Accountable Care Organizations
CMS Issues Final Rule On Medicare Shared Savings Program
The Centers for Medicare and Medicaid Services (CMS) unveiled October 20, 2011 the muchanticipated final rule on the Medicare Shared Savings Program (MSSP) for accountable care
organizations (ACOs) pursuant to Section 3022 of the Affordable Care Act (ACA).
The final rule, which was published in the November 2, 2011 Federal Register (76 Fed. Reg.
67802), includes a number of changes to the proposed rule, issued at the end of March, in
response to extensive comments from the healthcare industry.
These changes include making the one-sided payment model shared savings only; a preliminary
prospective, rather than retrospective, assignment of beneficiaries; reducing the number of
quality measures; and eliminating a requirement that 50% of primary physicians be meaningful
users of electronic health records by the start of the second performance year.
“We listened very carefully to the more than 1,300 comments we received on the proposed rule
released this spring, and this final rule includes a number of improvements suggested by those
comments that will strengthen the program,” said CMS Administrator Donald M. Berwick, M.D.
“For example, the final rule will increase the incentives and streamline the Shared Savings
Program, extending the benefits of the new program to a broader range of beneficiaries.”
CMS also is asking for applications for an “Advance Payment” model aimed at increasing
participation of physician-owned and rural ACOs in the MSSP. See related item in this issue.
According to a CMS press release, the voluntary MSSP could rack up $940 million in federal
savings over four years.
The final rule, slated for publication in the November 2 Federal Register, is intended to help
physicians, hospitals, and other providers form patient-centered ACOs to better coordinate care
across healthcare settings.
The American Hospital Association (AHA) generally reacted positively to the final rule,
commending CMS for addressing a number of hospital concerns with the proposed framework.
“We believe today’s menu of ACO options allows America’s hospitals to create new models of
accountable care organizations on which the transformation of health care delivery is so
dependent,” said AHA President and Chief Executive Officer Rich Umbdenstock.
The American Medical Association (AMA) said the final rule incorporated a number of the changes
the group sought.
“After preliminary review, the AMA believes this final rule includes a number of positive
changes," according to its statement.
“The AMA has stressed throughout this rule-making process that, if well-implemented, the ACO
model offers promise to improve care coordination and quality while reducing costs. This final
rule requires a full, in-depth review to ensure it maximizes those potential benefits for Medicare
patients and physicians," AMA said.
America's Health Insurance Plans said the "the ACO program takes important steps towards
achieving greater accountability and better quality care for patients across our health care
system." But added "the ACO program should move away from the traditional Medicare fee-forservice payment model and instead reimburse doctors and hospitals based on improving the
quality, safety, and efficiency of patient care, rather than the volume of services provided."
Accountable Care
Under Section 3022, ACOs agree to be accountable for the quality, cost, and overall care of the
Medicare fee-for-service beneficiaries assigned to the organization. The ACA requires the MSSP
to start by January 1, 2012.
ACOs that meet specified quality performance standards will be eligible to receive a share of any
savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a
sufficient percentage below benchmark amounts set by CMS.
The proposed rule would have set a uniform annual start date for the three-year ACO
agreements with performance years based on calendar years.
The final rule calls for the first round of applications by early 2012, with the ACO agreements
starting on April 1, 2012 and July 1, 2012. Under the final rule, ACOs will have agreements with
a first performance “year” of 18 or 21 months.
ACOs can opt for an interim payment if they report calendar year 2012 quality measures.
ACOs must report quality measures for calendar year 2013 to qualify for first-performance-year
shared savings.
Eligibility for Shared Savings
The ACA identifies four groups as eligible to participate in the shared savings program: ACO
professionals (i.e., hospitals and physicians) in group practice arrangements, networks of
individual practices of ACO professionals, partnerships or joint venture arrangements between
hospitals and ACO professionals, and hospitals employing ACO professionals.
The statute also gives the Secretary the discretion to expand eligibility to other groups of
providers and suppliers as appropriate.
Under the final rule, the four statutorily identified groups, as well as critical access hospitals, will
be allowed to form ACOs independently.
In addition, the final rule allows federally qualified health centers (FQHCs) and rural health clinics
(RHCs) both to form and participate in ACOs. The proposed rule allowed FQHCs and RHCs to
participate in ACOs, but not form them independently.
Beneficiary Assignment
CMS proposed assigning beneficiaries to ACOs retrospectively based on utilization of primary
care services, with prospective identification of a benchmark population.
The final rule implements a prospective assignment method at the beginning of the performance
year. The list will be updated quarterly, with final reconciliation after each performance year
based on patients served by the ACO (i.e., retrospectively). CMS said it adopted this approach in
response to comments.
“Preliminary prospective assignment will allow ACOs to develop care plans and undertake
appropriate quality initiatives on the basis of some knowledge regarding the beneficiaries for
whom they will ultimately be held accountable,” CMS noted. “However, a final retrospective
reconciliation allows CMS to assess an ACO’s performance based on where beneficiaries have
chosen to receive services during the performance year.”
Under the ACA, an ACO must have a minimum of 5,000 beneficiaries assigned to it to participate
in the MSSP.
Payment Models
As did the proposed rule, the final rule includes two tracks. However, unlike the proposed rule,
the final rule removes risk from the one-sided payment model, allowing providers to share in
savings without the risk of sharing in losses. The proposed rule would have required providers to
share in losses in the third year of their agreements.
Under the two-sided payment model, providers will share in savings and losses, with the added
incentive of greater shared savings.
CMS said it adopted a one-sided shared savings-only model in response to concerns that the risk
of sharing in losses in the third year of track one would dampen participation by organizations
with less experience with risk models.
“This will help organizations with less experience coordinating care, such as some physician
organizations or small or rural providers, to gain experience before taking on the responsibility of
sharing losses,” CMS said.
Organizations that enter the MSSP under the first track, however, must switch to the second
track for any subsequent participation in the program.
Providers willing to take on more risk will be able to reap more shared savings under track two.
ACOs may share up to 50% of the savings under the one-sided model and up to 60% of the
savings under the two-sided model, depending on performance.
The final rule eliminates a 2% threshold for ACOs in the one-sided model to share in savings
after reaching a minimum sharing rate (MSR). Instead, under both models, ACOs will receive
shared savings for the first dollar after achieving the MSR.
Quality Measures, Performance
CMS also reduced the number of quality measures for the first performance year from the
proposed 65 to 33 in four, instead of five, domains: patient experience, care coordination,
preventive health, and caring for at-risk populations. The amount of an ACO’s shared
savings/losses is tied to performance on these quality measures.
CMS said the final rule reflects industry comments to adopt fewer total measures and to focus
more on outcomes.
CMS also clarified that while an ACO’s first performance period for shared savings purposes will
be 18 or 21 months, quality data will be collected on a calendar year basis, beginning with the
reporting year ending December 31, 2012.
In the first year of the shared savings program, CMS will define the quality performance standard
at the reporting level, and will phase in defining it on measure scores in subsequent years,
according to the rule.
Federal Agencies Address Antitrust, Fraud And Abuse Concerns For
ACOs
As the Centers for Medicare and Medicaid Services (CMS) unveiled the long-awaited final
regulations on the Medicare Shared Savings Program (MSSP or Shared Savings Program), the
administration also issued final guidance to address concerns that accountable care organizations
(ACOs) could run afoul of federal antitrust, tax, and fraud and abuse laws.
Stakeholders have said certain federal laws could pose significant barriers to ACO formation,
indicating that in the absence of further guidance from the agencies, ACOs and other similar
integration strategies may present too great of a regulatory risk for providers.
CMS and the Department of Health and Human Services Office of Inspector General (OIG)
previously issued a joint notice seeking comments on potential fraud and abuse law waivers
for ACOs participating in the shared savings program.
The agencies now have issued an interim final rule with comment period establishing five waivers
of the physician self-referral law, the anti-kickback statute, and certain provisions of the civil
monetary penalty (CMP) law in connection with the MSSP.
The Federal Trade Commission (FTC) and the Department of Justice (DOJ) also jointly issued a
final "Statement of Antitrust Enforcement Regarding Accountable Care Organizations
Participating in the Medicare Shared Savings Program." FTC and DOJ had issued a proposed
antitrust policy statement regarding ACOs in March.
Finally, the Internal Revenue Service (IRS) issued a fact sheet providing additional information
for charitable organizations that want to participate in the MSSP through an ACO. IRS previously
issued Notice 2011-20 (April 18, 2011), summarizing how the agency expects existing IRS
guidance may apply to Section 501(c)(3) tax-exempt organizations, such as charitable hospitals,
participating in the MSSP.
Fraud and Abuse Law Waivers
The CMS/OIG rule sets forth five specific waivers and the circumstances for their application.
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An “ACO pre-participation” waiver of the Physician Self-Referral Law, the federal AntiKickback Statute, and the Gainsharing CMP that applies to ACO-related start-up
arrangements in anticipation of participating in the Shared Savings Program, subject to
certain limitations, including limits on the duration of the waiver and the types of parties
covered;
An “ACO participation” waiver of the Physician Self-Referral Law, the federal AntiKickback Statute, and the Gainsharing CMP that applies broadly to ACO-related
arrangements during the term of the ACO's participation agreement under the Shared
Savings Program and for a specified time thereafter;
A “shared savings distributions” waiver of the Physician Self-Referral Law, federal AntiKickback Statute, and Gainsharing CMP that applies to distributions and uses of shared
savings payments earned under the Shared Savings Program;
A “compliance with the Physician Self-Referral Law” waiver of the Gainsharing CMP and
the federal Anti-Kickback Statute for ACO arrangements that implicate the Physician SelfReferral Law and meet an existing exception; and
A "patient incentive" waiver of the Beneficiary Inducements CMP and the federal AntiKickback Statute for medically related incentives offered by ACOs under the Shared
Savings Program to beneficiaries to encourage preventive care and compliance with
treatment regimes.
According to the agencies, the rule includes the two waivers proposed in their initial notice “(the
shared savings distributions waiver and the compliance with the Physician Self-Referral Law
waiver), as well as three new waivers developed in response to public comments seeking
additional pathways to address a broader array of ACO activities needed to achieve the purposes
of the Shared Savings Program.”
CMS/OIG said the waivers provided the needed flexibility for ACOs “to pursue a wide array of
activities, including start-up and operating activities that further the purposes of the Shared
Savings Program.”
The American Medical Association (AMA) said it was still reviewing the rule, but generally is
“pleased that CMS and the OIG adopted our recommendations to expand the waivers of certain
Medicare laws for ACOs."
Specifically, the group said, the "agencies adopted the AMA recommendation that the waivers
begin sooner so that they will apply during the process of planning Medicare ACOs. It is
important that the agencies issued these new waivers as an interim final rule, as the AMA had
recommended, which allows for greater flexibility.”
Antitrust Policy
The FTC/DOJ final antitrust policy statement makes two significant changes from the early draft,
the agencies said.
First, the policy statement, with the exception of the voluntary expedited antitrust review, now
applies to all providers that are eligible or intend to participate in the MSSP. The proposed policy
statement limited its application to those collaborations formed after March 23, 2010, the date
the Affordable Care Act was enacted.
Second, the final policy statement drops provisions regarding mandatory antitrust review. This
change, the statement indicates, stems from the fact that the MSSP final rule no longer requires
a mandatory antitrust review for certain collaborations as a condition of participation.
The statement makes clear, however, that the agencies will be actively monitoring the
competitive effects of ACOs using aggregate claims data provided by CMS.
FTC and DOJ also will provide an expedited 90-day review for newly formed ACOs that want
additional antitrust guidance.
The American Hospital Association (AHA) praised the agencies for “respond[ing] to hospital
concerns and revers[ing] their plan to require antitrust preapproval for every ACO applicant and
instead provided guidance."
"We believe removing this barrier was essential to encouraging ACO participation,” AHA said.
AMA likewise said the changes "will significantly lower the administrative burden and cost for
potential ACOs to comply with the antitrust rules."
But America's Health Insurance Plans (AHIP) commented that "doing away with the mandatory
review process raises concerns that provider market power may not be scrutinized sufficiently,
potentially increasing health care costs for consumers and employers."
AHIP urged DOJ and FTC "to take steps to ensure the ACO process is transparent and there is
vigorous oversight and enforcement of antitrust laws to protect consumers and employers from
higher prices and cost-shifting that could result from increased provider consolidation.”
Tax Guidance
IRS indicates in Fact Sheet 2011-11 that its discussion in Notice 2011-20 continues to reflect the
agency's expectations regarding charitable organizations participating in the MSSP through
ACOs, even though the CMS final regulations differ from the proposed regulations.
To that end, IRS says consistent with the previous notice, the agency expects MSSP participation
through an ACO "generally will further the charitable purpose of lessening the burdens of
government . . . ."
In the fact sheet, IRS notes that tax-exempt participants in an ACO that is treated as a
partnership do not necessarily have to have control over the ACO to ensure the ACO's
participation in the MSSP furthers a charitable purpose.
"In the case of an ACO that has been accepted into (and not terminated from) the Shared
Savings Program, the IRS expects that CMS's regulation and oversight of the ACO will be
sufficient to ensure that the ACO's participation in the Shared Savings Program furthers the
charitable purpose of lessening the burdens of government," the fact sheet says.
The fact sheet also clarifies that a charitable organization does not always have to satisfy all five
factors described in Notice 2011-20 to avoid inurement or impermissible private benefit.
IRS says it will determine whether prohibited or impermissible private benefit has occurred with
respect to charitable organizations participating in the MSSP through an ACO based on all the
facts and circumstances.
"[N]o particular factor must be satisfied in all circumstances to prevent inurement or
impermissible private benefit," the fact sheet says.
CMS Launches Advance Payment ACO Model
At the same time as it released the final rule on the Medicare Shared Savings Program (MSSP),
the Centers for Medicare and Medicaid Services (CMS) also launched an “Advance Payment
Model” initiative to test whether advancing a portion of an Accountable Care Organization’s
(ACO’s) future shared savings will boost participation among physician-owned and rural
providers.
CMS said the Advanced Payment Model initiative, developed by the new Center for Medicare and
Medicaid Innovation, is intended to help support infrastructure investments for physician-owned
and rural ACOs.
Provider groups can receive payments either as an upfront fixed payment, an upfront payment
based on the number of Medicare patients served, or a monthly payment based on the number
of Medicare patients, according to a fact sheet.
The advanced payments will be recouped as the ACOs achieve savings. CMS said it will not
pursue recoupment after the ACO completes the first agreement period if insufficient savings are
generated by that time.
However, CMS will “pursue full recoupment of advance payments from any ACO that does not
complete the full initial agreement period of the Shared Savings Program,” the fact sheet said.
The model is limited to physician-owned organizations, critical access hospitals, and rural
providers participating in the MSSP.
Specifically, the Advance Payment ACO model is open to ACOs that do not include any inpatient
facilities and have less than $50 million in annual revenue; and ACOs in which the only inpatient
facilities are critical access hospitals and/or Medicare low-volume rural hospitals and have less
than $80 million in total annual revenue.
CMS Selects 32 Organizations For Pioneer ACO Initiative
The Centers for Medicare and Medicaid Services (CMS) has selected 32 healthcare organizations
to participate in the new Pioneer Accountable Care Organizations (ACOs) initiative under the
Affordable Care Act (ACA), the agency announced December 19, 2011.
The Pioneer ACO initiative is an offshoot of the Medicare Shared Savings Program created by
Section 3022 of the ACA under which ACOs agree to be accountable for the quality, cost, and
overall care of the Medicare fee-for-service beneficiaries assigned to the organization.
ACOs that meet specified quality performance standards will be eligible to receive a share of any
savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a
sufficient percentage below benchmark amounts set by CMS.
CMS unveiled the much-anticipated final rule on the shared savings program in October.
The Pioneer Model provides a faster path for mature ACOs that already have started coordinating
patient care and are ready to move forward, CMS said.
Pioneer ACOs generally will have higher levels of shared savings and risk than those ACOs
participating in the Shared Savings Program.
CMS said the initiative could save up to $1.1 billion over five years.
The first performance period of the Pioneer ACO Model began January 1, 2012.
The CMS Innovation Center selected the 32 Pioneer ACOs following a “rigorous competitive
selection process” that included “extensive review of applications and in-person interviews.”
According to CMS, the Pioneer ACOs selected include physician-led organizations and health
systems, urban and rural organizations, and organizations in various geographic regions of the
county.
CMS Selects 27 ACOs As First Participants In Medicare Shared Savings
Program
The Centers for Medicare and Medicaid Services (CMS) announced April 10, 2012 the selection of
27 accountable care organizations (ACOs) as the first group of participants in the Medicare Share
Savings Program under the Affordable Care Act (ACA).
According to an agency fact sheet, the selected ACOs have agreed to be responsible for
improving care for nearly 375,000 beneficiaries in 18 states through better coordination among
providers.
CMS issued the much-anticipated final rule implementing the shared savings program, mandated
under Section 3022 of the ACA, in November 2011 (76 Fed. Reg. 67802). Under the program,
ACOs agree to be accountable for the quality, cost, and overall care of the Medicare fee-forservice beneficiaries assigned to the organization.
ACOs that meet 33 quality performance standards will be eligible to receive a share of any
savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a
sufficient percentage below benchmark amounts set by CMS.
The final rule called for the first round of ACO agreements to start on April 1, 2012 and July 1,
2012.
According to the agency, the newly selected ACOs include more than 10,000 physicians, 10
hospitals, and 13 smaller physician-driven organizations in both urban and rural areas.
The American Medical Association (AMA) said it was pleased the majority of the new Medicare
ACOs will be physician-led.
"Allowing physicians in all practice settings and sizes to participate increases the number of
Medicare ACOs and maximizes the benefits for patients, physicians, taxpayers and the Medicare
system as a whole," said AMA President Peter W. Carmel, MD.
CMS said two of the ACOs opted to participate in the two-sided payment model, which allows
them to share in a greater portion of any savings they achieve, but also requires them to share
in any losses. The remaining 25 are participating in the one-sided payment model, with a lower
share of potential savings, but no downside risk throughout the term of the three-year
participation agreement.
Five of the 27 ACOs are participating in the Advance Payment ACO Model, which is designed to
spur participation by rural and physician-based ACOs by providing some payments upfront to
help defray start-up costs. These advance payments must be repaid from shared savings earned
by the ACO, CMS explained.
“If an ACO does not complete the full, initial agreement period of the Shared Savings Program,
CMS will in most cases pursue full recoupment of advance payments,” the fact sheet said.
CMS indicated the agency is reviewing more than 150 applications from ACOs for participation in
the shared savings program starting July 1. Fifty of these are applying for the Advance Payment
ACO Model.
"We are encouraged by this strong start and confident that by the end of this year, we will have
a robust program in place, benefitting millions of seniors and people with disabilities across the
country," said CMS Acting Administrator Marilyn Tavenner in a press release.
Antitrust
Third Circuit Finds Hospital, As Indirect Purchaser, Lacks Antitrust
Standing In Action Alleging Illegal Tying Arrangement
A hospital that buys certain pharmaceutical products through a wholesaler is an indirect
purchaser and therefore lacks standing to bring an antitrust action against the manufacturer, the
Third Circuit ruled June 14, 2011.
Affirming a lower court decision dismissing the action, the appeals court refused to bend the
bright-line rule under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), which held only direct
purchasers have standing under Section 4 of the Clayton Act.
Plaintiff Warren General Hospital filed a class action against Amgen Inc. alleging the
pharmaceutical manufacturer violated antitrust law by “tying” the purchase of its drugs,
Neupogen and Neulasta, which are White Blood Cell Growth Factor (WBCGF) drugs, with
Aranesp, a Red Blood Cell Growth Factor (RBCGF) drug.
The hospital alleged Amgen had a monopoly in the WBCGF market, which it leveraged to force
hospitals to buy its more expensive RBCGF drug.
According to the hospital, in 2003, Amgen devised a rebate program on the price of its WBCGF
drugs that correlated to purchases of Aranesp. Hospitals received low reimbursement for WBCGF
drugs from payors and therefore could not afford to purchase them without the manufactureroffered rebates.
While Neupogen and Neulasta comprised a large portion of the WBCGF market, Aranesp was
directly in competition with Procrit, another anti-anemia drug.
The hospital said absent the illegal tying arrangement, it would have purchased Procrit, instead
of the more expensive Aranesp.
Applying Illinois Brick, the district court found the hospital lacked antitrust standing because it
did not purchase the drugs at issue directly from Amgen, instead it purchased them through a
middleman wholesaler under group purchasing organization contracts.
The Third Circuit affirmed, rejecting the hospital’s argument that it was in fact a direct purchaser
of Amgen’s pharmaceutical products.
The hospital argued it had a number of direct dealings with Amgen, including negotiating
purchase requirements and rebates and receiving rebates directly from Amgen.
But the appeals court found these transactions did not change the fact that the hospital ordered
the drugs through a wholesale middleman; the wholesaler maintains the right to set the price of
the drugs it sells, and thus its price is not necessarily the price it paid Amgen; the hospital
physically takes delivery of the drugs from the wholesaler; and the hospital pays the
wholesaler directly and transmits no funds to Amgen.
While there may have been some direct interactions between the hospital and Amgen relating to
the rebate program, the “key question in an illegal typing claim is whether the plaintiff purchased
the tied product from the antitrust defendant,” which the hospital simply did not do, the appeals
court said.
“This result is in line with numerous other cases from this Court recognizing that standing lies
with the direct purchaser and not any subsequent downstream purchaser,” the appeals court
said.
The appeals court also refused to find antitrust standing based on the hospital’s argument that it
was the first injured party in the chain of distribution.
According to the hospital, the policies underlying Illinois Brick confer standing on the first harmed
direct purchaser, not just the direct purchaser.
But the appeals court said the hospital’s argument conflated the different components of
antitrust standing—i.e., the “direct purchaser” requirement under Illinois Brick and that the
plaintiff suffered a recognizable injury.
Moreover, the appeals court found the policy rationales of the direct purchaser rule were present
in the instant case, including the risk of duplicative recovery and the complexity of apportioning
multiple recoveries.
Warren Gen. Hosp. v. Amgen, No. 10-2778 (3d Cir. June 14, 2011).
U.S. Court In Michigan Refuses To Dismiss DOJ, Michigan Antitrust
Action Against Blue Cross Blue Shield Over MFN Clauses
A federal district court in Michigan issued an order August 12, 2011 detailing its refusal to
dismiss an antitrust lawsuit brought by the Department of Justice and the state of Michigan
against Blue Cross Blue Shield of Michigan (BCBSM).
The lawsuit, filed October 18, 2010 in the U.S. District Court for the Eastern District of Michigan,
alleged BCBSM’s use of most favored nation (MFN) clauses in its contracts with hospitals raises
prices, prevents other insurers from entering the marketplace, and discourages discounts in
violation of the Sherman Act and the Michigan Antitrust Reform Act (MARA).
According to the suit, the challenged provisions likely resulted in Michigan consumers paying
higher prices for their healthcare services and health insurance.
MFN provisions generally refer to contractual clauses between health insurance plans (buyers)
and healthcare providers (sellers) that essentially guarantee no other plan can obtain a better
rate than the plan wielding the MFN.
Two types of MFN clauses are at issue in the lawsuit—“MFN-plus” clauses, which require hospitals
to charge some or all other commercial insurers more than what the hospitals charge BCBSM and
the traditional “equal-to MFN” clauses, which require the hospitals to charge other commercial
health insurers at least as much as they charge BCBSM.
According to the complaint, BCBSM has used MFNs or similar clauses in its contracts with at least
70 of Michigan’s 131 general acute care hospitals, including many major hospitals in the state.
The complaint alleged BCBSM’s use of MFN provisions reduced competition in the sale of health
insurance in Michigan by raising hospital costs to BCBSM’s competitors, which discourages other
health insurers from entering into or expanding within markets throughout the state.
In addition, the complaint alleged BCBSM agreed to raise the prices that it pays to hospitals to
obtain the MFN clauses, thus buying protection from competition by increasing its own costs.
The court during a hearing in June indicated it would deny BCBSM’s motion to dismiss. BCBSM
since filed a notice of interlocutory appeal.
The order issued by the court explaining the refusal to dismiss the case found the complaint
“plausibly” alleged relevant product and geographic markets, market power, and anticompetitive
effects.
The court concluded the complaint sufficiently alleged the product markets at issue—commercial
group health insurance and commercial individual insurance, noting no requirement at this point
in the proceedings for a market-by-market analysis.
Next, the court held the complaint alleged plausible facts to establish 17 geographic markets
based on statistical data.
The court rejected BCBSM’s contention that health insurance markets are “national” rather than
local and the complaint failed to focus on whether capital for spreading financial risk could be
supplied on a national basis.
According to the court, “[a]t the pleading stage, the Complaint states a claim that consumers
demand access to local providers and, therefore, the health insurance markets are local.”
The court also concluded the complaint sufficiently alleged market power based on BCBSM’s
market share, which ranged from 40% to more than 80% in the relevant geographic markets.
With respect to impact of the MFN clauses, the court declined to weigh the procompetitive versus
anticompetitive effects at this stage of the litigation.
Instead, the court said it was enough that the complaint alleged a negative impact on
competition in Michigan health insurance markets by raising competitors’ costs, likely increasing
premiums, and directly increasing costs to self-insured employers.
Finally, the court rejected BCBSM’s other defenses, including state action immunity and that it
was exempt from the MARA.
United States v. Blue Cross Blue Shield of Mich., No. 10-14155 (E.D. Mich. Aug. 12, 2011).
Eighth Circuit Affirms Dismissal Of Antitrust Suit Brought By FTC
Against Drug Maker
The Eighth Circuit August 19 affirmed a lower court decision finding the Federal Trade
Commission failed to show that two drugs were in the same product market for purposes of its
antitrust suit against the manufacturer of the drugs.
The government had urged the appeals court to find fault with the lower court’s decision to credit
testimony of certain physicians, but the Eighth Circuit noted, “[i]t is precisely the job of the
district court to consider the evidence offered by both sides and render a judgment.”
Patent ductus arteriosus (PDA) is a life-threatening heart condition that primarily affects lowbirth-weight, usually premature, babies.
When this case was brought, there were two Food and Drug Administration (FDA)-approved
drugs for PDA—Indocin IV and NeoProfen.
Defendant Lundbeck purchased the rights to Indocin IV from Merck & Co. in 2005, and the rights
to NeoProfen from Abbott Laboratories in 2006 (before it was put on the market). Thus, until
generics appeared in 2010, Lundbeck owned all the drugs for PDA.
Lundbeck immediately raised the price of Indocin IV and two days after acquiring the rights to
NeoProfen, Lundbeck raised the price thirteen-fold.
The Federal Trade Commission and Minnesota (collectively, FTC) sued Lundbeck, alleging its
acquisition of the drug NeoProfen violated the Federal Trade Commission Act, the Sherman Act,
the Clayton Act, the Minnesota Antitrust Law of 1971, and unjustly enriched Lundbeck.
The district court determined the FTC did not meet its burden to prove that Indocin IV and
NeoProfen were in the same product market and thus failed to identify a relevant market. FTC
appealed.
After noting the lower court’s decision would be reviewed for clear error, the appeals court
highlighted that the FTC bears the burden of identifying a relevant market.
The district court credited testimony of physicians who said the relative price of the drugs does
not factor into the choice of drug treatment.
Considering these facts, as well as testimony by Lundbeck’s expert whom the court found
“persuasive,” the court ruled that there is low cross-elasticity of demand between Indocin IV and
Neoprofen, and thus the drugs are not in the same product market.
FTC argued the hospitals, not the neonatologists, are the consumers, and the hospitals would
switch between Indocin IV and NeoProfen based on price differences.
But “FTC offers no evidence that hospitals would disregard the preferences of the neonatologists
and make purchasing decisions based on price,” the appeals court found.
Accordingly, the district court did not err in finding more persuasive the testimony of the
pharmacists and most neonatologists, compared to the one neonatologist favorable to the FTC,
the appeals court held.
The appeals court rejected the FTC’s other arguments as well, finding “[i]n the end, the FTC
disagrees with the district court’s weighing of the facts applicable to the relevant market
determination.”
However, the district court reached its decision after “careful consideration based upon the entire
record,” and thus its “fact-finding was not clearly erroneous,” according to the appeals court.
Federal Trade Comm'n v. Lundbeck, Inc., No. 10-3458/3459 (8th Cir. Aug. 19, 2011).
Second Circuit Rejects NYC’s Antitrust Action To Block Merger Of
Health Insurers
The Second Circuit affirmed August 18, 2011 the dismissal of the City of New York’s antitrust
action seeking to prevent Health Insurance Plan of Greater New York’s (HIP’s) merger with Group
Health Inc. (GHI).
Affirming the U.S. District Court for the Southern District of New York’s grant of summary
judgment to defendants, the appeals court agreed that the City’s market definition as “low-cost
municipal health benefits market” was legally deficient because it was based on the preferences
of a single-purchaser, not according to the rule of reasonable interchangeability and crosselasticity of demand.
The appeals court also held the district court did not err in denying the City’s motion to amend
its complaint to expand its market definition and add a new basis for its antitrust claims.
Specifically, the appeals court found the amended market definition to encompass all insurance
providers participating in the City’s Health Benefits Program and all providers of commercial
medical benefits in downstate New York would still be legally deficient.
The appeals court also noted no clear error in the district court’s determination that allowing the
amendment would cause undue prejudice to GHI and HIP because it would require, at minimum,
additional discovery from large employers other in the City in the downstate New York area and
from other health insurer competitors.
The City obtains health insurance for its employees and their dependents through its Health
Benefits Programs, which provides coverage to about 1.2 million.
The City selects several plan options from which employees choose coverage, either through
health maintenance organizations, preferred provider organizations, or point of service plans.
GHI and HIP offer the two least expensive and most popular plans among City employees.
In September 2005, GHI and HIP announced merger plans and to covert from nonprofit to forprofit status.
The U.S. Department of Justice and the New York State Attorney General investigated the
antitrust implications and decided not to challenge the proposed merger. The City, however,
sued GHI and HIP in November 2006, seeking an injunction to block the merger under Section 7
of the Clayton Act, and Sections 1 and 2 of the Sherman Act.
The district court ultimately granted defendants summary judgment.
Affirming, the Second Circuit said the City’s alleged market was legally insufficient because “it
ignores the competition existing among insurance providers for the City’s business, as well as the
health insurance market for other large employers in the region.”
According to the appeals court, the City’s proposed market was too narrow because the City did
not explain why other insurers could not propose competitive products if the merged firm raised
its premiums to supracompetitive prices.
The appeals court also found the City’s proposed amendment to the market definition would not
cure this deficiency and would be unfair to defendants that at this stage of the litigation would
need to conduct significant additional discovery.
City of New York v. Group Health Inc., No. 10-2286-cv (2d Cir. Aug. 18, 2011).
Eleventh Circuit Dismisses FTC Bid To Block Hospital Acquisition
Citing State Action Immunity
The Eleventh Circuit dismissed December 9 a lawsuit brought by the Federal Trade Commission
(FTC) seeking to halt Phoebe Putney Health System, Inc.’s (PPHS) proposed acquisition of rival
Palmyra Park Hospital, Inc. in Albany, GA from its owner HCA.
The lawsuit, filed in April, sought to enjoin the deal until the FTC concluded its administrative
challenge to the transaction.
The appeals court, affirming a federal district court decision in June dismissing the lawsuit, found
the transaction was immune from scrutiny under the state action doctrine, which provides a
narrow exception to the antitrust laws for anticompetitive conduct if it is an act of government.
Under the terms of the $195 million acquisition, a government entity, the Hospital Authority of
Albany Dougherty County, which holds title to Phoebe Putney Memorial Hospital, Inc. (PPMH),
would acquire Palmyra from its owner HCA and then lease it to PPHS, a nonprofit corporation
that also operates PPMH under a long term lease entered into with the Authority in 1990.
According to the appeals court, the legislature gave the Authority broad authority under the
Georgia Hospital Authorities Law not only to operate hospitals and establish rates but also to
“acquire by purchase, lease, or otherwise . . . projects,” including hospitals.
The appeals court agreed with the FTC that, based on the facts alleged, the joint operation of
PPMH and Palmyra would substantially lessen competition or potentially create a monopoly, but
found the transaction immunized under the state action doctrine because the law establishing
the Authority articulated a clear “policy to displace competition” when necessary.
“The Eleventh Circuit agrees with the Commission that this deal will create a monopoly and
eliminate competition. We remain very concerned that it will raise healthcare costs dramatically
in Albany, Georgia. We are considering all our options,” said FTC Bureau of Competition’s Richard
Feinstein in a statement.
Merger to Monopoly
According to the FTC’s administrative complaint, the transaction would violate federal law by
significantly reducing competition and allowing the combined Phoebe/Palmyra to raise prices for
general acute care hospital services charged to commercial health plans.
The FTC contended the transaction is a “merger to monopoly” because Phoebe and Palmyra are
the only two competing hospitals in the Albany, GA area.
The FTC also argued the proposed transaction was structured to skirt federal antitrust scrutiny
under the state action doctrine and that private parties, not the Authority, were the primary
players in the deal.
The Eleventh Circuit in July agreed to temporarily halt the transaction while the FTC appealed the
U.S. District Court for the Middle District of Georgia’s refusal, Federal Trade Comm’n v. Phoebe
Putney Health Sys., Inc., No. 1:11-cv-58 (WLS) (M.D. Ga. June 27, 2011), to grant the
injunction the agency sought.
State Action Immunity
The Eleventh Circuit ultimately agreed with the district court, however, that the FTC could not
escape application of the state action doctrine to immunize the transaction from antitrust
scrutiny.
According to the appeals court, the anticompetitive consequences that could result from the
merger “were a foreseeable result of the statute authorizing the Authority’s conduct.”
The appeals court rejected the FTC’s argument that the state action doctrine should not apply
because the plan essentially involved a transfer of control of a hospital from one private party to
another.
Supreme Court precedent does not allow the court to “look behind” governmental actions for
“perceived conspiracies to restrain trade,” the Eleventh Circuit said.
Federal Trade Comm’n v. Georgia, No. 11-12906 (11th Cir. Dec. 9, 2011).
In further developments, FTC sought March 23 Supreme Court review of the Eleventh Circuit’s
decision in this case.
Seventh Circuit Says District Court Erred In Denying Class Certification
In Lawsuit Alleging Antitrust Injury From Hospital Merger
The Seventh Circuit held January 13, 2012 that a federal district court in Illinois abused its
discretion by refusing to certify as a class action a lawsuit brought by individuals alleging they
suffered “antitrust injury” as a result of the 2000 merger of Northshore University HealthSystem
(formerly Evanston Northwestern Hospital Corp.) and Highland Park Hospital (Highland).
The U.S. District Court for the Northern District of Illinois found while most of the requirements
for class certification had been met, plaintiffs did not show “predominance” of common questions
of law or fact over individualized inquiries as required by Fed. R. Civ. P. 23(b)(3). In re Evanston
Northwestern Healthcare Corp. Antitrust Litig., No. 07-CV-446 (N.D. Ill. Apr. 12, 2010).
According to the court, the named plaintiffs failed to meet their burden of showing a method of
proving class-wide impact. Specifically, the court found plaintiffs could not satisfy the
predominance requirement because their expert conceded his method for demonstrating
classwide impact was invalid assent uniform price increases.
The Seventh Circuit ruled the “district court’s conclusion that a lack of uniform price increases
required denial of class certification was erroneous as a matter of both fact and law.”
In the appeals court’s view, “the degree of uniformity the district court demanded simply is not
required for class certification under Rule 23(b)(3)." The appeals court vacated the denial of
class certification and remanded for further proceedings.
2000 Merger
Northshore, which owned Evanston Hospital and Glenbrook Hospital, acquired Highland in
January 2000. In February 2004, the Federal Trade Commission (FTC) filed an administrative
complaint against Northshore, alleging the merger substantially lessened competition and
enabled ENH to raise its prices to private payors above the prices that the hospital would have
charged absent the merger, in violation of Section 7 of the Clayton Act.
An Administrative Law Judge found Northshore violated the Clayton Act and ordered it to divest
Highland. On appeal before the full Commission, the ALJ’s finding was affirmed, but the
divestiture order was reversed in favor of a “conduct” remedy, which required Northshore to
establish two separate and independent teams for negotiating contracts with payors.
Shortly after the FTC issued this decision, three separate class action complaints were filed by
various individual plaintiffs. These cases were consolidated in September 2007, and the plaintiffs
filed an amended complaint in November 2007. Among other claims, the complaint alleged, as a
result of the merger, Northshore acquired monopoly power in the marketing of healthcare
services in the relevant geographic market and has since abused that power to maintain its
market dominance, in violation of Section 2 of the Sherman Act and Section 7 of the Clayton Act.
Class Certification
The named plaintiffs are direct purchasers of healthcare services from Northshore since January
1, 2000. Plaintiffs moved for an order certifying the class.
The court found plaintiffs met the class certification requirements of Rule 23(a)—(1) numerosity,
(2) commonality, (3) typicality, and (4) adequacy of representation—but failed the second hurdle
of class certification of showing “questions of law or fact common to the members of the class
predominate over any questions affecting only individual members” as required by Rule
23(b)(3).
Specifically, the court found plaintiffs could not show an antitrust impact on a classwide basis.
Incorrect Standard
The Seventh Circuit noted the complexity of comparing prices in the hospital market, but said
the district court went too far in requiring plaintiffs to show uniform price increases to meet the
predominance requirement for class certification.
At the class certification stage, plaintiffs only had to show the element of antitrust impact “is
capable of proof at trial” through common evidence and a common methodology, not that the
same result would be reached for each class member.
The appeals court also found the district court erred in concluding plaintiff’s expert conceded that
non-uniform price increases invalidated his proposed methodology for determining classwide
antitrust harm. Rather, he specifically explained how he would account for non-uniformity in
making his calculations.
Messner v. Northshore Univ. HealthSystem, No. 10-2514 (7th Cir. Jan. 13, 2012).
U.S. Court In Washington Dismisses Physician's Antitrust, Stark Claims
Against Medical Center
A federal district court dismissed February 15, 2012 a radiologist’s antitrust, Stark Law, and
Washington state law claims against a medical center after his employment with a radiology
group that had a services agreement with the hospital ended.
The court also held the radiologist had to arbitrate his claims against the group per his
employment agreement.
Kadlec Regional Medical Center (collectively, with Kadlec Health System, Kadlec) and Columbian
Basin P.C. (CBI) recruited plaintiff Julian Kassner, M.D., a radiologist, to relocate from Bethesda,
MD to the Tri-Cities area of Washington state in September 2005.
According to plaintiff, Kadlec committed to pay over $200,000 to CBI to recruit him.
Plaintiff and CBI executed an employment agreement that included a non-competition provision.
The agreement also included a requirement to arbitrate all disputes arising thereunder.
In November 2005, Kadlec and CBI entered into a hospital-based physician services agreement,
allegedly without plaintiff’s knowledge. The services agreement contained a covenant not to
compete, which plaintiff asserted prohibited CBI’s radiologists from competing with Kadlec or
obtaining privileges at any nearby other healthcare facilities.
CBI subsequently decided not to renew plaintiff’s employment contract. Plaintiff then left to
assume a position in Orlando, FL.
Plaintiff sued Kadlec and CBI for damages of “no less than” $5 million and treble damages,
asserting federal antitrust claims, Stark Law violations, and various state law consumer
protection, contract, and tort claims.
The U.S. District Court for the Eastern District of Washington dismissed all claims against Kadlec
and ordered arbitration of the claims against CBI.
The court held plaintiff’s claims against Kadlec that the restrictive covenants in the services
agreement violated federal antitrust law failed because he did not define a relevant product
market.
Specifically, the court found plaintiff’s references to “medical services,” “all radiology services,”
“imaging services,” women’s imaging,” and “mammography,” too imprecise to define the
relevant product market.
As to the Stark Law claim, the court noted “no authority to support” a private right to enforce the
statute. Moreover, the court did not see how the service agreement violated any provisions of
the Stark Law concerning physician recruitment, particularly as plaintiff was not a party to that
agreement.
The court also dismissed plaintiff’s state law claims, finding them similarly deficient.
Finally, the court granted CBI’s motion to compel arbitration of plaintiff’s claims against the
group.
In so holding, the court agreed with CBI that plaintiff’s claims arose from the employment
agreement, not the services agreement to which he was not a party.
Kassner v. Kadlec Reg’l Med. Ctr., No. CV-11-5114-RMP (E.D. Wash. Feb. 15, 2012).
FTC Orders ProMedica Health To Divest St. Luke’s Hospital
The Federal Trade Commission (FTC) has ruled the consolidation of ProMedica Health System,
Inc. and rival St. Luke’s Hospital in Lucas County, OH is anticompetitive and likely to increase
prices for general acute-care inpatient hospital services and inpatient obstetric services sold to
commercial health plans in the area, according to a March 28, 2912 agency press release.
The 4-0 decision, which largely affirms a ruling by an administrative law judge (ALJ) in December
2011, requires ProMedica to divest St. Luke’s to an FTC-approved buyer within six months after
the FTC’s order is final.
The Commission’s opinion and final order was issued on March 22, with a provisionally redacted
version made public March 28.
The transaction closed August 31, 2010 but has been subject to a limited “hold-separate”
agreement (HSA) since then.
The FTC filed an administrative complaint January 6, 2011 alleging the merger would reduce
competition and allow ProMedica to raise prices for general acute-care and inpatient obstetrical
services, significantly harming patients and local employers and employees, in violation of
Section 7 of the Clayton Act.
The complaint alleged the acquisition would reduce the number of general acute-care hospital
competitors in Lucas County from four to three leaving ProMedica with a market share
approaching 60% for general acute-care services in Lucas County.
In the market for inpatient obstetrical services in Lucas County, FTC charged the acquisition
would leave only one competitor to ProMedica, increasing ProMedica’s market share to more than
80%.
An ALJ in December 2011 found the acquisition eliminated competition and ordered ProMedica to
divest St. Luke’s within 180 days.
The FTC’s opinion and final order affirmed the ALJ’s decision on liability, but excluded “tertiary”
services from the market definition of general acute-care inpatient hospital services.
The Commission also concluded the combination was likely to substantially lessen competition in
a separate market consisting of inpatient obstetrical services sold to commercial health plans.
According to Commissioner Julie Brill, however, “regardless of which market definition is used,
market shares and concentration levels exceed the threshold for presumptive illegality provided
in the 2010 Horizontal Merger Guidelines and the case law. Respondent does not dispute this.”
Under the order, the FTC may appoint a trustee to sell the assets if ProMedica fails to divest St.
Luke’s within the required timeframe.
ProMedica may file a petition for review in a federal appeals court within 60 days of the final
order.
While the administrative proceedings were pending, FTC filed a separate complaint January 7,
2011 with a federal district court in Ohio seeking an order requiring ProMedica to preserve St.
Luke’s as a separate, independent competitor during the administrative proceeding and appeals
process.
In a 115-page opinion, the U.S. District Court for the Northern District of Ohio granted the FTC’s
motion to temporarily block the consolidation. Federal Trade Comm’n v. ProMedica Health Sys.,
Inc., No. 3:11 CV 47 (Mar. 29, 2011).
U.S. Court In Illinois Temporarily Halts Merger Of Two Illinois
Hospitals
The U.S. District Court for the Northern District of Illinois granted April 5, 2012 a preliminary
injunction enjoining OSF Healthcare System’s acquisition of Rockford Health System in Illinois
pending the outcome of the Federal Trade Commission’s (FTC’s) administrative proceedings
challenging the merger.
FTC Bureau of Competition Director Richard Feinstein called the court’s ruling a win for
competition and patients. "We continue to believe in the merits of our case, and that if this deal
is ultimately allowed to proceed, the result will be less competition and higher health care prices
in the Rockford area. We look forward to presenting our case before the Administrative Law
Judge later this month."
The court found the FTC was likely to succeed on the merits of its claim that the OSF-Rockford
Health combination would substantially lessen competition in the market for general acute care
inpatient (GAC) services in the Rockford, IL area.
The two hospitals announced their affiliation agreement in January 2011. The FTC filed an
administrative complaint challenging the deal in November 2011, arguing the merger would
substantially reduce competition among hospitals and primary care physicians in Rockford, IL,
and significantly harm local businesses and patients, in violation of Section 7 of the Clayton Act.
FTC alleged the acquisition would reduce competition in two markets in the Rockford area: (1)
GAC services, and (2) primary care physician (PCP) services.
In its opinion, the court noted testimony from FTC experts that the post-market shares of the
merged entity would control 59.4% of the GAC market based on patient admissions, or 64.2% of
the market based on patient days.
“Based on these market share calculations, the court has no trouble finding that the combined
entity in this case would control ‘“an undue percentage share of the relevant market.’”
The court also found the proposed merger would substantially increase concentration in the GAC
market in Rockford.
The court declined to decide whether FTC had a likelihood of success on its claim involving the
PCP market, although it expressed doubt that the agency would, given the lower post-merger
market concentration level in the PCP market and other factors.
Although defendants’ argued one strong competitor, SwedishAmerican, would remain after the
merger that would prevent the combined entity from charging supracompetitive prices, the court
said the FTC need not show the elimination of all competition to satisfy the preliminary injunction
standard.
The court also found the current conditions in Rockford would give the combined entity
substantial bargaining leverage, “which would in turn allow the combined entity to extract higher
prices from MCOs,” regardless of SwedishAmerican's presence.
Defendants also contended the merger would produce substantial efficiencies, but the court
found the potential efficiencies were not sufficient to rebut the FTC’s case at this time.
Finally, the court held the balance of the equities weighed in favor of granting the injunction.
“[D]espite their obvious desire to proceed with the merger immediately, defendants admit that
the efficiencies they hope to gain can be achieved whenever the merger is allowed to proceed,
even if that does not occur until after the FTC makes its final ruling,” the court observed.
Thus, the court directed the hospitals to maintain the status quo until the completion of the FTC’s
administrative proceedings or further order from the court.
Federal Trade Comm’n v. OSF Healthcare Sys., No. 11 C 50344 (N.D. Ill. Apr. 5, 2012).
Following the issuance of the injunction, OSF Healthcare System and Rockford decided to drop
merger plans.
FTC Closes Investigation Of PBM Merger Deal
A divided Federal Trade Commission (FTC) said April 2, 2012 the proposed merger of pharmacy
benefit manager (PBM) companies Express Scripts Inc. and Medco Health Solutions Inc. is
unlikely to substantially lessen competition.
According to an agency press release, the FTC voted 3-1 to close an eight-month investigation
into the merger that will bring together two of the nation’s largest pharmacy benefits managers
(PBMs).
Under the deal reached in July 2011, Express Scripts intends to acquire Medco for approximately
$29 billion.
The Commission majority found the PBM market was sufficiently competitive to withstand an
Express Scripts-Medco combination.
“The acquisition of Medco by Express Scripts will likely not change these dynamics: the merging
parties are not particularly close competitors, the market today is not conducive to coordinated
interaction, and there is little risk of the merged company exercising monopsony power,” the
Commission majority said in their statement.
But a dissenting statement, by Commissioner Julie Brill, described the merger as an industry
“game changer” creating a “merger to duopoly” between the merged entity and CVS Caremark,
“with few efficiencies and high entry barriers.”
The National Association of Chain Drug Stores (NACDS), the National Community Pharmacists
Association (NCPA), and nine retail pharmacy companies filed suit March 29 seeking to block the
Express Scripts-Medco merger.
The lawsuit, filed in the U.S. District Court for the Western District of Pennsylvania, alleges the
merger violates Section 7 of the Clayton Act.
According to the complaint, “[t]he relevant markets are highly concentrated and would become
significantly more concentrated as a result of the proposed acquisition.”
NACDS/NCPA React
In an April 2 statement, NACDS and NCPA expressed disappointment in the FTC’s decision to end
its review of the deal.
“NACDS and NCPA will continue to push through the Washington gridlock by advancing the
litigation we have filed with nine community pharmacy companies, and we urge state attorneys
general to take action to block the merger as well,” the statement said.
The groups said they will seek a court order directing Express Scripts and Medco to keep
separate their assets pending review of the lawsuit and/or schedule an expedited review of the
merits of their case.
“That the agency is allowing the merger to proceed, and without any conditions, leaves patients
and pharmacies vulnerable to significant harm from a combined ESI-Medco. Furthermore, we are
disappointed that the agency based some of its views of the PBM-pharmacy marketplace on old,
inaccurate data, despite NACDS and NCPA providing evidence to the contrary,” the statement
said.
U.S. Court In Michigan Dismisses City’s Antitrust Action Against Blue
Cross, Hospitals Over MFN Clauses
A federal district court in Michigan dismissed March 30, 2012 an antitrust action brought by the
City of Pontiac against Blue Cross and Blue Shield of Michigan (BCBSM) over its use of so-called
“most favored nation-plus” (MFN-plus) clauses in its hospital contracts.
In a separate opinion issued the same day, the court also dismissed the city’s action against 22
hospitals alleging they engaged in anti-competitive behavior.
The city filed its complaint in January 2011, alleging BCBSM’s use of MFN-plus clauses, which
require hospitals to charge some or all other commercial insurers more than what the hospitals
charge BCBSM, hurt competition by raising hospital prices and preventing other insurers from
competing in or entering the market in violation of the Sherman Act and the Michigan Antitrust
Reform Act. The complaint also asserted a cause of action for unjust enrichment.
In October 2010, the U.S. Department of Justice and the state of Michigan filed a similar lawsuit
against BCBSM, which is the largest provider of commercial health insurance in Michigan,
covering 60% of the commercially insured population. The court previously refused to dismiss
the government's case.
In the instant case, however, the U.S. District Court for the Eastern District of Michigan granted
BCBSM's motion to dismiss the city’s antitrust action, which asserted a per se violation of Section
1 of the Sherman Act.
The court found the per se rule did not apply because there was no horizontal relationship
between BCBSM and the hospital defendants. BCBSM and the hospitals are at different levels of
the market structure—BCBSM as a purchaser of services from the hospital defendants, the court
explained.
“There is no allegation BCBSM competes with the hospital defendants”; thus, their relationship is
vertical, not horizontal.
The court then considered whether the city could maintain its Sherman Act claim under a “rule of
reason” analysis and found it could not.
While the court was willing to find the complaint adequately alleged a relevant product market,
i.e. hospital services, it failed to sufficiently allege any anticompetitive effects of the MFN-plus
clauses.
Finally, the court held the city failed to allege an unjust enrichment claim against BCBSM since
there was no evidence the city paid any specific benefits to BCBSM, other than as a third-party
claims administrator.
The court dismissed the city’s complaint against the 22 hospital defendants based on similar
reasoning.
The court found it could not apply the per se rule absent some allegations of horizontal
agreements between the hospital defendants to fix the prices of hospital services, which the
complaint did not supply.
As to the unjust enrichment claim, the court found “no factual circumstances alleged which
would make it unjust for the Hospital Defendants to retain the benefit the City of Pontiac may
have conferred to the Hospital Defendants, as a result of one of the City of Pontiac's employees
or retirees using the Hospital Defendants' services.”
City of Pontiac v. Blue Cross Blue Shield of Mich., No. 11-10276 (E.D. Mich. Mar. 30, 2012)
(dismissing the claims as to BCBSM).
City of Pontiac v. Blue Cross Blue Shield of Mich., No. 11-10276 (E.D. Mich. Mar. 30, 2012)
(dismissing the claims as to the hospital defendants).
Arbitration
West Virginia High Court Rules Pre-Injury Arbitration Clauses In
Nursing Home Admissions Agreements Are Unenforceable
Pre-injury arbitration clauses in nursing home admission agreements are unenforceable to
compel arbitration of a dispute concerning negligence that results in a personal injury or
wrongful death, the West Virginia Supreme Court ruled June 29, 2012.
Reversing several lower court decisions, the high court concluded Congress did not intend the
Federal Arbitration Act (FAA) to apply to arbitration clauses in pre-injury contracts where a
personal injury or wrongful death occurred after the contract was signed.
The consolidated action involved several cases in which the plaintiffs alleged a nursing home
negligently caused the death of a nursing home resident.
In each case, a representative for the resident had signed the nursing home admissions
agreement that contained an arbitration clause for any dispute involving allegations of negligent
treatment.
The defendant nursing homes argued any claims arising from the death of the resident must be
submitted to arbitration. Plaintiffs contended the arbitration clauses were null and void under
Section 15(c) of the West Virginia Nursing Home Act (Act). But the nursing homes asserted the
FAA preempted this provision of the Act.
The high court agreed the FAA preempted Section 15(c), but concluded, in two of the cases on
appeal, the arbitration agreements were unconscionable and unenforceable as a matter of law.
In the third case, the high court said, the trial court did not consider the issue of
unconscionability but should find the arbitration provision invalid on remand.
Section 15(c) prohibits “any waiver by a resident or his or her legal representative of the right to
commence an action” under the Act, declaring such waivers “null and void as contrary to public
policy.”
As to the preemption issue, the high court found substantial evidence the nursing home
admission agreements at issue were contracts affecting interstate commerce under Section 2 of
the FAA.
Next, the high court held Section 15(c) of the Act conflicted with the FAA’s intended purpose of
putting arbitration clauses on equal footing with other contractual clauses and therefore federal
preemption applied.
But the high court emphasized “nothing in Section 2 of the FAA overrides normal rules of
contract interpretation”—including applicable contract defenses such as unconscionability.
Thus, “whether the arbitration clauses at issue are enforceable is still a matter of state contract
law and capable of judicial review,” the high court said.
After a lengthy discussion of procedural and substantive unconscionability, the high court ruled,
“as a matter of public policy under West Virginia law, an arbitration clause in a nursing home
admission agreement adopted prior to an occurrence of negligence that results in a personal
injury or wrongful death, shall not be enforced to compel arbitration of a dispute concerning the
negligence.”
Brown v. Genesis Healthcare Corp., No. 35494 (W.Va. June 29, 2011).
Subsequently, the U.S. Supreme Court, in a per curiam opinion issued February 21, 2012,
vacated the West Virginia High Court’s decision, finding it misread and disregarded U.S. Supreme
Court precedent interpreting the Federal Arbitration Act (FAA) and therefore did not follow
controlling federal law, the five-page opinion said.
The consolidated action involved several cases in which the plaintiffs alleged a nursing home
negligently caused the death of a resident. In each case, a family member of the resident signed
an agreement that included a requirement for binding arbitration of all disputes.
In a June 2011 decision, the West Virginia high court held pre-injury arbitration clauses in
nursing home admission agreements were unenforceable as a matter of public policy. Brown v.
Genesis Healthcare Corp., No. 35494 (W.Va. June 29, 2011).
In so holding, the state high court concluded Congress did not intend the FAA to apply to
arbitration clauses in pre-injury contracts where a personal injury or wrongful death occurred
after the contract was signed.
But the Supreme Court specifically rejected this conclusion, noting no exception in the statute for
personal injury or wrongful death claims and calling the West Virginia high court’s interpretation
of the FAA both “incorrect and inconsistent” with Court precedent.
“West Virginia’s prohibition against predispute agreements to arbitrate personal-injury or
wrongful death claims against nursing homes is a categorical rule prohibiting arbitration of a
particular type of claims, and that rule is contrary to the terms and coverage of the FAA,” the
Court said.
The Court remanded to the West Virginia high court to determine whether there were other
grounds under state common law principles for invalidating the arbitration agreements at issue.
Marmet Health Care Ctr., Inc. v. Brown, Nos. 11-391 and 11-394 (U.S. Feb. 21, 2012).
U.S. Court In Texas Refuses To Compel Arbitration Of Dispute Between
Insurer and Professional Associations Under Physician-Owners’ Network
Agreements
A federal district court in Texas denied August 10, 2011 a defendant insurer’s motion to compel
arbitration of an action brought by several professional associations (PAs) pursuant to network
participation agreements signed by their physician owners but not the PAs themselves.
The U.S. District Court for the Southern District of Texas refused to enforce binding arbitration
requirements in the agreements because the plaintiff PAs were non-signatories to the
agreements and not referenced therein, no evidence showed plaintiffs sought and obtained direct
benefits under the agreements, and there was no reason to pierce the corporate veil.
Each plaintiff entered into an agreement with The Palladium for Surgery—Houston, L.L.P. that
allowed their physicians to perform outpatient surgeries at the ambulatory surgery center in
exchange for a facility fee.
Most of the physician-owners also had network agreements with United Healthcare Services.
Those agreements included mandatory arbitration provisions.
Plaintiffs submitted health insurance claims to United, as well as other insurers, for
reimbursement of the Palladium facility fee. United paid the claims until late 2009, when it
demanded repayment of the previously paid facility fees from plaintiffs and refused to pay any
future fees.
According to United, the facility fees were part of an illegal kickback scheme and therefore
plaintiffs were not entitled to reimbursement.
Plaintiffs sued United and Ingenix, Inc., asserting claims for negligent misrepresentation, breach
of an “implied-in-fact” contract, violations of state insurance law, quantum meruit, and
promissory estoppel. United moved to compel arbitration pursuant to the network agreements.
The court denied the motion, finding the physician-owners, not plaintiffs, signed the network
agreements and therefore the PAs were not bound to arbitrate their dispute.
In many cases, the court noted, plaintiffs were not even in existence when their physicianowners signed the agreements, nor did the agreements provide the mandatory
arbitration requirements applied to plaintiffs.
United advanced a “direct-benefit estoppel” theory as a reason for subjecting plaintiffs to the
mandatory arbitration agreements, arguing the PAs “embraced the contract despite their nonsignatory status, but then, during litigation, attempt[ed] to repudiate the arbitration clause in
the contract.”
But the court noted no evidence plaintiffs sought and obtained direct benefits under the
agreements. Rather, the court pointed to evidence that the physicians billed United for the
physician fees as “in network” under the agreement, while plaintiffs billed United for the facility
fees as “out-of-network” using the professional association’s tax identification number.
United also argued the court should “pierce the corporate veil” and apply the mandatory
arbitration provisions to plaintiffs under an alter ego theory.
But the court refused, noting no evidence the physician-owners exercised control over the PAs to
defraud United.
DAC Surgical Partners, P.A. v. United Healthcare Servs., Inc., No. H-11-1355 (S.D. Tex. Aug. 10,
2011).
Sixth Circuit Finds Fired Employee Not Bound By Arbitration Clause
The Sixth Circuit reversed and remanded August 30, 2011 a case granting a nursing home’s
motion to compel arbitration in an employment dispute.
The appeals court found the employee could not be bound by the arbitration clause that was in a
document the employee never saw and had no reason to believe contained such a clause.
Plaintiff Maureen Hergenreder worked as a nurse for Bickford Senior Living Group. A short time
after she was hired, she took a leave of absence for cancer treatment. When she was ready to
return to work, she was instead terminated.
Plaintiff sued, alleging her firing violated the Americans with Disabilities Act. Bickford moved
to stay the proceedings and compel arbitration.
When she was hired, plaintiff signed multiple documents, including an acknowledgment that she
had read and understood the terms of Bickford’s Employee Handbook.
The handbook refers to the Eby Companies Dispute Resolution Procedure (DRP), which requires
employees to submit to arbitration. Although plaintiff never actually signed the DPR, the trial
court found she was bound by it and granted Bickford’s motion to compel arbitration.
On appeal, Hergenreder argued she was never informed that the DRP contained arbitration terms
and constituted an arbitration agreement. In addition, plaintiff argued that, although she
acknowledged reading and understanding the handbook, neither the handbook nor the specific
reference to the DRP constituted an agreement in any way.
The appeals court agreed. “There was neither an offer nor an acceptance,” the appeals court
noted.
The handbook’s reference to the DPR “says nothing about arbitration, and it says nothing that
would indicate to Hergenreder that accepting or continuing her job with Bickford would constitute
acceptance.”
“[T]his court’s inquiry is focused on whether there is an objective manifestation of intent by
Bickford to enter into an agreement with (and invite acceptance by) Hergenreder, and we are not
convinced that there is any such manifestation made by Bickford in the record in this case,” the
appeals court said.
Furthermore, even if Bickford were deemed to have made an offer to Hergenreder, “we see no
evidence that Hergenreder ‘manifest[ed] an intent to be bound by the offer, and all legal
consequences flowing from the offer, through voluntarily undertaking some unequivocal act
sufficient for that purpose,’” the appeals court held.
The appeals court went on to review the cases cited by Bickford, but found no support for its
arguments in Michigan law.
Lastly, the appeals court found plaintiff did not knowingly and voluntarily waive her right to a
jury trial.
Hergenreder v. Bickford Senior Living Grp., LLC, No. 10-1474 (6th Cir. Aug. 30, 2011).
Florida Supreme Court Invalidates Arbitration Agreements Limiting
Remedies In Cases Alleging Nursing Home Negligence
On November 23, 2011, the Florida Supreme Court struck down provisions in a nursing home
agreement requiring arbitration in accordance with rules that limited certain remedies and
denying the arbitrator authority to award punitive damages.
The high court determined that these provisions violated public policy by undermining remedies
set forth in the Nursing Home Residences Act (Fla. Stat. §§ 400.022-023 (2003)).
The first issue the court addressed was procedural: who decides whether the agreement to
arbitrate violates public policy. In ruling that this was a decision for the court, not the arbitrator,
the state high court distinguished the U.S. Supreme Court’s recent decision Rent-A-Center, West,
Inc. v. Jackson, 130 S. Ct. 2772 (2010)).
In that case, Rent-A-Center moved to compel arbitration pursuant to an agreement Jackson
signed as a condition of employment. Jackson argued the entire agreement was unconscionable.
The U.S. Supreme Court held that because the parties had agreed to arbitrate the enforceability
of the agreement, and Jackson challenged the entire agreement, not the specific provision
delegating authority to determine enforceability, the delegation provision was controlling.
The Florida Supreme Court distinguished Jackson because the arbitration agreement before it did
not specifically delegate the authority to determine enforceability to the arbitrator.
Finally, the high court determined that the limitation of remedies provision at issue could not be
severed from the remainder of the agreement to arbitrate because it went to the heart of the
agreement and severance would force the trial court to rewrite the agreement to add new rules
and standards.
South Dakota Supreme Court Says Arbitral Forum Not Integral To
Nursing Home Arbitration Agreement
The South Dakota Supreme Court reversed December 28, 2011 a lower court’s refusal to compel
arbitration of a wrongful death action against a nursing home because the arbitral forum
designated in the agreement signed by the resident’s husband was no longer available.
The high court noted the agreement was governed by the Federal Arbitration Act (FAA), which
includes a provision for appointing a substitute arbitrator when the designated arbitral forum
becomes unavailable. See Section 5 of the FAA.
According to the high court, in the instant case, nothing in the language of the agreement
suggested the designation of a specific arbitration code of procedure “was as important as the
agreement to arbitrate.”
Thus, Section 5 applied and required the appointment of a substitute arbitrator.
Katherine Wright’s husband, Lewellyn Wright, signed an agreement on his wife’s behalf when she
was admitted to a nursing home owned by GGNSC Holdings LLC (GGNSC) that required binding
arbitration of all disputes regarding her care.
The agreement also provided the arbitration would occur “in accordance with the National
Arbitration Forum [NAF] Code of Procedure.”
After Katherine died, Wright sued the nursing home for wrongful death. GGNSC moved to compel
arbitration.
In the interim, the NAF entered into a settlement with the Minnesota Attorney General in which it
agreed to discontinue arbitrating consumer disputes and therefore was unavailable to administer
the instant dispute.
The lower court raised the issue of NAF’s unavailability sua sponte and denied GGNSC’s motion
to compel arbitration on that basis.
GGNSC argued the NAF and its Code of Procedure were not integral to the parties’ agreement to
arbitrate and therefore a substitute arbitrator should be appointed under Section 5 of the FAA.
Reversing, the high court agreed with GGNSC.
In so holding, the high court first noted the FAA specifically applied to the agreement, both by its
terms and by the fact that GGNSC’s business operated in interstate commerce.
Next, the high court found the NAF Code of Procedure was not “integral” to the arbitration
agreement and could be applied by a substitute arbitrator.
Unlike the lower court, the high court did not view the NAF Code as requiring the appointment of
an NAF arbitrator. Nor did the Code preclude a substitute arbitrator, “in a non-NAF administered
arbitration, from using the same substantive law and procedural rules as would have been
applied under the NAF Code,” the high court said.
Rather, the high court held, “a substitute arbitrator could apply common procedural rules like
those found in the NAF Code of Procedure and public domain; and a substitute arbitrator would
be required to apply the same substantive rule.”
Moreover, the high court continued, “this is not a case in which the record suggests that the
experience of the NAF in the nursing home field was vital to the parties and no other arbitrator
could perform the arbitration.”
Given these circumstances, the high court reversed and remanded for the appointment of a
substitute arbitrator under Section 5 if Wright’s other pending defenses to arbitration failed.
Wright v. GGNSC Holdings LLC, 2011 S.D. 95 (S.D. Dec. 28, 2011).
In a companion case, the Florida Supreme Court applied the same reasoning to overturn
provisions in a nursing home admission agreement that compelled arbitration and capped noneconomic damages at $250,000 and waived punitive damages. The court also found these
provisions non-severable because they went to the financial heart of the agreement.
Shotts v. OP Winter Haven Inc., No. SC08-1774 (Fla. Nov. 23, 2011).
Gessa v. Manor Care of Fla., Inc. No. SC09-768 (Fla. Nov. 23, 2011).
Third Circuit Upholds Class Arbitration
The Third Circuit affirmed April 3, 2012 a decision by the U.S. District Court for the District of
New Jersey to confirm an arbitrator’s award of class-wide relief.
In 1998, Oxford Health Plans, LLC (Oxford) presented John Ivan Sutter, M.D. with a Primary
Care Physician Agreement. It stated: “No civil action concerning any dispute under this
Agreement shall be instituted before any court” and required arbitration of all such disputes.
When Sutter sued Oxford for underpayment in 2002, he sought classwide relief.
After the case was ordered into arbitration, the arbitrator determined the agreement authorized
a class action.
The Third Circuit agreed, distinguishing Stolt-Nielson S.A. v. AnimalFeeds Internat’l Corp., 130 S.
Ct. 1758 (2010).
In Stolt-Nielson, the U.S. Supreme Court held an arbitrator cannot allow class arbitration unless
the parties’ contract calls for it. The Third Circuit noted, however, that the contract need not
explicitly state that class actions are authorized.
In this case, the arbitrator reasoned the phrase “civil action concerning any dispute” necessarily
includes class actions, and that if class relief is unavailable in court, it is available in arbitration
absent an agreement to the contrary.
The Third Circuit found this interpretation was rational.
Sutter v. Oxford Health Plans LLC, No. 11-1773 (3d Cir. Apr. 3, 2012).
Employment and Labor
Maine High Court Finds Restrictive Covenants In Doctor’s Employment
Covenant Enforceable
Maine’s highest court held May 26, 2011 that the restrictive covenants contained in three
doctors’ employment contracts were reasonable and thus the doctors must pay the liquidated
damages contained in the contracts after violating the covenants.
In so holding, the Maine Supreme Judicial Court agreed with the trial court that the covenants
protected a legitimate business interest of the doctors’ former employer.
Sisters of Charity Health System, Inc. (SOCHS) sued its former employees Douglas Farrago,
M.D., Raymond Stone, D.O., and Carolyn Kase, D.O. (collectively, defendants) to enforce
restrictive covenants contained in their employment contracts.
The “Limitation of Practice” clause in their contracts forbade the doctors from practicing medicine
with Central Maine Healthcare Corporation, its affiliates, or its subsidiaries within a 25-mile
radius for a period of two years from the date of the termination or dismissal.
Eventually, Farrago, Kase, and Stone terminated their employment with SOCHS and became
employees of Central Maine Medical Center.
The trial court enforced the restrictive covenants and ordered each doctor to pay SOCHS
$100,000 pursuant to the liquidated damages clauses in their contracts.
On appeal, defendants argued the covenants were unenforceable because they were not
designed to protect a legitimate business interest of SOCHS.
The high court noted that it “previously recognized existing patients and business goodwill as
legitimate interests that may be protected through a restrictive covenant.”
Here, the high court agreed with the lower court that protecting SOCHS' patient base and
goodwill were legitimate business interests.
The high court turned next to the doctors’ challenge to the liquidated damages clause.
In order for a liquidated damages clause to be enforceable, it must meet a two-part test, the
high court said.
First, it must be “very difficult to estimate [the damages caused by the breach] accurately,” and
second, the amount fixed in the agreement must be a reasonable approximation of the loss
caused by the breach.
As to the first prong, the high court found at the time the parties executed their employment
contracts, it was not possible to determine how many patients would leave with their doctor or
how much revenue those patients would have generated.
Second, considering evidence demonstrating it takes two to three years for a replacement
physician to generate income at a level commensurate with that of an established doctor, and
that 1,373 patients requested their medical records be transferred following these doctors’
breaches, the amount of damages fixed in the contract was a reasonable approximation of the
damages that SOCHS would incur, the high court found.
Sisters of Charity Health Sys., Inc. v. Farrago, No. 2011 ME 62 (Me. May 26, 2011).
Ninth Circuit Says Physician’s Retaliation Claim Should Be Tried By A
Jury
A physician’s claim that he was fired in retaliation for making a confidential complaint to the
California Department of Health Services (DHS) about the developmental center where he
worked should not have been disposed of on summary judgment, the Ninth Circuit held May 27,
2011 in an unpublished opinion.
The appeals court also concluded, however, that the district court properly rejected the
physician’s First Amendment retaliation claim against his employer, Sonoma Developmental
Center (SDC), for reporting suspected patient abuse to his supervisor.
The appeals court agreed because his reporting of mistreatment to an SDC superior fell squarely
within his duties as an SDC physician, he was not entitled to First Amendment protection for that
action.
In addition to his First Amendment retaliation claim, Dr. Van A. Pena also appealed the district
court’s grant of summary judgment to defendants (SDC, its Medical Director Judith Bjorndal, and
its Executive Director Timothy Meeker) on his claim that he was fired after lodging a complaint
with DHS concerning the removal of patient photographs from files at SDC.
According the facts set forth in the opinion, as a result of Pena’s complaint, DHS issued a
statement of deficiencies to SDC, requiring Meeker to implement a plan of correction modifying
SDC’s polices for removal of patient photographs.
One week later, Pena’s habit of taking patient photographs was raised as a “big issue” at a
meeting attended by Bjorndal and Meeker. Pena also presented evidence that he had a
reputation among his SDC superiors, as a “repeat whistleblower whose complaints of patient
mistreatment threatened to subject SDC to legal liability.”
The district court granted defendants summary judgment after finding Pena failed to raise a
genuine issue of material fact that Bjorndal knew Pena was the one responsible for the DHS
complaint.
Reversing, the Ninth Circuit viewed the close proximity in time between the imposition of the
corrective action plan and the issue of Pena’s picture taking being raised during the executives’
meeting, as well as the perception of Pena as “troublesome whistleblower,” as strong
circumstantial evidence “from which a reasonable factfinder could infer that SDC leadership,
including Bjorndal, suspected Pena of having filed the DHS complaint and retaliated against him
on that basis.”
