1995 sought a medical license from the Board to practice general medicine in Montana. Stephenson had previously worked as a cosmetic surgeon in California, where he faced disciplinary action for unprofessional conduct, including false claims in advertising, gross negligence in treating patients, and dishonesty and corruption. His medical license there had been revoked, although the revocation was stayed pending Stephenson’s successful completion of 10 years’ probation with certain conditions, including a ban on practicing cosmetic surgery. Stephenson’s application materials for his Montana license also revealed alcohol abuse and Demerol addiction, 11 malpractice suits, bankruptcy, and a history of illegible 279 medical records. His license in Florida also had been suspended for his failure to notify the state about the actions taken against his license in California. The Board interviewed Stephenson and granted him a temporary license subject to certain conditions. In January 1999, the Board granted Stephenson a full, unrestricted license. Subsequently, one of Stephenson’s patients, Emil J. Nelson, died from an abdominal aneurysm. His wife (plaintiff), as the personal representative of Nelson’s estate, sued the state, alleging the Board was negligent in granting Stephenson a medical license. The state moved to dismiss, arguing the Board’s decisions were protected by quasijudicial immunity or, alternatively, that it owed no duty of care to Nelson in licensing Stephenson. The trial court eventually granted summary judgment to the state on the issue of quasijudicial immunity. On appeal, the Montana Supreme Court affirmed, albeit on the alternative ground that the state owed no specific duty to Nelson. The high court disagreed with the trial court that the Board’s decision-making process was entitled to quasi-judicial immunity. First, the high court concluded that the Board was not performing discretionary, quasijudicial functions when it issued the license to Stephenson. The relevant Montana statute in effect during the relevant time period required the Board to “refrain” from issuing licenses to those who committed “unprofessional conduct.” The statute, the high court said, “clearly reflects mandatory, nondiscretionary duties.” The high court also rejected the state’s contention that the entire three-year process between the Board’s receipt of Stephenson’s application and its issuance of an unrestricted license was a controversy or adversarial proceeding. Instead, the high court noted that Stephenson at no point challenged any of the Board’s requirements or its decision to issue a temporary license with certain conditions. Thus, regardless of whether the Board was performing discretionary functions, its actions were not undertaken in the context of a controversy or adversarial proceeding and therefore were not entitled to quasi-judicial immunity. But the high court went on to find the state did not owe a duty of care to Nelson. Rather, the high court concluded that the medical licensing statutes benefit the general public and do not create a special duty to an individual. Nothing in the relevant licensing statute “supports a legislative intent to protect a specific class of persons from a particular type of harm,” the high court said. “Thus, we further conclude that the statutory special relationship exception to the public duty doctrine does not exist,” and “hold the State did not owe a duty of care to” Nelson. A dissenting opinion argued the state “owed a duty to [Nelson], not to insure against specific instances of malpractice, but to investigate applicants and license only qualified, competent physicians whom he might seek care for his health needs.” 280 Another dissenting opinion characterized the majority’s opinion of the public duty doctrine as “a duty to all is a duty to none.” Calling the majority’s opinion untenable, this dissenter argued the legislature “enacted the medical licensing laws to protect innocent, unsuspecting, sick Montanans” like Nelson from physicians like Stephenson. Nelson v. Montana, No. 05-694 (Mont. Oct. 6, 2008). Eighth Circuit Says Nebraska AG Entitled To Immunity In Physician’s Due Process Suit The Nebraska Attorney General was entitled to qualified immunity in a physician’s lawsuit alleging his constitutional due process rights were violated when the state issued a public letter of concern in connection with his medical license without giving him detailed notice of the charges and an opportunity to respond, the Eighth Circuit ruled November 3, 2008. Reversing a district court decision, the appeals court concluded the public letter of concern could not be equated to a formal censure and that the physician was not entitled to due process protection for damage to his reputation alone. The case involved Gregory M. Kloch, M.D., who in May 2002 received notice from the Nebraska Department of Health and Human Services Regulation and Licensure (Department) that a complaint had been filed against him and that an investigation was underway. Three months later, Kloch received a letter of concern from the Nebraska Board of Medicine and Surgery explaining that he had been investigated for failing to keep proper medical records on a patient. The letter also stated that it was intended as cautionary only and was not a disciplinary action against Kloch’s license. Pursuant to the state’s Uniform Licensing Law, the letter was added to Kloch’s public record and posted on the Department’s website. After Kloch was unable to have the letter of concern expunged, he filed an action in court against Attorney General Jon C. Bruning, in his individual and official capacity, and various members of the medical board and the Department of Health. Kloch contended the issuance of the letter violated his due process rights under the Fifth and Fourteenth Amendments to the U.S. Constitution. The district court concluded the Uniform Licensing Law was unconstitutional on its face and as applied to Kloch. The court also found qualified immunity protected all defendants except Bruning, concluding that, as a licensed attorney, he reasonably should have known the law was unconstitutional. The state legislature has since eliminated letters of concern from the state’s regulatory scheme, according to the appeals court’s opinion. The Eighth Circuit reversed the district court’s conclusion that Bruning was not entitled to qualified immunity. The appeals court said the dispositive question in Kloch’s claim was whether the letter of concern impaired his medical license. 281 In this regard, the appeals court distinguished a letter of concern from a formal letter of censure. While formal censures “are unmistakably adversarial,” Kloch’s letter of concern “opens with a salutation and closes with a request that he ‘please accept this letter as a caution.’” The appeals court also noted that formal censures “express strong condemnation of the accused, and they do so with gravity and clarity.” Moreover, the appeals court continued, administrative regulations prohibited consideration of “uncharged incidents,” such as letters of concern, when imposing subsequent disciplinary sanctions. Finally, the appeals court said, even if Kloch properly alleged a constitutional violation, Bruning was entitled to qualified immunity because the right at issue was not so clearly established that a reasonable official would have known his conduct was unconstitutional. Kloch v. Kohl, No. 07-2120 (8th Cir. Nov. 3, 2008). U.S. Court In Florida Refuses To Dismiss Challenge To Florida’s Patients Right To Know Amendment A federal district court in Florida refused to dismiss on procedural grounds a challenge to a constitutional amendment passed by Florida voters that gives patients the right to access information from healthcare providers about adverse medical incidents. Plaintiffs, the Florida Hospital Association and the Florida Medical Association, among others, brought the action in federal district court alleging the “Patients Right To Know Amendment,” or Amendment 7, violates the U.S. Constitution. Specifically, the groups contended that “Amendment 7 is expressly preempted by, conflicts with congressional policy in, and represents an obstacle to the accomplishment of federal statutes governing the medical review process.” In addition, the groups’ complaint alleged that Amendment 7, which was approved by Florida voters in 2004, violates healthcare providers’ constitutional right to informational privacy, denies them their due process rights, and substantially impairs the obligations of existing contracts. The action in the U.S. District Court for the Northern District of Florida was brought against defendant Florida state officials: the Surgeon General and Secretary of the Department of Health and Human Services; the Secretary of the Agency for Health Care Administration; and the Attorney General. Defendants moved to dismiss on a number of procedural grounds. In a November 26, 2008 opinion, the court found the action should go forward. The court rejected the officials’ argument that plaintiffs sued the wrong defendants. The court noted each of the named defendants has the authority under Florida law to enforce the obligations that Amendment 7 imposes on at least some of the plaintiffs. The court also concluded the case presented a “live and ripe case or controversy” as plaintiffs indicated they already had received 400 demands for information under Amendment 7. 282 Next, the court found the plaintiff associations had standing to assert the rights of their members (hospitals and physicians) who had received requests for information under Amendment 7. Finally, the court disagreed with the Florida officials that plaintiffs failed to join required parties—namely the 400 patients who had demanded information under Amendment 7 and the Department of Health and Human Services Secretary. The Florida Supreme Court in March 2008 held Amendment 7 applies retroactively to existing medical records, trumping any previous statutory protections limiting discovery during litigation. Resolving a split among the lower courts, the Florida high court concluded the selfexecuting amendment is prospective in operation, but retrospective as to extant records created before the provision’s November 2, 2004 effective date. Florida Hosp. Ass’n v. Viamonte, No. 4:08cv312-RH-WCS (N.D. Fla. Nov. 26, 2008). Colorado Appeals Court Says Hospital That Revoked Surgeon’s Privileges Without Notice Or Hearing Not Entitled To HCQIA Immunity A Colorado hospital that revoked a surgeon’s provisional staff privileges without providing him notice and a hearing was not entitled to immunity under the Health Care Quality Improvement Act (HCQIA), a state appeals court ruled December 11, 2008. The Colorado Court of Appeals reversed a lower court’s decision granting summary judgment to the hospital and three of its officers (collectively, defendants). In so doing, the appeals court rejected defendants’ argument that HCQIA’s notice and hearing requirements were waived voluntarily by the surgeon when he applied for provisional status and agreed to be bound by medical staff bylaws that did not give rise to hearing and appeal rights for provisional staff. In spring 2002, plaintiff Eric Anthony Peper, a cardiothoracic surgeon, applied for and was granted medical staff privileges at St. Mary’s Hospital and Medical Center (St. Mary’s) in Denver, Colorado. Subsequently, in December 2002, Peper was reappointed to St. Mary’s provisional active medical staff until December 2004, and was subject to the terms of the initial appointment and to hospital and medical staff bylaws. At that time, St. Mary’s, without notifying Peper, decided to review a random sample of his cardiothoracic cases. According to Peper, this decision was made after he told the hospital’s president that he planned to establish a competing medical practice. An external reviewer examined the selected cases and found a potential “problem with surgical technique and/or judgment.” In February 2003, without any notice, St. Mary’s revoked Peper’s privileges and staff membership. The letter sent to Peper notified him of an already-concluded review process and external reviewer comments indicating “care falling below generally accepted standards of review.” 