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I. INTRODUCTION: HEALTH POLICY AND THE US HEALTH CARE SYSTEM
a. Crises in Health Care Cost, Access, and Quality:
i. The 4 axes:
1. Cost:
a. Cost are going up  older populations + inflation + tech is being used more and is costing more + the amount we are spending on healthcare is outpacing the rest of the
economy
2. Quality
a. Is a matter of degrees
b. Quality v Safety:
i. Elimination of human error in repetitive task
ii. System has become safer, but it is still an issue
3. Access
a. On average people are getting $400 deducted from their paycheck every month
b. Deductibles are going up even though people are paying more out of their paycheck
c. Roughly 25% of median family income will go to premiums
4. Choice
b. History and Structure of Health Care Finance and Delivery Systems:
i. Allocation Health Care Resources:
1. In most areas of the country we allow the market to determine cost and other factors
2. Healthcare is more complicated because there is a mixture  subsidy, regulation, and competition
3. Nirvana Fallacy: all we know is the “A” is bad  but not that “B” is good  or even that “B” is better than “A”  so we are looking for the least worst option
4. Production Efficiency:
a. Good for competition  the incentive that market competition creates towards better products and lower prices  we don’t need the government to outlaw bad products
because people will find a better option
5. Allocative Efficiency:
a. Good for consumer choice when there are choices of what they can buy they can take the resources available and get what they need
b. Publix Example  if you give out 15 gift cards to 15 different people they would each get something different  same price but different products
ii. Why is Market Operation Difficult in Health Care?
1. Moral Hazard:
a. Don’t care about the cost because you aren’t paying for it  your insurance is
i. Rental Car example
2. Health Care insurance increases consumption of services
iii. US Tax Policy:
1. Employer Provided:
a. Not taxable to the employee
i. So, employees would rather have health insurance b/c they aren’t paying taxes on it
b. Tax incentives have created a culture of over insurance
iv. Free Choice and Price Competition:
1. Traditionally you could see any licensed physician and get the same benefit
2. Why does this lead the higher cost?
a. Information:
i. Incomplete  people don’t know who the good Dr’s are
ii. Asymmetric  the people who buy insurance are the ones who need it/use it the most
1. Adverse Selection by Consumer:
a. Buyers and sellers don’t have the same information
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iii. This creates risk selection by the plans:
1. They don’t want the 20% of people who use 80% of the healthcare plan
2. They control this by placing fewer physicians in certain areas
iv. Consumer Irrationality:
1. Who are we going to put in charge of making decisions for them
v. Development of Commercial Insurance:
1. The blue cross was first
a. Engaged in community rating
i. Charges everyone the same premium by attempting to judge the average cost per consumer in that community
2. Private Capital and Commercial Insurance:
a. They wanted to cut cost to attract customers
i. Began determining cost based on only small groups of people
1. The groups are limited to people that have similar traits
vi. Unraveling of the Small-Group Insurance Market:
1. Experience Rating Increases and Decreases Access
2. Adverse Selection
a. Necessitates pre-existing condition exclusion
3. What is insurance for?
a. Voluntary risk spreading
b. Social redistribution of resources
4. Job-Lock & Unsurance
a. Job-Lock  You must stay b/c you may not get insurance at another job  so now people work jobs just to keep insurance
b. HIPAA attempted to make insurance portable
vii. Agency Problems:
1. Differing Consumer Preferences
a. I don’t want the same thing that you do
2. Agents’ conflicts of interest – they sometimes have different interest that consumers do
a. Dr’s, Hospitals, Insurers, Employers
viii. Solutions:
1. Regulation
a. Nirvana Fallacy  regulation would solve some problems but could create others  what is least worse?
2. Tax Reform:
a. Could tax benefits same way we tax salary
3. Better Agents:
a. Managed Competition
4. Quality Reforms:
a. More information
c. Health Care Reform and the ACA:
i. NFIB v. Sebelius:
1. Does the individual mandate exceed the commerce clause?
a. Majority thinks it does b/c it is forcing people to engage in commerce that don’t want to be in it
b. But w/o the individual mandate then healthy people will leave the market leaving only the sick
i. This will force premiums to go up which will force more people to leave the market
d. Public Health Insurance:
i. Regulation:
1. Ideas Rejected by the ACA:
a. Single Payer
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2. Insurance Market Reforms:
a. Disclosure:
i. Data Disclosure
ii. Standard Benefit Descriptions
b. Underwriting Reform:
i. Doesn’t let companies refuse insurance based on health
ii. Must be renewable plans every year  once you take me on you have to keep me
iii. Community rating in small group markets
c. Health Insurance Exchanges:
i. State Run*  The states can default to the federal governments market
1. Facilitates individual and small group
2. Transparency
3. Gathering of Data
ii. Participation  forces insurers to meet certain requirements to be on the exchange
3. Plans:
a. Cover similar things but value is lower
i. The percentage of expenses for a standard population that the plan will pay
b. Most people supporting ACA didn’t like high deductible plans
i. If you buy bronze, then you are going to spend a lot of you own cash for benefits
ii. The higher you go the less you pay out of pocket – but the higher the premium
ii. Access:
1. Increases Access by:
a. Pay or Play for employers
i. Employer Mandate  large employers must offer bronze equivalent – if not then they pay a penalty
b. Subsidies:
i. Who can get tax credits?