Pena v. Meeker, No. 10-15326 (9th Cir. May 27, 2011).
Sixth Circuit Affirms Judgment For Hospital On Physician’s
Discrimination, Interference Claims
The Sixth Circuit in a unpublished decision affirmed July 8, 2011 a lower court decision granting
summary judgment in favor of a hospital that was sued by a physician on various claims of racial
discrimination and tortious interference.
In 2003, 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)
on 16 counts related to an income guarantee agreement (IGA) that Grain entered into with
Mercy.
That agreement guaranteed Grain a certain annual income for three years in exchange for
Grain’s neurosurgery and emergency room services. Grain signed a release terminating the IGA
in February 1999.
Grain alleged that, prior to his signing the release, defendants plotted over a several-month
period to terminate his IGA and replace him. Grain also alleged after he signed the release,
Mercy transferred all neurosurgery cases out of Mercy and refused to refer any patients to him,
which effectively inhibited him from building his own practice.
In addition, Grain alleged, as a result of Mercy’s actions, he tried to leave the hospital and seek
employment with another hospital in Ohio. However, that hospital broke off negotiations with
him upon receiving a “scathing and defamatory” review of Grain from the director of Mercy’s
emergency department, according to Grain.
Plaintiffs’ claims included racial discrimination under 42 U.S.C. § 1981 (prohibiting discrimination
in the making and enforcement of contracts), and various contract and tortious interference
claims.
The district court found certain of plaintiffs' state law claims 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. In an
earlier decision, the Sixth Circuit also declined to increase the arbitration award.
Plaintiffs returned to district court to litigate their civil rights claims. The district court granted
summary judgment in defendants’ favor.
Affirming, the Sixth Circuit found plaintiffs’ racial discrimination claim was time barred because
they failed to prove any contractual interference that occurred within the four-year statute of
limitations.
Grain signed the release from the IGA in February 1999, which was more than four years prior to
the filing of the complaint. Grain argued the IGA was supposed to last until June 2000, with the
potential for additional extensions, and therefore he continues to suffer the effects of the alleged
discrimination.
Rejecting this argument, the appeals court noted the statute of limitations accrues at “the time
of the discriminatory act, not the point at which the consequences of the act become painful.”
Plaintiffs also argued the relevant discriminatory act occurred in April 2003, when defendants
shuttered the intracranial-surgery program in violation of the hospital bylaws. The district court
held, however, the bylaws created no contract between Grain and Mercy, and the appeals court
agreed.
Plaintiffs further contended closing the intracranial-surgery program prevented Grain from
entering into future contractual relationships with referral sources and third-party payors.
Even assuming plaintiffs presented sufficient evidence that defendants impaired their proposed
contractual relationships, plaintiffs still failed to create a genuine issue of material fact as to
whether defendants’ closure of the intracranial program was a pretext for discrimination.
Defendants claimed they closed the program due to concerns about patient safety, the low
volume of cases, and financial considerations. Plaintiffs failed to refute any of these “compelling
nondiscriminatory reasons,” the appeals court found.
The appeals court went on to reject the remainder of plaintiffs’ claims on similar grounds—i.e.,
as time barred or for failing to rebut defendants’ cited nondiscriminatory reasons for closing the
program.
Grain v. Trinity Health, No. 09-2531 (6th Cir. July 8, 2011).
Maryland High Court Affirms Dismissal Of Wrongful Termination
Claim Against Drug Company
The Maryland Court of Appeals affirmed July 19, 2011 the dismissal of a wrongful termination
claim brought by a former Alpharma Inc. employee who alleged the company fired her after she
complained it illegally marketed the drug Kadian, a slow-release form of morphine used to
manage pain.
The high court found Debra Parks, who worked as a sales representative for Alpharma from April
2002 to July 2006, failed to identify a clear public policy that the company violated for purposes
of her wrongful termination claim. Alpharma.
The U.S. District Court for the District of Maryland dismissed April 11 Park’s retaliation claim
under the False Claims Act (FCA) against Alpharma, which was acquired by King Pharmaceuticals
in 2008. United States ex rel. Parks v. Alpharma Inc., No. RDB-06-2411 (D. Md. Apr. 11, 2011).
In March 2010, the Department of Justice and various states reached a $42.5 million settlement
with Alpharma resolving allegations it paid kickbacks to physicians so they would prescribe
Kadian and misrepresented the safety and efficacy of the drug. As part of the settlement, Parks
received $5.33 million from the federal share of the recovery.
Parks brought the instant case in state court for wrongful termination in violation of public policy.
According to Parks, she repeatedly reported to various individuals at Alpharma her concerns
about the marketing of Kadian, and Alpharma “retaliated against her” by terminating her
employment in July 2006.
Kadian identified three statutes as the basis for her claim of wrongful termination in violation of
public policy: the Maryland’s Consumer Protection Act and the Federal Trade Commission
(FTC) Act (alleging Alpharma had a duty to refrain from engaging in “unfair or deceptive trade
practices”) and Food and Drug Administration (FDA) drug labeling regulations (alleging Alpharma
had a duty to place warnings on the Kadian drug label when it learned of the potential for “dose
dumping” with alcohol consumption).
The trial court dismissed the action, finding Parks did not identify any clear mandate of public
policy Alpharma allegedly violated and she allegedly reported that would satisfy the requirements
of a wrongful discharge claim.
While the appeal was pending in the intermediate court, the high court decided to hear the case
on its own initiative.
Affirming the ruling below, the high court agreed that Parks failed to articulate a clear public
policy mandate to support her wrongful discharge claim.
The high court found the Maryland Consumer Protection Act and the FTC Act did not “provide the
specificity of public policy that we have required to support a wrongful discharge claim.”
Instead, the high court said, these statutes were too broad to serve as the basis for a wrongful
discharge claim.
Likewise, the high court concluded the FDA regulations did not provide a clear public policy
mandate. “[I]f we were to recognize a mandate in the FDA’s labeling standard, we are at a loss
for articulating precisely what the contours of that mandate would be,” the high court
commented.
Parks v. Alpharma, Inc., No. 115 (Md. July 19, 2011).
Fifth Circuit Finds Indian Cardiologists Adequately Pled Equal
Protection Claims Against Hospital
The Fifth Circuit reversed January 13, 2012 in part and affirmed in part a lower court’s holdings
in a discrimination action brought by three Indian cardiologists against the hospital where they
formerly practiced.
Although the appeals court found the hospital’s actions did not violate the cardiologists’ due
process rights, it found plaintiffs adequately asserted an equal protection claim.
Plaintiffs Ajay Gaalla, M.D., Harish Chandna, M.D., and Daksheesh Parikh, M.D., all cardiologists
of Indian origin, regularly admitted their patients at Citizens Medical Center (CMC), a countyowned, nonprofit hospital.
Starting in 2007, according to plaintiffs, CMC began denying them privileges for implantable
cardioverter defribillators, while granting those privileges to less qualified, non-Indian physicians.
Plaintiffs also alleged a host of other purported discriminatory actions taken by CMC.
CMC ultimately passed a resolution that limited the hospital’s cardiology department to one
group of cardiologists. Plaintiffs sued the hospital and several of its physicians (defendants)
seeking a temporary restraining order and preliminary and permanent injunctions as well as
asserting discrimination claims.
The district court eventually held the cardiologists had a property interest in their privileges at
CMC and that the resolution terminated those privileges without providing due process.
In addition, the district court found a genuine dispute as to whether racial animus motivated the
hospital and thus denied defendants qualified immunity.
Due Process Claims
The appeals court first noted that in ruling on the cardiologists’ due process claims, the district
court was not able to consider the appeals court’s previous ruling reversing its grant of the
preliminary injunction.
In that opinion, the Fifth Circuit held that, because the resolution had a conceivable rational
basis, the cardiologists’ substantive due process claim did not have a substantial likelihood of
success.
Noting its prior findings “are now binding law of the case” and the instant appeal “contains no
new facts that substantially change these legal conclusions,” the appeals court held the
cardiologists’ claim that the resolution violated their substantive due process rights “must fail.”
The appeals court said its previous opinion “also forecloses the Cardiologists’ procedural due
process claim.”
Turning to the issue of qualified immunity, the appeals court found because it held defendants
did not violate the cardiologists’ due process rights, defendants were protected by qualified
immunity on those claims.
Equal Protection Claims
The appeals court next considered plaintiffs’ claim that the resolution violated their equal
protection rights because it was motivated by racial animus.
The district court’s finding that the resolution was motivated by a discriminatory purpose dictated
strict scrutiny review, the appeals court explained, thus defendants must show the resolution
was “narrowly tailored to further a compelling governmental interest.”
However, defendants failed to make that showing; therefore, “[b]ecause the Resolution does not
withstand strict scrutiny, the Cardiologists have adequately made out an equal protection claim,”
the appeals court held.
Accordingly, the appeals court said, the hospital’s board members were not entitled to qualified
immunity, and the district court properly denied them summary judgment on that claim.
Lastly, the appeals court remanded two issues to the lower court for further consideration. First,
the district court must consider individually plaintiffs’ claims that one particular physician
defendant violated the their equal protection rights.
Second, the lower court should consider the supplemental jurisdiction argument made by
another physician defendant, the appeals court held.
Gaalla v. Brown, No. 10-41332 (5th Cir. Jan. 13, 2012).
Third Circuit Finds Physician Failed To Show Employment Contract
Was For Definite Term
The Third Circuit in a January 23, 2012 non-precedential decision agreed with a lower court that
the physician plaintiff failed to show he had an employment contract with his former employer
for a definite term as opposed to at-will employment.
Accordingly, the appeals court affirmed the lower court’s grant of summary judgment to the
employer on the physician’s breach of contract claims.
Plaintiff Philip Edwards is a licensed physician from the United Kingdom who specializes in
interventional radiology.
Edwards accepted employment with defendant Geisinger Clinic after negotiations in which he
stated he wanted to obtain board certification from the American Board of Radiology (ABR),
which Geisinger requires new physicians to receive.
It was discussed that Geisinger would develop a program that would enable Edwards to obtain
board certification within four to six years.
One to two months after Edwards began working for Geisinger, he signed a Practice Agreement,
which was referenced in his original offer letter, that specified his employment with Geisinger
was “at will” and “may be terminated at any time by either party for any or no reason.”
Approximately a year later, Geisinger terminated Edwards’ employment. Edwards then sued
Geisinger for breach of contract.
Geisinger moved for summary judgment, arguing Edwards’ employment contract was at-will, and
the district court agreed.
On appeal, Edwards argued he and Geisinger entered into an express employment contract for a
definite term, citing Geisinger’s emphasis on the ABR’s four-year residency requirement for
board certification during recruitment discussions and in its offer letter, among other things.
The appeals court explained that to overcome Pennsylvania’s presumption of employment at-will,
an employee “must show clear and precise evidence” that the parties intended to enter an
employment contract for a definite term.
Here, the appeals court found instead “that Geisinger and Edwards demonstrated their mutual
intent for Edwards to be an employee at-will when they both willingly signed the Practice
Agreement.”
The appeals court next held Geisinger’s statements concerning employment for four to six years
during recruitment discussions and in the offer letter “were too vague to establish an express
contract for a definite term.”
“We do not believe that Geisinger’s statements demonstrated that it intended to guarantee at
least four years of employment,” the appeals court said.
The appeals court likewise found none of Edwards’ other arguments raised any genuine dispute
of material fact supporting his claim that he had an express employment contract for a definite
term.
Edwards v. Geisinger Clinic, No. 11-1528 (3d Cir. Jan. 23, 2012).
U.S. Court In New York Denies Hospital Summary Judgment, Says
Physician Could Be Employee For Purposes of Discrimination,
Retaliation Claims
On remand from the Second Circuit, a federal court in New York denied April 3, 2012 summary
judgment to a hospital defendant in a physician’s lawsuit alleging discrimination and retaliation
because it was unclear whether she was an employee or an independent contractor.
The U.S. District Court for the Western District of New York found a genuine issue of material
fact as to the level of control the hospital exerted over the physician’s work through its peer
review process, leaving open the key issue of whether she was an employee for purposes of the
antidiscrimination laws.
Plaintiff Dr. Barbara Salamon sued Our Lady of Victory Hospital (OLV) and several of its
physicians (collectively, defendants) alleging sexual discrimination in violation of Title VII of the
Civil Rights Act of 1964 and the New York State Human Rights Law.
According to Salamon, one of the hospital physicians, Dr. Michael C. Moore, sexually harassed
her and, when she complained, used his position as a hospital administrator to subject her to
negative performance reviews that damaged her reputation.
Defendants moved for summary judgment, arguing Salamon, a board-certified
gastroenterologist, was an independent contractor and not an employee of the hospital, thus
falling outside of the antidiscrimination laws.
Salamon asserted, however, the hospital’s “quality assurance program included detailed
requirements as to when and how her work was to be performed.”
According to Salamon, after she complained about the alleged sexual harassment, the hospital
peer review committee scrutinized her work substantially more than other comparable physicians
and raised quality of care concerns that had never been voiced before.
Applying the Supreme Court’s non-exclusive list of 13 factors for analyzing employment status,
the district court concluded Salamon was an independent contractor.
The Second Circuit reversed, finding a genuine issue of material fact on what it called the “most
important factor” for determining the existence of an employment relationship—i.e. “the hiring
party’s right to control the manner and means” by which the work is accomplished. Salamon v.
Our Lady of Victory Hosp., No. 06-1707-cv (2d Cir. Jan. 16, 2008).
On remand, the court concluded this factor cut in Salamon’s favor because of the extensive
nature of the hospital’s quality assurance program and “reeducation” requirement,
which mandated how she was to perform certain procedures.
In so holding, the court rejected defendants’ counter argument that statutory and regulatory
requirements necessitate all hospitals to exert some control over the manner and means by
which physicians render medical care. The court seemed to indicate that the level of control
exerted by the hospital went beyond maintaining the standard of care.
As to the other factors, the court found some favored the hospital’s position that she was an
independent contractor while others tilted to Salamon’s status as an employee.
The court therefore held it could not grant the hospital summary judgment, as these disputed
issues had to be resolved by the fact-finder.
Salamon v. Our Lady of Victory Hosp., No. 99-CV-048S (W.D.N.Y. Apr. 3, 2012).
EMTALA
U.S. Court In Nevada Finds Hospital Not Equipped To Provide Mental
Health Screening Did Not Violate EMTALA
The U.S. District Court for the District of Nevada dismissed July 13, 2011 claims a hospital
violated the Emergency Medical Treatment and Labor Act (EMTALA).
According to the court, under EMTALA, a hospital is only required to provide a screening that is
within the capability of the hospital’s emergency department.
Here, the hospital clearly lacked the capacity to provide a mental health screening, and thus
EMTALA did not apply, the court found.
Oscar Aniceto Mejia-Estrada committed suicide while in the care of Sunrise Hospital and Medical
Center approximately 12 hours after his arrival.
Mejia-Estrada’s relatives (plaintiffs) sued Sunrise and others for violations of EMTALA and
medical malpractice.
The court dismissed plaintiffs’ EMTALA claims, noting the statute explicitly limits the screening
examination that a hospital must provide to one that is within the capability of the hospital’s
emergency department.
“The record clearly establishes here that while Defendant Sunrise Hospital performed a medical
screening of Mr. Mejia on July 27, 2008, it did not at that time have the capability to perform
mental health screening,” the court found.
Instead, Mejia was moved to the hospital's Discharge and Observation Unit until he could receive
the requisite psychiatric evaluation from Southern Nevada Adult Mental Health, to determine
whether he would be admitted to their psychiatric facility.
Accordingly, the court found no genuine issues of material fact that Sunrise Hospital violated
EMTALA by discriminatorily failing to provide a mental health screening.
“Sunrise Hospital cannot be charged with discriminating against Mr. Mejia by failing to provide
him with mental health screening where the hospital lacked the capacity to do so,” the court
held.
But the court refused to dismiss plaintiffs’ medical malpractice claims, finding discovery in the
case still ongoing.
Esperanza v. Sunrise Hosp., Nos. 2:10-CV-01228, 2:10-CV-01983 (D. Nev. July 13, 2011).
U.S. Court In California Says Third-Parties Lack Standing Under
EMTALA
Third-party relatives of living patients lack standing to bring suit under the Emergency Medical
Treatment and Labor Act (EMTALA), the U.S. District Court for the Northern District of California
held September 21, 2011.
Pro se plaintiff Faiza Marie Pauly alleged in the case that she brought her 10-year old daughter,
M.P., to defendant Stanford Hospital & Clinics’ emergency room for treatment of severe and
acute abdominal pain, and that Stanford refused to treat M.P.
The court dismissed plaintiff’s complaint, with leave to amend, on the basis that Pauly lacks
standing to bring suit on her own behalf under EMTALA.
Pauly eventually filed a first amended complaint omitting the prior claims asserted on her own
behalf and instead asserting EMTALA claims only on behalf of her minor daughter.
She subsequently filed a second amended complaint again asserting EMTALA claims on behalf of
her daughter. She also filed a motion for reconsideration of the court's earlier order, a motion to
vacate that order, and a motion for summary judgment.
But the court affirmed its earlier holdings in the case, on all but one narrow issue.
Regarding plaintiff’s standing to bring suit under EMTALA, the court affirmed its earlier holding
that third-parties do not have standing.
The court rejected plaintiff’s argument that she was a "co-patient" along with her daughter, and
thus she had standing to sue under EMTALA.
“While the argument has some facial appeal, particularly in light of Pauly's factual allegations
regarding her daughter's treatment, the Court declines to extend the statute in the manner Pauly
suggests absent any support in the legislative history or relevant case law,” the court held.
The court did allow plaintiff leave to amend on one narrow issue. According to the court, it must
dismiss M.P.'s claims unless M.P. is represented by counsel. Accordingly, the court allowed leave
to amend on the issue of counsel only.
Pauly v. Stanford Hosp. and Clinics, No. 5:10-cv-05582-JF (N.D. Cal. Sept. 21, 2011).
U.S. Court In Vermont Allows Negligence, EMTALA Screening Claims
Against Hospital
The U.S. District Court for the District of Vermont allowed to go forward a patient’s medical
negligence and Emergency Medical Treatment and Labor Act (EMTALA) screening claim against a
hospital and the treating physician.
The court found, however, that the plaintiff failed to adequately establish an EMTALA stabilization
claim and therefore granted the hospital summary judgment on that claim.
Amy Hale was treated in the emergency room of Northeastern Vermont Regional Hospital
(NVRH) on May 18 by Dr. Paul M. Newton after she complained of pain in her neck and pain
radiating into her temples and back.
Newton diagnosed her with torticollis, a stiff neck associated with muscle spasm, and prescribed
a pain medication and muscle relaxant. On May 21, Hale came back to the emergency room and
was again seen by Newton, who ordered a lumbar puncture and CT scan.
Those tests came back suspicious for an intracranial bleed. Hale was then transferred to
Dartmouth Hitchcock Medical Center (DHMC), where she underwent further testing and was
diagnosed with a brain aneurysm.
On May 23, DHMC doctors performed surgery during which the aneurysm ruptured. As a result of
the rupture, Hale suffered neurological injuries with devastating and permanent effects.
Plaintiff Carl Hale, as guardian of Amy, sued NVRH and Newton for medical negligence and
violating EMTALA, alleging their original misdiagnosis delayed Hale's treatment and caused the
irreversible brain damage.
Defendants moved for summary judgment on the negligence claim, and NVRH moved for partial
summary judgment on the EMTALA claim.
Defendants argued they were entitled to summary judgment on plaintiff’s professional
negligence claim because plaintiff could not establish the requisite causal connection between the
alleged negligent conduct and Hale's injuries.
The court disagreed with defendants that plaintiff’s expert testimony was not sufficient to carry
plaintiff's burden to show but-for causation.
Instead, the court found plaintiff successfully raised a fact issue as to causation based on her
expert’s testimony.
“At the least, a reasonable jury, after hearing Dr. Chavali's testimony, could find the
deterioration in Ms. Hale's condition between May 18 and May 21, would not have happened if
Dr. Newton had properly diagnosed her on May 18,” the court reasoned.
Turning to plaintiff’s EMTALA stabilization claim, the court pointed out that plaintiff admitted
Newton diagnosed torticollis on May 18 and did not suspect an intracranial bleed, arguably an
emergency medical condition, until May 21.
“Accordingly, Plaintiff has failed to create a material issue of fact as to the actual knowledge
requirement for an EMTALA stabilization claim and NVRH is entitled to summary judgment as to
that claim,” the court held.
However, the court did find a material issue of fact as to whether NVRH performed a screening
examination that conformed to its standard screening procedures.
The court noted that on prior occasions Hale had presented to the emergency room with head
pain and received a lumbar puncture.
Thus, “[w]ithout the luxury of evidence of any written policy at NVRH, the Court concludes a jury
could reasonably infer that NVRH's standard screening includes performing a lumbar puncture
when a patient presents with head pain,” the court found.
“Viewing the facts in the light most favorable to the Plaintiff, there is a material issue of fact as
to whether this is a case of misdiagnosis based upon an appropriate screening examination or a
case of failure to provide an appropriate screening examination,” the court found.
“Accordingly, summary judgment is not appropriate as to Plaintiff's EMTALA screening claim.”
Hale v. Northeastern Vt. Reg’l Hosp., Inc., No. 1:08-cv-82-jgm (D. Vt. Sept. 30, 2011).
U.S. Court In Indiana Says EMTALA Amendment On Hospital-Owned
Ambulances Applies Retroactively
A federal district court in Indiana, reconsidering an earlier decision, granted summary judgment
to a hospital that disputed its liability under the Emergency Medical Treatment and Labor Act
(EMTALA) in light of a regulatory amendment that clarified the term “comes to the emergency
department” as it relates to hospital-owned ambulances.
The U.S. Court for the Southern District of Indiana in June refused to grant defendant Health and
Hospital Corporation of Marion County, Indiana, d/b/a Wishard Memorial Hospital d/b/a Wishard
Ambulance Service, summary judgment, finding a genuine dispute of material fact as to whether
plaintiffs Melissa Welch and her minor son came to the hospital’s emergency department as
defined by EMTALA.
At issue in the case was whether a 2003 amendment to 42 C.F.R. § 489.20 applied retroactively
to an alleged EMTALA violation that occurred in 2001.
The 2001 version of Section 489.20 defined “comes to the emergency department” to mean
“that the individual is on the hospital property,” which includes hospital-owned ambulances,
“even if the ambulance is not on hospital grounds.”
The 2003 amendment clarified that hospital-owned ambulances are not considered to have
“come to the hospital’s emergency department” if they are operating under a communitywide
emergency medical service (EMS) protocol and are diverted to the closest, appropriate facility.
In the instant case, defendant’s hospital-owned ambulance was operating under a
communitywide EMS protocol when it transported plaintiffs to another hospital.
Thus, plaintiffs’ failure to stabilize claim under EMTALA against defendant hinged on whether
they were on hospital property.
Following the court's ruling in June, defendant moved for reconsideration, arguing the judgment
was inconsistent with well-settled Seventh Circuit precedent that an agency’s regulation or
rule clarifying an unsettled or confusing area of law may be applied retroactively.
The court in its latest decision agreed that the 2003 amendment was a clarification of an
unsettled area of the law and therefore, under Seventh Circuit case law, could be applied
retroactively to this case.
The court rejected plaintiffs’ argument that the 2003 amendment amounted to a substantive
change, instead concluding the Department of Health and Human Services (HHS) specifically
indicated it adopted the amendment “to clarify the responsibilities of hospital-owned
ambulances” operating under EMS protocols.
The court said HHS’ designation of the 2003 amendment as a clarification was entitled to
deference.
In addition, the court concluded retroactive application of the amendment was due because HHS’
“clarification of the EMTALA’s reach over hospital-owned ambulances operating under EMS
protocols had been a constant source of confusion for hospitals.”
Beller v. Health and Hosp. Corp. of Marion County, IN, No. 1:03-cv-00889-TWP-TAB (S.D. Ind.
Nov. 4, 2011).
CMS Opts Not To Change EMTALA Regs, But Seeks Input On
Obligations Of Hospitals With Specialized Capabilities
The Centers for Medicare and Medicaid Services (CMS) has decided not to propose any changes
to its current regulations implementing the Emergency Medical Treatment and Labor Act
(EMTALA) as they pertain to hospital inpatients, according to a notice published in the February
2, 2012 Federal Register (77 Fed. Reg. 5213).
EMTALA rules provide a hospital’s obligation under EMTALA ends when a hospital, in good faith,
admits a patient with an emergency medical condition for purposes of providing stabilizing
treatment.
While the agency noted ongoing concerns about the application of EMTALA to hospital inpatients,
including some divergent court rulings, CMS said based on stakeholder input, which expressed
a preference for “a bright line policy,” it decided to maintain its current regulations on the issue.
“We continue to believe that this policy is a reasonable interpretation of the EMTALA statute,”
CMS said.
Although not proposing any changes, CMS is seeking comments on the EMTALA obligations of
hospitals with specialized capabilities that may receive transfers from the original admitting
hospitals of patients with unstabilized emergency medical conditions.
CMS’ current policy is that hospitals with specialized capabilities, such as burn units, shock
trauma units, neonatal intensive care units, or regional referral centers in rural areas, do not
have an EMTALA obligation to accept an appropriate transfer of an individual who has been
admitted in good faith as an inpatient at the first hospital.
However, CMS “will continue to monitor whether it may be appropriate in the future to
reconsider the issue” and, accordingly, is seeking further comments, which are due April 2.
EMTALA, known as the patient anti-dumping statute, applies to Medicare participating hospitals
and critical access hospitals.
U.S. Court In West Virginia Finds EMTALA Preempts State Certificate
Of Merit Statute
The U.S. District Court for the Southern District of West Virginia found March 2, 2012 that a
plaintiff could proceed with a private action under the Emergency Medical Treatment and Labor
Act (EMTALA) without receiving the screening certificate of merit required by state law because
EMTALA preempts the statute at issue.
Plaintiff Carl B. Cox presented to the emergency treatment facility at Cabell Huntington Hospital
(CHH) with a severely commuted arm fracture.
Plaintiff later sued, claiming he was discharged from CHH without being adequately screened or
stabilized, as required by EMTALA.
Defendant CHH moved to dismiss the claim, arguing plaintiff's claim in reality was one based on
negligent medical care, and, therefore, required a screening certificate of merit executed under
oath by a qualified expert before filing suit.
The court found while two sections of EMTALA expressly incorporate state law, neither would
apply to incorporate West Virginia’s screening certificate requirement.
Defendant next argued that because EMTALA provides "only state and local laws that directly
conflict with the requirements of EMTALA are preempted” and the state certificate of merit
requirement did not directly conflict with EMTALA, then plaintiff must comply with the state
statute.
But the court disagreed finding the statute’s “requirements directly conflict with the EMTALA
private right of action and are therefore preempted.”
The court highlighted that West Virginia's law contains specific waiting periods, and therefore
directly conflicts with EMTALA's statute of limitations, and noted that other provisions directly
conflict with the remedial purposes of EMTALA.
Cox v. Cabell Huntington Hosp., No. 3:11-0843 (S.D.W.V. Mar. 2, 2012).
ERISA
Fifth Circuit Holds ERISA Preempts State Law Claims Of Former Plan
Beneficiary
The Employee Retirement Income Security Act (ERISA) can preempt state claims brought by
former plan participants and beneficiaries where those claims “relate to” a qualifying employee
benefit plan, the Fifth Circuit held in an August 30, 2011 unpublished decision.
The appeals court noted it has long held that holding an employee benefit plan liable for claims
by individuals who were not otherwise entitled to benefits, based solely on an oral agreement,
would threaten the stability of the plan.
Plaintiff Michael King, Jr. sued defendants Bluecross Blueshield of Alabama and Bluecross
Blueshield of Louisiana (collectively, Blue Cross) in state court after undergoing a hip
replacement surgery that Blue Cross refused to pay for.
According to King, he was issued a Blue Cross policy in 2004 through his wife’s employee health
benefit plan, and this policy remained “in full force and effect” at all times relevant to this case.
King’s complaint also stated that he had conferred with Blue Cross representatives by phone and
confirmed that his policy was in effect and would cover the surgery.
However, Blue Cross contended King’s policy had been cancelled at some earlier date not
specified in the complaint.
Blue Cross removed the case to federal court and then moved to dismiss arguing ERISA
preempted King’s wrongful denial of coverage claims and King failed to exhaust his
administrative remedies as required by ERISA.
The trial court dismissed King’s claims and granted summary judgment to Blue Cross. King later
filed a Rule 59 motion for a new trial.
At this point, King abandoned his denial of coverage claim and now agreed with Blue Cross that
he was not covered by the policy when he underwent hip replacement surgery in January 2009
and instead argued before the court that because he was not covered as an employee health
benefit plan participant or beneficiary when Blue Cross’ oral misrepresentations allegedly
occurred, Louisiana law provided an independent cause of action for detrimental reliance that
was not preempted by ERISA.
The trial court denied the motion and King appealed.
On appeal, King argued that because he was not an ERISA-plan “beneficiary” at the time of Blue
Cross’ oral misrepresentations, his state detrimental reliance claim could not “relate to” an
employee health benefit plan.
However, the appeals court noted it “previously considered and rejected similar arguments by
former (and potential) ERISA-plan participants and beneficiaries.”
ERISA can preempt state claims brought by former plan participants and beneficiaries where
those claims “relate to” a qualifying employee benefit plan, the appeals court held.
Here, the court found King’s state detrimental reliance claim relates to a qualifying employee
health benefit plan and is preempted by ERISA.
The court acknowledged “it is likely that even if King had filed a timely administrative claim
under ERISA seeking redress for Blue Cross’s oral misrepresentations, that claim would have
been denied outright.”
“But that lack of a remedy does not take King’s state claim outside the scope of ERISA’s
preemption clause,” the appeals court held.
“[A]llowing King’s state claims to go forward could undermine the stability of the employee
benefit plan at issue and encroach upon the plan fiduciaries’ management of plan assets,” the
appeals court reasoned.
King v. Bluecross Blueshield of Ala., No. 10-31134 (5th Cir. Aug. 30, 2011).
Seventh Circuit Says Health Plan’s Action Against Hospital Did Not
Implicate ERISA
The Seventh Circuit held September 2, 2011 an action by a health plan and an employer seeking
to recover amounts paid to medical providers for care rendered to an uncovered minor did not
implicate the Employee Retirement Income Security Act (ERISA).
Specifically, the appeals court said, plaintiffs could not sue the providers under ERISA Section
502(a)(3) to enforce the terms of the plan, since the terms of the plan did not apply.
“ERISA has nothing to do with this case,” the Seventh Circuit said. “This case involves an ERISA
plan that paid medical providers for medical services they provided to an individual who is not
and never was covered under the ERISA plan,” the appeals court noted.
Plaintiffs Kolbe & Kolbe Health and Welfare Benefit Plan and Kolbe & Kolbe Millwork Company,
Inc. sued The Medical College of Wisconsin, Inc. and Children’s Hospital of Wisconsin, Inc.
(collectively, defendants) under ERISA Section 502(a)(3), the federal common law of ERISA, and
state common law to recover amounts the plan paid to defendants for medical treatment
provided to a minor child of a Kolbe Millwork employee. The child later was determined not to be
a “covered person” under the plan.
The U.S. District Court for the Western District of Wisconsin eventually dismissed the complaint
for failure to state a claim for relief and also granted attorneys’ fees to defendants of over
$62,000. Kolbe & Kolbe Health and Welfare Benefit Plan v. The Medical College of Wis., Inc., No.
09-cv-205-bbc (W.D. Wis. Feb. 9, 2010).
The appeals court agreed with the dismissal of the ERISA Section 502(a)(3) claim, but on
different grounds than the district court, which held plaintiffs had not stated a claim for equitable
relief.
Section 502(a)(3) permits participants, beneficiaries, and fiduciaries to bring a civil action “to
obtain other appropriate equitable relief . . . to redress [violations of the plan] . . . or . . . to
enforce . . . the terms of the plan.”
In bringing its action under this section, plaintiffs relied on a plan term giving the plan the right
to recover payments made in error.
But that provision, the appeals court observed, only applies with respect to a “covered person,”
which the minor in this case did not turn out to be.
“Accordingly, the ‘term’ of the Plan that plaintiffs allegedly seek to ‘enforce’ through § 502(a)(3)
has nothing to do with this suit,” the Seventh Circuit said.
The district court also dismissed plaintiffs’ unjust enrichment claim under the federal common
law of ERISA because they were seeking legal relief precluded by the statute.
While agreeing the claim should be dismissed, the Seventh Circuit again noted ERISA was in no
way implicated by the dispute and, therefore, there was no need to develop federal common law
under ERISA.
The appeals court did reverse, however, the district court’s decision finding ERISA preempted
plaintiffs’ state law claims.
“Since this case does not require interpreting or applying the Plan, nor does it relate to the Plan
in any significant way, plaintiffs’ state law claims are not preempted,” the appeals court said.
On remand, the Seventh Circuit said, the district court has discretion to exercise supplemental
jurisdiction.
Finally, the appeals court found the district court abused its discretion in awarding attorneys’
fees to defendants, holding plaintiffs’ litigation position in bringing all their claims was
substantially justified, taken in good faith, and was not aimed at harassing defendants.
Kolbe & Kolbe Health & Welfare Benefit Plan v. Medical College of Wis., Inc., Nos. 10-2284 and
10-3046 (7th Cir. Sept. 2, 2011).
Ninth Circuit Holds ERISA Preempts State Law HIPAA Claim, But Not
“Unfair Discrimination” Claim Under Insurance Law
The Employee Retirement Income Security Act of 1974 (ERISA) preempted a claim brought
under state law that prohibits health insurers from charging different premiums to “similarly
situated” participants on account of a participant’s “health status-related factor,” the Ninth
Circuit held October 18, 2011.
Affirming the district court’s grant of summary judgment to Blue Cross Blue Shield of Montana,
Inc. (Blue Cross) on this issue, the appeals court found the federal Health Insurance Portability
and Accountability Act of 1996 (HIPAA), which is part of ERISA, preempted the Montana “little
HIPAA” law, Mont. Code Ann. § 33-22-526(2)(a), both jurisdictionally and on the merits, because
the state law provision is identical to, and expressly relies on, federal law.
The appeals court reversed summary judgment in Blue Cross’ favor, however, on a second claim
premised on Montana’s unfair insurance practices statute, Mont. Code Ann. § 33-18-206(2),
which bars insurers from engaging in “unfair discrimination” when charging policy premiums to
similarly situated individuals.
The appeals court held federal law did not preempt this claim and therefore remanded to the
district court.
“Little HIPAA,” Insurance Law Claims
Plaintiffs are three brothers, the Fossens, and their companies, who obtained health insurance
coverage from Blue Cross.
In 2006, Blue Cross informed the Fossens their premium was increasing by over 20%. The
Fossens learned Blue Cross was imposing different increases, and even decreases, on other plan
members. In 2008, Blue Cross increased the Fossens’ premiums over 40%.
The Fossens sued Blue Cross under Montana’s “little HIPAA” law, which prohibits “group health
plan[s]” from imposing a “premium or contribution that is greater than the premium or
contribution for a similarly situated individual” on account of “any health status-related factor of
the individual . . .”
The Fossens also alleged Blue Cross’ premium increase violated the Montana Unfair Trade
Practices Act, which prohibits insurers from engaging in “any unfair discrimination between
individuals of the same class and of essentially the same hazard in the amount of premium,
policy fees, or rates charged for any policy or contract of disability insurance,” which includes
insurance against medical expenses resulting from accident or sickness.
ERISA Preemption
Blue Cross removed the complaint to federal court citing complete ERISA preemption. The
district court refused to remand the action and then granted Blue Cross’ motion for summary
judgment, determining the Fossens’ claims were premised on an identical provision of federal
HIPAA, 29 U.S.C. § 1182(b)(1), and finding no violation of the statute.
The Ninth Circuit agreed the Fossens’ state law HIPAA claim was “conflict” preempted under
ERISA’s civil enforcement provision, Section 502(a).
Specifically, the appeals court found the Fossens could have brought their complaint under
Section 502(a), noting they were suing for restitution of premiums they allegedly overpaid in
violation of Montana’s HIPAA statute.
“As the district court correctly recognized, the Fossens’ claim under Montana HIPAA could also
have been brought under federal HIPAA, because the relevant state and federal HIPAA provisions
are identical,” the appeals court said.
“We express no opinion about whether our holding would apply to a state HIPAA statute that
provided additional protections beyond federal HIPAA and was not exactly identical to federal
HIPAA,” the appeals court added.
Unfair Insurance Practices Claim Remanded
The appeals court reversed, however, the district court’s grant of summary judgment to Blue
Cross on the statutory unfair insurance practices claim, finding the claim saved from ERISA
express preemption under Section 514.
According to the appeals court, the statute is “specifically directed toward entities engaged in
insurance” and “substantially affect[s] the risk pooling arrangement between the insurer and the
insured,” and therefore is saved from Section 514 preemption.
The appeals court also found conflict preemption under Section 502(a) did not apply because the
Fossens sought relief (restitution) not available under ERISA’s enforcement scheme.
“[T]he unfair insurance practices statute creates a right that is separate from and could not
possibly be remedied under ERISA,” the appeals court said.
Fossen v. Blue Cross and Blue Shield of Mont., Inc., No. 10-36001 (9th Cir. Oct. 18, 2011).
Fifth Circuit Finds Some State Law Claims Preempted By ERISA,
Allows Others
The Fifth Circuit allowed November 8, 2011 certain state law claims of a medical device
purchaser to go forward against an insurer, but found that other claims were preempted under
the Employee Retirement Income Security Act (ERISA).
According to the appeals court, ERISA did not preempt the plaintiff’s promissory estoppel,
negligent misrepresentation, and Texas Insurance Code claims because they were premised on
allegations and evidence that the services were provided in reliance on the insurer’s
representations that it would pay reasonable charges for the services.
However, the appeals court found, the plaintiff’s quantum meruit and unjust enrichment claims
were preempted.
Plaintiff Access Mediquip L.L.C. procures and finances the purchase of medical devices for
healthcare providers.
Before procuring equipment, Access contacts the patient’s insurer to confirm the insurer will
reimburse Access for the device and pay for Access’ services.
The instant dispute arose after UnitedHealthcare Insurance Company refused to pay some or all
of Access’ claims provided in connection with over 2,000 patients insured under ERISA plans
administered by United.
Access sued United asserting state law claims of promissory estoppel, quantum meruit, unjust
enrichment, negligent misrepresentation, and violations of the Texas Insurance Code.
United moved for summary judgment on preemption grounds. The district court ordered United
to limit its motion to Access’ claims arising from services for three patients, whom the district
court anticipated would serve as exemplars for treatment of the preemption issue for the
remaining patients.
The district court granted summary judgment, and Access appealed.
The appeals court first noted that Access’ state law promissory estoppel, negligent
misrepresentation, and Texas Insurance Code claims were premised on its allegations that it
provided its services in reliance on United’s representations regarding how much, and under
what conditions, United would pay Access for those services.
In Memorial Hospital System v. Northbrook Life Ins. Co. 904 F.2d 236 (5th Cir. 1990), the
appeals court laid out the test used to determine whether ERISA Section 1144(a) preempts a
state law claim: “(1) the state law claims address an area of exclusive federal concern, such as
the right to receive benefits under the terms of an ERISA plan; and (2) the claims directly affect
the relationships among traditional ERISA entities–the employer, the plan and its fiduciaries, and
the participants and beneficiaries.”
Accordingly, the appeals court explained that the dispositive issue here was whether Access’
state law claims depended on and were derived from the rights of the patients to recover
benefits under the terms of their ERISA plans.
The appeals court noted that in Transitional Hospitals Corp. v. Blue Cross, 164 F.3d 952, 955
(5th Cir. 1999), it explicitly rejected the proposition that ERISA preempts state law causes of
action based on misrepresentations regarding the extent of an insured’s coverage.
“The state law underlying Access’s misrepresentation claims does not purport to regulate what
benefits United provides to the beneficiaries of its ERISA plans, but rather what representations
it makes to third parties about the extent to which it will pay for their services,” the appeals
court found; thus, Access’ alleged right to reimbursement does not depend on the terms of the
ERISA plans.
Finally, the appeals court found Access’ unjust enrichment and quantum meruit claims
preempted because Access could only recover under these claims “to the extent that the
patients’ ERISA plans confer on their participants and beneficiaries a right to coverage for the
services provided.”
Access Mediquip L.L.C. v. UnitedHealthcare Ins. Co., No. 10-20868 (5th Cir. Nov. 8, 2011).
U.S. Court In New Jersey Allows ERISA Plaintiff To Assert
Simultaneous Claims Under Sections 502(a)(1)(B) and 502(a)(3)
The U.S. District Court for the District of New Jersey denied November 22, 2011 an insurer’s
motion to dismiss a beneficiary’s claim for breach of fiduciary duty under Section 502(a)(3) of
the Employee Retirement Income Security Act of 1974 (ERISA).
According to the court, there is a circuit split as to whether an ERISA plaintiff may
simultaneously pursue claims for benefits under Section 502(a)(1)(B) and for breach of fiduciary
duty under Section 502(a)(3).
But the court sided with the courts that have found the claims permissible at the motion to
dismiss stage, and thus, denied the motion as premature.
Plaintiff Mark Lipstein is a participant in a healthcare plan administered by defendant United
Healthcare Insurance Company.
Plaintiff's wife is a beneficiary under the plan and has received various services from a provider
who does not accept Medicare.
Under the terms of the plan, defendants serve as a secondary payor to Medicare. Plaintiff alleged
defendants improperly reduce plan payments in situations where a plan participant receives
services from a provider who does not participate in Medicare, by estimating the amount that
Medicare would have paid if the participant had visited a provider who participated in Medicare.
Accordingly, plaintiff contended defendants were obligated to pay full benefits when a subscriber
visits a provider who does not accept Medicare.
Plaintiff further alleged even if defendants were entitled to estimate the amount Medicare would
have paid when a subscriber visits a provider who does not accept Medicare, they do so
improperly by estimating what Medicare would have paid by using billed charges instead of the
Medicare fee schedule and by overstating the percentage of the allowed amount under the
Medicare fee schedule that Medicare would pay.
Plaintiff thus alleged three counts. In Counts I and II, plaintiff asserted claims for plan benefits
under Section 502(a)(1)(B), and in Count III, plaintiff sought equitable relief for an alleged
breach of fiduciary duty by defendant under Section 502(a)(3).
Defendant moved to dismiss Count III on the theory it impermissibly duplicated the benefits
claims in Counts I and II.
The court noted that in Varity Corp. v. Howe, 516 U.S. 489, 512 (1996), the Supreme Court held
Section 502(a)(3) allows a plaintiff to seek "appropriate equitable relief for injuries caused by
[ERISA] violations that § 502 does not elsewhere adequately remedy."
The court further noted a split among circuits regarding the effect of Varity on a plaintiff's ability
to simultaneously pursue claims for benefits under Section 502(a)(1)(B) and for breach of
fiduciary duty under Section 502(a)(3).
The court was “persuaded by the reasoning of those courts that have found that Varity does not
establish a bright line rule precluding the assertion of alternative claims under §§ 502(a)(1)(B)
and 502(a)(3) at the motion to dismiss stage.”
Lipstein v. United Healthcare Ins. Co., No. 11-1185 (D.N.J. Nov. 22, 2011).
U.S. Court In Louisiana Dismisses ERISA Action For Benefits Denial
Involving Nonparticipating Provider
The U.S. District Court for the Middle District of Louisiana dismissed with prejudice March 1,
2012 an insured’s Employee Retirement Income Security Act (ERISA) action for benefits denied
by his insurer.
According to the court, the insurer did not abuse its discretion in its interpretation of the plan at
issue.
Plaintiff Curtis Locke Meredith, Jr. had insurance coverage through defendant Louisiana Health
Service and Indemnity Company, doing business as Blue Cross Blue Shield of Louisiana (BCBS).
Plaintiff had surgery at the Laser Spine Institute (LSI) in Tampa after he was told by a BCBS
representative that the procedure would be covered by BCBS, that the surgery did not require
pre-approval, and that BCBS would pay 60% of the allowable charge.
BCBS paid only a small portion of the surgery because, although the claim was covered, LSI was
a nonparticipating provider at the time of the surgery.
Plaintiff completed two separate internal appeals with BCBS, both of which BCBS denied. Plaintiff
then sued seeking reimbursement for $51,181 in expenses he incurred as a result of the surgery.
Plaintiff argued, among other things, that BCBS picked arbitrary numbers to represent allowable
charges and that its interpretation of the plan directly contradicted the plain meaning of the
language in the plan. Plaintiff also argued BCBS should be estopped from denying coverage
based on its representative's communication with him.
Both parties moved for summary judgment. Because ERISA governs the plan at issue, the court
noted it would review the plan administrator's decision under an abuse of discretion standard,
looking first at whether the plan administrator made a legally correct decision and, if the decision
was incorrect, whether or not the plan administrator abused its discretion.
The court first found the allowable charge that BCBS used was consistent with a fair reading of
the plan. According to the court, “it is fair to read the plan as permitting a nonparticipating
allowable that leads to a lower benefit payment than that applicable to services provided by
participating providers, especially where the plan does not require the administrator to base its
allowable calculation on any particular formula.”
In addition, nothing in the plan required BCBS to show plaintiff details of the negotiations or
calculations that establish an allowable charge for a particular surgical procedure by a particular
healthcare provider, the court found.
The court also rejected plaintiff’s argument that the plan administrator had not given the plan a
uniform construction. Plaintiff presented evidence that BCBS paid different amounts to patients
at LSI, but the court noted every plan is different; thus, “that BCBS used different allowable
charges for different patients for the same procedure does not mean that BCBS has nonuniformly interpreted the plan at issue.”
Lastly the court found insufficient evidence to invoke the doctrine of ERISA estoppel.
Meredith v. Louisiana Health Serv. & Indemnity Co., No. 08-795 (M.D. La. Mar. 1, 2012).
Fifth Circuit Affirms Dismissal Of Plan's Action Against Tort Recovery
Held In Trust
The Fifth Circuit upheld April 2, 2012 the dismissal of a plan fiduciary's suit for equitable relief
under the Employee Retirement Income Security Act of 1974 (ERISA) against a plan participant
and his special needs trust.
The appeals court found the defendant beneficiary of a third-party tort recovery did not have
actual or constructive possession or control of the funds at issue, which were held for his benefit
by a special needs trust.
The Fifth Circuit therefore agreed with the district court that subject matter jurisdiction was
lacking.
Larry Griffin worked for FKI Industries, Inc. (FKI) and participated in its employee welfare
benefits plan. He was seriously injured in an automobile accident and received over $50,000 in
medical benefits from the plan, which required reimbursement from any third-party tort
recoveries.
Griffin subsequently recovered over $294,000 from the tortfeasor. The court allocated some of
the settlement for attorneys’ fees and additional medical expenses and $40,000 to Griffin’s now
ex-wife Judith Griffin for her loss of consortium claim, leaving roughly $148,000, which was
transferred to a special needs trust.
The funds were used to purchase an annuity that would make monthly payments for Griffin’s
benefit.
ACS Recovery Services, Inc. and FKI (collectively, plaintiffs) sued Griffin, the trust, trustee, and
Judith under ERISA “to obtain other appropriate equitable relief.” 29 U.S.C. § 1132(a)(3)(B).
The district court, citing Supreme Court precedent, dismissed the case for lack of subject matter
jurisdiction because Griffin did not have legal title to the funds and therefore the action did not
lie in equity.
The Fifth Circuit affirmed, reviewing two major Court decisions: Great-West Life & Annuity Ins.
Co. v. Knudson, 534 U.S. 204 (2002) (plan could not recover medical benefits it had paid after
the beneficiary received a third-party settlement because the funds were not in the beneficiary’s
possession but in a special needs trust), and Sereboff v. Mid Atlantic Med. Servs., Inc., 547 U.S.
356 (2006) (equitable relief is available where a plan fiduciary could recover specifically
identifiable funds that were within the possession and control of the defendant beneficiary).
The appeals court also pointed to the three-part test it established in Bombardier Aerospace
Emp. Welfare Benefit Plan v. Ferrer, Poirot & Wansbrough, 354 F.3d 348 (5th Cir. 2003), for
determining whether the relief sought was equitable within the meaning of ERISA.
Under the test, the plan must show it seeks “to recover funds (1) that are specifically
identifiable, (2) that belong in good conscience to the Plan, and (3) that are within the
possession and control of the defendant beneficiary[.]”
Here, the appeals court found plaintiffs failed to meet the third element with respect to Griffin,
the trust, and the trustee.
While distinguishing the instant case from Knudson, in that plaintiffs specifically named the trust
and trustee in the lawsuit, the appeals court concluded Griffin did not have actual or constructive
possession or control the funds at issue.
The appeals court also found neither the trust nor the trustee had possession or control of the
funds, which were used to purchase an annuity that then made periodic payments to the trust
for Griffin's benefit. Moreover, the trust in this case could not be controlled by Griffin.
The fact that Griffin had “fleeting” control of the funds after the settlement was reached did not
change this analysis, which is conducted at the time the plaintiffs sought equitable relief.
Finally, the appeals court held plaintiffs claim against Judith failed based on the second element
of the Bombardier test—namely, the funds did not “belong in good conscience to the Plan” since
they resulted from her separate loss of consortium action and were not compensation for Griffin’s
injury.
ACS Recovery Servs., Inc. v. Griffin, No. 11-40446 (5th Cir. Apr. 2, 2012).
Fraud and Abuse
Settlements
Pur Pharmaceutical Inc. will pay $154 million to resolve allegations that it defrauded Medicaid by
improperly inflating reported drug prices used to set pharmacy reimbursement rates, Texas
Attorney General Greg Abbott announced August 24, 2011. Texas will share the settlement with
four other states—Florida, Kentucky, South Carolina, and Alaska—and the federal government.
Abbott said Texas will receive $71.8 million of the recovery, $24.4 million of which will go to the
state’s general fund. The relator that initiated the whistleblower action, Ven-a-Care of the Florida
Keys, Inc., also will receive a portion of the settlement. Similar cases have been filed across the
country against numerous drug makers for allegedly inflating their drug prices to increase the
so-called “spread” between actual costs and pharmacy reimbursement amounts. The settlement
resolves an enforcement action filed by Texas in 2008 against Pur and several other drug
manufacturers for allegedly improperly reporting drug prices to Medicaid to increase their market
share. The action against Pur was headed to trial later this year, Abbott said. Pur admitted no
liability or wrongdoing in agreeing to the settlement.
California Attorney General Kamala D. Harris announced August 31, 2011 a $49.5 million
settlement with Laboratory Corporation of America. The settlement resolves allegations that
Labcorp and other medical laboratories systematically overcharged the state's Medi-Cal program
for more than 15 years and gave illegal kickbacks in the form of discounted or free testing to
doctors, hospitals, and clinics that referred Medi-Cal patients and other business to the labs. The
allegations stem from a whistleblower suit filed in 2005. Harris previously announced a
settlement of $241 million with Quest Diagnostics for the same alleged practice.
Medicare Strike Force operations resulted in charges against 91 individuals in eight cities over
the last few weeks for their alleged participation in a host of Medicare fraud schemes involving
roughly $295 million in false billing, the Department of Justice (DOJ), Department of Health and
Human Services (HHS), and other federal officials announced September 7, 2011. As part of the
massive fraud crackdown, 70 individuals were charged in indictments unsealed September 6 and
7 in six cities representing allegedly fraudulent claims of about $263.6 million, according to a
DOJ press release. The remaining individuals were charged in indictments unsealed previously on
September 1 and August 24. Charges were brought in Miami, Houston, Baton Rouge, Los
Angeles, Brooklyn, Chicago, Dallas, and Detroit, the release indicated. Individuals charged
included physicians, nurses, and other medical professionals. The charges, which include
conspiracy to defraud the Medicare program, healthcare fraud, anti-kickback violations, and
money laundering, stem from a variety of alleged fraud schemes involving medical treatments
and services such as home healthcare, physical and occupational therapy, mental health
services, psychotherapy, and durable medical equipment (DME), according to the release. DOJ
said the nationwide fraud sweep “involved the highest amount of false Medicare billings in a
single takedown in Strike Force history.”
Maxim Healthcare Services Inc., one of the nation’s leading providers of home healthcare
services, entered into a $150 million settlement to resolve criminal and civil charges relating to
an alleged nationwide scheme to defraud Medicaid programs and the Veterans Affairs program,
the Department of Justice (DOJ) and other federal officials said in a September 12, 2011 press
release. Maxim was charged in a criminal complaint with conspiracy to commit healthcare fraud,
and has entered into a deferred prosecution agreement (DPA) with DOJ, according to the
release. Under the DPA, Maxim will avoid a healthcare fraud conviction on the charges if it
complies with the DPA’s requirements, which include a criminal penalty of $20 million and
approximately $130 million in civil settlements. The criminal complaint alleged Maxim, a
privately held company based in Columbia, Md., submitted more than $61 million in fraudulent
billings through its former officers and employees to government healthcare programs for
services not rendered or otherwise not reimbursable. According to the release, an investigation
revealed the submission of false bills to government healthcare programs was a common
practice at Maxim from 2003 through 2009. During that time period, Maxim received more than
$2 billion in reimbursements from government healthcare programs in 43 states based on its
submitted billings, the release said. So far, nine individuals have pled guilty to felony charges
arising out of the submission of these fraudulent billings, the creation of fraudulent
documentation associated with government program billings, or false statements to government
healthcare program officials regarding Maxim’s activities, DOJ said. Also included in the
settlement is a corporate integrity agreement with the Department of Health and Human
Services Office of Inspector General (OIG), which requires additional reforms and monitoring
under OIG supervision, the release noted.
Watson Pharmaceuticals reached a $70 million settlement with Florida, Texas, and New York to
resolve allegations that it defrauded the states’ Medicaid programs by knowingly setting and
reporting false and inflated prices for medications that were then reimbursed by the programs,
Florida Attorney General Pam Bondi announced September 16, 2011. Florida will receive $20.2
million of the settlement. The settlement involves lawsuits initiated by whistleblower Ven-A-Care
of the Florida Keys Inc. The company admitted no wrongdoing or liability in agreeing to the
settlement.
Johnson & Johnson subsidiary Scios Inc. pleaded guilty October 5, 2011 to a misdemeanor
violation of the Food, Drug, and Cosmetic Act for misbranding its heart failure drug Natrecor, the
Department of Justice (DOJ) announced. According to a press release, Scios admitted
it promoted Natrecor for uses not approved by the Food and Drug Administration. The district
court also sentenced Scios to pay an $85 million criminal fine in accordance with the plea
agreement. The federal government also is pursuing a related civil False Claims Act case against
Scios and Johnson & Johnson, alleging the companies' "off-label" promotion of Natrecor caused
the submission of false claims to Medicare, TRICARE, and the Federal Employees Health Benefits
Program. In a company statement, Johnson & Johnson said Scios acknowledged Natrecor was
misbranded because its labeling lacked adequate directions for use, but denied any wrongful
intent in connection with the plea.
LHC Group Inc., one of the nation’s largest home health providers, agreed to pay $65 million,
plus interest, to the federal government to resolve allegations that it submitted false billings to
Medicare and other federal healthcare programs in violation of the FCA, DOJ announced in a
September 30 press release. The settlement resolves allegations raised in a qui tam action that
between 2006 and 2008, Lafayette, LA-based LHC improperly billed for services that were not
medically necessary and for services rendered to patients who were not homebound, the release
said. The whistleblower in the case, Judy Master, will receive over $12 million as her share of the
recovery. The company also entered into a corporate integrity agreement with the Department of
Health and Human Services Office of Inspector General. “While LHC Group cooperated fully, the
settlement agreement reflects that the company disputes the government's claims and includes
no admission or determination of wrongdoing. The government did not question LHC Group's
quality of patient care, and there were no findings that the company billed or received payments
for services not rendered,” the company said in a statement.
GlaxoSmithKline (GSK) has reached an agreement in principal to pay the United States $3 billion
to resolve what it characterized as the company's "most significant ongoing Federal government
investigations" into possible improper activities, GSK said November 3, 2011. Specifically,
the proposed settlement would address allegations of inappropriate use of the nominal price
exception under the Medicaid Rebate Program and of improper development and marketing of
the company’s drug Avandia. The settlement, which would resolve civil and criminal liabilities,
remains subject to negotiation of specific terms and is expected to be finalized in 2012, the
company said. The long-running investigation of the diabetes drug Avandia raised questions
about both GSK's and the Food and Drug Administration's (FDA’s) handling of Avandia since a
study published May 21, 2009 in the New England Journal of Medicine found the drug causes a
43% increase in the risk of having a heart attack. A 2010 Senate Finance Committee staff report
concluded that evidence suggested GSK knew for several years prior to the study of the possible
cardiac risks associated with Avandia.
Janssen Pharmaceuticals, Inc., a unit of Johnson & Johnson, agreed to pay $158 million to
resolve claims it defrauded the Texas Medicaid program, Texas Attorney General Greg Abbott
said in a January 19, 2012 statement. The settlement involves allegations initiated in a
whistleblower action filed in 2004 that Janssen promoted the anti-psychotic medication Risperdal
for uses not approved by the Food and Drug Administration. According to Abbott’s statement, the
Texas Medicaid program for many years reimbursed pharmacies that dispensed Risperdal
prescriptions written for unapproved uses. The lawsuit alleged the company downplayed the risks
associated with the drug while promoting its use as safe and effective in children and the elderly
for treating schizophrenia and dementia. The company did not admit any wrongdoing or liability
in agreeing to the settlement.
Medical device manufacturer Smith & Nephew Inc. has entered into a deferred prosecution
agreement (DPA) with the Department of Justice (DOJ) to resolve improper payments by the
company and certain affiliates in violation of the Foreign Corrupt Practices Act (FCPA), DOJ
announced February 6, 2012. According to the criminal information filed in the U.S. District Court
for the District of Columbia, Smith & Nephew, through certain executives, employees, and
affiliates, agreed to sell products at full list price to a Greek distributor based in Athens, and then
pay the amount of the distributor discount to an off-shore shell company controlled by the
distributor. Those funds were then used by the distributor to pay cash incentives and other
things of value to publicly employed Greek healthcare providers to induce the purchase of Smith
& Nephew products, DOJ said. Under the DPA, Smith & Nephew will pay a $16.8 million penalty
and must implement rigorous internal controls, cooperate fully with DOJ, and retain a compliance
monitor for 18 months, a press release said. According to DOJ, the DPA “recognizes Smith &
Nephew’s cooperation with the department’s investigation, thorough self-investigation of the
underlying conduct, and the remedial efforts and compliance improvements undertaken by the
company.” Smith & Nephew also reached a settlement with the U.S. Securities and Exchange
Commission, under which Smith & Nephew agreed to pay $5.4 million in disgorgement of profits,
including pre-judgment interest.
Tampa, FL-based WellCare Health Plans Inc. will pay $137.5 million to the federal government
and nine states to settle allegations that it defrauded Medicare and Medicaid, the Department of
Justice (DOJ) announced April 3, 2012. The settlement resolves four whistleblower lawsuits
under the False Claims Act that alleged WellCare, which provides managed healthcare services
for approximately 2.6 million Medicare and Medicaid beneficiaries nationwide, falsely inflated the
amount it spent on medical care, knowingly retained overpayments from Medicaid, and falsified
data that misrepresented the medical conditions of patients and the treatments they received,
according to DOJ. The settlement proceeds will be divided among the federal government and
Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Missouri, New York and Ohio.
Whistleblower Sean Hellein, a former WellCare financial analyst, will receive approximately
$20.75 million of the settlement, while the other three relators will split about $4.66
million. WellCare also would have to pay an additional $35 million if the company is sold or
experiences a change in control within three years of the settlement agreement, DOJ said. In
May 2009, WellCare entered into a deferred prosecution agreement (DPA) and paid $40 million
and forfeited $40 million to resolve potential criminal charges involving the Florida Medicaid and
Health Kids programs. One former WellCare analyst has pleaded guilty to a conspiracy charge,
while five former executives were indicted in March 2011 and are currently awaiting trial. The
company said in an April 3 statement that federal and state prosecutors agreed to early
termination of the DPA, effective immediately, and to seek dismissal of criminal charges against
WellCare. “This action acknowledges that WellCare has fulfilled all of its obligations under the
DPA,” the statement said. The original term of DPA was 36 months, but the agreement provided
for earlier termination based on WellCare’s remedial actions, compliance record, and reports
from an independent monitor, the company noted. The civil settlement is not an admission of
liability.
U.S. District Court for the District of Massachusetts Judge Patti B. Saris ordered pharmaceutical
company Merck, Sharp & Dohme to pay a criminal fine of $321,636,000 following its December
2011 guilty plea for illegal promotion and marketing of the painkiller Vioxx.According to an April
19, 2012 press release posted by Carmen M. Ortiz, U.S. attorney for the District of
Massachusetts, Merck’s guilty plea was part of a global resolution involving its illegal promotional
activity. In November 2011, Merck entered into a civil settlement agreement under which it will
pay $628,364,000 to resolve additional allegations regarding off-label marketing of Vioxx and
false statements about the drug’s cardiovascular safety. Merck’s criminal plea related to the
misbranding of Vioxx by promoting the drug for treating rheumatoid arthritis, before that use
was approved by the Food and Drug Administration, the release said. As part of the settlement,
Merck also agreed to enter into a corporate integrity agreement with the Department of Health
and Human Services Office of Inspector General, which will strengthen the system of reviews and
oversight procedures imposed on the company, according to the release.
Drug wholesaler McKesson Corporation agreed to a more than $190 million settlement with the
federal government of claims under the False Claims Act that it reported inflated prescription
drug prices causing Medicaid to overpay for those drugs, the Department of Justice (DOJ) and
other federal officials announced April 26, 2012. According to the DOJ press release, the
settlement resolves claims based on the federal share of Medicaid overpayments allegedly
caused by McKesson reporting inflated pricing data to First DataBank, a publisher of drug prices
that most state Medicaid programs use to set payment rates for pharmaceuticals. States can
separately negotiate with McKesson to resolve their share of alleged Medicaid overpayments, the
release said. The lawsuit relates to average wholesale price (AWP) litigation, which DOJ said has
resulted in federal and state recoveries of more than $2 billion from drug manufacturers that
allegedly reported inflated AWP information used to set Medicaid drug reimbursement rates to
First DataBank and other similar publishers. McKesson admitted no liability in agreeing to the
settlement.
A nationwide takedown by Medicare Fraud Strike Force operations in seven cities culminated in
indictments against 107 individuals, including doctors, nurses, and other health professionals, for
their alleged participation in Medicare fraud schemes involving approximately $452 million in
false billings. U.S. Attorney General Eric Holder and Department of Health and Human Services
(HHS) Secretary Kathleen Sebelius were joined by other federal officials in announcing the
record-breaking takedown May 2, 2011. Holder said at a press conference that the Strike Force’s
“work is at the heart of an Administration-wide commitment to protecting the American people
from all forms of health-care fraud, which--as we’ve seen in far too many communities--can
drive up health-care costs and even threaten the strength and integrity of our entire health-care
system.” In connection with the operation, HHS suspended or took other administrative action
against 52 providers under new authority provided by the Affordable Care Act that increases the
agency's ability to suspend payments until an investigation is complete. The joint Department of
Justice (DOJ) and HHS Medicare Fraud Strike Force investigation unearthed a variety of alleged
fraud schemes involving services such as home healthcare, mental health services,
psychotherapy, physical and occupational therapy, durable medical equipment (DME), and
ambulance services. According to DOJ’s press release, a total of 59 defendants in Miami, FL were
charged, including three nurses and two therapists, for their participation in various fraud
schemes involving a total of $137 million in false billings for home healthcare, mental health
services, occupational and physical therapy, DME, and HIV infusion. In Baton Rouge, LA, seven
individuals were charged for participating in a fraud scheme involving $225 million in false claims
for community mental health center (CMHC) services. According to court documents, the
defendants recruited beneficiaries from nursing homes and homeless shelters, some of whom
were drug addicted or mentally ill, and provided them with no services or medically inappropriate
services. The Baton Rouge fraud represents the largest CMHC-related scheme ever prosecuted
by the Medicare Fraud Strike Force, DOJ noted.
The five remaining cities involved in the takedown are as follows:
 In Houston, TX nine individuals, including one doctor and one nurse, were charged with

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fraud schemes involving a total of $16.4 million in false billings for home healthcare and
ambulance services;
In Los Angeles, CA, eight defendants, including two doctors, were charged for their
alleged roles in schemes to defraud Medicare of approximately $14 million for DME;
In Detroit, MI, 22 defendants, including four licensed social workers, were charged for
their alleged roles in fraud schemes involving approximately $58 million in false claims
for medically unnecessary services, including home health, psychotherapy, and infusion
therapy;
In Tampa, FL, a pharmacist was charged with illegal diversion of controlled substances;
and
In Chicago, IL, one defendant was charged last week for his alleged role in a scheme to
submit approximately $1 million in false billing to Medicare for psychotherapy services.
Abbott Laboratories Inc. pled guilty and agreed to pay $1.5 billion to resolve its criminal and civil
liability arising from its unlawful promotion of the prescription drug Depakote for uses not
approved as safe and effective by the Food and Drug Administration (FDA), the Justice
Department (DOJ) announced May 7, 2012. The agreement—the second largest payment ever by
a drug company—includes a criminal fine and forfeiture and civil settlements with the federal
government and the states, DOJ said. Abbott pled guilty to misbranding Depakote by promoting
the drug to control agitation and aggression in elderly dementia patients and to treat
schizophrenia when neither use was FDA approved. The FDA approved Depakote for three
uses: epileptic seizures, bipolar mania, and the prevention of migraines. However, the
government alleged Abbott trained its sales force to promote Depakote to healthcare providers
and employees of nursing homes as advantageous over antipsychotic drugs for controlling
agitation and aggression in elderly dementia patients because Depakote was not subject to
certain provisions of the Omnibus Budget Reconciliation Act of 1987 and its implementing
regulations designed to prevent the use of unnecessary medications in nursing homes. Abbott
also admitted that from 2001 through 2006, the company misbranded Depakote by marketing
the drug to treat schizophrenia. When a second clinical trial failed to show a statistically
significant treatment difference between antipsychotic drugs used in combination with Depakote
and antipsychotic drugs alone, Abbott waited nearly two years to notify its own sales force about
the study results and another two years to publish those results, DOJ said. Specifically, under
the plea agreement, Abbott will pay a criminal fine of $500 million, forfeit assets of $198.5
million, and submit to a term of probation for five years. In addition, Abbott will pay $1.5 million
to the Virginia Medicaid Fraud Control Unit. Under the civil settlement, Abbott has agreed to pay
$800 million to the federal government and the states. According to DOJ, the civil settlement
addresses broader allegations that Abbott unlawfully promoted Depakote for additional
unapproved uses and offered and paid illegal remuneration to healthcare professionals and long
term care pharmacy providers to induce them to promote and/or prescribe Depakote and to
improperly and unduly influence the content of company-sponsored Continuing Medical Education
programs, in violation of the federal Anti-Kickback Statute. Abbott also agreed to a five-year
Corporate Integrity Agreement with the Department of Health and Human Services Office of
Inspector General.
False Claims Act
First Circuit Refuses To Dismiss FCA Action Against Device Maker
Who Allegedly Paid Kickbacks To Physicians
The First Circuit refused June 1, 2011 to dismiss a False Claims Act (FCA) action against a
medical device maker who allegedly paid kickbacks to physicians for use of its products.
Reversing the dismissal of the case, the appeals court rejected the lower court’s holding that a
claim can only be false or fraudulent for impliedly misrepresenting compliance with a legal
condition of payment if that condition is expressly stated in a statute or regulations.
Instead, the appeals court found a claim may be false or fraudulent because a defendant failed
to comply with the terms of underlying contractual provisions as well.
Accordingly, the complaint here, in alleging hospital and physician claims represented compliance
with a material condition of payment that was not in fact met, stated a claim under the FCA that
the hospital and physician claims for payment at issue were materially false or fraudulent, the
appeals court held.
It follows then that the qui tam plaintiff stated a claim that the device maker knowingly caused
the submission of materially false or fraudulent claims in violation of the FCA, according to the
opinion.
Whistleblower Susan Hutcheson was employed by Blackstone Medical as a Regional Manager
from January 2004 until she was terminated in January 2006.
Hutcheson filed a qui tam action against Blackstone alleging Blackstone paid kickbacks to doctors
across the country so they would use its products in certain spinal surgeries.
Hutcheson alleged that through its kickback scheme, Blackstone "knowingly cause[d]" healthcare
providers to present "false or fraudulent" claims for payment to federal healthcare programs and
thus violated the FCA.
Blackstone moved to dismiss, arguing, among other things, that the complaint failed to state a
claim under the FCA for purposes of Fed. R. Civ. P. 12(b)(6) and that the complaint failed to
meet the pleading standard for fraud under Rule 9(b).
The district court held that Hutcheson's allegations did not state a claim under the FCA for
purposes of Rule 12(b)(6).
The district court construed the statute such that a claim is "false or fraudulent" if it is either
"factually false" or "legally false." A claim can be legally false under either an express
certification theory or an implied certification theory, the district court said.
Applying this framework, the district court held that Hutcheson's complaint failed to identify a
claim that was materially false or fraudulent for purposes of the FCA. Hutcheson appealed.
As a threshold matter, the appeals court refused to employ the categories of claims used by the
lower court. The “text of the FCA does not refer to ‘factually false’ or ‘legally false’ claims, nor
does it refer to ‘express certification’ or ‘implied certification,’” the appeals court said.
The appeals court then turned to the district court’s holding that a claim can only be false or
fraudulent for impliedly misrepresenting compliance with a legal condition of payment if that
condition is found expressly stated in "the relevant statute or regulations."
Hutcheson argued claims submitted by hospitals were false because the Hospital Cost Report
forms establish that claims for Medicare reimbursement may only be paid if they comply with the
Anti-Kickback Statute.
The appeals court noted a split in the circuits on this issue.
But the appeals court ultimately rejected Blackstone’s argument that only express statements in
statutes and regulations can establish preconditions of payment, noting such language “is not set
forth in the text of the FCA.”
The appeals court next turned to the lower court’s holding that a submitting entity's
representations about its own legal compliance cannot incorporate an implied representation
concerning the behavior of non-submitting entities.
Explaining, the appeals court said that when the defendant in an FCA action is a non-submitting
entity, the question is whether that entity knowingly caused the submission of either a false or
fraudulent claim or false records or statements to get such a claim paid.
The Supreme Court has long held that a non-submitting entity may be liable under the FCA for
knowingly causing a submitting entity to submit a false or fraudulent claim, and it has not
conditioned this liability on whether the submitting entity knew or should have known about a
non-submitting entity's unlawful conduct, the appeals court said.