283 The letter informed Peper that the members of the credentials committee had determined that, under St. Mary’s bylaws, a physician whose provisional privileges are revoked is not afforded a hearing or appeal. The committee said it would report the revocation to the National Practitioner Data Bank and the Colorado Board of Medical Examiners. Peper filed a lawsuit in state court, seeking monetary damages based on eight contract and tort claims. The court dismissed the complaint, concluding defendants were entitled to immunity from damages under the HCQIA. In an unpublished opinion, a division of the appeals court reversed. A majority of the court concluded that three of the four HCQIA immunity prerequisites were met, i.e., defendants acted in the reasonable belief their action was in furtherance of quality healthcare; defendants acted after a reasonable effort to obtain the facts; and defendants acted in the reasonable belief that the action was warranted by the known facts. The majority ultimately reversed the lower court’s decision, however, after determining the remaining HCQIA prerequisite, i.e., adequate notice and hearing procedures, had not been met. The appeals court remanded the case to the lower court for further proceedings. The district court then granted summary judgment to defendants, agreeing that, under the terms of the medical staff bylaws in effect at the time, provisional appointees clearly and unambiguously were not entitled to a hearing or appeal in the event of an adverse action against them during the provisional period. Peper appealed. On second review of the case, the appeals court found Peper’s application for provisional appointment was legally insufficient to waive his statutory due process rights under HCQIA. The bylaw provision at issue—that actions against provisional staff do not give rise to hearing and appeal rights—could be read, at most, to have waived a right to hearing and appeal under the medical staff bylaws, the appeals court concluded. However, “[t]here is a legally significant distinction between rights under a hospital’s or medical staff’s own bylaws and those under the HCQIA,” the appeals court said. The appeals court concluded Peper’s HCQIA rights to notice and hearing were not waived by his alleged acknowledgment that medical staff bylaws did not afford him hearing and appeals rights. Peper v. St. Mary’s Hosp. and Med. Ctr., No. 07CA2491 (Col. Ct. App. Dec. 11, 2008). First Circuit Upholds Secretary’s Interpretation Of “Investigation” For HCQIA Reporting Purposes In a case of first impression for the federal appellate courts, the First Circuit declined January 14, 2009 to overturn the Department of Health and Human Services Secretary’s interpretation of “under an investigation” for purposes of a hospital’s reporting obligations pursuant to the Health Care Quality Improvement Act (HCQIA). The Secretary had upheld a hospital’s decision to report a physician’s resignation to the National Practitioner Data Bank (NPDB) after a hospital committee had completed the fact-gathering process but before it had taken a final action or formally closed the investigation. 284 The appeals court found the Secretary’s interpretation that the investigation was still ongoing at the time of the physician's resignation for HCQIA reporting purposes “eminently sensible” in light of the statute’s legislative history and underlying purpose. The case arose when an operating room nurse at an unnamed hospital filed a written complaint against a physician (referred to as Dr. Doe in the opinion) who allegedly threatened the nurse. The medical staff executive committee temporarily suspended Doe’s privileges. An ad hoc investigating committee (AHC) subsequently reported to the executive committee that the nurse reasonably perceived the physician’s actions as threatening. The executive committee proposed Doe be allowed to return to work provided he agreed to certain contractual modifications, including provisions for regular proctoring and psychological evaluations. Doe rejected the proposal and voluntarily relinquished his clinical privileges. The hospital reported Doe’s resignation to the NPDB, believing it was required to do so because the physician had resigned while “under an investigation.” 42 U.S.C. § 11133(a)(1)(B). Doe sought an administrative review of the hospital’s filing, contending its investigation had ended when the AHC presented its report to the executive committee and therefore he had not resigned while under an investigation. The Secretary issued a written decision ruling the hospital appropriately reported Doe to the NPDB. For purposes of HCQIA, the Secretary found “[a]n investigation is . . . considered ongoing until the health care entity’s decision making authority takes a final action or formally closes the investigation.” Doe sought judicial review, arguing the word “investigation,” as used in HCQIA, refers only to the fact-gathering phase of an inquiry. But the U.S. District Court for the District of Maine disagreed and upheld the Secretary’s interpretation in a sealed opinion. The First Circuit affirmed. As the district court did, the First Circuit sidestepped the issue of the level of deference to afford the Secretary’s “informal” interpretation of the word “investigation” as set forth in the agency’s NPDB Guidebook and his decision in the instant case. Finding the Secretary’s interpretation withstood scrutiny regardless of whether the highly deferential standard under Chevron U.S.A., Inc. v. Natural Resource Defense Council, Inc. 467 U.S. 837 (1984), or a less-forgiving review under Skidmore v. Swift & Co., 323 U.S. 134 (1944), applied, the appeals court said it need not decide the issue here. Turning to the merits, the appeals court held the Secretary’s interpretation passed muster even under Skidmore’s “sliding-scale approach.” In reaching this conclusion, the appeals court noted the Secretary reached his determination through an established adjudication process, rather than an ad hoc review. The procedures employed by the Secretary encouraged the operation of a deliberative process that allowed both sides to present their views. 285 The appeals court also looked favorably on the facts that the Secretary’s expertise specifically encompassed the issues presented by the instant case and his interpretation was consistent with the agency's approach in the NPDB Guidebook, which was published in 2001. Most importantly, the First Circuit said, the Secretary’s determination was grounded in a reasonable interpretation of the policies and legislative history underlying the HCQIA. For example, the legislative history demonstrated Congress’ concern that “hospitals too often accept voluntarily resignations of incompetent doctors in return for the hospital's silence about the reasons for the resignation.” “Reasoning from this overarching congressional purpose, the Secretary concluded that Congress did not intend to construct an easily accessible escape hatch that would permit beleaguered physicians to elude the reach of the HCQIA’s reporting requirement,” the appeals court wrote. A more limited view of an investigation’s duration as suggested by Doe here, “would create a gap between the completion of fact-gathering and the taking of a final disciplinary action” in which “a physician could resign with impunity.” “That easy escape would operate at cross-purposes with the goal of the reporting requirement,” the First Circuit observed. Doe v. Leavitt, No. 08-1431 (1st Cir. Jan. 14, 2009). Montana Supreme Court Upholds Preliminary Injunction Blocking Hospital From Changing Physician’s Medical Staff Status The Montana Supreme Court held recently that a lower court did not abuse its discretion when it granted a physician a preliminary injunction preventing a hospital from taking further adverse action against him and restoring his “active” status as a staff member pending a peer review investigation. As a member of St. James Healthcare’s medical staff, Dr. Jesse Cole was required to apply for reappointment every two years. In 2006, after Cole submitted his reappointment application, St. James changed Cole’s medical staff status from “active” to “consulting,” citing serious concerns about his professional relationship with other healthcare providers, staff, and patients. Cole was not given advance notice of his status change and St. James denied his request to appeal the decision. St. James also hired an attorney to conduct an investigation of Cole. According to Cole, these actions violated St. James’ bylaws, which required three months’ notice before reducing a medical staff member’s privileges and a right to a hearing and an appeal upon request. The bylaws also specified that an investigation of a physician must involve a peer review by the medical staff. Cole claimed the bylaws were an enforceable contract between the parties that St. James had breached. Cole sought a preliminary injunction against St. James in court to prevent the hospital from taking further adverse action against him and from making a detrimental report to the National Practitioner Data Bank (NPDB). He also asked the court to order St. James to restore his active privileges. 286 The lower court granted the preliminary injunction and ordered Cole restored to active status. On appeal, the Montana Supreme Court clarified that its review was limited to whether the district court manifestly abused its discretion in granting the injunction, not to decide the substantive merits of the underlying lawsuit. Applying substantial deference, the high court held the district court did not abuse its discretion in finding that it appeared St. James may have breached the bylaws thus entitling Cole to relief. St. James did not challenge these findings, the high court observed. The high court also upheld the district court’s conclusion that there was a likelihood of irreparable injury given the substantial risk that St. James would issue an adverse report to the NPDB. Because a preliminary injunction is intended to restore the status quo, the high court found the lower court properly ordered Cole’s reinstatement to active staff member status and prohibited St. James from adopting the recommendation of the challenged attorney investigation or from taking any adverse action on Cole’s application. In doing so, the lower court protected Cole’s patients and his professional reputation at minimal cost to St. James, according to the high court. A dissenting opinion argued that contrary to Montana case law, the majority reached the merits when deciding the preliminary injunction. The dissent also agreed with St. James that the district court looked to the wrong provisions of the bylaws in determining what procedures were required following the denial of Cole’s reappointment application. The lower court’s findings, the dissent said, were based on the incorrect bylaw provisions thus resulting in an abuse of discretion. Cole v. St. James Healthcare, 2008 MT 453 (Mont. Dec. 30, 2008). Arkansas Court Finds Hospital’s Economic Credentialing Policy Unenforceable An Arkansas circuit court held February 27, 2009 that Baptist Health’s economic credentialing policy was unenforceable and permanently enjoined its application in a case brought by several cardiologists with ownership interests in competing facilities. The court cited several ways the economic credentialing policy at issue violated public policy, including interfering with patient-physician relationships and compromising the continuity of care. “[E]conomic credentialing punishes physician investment in specialty hospitals and punishes physicians for engaging in conduct that is wholly legal, negatively affects patient care, impedes advancements in medical technology and the construction of a modern healthcare infrastructure, and interferes with patient choice and patient-physician relationships,” the court wrote. 287 Commenting on the closely watched case, Rebecca Patchin, M.D., chair-elect of the American Medical Association (AMA) Board, called the outcome “an important court victory demonstrat[ing] that economic policies that restrict physician credentialing are really intended to prevent patients from choosing medical facilities that might compete with large hospitals.” “Hospitals cannot use their financial interest to justify policies that interfere with patients’ health care choices,” she added. The case was initiated by the physician-partners of Little Rock Cardiology Clinic, which owns a 14.5% interest in the Arkansas Heart Hospital (AHH), 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 the Policy, which would prevent them from maintaining privileges at Baptist Health, tortiously interfered with the patient-physician relationship and with associated business expectancies, was contrary to public policy, and violated the Arkansas Deceptive Trade Practices Act (ADTPA). The court preliminary enjoined Baptist Health from enforcing the Policy against plaintiffs in 2004. The case twice went up to the Arkansas Supreme Court on appeal, during which time the preliminary injunction remained in place. In its February 27, 2009 ruling, the Arkansas Circuit Court of Pulaski County 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. Tortious Interference The court ruled that plaintiffs had proved all the elements of a tortuous interference claim by a preponderance of the evidence. The trial court first noted that physicians have a contractual relationship with their patients and valid business expectancies in their referral relationships with other physicians. Next, the court found Baptist Health had knowledge of plaintiffs’ contractual relationships and intended to interfere with them. The court acknowledged that plaintiffs’ ability to prove damages presented the most problematic aspect of their argument because the preliminary injunction meant most of the plaintiffs never lost their privileges at Baptist Health. But the court found sufficient evidence 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 court also concluded 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. 