1. If earnings are up to 400% the federal poverty line (FPL)
2. Can’t get more than you what you spend on the exchange
c. Expanding Medicaid:
i. Used to be modeled on traditional welfare laws – had to be disabled/couldn’t work – couldn’t just be poor
ii. Now if under 133% of FPL you are eligible  this would produce 10 million new enrollees
d. Market Reforms:
e. Expansion of Private Coverage
i. Make people buy (mandate)
ii. Employer Mandate
iii. Subsidies
iv. Availability
II. ADJUDICATING DISPUTES OF HEALTH CARE RESOURCES
a. Rights to Treatment: State Law:
i. Usually, patient-provider relationship is consensual & both parties must agree. An individual Dr. may refuse to accept patients for any or no reason  Hospitals have to accept
people in an emergency
ii. Hurley v. Eddingfield:
1. Patient seeks Dr. services, but Dr doesn’t want to treat patient w/o reason. P uses common carrier argument, but Ct. says that licensing statute is not to commandeer labor of
Drs., but to regulate those who practice by keeping out those not properly trained  Generally a Dr. patient K lasts the course of a “spell of illness”
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iii. Wilmington General v. Manlove:
1. Liability of private hospitals for death of infant who was refused treatment in ER. Ct. made community-reliance theory argument, but Manloves lost b/c they weren’t able to
show there was an actual emergency
2. Liability on the part of the hospital may be predicated on refusal of service if there is an unmistakable emergency and if the patient relied on established custom of hospital
rendering aid in such case
b. Rights to Treatment: EMTALA:
i. EMTALA:  Emergency Medical Treatment and Active Labor Act
1. Only hospitals that accept Medicare with an emergency room
a. Must provide appropriate screening w/n the abilities of the hospital
i. Screening will vary based on patient and the conditions
2. This is designed to prevent “patient dumping”  when they just pass off indigent patients to another facility
3. “Good Faith” admission to the hospital takes the patient out from under EMTALA  at this point they didn’t dump you
c. Coverage Decisions:
i. Zorek:
1. “Medically necessary”  only the treating physician can determine for a single condition
2. Contra Proferentem generally construed against the party that profits from the K
ii. Bechtold v. Physicians Health Plan:
1. Court looked at K language which said experimental treatments weren’t covered. There were 3 ways to define “experimental” under the K.  Congress never intended
ERISA to dictate the content of welfare benefit plans; the discretion to make decisions concerning the content of the plan rest with the Plan administrator
iii. ERISA
1. Deals with employer benefit plans  health, pensions, etc.
2. Federalized the regulation of employer health plans
3. There aren’t punitive damages under ERISA
a. § 502  to recover benefits or to obtain appropriate equitable relief  write a check or order the payment
III. INSURANCE, INCENTIVES, AND REGULATIONS
a. Corporate Structure:
i. How do you make more money as the CEO of an insurance company?
1. More premiums  raise prices, increase volume of people
2. Reduce Claims Paid  insure healthy people
ii. Moral Hazard
1. Increase deductible, exclude (cosmetics, experimental, etc.), caps, co-pays, and “medically necessary” reviews
iii. Provider Incentives:
1. FFS (fee for service) (Rally’s Example)  you want to pull the lever as much as possible  incentive for physicians to do as many procedures as possible
2. Withholds/Bonuses  hold back some monies and only given to the group if they don’t over spend
3. Capitation  we will pay you so much per patient per month regardless of what treatment is given – this incentivizes the Dr. to do the most efficient treatment b/c they get
paid more that way
iv. Managed Care:
1. Health plans that use private sector economic policies to control cost
a. Replace “free choice” with selective contracting
b. Replace FFS/UCR with
i. Discounted fee schedules
ii. Withholds
iii. Capitation
iv. Bundled Groups
c. End separation of finance and delivery
i. Companies start being involved in the decision of what healthcare is provided rather than just signing checks
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2. Corporate Restructuring:
a. HMO – Health Maintenance Organizations  merges finance and delivery
b. Insurance and Managed Care Regulation:
i. Jordan v Group Health:
1. Under the K that was in place Group Health was not assuming any risk as the insurer  if the company is not assuming any risk then it is not an insurer
2. This was the early beginnings of an HMO  they weren’t really serving as an insurer but more as a middleman  ultimately the government just wanted the statute to
regulate them
ii. Insurance:
1. HMO’s
a. Organization that merges finance and delivery
b. Types:
i. Staff (Paid Salary):
1. Dr.’s are employees of the HMO  some believe that this isn’t the sale of insurance but just a “pre-paid plan”
ii. Group (Contracted with specific physician group)
1. K b/t large group of diverse groups of Drs with the HMO – they provide all services needed in exchange for payment
iii. IPA (Independent Practice Association) (K’s with individual physicians or associations)
1. Gives the HMO the right to a certain fee schedule from the Drs. – but all Drs. Are separate from each other
2. There is often a “gatekeeper”  PCP that is designated to decide things outside of primary care
iv. Network/Joint Venture
1. Separate PHO contracted with HMO or a three-way agreement b/t Drs., hospital, & HMO
2. PPO  Preferred Provider Organization
a. Organization of Drs. That say to an insurance company they will give enrollees better rates if they get designation as “preferred provider”
3. POS  Point of Service Plan
a. Option that is attached to HMO
i. You have the option to go outside the network, but it will cost a little bit more
4. Direct Employer Contracting:
a. Generally self-insured employers contract directly with a provider for their employees
b. Usually administered by a TPA (Third Party Admin)
5. Terminology:
a. Management Services Organization (MSO)  will manage the practice for you – you just be a Dr.
b. Physician Hospital Organization (PHO)  Joint venture b/t Drs. On medical staff and the hospital
c. Accountable Care Organization (ACO)  Combine finance and deliver like an HMO – but they document the quality of care – about providing evidence based on
quality care – big under the ACA
iii. Managed Care Regulation:
1. Consumer Protection:
a. Good Outcomes:
i. Patient Safety  minimum standards, allowing people to go out-of-network
ii. Information  standardized disclosures, mandated benefits
2. The ACA:
a. Mandated Benefits  minimum standard of coverage
b. Provider nondiscrimination  a “free choice” requirement
c. ERISA Preemption:
i. ERISA:
1. § 502  allows employees to bring action
a. Authorizes employees to have a federal claim
2. § 514 – Start with 514 preemptions
a. Start with express preemption which is the savings clause, deemer
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b. 502 is a second bite of the apple – the Moran case – whether Congress has preempted the field by creating a federal cause of action for this problem – worried about a
lawyer who doesn’t want to be in federal court so he frames his complaint as a state law claim – if congress has made an exclusive way to make
this claim then it will be preempted under the Supremacy Clause – anything that they state would change to make a cause of cation outside of the
federal ones
i. Moran – external review looked a lot like arbitration
c. Express preemptive provisions
i. Laws that conflict with ERISA but relate insurance are not preempted
d. Even if law is not preempted under 514 it can still be preempted under 502
e. Three Clauses:
i. Preemption Clause [a]  preempts all state laws if they relate to employee benefit plans
ii. Savings Clause [b][2][a]  insurance is not preempted
iii. Deemer Clause [b][2][b]  Can’t expand definitions just so you can regulate more
1. The deemer clause is always relevant when talking about laws applied to self-insured funds – only reach if you find a relationship under the preemption and
then find the savings in operation – if the legislature in order to bring people into the net deemed this to be an insurance company it can’t do that – this law is
preempted as to a self-insured plan b/c the state was just trying to expand their reach – not allowed to treat a self-insured plan like an insurance company
ii. Rush v Moran:
1. Patient who participate in employee benefit plan brought state-action against HMO, seeking reimbursement for surgery
2. SCOTUS Held:
a. Held that HMO’s are insurers and there for saved under the savings clause
b. The state HMO statute is not preempted because HMO’s have taken over much of the business formerly done by insurers and are regulated as insurers
iii. AMS v Bartlett:
1. Employers and insurers sought judgment that insurance regulation fixing minimum attachment point for stop-loss insurance to self-funded employee benefit plans was
preempted by ERISA.