The appeals court rejected Blackstone’s argument that such a reading of the FCA is too broad.
“Only persons who knowingly submit or cause the submission of a false or fraudulent claim can
be held liable for violating the FCA. The term ‘causes’ is hardly boundless; it has been richly
developed as a constraint in various areas of the law,” the appeals court said.
Lastly, the appeals court held that the Provider Agreement forms signed by the physicians and
the Hospital Cost Report forms identified in Hutcheson's complaint were sufficient to support her
claim.
“[T]he claims presented to the government in this case, as alleged, represented that there had
been compliance with a material precondition of payment that had not been met,” the appeals
court held.
The appeals court rejected Blackstone’s arguments that the documents were not specific enough
to render the claims at issue false or fraudulent.
“These two documents are more than specific enough to make clear that the claims submitted by
hospitals represented that any underlying transactions had not involved third party kickbacks
prohibited by the AKS,” the appeals court held.
The Provider Agreement also was sufficiently clear to establish that the claims submitted by
physicians represented that the underlying transactions did not involve kickbacks to physicians
prohibited by the Anti-Kickback Statute, the appeals court added.
The appeals court also found the hospital and physician misrepresentations were material.
Blackstone argued the mechanisms of hospital billing rendered any Anti-Kickback Statute noncompliance irrelevant to the payment of claims and that the physicians submitted claims for their
services conducting medically necessary surgeries, not for the devices allegedly used because of
Blackstone's kickbacks.
“We cannot say that, as a matter of law, the alleged misrepresentations in the hospital and
physician claims were not capable of influencing Medicare's decision to pay the claims,” the
appeals court said in rejecting Blackstone’s arguments.
United States ex rel. Hutcheson v. Blackstone Med., Inc., No. 10-1505 (1st Cir. Jun. 1, 2011).
The U.S. Supreme Court declined to review December 5, 2011 the First Circuit’s decision in
Blackstone, which has been widely viewed as expanding the scope of liability under the FCA.
Third Circuit Reverses Dismissal Of FCA Claims Against MA Plans
Based On Alleged AKS Violations
The Third Circuit held June 30, 2011 that relators could maintain an action under the False
Claims Act (FCA) against Medicare managed care plans based on alleged violations of the AntiKickback Statute (AKS).
Reversing a district court opinion, the appeals court found compliance with the AKS is a condition
for payment from the federal government and therefore could form the basis for an FCA claim.
The appeals court affirmed, however, the district court’s dismissal of relators’ claims based on
alleged violations of the Medicare marketing regulations because these rules are not a condition
of payment from the federal government.
Relator Charles Wilkins began employment with United Health Group and its subsidiaries
AmeriChoice and AmeriChoice-New Jersey, two Medicare Advantage (MA) plans, (collectively,
defendants) in October 2007 as a sales representative. Relator Darryl Willis also began
employment with defendants in 2007 as the general manager for Medicare/Medicaid marketing
and sales.
After defendants terminated Wilkins and Willis, allegedly for complaining about illegal practices,
they filed a qui tam action under the FCA, alleging defendants violated MA marketing rules and
offered physicians illegal kickbacks while accepting payments from government funded health
insurance programs.
The federal government declined to intervene. Defendants moved to dismiss for failure to state a
claim on which relief could be granted.
The district court granted the motion to dismiss, finding relators failed to identify “even a single
claim for payment to the Government.” The court also held defendants’ alleged violations of the
Medicare marketing guidelines were not relevant to the government’s decision to issue payment
and therefore could not be the basis for an FCA claim. Finally, the court rejected relators’ claims
based on the AKS, finding no allegations defendants certified compliance with the AKS or the
government predicated its funding decision on such certifications.
As a threshold issue, the Third Circuit, joining the Second, Sixth, Ninth, Tenth, Eleventh, and
District of Columbia Circuits, recognized “implied false certification liability” under the FCA.
At the same time, the Third Circuit said implied false certification liability should be limited to
instances where the alleged violations of Medicare rules would have prevented the government
from paying the defendant’s claims.
Affirming the dismissal of the FCA claims based on the alleged marketing violations, the appeals
court concluded the government’s payments of defendants’ Medicare claims were not conditioned
on their compliance with the MA marketing regulations.
While compliance with the marketing regulations is a condition of participation in the Medicare
program, it is not a condition of payment; thus, relators’ claims based on these alleged violations
failed under both an express and implied false certification theory, the appeals court found.
Turning to the kickback allegations, the appeals court said it was a “close question” whether
relators pleaded an FCA claim based on defendants’ express false certification of compliance with
the AKS.
But the appeals court said it need not decide the express false certification issue because relators
clearly stated a claim for relief under an implied false certification theory, which focuses not on
defendants’ representations to the government, but on the underlying contracts, statutes, or
regulations to determine whether they make compliance a prerequisite to the government’s
payment.
“To plead a claim for relief under an implied certification theory, [relators] were required to
allege, as they did, that [defendants] submitted claims for payment to the Government at a time
that they knowingly violated a law, rule or regulation which was a condition for receiving
payment from the Government,” the appeals court said.
Here, relators’ amended complaint met the implied false certification standard for liability
because it alleged defendants received federal health insurance program payments despite
knowing they violated the AKS.
In so holding, the appeals court rejected the district court’s conclusion that compliance with the
AKS is not a condition for payment from the government.
“Compliance with the AKS is clearly a condition of payment under Parts C and D of Medicare and
[defendants] do not refer us to any judicial precedent holding otherwise,” the appeals court said.
United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747 (3d Cir. June 30, 2011).
On remand from the Third Circuit, the U.S. District Court for the District of New Jersey dismissed
December 20, 2011 the FCA claims. In an unpublished opinion, the court found the relators’
complaint failed to plead the alleged fraud with the required particularity under Fed. R. Civ. P.
9(b).
Specifically, the court held relators did not indicate the “date, place, or time” of the alleged
violations or provide an “alternative means of injecting precision and some measure of
substantiation into their allegations of fraud.” United States ex rel. Wilkins v. United Health
Group, Inc., No. 08-3425 (RBK/JS) (D.N.J. Dec. 20, 2011).
U.S. Court In Illinois Dismisses Certain FCA Claims, Finding FCA
Amendments Not Retroactive
The U.S. District Court for the Northern District of Illinois July 7, 2011 dismissed several of a qui
tam relator’s claims against OmniCare, Inc., finding the claims that relied on a retention of
overpayment theory under the amended False Claims Act (FCA) must be dismissed because the
allegations concerned events that happened before enactment of the amendments.
The court also found those claims failed to adequately allege a violation of the FCA preamendment.
Relator John Stone worked as Vice President for Internal Audit at OmniCare, the nation’s largest
provider of pharmaceuticals and related ancillary services to long term care institutions.
According to Stone, while working at OmniCare he conducted two separate audits that revealed
retention of overpayments and other compliance problems.
After he prepared a report detailing the suspected fraud, Stone alleged he was fired.
Stone filed a 24-count qui tam complaint against OmniCare alleging it submitted false claims to
the U.S. government and numerous individual states. OmniCare moved to dismiss.
Stone’s first two counts alleged defendant violated the FCA, as amended by the Fraud
Enforcement and Recovery Act (FERA) and the Affordable Care Act (ACA).
The ACA included a provision targeting retention of an overpayment, which was one of Stone’s
main allegations against OmniCare.
Defendant argued this claim must be dismissed because the alleged retention occurred before
the enactment of FERA and ACA.
Stone argued the ACA’s new 60-day deadline for reporting and returning overpayments went into
effect on March 23, 2010 and instantly attached to overpayments retained on that day, including
all of defendant’s alleged false claims.
But the court disagreed, finding such a reading would “create impermissible retroactive effect.”
Because defendant was made aware of the overpayments before the statute was enacted, the
liability for retention of an overpayment in ACA cannot attach, the court said.
The court next addressed Stone’s alternative argument that defendant also violated the preFERA FCA.
The court rejected this argument as well, finding Stone’s allegations failed to adequately allege a
presentment claim. According to the court, the complaint did not “identify specific false claims for
payment or specific false statements made in order to obtain payment.”
Stone’s argument that the error rates in the claims was so high that OmniCare “knew or should
have known that false or fraudulent claims were being made,” is insufficient, the court found.
The court next turned to Stone’s allegation that OmniCare was improperly stockpiling the
pediatric drug Synagis. In relation to that matter, the Nevada Department of Justice investigated
and a settlement was reached. Thus, OmniCare argued, that claim is barred by the public
disclosure bar.
To resolve this claim, the court found it would have to exercise its discretion to convert
Omnicare’s motion to one for summary judgment. Accordingly, the court said it would allow the
parties time to present any additional materials on this issue.
The court did refuse, however, to dismiss Stone’s retaliatory discharge claim finding he
adequately pleaded that claim.
United States ex rel. Stone v. OmniCare, Inc., No. 09 C 4319 (N.D. Ill. July 7, 2011).
First Circuit Holds Whistleblower Action Against Amgen Can Proceed
Under Six States’ FCAs
The First Circuit reversed a Massachusetts district court’s dismissal of a whistleblower action
against Amgen Inc. and a group of affiliated enterprises alleging they violated six state’s False
Claims Acts (FCAs) by causing providers to present false Medicaid claims that were tainted by
kickbacks to the government and by conspiring to get false claims paid in connection with the
anti-anemia drug Aranesp.
Citing its recent decision in United States ex rel. Hutcheson v. Blackstone Med., Inc., No. 101505 (1st Cir. Jun. 1, 2011), the appeals court concluded that in California, Illinois, Indiana,
Massachusetts, New Mexico, and New York compliance with anti-kickback requirements is a
condition of Medicaid payment that can give rise to false claims under their FCA statutes.
The appeals court did affirm, however, the dismissal of the action under Georgia’s FCA, finding
the relator in the case failed to identify any materials that made clear claims tainted by kickbacks
violated a precondition of payment under the state’s Medicaid program.
In June 2006, relator Kassie Westmoreland brought a qui tam action against Amgen and a group
of affiliated enterprises, including International Nephrology Network and ASD Healthcare, under
the federal and state FCAs.
The United States declined to intervene but 15 states and the District of Columbia joined the
action.
Plaintiffs alleged defendants used various types of kickbacks to induce providers to purchase
Aranesp, which is used to treat anemia associated with chronic kidney disease and
chemotherapy.
These kickback schemes, according to plaintiffs, involved “excess overfills” of the drug, which
was akin to a built-in free sample that providers could bill for, and sham consulting agreements,
all-expense paid retreats, free services, and price concessions.
Defendants’ provision of the alleged kickbacks caused providers to falsely certify their
compliance with federal and state anti-kickback statutes when seeking reimbursement, plaintiffs
said.
The district court granted defendants’ motion to dismiss, finding plaintiffs failed to identify “a
false claim for payment” under an express or implied certification theory. United States v.
Amgen, Inc., No. 06-10972-WGY (D. Mass. Apr. 23, 2010).
Westmoreland appealed the dismissal of the state law claims she asserted on behalf of the two
non-intervening states, Georgia and New Mexico. She did not appeal the dismissal of the federal
claims. California, Illinois, Indiana, Massachusetts, and New York also appealed the district
court’s dismissal of their claims.
The First Circuit reversed the dismissal for six of the states and affirmed as to Georgia, although
for different reasons than the district court.
Plaintiffs asserted a claim is false or fraudulent under the state FCA statutes if it misrepresents
compliance with a pre-condition of payment.
A provider that submits a claim for Medicaid reimbursement impliedly represents the claim is
payable. According to plaintiffs, the alleged kickbacks provided by Amgen and the affiliated
entities rendered Medicaid reimbursement claims submitted by the medical providers for Aranesp
ineligible for payment.
In Hutcheson, the First Circuit reversed the dismissal of an action under the federal FCA against
a medical device maker who allegedly paid kickbacks to physicians for use of its products.
The appeals court rejected the lower court’s holding that a claim can only be false or fraudulent
for impliedly misrepresenting compliance with a legal condition of payment if that condition is
expressly stated in a statute or regulations. Instead, the appeals court found Medicare forms
signed by hospitals and physicians made clear that when they submitted claims for Medicare
payment, they represented transactions underlying the claims did not involve illegal kickbacks.
Here, instead of Medicare, the question was whether claims submitted to the seven state
Medicaid programs misrepresented compliance with a precondition of payment recognized by
those particular programs.
The First Circuit declined to apply a general recognition that kickback schemes are fraudulent
practices under Medicare and Medicaid programs as plaintiffs urged.
“So long as states have discretion over the operation of their Medicaid programs, generalities
about national views as to what constitutes a precondition of Medicaid payment cannot control,”
the appeals court said.
The appeals court went on to find, however, the regulatory regimes in Illinois, Indiana,
Massachusetts, and New York made clear that claims affected by kickbacks like those alleged in
the instant case are not eligible for Medicaid payment. The appeals court also concluded provider
agreements in California and New Mexico made clear that claims submitted to the Medicaid
programs in those two states may not be paid if tainted by kickbacks.
However, regarding Georgia, plaintiff relator failed to show any materials clearly indicating claims
affected by kickbacks may violate a precondition of payment under the state’s Medicaid program.
Thus, the appeals court affirmed the dismissal of the action under Georgia’s FCA.
The appeals court acknowledged Georgia’s Medicaid program may well have a precondition of
payment that claims not be affected by kickbacks, but said plaintiff relator failed to identity any
clear authority on this point.
“It bears emphasis that Georgia, unlike the other six states involved in this litigation, does not
have a state law analogue to the federal [Anti-Kickback Statute],” the appeals court said.
New York v. Amgen Inc., Nos. 10-1629, 10-1630, 10-1633, 10-1634, 10-1635, 10-1636, 101954, 10-1955 (1st Cir. July 22, 2011).
Fifth Circuit Finds FCA Claims Must Be Dismissed Under Public
Disclosure Bar
The Fifth Circuit found August 5, 2011 that a relator’s suit against more than 450 possible
defendants must be dismissed as barred by the public disclosure provisions of the False Claims
Act (FCA).
According to the appeals court, the whistleblower suit contained only general allegations against
the defendants and no specific facts regarding any particular defendant’s alleged fraudulent
conduct.
Relator Thomas Jamison operates a durable medical equipment (DME) business that provides
enteral nutrition products to nursing homes.
In the course of his business, Jamison learned Beverly Enterprises created a subsidiary that
entered into a joint venture with McKesson Corporation to supply Beverly nursing home with
DME.
After reading an Office of Inspector General advisory bulletin, Jamison suspected such conduct
was illegal.
Jamison then filed a qui tam complaint under the FCA against McKesson and Beverly and about
450 other defendants, including other nursing homes, DME suppliers, and owners or officers of
such organizations, whom Jamison suspected of setting up similar arrangements.
Jamison later filed a First Amended Complaint, which contained the same theories of fraud but
included specific allegations against Beverly and McKesson.
The government decided to intervene in the action, but the district court dismissed Jamison on
the ground that his action violated the public disclosure provisions of the FCA. Jamison appealed.
After first finding that it must look to Jamison’s original complaint to establish jurisdiction, the
appeals court turned to whether Jamison’s action was based upon public disclosures of
allegations or transactions.
In finding Jamison’s action was based on public disclosures, the appeals court noted the
complaint “described various fraudulent schemes only generally.”
While the appeals court acknowledged it “would have been exceedingly difficult for the
government to identify, from the public disclosures, which particular suppliers or nursing homes
were committing fraud,” it also pointed out the complaint did not contain any specific allegations
against any particular defendant.
“Like the public disclosures, it contained no information about any actions specific to Beverly or
McKesson. Indeed, one could have produced the substance of the complaint merely by
synthesizing the public disclosures’ description of the joint venture scheme in the DME supplier
industry,” the appeals court found.
The appeals court further noted that Jamison’s list of defendants appeared to be selected
arbitrarily and thus contained no useful information.
“Were we to rule otherwise, a qui tam relator could arbitrarily select a large group of defendants
in any industry in which public disclosures have revealed significant fraud, in hopes that his
allegations will prove true for at least a few defendants,” the appeals court said, saying it could
not “countenance such relator lotteries . . . .”
Lastly, the appeals court considered whether Jamison was “an original source of the information”
supporting his allegations.
Answering in the negative, the appeals court noted it was “obvious that he was not a ‘direct’ or
‘independent’ source of any of the ‘information on which the allegations are based.’”
United States ex rel. Jamison v. McKesson Corp., No. 10-60376 (5th Cir. Aug. 5, 2011).
Sixth Circuit Rejects Whistleblower Action Alleging “Worthless
Services” For Failure To Plead Submission Of False Claim
The Sixth Circuit affirmed August 23, 2011 the dismissal of a qui tam action under the False
Claims Act (FCA) alleging Visiting Physicians Association, P.C. (VPA) defrauded Medicare and
Medicaid by billing for defective radiology studies.
The appeals court found relators Dr. Richard Chesbrough and and his wife failed to allege a
fraudulent scheme with respect to radiology tests they claimed did not meet "objective
standards" for testing.
“Medicare does not require compliance with an industry standard as a prerequisite to payment,”
the appeals court noted.
Relators did allege a fraudulent scheme with respect to five radiology studies they claimed were
“non-diagnostic”--i.e., a “worthless service.”
But the appeals court nonetheless found dismissal of these claims was proper under Fed. R. Civ.
P. 9(b), holding relators failed to plead fraud with the required particularity.
Specifically, the relators supplied no personal knowledge that claims for the allegedly nondiagnostic tests were presented to the government, nor did the alleged facts strongly support an
inference that such billings were submitted, the appeals court said.
“Assuming that the five tests alleged by the Chesbroughs to be non-diagnostic constituted
‘worthless services,’ it is not necessarily true that VPA billed the government for these tests,” the
appeals court said.
The tests may not have involved Medicare or Medicaid patients, or VPA may have absorbed the
expense of the five tests and not billed the government at all, the appeals court observed.
Defective Services
Dr. Chesbrough runs a radiology service business that entered into an independent contractor
agreement with VPA, which provides in-home medical services for homebound and disabled
patients, to interpret images created by VPA’s technologists.
According to relators, the images VPA provided for interpretation were often of poor quality or
defective.
Relators ended the contract after roughly six months and then filed a qui tam action against VPA,
alleging the diagnostic studies it billed were “false or fraudulent” in violation of the federal and
Michigan FCAs.
Relators also alleged VPA’s billings were fraudulent because it was not owned by a physician in
violation of Michigan’s Professional Service Corporation Act.
The federal government declined to intervene.
The district court agreed to dismiss the action under Rule 9(b), noting relators were "unable to
provide dates or particularities for even a single claim that was submitted to the government. . .”
Fraudulent Scheme
Relators alleged the studies submitted as part of their complaint either failed to meet industry
standards or were “non-diagnostic.”
Relators could not maintain an FCA action under an “implied certification” theory based on a
failure to meet industry standards, the appeals court said, because compliance with those
standards was not a condition of payment.
They did allege, however, a fraudulent scheme under the FCA “insofar as they claim that VPA
knowingly submitted claims to the government for completely non-diagnostic tests.”
According to the appeals court, “[i]f VPA sought reimbursement for services that it knew were
not just of poor quality but had no medical value, then it would have effectively submitted claims
for services that were not actually provided,” i.e. “worthless services.”
But the appeals court held the worthless services claims failed for another reason—relators failed
to plead the submission of any claims for payment for those tests to the government.
Illegal Corporation
The appeals court also rejected relators’ claims based on VPA’s alleged status as an illegal
corporation, noting no regulation making payment contingent on compliance with Michigan’s laws
of incorporation.
The complaint did not allege VPA performed tests without physician supervision, as required by
federal regulations, nor that the company submitted claims under the Medicare physician fee
schedule that were not performed by a physician or specialist authorized to perform the tests.
Chesbrough v. VPA., P.C., No. 10-1494 (6th Cir. Aug. 23, 2011).
U.S. Court In Tennessee Says Imaging Firm Violated FCA By Failing To
Comply With Medicare Physician Supervision Requirement
A federal trial court in Tennessee held August 23, 2011 that a diagnostic testing firm was liable
under the False Claims Act (FCA) for failing to comply with Medicare’s direct physician
supervision requirement at several of its independent diagnostic testing facilities (IDTFs) in
Nashville. See 42 C.F.R. § 410.33.
The U.S. District Court for the Middle District of Tennessee granted summary judgment to the
federal government in the whistleblower action, which was initiated by relator Karen Hobbs, who
formerly worked for the defendant company, MedQuest Associates, Inc.
Defendants, MedQuest and several of its Nashville-area facilities, argued the applicable Medicare
regulations for IDTFs did not require a board certified radiologist to supervise diagnostic tests
with contrast, but the court disagreed.
According to the court, the governing regulation expressly requires a supervising physician to
“evidence proficiency in the performance and interpretation of each type of diagnostic procedure
performed by the IDTF” under criteria established by the Medicare carrier.
In this case, the Medicare carrier, CIGNA, required IDFTs to have Medicare-approved physicians
on hand to supervise diagnostic tests at IDTFs; a requirement MedQuest failed to meet, resulting
in the submission and payment of false claims by Medicare, the court concluded.
Lack of Physician Supervision Alleged
Hobbs worked for MedQuest between 2002 and 2004, when MedQuest terminated her
employment citing “poor performance.” In 2006, Hobbs initiated the qui tam action against
MedQuest and three of its IDTFs in the Nashville area. The government later intervened.
According to Hobbs, while she was a MedQuest employee she complained to supervisors that the
Nashville-area IDTFs were conducting diagnostic tests using contrast without trained physicians
approved by Medicare and, in some instances, by the centers’ staff members who are not
physicians.
The complaint also alleged MedQuest used another provider’s Medicare billing number at one of
the IDTFs for a year and a half after it was acquired from a physician practice.
Statutory/Regulatory Violation Not Pre-Requisite for FCA Liability
The court rejected MedQuest’s argument that they did not violate any statute or regulation and
therefore did not violate the FCA.
According to the court, statements or omissions on Centers for Medicare and Medicaid Services’
(CMS’) enrollment forms, as well as responses or omissions to specifications set by CIGNA could
form the basis of FCA liability.
Here, statements on MedQuest’s completed CMS enrollment application that Medicare approved
resulted in a contract in which the company certified or agreed that testing at its IDTF would be
provided in accordance with applicable regulations requiring testing at its IDTFs by an approved
supervising physician, the court said.
“The requirement of a physician approved by Medicare for these tests was also a specification
and by the language of the regulation, a condition for Medicare’s payment of tests by an IDTF,"
the court noted.
In any event, the court continued, the facts also demonstrated that defendants violated express
Medicare regulations applicable to IDTFs, which require a supervising physician to “evidence
proficiency in the performance and interpretation of each type of diagnostic procedure,” in
accordance with the requirements set by the Medicare carrier.
“[T]he proof establishes that MedQuest’s failure to provide adequate supervising physician
coverage for the diagnostic tests with contrast was so significant that MedQuest’s technical staff
at its Nashville area IDTFs actually conducted the diagnostic testing without any physician
supervision,” the court concluded in granting summary judgment to the government.
Change of Ownership
The court also found MedQuest failed to properly notify or apply for an enrollment as an IDTF
after it acquired a physician practice, and instead continued to bill Medicare using the physician’s
billing number, which could give rise to an FCA violation.
“Eighteen months lapsed before MedQuest informed CMS of the change of ownership of the
Charlotte location, Defendants billed the Medicare program for diagnostic services performed at
the Charlotte center using Dr. Witt’s Medicare physician provider number,” the court observed.
“If this omission involved a ‘mom and pop’ operation of an IDTF, the Court would take a different
view, but MedQuest is a highly sophisticated and experienced IDTF provider with operations in
13 states,” the court said, finding MedQuest recklessly disregarded Medicare regulations in this
regard.
Retaliation Claim Rejected
The court did reject Hobbs’ retaliation claim as time-barred. The FCA’s new three-year statute of
limitations did not apply to this action, the court said, because the provision’s effective date was
July 22, 2010, after the conduct at issue occurred.
Instead, the court “borrowed” the applicable state statute of limitations for an FCA retaliatory
discharge claim from state law, which in this case was one year, making the claim time-barred,
the court held.
United States ex rel. Hobbs v. MedQuest Assocs., Inc., No. 3:06-01169 (M.D. Tenn. Aug. 23,
2011).
U.S. Court In Pennsylvania Finds Public Disclosure Provision Bars FCA
Action Alleging False Certification Of Stark, Anti-Kickback Compliance
The U.S. District Court for the Middle District of Pennsylvania dismissed September 9, 2011 for
lack of subject matter jurisdiction a qui tam action under the False Claims Act (FCA) alleging a
medical clinic, several affiliated entities, and a hospital had improper financial relationships that
led to illegal referrals resulting in false claims submissions to the federal government.
The court found the allegations concerning the improper financial relationships and illegal
referrals were based on publicly disclosed information, including previous court litigation, tax
forms and financial statements, and publicly accessible websites.
The court also held the relator, Rodney Repko, the clinic’s former general counsel, was not an
original source of the information, noting, among other things, he left his employment with the
clinic in 1998, “long before the events which he speculates constituted fraud occurred.”
Repko instituted his qui tam action against defendants Guthrie Clinic, P.C. (clinic), several of its
affiliates, and Robert Packer Hospital (hospital), among others.
According to Repko, the clinic entered into various financial agreements with the other medical
entities, such as loans at low interest rates, in exchange for referrals of large volumes of patients
to the hospital, which then billed Medicare and Medicaid.
Thus, according to Repko, every claim the medical entities submitted to the government for
payment was the result of these illegal referrals from physicians employed by the clinic.
In a March 2008 opinion, the court refused to dismiss the action under Fed. R. Civ. P. 9(b),
finding Repko sufficiently pled fraud with the required particularity by alleging every claim
submitted to the government during the relevant time period was false in that it certified
compliance with the Stark and Anti-Kickback laws. It did dismiss, however, other claims. United
States ex rel. Repko v. Guthrie Clinic, P.C., No. 4:04-CV-1556 (M.D. Pa. Mar. 12, 2008).
Defendants then moved to dismiss on the ground the remaining claims were based on public
disclosures and Repko was not an original source.
Websites=Public Disclosure
Granting the motion, the court agreed with defendants that the information on which Repko’s
claims of improper financial arrangements were based was publicly disclosed through prior
litigation and the news media, including various websites.
In so holding, the court found information contained on publically available websites could be
public disclosures under the FCA, noting they provide the same purpose as traditional news
sources—i.e., to provide the general public with access to information.
Allegations Based on Publicly Disclosed Info
The court next found the allegations in the complaint were based on the publicly disclosed
information
“Any stranger to the transactions here referenced could examine the evidence of remunerative
financial relationships . . . , see that the defendants had referral relationships, and conclude that
the Stark and Anti-Kickback statutes had been violated,” the court observed.
“Though not identical to relator’s complaint, the information publicly disclosed is substantially
similar to the complaint,” the court said.
Relator Not Original Source
The court held Repko was not an original source because he left the clinic’s employment before
the alleged fraudulent activities occurred. Thus, the court said, Repko had “no more knowledge
of the fraud than any other outside observer.”
The court also noted allegations involving the Guthrie Eye Care Network that were not publicly
disclosed was based on information Repko did not provide voluntarily to the government, a
prerequisite for finding original source status.
Instead, Repko disclosed this information as part of a plea agreement to reduce his sentence, the
court said.
United States ex rel. Repko v. Guthrie Clinic, P.C., No. 3:04cv1556 (M.D. Pa. Sept. 1, 2011).
U.S. Court In Virginia Dismisses FCA Case Against Drug Maker
Alleging Off-Label Promotion, Says Statistics Do Not Satisfy Specificity
Requirements
A federal court in Virginia dismissed September 6, 2011 without leave to amend a False Claims
Act (FCA) whistleblower action against a pharmaceutical company, finding the complaint failed to
identify any specific false claims submitted for reimbursement to federal healthcare programs as
a result of allegedly improper off-label marketing.
In so holding, the U.S. District Court for the Eastern District of Virginia rejected the relator’s
attempt to satisfy the specificity requirements for fraud-based claims by pleading statistics
concerning the make-up of the drug’s sales together with allegations that the drug was marketed
to medical specialists whose patient populations did not have medical conditions for which the
drug was approved to treat.
Relator Noah Nathan alleged defendants Takeda Pharmaceuticals North America, Inc. and
Takeda Pharmaceuticals America, Inc. promoted their drug Kapidex, a proton pump inhibitor, for
off-label uses, causing false claims to be filed with federal healthcare programs.
The court in a previous decision dismissed, with leave to amend, relator’s claims for failure to
plead facts with sufficient specificity to state a claim.
According to the court, while the third amended complaint contained considerably more details, it
was “substantially the same in substance” as the second amended complaint.
The court noted the Fourth Circuit adheres to a “strict application” of Fed. R. Civ. P. 9(b)’s
specificity requirements to FCA claims.
“There have been cases in this Circuit, relied on by the Relator, that have not required at the
pleadings stage the identification of specific false claims, but only where there has been an
adequate description of a fraudulent scheme that makes the submission of all claims for
reimbursement submitted by the defendant fraudulent,” the court said. This was not such a case,
the court concluded.
Courts outside the Fourth Circuit have allowed relators to proceed without alleging the “who,
what, when, where, and how” as to specific false claims submitted to the government, as long as
the complaint contained statistical or factual evidence to strengthen the inference of fraud
“beyond possibility,” the opinion noted.
However, in the Fourth Circuit, allegations that “fraud must be occurring” is not sufficient to
satisfy Rule 9(b), and relator’s “statistics-based version of this theory does not satisfy his
obligation to plead his claims under the FCA with specificity,” the court said.
The court also concluded relator’s complaint was deficient in that it failed to make a plausible
claim that defendants “caused” any off-label prescriptions to be issued.
“[O]ff-label FCA cases generally involve allegations that the judgment of a physician was altered
or affected by the defendant’s fraudulent activities, which also typically involve improper
payments, benefits or inducements, or misrepresentations,” the court noted.
Relator in this case did not allege defendants paid prescribers “kickbacks or other improper
incentives or attempt[ed] to distort otherwise objective medical literature,” the court said.
The court went on to find relator failed to allege facts that would support an actionable
misrepresentation claim.
Thus, the court dismissed the complaint without leave to amend, finding further amendment
would be futile.
United States ex rel. Nathan v. Takeda Pharmaceuticals N. Am., Inc., No. 1:09-cv-1086 (AJT)
(E.D. Va. Sept. 6, 2011).
U.S. Court In Massachusetts Allows Whistleblower Action Against Drug
Maker Involving Anti-Kickback Allegations To Proceed
The U.S. District Court for the District of Massachusetts said September 15, 2011 a relator could
go forward with her False Claims Act (FCA) whistleblower action against Amgen Inc. and a group
of affiliated enterprises based on alleged anti-kickback violations.
The court held compliance with the Anti-Kickback Statute (AKS) is a precondition of Medicare
payment and therefore can form the basis of an FCA claim.
In June 2006, relator Kassie Westmoreland brought a qui tam action against Amgen and a group
of affiliated enterprises, including International Nephrology Network and ASD Healthcare, under
federal and state FCAs. The United States declined to intervene but 15 states and the District of
Columbia joined the action.
Relator alleged defendants used kickbacks to induce providers to purchase Aranesp, which is
used to treat anemia associated with chronic kidney disease and chemotherapy.
These kickback schemes, according to relator, involved “excess overfills” of the drug, which was
akin to a built-in free sample for which providers could bill.
Defendants’ provision of the alleged kickbacks caused providers to falsely certify their
compliance with federal and state anti-kickback statutes when seeking reimbursement, relator
said.
But defendants contended neither the Medicare statutes nor regulations expressly or impliedly
preconditioned Medicare payment on complying with the AKS.
The First Circuit recently held in United States ex rel. Hutcheson v. Blackstone Med., Inc., No.
10-1505 (1st Cir. Jun. 1, 2011), that the certification clause in the Medicare provider agreement
made compliance with the AKS a precondition of payment.
According to the court, defendants challenged the validity of the contractual term conditioning
payment on AKS compliance as inconsistent with the legal framework governing Medicare
payment.
In the defense’s view, the court said, the provision of the Medicare statute banning payment to
providers who violate the AKS was intended to cover only the period that these providers are
actually excluded from participating in Medicare.
Calling such an argument an “absurdity,” the court noted “[p]reservation of the public fisc would
be undermined if a provider could engage in conduct warranting exclusion from the program
altogether yet still demand payment until the time of formal exclusion.”
According to the court, defendants “failed to identify how or why Anti-Kickback Statute
compliance as an implied precondition of payment is contrary to the Medicare statutes.” The
court reached the same conclusion regarding applicable Medicare regulations.
The court also viewed a recent amendment under the Affordable Care Act expressly linking illegal
remuneration under the AKS to making a “false claim” under the FCA as a clarification, not a
substantive alteration of the law.
“This Court declines to deviate from well-established precedent that a provider must be in
compliance with the Anti-Kickback Statute to seek and receive payment for a Medicare claim.”
Relator also asserted Amgen artificially inflated Arnesp’s average sales price (ASP) by failing to
include overfills as a “price concession.” According to relator, claims submitted based on the
artificially inflated ASP were false and fraudulent as a matter of law.
Amgen asserted that federal rules and regulations make clear that overfill is not to be included in
a drug’s ASP and there was no evidence Amgen intended to submit an inaccurate ASP for
Aranesp.
The court agreed with Amgen and granted partially summary judgment to defendants on this
issue.
The Food and Drug Administration (FDA) regulates overfill, which is the amount of liquid in
excess of the volume indicated on a drug’s label needed to ensure a full dose is administered,
the court explained.
CMS does not regulate overfill and in relevant final regulations excluded overfill as a price
concession for purposes of determining ASP.
“Because the ASP calculation does not include overfill and because Amgen followed this
methodology in calculating Aranesp’s ASP, the Court need not address the Relator’s additional
arguments that Amgen had a legal duty to report its assumption that overfill was not included in
the ASP calculation and that Amgen failed to meet this duty,” the court said.
The court’s opinion also addressed several other motions advanced by the parties.
United States ex rel. Westmoreland v. Amgen, Inc., No. 06-10972-WGY (D. Mass. Sept. 15,
2011).
U.S. Court In Kentucky Finds Questions Of Intent, Presentment
Preclude Summary Judgment In FCA Case
The U.S. District Court for the Eastern District of Kentucky denied the federal government’s
motion for summary judgment in an action alleging two pharmacists and a pharmacy violated
the False Claims Act (FCA) by selling drug samples.
The court found the Fraud Enforcement and Recovery Act of 2009 (FERA) amendments to the
FCA did not apply and therefore the government had to prove the defendants presented false
claims to the federal government for payment and that they did so with the intent that the
government would pay the claims.
The federal government filed the civil FCA case against defendants Joseph Edelstein, a
pharmacist, and his wife Susan Edelstein; Holland Pharmacy, which Joseph owns and operates;
and Thomas B. Bond, also a licensed pharmacist. In 2007, Bond and Joseph Edelstein pled guilty
to knowingly selling prescription drug samples in violation of the Prescription Drug Marketing Act.
The government alleged defendants violated the FCA by selling sample drugs and then
submitting claims to University Health Care, Inc. d/b/a Passport Health Plan (Passport), a
nonprofit organization that operates under a waiver from Kentucky's regular Medicaid program.
The government moved for summary judgment. Bond also moved for summary judgment on the
claims asserted against him.
First, the court found the government was not entitled to summary judgment on its claim that
Bond, Edelstein, and Holland knowingly presented, or caused to be presented, “to an officer or
employee of the United States Government a false or fraudulent claim for payment or approval.”
31 U.S.C. § 3729(a)(1).
Bond argued the government only alleged he and Edelstein presented false claims to Passport,
which is not a governmental entity.
The court acknowledged presenting false claims directly to a state agency that administers
Medicaid would satisfy the presentment requirement under the pre-FERA FCA.
Thus, according to the court, the question was whether Passport passes healthcare provider
claims along to the federal government as state Medicaid agencies do. “The record is not clear on
this point,” the court said, noting, for example, that Passport operates under a waiver and is a
managed care rather than fee-for-service program like regular Medicaid.
The court also denied Bond’s motion for summary judgment, citing “a factual issue as to whether
any allegedly false claim was ultimately submitted to a federal government employee for
payment or approval.”
Next, the court held the government was not entitled to summary judgment as to Joseph
Edelstein on its claim under the pre-FERA version of 31 U.S.C. § 3729(a)(2), which prohibits any
person from “knowingly mak[ing], us[ing], or caus[ing] to be made or used, a false record or
statement to get a false or fraudulent claim paid or approved by the Government.”
In Allison Engine Co. v. United States ex rel. Sanders, 533 U.S. 662 (2008), the Supreme Court
held liability is not triggered under § 3729(a)(2) absent proof the defendant intended “that the
Government itself pay the claim.”
Although FERA amended this provision by omitting the requirement that the defendant use the
false record or statement with the intent of “getting” the government to pay or approve the false
claim, the court held the amendment was not applicable to the instant case because the claims
at issue were not pending at the time of the statute’s effective date, June 7, 2008.
The court said it was unclear from the record whether Edelstein “intended” that upon the
submission of the claims at issue the federal government would pay the claim. Thus, the court
refused to grant summary judgment.
The court did grant, however, summary judgment to Bond on this claim, noting the government
appeared to abandon this claim as to Bond.
Finally, the court denied summary judgment to the government on its claims under 31 U.S.C. §
3729(a)(3), which prohibits conspiracy to defraud the government by getting a false or
fraudulent claim paid.
Again citing Allison Engine, the court noted an issue of fact as to whether Bond and Edelstein
intended that the federal government would pay the claims at issue.
United States v. Edelstein, No. 3:07-cv-ooo52-KKC-REW (E.D. Ky. Sept. 29, 2011).
Third Circuit Dismisses Qui Tam Action Alleging Fabrication Of
Research Data Used For Grant Application
The Third Circuit affirmed October 20, 2012 the dismissal of a False Claims Act (FCA) qui tam
action, finding the plaintiff presented evidence only demonstrating a scientific disagreement over
the reliability of data used to support a grant application, and not evidence as to the defendants’
knowledge of the alleged falsity.
Drs. Helene Hill, Robert Howell, and Anupam Bishayee worked in University of Medicine and
Dentistry of New Jersey’s (UMDNJ’s) radiology department where they collaborated on
preliminary research to support a grant application to the National Institutes of Health (NIH).
Hill alleged data used to support the grant application was fabricated, Bishayee failed to follow
the proper scientific protocol, and Howell dismissed her concerns and employed the data in the
NIH grant application.
UMDNJ’s Committee on Research Integrity and the federal Office of Research Integrity found
insufficient evidence of misconduct to warrant further investigation.
Hill filed a qui tam action against UMDNJ, Bishayee, and Howell. The government declined to
intervene.
The district court granted defendants’ motion for summary judgment, holding Hill failed to allege
the scienter and materiality elements of the FCA and failed to establish she suffered any adverse
employment action.
Affirming, the Third Circuit, in not precedential opinion, agreed Hill’s claim failed because she
could not establish defendants had the requisite scienter.
The appeals court found insufficient Hill’s allegations that defendants must have known the data
was false based on her claims and the inability of others to replicate the data.
Here, both UMDNJ and the ORI found the data survived scrutiny. The district court found, and
the appeals court agreed, that the inability to replicate the data did not demonstrate knowledge
of a false claim or an intent to deceive the federal government.
“While the data ‘might be proof of a mistake’ or even of 'negligence’ in performing the work, . . .
it does not prove that defendants knowingly submitted false information," the Third Circuit held.
United States ex rel. Hill v. University of Med. & Dentistry of N.J., No. 10-4364 (3d Cir. Oct. 20,
2011).
U.S. Court In Tennessee Finds $11 Million Award In FCA Case Was
Not Excessive
A federal trial court in Tennessee held October 21, 2011 that an award totaling $11.1 million in
civil penalties and damages to the government in a False Claims Act (FCA) case was not an
excessive fine in violation of the Eighth Amendment.
The U.S. District Court for the Middle District of Tennessee in August granted summary judgment
to the federal government in the whistleblower action, which was initiated by relator Karen
Hobbs, who formerly worked for the defendant company, MedQuest Associates, Inc. United
States ex rel. Hobbs v. MedQuest Assocs., Inc., No. 3:06-01169 (M.D. Tenn. Aug. 23, 2011).
The court found the diagnostic testing firm was liable under the FCA for failing to comply with
Medicare’s direct physician supervision requirement at several of its independent diagnostic
testing facilities (IDTFs) in Nashville. See 42 C.F.R. § 410.33.
Defendants, MedQuest and several of its Nashville-area facilities, argued the applicable Medicare
regulations for IDTFs did not require a board certified radiologist to supervise diagnostic tests
with contrast, but the court disagreed.
The court also found MedQuest failed to properly notify or apply for an enrollment as an IDTF
after a change of ownership at its Charlotte location.
Damages and Penalties
The court concluded the $11,000 penalty was appropriate for each billing associated with
defendants’ failure to comply with the supervision requirement for contrast testing at its
Nashville facilities, and $5,500 for each billing of a contrast test of a Medicare beneficiary
submitted by the Charlotte facility.
After eliminating duplicative billings, the court determined there were 343 false claims and
billings for contrast testing without Medicare-approved physicians for which the program paid
MedQuest $250,031.31, damages were trebled under the statute to $750,090.93.
With respect to this violation, the court refused to exclude 52 claims that were submitted to
Medicare but not paid from its calculation, even though the government did not suffer a loss
from them.
The court then determined the amount of the civil penalties for the first violation as $3,773,000,
($11,000 x 343 claims).
For the second FCA violation, involving the Charlotte facility, the court identified 945 false
Medicare claims and billings for which Medicare paid MedQuest $463,357.26, which was trebled
to $1,390,071.78.
With 945 false Medicare claims at $5,500 per claim, the civil penalty for the second FCA violation
was $5,197,500. Thus, the total award was $11,110,662.71 in treble damages and civil
penalties.
Award Not Excessive
MedQuest argued the total award was “grossly disproportionate” to other FCA awards in violation
of the Eighth Amendment, but the court disagreed.
First, the court rejected MedQuest’s characterization of the violations as “technical.” Instead, the
court called them “serious violations of Medicare laws and regulations.”
The court also noted the ratio between the award of damages to civil penalties was roughly 8 to
1, in line with awards by other courts.
Moreover, although the statutory maximum civil penalty of $11,000 was imposed for the first
FCA violation, “that civil penalty was not imposed on all tests conducted by the Defendants’
IDTFs that operated without approved physicians.” In addition, the $5,500 civil penalty was the
statutory minimum for the second FCA violation, the court observed.
United States ex rel. Hobbs v. MedQuest Assocs., Inc., No. 3:06-01169 (M.D. Tenn. Oct. 21,
2011).
U.S. Court In Pennsylvania Allows DOJ To Intervene In FCA Action
Alleging Stark, Anti-Kickback Violations
A federal trial court in Pennsylvania granted November 2, 2011 the federal government’s motion
to intervene in a qui tam action under the False Claims Act (FCA) alleging a medical center’s
equipment sublease with two physicians and their practice group violated the Stark Law and
Anti-Kickback Statute.
The U.S. District Court for the Western District of Pennsylvania in November 2010 held the
arrangement at issue violated the Stark law as it "took into account" referrals. At the same time,
the court said it was unable at the summary judgment stage to conclude defendants’ violation of
the Stark law was done knowingly for purposes of the FCA. United States ex rel. Singh v.
Bradford Reg’l Med. Ctr., No. 04-186 Erie (W.D. Pa. Nov. 10, 2010).
The court likewise held it was unable to conclude as a matter of law that defendants “knowingly
and willfully” paid and received remuneration under the sublease and other arrangements for
referrals of services in violation of the Anti-Kickback Statute (AKS), saying this determination
must be left to the fact finder.
The Department of Justice (DOJ) filed its motion to intervene November 1. In a supporting
memorandum, DOJ noted if a jury were to find defendants lacked the necessary “knowledge”
under the FCA, the relators would recover nothing.
“[U]nless the United States is permitted to intervene to assert common law claims for payment
by mistake and unjust enrichment—theories that do not require a showing of the Defendants’
knowledge or other scienter—Defendants might never be required to repay the Unites States for
the payments illegally obtained from federal health care programs in violation of the Stark Act,”
DOJ argued.
In granting the motion to intervene, the court agreed that the government could assert its
common law claims of payment by mistake and unjust enrichment as part of the action.
Court’s Decision
A group of physicians (relators) initiated the qui tam action against Bradford Regional Medical
Center (BRMC), V&S Medical Associates, LLC, and two individual physicians, Peter Vaccaro, M.D.,
and Kamran Saleh, M.D.(collectively, defendants) alleging FCA violations for claims made
seeking reimbursement for services rendered to patients who allegedly were unlawfully referred
to BRMC.
According to relators, the scheme arose out of BRMC’s equipment sublease of a nuclear camera
from V&S Medical, which was owned by Vaccaro and Saleh, two medical staff physicians at
BRMC.
Under the arrangement, BRMC would sublease the equipment from V&S Medical, and then use it
to provide diagnostic tests for patients of BRMC. V&S in turn agreed not to compete with the
provision of nuclear cardiology services by BRMC for the term of the agreement.
Relators alleged the sublease was intended to gain patient referrals in violation of the Stark Law
and AKS.
The court found the physicians had a financial relationship with BRMC, they made referrals to
BRMC, and BRMC submitted claims to Medicare and Medicaid pursuant to those referrals in
violation of the Stark Law.
The court deferred ruling on damages, however, saying it was unable to hold, at this stage of the
litigation, that defendants’ violation of the Stark Law was done knowingly for purposes of the
FCA.
While the court held defendants violated Stark because the arrangement “took into account”
anticipated referrals, it was unable to conclude the same with respect to the AKS, noting “much
of the evidence in support of establishing the requisite intent of Defendants implicates credibility
decisions that are the province of the fact-finder at trial.”
The court also found genuine issues of material fact precluded a determination that defendants
acted “knowingly” for purposes of the FCA. While the record evidence did not strongly favor
defendants, a fact-finder could conclude they did not act “knowingly” based on the fact that they
carefully sought to avoid requiring referrals and attempted to make a business decision based on
the fair market value assessment of the arrangements, the court observed.
Thus, the court denied defendants’ motion for summary judgment, and granted in part and
denied in part relators’ motion for summary judgment.
U.S. Court In Kentucky Refuses To Dismiss “Worthless Services” Claim
Under FCA Against Nursing Home
A federal district court in Kentucky refused December 19, 2011 to dismiss the federal
government’s False Claims Act (FCA) lawsuit against a nursing home for allegedly submitting
claims to Medicare and Medicaid for “worthless services.”
“Although it is true that a worthless services claim is not easy to establish in the context of
nursing home services,” the U.S. District Court for the Central District of Kentucky commented,
“[i]t is not necessary to show that the services were completely lacking; rather, it is also
sufficient to show that ‘patients were not provided the quality of care’ which meets the statutory
standard.”
The court also concluded the government could move forward under an “implied certification”
theory of recovery.
In so holding, the court acknowledged the Sixth Circuit has not addressed the issue, which has
divided the federal appeals courts, but was persuaded “at this point in the proceedings, . . . that
the United States has adequately pleaded an implied certification claim” based on the allegations
that the nursing home violated its provider agreement.
“Based on this contract language, it is reasonable for the government to assert that a violation of
a Medicare statute or regulation could give rise to liability under an implied certification theory,”
the court said.
The case followed a criminal investigation by the Kentucky Attorney General into allegations of
neglect at a nursing home in Erlanger, KY operated by Villaspring Health Care Center, Inc.
(Villaspring).
The state decided not to pursue criminal charges but the federal government instituted a civil
FCA action against defendants Villaspring, a related company, and Villaspring’s Chief Executive
Officer (CEO) and majority shareholder.
The complaint alleged defendants defrauded the federal government and the state “by seeking,
and receiving, substantial reimbursement from the Medicare and Kentucky Medicaid programs
for care purportedly provided to these residents, despite knowing that such ‘care’ was either
non-existent or so inadequate as to be worthless.”
Defendants moved to dismiss.
The court first rejected defendants’ argument that the government lacked standing and was
estopped from bringing the action because the Centers for Medicare and Medicaid Services
(CMS) had not terminated Villaspring from the Medicare and Medicaid programs or denied
payment of its claims.
After summarily concluding the government had standing, the court also found defendants’
estoppel argument “without merit.”
According to the court, the fact that CMS failed to declare the services at issue worthless “does
not constitute a representation from the government that the claims submitted by Villaspring
were not false.”
Moreover, defendants’ argument that CMS’ failure to bring charges or discontinue payments
negated the scienter element of the FCA claim “would have the effect of shielding defendants
who engaged in intentional and purposeful fraud on the United States just because the
government did not inform them that their claims were false before bringing an action.”
The court also pointed out that ruling the government was estopped from bringing an FCA action
because it paid the claims at issue would undermine “the entire purpose and history” of the
statute.
Next, the court rejected defendants’ motion to dismiss on the ground the government failed to
plead fraud with the required particularity under Fed. R. Civ. P. 9(b).
The court noted the complaint included specific allegations regarding five representative patients,
including the dates claims were submitted for payment and the amounts Medicare and Medicaid
paid for them.
Defendants also argued the government could not base an FCA claim against a nursing home on
a “worthless services” theory—i.e., that the services were so deficient as to essentially be of no
value at all—because services to residents are billed on a per diem basis and Villaspring provided
room, board, and at least some patient care.
According to the court, determining whether Villaspring failed to perform minimum necessary
care activities was a “fact-intensive inquiry” that could not be resolved on a motion to dismiss.
Likewise, the court rejected defendants’ objection to the government’s implied certification
theory of recovery under the FCA.
The certification statement Villaspring’s CEO signed when the nursing home enrolled in Medicare
conditioned payment of its claims on “complying with such laws, regulations and program
instructions . . . and on a provider/supplier being in compliance with any applicable conditions of
participation in any federal healthcare program.”
This language, the court said, was sufficient to support the government’s implied certification
theory.
But the court also emphasized the alleged non-compliance would have had to have been material
to the government’s decision to pay to trigger FCA liability.
Finally, the court did grant the defendant CEO’s motion to dismiss the FCA action as to him,
finding the complaint failed to allege any facts to support allegations the CEO caused the claims
in question to be submitted to Medicare or Medicaid.
United States v. Villaspring Health Care Ctr., Inc., No. 3:11-43-DCR (E.D. Ky. Dec. 19, 2011).
U.S. Court In Mississippi Dismisses FCA, HIPAA Claims Against
Hospital
The U.S. District Court for the Northern District of Mississippi dismissed February 8, 2012 former
hospital employees’ claims under the False Claims Act (FCA), Health Insurance Portability and
Accountability Act (HIPAA), and other claims, finding plaintiffs failed to plead sufficient facts to
show violations of the statutes.
Marsha Little Hendren was a practicing psychologist at Parkwood Behavioral Health Systems from
1991 until her privileges were revoked on April 1, 2007.
According to the opinion, in 2005, Hendren discovered a colleague, Dr. Barry Vinick, was
poaching clients who had been referred to her by the treating physician, but the hospital took no
action.
In January 2007, Parkwood’s rules on credential privileges changed, requiring psychologists to
submit letters of recommendation from three other psychologists. Parkwood never received one
of Hendren’s letters.
Meanwhile, on March 21, 2007, Hendren filed a complaint in federal court against Vinick,
Parkwood, and others, asserting claims for breach of contract, violation of the Civil Rights Act,
interference with contract, conspiracy to defraud, and intentional infliction of emotional distress,
which was eventually dismissed. A state court suit also was dismissed.
Hendren and another former employee (plaintiffs) then filed the instant FCA suit against
Parkwood and several other defendants asserting claims for Medicare fraud as well as violations
of HIPAA and the FCA.
Plaintiffs also asserted supplemental state law claims for defamation, breach of contract, tortious
interference with contract, bad faith, and intentional and/or negligent infliction of emotional
distress.
Defendants moved to dismiss arguing the complaint failed to state a claim under Fed. R. Civ. P.
12(b)(6) and did not meet the heightened pleading standard required by Fed. R. Civ. P. 9(b).
After reviewing the requirements for a successful FCA claim, the court concluded the complaint
failed to satisfy Rule 9(b) because no fraudulent activity was particularized.
Much of the complaint focused on Vinick stealing patients from Hendren and billing Medicare, but
“[t]here is no allegation that the defendants submitted bills for unperformed services or acted
with the intent of getting a false claim paid by the Government,” the court noted.
Turning to plaintiffs’ argument that defendants violated FCA whistleblower protections, the court
found at the time of plaintiffs' claims, only employees could assert a cause of action under the
whistleblower provision of FCA, and Hendren was not an employee at the time. See 31 U.S.C.A.
§ 3730 (2007).
The court also held plaintiffs similarly failed to plead enough facts to state valid claims for
Medicare fraud and HIPAA violations.
The court exercised supplemental jurisdiction over plaintiffs’ state law claims, but ultimately
found those claims should be dismissed as well.
United States ex rel. Hendren v. Mayo, No. 2:09-CV-00210 (N.D. Miss. Feb. 8, 2012).
U.S. Court In Virginia Refuses To Enforce Mandatory FCA Penalty
Finding It Excessive Under Eighth Amendment
The U.S. District Court for the Eastern District of Virginia held February 14, 2012 that a
mandatory civil penalty of at least $50,248,000 under the False Claims Act (FCA) constituted an
unconstitutionally excessive fine in violation of the Eighth Amendment under the circumstances
of the case.
In so holding, the court also found it lacked the discretion to fashion some other civil penalty that
would be within constitutional limits; therefore, it imposed no civil penalty.
The case centered around government contracts for the transportation of military household
goods owned by U.S. military personnel and their families between U.S. military installations in,
to, and from Germany, Italy, Belgium, The Netherlands, and Luxemburg.
The consolidated FCA actions were originally filed in 2002 by two relators alleging defendants
Gosselin Worldwide Moving N.V., its successor Gosselin Group N.V., and Marc Smet (Gosselin
defendants) violated the FCA by filing a false certification in connection with their bid for the
2001 Direct Procurement Method (DPM) contract.
According to relators, defendants certified that the prices in their offer had been arrived at
“independently,” when in fact, they and other potential bidders had entered into a subcontract
price-fixing agreement and territory allocations. A jury eventually returned a verdict in favor of
the relators as to the DPM claim.
Based on the jury's finding of liability, the relators sought to have a civil penalty of between
$5,500 and $11,000 assessed as to each of 9,136 invoices that the parties stipulated had been
filed under the DPM contract.
The court noted at the outset the FCA provides that a person who violates the statute “is liable to
the United States Government for a civil penalty of not less than $5,000 and not more than
$10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990.”
The court found it was obligated, therefore, to assess a civil penalty of no less than $5,500 and
no more than $11,000 for each of 9,136 false claims stipulated in the case, which amounts to no
less than $50,248,000 and no more than $100,496,000.
To determine whether a civil penalty is “grossly disproportional to the gravity of a defendant's
offense” for Eighth Amendment purposes, the court must first consider the “harm” caused by
defendants' conduct, the opinion said.
Here, neither the government nor the relators attempted to prove at trial any damages
associated with the DPM claim; and in fact there was no evidence during the trial of any
cognizable financial harm to the United States as a result of the 2001 DPM contract, the court
noted.
After reviewing the evidence, the court held the relators failed to establish defendants' conduct
caused the government any economic harm.
Looking at noneconomic harm, the court determined the extent to which defendants' conduct
compromised the integrity of the contracting process was minimal.
After taking all elements into consideration, the court concluded the minimum mandated civil
penalty of $50,248,000 was grossly disproportional in this case to the harm caused by
defendants with respect to the 2001 DPM contract.
“The Court therefore concludes that the FCA, as applied to the Defendants based on the facts of
this case, results in the imposition of an excessive fine in violation of the Eighth Amendment,”
the opinion said.
The court also addressed the issue of whether it should determine and impose a civil penalty that
would be within constitutional limits.
After examining the text of the statute, the court came to the conclusion “that it must simply
refuse to enforce the mandated penalty after finding it unconstitutional under the facts of this
case, and not substitute its own fashioned penalty, in large part due to the structure and
language of the FCA itself.”
United States ex rel. Bunk v. Birkart Globistics GMBH & Co., Nos. 1:02cv1168, 1:07cv1198 (E.D.
Va. Feb. 14, 2012).
Eleventh Circuit Reverses Dismissal Of FCA Claim Alleging $69 Million
In Overpayments
The Eleventh Circuit held February 22, 2012 that a lower court should not have dismissed a qui
tam action under the False Claims Act (FCA) against Medco Health Solutions, Inc. and its
subsidiaries for allegedly failing to return identified overpayments as required under a corporate
integrity agreement (CIA) with the government.
The appeals court found the relators, who formerly worked for one of the Medco defendant
subsidiaries, pled their reverse FCA claim— that defendants knowingly made a false statement
for the purpose of concealing or avoiding an obligation to pay money to the government—with
sufficient particularity under Fed. R. Civ. P. 9(b).
Thus, the Eleventh Circuit reversed the district court’s dismissal of the complaint for failure to
state a claim.
Relators Lucas Matheny and Deborah Loveland brought the qui tam action against Medco Health,
its subsidiaries, and two corporate executives. Relators formerly were employed by one of the
defendant subsidiaries.
The corporate defendants were subject to a CIA that one of the subsidiaries, PolyMedica
Corporation, had entered into with the Department of Health and Human Services Office of
Inspector General (OIG).
The CIA required defendants to remit to the government “overpayments” resulting from lack of
documentation and duplicate and erroneous billings within 30 days of identification.
According to relators, defendants engaged in a scheme to conceal roughly $69 million in alleged
overpayments that under the CIA should have been remitted to the government.
Relators alleged defendants transferred the overpayments to unrelated patient accounts,
fictitious patient accounts, or eliminated them from the records through a program called a
“datafix.”
In Count I of their complaint, relators alleged a 2008 certification of compliance required under
the CIA was false due to the failure to report or remit the overpayments.
Count II of the complaint involved the same obligation to remit overpayments but was based on
a separate scheme and separate false records.
Specifically, under the CIA, defendants had to submit annually a random sample of patient
accounts, known as the Discovery Sample, to the OIG’s Independent Review Organization (IRO),
which would initiate an audit of all patient records if it found an error rate above 5%. Relators
alleged defendants scrubbed the Discovery Sample to remove any evidence of overpayments to
avoid triggering the audit.
The district court dismissed the complaint, finding relators had not pled fraud under either count
with the required particularity. The Eleventh Circuit reversed.
To establish a reverse false claim, a relator must prove: (1) a false record or statement; (2) the
defendant’s knowledge of the falsity; (3) that the defendant made, used, or caused to be made
or used a false statement or record; (4) for the purpose to conceal, avoid, or decrease an
obligation to pay money to the government; and (5) the materiality of the misrepresentation,
the appeals court explained.
First, the appeals court found relators adequately alleged with particularity the existence of an
obligation to pay money to the government.
“Here, the Complaint contains detailed allegations relating to the defendants’ contractual
obligation to identify, report, and remit excess government money in accordance with the CIA’s
instructions,” the appeals court noted.
Next, the appeals court held relators sufficiently alleged the certification of compliance and the
discovery sample were knowingly false and were submitted to the government.
The appeals court also disagreed with the district court’s conclusion that relators failed to allege
a factual basis to show the funds identified in the complaint were actually overpayments.
“Relators’ allegations are particular because they establish exactly how the Defendants violated
the CIA, including when the violations occurred, who directed and performed the violations, how
and which accounts were affected, and what the Defendants gained as a result,” the appeals
court said.
The appeals court then found the complaint was not deficient in showing materiality.
Specifically, the appeals court held “because the CIA required the Defendants to provide an
accurate account of any excess government property in the Defendants’ possession, and the
Certification of Compliance misrepresented the value of the property in the Defendants’
possession, the submission of the Certification played a material role in the concealment and
avoidance of an obligation.”
Finally, the appeals court ruled the district court should not have dismissed Count II, finding
among other things, relators provided adequate evidence the discovery sample was submitted to
the IRO.
United States ex rel. Matheny v. Medco Health Solutions, Inc., No. 10-15406 (11th Cir. Feb. 22,
2012).
U.S. Court In Massachusetts Dismisses False Claims Act Counts; Spares
Retaliation Claims
On March 2, 2012, the U.S. District Court for the District of Massachusetts dismissed alleged
violations of the False Claims Act (FCA) by Ortho-McNeil Pharmaceutical (Ortho), Johnson &
Johnson, Inc. (J&J), and a host of related entities.
However, the court denied defendants’ motion to dismiss relator Scott Bartz’s retaliation claim
against Ortho and J&J under the FCA and a comparable New Jersey statute.
In his third amended complaint, Bartz alleged pharmaceutical distributor McKesson Specialty
Pharmaceutical took kickbacks from J&J as an inducement to purchase the anti-psychotic
medication Risperdal Consta.
The district court determined these allegations had been publicly disclosed before Bartz brought
them to the federal government’s attention, and that Bartz’s claim to be the original source of
the information was not supported. Therefore, Bartz was barred from suing under the FCA, 31
U.S.C. § 3730(e)(4)(A).
In addition, the district court held even if Bartz had been the original source of the information,
he was not the first to file suit. His claim was therefore also barred by the FCA’s first-to-file rule,
31 U.S.C. § 3730(b)(5).
The court also determined an amendment to the Anti-Kickback Statute contained in the
Affordable Care Act, which states that a violation of the Anti-Kickback Statute constitutes a
violation of the False Claims Act, was inapplicable because the alleged kickback occurred before
the amendment took effect.
However, the court did find Bartz, a former employee of Ortho, met the pleading standards for a
retaliation claim under the FCA and New Jersey law.
United States ex rel. Bartz v. Ortho-McNeil Pharmaceutical, Inc., No. 11-10316-RGS (D. Mass.
Mar. 2, 2012).
U.S. Court In New York Holds Relator Was Original Source Of
Information Publicly Disclosed Through FOIA Request
A federal district court in New York held February 16, 2012 that the False Claims Act (FCA) public
disclosure bar did not preclude a whistleblower case alleging a hospital inflated “outlier” claims to
the government for reimbursement.
The U.S. District Court for the Southern District of New York found even though the information
in the complaint was publicly disclosed through a Freedom of Information Act (FOIA) request, the
relator was an “original source” because he had “direct and independent” knowledge of the
alleged fraud.
Relator alleged defendant Huron Consulting Group, Inc., which controls St. Vincent’s Medical
Center, submitted fraudulently inflated outlier claims through a practice known as
“turbocharging”—i.e., inflating charges without any corresponding increases in costs.
Relator also alleged Empire Health Choice Assurance, Inc., St. Vincent’s fiscal intermediary,
“recklessly ignored the evidence of this turbocharging and processed the outlier claims at a
higher reimbursement level than was appropriate,” according to the opinion.
Before the complaint was filed, relator made several FOIA requests to the government.
Responses to the FOIA requests contained cost and charge information, as well as information on
the payments St. Vincent’s received from the government.
Defendants moved to dismiss plaintiff’s third amended complaint in light of the Supreme Court’s
intervening decision in Schindler Elevator Corp. v. United States ex rel. Kirk, 131 S.Ct. 1885
(2011), arguing the FCA’s public disclosure provision stripped the court of subject matter
jurisdiction.
In Schindler, the Court held documents issued by government agencies in response to FOIA
requests are public disclosures for purposes of the FCA bar.
The court agreed the information disclosed through the FOIA requests was public for purposes of
the FCA under the Court’s Schindler decision.
“The transactions underlying the fraud that were disclosed with the FOIA data were sufficient
that a person relying solely on the FOIA data could infer that fraud had been committed,” the
court observed.
But the court found relator, as a former independent contractor working in St. Vincent’s
reimbursement department, had “direct and independent” knowledge of the fraud, making him
an original source of the information.
“That the responses he later received to his FOIA requests are now considered a ‘report’ for
public disclosure purposes does not change that he still obtained direct, first-hand knowledge of
the heart of the fraud, making him an original source,” the court held.
Defendants argued a Second Circuit decision, United States ex rel. Dick v. Long Island Lighting
Co., 912 F.2d 13 (2d Cir. 1990), required, for purposes of the original source analysis, the
relator to “have directly or indirectly been a source to the entity that publicly disclosed the
allegations on which a suit is based.”
But the court declined to apply this additional requirement, noting it was directly rejected by the
Supreme Court in Rockwell Int’l Corp. v. United State ex rel. Stone, 549 U.S. 457 (2007), which
found Congress did not intend to “link original-source status to the information underlying the
public disclosure.”
Here, the court observed, “the relator’s FOIA requests simply corroborated and elaborated the
direct and independent knowledge of the fraud he had obtained through his work at St.
Vincent’s.”
While no court in the Second Circuit had yet to repudiate the Long Island Lighting case, the court
here said it was required to do so by the Rockwell ruling.
Finally, the court concluded relator established his original source status as to his claims against
Empire.
Although relator was never employed by Empire, he stated he personally learned from inquiries
that Empire was using outdated information in processing St. Vincent’s outlier claims, which the
court viewed as sufficient to establish the “core allegations” that Empire recklessly ignored St.
Vincent’s inflated charges.
United States ex rel. Associates Against Outlier Fraud v. Huron Consulting Group, Inc., No. 09
Civ. 1800 (JSR) (S.D.N.Y. Feb. 16, 2012).
U.S. Court In Georgia Refuses To Dismiss FCA “Worthless Services”
Claim
A federal district court in Georgia denied March 2 a motion to dismiss a qui tam action under the
False Claims Act (FCA) alleging a dialysis provider defrauded federal healthcare programs by
improperly billing for two medications, Zemplar (a Vitamin D supplement) and Venofer (an iron
supplement).
Whistleblowers Alon J. Vainer, a board certified nephrologist, and Daniel D. Barbir, a registered
nurse, filed the action against their former employers DaVita, Inc., the second largest
independent provider of dialysis services, and Gambro Healthcare, Inc., which sold its U.S. clinics
to DaVita in 2005.
Relators alleged defendants engaged in various schemes to maximize their reimbursements
from the government in violation of “reasonable-and-necessary” reimbursement requirements.
As described in the complaint, these alleged schemes involved: (1) not allowing re-entry of
single-use vials of Zemplar and Venofer; (2) manipulating corporate protocols for administering
iron supplements to maximize waste and thereby maximize reimbursements; (3) not allowing
combinations of different concentrations of Zemplar to be administered in the same dose; and
(4) directing employees to increase the dosages of Zemplar by 0.5 mcg.
The government declined to intervene in the action.
Defendants moved to dismiss for failure to state a claim, arguing relators failed to plead
defendants submitted any false or fraudulent claims for purposes of the FCA, and for not
pleading with the particularity required under Fed. R. Civ. P. 9(b).
The U.S. District Court for the Northern District of Georgia denied the motion.
The court found the complaint, particularly the alleged second and fourth schemes, could support
a "worthless services" claim.
The court also had “little difficulty” concluding the complaint stated a claim for legal falsity—both
expressly and impliedly.
As to express false certification, relators alleged defendants submitted claims to Medicare on
forms containing an express certification that all information provided on the form was true and
correct. In addition, the court noted, relators alleged defendants submitted annual cost reports
certifying the services identified therein were provided in compliance with the relevant laws and
regulations.
The court found these allegations sufficient to allow relators to proceed based on express
certification.
The court also concluded relators’ allegations were sufficient under the implied certification
theory, because defendants’ submission of claim forms implicitly certified compliance with 42
U.S.C. § 1395(a)(1), which specifies Medicare generally does not reimburse for items and
services that are not “reasonable and necessary.”
Finally, the court rejected defendants’ argument that the complaint should be dismissed based
on Rule 9(b).
“In this case, the examples pled with specificity are sufficiently illustrative of the schemes they
represent—and of the overall scheme to maximize billing for waste—to warrant discovery in light
of the allegations that these billing practices were mandated by company-wide policies,” the
court said.
United States ex rel. Vainer v. Davita, Inc., No. 1:07-CV-2509-CAP (N.D. Ga. Mar. 2, 2012).
U.S. Court In Massachusetts Allows FCA Case Against Dialysis Provider
To Proceed, Finds “Original Source” Status
The U.S. District Court for the District of Massachusetts denied March 6, 2012 a motion by
defendant Fresenius Medical Care Holdings, Inc. to dismiss relator Christopher Drennen’s action
under the False Claims Act (FCA).
Drennen was an area manager for Fresenius, the nation’s largest dialysis treatment provider,
from January 2006 until January 2008.
He alleged Fresenius performed certain hepatitis B and ferritin tests on dialysis patients at a rate
exceeding the frequency authorized for reimbursement by Medicare’s National Coverage
Determination manual.
In support of its motion to dismiss, Fresenius argued Drennen did not plead fraud with the
specificity required by Fed. R. Civ. P. 9(b) and that he was not an original source of the publicly
disclosed information in his complaint.
The court found Drennen met the requirement for specificity by identifying 64 instances of fraud
in three Fresenius clinics with a significant amount of detail, and by alleging that similar practices
likely occurred at other facilities around the country.
The court acknowledged Drennen’s allegations appeared to be based on publicly disclosed
information, but concluded he could proceed with his FCA action because he was an “original
source” of the allegations in the complaint.
According to the court, a trier of fact could conclude Drennen was the original source of
information about the alleged fraud, even if he did not have personal knowledge of every
possible instance.
United States ex rel. Drennen v. Fresenius Med. Care Holdings, Inc., No. 09-10179-GAO (D.
Mass. Mar. 6, 2012).
Anti-Kickback Statute
OIG Says Existing And Proposed Contracts Between DME Supplier And
IDTFs May Trigger Sanctions
Existing and proposed contracts between a durable medical equipment (DME) supplier and
various independent diagnostic testing facilities (IDTFs), pursuant to which IDTF staff members
perform certain services on behalf of the DME supplier, could potentially generate prohibited
remuneration under the Anti-Kickback Statute and trigger sanctions, the Department of Health
and Human Services Office of Inspector General (OIG) said in an advisory opinion posted June
21, 2011.
Highlighting longstanding concerns with several different aspects of such arrangements, OIG said
it could not conclude that either the Existing Arrangement or the Proposed Arrangement “poses a
sufficiently low risk of fraud and abuse to provide prospective immunity under our administrative
authorities.”
The requestor, a Medicare-enrolled supplier of DME, sells among other things, continuous
positive airway pressure (CPAP) blower units, masks, and supplies.
When a physician prescribes the CPAP for a patient pursuant to a sleep study, the patient
chooses a DME supplier to supply the equipment. According to the requestor, an additional sleep
study may be necessary to determine the CPAP’s most effective pressure settings.
Accordingly, the requestor has entered into contracts with several IDTFs to perform services
related to setting up the CPAP for and educating the patient on behalf of the requestor.