288 The court discounted Baptist Health’s stated justifications for the policy, which included discouraging selective referrals, also referred to as “cherry-picking,” of more profitable patients; protecting its financial health so that it could continue to carry out its charitable mission; and preventing physicians from recruiting Baptist health staff members to work for the facility the physician owns. The court concluded the justifications were pretextual, noting no evidence that Baptist Health’s Board had analyzed referral patterns or the effect AHH had on Baptist Health’s profitability before adopting the Policy. Moreover, the court found no evidence that plaintiffs performed unnecessary procedures or that the specialty hospital had negatively impacted Baptist Health’s financial viability or its ability to carry out its charitable mission. “While the Court finds that society has a strong interest in Baptist Health and other community hospitals remaining economically viable. The facts of this case indicate that Baptist Health’s finances were never at risk.” The court also criticized the Policy as overbroad, saying it “creates an irrebuttable presumption that physicians will act unethically”; affects relationships that had no potential to generate referrals; and covers an unnecessarily expansive geographic area— i.e., the entire state of Arkansas. Finally, the court rejected Baptist Health’s argument that it had an absolute right of refusal to deal and could not be compelled to grant staff privileges to plaintiffs. “A party may not refuse to deal where the refusal is illegal, unconscionable, or contrary to public policy,” the court said. Deceptive Trade Practices The court also agreed with plaintiffs that the Policy constituted an unconscionable trade practice that violated the ADTPA. According to the court, the evidence showed Baptist Health adopted the Policy in connection with its “business, trade, or commerce,” caused plaintiffs actual injury by disrupting their relationships with patients and referral sources, and the Policy was unconscionable as it violated public policy. Thus, the court granted held the Policy was unenforceable and granted plaintiffs a permanent injunction. Murphy v. Baptist Health, No. CV 2004-2003 (Ark. Cir. Ct. Feb. 27, 2009). Tenth Circuit Says Wyoming Anti-Discrimination Statute Did Not Create A Property Right In Medical Staff Membership A Wyoming statute that prohibits state-funded hospitals from discriminating against allied health professionals did not give rise to a property interest protected by the Due Process Clause, the Tenth Circuit ruled recently. The statute at issue, Wyo. Stat. § 35-3-113, provides that any hospital receiving public funds “shall be open for practice to doctors of medicine, doctors of osteopathy, doctors of chiropractic, doctors of dentistry and podiatrists.” Under the statute, these hospitals may 289 not predicate admission “solely upon the type of degree of the applicant” but “shall consider the competency and character of each applicant.” This statute, the appeals court said, mandates only a particular procedure—i.e. consideration of an applicant’s character and competence—and does not mandate a particular outcome regarding medical staff membership. James F. Ripley, a dentist and oral surgeon, brought the action alleging Wyoming Medical Center deprived him of his property right arising under Section 35-3-113 without due process when it denied him admitting privileges at the hospital. The Wyoming Medical Center bylaws allow allied health professionals like Ripley to receive clinical privileges at the hospital, but provide that only “physicians” may be members of the medical staff with full admitting privileges. The district court granted summary judgment in Wyoming Medical Center’s favor. The Tenth Circuit affirmed. The appeals court highlighted state supreme court precedent that the right to practice medicine is a conditional property right and that a hospital’s decision regarding staff privileges should be afforded “great deference.” The Tenth Circuit also cited its decision in Stears v. Sheridan County Mem’l Hosp. Bd. of Trustees, 491 F.3d 1160 (2007), which held that Section 35-3-113 is not applicable where the exercise of a physician’s hospital privileges was affected, but his staff privileges were not revoked. At most, the appeals court said, the statute “creates a state-law interest in consideration for admission to the medical staffs of Wyoming public hospitals, with consideration predicated upon an applicant’s competency and character, rather than solely upon the type of degree held by the applicant.” But this is a procedural right without a mandated outcome; therefore, the state law interest is not protected by the Due Process Clause under governing Supreme Court and Tenth Circuit precedent. Ripley v. Wyoming Med. Ctr., No. 08-8015 (10th Cir. Mar. 16, 2009). Fourth Circuit Finds Hospital Entitled To HCQIA Immunity From Physicians’ Claims Despite Lack Of Formal Hearing A hospital was entitled to qualified immunity under the Health Care Quality Improvement Act (HCQIA) even though it did not hold a formal hearing before suspending a physician's privileges because it provided “other procedures” that were “fair and reasonable . . . under the circumstances,” the Fourth Circuit held April 10, 2009. Affirming a district court decision granting the hospital’s motion to dismiss the action, the Fourth Circuit said the hospital’s path to immunity was “not a recommended model," but the failures in its process, “when viewed in the totality of circumstances against a measuring stick of objective reasonableness,” did not rebut the presumption of immunity under HCQIA. The appeals court also affirmed the district court’s dismissal of the physician’s contract and civil rights claims, to which immunity under HCQIA did not apply, finding no contract 290 existed between the parties and that the hospital did not become a state actor by reporting him to the National Practitioner Data Bank (NPDB). The appeals court said the physician was not entitled to a injunction requiring the hospital to provide him a hearing and remove his name from the NPDB because he did not present a viable claim that the hospital committed a wrong. Rakesh Wahi, M.D. is a licensed physician in West Virginia who specializes in cardiovascular, thoracic, and general surgical procedures. Wahi joined the staff of Charleston Area Medical Center (CAMC) where he started his own practice. According to Wahi, around the time he began exploring associating himself with another practice, CAMC initiated steps to restrict his ability to practice medicine and compete with CAMC. CAMC eventually suspended Wahi and made several reports about him to the NPDB pursuant to the HCQIA. The reports to the NPDB prompted an investigation and charges against Wahi by the West Virginia Board of Medicine (Board). The Board eventually dismissed the allegations without ruling on the merits. Wahi sued CAMC and several other healthcare providers (defendants) alleging, among other things, antitrust conspiracy and antitrust monopolization under the Sherman Act, breach of contract, violation of his constitutional due process rights, invasion of privacy and disclosure of confidential information, and violation of his civil rights. Defendants moved to dismiss the complaint. The U.S. District Court for the Southern District of West Virginia granted the motion and dismissed the complaint with prejudice. Affirming, the Fourth Circuit rejected Wahi’s argument that CAMC was not entitled to HCQIA immunity because it failed to provide him notice and a hearing. The appeals court noted nothing in the statute mandated a formal hearing, as Wahi argued, but rather offered two avenues for HCQIA immunity—“after adequate notice and hearing procedures” or “after such other procedures as are fair to the physician under the circumstances.” 42 U.S.C.A. § 11112(a). Examining the totality of the circumstances in an objectively reasonable manner, the appeals court held Wahi failed to rebut the presumption that CAMC afforded him “other procedures as are fair to the physician under the circumstances.” Specifically, the appeals court noted that CAMC had repeatedly asked Wahi to select dates for a hearing, which he refused to do unless the hospital met his preconditions. “Had Wahi proceeded to a hearing, any complaint about the inadequacy of notice, defective witness list or discovery, the composition of the hearing panel, the conduct of the hearing or other relevant issues could have been addressed and subjected to judicial review,” the appeals court wrote. Instead, Wahi “seemed more intent on forestalling a hearing than having one.” The appeals court also affirmed the dismissal of Wahi’s remaining claims. 291 The appeals court agreed with the district court's conclusion that CAMC was not a state actor, rejecting Wahi’s contention that by reporting him to the NPDB, CAMC “essentially decredentialed” him, a power that is “reserved exclusively to state government.” The HCQIA “does not confer to CAMC powers traditionally reserved to the state, and it does not turn CAMC’s actions into state actions for a § 1983 claim,” the appeals court said. The appeals court also rejected his breach of contract claims, finding CAMC’s bylaws did not constitute a contract between CAMC and Wahi under West Virginia law. A hospital may be required to follow its bylaws as a due process component, but there is no contractual relationship unless the bylaws specifically so provide. Wahi v. Charleston Area Med. Ctr., Inc., No. 06-2162 (4th Cir. Apr. 10, 2009). U.S. Court In Tennessee Rejects Physician’s Lawsuit Against Hospital That Revoked His Privileges A physician could not maintain a breach of contract action against a hospital that revoked his privileges citing repeated concerns about unprofessional behavior that could harm patients, a federal trial court in Tennessee ruled. The U.S. District Court for the Western District of Tennessee found the hospital was entitled to immunity under the Health Care Quality Immunity Act (HCQIA) for suspending and eventually revoking the physician’s privileges. The court also rejected the physician’s constitutional challenges—i.e., that the hospital had retaliated against him for voicing concerns about its dialysis unit in violation of the First Amendment and deprived him of procedural due process in violation of the Fourteenth Amendment. The case involved Mazen Abu-Hatab, M.D. (plaintiff), who practices nephrology. Plaintiff had medical staff privileges at Blount Memorial Hospital (BMH) beginning in October 1998. Plaintiff originally worked for the medical practice of Naseem Saddiqi, M.D., who contracted with BMH to provide services, equipment, and staffing for the hospital’s dialysis clinic. In 1999, plaintiff started his own practice and tried unsuccessfully to convince BMH to discontinue contracting with Saddiqi and make other arrangements to maintain its dialysis unit. According to plaintiff, during this time, he faced an “openly hostile environment” in the dialysis unit from nurses who worked for a corporate entity headed by Saddiqi. BMH first suspended plaintiff’s license for 14 days in May 2001 for violating a detailed “code of conduct” letter outlining concerns about his behavior. The Medical Executive Committee (MEC) then sent a second “code of conduct” letter in February 2002 indicating that further violations of BMH policies would result in an immediate 29-day suspension of plaintiff’s hospital privileges. 