2. Ct. Held:
a. ERISA preempted Maryland regulation, designed to prevent insurers & self-funded employee benefit plans form depriving plan participant & beneficiaries of state
mandated health benefits
b. State insurance regulation may not directly or indirectly regulate self-funded ERISA plans
c. Ct. said that Maryland was trying to get around Savings clause but b/c of Deemer clause was still preempted
i. They were really just trying to get self-insured plans to follow your state law – by regulating their stop loss coverage
ii. ERISA preempts state law and assures that federal regulation will be exclusive
d. Hospital Payment:
i. HealthPlan:
1. Society has accepted a casualty insurance model which only contributes to higher cost
2. We believe that there is a standard or best treatment for everything but there isn’t
a. This makes healthcare unfit for casualty insurance  there are too many different types of treatments and the element of choice is too great
ii. Reasonable Cost:
1. Means that the payment the hospital receives is for the expenses or cost associate to the service
a. But the definition of reasonable was essentially left up to the hospitals to decide
2. There is a “cost-plus” payment
a. First Factor  depreciation provisions allowed on assets in use at the time the hospital entered the program even though they may be full depreciated
b. Second Factor  2% allowance of allowable cost – benefits the hospital to spend more b/c they will be a bigger allowance
iii. Prospective Payment Systems:
1. Reverse the incentives  there is a fixed rather in advance and it doesn’t vary
a. Forces to sell at market rate
2. PPS Results:
a. Length of stay goes down
b. Hospitals made more money, but the government started to scale back
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c. Decrease in inpatient and increase in outpatient
d. No evidence that quality went down
iv. Complexity of Medicare Reimbursement:
1. Medicare wasn’t originally intended to regulate the healthcare decisions
2. Diagnosis Related Groups (DRG)
a. A way for Medicare to classify patients around specific characteristics
i. They make the groups as tight as possible while still providing a correlation
b. Originally just thought that they could set the averages and then revisit them every now and then
i. But medical care is not delivered in standardized units
3. DRG Efficiency:
a. Medical care is not standardized  cost vary  there was a large increase in discharges and the use of home health care services – and a large surge in capital
expenditures
v. Other Reforms to Hospital Payment
1. Never Events  terrible event that never should have happened in a hospital
a. Foreign objects, medication errors, surgery on wrong body part  Medicare refuses to pay = you only get paid of you do a good job
2. Penalties on Readmission w/n 30 days:
a. There was worry that you would discharge and readmit to gain more money
b. Heavily Criticized b/c it assumes that hospitals don’t have the best interest of the patient in mind  comparison to “no child left behind”  hospitals with sicker
patients have higher levels of readmission
e. Physician Payment:
i. Pegram v. Herdrich:
1. Patients appendix ruptured because HMO delayed ordering an ultrasound than then he had to go to another facility once it was ordered
2. RULE
a. Treatment decisions made by a HMO, acting through its physicians, are not fiduciary acts w/n the meaning of the ERISA
b. Congress did not intend for HMO’s to be treated as fiduciary
ii. Types of Payment:
1. Traditional – UCR  Dr. named his own price and insurance co. paid it which gave Dr. incentive to provide as many services as possible
2. Fee Schedule  Resource based relative value scale
a. Uses bonus/penalty/withhold
3. Withhold Arrangements – Bonus/Penalty  not done on individual basis b/c might incentivize not providing adequate service
4. Capitation  payment by the head, or on a per patient basis
a. Per Member Per Month & money is received whether or not patient sees Dr. – less you spend more you make
5. Salary  likely less conflict of interest
a. Brewbaker would argue that there is always a financial conflict b/t patient & Dr.
iii. Medicare Physician Payment:
1. Relative Value Scale (RVS)  didn’t work b/c those who got cuts in their fees could just pull the lever more
2. Volume Performance Standard (VPS)  No individual Dr. could affect the entire pool
3. Sustainable Growth Rate (SGR)  if you don’t curb your spending this year then next year you will have a reduced payment
a. This keeps going until you catch you spending up to where it should be
iv. MACRRA of 2015:
1. SGR Repealed
2. Effective 2019
a. Merit-Based Incentive Payment System (MIPS) or
i. If a Dr. doesn’t want to be a party of a managed care organization
1. They are going to measure your practice, resource use & health records
2. Then you get a score, and everyone gets put on a curve – if you are above median you get a bonus – if below median a penalty
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b. Alternative Payment Model (APM)
i. 5% annual bonus just for practicing
v. Physician Quality Reporting System (PQRS)
1. Paid Drs for reporting
vi. Incentives for Integration – Why does Medicare want to force integration?
1. Physician Decision Making as Cost-Driver
a. No Economic Accountability:
i. They can affect how much they got paid but they weren’t accountable for what the decisions did externally
ii. Forces Dr. to think more about the aggregate effect of decision making
b. Pay Physicians to Keep Costs Down
vii. Accountable Care Organizations (ACO)
1. Important w/ ACA
2. Entities that combine finance and deliver (like an HMO) – but they document the quality of care
3. About showing that they can provide evidence based on quality care and are rewarded for having good care
f. Professional Licensure:
i. State v. Miller:
1. Δ was convicted on 7 counts of practicing w/o a license; he appealed. SC held that vitamins were med for purposes of prosecution for practicing medicine w/o license.