Federal healthcare program beneficiaries are excluded from the Existing Arrangement, under
which in exchange for its services, the requestor pays the IDTF a per patient fee, which the
requestor has certified reflects fair market value for the services.
The Proposed Arrangement is identical to the Existing Arrangement except that federal
healthcare program beneficiaries would be included and the fee paid to an IDTF for the services
would be a flat monthly or flat annual fee.
Although the Existing Arrangement covers services provided to non-federally insured patients
only, the “carve out” is not sufficient to save the arrangement from violating the Anti-Kickback
Statute, OIG found.
The agency “has a long-standing concern about arrangements pursuant to which parties ‘carve
out’ Federal health care program beneficiaries or business generated by Federal health care
programs from otherwise questionable financial arrangements,” the opinion noted.
Here, IDTFs participating in the Existing Arrangement may still influence referrals of federal
healthcare program beneficiaries to the requestor for DME. “Thus, we cannot conclude that there
would be no nexus between the Requestor’s payments to the IDTF for services provided to nonFederal patients and referrals to the Requestor of Federally insured patients,” OIG said.
OIG next found the Existing Arrangement and the Proposed Arrangement would not qualify for
safe harbor protection under the personal services and management contracts safe harbor.
Noting that “[c]areful scrutiny of the Arrangements is warranted because the Requestor, a DME
supplier, plans to subcontract to IDTFs performance of several of its obligations,” OIG said the
IDTFs, through their staffs, are “potentially in a position to influence Federal health care program
beneficiaries to select the Requestor’s products.”
OIG also noted that, in some cases, physicians who are able to prescribe the requestor’s
products may have a financial interest in the IDTFs.
The opinion cited concerns generally with payments that are above market rates, as is
potentially the case with the Proposed Arrangement, and with payments that may be consistent
with fair market value but otherwise reflect the volume or value of past or expected referrals, as
is the case with the Existing Arrangement.
“Moreover,” OIG said, “we have long been concerned about aggressive marketing by DME
suppliers, including those marketing activities that involve personal contact with Federal health
care program beneficiaries.”
“The fraud and abuse risks are compounded where, as here, a physician or other health care
professional is involved in the marketing activity—a practice sometimes referred to as ‘white
coat’ marketing,” the opinion said.
OIG indicated the arrangements have many of the hallmarks of a problematic arrangement,
including that they involve direct payments to IDTFs that can closely tie the requestor to IDTF
staff members and, in some instances, to physicians with financial interests in the IDTF who are
in a position to prescribe.
“That connection effectively allows the Requestor to obtain in-person contacts with patients—
including Federal health care program beneficiaries—through health care professionals who are in
a position of trust,” OIG said.
Advisory Opinion No. 11-08 (Dep't of Health and Human Servs. Office of Inspector Gen. Jun. 14,
2011).
OIG Says Medigap Plans May Use Preferred Hospital Network
Medicare Supplemental Health Insurance (Medigap) plans may use a "preferred hospital"
network without running afoul of federal fraud and abuse laws, the Department of Health and
Human Services Office of Inspector General (OIG) said in an advisory opinion posted July 21,
2011.
Under the proposed arrangement, Medigap plans would contract indirectly through a preferred
provider organization (PPO) with hospitals for discounts on otherwise applicable Medicare
inpatient deductibles for their policyholders and in turn would provide a $100 premium credit to
policyholders who use a network hospital for an inpatient stay.
The Medigap plans would pay the PPO a fee for administrative services each time it receives a
discount from a network hospital.
OIG noted prohibited remuneration under the Anti-Kickback Statute (AKS) may include waivers
of Medicare cost-sharing amounts.
However, OIG concluded “the discounts offered on inpatient deductibles by the network hospitals
would present a low risk of fraud or abuse.”
According to the opinion, the waivers would not increase or affect per service Medicare
payments and should not increase utilization.
"In this case, the discounts effectively are invisible to patients, because they only apply to that
portion of the beneficiary’s cost-sharing obligations that the beneficiary’s supplemental insurance
would otherwise already cover," OIG said.
The opinion also found the arrangement should not unfairly affect competition among hospitals
because membership in the PPO network is open to any accredited, Medicare-certified hospital
that meets the requirements of applicable state laws.
Lastly, the arrangement "would not likely affect professional medical judgment, because the
patient’s physician or surgeon receives no remuneration, and the patient remains free to go to
any hospital without incurring any additional out-of-pocket expense," OIG said.
OIG also found the “premium credit for patients who have inpatient stays in network hospitals
similarly presents a low risk of fraud or abuse,” noting the same factors applicable to its analysis
of the cost-sharing waivers applied equally to the premium credit for purposes of the AKS.
The premium credit, however, also implicates the prohibition on inducements to beneficiaries,
but added the credit was similar to differentials in coinsurance and deductible amounts as part of
a benefit plan design, for which there is a statutory exemption.
OIG also pointed out that such arrangements have the potential to lower costs for all
policyholders.
Advisory Opinion No. 11-09 (Dep’t of Health and Human Servs. Office of Inspector Gen. July 14,
2011).
OIG Allows Healthcare Management Company To Make Pay-for
Performance Payments On Behalf Of State Medicaid Program
A healthcare management services company may disburse pay-for-performance financial
incentives on behalf of a state’s Medicaid program without risking sanctions, the Department of
Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted
August 1, 2011.
Although the arrangement has the appearance of possible impropriety, OIG found, the specifics
of the arrangement would not implicate the Anti-Kickback Statute.
The opinion requestor sells a variety of healthcare management services, including behavioral
health administrative services and disease management and care coordination services.
The state’s Medicaid Department runs a Medical Home Program, which has a disease
management component that provides comprehensive systemic care to chronically ill
beneficiaries suffering from certain conditions.
The requestor and the Department entered into an agreement pursuant to which the requestor
agreed, among other things, to administer the disease management program on behalf of the
Department, the opinion explained.
The disease management program includes a pay-for-performance program in which physicians
and dentists participate.
Under the program, payments are made by the state’s Medicaid program to induce physicians
and dentists to arrange for, order, or recommend certain specified services, with the goal of
reducing overall medical costs by achieving better health outcomes for patients.
OIG first pointed out that its opinion “addresses the narrow question of whether the
Arrangement, i.e., Requestor’s disbursement of Pay-for-Performance Program payments to
physicians and dentists on behalf of the Department, implicates the anti-kickback statute.”
“We are specifically not opining on other elements of the Agreement or the Pay-for-Performance
Program,” OIG specified.
An Anti-Kickback Statute issue arises in this case because of the appearance that the requestor
is making payments to physicians and dentists by issuing pay-for-performance checks drawn on
its own bank account, the opinion said.
Ideally, this problem could be solved by drawing payments from a state bank account, but such
arrangement is apparently not possible, according to the opinion.
Noting that “[s]uperficial appearances are not controlling,” OIG found that the specific
circumstances of the arrangement do not implicate the Anti-Kickback Statute.
Specifically, OIG found, the payments are funded by the state; the requestor does not have
control or discretion over the payments; the parties have taken meaningful steps to minimize
any misimpression by physicians and dentists that the requestor is paying them for referrals of
Medicaid business; and the Department supervises all payments disbursed by the requestor and
retains the right to audit the requestor’s performance under the agreement.
Lastly, OIG highlighted that its opinion in this case was fact-specific and that it “might reach a
different conclusion were we to consider, for example, a similar arrangement whereby an
administrator had power to control payments that related to its products or services.”
Advisory Opinion No. 11-10 (Dept. of Health and Human Servs. Office of Inspector Gen. July 25,
2011).
OIG Finds Problematic Two Possible Medical Supply Contracts With
SNF
Two possible options for a medical supplier contract with a skilled nursing facility (SNF) to supply
both items that are covered by Medicare Part B and items that are not covered could potentially
generate prohibited remuneration under the Anti-Kickback Statute and the Department of Health
and Human Services Office of Inspector General (OIG) could potentially impose administrative
sanctions, according to an advisory opinion posted August 4, 2011.
Both arrangements present the possibility that the SNF may be soliciting improper discounts on
business for which it bears risk in exchange for referrals of business for which it bears no risk,
OIG found.
The opinion requestor is a supplier that furnishes medical supplies and equipment to SNFs as
well as certain related services.
When the medical supplies and equipment that the requestor furnishes to a SNF are covered by
Medicare Part B (Covered Items), the requestor bills the Medicare program directly. When they
are not (Non-Covered Items), the requestor bills the SNF directly.
A county-owned SNF has issued a request for proposals (RFP) soliciting bids to be the exclusive
supplier of Covered Items and related services to the SNF. Suppliers that submit bids in response
to the RFP are also required to submit pricing for the Non-Covered Items and related services,
which the SNF may purchase at its option.
Under Proposed Arrangement A, the opinion requestor would submit a bid in connection with the
RFP and, if selected, enter into a contract with the SNF to: (1) serve as the SNF’s exclusive
supplier of Covered Items, (2) furnish Non-Covered Items at the pricing listed in its bid if the
SNF chose to purchase those items from the requestor, and (3) furnish the related services in
connection with all Covered Items and Non-Covered Items it would furnish under the contract.
Under Proposed Arrangement B, the requestor’s owners would form a new company (Newco) and
would submit a joint bid in response to the RFP and, if selected, enter into a contract with the
SNF whereby the requestor would be the exclusive supplier of the Covered Items and related
services and Newco would furnish the Non-Covered Items and related services.
Arrangement A
Turning first to Proposed Arrangement A, OIG noted that the requestor said it would charge the
SNF an amount that would be below the requestor’s costs for Non-Covered Items and related
services.
“Thus, the circumstances surrounding Proposed Arrangement A suggest that a nexus may exist
between the below-cost payment rates offered to the SNF for Non-Covered Items and related
services and referrals of other Federal health care program business,” OIG concluded.
In support of its finding, OIG cited the following facts: (1) the SNF is in a position to direct
business to the requestor that is not paid by the SNF under Proposed Arrangement A, i.e.,
Covered Items; (2) the single RFP solicits pricing information for the Non-Covered Items,
together with service information related to the provision of both Covered Items and NonCovered Items, suggesting a link between the two; and (3) both parties have obvious motives
for agreeing to trade below-cost payment rates for the Non-Covered Items and related services
for referrals of other federal healthcare program business.
According to the opinion, in evaluating whether an improper nexus exists between the rates
offered for items and services and referrals of federal business in a particular arrangement, OIG
looks for indicia that the rate is not commercially reasonable in the absence of other, nondiscounted business.
Here, “[p]rices offered to a skilled nursing facility that are below the supplier’s total costs of
providing the items and services . . . give rise to an inference that the supplier and the skilled
nursing facility may be ‘swapping’ the below-cost rates on business for which the skilled nursing
facility bears the business risk (i.e., the Non-Covered Items) in exchange for other profitable
non-discounted Federal business (i.e., the Covered Items), from which the supplier can recoup
losses incurred on the below-cost business, potentially through overutilization or abusive billing
practices,” OIG said.
Thus, OIG concluded that it would be “unable to exclude the possibility that the Requestor may
be offering improper discounts to the SNF for the Non-Covered Items and related services with
the intent to induce referrals of more lucrative Federal business.”
Arrangement B
Next looking at Proposed Arrangement B, OIG noted that it reflects the same substantial risk of
improper “swapping” as Proposed Arrangement A.
The fact that the Covered Items and related services would be provided by the Requestor and
the Non-Covered Items and related services would be provided by Newco—a separate, but
commonly-owned, company—does not mitigate that risk, OIG found.
“It is the substance, not the form, of an arrangement that governs under the anti-kickback
statute,” the opinion noted.
Advisory Opinion No. 11-11, (Dept. of Health and Human Servs. Office of Inspector Gen. Jul. 28,
2011).
Neuro Emergency Telemedicine Proposal Would Not Trigger Sanctions,
OIG Says
A health system’s proposal to provide neuro emergency clinical protocols and immediate
consultations via telemedicine technology to area community hospitals treating stroke patients
would not result in administrative sanctions under the Anti-Kickback Statute, the Department of
Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted
September 6, 2011.
According to OIG, the proposed arrangement was structured so as to reduce the risk that the
remuneration provided under the agreement could be an improper payment for referrals of
federal healthcare program business.
OIG also emphasized the proposal resulted in an “obvious public benefit of promoting timely
access to specialty care for acute stroke patients.”
The nonprofit health system provides nationally ranked neuroscience care at its flagship hospital,
which frequently receives transfers from local community hospitals of patients needing
comprehensive stroke care.
The requesting health system is proposing to provide, at its expense, to these community
hospitals (1) neuro emergency telemedicine technology, (2) neuro emergency clinical
consultations, (3) acceptance of neuro emergency transfers, and (4) neuro emergency clinical
protocols, training, and medical education.
Participating community hospitals would initially be only those that have a pre-existing,
significant contractual relationship with the requestor. Participation in the telemedicine
arrangement would not, however, be based on the value or volume of any business generated
between the parties.
As part of the arrangement, the community hospitals would agree not to participate in any other
neuro emergency telemedicine service without the requestor’s prior approval. This exclusivity
provision, as certified by the requestor, would not restrict the community hospitals from
consulting with other stroke specialists or from transferring a patient to a hospital not affiliated
with the health system.
As a threshold matter, OIG noted the proposed arrangement was not eligible for the personal
services and management contracts safe harbor because it would operate on an “unscheduled,
as-needed basis.”
But nonetheless OIG found the arrangement did not run afoul of the Anti-Kickback Statute,
saying it was unlikely to generate appreciable referrals of federal healthcare program business.
Moreover, the requestor certified that one of the proposal’s main goals was “to reduce the
number of transfers of stroke patients” to its hospital and, instead, help support their treatment
at the community hospital.
OIG stressed the proposal would primarily benefit stroke patients, who ultimately could receive
more timely and effective care as a result of the telemedicine program.
OIG also was not concerned with the exclusivity requirement, noting the community hospitals
only would be prohibited from entering into other neuro emergency telemedicine agreements,
but could still, without restriction, consult with and refer patients to non-health system affiliated
neurologists and hospitals.
Finally, OIG said the proposal was unlikely to increase federal healthcare program costs given its
specific design to reduce the volume of transfers of stroke patients and to ensure better care
with fewer complications later on.
Advisory Opinion No. 11-12 (Dep’t of Health and Human Servs. Office of Inspector Gen. Aug. 29,
2011).
OIG Approves Insurance-Only Billing For County Residents’ EMS
Transport Services
A county may treat revenue received from taxes as payment of otherwise applicable cost-sharing
amounts for emergency medical services (EMS) transportation to hospitals, the Department of
Health and Human Services Office of Inspector General (OIG) said in an advisory opinion posted
September 6, 2011.
The opinion requestor is a county that provides EMS transport services through its fire
department. Currently, the county funds EMS transportation within its service area by means of
taxes and per-service ambulance transport fees.
Under the proposed arrangement, the county would not bill bona fide residents who receive EMS
transportation to hospitals for cost-sharing amounts for which they otherwise would be
responsible.
Instead, the county would accept payment from bona fide residents’ insurers, including federal
healthcare programs, as payment in full for the EMS transportation to hospitals (i.e., “insurance
only billing”), and would treat revenues received from local taxes as payment of the cost-sharing
amounts.
OIG first noted the “insurance only” billing under the proposed arrangement could implicate the
Anti-Kickback Statute to the extent that it constitutes a limited waiver of Medicare or other
federal healthcare program cost-sharing amounts.
However, the opinion highlighted the special rule in the Medicare Benefit Policy Manual Chapter
16, Section 50.3.1 for providers and suppliers that are owned and operated by a state or a
political subdivision of a state, such as a municipality or fire department.
“Accordingly, because Medicare would not require the County to collect cost-sharing amounts
from residents, we would not impose sanctions under the anti-kickback statute where the costsharing waiver is implemented by the County categorically for bona fide residents of the County,”
OIG said.
The opinion noted the Manual provision “applies only to situations in which the governmental unit
is the ambulance supplier; it does not apply to contracts with outside ambulance suppliers.”
Advisory Opinion No. 11-13 (Dep't of Health and Human Servs. Office of Inspector Gen. Aug. 29,
2011).
OIG Says Proposal To Co-Manage Cataract Surgery Patients Would Not
Generate Prohibited Remuneration
The Department of Health and Human Services Office of Inspector General (OIG) found in an
advisory opinion posted October 7, 2011 that an ophthalmology group practice’s proposal to comanage cataract surgery patients with optometrists external to the group would not generate
prohibited remuneration under the Anti-Kickback Statute.
Thus, OIG said the proposal, under which the optometrists would charge separately for certain
post-operative care, would not trigger administrative sanctions.
Premium vs. Conventional IOLs
The requesting physician group practice specializes in cataract surgery, which involves removing
a cloudy lens and replacing it with a permanent prosthetic intraocular lens (IOL). They receive
referrals from optometrists if a cataract has reached a point where surgery is necessary.
A Conventional IOL provides patients with clear distance vision but does not correct any preexisting vision problems, the opinion explained. Alternatively, a Premium IOL can correct other
vision problems in addition to the cataract.
Medicare covers Conventional IOLs, but not the extra costs associated with Premium IOLs.
Cataract surgery is a global surgical procedure, meaning Medicare pays the physician one global
fee for the pre-operative care, the surgery, and the post-operative care for 90 days following
surgery. For Premium IOLs, Medicare pays for the medically necessary cataract surgery and
other covered aspects of the IOL, but the beneficiary is responsible for any additional
professional and facility fees.
The group practice offers all cataract surgery patients the option to return to their referring
optometrist for post-operative care, assuming it is clinically appropriate.
The requesting group indicated that some optometrists now plan to charge Premium IOL patients
for non-covered, post-operative services that are not required in connection with Conventional
IOLs.
Requestor asked OIG about the co-management of patients receiving Premium IOLs where
optometrists charge them for additional testing and services.
Specifically, requestors want to know whether the proposed arrangement would constitute
remuneration to a referral source in the form of an opportunity to earn a fee for services not
covered by Medicare in connection with post-operative management of Premium IOL patients.
No Prohibited Remuneration
OIG blessed the co-management arrangement after concluding it would not generate prohibited
remuneration.
Among other things, OIG noted the requestor would have no written or unwritten agreements to
co-manage Premium IOL patients with optometrists but would simply inform patients of the
option to return to their optometrists for follow-up care.
In addition, the requestor would inform patients that the optometrist may charge them for
services related to the Premium IOL, which OIG said would likely discourage many patients from
choosing to return to the referring optometrist.
Moreover, Medicare does not cover the increased costs associated with a Premium IOL. “Thus,
the fact that the Requestor would co-manage a beneficiary receiving a Premium IOL with an
optometrist who may charge the beneficiary for additional, non-covered services provided would
not increase costs to the Medicare program.”
Advisory Opinion No. 11-14 (Dep’t of Health and Human Servs. Office of Inspector Gen. Oct. 7,
2011).
OIG Finds Proposal For Physician Investment In Path Lab Problematic
A proposed arrangement under which physicians would invest in a company that would provide
pathology laboratory management services to a third party could potentially generate prohibited
remuneration under the Anti-Kickback Statute and would risk administrative sanctions, the
Department of Health and Human Services Office of Inspector General (OIG) said in an advisory
opinion posted October 11, 2011.
The opinion requestor is a Delaware limited liability company owned and managed by a
physician.
Under the proposed arrangement, the requestor would enter into a management services
contract with another company (the Path Lab) for a term of at least three years.
Under the management contract, the requestor would furnish the Path Lab with the complete
array of clinical laboratory pathology services for a fixed maximum number of hours each year,
as well as utilities, furniture, fixtures, and the exclusive use of laboratory space and equipment.
The requestor also would provide the Path Lab marketing and billing services, and essential nonphysician staff.
In turn, the Path Lab would pay the requestor a usage fee that would be calculated based on a
percentage of the Path Lab’s income, fixed in advance for a term of 12 months, which generally
would correspond to the volume of the Path Lab’s use of the requestor’s services, personnel, and
equipment.
The physician owner would offer the opportunity to invest in the requestor to various additional,
as-yet undetermined physicians, including urologists, gastroenterologists, and dermatologists.
OIG first analyzed the arrangement under the small entity investment safe harbor, 42 C.F.R. §
1001.952(a)(2).
Among the small entity investment safe harbor’s eight elements are requirements that no more
than 40% of an entity’s investment interests may be held by investors that are in a position to
make or influence referrals to, or otherwise generate business for, the entity; and no more than
40% of an entity’s gross revenue may come from referrals or business otherwise generated from
investors, OIG noted.
Here, however, the requestor certified that more than 40% would be held by physician investors
in a position to generate business for the requestor through referrals of laboratory specimens to
the Path Lab, and, further, that substantially more than 40% of the requestor’s gross revenue
related to furnishing healthcare items and services would come from laboratory business
generated by its physician investors.
“As the result of noncompliance with these elements, the small entity safe harbor would be
inapplicable and would not protect the Requestor’s profit distributions to the New Physician
Investors and the Owner/Manager,” OIG concluded.
OIG also found the safe harbors for space rental, for equipment rental, and for personal services
and management contracts would not apply because, among other reasons, the aggregate usage
fees paid to the requestor would not be set in advance.
The opinion further concluded the arrangement would pose more than a minimal risk of fraud
and abuse.
Among the problematic features in the arrangement were that: the usage fees to be paid by the
Path Lab to the requestor under the management contract would take into account the volume
or value of business generated for the Path Lab by the new physician investors in the form of
laboratory specimen referrals directed to the Path Lab; and that more than 40% of the
requestor’s investment interests would be held by physician investors in a position to generate
business for the Path Lab in the form of referrals of laboratory specimens.
Such features pose “considerable risks of overutilization of laboratory services, distorted medical
decision-making, and increased costs to Federal health care programs,” OIG said.
In addition, OIG pointed to the fact that the requestor would be an entity largely owned by
persons with no experience in providing clinical pathology services but with the ability to refer
patients for these services.
“The Proposed Arrangement appears to have no business purpose other than to permit the
physician investors to profit from the business they generate for the Path Lab in the form of their
laboratory specimen referrals,” the opinion said.
Advisory Opinion No. 11-15 (Dept. of Health and Human Servs. Office of Inspector Gen. Oct. 3,
2011).
OIG OKs Nonprofit Hospital’s Program Providing Transportation,
Lodging, Other Services To Patients
A hospital’s domiciliary services program that provides transportation, lodging, and meal
assistance to certain patients and their family members would not fun afoul of federal fraud and
abuse laws and thus would not risk sanctions, the Department of Health and Human Services
Office of Inspector General (OIG) said in an advisory opinion posted November 15, 2011.
The hospital requestor is a well-known, not-for-profit institution dedicated to finding cures for
catastrophic diseases in children through research and treatment, according to the opinion.
The highly complex nature of many of the clinical and translational trials that the requestor
designs and conducts requires greater patient participation, and more time at the requestor’s
campus, than the clinical trials conducted by most cooperative groups or single institutions, the
opinion noted.
Accordingly, many of the patients who seek to avail themselves of treatment must travel or
temporarily relocate to the requestor’s metropolitan area.
Under the arrangement, the requestor offers an extensive Domiciliary Services program that
provides transportation, lodging, meal assistance, and certain other miscellaneous items and
services for patients and their families depending on criteria such as anticipated length of stay
and distance from the requestor.
OIG concluded the arrangement presented a low risk of fraud and abuse.
OIG first noted the requestor is a nonprofit that is reimbursed for less than a quarter of the costs
it expends to care for the federal healthcare program beneficiaries it treats.
“Most of the remaining costs for care not reimbursed by the Federal health care programs, and
all of the costs of providing the Domiciliary Services, are funded by philanthropic sources through
the Charity,” OIG highlighted.
“Although we cannot determine a party’s intent, we think it is implausible that the Requestor,
already faced with more qualified patient applicants than it can accommodate, provides the
Domiciliary Services to generate additional referrals of business for which it receives less than a
quarter of the cost of providing care,” the opinion said.
Next, OIG found the unique nature of the services provided made it unlikely that the Domiciliary
Services would induce patients to self-refer to the requestor’s facilities for unnecessary services.
Further, OIG found the arrangement helps patients comply with research protocol, ensures that
patients are able to satisfy their basic nutritional requirements, and helps to protect the
compromised immune systems of many patients.
The opinion also found the services are unlikely to serve as an inducement to patients
because they are not advertised or marketed to prospective patients, their families, or referring
physicians, and because patients generally are informed of the program only after they have
been accepted for treatment.
Moreover, none of the costs of the items and services provided under the program are claimed or
have their costs shifted—either directly or indirectly—to federal healthcare programs or other
third-party payors, the opinion noted; thus, the arrangement was unlikely to lead to increased
costs to federal healthcare programs.
Lastly, OIG highlighted “the substantial public benefits obtained from the specialized care
provided, and the research conducted, by the Requestor in its mission to find cures for
catastrophic diseases in children.”
Advisory Opinion No. 11-16 (Dep't of Health and Human Servs. Office of Inspector Gen. Nov. 8,
2011).
OIG Says Proposed Arrangement For Allergy Testing Services May
Violate Anti-Kickback Statute
An arrangement under which a laboratory services management company would furnish allergy
testing and immunotherapy laboratory services within various primary care physicians’ medical
offices could potentially generate prohibited remuneration under the Anti-Kickback Statute and
would risk the imposition of sanctions, the Department of Health and Human Services Office of
Inspector General (OIG) said in an advisory opinion posted November 23, 2011.
The opinion requestor, a laboratory services management company, proposed to enter into
exclusive contracts with primary care physicians to operate an allergy testing laboratory on the
physicians’ behalf within their medical offices (Proposed Arrangement).
Under the Proposed Arrangement, the requestor would provide all of the necessary laboratory
personnel (including laboratory technicians), equipment, supplies, training, and billing and
collection services to the physicians on an as-needed basis.
The requestor also would assist the physicians with marketing allergy services to patients by
providing patient education materials and reviewing patient files to identify candidates for allergy
laboratory services.
The physicians in turn would provide: (1) space within their offices to operate the laboratory; (2)
administrative staff for patient scheduling and other administrative tasks; (3) general medical
office supplies and furniture; (4) general liability and malpractice insurance; and (5) physician
supervision and interpretation of laboratory results.
The physicians would then pay the requestor a fee for the items and services provided by the
requestor equal to 60% of the physicians’ gross collections from allergy testing and
immunotherapy items and services.
OIG first noted that, although the safe harbors for equipment leases and personal services and
management contracts were potentially applicable to the Proposed Arrangement, the
Arrangement would not qualify for safe harbor protection because (1) the services would be
provided on an as-needed basis, and (2) the aggregate compensation to be paid under the
contract would not be set in advance, and would be based, in part, on the volume or value of
federal healthcare program business.
Looking at the totality of the facts and circumstances of the Arrangement, OIG concluded it
would not pose a sufficiently low risk under the Anti-Kickback Statute to be protected from
possible sanctions.
First, the opinion noted that “[p]ercentage compensation arrangements are inherently
problematic under the anti-kickback statute, because they relate to the volume and value of
business generated between the parties, rather than the fair market value of the services
provided.”
Second, OIG said that the requestor’s review of patient files to identify candidates for allergy
testing services would be a suspect marketing activity.
“We are concerned that this type of marketing activity could encourage Physicians to order
medically unnecessary tests that could pose a risk of patient harm,” the opinion said.
Lastly, OIG noted the requestor’s statement that it structured the Proposed Arrangement to
comply with the in-office ancillary services exception to the Stark Law “is immaterial to the
application of the anti-kickback statute.”
“The Stark Law and the anti-kickback statute are independent legal authorities, and each
transaction or arrangement must be separately evaluated under both statutes,” OIG said.
Advisory Opinion No. 11-17 (Dep't of Health and Human Servs. Office of Inspector Gen. Nov. 16,
2011).
OIG Says Online Service To Exchange Information Between Healthcare
Practitioners, Providers, and Suppliers Would Not Violate Anti-Kickback
Statute
A proposal for an online service that would facilitate the exchange of information between
healthcare practitioners, providers, and suppliers would not subject the requestor to
administrative sanctions under the Anti-Kickback Statute, the Department of Health and Human
Services Office of Inspector General (OIG) said in an advisory opinion posted December 7, 2011.
The opinion requestor is a publicly traded company that provides web-based business services to
physician practices.
The requestor currently offers three principal services: (1) the Billing Service, which automates
and manages billing-related functions for physician practices and assists clients with non-billing
related back-office operations such as appointment scheduling, insurance eligibility verification,
and account reconciliation and reporting; (2) the EHR Service, which automates and manages
medical record-related functions for physician practices; and (3) the Messaging Service, which
automates practice communications with patients and includes patient messaging services, live
operator services, and a patient web portal.
Under the Proposed Arrangement, the requestor would offer a new service (Coordination
Service) intended both to facilitate the exchange of information between healthcare practitioners,
providers, and suppliers and to help them keep track of patients receiving services from other
health professionals.
According to the requestor, because much of the functional benefit of the Coordination Service is
derived from the data maintained within the EHR Service, only Health Professionals who
purchase the EHR Service could use the Coordination Service to transmit patient information to
other Health Professionals in connection with a referral.
Under the Arrangement, Health Professionals that wish to make a referral (Ordering Health
Professionals) would use the Coordination Service to access an electronic database to identify
Health Professionals to which they would like to make a referral.
The requestor also would offer Health Professionals that are interested in receiving referrals
through the Coordination Service the opportunity to enter into “Trading Partner Agreements”
with the requestor.
The requestor would receive payment from either the Ordering Health Professionals or the
Trading Partners for transmitting information, and from the Trading Partners for any value-added
services it provides.
OIG first found the Arrangement did not qualify for the safe harbor for referral services under the
Anti-Kickback Statute.
However, OIG concluded “the facts and circumstances of the Proposed Arrangement, in
combination, adequately reduce the risk that the remuneration provided under the Proposed
Arrangement could be an improper payment for referrals or for arranging for referrals of Federal
health care program business.”
The first fact OIG highlighted was that the requestor would offer a comprehensive network,
within which all Health Professionals in a marketplace could participate, from which an Ordering
Health Professional could select a receiving Health Professional, with no fee required.
OIG also noted the fees the requestor charged would reflect the fair market value of the actual
services the requestor would provide to the Health Professionals.
OIG next found that, although the requestor would charge one fee on a “per-click” basis, “the
use of a transaction-based pricing model is reasonable under these circumstances.”
In addition, according to the opinion, the Proposed Arrangement’s fee structure would be unlikely
to influence an Ordering Health Professional’s referral decisions in a material way.
The opinion acknowledged charging an Ordering Health Professional a fee for transmitting
information in connection with a referral to a Non-Trading Partner—but not for transmitting
information to a Trading Partner—could influence the Ordering Health Professional’s referral
decisions.
However, OIG said the following two factors, in combination, would minimize this risk: (1) the
amount of the fee is very low; and (2) the aggregate amount of the fees would be capped.
OIG further pointed out that the requestor’s goal is to have the network be as complete as
possible; “[t]hus, neither patient freedom of choice nor provider freedom of choice would be
compromised under the Proposed Arrangement,” OIG concluded.
Lastly, the opinion said that a Trading Partner’s payment of fees to the requestor would not
provide the Trading Partner with enhanced access to a referral stream versus a non-Trading
Partner.
“Although the added convenience and ease of information exchange offered by Trading Partners
might provide them with an advantage over Non-Trading Partners, the Non-Trading Partners
would not be disadvantaged with respect to, nor precluded from, the opportunity to receive and
respond to referrals made through the Coordination Service in the first instance,” OIG said.
Advisory Opinion No. 11-18 (Dep't of Health and Human Servs. Office of Inspector Gen. Nov. 30,
2011).
OIG Says Medigap Policies May Use Preferred Hospital Network
Medicare Supplemental Health Insurance (Medigap) policies may use a "preferred hospital"
network without running afoul of federal fraud and abuse laws, the Department of Health and
Human Services Office of Inspector General (OIG) said in an advisory opinion posted December
20, 2011.
Under the proposed arrangement, a company offering multiple life and health insurance
products, including Medigap policies, would contract indirectly through a preferred provider
organization (PPO) with hospitals for discounts of up to 100% on otherwise applicable Medicare
inpatient deductibles for their policyholders and in turn would provide a $100 premium credit to
policyholders who use a network hospital for an inpatient stay.
The requesting company would pay the PPO a fee for administrative services each time it
receives a discount from a network hospital.
OIG noted prohibited remuneration under the Anti-Kickback Statute (AKS) may include waivers
of Medicare cost-sharing amounts and relief of a financial obligation—here amounts the
requestor would otherwise have to pay—may constitute an illegal kickback.
Moreover, the premium credit implicated both the AKS, as remuneration for selecting a network
hospital, and also the civil monetary prohibition on inducements to beneficiaries.
However, OIG concluded the proposed arrangement “would present a low risk of fraud or abuse”
under the AKS.
According to the opinion, neither the waivers nor the premium credits would increase or affect
per service Medicare payments and should not increase utilization.
"In particular, the discounts effectively would be invisible to the Requestor’s policyholders,
because they would only apply to the portion of the individual’s cost-sharing obligations that the
individual’s supplemental insurance otherwise would cover," OIG said.
The opinion also found the arrangement should not unfairly affect competition among hospitals
because membership in the PPO network is open to any accredited, Medicare-certified hospital
that meets the requirements of applicable state laws.
Lastly, the arrangement "would be unlikely to affect professional medical judgment, because the
policyholder’s physicians and surgeons would receive no remuneration, and the policyholder
would remain free to go to any hospital without incurring any additional out-of-pocket expense,"
OIG said.
OIG noted the premium credit would implicate the prohibition on inducements to beneficiaries,
but added the credit was similar to differentials in coinsurance and deductible amounts as part of
a benefit plan design for which there is a statutory exemption.
OIG also pointed out that such arrangements have the potential to lower costs for all
policyholders.
Advisory Opinion No. 11-19 (Dep’t of Health and Human Servs. Office of Inspector Gen. Dec. 14,
2011).
OIG OKs Proposed GPO Involving Affiliated Entities
A proposed group purchasing organization (GPO) that would be wholly owned by the parent
organization of many of the potential participants and that would pass through to the GPO
participants a portion of the payments received by the GPO from vendors would not trigger
administrative sanctions under the Anti-Kickback Statute, the Department of Health and Human
Services Office of Inspector General (OIG) said in an advisory opinion posted March 15, 2012.
OIG found the proposed GPO did not qualify for the discount safe harbor or the GPO safe harbor
because of its ownership structure, but determined a number of features sufficiently mitigated
the risks presented by some GPO arrangements.
Proposed GPO
The requestors are the parent organization of a national health system that consists primarily of
nonprofit corporations that run healthcare facilities.
One of the parent’s subsidiaries holds governance and oversight responsibility for the nonprofit
healthcare facilities and includes a wholly owned limited liability company (LLC) that oversees
supply chain, resource, and materials management functions and operations for all the related
entities.
Under the proposed arrangement, the LLC would form a GPO for the benefit of the nonprofit
healthcare facilities and other affiliated and non-affiliated entities.
The requestors have certified the purpose of the proposed GPO is to aggregate the various
participants’ purchasing power to improve efficiencies, reduce administrative costs, and obtain
better discounts from suppliers.
Purchases will continue to be made through independent GPOs to the extent they provide better
value from suppliers or directly with vendors if necessary to meet a healthcare facility’s particular
need.
Pursuant to participation and supplier agreements, the proposed GPO would arrange for initial
discounts when participants purchase discounted products directly from the suppliers. Rebates
also may be provided to participants if the proposed GPO collects administrative fees from
suppliers that exceed the GPO’s costs.
Safe Harbor Protection
Although the requestors certified the proposed GPO satisfied all the elements of the discount safe
harbor, OIG disagreed.
Specifically, OIG noted that even if the initial discounts and administrative fees passed through
the proposed GPOs to participants as rebates, the proposed GPO would still retain a portion of
the administrative fees to which the discount safe harbor would not apply.
Protection under the GPO safe harbor also would not extend to the administrative fees retained
by the proposed GPO because of its ownership structure—i.e., because the proposed GPO and
most of the participants would be wholly owned by the parent organization or its subsidiary.
While the proposal did not qualify for either of these safe harbors, OIG noted absence of safe
harbor protection was not fatal.
GPO Concerns
The next portion of OIG’s opinion highlighted some of the concerns that have been raised
recently—including several Government Accountability Office (GAO) and OIG reports—about
whether GPOs are meeting their intended purpose of reducing costs through volume discounts.
For example, OIG pointed to a GAO report noting concerns that GPOs do not necessarily have
incentives to seek the lowest price because they can earn higher administrative fees on higherpriced products.
“[W]hen a GPO is wholly owned by the same parent organization as many of the participants,
there is an increased risk that administrative fees collected by the GPO could be illegal
inducements to induce referrals or recommendations,” OIG noted.
Another concern, OIG said, is that GPO members do not fully account for net revenue
distributions from GPOs on their Medicare cost reports.
Proposed GPO’s Features Mitigate These Concerns
OIG concluded the proposed GPO included a number of features that sufficiently mitigated the
potential risk to federal healthcare programs posed by a wholly owned GPO.
First, OIG highlighted the proposed GPO had little incentive to negotiate higher administrative
fees in lieu of discounts since it would retain only the portion of those fees needed to offset its
costs of centralized contracting activities. The remainder of the fees would be disbursed to the
GPO’s participants.
Next, OIG noted requestors’ certifications that the GPO’s participation agreements would require
participants to report the full amounts of their allocated administrative fees as rebates and net
such amounts against the costs of purchasers, whether the fees were distributed.
Moreover, the requestors certified that cost reports would reflect not only the cost reductions
affiliated participants receive from their purchasers, but also the amounts of any administrative
fees they are allocated.
OIG also observed the proposed GPO would not be restricted to affiliated participants, which
should serve to motivate the GPO to be competitive in the marketplace by seeking out the best
prices and services.
In addition, the requestors committed to use multiple resources to seek out the best value for
the participants, including continuing to use independent GPOs and direct contracts with vendors
when warranted.
“Such a commitment increases the likelihood that the Participants will receive the GPO benefits
intended and anticipated by Congress,” OIG said.
Advisory Opinion No. 12-01 (Dep’t of Health and Human Servs. Office of Inspector Gen. Mar. 8,
2012).
OIG Says Company May Operate Website With Coupons And
Advertising From Healthcare Providers, Suppliers, Other Entities
The Department of Health and Human Services Office of Inspector General (OIG) said March 27,
2012 that it would not impose administrative sanctions regarding a proposal to operate a website
that would display coupons and advertising from healthcare providers, suppliers, and other
entities, even though the arrangement could potentially generate prohibited remuneration under
the Anti-Kickback Statute.
The opinion requestor, an S-corporation with two members, proposed to operate a website that
includes coupons for healthcare items and services and advertising on behalf of individuals and
entities operating in the healthcare industry.
Any providers who are willing to enter into a contract with the requestor and comply with the
provider Terms of Use would be eligible to participate in the website.
Providers who wish to post coupons on the website would have the option of participating at one
of five membership levels with a flat monthly fee for each level of membership except for
“Basic,” which would be free.
In addition, according to the opinion, healthcare practitioners, hospitals, healthcare systems,
insurance companies, drug companies, pharmacies, and other entities would be able to purchase
space on the website to advertise items or services that may be of interest to healthcare
consumers.
OIG noted in its opinion that the Proposed Arrangement involves two activities that implicate the
Anti-Kickback Statute: selling advertising space on the website to healthcare providers and
suppliers that may bill federal healthcare programs; and posting providers’ coupons for
healthcare items or services.
In evaluating marketing or advertising, OIG said it considers a number of factors, such as: the
identity of the party engaged in the marketing activity and the party’s relationship with its target
audience; the nature of the marketing activity; the item or service being marketed; the target
population; and any safeguards to prevent fraud and abuse.
Looking at such factors, OIG concluded the Proposed Arrangement would present a low risk
under the Anti-Kickback Statute.
OIG first highlighted that the requestor is not a healthcare provider or supplier.
“Marketing by health care providers and suppliers (particularly ‘white coat’ marketing by health
care professionals such as physicians) is subject to closer scrutiny, because health care providers
and suppliers are in a position of trust and may exert undue influence when recommending
health care-related items or services,” the opinion said.
Although OIG noted that one of the requestor’s members is a practicing physician, the requestor
certified the Physician Member’s name would not appear on the website and he would not post
any coupons for his own services on the website.
In addition, the opinion said, the requestor certified providers or suppliers to whom the Physician
Member makes referrals would not be permitted to participate in the Proposed Arrangement.
OIG also pointed out that the payments from providers and advertisers to the requestor do not
depend in any way on customers using the coupons or obtaining services from the providers or
advertisers.
OIG next looked at special risks associated with the use of coupons. The opinion noted certain
types of “coupon” offers raise the risk of overutilization, but here the risk a provider’s medical
judgment would be improperly influenced to render medically unnecessary or inappropriate
services based on the customer’s possession of a coupon was low.
In all, OIG found the structure of, and limitations associated with, the coupons decreased risk
under the Anti-Kickback Statute.
First, OIG said the coupons would be for a reduced price or percentage reduction on a particular
item or service, and any discount would inure to the payor as well as the patient.
“Therefore, third party payors, including Federal health care programs, would benefit from
reduced costs associated with the coupons,” OIG said.
In addition, the requestor’s Terms of Use would require providers to comply with the discount
safe harbor.
Although the requestor “cannot certify whether the Providers and Customers would meet their
obligations to qualify for protection under the discount safe harbor,” the requestor did certify
“that it would give these parties the information and notices necessary to facilitate their
compliance, which reduces the risk of program abuse.”
Lastly, OIG highlighted that its opinion “protects only the Requestor with respect to the
Requestor’s transactions with Providers and with Customers. Because the Providers and
Customers are not jointly requesting this opinion, and thus have provided us with no
certifications that they intend to comply with the discount safe harbor under the Proposed
Arrangement, we cannot opine on whether these parties would be protected under the safe
harbor.”
Advisory Opinion No. 12-02 (Dep't of Health and Human Servs. Office of Inspector Gen. Mar. 20,
2012).
OIG OKs Cost-Sharing Arrangement For Dispatch Services Between
Municipal Fire Department And Hospital-Based Ambulance Providers
The Department of Health and Human Services Office of Inspector General (OIG) said April 26,
2012 it would not impose administrative sanctions in connection with a proposed arrangement in
which a municipal fire department would share certain costs related to dispatch and other
services with hospital-based ambulance providers that participate in the local 911 emergency
dispatch system.
The fire department provides the majority of EMS services within an unidentified city’s limits but
various hospitals also participate as EMS providers in the 911 system on a voluntary basis,
without separate compensation from the city.
The fire department provides certain dispatch-related services and offers assistance to EMS
crews, both its own and those of the participating hospitals, with decisions about critical patient
care, situations involving refusal of medical aid by patients, and ambulance transport
destinations.
Under the proposed arrangement, the fire department would share the personnel-related costs of
providing these dispatch services with the participating hospitals. Participating hospitals would be
required to contribute a pro rata share of the costs.
OIG said the proposal would implicate the Anti-Kickback Statute (AKS) as it would require the
hospitals, which are potential referral sources, to bear a portion of the costs as a condition of
providing EMS services in the city, some of which would be reimbursable under federal
healthcare programs.
But OIG nonetheless blessed the arrangement because of a number of factors it said mitigated
the risk of fraud or abuse.
First, the proposal would be part of a comprehensive scheme by the city, a valid governmental
entity, to manage the delivery of EMS through the fire department.
Next, OIG noted the proposed arrangement would be structured so that each participating
hospital’s payment would reasonably approximate its proportionate share of the costs. Thus, the
hospitals would not be overpaying the source of the referrals, which OIG said was the typical
AKS concern.
Third, what the hospitals pay under the proposal would not be tied, directly or indirectly, to the
volume or value of referrals between the parties.
Moreover, the cost-sharing arrangement would be limited to dispatch procedures already in
place, so it would be unlikely to increase the risk of overutilization, OIG reasoned.
Finally, OIG said, the proposal should have no adverse impact on competition, given that any
state-licensed hospital with an ambulance operating certificate could request to participate.
“We might have reached a different result if the Participating Hospitals would pay the City or the
Fire Department remuneration not directly related to the provision of the EMS that are the
subject of the ambulance agreements between the Fire Department and the Participating
Hospitals,” OIG cautioned.
Advisory Opinion No. 12-03 (Dep’t of Health and Human Servs. Office of Inspector Gen. Apr. 19,
2012).
OIG Sees Low Risk Of Fraud In Exclusive Ambulance Services Contract
That Requires Certain Payments To Municipality
The Department of Health and Human Services Office of Inspector General (OIG) said in an
advisory opinion issued April 30, 2012 that it would not impose administrative sanctions related
to an exclusive contract for emergency transport services between a municipality and an
ambulance company that reimburses the municipality for dispatch services and for certain costs
incurred when municipal firefighters drive transports.
According to OIG, although such an arrangement could potentially generate prohibited
remuneration under the Anti-Kickback Statute, the risk of fraud and abuse from this particular
arrangement is low.
The opinion requestor is an ambulance company that maintains an exclusive advanced life
support (ALS) ambulance transport services contract with the town in which it is located.
The contract has two provisions that make up the arrangement: (1) a requirement that the
ambulance company remit an annual Call Dispatch Fee of $23,684.67 to the town, payable in
monthly installments; and (2) a requirement that the ambulance company pay remittances to
the town when a firefighter must attend a transport (Backfill Reimbursement Provision).
Protocol for ALS services requires the ambulance company to staff two paramedics on each ALS
transport; ordinarily one paramedic drives the ambulance to the hospital while the other attends
to the patient in the rear of the vehicle.
Critically-ill or -injured patients, however, sometimes require simultaneous administration of ALS
by two paramedics en route to the hospital. When this happens town guidelines allow the
paramedic-in-charge discretion to request that the Fire Department allow an on-duty firefighter
present at the emergency scene to assist the paramedics by driving the ambulance.
Because safety rules arising out of the local firefighters’ union’s bargaining agreement require
the Fire Department to maintain a minimum contingent of six firefighters, when a firefighter
drives a critical care transport, the town may be temporarily deprived of its requisite sixth
firefighter.
Accordingly, the Fire Department must then “backfill” the sixth position by calling another
firefighter back to work. For this reason, the Backfill Reimbursement Provision requires the
ambulance company to remit to the town $199.86 in connection with each call back.
Although OIG noted the arrangement implicates the AKS because it requires the ambulance
company—a potential referral recipient—to bear a portion of the costs of providing emergency
call dispatch services, as well as the costs of backfilling firefighter positions, the opinion
concluded “a number of factors are present in the Arrangement that, in combination, mitigate
the risk of Federal health care program fraud or abuse.”
OIG first highlighted that the arrangement is part of a comprehensive regulatory plan by the
town to manage the delivery of emergency medical services and opined that “[m]unicipalities
should have sufficient flexibility to organize local EMS transport systems efficiently and
economically.”
The opinion also pointed out that the Call Dispatch Fee will only partially offset the actual costs of
the town’s dispatch operations attributable to the ambulance company’s services. As a result, the
arrangement mitigates the typical anti-kickback concern that the ambulance company could be
overpaying the source of the referrals.
According to OIG, the Call Dispatch Fee will not be tied directly or indirectly to the volume or
value of referrals between the parties and total payments under the Backfill Reimbursement
Provision will match the actual costs incurred by the town to maintain the minimum firefighter
contingent required by safety rules arising out of the firefighters’ union bargaining agreements.
Lastly, OIG concluded that the contract exclusivity is unlikely to adversely impact competition.
Advisory Opinion No. 12-04 (Dept. Health and Human Servs. Office of Inspector Gen. Apr. 23,
2012).
OIG Says Rewards Program For Pharmacy Customers Not
Remuneration Under CMP
A proposed rewards program that would allow consumers to earn gasoline discounts based on
the amount spent on purchases in retail stores and pharmacies, including cost-sharing amounts
paid for items covered by federal healthcare programs, would not trigger administrative
sanctions, the Department of Health and Human Services Office of Inspector General (OIG)
concluded in an advisory opinion posted May 1, 2012.
A retailer that operates stand-alone pharmacies and supermarkets with in-store pharmacies
offers customers a “loyalty card” that allows them to earn discounts on gasoline purchases for
every $50 they spend in the stores on “allowable purchases.”
Currently, the rewards program excludes co-payments for prescriptions covered under federal
healthcare programs. Under the proposed arrangement, out-of-pocket costs, including
deductibles and co-payments on federally reimbursable prescription items, would be eligible to
earn gasoline discounts in the same manner as other allowable purchases.
OIG said the proposed arrangement implicated the civil monetary penalty (CMP) provision
prohibiting inducements, but also satisfied the new Affordable Care Act (ACA) exception to the
definition of remuneration in the CMP related to retailer rewards.
Under the ACA, retailer rewards do not constitute remuneration under the CMP if (1) the rewards
consist of coupons, rebates, or other rewards from a retailer; (2) the rewards are offered or
transferred on equal terms available to the general public, regardless of health status; and (3)
the offer or transfer of the rewards is not tied to the provision of other items or services
reimbursed in whole or in part by the Medicare or Medicaid programs.
OIG found the rewards program at issue met all these requirements.
OIG also said the proposed rewards program implicated the Anti-Kickback Statute, but ruled out
administrative sanctions because of a low risk of fraud and abuse.
According to OIG, the risk that the proposal would steer beneficiaries to the retailer’s stores to
purchase federally reimbursable items or services was low.
OIG also found the proposal was unlikely to result in overutilization or otherwise increase costs
to federal healthcare programs, since any cost-sharing amounts counting towards a customer’s
rewards would result from already-prescribed drugs.
Advisory Opinion No. 12-05 (Dep’t of Health and Human Servs. Office of Inspector Gen. Apr. 24,
2012).
Stark Law
Fourth Circuit Vacates Judgment Against Hospital Based On Alleged
Stark Violations
The Fourth Circuit vacated a district court’s nearly $45 million judgment against a hospital on the
federal government’s equitable claims (payment by mistake and unjust enrichment) after a jury
determined the hospital had violated the Stark Law, but not the False Claims Act (FCA), in
connection with certain physician compensation arrangements.
The district court set aside the jury verdict in its entirety and ordered a new trial on the FCA
claim.
Thus, the appeals court found the district court violated the hospital’s Seventh Amendment right
to a jury trial by basing its judgment with respect to the equitable claims on the jury’s finding of
a Stark violation, which essentially was nullified by the court’s decision to grant a new trial.
The appeals court remanded the case for the jury to determine whether the employment
contracts at issue took into account the volume or value of referrals; if so, whether the Stark
Law indirect compensation arrangement exception applied; and finally, if an impermissible
financial relationship was created, the number and value of claims the hospital presented to
Medicare for payment of facility fees resulting from the physician referrals.
Jury Verdict
Relator Michael K. Drakeford, M.D. filed the qui tam action under the FCA in the U.S. District
Court for the District of South Carolina against Tuomey, d/b/a Tuomey Healthcare System, Inc.,
which owns and operates Tuomey Hospital in Sumter, SC. The government intervened.
Drakeford is an orthopedic surgeon who Tuomey attempted to hire as a part-time physician.
The complaint alleged that beginning in January 2005 and continuing at least until September
2007, Tuomey entered into compensation arrangements with physicians that violated the
physician self-referral prohibition, or Stark Law.
According to the complaint, Tuomey submitted and caused others to submit false and fraudulent
claims for payment to Medicare and Medicaid of the facility fees generated as a result of the
outpatient procedures performed pursuant to prohibited financial relationships—i.e. the
contracts—with the physicians.
A federal jury in South Carolina returned a verdict finding the hospital violated the Stark Law,
but not the FCA. Because it found no FCA violation, the jury did not indicate the amount of
damages, if any, and the number of false claims, if any.
The district court subsequently ordered a new trial “on the whole issue of the [FCA].” At the
same time, the court also granted a $45 million judgment in the government’s favor on its
equitable claims based on the jury’s finding that Tuomey violated the Stark Law.
Vacated Judgment
The Fourth Circuit vacated the district court’s judgment after finding it violated Tuomey’s
Seventh Amendment right to a jury trial.
“[T]he factual issue of whether a financial relationship prohibited by the Stark Law existed is
common to the equitable claims and the FCA claim”; thus, the district court could not resolve the
equitable claims before submitting that issue to a jury, the appeals court held.
Issues Likely to Recur
The appeals court went on to address a number of issues it said were “likely to recur” on
remand.
First, the appeals court determined the facility component of the services performed by the
physicians pursuant to the contracts for which Tuomey billed a facility fee to Medicare constituted
a “referral” under the Stark Law and regulations.
“As such, Tuomey’s argument that the physicians were not making referrals—as that term is
defined in the Stark Law—pursuant to the contracts failed,” the appeals court said.
Next, after reviewing the law, regulations, and official agency commentary, the appeals court
found “compensation arrangements that take into account anticipated referrals do implicate the
volume or value standard” (emphasis added).
A separate opinion concurred in the result—i.e., that the district court’s judgment should be
vacated—but argued the aspect of the decision resolving issues likely to recur on remand
amounted to an “advisory opinion.”
United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., No. 10-1819 (4th Cir. Mar. 30,
3012).
Criminal Law
D.C. Circuit Finds Plain Error In Above-Guidelines Sentence Of
Convicted Physician
The District of Columbia Circuit affirmed June 14, 2011 the conviction of a primary care physician
for healthcare fraud and making false statements but vacated the 53-month prison sentence
imposed by the district court.
According to the appeals court, the district court gave an inadequate explanation for its aboveU.S. Sentencing Guidelines sentence, which amounted to plain error. The appeals court therefore
vacated the procedurally unreasonable sentence and remanded for re-sentencing.
While the district court commented generally about the negative consequences of healthcare
fraud and its associated costs, it provided “no individualized reasoning as to why” a sentence 12
months above the advisory Guidelines range was appropriate for the particular defendant, the
appeals court found.
The significant variance from the Guidelines range, the fact the government did not seek the
higher sentence in the first place, and the district court’s lack of specificity required reversing the
procedurally defective sentence, the appeals court concluded.
Ehigiator O. Akhigbe, a physician licensed in the District of Columbia who practiced at a medical
clinic in the city, was convicted of healthcare fraud and all but one false statement charge.
According to prosecutors, Akhigbe over several years submitted false claims to Amerigroup
Corporation, which contracted with the D.C. Medicaid program to provide medical services to
low-income city residents, for visits and surgical procedures that never took place.
The government also presented evidence at trial that Akhigbe regularly created false progress
notes to substantiate the false billings. It also offered evidence Akhigbe billed for so-called
“impossible days,”—i.e., days where the sum of the claim forms indicated he had worked more
than 24 hours.
In his defense, Akhigbe asserted any billing discrepancies were the result of negligent oversight,
not intentional fraud. Based on this mismanagement defense, Akhigbe asked the court to provide
a “good faith” instruction to the jury. The court refused.
Following his conviction, the government and Akhigbe agreed the applicable advisory Guidelines
range was 33 to 41 months, but the district court sentenced him to 53 months, an upward
variance of 12 months.
On appeal, Akhigbe challenged his conviction on several grounds, including the admission of
evidence of false claim submissions that predated the specific false statements charged in the
indictment was cumulative and unduly prejudicial.
Affirming the conviction, the appeals court rejected this argument, noting the evidence allowed
the government to establish a pattern of false claim submissions spanning the full period of the
charged healthcare fraud, as well as to show Akhigbe had billed for impossible days.
The appeals court also found no error in the district court’s refusal to give a “good faith”
instruction to the jury, noting the lower court “adequately conveyed the substance of that
instruction in its explanation of the state of mind elements of the charged offenses.”
But the appeals court agreed with Akhigbe that the above-Guidelines sentence was
unreasonable, finding the lower court’s oral and written justifications for the significant upward
variance inadequate.
“Although the district court did recite sentencing factors that it said informed its decisionmaking,
contrary to section 3553(c) and controlling case law it never explained why those factors justified
Akhigbe’s particular sentence,” the appeals court said.
Specifically, the appeals court noted, the district court “never explained whether or why . . . this
defendant’s fraud was more harmful or egregious than the typical case.”
United States v. Akhigbe, No. 10-3019 (D.C. Cir. June 14, 2011).
Seventh Circuit Affirms Conviction Of Pharmacy Director For Soliciting
And Receiving Kickbacks
The Seventh Circuit affirmed November 21, 2011 the conviction of a hospital pharmacy director
of various federal felonies relating to his solicitation and receipt of kickbacks to continue to stock
a certain medication over another option.
A federal judge sentenced defendant Benjamin Muoghalu, who served as the pharmacy director
of the Provena St. Joseph Medical Center in Joliet, IL, to 22 months in prison following the
conviction.
According to the facts described in the opinion, defendant had substantial sway over deciding
which drugs the hospital would stock and, in particular, was considering replacing Lovenox, a
blood thinner made by Aventis (now Sanofi), with Pfizer’s blood thinner Fragmin.
Joseph Levato, the then-local business manager for Aventis, agreed to pay $32,000 to
defendant, ostensibly for speechmaking, which the opinion indicated never actually occurred.
The Food and Drug Administration (FDA) questioned defendant in 2006 about the payments for
the alleged speeches in the course of an investigation concerning allegations of misbranding and
kickbacks by pharmaceutical companies.
According to the opinion, defendant admitted he gave no speeches, but indicated the payments
were for informal talks he had delivered to hospital nurses, although there was no
documentation to back up his claim.
Defendant was indicted along with Levato, who pled guilty and testified against defendant at
trial.
Following his conviction, defendant sought reversal on two grounds: (1) that the government
withheld material exculpatory evidence it knew it had, see Brady v. Maryland, 373 U.S. 83
(1963); and (2) that the judge should have allowed the defense more leeway at trial to explore
the FDA’s interview of defendant and ask the FDA agent on cross-examination whether
defendant had requested a lawyer be present during the interview.
The Brady material at issue was Department of Health and Human Services (HHS) memoranda
summarizing the results of an investigation of suspected misconduct by Aventis, including
payments of kickbacks, which “fingered Muoghalu and Levato,” the opinion said.
Federal prosecutors discovered the memoranda after the trial ended but before defendant was
sentenced and immediately turned them over to his lawyer. Defendant argued the memoranda
could have been used to impeach Levato's credibility.
The district judge rejected the Brady claim, saying defendant’s lawyer knew about the HHS
investigation, knew its targets included his client and Levato, and could have requested the
records if he thought they might undermine Levato’s credibility.
“That’s a sound ground for the rejection of the claim,” the appeals court concluded.
Moreover, the “documents in question would be unlikely to have strengthened, and might well
have weakened, Muoghalu’s defense in the minds of jurors,” the appeals court observed.
Rejecting the second ground for appeal as well, the Seventh Circuit said it did not “understand
the relevance of the question” and therefore the “judge was right to forbid.”
Specifically, the appeals court noted defendant “was not under arrest when he was interviewed,
and so he could have refused to be interviewed had the agent refused to interview him in the
presence of a lawyer.”
United States v. Muoghalu, No. 10-3873 (7th Cir. Nov. 21, 2011).
Sixth Circuit Affirms Physician’s 62-Month Prison Sentence
The Sixth Circuit affirmed February 8 a physician’s 262-month prison sentence for illegally
dispensing controlled substances.
According to the appeals court, the sentence was substantively reasonable and the lower court
did not err in applying a four-level sentence enhancement.
Dr. Daniel Fearnow pled guilty to intentionally distributing controlled substances and conspiracy
to distribute controlled substances after an investigation by the Drug Enforcement Agency (DEA)
revealed he was issuing prescriptions to “patients” in exchange for cash.
Fearnow was sentenced to 262 months in prison after the court imposed a four-level sentence
enhancement under United States Sentencing Guidelines (U.S.S.G) Section 3B1.1(a) based
on his status as an organizer or leader of the criminal conspiracy.
According to the appeals court, in considering the applicability of an enhancement pursuant to
Section 3B1.1, “courts weigh the following factors: the exercise of decision making authority, the
nature of participation in the commission of the offense, the recruitment of accomplices, the
claimed right to a larger share of the fruits of the crime, the degree of participation in planning
or organizing the offense, the nature and scope of the illegal activity, and the degree of control
and authority exercised over others.”
Finding the lower court did not err in applying the enhancement, the appeals court highlighted
that Fearnow’s criminal conduct involved at least five participants and that he exercised
managerial authority over staff members who assisted him in accomplishing the offenses.
Rejecting Fearnow’s argument that the lower court should have applied a downward departure
based on alleged sentencing entrapment or sentencing manipulation, the appeals court found
“the facts of this case do not support” such a finding.
The appeals court next addressed the substantive reasonableness of the 262-month sentence.
Fearnow argued the district court did not give due consideration to his history and
characteristics.
Because Fearnow’s sentence was within the advisory range of the sentencing guidelines, the
appeals court applied a rebuttable presumption of reasonableness.
“A review of the sentencing hearing transcript reveals that the district court considered each of
Fearnow’s arguments and explained its rationale for rejecting them,” the appeals court found.
United States v. Fearnow, No. 10-6034 (6th Cir. Feb. 8, 2012).
Regulatory/Other
OIG Alerts Physicians Of Potential Liability After Reassigning Right To
Medicare Payments
Physicians who reassign their right to bill the Medicare program and receive Medicare payments
may be liable for false claims submitted by entities to which they reassigned their Medicare
benefits, the Department of Health and Human Services Office of Inspector General (OIG)
warned in a February 8, 2012 Alert.
The Alert encouraged physicians to use heightened scrutiny of entities prior to reassigning their
Medicare payments.
According to OIG, it recently reached settlements with eight physicians who reassigned their
Medicare payments to various physical medicine companies in exchange for Medical Directorship
positions.
However, while serving as Medical Directors, the physicians did not personally render or directly
supervise any services.
These physical medicine companies falsely billed Medicare using the physicians’ reassigned
provider numbers as if the physicians personally rendered the services or directly supervised a
“technician” rendering the services, OIG said.
The Alert noted many of the owners and operators were criminally prosecuted while OIG pursued
the liability of the physicians under the Civil Monetary Penalties Law.
“A physician who reassigns to any entity his or her right to bill the Medicare program and receive
Medicare payments has the right to access the entity's billing information concerning the services
the physician is alleged to have performed and for which the entity billed Medicare,” the Alert
said.
CMS Issues Proposed Rule On Returning Overpayments
The Centers for Medicare and Medicaid Services announced February 14, 2012 a proposed rule
(77 Fed. Reg. 9179) that would implement a provision of the ACA requiring providers and
suppliers to report and return overpayments within 60 days of identification, or on the date when
a corresponding cost report is due—whichever is later.
Under the new provision, a failure to report and return the overpayment within the applicable
time period can result in FCA liability, civil monetary penalties, and exclusion from federal
healthcare programs.
The proposed rule sets forth the policies and procedures for reporting and returning
overpayments to Medicare.
The new requirements apply to providers, suppliers, Medicaid managed care organizations
(MCOs), Medicare Advantage organizations (MAOs), and prescription drug plan (PDP) sponsors.
However, CMS is proposing to implement the requirements only as to Medicare Parts A and B
providers and suppliers initially, while other stakeholders, including MAOs, MCOs, and PDPs will
be addressed later.
“Notwithstanding the foregoing, we remind all stakeholders that even without a final regulation
they are subject to the statutory requirements found in section 1128J(d) of the Act and could
face potential False Claims Act liability, Civil Monetary Penalties Law liability, and exclusion from
Federal health care programs for failure to report and return an overpayment,” CMS said.
The proposed rule mirrors the statutory language in defining “overpayments” as “any funds that
a person receives or retains under title XVIII . . . to which the person, after applicable
reconciliation, is not entitled under such title."
The proposed rule lists a number of examples of overpayments under this definition, including
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Medicare payments for noncovered services.
Medicare payments in excess of the allowable amount for an identified covered service.
Errors and nonreimbursable expenditures in cost reports.
Duplicate payments.
For reporting and refunding purposes, CMS is proposing to use the existing voluntary refund
process, which would be renamed the “self-reported overpayment refund process.
CMS Final Rule Aimed At Fighting Fraud Will Save Estimated $1.6
Billion Over Ten Years
A Centers for Medicare and Medicaid Services (CMS) rule published April 27, 2012 (77 Fed. Reg.
25284) finalizes provisions mandated under the Affordable Care Act that require all providers of
medical or other items or services and suppliers that qualify for a National Provider Identifier
(NPI) to include their NPI on all applications to enroll in the Medicare and Medicaid programs and
on all claims for payment submitted under those programs.
“This gives CMS and States the ability to tie specific claims to the ordering or certifying physician
or eligible professional and to check for suspicious ordering activity,” CMS said in a press release.
The final rule is estimated to save taxpayers nearly $1.6 billion over 10 years, according to the
agency.
The rule also requires physicians and other professionals who are permitted to order and certify
covered items and services for Medicare beneficiaries to be enrolled in Medicare and mandates
document retention and provision requirements on providers and suppliers that order and certify
items and services for Medicare beneficiaries.
According to CMS, the rule also builds on the work the agency is doing in Medicare Part D by
requiring all prescriptions include an NPI for prescribing physicians.
“In conjunction with Part D, these efforts will help better safeguard the Medicare Trust Funds by
giving CMS the ability to know which providers are ordering, certifying and prescribing items and
services to Medicare beneficiaries,” the release said.
Health Information Technology
HHS Plans To Delay Stage 2 Meaningful Use Requirements
The Department of Health Human Services (HHS) announced November 30, 2011 plans to give
doctors and hospitals that meet Stage 1 requirements in the 2011 payment year for purposes of
the Medicare electronic health record (EHR) incentive program another year, until 2014, to meet
the Stage 2 meaningful use standards.
The Health Information Technology for Economic and Clinical Health (HITECH) Act provides
reimbursement incentives for eligible professionals and hospitals that are successful in becoming
"meaningful users" of certified EHR technology.
Under current requirements, doctors and hospitals that participate in the Medicare EHR program
in 2011 would have to meet the new standards in 2013.
If they delayed participating in the program until 2012, however, they could wait to meet the
Stage 2 standards until 2014 and still be eligible for the same incentive payment, HHS said in a
press release.
HHS indicated the change in the Stage 2 deadline is intended to encourage faster adoption of
health information technology.
The American Hospital Association (AHA) praised HHS’ plans to delay the start of Stage 2
meaningful use. In a statement, AHA President and Chief Executive Officer Rich Umbdenstock
said “the rushed timelines and complex regulatory requirements of meaningful use have made
the process difficult.”
According to the statement, “While the flow of meaningful use incentives to date has been slow,
the delay will better align EHR adoption policy with market realities, such as limited vendor
capacity to work with providers. Giving hospitals another year to implement these changes
before the bar is raised on the meaningful use requirements is good news, especially for small,
rural and safety net facilities.”
The American Medical Association likewise welcomed the HHS announcement.
"We continue to urge HHS to fully evaluate Stage 1 and develop solutions to increase physician
participation rates prior to finalizing requirements for Stage 2," the group said in a statement.
HHS said it also plans to ramp up outreach efforts to help providers and vendors meet
meaningful use requirements.
“HHS will target outreach, education and training to Medicare eligible professionals that have
registered in the EHR incentive program but have not yet met the requirements for meaningful
use,” the agency press release said.
The release also noted a new Centers for Disease Control and Prevention (CDC) survey showing
physicians’ adoption of health information technology doubled between 2008 and 2011, from
17% to 34%.
According to the survey, 52% of office-based physicians intend to participate in the EHR
incentive programs.
CMS Releases Proposed Rule For Stage 2 Of EHR Incentive Programs
The Centers for Medicare and Medicaid Services (CMS) released February 23, 2012 a proposed
rule for Stage 2 requirements for the Medicare and Medicaid Electronic Health Record (EHR)
Incentive Programs.
Under the EHR program, which was mandated by the Health Information Technology for
Economic and Clinical Health (HITECH) Act, eligible healthcare professionals (EPs), eligible
hospitals, and critical access hospitals (CAHs) can qualify for Medicare and Medicaid incentive
payments when they adopt certified EHR technology and use it to demonstrate “meaningful use”
of that technology.
In July 2010, CMS published a final rule (75 Fed. Reg. 44314) on Stage 1 requirements, which
among other things divided the requirement for physicians and other EPs to meet 25 objectives
(23 for hospitals) in reporting their meaningful use of EHRs, into a “core” group of requirements
that must be met, plus an additional “menu” of procedures from which providers may choose.
With the Stage 2 rule, CMS said in a fact sheet that it hopes to expand the meaningful use of
certified EHR technology.
In the Stage 2 proposal, CMS maintains the same core and menu structure, and would require
that EPs meet or qualify for an exclusion to 17 core objectives and three of five menu objectives.
Hospitals and CAHs must meet or qualify for an exclusion to 16 core objectives and two of four
menu objectives.
Changes To Stage 1 Criteria
Although nearly all of the Stage 1 core and menu objectives have been retained for Stage 2,
some changes were made in the Stage 2 rule.
According to the fact sheet, some of the changes would be optional for use by providers in Stage
1 but would be required for use in Stage 2, and other changes would not take effect until
providers have to meet the Stage 2 criteria.
Adjustments made in the proposed rule include: changes to the denominator of computerized
provider order entry (CPOE) (Stage 1 Optional, Stage 2 Required); changes to the age
limitations for vital signs (Stage 1 Optional, Stage 2 Required); elimination of the “exchange of
key clinical information” core objective from Stage 1 in favor of a “transitions of care” core
objective that requires electronic exchange of summary of care documents in Stage 2 (Effective
Stage 2); and replacing “provide patients with an electronic copy of their health information”
objective with a “view online, download and transmit” core objective (Effective Stage 2).
The proposal also contains new objectives that would apply to specialty providers. “The addition
of these objectives recognizes the leadership role that many specialty providers have played in
the meaningful use of health IT for quality improvement purposes . . . ,” CMS said in the fact
sheet.
Stage 1 Extension
The proposal also includes an extension of Stage 1, which gives providers an extra year to
implement Stage 2 criteria.
In the 2010 Stage 1 rule, CMS required any provider who first attested to Stage 1 criteria in
2011 to begin using Stage 2 criteria in 2013.
The proposed rule would delay the onset of Stage 2 criteria for those providers until 2014.
CMS said in the fact sheet that it believes this provision will “allow the needed time for vendors
to develop Certified EHR Technology that can meet the Stage 2 requirements.”
Clinical Quality Measure Reporting
To qualify for incentive payments under the EHR program, EPs, eligible hospitals, and CAHs must
report on specified clinical quality measures (CQMs).
The proposed rule would require EPs to report a total of 12 CQMs and eligible hospitals and CAHs
to report 24 CQMs.
To reduce reporting burdens, in the Stage 2 rule, CMS is proposing for EPs a set of measures
that align Stage 2 CQMs with the following existing quality programs: Physician Quality Reporting
System, Medicare Shared Savings Program, and National Council for Quality Assurance for
medical home accreditation, as well as measures proposed under the Children’s Health Insurance
Program Reauthorization Act and under Section 1139A of the Social Security Act (as added by
Section 2701 of the Affordable Care Act).