292 The conflicts between plaintiff and other hospital and medical staff continued during 2002, 2003, and 2004. Citing his continuing non-compliance, the MEC decided in November 2004 to impose a 29-day suspension. The MEC then notified plaintiff that it was recommending the permanent revocation of his privileges based on “multiple violations of hospital policy, a pattern of inappropriate conduct, and the failure of all previous collegial, education, and disciplinary actions to correct these problems.” Following a hearing, the fair hearing panel unanimously voted to affirm the MEC’s recommendation and BMH’s Board of Directors also agreed. Plaintiff sued BMH for breach of contract, retaliation for speech in violation of the First Amendment, and deprivation of procedural due process in violation of the Fourteenth Amendment. The court granted BMH’s motion for summary judgment on all the claims. The court first found BMH was immune from liability for the contract claim under the HCQIA. In so holding, the court reviewed the standards for HCQIA immunity—i.e., that the professional review action was (1) taken in the reasonable belief that the action was in furtherance of quality healthcare; (2) after a reasonable effort to obtain the facts of the matter, (3) after adequate notice and hearing procedures, and (4) in the reasonable belief that the action was warranted by the facts—and held plaintiff could not rebut the presumption of immunity. See 42 U.S.C. § 11112(a). The court relied on a number of factors in reaching this conclusion, including the extensive meetings and documents BMH provided to plaintiff to prevent disruption to hospital functions and patient care and its well-documented investigation. With respect to his 29-day immediate suspension in November 2004, the court held plaintiff was given adequate notice as contemplated under HCQIA even though two years had passed since the February 2002 warning letter. Although 30 days notice is required for purposes of the HCQIA safe harbor, “the record of consistent and thorough correspondence and communication between BMH and the Plaintiff demonstrates that the notice afforded to the Plaintiff was fair under the circumstances,” the court said. The court also found the immediate suspension was warranted based on patient safety concerns, including that plaintiff’s refusal to communicate with or respond to the pages of the nurses could compromise patient care. Thus, the court held BMH was entitled to HCQIA immunity. The court went on to reject plaintiff’s constitutional claims, which were not covered by HCQIA immunity. According to the court, plaintiff’s First Amendment retaliation claim—i.e., that he spoke out regarding the management and operation of BMH’s dialysis unit—did not constitute a public concern. “Plaintiff’s criticisms of the dialysis contract involved administrative issues rather than political, social, or economic concerns affecting the community,” the court held. 293 Finally, the court rejected plaintiff’s Fourth Amendment due process claim, finding no evidence of inadequate notice, deficiencies in the investigation, or bias of the fair hearing panel. Abu-Hatab v. Blunt Mem’l Hosp., Inc., No. 3:06-CV-436 (E.D. Tenn. Apr. 2, 2009). Quality of Care Third Year Of Medicare Value-Based Purchasing Demo Shows Significant Improvement In Hospital Inpatient Care, CMS Says Data from the third year of the Premier Hospital Quality Incentive Demonstration (HQID) show “significant” continued improvement in the quality of care provided by participating hospitals in five clinical areas, according to a press release issued June 17, 2008 by the Centers for Medicare and Medicaid Services (CMS). "These Premier results show that Value-Based Purchasing can achieve excellent results in Medicare," CMS Acting Administrator Kerry Weems said. Launched in October 2003, HQID was developed by CMS in collaboration with the Premier Inc. Healthcare Alliance (Premier) to test new payment systems under Medicare that would improve safety, quality, and efficiency of care delivered in U.S. hospitals, according to the release. Premier is a group purchasing organization owned by nonprofit hospitals that operates “the nation’s most comprehensive repository of hospital clinical and financial information,” it said. The demonstration involves approximately 250 participating hospitals in 36 states. “Hospitals participating in HQID include small/large, urban/rural, and teaching/nonteaching facilities that have volunteered to report their quality data for . . . five highvolume inpatient conditions using national measures of quality care,” CMS explained. These conditions are acute myocardial infarction (AMI) or heart attack; coronary artery bypass graft; heart failure; pneumonia; and hip and knee replacement. Participating hospitals showed “significant” improvement in their average composite quality score (CQS), which is an aggregate of all quality measures within each clinical area, from the inception of HQID and the end of year three (2006), CMS reported. Specifically, the average CQS improved 15.8 percentage points over the project’s first three years, with an improvement of 4.4 percentage points between the second and third year. As for improvement broken down by clinical area, the average CQS for participating hospitals improved: from 87% to 96% (heart attack); from 85% to 97% (coronary artery bypass graft); from 64% to 89% (heart failure); from 69% to 90% (pneumonia); and from 85% to 97% (hip and knee replacement). CMS also emphasized that certain individual hospitals had demonstrated “striking” improvements over the demonstration’s first three years. “Fifteen hospitals moved from ‘worst to first’ rankings, moving from the bottom to the top fifth of hospitals in one or more clinical areas" and improving by 32.6 percentage points in quality scores over three years on average. CMS has awarded more than $24.5 million to participating hospitals over HQID’s first three years. In the third year, “the top-performing 112 hospitals earned a total of $7 294 million in incentive payments for substantial and continual advancement of quality care,” CMS said. The pay-for-performance model used in the first three years of HQID included financial incentives for the top 20% of participating hospitals in each of the five clinical areas, according to Premier. Within that percentage, the top 10% of hospitals receive a 2% incentive payment, while hospitals in the second decile receive a 1% incentive payment. In November 2007, according to CMS, the agency submitted a proposal to Congress to implement value-based purchasing throughout the Medicare program. Under that proposal, a percentage of the hospital’s payment for each discharge would be contingent on the hospital’s actual performance on a specific set of clinical quality measures. Making such changes to Medicare’s payment methodology, however, would require Congress to enact new legislation. New York Medicaid Program Will Stop Reimbursing For “Never Events” The New York state Medicaid program will no longer reimburse providers for 14 so-called “never events”—avoidable hospital complications and medical errors that should never happen. Such “never events” include wrong-site or wrong-patient surgeries, serious medication errors, and unintentionally leaving a foreign object in a patient. The list will be continually reviewed and revised as needed, according to the state Department of Health. Hospitals will be required to provide information that will designate which complications were present on admission and which ones occurred during or as a result of hospital care. The Centers for Medicare and Medicaid Services has announced a similar policy for Medicare reimbursements. And other private payors are moving in this direction as well. “Reforming Medicaid’s hospital payment system is a key initiative in New York Medicaid,” said state Health Commissioner Richard F. Daines, M.D. “Reform isn’t solely about balance sheets—quality of care and patient safety are paramount,” he added. Massachusetts Adopts Uniform “Never Events” Healthcare Payment Policy Massachusetts health officials announced June 18, 2008 that the state will no longer pay for costs associated with 28 serious reportable healthcare events identified by the National Quality Forum. According to a release posted by the Office of Health and Human Services, Massachusetts is the first state in the nation to establish a uniform, non-payment policy across state government. The new policy, which was adopted by the Office of Medicaid (MassHealth); Group Insurance Commission; Commonwealth Health Insurance Connector Authority; and Department of Correction, will apply to more than 1.6 million Massachusetts residents covered by state programs. The new policy will be implemented in each state agency’s next contract cycle. 295 “By adopting a consistent policy, Massachusetts is applying the state’s purchasing power in support of patient safety,” said Health and Human Services Secretary Dr. JudyAnn Bigby, who chairs the Executive Committee of the HealthyMass initiative. New National Scorecard Shows U.S. Health System Lagging The overall performance of the U.S. health system continues to lose ground, despite investing more resources than any other industrialized nation, according to a new 2008 National Scorecard on U.S. Health System Performance issued by the Commonwealth Fund. The 2008 Scorecard found little overall improvement since the Commonwealth Fund Commission on a High Performance Health System issued the first National Scorecard in 2006. Most notably, said the report, Why Not the Best? Results from the National Scorecard on U.S. Health System Performance 2008, is a marked decline in U.S. scores on access, as well lackluster performance on key indicators of health outcomes, quality, and efficiency. According to the report, the U.S. had an overall score of 65 out of a possible 100 across 37 core indicators of healthy lives, quality, access, efficiency, and equity when compared to national and international top performing benchmarks. “Despite some encouraging pockets of improvement, the country as a whole has failed to keep pace with levels of performance attained by leading nations, delivery systems, states, and regions,” the report said. The report highlighted several areas of particular concern—including low scores on efficiency measures (53 out of 100). Lowering insurance administrative costs alone could save up to $100 billion annually at the lowest country rates, the report said. Other average scores were 72 for healthy lives, 71 for quality, 58 for access, and 71 for equity. The U.S. also fell to last place among 19 industrialized nations on preventable mortality (i.e. deaths that might have been prevented with timely and effective care). Although U.S. rates improved somewhat from earlier measurements, the nation lagged behind big gains in other countries, the report said. The report did note some exceptions to the overall trend for “quality measures that have been the focus of national campaigns or public reporting.” For example, rates of controlling two common chronic conditions, diabetes and high blood pressure, have improved significantly with public reporting and pay-for-performance initiatives. Closing the performance gap could help prevent 101,000 premature deaths, improve access to preventative care for 70 million more adults, and save Medicare at least $12 billion per year, the report noted. CMS Announces Over $36 Million In Bonus Payments To 2007 Participants In Quality Reporting Initiative The Centers for Medicare and Medicaid Service (CMS) announced July 15, 2008 that over $36 million in bonus payments was awarded to many of the more than 56,000 health 296 professionals (physicians and group practices) who satisfactorily reported quality information to Medicare under the 2007 Physician Quality Reporting Initiative (PQRI). Congress established the voluntary PQRI in 2006. Under the program, participating physicians and other eligible professionals could receive bonus payments of up to 1.5% of their total allowed Medicare charges, subject to a cap, by satisfactorily submitting quality information for services rendered between July and December 2007. Payments under the 2007 PQRI should be received no later than August 2008 by physicians, physician group practices, and other PQRI eligible professionals, according to CMS. The average incentive amounts for individual professionals and physician group practices was over $600 and $4,700, respectively. CMS also noted that the largest payment to a physician group practice under the 2007 PQRI totaled over $205,700. Of the more than 109,000 professionals who participated in the 2007 PQRI nationwide, roughly 56,700 physicians and other eligible professionals met the statutory requirements for satisfactory reporting, CMS said. Health professionals in Florida and Illinois, however, received the highest incentive payments for the 2007 reporting period, with those in Florida receiving over $3 million and those in Illinois receiving more than $2 million. The PQRI for 2008 includes 119 quality measures, up from 74 quality measures in 2007. “Nearly all of the measures are clinical performance measures, such as the percentage of patients who received necessary mammograms and cancer screenings . . . [along with] two structural measures that focus on the use of electronic health records and electronic prescribing technology,” CMS said. Other enhancements in the 2008 PQRI include: the opportunity to receive incentive payments for the entire year, ability to report measures within a group for a specified number of patients, and the use of medical registries through which program participants can report their quality data to CMS. Potentially Preventable Medical Errors Cost Employers Nearly $1.5 Billion Annually, Study Says Medical errors that occur during or after surgery, and that are potentially preventable, may cost employers nearly $1.5 billion annually, according to a new study released July 28, 2008 by the Department of Health and Human Services Agency for Healthcare Research and Quality (AHRQ). The study, published in an article—“Impact of Medical Errors on Ninety-Day Costs and Outcomes: An Examination of Surgical Patient”—in the journal Health Services Research, found that one of every 10 patients who died within 90 days of surgery did so because of a preventable error, and that one-third of these deaths occurred after the initial hospital discharge. The study, which was conducted by researchers at AHRQ, was based on a nationwide sample of more than 161,000 patients age 18 to 64 in employer-based health plans who underwent surgery between 2001 and 2002. The researchers used AHRQ’s Patient Safety Indicators to identify medical errors. 