Conviction was supported b/c Δ was treating people for things like arthritis, rash, infection, and headaches even though he didn’t claim to be a Dr. & didn’t advertise his
services
ii. How do we Regulate the Market?
1. Licensure  who can/cannot engage in the practice
2. Accreditation  an opinion expressed by someone w/ a reputation for giving reliable opinions – “board certified”
3. Certification  approval to be paid or do business w/ an organization – “I’m certified to do business w/ Medicare/BlueCross
iii. Criticism of Professional Licensure:
1. Self-Governance
2. Disciplinary: no rooting our bad Drs.
iv. Occupational Licensure:
1. Effects:
a. Appears to raise the quality of services provided by the licensed group
b. Also raises prices – limiting entry into sector
c. The increase in quality doesn’t translate into an increased quality of services received by consumer
i. Dentist – tighter regulations lead to poorer dental health b/c people go w/o
ii. Electricians – tighter regulation equals more electrocutions – people start DIYing
v. Most courts have upheld licensing statutes under rational basis review – there is no fundamental right of access to treatment from unlicensed Dr.
g. HIPAA:
i. 3 Goals:
1. Portability:
a. Wanted to remove job lock  making healthcare insurance portable when changing jobs
2. Accountability:
a. Increased penalties – federalized some offenses – increased funding for fraud control
3. Administrative Simplification:
a. Health Info Security – Worried about electronic dissemination
b. Heath Info Privacy
i. Who we are worried about:
1. Covered Entity:
a. Health Plan (Employer health plans with more than 50)
b. Clearinghouses (companies who standardize info for companies)
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c. Any provider who transmits health info in electronic form
i. If you do anything with electronic information, then all your information is covered even non-electronic under HIPAA
2. Use or Disclose
3. PHI – Protected Health Information
a. Individually identifiable Information – relates to physical or mental health, health care, or payment if it can identify the person
4. Except
a. They just have to tell you about the exceptions
ii. Examples:
1. Calling name in the waiting room:
a. Incidental as long as there isn’t a lot more information exposed
2. Dr. discussing diagnosis while you are in semi-private room:
a. Just ask the Drs. To be more careful
i. Pull the curtain, talk quieter
h. Facility Licensure: Accreditation; Certification:
i. 3 Terms:
1. Licensure – A mandatory governmental process to receive your right to operate
2. Accreditation – private voluntary approval process where health corp. is evaluated an can receive a designation of competent and quality
3. Certification – voluntary procedure to meet the qualifications for participation in govt. funding programs – Medicare/Medicaid
ii. Estate of Smith v. Heckler
1. Issue was the way Medicaid certified quality of nursing homes. P alleged that Medicaid had an obligation to make sure they were receiving care of a certain quality & the
way it went about doing so didn’t ensure that.
2. COA Held:
a. Sec. has duty to establish a system to adequately inform herself as to whether facilities receiving fed money are satisfying requirements of Medicaid Act, including
provision of high quality patient care
b. By promulgating a “facility-oriented” enforcement system, rather than a “patient -oriented” system, secretary had failed to follow the focus of the Act.
iii. Cospito v. Heckler:
1. Patients in psychiatric hospital benefits were terminated when it lost accreditation
2. COA Held:
a. Patients were not in position to claim DP violation b/c there was not deprivation attributable to the federal government
b. Didn’t believe that the JCAH was given too much authority b/c the government could set higher or lower standards – but the ultimate decision was left to the secretary
c. Where the decisions of a private accrediting body are subject to full review by a public official, there is no improper delegation of authority
iv. How to Measure Quality:
1. Structure – Snapshots:
a. SqFt to number of patients
b. Is the equipment needed for ___ present?
2. Process:
a. What use are you making of the structure/resources?
3. Outcome
a. What are the results?
i. Certificate of Need:
i. CON law operates like a building permit – medical facilities must show that a need exists in the community, and satisfy financial feasibility, before beginning construction,
purchasing major equipment, initiating new services, or changing ownership
ii. Criteria:
1. Consistency with State Health Plan
2. Availability of alternative, less costly, or more effective methods of service – must show that this is the best way to provide the service
3. Must be an unmet public requirement
4. Appropriate Applicant
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iii. Statewide Health Coordinating Council (SHCC)
1. Prepare State Health Plan
2. Governor Appoints
3. Not less than 16 members
4. At least 1.2 must be consumers who are not providers
iv. History of CON Regulation:
1. NHPRDA (1974)
a. State health planning was a condition of federal program participation
2. NHPRDA (1986)
a. Most states kept their CON Programs
v. Rationales for Health Planning:
1. Roemer’s Law
a. Market principles don’t apply to the health care industry
i. There’s insurance
ii. Physicians induce demand
iii. Nonprofit organization form
b. The only alternative is regulation
c. Healthcare is like the field of dreams – if you build it they will come
d. CON helps develop “centers of excellence” – preventing competition can force certain providers to become the best
vi. Criticisms of CON:
1. It doesn’t produce cost-containment
a. Focus on need likely to limit new technology
i. Overlake shows that courts don’t restrict need
b. Limitation on Competition
i. If they don’t have competition they will raise prices
ii. This is like giving the power company a monopoly and not have the public service commission
c. No limit on overall expenditure of facilities
i. Once you have the beds in place you can spend what you want
d. Data Suggest that CON doesn’t contain cost
IV. NONPROFIT CORPORATIONS AND TAX-EXEMPT STATUS
a. Nonprofit and Public Entities:
i. Most hospitals and some HMOs are organized as nonprofit, so they are subject to a special set of governance and tax rules. Public hospitals are subject to similar restrictions
ii. 3 Doctrines of Nonprofit & Charitable Trust Law – State Law
1. Ultra vires (beyond its powers) – ask whether proposed transaction goes w/ charitable purpose or is against it
a. Org’s new purpose must still pursue main charitable aims
b. Courts sometimes require strict adherence when gifts are given that have specific strings attached
2. Duty of Care or business judgment rule
a. Duty to act with ordinary diligence
3. Duty of loyalty and conflict of interest
a. Act with the interest of the non-profit in mind
i. There is an incentive for the trustee to approve the merge – creates a conflict
iii. Cy pres (as near as possible)  determines what alternative use to make of proceeds from sale of a nonprofit. Doctrine created to deal w/ problem of dead-hand control.