For eligible hospitals and CAHs, CMS is proposing to align Stage 2 CQMs with the Inpatient
Quality Reporting and The Joint Commission’s hospital quality measures.
To further reduce reporting burdens, the proposed rule outlines a process by which EPs, eligible
hospitals, and CAHs beyond their first year of Stage 1 participation would submit CQM data
electronically.
The rule solicits public comment on two mechanisms of electronic CQM reporting: aggregatelevel electronic reporting as a group, or through existing quality reporting systems (for Medicare
providers).
Payment Adjustments
According to the fact sheet, under the proposed rule, any Medicare EP or hospital that
demonstrates meaningful use in 2013 would avoid a statutorily required payment adjustment in
2015.
In addition, any Medicare provider that first demonstrates meaningful use in 2014 could avoid
the penalty if they meet the attestation requirement by July 3, 2014 (eligible hospitals) or
October 3, 2014 (EPs).
“However, it is important to note that the receipt of Medicaid EHR Incentive Program payments
for one kind of Medicaid incentive payment (the adopt, implement or upgrade, the criteria for the
first year of Medicaid EHR Incentive Program payments), is not the same as meeting the
meaningful use criteria,” the fact sheet said. “Therefore, those providers may be subject to
Medicare payment adjustments if they do not otherwise demonstrate meaningful use.”
The rule goes on to lay out three categories of exceptions to the payment adjustment:
availability of internet access or barriers to obtaining IT infrastructure; a time-limited exception
for newly practicing EPs who would not otherwise be able to avoid payment adjustments; and
unforeseen circumstances such as natural disasters that would be handled on a case-by-case
basis.
Healthcare Reform
Sixth Circuit Upholds Individual Mandate In Healthcare Reform Law
The Sixth Circuit handed down a decision June 29, 2011 upholding the individual mandate in the
healthcare reform law, making it the first federal appeals court to rule on the constitutionality of
the Affordable Care Act’s (ACA’s) controversial minimum coverage provision.
Affirming an October 7, 2010 decision by the U.S. District Court for the Eastern District of
Michigan, which refused to grant an injunction blocking the individual mandate, the appeals court
panel found in its 2-1 decision that requiring Americans to buy health insurance was not beyond
Congress' Commerce Clause powers.
Three district courts also have upheld the provision, while two federal trial courts in Florida and
Virginia have ruled the individual mandate is unconstitutional. The Eleventh and Fourth Circuits
are expected to rule soon on the issue. The D.C. Circuit is set to hear oral arguments in a third
case in the fall.
In a White House blog posting, a senior advisor to the President called the ruling a key legal
victory.
“We’re gratified by today’s ruling, which came from judges appointed by Democratic and
Republican Presidents who agreed that the law’s individual responsibility provision . . . is
constitutional,” the posting said.
The majority opinion was written by Democratic appointee Judge Boyce F. Martin, Jr. More
significant is the concurring opinion written by Judge Jeffrey S. Sutton, a Republican appointee,
who agreed the individual mandate, at least in the context of a facial challenge, was not
invalid. Judge James Graham, also a Republican appointee, dissented.
Most observers agree the Supreme Court ultimately will have the last word on whether the
provision passes constitutional muster.
Constitutional Challenge
Ann Arbor, MI-based Thomas More Law Center, a conservative public interest law firm, and four
individual plaintiffs filed the instant action on March 23, 2010, the same day the ACA became
law.
The lawsuit sought a preliminary and permanent injunction to block enforcement of the
healthcare reform law’s individual mandate, which starting in 2014 requires individuals to
purchase insurance or pay a penalty.
Valid Exercise of Commerce Clause Power
“By regulating the practice of self-insuring for the cost of health care delivery, the minimum
coverage provision is facially constitutional under the Commerce Clause for two independent
reasons,” Judge Martin wrote in his majority opinion.
First, Martin rejected the plaintiffs’ contention that the provision regulated economic inactivity in
violation of the Commerce Clause.
According to Martin, the Commerce Clause itself, as well as Supreme Court jurisprudence, make
no distinction between economic activity/inactivity, a point on which Judge Sutton in his
concurrence agreed.
“As long as Congress does not exceed the established limits of its Commerce Power, there is no
constitutional impediment to enacting legislation that could be characterized as regulating
inactivity,” Martin noted.
But in any event, Martin said, the minimum coverage provision does in fact regulate economic
activity with a substantial effect on interstate commerce—i.e., the substantial cost-shifting that
occurs when those without insurance inevitably enter the healthcare market.
“The activity of foregoing health insurance and attempting to cover the cost of health care needs
by self-insuring is no less economic than the activity of purchasing an insurance plan,” Martin
wrote.
“Congress had a rational basis for concluding that, in the aggregate, the practice of self-insuring
for the cost of health care substantially affects interstate commerce,” Martin concluded.
As a second alternative for upholding the individual mandate, Martin continued, “Congress had a
rational basis for concluding that the minimum coverage requirement is essential to its broader
reforms to the national markets in health care delivery and health insurance.”
Proponents of the individual mandate repeatedly have argued the provision is essential to the
ACA’s insurance market reforms, which include a guaranteed issue requirement that bars
insurers from denying coverage to those with pre-existing conditions. Without the individual
mandate, people could wait until they got sick to obtain coverage, which would drive up
premiums for everyone.
Substantial Effects
In his opinion, Judge Sutton also sided with the government on the Commerce Clause issue,
saying they had “the better of the arguments,” particularly given the nature of the challenge—“a
pre-enforcement facial attack on the individual mandate in all of its settings.”
According to Sutton, the case presented two distinct questions: whether the individual mandate
survived the substantial-effects test and, if so, whether the novelty of the law justified
invalidating it anyway.
Sutton said the first question was a fairly easy call, “[n]o matter how you slice the relevant
market—as obtaining health care, as paying for health care, as insuring for health care—all of
these activities affect interstate commerce, in a substantial way.”
As with the majority opinion, the concurrence agreed Congress had a rational basis for
concluding the decisions and actions of the self-insured substantially affect interstate commerce.
“Faced with $43 billion in uncompensated care, Congress reasonably could require all covered
individuals to pay for health care now so that money would be available later to pay for all care
as the need arises,” Sutton wrote.
Sutton acknowledged the novelty of the regulation and the need to define a limit on Congress’
Commerce Clause powers were viable arguments.
But similar to the majority opinion, Sutton rejected the action/inaction dichotomy advanced by
plaintiffs, finding such a distinction was ultimately unworkable.
“[I]naction is action, sometimes for better, sometimes for worse, when it comes to financial
risk,” Sutton said. “No one is inactive when deciding how to pay for health care, as self-insurance
and private insurance are two forms of action for addressing the same risk,” he added.
Sutton also repeatedly stressed the case was before the court as a facial challenge, which
favored a ruling in the government's favor.
“[E]ven if the Constitution prohibited Congress from regulating all of the self-insured together,
that would not require a court to invalidate the individual mandate in its entirety,” Sutton said.
“Nothing prevents such individuals from bringing as-applied challenges to the mandate down the
road,” he added.
Sutton noted the idea that Congress can compel Americans to buy products they do not want
raised concerns, but found “a mandate to purchase health insurance does not parallel . . . other
settings or markets.”
Dissent
In his dissent, Judge James Graham argued the “mandate does not regulate the commercial
activity of obtaining health care. It regulates the status of being uninsured.”
Graham viewed the mandate as an invalid exercise of Congress’ Commerce Clause powers
because it “attempted to force a non-participant into a market.”
“If the exercise of power is allowed and the mandate upheld, it is difficult to see what the limits
on Congress’s Commerce Clause authority would be,” he said.
Thomas More Law Ctr. v. Obama, No. 10-2388 (6th Cir. June 29, 2011).
Third Circuit Finds Physician Plaintiffs Lack Standing To Challenge
Reform Law
The Third Circuit August 3, 2011 found a physician, his patient, and a physician association failed
to establish standing in their challenge to the individual mandate provision of the healthcare
reform law.
The appeals court did not consider the merits of the claims, as the appeal was solely brought in
response to a lower court ruling on standing.
The individual mandate provision of the reform law remains controversial and has been widely
litigated. Three district courts have previously upheld the individual mandate provision, while two
federal trial courts in Florida and Virginia have ruled the individual mandate is unconstitutional.
The Eleventh and Fourth Circuits are expected to rule soon on the issue and the D.C. Circuit is
set to hear oral arguments in a third case in the fall. The issue is widely expected to be
eventually resolved by the Supreme Court.
The plaintiffs in the case are Mario A. Criscito, M.D., a licensed New Jersey physician, a patient of
Criscito, and New Jersey Physicians, Inc., a nonprofit corporation that “has as a primary purpose
the protection and advancement of patient access to affordable, quality healthcare.”
Plaintiffs challenged the individual mandate provision in the Patient Protection and Affordable
Care Act (PPACA) in New Jersey federal court.
The individual mandate, beginning in 2014, will require individuals either to maintain a certain
minimum level of health insurance or pay a monetary penalty.
The district court did not reach the merits of the action, instead finding that plaintiffs failed to
adequately plead injury in fact and, therefore, could not establish standing. Plaintiffs appealed.
The appeals court first considered the standing of the patient of Criscito. According to the court,
plaintiffs allege that “Patient Roe” has the following injury: (1) “Roe is a patient of Dr. Criscito
who pays himself for his care,” and (2) Roe “is a citizen of the State of New Jersey who chooses
who and how to pay for the medical care he receives from Dr. Criscito and others.”
Finding such allegations insufficient to establish injury in fact, the court noted the complaint is
“factually barren with respect to standing.”
The appeals court found “no facts alleged to indicate that Roe is in any way presently impacted
by the Act or the mandate.”
In so finding, the appeals court distinguished the facts of the instant case from others where
standing was found.
“This case is thus unlike some of the other pending health care challenges, in which the plaintiffs
alleged or demonstrated that they were experiencing some current financial harm or pressure
arising out of the individual mandate’s looming enforcement in 2014,” the appeals court noted.
The appeals court went on to find the complaint “similarly deficient in regard to Dr. Criscito.”
The complaint alleges only that some of Criscito’s patients currently pay out of pocket.
Although the complaint states that the individual mandate provisions “will have a direct,
substantial impact upon Dr. Criscito’s medical practice, the manner in which he may, or may not,
seek payment for his professional services and the manner in which he may render treatment to
his patients,” the plaintiffs plead no facts in their complaint to buttress these arguments and thus
prove nothing more than an impermissible “conjectural or hypothetical” injury in fact suffered by
Criscito, the appeals court held.
Similarly, New Jersey Physicians, Inc. failed to allege sufficient injury, the appeals court found.
In order to establish associational standing, an organization must “make specific allegations
establishing that at least one identified member ha[s] suffered or would suffer harm,” the court
noted.
But here, the only member of New Jersey Physicians, Inc. identified in the complaint is Criscito,
who the court found failed to establish any injury in fact.
New Jersey Physicians, Inc. v. Obama, No. 10-4600 (3d Cir. Aug. 3, 2011).
Eleventh Circuit Finds Reform Law’s Individual Mandate
Unconstitutional, But Severable
In a 2-1 decision, the Eleventh Circuit held August 12, 2011 the individual mandate provision in
the healthcare reform law violates the constitution. The appeals court stopped short, however, of
declaring the entire law void, instead finding the provision severable.
The 207-page majority decision was written by Chief Judge Joel F. Dubina and joined by Judge
Frank M. Hull, with an 83-page dissent authored by Judge Stanley Marcus.
This decision creates a circuit split on the issue after the Sixth Circuit held June 29 in another 2-1
panel decision that requiring Americans to buy health insurance under the Affordable Care Act’s
(ACA’s) individual mandate was not beyond Congress' Commerce Clause powers. Thomas More
Law Ctr. v. Obama, No. 10-2388 (6th Cir. June 29, 2011). Thomas More has appealed that
decision to the U.S. Supreme Court, where it is widely expected the issue eventually will be
resolved.
In a blog post the same day the case was issued, the White House said “We strongly disagree
with this decision and we are confident it will not stand.”
“Individuals who choose to go without health insurance are making an economic decision that
affects all of us--when people without insurance obtain health care they cannot pay for, those
with insurance and taxpayers are often left to pick up the tab,” the administration argued.
Plaintiffs in the instant case are 26 states, private individuals Mary Brown and Kaj Ahlburg, and
the National Federation of Independent Business.
Judge Rodger Vinson of the U.S. District Court for the Northern District of Florida held January 31
that the individual mandate provision exceeds Congress’ authority under the Commerce Clause
and is not severable from the law. Thus, Vinson declared the law void in its entirety and this
appeal followed.
Medicaid Expansion Constitutional
As an initial matter, the appeals court affirmed the lower court’s holding that the Medicaid
expansion in the ACA passes constitutional muster.
The state plaintiffs argued the ACA’s expansion of the Medicaid program, enacted pursuant to the
Spending Clause, is unduly coercive.
In rejecting this argument, the appeals court pointed to the fact that Medicaid-participating
states were warned from the program's inception that Congress reserved the right to make
changes, and states have plenty of notice—nearly four years from the date the bill was signed
into law—to decide whether they will continue to participate in Medicaid by adopting the
expansions or not.
“Existing Supreme Court precedent does not establish that Congress’s inducements are
unconstitutionally coercive, especially when the federal government will bear nearly all the costs
of the program’s amplified enrollments,” the appeals court concluded.
Individual Mandate
The controversial provision requires all “applicable individuals” to maintain “minimum essential
coverage” for themselves and their dependents or pay a monetary penalty.
The appeals court found the individual mandate exceeds Congress’ enumerated Commerce
Clause power and is unconstitutional.
“This economic mandate represents a wholly novel and potentially unbounded assertion of
congressional authority: the ability to compel Americans to purchase an expensive health
insurance product they have elected not to buy, and to make them re-purchase that insurance
product every month for their entire lives,” the appeals court noted.
“We have not found any generally applicable, judicially enforceable limiting principle that would
permit us to uphold the mandate without obliterating the boundaries inherent in the system of
enumerated congressional powers,” the appeals court held.
Rejecting the argument that healthcare is a unique situation, the appeals court observed
“‘[u]niqueness’ is not a constitutional principle in any antecedent Supreme Court decision.”
The appeals court further noted that decisions to abstain from the purchase of a product or
service, whatever their cumulative effect, lack a sufficient nexus to commerce.
“Never before has Congress sought to regulate commerce by compelling non-market participants
to enter into commerce so that Congress may regulate them,” the opinion said.
The appeals court also rejected the government’s alternative argument that the individual
mandate is a tax validly enacted pursuant to the Taxing and Spending Clause.
“[T]he individual mandate was enacted as a regulatory penalty, not a revenue-raising tax, and
cannot be sustained as an exercise of Congress’s power under the Taxing and Spending Clause,”
the appeals court concluded.
Severability
The appeals court highlighted the “presumption of severability is rooted in notions of judicial
restraint and respect for the separation of powers in our constitutional system.”
Finding the individual mandate severable, the appeals court found the ACA’s “other provisions
remain legally operative after the mandate’s excision, and the high burden needed under
Supreme Court precedent to rebut the presumption of severability has not been met.”
Accordingly, the appeals court concluded the district court erred in its decision to invalidate the
entire healthcare reform law.
Dissent
A lengthy dissent by Judge Marcus argued the individual mandate provision is a valid exercise of
Congress’ Commerce Clause powers.
According to the dissent, the “consumption of health care services by the uninsured has a very
substantial impact on interstate commerce--the shifting of substantial costs from those who do
not pay to those who do and to the providers who offer care” and thus falls squarely within
Congress’ powers.
“While the individual mandate is indeed novel, I cannot accept the charge that it is a ‘bridge too
far,’” Marcus wrote. “The individual mandate, viewed in light of the larger economic regulatory
scheme of the Act as a whole and the truly unique and interrelated nature of both markets, is a
legitimate exercise of Congress’ power under Art. I, § 8, cl. 3 of the Constitution and is not prone
to the slippery slope of hypothetical horrors leading to an unlimited federal Commerce Clause
power.”
Florida v. Department of Health and Human Servs., Nos. 11-11021, 11-11067 (11th Cir. Aug.
12, 2011).
Fourth Circuit Dismisses Challenges To Healthcare Reform Law On
Jurisdictional Grounds
The Fourth Circuit handed down September 8, 2011 a pair of decisions dismissing for lack of
jurisdiction two closely watched challenges to the healthcare reform law.
In Virginia v. Sebelius, the appeals court held the state, the sole plaintiff in the action, lacked
standing to bring the lawsuit.
Based on this conclusion, the Fourth Circuit vacated a December 2010 decision by the U.S.
District Court for the Eastern District of Virginia, which found unconstitutional the Affordable Care
Act’s (ACA’s) individual mandate, and remanded with instructions to dismiss the case for lack of
subject matter jurisdiction. Virginia v. Sebelius, No. 3:10CV188-HEH (E.D. Va. Dec. 13, 2010).
Starting in 2014, the individual mandate requires individuals to buy insurance or pay a penalty.
In Liberty Univ. v. Geithner, the Fourth Circuit held the Anti-Injunction Act (AIA) stripped the
court of jurisdiction because the case was a pre-enforcement action seeking to restrain the
assessment of a tax.
The U.S. District Court for the Western District of Virginia ruled the individual mandate was a
valid exercise of Congress’ Commerce Clause powers after concluding plaintiffs had standing to
bring the challenge and the AIA did not bar the lawsuit. Liberty Univ., Inc. v. Geithner, No. 6:10cv-00015-nkm (W.D. Va. Nov. 30, 2010).
The Fourth Circuit remanded the case to the district court with instructions to dismiss for lack of
jurisdiction.
In both decisions, the Fourth Circuit did not decide the issue of whether the controversial
individual mandate is constitutionally sound.
Two other federal circuits have split on this issue, with the Eleventh Circuit in a 2-1 decision on
August 12 holding the individual mandate violates the Commerce Clause, Florida v. Department
of Health and Human Servs., Nos. 11-11021, 11-11067 (11th Cir. Aug. 12, 2011), and the Sixth
Circuit on June 29 upholding the provision in another 2-1 panel decision. Thomas More Law Ctr.
v. Obama, No. 10-2388 (6th Cir. June 29, 2011).
Thomas More has appealed the Sixth Circuit decision to the U.S. Supreme Court, where it is
widely expected the issue eventually will be resolved.
In a statement, Virginia Attorney General Kenneth T. Cuccinelli, II, who initiated the Virginia v.
Sebelius action, said the ruling was disappointing not only because “the court ruled against us,
but also that the court did not even reach the merits on the key question of Virginia’s lawsuit—
whether Congress has a power never recognized in America’s history: the power to force one
citizen to purchase a good or service from another citizen."
In a White House blog, Stephanie Cutter, deputy senior advisor, hailed the decision as “another
victory for the Affordable Care Act and the tens of millions of Americans already benefiting from
this landmark law.”
State Lacks Standing
Cuccinelli brought the state's action in part to defend the legislative enactment of the Virginia
Health Care Freedom Act (VHCFA), which the state argued was in direct conflict with the ACA’s
individual mandate.
The VHCFA, enacted one day after the ACA, provides “[n]o resident of this Commonwealth . . .
shall be required to obtain or maintain a policy of individual insurance coverage.”
The district court found the state had standing to bring its suit based on the VHCFA and then
went on to hold the individual mandate did not fall under Congress’ power to regulate activities
that substantially affect interstate commerce.
But the unanimous three-judge panel of the Fourth Circuit said the lower court should never
have reached the merits because the state lacked standing.
Specifically, the appeals court found the purported conflict between the VHCFA and the individual
mandate did not inflict an actual sovereign injury on the state.
Unlike the state statutes at issue in the cases cited by the state to support standing, the VHCFA
“regulates nothing and provides for the administration of no state program . . . it simply purports
to immunize Virginia citizens from state law.”
According to the appeals court, under Virginia’s standing theory, “each state could become a
roving constitutional watchdog of sorts; no issue, no matter how generalized or quintessentially
political, would fall beyond a state’s power to litigate in federal court.”
Anti-Injunction Act Bars Suit
In the Liberty University case, plaintiffs, two individuals and a private Christian university in
Virginia, challenged the penalty provisions of the individual and employment mandates under the
healthcare reform law.
The district court held the AIA did not bar its consideration of the case, finding Congress did not
intend to “convert the[se] penalties into taxes for purposes of the Anti-Injunction Act.”
On the merits, the district court ruled Congress acted in accordance with its constitutionally
delegated powers under the Commerce Clause when it passed the ACA's employer and individual
coverage provisions.
The AIA provides “no suit for the purpose of restraining the assessment or collection of any tax
shall be maintained in any court by any person.”
When applicable, the AIA divests federal courts of subject-matter jurisdiction in pre-enforcement
challenges, i.e., before a tax is assessed or collected.
Unlike other courts to consider the issue, the majority of the Fourth Circuit panel concluded the
penalty provisions constitute a “tax” for purposes of the AIA even if they would not constitute a
“tax” under the Constitution.
In support of its position, the Fourth Circuit cited Supreme Court precedent that “the term ‘tax’
in the AIA encompasses penalties that function as mere 'regulatory measure[s] beyond the
taxing power of Congress' and Article I of the Constitution.”
A concurring opinion agreed the AIA stripped the court of jurisdiction. Even reaching the merits,
however, the concurring opinion argued Congress had the authority to enact the individual and
employer mandates under its plenary taxing power.
A dissenting opinion disagreed with the majority’s conclusion that the Act divested the appeals
court of jurisdiction. Instead, the dissent would uphold the provisions as valid exercises of
Congress’ Commerce Clause authority.
Virginia v. Sebelius, No. 11-1057 (4th Cir. Sept. 8, 2011). Liberty Univ., Inc. v. Geithner, No.
10-2347 (4th Cir. Sept. 8, 2011).
D.C. Circuit Upholds Individual Mandate In Healthcare Reform Law
The D.C. Circuit in a 2-1 ruling issued November 8, 2011 became the second federal appeals
court to uphold the minimum essential coverage provision of the healthcare reform law, which
has been the subject of numerous constitutional challenges across the country. Seven-Sky v.
Holder, No. 1:10-cv-00950 (D.C. Cir. Nov. 8, 2011).
The decision comes came two days before the U.S. Supreme Court was slated to consider
whether to grant review of several pending cases concerning the constitutionality of various
aspects of the Affordable Care Act (ACA), with the issue of whether the individual
mandate violates Congress’ power under the Commerce Clause taking center stage.
The majority opinion of the D.C. panel, written by Judge Laurence H. Silberman, an appointee of
President Ronald Reagan, concluded the individual mandate, which starting in 2014 requires
individuals to buy insurance or pay a penalty, was a valid exercise of Congress’ powers under the
Commerce Clause.
The court acknowledged the individual mandate was a novel use of Congress’ Commerce Clause
powers, but also said the challenge to the law based on an activity/inactivity distinction was
equally unprecedented.
In the end, the appeals court concluded the government had the better argument—i.e., that
individual decisions not to purchase health insurance can, in the aggregate, have a substantial
effect on interstate commerce as many of those individuals inevitably enter the market for
healthcare, which in turn is validly subject to regulation under the Commerce Clause.
“A single individual need not even be engaged in any economic activity–-i.e. not participating in
any local or interstate market–-so long as the individual is engaged in some type of behavior
that would undercut a broader economic regulation if left unregulated,” the majority opinion
said.
According to the court, the individual mandate was most akin to the type of regulation upheld by
the Court in Wickard v. Filburn, 317 U.S. 111 (1942), which involved federal limits on wheat
production that included wheat grown for personal use.
Wickard, the court observed, “comes very close to authorizing a mandate similar to ours.”
The court did express some unease about the government’s failure to articulate any clear limits
on Congress’ Commerce Clause powers in the context of requiring the purchase of goods or
services.
“That a direct requirement for most Americans to purchase any product or service seems an
intrusive exercise of legislative power surely explains why Congress has not used this authority
before–-but that seems to us a political judgment rather than a recognition of constitutional
limitations," the court said. The majority opinion was joined by Judge Harry T. Edwards.
The majority also rejected the application of the Anti-Injunction Act (AIA) as a jurisdictional bar
to considering the merits, a position on which Judge Brett M. Kavanaugh, an appointee of
President George W. Bush, dissented.
The AIA prohibits pre-enforcement actions seeking to restrain the assessment of a tax. The
Fourth Circuit, in Liberty Univ. v. Geithner, No. 10-2347 (4th Cir. Sept. 8, 2011), dismissed a
similar challenge to the healthcare reform law on the ground that the AIA stripped the court of
jurisdiction.
Circuit Court Decisions
With the D.C. Circuit’s decision, four federal appeals courts have now ruled in cases challenging
the constitutionality of the ACA, although only three of those have decided on the merits.
The Sixth Circuit on June 29 upheld the individual mandate, in a 2-1 panel decision. Thomas
More Law Ctr. v. Obama, 651 F.3d 529 (6th Cir. 2011). The Eleventh Circuit, however, created a
circuit split when it struck down the provision, finding in a 2-1 decision on August 12 that
Congress overstepped its powers under the Commerce Clause in enacting the individual
mandate. Florida v. Department of Health and Human Servs., 648 F.3d 1235 (11th Cir. Aug. 12,
2011). The appeals court concluded, however, the mandate provision could be severed from the
ACA, leaving the remainder of the statute intact.
In a pair of decisions issued September 8, the Fourth Circuit rejected two challenges to the
healthcare reform law on jurisdictional grounds. In Virginia v. Sebelius, No. 11-1057 (4th Cir.
Sept. 8, 2011), the appeals court held the state, the sole plaintiff in the action, lacked standing
to bring the lawsuit. As mentioned above, in Liberty Univ. v. Geithner, No. 10-2347 (4th Cir.
Sept. 8, 2011), the Fourth Circuit held the AIA applied and barred further consideration of the
lawsuit. The Fourth Circuit did not reach the merits in either case.
Anti-Injunction Act
The AIA, with a few exceptions, denies courts jurisdiction over pre-enforcement suits that would
restrain “the assessment or collection of any tax.” 26 U.S.C. § 7421(a).
The application of the AIA to bar the individual mandate litigation was largely a non-starter until
the Fourth Circuit revived the issue in Liberty.
The D.C. panel majority, as well as the dissent, devoted a considerable bulk of their opinions to
the AIA issue.
The majority argued in its opinion, which rejected the Fourth Circuit’s reasoning, that Congress
did not intend the reference to “any tax” in the AIA to include exactions “unrelated to taxes that
Congress labeled ‘penalties.’”
The majority noted a distinction between the mandate and the “shared responsibility,” or
penalty, provision, saying the ACA made the two “analytically and legally separate.” The majority
also emphasized the government’s position--that the AIA is inapplicable--was entitled to
deference.
According to the majority, “[t]axes and penalties carry distinct meanings in the Code, and
Congress has been deliberate when it wants certain penalties to be treated as taxes.”
But in a lengthy dissenting opinion, Judge Kavanaugh discounted the “penalty” versus “tax
distinction.
According to the dissent, the AIA still applies because the ACA requires the penalty for failure to
maintain health insurance “be assessed and collected in the same manner as an assessable
penalty under subchapter B of chapter 68” of the Tax Code. 26 U.S.C. § 5000A(g)(1), which in
turn is “assessed and collected in the same manner as taxes.” 26 U.S.C. § 6671(a).
“[C]ritical for present purposes (and overlooked by the majority opinion) is that the Tax Code
equates tax penalties to taxes for numerous administrative purposes, including for assessment
and collection by the IRS,” the dissent said.
U.S. Supreme Court Agrees To Hear Healthcare Reform Challenge
The U.S. Supreme Court granted November 14, 2011 review of an Eleventh Circuit decision that
found the essential minimum coverage provision, or individual mandate, of the healthcare reform
law was unconstitutional.
The controversial individual mandate, which starting in 2014 requires individuals to buy
insurance or pay a penalty, has taken center stage in a series of lawsuits challenging the
Affordable Care Act (ACA). With numerous federal court rulings, including four federal appeals
court decisions, it was widely expected the Court would ultimately decide the fate of the
individual mandate provision, and potentially the entire law.
The Court now has agreed to consolidate review of three petitions filed by the parties involved in
the litigation—the National Federation of Independent Business, the Department of Justice, and
26 state plaintiffs.
The three petitions are: National Federation of Independent Business v. Sebelius, No. 11-393
(U.S., review granted Nov. 14, 2011); Department of Health and Human Services v. Florida, No.
11-398 (U.S., review granted Nov. 14, 2011); and Florida v. Department of Health and Human
Services, No. 11-400 (U.S., review granted Nov. 14, 2011).
The Court will consider four questions: whether the individual mandate violates congressional
Commerce Clause power; whether the mandate, if found to be unconstitutional, is severable
from the remainder of the ACA; whether the Anti-Injunction Act strips the courts of jurisdiction
as a pre-enforcement challenge to a tax; and whether the ACA’s expansion of Medicaid is
unconstitutional.
ACA Challenge Oral Arguments—A Recap
The U.S. Supreme Court heard oral arguments March 26-28, 2011 in the most important health
law case ever to reach it, a constitutional challenge to the Patient Protection and Affordable Care
Act (ACA).
On March 26, the Court heard arguments on whether the suit brought to challenge the minimum
coverage provision (26 U.S.C. 5000A) is barred by the Anti-Injunction Act (AIA) (26 U.S.C.
7421(a)).
Under the minimum coverage provision, beginning in 2014, non-exempted federal income
taxpayers who fail to maintain a minimum level of health insurance coverage for themselves or
their dependents will owe a penalty for each month in the tax year during which minimum
coverage is not maintained.
The amount of the penalty will be calculated as a percentage of household income for federal
income tax purposes, subject to a floor and capped at the price of forgone insurance coverage.
The penalty will be reported on the taxpayer’s federal income tax return for the taxable year,
and will be assessed and collected by the Internal Revenue Service.
The AIA, with a few exceptions, denies courts jurisdiction over pre-enforcement suits that would
restrain “the assessment or collection of any tax.” 26 U.S.C. § 7421(a).
Many of the questions posed by the Justices on Monday reflected the threshold question of
whether the AIA is jurisdictional.
Counsel also faced questions about whether the fine imposed on individuals who do not purchase
insurance is a “tax” or a “penalty.”
Justice Kagan relied on the statutory language in the ACA in her questioning, noting the statute
uses the word “taxes” and “fees” on numerous occasions but chose the word “penalty for Section
5000A(b).”
On March 27, the Court focused on the core issue of the challenge: the constitutionality of the
individual mandate.
Solicitor General Verrilli encountered some forceful challenges early on in his presentation on
Congress’ power under the commerce clause. In particular, Chief Justice Roberts and Justices
Scalia and Alito raised concerns about the slippery slope issue.
Much of the questioning throughout the morning addressed the key issue of which of several
markets the Court should regard as being regulated: the insurance market, all health services, or
the portion of health services that uninsured people are likely to use.
Courtroom observers also noted there seemed to be very little support, on either side of the
Court’s ideological divide, for sustaining the individual mandate as an exercise of Congress’
taxing power.
On March 28, the last day of oral arguments, addressed two issues: severability and the ACA’s
expansion of Medicaid.
On severability, several Justices appeared open to the challengers' position that striking the
mandate would gut the heart of the ACA and leave behind only an outer shell of miscellaneous
other provisions that Congress would not have intended to stand by themselves.
Bartow Farr, the Court-appointed amicus, argued for the narrowest version of severability, which
would leave the rest of the Act intact if the Court strikes the mandate. Although conceding that
the mandate is central to the regulatory scheme, he argued that Congress should be left to
decide whether to make further amendments or instead to just leave the rest of the law as is.
But Justices Kennedy, Kagan, and Sotomayor seemed reluctant to issue a ruling that might well
cause significant adverse selection in the insurance market.
Regarding the Medicaid expansion, the four Justices with more liberal leanings appeared to
clearly reject the argument that it might ever constitute coercion simply to offer states a deal too
good to refuse. Several Justices from the conservative wing, however, insisted that some test or
standard for this type of "coercion" is needed to keep Congress' spending power from being too
expansive.
Health Lawyers thanks Mark A. Hall, Wake Forest University, and AHLA’s Cynthia Conner, Vice
President of Professional Resources, for their first-hand observations from the courtroom and
their contributions to AHLA’s ACA Challenge blog, from which the above summary is compiled.
Please see AHLA’s blog for more extensive coverage of the arguments in this case.
HHS, Treasury Issue Final Rule On State Innovation Waivers
The Departments of Health and Human Services (HHS) and Treasury issued February 22, 2012 a
final rule outlining the steps states must take to receive a State Innovation Waiver under the
Affordable Care Act (ACA).
According to an HHS fact sheet, under the ACA, states can apply for a State Innovation Waiver
to pursue their own innovative strategies to ensure their residents have access to high quality,
affordable health insurance.
The waivers, which are available beginning in 2017, are designed to allow states to implement
policies that differ from those in the ACA as long as the policies: provide coverage that is at least
as comprehensive as the coverage offered under the ACA; make coverage at least as affordable
as it would have been under the ACA; provide coverage to at least as many residents as
otherwise would have been covered under the ACA; and do not increase the federal deficit, the
fact sheet said.
The final rule, which is slated for publication in the February 27 Federal Register, describes the
content of the waiver application and how such proposals may be disclosed to the public,
monitored, and evaluated.
Under the final rule, a state’s waiver application must include the following:
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The provisions of law that the state seeks to waive;
An explanation of how the proposed waiver will meet the goals related to coverage
expansion, affordability, comprehensiveness of coverage, and costs;
An implementation timeline;
A budget plan that does not increase the federal deficit, with supporting information;
Actuarial certifications and economic analysis to support the state’s estimates that the
proposed waiver will comply with the comprehensive coverage requirement, the
affordability requirement, and the scope of coverage requirement; and
Analyses of the waiver’s potential impact on provisions that are not waived, access to
healthcare services when residents leave the state, and deterring waste, fraud, and
abuse.
The final rule also requires states with waivers to submit quarterly and annual reports tracking
measures in affordability, comprehensiveness of coverage, the number of people covered, and
impact on the federal deficit.
HHS, Labor, Treasury Issue Notice Of Proposed Rulemaking On
Preventive Services
The Departments of Health and Human Services (HHS), Labor, and Treasury issued March 16,
2012 an Advanced Notice of Proposed Rulemaking outlining draft proposals to implement the
administration’s policy on women’s preventive services.
The administration announced on February 10, 2012 a policy that would provide women with
access to recommended preventive services, including contraceptives, without cost sharing,
while ensuring that nonprofit religious organizations are not forced to pay for, provide, or
facilitate the provision of any contraceptive service they object to on religious grounds.
In the case of a religious objection, contraception coverage will be offered to women by their
employers’ insurance companies directly, with no role for the religious employers who oppose
contraception.
The compromise policy followed a firestorm of criticism from Republican lawmakers and religious
organizations of the administration’s initial policy that would have required nonprofit employers
to cover such services beginning August 1, 2013.
“As the consultations with interested parties continue, this ANPRM presents questions and ideas
to help shape these discussions as well as an early opportunity for any interested stakeholder to
provide advice and input into the policy development relating to the accommodation to be made
with respect to non-exempted, non-profit religious organizations with religious objections to
contraceptive coverage,” the notice said.
A final rule governing student health plans was also released March 16. Under that rule, students
will gain the same consumer protections other people with individual market insurance have, like
a prohibition on lifetime limits and coverage of preventive services without cost sharing, HHS
said in a press release.
“In the same way that religious colleges and universities will not have to pay, arrange or refer
for contraceptive coverage for their employees, they will not have to do so for their students who
will get such coverage directly and separately from their insurer,” the release said.
The notice requests comments by June 19, 2012.
HIPAA
Regulatory
HHS Adopts Operating Rules For Two HIPAA Transactions, Estimates
$12 Billion In Savings
The Department of Health and Human Services (HHS) issued June 30, 2011 an interim final rule
with comment period adopting operating rules for two Health Insurance Portability and
Accountability Act (HIPAA) transactions: patient eligibility for coverage and healthcare claim
status.
The interim final rulewas mandated by Section 1104 of the Affordable Care Act’s (ACA’s)
administrative simplification provisions, which require the HHS Secretary to adopt new operating
rules that standardize electronic healthcare transactions with the aim of promoting efficiency and
reducing costs.
According to HHS, the new rules could save an estimated $12 billion for healthcare providers and
insurers by lowering transactional costs.
“Doctors and health insurance companies waste thousands of hours and billions of dollars filling
out forms and processing paperwork,” said HHS Secretary Kathleen Sebelius in a press release
announcing the rule. “The Affordable Care Act is helping doctors operate more efficiently and
spend their time treating patients, not filling out papers.”
HHS cites a May 2010 study published in the online journal Health Affairs finding physicians
waste considerable money and time at the hands of excessive administrative complexity.
Under HIPAA’s administrative simplification provisions, the HHS Secretary adopted standards for
certain transactions to enable the electronic exchange of health information and to achieve
greater uniformity in the transmission of health information.
But according to the interim final rule, “gaps created by the flexibility in the [HIPAA transaction]
standards permit each health plan to use the transactions in very different ways, which remains
an obstacle to achieving greater health care industry administrative simplification.”
“These gaps,” HHS explained, “have spurred the creation of companion guides by health plans”
to describe their unique implementation of HIPAA transactions and how they will work with their
business partners. The companion guides now total over 1,200, according to the American
Medical Association.
HHS said the proliferation of health plan companion guides has in turn led to the development of
operating rules, which “more clearly define the rights and responsibilities of all parties, security
requirements, transmission formats, response times, liabilities, exception processing, error
resolution and more.”
The use of such operating rules, HHS said, has been shown “to reduce costs and administrative
complexities.”
The two new operating rules, which largely track those developed by the Council for Affordable
and Quality Healthcare’s Committee on Operating Rules for Information Exchange, a healthcare
coalition focusing on administrative simplification, “will provide greater uniformity of information
and transmission formats so that physicians and other health care providers can use one type of
information request for all insurers rather than being required to use multiple systems,” HHS
said.
HHS said the interim final rule is the first in a series of administrative simplification rules that will
be issued to streamline and simplify the healthcare system.
Future administrative simplification rules will address standards and operating rules for electronic
funds transfer and remittance advice; a standard unique identifier for health plans; a standard
for claims attachments; and requirements that health plans certify compliance with all HIPAA
standards and operating rules, HHS said.
Health plans, healthcare clearinghouses, and certain healthcare providers must comply with the
interim final rule by January 1, 2013.
HHS Issues Proposed Rules Allowing Patients Direct Access To Lab
Results
Patients and their authorized representatives would have direct access to their laboratory test
results under a proposed rule unveiled September 12, 2011 by the Department of Health and
Human Services (HHS) at the first-ever HHS Consumer Health IT Summit.
The Centers for Medicare and Medicaid Services (CMS), Office for Civil Rights, and the Centers
for Disease Control and Prevention jointly drafted the proposed rule, which would amend the
Clinical Laboratory Improvement Amendments of 1988 (CLIA) regulations and the Health
Insurance Portability and Accountability Act (HIPAA) privacy rules.
Under existing CLIA regulations, a laboratory may release patient test results directly to the
patient only if (1) the ordering provider expressly authorizes the laboratory to do so at the time
the test is ordered, or (2) state law expressly allows for it, according to a CMS fact sheet.
While the current HIPAA privacy rules generally give individuals access to health information on
request, they include an exception for direct access by patients to their lab results, deferring
instead to the CLIA rules.
According to the CMS fact sheet, 26 states have no laws authorizing direct disclosure of test
results to patients, while 13 states outright prohibit such access.
The proposed rule, which was published in the September 14, 2011 Federal Register (76 Fed.
Reg. 56712), would amend the CLIA regulations to allow patients direct access to their lab
results upon request and, at the same time, would eliminate the privacy rule exception to the
general access requirements. The amended privacy rule, HHS explained, would preempt contrary
state laws governing a patient’s direct access to lab results.
OCR Publishes its HIPAA Audit Protocol: Focus to be on Data
Gathering and Best Practices
By Joshua J. Freemire and James B. Wieland, Ober|Kaler
On November 8, 2011 the Office for Civil Rights (OCR) made public, on a dedicated webpage,
details of its Health Insurance Portability and Accountability Act (HIPAA) Audit Program. Section
13411 of the Health Information Technology for Economic and Clinical Health (HITECH) Act
mandated that the Department of Health and Human Services (HHS) implement periodic audits
to ensure that covered entities are complying with the HIPAA Privacy and Security rules. Earlier
this year, HHS made public the fact that KPMG had been selected by HHS to create and
implement an Audit Protocol. An initial batch of 20 audits (of the eventual 150 to be completed
by December 2012) will begin this month. The audits will cover both HIPAA privacy and HIPAA
security compliance.
The announced protocol calls for audits of a wide range of covered entities, but does not identify
any specific entities (or specific entity types) that will be identified for audit. As OCR explains,
Every covered entity and business associate is eligible for an audit. Selections in the
initial round will be designed to provide a broad assessment of a complex and diverse
health care industry. OCR is responsible for selection of the entities that will be audited.
OCR will audit as wide a range of types and sizes of covered entities as possible; covered
individual and organizational providers of health services, health plans of all sizes and
functions, and health care clearinghouses may all be considered for an audit.
Although the above notes that “every . . . business associate is eligible for an audit . . .,” a later
statement notes that “business associates will be included in future audits” indicating that OCR
will be including only covered entities in this initial group of audits. OCR’s selections will remain
private. Audit selections will not be announced, and OCR makes clear that audit findings that
could identify the audited entity will not be made public.
As originally announced, OCR intends to complete a total of 150 audits before the end of 2012.
Beginning this month, however, OCR will begin its audit program with an initial set of 20 audits.
Following these initial audits (which OCR expects to complete by early 2012), OCR intends to
revisit, and, as necessary, revise its audit protocol before beginning the remaining 130 audits
during 2012.
Following the site visit, the OCR’s audit contractor will prepare, and make available to the
audited provider, a draft audit report. Final audit reports will generally, according to OCR,
“describe how the audit was conducted, what the findings were and what actions the covered
entity is taking in response to those findings.” The covered entities “actions” will be added to the
report after the entity has had the opportunity to discuss “concerns” identified in the report, and
to describe to the auditor corrective actions taken to address those “concerns.” The covered
entities' response, however, will, like the response to the auditor’s initial document request, be
expected within ten business days. The final audit report, which will be submitted to OCR, will
then contain an explanation of the steps the entity took to resolve any identified problems and
identify the entities “best practices.” OCR implies that some, but not necessarily all, final audit
report findings will be made public; as OCR explains, it will “broadly share best practices gleaned
through the audit process and guidance targeted to observed compliance challenges.”
OCR’s explanation of the protocol takes pains to make clear that the audit process is not
intended, at least primarily, as an enforcement tool. As OCR explained,
Audits are primarily a compliance improvement activity . . . The aggregated results of the audits
will enable OCR to better understand compliance efforts with particular aspects of the HIPAA
Rules. Generally, OCR will use the audit reports to determine what types of technical assistance
should be developed, and what types of corrective action are most effective.
OCR’s explanation also makes clear, however, that OCR will take steps to follow up where
“serious compliance issues” are identified. In those instances, OCR explains that “OCR may
initiate a compliance review to address the problem.” OCR’s explanation also makes it clear that
it “expect[s] covered entities to provide the auditors their full cooperation and support and
remind[s] them of their cooperation obligations under the HIPAA Enforcement Rule.”
CMS Delays Enforcement For Compliance With New HIPAA
Transaction Standards
The Centers for Medicare and Medicaid Services’ (CMS’) Office of E-Health Standards and
Services (OESS) is delaying for 90 days until March 31, 2012 enforcement of the Version 5010,
NCPDP D.0, and NCPDP 3.0 transaction standards under the Health Insurance Portability and
Accountability Act (HIPAA).
The compliance date for use of these new standards remains January 1, 2012, and small health
plans have until January 1, 2013 to comply with NCPDP 3.0, according to a CMS statement.
Even though enforcement action will not be taken until after March 31, 2012, OESS will continue
to accept complaints associated with compliance with the Version 5010, NCPDP D.0, and NCPDP
3.0 transaction standards during the 90-day period beginning January 1, 2012.
During that time, OESS may ask covered entities to produce evidence of either compliance or a
good faith effort to become compliant with the new HIPAA standards.
According to the statement, OESS decided to implement the discretionary enforcement period
based on a number of indicators that the industry’s readiness to comply with the new standards
has been low across some sectors and reports that many covered entities are still awaiting
software upgrades.
NCDP D.0 addresses certain pharmacy industry needs; NCPDP 3.0 allows state Medicaid
programs to recoup payments for pharmacy services in cases where a third-party payor has
primary financial responsibility; and Version 5010 provides more functionality for transactions
such as eligibility requests and healthcare claim status, the statement said.
(OESS) subsequently extended the enforcement delay of the three transaction standards through
June 30. According to a March 15 statement, health plans, clearinghouses, providers, and
software vendors are making “steady progress” in implementing the new standards, with the
Medicare fee-for-service program reporting successful receipt and processing of over 70% of all
Part A claims and over 90% of all Part B claims in the Version 5010 format.
Commercial health plans are reporting similar progress, with some state Medicaid agencies
having made a full transition to Version 5010, OESS said.
OESS added that covered entities are making similar process with Version D.0.
“At the same time, OESS is aware that there are still a number of outstanding issues and
challenges impeding full implementation. OESS believes that these remaining issues warrant an
extension of enforcement discretion to ensure that all entities can complete the transition,” its
statement said.
CMS Issues New HIPAA Electronic Funds Transfers Standards
The Centers for Medicare and Medicaid Services (CMS) issued January 5, 2012 an interim final
rule with comment period adopting new electronic funds transfers (EFT) standards under the
Health Insurance Portability and Accountability Act (HIPAA) that the agency estimates
could reduce administrative costs by up to $4.5 billion for physicians, hospitals, private health
plans, and government health plans.
The interim final rule is the second in a series of regulations CMS must issue over the next five
years under Section 1104 of the Affordable Care Act’s administrative simplification provisions to
standardize electronic healthcare transactions with the aim of promoting efficiency and reducing
costs, according to a fact sheet.
In July 2011, CMS issued operating rules for two HIPAA transactions: patient eligibility for
coverage and healthcare claim status.
According to CMS, the rules issued thus far could save a combined $16 billion over the next 10
years through lower transactional costs.
The latest interim final rule streamlines “the format and data content of the transmission a
health plan sends to its bank when it wants to pay a claim to a provider electronically . . . and to
issue a Remittance Advice [RA] notice,” CMS said.
CMS explained that currently when a provider submits an electronic claim for payment, the
health plan often may send a RA, i.e., a notice of payment, separately from the EFT payment.
The new rule requires the use of a trace number so the EFT and RA can be matched up
automatically without the need for often difficult manual reconciliation.
The rule will be published in the January 10 Federal Register and health plans covered by
HIPAA must comply by January 1, 2014.
“Thanks to the Affordable Care Act, health care professionals will spend less time filling out
paperwork and more time focusing on delivering the best care for patients,” said Department of
Health and Human Services Secretary Kathleen Sebelius in a press release.
HHS cited a May 2010 study published in the online journal Health Affairs finding physicians
waste considerable money and time at the hands of excessive administrative complexity.
Future administrative simplification rules will address a standard unique identifier for health
plans; a standard for claims attachments; and requirements that health plans certify compliance
with all HIPAA standards and operating rules.
HHS Proposes One-Year Delay Of ICD-10, Establishes Unique Health
Plan Identifier Under HIPAA
The Department of Health and Human Services (HHS) issued a proposed rule April 9, 2012 that
would delay the compliance date for the International Classification of Diseases, 10th Edition
diagnosis and procedure codes (ICD-10) from October 1, 2013 to October 1, 2014.
The compliance deadline has been controversial since HHS issued a final rule (74 Fed. Reg.
3328) in January 2009 to replace the ICD-9 code sets as Health Insurance Portability and
Accountability Act of 1996 (HIPAA) standards for reporting healthcare diagnoses and procedures
with the greatly expanded ICD-10 code sets, effective October 1, 2013.
Physician groups have said compliance with the new standards will be onerous. According to the
American Medical Association (AMA), the cost of implementing the ICD-10, which includes a fivefold increase in codes from the current 13,000 to 68,000, for a medical practice ranges from
$83,290 to more than $2.7 million, depending on practice size.
Nonetheless, HHS still stands behind the new codes. “Implementation of ICD-10 will
accommodate new procedures and diagnoses unaccounted for in the ICD-9 code set and allow
for greater specificity of diagnosis-related groups and preventive services” which “will lead to
improved accuracy in reimbursement for medical services, fraud detection, and historical claims
and diagnoses analysis for the health care system,” the Centers for Medicare and Medicaid
Services (CMS) said in a fact sheet.
Unique Health Plan Identifier Provisions
The proposed rule also would establish a unique health plan identifier (HPID) under HIPAA
standards for electronic healthcare transactions.
The proposal, developed by the Office of E-Health Standards and Services (OESS), would
implement an administrative simplification provision of the Affordable Care Act, which requires
HHS to issue a series of regulations over five years that are designed to streamline healthcare
administrative transactions, encourage greater use of standards by healthcare providers, and
make existing standards work more efficiently.
According to a CMS fact sheet, health plans currently are identified in standard transactions
using multiple identifiers that differ in length and format.
The proposed rule also would adopt an “other entity” identifier (OEID) for entities such as
healthcare clearinghouses, third-party administrators, and repricers that are not health plans but
that perform certain health plan functions, CMS said.
According to CMS, return on investment of HPID over 10 years for the entire healthcare industry
is estimated at approximately $700 million to $4.6 billion.
NPI
In 2004, HHS finalized the National Provider Identifier (NPI) as the standard unique healthcare
provider identifier and adopted requirements for obtaining and using the NPI.
Since then, pharmacies have encountered situations where the NPI of a prescribing healthcare
provider needs to be included in the pharmacy claim, but the prescribing healthcare provider
does not have an NPI or has not disclosed it, HHS noted.
To remedy this issue, the proposed addition to the NPI requirements specifies the circumstances
under which an organization covered healthcare provider must require certain noncovered
individual healthcare providers who are prescribers to obtain and disclose an NPI.
Enforcement
UCLA Health System Agrees To Settlement To Resolve Allegations Of
HIPAA Violations
The University of California at Los Angeles Health System (UCLAHS) agreed to a settlement with
the Department of Health and Human Services (HHS) Office for Civil Rights (OCR) resolving
allegations it violated the Health Insurance Portability and Accountability Act of 1996 (HIPAA)
Privacy and Security Rules.
Under the agreement, UCLAHS will pay HHS $865,500 and has committed to a corrective action
plan aimed at remedying gaps in its compliance with the rules, HHS said.
The agreement resolves two separate complaints filed with OCR on behalf of two celebrity
patients who received care at UCLAHS.
The complaints alleged UCLAHS employees repeatedly and without permissible reason looked at
the electronic protected health information of these patients.
OCR’s investigation into the complaints revealed that from 2005-2008, unauthorized employees
repeatedly looked at the electronic protected health information of numerous UCLAHS patients.
The corrective action plan requires UCLAHS to implement Privacy and Security policies and
procedures approved by OCR, to conduct regular and robust trainings for all UCLAHS employees
who use protected health information, to sanction offending employees, and to designate an
independent monitor who will assess UCLAHS compliance with the plan over three years.
The agreement specifies that it is neither an admission of liability on the part of UCLAHS nor a
concession on the part of HHS that USLAHS is not in violation of HIPAA.
Blue Cross Blue Shield Of Tennessee Will Pay $1.5 Million To Settle
Allegations Of HIPAA Violations
Blue Cross Blue Shield of Tennessee (BCBST) has agreed to pay the Department of Health and
Human Services (HHS) a $1.5 million settlement related to potential violations of the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy and Security Rules, the
agency announced March 13, 2012.
According to HHS’ press release, the enforcement action is the first resulting from a breach
report required by the Health Information Technology for Economic and Clinical Health (HITECH)
Act Breach Notification Rule.
The agreement requires BCBST to implement a corrective action plan to address gaps in its
HIPAA compliance program, as well as review, revise, and maintain its privacy and security
policies and procedures; conduct regular and robust trainings for all BCBST employees covering
employee responsibilities under HIPAA; and perform monitor reviews to ensure BCBST
compliance with the corrective action plan.
The Office for Civil Rights (OCR) investigation stemmed from a notice BCBST submitted reporting
that 57 unencrypted computer hard drives were stolen from a leased facility in Tennessee.
The drives contained the protected health information of over 1 million individuals, including
member names, social security numbers, diagnosis codes, dates of birth, and health plan
identification numbers, the release noted.
OCR’s investigation revealed that BCBST failed to implement appropriate administrative
safeguards to adequately protect information remaining at the leased facility by not performing
the required security evaluation in response to operational changes and showed a failure to
implement appropriate physical safeguards by not having adequate facility access controls, the
agency said.
“This settlement sends an important message that OCR expects health plans and health care
providers to have in place a carefully designed, delivered, and monitored HIPAA compliance
program,” OCR Director Leon Rodriguez said.
“Since the theft, we have worked diligently to restore the trust of our members by demonstrating
our full commitment to limiting their risks from this misdeed and making significant investments
to ensure their information is safe at all times,” said Tena Roberson, deputy general counsel and
chief privacy officer for BCBST in a statement.
According to the statement, "the company has spent nearly $17 million in investigation,
notification and protection efforts."
Cases
U.S. Court In Illinois Finds HIPAA Not Applicable To Dispute Over
Termination Of Disability Benefits
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) does not apply to a suit
claiming improper termination of disability benefits pursuant to information received about an
insured from her treating physician, the U.S. District Court for the Southern District of Illinois
held October 27, 2011.
In so holding, the court observed that HIPAA does not create a physician-patient privilege and no
such privilege exists under federal law.
In August 2008, plaintiff Rita Westerheide applied for and received long term disability benefits
under a plan administered by Hartford Life Insurance Company. In May 2009, Westerheide was
advised that her benefits were terminated, based on, among other factors, new information
obtained from one of Westerheide's treating physicians.
Plaintiff appealed administratively but was unsuccessful. Plaintiff then sued under the Employee
Retirement Income Security Act of 1974 (ERISA) asserting claims for payment of long term
disability benefits past due and for a declaration of her right to future benefits under the terms of
the plan.
Plaintiff also asserted claims for violating HIPAA and attorneys’ fees.
Defendants based their denial on the report of Dr. John Wrightson who did not see plaintiff, but
said he relied on facts as relayed by a phone call with her treating physician.
Plaintiff moved to exclude that evidence based on violation of the physician-patient privilege and
HIPAA. A magistrate judge found no such privilege exists under federal law.
Plaintiff relied on Northwestern Memorial Hospital v. Ashcroft, 362 F.3d 923 (7th Cir. 2004),
which she argued recognizes both a federal common law physician-patient privilege and suggests
that HIPAA could be used to strike Wrightson's report.
But the court found the cited case held HIPAA merely creates a procedure for obtaining medical
records in litigation and does not create a privilege.
Moreover, the court found “[d]efendants correctly observe that HIPAA does not pertain to
disability income insurance.”
Westerheide v. Hartford Life Ins. Co., No. 10-cv-471-MJR-PMF (S.D. Ill. Oct. 27, 2011).
U.S. Court In Florida Finds State Statute Conflicts With HIPAA And Is
Preempted
The U.S. District Court for the Northern District of Florida held December 2, 2011 that the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) preempts a state statute requiring
nursing homes to furnish certain information to a resident’s representative.
According to the court, the statute at issue is both contrary to, and less stringent, than HIPAA.
Plaintiffs operate and manage nursing facilities that Florida’s Agency for Health Care
Administration (AHCA) has cited for violating a state law requiring nursing homes to “furnish to
the spouse, guardian, surrogate, proxy, or attorney in fact . . . of a former resident . . . a copy of
that resident’s records which are in the possession of the facility.”
Plaintiffs claimed their non-compliance was excusable because HIPAA preempted the state law
and sought a declaratory judgment that the law was invalid and injunctive relief prohibiting its
enforcement.
AHCA asserted HIPAA did not preempt the law because the statute was not contrary to HIPAA,
and was more stringent than HIPAA.
Under HIPAA, “covered entities” may not disclose protected health information (PHI) except to
the individual, or to his or her personal representative, the court explained.
The court first noted the term “personal representative” under Florida law is a term of art distinct
from the same term under HIPAA.
Looking to Florida probate law, the court observed the statute in question did not require a
fiduciary relationship to become a personal representative and thus could lead to absurd results.
“As an extreme example,” the court said, “a convicted felon would be disqualified as a personal
representative [under Florida probate law] but qualified under” the statute at issue.
Accordingly, the court found the statute both contrary to HIPAA and less stringent than HIPAA.
Opis Management Resources, LLC v. Dudek, No. 4:11-cv-400/RS-WCS (N.D. Fla. Dec. 2, 2011).
Hospitals and Health Systems
California Appeals Court Affirms Dismissal Of Action Alleging Elder
Abuse Against Hospital
A California appeals court affirmed August 12, 2011 a judgment in favor of a hospital in an action
alleging elder abuse, willful misconduct, and wrongful death.
The California Court of Appeal, Fourth District, agreed with the lower court that the complaint
failed to allege “neglect” under the state’s Elder Abuse and Dependent Adult Civil Protection Act
(Act), which imposes stiffer penalties for abuse of an elder than those available for ordinary
negligence actions.
The appeals court also upheld the lower court’s determination that the remaining claims were
time-barred.
Plaintiffs sued Prime Healthcare Paradise Valley LLC, doing business as Paradise Valley Hospital,
and Paradise Valley Health Care Center, Inc., a skilled-nursing facility, following the death of
their father Roosevelt Grant.
Eighty-seven-year-old Grant was admitted to the Hospital for chest pain and two days later was
transferred to the Center for short-term rehabilitation therapy.
According to plaintiffs, while at the Center, Grant was “continually neglected” and developed
various complications, including pneumonia, pressure ulcers, and sepsis.
Grant bounced back and forth between the Center and the Hospital several times. During his
third hospitalization, Grant died.
Plaintiffs sued both the Hospital and the Center. With respect to the Hospital, plaintiffs alleged it
“recklessly,” “willfully,” and “with deliberate indifference . . .” caused his death by failing to treat
his pressure ulcers, administer prescribed medications, and stock a crash cart with the proper
equipment.
The trial court sustained the Hospital’s demurs without leave to amend. The appeals court
affirmed.
The Act defines abuse as “[p]hysical abuse, neglect, financial abuse, abandonment, isolation,
abduction, or other treatment with resulting physical harm or pain or mental suffering.”
The appeals court found the allegations in the complaint did not allege “neglect” as to the
Hospital for purposes of the Act.
“To recover the enhanced remedies available under the Elder Abuse Act from a health care
provider, a plaintiff must prove more than simple or even gross negligence in the provider’s care
or custody of the elder,” the appeals court said.
While the Hospital’s conduct might have risen to the level of professional negligence, nothing in
the complaint alleged its actions were “sufficiently egregious to constitute neglect” under the Act.
The appeals court also concluded the trial court properly denied leave to amend, as plaintiffs
failed to show how they could further amend their pleadings to cure the defects.
Finally, the appeals court upheld the trial court’s judgment as to the remaining causes of action
as time-barred.
Carter v. Prime Healthcare Paradise Valley LLC, No. D057852 (Cal. Ct. App. Aug. 12, 2011).
Ninth Circuit Revives Dormant Commerce Clause Challenge To State’s
CON Regulations
The Ninth Circuit held August 19 that a nonprofit hospital’s dormant commerce clause challenge
to Washington state certificate of need (CON) regulations limiting licensed providers of certain
“elective” cardiac procedures should not have been dismissed.
After finding Yakima Valley Memorial Hospital (Memorial) had prudential standing to mount the
constitutional challenge, the appeals court reversed a lower court’s ruling that Congress
expressly authorized approval of CON regimes pursuant to the National Health Planning and
Resources Development Act of 1974 (NHPRDA).
Congress repealed the NHPRDA in 1986; the CON law and regulations at issue were promulgated
after that in 2007 and 2008, respectively. Thus, the NHPRDA could not serve as an express
congressional authorization of Washington's CON regulations, the Ninth Circuit said.
The appeals court reversed and remanded for further consideration of the hospital’s dormant
Commerce Clause claim.
CON Regulations
The Washington State Department of Health refused to license Memorial to perform certain
procedures known as elective percutaneous coronary interventions (PCI), although the hospital
provides such services on an emergency basis.
State law, passed in 2007, requires the Department to issue a CON before licensing a provider to
provide elective PCI. The Department issued implementing regulations in 2008.
Memorial sued the Department, arguing the CON requirement violates the dormant Commerce
Clause by unreasonably burdening interstate commerce. Memorial also argued the way the
Department defines “need” is anticompetitive and is preempted by Section 1 of the Sherman Act
because it allows incumbent certificate holders to expand their capacity and preclude new
certificates.
Unilateral Restraint of Trade
The district court held, and the appeals court agreed, Memorial could not maintain a claim of
antitrust preemption because the PCI regulations were a unilateral restraint of trade by the state
and therefore not barred by the Sherman Act.
Memorial argued the PCI regulations grant regulatory power to incumbent licenses by effectively
allowing them to expand their capacity and exclude competitors from the elective PCI market.
The Ninth Circuit disagreed. While the PCI regulations create “market power,” they do not
delegate “regulatory power” to the incumbent license holders, the appeals court said.
“The state imposes the licensing requirements. The state decides what the licensing
requirements will be and whether they are met. The state does not delegate any aspect of need
calculation to private parties,” the appeals court said.
“In short, nothing about the PCI regulations involves private discretion to engage in per se
anticompetitive conduct,” the appeals court said.
Dormant Commerce Clause
The appeals court also agreed with the district court that Memorial had prudential standing to
assert a dormant commerce clause challenge, but parted ways with the lower court on the issue
of whether Congress precluded the challenge to the state’s CON regulations.
“Here, the barrier to interstate commerce is the requirement of a certificate of need to offer
elective PCI to all patients, in-state or out-of-state,” the appeals court observed. “By virtue of
the certificate of need requirement, the department prevents Memorial from soliciting out-ofstate patients and competing in an interstate market to offer elective PCI services, activities that
clearly involve interstate commerce.”
The district court also ruled, however, that Congress had authorized CON programs under
NHPRDA, and even though the statute was repealed before the CON requirements at issue were
enacted “erroneously put the burden on Memorial to prove the significance of repeal.”
Reversing, the Ninth Circuit held the repealed NHPRDA did not provide the requisite clear
statement of authorization for the subsequently promulgated 2008 PCI regulations.
“Had Congress meant to perpetuate its alleged authorization for certificate of need programs, it
could have included a savings clause in the repeal,” the appeals court added.
Yakmia Valley Mem’l Hosp. v. Washington State Dep’t of Health, No. 10-35497 & 10-35543 (9th
Cir. Aug. 19, 2011).
Plaintiff May Maintain Breach Of Contract Action Against Hospital
Following Cancer Misdiagnosis
The Eighth Circuit allowed September 2, 2011 a plaintiff to proceed with a breach of contract
action against a hospital after one of its physicians failed to perform an intraoperative biopsy to
confirm the presence of pancreatic cancer as allegedly promised.
Elliot Kaplan and his wife (plaintiffs) sued Mayo Clinic Rochester, Inc., other Mayo entities, and
two Mayo physicians after Kaplan was erroneously diagnosed with pancreatic cancer, resulting in
unnecessary surgery.
According to the opinion, Dr. David Nagorney performed a so-called “Whipple procedure”—which
involves removing part of the pancreas, stomach, and duodenum—following a pancreatic cancer
diagnosis. Three days later it was determined Kaplan never had cancer.
Before the procedure, Kaplan said he expressed some doubts about his cancer diagnosis to
Nagorney, who allegedly assured Kaplan he would take steps to ensure the diagnosis was correct
before proceeding with the Whipple procedure.
The court granted summary judgment in Nagorney’s favor. The court later granted judgment as
a matter of law against plaintiffs on their breach of contract claim, finding it merely restated a
medical negligence claim and therefore required expert testimony to show Nagorney failed to
meet the appropriate standard of care by not performing an intraoperative biopsy.
A jury returned a verdict for Mayo and the other physician defendant on plaintiffs’ negligent
failure to diagnosis claim.
Plaintiffs appealed. The Eighth Circuit affirmed, except as to Mayo on the contract claim.
Mayo did not contend any promise Nagorney made was not on its behalf, or that Mayo was not
bound if it was, the appeals court noted.
Thus, the issue was whether Nagorney promised to perform a certain procedure and failed to do
so, resulting in damages to plaintiffs, the appeals court said.
Viewing the evidence in the light most favorable to plaintiffs, the Eighth Circuit held they should
be allowed to go ahead with their contract claim against Mayo.
Nagorney testified he had not promised to do a biopsy, and, in any event, there was no
procedure that could have confirmed the cancer diagnosis without proceeding with the operation.
“But this testimony merely raises factual questions for the jury as to whether there was an
agreement,” the appeals court observed.
Moreover, other evidence that Nagorney performed intraoperative biopsies of the pancreas in the
past to determine whether to proceed with a Whipple surgery, a protocol other surgeons still
followed, “lends some credibility to the testimony that Dr. Nagorney promised to do the
procedure in this case,” the appeals court said.
The appeals court also pointed to some evidence that would allow a reasonable jury to find that,
had Nagorney done the allegedly promised procedure, it would have revealed Kaplan did not
have cancer.
Thus, the appeals court vacated the judgment in Mayo’s favor on the contract claim and
remanded for further proceedings.
Kaplan v. Mayo Clinic, Nos. 09-2493/10-2290 (8th Cir. Sept. 2, 2011).
Ohio Appeals Court Allows Vicarious Liability Claims Against Hospital
To Proceed
An Ohio appeals court held September 23, 2011 that a suit against a hospital could proceed
where an allegedly negligent employee was not named as a defendant.
The Court of Appeals of Ohio, Second Appellate District, found because the suit containing
medical negligence claims was timely filed for the alleged negligence of an MRI technician or
technicians, respondeat superior applies.
The court narrowly applied a case cited by the parties holding that a claim cannot be maintained
directly against an entity when all of the relevant principals and employees have either been
dismissed or were never sued to malpractice claims only and not other medical negligence claims
against employee technicians.
Plaintiff Eva G. Cope underwent an MRI procedure at Miami Valley Hospital (MVH). Immediately
after the procedure, a large blister was noticed on Mrs. Cope’s arm, which was soon after
diagnosed as a third-degree burn.
Cope and her husband sued alleging medical negligence claims against MVH, certain physicians
and technicians at MVH, and others.
The Copes subsequently voluntarily dismissed some of the defendants leaving only MVH and
defendants associated with Anesthesia Services Network (ASN).
MVH filed for summary judgment on the grounds that the Copes dismissed the only agent or
employee of MVH and the statute of limitations against any other employee had run.
The trial court granted MVH’s motion for summary judgment, but the appeals court reversed.
MVH argued it could not be found vicariously liable because only individuals can commit
malpractice, not the hospital as an entity.
In support of its position, MVH relied on National Union Fire Ins. Co. of Pittsburgh v. Wuerth, 122
Ohio St.3d 594, 2009-Ohio-3601, which held a malpractice claim could not be maintained
directly against an entity when all of the relevant principals and employees have either been
dismissed or were never sued.
But the appeals court drew a distinction between malpractice claims and other medical
negligence claims.
According to the appeals court, its “decision to give Wuerth a narrow application is supported by
the public policy considerations found at the heart of the 'respondeat superior' doctrine, which
supports vicarious liability.”
Because only physicians and not other medical practitioners are subject to malpractice, Wuerth
does not apply here, the appeals court held.
The appeals court next turned to the issue of agency by estoppel.
According to the appeals court, “[a] hospital may be held liable under the doctrine of agency by
estoppels for the negligence of independent medical practitioners practicing in the hospital when:
(1) it holds itself out to the public as a provider of medical services; and (2) in the absence of
notice or knowledge to the contrary, the patient looks to the hospital, as opposed to the
individual practitioner, to provide competent medical care.” Clark v. Southview Hosp. & Family
Health Ctr., 68 Ohio St.3d 435, 1994-Ohio-519.
Here, Mrs. Cope’s reliance, or lack thereof, on the hospital was not entirely clear, the appeals
court found.
“With this essential question remaining, MVH did not meet its burden to establish that no
genuine issue of material fact remained to be litigated,” the court held.
Cope v. Miami Valley Hosp., No. 24458 (Ohio Ct. App. Sept. 23, 2011).
Indiana Appeals Court Allows Uninsured Patients’ Breach of Contract
Action Against Hospital Alleging Unreasonable Charges
The Indiana Court of Appeals reversed October 12 a trial court decision dismissing two uninsured
patients’ breach of contract action against a hospital for allegedly charging them an
unreasonable rate for medical services they received there.
The appeals court found the contract, which the patients signed before receiving services, was
ambiguous on price and therefore state common law implied a reasonable charge.
Abby Allen and Walter Moore each separately received services at a Clarian Health Partners, Inc.
(Clarian) hospital.
Allen and Moore, who both lacked health insurance coverage, signed a standard form contract
before the services were provided agreeing to pay their accounts following treatment. The
contracts did not specify a price or a fee schedule for the services.
Following their treatments, Clarian billed Allen and Moore in accordance with their
“chargemaster” rates, which were much higher than the discounted rates applicable to insured
patients.
Allen and Moore (plaintiffs) filed a putative class action against Clarian in May 2010 for breach of
contract, alleging no price was specified in the contract and therefore the hospital had a duty to
act in good faith and charge a reasonable amount for the medical services and supplies provided.
Plaintiffs sought a declaratory judgment that the chargemaster rates billed to Clarian’s uninsured
patients were unreasonable and unenforceable.
The trial court granted Clarian’s motion to dismiss for failure to state a claim.
Reversing, the appeals court ruled plaintiffs had stated a claim for breach of contract, citing
“more than 120 years of Indiana common law.”
The appeals court agreed with plaintiffs that the contracts were ambiguous as to price and made
no reference, either express or implied, to Clarian’s chargemaster rates.
“Indiana common law has long held that a reasonable charge will be implied in a contract that
does not otherwise specify a charge.”
In so holding, the appeals court rejected Clarian’s argument that establishing charges in advance
is unworkable in the healthcare setting because the course of treatment is not known from the
outset.
The appeals court pointed to state supreme court precedent in the personal injury context that
the proper measure of medical expenses is the reasonable value of those expenses that, in the
absence of an express agreement, can be determined by taking into account various factors.
The appeals court also rejected or distinguished cases from other jurisdictions on which Clarian
relied.
Unlike some of those cases, the appeals court said, the contract at issue makes no mention of
“regular rates,” “pre set” rates, “all charges,” “usual and customary charges,” or “any other
statement that might have placed Allen and Moore on notice of Clarian’s fee schedule at the time
they entered into the contract.”