297 The study also found health insurers paid $28,218 more (or 52% more) per patient who experienced acute respiratory failure as compared to patients who did not experience this complication. In addition, the study found health insurers paid $19,480 more (or 48% more) per patient who experienced a postoperative infection as compared to patients who did not experience this post-surgical complication. The study further noted nursing care associated with medical errors (i.e., pressure ulcers and hip fractures) cost $12,196 more (or 33% more), and $11,797 (32% more) for surgery patients who experienced nursing care associated with medical errors or metabolic problems associated with medical errors (i.e., kidney failure or uncontrolled blood sugar), respectively, as compared with patients who did not experience either error. The authors of the study concluded that the effects of medical errors continue long after the patient leaves the hospital, and that “medical error studies that focus only on the [hospital] inpatient stay” may underestimate the financial impact of patient safety events by “up to 30 percent.” Physician Groups In CMS Quality Demo Will Earn $16.7 Million In Performance Payments All ten physician groups that participated in the Centers for Medicare and Medicaid Services’ (CMS’) Physician Group Practice (PGP) Demonstration improved the quality of care delivered to patients and thus earned $16.7 million in incentive payments in the second year of the demo, the agency announced August 14, 2008. According to CMS, all of the participating physician groups achieved benchmark or target performance on at least 25 out of 27 quality markers for patients with diabetes, coronary artery disease, and congestive heart failure. CMS noted that the ten groups also improved the quality of care delivered to Medicare beneficiaries on the chronic conditions measured, increasing their quality scores an average of 9 percentage points across the diabetes mellitus measures, 11 percentage points across the heart failure measures, and 5 percentage points across the coronary artery disease measures. A total of $2.9 million in the related Physician Quality Reporting Initiative (PQRI) incentive payments was paid out to the 10 groups under the demonstration. “In addition to achieving benchmark performance for quality, several physician groups also experienced favorable financial performance under the demonstration’s performance payment methodology,” CMS said. For patients with diabetes or coronary artery disease, Medicare expenditures grew more slowly for beneficiaries assigned to the participating physician groups than for beneficiaries in the comparison group with the same conditions, CMS explained. Accordingly, four of the physician groups earned $13.8 million in performance payments for improving the quality and cost efficiency of care as their share of a total of $17.4 million in Medicare savings, CMS said. In the first year of the demonstration, only two physician groups shared $7.3 million in performance payments. 298 Medical Practices Unsatisfied With Administrative Aspects Of CMS Quality Reporting Program Medical practice leaders have expressed frustration with the Centers for Medicare and Medicaid Services’ (CMS’) Physician Quality Reporting Initiative (PQRI), the Medical Group Management Association (MGMA) reported September 8, 2008. According to data released by MGMA, its members have criticized the lack of data for improving patient outcomes, the administrative burden of participation, difficulty accessing and downloading the 2007 feedback reports, and the delay from the time data were submitted to the time reports were available. “While MGMA and its members support initiatives that help physicians provide highquality patient care, these data highlight the fundamental problems with this program,” MGMA President and CEO William F. Jessee, MD, FACMPE, said in a press release. According to the data, 92.9% of the practices that responded to MGMA’s survey had difficulty in obtaining their PQRI reports; with 58.2% reporting “extreme difficulty.” Of those practices that did obtain reports, 69.8% reported “low” or “no” satisfaction with the document’s guidance in improving patient care outcomes, MGMA said. “On average,” MGMA noted, “respondent practices spent five hours downloading their final 2007 PQRI feedback reports from the CMS Web site.” The data indicated that 69.6% of respondent practices attempted to get support or assistance from CMS in obtaining their PQRI reports, but over 42% reported “no” or “low” satisfaction with CMS’ responsiveness to their requests for assistance. Although Overall Healthcare Quality Has Improved, Gains Varied Widely, NCQA Reports While the overall quality of healthcare has improved, significant variations between health plans persist, according to a report released October 2, 2008 by the National Committee for Quality Assurance (NCQA). Quality improved for most people in private health insurance plans, the report found; however, "there was little improvement in the care delivered to those enrolled in Medicare and Medicaid, the nation’s two largest public health care programs." According to NCQA, in 2008 a record 845 health plans reported on their performance through data submitted to NCQA. The data show that commercial health plans improved on 44 of 54 measures of healthcare quality, with 16 significant gains in such areas as blood pressure control and postpartum care for women and their newborns. In contrast, however, health plans serving Medicare beneficiaries posted gains on only 24 of 45 measures of care, while plans serving Medicaid beneficiaries gained in only 26 measures, and many of those improvements were quite small, NCQA said. In addition, the report found that quality of care varied widely by region. Commercial health plans in Maine, New Hampshire, Vermont, Massachusetts, Connecticut, and Rhode Island all performed at a rate that exceeded the national average by 4.7 percentage points, the report said. 299 In contrast, plans in Texas, Oklahoma, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, and Kentucky reported quality scores that averaged 4.0 points below the national average. "True health care reform must address the gaps and inconsistencies in quality that deny millions of people the care they deserve," said NCQA President Margaret E. O’Kane. OIG Says Incidence Of Adverse Events In Hospitals Warrants Concern Fifteen percent of Medicare beneficiaries hospitalized in two selected counties experienced an “adverse event” during their hospital stays, according to a recent Department of Health and Human Services Office of Inspector General (OIG) report. While findings were not nationally representative, the OIG said the report substantiated concerns about the incidence of adverse events in hospitals and the importance of patient safety initiatives to reduce occurrences. The report, part of a series mandated by Congress on adverse events, was based on a sample of 278 Medicare beneficiaries hospitalized in the two counties during a one-week period in August 2008. OIG defined an adverse event for purposes of its reports as harm to the patient as a result of medical care. OIG distinguished adverse events from so-called "never events," which the National Quality Forum (NQF) identifies as those that “should never occur in a healthcare setting,” and the Centers for Medicare and Medicaid Services’ (CMS’) list of hospital-acquired conditions (HACs) for which Medicare will no longer reimburse hospitals. According to OIG, of the adverse events it identified in its selected survey, 1% constituted a serious reportable event on NQF’s list; 4% as a HAC on CMS’ list; and 13% fell into the most serious categories on an established harm scale (i.e. prolonged hospital stay, permanent harm, life-sustaining intervention, or death). OIG also said of the adverse events found on CMS’ or NQF’s lists, only one caused an increase in Medicare reimbursement. The incidence rate of adverse events rose another 15% where events that resulted in temporary harm requiring medical intervention (e.g., an allergic reaction to medication) were considered. OIG said one hurdle in calculating an adverse event incidence rate stems from the different definitions used to identify them. As directed by Congress, OIG will continue to study adverse events and their effect on patient safety and reimbursement polices through 2009. OIG also indicated that it planned to make recommendations for future legislative or administrative action as appropriate. Adverse Events in Hospitals: Case Study in Incidence Among Medicare Beneficiaries in Two Selected Counties (OEI-06-00220). 300 CMS Says Nearly All Hospitals Met Quality Reporting Requirements For Outpatient Services The Centers for Medicare and Medicaid Services (CMS) announced January 8, 2009 that 99.3% of all hospitals paid under the Medicare outpatient prospective payment system (OPPS) will receive a full payment update for calendar year (CY) 2009 after successfully reporting quality data on seven quality measures for heart attack and surgical care. The new Hospital Outpatient Quality Data Reporting Program, which began in 2008, was mandated by the Tax Relief and Health Care Act (TRHCA) of 2006. In all, of 3,339 hospitals that participated in the program, 3,313 will receive the full CY 2009 update. Of the remaining 26 hospitals that will receive the reduced update, 18 did not report the quality data successfully, while eight did not have a QualityNet Administrator, CMS explained. The OPPS CY 2009 final rule added four imaging efficiency measures to the seven original measures, CMS noted. The reporting program does not apply to hospitals excluded from the OPPS, Maryland hospitals subject to special payment rules reflecting state hospital payment laws; hospitals situated outside of the 50 state and the District of Columbia, Indian Health Service Hospitals, and certain other OPPS-exempt hospitals. NCDs Barring Coverage Of Three "Never Events" Issued By CMS The Centers for Medicare and Medicaid Services (CMS) finalized January 15, 2009 three national coverage determinations (NCDs) to establish uniform national policies that will prevent Medicare from paying for three so-called "never events." Never events, identified in the National Quality Forum's (NQF's) list of Serious Reportable Events, are adverse events that ideally should never happen. The three national coverage determinations (NCDs) would bar Medicare payment for: (1) wrong surgical or other invasive procedures performed on a patient; (2) surgical or other invasive procedures performed on the wrong body part; and (3) surgical or other invasive procedures performed on the wrong patient. "The national coverage policies for certain types of surgical errors are important steps for Medicare in working to reduce or eliminate their occurrence and their associated payments," CMS Acting Administrator Kerry Weems said. "These policies have the potential to reduce causes of serious illness or deaths to beneficiaries and reduce unnecessary costs to Medicare." CMS previously addressed some of the never events through the Hospital-Acquired Conditions (HACs) provisions in the Inpatient Prospective Payment System final rule for fiscal years (FYs) 2008 and 2009. Under those provisions, for discharges occurring on or after October 1, 2008, Medicare will no longer pay a hospital at a higher rate for an inpatient hospital stay if the sole reason for the enhanced