Basically, says that where donee has a general charitable intent & that intent is proved impracticable, then court will allow use of funds for similar purpose
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b. Tax-Exempt Status:
i. Eastern KY Welfare v. Simon:
1. Various welfare orgs and citizens brought action seeking relief regarding validity of IRS definition of “charitable”
2. COA Held
a. Charitable is not a limited term – the definition was not contrary to congressional intent – such determination was not an abuse of discretion.
b. Hospitals are changing and for many people an ER is the only means of access to healthcare
c. The term charitable is not limited to those organizations that provide relief to the poor
ii. Provena v. Dept. of Rev.
1. Provena is not entitled to charitable exemption under Property Tax Code
a. They were receiving almost none of its income from charitable donations
b. Didn’t advertise a charitable policy – and people who wanted charity had to apply for it
c. Provena instantly sent collections after person who didn’t pay
iii. Revenue Rulings:
1. 1956 (56-189)
a. Provided services for indigents, but only if it operated to the extent of its financial ability for those not able to pay
2. 1969 (69-545)
a. If you promote the community’s health, then you are charitable
b. But have to have an ER open to anyone regardless of pay – and must take Medicare/Medicaid
3. 1983 (83-547)
a. Specialty Hospitals:
i. They don’t have emergency room b/c they are a specialty organization
b. Other Facts:
i. Board of Directors from the community
ii. Open Medical Staff Policy
iii. Accepting Medicare/Medicaid
iv. Application of surplus funds to “Good Things”
1. Building Improvements
2. Equipment
3. Patient Care
4. Medical Training
5. Resident Programs
4. ACA:
a. Hospitals have to file form 990 – tells the gov. what charitable services they are providing
iv. 501(c)(3):
1. Organizational Test:
a. Just that your organizational document reflect;
i. A statement that your operations are charitable
ii. Charter has to have non-distribution constraints
1. Not going to distribute to private individuals
2. Operational Test:
a. This is more difficult – are you operating in the way that an exempt entity should?
3. Non-Inurement
4. Community Benefit Requirement
5. Prohibition Against Lobbying
6. Public Policy
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v. Pros & Cons of Tax Exemption:
1. Non-Profit healthcare deserves tax emption and governmental support
a. The generous federal standard is better than stingy state standards
2. Superiority of Non-Profits:
a. They put money back into the system rather than people’s pockets
b. For-Profit has incentive to take advantage of consumers
c. Non-Profits provide other benefits:
i. Research, burn units, etc.
d. Patients trust non-profits more
c. Tax-Exempt Status: Joint Ventures with Physicians:
i. GCM 39862:
1. Part of it changed Medicare to PPS:
a. Made the hospitals depended on the physician’s decisions to be beneficial to the hospital
b. Huge shift in incentives of inpatient to outpatient care
2. ISSUE:
a. Does a tax-exempt hospital jeopardize exempt status by forming joint venture w/ members of the staff
3. ANALYSIS:
a. These transactions must be viewed as jeopardizing tax-exempt status for 3 reasons
i. They allow inurement of part of a charitable organization net earnings to benefit private individuals
ii. They confer more than incidental benefits on private interests
iii. They may violate federal law
b. Inurement:
i. Need a private individual &
1. Person having personal or private interest in the organization – insiders
ii. Transactions
1. Can pay reasonable compensation
2. Can’t have dividend-like distribution or things that are above Fair Market Value
c. Private Benefit:
i. Doesn’t have to be an insider – any private party will do
ii. Test:
1. Was the transaction incidental to the purpose of the community?
4. WHAT TO ARGUE for Hospital:
a. New treatment, new access, more efficient
i. Finding private inurement can be fatal to tax exemption. Private benefit doesn’t require monetary payment & isn’t limited to “insiders”, but it does have to be de
minimis
ii. 2 Big Issues:
1. Which subsidiaries will lose exemption if their functions are examined separately from the hospital’s?
2. Will the parent qualify for exemption even though it is a “shell” corporation that offers no charitable services directly, and even though a number of its
subsidiaries are run as for-profit?
a. Usually YES under the “integral parts test.”
5. If it is creating new facilities then it is more likely to be permissible, but if it is simply reallocating revenue stream then it will be suspect
d. Joint Ventures with For-Profit Entities:
i. UBIT – Unrelated Business Income Tax:
1. 3 Part Test:
a. Did you make money by doing this?
i. Was the intent to make money?
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b. Was this activity regularly carried on?
i. Fundraiser could be saved b/c it isn’t regular
c. Was it substantially related to the exempt purpose?
i. Gift shops and cafeterias are substantially related – if it’s for the convenience of employees or patrons then it is likely substantially related
2. If UBIT becomes too substantial, then it can jeopardize the tax-exempt status entirely
a. 5 Factors:
i. Time, attention, and importance given by officers to exempt activities compared to UBIT
ii. Expenditures for exempt activities v expenditures for unrelated activities
iii. Income from exempt v. income from unrelated
iv. Organizations expectation of earning profit
v. Staff time spend on exempt activities compared to unrelated activities
3. Harding Hosp. v. US:
a. Didn’t open its medical staff to all physicians in the community
b. A hospital operated almost exclusively for a small group of physicians is not operated for charitable purposes
ii. Revenue Ruling 98-15:
1. “Whole Hospital Joint Venture”
a. A substitute for the sale of a hospital to a for-profit
b. If you don’t want to sell, then you can do a joint venture
i. But all assets have to be placed into the JV
c. Have to make sure that JV is still operating with charitable purpose
i. If you are just making assets available for-profit then it isn’t exempt
d. They need to be able to have control of the board
i. Have to assure itself that assets will be used for purpose
ii. Need to have 50+1
2. “Ancillary Services Joint Venture”  Redlands
a. How to Retain Exemption
i. Control of the Governing Body
1. Need to make sure that you can control decisions, so they are charitable
ii. Board Approval of Major Decisions
1. Look to see if they have given away too much with the management K
iii. Governing Documents of the Joint Venture
1. Need to have documentation that says it is acting for charitable purposes
2. “Charitable mission trumps making profit”
e. Tax-Exempt Status: Intermediate Sanctions:
i. 501(c)(3) – to be exempt must be organized and operate exclusively for charitable purposes
1. 2 Test:
a. Organizational:  simply organized for charitable purposes
b. Operational:
i. Exempt orgs cannot have more than an insubstantial part of activities unrelated to the charitable purpose
1. If it is an insubstantial amount, then they will pay UBIT on UBI
ii. Must serve a public rather than personal interest
1. Private Benefit – is ok to have some but must be qualitatively and quantitatively incidental to the public benefit
iii. Must operate in accordance with public policy
1. Must participate in Medicare/Medicaid
2. Non-Inurement Doctrine:
a. Insider – who is getting non-fair market value transaction or dividend like payment
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3. Community Benefit Requirement:
a. Also seen as private benefit prohibition.