Turning to the issue of damages, the appeals court noted plaintiffs sought a declaration of their
payment obligations under the contract, which was sufficient to maintain their action even
absent an express breach.
“Allen and Moore are not required to pay a partial fee and then to wait for Clarian to sue them on
the balance, as Clarian asserts they must do,” as that would undermine the purpose of the
Declaratory Judgment Act.
Finally, the appeals court rejected Clarian’s public policy argument that the complicated nature of
healthcare billing did not lend itself to the courts determining reasonable medical expenses.
“We recognize that medical billing is complicated, . . . but that does not change the fact that this
is a basic breach of contract case guided by well-established Indiana law,” the appeals court
said.
Allen v. Clarian Health Partners, Inc., No. 49A02-1011-CT-1174 (Ind. Ct. App. Oct. 12, 2011).
Florida Supreme Court Upholds Disclosure Of Blank Application Form
For Medical Staff Privileges
The Florida high court held January 12, 2012 that a blank application form for hospital medical
staff privileges is not protected from disclosure under either state or federal peer review law.
In so holding, the Florida Supreme Court allowed a medical malpractice plaintiff to discover the
document in her vicarious liability suit against the hospital.
Lynda See alleged that West Florida Regional Medical Center (West Florida) was vicariously liable
for negligence by Dr. Mary Jane Benson in treating her, and was directly liable for negligence in
granting medical staff privileges to Benson and to Dr. George C. Rees.
In discovery, See sought a copy of the blank application form for medical staff privileges. West
Florida argued the application form was exempt from disclosure under Fla. Stat. §§ 766.101(5)
and 395.019(8), which shield documents used in peer review hearings from discovery.
The high court held that the blank form was not protected by these statutes because it was part
of the decision-making process in the relevant peer review hearings.
In addition, the high court determined that, if Sections 766.101(5) and 395.019(8) exempted
the blank form from disclosure, they would conflict with Article X, Section 25 of the Florida
Constitution, which accords patients access to records relating to adverse medical incidents.
The high court held that in the context of See’s action for negligence in granting medical staff
privileges, the blank form constituted a record of an adverse medical incident.
The high court also rejected West Florida’s argument that the Health Care Quality Improvement
Act of 1986 (HCQIA) preempted the Florida Constitution with respect to documents pertaining to
peer review.
The high court found no interference with federal law because the HCQIA promotes effective peer
review by immunizing peer review bodies, and those who provide information in peer review
proceedings from civil damages, not by shielding peer review materials from discovery.
For these reasons, the high court affirmed the decision below, Florida Regional Medical Center v.
See, 18 So.3d 676 (Fla. Ct. App. 2009), and disapproved of the decision in Tenet Health Systems
Hospitals, Inc. v. Taitel, 855 So. 2d 1257 (Fla. Ct. App. 2003), which reached a contrary result
on essentially the same issue.
West Florida Reg’l Med. Ctr., Inc. v. See, No. SC09–1997 (Fla. Jan. 12, 2012).
HHS Steps Up Enforcement Of Rule Requiring Equal Hospital Visitation
Rights
The Department of Health and Human Services (HHS) announced September 7, 2011 new
guidance to support enforcement of rules that require hospitals to protect patients’ right to
choose their own visitors during a hospital stay, including a visitor who is a same-sex domestic
partner.
The final rule, which was issued November 19, 2010, applies to all hospitals that participate in
Medicare and Medicaid and updates hospital conditions of participation to specify that visitors
chosen by the patient must enjoy visitation privileges that are no more restrictive than those for
immediate family members.
The regulations were issued after President Obama asked the HHS Secretary on April 15, 2010 to
initiate rulemaking to ensure that hospitals participating in Medicare and Medicaid allow patients
to request visitation from persons other than immediate family members.
The Presidential Memorandum noted visitation policies that allow only immediate family
members uniquely affect gay and lesbian Americans
HHS’ updated guidance for the rule emphasizes that hospitals should give deference to patients’
wishes concerning their representatives, whether expressed in writing, orally, or through other
evidence, unless prohibited by state law.
The guidance “is intended to make it easier for family members, including a same-sex domestic
partner, to make informed care decisions for loved ones who have become incapacitated,” HHS
said.
“This announcement is another step toward equal rights for all Americans, and it is another step
toward putting the patient at the center of our health care system,” said Centers for Medicare
and Medicaid Services (CMS) Administrator Donald M. Berwick, M.D. “All patients should be
afforded the same rights and privileges when they enter our health care system, and that
includes the same opportunity to see their significant other.”
As part of the stepped up enforcement of the rule, CMS sent a letter to State Survey Agencies
(SSAs), which conduct on-site inspections of hospitals on behalf of CMS.
The letter highlights the equal visitation and representation rights requirements and directs SSAs
to be aware of the guidance when evaluating hospitals' compliance with conditions of
participation.
CMS Proposal Modifies Uninsured Definition For Determining Hospital
DSH Payments
The Centers for Medicare and Medicaid Services (CMS) issued a proposed rule in the January 18,
2012 Federal Register (77 Fed. Reg. 2500) that would implement a service-specific basis to
define the uninsured for purposes of determining the hospital-specific limitation on
disproportionate share hospital (DSH) payments.
Section 1923(g) of the Social Security Act limits DSH payments to hospitals to the
uncompensated costs of furnishing hospital services to individuals who are Medicaid eligible or
“have no health insurance (or other source of third party coverage) for the services furnished
during the year.”
CMS in previous guidance endorsed a service-specific approach to determining which individuals
were considered “uninsured” for purposes of the DSH limitation.
Thus, under this approach, the determination of whether the uncompensated costs counted for
purposes of the hospital-specific limitation depended on whether the individual had coverage for
the particular service, not whether the individual was otherwise covered by insurance.
In December 2008, however, CMS issued a final rule (73 Fed. Reg. 77904) that defined the
uninsured for purposes of the DSH limitation as those individuals without “creditable coverage,”
consistent with the definitions under 45 C.F.R. pt. 144 and 45 C.F.R. pt. 146.
Creditable coverage includes coverage of an individual under a group health plan, Medicare,
Medicaid, a medical care program of the Indian Health Service or tribal organization, and other
examples outlined at 45 C.F.R. § 146.113, the proposed rule explained.
Thus, the definition of uninsured shifted from a service-specific basis to an individual-specific
basis.
According to CMS, numerous states, lawmakers, and other stakeholders raised concerns with the
new definition under the 2008 final rule, saying it deviated from prior guidance and would have
significant financial impact on states and hospitals.
“In practical application, this definition appeared to exclude from uncompensated care for DSH
purposes the costs of many services that were provided to individuals with creditable coverage
but were outside the scope of such coverage. Costs affected included those associated with
individuals who have exhausted their insurance benefits or who have reached lifetime insurance
limits for certain services, as well as services not included in a benefit package,” CMS noted.
To address these concerns, CMS issued the proposed rule, which drops the creditable coverage
definition in favor of a service-specific approach to define who is uninsured for purposes of
determining a hospital’s uncompensated care costs and accompany DSH limit.
“For purposes of defining uncompensated care costs for the Medicaid hospital-specific DSH limit,
we believe that uncompensated costs of providing inpatient and outpatient hospital services to
individuals who do not have coverage for those specific services should be considered costs for
which there is no liable third party payer and thus eligible costs for Medicaid DSH payments,"
CMS said.
Individual/Patient Rights
HHS Considering Overhaul Of Regulations On Human Subjects
Research Protections
The Department of Health and Human Services (HHS) is considering modernizing the regulatory
framework for the agency’s oversight of human subjects research to take into account changes
in how research is conducted since applicable regulations were issued in 1991.
HHS published in the July 25, 2011 Federal Register (76 Fed. Reg. 44512) an advance notice of
proposed rule making (ANPRM) asking the public for input on a number of proposals, including
revising the existing risk-based framework to more accurately calibrate the level of review to the
level of risk; using a single Institutional Review Board review for all domestic sites of multi-site
studies; updating informed consent forms and processes; and establishing mandatory data
security and information protection standards for all studies involving identifiable or potentially
identifiable data, according to an agency press release.
“This ANPRM seeks comment on how to better protect human subjects who are involved in
research, while facilitating valuable research and reducing burden, delay, and ambiguity,” HHS
said.
HHS noted a number of changes to the research community since the so-called “Common Rule”
governing human subject protections was adopted in 1991. For example, the agency said,
research at that time was mostly conducted at universities, colleges, and medical institutions and
generally took place at only a single site.
“Expansion of human subject research into many new scientific disciplines and venues and an
increase in multi-site studies have highlighted ambiguities in the current rules and have led to
questions about whether the current regulatory frame is effectively keeping up with the needs of
researchers and research subjects,” HHS said.
Ohio Supreme Court Sets Medical Expert Requirements In Lack-OfInformed-Consent Case
Lack-of-informed consent is a medical claim and therefore expert testimony is required to
establish both the material risk and dangers inherently and potentially involved with a medical
procedure and that an undisclosed risk or danger actually materialized and proximately caused
injury to the patient, the Ohio Supreme Court held December 8, 2011.
Expert medical testimony is not required, however, to establish what a reasonable person in the
position of a patient would have done had the material risks and dangers been disclosed prior to
the procedure, the high court explained.
Robert N. White sued Warren H. Leimbach II, M.D. for failing to obtain informed consent from
White prior to a surgery to alleviate pain radiating from his lower back.
Leimbach previously successfully performed the same surgery on White. After a fall, White’s pain
returned.
According to White, Leimbach failed to inform him that the second surgery carried an increased
risk of a bad outcome. Following the second surgery, White’s pain worsened.
The trial court directed a verdict for Leimbach, finding White failed to present expert testimony
to prove his claim. The appeals court vacated the verdict and remanded for further proceedings.
In Nickell v. Gonzalez, 477 N.E. 2d 1145 (1985), the high court set forth three elements of a
cause of action for a physician’s failure to obtain informed consent: (1) failure to disclose and
discuss material risks and dangers inherently and potentially involved regarding the proposed
therapy; (2) the unrevealed risks and dangers that should have been disclosed actually
materialize and were the proximate cause of the patient’s injury; (3) a reasonable person in the
patient’s position would have decided against the therapy had the material risks and inherent
dangers been disclosed.
The high court noted a cause of action premised on the failure of a physician to obtain informed
consent is a “medical claim” under Ohio law, requiring expert testimony to establish professional
standards of conduct.
The high court concluded the first two elements required expert testimony because they would
be outside the common knowledge and understanding of a layperson. The third element,
however, could be determined by the trier of fact without expert input, the high court said.
In this case, the high court continued, White failed to present any expert testimony that the
second surgery proximately caused the nerve damage.
Although Leimbach’s experts opined the second surgery could have caused the nerve damage,
neither “testified to a reasonable degree of medical certainty that the risk of nerve damage
materialized and proximately caused injury in this case.”
Moreover, one expert’s statement on cross-examination that the second surgery was the “most
likely cause” of White’s chronic pain was insufficient to establish the second element.
“Testimony that the surgery is the most likely among other potential causes of nerve damage is
not the equivalent of an opinion that the surgery more likely than not caused nerve damage,”
the high court said.
Thus, the high court reversed the appeals court judgment and reinstated the trial court’s verdict.
White v. Leimbach, No. 2011-OHIO-6238 (Ohio Dec. 8, 2011).
Oklahoma Supreme Court Reverses Summary Judgment On Informed
Consent Claim Involving Post-Surgical Treatment
A defendant surgeon was not entitled to summary judgment on a plaintiff’s claim that the
surgeon failed to disclose the removal of the patient’s prostate showed no signs of cancer before
continuing post-surgical treatment, the Oklahoma Supreme Court held March 6, 2012.
However, the high court affirmed summary judgment below in defendants' favor on plaintiff Bob
Parris’ medical malpractice claims relating to the cancer diagnosis of his prostate, finding the
evidence “uncontroverted” that the surgeon, pathologist, and other medical providers properly
treated plaintiff.
An initial biopsy of Parris’ prostate indicated cancerous cells, but post-surgical findings showed
there was, in fact, no cancer present.
According to the high court, plaintiff did not controvert evidence that defendant surgeon Shelby
D. Barnes’ decision to remove plaintiff’s prostate was in accordance with acceptable medical
practices and standards.
However, while not “artfully pleaded,” plaintiff did sufficiently raise a claim against Barnes for
lack of informed consent before undertaking the post-surgical treatment.
A cause of action based on lack of informed consent has three elements: (1) breach of the duty
to inform (non-disclosure); (2) causation; and (3) injury, the high court explained.
The high court agreed with the lower courts’ findings that plaintiff’s “concealment” claim based
on fraud failed, but said plaintiff should be allowed to go forward with his lack of informed
consent claim involving the post-surgical treatment.
Specifically, the high court noted a dispute between the parties as to whether Barnes disclosed
to plaintiff the non-cancer diagnosis before proceeding with post-surgical treatment, which
included follow-up blood work.
Plaintiff also indicated in his court filings that he would have discontinued post-surgical treatment
had the disclosure been made, which satisfied the causation element for purposes of summary
judgment.
Finally, plaintiff’s complaint alleged an injury and damages relating to the follow-up blood work
conducted as part of the post-surgical treatment.
“The injury for which a patient may recover need not be extensive or permanent, and can
include the temporary discomfort of invasive blood testing,” as well as reasonable travel
expenses to and from treatment, and the value of a patient’s time, the high court said.
Thus, the high court sent the case back to the trial court so a jury could determine whether
Barnes informed plaintiff that no cancer was found in his prostate before the post-surgical
treatment; whether plaintiff truthfully asserted he would have discontinued treatment had this
disclosure been made; and the damage or detriment plaintiff suffered as a result of the postsurgical treatment.
Parris v. Limes, No. 107979 (Okla. Mar. 6, 2012).
Pennsylvania Appeals Court Finds Wife's Interest In Pre-Embryos
Outweighs Husband's
A Pennsylvania appeals court upheld a divorce decree and equitable distribution order that
awarded a woman (wife) the frozen pre-embryos that she created with her husband while they
were married.
The Pennsylvania Superior Court found, on balance, the wife’s interest in the pre-embryos
outweighed her husband’s interest in avoiding unwanted procreation because they were likely
the only way for her to have a biological child.
Husband and wife created the pre-embryos after the wife was diagnosed with breast cancer and
told that undergoing in vitro fertilization was her best chance to have children later.
As part of divorce proceedings, a dispute arose over who should receive the pre-embryos, which
both parties agreed were marital property. The wife wanted all 13 pre-embryos for implantation
while the husband wanted to destroy or donate them for research purposes.
The trial court awarded the frozen pre-embryos to the wife, concluding her inability to have
biological children otherwise outweighed her husband’s interests to avoid unwanted procreation.
The appeals court affirmed.
Noting the issue was one of first impression, the appeals court looked to other jurisdictions and
decided, absent a prior agreement between the parties about the disposition of the embryos in
the event of divorce, to balance each party’s interests in the pre-embryos.
The appeals court found the wife’s interest in the frozen pre-embryos “compelling” given her
likely inability to have a biological child without them.
The husband disputed the trial court’s conclusion, absent medical expert testimony, that the wife
would be unable to procreate biologically without them. But the appeals court found this
determination reasonable given the wife’s own testimony about what her medical providers had
told her, her age, and her past medical history.
The appeals court also rejected the husband’s argument that the wife could adopt. “There is no
question that the ability to have a biological child and/or be pregnant is a distinct experience
from adoption.”
Turning to the husband’s interest in avoiding unwanted procreation, the appeals court noted a
number of factors mitigated his concerns, including the wife’s pledge not to seek financial
support for the child.
Finally, according to the appeals court, state public policy did not address the issue of forced
procreation under these circumstances.
“[U]nless and until our legislature decides to tackle this issue, our courts must consider the
individual circumstances of each case.”
Reber v. Reiss, No. 1351 EDA 2011 (Pa. Super. Ct. Apr. 11, 2012).
Insurance
Market Reforms
Agencies Amend Rules For Internal Claims Appeals, External Reviews
The Departments of Health and Human Services (HHS), Labor, and Treasury published June 24,
2011 amended interim final regulations (76 Fed. Reg. 37208) concerning internal claims and
appeals and external review processes for group health plans and health insurance coverage
mandated by the Affordable Care Act (ACA).
The amended regulations respond to comments on the original interim final regulations issued in
July 2010 (75 Fed. Reg. 43330) giving consumers in new health plans the right to appeal
decisions, including claims denials and rescissions.
The regulations do not apply to "grandfathered" plans that were in existence as of March 23,
2010, when the ACA was enacted.
External Reviews
Under the new rules, the agencies decided to give states an additional six months, until January
1, 2012, to implement external review processes that meet certain minimum standards.
The Public Health Services Act, as amended by the ACA, requires health plans to comply with
state external review processes that, at a minimum, include model consumer protection
standards issued by the National Association of Insurance Commissioners (NAIC). If state's
external process failed to meet these minimum requirements, than health plans would be subject
to the requirements of a federally administered process.
In the July 2010 regulation, the agencies set forth 16 minimum consumer protection standards
from the NAIC model. The original transition period to meet these requirements extended until
July 1.
But in the amended interim final rule, the agencies recognized that “enacting State legislation
and regulations can often be a complex and time-consuming process.” The agencies therefore
decided to extend the transition period to January 1, 2012.
Thus, under the amendment, any currently effective state external review process will apply in
lieu of a federal external review process until the end of the year.
At the same time that the new rules were unveiled, the agencies also issued separate technical
guidance on external reviews processes.
The new rules also narrow the scope of claims eligible for the federal external review process to
those involving medical judgment (excluding those that involve only contractual or legal
interpretation), or a rescission of coverage.
According to the rule, the narrower scope is more in line with the claims eligible for external
review under the NAIC Uniform Model Act.
The July 2010 regulations made any adverse benefit determination eligible for external review,
so long as it was not related to a participant’s failure to meet the requirements for eligibility
under the plan’s terms.
Internal Appeals
The amended rule also changes certain internal appeals provisions, which currently are subject
to an enforcement grace period. Once the grace period expires on January 1, 2012, the amended
requirements as set forth in the new interim final rule will apply.
For example, the new regulations revert to the current Department of Labor claims procedure
regulation requiring health plans to notify a claimant of a benefit determination in the context of
an urgent care claim within 72 hours of the request for a determination. The original interim final
rule set a 24-hour decision-making deadline for pre-service urgent care claims.
The agencies emphasized, however, that the 72-hour timeframe “remains only an outside limit
and that, in cases where a decision must be made more quickly based on the medical exigencies
involvement, the requirement remains that the decision should be made sooner than 72 hours
after receipt of the claim."
The new rule also amends certain additional content requirements for notices of adverse benefit
determinations. Specifically, the new rule eliminates the requirement to automatically provide
the diagnosis and treatment codes as part of a notice of adverse benefit determination. Instead,
the plan or issuer must notify consumers of the opportunity to request diagnosis and treatment
codes, and their meaning, and provide this information accordingly.
Administration Releases Proposed Rules For State-Based Insurance
Exchanges
The Department of Health and Human Services (HHS) issued July 11, 2011 two proposed rules
aimed at getting the new state-based health insurance exchanges up and running by 2014 as
required under the Affordable Care Act (ACA).
The first proposed rule, the Exchange notice of proposed rule making (NPRM), published in the
July 15, 2011 Federal Register (76 Fed. Reg. 41866), provides a roadmap for states to structure
their exchanges, including setting up a Small Business Health Options Program, performing basic
functions, and certifying health plans for participation in the exchanges, according to an HHS
press release.
The second NPRM (76 Fed. Reg. 41930) addresses standards related to reinsurance, risk
corridors, and risk adjustment to ensure premium stability for plans and enrollees in the newly
established market.
“Exchanges offer Americans competition, choice, and clout,” said HHS Secretary Kathleen
Sebelius. “Insurance companies will compete for business on a transparent, level playing field,
driving down costs; and Exchanges will give individuals and small businesses the same
purchasing power as big businesses and a choice of plans to fit their needs.”
Flexibility
According to an overview of the proposed regulations, the Exchange NPRM is designed to give
states maximum flexibility, while ensuring a minimum set of baseline standards.
For example, under the NPRM, states may choose how to structure their exchanges (i.e., as a
nonprofit entity, as an independent public agency, or as part of an existing state agency);
whether to operate their exchanges on a local or regional level; how to select plans to
participate; and whether to partner with HHS to split up the work, the agency said.
Exchanges will perform a variety of functions, including certifying health plans as Qualified
Health Plans to be offered in the exchange; operating a website to facilitate comparisons among
qualified health plans for consumers; operating a toll-free hotline for consumer support; and
facilitating enrollment of consumers in QHPs.
Market Stability
To help protect insurers against risk selection and market uncertainty, the ACA establishes three
programs, which begin in 2014: temporary reinsurance and risk corridor programs to give
insurers payment stability as insurance market reforms begin, and an ongoing risk adjustment
program that will make payments to health insurance issuers that cover higher-risk populations
(e.g., those with chronic conditions) to more evenly spread the financial risk borne by issuers,
according to a fact sheet.
“These programs will ensure that health plans and issuers compete for coverage on the basis of
price, quality and service,” the fact sheet said.
The NPRM sets forth standards for these programs, while giving states considerable flexibility on
implementation.
HHS Issues Final Standards For CO-OPs
The Department of Health and Human Services (HHS) issued December 13, 2011 a final rule for
establishing Consumer Operated and Oriented Plans (CO-OPs).
Section 1322 of the Affordable Care Act (ACA) created CO-OPs to foster the creation of new
consumer-governed, private, nonprofit health insurance issuers in the individual and small group
market.
According to the final rule, “[t]he goal of this program is to create a new CO-OP in every State in
order to expand the number of health plans available in the Exchanges with a focus on
integrated care and greater plan accountability.”
The final rule sets forth eligibility standards for the CO-OP program; establishes terms for loans;
and provides basic standards organizations must meet to participate in this program and become
a CO-OP.
Eligible organizations seeking to establish a CO-OP will be able to apply for a portion of the $3.8
billion in repayable loans made available under the ACA to fund start-up and capitalization costs.
MLR Adjustments
Over the course of the last year, the Center for Consumer Information and Insurance Oversight
(CCIIO) considered a number of states’ requests for an adjustment to the medical loss ratio
(MLR) standard under the healthcare reform law, which requires insurance companies to spend
80% of premium dollars on medical care and quality improvements rather than overhead costs.
Under the Affordable Care Act, states may apply for an adjustment to the MLR if the 80%
standard “may destabilize the individual market in such state.”
Regulations implementing this provision provide an adjustment should be granted “only if there
is a reasonable likelihood” that application of the 80% MLR standard will destabilize the state’s
individual insurance market.
In a July 22, 2011 letter to the North Dakota Insurance Department, CCIIO refused to adjust the
MLR standard from 80% to 65% in 2011, 70% in 2012, and 75% in 2013 in the state’s individual
insurance market as the insurance department requested.
CCIIO granted July 22, 2011 MLR adjustment requests to Iowa and Kentucky, although not to
the extent sought by those states.
The Kentucky Department of Insurance asked for an adjustment of the 80% MLR standard to
65% for 2011, 70% for 2012, and 75% for 2013.
In a letter to the insurance department, CCIIO agreed to adjust the standard to 75% in 2011
only. According to CCIIO, all four of Kentucky’s individual market issuers are expected to owe
rebates in 2011, but still have MLRs above the state’s requested 65% for 2011 and 70% for
2012. Thus, CCIIO saw no need to adjust the MLR to the degree requested by the state.
“This approach creates a glide path for compliance with the 80 percent standard and balances
the interests of consumers, the State and the issuers in accordance with the principles
underlying the MLR provision,” according to a fact sheet.
In a letter to the Iowa Department of Insurance, CCIIO agreed to a MLR adjustment of 67% for
2011, 75% for 2012, and 80% thereafter.
Iowa had sought an adjustment to 60% for 2011, 70% for 2012, and 75% for 2013.
CCIIO noted while the state’s three dominate issuers were not expected to owe rebates in 2011
and beyond, three smaller issuers, comprising 5.4% of the market, had MLRs well below the
80% threshold.
“These issuers also reported relatively high commissions, validating Iowa’s concern that they
may have difficulty adjusting their business models to meet an 80% standard as a result of being
locked into binding multi-year agent commission and provider contracts,” CCIIO said.
These issuers could leave the market, which would affect roughly 15,000 enrollees, CCIIO noted.
“At the same time, the information provided in Iowa’s application makes it clear that issuers can
meet a higher MLR than it requested for 2011, 2012 and 2013,” CCIIO observed.
In a December 15, 2011 letter to the Florida Office of Insurance Regulation, CCIIO refused to
adjust the MLR standard in the state's individual insurance market from 80% to 68% in reporting
year 2011, 72% in 2012, and 76% in 2013. CCIIO denied January 19, 2012 Florida’s request for
reconsideration of its determination not to adjust the 80% MLR standard applicable to the Florida
individual health insurance market, finding “no basis to modify” its previous determination.
One day later, in a December 16, 2011 letter to the Michigan Office of Financial and Insurance
Regulation, CCIIO denied the state's request for an MLR adjustment to 65% in 2011, 70% in
2012, and 75% in 2013.
On January 4, 2012, CCIIO also decided to deny Kansas' and Oklahoma's requests for MLR
adjustments in their individual markets. See letter to the Kansas Insurance Department and the
letter to Oklahoma Insurance Department.
Kansas requested an adjustment to 70%, 73%, and 76% for the reporting years 2011, 2012,
and 2013, respectively, while Oklahoma requested an adjustment to 65% in 2011, 70% in 2012,
and 75% in 2013.
In each instance where it denied the adjustment request, CCIIO “determined that the evidence
presented does not establish a reasonable likelihood that the application of the 80 percent MLR
standard” would destabilize the states' individual market.
CCIIO denied January 27, 2012 Texas’ request for an adjustment to the MLR. In a letter to the
Texas Department of Insurance, CCIIO refused to adjust the MLR standard in the state's
individual insurance market from 80% to 71% in reporting year 2011, 74% in 2012, and 77% in
2013.
CCIIO agreed February 16, 2012 to adjust MLR standard in North Carolina for one year to 75%
in 2011 after finding the individual market "highly concentrated" in the state.
The North Carolina Department of Insurance requested an adjustment of the MLR to 72%, 74%,
and 76% for reporting years 2011, 2012, and 2013.
In a letter to the Department, CCIIO noted “North Carolina’s individual market is one of the most
concentrated, with the State’s largest insurer having 81% of the market.”
While recent decisions by some issuers to leave the state were unrelated to the MLR
requirements, they “have resulted in reduced consumer options," CCIIO observed.
Accordingly, CCIIO agreed that application of the 80% MLR standard in 2011 could lead to
individual market destabilization.
“However, the MLR standard sought by the Department exceeds the adjustment necessary to
avoid the likelihood of market destabilization between now and 2014.” Thus, CCIIO granted an
adjustment to 75% in 2011 only.
CCIIO denied, however, Wisconsin’s request for an MLR adjustment to 71%, 74%, and 77% for
the reporting years 2011, 2012, and 2013, respectively.
In a February 16, 2012 letter to the Wisconsin Office of the Commissioner of Insurance, CCIIO
determined the evidence did not establish a reasonable likelihood that the applying the 80% MLR
standard would destabilize the state’s individual market.
HHS, Treasury Issue Proposed Rules On Establishment Of State Health
Insurance Exchanges
The Departments of Health and Human Services (HHS) and Treasury took several steps August
12, 2011 toward establishing state Health Insurance Exchanges under the Affordable Care Act
(ACA).
The agencies announced another round of grant funding to assist states in establishing
exchanges and also released three proposed rules. The agencies noted they “expect to modify
these rules based on feedback we receive from the public.”
Exchange Establishment Grants
The agencies announced that 13 states and the District of Columbia were awarded over $185
million in Exchange Establishment grants. Three states—Indiana, Rhode Island, and
Washington—previously were awarded grants in May 2011.
According to HHS, the Exchange Establishment grants “recognize that states are making
progress toward establishing Exchanges but are doing so at different paces.”
States can choose when to apply for grant funding based on their needs and will have multiple
opportunities to apply for funding, HHS noted. Future applications for grants will be accepted
quarterly, with the last deadline on June 29, 2012 and awards will be made approximately 45
days after the application due date, the agency said.
Tax Credits
The proposed rule issued by Treasury (76 Fed. Reg. 50931) implements a premium tax credit
that aims to make it easier for individuals to purchase affordable health insurance.
The credit generally will be available to individuals and families with incomes between 100% and
400% of the federal poverty level (FPL) and older Americans who face higher premiums will
receive a bigger credit, Treasury said in press release.
In addition, the release noted, “since many moderate-income families may not have sufficient
cash on hand to pay the full premium upfront, an advance payment of the premium tax credit
will be made by the Department of the Treasury directly to the insurance company.”
Exchange Eligibility and Employer Standards Proposed Rule
This rule (76 Fed. Reg. 51202) establishes a streamlined and coordinated system through which
an individual may apply for and receive a determination of eligibility for enrollment in a qualified
health plan through the Exchange and for insurance affordability programs.
According to a fact sheet, the proposal accomplishes three goals: expanding access to private
insurance; a seamless system of coverage; and using technology to support the eligibility
determination process.
Under the proposal, Exchanges will be able to access a single place to review and electronically
verify existing application data while protecting consumer privacy.
These verification and eligibility determination processes “are designed to parallel and integrate
with those in Medicaid and CHIP [the Children's Health Insurance Program],” the fact sheet
noted.
Medicaid and CHIP Eligibility Proposed Rule
The third proposed rule (76 Fed. Reg. 51148) expands and simplifies Medicaid eligibility and
promotes a simple, seamless system of affordable coverage by coordinating Medicaid and CHIP
with the new Exchanges, according to an agency fact sheet.
The rule proposes a new Medicaid coverage group that will cover adults with incomes up to
133% of the FPL.
In addition, the proposal would create new federal matching rates that will provide 100% federal
funding for newly eligible individuals for three years (calendar years 2014 – 2016), gradually
reduced to 90% in 2020.
Under the rule, states will have a choice of approaches for how they can access the new federal
funding.
Rather than require states to track who would be eligible before and after the health reform law
passed, the proposal lets states opt to use “proxy” rules for who is newly eligible, statistical
sampling, or data-driven estimates of the proportion of spending associated with newly eligible
individuals, the fact sheet explained. The rule also solicits other ideas for approaches that will
assure accuracy while reducing administrative burdens.
The proposed rule also institutes simple income-based rules for Medicaid/CHIP eligibility.
According to the fact sheet, the rule would simplify financial eligibility by relying on Modified
Adjusted Gross Income for determining most individuals' Medicaid/CHIP eligibility.
In addition, the rule would eliminate obsolete eligibility categories and collapse other categories
into four primary groups; modernize eligibility verification rules to rely primarily on electronic
data when available; and present options for states to determine the appropriate federal
matching rate without having to simultaneously operate their pre-ACA eligibility rules to
determine who is “newly eligible,” among other things.
Letter To Governors
HHS Secretary Kathleen Sebelius also sent a letter to state officials accompanying the new rules
and grants detailing a partnership opportunity for states to work with HHS.
According to the letter, states have three options in implementing Exchanges; (1) the state
operates all of the functions of the Exchange; (2) a federally facilitated exchange; or (3) a
partnership option with some Exchange activities performed by the state and others by HHS.
“States and HHS can explore using a Partnership model to tailor the Exchange to local needs and
market conditions,” the letter said, noting the agency is looking forward “to working with the
states to further define this option.”
Sebelius also indicated the governors’ comments on the proposed rules “will significantly help us
in the development of the final rules.”
HHS Aims To Give States More Flexibility For Establishing Exchanges
The Department of Health and Human Services (HHS) issued guidance November 29, 2011 that
gives states more flexibility and resources to implement health insurance exchanges under the
Affordable Care Act (ACA), the agency said in a press release.
HHS also announced nearly $220 million in exchange establishment grants to 13 states—
Alabama, Arizona, Delaware, Hawaii, Idaho, Iowa, Maine, Michigan, Nebraska, New Mexico,
Rhode Island, Tennessee, and Vermont—to help them create exchanges.
To accommodate state legislative sessions, HHS decided to extend by six months until June 29,
2012 the deadline for Level One establishment grant applications, which provide one year of
funding to states that already have made progress using their exchange planning grants.
Level Two grants provide multi-year funding to states further along in the planning process.
Rhode Island is first state to receive a Level Two grant, HHS said.
Twenty-nine states (including the District of Columbia) have now been awarded funding and are
making significant progress toward establishing the exchanges, according to HHS.
In a series of Frequently Asked Questions (FAQs), HHS explained that grant funding for
establishing exchanges may be awarded through the end of 2014 and can be used beyond the
first date of operation for improvements and enhancements to key functions over a limited
period of time.
The new insurance exchanges will serve as “one-stop marketplaces” for consumers to select a
healthcare plan that fits their needs, HHS said. States can opt to run their own exchanges or
allow the federal government to do so. The ACA requires that state exchanges be self-sustaining
by January 1, 2015.
According to HHS, state-based exchanges will not be charged for accessing federal data needed
to run the exchanges in 2014.
The FAQs also detail how the federally facilitated exchange will coordinate with state insurance
departments, noting “HHS will seek to harmonize Exchange policy with existing State programs
and laws wherever possible.”
In addition, HHS said it has decided to allow states greater flexibility in eligibility determinations
for Medicaid and the Children’s Health Insurance Program (CHIP) than contemplated under
previous proposals.
In August 2011, HHS and the Treasury Department issued a series of proposed rules for
establishing the exchanges. See HLW, v. 9, no. 32. According to the FAQs, HHS plans to modify
the proposed rules “to permit additional options for determining eligibility under a State-based
and Federally-facilitated Exchange.”
Specifically, for the federally facilitated exchange, the federal government will conduct initial
assessments of applicants for Medicaid and CHIP eligibility as part of determining eligibility for
advance payments of the premium tax credit and cost-sharing reductions, with the state making
final Medicaid and CHIP determinations.
States making final Medicaid and CHIP determinations would have to agree to general guidelines
to prevent applicants from submitting redundant documentation and to ensure timeliness
standards are met, the FAQs said.
Alternatively, the state can opt not to retain Medicaid and CHIP eligibility determinations and
instead allow the federally facilitated exchange to do so using state eligibility rules and standards
in conjunction with determining eligibility for advance payments of the premium tax credit and
cost-sharing reductions.
States operating their own exchanges could either conduct all eligibility functions or use federally
managed services for determinations of the premium tax credit, cost-sharing reductions, and
exemptions from the individual responsibility requirement.
HHS Issues Final Rule On State-Based Insurance Exchanges
The Department of Health and Human Services (HHS) issued March 12, 2012 a final rule
detailing the framework for states to establish their health insurance exchanges under the
Affordable Care Act.
HHS said the final rule maintains and even expands on the flexibility envisioned under the
proposed rule for states to design and implement their exchanges, which starting in 2014 will be
available for individuals and small businesses to purchase private health insurance.
If a state does not establish an exchange, HHS will step in and do so.
The final rule combines two separate proposed rules issued in July and August 2011,
respectively, on establishing the exchanges and on setting eligibility and enrollment standards in
the qualified health plans (QHPs) offered through the exchanges and in insurance affordability
programs, including premium tax credits, HHS explained in a fact sheet.
“While originally published as separate rulemaking, the provisions contained in these proposed
rules are integrally linked, and together encompass the key functions of Exchanges related to
eligibility, enrollment, and plan participation and management,” the final rule said.
HHS issued some of the provisions as an interim final rule subject to a 45-day comment period
after the final rule’s publication in the Federal Register, which is slated for March 27.
Flexibility
Many commenters on the proposed rules focused on the balance between flexibility for state
exchanges and standardization and predictability for consumers nationwide, HHS said.
“While we recognize that consumers may benefit from national standards, we continue to believe
that States are best equipped to adapt the minimum Exchange functions to their local markets
and the unique needs of their residents,” HHS responded in the final rule.
Thus, the final rule is aimed at providing significant discretion for states in designing and
implementing their exchanges.
As in the proposed rule, states can decide how to structure their exchange (i.e., as a nonprofit
entity, as an independent public agency, or as part of an existing state agency); whether to
operate their exchanges on a local or regional level; how to select plans to participate; and
whether to partner with HHS to split up the work, the agency said.
The final rule also offers states significant additional flexibility in terms of determining an
individual’s eligibility to participate in the exchange and “makes it easier for small businesses to
get coverage through the Small Business Health Options Program (SHOP),” HHS noted.
Under the final rule, states can set the size of the small group market at one to 50 or one to 100
employees until 2016, when employers with up to 100 employees can participate in SHOP.
Beginning in 2017, states have the additional option of allowing businesses with more than 100
employees to buy large group coverage through the SHOP.
Exchanges will perform a variety of functions, including certifying health plans as QHPs to be
offered in the exchange; operating a website to facilitate comparisons among QHPs for
consumers; operating a toll-free hotline for consumer support; and facilitating enrollment of
consumers in QHPs.
States will have substantial flexibility in determining how to perform all of these functions. HHS
said the final rule simplifies the process for approving and updating states’ exchange blueprints
and allows states to determine a role for agents and brokers.
Under the final rule, exchanges can partner with and award grants to entities known as
“Navigators” who will reach out to employers and employees and consumers to distribute
enrollment information and help them select a plan.
The final rule directs states to choose at least two Navigator organizations, including one that is
a community or consumer-focused nonprofit.
Eligibility
The final rule sets forth the standards and processes states will use to determine whether a
particular consumer is eligible for the exchange or for insurance affordability programs.
The final rule provides a single, streamlined application and ensures exchanges coordinate with
Medicaid and the Children’s Health Insurance Program (CHIP) so the applicant experiences “a
seamless eligibility and enrollment process regardless of where he or she submits an
application.”
Responding to public comments, the final rule also incorporates two ways for exchanges to
interact with state Medicaid agencies on eligibility determinations.
Under the first option, exchanges, using state-established Medicaid rules, conduct eligibility
determinations for Medicaid and for advance payment of premium tax credits. Alternatively,
exchanges will make a preliminary eligibility assessment with the state Medicaid agency making
the final determination, within certain parameters.
“These approaches continue the commitment to facilitating enrollment in the appropriate
insurance affordability program without delay,” HHS said.
Interim Final Rule
HHS issued a number of provisions as an interim final rule with a request for comments.
These provisions include 42 C.F.R. § 155.220(a)(3)—regarding a state’s ability to permit agents
and brokers to assist consumers in applying for advance payments of the premium tax credit and
cost-sharing reductions for QHPs; 42 C.F.R. §155.300(b)—regarding the Medicaid and CHIP
regulations; 42 C.R.R. § 155.302—regarding the options for conducting eligibility determinations;
and 42 C.F.R. § 155.310(e)—regarding timeliness standards for exchange eligibility
determinations.
HHS Finalizes Standards On Reinsurance, Risk Corridors, And Risk
Adjustment Under ACA
The Department of Health and Human Services (HHS) released March 16, 2012 a final rule on
the standards related to Reinsurance, Risk Corridors, and Risk Adjustment—three initiatives in
the Affordable Care Act (ACA) that are aimed at eliminating incentives for health insurance plans
to avoid insuring people with pre-existing conditions or those who are in poor health.
Risk Adjustment
The risk adjustment program is intended to provide payments to health insurance issuers that
attract higher risk populations by transferring funds from plans that enroll the lowest risk
individuals to plans that enroll the highest risk individuals, HHS said in a fact sheet.
All non-grandfathered plans in the individual and small group markets are subject to risk
adjustment, inside and outside of the state-based exchanges.
States certified to operate an Affordable Insurance Exchange (Exchange) have the option to
establish a risk adjustment program, but are not required to do so, the fact sheet noted. If a
state does not establish a risk adjustment program, HHS will establish the program and will
perform the risk adjustment functions for that state.
According to HHS, the final rule affords states flexibility in how they collect data for risk
adjustment.
When HHS operates risk adjustment on behalf of the state, a distributed data collection approach
will be used, the fact sheet said. Under the distributed approach, issuers retain their own data
and do not submit personal health information to a state or HHS on a state’s behalf.
Reinsurance
The Affordable Care Act also established a transitional reinsurance program in each state to help
stabilize premiums for coverage in the individual market due to individuals with higher cost
needs gaining insurance coverage during the first three years of Exchange operation (2014
through 2016).
Under the final rule, states have the option to establish a reinsurance program, regardless of
whether they establish an Exchange.
If a state elects not to establish a reinsurance program, HHS will perform the reinsurance
functions for that state.
Risk Corridors
The ACA’s temporary risk corridor program provides additional protection for issuers of qualified
health plans in the Exchanges.
Risk corridors will protect against uncertainty in rate-setting in the first several years of the
Exchanges by creating a mechanism for sharing risk between the federal government and
qualified health plan issuers, the fact sheet said.
Under the final rule, qualified health plans with costs that are at least 3% less than the plans’
costs projections will remit charges for a percentage of those savings to HHS, while qualified
health plans with costs at least 3% higher than cost projections will receive payments from HHS
to offset a percentage of those losses.
Agencies Issue Proposed Rules On ACA-Required Summaries Of Health
Plan Benefits And Coverage
The Departments of Health and Human Services (HHS), Labor, and Treasury issued August 17,
2011 proposed rules requiring health insurers and group plans to provide consumers upon
request or before they buy coverage an easy to understand Summary of Benefits and Coverage
and a uniform glossary of commonly used health insurance terms.
The new Affordable Care Act-mandated disclosure requirements are intended to help those
shopping for insurance, as well as those already enrolled in a plan, make “apple-to-apple”
comparisons in evaluating their health insurance coverage options, the agency said.
“Today, many consumers don’t have easy access to information in plain English to help them
understand the differences in the coverage and benefits provided by different health plans,” said
HHS Secretary Kathleen Sebelius in a press release. “Thanks to the Affordable Care Act, that will
change.”
According to a fact sheet, the proposed summary form and glossary were developed by the
National Association of Insurance Commissioners and a working group of various stakeholders,
including health insurers and consumer advocates.
Under the proposed rules, beginning on March 23, 2012, insurance companies and group health
plans must provide “consumers with a concise document detailing, in plain language, simple and
consistent information about health plan benefits and coverage,” the fact sheet said.
The summary will include key features of the plan, such as what is covered, cost-sharing
requirements, and coverage limitations and exceptions. The summary must be made available to
those shopping for coverage, enrolling in coverage, at each new plan year, and within seven
days of a request for such information.
The summary document will include a new, standardized health plan comparison tool, called
“Coverage Examples,” which the agencies likened to "Nutrition Facts" labels.
The Coverage Examples will illustrate what proportion of care expenses a health insurance policy
or plan would cover for three common benefits scenarios—having a baby, treating breast cancer,
and managing diabetes.
The agencies also issued a proposed template for the Summary of Benefits and Coverage
document.
The glossary of terms would provide consumers with common definitions of key health insurance
“jargon” such as “deductibles” and “co-pays” that would be the same across all plans.
America’s Health Insurance Plans (AHIP) said in a statement that the “benefits of providing a
new summary of coverage document must be balanced against the increased administrative
burden and higher costs to consumers and employers.”
AHIP, which said it would submit detailed comments on the new requirement, also argued the
implementation date should be pushed back, “to give health plans sufficient time to make the
operational and administrative changes needed to create these new documents.”
Agencies Issue Final Rule On ACA-Required Summaries Of Health Plan
Benefits And Coverage
The Departments of Health and Human Services (HHS), Labor, and Treasury issued February 9,
2012 a final rule requiring health insurers and group health plans to provide consumers an easyto-understand Summary of Benefits and Coverage (SBC) and a uniform glossary of commonly
used health insurance terms.
The new Affordable Care Act-mandated disclosure requirements are intended to help those
shopping for insurance, as well as those already enrolled in a plan, make comparisons to
better evaluate their health insurance coverage options, HHS said.
Under the final rule, insurance companies and group health plans, starting September 23, must
provide consumers “with clear, consistent and comparable summary information about their
health plan benefits and coverage.” The proposed rule, issued in August 2011, set a March 23
compliance date.
The SBC must include key features of the plan, such as what is covered, cost-sharing
requirements, and coverage limitations and exceptions. The SBC must be made available to
those shopping for coverage, renewing coverage, 60 days before “significant” plan changes take
effect, and within seven days of a request for such information.
The summary document also will include a new, standardized health plan comparison tool, called
“Coverage Examples,” which the agencies likened to "Nutrition Facts" labels.
The Coverage Examples will illustrate what proportion of care expenses a health insurance policy
or plan would cover for two common benefits scenarios—having a baby and managing diabetes.
The proposed rule included a third scenario—treating breast cancer.
The agencies also issued a template for the SBC and a guidance document.
The glossary will provide consumers with common definitions of key health insurance terms such
as “deductibles” and “co-pays” that would be the same across all plans.
“All consumers, for the first time, will really be able to clearly comprehend the sometimes
confusing language insurance plans often use in marketing,” said HHS Secretary Kathleen
Sebelius. “This will give them a new edge in deciding which plan will best suit their needs and
those of their families or employees.”
In a statement, America's Health Insurance Plans President and Chief Executive Officer Karen
Ignagni noted the final rule made some improvements over the initial proposal,
but said "additional time and flexibility are needed to avoid imposing costs that outweigh the
benefits to consumers."
Ignagni said the final rule will require almost a complete overhaul of how insurers provide
information to consumers.
"The short time frame in which to implement this new requirement creates significant
administrative challenges that will increase costs and result in duplication because many plans
are already developing materials for employers whose policies take effect October 1, 2012," she
added.
According to the final rule, the agencies estimate annualized cost of the new requirements at
around $73 million. "[T]he Departments believe that these final regulations lower overall
administrative costs from the proposed regulations because of several policy changes, notable
flexibility in the instructions for completing the SBC, the omission of premium (or cost of
coverage) information from the SBC, the reduction in number of coverage examples required
from three to two, and provisions allowing greater flexibility for electronic disclosure."
Rate Reviews To Include Association Coverage, HHS Says
The Department of Health and Human Services (HHS) issued September 1, 2011 a final rule
amending the definitions of “individual market” and “small group market” to include coverage
sold to individuals and small groups through associations for purposes of new requirements to
review premium rate increases.
The amended definition is effective November 1 for rate review purposes even if the state does
not include such coverage in its definition of individual and small group market.
“This approach is consistent with the approach taken under long-standing Department policy and
the medical loss ratio regulation,” HHS said in a fact sheet.
The final rule amends the final regulation HHS issued May 19, 2011 requiring state or federal
officials to review rate increases for most individual and small group health insurance plans of
10% or more.
At the time the final rule was issued, HHS requested comment on applying the rule to individual
and small group coverage sold through associations, which is sometimes exempt from state
oversight. The Affordable Care Act mandated the premium rate reviews.
According to the HHS fact sheet, in many states “a significant portion of individual and small
group health insurance is sold through associations.” The fact sheet said the only real difference
with individual and small group coverage not sold through an association “is that the association
exists as a quasi-employer group; but in reality, the enrollees do not work for the association.”
HHS said the amended rule “closes [a] significant loophole, levels the playing field between
issuers, and assures that all insurers in the individual and small group markets nationwide
receive the benefit of rate review.”
In a separate press release, HHS touted the benefits of the new rate review requirements, which
went into effect September 1, 2011
“The next time your insurance company tries to raise your premium by double digits, it will have
to give you and rate review experts a good reason—or be labeled as unjustified, or in some
states denied,” said Center for Consumer Information and Insurance Oversight Director Steve
Larsen. \
HHS Says Pennsylvania Insurer’s Rate Hikes Are Excessive
The first federal rate review under the Affordable Care Act (ACA) revealed that Everence
Insurance of Pennsylvania is charging small businesses unreasonably high premium increases,
the Department of Health and Human Services (HHS) said November 21, 2011.
Under the ACA, proposals to raise rates by 10% or more are subject to review. Once an increase
is found to be excessive, companies can either reduce their rates or post a justification on their
website within 10 days of the rate review determination.
According to HHS, Everence’s proposed 12% rate increase for small businesses was “excessive.”
“After reviewing the rate, independent experts determined the choice of assumptions the
company based its rate increase on reflected national data rather than reliable and available
state data,” HHS said. “These assumptions resulted in an unreasonably high premium in relation
to the benefits provided.”
“We have called on this insurer to immediately rescind the rate, issue refunds to consumers or
publicly explain their refusal to do so,” said Steve Larsen, director of the Center for Consumer
Information and Insurance Oversight.
In an a statement posted on its website November 23, Everence said it "did not set its insurance
rate for small businesses in Pennsylvania with methods that inflated the true cost of providing
coverage to their employees."
According to Dave Gautsche, Everence's senior vice president of products and services, “HHS
made their determination based on a different methodology than Everence did, which naturally
led to a different result.”
“We continue to believe our methodology provides the best rate stability for our small group
clients. It is based on our years of experience as a small insurer helping small businesses
manage employees’ health expenses.”
HHS Finds More Insurer Rate Hikes Excessive
Exercising its “rate review” authority under the Affordable Care Act (ACA), the Department of
Health and Human Services (HHS) found “unreasonable” health insurance premium increases
proposed by Trustmark Life Insurance Company in Alabama, Arizona, Pennsylvania, Virginia, and
Wyoming.
Under the ACA, proposals to raise rates by 10% or more are subject to review. Once an increase
is found to be excessive, companies must post a justification on their website within 10 days of
the rate review determination.
According to an HHS press release, in the five states, Trustmark has raised rates by 13%. “For
small businesses in Alabama and Arizona, when combined with other rate hikes made over the
last 12 months, rates have increased by 27.2 percent and 18.1 percent, respectively.”
Following an independent review, “HHS determined the rate increases were unreasonable
because the insurer would be spending a low percent of premium dollars on actual medical care
and quality improvements, and because the justifications were based on unreasonable
assumptions.”
“It’s time for Trustmark to immediately rescind the rates, issue refunds to consumers or publicly
explain their refusal to do so," HHS Secretary Kathleen Sebelius said.
According to published reports, the company disagreed that the rates were unreasonable, citing
rising healthcare costs and increased use of medical services.
In November 2011, HHS found Everence Insurance of Pennsylvania's proposed 12% rate
increase for small businesses was “excessive.”
HHS noted a number of states also are exercising newly enacted authority to question
unreasonable premium increases. According to HHS, since the ACA’s passage, “the number of
states with this authority increased from 30 to 37, with several states extending existing ‘prior
authority’ to new markets.”
HHS Deems Excessive Insurance Rate Hikes Affecting Nine States
The Department of Health and Human Services (HHS) announced March 22, 2012 that it has
determined that two insurance companies have proposed unreasonable health insurance
premium increases in nine states.
The increases—as high as 24%--were deemed “unreasonable” under the rate review authority
granted by the Affordable Care Act (ACA). HHS said it reached this conclusion because the
insurer would be spending a low percentage of premium dollars on actual medical care and
quality improvements, and because the justifications were based on unreasonable assumptions.
The excessive rate hikes would affect over 42,000 residents in Arizona, Idaho, Louisiana,
Missouri, Montana, Nebraska, Virginia, Wisconsin, and Wyoming.
Under the ACA, proposals to raise rates by 10% or more are subject to review. Once an increase
is found to be excessive, companies must post a justification on their website within 10 days of
the rate review determination.
The same day, HHS released a report showing that since the rate review program took effect in
2011, health insurers have proposed fewer double-digit rate increases.
According to the report, in the last quarter of 2011, states reported that premium increases
dropped by 4.5%, and in certain states, premiums actually declined.
The report also noted that as of March 10, 2012, the justifications and analysis of 186 doubledigit rate increases for plans covering 1.3 million people have been posted at HealthCare.gov.
CMS Issues Final Rule Amending MLR Provisions
The Centers for Medicare and Medicaid Services (CMS) issued December 2, 2011 a final rule
making modifications to Medical Loss Ratio (MLR) rules that took effect January 1, 2011.
CMS said the changes, which respond to comments requested on the earlier version of the MLR
provisions to implement the Affordable Care Act (ACA), is aimed at increasing transparency and
providing certainty as to how the MLR is calculated.
“Under the Affordable Care Act, consumers are already seeing better value from their health
insurance companies,” said CMS Acting Administrator Marilyn Tavenner. “If your insurance
company doesn’t spend enough of your premium dollars on medical care or quality improvement
this year, they’ll have to give you rebates next year. This will bring costs down and give
insurance companies the incentive to focus on what matters for patients—high quality health
care.”
Section 2718 of the Public Health Service Act, which was added by Sections 1001 and 10101 of
the ACA, requires health insurance issuers offering individual or group coverage to submit annual
reports to the Department of Health and Human Services on the percentages of premiums spent
on reimbursement for clinical services and activities that improve healthcare quality, known as
the MLR.
Beginning in 2011, ACA requires insurers to meet minimum MLR standards of 85% in the large
group market and 80% in the small group and individual markets or pay rebates to their
enrollees.
According to a fact sheet posted by the Center for Consumer Information and Insurance
Oversight, “the modifications in the final rule largely address technical issues involved in the way
issuers calculate and report their MLR and the mechanism for distributing rebates to enrollees in
group health plans.”
Specifically, the final rule makes MLR rebates tax free by directing issuers to provide them to the
group policyholder through lower premiums or in other ways that are not taxable, the fact sheet
said.
The final rule also requires issuers to provide notice of rebates to enrollees and the group
policyholder (generally the employer).
The final rule also phases down the special circumstances adjustment for so-called “mini-med”
plans, which in 2011 was a multiplier of 2.0. Under the final rule, the multiplier will be 1.75 in
2012, 1.5 in 2013, and 1.25 in 2014. The ACA’s ban on annual limits will apply to mini-med
plans in 2014 at which time “we expect these mini-med policies will cease to exist, as plans
offered in the Affordable Insurance Exchanges will offer affordable coverage options,” the fact
sheet said.
According to CMS, the final rule makes only “a minor change to a quality improvement definition
to promote insurer improvements in defining or coding of medical conditions for a limited window
of time.”
HHS Will Give States Maximum Flexibility In Implementing Essential
Health Benefits Standard
The Department of Health and Human Services (HHS) released December 16, 2011 a bulletin
outlining proposed policies detailing the rulemaking approach the agency intends to pursue to
define essential health benefits under the Affordable Care Act (ACA).
Under the ACA, health insurance plans offered in the individual and small group markets, both
inside and outside of the insurance exchanges, must offer a comprehensive package of items and
services, known as “essential health benefits.”
HHS said in a press release that under the approach described in the bulletin, states would have
the flexibility to select an existing health plan to set the “benchmark” for the items and services
included in the essential health benefits package.
HHS will allow states to select a benchmark plan that reflects the scope of services offered by a
“typical employer plan.”
States would choose one of the following health insurance plans as a benchmark:




One of the three largest small group plans in the state;
One of the three largest state employee health plans;
One of the three largest federal employee health plan options;
The largest HMO plan offered in the state’s commercial market.
If states choose not to select a benchmark, HHS said it intends to propose that the default
benchmark will be the small group plan with the largest enrollment in the state.
Plans could modify coverage within a benefit category so long as they do not reduce the value of
coverage, HHS said.
In addition, as required by the ACA, states must ensure the essential health benefits package
covers items and services in at least 10 categories of care, including preventive care, emergency
services, maternity care, hospital and physician services, and prescription drugs, among others,
the release said.
“This approach would provide maximum flexibility to states, employers and issuers while
providing quality, comprehensive, coverage for consumers,” HHS said in a fact sheet.
According to the fact sheet, HHS intends to propose that benchmarks will be updated in the
future, and that state mandates outside the definition of essential health benefits may not be
included in future years.
CCIIO Issues More Guidance On Defining ACA-Mandated Essential
Health Benefits
The Center for Consumer Information and Insurance Oversight (CCIIO) posted February 17,
2012 further guidance on the administration’s intended approach to defining essential health
benefits (EHBs) under the Affordable Care Act (ACA).
The guidance took the form of a Frequently Asked Questions (FAQs) document that elaborates
on a bulletin the Department of Health and Human Services (HHS) released in December 2011.
The ACA requires health insurance plans in the individual and small group markets, both inside
and outside of the insurance exchanges, to offer a comprehensive package of items and services,
known as “essential health benefits.”
Under the approach described in the bulletin, states would have the flexibility to select an
existing health plan to set the “benchmark” for the items and services included in the EHBs
package.
Specifically, according to the bulletin, states could choose one of the following health insurance
plans as a benchmark: one of the three largest small group plans in the state; one of the three
largest state employee health plans; one of the three largest federal employee health plan
options; or the largest health maintenance organization plan offered in the state’s commercial
market.
The FAQs clarify that the state is not permitted to adopt different benchmark plans for its
individual and small group markets. “HHS believes that selecting one benchmark for these
markets in a State would result in a more consistent and consumer-oriented set of options that
would also serve to minimize administrative complexity,” the guidance said.
The guidance also indicates that if a state selected a benchmark plan that did not include all
state-mandated benefits, the ACA would require the state to defray the cost of those mandated
benefits in excess of EHBs as defined by the selected benchmark.
Another FAQ notes HHS intends “to propose that if a benchmark plan is missing coverage in one
or more of the ten statutory categories, the State must supplement the benchmark by reference
to another benchmark plan that includes coverage of services in the missing category.”
The ACA requires states to ensure the EHBs package covers items and services in at least 10
categories of care, including preventive care, emergency services, maternity care, hospital and
physician services, and prescription drugs.
The guidance also reiterates that HHS plans to propose a process for updating the EHBs package
in future rulemaking.
Specifically, according to one FAQ, the benchmark benefits selected in 2012 would apply for plan
years 2014 and 2015. For 2014 and 2015, the benchmark plan selection would occur in the third
quarter of 2012. HHS intends to revisit this approach for plan years starting in 2016.
“A consistent set of benefits across these two years would limit market disruption during this
transition period,” the FAQ says.
GOP leaders have criticized HHS for issuing the bulletin rather than a proposed rule. See January
13, 2012 letter to HHS Secretary Kathleen Sebelius. According to the letter, the bulletin leaves
too many open questions for the states.
Democratic leaders also sent a letter February 6, 2012 to Sebelius about the bulletin, saying the
agency’s decision to delegate the definition of the EHBs package to states was not what they
intended in crafting the law.
Cases
U.S. Court In Pennsylvania Allows Unlawful Rescission Claims To Go
Forward
The U.S. District Court for the Middle District of Pennsylvania refused to dismiss September 27,
2011 claims that an insurer’s rescission of coverage was improper.
In so holding, the court allowed the insured’s breach of contract and bad faith claims to go
forward against her former insurer, finding she pled sufficient facts to support her claims.
Plaintiff Stephanie Wasko, who was covered under a health insurance policy issued by Coventry,
underwent a spinal surgery.
Before the surgery, Wasko’s doctor faxed a pre-certification coverage request to Coventry for
posterior lumbar interbody fusion surgery, which Coventry approved.
After the surgery, Coventry informed Wasko that her coverage was rescinded due to “a medical
history of chronic back trouble” that was not revealed on her application for insurance.
Wasko sued Coventry in state court for bad faith and breach of contract. Coventry removed the
action to federal court and filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6).
Turning first to Wasko’s bad faith claim, the court noted that a plaintiff must establish (1) that
the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or
recklessly disregarded its lack of reasonable basis.
Here, the court found Wasko adequately pled a bad faith cause of action.
Noting that Wasko alleged she adequately informed Coventry of her medical history and
Coventry agreed to provide coverage with knowledge of Wasko’s back pain and treatment, the
court found “[h]aving been so informed, Coventry would also know that it did not have a
reasonable basis to deny coverage.”
The court also refused to dismiss Wasko’s breach of contract claim, finding she adequately
alleged the existence of a contract and that “[Coventry] breached the contract of health
insurance by denying her the benefits due and owing on proper demand.”
Wasko v. Coventry Health and Life Ins. Co., No. 3:11cv618 (M.D. Pa. Sept. 27, 2011).
Wyoming Supreme Court Finds Insurer Improperly Denied Claims
Stemming From Covered Breast Reduction Procedure
The Wyoming Supreme Court reversed September 20, 2011 a lower court’s grant of summary
judgment to an insurer, finding the insurer improperly denied claims stemming from a breast
reduction surgery.
After examining the insurance contract, the high court concluded the lower court erred in
granting summary judgment to the insurer and thus directed the entry of a partial summary
judgment in favor of the insured on her claims for benefits.
The high court also remanded to the district court for further proceedings to address plaintiff’s
other claims, including bad faith and attorney’s fees.
Plaintiff Kimberly Shaffer underwent a breast reduction surgery after it was authorized as
medically necessary by her insurer, Great West Healthcare.
About a month after the surgery, the insurer for her husband’s employer was changed from
Great West to WINhealth Partners.
At the same time, plaintiff was hospitalized for a MRSA (Methicillinresistant Staphylococcus
aureus) infection as a result of her surgery.
WIN denied payment for the MRSA treatment in part on the basis that the treatment she
received for her MRSA infection arose from treatment to improve appearance.
Shaffer sued, alleging breach of contract, and bad faith breach of contract, and she asked for
attorney’s fees and prejudgment interest.
The trial court granted summary judgment to WIN and Shaffer appealed.
The high court noted at the outset that the parties disagreed as to whether Shaffer’s noncosmetic breast reduction surgery fell within the definition of reduction mammoplasty referred to
in the insurance contract.
WIN claimed the term refers to all breast reduction surgeries, while Shaffer argued it only applies
to cosmetic breast reductions.
Applying the ordinary and common meaning of the words used in the insurance contract, the
high court concluded Shaffer’s breast reduction surgery fell within the definition of “reduction
mammoplasty.”
However, the court noted, the contractual language states that reduction mammoplasty is either
“not covered or subject to limitations,” and found the district court did not consider the effect
of the “subject to limitations” language.
After examining the contract as a whole, the high court concluded the only interpretation that
gave effect to both implicated sections was that coverage for reduction mammoplasty was not
wholly excluded but, rather, coverage was limited to noncosmetic breast reduction surgeries.
Shaffer v. WINhealth Partners, No. S-11-0005 (Wyo. Sept. 20, 2011).
Connecticut Supreme Court Rejects “Unfair Discrimination” Claim
Against Insurers for Reimbursing Podiatrists Less Than Medical Doctors
The Connecticut Supreme Court held October 18 that a group of podiatrists could not maintain
an action for “unfair discrimination” under state insurance law against Health Net of Connecticut,
Inc. for paying them less than medical doctors for the same procedures.
Affirming a trial court decision granting Health Net summary judgment, the high court found
“unfair discrimination” under the Connecticut Unfair Insurance Practices Act (CUTPA) applies only
to outright denials of reimbursement, not to different rates of reimbursement.
First, the high court determined the individual podiatrists who brought the action had standing to
sue, finding the fact that the practice groups received reimbursement directly from Health Net
rather than the individual podiatrists did not render the injury too remote.
“Because only the individual podiatrists can enforce their contractual rights under the provider
agreements, there is no party that is more directly injured or in a better position to remedy the
alleged harm,” the high court said.
Next, the high court agreed with the trial court that, as a matter of law, Health Net’s practice of
reimbursing the individual podiatrists at a lesser rate than medical doctors for the same
procedures was not “unfair discrimination” under CUTPA.
Plaintiffs argued setting different reimbursement rates solely on the basis of license constituted
“unfair discrimination,” i.e. that the statute prohibited discrimination against podiatrists in favor
of medical doctors with respect to the rate of reimbursement.
But the high court disagreed, finding the legislature intended “unfair discrimination” to
encompass only the denial of reimbursement to licensed practitioners of the healing arts, not
discriminatory rate setting.
The high court said the specific statutory language, as well as related statutory provisions, was
ambiguous on this point and therefore relied on legislative history in making its ruling.
According to the high court, the legislative history supported two conclusions: that the statute at
issue was intended to prevent “unfair discrimination based on licensure,” but that the type of
decisions contemplated by the provision were limited to reimbursement denials.
These conclusions, the high court said, are in line with the purposes behind the statute—to
protect practitioners from discrimination and to ensure subscribers have coverage for treatment
by any state-licensed practitioner of the healing arts.
“The second purpose,” the high court reasoned, “would be directly implicated only by denials of
reimbursement, not by reimbursement at different rates.”
Moreover, the high court added, none of the legislative history even mentioned rates of
reimbursement.
A dissenting opinion argued the statute barred discrimination both with respect to the denial of
reimbursement and to the amount of reimbursement.
Connecticut Podiatric Med. Ass’n v. Health Net of Conn., Inc., No. 18267 (Conn. Oct. 18, 2011).
Second Circuit Affirms Dismissal Of Insured’s Claims For Benefits
The Second Circuit affirmed December 8, 2011 the dismissal of an insured’s suit for benefits,
agreeing with the lower court that the insurance provider’s interpretation of the term “incurred”
was the correct one.
Plaintiff Florence Metz sued defendant United States Life Insurance Company with which she has
a catastrophic medical insurance policy, because U.S. Life told her she had not yet “incurred”
sufficient charges to satisfy its deductible.
Metz claimed U.S. Life’s refusal to pay benefits rested on a deliberate misinterpretation of the
term “incurred” and thus breached the insurance contract.
The district court granted U.S. Life’s motion to dismiss for failure to state a claim and Metz
appealed.
Metz argued the district court incorrectly read “incurred” (as in “incurred charge”) in the
insurance policy as including only those amounts the insured paid or was legally obligated to
pay. Instead, according to Metz, the term should refer to the full reasonable and customary
charge for that treatment.
Under the applicable regulatory framework, physicians treating Medicare beneficiaries agree prior
to treatment that they will not seek amounts exceeding the Medicare-approved fee, the appeals
court explained.
To incur a charge under New York law, an insured must at some point be legally liable to pay
that charge, even if liability is later extinguished prior to payment by the insured. See Rubin v.
Empire Mut. Ins. Co., 25 N.Y.2d 426, 429 (1969).
Therefore, the appeals court reasoned, Metz could not incur a charge for which she implicitly
conceded she was never liable.
The appeals court went on to hold that the district court did not err in dismissing the complaint
with prejudice.
Metz v. United States Life Ins. Co., No. 10-4305 (2d Cir. Dec. 8, 2011).
Third Circuit Finds Non-Participating Ambulance Providers Have No
Right To Direct Payment From Insurers
The Third Circuit in a January 25, 2012 non-precedential decision upheld a lower court’s
dismissal of ambulance providers’ claims that a state statute entitled them to direct payment
from insurance carriers with whom they have not contracted.
In so holding, the appeals court agreed that plaintiff Ambulance Association of Pennsylvania
failed to state a claim under Fed. R. Civ. P. 12(b)(6).
Pennsylvania’s Quality Health Care Accountability Act (Act) regulates the financial exchanges
between managed care plans and healthcare providers.
The Association represents a class of plaintiffs that are ambulance service corporations that have
not contracted with Highmark and other defendant managed care plans that contract with
ambulance service providers.
Thus, after completing ambulance service for one of Highmark’s enrollees, the Association
submits bills to Highmark for the costs it incurred, but rather than paying the Association directly
for this service, Highmark reimburses its enrollees, who then in turn remit payment to the
Association.
The non-participating provider plaintiffs contended the interposition of the Act confers upon them
the privilege of direct payment without having signed a managed care agreement.
Plaintiffs sought a declaration that plans must pay the non-participating providers directly; and,
if successful, sought treble damages under the Racketeer Influenced and Corrupt Organizations
Act (RICO), among other claims.
The district court dismissed the complaint, and plaintiffs appealed.
The appeals court agreed with the lower court that the plain language of the Act does not require
direct payment.
The appeals court first noted the statute is entirely silent on the issue of direct payment. Second,
the appeals court found, the Act’s emergency-services provision explicitly endorses Highmark’s
payment scheme.
In the appeals court's view, “the Association’s ado about the absurd results that will result from
upholding Highmark’s payment system is exaggerated.”
The appeals court observed that the Act clearly anticipates a system of contracts between Plans,
providers, and enrollees.
“Hence, the argument that a provider who purposefully turned down the burdens and benefits of
a contract may demand direct payment from a Plan simply because it administered aid to a
patient with a Plan contract is a theory devoid of deductive or inductive reasoning,” the appeals
court held.
Lastly, the appeals court found “no violations of the Hobbs Act that might support a viable RICO
claim.”
Ambulance Ass’n of Pennsylvania v. Highmark, Inc., No. 11-2763 (3d Cir. Jan. 25, 2012).
U.S. Court In Texas Says Provider Can Proceed With Most Claims
Against BCBS In Reimbursement Dispute
On April 11, 2012, the U.S. District Court for the Southern District of Texas refused to dismiss
most of plaintiff Mid-Town Surgical Center, LLP's claims against Blue Cross Blue Shield of Texas,
Inc. (BCBS), including negligent misrepresentation and promissory estoppel.
Mid-Town alleged BCBS either failed to pay or underpaid approximately $12 million in claims
under the terms of health plans it insured or administered.
Plaintiff did not have managed contracts with BCBS, but it verified with BCBS that services
provided to its health plan members were covered.
Mid-Town’s lawsuit asserted claims including negligent misrepresentation, promissory estoppel,
quantum meruit, and breach of fiduciary duty. BCBS sought dismissal of five of plaintiff’s 10
claims.
In ruling on BCBS’ motion to dismiss, the court held Mid-Town stated claims of negligent
misrepresentation and promissory estoppel under Texas law.
BCBS argued its coverage representations were merely future promises, not statements of
existing fact, and therefore were not actionable as negligent misrepresentation.
But the court disagreed, saying BCBS made statements regarding a patient’s current coverage
status, which amounted to statements of existing fact.
The pleadings also established a claim for promissory estoppel based on acts plaintiff took in
reliance on BCBS’ verbal agreement to pay for certain medical procedures.
However, the court found Mid-Town failed to state a claim for quantum meruit. Patients—not
BCBS—benefitted from Mid-Town’s services, and this equitable doctrine permits recovery only
where there is a direct link between the parties.
The district court also held Mid-Town could not assert claims under the Employee Retirement
Income Security Act for both monetary and equitable relief.
A private action for breach of fiduciary duty is allowed only when no other avenue of relief is
available under 29 U.S.C. § 1132. Thus, the court dismissed plaintiff’s breach of fiduciary duty
claim.
Thus, the court agreed to dismiss two of plaintiff's 10 claims.
Mid-Town Surgical Ctr., LLP v. Blue Cross Blue Shield of Tex., Inc., No. H-11-2086 (S.D. Tex.
Apr. 11, 2012).
Blue Shield To Pay $2 Million To Resolve Allegations Involving
Rescission Practices
Blue Shield of California agreed to pay $2 million to resolve a civil enforcement action alleging
the company had engaged in illegal rescission practices, L.A. City Attorney Carmen Trutanich
announced December 28, 2011.
The city filed the action in 2008 against Blue Shield and several other insurance companies,
including WellPoint, Inc., alleging violations of the state’s unfair competition and false advertising
laws.
As part of the settlement, Blue Shield also agreed to continue its "Best Practices in underwriting
and rescission determinations" that exceed current regulatory standards.