payment is one of the selected HACs, and the condition was acquired during the hospital stay. 301 CMS noted it "determined that not all conditions included on the NQF list of Never Events should be addressed by the HAC payment provision and therefore determined that the NCD process was appropriate to address coverage for the three types of surgical errors cited above." The NCD is effective immediately. CMS said it will issue implementation instructions for processing such claims "at a later date." Most Hospitals Not Meeting Quality Standard, Leapfrog Survey Finds The majority of hospitals have not fully implemented standards known to improve quality and protect patient safety, according to a recent survey report issued by the Leapfrog Group. “Progress on patient safety is moving too slowly,” said Leapfrog Chief Executive Officer Leah Binder. “The safety goals Leapfrog promotes are achievable.” The Leapfrog Hospital Survey, released annually since 2001, found that in 2008 only 7% of hospitals fully met Leapfrog medication error prevention (CPOE) standards. CPOE systems are electronic prescribing systems that intercept errors at the time medications are ordered, the survey report said. Physician orders are integrated with patient information, including laboratory and prescription data, and then automatically checked for potential errors or problems. The voluntary survey, which includes 1,276 hospitals in 37 major U.S. metropolitan areas, also found low percentages of hospitals fully meeting Leapfrog efficiency standards (defined as highest quality and lowest resource use). Specifically, 24% of hospitals met efficiency standards for heart bypass surgery; 21% for heart angioplasty; 14% for heart attack; and 14% for pneumonia care. Leapfrog also reported relatively low percentages of surveyed hospitals were fully meeting volume and risk-adjusted mortality standards or adhering to nationally endorsed process measures for eight high-risk procedures. Sixty-five percent of reporting hospitals did not have all recommended policies in place to prevent common hospital-acquired infections, while 75% failed to fully meet the standards for 13 evidence-based safety practices, ranging from hand washing to competency of the nursing staff. The survey did reveal some notable improvements, including an increase in the percentage of hospitals now meeting Leapfrog’s ICU standard from 10% in 2002 to 31% in 2008. In addition, the group said 60% of hospitals have agreed to implement Leapfrog’s “Never Events” policy when a serious reportable event occurs within their facility. “In spite of huge opportunities for improvement, many hospitals are, in fact, demonstrating quality excellence and serving as role models,” said Binder. “We need to take the lessons learned from the best hospitals and use these to move the status quo forward so all Americans have access to safe, cost-effective care.” 302 According to the survey report, research indicates that if three of Leapfrog’s standards were implemented in all urban hospitals in the U.S. (ICU staffing, medication ordering systems, and use of higher-performing hospitals for high-risk procedures), the nation could save up to 57,000 lives, avoid as many as three million adverse drug events, and save up to $12 billion in healthcare costs each year. RICO Third Circuit Finds Alleged Fraud Did Not Cause Other Medicare Providers Injury Under RICO In a decision that is not precedential, the Third Circuit upheld January 5, 2009 the dismissal of a hospitals' claims that an integrated healthcare system violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by fraudulently inflating costs to increase their Medicare outlier payment. The appeals court found the hospital failed to show the alleged conduct at issue was the proximate cause of its alleged injuries (i.e. lower outlier reimbursement from Medicare) for purposes of the RICO claims. Saint Barnabas Corporation (SBC) settled a qui tam action with the United States alleging that, through a consortium of hospitals SBC owned and operated in New Jersey, it received excessive Medicare payments by reporting inflated patient treatment costs. Subsequently, Longmont United Hospital, a Medicare participant located in Colorado, filed a class action against SBC, claiming four violations of RICO, 18 U.S.C. § 1961 et seq. SBC moved to dismiss and the district court granted the motion. Longmont appealed. The appeals court noted that for a plaintiff to have standing to assert a RICO claim under 18 U.S.C. § 1964(c), the alleged RICO violation must be the proximate cause of the plaintiff’s injury. Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 457 (2006); Holmes v. Secs. Investor Prot. Corp., 503 U.S. 258, 268 (1992). "Here, we have no difficulty finding that SBC’s conduct was not the proximate cause of Longmont’s injuries," the appeals court said. In rejecting Longmont's argument that SBC’s scheme reduced Longmont’s Medicare reimbursements by both increasing the cost threshold necessary to qualify for outlier payments and decreasing the amount of those payments, the appeals court found "that the Centers for Medicare & Medicaid Services (CMS) stands between SBC’s conduct and Longmont’s injuries." According to the appeals court, SBC’s alleged inflation of hospital costs did not cause Longmont’s injuries; "instead, it was CMS’s response to this behavior—reimbursing SBC for its inflated costs without ensuring that they were justified and raising the qualification threshold for Outlier Payments in subsequent years—that led to a decrease in Longmont’s Outlier Payments," the appeals court said. The appeals court also noted that regulations enacted in 2003 "allowed CMS to prevent conduct like SBC’s from ever harming hospitals like Longmont by 'adjust[ing] Outlier payments retroactively once hospitals’ cost reports are audited' and forcing those who violate the rules to 'repay the money they receive[d] improperly.'" 303 "Finding proximate causation here would require stretching the concept past its breaking point," the appeals court concluded. Longmont United Hosp. v. Saint Barnabas Corp., No. 07-3236 (3d Cir. Jan. 5, 2009). Eighth Circuit Affirms Dismissal Of Physician’s RICO Claims Against Insurer The Eighth Circuit affirmed March 5, 2009 the dismissal of a claim that an insurer violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by mailing erroneous explanation of benefits (EOB) forms that improperly denied, reduced, or delayed payments to a physician for the healthcare services he provided to plan members. The appeals court agreed with the district court's finding that plaintiffs failed to show a material falsehood in the EOBs. Orthopedic surgeon George Schoedinger and his employer Signature Health Services, Inc., one of the largest healthcare provider organizations in St. Louis, (collectively, plaintiffs) sued United Healthcare of the Midwest, Inc. (United) alleging it wrongfully denied or reduced 295 healthcare insurance claims. All but six of the 295 claims involved health plans governed by the Employee Retirement Income Security Act (ERISA). Plaintiffs asserted state law claims for breach of contract and for violations of the Missouri Prompt Payment Act (MPPA) and federal claims under ERISA and RICO. Before trial, United paid the unpaid principal amount of most of the claims. At trial, the evidence showed that United’s computerized claims processing system committed hundreds of errors with respect to Schoedinger’s claims for healthcare services, including improperly applying in-network discounts after he terminated his provider agreement; inappropriate “grouping” or “bundling” of distinct medical procedures; and improper “downcoding.” After trial, the district court awarded plaintiffs an additional $28,874 in principal on the 289 ERISA claims, $4,768 in interest on the six non-ERISA claims, and $284,261 in prejudgment interest, attorneys’ fees, and costs. The court also dismissed plaintiffs’ RICO claim and ruled that United breached no independent contract governing the ERISA claims, and that ERISA preempted claims for additional penalties under the MPPA. In addition, the court denied plaintiffs broad injunctive relief. Plaintiffs appealed these rulings, but the Eight Circuit affirmed. Schoedinger was an out-of-network provider who received assignments from his patients of their plan benefits. In addition to asserting ERISA claims based on these assignments, plaintiffs also argued the claims procedures Untied published on its website, in its administrative guide, and in insurance cards distributed to plan participants was an offer of an independent contract in which United promised to properly and promptly pay Schoedinger every time he treated a United plan member. The appeals court rejected this argument, agreeing with the district court that this information was intended for instructional purposes only, not as a contract offer. 304 The appeals court next found ERISA preempted plaintiffs’ MPPA cause of action with respect to the 289 ERISA claims. Specifically, the appeals court noted that MPPA regulates health carrier payments to “claimants,” who are broadly defined to include ERISA participants and beneficiaries. In addition, Schoedinger’s ERISA claims were based on patients’ assignments of plan benefits, not on a provider agreement. “Thus, the impact of the MPPA on plan administration is not ‘remote.’” The appeals court also affirmed the dismissal of plaintiffs’ RICO claim, which asserted that United “engaged in a scheme to avoid paying full amounts of claims,” that its claims processing errors were intentional, and that erroneous EOBs constituted repeated acts of mail fraud. Although the district court based the dismissal on its conclusion that plaintiffs failed to show detrimental reliance, which the Supreme Court in a subsequent decision held was not an element of a RICO claim predicated on mail fraud, the lower court's finding that the complaint failed to allege material falsehoods was still relevant, the appeals court said. Plaintiffs contended the EOBs themselves amounted to material falsehoods. But the district court found the EOBs were what they purported to be—i.e., truthful disclosures of discounts applied in determining covered benefits. “It is not a scheme to defraud to adopt as a claims policy, ‘When in doubt, apply the discount and truthfully disclose it,’” the appeals court observed. Plaintiffs offered no evidence United intentionally, or with reckless disregard, applied and disclosed discounts it knew to be improper. Finally, the appeals court held plaintiffs were not entitled to an injunction detailing the manner in which United must process future claims. Schoedinger v. United Healthcare of the Midwest, Inc., No. 07-3317 (8th Cir. Mar. 5, 2009). SCHIP President Signs SCHIP Reauthorization Legislation President Obama signed into law February 4, 2009 legislation that reauthorizes the popular State Children’s Health Insurance Program (SCHIP) for four-and-a-half years after the House passed the bill in a 290-135 vote earlier in the day. The Senate on January 29, 2009 voted 66-32 in favor of the measure (H.R. 2), which boosts funding by $32.8 billion over baseline levels to expand coverage to about 4.1 million low-income children, while preserving coverage for 6.7 million. “This is only the first step," Obama said about the bill signing. "As I see it, providing coverage for 11 million children is a down payment on my commitment to cover every single American.” 