b. Must gauge amount of benefit community receives against what the hospital is paying out
4. Prohibition against lobbying:
a. “Substantial Part” test  can only engage in such activities if they are an insubstantial part of operations
5. Public Policy:
a. Accepting Medicare/Medicaid patients, not violating fraud and abuse laws
ii. § 4958:
1. Congress realized that non-inurement document is not working b/c it was too large of a penalty to remove tax-exempt status – so it was an empty threat
2. 4958 says that if you engage in a transaction with a Disqualified Person that provides excess benefits to DQP then you pay a tax
3. Taxing DQP:
a. 25% of the excess benefit received
i. If corrected w/n the taxable year
b. If not corrected, then there is an additional 200% tax
c. 10% tax of the excess benefit that has to be paid by organization managers who were involved in the transaction
i. Maximum 10k per transaction
ii. This is still owed even if the issue is resolved
4. Rebuttable presumption of reasonableness
a. Payments under a compensation arrangement are presumed to be reasonable and property transfer is presumed to be FMV if
i. The specific compensation arrangement, or terms of a property transfer, is approved in advance by authorized body composed of people who don’t have a COI
ii. The board or committee obtained and relied upon appropriate date as to comparability; and
iii. The board or committee adequately documented the basis for its determination
5. Disqualified Persons
a. Is A DQP
i. Person in position to exercise substantial influence over the affairs of the organization
1. Serves on the governing body and is entitled to vote
2. Is the president, CEO, or COO
3. Is the treasurer or CFO
ii. Other Factors:  Facts and Circumstances Test
1. Founder
2. Substantial contributor
3. Compensation is based primarily on revenues derived from activities of the organization that he controls
4. Has or shares authority to control expenditures, budget, or compensation
5. Manages a discrete segment or activity of the organization
6. Owns controlling interest in a DQP
7. Nonstock corporation controlled by one or more DQP’s
iii. Doctors Examples:
1. Radiologist who didn’t have substantial influence, no managerial authority, doesn’t supervise employees, fixed salary, not related to DQP, and not on board
b. Is Not a DQP
i. NO
1. The person is a 501(c)(3)
2. Is an employee receiving total direct and indirect compensation less than 80k
ii. Other Factors
1. Independent contractor
2. Direct supervisor of individual is not a DQP
3. Doesn’t participate in management decisions
4. Donor but everyone was solicited for donation and given the same preferential treatment
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iii. Doctor Examples:
1. Cardiologist is head of department, has managerial authority, can allocate budget, and distribute bonuses0
V. PHYSICIANS, HOSPITALS, AND OTHER CORPORATE ENTITIES:
a. Corporate Practice of Medicine:
i. There is a concern about commercialization – that Drs wouldn’t care as much about their work b/c it would be less personal, and there would be more incentive to make profit
than treating patients
ii. Bartron v. Coddington County:
1. Hospital had K with county to care for indigent patients – Corp wanted payment for the services, but county didn’t want to pay and wouldn’t b/c it was a corporation
practicing medicine in violation of corp. practice medicine doctrine
2. Court Held:
a. County didn’t have to pay. K was null & void as a violation of doctrine.
b. Even though there was no unlawful action – there was tendency for conduct
c. The practice of medicine by a profit corporation is unlawful and against public policy
iii. Berlin v. Sarah Bush Lincoln Health Center:
1. Dr. had to sign a non-compete with the hospital then took a job one mile away and the hospital sought injunction
2. Court Held:  hospital wins
a. Hospitals employing physicians aren’t practicing medicine, just making available
b. Doctrine is inapplicable to nonprofits
c. Doctrine not applicable to hospitals employing physicians b/c they are authorized by other laws to provide medical treatment
3. 4 Options Under the Berlin Case
a. It doesn’t exist
b. Doesn’t apply to non-profits
c. Doesn’t apply to – need to look at depot outline
d. Out there in full force – it would be hard for a hospital to hire a hospitalist
b. Medical Staff Bylaws:
i. Hospital Organization:
1. Odd relationship b/t hospital staff and medical staff
a. Medical staff provide medical services and have power over their specific department
b. This works b/c we assume it would be bad to have a hospital completely controlled by lay people
ii. St. John’s Med Staff v. St. John Med Center:
1. Ct. held that bylaws adopted by both hospital and medical staff was a K which was subject to amendment if both parties agreed & any bylaws adopted unilaterally were void
2. The medical staff bylaws constitute a binding contract
iii. Mahan v. Avera St. Luke’s: See chart on back of Mahan Case
1. Med staff brought claim against private nonprofit b/c hospital closed medical staff – alleging breach of K
2. Court Held:
a. Staff bylaws don’t trump decision making ability of hospital as to all decision relating to med personnel issues
b. Staff power had to be derived from the corporate bylaws – there was no express power for staff to make personnel decisions
c. It was w/n the power of the board to unilaterally close privileges
d. The medical staff bylaws do not trump the Board of Directors’ ability to make administrative decisions
c. Medical Staff Disputes:
i. Greisman v. Newcomb Hospital:
1. NJ SC held that graduate of osteopathic college who had unrestricted license was entitled to have his app evaluated on his merits
2. Greisman’s argument is that hospital is essentially a common carrier – nonprofit is in no place to claim immunity from public supervision & control b/c of allegedly private
nature
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ii. Nanavati v. Burdette Tomlin Hosp.