In a press release, the city attorney noted Blue Shield’s voluntary cooperation in the
investigation of its rescission practices and its establishment of industry best practices in this
area.
Blue Shield admitted no wrongdoing in agreeing to the settlement.
According to the release, the civil enforcement action against WellPoint, Blue Cross Life and
Health Insurance Company, and Anthem Blue Cross are pending. No trial date has been set for
the remaining defendants, the release said.
Life Sciences
Federal Judge Grants Government Summary Judgment In Lawsuit
Seeking To Block Federal Funding For Stem Cell Research
U.S. District Court for the District of Columbia Judge Royce C. Lamberth granted July 27, 2011
summary judgment to the government in a lawsuit that sought to block federal funding for
human embryonic stem cell (hESC) research.
Judge Lamberth, in a 38-page opinion, said he was bound by a D.C. Circuit 2-1 panel decision
finding plaintiffs, two researchers of adult stem cell lines, were unlikely to prevail on their
argument that the National Institutes of Health (NIH) guidelines establishing the policies and
procedures for federal funding of human embryonic stem cell (hESC) research violated a federal
appropriations rider, known as the Dickey-Wicker Amendment, which prohibits the expenditure
of federal funds on “research in which a human embryo or embryos are destroyed.” Sherley v.
Sebelius, No. 10-5287 (D.C. Cir. Apr. 29, 2011).
The D.C. Circuit vacated April 29, 2011 a preliminary injunction barring the implementation of
the NIH guidelines, which Judge Lamberth put in place in August 2010. Sherley v. Sebelius, No.
1:09-cv-1575 (RCL) (D.D.C. Aug. 23, 2010).
Contrary to the lower court’s decision, the appeals court held the Dickey-Wicker Amendment was
ambiguous and found NIH seemed to reasonably interpret the provision as barring funding only
for the destructive act of deriving a hESC from an embryo, not as prohibiting funding for all
research in which a hESC will be used.
The case returned to Lamberth for consideration of the parties' competing motions for summary
judgment.
Granting summary judgment in the government’s favor, Lamberth said “absent compelling
reason to depart” from the D.C. Circuit’s holding, “the Court is constrained” on remand by the
appeals court’s decision.
Plaintiffs have offered no new information or reasoning that was unavailable to the appeals court
that would allow the court to depart from the D.C. Circuit’s holding, Lamberth added.
Guidelines
NIH promulgated the guidelines to implement a March 9, 2010 Executive Order issued by
President Obama that lifted the ban on federal funding for hESC research. Under a previous
Executive Order signed by former President Bush, federal funding was limited to embryonic stem
cell lines derived before August 9, 2001.
The final guidelines allow funding for research using hESCs that were derived from embryos
created by in vitro fertilization for reproductive purposes that were no longer needed for that
purpose. The guidelines also detail specific requirements for hESCs to be eligible for federal
funding.
Unlike adult stem cells, hESCs can divide into approximately 200 types of human cells, which
some researchers believe make them particularly valuable for studying and treating disease.
Injunction
Dr. James L. Sherley and Theresa Deisher, who say they compete for limited federal funding as
researchers of adult stem cell lines, sought declaratory and injunctive relief to prevent the NIH
guidelines from taking effect.
Last year, Lamberth ruled the guidelines violated the Dickey-Wicker Amendment and granted the
injunction. The administration unsuccessfully argued for a distinction between the derivation of
embryonic stem cells, which results in destruction of the embryo and therefore violates the
Dickey-Wicker Amendment, and the subsequent research involving embryonic stem cell lines.
But Lamberth rejected this interpretation, saying the Dickey-Wicker Amendment is an
unambiguous, broad prohibition on federal funding of all “research in which” an embryo is
destroyed, not just the “piece of research” in which the embryo is destroyed.
The Department of Justice (DOJ) filed an emergency motion with the appeals court
after Lamberth refused to stay his order, arguing the “sweeping” order could irreparably harm
many ongoing research projects involving hESCs, “negating years of scientific progress toward
finding new treatments for devastating illnesses such as diabetes, Parkinson’s disease, and
blindness, as well as crippling spinal cord injuries.”
The D.C. Circuit granted the government's motion for a stay of the injunction pending appeal,
and subsequently vacated the preliminary injunction and remanded to the lower court to
consider the parties’ summary judgment motion.
No APA Violation
In addition to upholding the NIH guidelines based on the D.C. Circuit precedent, Lamberth also
rejected plaintiffs’ challenge to the guidelines under the Administrative Procedure Act (APA).
Plaintiffs argued NIH failed to consider or respond to comments arguing against federal funding
of hESC research.
But NIH did not invite comments on whether to fund human embryonic stem cell research, Judge
Lamberth noted; rather, the purpose of the rule making was to promulgate guidelines for the
specific purpose of funding hESC per the President’s Executive Order.
“NIH wasn’t obligated to consider comments that, if adopted would cause it to disobey the
President and create an unlawful rule,” Judge Lamberth said.
Sherley v. Sebelius, No. 1:09-cv-1574 (RCL) (D.D.C. July 27, 2011).
NIH Issues Final Rule On Financial Conflicts Of Interest
The National Institutes of Health (NIH), on behalf of the Department of Health and Human
Services (HHS), issued a final rule August 23, 2011 on financial conflicts of interest.
The rule, published in the August 25, 2011 Federal Register (76 Fed. Reg. 53256 ), revises the
1995 regulations on the Responsibility of Applicants for Promoting Objectivity in Research for
which Public Health Service Funding is Sought and Responsible Prospective Contractors to update
and enhance the objectivity and integrity of the research process.
The rule noted, “[s]ince the promulgation of the regulations in 1995, biomedical and behavioral
research and the resulting interactions among government, research Institutions, and the private
sector have become increasingly complex.”
Such complexity plus a need to strengthen accountability, led NIH to revise the regulations,
according to the rule.
Accordingly, the rule requires investigators to disclose to their institutions all of their significant
financial interests (SFIs) related to their institutional responsibilities.
The rule lowers the monetary threshold at which SFIs require disclosure, generally from $10,000
to $5,000 and requires institutions to make certain information accessible to the public
concerning identified SFIs held by senior/key personnel.
In addition, institutions must report to the Public Health Service (PHS) awarding component
additional information on identified financial conflicts of interest and how they are being
managed.
The rule also requires investigators to complete training related to the regulations and their
institution’s financial conflict of interest policy.
“The NIH is committed to safeguarding the public’s trust in federally supported research that is
conducted with the highest scientific and ethical standards,” NIH Director Dr. Francis S. Collins
said in a press release. “Strengthening key provisions of the regulations with added transparency
will send a clear message that NIH is committed to promoting objectivity in the research it
funds.”
The rule also said Institutions applying for or receiving PHS funding from a grant, cooperative
agreement, or contract that is covered by the rule must be in full compliance with all of the
regulatory requirements no later than August 24, 2012, and immediately upon making its
institutional Financial Conflict of Interest (FCOI) policy publicly accessible as described in the
rule.
Ninth Circuit Finds Compensation For Stem Cell Donors Not Prohibited
By National Organ Transplant Act
The Ninth Circuit held December 1, 2011 that compensating bone marrow donors of cells
extracted by “peripheral blood stem cell apheresis” was not barred by the National Organ
Transplant Act because blood, as opposed to actual bone marrow, is collected under the method.
Because blood is not covered under the Act, compensation to donors is not prohibited, the
appeals court held, reversing the district court’s dismissal of the complaint for failure to state a
claim upon which relief could be granted.
One of the plaintiffs in the case is a California nonprofit corporation that seeks to operate a
program incentivizing bone marrow donations. Some plaintiffs are parents of sick children and
one plaintiff is an African-American man suffering from leukemia. Another plaintiff is a physician
and medical school professor, and an expert in bone marrow transplantation.
Plaintiffs argued the National Organ Transplant Act, as applied to MoreMarrowDonor.org’s
planned pilot program, violates the Equal Protection Clause.
Plaintiffs sought declaratory and injunctive relief so that MoreMarrowDonors.org could proceed
with its initiative.
After describing in detail the bone marrow donation process and the problems that come with
finding a suitable match, the appeals court agreed with plaintiffs that compensation for bone
marrow donations accomplished through apheresis would not be prohibited under the Act.
The appeals court also agreed with the U.S. Attorney General that the statute plainly classifies
“bone marrow” as an organ for which compensation is prohibited; thus, to the extent plaintiffs
challenged the constitutionality of the compensation ban on bone marrow donation by the old
aspiration method — where a long needle is inserted into the cavity of the hip bone to extract
the soft, fatty marrow—the challenge must fail.
“Here, Congress made a distinction between body material that is compensable and body
material that is not. The distinction has a rational basis, so the prohibition on compensation for
bone marrow donations by the aspiration method does not violate the Equal Protection Clause,”
the appeals court said.
The appeals court turned next to plaintiffs’ main argument that compensation for “bone marrow
donations” by the peripheral blood stem cell apheresis method should not be banned.
“For this, we need not answer any constitutional question, because the statute contains no
prohibition,” the appeals court said.
“Such donations of cells drawn from blood flowing through the veins may sometimes
anachronistically be called ‘bone marrow donations,’ but none of the soft, fatty marrow is
donated, just cells found outside the marrow, outside the bones, flowing through the veins,” the
appeals court reasoned.
“Since payment for blood donations has long been common, the silence in the National Organ
Transplant Act on compensating blood donors is loud,” the appeals court added.
The appeals court rejected the government’s argument that hematopoietic stem cells in the veins
should be treated as “bone marrow” because “bone marrow” is a statutory organ, and the
statute prohibits compensation not only for donation of an organ, but also “any subpart thereof.”
According to the appeals court, this argument “proves too much,” and “construes words to mean
something different from ordinary usage.”
Flynn v. Holder, No. 10-55643 (9th Cir. Dec. 1, 2011).
Long Term Care
U.S. Court In Colorado Finds FNHRA Does Not Confer Private Right
Of Action
The Federal Nursing Homes Reform Amendments (FNHRA) contained in the Omnibus Budget
Reconciliation Act of 1987 do not confer a private right of action for a nursing home resident, the
U.S. District Court for the District of Colorado held July 6, 2011.
According to the court, the statute does not unambiguously provide for a private enforcement
right enforceable under 42 U.S.C. § 1983.
Plaintiff Alice Hawkins was admitted to Parkview Medical Center for repair of a fractured hip and
for rehabilitation. During her stay, plaintiff developed a pressure sore.
Plaintiff was then transferred from Parkview Medical Center to Bent County Healthcare Center for
further rehabilitation. Despite knowing about the pressure sore, plaintiff alleged the facility did
not monitor it and she was not provided with adequate nutrition and hydration.
After plaintiff was released, she underwent surgery to repair the sore.
Plaintiff sued defendants County of Bent, CO and others alleging they violated her rights by
failing to satisfy the standards of quality of care and resident rights set forth in the FNHRA.
Defendants moved to dismiss arguing FNHRA does not confer a private right of action
enforceable through a Section 1983 action.
Pursuant to Section 1983, an individual may obtain relief for a violation of a federal statutory or
constitutional right against anyone who, under color of state law, deprives that individual of such
right. See Blessing v. Freestone, 520 U.S. 329 (1997).
However, the court found under the Blessing test, FNHRA does not unambiguously create a
private right enforceable through a Section 1983 action.
After a lengthy examination of the plain language of the statute, the court found the provision
focuses on the persons regulated (i.e., the nursing homes), not the persons benefitted.
“[M]erely because Congress intended to benefit nursing home residents through the FNHRA
regulations does not mean that Congress intended to bestow an individual enforceable right upon
them,” the court noted.
In addition, the court found the statute, as a whole, does not indicate Congress unambiguously
conferred a private right.
According to the court, “the enforcement provisions demonstrate that Congress intended that the
FNHRA was to be enforced only by the Secretary of Health and Human Services ("Secretary) and
the State, not through individual actions under a federal statute.”
Hawkins v. County of Bent, No. 11-cv-00126-CMA-CBS (D. Colo. July 6, 2011).
GAO Finds No Significant Quality Differences In Private InvestmentOwned Nursing Homes
Although the acquisition of nursing homes by private investment (PI) firms raised questions
about the potential effects on quality of care, an analysis by the Government Accountability
Office (GAO) of data from before and after such acquisitions did not indicate an increase in the
likelihood of serious deficiencies or a decrease in average reported total nurse staffing.
The report, Nursing Homes: Private Investment Homes Sometimes Differed from Others in
Deficiencies, Staffing, and Financial Performance (GAO-11-571), was released by Representative
Pete Stark (D-CA) and Senator Max Baucus (D-MT).
The lawmakers said in a statement that the “report reveals business practices in PI homes that
suggest they are targeting care to patients that receive higher reimbursement from Medicare and
other payers, rather than to all patients needing skilled nursing services.”
The Medicare Payment Advisory Commission (MedPAC) “has long advised us to reform the
Medicare reimbursement system for skilled nursing facilities,” Stark said.
“Today's report backs that up,” Stark added. “The system should not overpay for certain
patients, which creates incentives for nursing homes to spiff up their buildings and set staffing
levels to entice profitable patients. I encourage CMS to continue taking steps to address these
issues."
In the report, GAO highlighted that “[s]ome nursing homes trying to increase their profitability
may focus on reducing their costs, by providing fewer or less expensive services. Other homes
trying to increase their profitability may staff their homes and renovate their buildings to attract
the better-paying Medicare and private insurance residents that will enhance their revenues or
profits.”
GAO noted both it and MedPAC “have reported that for-profit nursing homes have a greater
profit on their Medicare line of business than nonprofit homes, on average.”
Serious Deficiencies
On average, GAO found, PI and other for-profit homes had more total deficiencies than nonprofit
homes both before (2003) and after (2009) acquisition.
PI-acquired homes were more likely to have been cited for a serious deficiency than nonprofit
homes before, but not after, acquisition, GAO further noted.
Other Quality Factors
Although GAO found no increase in deficiencies, the report noted that “performance of these PI
homes was mixed . . . with respect to the other quality variables GAO examined.”
For example, reported average total nurse staffing ratios (hours per resident per day) were lower
in PI homes than in other homes in both 2003 and 2009, the report found.
Looking at staffing mix—the relative proportion of registered nurses (RN), licensed practical
nurses (LPN), and certified nurse aides (CNA)—GAO noted that RN ratios increased more from
2003 to 2009 in PI homes than in other homes, while CNA ratios increased more in other homes
than in PI homes.
Financial Performance
GAO found the financial performance of PI homes showed “both cost increases from 2003 to
2008 and higher margins in those years when compared to other for-profit or nonprofit homes.”
Specifically, facility costs per resident day for PI homes increased more, on average, from before
acquisition to after acquisition than other for-profit and nonprofit homes, the report said.
“Despite increased costs, PI homes also showed increased facility margins but the increase was
not significantly different from the change in other for-profit homes,” GAO reported.
Sixth Circuit Affirms Immediate Jeopardy Citation And Penalties
Imposed On Nursing Home
The Sixth Circuit affirmed August 31, 2011 the Centers for Medicare and Medicaid Services’
(CMS’) findings of immediate jeopardy and resultant penalties imposed on a nursing home.
In so holding, the appeals court pointed to substantial evidence that supported the agency’s
findings, including the severity of the violations, the fact that the violations harmed one resident
and likely affected other residents, and the necessity to revisit the facility to confirm compliance.
Golden Living Center, a Medicare/Medicaid certified skilled nursing facility, admitted a 66-yearold resident (R1) to its facility after she was discharged from a weeklong stay in the hospital.
During her 18-day stay in Golden’s facility, R1 was sent to the hospital twice with serious
medical complications.
In response to a complaint, a state survey agency completed an extended survey of Golden and
concluded that Golden was not in substantial compliance with five requirements under federal
law and the noncompliance created immediate jeopardy with respect to a resident’s health and
safety.
Based on the agency’s conclusions, CMS imposed a civil money penalty in the amount of $3,750
per day from December 15, 2007 through January 28, 2008 and $100 per day from January 29,
2008 through March 2, 2008.
After a revisit by the agency, CMS concluded Golden removed the immediate jeopardy on
January 30, 2008, but determined Golden did not achieve substantial compliance with all federal
requirements until March 3, resulting in a total penalty of $172,150.
After an Administrative Law Judge (ALJ) agreed with CMS, Golden appealed to the Departmental
Appeals Board, which also affirmed the penalties.
On appeal, Golden challenged the legal standard applied by the ALJ and Appeals Board, arguing
that by requiring submission of written direct testimony, the ALJ violated Golden’s rights under
the Confrontation Clause.
But “Golden has not shown that the Confrontation Clause applies to this case . . . nor does
Golden establish any prejudice,” the appeals court found.
The appeals court also rejected Golden’s argument that the ALJ and Appeals Board applied an
improper subjective de novo standard of review.
The appeals court noted the ALJ considered Golden’s evidence, but “much of Golden’s own
evidence supported a finding of violations.”
Golden also challenged the ALJ’s findings on each violation, arguing substantial evidence did not
support the findings.
However, after reviewing each violation, the appeals court found “[s]ubstantial evidence exists
on the record as a whole to support the ALJ’s finding that Golden was not in compliance with the
hydration requirement of 42 C.F.R. § 483.25(j), the requirement to provide proper laboratory
services under § 483.75(j)(1), the requirement to create a comprehensive care plan under §
483.20(k), and the requirement to provide necessary care and services under § 483.25.”
The appeals court also held CMS’ finding of immediate jeopardy was not clearly erroneous,
highlighting evidence that “Golden’s noncompliance was likely to cause harm and indeed did
harm R1.”
Lastly, the appeals court affirmed the duration of the penalties, holding “Golden has not shown
that it fully complied at an earlier date.”
Golden Living Center-Frankfort v. HHS, No. 10-3200 (6th Cir. Aug. 31, 2011).
Tennessee Appeals Court Reverses Verdict, $5 Million Damages Award
Against Assisted Living Facility’s Management Company
A Tennessee appeals court reversed January 5, 2012 a jury verdict against an assisted living
facility’s management company in a wrongful death action based on allegations that
the company was directly liable for failing to provide adequate staff at the facility.
The jury awarded $5 million in punitive damages against the management company, Americare
Systems Inc.
The Tennessee Court of Appeals reversed the verdict and judgment after finding “no material
evidence” that staffing deficiencies, rather than substandard care alone, proximately caused the
decedent’s death.
Mable Frances Farrar’s next of kin filed the lawsuit against Americare, Celebration Way, the
assisted living facility where she resided in Shelbyville, TN, and two nurses after she died from a
perforated bowel caused by an enema administered by one of the nurses.
The trial court ruled as a matter of law that defendants’ care of Farrar breached applicable
standards of professional practice.
The jury subsequently entered a verdict in plaintiffs’ favor, attributing fault 20% to one nurse,
30% to the nurse who performed the enema, and 50% to Americare based on its alleged failure
to provide sufficient personnel at the facility.
The jury awarded $300,000 in compensatory damages and punitive damages including $5 million
against Americare.
The appeals court reversed the verdict and the judgment as to Americare, which was the only
issue before it on appeal.
“Even if we assume that the plaintiffs proved that there was inadequate staffing at Celebration
Way, this court cannot find any material evidence making it more probable than not that such
understaffing caused Ms. Farrar’s death,” the opinion said.
Wilson v. Americare Sys. Inc., No. M2011-00240-COA-R3-CV (Ten. Ct. App. Jan. 5, 2012).
Sebelius Says “No Viable Path Forward” For CLASS Program
The Administration has decided to shelve the Community Living Assistance Services and
Supports (CLASS) program, a voluntary, self-funded long term care insurance program that was
included in the healthcare reform law.
Despite our best efforts, said Department of Health and Human Services (HHS) Secretary
Kathleen Sebelius in an October 14, 2011 letter to House Speaker John Boehner (R-OH), “I do
not see a viable path forward for CLASS implementation at this time.”
The CLASS program, under which workers would pay in premiums to receive a daily cash benefit
for long term care in the event of a disability, has been controversial since enacted as part of the
Affordable Care Act (ACA) with opponents arguing the program would not be self-sustaining.
In recent weeks, GOP leaders have called on the Administration to acknowledge the CLASS
program would not be financially viable
The ACA tasked the HHS Secretary with designing a plan that would be actuarially sound and
financially solvent for at least 75 years, Sebelius noted.
Despite extensive efforts by the CLASS Office, the Office of the Assistant Secretary for Planning
& Evaluation, and the Office of the General Counsel, Sebelius said no clear path forward for the
CLASS program has emerged at this time.
With the letter, Sebelius also sent to Congress a comprehensive report detailing the actuarial and
policy analyses of the CLASS Act conducted in the months since the ACA was enacted, including
a legal analysis of multiple plan design options.
“While the report does not identify a benefit plan that I can certify as both actuarially sound for
the next 75 years and consistent with statutory requirements, it reflects the development of
information that will ultimately advance the cause of finding affordable and sustainable long-term
care options,” said Sebelius.
Questions about the program came to a head recently after an actuary for the CLASS Office
recently commented to the press that he had been terminated and the CLASS Office was being
closed.
“It is worth remembering that the CLASS Act is only one of the unwise, unsustainable
components of an unwise, unsustainable law,” said Senate Minority Leader Mitch McConnell in a
statement following the Administration’s announcement.
But ARRP expressed disappointment with the decision, calling it premature. “In fact, the CLASS
actuarial report established that CLASS can still be designed to be a ‘value proposition,’ although
development work still needs to be done. We urge the Administration to continue dialogue and
development of a viable path forward,” the statement said.
Houses Passes Repeal Of CLASS Act
The House passed February 1, 2012 legislation to repeal the Community Living Assistance
Services and Support Act (CLASS Act) with a vote of 267 to 159.
The CLASS program, under which workers would pay in premiums to receive a daily cash benefit
for long term care in the event of a disability, has been controversial since enacted as part of the
Affordable Care Act (ACA), with opponents arguing the program would not be self-sustaining.
Department of Health and Human Services (HHS) Secretary Kathleen Sebelius told Congress
October 14, 2011, the administration decided to shelve the program because it could not find a
“viable path forward” for implementation.
But House Republicans have continued to call for full repeal of the CLASS Act.
Representative Charles W. Boustany, Jr., M.D. (R-LA), the bill’s sponsor, said at an October
hearing that “[k]eeping the law on the books gives bureaucrats a creative license to keep trying
to implement it and is an opening for Congress to keep trying to tweak the program.”
“Washington Democrats ignored warnings given by experts and actuaries in order to employ
CLASS as a budget gimmick in Obamacare,” Boustany said January 31 in urging his colleagues to
pass the repeal bill. “The true cost and sustainability of this program is now coming to light.”
The Fiscal Responsibility and Retirement Security Act of 2011 (H.R. 1173) will now go to the
Senate, where it is not expected to pass.
Medicaid
Regulatory
CMS Final Rule Bars Medicaid Payments For Preventable Conditions
The Centers for Medicare and Medicaid Services (CMS) issued June 1, 2011 a final rule that will
reduce or prohibit Medicaid payments to providers for services that result from certain "providerpreventable conditions," which includes healthcare-acquired conditions.
The rule, implementing Section 2702 of the Affordable Care Act, prohibits federal payments to
states for any payments made to providers under the Medicaid program for conditions that are
reasonably preventable.
According to CMS, the rule builds on states’ successes and Medicare policies, which already
reduce or prohibit hospital payments for preventable conditions.
In addition, the rule is intended to “better align Medicare and Medicaid payment policy,” the
agency said.
The final rule uses Medicare’s list of preventable conditions in inpatient hospital settings as the
base and provides states the flexibility to identify additional preventable conditions and settings
for which Medicaid payment will be denied.
“Today, we are partnering with States to give them the tools to improve the quality of care for
patients and lower costs for taxpayers,” CMS Administrator Donald M. Berwick, M.D. said in a
press release.
“These steps will encourage health professionals and hospitals to reduce preventable infections,
and eliminate serious medical errors,” Berwick added. “As we reduce the frequency of these
conditions, we will improve care for patients and bring down costs at the same time.”
The rule is effective July 1, 2011, but allows states until July 1, 2012 to implement it.
CMS Issues Final Rule On Medicaid RACs, Projects $2 Billion In
Savings Over Five Years
The Centers for Medicare and Medicaid Services (CMS) released September 14, 2011 a final rule
on new Medicaid Recovery Audit Contractors (RACs) required under the healthcare reform law to
help reduce fraud, waste, and abuse in the federal-state program.
RACs are expected to save Medicaid a projected $2.1 billion over five years, $900 million of
which would be returned to the states, Department of Health and Human Services (HHS)
Secretary Kathleen Sebelius said in a press release.
The final rule, which is effective January 1, 2012, was released the same day as a Cabinet-level
meeting convened by Vice President Joe Biden on the administration’s efforts to cut wasteful
spending across all federal agencies.
In addition to the new initiative to fight waste in Medicaid, Biden also unveiled efforts to track
state progress in reducing improper unemployment insurance payments and directed each
Cabinet secretary to undertake a waste and efficiency review targeting wasteful federal
spending, the release said.
The Medicaid RAC program takes its lead from a similar Medicare initiative.
RACs are contractors that audit healthcare provider payments to determine whether any
overpayments or underpayments have occurred. Similar to the Medicare RAC program, Medicaid
RACs also will be tasked with recovering overpayments or correcting underpayments.
“Today we are building on an already successful program that targets improper payments in our
health care programs and recovers those dollars, making Medicare and Medicaid more reliable
and responsible,” said Sebelius. “We simply can't afford to see even one penny of our health care
dollars wasted and expanding this program will help us reach that goal."
The final rule, which was published in the September 16 Federal Register (76 Fed. Reg. 57808),
implements Section 6411 of the Affordable Care Act (ACA), which required states to establish
their own Medicaid RAC programs by December 31, 2010. The ACA requires states to contract
with RACs on a contingency fee basis, again similar to Medicare.
In the November 2010 proposed rule (75 Fed. Reg. 69037), CMS said states, absent an
exception, had to fully implement their RAC programs by April 1, 2011, but the agency
subsequently delayed this date partly to ensure states would be able to comply with the
provisions of the then still-to-be-issued final rule.
According to CMS, while states were required to establish their Medicaid RAC programs by
December 31, 2010, via the state plan amendment process, the Medicaid RAC programs were
not required to be implemented by this date.
The final rule provides guidance to states on federal/state funding of start-up, operation, and
maintenance costs and the payment methodology for state payments to Medicaid RACs.
Under the rule, states also must ensure adequate appeals processes are in place for providers to
dispute adverse determinations made by Medicaid RACs.
Finally, the rule directs states to coordinate with other contractors and entities auditing Medicaid
providers and with state and federal law enforcement agencies.
HHS Releases Core Set Of Quality Measures For Medicaid-Eligible
Adults
The Department of Health and Human Services (HHS) published in a January 4, 2012 Federal
Register notice (77 Fed. Reg. 286) a final core set of health quality measures recommended for
Medicaid-eligible adults, as required by Section 2701 of the Affordable Care Act, for voluntary
use by state programs, health insurance issuers, and managed care entities that enter into
contracts with Medicaid.
The initial core set of quality measures for voluntary annual reporting by states was determined
based on recommendations from the Agency for Healthcare Research and Quality’s
Subcommittee to the National Advisory Council for Healthcare Research and Quality, as well as
public comments, HHS said in the notice.
The quality measures are grouped into six categories: prevention and health promotion;
management of acute conditions; management of chronic conditions; family experiences of care;
care coordination; and availability.
According to the notice, the “core set measures will support HHS and its State partners in
developing a quality-driven, evidence-based, national system for measuring the quality of health
care provided to Medicaid-eligible adults.”
CMS Clarifies “For Cause” Terminations For State Medicaid Programs
The Centers for Medicare and Medicaid Services (CMS) issued January 20, 2012 an informational
bulletin clarifying it considers “for cause” terminations to be those that are based on fraud,
integrity, or quality issues.
The bulletin concerns new regulations implementing a provision of the Affordable Care Act (ACA)
that requires state Medicaid agencies to terminate the participation of any individual or entity if
they are terminated under Medicare or any other state Medicaid plan.
The final implementing regulations at 42 C.F.R. § 455.101 specify that the requirement to
terminate under the ACA only is triggered where providers, suppliers, or eligible professionals
have been terminated or had their billing privileges revoked “for cause.”
Some states asked for clarification of the definition of “for cause.” In the bulletin, CMS
acknowledged some states have different interpretations of what constitutes a termination “for
cause.”
The bulletin specifically highlights as an example of a termination that would not be “for cause”
under the regulations, a provider whose active medical license lapses because he or
she relocates to another state.
According to the bulletin, “‘for cause’ does not include any voluntary action taken by the provider
to end its participation in the Medicaid program, except where that ‘voluntary action’ is taken to
avoid sanction.”
The bulletin also provides a non-exhaustive list of the type of conduct that would be considered a
“for cause” termination.
In addition, the bulletin notes that, as specified in the ACA, states may seek a waiver from the
requirement to terminate a provider’s participation if the termination would impose a hardship on
Medicaid beneficiaries—e.g., where the individual or entity is the sole source of essential services
in a community.
CMS Says Medicaid Prescription Drug Pricing Rule Will Save $17.7
Billion
The Centers for Medicare and Medicaid Services (CMS) issued January 27, 2012 a proposed rule
to implement provisions of the Affordable Care Act (ACA) that it projected would save the federal
government and the states $17.7 billion over five years on prescription drugs reimbursed by
Medicaid.
According to a CMS press release, the proposed rule would align reimbursement rates to better
reflect the actual price the pharmacy pays for the drug; increase rebates drug manufacturers
that participate in Medicaid pay; and provide rebates for drugs dispensed to individuals enrolled
in a Medicaid managed care organization.
CMS provided guidance to state Medicaid directors on the ACA-required changes to the average
manufacturer price (AMP) calculation for Medicaid prescription drug reimbursement in April 2010.
In a letter dated January 27, Republican lawmakers questioned why CMS had not yet issued a
proposed AMP rule since issuing the guidance almost a year ago.
The lawmakers said in the letter that the ACA “revised the formula for reimbursing pharmacies
for generic and multiple source drugs in the Medicaid program by using the AMP to set Federal
Upper Limits (FULs); and the accurate calculation of the AMP and FULs are dependent on one
another.”
“It is unacceptable for CMS to continue delaying action on a final AMP rule when providers are
expected to comply with the related FULs,” added the letter.
The proposed rule was published in the February 2 Federal Register (77 Fed. Reg. 5318), with
comments due April 2.
The National Association of Chain Drug Stores (NACDS) President and Chief Executive Officer
Steven C. Anderson, IOM, CAE, said the group is “reviewing the proposed rule with its members,
and will provide comments to CMS based on this analysis.”
According to the statement, “NACDS has long-expressed concerns with using AMP as a basis for
pharmacy reimbursement as it is not a price paid in the marketplace but instead is a benchmark
to determine manufacturer rebates in the Medicaid program.”
CMS Issues Final Rule On Public Notice Procedures For Section 1115
Medicaid, CHIP Demos
The Centers for Medicare and Medicaid Services (CMS) issued February 22, 2012 a final rule
intended to increase the transparency of Medicaid and Children’s Health Insurance Program
(CHIP) demonstrations, according to a fact sheet.
The final rule, to be published in the February 27 Federal Register, sets forth transparency and
public notice procedures for Medicaid and CHIP experimental, pilot, and demonstration projects
approved under Section 1115 of the Social Security Act.
The final rule implements Affordable Care Act provisions requiring transparency and public input
in the process of developing, approving, and extending demonstration projects.
The procedures set forth in the rule include those for submitting, publishing, and issuing public
notices, applications, annual reports, and other documents.
Section 1115 permits the Department of Health and Human Services Secretary to waive selected
provisions of the Social Security Act to allow states to test new delivery mechanisms for Medicaid
and CHIP and to pay for coverage or services that would otherwise not be paid for under those
programs.
CMS said the final rule incorporates comments received on the proposed rule, which was
published in September 2011. (75 Fed. Reg. 56946).
Under the final rule, states must publish a notice of the demonstration that solicits public input
for a period of at least 30 days. States must publish the public notice online and in either the
state’s administrative record or in newspapers with the widest circulation and also maintain an
email mailing list or similar mechanism to notify interested parties of the demonstration
applications.
The procedures apply to both new demonstration approvals and to extensions of existing demos,
CMS said.
In addition to public notice, states also must convene two public hearings for input on the
proposed demos. Those hearings must take place at least 20 days before the state submits its
application to CMS.
The final rule also includes a good cause exception that allows CMS to waive all or part of the
public notice requirements in emergency situations, such as a natural disaster.
The final rule standardizes demonstration application and renewal requirements. CMS said
receipt of a complete application triggers a 30-day federal public comment period, which includes
posting the state’s application on Medicaid.gov for public comment.
CMS said it would not render a final decision on a demonstration application until 45 days after
the state’s application is complete.
HHS Issues Medicaid Eligibility Final Rule
The Department of Health and Human Services (HHS) issued March 16, 2012 a final rule on the
standards for expanding Medicaid eligibility as required by the Affordable Care Act (ACA).
HHS said the final rule “provides additional protections for consumers, as well as additional
flexibilities and options for States,” than the proposed rule, which it issued in August 2011. (76
Fed. Reg. 51148).
As required under the ACA, the rule finalizes a new Medicaid coverage group that will cover
adults with incomes up to 133% of the federal poverty level.
According to a fact sheet, new federal matching rates will provide 100% federal funding for
newly eligible individuals for three years (calendar years 2014 – 2016), gradually reduced to
90% in 2020.
HHS said the final rule also codifies “the streamlining of income-based rules and systems for
processing Medicaid and CHIP [Children’s Health Insurance Program] applications and renewals
for most individuals,” including modernizing eligibility, enrollment, and renewal processes.
For example, the final rule simplifies financial eligibility by using a single “Modified Adjusted
Gross Income” standard.
HHS noted the final rule does not address changes in the Federal Medical Assistance Percentage
rates, which will be issued separately as a final rule.
“The Medicaid improvements in the Affordable Care Act will help simplify the system and ensure
all Americans have the affordable high-quality coverage they need,” said HHS Secretary Kathleen
Sebelius.
CMS Proposed Rule Would Boost Medicaid Payments For Primary
Care
The Centers for Medicare & Medicaid Services (CMS) issued May 8, 2012 a proposed rule that
would implement a provision of the Affordable Care Act (ACA) requiring Medicaid to reimburse
family medicine, general internal medicine, pediatric medicine, and related subspecialists on par
with Medicare rates in Calendar Years (CY) 2013 and 2014.
The increase in Medicaid payments will be funded entirely by the federal government, with states
expected to receive more than $11 billion to improve their Medicaid primary care delivery
systems, CMS said.
“The payment increase proposed today will be an important tool for states to ensure their
primary care networks are prepared for increased enrollment as the health care law is
implemented,” said Marilyn Tavenner, CMS Acting Administrator. “Today’s action will help
encourage primary care physicians to continue and expand their efforts to provide checkups,
preventive screenings, vaccines, and other care to Medicaid beneficiaries.”
According to a CMS fact sheet on the proposed rule, the ACA requires certain physicians who
provide eligible primary care services to be paid under the Medicare rates in effect for CYs 2013
and 2014 instead of any lower state-established Medicaid rates that may be in place.
The proposed rule provides information about identifying eligible providers and services, how to
meet statutory requirements when making payments for services provided through managed
care, and how CMS will work with the states to make the increased payments operational, the
fact sheet said.
The higher payment rate only applies to services delivered under the Medicaid physician services
benefit, including those rendered by practitioners, such as nurse practitioners, working under the
supervision of a qualifying physician.
Under the proposed rule, states would have the option to (1) “lock” rates at Medicare physician
fee schedule levels in effect at the beginning of 2013 and 2014; or (2) modify the rates in
alignment with all updates made by Medicare, the fact sheet explained.
Cases
U.S. Court In New York Finds Medicaid Providers May Not Sue State
For Alleged Underpayment
The U.S. District Court for the Southern District of New York granted May 26, 2011 the state of
New York’s motion to dismiss claims brought against it for alleged money due to Medicaid
providers, finding the state is entitled to sovereign immunity from suit.
After finding no exceptions to the Eleventh Amendment’s sovereign immunity bar applied, the
court held the plaintiff health centers and a nonprofit trade association could not sue the state.
Plaintiffs are Federally-Qualified Health Centers (FQHCs) that participate in the state's Medicaid
program and receive federal grant monies under the Public Health Service Act (PHSA).
Plaintiffs alleged defendants—the state of New York, the New York State Department of Health
(DOH), Richard Daines, M.D., in his official capacity as Commissioner of DOH, and 20 unnamed
defendants— continually violated federal law by failing to meet their payment obligations.
The state defendants moved to dismiss the action, asserting immunity pursuant to the Eleventh
Amendment.
Plaintiffs argued they are trustees of federal funds to which they are entitled under federal law;
thus, they could bring the action because sovereign immunity does not bar the federal
government from suing states.
However, the court found no merit to this argument. “Persons and entities entitled to federal
funds do not become--or ‘stand in the shoes of’--the federal Government itself,” the court said.
The court similarly found no merit in plaintiffs’ argument that the PHSA, which provides that
FQHCs shall "make every reasonable effort" to collect all Medicaid payments they are due, in
effect authorizes them to sue states that are obligated to distribute the federal funds.
Lastly, the court distinguished a series of cases holding that, despite sovereign immunity,
individuals may sue states for the return of illegally seized property.
According to the court, such cases are “not on point” as the state “has seized no property from
plaintiffs.”
Community Health Care Ass’n of New York v. New York State Dep't of Health, No. 10 Civ. 8258
(S.D.N.Y. May 26, 2011).
Third Circuit Upholds Disallowance Of Occupancy Costs Claimed By
Pennsylvania Medicaid Program
The Third Circuit upheld June 13, 2011 a decision disallowing federal reimbursement of
occupancy costs incurred for operating community residential facilities for the developmentally
disabled claimed by Pennsylvania’s Medicaid program under a home and community based
service waiver (HCBS) authorizing reimbursement of state expenses for “habilitation services.”
The appeals court agreed with the Department of Health and Human Services (HHS) that the
costs constituted non-reimbursable “room and board” expenses under the Medicaid statute and
the State Medicaid Manual.
While the Medicaid statute extended federal financial participation to cover developmentally
disabled individuals receiving care in home and community-based settings, it specifically
excluded expenditures for “room and board.” 42 U.S.C. § 1396n(c)(1).
Pennsylvania obtained a HCBS waiver in 2001, which was renewed in 2006, authorizing
reimbursement for “habilitation services,” which are defined by statute as “services designed to
assist individuals in acquiring, retaining and improving the self-help, socialization, and adaptive
skills necessary to reside successfully in home and community based settings.” 42 U.S.C. §
1396n(c)(5)(A).
From 2001 through part of 2006, Pennsylvania did not seek federal reimbursement of occupancy
costs for Medicaid recipients living in its community residential facilities.
However, on March 1, 2006, Pennsylvania began claiming approximately 54% of its occupancy
costs, including rent, utilities, interest, depreciation, building insurance, housekeeping, building
repairs, maintenance and renovation, and furnishings and equipment, as reimbursable
“habilitation services.”
According to the opinion, this claim was based on the fact that residents were engaged in
“waiver services” on the premises for 13 hours in a typical 24-hour day, and consequently, room
costs for this period actually supported habilitation.
The Centers for Medicare and Medicaid Services denied federal reimbursement for over $60
million in claimed occupancy costs, finding instead they constituted non-reimbursable “room and
board” expenses.
Pennsylvania sued in federal district court, alleging the decision was arbitrary, capricious, an
abuse of discretion, or otherwise unlawful in violation of the Administrative Procedure Act.
The district court granted summary judgment to HHS, finding “room and board” unambiguously
meant the provision of living space and meals. The court went on to conclude that even if the
statutory language was ambiguous, under the deferential Chevron standard of review, HHS’
interpretation was reasonable.
The Third Circuit affirmed, holding the “plain meaning of the statute leaves no doubt that the
costs at issue here were meant to be excluded from reimbursement.”
The appeals court also agreed with the lower court that, even if the statute was ambiguous, HHS’
interpretation was “plainly reasonable.”
Pennsylvania argued Chevron was inapplicable because the issue concerned a federal grant to
the states that essentially involved a contract between Congress and the states. According to
Pennsylvania, because the definition of “room” did not definitely exclude “occupancy costs,” the
state should not now be forced to accept a term that was not ascertainable at the time of the
agreement.
But the appeals court found the line of cases the state relied on in advancing this argument were
inapposite, noting the instant action did not involve retroactivity of statutory amendments or the
issue of retroactive punitive sanctions.
“On the contrary, the case before us involves a consistent interpretation of a statutory provision
that has been applied throughout Pennsylvania’s participation in the waiver program,” the
appeals court said.
Pennsylvania v. Department of Health and Human Servs., No. 10-2409 (3d Cir. June 13, 2011).
Third Circuit Upholds State’s Lien On Medicaid Beneficiaries’ ThridParty Recovery
The Third Circuit held June 29, 2011 that states may assert liens on third-party recoveries of
Medicaid beneficiaries for medical costs paid on their behalf by the program.
Ruling on an issue the appeals court said has remained open since the U.S. Supreme Court’s
decision in Arkansas Department of Health and Human Services v. Ahlborn, 547 U.S. 268
(2006), the Third Circuit found liens limited to medical costs are not prohibited by the anti-lien
and anti-recovery provisions of the Social Security Act (Act), which ban states from imposing
liens on the property of Medicaid beneficiaries.
Instead, the appeals court said the only way to reconcile the anti-lien and anti-recovery
provisions with the subsequently enacted reimbursement and forced assignment provisions,
which require Medicaid beneficiaries to assign the right to, and states to seek reimbursement of,
medical expenses from liable third parties, was to view the latter as an implied exception to the
former, a conclusion the Court assumed but did not decide in Ahlborn.
Specifically, the Third Circuit noted,
While the anti-lien and anti-recovery provisions were intended to ensure that Medicaid
beneficiaries were not forced to directly bear the costs of their medical care, the reimbursement
and forced assignment provisions were intended to allow states to recoup their expenditures for
medical assistance payments when third parties are held liable. By allowing states to recover
these expenditures, Congress both protected the public fisc and ensured that beneficiaries did
not receive a windfall by recovering medical expenses they did not pay.
Thus, the appeals court upheld Pennsylvania’s longstanding practice of imposing such liens on
Medicaid beneficiaries’ third-party recoveries.
The instant action involved a putative class action filed by three Pennsylvania Medicaid
beneficiaries subject to liens imposed under state law by Pennsylvania’s Department of Public
Welfare (DPW).
The three Medicaid beneficiaries in the case asserted the anti-lien and anti-recovery provisions of
the Act prohibited the DPW’s liens on the medical expense portion of their third-party tort
recoveries.
The district court held federal law, namely, the anti-lien and anti-recovery provisions, preempted
the Pennsylvania statute authorizing Medicaid liens, but in an attempt to harmonize the
seemingly conflicting reimbursement and forced assignment provisions, ruled the state could
assert the liens if it took an active role in the recovery of the medical costs, either by intervening
in the Medicaid beneficiaries’ lawsuits or by directly pursuing the liable third parties.
On appeal, the Third Circuit noted while a number of decisions have permitted the use of
Medicaid liens limited to medical costs, “the majority of them have not clearly articulated their
rationale for doing so.”
In fact, the appeals court continued, many of these courts “appear to be under the
misapprehension that the Supreme Court held such liens to be permissible in Ahlborn.”
According to the appeals court, the district court’s attempt to reconcile the conflicting provisions
failed because the anti-recovery and anti-lien prohibitions, by their plain language, applied
regardless of the specific collection method used.
But the appeals court found the provisions could be reconciled when viewed through the lens of
the Act as a whole, including its structure, purpose, and legislative history, to conclude Congress
intended the later-enacted reimbursement and forced assignment provisions as an implied
exception to the earlier anti-lien and anti-recovery rules.
Congress has consistently pursued the dual goals of protecting the personal property of Medicaid
beneficiaries and ensuring liable third parties reimburse states for Medicaid expenditures, the
appeals court noted.
“[T]he available evidence indicates that Congress did not intend that liens for medical costs
would fall within the scope of the anti-lien and anti-recovery provisions,” the appeals court held.
The appeals court went on to uphold the Pennsylvania lien statute, which, in the absence of a
judicial allocation of damages, applies a 50% allocation of medical expenses on the recovery,
under the framework established in Ahlborn.
The appeals court found the current scheme, which allows beneficiaries unhappy with the default
allocation to seek judicial review, was valid. However, the previous mechanism, which did not
provide a right of appeal from the default allocation, was invalid under Ahlborn, the appeals court
added.
A dissenting opinion argued Congress did not intended to permit state Medicaid agencies to
impose liens on judgments and settlements obtained by Medicaid beneficiaries from third parties.
Tristani v. Richman, Nos. 09-3537 and 09-3538 (3d Cir. June 29, 2011).
Ninth Circuit Holds Increased Mandatory Copayments On Low-Income
Arizona Residents Violated Federal Waiver Requirements
The Ninth Circuit held August 24, 2011 that the Department of Health and Human Services
(HHS) Secretary failed to consider the required factors in granting Arizona's request to increase
mandatory copayments on certain "medically needy" residents covered under a Medicaid waiver.
According to the appeals court panel, increasing the copayments as a way to save money did not
satisfy the requirement for a “research or demonstration value” under a 42 U.S.C. § 1315
waiver.
Plaintiffs are a class of “medically needy” Arizonans who receive coverage through the state’s
Medicaid agency, the Arizona Health Care Cost Containment System (AHCCCS), under a Section
1315 waiver, but who are not otherwise entitled to Medicaid.
In 2003, AHCCCS sought an increase in mandatory cost-sharing on certain low-income residents
covered under its Section 1315 waiver. The HHS Secretary granted the request.
Plaintiffs alleged, among other things, the heightened mandatory copayments imposed by the
state violated Medicaid cost-sharing restrictions and that the waiver exceeded the Secretary’s
authority.
The district court granted summary judgment to defendants, finding cost-sharing was a
reasonable means of providing care to certain expansion populations when budgets are tight.
According to the court, the demonstration allowed plaintiffs to receive healthcare coverage they
otherwise may not have had.
On appeal, the Ninth Circuit held the increased mandatory copayments did not violate Medicaid
cost-sharing restrictions because plaintiffs were part of an “expansion population.”
HHS regulations, which are entitled to deference, “support the Secretary’s interpretation that
where, as here, a state has not defined its 'medically needy' population pursuant to the Medicaid
Act, persons who are not mandatorily covered by the state plan are expansion populations not
protected by the 42 U.S.C. § 1396o cost sharing limits,” the appeals court said.
But the Ninth Circuit panel went on to find that the cost-sharing requirements did not comply
with Section 1315.
Specifically, the appeals court said, the Secretary was required to consider certain factors before
granting a waiver, including whether a “project has a research or a demonstration value.”
“A simple benefits cut, which might save money, but has no research or experimental goal,
would not satisfy this requirement,” the appeals court explained.
“There is little, if any, evidence that the Secretary considered the factors § 1315 requires her to
consider before granting Arizona’s waiver,” the appeals court concluded. Thus, the Secretary’s
decision was arbitrary and capricious.
The appeals court reversed the district court’s ruling on this claim and remanded with directions
to vacate the Secretary’s decision and remand to the agency for further consideration.
Newton-Nations v. Betlach, No. 10-16193 (9th Cir. Aug. 24, 2011).
U.S. Court In Indiana Refuses To Block 38% Cut In Indiana Medicaid
Program’s Pharmacy Dispensing Fee
A federal district court in Indiana refused to grant a preliminary injunction enjoining Indiana from
imposing a 38% reduction in the dispensing fees paid to pharmacies under the state’s Medicaid
program.
In so holding, the U.S. District Court for the Southern District of Indiana vacated a temporary
restraining order (TRO) it granted to plaintiffs—Community Pharmacies of Indiana, Inc., a
nonprofit trade association representing 170 community pharmacies in Indiana, Williams
Brothers Health Care Pharmacy, an independently owned pharmacy, and Indiana Pharmacists
Alliance, Inc., a nonprofit representing Indiana pharmacists—on July 8.
Citing budgetary constraints, the state used emergency rulemaking to lower the Medicaid
dispensing fee paid to pharmacies from $4.90 to $3.00 effective July 1.
Plaintiffs sued to block the fee reduction, arguing it violated federal Medicaid law and could cause
many pharmacies to stop accepting Medicaid patients.
The court agreed to grant plaintiffs a TRO, noting the Centers for Medicare and Medicaid Services
(CMS) had not approved the fee reduction and, in fact, had asked the state for more information
before reaching a decision. Community Pharmacies of Ind., Inc. v. Indiana Family and Soc.
Servs. Admin., No. 1:11-cv-0893 TWP-DKL (S.D. Ind. July 8, 2011).
After finding plaintiffs had standing to bring a private action under the Supremacy Clause, an
issue currently being considered by the U.S. Supreme Court, see related item in this issue, the
court retreated from its earlier position that federal approval of the fee reduction was required
before the state could proceed with implementation.
The court cited Seventh Circuit precedent suggesting proposed amendments to a Medicaid state
plan may be implemented before approval from CMS. The court also found support in CMS
regulations that seemed to assume a state could implement state plan amendments before
federal approval.
Turning to the merits, the court held plaintiffs were unlikely to succeed on their claim that the
fee reduction violated 42 U.S.C. § 1396a(a)(30)(A), which requires a state Medicaid plan to
provide reimbursement amounts that are sufficient to attract 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.”
The court was sympathetic to plaintiffs’ position and acknowledged the steep cuts could cause
pharmacies to drop out of the Medicaid program or close altogether.
But ultimately, the court found the evidence was not there yet to conclude the fee reduction
would create widespread access problem in violation of Section 30(A).
While other circuits have adopted the general rule that budgetary considerations cannot be the
driving factor in Medicaid decisions, the Seventh Circuit has taken a different view—namely, that
“pre-implementation motivations, processes, and predictions are not of particular importance.”
Instead, the Seventh Circuit emphasizes “post-implementation results” for purposes of a Section
30(A) analysis.
“Here, the State has not been given a meaningful opportunity to test results to determine
whether the new dispensing fee will actually attract sufficient pharmacy services,” the court
observed.
Plaintiffs argued this approach would effectively immunize the state from injunctive relief in the
Section 30(A) context, but the court disagreed, noting such relief would still be available if the
fee reduction were arbitrary, capricious, or “unreasonable on its face.”
“To be sure, the Fee Reduction will harm pharmacies’ bottom lines,” and after its
implementation, “Indiana will have one of the lowest Medicaid reimbursement rates in the
country,” the court acknowledged.
But the court also cited other evidence that most Medicaid patients in the state currently have
access to multiple pharmacies and that pharmacies previously have received reimbursement
rates that were comparable to what they would receive after the fee reduction.
“[A]t this stage, the Court simply has more questions than answers when it comes to the Fee
reduction’s future impact on the availability of Medicaid services.”
Finally, the court rejected plaintiffs’ argument that the fee reduction violated state and federal
notice requirements.
Community Pharmacies of Ind., Inc. v. Indiana Family and Soc. Servs. Admin., No. 1:11-cv0893-TWP-DKL (S.D. Ind. Sept. 14, 2011).
U.S. Court In Virginia Refuses To Reconsider Decision In Medicaid
Payment Dispute
The U.S. District Court for the Eastern District of Virginia refused October 14, 2011 to reconsider
its decision granting summary judgment to Healthkeepers, Inc. in its long-running litigation with
the Richmond Ambulance Authority.
The case involves a dispute as to what HealthKeepers, Inc. as a Medicaid managed care
provider, must pay defendant Richmond Ambulance Authority when the Authority provides
emergency transportation services to HealthKeepers' Medicaid enrollees.
HealthKeepers asserted it should have to pay the rates established by the Virginia Department of
Medical Assistance (DMAS) and the Authority claimed it could charge its own rates.
In a 2001 ruling, the Richmond Circuit Court sided with the Authority. Since that decision,
HealthKeepers has been paying the Authority's rates for services rendered by the Authority to
HealthKeepers' Medicaid-eligible enrollees.
Subsequently, Congress passed the Deficit Reduction Act, which amended the Social Security Act
by appending a new subsection (the Medicaid amendment).
Healthkeepers went back to court asserting the Medicaid amendment applies to emergency
ambulance services provided by the Authority to HealthKeepers' Medicaid managed care
enrollees, and, therefore, that the Authority could not charge more than the amounts set by
DMAS.
The court granted the Authority summary judgment, but the Fourth Circuit reversed. The court
then granted summary judgment in favor of Healthkeepers and the Authority filed the instant
motion under Fed. R. Civ. P. 59(e) asking the court to alter or amend its order.
The court noted to prevail on its motion, the Authority must show an alteration or amendment to
the judgment is necessary to correct a clear error of law or to prevent a manifest injustice.
The Authority argued the court’s order would be tantamount to entering a declaration
inconsistent with both the Medicaid Statute and the Fourth Circuit's interpretation of the law and
that entering summary judgment in favor of Healthkeepers provides for a declaration that is
impermissibly retroactive.
According to the Authority, "[t]he Fourth Circuit specifically concluded that 'the term outpatient
emergency services [in § 1396u-2(b)(2)(B)] encompasses patients being treated outside of the
hospital as long as the medical provider and type of service fall within the definition of
emergency services.'"
The Authority contended to the extent it provides services that do not constitute "emergency
services" under section (b)(2)(B), the Richmond Circuit Court's earlier declaration should
continue to control.
But the court disagreed, finding the Authority “does little more than disagree with the wording of
the declaration provided in HealthKeepers' Complaint” and fails to “show that this Court made a
clear error of law by entering summary judgment in accordance with the Fourth Circuit
mandate.”
“The Authority has also not demonstrated how the Court's failure to amend the order would
result in manifest injustice,” the court noted.
The court observed that the Fourth Circuit “made abundantly clear its position as to whether the
‘emergency services’ provided by the Authority fall within the compass of § (b)(2)(B)--and thus
within the reach of § (b)(2)(D).”
Healthkeepers, Inc. v. Richmond Ambulance Auth., No. 3:09-CV-160 (E.D. Va. Oct. 14, 2011).
U.S. Court In D.C. Holds HHS Properly Disallowed Certain Federal
Matching Funds Paid To Arkansas During Transition Period For New
UPLs
A federal district court in the District of Columbia upheld the disallowance of over $4 million in
federal matching the Centers for Medicare and Medicaid Services (CMS) paid to plaintiff Arkansas
Department of Human Services for certain outpatient hospital services from July 1, 2001 to
September 30, 2002.
In so holding, the U.S. District Court for the District of Columbia held CMS’ regulation concerning
new upper payment limits (UPLs) for these services was not an unreasonable interpretation of
the ambiguous statutory language.
Pursuant to the federal Medicaid statute, CMS regulations impose limits on state Medicaid
payments to providers of certain medical services, including outpatient hospital and clinic
services.
As of October 2000, the outpatient hospital and clinic services regulation, 42 C.F.R. § 447.321,
established a UPL for federal financial participation (FFP) payments not to exceed the amount
that would be payable to Medicare providers under comparable circumstances.
CMS proposed amending the regulation to close a loophole that allowed states to reduce their
share of Medicaid costs and caused the federal government to pay more for the same volume
and level of Medicaid services, the opinion said.
After the proposal rule, Congress issued the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA), requiring the Department of Health and Human
Services (HHS) to issue a final rule about Medicaid UPLs based on the proposed rule. BIPA
provided a longer transition period for implementing the UPL changes for certain states.
The final rule amended Section 447.321, which previously provided for a single aggregate UPL
for all outpatient service providers, so that separate UPLs applied to state government-owned or
operated facilities, other government facilities, and privately owned and operated facilities.
The rule provided for three transition periods of varying lengths for states with noncompliant
state plan amendments. For Arkansas, the rule provided “payments may exceed [the newly
established UPLs] until September 30, 2002.” The rule also set forth a general requirement that
the amount of a state’s payment “must not increase” during the transition period as compared to
the prior UPL.
As a result of the final rule, certain supplemental Medicaid payments to Arkansas' sole stateoperated teaching hospital for outpatient services, the University of Arkansas for Medicaid
Sciences (UAMS), were disallowed under the distinct UPL established for such facilities. The
supplemental payments to UAMS increased during the transition period as compared to the prior
UPL, although the state’s method for calculating payments remained the same.
CMS disallowed $4,449,683 in FFP for the UAMS supplemental payments. On appeal, the HHS
Departmental Appeal Board (DAB) generally upheld the disallowance, although it required CMS
to recalculate the amount, which ultimately was set at $4,038,093 plus $391,608 in interest.
The state argued the DAB’s decision was arbitrary and capricious in violation of the
Administrative Procedure Act.
Specifically, the state maintained CMS’ interpretation of the applicable regulation was
inconsistent with BIPA. And, in any event, the state lacked fair notice of the interpretation and
therefore CMS could not apply it to Arkansas’ detriment.
Both parties moved for summary judgment.
The court granted summary judgment in the agency’s favor, finding CMS’ interpretation of the
regulation was consistent with its reasonable construction of BIPA and the disallowance did not
rise to the level of sanctions contemplated by the “fair notice” doctrine.
At issue was CMS’ interpretation of the “must not increase” provision, which the court ultimately
held did not conflict with BIPA.
CMS interpreted the provision as imposing a hard cap on the absolute dollar amount during the
transition period that was based on “the state’s excess UPL payment in a prior comparable
period.”
Arkansas believed, however, the provision prohibited changes to its payment methodology that
would have the effect of increasing its excess UPL payments, but did not understand the
regulation to require a “fixed dollar baseline.” Thus, the state thought it could continue to make
payments consistent with its existing methodology until the end of the transition period.
Applying Chevron deference, the court found first that BIPA was ambiguous regarding the
transition periods, and then held CMS reasonably filled the statutory gap when it instituted the
“must not increase” provision.
The court pointed to CMS’ reasoning in the final rule that the “purpose of instituting transition
periods was to enable states to come into compliance with the new UPLs, . . . not to enable them
to move farther out of compliance.”
“When Congress mandated that the Final Rule include a third, longer transition period for certain
states, HHS reasonably interpreted BIPA not to simultaneously and implicitly require that the
Final Rule permit those states to increase their excess UPL payments prior to beginning the
phase-down schedule,” the court said.
Finally, the court refused to equate a disallowance of federal matching funds with sanctions
“sufficiently grave” to merit application of the “fair notice” doctrine.
Moreover, the “disallowance concerned supplemental payments that were not even related to
Medicaid costs actually incurred by UAMS—they were payments beyond the UPL for the medical
services actually provided by that facility.”
Arkansas Dep’t of Human Servs. v. Sebelius, No. 10-1251 (JEB) (D.D.C. Oct. 12, 2011).
Ninth Circuit Allows Claims Challenging Medi-Cal Rate Cuts To 340B
Entities To Go Forward
The Ninth Circuit in a November 3, 2011 unpublished opinion found a lower court erred in
dismissing certain claims challenging a statute that would reduce Medi-Cal reimbursement rates
to 340B entities.
In so holding, the appeals court allowed claims alleging violations of equal protection and federal
law against the Director of the California Department of Healthcare Services to go forward.
Plaintiff AIDS Healthcare Foundation (AHF), which is a so-called 340B entity (a safety-net
provider), challenged a California statute that would significantly reduce reimbursement rates to
340B providers.
The district court dismissed the complaint with prejudice, and AHF appealed.
The Ninth Circuit found the district court erred in dismissing AHF’s equal protection claims,
finding “AHF has plausibly pled that the California statute in question here violates its right to
equal protection because the reimbursement regime it imposes on AHF does not rationally
distinguish between AHF and other similarly situated providers of medications to patients who
are covered by Medi-Cal.”
The appeals court further noted the state did not point to a rational basis for that distinction.
Next, the appeals court agreed the district court erred in dismissing AHF’s claims that the statute
was inconsistent with federal law.
The state argued the statute does not on its face make any change to the rates or
reimbursements to AHF and others.
“But that is an unduly crabbed view of the matter,” the appeals court held. “AHF has
persuasively pled that the statute effectively does exactly that by severely (if indirectly) reducing
reimbursement rates to 340B providers.”
The district court also dismissed AHF’s claim that the statute was preempted by federal law
designed to preclude so-called double discounts.
The appeals court agreed with the district court on this issue, finding “no real conflict is spelled
out.” The appeals court also agreed with the lower court that it was not required to grant AHF
leave to amend as amendment would be futile.
AIDS Healthcare Found. v. Douglas, No. 10-55633 (9th Cir. Nov. 3, 2011).
Ninth Circuit Vacates Injunction Enjoining Medicaid Rates, Says
Providers Could Not Sue Under Section 1983
The Ninth Circuit vacated November 30, 2011 a preliminary injunction blocking certain provider
reimbursement rates under California’s Medi-Cal program in an action brought by groups
representing intermediate care facilities for the mentally retarded and for the developmentally
disabled and free standing pediatric subacute facilities.
The Developmental Services Network, the United Cerebral Palsy/Spastic Children’s Foundation of
Los Angeles and Ventura County, and the California Association of Health Facilities brought an
action under 42 U.S.C. § 1983 challenging amendments to the state’s Medicaid plan that froze
reimbursement rates for certain providers at 2008-2009 levels.
The groups contended the legislative changes were unlawful because the state did not first
obtain federal approval of its State Plan Amendment (SPA).
Specifically, the groups argued the amendments violated federal Medicaid law, which requires a
state Medicaid plan to 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.” 42 U.S.C. § 1396a(a)(30)(A).
In granting the groups a preliminary injunction, the district court found they were likely to
succeed on the merits of their Section 1983 claim that the state had unlawfully failed to obtain
federal approval of the SPA before implementing it.
The Ninth Circuit agreed that the state had to obtain approval of the Medicaid plan amendment
before implementing the changes, but concluded providers did not have a private right of action
under Section 1983 to enforce this requirement, which was the issue ruled on by the district
court.
With the repeal of the Boren Amendment, Congress essentially made clear that providers had no
cause of action under Section 1983 to challenge the adequacy of their rates, the appeals court
said.
“[T]he Providers have not shown that they have an unambiguously conferred right to bring a §
1983 action,” the appeals court observed.
Thus, the preliminary injunction could not stand, and the appeals court remanded to the district
court for further proceedings.
In a footnote, the appeals court declined to consider the Supremacy Clause as an avenue for the
providers to pursue their claims, noting the district court “expressly refused to proceed on that
basis, and it should decide the issue in the first instance.”
The appeals court also noted this issue was pending before the Supreme Court. “[P]rudence
suggests that consideration of the issue should be put off for another day.”
A number of provider lawsuits have challenged various Medi-Cal rate cut proposals. The Supreme
Court in January 18 granted certiorari of three petitions: Maxwell-Jolly v. Independent Living Ctr.
of Southern Cal. (No. 09-958); Maxwell-Jolly v. California Pharmacists Ass'n (No. 09-1158); and
Maxwell-Jolly v. Santa Rosa Mem’l Hosp. (No. 10-283).
In the lawsuits, which have been consolidated before the Court, the providers alleged the cuts
violated Section 1396a(a)(30)(A) and therefore are invalid under the Supremacy Clause of the
U.S. Constitution.
DHCS argued Section 30(A) does not confer a private right of action that plaintiffs could sue to
enforce. The Court held oral arguments on October 3.
Developmental Servs. Network v. Douglas, No. 11-55851 (9th Cir. Nov. 30, 2011).
U.S. Court In California Enjoins Medi-Cal Rate Cuts To Nursing
Facilities, Pharmacies
The U.S. District Court for the Central District of California granted December 28, 2011
preliminary injunctions in two cases challenging 10% reimbursement cuts to pharmacies and
skilled nursing facilities operating as distinct units within hospitals under California’s Medi-Cal
program.
In late October 2011, the Centers for Medicare and Medicaid Services (CMS) approved a number
of provider reimbursement cuts in California’s Medicaid program that are meant to help address
the significant budget shortfall the state is facing.
The California Department of Health Care Services (DHCS) said CMS found the proposed cuts
“were fully supported by a thorough access analysis” and “were accompanied by a unique
monitoring plan that will collect data to ensure that access to care is not comprised as the
reductions are implemented.”
The California Hospital Association (CHA) and Managed Pharmacy Care filed lawsuits on behalf of
hospitals with nursing facility units and pharmacies in federal court seeking to block the cuts,
which were effective as of June 1, 2011.
Among other things, the lawsuits alleged the cuts violated the federal Medicaid Act, specifically
42 U.S.C. § 1396a(a)(30)(A), which requires a state Medicaid plan 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,” and therefore are invalid under the Supremacy Clause of the U.S. Constitution.
As a threshold matter, the court found CMS’ decision approving California’s state plan
amendment (SPA) regarding the cuts was not entitled to Chevron deference.
The SPA process “did not involve a formal adjudication accompanied by the procedural
safeguards justifying Chevron deference, the court said.
The court went on to find a strong likelihood plaintiffs would succeed on the merits of their
claims that CMS’ approval of the SPA was arbitrary and capricious because the agency failed to
consider whether DHCS relied on responsible cost studies, a factor articulated by the Ninth
Circuit as required under Section 30(A), in promulgating the rate reductions.
Likewise, the court concluded CMS’ assessment of how the reductions would affect access and
quality of care was likely arbitrary and capricious.
The court specifically called out CMS’ acceptance of DHCS’ monitoring plan as a way to ensure
access and quality care.
According to the court, the monitoring plan “merely creates a potential response after an access
problem [or quality deficiency] has been identified.” And such an after-the-fact response will not
undo harm already suffered by Medi-Cal beneficiaries, the court observed.
The court also held plaintiffs had shown adequate irreparable injury to support a preliminary
injunction—namely, beneficiaries who may lose access to needed services as a result of the rate
reduction.
Finally, the court concluded the balance of equities and the public interest weighed in favor of
entering an injunction.
The court said it was “keenly aware of the state’s fiscal difficulties.” But the court noted “the
State’s fiscal crisis does not outweigh the serious irreparable injury plaintiffs would suffer absent
the issuance of an injunction.”
The court also briefly addressed the argument that plaintiffs lacked a private right of action to
enforce Section 30(A).
The court acknowledged this issue currently is pending before the Supreme Court, but added
that Ninth Circuit precedent, which was binding unless overruled, established Section 30(A) is
enforceable by private parties under the Supremacy Clause.
In a statement, DHCS said it would seek a stay of the preliminary injunctions and immediately
appeal to the Ninth Circuit.
California Hosp. Ass’n v. Douglas, No. CV 11-9078 CAS (MANx) (C.D. Cal. Dec. 28, 2011).
Managed Pharmacy Care v. Sebelius, No. CV 11-9211 CAS (MANx) (C.D. Cal. Dec. 28, 2011).
U.S. Court In California Enjoins Medicaid Rate Reduction For NonEmergency Transportation
On January 10, 2012, the U.S. District Court for the Central District of California preliminarily
enjoined a reduction in Medi-Cal reimbursement for non-emergency medical transportation
services.
The Medi-Cal rate reduction was made pursuant to Assembly Bill 97, which was enacted in March
2011, and codified at California Wealth and Institutions Code § 14105.192.
The California Medical Transportation Association challenged the legislation, alleging that, in
approving a State Plan Amendment (SPA) proposed by defendant Director of the California
Department of Health Care Services (Director) to implement Assembly Bill 97, defendant
Kathleen Sebelius, Secretary of the Department of Health and Human Services, violated 42
U.S.C. § 1396a(a)(30)(A), which sets minimum standards for payments under state plans for
medical assistance.
An amended complaint added GMD Transportation, a non-emergency medical transportation
company (NEMT), and Lonny Slocum, a Medi-Cal beneficiary who relies on NEMT services to get
to treatments, as plaintiffs.
The court held plaintiffs had standing to sue because Section 30(A) arguably was crafted to
protect their interests and because payment cuts could injure them.
The court considered the first prong of the test for a preliminary injunction, likelihood of success
on the merits, separately with regard to each defendant.
The court found the Secretary’s failure to consider whether the Director relied on credible cost
studies created a strong probability that its approval of the SPA would be deemed to be arbitrary
and capricious. The court distinguished Chevron U.S.A. v. NRDC, 467 U.S. 837 (1984), which
requires a court to defer to an interpretive rule promulgated by an agency if it is a “permissible
construction” of the statute.
Here, the court found the Secretary’s decision not to require that payment rates be based on
provider costs did not result from a formal rulemaking process with the procedural protections
required by Chevron.
The court also found the Secretary’s decision was not entitled to deference under Skidmore v.
Swift, 323 U.S. 134 (1944), which held that the weight accorded to an administrative judgment
depends on its thoroughness, validity, and consistency with earlier and later pronouncements.
The court noted that the Secretary’s position was inconsistent with her position in Alaska Dept.
of Health and Social Services. v. CMS, 424 F.3d 931 (9th Cir. 2005), and with Ninth Circuit law,
Orthopedic Hospital v. Belshe, 103 F.3d 1491 (9th Cir. 1997), cert denied, 522 U.S. 1044
(1998).
In finding plaintiffs also were likely to succeed on the merits in their action against the Director,
the court held that private parties may enforce Section 30(A) under the Supremacy Clause
(Article VI, Cl. 2) of the U.S. Constitution.
The court noted that this issue is presently before the Supreme Court, but until the Court
overrules the controlling Ninth Circuit decision, Independent Living Center of Southern California
v. Shewry, 543 F.3d at 1050 (9th Cir. 2008), cert. granted in part by Maxwell-Jolly v.
Independent Living Center of Southern California, 131 S. Ct. 992 (U.S. Jan 18, 2011) (No. 09958), it is binding precedent.
Turning to the second prong of the preliminary injunction test, risk of irreparable injury, the
court found the Director’s monitoring plan would not necessarily prevent reductions in access to
medical transportation for at least some beneficiaries.
With regard to the third prong of the preliminary injunction test, the balance of hardships and
public interest, the court found California’s fiscal crisis did not outweigh the serious irreparable
harm that the plaintiffs would suffer without an injunction.
California Med. Transportation Ass’n v. Douglas, No. CV 11-9830 (C.D. Cal. Jan. 10, 2012).
U.S. Court In California Enjoins Medi-Cal Rate Cuts To Physicians,
Other Providers
The U.S. District Court for the Central District of California granted January 31, 2012 a
preliminary injunction blocking reimbursement cuts to physicians and other providers under
California’s Medi-Cal program.
Assembly Bill 97, enacted in March 2011, called for a host of Medi-Cal rate reductions, including
those relevant in the instant case involving physician, clinic, dental, pharmaceutical, emergency
medical transportation, and durable medical equipment services. See Cal. Wealth and Inst. Code
§ 14105.192.
In late October 2011, the Centers for Medicare and Medicaid Services (CMS) approved a number
of provider reimbursement cuts in California’s Medicaid program to help address the significant
budget shortfall the state is facing.