305 The House this week took up the Senate-passed version, which most notably did not include a controversial provision that would have banned physicians from self-referring to hospitals in which they have an ownership interest. The legislation includes several provisions that drew fire from Republican lawmakers, including a provision extending coverage to legal immigrant children and pregnant woman who have been in the country less than five years. Some GOP lawmakers also argued the measure will extend coverage to children in families with higher incomes and could shift those who would otherwise have coverage under private insurance to the public safety net program, so-called crowd-out. The measure among other things would extend coverage for children in families with incomes above 300% of the federal poverty level at the Medicaid match rate, rather than the higher SCHIP rate; give states the option to cover pregnant women for prenatal care; and move childless adults out of the program. Obama Rescinds SCHIP Directive Meanwhile, on the same day the reauthorization legislation was signed into law, President Obama issued a memorandum withdrawing a controversial directive issued by the Centers for Medicare and Medicaid Services (CMS) on August 17, 2007 that set forth stricter requirements for states to expand SCHIP eligibility to children in families with higher incomes. CMS reiterated the policy in a May 7, 2008 letter to state health officials. As a result of the so-called August 17 directive, "tens of thousands of children have been denied coverage," according to the Obama memo. "By this memorandum, I request that you immediately withdraw the August 17, 2007, and May 7, 2008 letters, to State health officials and implement SCHIP without the requirements imposed by those letters." The August 17, 2007 letter to state health officials enumerated a number of steps states should take before expanding eligibility for SCHIP beyond 250% of the federal poverty level (FPL), including establishing a minimum one-year period of uninsurance and requiring 95% enrollment of eligible children under 200% of the FPL. The directive was widely criticized by numerous lawmakers and the National Governors Association as an attempt by the Bush Administration to limit the expansion of SCHIP enrollment. Many critics said the directive's requirements were "unattainable" for states. At the time it issued the directive, CMS said it was intended to ensure that states have reasonable procedures in place to prevent substitution of public SCHIP coverage for private coverage. Tax Property Tax Exemption Illinois Appeals Court Reverses Ruling That Provena Covenant Qualifies For Property Tax Exemption An Illinois appeals court reversed August 26, 2008 a state circuit court ruling that held nonprofit hospital Provena Covenant Medical Center (Provena) qualified as both a charitable and religious exempt organization. 306 In July 2007, the circuit court in Sangamon County, Illinois overturned a previous decision by the Illinois Department of Review (IDOR) refusing to grant Provena’s renewal application for a property tax exemption. The IDOR decision found Provena did not qualify for the charitable institution tax exemption under Illinois’ property tax statutes because it failed to sufficiently show it used the property exclusively for charitable purposes. The Appellate Court of Illinois, Fourth District, however, sided with the IDOR, finding “no clear error” in the decision to deny Provena’s exemption from property taxes. At the outset of the opinion, the appeals court made the pivotal decision to review the IDOR’s decision under a “clear error” standard rather than “de novo,” as Provena urged. In a 55-page opinion, the appeals court conceded that “[i]t is of obvious public benefit for any community to have available one or more modern hospitals,” but added that “until such time as the legislature sees fit to either change or make definite the formula for the determination of the medical/charitable use of real property, Provena cannot, on the record before us here, prevail in its attempt to exempt itself from real estate taxation.” The underlying dispute in this case arose in 2002 when Provena applied to the Champaign County Board of Review for renewal of its property tax exemption for the 2002 tax year. Provena, a nonprofit general acute care hospital, uses several parcels of real estate located in Urbana, Illinois for its facilities. Provena Covenant Med. Ctr. v. Department of Revenue of Ill., No. 4-07-0763 (Ill. App. Ct. Aug. 26, 2008). *The Illinois Supreme Court agreed to review the appeals court’s decision concerning Provena’s property tax exemption. “As a Catholic, mission-driven and charitable hospital, Provena Covenant has long been dedicated to providing quality healthcare to all who come through our doors. . . . We are confident that the Supreme Court will offer important guidance and reaffirmation of the role that Provena Covenant and other not-for-profit hospitals play in helping the un and underinsured in their communities,” Provena said in a November 26, 2008 statement. The Illinois Hospital Association (IHA) said the appellate court ruling “contradicted 100 years of Supreme Court decisions regarding property tax exemption.” According to IHA, “the Illinois Supreme Court has recognized a simple, but critical reality: a hospital that treats patients regardless of their ability to pay and that does not provide profits to private individuals is charitable and merits an exemption from property taxes, without regard to the specific amount of free care it provides.” 307 Community Benefit Grassley Questions Two Nonprofit Hospitals About Tax Exemptions Senate Finance Committee Ranking Member Charles Grassley (R-IA) has launched a detailed inquiry into two nonprofit hospitals' activities following media reports that called into question their tax-exempt purposes, his office announced September 2, 2008. In separate letters to the University of Chicago Medical Center (UCMC) (dated August 29, 2008) and the University of Texas M.D. Anderson Cancer Center (dated July 23, 2008), Grassley posed an extensive list of questions ranging from the scope and distribution of the organizations’ financial assistance policies to their billing and collection practices. The letter to UCMC Chief Executive Officer James L. Madara was prompted by a report in the Washington Post describing the hospital’s efforts to steer underinsured and uninsured patients away from the hospital to clinics, Grassley said. Among the specific questions posed to the hospital were those related to UCMC’s budgeted amount for free or discounted care, whether billing staff are required to explain the hospital’s financial assistance policy to qualifying patients, a detailed breakdown of UCMC’s uncompensated care over the previous five years, how UCMC calculated reported amounts of charity care and bad debts, and compensation and transactions with interested persons. The other letter to M.D. Anderson Cancer Center President Dr. John Mendelsohn followed a report in the Wall Street Journal about a leukemia patient who was asked to pay $45,000 upfront because the hospital would not honor her insurance policy. Grassley asked the center whether it has a written financial policy, whether it budgets for free or discounted care, for a detailed breakdown of its uncompensated care, how it chooses which insurance companies it contracts with, and whether its “upfront payment policy” is a written policy. Grassley noted that the hospital community has urged him to delay legislating in this area, arguing the recent changes to the Form 990 Schedule H would change behavior. “It’s troubling then to hear about two world-renowned hospitals engaging in questionable practices,” Grassley said in a statement. “The answers to the questions I’m asking are critical to understanding whether these hospitals are setting standards for their peers. Those standards might include losing sight of the public service that comes with tax-exempt status,” Grassley said. IRS Standard Gives Hospitals Wide Latitude To Define Community Benefit, GAO Says The Internal Revenue Service’s (IRS’) community benefit standard allows nonprofit hospitals broad latitude to determine the services and activities that constitute community benefit, according to a Government Accountability Office (GAO) report issued October 14, 2008. 308 The report, prepared at the request of Senate Finance Committee Ranking Member Charles Grassley (R-IA), also found that state community benefit requirements vary significantly. “This report makes clear that tax-exempt hospitals are free to define community benefit as they see fit,” Grassley said in a statement responding to the report. Michael W. Peregrine, Partner at McDermott Will & Emery LLP, told Health Lawyers Weekly that the report is "well intentioned but, ultimately, inconclusive" in that it "lacks the 'smoking gun' that opponents of the Community Benefit standard seek." According to the report, previous studies have indicated that nonprofit hospitals may not be defining community benefit in a consistent and transparent manner that would enable policymakers to hold them accountable for providing benefits commensurate with their tax-exempt status. The results from the instant report supported those findings. The report noted that within the standards and guidance used by nonprofit hospitals, consensus exists to define charity care, the unreimbursed cost of means-tested government healthcare programs, and many other activities that benefit the community as community benefit. The report found, however, that “consensus does not exist to define bad debt and the unreimbursed cost of Medicare as community benefit.” “Variations in the activities nonprofit hospitals define as community benefit lead to substantial differences in the amount of community benefits they report,” GAO said. Peregrine noted that the report's observations regarding variation "is not new information" and, in his opinion, "can not credibly . . . be used to challenge the compliance of tax-exempt hospitals with the requirements of the Community Benefit standard." However, Peregrine said, "judging by the initial comments from Washington, it is being used to re-ignite the debate regarding the need for a new standard of tax exemption." In his comments, Grassley in fact made that argument. “[T]he IRS needs a bright line test to be able to determine whether hospitals are meeting the standard necessary to maintain their tax exemption,” he said. “As long as there’s such uncertainty and inconsistency in the definition of community benefit, it’ll be impossible to gauge whether the public is getting a fair return for the billions of tax dollars that tax-exempt hospitals don’t pay. While the new IRS Form 990 will help, Congress may need to fill in the blanks since hospitals still get to choose how they calculate their costs,” Grassley said. Nonprofit Hospitals: Variation in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements (GAO-08-880). IRS Releases Hospitals Report This item was contributed to Health Lawyers Weekly by Michael W. Peregrine, McDermott Will & Emery LLP The Internal Revenue Service (IRS) released February 12, 2009 its long-awaited "Final Report" on the results of its hospital industry compliance check audits conducted in 2006. 309 The Final Report focuses principally on two main topics: Executive Compensation, and Community Benefits reporting. As such, the Report is worthy of mention to the board and, in particular, to the compensation committee. With respect to executive compensation, the Final Report reveals high amounts of compensation, as well as broad reliance on the three-part "Rebuttable Presumption of Reasonableness" safe harbor. Senior IRS officials have expressed some concern that application of the Rebuttable Presumption may be precluding the IRS from investigating instances of allegedly excess compensation, beyond the concept of "burden shifting" originally contemplated by the regulations. Thus, the "Rebuttable Presumption" may be a particular target of criticism, despite the fact that it incentivizes hospitals to follow prudent decision-making practices. With respect to community benefit, the Final Report addresses three main issues: (i) what are the leading types of community benefit provided by hospitals; (ii) which types of hospitals reported spending the most on community benefit; and (iii) what are the revenues and profits of the hospitals responding to the compliance check audit. The Final Report does not take a position on what constitutes community benefit, or on whether (or how) the existing community benefit standard should be modified. It suggests a wide diversity in terms of community benefit provided by hospitals, as do recent Government Accountability Office and Congressional Budget Office reports. As such, the Final Report is unlikely to resolve the debate concerning the viability of the community benefit standard of tax exemption. FICA Seventh Circuit Says Medical Residents Not Per Se Ineligible For Student Exception To FICA Taxes The University of Chicago Hospitals (UCH) could proceed with its refund action against the government to recover $5,572,705 in taxes it paid in 1995 and 1996 under the Federal Insurance Contributions Act (FICA) on behalf of its medical residents, the Seventh Circuit held recently. According to UCH, its residents qualified for the “student exception” from FICA tax under the Internal Revenue Code and applicable Treasury Regulation effective at the time. 26 U.S.C. § 3121(b)(10); 26 C.F.R. § 31.3121(b)(1)-2. The district court rejected the government’s motion for summary judgment, holding residents were not per se ineligible for the student exception. The Seventh Circuit granted the government’s petition for interlocutory appeal and affirmed the district court’s decision. “The student exception unambiguously does not categorically exclude medical residents as ‘students’ potentially eligible for exemption from payment of FICA taxes,” the appeals court said. According to the appeals court, the applicable Treasury Regulation sets forth a method for determining eligibility for the student exception that implies a “case-specific analysis, not a categorical ineligibility for certain classes of employee-students.” 