1. Dr. brought claim for wrongful termination
2. NJ SC held
a. Hospital privileges may be revoked b/c of inability to work with others
b. But hospital must show that prospective disharmony will have adverse impact on patient care
3. It is ok for a hospital to have a “Can’t Play Can’t Stay” policy
4. Although they don’t have to wait for disruptive behavior to harm a patient they need more than general complaints of a physician’s inability to cooperate with others
d. Immunities:
i. Judy Jones Problem:
1. Due Process – not available b/c hospital is private; therefore, no state action  For Con. Due Process Claims Must Have Public Hospital
2. Common Law Fairness:
a. Ct. in Greisman finds that hospital has a quasi-public status in that it receives public funds & is tax exempt, it also has a charitable mission – Greisman would not control
the Jones problem
3. What is Jones didn’t have privileges yet?
a. Couldn’t bring §1983 Claim
i. Initial applicant has must more difficulty w/ due process claims than someone who has privileges taken away
4. Causes of Action Available for Excluded Drs.
a. Common law fairness (Greisman)  applicable to quasi-public hospitals & subject to Greisman analysis
b. Fed & State antitrust laws
c. Tort Law: defamation, tortuous interference with K
i. Look to med staff bylaws in Mahan – look to see what bylaws say about substantive grounds for termination & process to be followed for termination
d. State statues, constitutional claims, civil rights statutes (1983)
i. 2 Due Process Claims:
1. Procedural:
a. Notice & Opportunity to be heard
2. Substantive:
a. Rationale for membership criteria in bylaws
b. Evidence supporting application of bylaws to that individual
e. Title VII
f. Equal Protection – gender discrimination, etc.
ii. HCQIA
1. Don’t want physicians to not report b/c they fear lawsuit
2. If you make a malpractice payout then you must send notice to a common registry
3. Disciplinary actions taken by hospitals are reported
e. Managed Care Contracting:
i. Potvin v. MetLife
1. Dr was suing insurer who removed him from the preferred provider list w/o cause
a. Arguing that it was a violation of common law right to “fair procedure”
2. CA SC Held
a. Insurer must follow common law right to fair procedure if the insurer possesses power substantial enough that removal will impair the ability of an ordinary physician
b. Agreement which allowed removable of physician w/o cause was unenforceable to extent it conflicted w/ right to fair procedure
c. When an insurer possess power so substantial that removal from its preferred provider list significantly impairs the ability of a competent physician to practice in a
geographic area, thereby affecting an important, substantial economic interest, decides to remove a Dr. from its preferred provider list, the insurer must comply with the
common law right to fair practice
3. DISSENT:
a. Said that Dr. is now entitled to minimum income  and that if a physician’s income below that guaranteed minimum physician is entitle to a hearing & judicial review
that would inevitably follow upon an adverse decision
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b. More courts follow the dissent  allows Dr. to challenge no-cause termination only if they can show true reason it violates public policy
4. This case uses different rationale than Greisman
a. It analogizes medical staff to a labor union or professional association
b. Court will protect you from losing privileges if that is your way of making money
5. How to apply to hospital termination
a. If you were to say that they were like a voluntary association – loss of membership carried significant financial consequences – this would be good when there isn’t a
Greisman theory applicable – start with Greisman
VI. HEALTH CARE FRAUD:
a. False Claims Act:
i. Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval
ii. Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government
iii. Conspires to defraud the Government by getting a false or fraudulent claim allowed or paid
iv. “Knowing”
1. Actual knowledge
2. Deliberate ignorance
3. Reckless disregard
v. Krizek
1. Two claims of upcoding and providing procedures not medically necessary
2. Ct. Held:
a. Agreed w/ Dr. that procedures being done were medically necessary
b. Court also agreed that Krizek was billing the 45-50 minutes the same way that other Drs did
c. However, his billing practice was suspect b/c they were billing 45-50 for everything
d. He acted with reckless disregard as to the truth of the false submissions
vi. Qui-Tam:
1. Private AG actions – “Whistleblower” actions  someone with information about False Claims can file on behalf of the US government
2. Good because it cast a broad net, but bad b/c disgruntled employees are the most likely to do it
b. Anti-Kickback Statute:
i. U.S. v. Gerber:
1. D argues that referring Drs. is performing a service for which he should be compensated
2. Ct. Held:
a. Rejected argument and says that b/c some payment may be for services, if part of it is to induce referrals then it is a violation
b. One Purpose Rule:
i. If any purpose of the payment is to induce referrals, then it violates the statute
ii. Safe Harbors:
1. If you are in the safe harbor, then you are safe – but you have to be in compliance with all the safe harbors that are applicable  can’t just pick one
c. STARK Law:
i. Apply to self-referral arrangements in which physicians are rewarded for sending or keeping business in institutions they own, contract with, or are employed by
ii. Are an additional source of regulation on health care provider referral activity
iii. Provides civil penalties only, not criminal
iv. Stark I  banned self-referral to physician-owned clinical labs
v. Stark II  banned self-referral for designated health services “DHS”
1. Clinical laboratory services, Physical therapy services, Occupational therapy services, Radiology services, including magnetic resonance imaging, computerized axial
tomography scans, and ultrasound services, Radiation therapy services and supplies, Durable medical equipment and supplies, Parenteral and enteral nutrients, equipment,
and supplies, Prosthetics, orthotics, and prosthetic devices and supplies, Home health services, Outpatient prescription drugs, Inpatient and outpatient hospital services,
Outpatient speech-language pathology services.
vi. Strict Liability – No Intent Required
vii. Identify Exceptions then see if you can get around them
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viii. Stark Handout:
1. Three basic sets of Exceptions:
a. (b)  generally applicable exceptions (whether self-referral arises through ownership interest or compensation arrangement)
b. (d)  exceptions that specifically relate to ownership interest financial relationships
c. (e)  relates to exceptions for compensation arrangement financial relationship
VII. HEALTH CARE ANTITRUST:
a. Introduction:
i. Why is Antitrust Law Good?
1. Promotes competition
a. Lower prices
b. Better quality
c. Allocative efficiency
d. Decentralization of economic and political power
ii. Sherman Act:
1. Section 1 “Every K, combination, or conspiracy in restraint of trade or commerce among the several states, or with foreign nations, is illegal”
a. No violation if the challenged activity is unilateral in nature  1 entity
2. Section 2  “Every person who shall monopolize, or attempt to monopolize… any part of the trade or commerce … among several states shall be deemed guilty of a felony”
a. No conspiracy can exist w/n a single business
iii. Goldfarb:
1. There is no antitrust exception for professionals
iv. Rule of Reason:
1. Purpose:
a. Intent often becomes relevant b/c it can help determine the likely effects of restraint
2. Power:
a. Market power as measured by market share. Product/geographic markets
3. Effects:
a. Harms to competition  higher prices, reduced output, exclusion of competitors
b. Procompetitive Effects  product innovation, lower prices, more output, improving the market
4. Is there a way to effect less restrictively?
v. Per Se Rule  certain restraints are auto illegal if it is clear they are anticompetitive in the clear majority of situations
1. Price fixing, Market division, Some tying arrangements, some group boycotts
vi. Naked v. Ancillary Restraints
1. Naked  not attached to procompetitive purpose
2. Ancillary  Side product of a procompetitive purpose
b. Antitrust: Physician Networks:
i. Maricopa County:
1. Foundations, comprised of competing Drs. were setting maximum fee schedules
2. Ct. Held:
a. Price-fixing agreements couldn’t escape per se condemnation on ground they were horizontal & fixed max prices
b. The fact that they were Drs. didn’t save them from invalidity under §1
c. Anticompetitive potential inherent in all price-fixing agreements justifies facial invalidation
ii. North Texas Specialty Physicians:
1. NTSP polled members for minimum FFS rates  NTSP has 1st negotiation rights and negotiated on behalf of members  refused to negotiate or deliver K’s if less than the
minimum
2. Ct. Held:
a. The poll facilitated price fixing amongst the competing physicians
b. Participation Agreement allowed NTSP to fix prices
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c. Power of Attorney solidified bargaining power
iii. OZIPA:
1. Is it a physician network joint venture?
2. Is it exclusive or non-exclusive?
a. Exclusive:
i. Less than 20% of the physicians in a given specialty – have to share substantial financial risk
b. Non-Exclusive:
i. 30% in a specialty – have to shar substantial financial risk
iv. Anti-Trust Safety Zones:
1. Exclusive Network – That will not be challenged:
a. When physicians share substantial risk and constitute equal to or less than 20% of physicians in a specialty
b. If relevant market has less than 5 physicians in a specialty you can have 1 if he is non-exclusive
2. Non-Exclusive – That will not be challenged:
a. Share substantial financial risk and have equal to or less than 30% of physicians in a specialty
3. Non-Exclusive Factors:
a. That competing networks or plans with adequate physician participation currently exist in the market
b. That physicians in the network actually participate in, or contract wit, other networks – or there is evidence of a willingness and incentive to do so
c. That physicians in the network ear substantial revenue from other networks or through individuals K’s with managed care plans
d. The absence of any indications of significant de-participation from other networks in the market
e. The absence of any indication of coordination among the physicians in the network regarding price or other competitively significant terms of participation in other
networks
4. Sharing of Substantial Financial Risk:
a. Makes it clear that physician network involves sufficient integration by participants to achieve efficiencies
b. Examples:
i. Agreement by venture to services at a “capitated” rate  Capitation
ii. Use of significant financial incentives to achieve specified cost-containment goals:
1. Withholding from all participants substantial amount of payment based on group performance in meeting cost-containment goals;  Withholding
2. Establishing utilization targets for the network as a whole, with participants subject to substantial financial rewards based on group performance  Bonuses
iii. Agreement by venture to provide course of treatment that requires substantial coordination by physicians in different specialties for a fixed, predetermined
payment, where the cost for any individual can vary greatly due to patients condition, the choice, complexity, or length of treatment  Carve Out
5. Network Joint Ventures that are Outside the Safety Zone:
a. Does it get Rule of Reason?
i. If the integration is likely to produce significant efficiencies that benefit consumers, and any price agreements are reasonably necessary to realize those efficiencies
ii. If they share substantial financial risk
iii. Don’t share substantial financial risk but have Clinical Integration
1. Establishing mechanisms to monitor and control utilization
2. Selectively choosing physicians who are likely to further efficiency
3. Significant investment of capital, monetary or human, to realize efficiencies
b. Applying Rule of Reason:
i. Define the relevant market:
1. What substitutes are available to consumers
ii. Evaluate the Competitive Effects of the Physician Joint Venture:
1. Key Factors:
a. Whether the JV could raise prices; or
b. Prevent or impede the formation/operation of other networks
iii. Evaluate the Impact of Procompetitive Efficiencies:
1. Balance Procompetitive v. Anticompetitive
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a. Generally, significant efficiencies result from substantial financial risk sharing or clinical integration
b. Also make sure to look at what competition they face
iv. Evaluation of Collateral Agreements:
1. Are there agreements that that unreasonably restrict competition?
a. Are they reasonably necessary to achieve the efficiencies sought by the JV?
v. Messenger Model:
1. Network communicated the information obtained individually but does not negotiation on behalf of the providers
2. Optimally the payors' fee schedule is just passed along to the Drs and there is not communication b/t the Drs.
3. 3 Types:
a. Pure Messenger Model:
i. All the agent does is relate proposals to the physicians that are a part of the arrangement
b. Black Box Model:
i. Agent develops fee schedule w/o feedback from the Drs.
ii. This is riskier b/c it looks like the Drs. are allowing there to be a bargaining agent w/o them having knowledge of what is going on
c. Power of Attorney (POA):
i. Tell agent of their reserved price upfront
ii. Worry that agent will tell the Drs. what others are willing to take
c. Insurers and Market Power:
i. Ocean State v. Blue Cross
1. Ocean State started taking Blue Crosses business by offering more at a lower price – it was a physician owned HMO
2. Adverse Selection:
a. We underwrite based on population – healthy people will take HMO – so it affects out underwriting if there is an HMO on the table
b. Statement to Employers  We can take that into account when pricing out insurance – the best price is if everyone is in traditional plan – second best if you offer out
HMO coverage – worst price if you don’t offer out HMO but offer another HMO
3. Ct. Held:
a. Prudent Buyer was a bona fide policy to ensure that Blue Cross would not pay more than any competitor paid for the same service
i. This furthers competition
b. There is nothing wrong with wanting to crush you competition as long as you do it the right way – like Blue Cross did
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