310 The government argued that medical residents are not “students” under the statute because they already have a medical degree and that a hospital is not a “school, college, or university” in “the most common sense of those words.” But the appeals court disagreed, noting a teaching hospital like UCH may be regarded as part of an affiliated university for purposes of the student exception and that medical residents may be regarded as students. In the appeals court’s view, the majority of the government’s arguments were based on the statutory and legislative history of a different FICA tax exception, the one pertaining to medical interns, which was repealed in 1965. Even assuming the statute itself was ambiguous, the applicable Treasury Regulation, which is entitled to deference, describes a case-specific test for whether the student exception applies, focusing on the character of the employing organization as a school, college, or university, and its relationship to the employee claiming student status. While the regulation was revised to provide that an employee who works at least 40 hours per week is considered a full-time employee and not eligible for the student exception, the government acknowledged that the revised regulation was not effective until April 1, 2005. The appeals court also found no implication that the repeal of the intern exception had any bearing on whether medical residents could be eligible for the student exception. Thus, agreeing with the Eleventh Circuit, the Seventh Circuit held a case-by-case analysis is needed to determine whether medical residents qualify for the statutory exception from FICA taxation. University of Chicago Hosps. v. United States, No. 07-1838 (7th Cir. Sept. 23, 2008). U.S. Court In Massachusetts Defers Ruling On Whether Medical Residents’ Salaries Are Subject To FICA Taxes Although finding that medical residents’ salaries are “wages” for purposes of Federal Insurance Contributions Act (FICA) taxes, the U.S. District Court for the District of Massachusetts deferred ruling on whether residents fall under the student exemption until after a trial. Courts have not adopted the per se rule urged by the government, the court said, that medical residents may never be considered students; thus, formal fact finding must occur before resolution of the issue. Partners Healthcare System (Partners) owns several hospitals and is a Massachusetts nonprofit organization exempt from tax under Section 501(c)(3) of the Internal Revenue Code. Partners’ mission consists of three functions: patient care, medical education, and medical research. As part of its medical education function, Partners coordinates the residency and fellowship programs of its member hospitals under its Graduate Medical Education (GME) division. Prior to November 2003, Partners treated resident salaries as wages subject to FICA taxes. 311 On November 12, 2003 and May 10, 2004, however, Partners submitted Internal Revenue Service (IRS) Form 941c, excluding FICA taxes on resident salaries for the calendar years 2001, 2002, and 2003 on the grounds that the salaries were "scholarship grants for training" exempt from FICA taxes. The IRS credited Partners a total of $24,220,308.49 against its other FICA liabilities. The IRS subsequently claimed that the credit was erroneous and sued Partners to recover the credited amount plus interest. The IRS then moved for summary judgment. The court noted as an initial matter that Section 3101(a) of the Internal Revenue Code imposes FICA taxes on "wages" received by an individual "with respect to employment." Partners argued its residents' salaries are not "wages" because, similar to a scholarship or fellowship, the payments are intended not as compensation, but as stipends to defray the costs of living while residents pursue their courses of study. On the other hand, the IRS contended the payments are subject to FICA taxes because even though residents are physicians in training, their salaries represent payment for the patient care services that they perform. The court explained that one exception in Section 3121(a) arguably covers resident salaries. Section 3121(a)(20) exempts payments or other benefits that an employee reasonably believes are excludable from income as "qualified scholarships” (Section 117). The court explained that Partners did not argue the salaries it pays to residents are qualified scholarships under Section 117 or that the payments fall under the Section 3121(a)(20) exception; rather, it contended that payments to residents are "in the nature of 'scholarships or fellowships’" as defined by the regulations under Section 117. “In insisting that its resident salaries meet the Treasury Regulation definition of scholarships and fellowships under 26 C.F.R. § 1.117-4, but need not meet the statute's restrictions under 26 U.S.C. § 117, Partners attempts to create a loophole where none exists,” the court said. The court also rejected Partners’ argument that no quid pro quo exists, noting that residents do provide patient care. Turning to the student exception for FICA taxes, Partners urged a case-by-case analysis as to whether medical residents are students while the IRS argued medical residents are per se ineligible for the student exception. Noting that other courts have declined to adopt a per se rule, the court denied the government’s motion for summary judgment on the student exemption. “The issue must be resolved by formal fact-finding,” the court said. United States v. Partners Healthcare Sys., Inc., No. 05-11576-DPW (D. Mass. Oct. 15, 2008). Sixth Circuit Says Additional Facts Needed To Determine Whether Medical Residents Qualify As “Students” For Tax Purposes The Sixth Circuit remanded February 26, 2009 a case involving whether certain medical residents qualified for the “student” exemption from social security taxes under the 312 Federal Insurance Contributions Act (FICA), saying more facts were needed to make the determination. Although the government argued a resident as a per se matter could never be a student, the appeals court left open the possibility that depending on the “facts-and circumstances” a resident could qualify for the exemption. At issue was $15 million the government initially refunded to Detroit Medical Center, which operates seven hospitals in Detroit, for social security taxes on the stipends it had paid for the first three quarters of 2003. The government later determined the refund was in error and sued Detroit Medical in federal district court to recover the refunds. Detroit Medical Center, which jointly sponsors a graduate medical education program with Wayne State University, counterclaimed for the social security taxes on the stipends it had paid for 1995 through 1997 and 2002 and 2003. As part of the program, residents sign a contract agreeing to provide patient care and assume responsibility for teaching and supervising other residents or students. Under the contract, residents receive a stipend of roughly $40,000. The district court granted the government summary judgment, awarded it the amounts refunded, and dismissed Detroit Medical’s counterclaim. The court held the stipends paid to the residents were “wages,” not “scholarships” or "fellowships.” Detroit Medical argued “scholarships” or “fellowships” were excluded from “gross income” and therefore not subject to FICA taxes. The court also held the residents were not “students” who were statutorily exempt from social security taxes. As an initial matter, the Sixth Circuit questioned whether the exclusion of “scholarships” or “fellowships” from “gross income” under 26 U.S.C. § 117 necessarily meant they also were not subject to FICA taxes. The appeals court said it need not resolve the issue, however, because it agreed with the district court that the stipends were not “scholarships” or “fellowships” under Section 117. Citing the Supreme Court’s decision in Bingler v. Johnson, 394 U.S. 57 (1969), the appeals court found the residents gave Detroit Medical a substantial benefit in return for their stipends—i.e., providing patient care and teaching services. Thus, the stipends “cannot be viewed as ‘no strings’ education grants, with no requirement of any substantial quid pro quo from the residents’ that characterizes ‘scholarships’ and ‘fellowships,’” the appeals court wrote. The appeals court did find, however, that it could not affirm the lower court’s grant of summary judgment to the government based on the existing record concerning the issue of whether the residents qualified as “students” under 26 U.S.C. § 3121(b)(10). “While the meaning of ‘student’ is a legal issue, the question whether residents at the Detroit Medical Center come within the term is not,” the Sixth Circuit said. Thus, the appeals court remanded to the lower court, requesting a specific set of additional facts about typical residents, including 313 • • • • • • • how many hours per week they spend at the hospital; how many hours per week they spend in the classroom; what other responsibilities they have under the program and the time spent on average carrying these responsibilities out; how their time at the hospital usually is spent (i.e. patient care, supervising, other activities); the role Wayne State professors play in supervising residents; who employs the residents (Wayne State or Detroit Medical); and whether there are any other state or federal program under which the residents or their families would be (or would have been) eligible for disability or survivor benefits of the kind provided by the Social Security program. United States v. Detroit Med. Ctr., No. 07-1602 (6th Cir. Feb. 26, 2009). Second Circuit Says Medical Residents May Qualify As “Students” For Tax Purposes The Second Circuit became the latest federal appeals court to find the “student” exemption from social security taxes under the Federal Insurance Contributions Act (FICA) is not per se inapplicable to medical residents. The Eighth, Eleventh, Seventh, and Sixth Circuits have reached similar conclusions, rejecting the government’s argument that the issue could be decided as a matter of law. In a 2-1 panel ruling, the Second Circuit vacated and remanded separate decisions by federal district courts in New York that Memorial Sloan-Kettering Cancer Center and Albany Medical Center were not entitled to a refund on the social security taxes they paid for their residents. The appeals court did agree, however, with the lower court’s holding that Memorial Sloan-Kettering could not claim the stipends it pays its residents are “scholarships” that are exempt from FICA taxes. The so-called “student exception” to FICA payroll taxes excludes from the definition of “employment” any services performed by a student “in the employ of a school, college, or university[,] . . . who is enrolled and regularly attending classes at such school, college, or university.” 23 U.S.C. § 3121(b)(10). The Second Circuit disagreed with the Internal Revenue Service’s position that the statutory reference to “student” is ambiguous and therefore the court should resort to a review of the legislative history. “The statute expressly defines which individuals fall within the scope of the student exception: students who are ‘enrolled and regularly attending classes,’” the appeals court said. Thus, according to the opinion, the question of whether medical residents are students under FICA is a factual one and cannot be decided as a matter of law. Because the appeals court found the statute unambiguous, it said examining the legislative history was unnecessary. The government contended that Congress’ repeal of a separate exemption from FICA for services performed by hospital interns in 1965 314 demonstrated congressional intent that medical residents would fall outside the scope of the student exception. But even taking this legislative history into account, the appeals court said, “Congress has not defined the term ‘student’ such that a post-graduate doctor could never be eligible for the exception.” Rather, the repeal of the intern exception indicated only that Congress did not believe medical interns were per se eligible for the student exception. “We will not infer from a sequence of legislative events occurring more than forty years ago that Congress intended today’s medical residents to be categorically ineligible for the student exception,” the appeals court said. A dissenting opinion argued the statutory language was ambiguous and, citing the repeal of the intern exemption, Congress clearly intended to make residents categorically ineligible for the student exception. United States v. Memorial Sloan-Kettering Cancer Ctr., Nos. 07-0926-cv(L), 07-0949 (2d Cir. Mar. 25, 2009). 315