The California Department of Health Care Services (DHCS) said CMS found the proposed cuts
“were fully supported by a thorough access analysis” and “were accompanied by a unique
monitoring plan that will collect data to ensure that access to care is not comprised as the
reductions are implemented.”
The California Medical Association, the California Dental Association, the California Pharmacists
Association, among other plaintiffs representing affected providers, filed lawsuits in federal court
seeking to block the cuts.
Among other things, the lawsuits alleged the cuts violated the federal Medicaid Act, specifically
42 U.S.C. § 1396a(a)(30)(A), which requires a state Medicaid plan 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,” and therefore are invalid under the Supremacy Clause of the U.S. Constitution.
The court held plaintiffs had standing to sue because Section 30(A) arguably was crafted to
protect their interests and because payment cuts could injure them.
As a threshold matter, the court found CMS’ decision approving California’s state plan
amendment (SPA) regarding the cuts was not entitled to Chevron deference. See Chevron U.S.A.
v. NRDC, 467 U.S. 837 (1984).
The SPA process “did not involve a formal adjudication accompanied by the procedural
safeguards justifying Chevron deference," the court said.
The court also found the Secretary’s decision was not entitled to deference under Skidmore v.
Swift, 323 U.S. 134 (1944), which held that the weight accorded to an administrative judgment
depends on its thoroughness, validity, and consistency with earlier and later pronouncements.
According to the court, the Secretary’s position was inconsistent with Alaska Dept. of Health and
Social Services. v. CMS, 424 F.3d 931 (9th Cir. 2005), and with Ninth Circuit law, Orthopedic
Hospital v. Belshe, 103 F.3d 1491 (9th Cir. 1997), cert denied, 522 U.S. 1044 (1998).
The court went on to find a strong likelihood plaintiffs would succeed on the merits of their claim.
Specifically, the court highlighted DHCS’ access analyses failed to include projections on the
impact the rate reduction would have on beneficiary access or provide comparisons of Medi-Cal
payment rates to Medicare payment rates, average commercial payment rates, or provider costs.
The court also noted DHCS’ analyses lacked “any meaningful geographic comparisons.”
In addition, the court called out CMS’ acceptance of DHCS’ monitoring plan as a way to ensure
access and quality care.
According to the court, the monitoring plan “merely creates a potential response after an access
problem has been identified.” And such an after-the-fact response will not undo harm already
suffered by Medi-Cal beneficiaries, the court observed.
The court also held plaintiffs had shown adequate irreparable injury to support a preliminary
injunction—namely, beneficiaries who may lose access to needed services as a result of the rate
reduction.
Finally, the court concluded the balance of equities and the public interest weighed in favor of
entering an injunction.
The court acknowledged “the state’s fiscal difficulties,” but noted “the State’s fiscal crisis does
not outweigh the serious irreparable injury plaintiffs would suffer absent the issuance of an
injunction.”
The court also briefly addressed the argument that plaintiffs lacked a private right of action to
enforce Section 30(A).
The court acknowledged this issue currently is pending before the Supreme Court, but added
that Ninth Circuit precedent, which was binding unless overruled, established Section 30(A) is
enforceable by private parties under the Supremacy Clause.
The court now has agreed to block the Medi-Cal cuts as to non-emergency transportation
services, California Med. Transportation Ass’n v. Douglas, No. CV 11-9830 (C.D. Cal. Jan. 10,
2012), pharmacies, Managed Pharmacy Care v. Sebelius, No. CV 11-9211 CAS (MANx) (C.D. Cal.
Dec. 28, 2011), and skilled nursing facilities operating as distinct units within hospitals, California
Hosp. Ass’n v. Douglas, No. CV 11-9078 CAS (MANx) (C.D. Cal. Dec. 28, 2011).
On its website, DHCS said it has filed notices of appeal in the first three cases and the Ninth
Circuit has set an expedited briefing schedule.
California Med. Ass’n v. Douglas, No. CV-11-9688-CAS (MANx) (C.D. Cal. Jan. 31, 2012).
U.S. Supreme Court Returns Challenge To California Medi-Cal Rate
Cuts To Ninth Circuit
The U.S. Supreme Court in a 5-4 ruling vacated and remanded to the Ninth Circuit a series of
cases that challenged provider reimbursement cuts in California’s Medicaid program, known as
Medi-Cal.
The closely watched case presented the issue of whether private parties, here Medicaid providers
and recipients, could maintain a private cause of action under the Supremacy Clause of the U.S.
Constitution to enforce federal Medicaid law—specifically, 42 U.S.C. § 1396a(a)(30)(A), which
requires a state Medicaid plan to 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.”
The majority opinion, written by Justice Breyer and joined by Justices Kennedy, Ginsburg,
Sotomayor, and Kagan, vacated a series of Ninth Circuit rulings allowing the challenges and
enjoining the rate cuts, but did not resolve the issue, citing a change in the “relevant
circumstances” since the Court granted certiorari a year ago.
While the case was pending before the Court, the Centers for Medicare and Medicaid Services
(CMS) approved a number of the state’s Medi-Cal rate reductions.
“In light of the changed circumstances, we believe that the question before us now is whether,
once the agency has approved the state statutes, groups of Medicaid providers and beneficiaries
may still maintain a Supremacy Clause action asserting that the state statutes are inconsistent
with the federal Medicaid law,” Breyer wrote.
The Court therefore remanded to the Ninth Circuit for further proceedings.
“This is a win for physicians and their patients in California,” said Dustin Corcoran, Chief
Executive Officer, California Medical Association. “The lower court has previously ruled that
interested parties indeed have the right to sue the state if the federal Medicaid Act is being
violated. They will have the opportunity to decide that once again.”
A dissenting opinion, authored by Chief Justice Roberts and joined by Justices Scalia, Thomas,
and Alito, said nothing in the Medicaid Act allows providers or beneficiaries to sue to enforce
Section 30(A). Instead, the dissent said, only CMS has enforcement authority.
According to the dissent, the Supremacy Clause does not provide an avenue for enforcing federal
Medicaid requirements where Congress “elected not to provide such a cause of action in the
statute itself.”
Douglas v. Independent Living Ctr. of Southern Cal., No. 09-958 (U.S. Feb. 22, 2012).
U.S. Court In New Hampshire Orders Notice And Comment On
Medicaid Rate Reductions
The U.S. District Court for the District of New Hampshire issued March 2, 2012 an injunction
requiring defendant Nicholas Toumpas, the State Commissioner of Health and Human Services,
to provide notice of his intent to maintain reduced Medicaid reimbursement rates and a fair
opportunity for public comment, consistent with 42 U.S.C. § 1396(a)(13)(A).
However, the court refused to enjoin Commissioner Toumpas from enforcing these rates pending
the outcome of the notice and comment process.
The case arose out of legislation that effectively dictated reductions in Medicaid reimbursement
rates (as well as other Medicaid funding) in light of reduced appropriations.
The plaintiffs—hospitals who furnish Medicaid services and individuals who receive such
services—argued that, under 42 U.S.C. § 1396a (a) (30)(A), Commissioner Toumpas was
required to ensure that rates were set at a level sufficient to assure quality of care and to
provide beneficiaries equal access to medical care.
Plaintiffs alleged that any deviation from the rate-setting method approved by the Secretary of
the Department of Health and Human Services required notice and comment and approval by the
Centers for Medicare and Medicaid Services of a state plan amendment.
Commissioner Toumpas argued the Medicaid Act does not provide a private right of action to
enforce its substantive requirements.
Plaintiffs conceded this point but sought to assert a claim under the Supremacy Clause,
maintaining the state laws in question contravene federal mandates.
The court ordered further briefing on whether this claim could go forward in light of the U.S.
Supreme Court’s decision on February 22, 2012, in Douglas v. Independent Living Center of
Southern California, Inc., 2012 WL 555204.
But the court held that the plaintiffs could maintain a private right of action with regard to the
Medicaid Act’s requirement for notice and comment on proposed rate reductions, finding
plaintiffs likely to succeed on the merits of their Section (13)(A) claims.
"Putting aside the Supremacy Clause issue, the gravamen of plaintiffs’ complaint is that Section
(13)(A) notice and an opportunity to be heard were unlawfully denied them before the
Commissioner implemented these substantial rate reductions. From the evidence presented, that
seems highly likely," the court held.
The court rejected defendant’s argument that the legislative process through which the state
laws at issue were enacted allowed for adequate public participation, finding such
argument "unlikely to succeed on the merits."
The court finally concluded that an injunction prohibiting enforcement of the current
reimbursement rates would unnecessarily usurp the state’s authority to set rates and the federal
government’s authority to review and approve them.
Dartmouth-Hitchcock Clinic v. Toumpas, No. 11-cv-358-SM (D.N.H. Mar. 2, 2012).
Eleventh Circuit Says Alabama Not Entitled To Injunction After Court
Vacated CMS Guidance On Medicaid Fraud Recoveries
The state of Alabama was not entitled to an injunction prohibiting the Centers for Medicare and
Medicaid Services (CMS) from ever adopting state Medicaid fraud recovery guidance that a lower
court vacated as an invalid substantive regulation in violation of the Administrative Procedure Act
(APA), the Eleventh Circuit ruled March 19, 2012.
The appeals court held the district court did not abuse its discretion in denying the injunction
since vacatur of the guidance accomplished the right result.
The appeals court also pointed out that the district court did not address the merits of the
guidance—i.e., whether CMS had the authority to issue it—but instead found only that it was
invalid on procedural grounds—namely, that the agency failed to follow the APA’s notice and
comment rulemaking requirements.
The state of Alabama initiated the action against CMS, the Department of Health and Human
Services, and various government officials after CMS issued the “Dear State Health Official” letter
(SHO letter) in October 2008.
The SHO letter required states filing Medicaid fraud and false claims lawsuits to seek to recover
damages to compensate for both state and federal overpayments on the Medicaid program; in
the event of a state false claims act recovery, to submit to CMS “the Federal amount originally
paid attributable to fraud and abuse, [and] a proportionate share of any other recovery,”
including “fines, penalties, or assessments imposed” under the state’s false claims act; and to
reimburse CMS for the federal share of any recovery within specified time limits.
Alabama challenged the SHO letter under the APA and also asserted it exceeded CMS’ statutory
and constitutional authority.
The U.S. District Court for the Middle District of Alabama initially ruled, in March 2010, that
Alabama’s challenge to the substance of the SHO letter was not ripe. See Alabama v. Centers for
Medicare and Medicaid Servs., No. 2:08-cv-881-MEF-TFM (M.D. Ala. Mar. 30, 2010).
Then, in a February 2011 decision, the court held the SHO letter was procedurally deficient as it
constituted a substantive administrative rule subject to notice-and-comment requirements to
which CMS did not comply. Alabama v. Centers for Medicare and Medicaid Servs., No. 08-CV881-MEF (M.D. Ala. Feb. 18, 2011).
The court refused, however, to grant Alabama injunctive relief. The state appealed.
After affirming the denial of the injunction, the Eleventh Circuit also upheld the district court’s
determination that Alabama’s claim that CMS exceeded its statutory and constitutional authority
was unripe.
The district court vacated the CMS guidance; thus, “we have no way of knowing if these policies
will be adopted again by CMS, in what form they will be adopted, or what the concrete
repercussions of those policies will be,” the appeals court said.
Ruling on the now-vacated policy at this juncture, the appeals court noted, would amount to an
impermissible advisory opinion.
Moreover, should CMS later seek to obtain a portion of Alabama’s recovery in a future Medicaid
fraud lawsuit, the state would have “ample opportunity” to challenge the action through the
administrative process, the appeals court concluded.
Alabama v. Centers for Medicare and Medicaid Servs., No. 11-11939 (11th Cir. Mar. 19, 2012).
U.S. Court In Washington Denies Injunction Of State Changes To
Medicaid Personal Care Services Payment
The U.S. Court for the Western District of Washington refused to enjoin March 15, 2012 certain
changes to the way the state determines how to pay for Medicaid in-home personal care services
for individuals under age 21.
In so holding, the court found the plaintiffs were not likely to succeed on the merits of their
challenge to the new rules and also found plaintiffs were unable to show that they face any
likelihood of irreparable harm absent an injunction.
Plaintiffs D.B., H.C., and Charles Wilen have developmental disabilities and are authorized by the
Washington State Department of Social and Health Services (DSHS) to receive paid, in-home
personal care services through the Medicaid program.
Plaintiffs sued DSHS and other state officials seeking an injunction to halt the implementation of
certain changes to the rules governing how Medicaid in-home personal care services are
determined for individuals under age 21.
At issue is an adjustment to the “base hours” used by DSHS’ Comprehensive Assessment and
Reporting Evaluation tool (CARE).
The court noted at the outset that plaintiffs “have presented no credible evidence that their
needs for assistance with activities of daily living or instrumental activities of daily living are not
adequately met with their current amount of services” and “have not presented evidence
showing that the lower base hours are likely to have any serious repercussions for Plaintiffs or
the putative class.”
In denying the injunction, the court found plaintiffs not likely to succeed on the merits of their
argument that the new, lower base hours will result in plaintiffs or any putative class members
being denied medically necessary personal care services.
The court also found plaintiffs did not meet their burden of showing that they face any likelihood
of irreparable harm absent an injunction.
“Plaintiffs’ proposed injunction would interfere with an ongoing, and by all appearances fair and
careful, re-evaluation of children on a case-by-case basis under the amended CARE tool,” the
court reasoned.
D.B. v. Dreyfus, No. C11-2017 (W.D. Wash. Mar. 15, 2012).
Ninth Circuit Refuses To Stay Injunction Of Medi-Cal Rate Cuts
The Ninth Circuit refused March 20, 2012 to stay pending appeal four preliminary injunctions
issued by the U.S. District Court for the Central District of California blocking reimbursement cuts
under California’s Medicaid program, known as Medi-Cal, to various providers.
The California Department of Health Care Services (DHCS) sought an emergency stay of the
injunctions that blocked the Medi-Cal cuts as to pharmacies, Managed Pharmacy Care v.
Sebelius, No. CV 11-9211 CAS (MANx) (C.D. Cal. Dec. 28, 2011), skilled nursing facilities
operating as distinct units within hospitals, California Hosp. Ass’n v. Douglas, No. CV 11-9078
CAS (MANx) (C.D. Cal. Dec. 28, 2011), non-emergency transportation services, California Med.
Transportation Ass’n v. Douglas, No. CV 11-9830 (C.D. Cal. Jan. 10, 2012), and physicians and
dentists, California Med. Ass’n v. Douglas, No. CV-11-9688-CAS (MANx) (C.D. Cal. Jan. 31,
2012).
Assembly Bill 97, enacted in March 2011, called for a host of Medi-Cal rate reductions. See Cal.
Wealth and Inst. Code § 14105.192.
In late October 2011, the Centers for Medicare and Medicaid Services (CMS) approved a number
of provider reimbursement cuts in California’s Medicaid program to help address the significant
budget shortfall the state is facing.
Various provider groups challenged the rate cuts in federal district court. Among other things,
the lawsuits alleged the cuts violated the federal Medicaid Act, specifically 42 U.S.C. §
1396a(a)(30)(A), which requires a state Medicaid plan 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,” and therefore are invalid under the Supremacy Clause of the U.S. Constitution.
Before issuing an injunction in each case, the district court concluded plaintiffs had standing to
sue because Section 30(A) arguably was crafted to protect their interests and because payment
cuts could injure them.
The U.S. Supreme Court recently vacated and remanded to the Ninth Circuit a series of other
cases challenging the Medi-Cal provider reimbursement cuts without deciding the closely
watched issue of whether providers and Medicaid recipients could maintain a private cause of
action under the Supremacy Clause of the U.S. Constitution to enforce federal Medicaid law.
Douglas v. Independent Living Ctr. of Southern Cal., No. 09-958 (U.S. Feb. 22, 2012).
The majority opinion, written by Justice Breyer and joined by Justices Kennedy, Ginsburg,
Sotomayor, and Kagan, cited a change in the “relevant circumstances” since the Court granted
certiorari a year ago.
Specifically, the Court majority said CMS’ approval of a number of the state’s Medi-Cal cuts
changed the circumstances of the cases before it.
“[W]e believe that the question before us now is whether, once the agency has approved the
state statutes, groups of Medicaid providers and beneficiaries may still maintain a Supremacy
Clause action asserting that the state statutes are inconsistent," the Court said.
Managed Pharmacy Care v. Sebelius, No. 12-55607 (9th Cir. Mar. 20, 2012).
Nebraska Supreme Court Enforces Agreement To Reimburse State
Agency From Third-Party Settlement
The Nebraska Supreme Court reversed March 23, 2012 a trial court decision granting the
Nebraska Department of Health and Human Services (DHHS) only a fraction of the amount it
paid through Medicaid for medical expenses from a third-party liability settlement obtained by
Edward Smalley.
In the course of settling a personal injury suit for $805,000, Smalley negotiated a side
agreement with a DHHS representative.
DHHS agreed to fully resolve Smalley’s medical bills, which exceeded $400,000, at the reduced
rate of $130,000. In exchange, Smalley agreed to fully reimburse DHHS out of the settlement.
Based on this promise, DHHS paid the medical bills. Smalley then refused, however, to honor the
agreement, contending DHHS was required to pay the expenses irrespective of the agreement
and was prohibited by federal law from recovering the full amount.
Applying the formula used in Arkansas Dep't of Health and Human Services v. Ahlborn, 547 U.S.
268 (2006), the trial court awarded DHHS only from a portion of the settlement that the parties
designated as recovery for medical expenses, which came to $17,240.
On appeal, the high court held, first, that DHHS was not obligated to pay Smalley’s medical
expenses when third-party funds were available. Rather, DHHS paid these expenses only
because it was promised full reimbursement.
The high court then concluded the lower court erred in construing the formula used in Ahlborn as
a mandate.
It found that courts may employ any reasonable formula for determining which portion of a
settlement relates to medical expenses, and, consequently, may be recovered by a state
Medicaid administrator.
In this case, the high court said the lower court should have looked no further than the
agreement to reimburse DHHS for $130,000 in expenses.
Smalley v. Nebraska Dep’t of Health and Human Servs., No. S-11-151 (Neb. Mar. 23, 2012).
U.S. Court In D.C. Dismisses Hospital’s Lawsuit Against HHS
Challenging Payments From Medicaid MCOs For Emergency Services
The U.S. District Court for the District of Columbia dismissed March 29, 2012 for lack of subject
matter jurisdiction a group of Pennsylvania hospitals’ lawsuit against the Department of Health
and Human Services (HHS) challenging a federal law requiring them to accept payments for noncontracted emergency medical services (EMS) from Medicaid managed care organizations
(MCOs) based on the state’s fee-for-service (FFS) rates.
The court found plaintiff hospitals lacked standing to bring the lawsuit against HHS because they
failed to demonstrate “that a favorable decision would redress their injury, through either the
decision’s affect on the MCO’s contractual obligations, on the Hospital’s ability to pursue claims
against the MCOs, or on the Hospitals’ bargaining leverage vis-à-vis the MCOs.”
The lawsuit sought to enjoin the HHS Secretary from enforcing Section 6085 of the Deficit
Reduction Act of 2005, which the hospitals claimed was unconstitutional as applied to them.
Before January 1, 2007, under Pennsylvania law, hospitals not under contract with an EMS
patient’s Medicaid MCO could bill the MCO for “all reasonably necessary costs.”
Section 6085, however, requires the hospitals in such instances to forego these higher payments
and instead accept payment based on Pennsylvania’s FFS rates.
After the DRA was enacted, the Centers for Medicare and Medicaid Services issued a letter to
state Medicaid agencies advising them to amend their contracts with MCOs to comply with the
new Section 6085 payment limitation.
The court found while the hospitals had demonstrated an injury in fact, in the form of reduced
reimbursements for non-contracted EMS than they otherwise would be entitled to under
Pennsylvania law, they could not show this alleged injury would be cured if they obtained the
relief sought.
Plaintiffs are challenging a statutory provision adopted by Congress, not a regulation issued by
HHS; thus, “a judgment in this case . . . will not effect any change in federal Medicaid law that
could bind non-parties,”—i.e., the MCOs.
“The MCOs’ contractual obligations, which depend on the statute, will not be altered by a
judgment against the Secretary where the MCOs are not themselves parties to this action,” the
court observed.
According to the court, the hospitals’ failure to sue or join the MCOs was fatal to the
redressability of the action.
The court said the hospitals could sue the MCOs directly seeking a declaration that the statute is
unconstitutional and an injunction requiring them to make payments for the EMS under state,
rather than federal, law.
“Proceeding in that fashion would enable resolution of the Hospitals’ claims against the MCOs,
and redressability of their injuries, in one suit,” the court observed.
Urban Health Care Coalition v. Sebelius, No. 06-2220 (D.D.C. Mar. 29, 20120).
U.S. Court In Arizona Refuses To Enjoin Medicaid Rate Cuts For
Hospital Services
A federal district court in Arizona refused March 23, 2012 to issue a preliminary injunction to
enjoin a 5% reduction in Medicaid fee-for-service rates for inpatient and outpatient hospital
services that went into effect October 1, 2011.
The U.S. District Court for the District of Arizona found the Arizona Hospital and Healthcare
Association (plaintiff) had not shown a likelihood of success on the merits of its claims that the
cuts violated the federal Medicaid Act and regulations, that Arizona hospitals would suffer
irreparable harm, or that the balance of hardships tipped in its favor.
In November 2011, CMS approved several state plan amendments (SPAs) submitted by the state
implementing the 5% rate reductions and a change to the methodology for calculating outlier
payments, retroactive to October 1, 2011.
Plaintiff argued the cuts to the Arizona Health Care Cost Containment System (AHCCCS) violated
42 U.S.C. § 1396a(a)(30)(A), which requires a state Medicaid plan 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”; 42 U.S.C. § 1396a(a)(13)(A), requiring rate reductions to be adopted through
a public process; and 42 C.F.R. § 447.205, requiring public notice of the rate reductions.
Plaintiff argued the Section (13)(A) claim was actionable under the Supremacy Clause of the U.S.
Constitution and under 42 U.S.C. § 1983, and that the Section 30(A) and Section 447.205 claims
were actionable under the Supremacy Clause. Plaintiff also argued CMS’ approval of the SPAs
was arbitrary and capricious in violation of the Administrative Procedure Act (APA).
In a separate order, also issued March 23, the court dismissed plaintiff’s Section 13(A) claim
under Section 1983, finding no private right of action, as well as the claim for violation of Section
447.205. The court refused to dismiss plaintiff’s remaining claims.
According to the court, plaintiff at oral argument dropped its Section 30(A) claim under the
Supremacy Clause and instead sought a preliminary injunction for that claim based on CMS’
alleged violation of the APA in approving the SPAs.
The court first concluded the Department of Health and Human Services Secretary’s
interpretation of Section 30(A)—as requiring the agency to consider the factors of efficiency,
economy, quality of care, and equal access but not provider cost studies as specified in the Ninth
Circuit’s Orthopaedic Hospital v. Belshe, 103 F.3d 1491 (1997), decision—was likely entitled to
Chevron deference even if not set forth in a formal rule or decision.
While plaintiff raised “serious questions” about whether the APA standard had been met on
Section 30(A) “economy and efficiency” factors, the court could not conclude plaintiff was “likely
to succeed on the merits of showing that the Secretary ‘entirely failed’ to consider these factors.”
The court also held plaintiff was not likely to succeed on its Section 13(A) claim given the rate
reductions, the methodology underlying the rates, and their justifications were posted on the
AHCCCS website before they were implemented.
The court went on to consider the remaining preliminary injunction requirements, finding plaintiff
could not show its members would be irreparably harmed as a result of the rate reductions.
Specifically, the court found the hospitals’ potential losses, “amounting to a small fraction of one
percent of revenues,” did not satisfy the irreparable harm requirement.
The court also concluded the balance of equities and public interest weighed in favor of denying
the injunction because of the “very real possibility that an injunction” would result in the
reduction of AHCCCS benefits.
“The loss of medical care for those who depend on AHCCCS is not outweighed by slight
reductions in the revenues of plaintiff’s members,” the court said.
Arizona Hosp. and Healthcare Assoc. v. Betlach, No. CV11-2348-PHX-DGC (D. Ariz. Mar. 23,
2012).
Medical Devices
Regulatory
FDA Issues Draft Guidance On Mobile Medical Apps
The Food and Drug Administration (FDA) issued July 19, 2011 draft guidance outlining how it will
oversee mobile medical applications (“apps”) used on smartphones and other mobile devices.
Mobile apps range from calorie counters to allowing physicians to view a patient’s radiology
images on their mobile communications devices, FDA said.
The draft guidance is intended to clarify the types of mobile apps to which FDA intends to apply
its regulatory authority.
Specifically, the draft guidance indicates FDA plans to limit its regulatory oversight to a subset of
mobile apps the agency is calling “mobile medical apps,” defined as a mobile app that meets the
definition of “device” in the Federal Food, Drug, and Cosmetic Act and (1) is used as an
accessory to a regulated medical device or (2) transforms a mobile platform into a regulated
medical device.
FDA said its “narrowly tailored” proposed approach “focuses on a subset of mobile apps that
either have traditionally been considered medical devices or affect the performance or
functionality of a currently regulated medical device.”
“The use of mobile medical apps on smart phones and tablets is revolutionizing health care
delivery,” said Jeffrey Shuren, M.D., J.D., director of the FDA’s Center for Devices and
Radiological Health. “Our draft approach calls for oversight of only those mobile medical apps
that present the greatest risk to patients when they don’t work as intended.”
The draft guidance was published in the July 21 Federal Register (76 Fed. Reg. 43689). FDA
asked for comments by October 19.
CMS, FDA Launch Pilot For Parallel Evaluations Of Innovative Medical
Devices
The Centers for Medicare and Medicaid Services (CMS) and the Food and Drug Administration
(FDA) are soliciting nominations to participate in a new pilot program for parallel review of
innovative medical devices for FDA approval and Medicare coverage, according to an October 7,
2011 press release.
A notice detailing procedures for participating in the two-year pilot is slated to be published in
the October 11 Federal Register.
According to the press release, CMS and FDA are now accepting submissions for the pilot. The
goal behind parallel review is to close the gap between FDA approval and CMS national coverage
determinations, the agencies said.
“Often device sponsors focus solely on obtaining FDA approval, only to find that Medicare
coverage is not automatically forthcoming,” the press release said.
The pilot program is voluntary and limited to qualifying new medical device technologies, the
agencies said. The agencies also stressed their commitment to keeping data confidential and that
sponsors can opt-out of the parallel review program.
The agencies issued a notice in September soliciting comments on parallel evaluations of
premarket, FDA-regulated medical products (75 Fed. Reg. 57045). The agencies said they have
received 37 comments thus far.
IRS Issued Proposed Rule On Medical Device Tax
The Internal Revenue Service (IRS) published in the February 7, 2012 Federal Register (77 Fed.
Reg. 6028) a proposed rule on the provision of the Affordable Care Act (ACA) imposing an excise
tax on the sale of certain medical devices under Section 4191 of the Internal Revenue Code.
The proposal, IRS said, affects manufacturers, importers, and producers of taxable medical
devices.
Some lawmakers have called for the repeal of the medical device tax.
Under the ACA, medical devices will be charged a 2.3% excise tax starting in 2013. The tax is
expected to raise $20 billion in revenue over 10 years.
After the IRS released the proposed rule, the Advanced Medical Technology Association
(AdvaMed) called for swift action to repeal what it called an “anti-competitive, job-killing tax.”
According to a statement issued by AdvaMed President and Chief Executive Officer Stephen J.
Ubl, the “anticipated tax has already forced companies to lay off workers and to reduce critical
R&D that will help drive the next wave of treatments and cures.”
Comments on the proposed rule are due May 7. IRS plans to hold a public hearing on the
proposal on May 16.
Cases
Fourth Circuit Finds State Tort Law Claim Preempted By Medical
Device Amendments
On January 25, 2012, the Fourth Circuit affirmed an award of summary judgment to a device
manufacturer based on federal preemption of the plaintiff’s state law claims.
The Medical Device Amendments (MDA), 21 U.S.C. § 360c et seq., establish national standards
for approval of medical devices by the Food and Drug Administration (FDA) and preempt state
laws that impose different or additional requirements.
Defendants Medtronic, Inc. and Medtronic USA sought FDA approval to market the SynchroMed
pump for dispensing medication after it is surgically implanted in a patient. The FDA determined
that the pump was a Class III device requiring pre-market approval.
In the approval process, the FDA specified that the SynchroMed pump would dispense
medication within a flow accuracy rate of 15%, plus or minus.
Two years after physicians implanted a SynchroMed pump in Arnold Walker, Jr. to treat chronic
back pain, he died from an overdose of pain medication. Plaintiff Sherry Walker, his widow,
alleged the overdose occurred when the pump malfunctioned.
Walker sued, but the trial court granted summary judgment to defendants based on preemption.
Walker argued on appeal that her complaint was not preempted because it raised a parallel claim
under state (West Virginia) tort law. According to Walker, the FDA required the SynchroMed
pump to maintain a flow accuracy rate of plus or minus 15%, so her claim that it failed to meet
this specification did not impose a different or additional requirement on the manufacturer.
The Fourth Circuit disagreed. Since the MDA empowers the FDA to generate formal performance
standards for Class III devises, and since the FDA did not create such a standard with respect to
the flow accuracy rate, the appeals court determined that there was no guarantee of
performance.
Rather, the 15% specification reflected the SynchroMed pump’s output under “optimal
conditions” subject to “numerous qualifiers that disclose the possibility of infusion outside this
range.”
By transforming a design specification into a guarantee, Walker’s complaint would impose an
additional requirement on the manufacturer in violation of the MDA, the appeals court concluded.
In a dissenting opinion, Judge Wynn argued that the specification created a guarantee, and that
finding otherwise had serious implications.
If manufacturers cannot be held accountable when their devices fail to perform as specified,
“they will have little incentive to ensure that potentially deadly devices function properly,” the
dissent said.
Walker v. Medtronic, Inc. and Medtronic USA, No. 10-2219 (4th Cir. Jan. 25, 2012).
U.S. Court In Pennsylvania Declines To Dismiss Unfair Trade Practices
Claim From Medical Malpractice Case
The U.S. District Court for the Western District of Pennsylvania found April 18 that the state
unfair trade practices law applied to a medical negligence claim involving failure to warn about
the dangers of a medical device.
Accordingly, the court refused to dismiss the state law unfair trade practices claim in the
plaintiff’s medical malpractice action against her plastic surgeon.
Plaintiff Rae Schiff received plastic surgery from defendants Dennis J. Hurwitz, M.D. and Hurwitz
Center for Plastic Surgery, P.C., where Hurwitz performed a "BodyTite Procedure" on Schiff using
the Invasix Device.
Schiff was presented with an informed consent form, but alleged she did not know of the risks,
benefits, and alternatives to the procedure, and she was not aware the Invasix Device was being
investigated in a clinical trial for which Hurwitz was a paid investigator.
The surgery resulted in pain and injuries to Schiff, who then sued defendants asserting claims for
medical negligence and under Pennsylvania's Unfair Trade Practices Act and Consumer Protection
Law (UTPCPL).
Defendants moved to dismiss plaintiff's claim under the UTPCPL, arguing the statute was not
intended to apply to physicians rendering medical services.
The UTPCPL provides a private cause of action for purchasers of goods or services for an
ascertainable loss of money or property as the result of "unfair and deceptive acts or practices."
The court noted no Pennsylvania Supreme Court precedent setting forth the applicability (or
inapplicability) of UTPCPL to the claims at issue here.
Analyzing the facts under the UTPCPL, the court found “a Plaintiff must show that she justifiably
relied on Defendant's wrongful conduct or representations and that [s]he suffered harm as a
result of that reliance.”
Finding plaintiff stated a viable claim under the UTPCPL, the court highlighted her allegations that
confusion and deceptive conduct surrounded the affiliation, connection, and association Hurwitz
had with the Invasix Devices and the "BodyTite Procedure" as well as her lack of knowledge of
the clinical trial involving the Invasix device.
Moreover, the court said, “along with numerous other averments concerning a UTPCPL violation,
Dr. Hurwitz allegedly failed to warn Schiff of the potential dangers of the Invasix Device and,
critically, allegedly misrepresented that the FDA approved, or was at least involved in the clinical
trial, of the Invasix Device.”
Schiff v. Hurwitz, No. 12cv0264 (W.D. Pa. Apr. 18, 2012).
Medical Malpractice
The Eleventh Circuit rejected May 27, 2011 a claim that the Florida's statutory cap on
noneconomic damages in medical malpractice actions violates the Takings Clause of the Florida
and U.S. Constitutions and the Equal Protection Clause of the U.S. Constitution.
The appeals court also upheld a district court’s application of Florida’s $1 million statutory cap on
noneconomic damages awarded in the medical malpractice case.
The Estate of Michelle McCall, who died from the negligent peripartum and postpartum care she
received from providers at a U.S. military hospital, challenged the application and
constitutionality of Florida’s cap after the estate’s $2 million noneconomic damages award was
reduced under the statutory cap.
Throughout her pregnancy, Michelle McCall received prenatal care from the Family Practice
Department of a U.S. Air Force clinic. In February 2006, during her final trimester, she was
diagnosed with severe preeclampsia. The Family Practice medical providers immediately induced
her labor. McCall delivered a healthy baby boy but experienced excessive blood loss during the
delivery and died five days later.
McCall’s estate sued the United States alleging the negligent care administered by governmentemployed medical practitioners was the proximate cause of her death.
The district court issued judgment in favor of the estate and awarded noneconomic damages
totaling $2 million—which the court reduced in compliance with Florida’s statutory cap.
The estate argued it was entitled to the full noneconomic damages award because they could
recover under the $1 million cap for "practitioners" and the $1.5 million cap for
"nonpractitioners" under the statute. Fla. Stat. § 766.118(2). The estate also challenged the
constitutionality of the statute.
The district court rejected both challenges. The court also denied a later motion to alter or
amend the judgment in which the estate claimed it could recover up to $2.5 million under the
theory that the medical facility, as a "nonpractitioner," was vicariously liable for the negligence of
its practitioner employees.
The court determined that even if the medical facility was vicariously liable for decedent’s
injuries, any resulting award would still be subject to the $1 million cap for “practitioners.”
The Eleventh Circuit affirmed.
The appeals court rejected the estate's claim that they should be able to recover against the
medical facility as a nonpractitioner because it was "independently liable" for the breaches in the
standard of care.
The Eleventh Circuit found the estate waived this argument and could not raise it for the first
time on appeal. In the lower court, the appeals court noted, the estate only argued the facility
was vicariously liable.
The appeals court also agreed with the lower court that the vicarious liability claim for
noneconomic damages against the hospital fell within the $1 million cap, noting the statute
expressly stated "the term 'practitioner' includes . . . any person or entity whose liability is based
solely" on vicarious liability.
Further, the appeals court found insufficient evidence to prove the “nonpractitioner” medical
facility was negligent.
Next, applying rational basis review, the appeals court determined the cap does not violate equal
protection because it meets a legitimate government interest in “reduc[ing] the cost of medical
malpractice premiums and care.”
The appeals court also found the statutory cap is not an unconstitutional taking because both
state and federal law provide that a litigant does not have property rights to an award of
damages that has not yet vested.
The appeals court declined to address additional state constitutional claims raised by the estate
due to a lack of controlling Florida law to inform a review by the Eleventh Circuit.
These claims were submitted to the Florida Supreme Court as certified questions for review by
the state’s highest court.
McCall v. United States, No. 09-16375 (11th Cir. May 27, 2011).
Ohio Appeals Court Finds Apology Statute Does Not Bar Evidence Of
Physician’s Admission Of Fault
An Ohio appeals court held June 29, 2011 the state’s so-called “apology statute” does not bar
evidence of a physician’s admission of fault or liability at trial.
Instead, the statute merely bars admission of expressions of sympathy or condolence, the Ohio
Court of Appeals said.
After Barbara Davis died following back surgery, her husband (plaintiff) filed a wrongful death
action against her orthopaedic surgeon, Michael S. Knapic, and his practice group, Wooster
Orthopaedics & Sports Medicine Inc. (collectively, defendants).
At trial, the jury found against Knapic and awarded a $3 million verdict to plaintiff. Defendants
appealed.
Defendants argued the trial court incorrectly admitted apology evidence in violation of Section
2317.43 of the Ohio Revised Code. Plaintiff countered the trial court did not admit any apology
evidence at trial and Section 2317.43 does not prohibit the use of statements of fault,
responsibility, or liability as compared to statements of sympathy or condolence.
The appeals court observed that at trial, the jury heard testimony that Knapic told plaintiff he
had nicked an artery and took full responsibility for it.
Although the parties agreed the statute prohibited the admission of a healthcare professional’s
statement of sympathy in a medical malpractice case, the appeals court noted the issue of
whether it also prohibited statements admitting liability or fault was one of first impression.
Looking at other states with similar statutes, the appeals court found the majority explicitly
distinguished between statements of sympathy and admissions of fault or liability.
Further, 17 of the states that have explicitly distinguished between expressions of sympathy and
admissions of fault have chosen to admit expressions of fault while excluding from evidence any
part of a statement that expresses sympathy, while eight have chosen to exclude both types of
statements from evidence.
Noting Ohio’s apology statute did not make a clear distinction between an alleged tortfeasor’s
statement of sympathy and one acknowledging fault, the appeals court concluded the legislature
did not intend to include statements of fault within the statute’s ambit of protection.
“Based upon the plain language of Section 2317.43, the intent was to protect pure expressions
of apology, sympathy, commiseration, condolence, compassion or a general sense of
benevolence, but not admissions of fault,” the appeals court held.
Accordingly, the appeals court found the trial court correctly admitted testimony that Knapic took
responsibility because such testimony did not include any expression of apology, sympathy,
commiseration, condolence, compassion, or a general sense of benevolence.
The appeals court also rejected defendants’ objection to the court’s jury instructions regarding
medical malpractice insurance and other evidentiary issues.
Davis v. Wooster Orthopaedics & Sports Medicine Inc., No. 2011-Ohio-3199 (Ohio Ct. App. June
29, 2011).
Oklahoma Supreme Court Allows Wrongful Birth Case But Limits
Damages
The Oklahoma Supreme Court held July 6, 2011 the state recognizes a claim for wrongful birth,
but damages are limited to “extraordinary expenses” over and above that of raising a healthy
child.
According to the high court, “recovery may be had only for extraordinary expenses, not the
normal and foreseeable costs of raising a normal, healthy child, for the period of time of the
child's life expectancy or until the child reaches the age of majority, whichever is the shorter
period.”
Plaintiffs Patricia and Brian Shull brought a medical malpractice action against several physicians
and the medical center (collectively, defendants) where their child was born.
According to plaintiffs, defendants failed to properly diagnose a Cytomegalovirus infection (CMV)
that occurred during Patricia Shull's first trimester of pregnancy and failed to inform the Shulls of
the significant health risk to their unborn child.
As a result, plaintiffs’ son was born with the CMV infection and suffers significant complications
rendering the child permanently and completely helpless.
Plaintiffs claimed that, had they known of the virus, they would have terminated the pregnancy.
Defendants moved for summary judgment alleging the Shulls may only recover damages for the
medical cost of continuing the pregnancy, offset by the cost of termination of the pregnancy.
The trial court found the issue of what damages are available to parents of an unhealthy,
abnormal child, bringing a claim for wrongful birth and medical malpractice was an issue of first
impression. Accordingly, the court granted the motion and allowed the case to pass immediately
to appellate review.
The state high court noted it had previously addressed the issue of wrongful birth in several prior
cases.
However, subsequent to the birth of the child in the instant case, the Oklahoma State Legislature
passed a statute that recognizes wrongful birth actions but does not allow a parent, or other
person who is legally required to provide for the support of a child, to seek economic or
noneconomic damages because of a condition that existed at the time of the child's birth, based
on a claim that a person's act or omission contributed to the mother not terminating the
pregnancy.
The high court said that statute does not apply retroactively and accordingly does not affect
the instant case.
Here, the high court recognized a wrongful birth action alleging medical malpractice, but said
“the measure of damages allowable is the extraordinary medical expenses and other pecuniary
losses proximately caused by the negligence.”
In so holding, the high court did not allow emotional distress damages, finding “the child's injury
in this case occurred without human fault during development of the fetus, and the parents were
not aware of the injury at the time.”
Shull v. Reid, No. 109136 (Okla. July 6, 2011).
Florida Supreme Court Holds Parents’ Malpractice Action Not Subject
To Birth-Related Injury Compensation Act
A Florida appeals court erred in concluding plaintiff parents could not pursue their medical
malpractice action in court and instead were limited to an administrative forum pursuant to the
state’s Birth Related Neurological Injury Compensation Act (NICA), the state’s high court ruled
July 7, 2011.
According to the Florida Supreme Court, the Florida District Court of Appeal, First District,
interpreted the term “immediate postdelivery period in a hospital” as used in the statute too
expansively to include a period of time beyond the initial delivery when the baby was not in
continuous respiratory distress.
A “birth-related neurological injury” under the NICA occurs when the brain is injured by oxygen
deprivation, rendering the infant permanently and substantially impaired, during labor, delivery
or resuscitation in the immediate postdelivery period, the high court noted.
“That period does not encompass an additional ‘extended period of time when a baby is delivered
in a life threatening condition,” as the appeals court found, “unless there are ongoing and
continuous efforts of resuscitation,” the high court concluded.
In the instant case, Tristan Bennett, the minor child of Robert and Tammy Bennett (plaintiffs),
was delivered by caesarean section on September 26, 2001 at St. Vincent’s Medical Center after
her mother was in a car accident.
At birth, Tristan required resuscitation but subsequently improved and was transferred to the
newborn nursery. Shortly thereafter, however, she was transferred to the special care nursery
due to moderate respiratory distress and metabolic acidosis.
In the week following her birth, she remained in the special care nursery where she suffered
from numerous conditions, including kidney and liver damage, but there was no indication of any
ongoing treatment for respiratory distress and no other resuscitative efforts.
On October 3, 2001, she suffered a pulmonary hemorrhage and began showing signs of possible
neurologic abnormalities. Subsequent testing showed permanent and substantial brain damage.
Plaintiffs sued the obstetrician who delivered Tristan, St. Vincent’s, and other providers
(collectively, defendants) in court for medical malpractice.
In a narrow category of cases involving a “birth-related neurological injury,” parents’ common
law rights to sue for medical malpractice are eliminated and replaced by an administrative
remedy that provides limited compensation on a no-fault basis under the NICA, the high court
explained.
An administrative law judge (ALJ) determined, however, that the NICA did not apply to the
action.
The ALJ found Tristan’s brain injury “more likely than not” occurred because of oxygen
deprivation that occurred on October 3, following the pulmonary hemorrhage, rather than during
“labor, delivery, or resuscitation in the immediate postdelivery period.”
The appeals court reversed, however, holding the phrase “immediate postdelivery period in a
hospital” includes “an extended period of days when a baby is delivered with a life-threatening
condition and requires close supervision.”
The high court concluded the First District’s expansive interpretation of “immediate postdelivery
period in a hospital” conflicted with a Fifth District’s decision, which found the NICA applied in a
case involving an infant with an ongoing need for resuscitation who suffered brain damage.
Here, “the records do not reveal ongoing problems related to respiration in [Tristan’s] first few
days after birth and do not show any ongoing efforts related to any form of resuscitation that
continued during the week after birth,” the high court observed.
Thus, the First District erred in holding the NICA applied to the facts of the instant case.
The high court also rejected the First District’s conclusion that the statutory presumption in favor
of compensability applied, even though plaintiffs did not seek to invoke this presumption.
The rebuttable presumption does not depend on when the brain injury occurred; rather, it arises
in favor of the “claimant” when an infant has sustained a brain injury caused by oxygen
deprivation that has rendered the infant permanently and substantially impaired.
According to the First District, this presumption could be invoked by either party, but the high
court rejected this conclusion.
“[W]e hold that where an individual is not seeking compensation under the NICA Plan, but is
instead seeking to establish the right to sue in a court of law, that individual is not a claimant for
the purposes of the statutory presumption,” the high court said.
Here, plaintiffs were not seeking the benefit of the presumption, and therefore were not
“claimants” under the statute; defendants “were not entitled to the benefit of the presumption,”
the high court said.
Finally, the high court found the ALJ’s findings of fact were supported by competent, substantial
evidence and therefore the order holding the claim was not compensable under the NICA was
“legally and factually correct.”
Bennett v. St. Vincent’s Med. Ctr., No. SC10-390 (Fla. July 7, 2011).
New York Appeals Court Finds Question Of Fact Regarding Whether
Hospital May Be Vicariously Liable For Advice Given By Consulting
Physician Over The Phone
A New York appeals court held July 28, 2011 that more evidence was needed to determine if a
treating hospital could be held vicariously liable for advice given over the telephone by a
physician at a neighboring hospital.
In so holding, the Supreme Court of New York, Appellate Division, Third Department, agreed
with the trial court’s holding denying the treating hospital’s request for a ruling that it was not
liable for the opinion.
In October 2004, plaintiff Stella Brink presented at the emergency room of defendant
Community Memorial Hospital, Inc. with symptoms consistent with a stroke.
During the course of plaintiff's treatment, a question arose as to whether she should be given a
tissue plasinogen activator (TPA), otherwise known as a clot buster.
Defendant, a small community hospital, did not have a neurologist on call, so plaintiff’s treating
physician telephoned Michael Miller, the on-call neurologist at another hospital, who advised
against the administration of TPA.
The treating physician later called for a second opinion Hassan Shukri, the on-call neurologist at
another hospital at the patient’s daughter’s request, who also agreed that plaintiff should not
receive a TPA.
Plaintiff’s condition later deteriorated and the next day she suffered another stroke.
Plaintiff sued defendant and others for medical malpractice. During trial, defendant sought a
ruling that it was not liable for the opinions provided by Miller and Shukri during the course of
plaintiff’s treatment.
The trial court granted the motion as to Shukri but denied the motion as to Miller, finding that
the record presented a question of fact as to whether defendant could be held vicariously liable
for Miller's advice.
Noting that generally a hospital may not be liable for the malpractice of a physician who is not an
employee, the appeals court explained that an exception to this general rule exists where a
patient comes into a hospital emergency room seeking treatment from the hospital itself rather
than a physician of the patient's own choosing.
In that case, liability may be imposed under an apparent or ostensible agency theory, the
appeals court said.
Specifically, "[i]n the context of a medical malpractice action the patient must have reasonably
believed that the physicians treating him or her were provided by the hospital or acted on the
hospital's behalf" and, further, must have accepted the physicians' services in reliance not upon
their particular skill but, rather, based upon their relationship with the underlying hospital.
“Applying these principles to the matter before us, we are persuaded that the record as a whole
presents a question of fact as to whether defendant may be held vicariously liable for Miller's
alleged negligence,” the appeals court held.
But there is also evidence in the record that militates against such a finding, the appeals court
noted.
In addition, it is not clear whether plaintiff's daughter was aware of the actual relationship (or
the alleged lack thereof) between Miller and defendant, the court said.
Accordingly, the lower court’s refusal to grant the motion as to Miller in light of the need for
more evidence, was correct, the appeals court held.
Significantly, the appeals court warned that its decision “should in no way be construed as
standing for the proposition that any sort of telephone consultation between colleagues in an
emergency room setting necessarily exposes the admitting hospital to vicarious liability for any
opinion rendered by the physician so consulted.”
Brink v. Muller, No. 511684 (N.Y. App. Div. July 28, 2011).
New Mexico High Court Says Recovery For Wrongful Conception Only
Available When Physician Fails To Notify Patient Of Fertility
Following a failed sterilization procedure, damages related to an additional pregnancy, along with
the costs of raising any subsequent children to the age of majority, are only available when
plaintiffs can prove a breach of the duty to inform, the New Mexico Supreme Court held August
17, 2011.
Although New Mexico follows a small minority of states that allow for full damages for a wrongful
conception claim, the damages should be reserved for only the most egregious cases, the high
court said.
In so holding, the high court reversed the appeals court and reinstated the district court’s entry
of judgment for the physician in the case.
Defendant Dr. Steven Wenrich delivered plaintiff Cynthia Provencio’s fourth child and at the
same time performed a tubal ligation procedure.
After completing the surgery, defendant sent tissue to a lab and the resulting pathology report
revealed the tissue defendant had ligated was ligament, not fallopian tube, and plaintiff still could
conceive children.
At a follow up appointment, defendant informed plaintiff she could still conceive a child. Plaintiff
subsequently conceived and delivered a fifth child.
Provencio and her husband then sued defendant for wrongful conception and battery. As to the
wrongful conception claim, the only damages for which plaintiffs sought recovery were the costs
associated with raising Mrs. Provencio’s fifth child to the age of majority and punitive damages.
The district court entered judgment in favor of defendant. Plaintiff appealed. The court of appeals
reversed, and defendant then appealed.
In Lovelace Medical Center v. Mendez, 111 N.M. 336, 805 P.2d 603 (1991), the high court held
New Mexico would join a minority of jurisdictions that recognize damages resulting from the birth
of an unplanned, yet healthy child.
The appeals court in its opinion below found “in an ordinary medical malpractice claim stemming
from a negligently performed sterilization procedure, the cost of raising a child may be recovered
when a doctor’s negligence causes the birth of an unwanted child,” regardless of whether that
doctor informs the patient about the failed procedure.
The jury would then weigh the effect of the notice, or lack of it, when assessing causation under
this theory.
The high court agreed with the appeals court that wrongful conception sounds in the law of
medical negligence.
“We are of the view, however, that this case is fundamentally about duty, which is for the court
alone to define,” the high court said.
In examining the specific duty owed, the high court noted “[w]rongful birth is appropriately
characterized as a claim-based failure to diagnose or failure to advise the parents. The duty
owed is part of the doctor’s obligation to provide adequate care so that the parents can make an
informed decision about the risks of pregnancy and childbirth; adequate care includes adequate
notice.”
Wrongful conception is a closely related medical negligence claim that involves the birth of a
healthy, but unplanned, child, the high court explained.
“As a matter of sound policy, we think that the extraordinary damages of raising a child to the
age of majority should be reserved for extraordinary cases like Mendez” where the physician
both failed to properly perform a tubal ligation and failed to inform the patient of the failure, the
high court said.
In distinguishing the present case, the high court noted it was “the doctor in Mendez, not the
patient, who controlled the relevant medical information.”
“In contrast to Mendez, Mr. and Mrs. Provencio possessed information that they could have used
to avoid conception, assuming this was their goal,” the opinion said.
Accordingly, the high court found “damages relating solely to a negligently performed
sterilization are those that would normally flow from a failed surgery, such as the cost of a
second sterilization procedure, any physical or emotional harm that may result from the initial or
subsequent sterilization, lost wages, the reasonable costs of birth control until a second
procedure is feasible, and so forth.”
Provencio v. Wenrich, No. 32,344 (N.M. Aug. 17, 2011).
Georgia High Court Allows Medical Malpractice Suit Against
Psychiatrist By Patient Who Killed His Mother
The Georgia Supreme Court found September 12, 2011 that state public policy does not bar a
patient's medical malpractice action against his psychiatrist claiming the patient killed his
mother partly due to the psychiatrist’s allegedly negligent treatment.
According to the opinion, Dr. Derek O'Brien began treating 38-year-old Victor Bruscato, who had
a history of severe mental illness and violent behavior, after he had been living with his parents
for almost two years. Bruscato previously lived in a group home but had been removed from the
home because of concerns he might commit sexual assault.
O'Brien ordered two of Bruscato's medications, which he had been taking up to that point, be
discontinued for six weeks to rule out the possibility that he might be developing a syndrome
associated with the drugs.
According to a family friend, shortly after Bruscato stopped taking the medications, he began
having nightmares, panic attacks, and bouts of heavy sweating.
A couple months after discontinuing the medications, Bruscato killed his mother. He was indicted
for his mother's murder, but ruled incompetent to stand trial and since was committed to a state
hospital.
Through his guardian, Bruscato brought a medical malpractice action alleging his actions were a
result of deficient psychiatric treatment.
The trial court granted summary judgment in O’Brien's favor, finding, among other things, that
public policy would not allow Bruscato to benefit from his wrongdoings. The appeals court
reversed, and O’Brien appealed.
The state high court agreed that, in most circumstances, an individual may not profit from his
own act of wrongdoing, but situations could arise when an individual’s psychiatric disorder
prevented him from exercising a reasonable degree of care to prevent himself from taking
improper and illegal actions.
Here, the high court concluded “a question of fact remains whether Bruscato knowingly
committed a wrongful act.”
Accordingly, given Bruscato was found mentally incompetent to stand trial, the high court
reasoned that “at this moment in time, it cannot be said that, should Bruscato’s claim against
O’Brien be successful, he might profit from knowingly committing a wrongful act.”
Thus, O’Brien’s motion for summary judgment based on such an argument could not succeed,
the high court held.
Lastly, the high court agreed with the appeals court that Bruscato’s lawsuit was not wholly
related to his act of murder and was not wholly designed to profit from that act.
“To the contrary, his lawsuit relates to the allegedly improper medical treatment he received
from O’Brien and seeks damages for the suffering it caused to him,” the high court noted.
O’Brien v. Bruscato, No. S11G0660 (Ga. Sept. 12, 2011).
Seventh Circuit Reverses Decision Finding Physicians Immune From
Liability Under Illinois Good Samaritan Act
A federal district court in Illinois erred in holding two physicians were immune under the Illinois
Good Samaritan Act (Act) from a medical negligence lawsuit brought by a mother whose infant
died shortly after birth, the Seventh Circuit held August 31, 2011.
Reversing the grant of summary judgment to the physicians, the Seventh Circuit rejected the
U.S. District Court for the Northern District of Illinois' reasoning that the physicians had provided
labor and delivery services to plaintiff “without a fee” so as to qualify for immunity under the Act
because they were not compensated directly for their services, but rather received a salary from
their employer.
“We see no evidence that the legislature, with its use of the unassuming word ‘fee’ intended
anything to turn on how a fee is processed or the compensation structures of the physicians who
provide treatment,” the appeals court said.
“The moment the General Assembly makes the coverage of the Good Samaritan Act turn on the
business model used to collect physicians’ fees is the moment every medical practice
restructures so that every doctor can be a good Samaritan,” the appeals court observed.
The two physicians, Dr. John Seidlin and Dr. Ana-Maria Soleanicov, were called in to help with
plaintiff Gloria Rodas’ delivery. Rodas received prenatal care from the Crusader Central Clinic
Association (clinic), a Rockford, IL community health center.
The clinic had an agreement with the University of Illinois College of Medicine at Rockford (UIC)
whereby UIC obstetricians and gynecologists would provide back-up professional services to
clinic patients that were admitted to the labor and delivery floor of SwedishAmerican Health
System Corporation (SAH).
Under the agreement, the clinic paid UIC a set monthly fee regardless of the level of services
provided. The UIC-salaried physicians would fill out billing forms for their work and submit them
to the clinic. The clinic reserved the rights to bill patients directly for the services rendered.
Seidlin and Soleanicov provided emergency labor and delivery services to Rodas after she
presented at SAH. Following a cesarean delivery, the infant died about two weeks after birth.
The two physicians moved for summary judgment in Rodas’ subsequent medical negligence
lawsuit, alleging they were entitled to immunity under the Act, 745 Ill. Comp. Stat. § 49/25,
which shields physicians from liability if he or she provided emergency care, did not charge a fee
for the services rendered, and acted in good faith.
Applying its interpretation of state court precedent, the district court held both Seidlin and
Soleanicov were entitled to immunity under the Act because neither physician billed plaintiff for
their services rendered or received an economic benefit that was derived directly from the
services performed. Rodas v. SwedishAmerican Health Sys. Corp., No. 05 C 50105 (N.D. Ill. Jan.
29, 2009).
The Seventh Circuit reversed and remanded for further proceedings.
In the instant case, Soleanicov prepared and submitted a billing form for the services she
provided to Rodas; Seidlin, contrary to his customary practice, did not, the appeals
court observed.
“We reject as unsound the argument that [Soleanicov] did not charge a fee because she was
paid a salary and because an entity other than her employer derived direct economic benefit
from the billing form she prepared and submitted,” the appeals court held.
Although Seidlin did not submit a billing form, the appeals court said a genuine issue of material
fact existed as to whether that decision was made in good faith, which is required for the Act’s
protections to apply.
“The decision to deviate from his ordinary practice creates a genuine issue of material fact about
whether his decision not to bill was made in good faith,” the appeals court observed.
Rodas v. Seidlin, No. 09-3760 (7th Cir. Aug. 31, 2011).
Vermont High Court Rules Consulting Doctor Owes Duty To Patient In
TelePsychiatry Study
The Vermont Supreme Court held September 29, 2011 that a psychiatrist owed a duty to a
patient who participated in a short consultation with him as part of a telepsychiatry research
study.
Reversing a lower court decision, the high court said although the psychiatrist’s consultation with
the patient, who later committed suicide, was very limited, he still owed her a duty to provide
care during that time that met the appropriate standard of care.
Plaintiffs sued defendant Fletcher Allen Health Care, Inc. for wrongful death after their fourteenyear-old daughter, who had ongoing mental health problems, committed suicide.
Defendant employed a psychiatrist who briefly was involved with their daughter’s case through a
telepsychiatry research study.
As part of the study, plaintiffs and their daughter completed pre-assessment documentation and
participated in a one-time, 90-minute video conference session with the psychiatrist in August
2006.
Following the session, the psychiatrist completed an evaluation that included his diagnostic
impression of decedent and set forth recommendations for an initial treatment plan.
The evaluation stated that, consistent with the research protocol, no follow-up services would be
provided. After sending the evaluation, the psychiatrist had no further interaction with plaintiffs,
decedent, or any member of her treatment team.
Decedent committed suicide in June 2007 from ingesting several medications, none of which the
psychiatrist recommended.
Plaintiffs sued a number of physicians and medical care providers following their daughter’s
death for medical malpractice, including defendant as the psychiatrist’s employer.
Defendant moved for summary judgment, asserting the psychiatrist had no duty to decedent at
the time she committed suicide because no doctor-patient relationship had been formed, or
alternatively that any such relationship had ended following the one-time interaction.
The trial court granted the motion, agreeing that Harris’ contact with decedent was “so minimal
as to not establish a physician-patient relationship.” The court further found even if a physicianpatient relationship existed at one time, it ended following the video conference, thus no duty
existed at the time of decedent’s death.
Plaintiffs maintained the psychiatrist had a duty to exercise reasonable care to protect decedent
from the danger she posed to herself and that he failed to effectively terminate the doctorpatient relationship prior to decedent’s death.
The Vermont Supreme Court reversed, finding the psychiatrist “had a duty of care in his
professional contact with decedent, which was not extinguished by the ministerial act of
termination of their professional relationship.”
While acknowledging the limited scope of his services, the high court emphasized the psychiatrist
unquestionably provided a psychiatric evaluation and offered treatment recommendations.
“We hold that the ninety-minute consultation performed in this case created a doctor-patient
relationship,” even though the telepsychiatry research study provided no treatment component
to decedent other than the written recommendations to her treatment team.
“Through this consultation, defendant’s doctor assumed a duty to act in a manner consistent with
the applicable standard of care so as not to harm decedent through the consultation services
provided,” the court concluded.
Moreover, even if the doctor-patient relationship ended with the submission of the evaluation
report, this event did not “terminate the doctor’s responsibility for the consequences of any
lapses in his duty to provide services consistent with the applicable standard of care for the
consultation.”
Under Vermont law, physicians are liable for injuries resulting from negligent care while treating
the patient, regardless of whether the doctor-patient relationship is ongoing.
The high court noted, however, its ruling only addressed whether a duty existed, not the scope
of that duty or the appropriate standard of care.
White v. Harris, No. 2010-246 (Vt. Sept. 29, 2011).
Washington Supreme Court Allows Loss Chance Cause Of Action In
Medical Malpractice Cases
The Washington Supreme Court held October 13, 2011 that a plaintiff who suffered significant
brain damage following a stroke could maintain a cause of action for a lost chance of a better
outcome in the medical malpractice context.
The high court’s decision reversed a trial court decision dismissing the action, which found
plaintiffs failed to show “but for” causation and refused to extend the lost chance doctrine to
medical malpractice cases.
In Herskovitz v. Group Health Cooperative of Puget Sound, 664 P.2d 474 (Wash. 1983), the high
court adopted the lost chance doctrine in a survival action where the plaintiff died following the
alleged failure of his doctor to timely diagnose his lung cancer.
The high court here saw no reason to distinguish survival actions from medical malpractice
actions where the plaintiff survived but was left with a serious injury for purposes of allowing a
cause of action for lost chance of a better outcome.
Linda Mohr suffered a trauma-induced stroke following a car accident and is now permanently
disabled. Mohr and her husband (plaintiffs) sued the physicians who treated her following the
accident and the hospital where she was taken for medical malpractice.
Plaintiffs’ claims relied, in part, on a loss of chance cause of action, i.e., that had she received
non-negligent care she would have had a 50% to 60% chance, as opined by their experts, of a
better outcome, including no disability or a significantly less serious disability.
The trial court granted summary judgment for defendants.
The Washington Supreme Court reversed, finding “no persuasive rationale to distinguish
Herskovits from a medical malpractice claim where the facts involve a loss of chance of avoiding
or minimizing permanent disability rather than death.”
The high court continued: “To limit Herskovits to cases that result in death is arbitrary; the same
underlying principles of deterring negligence and compensating for injury apply when the
ultimate harm is permanent disability.”
Adopting the reasoning of the Herskovitz plurality, the high court said a plaintiff bears the
burden to prove duty, breach, and that such breach of duty proximately caused a loss of chance
of a better outcome.
Under this theory, the loss of a chance is the compensable injury, the high court said.
The high court refused to find such harm overly speculative, noting the “nature of tort law
involves complex considerations of many experiences that are difficult to calculate or reduce to
specific sums.”
Finding plaintiffs made a prima facie case of the requisite elements of proof, the high court
reversed summary judgment in defendants’ favor.
A dissenting opinion argued “the loss chance doctrine adopted by the majority punishes
physicians for negligent acts or omissions that cannot be shown to have caused any actual
physical or mental harm.”
Mohr v. Grantham, No. 94712-6 (Wash. Oct. 13, 2011).
Delaware High Court Holds Physician Owes No Duty To Patient After
Referral To Specialist
A physician owes no duty of care to a patient after the doctor has referred the patient to a
specialist, the Delaware Supreme Court held November 15, 2011.
Plaintiff Deborah Spicer was treated by family practitioner, Dr. Abimbola Osunkoya, for a sore
throat on several occasions. After Osunkoya noted that plaintiff’s tonsils were large and red, he
diagnosed her as suffering from recurrent tonsillitis and referred her to Dr. Stephen Cooper, an
ear, nose and throat (ENT) specialist.
Following the referral, Osunkoya neither treated plaintiff again nor consulted with Cooper.
Cooper performed a tonsillectomy on plaintiff.
Plaintiff and her mother later sued Cooper and Osunkoya for medical malpractice, alleging
Cooper performed unnecessary surgery and prescribed an excessive amount of Oxycodone for
post-operative pain.
Osunkoya moved for summary judgment, which the trial court granted, and plaintiff appealed.
Plaintiff argued Osunkoya was negligent because: (1) he referred her to Cooper without objective
evidence to support Osunkoya’s diagnosis of recurrent tonsillitis; (2) he failed to conduct
appropriate tests and physical examinations before diagnosing her; and (3) he failed to ensure
that Cooper received plaintiff's complete and accurate medical history.
The high court found other jurisdictions have consistently held that, in circumstances like those
presented here, the original physician has no duty after the referral.
The high court noted, however, that its “holding would be different if the original physician had
reason to know that the specialist was incompetent, or the original physician acted in concert
with the specialist.”
“But the undisputed facts in this case confirm that Osunkoya had no direct or indirect
involvement in [plaintiff’s] care after referring her to Cooper,” the high court said. “Accordingly,
we hold that, at the time of her injury, Osunkoya owed no duty to plaintiff.”
The high court explained the claims that Osunkoya was negligent before the referral also must
fail because plaintiff “does not allege that she suffered any harm prior to the tonsillectomy.”
The high court also rejected the argument that plaintiff would not have been injured “but for” the
referral made by Osunkoya, finding a remote cause cannot form the basis of liability.
Accordingly, Osunkoya’s alleged negligence was not a proximate cause of plaintiff’s injury, the
high court reasoned.
Spicer v. Osunkoya, No. 102, 2011 (Del. Nov. 15, 2011).
Fourth Circuit Says Under Virginia Law Physician May Testify As To
Standard Of Care For Nurses
A federal trial court did not err in allowing an obstetrician-gynecologist to testify regarding the
standard of care for obstetrical nurses under Virginia law, the Fourth Circuit held December 8,
2011.
According to the appeals court, state court precedent emphasizes the substance of an expert’s
background, knowledge, and practice over a particular title or form.
After plaintiff Latarsha Creekmore was admitted to Maryview Hospital’s Labor and Delivery Unit
for the delivery of her fourth child, she suffered from hemolyses low platelets syndrome, a
severe form of preeclampsia.
As a result, she had a massive stroke with severe and painful physical and cognitive
impairments.
Creekmore sued Maryview for medical malpractice. The district court entered judgment in favor
of Creekmore for $900,000. Maryview appealed.
On appeal, Maryview argued the district court abused its discretion by allowing an obstetriciangynecologist to testify as an expert regarding the standard of care for a nurse’s postpartum
monitoring of a high-risk patient with preeclampsia.
At the outset, the appeals court noted that even though the case was heard by a federal court,
because the testimony at issue was required for a medical malpractice claim under Virginia law,
the sufficiency of its substance to meet plaintiff’s prima facie case was governed by state law.
Under Virginia law, two requirements must be satisfied before an expert may testify regarding
the standard of care—the so-called "knowledge requirement" and the "active clinical practice
requirement."
According to the appeals court, the knowledge requirement does not demand an identical level of
education or degree of specialization; rather, it can be shown by "evidence that the standard of
care, as it relates to the alleged negligent act or treatment, is the same for the proffered expert’s
specialty as it is for the defendant doctor’s specialty." Jackson v. Qureshi, 671 S.E.2d 163, 167
(2009).
The active clinical practice requirement likewise concerns the "‘relevant medical procedure’ at
issue in a case" or, more specifically, the "actual performance of the procedures at issue," which
"must be read in the context of the actions by which the defendant is alleged to have deviated
from the standard of care," the appeals court explained. See Hinkley v. Koehler, 606 S.E.2d 803,
808 (2005).
“Taken together, these cases indicate that the Virginia Supreme Court elevates the substance of
an expert’s background, knowledge, and practice over a particular title or form,” the federal
appeals court said.
Here, the standard of care at issue concerned the postpartum monitoring of a high-risk patient
with preeclampsia and, according to the uncontroverted testimony of Creekmore’s expert Dr.
Stokes, the risks inherent to patients with preeclampsia are well known to both physicians and
nurses working in the field of obstetrics.
The appeals court rejected Maryview’s argument that the district court abused its discretion by
permitting Stokes to testify regarding the standard of care for obstetrical nurses because Stokes
did not have an active clinical practice in nursing.
“It is undisputed that Dr. Stokes regularly performs the procedure at issue—the postpartum
monitoring of high-risk patients with preeclampsia—and ‘the standard of care for performing the
procedure is the same’. . . . As such, he ‘provide[s] healthcare services in the same context in
which it is alleged that [the] defendant deviated from the standard of care,’ fulfilling the purpose
of the active clinical practice requirement,” the appeals court held.
The appeals court further pointed out that “[a]s noted by the district court, Creekmore had a
nurse testify during rebuttal to ‘pretty much the same’ as what Dr. Stokes said with respect to
the standard of care. Thus, taking a global view of the evidence, Creekmore made out her prima
facie case of negligence even without Dr. Stokes as an expert in the applicable standard of care.”
Creekmore v. Maryview Hosp., No. 10-1183 (4th Cir. Dec. 8, 2011).
Utah High Court Finds Wrongful Death Statute Applies To Unborn
Children
The Utah Supreme Court in a 4-1 decision ruled December 20, 2011 that the parents of a child
who died in utero could maintain a wrongful death action under state law.
Amelia Sanchez and Miguel Carranza initiated a wrongful death action against the federal
government after their baby was stillborn. Sanchez received prenatal care at a community health
center where she was treated by Public Health Service employees.
The lawsuit was brought in federal district court, which certified to the Utah Supreme Court the
question of whether the 2006 version of the state law at issue allowed a claim to be made for the
wrongful death of an unborn child.
The relevant state law, Utah Code Ann. § 78-11-6 (2006), provides that “a parent or guardian
may maintain an action for the death or injury of a minor child when the injury or death is
caused by the wrongful act or neglect of another.”
The statute has since been amended to apply only to the injury, not the death, of a minor child.
The legislature also amended Utah Code § 78-B-3-106(1) to state that “when the death of a
person is caused by the wrongful act or neglect of another, his heirs . . . may maintain an action
for damages against the person causing the death.”
Two of the justices in the majority concluded that a “plain language” reading of “minor child” as
used in the statute included an unborn child.
Another two justices found the accepted definitions of “minor child” ambiguous as to whether
they included the unborn.
These justices agreed, however, that “minor child” as used in the law encompassed the unborn
based on “the nature and scope of the right of action recognized in the wrongful death statute.”
Specifically, this opinion noted the statute applies to claims for “death or injury” to a “minor
child.”
Thus, fetal injuries unarguably were actionable under the statute, the opinion observed. “And
given that minor children have tort claims when they survive a tortious act in utero, it would be
absurd to read the statute to foreclose such claim when the fetus is so battered that he dies in
the womb,” the opinion concluded.
A dissenting opinion concluded an unborn fetus is not a “minor child” under Section 78-11-6.
According to the dissent, the plain meaning of “minor child” does not include a fetus; a wrongful
death cause of action may only be recognized through clear legislative direction; and a
construction of “minor child” that encompasses an unborn fetus leads to absurd results.
Carranza v. United States, No. 2011 UT 80 (Utah Dec. 20, 2011).
Arkansas Supreme Court Dismisses Negligent Credentialing Claim
Against Medical Center
The Arkansas Supreme Court dismissed February 9, 2012 a medical malpractice action against a
hospital that employed the physician who caused the plaintiff’s injury, finding the state’s
malpractice statute does not confer a cause of action for negligent credentialing.
After three spinal surgeries performed by Dr. Cyril Raben left her unable to work, plaintiff
Theresa Paulino and her husband, Eddie Paulino, sued QHG of Springdale, Inc. d/b/a Northwest
Medical Center (NWC), for negligently credentialing Raben.
The high court, however, found the Medical Malpractice Act, Ark. Code Ann. § 16-11-202 (Repl.
2006), applies only to medical injuries arising from professional services, a doctor’s treatment or
order, or the application of medical science to patient care.
Credentialing does not fit within this definition, the high court said.
The high court also declined to recognize a tort of negligent credentialing. Unlike ordinary
decisions to hire an employee or procure an independent contractor, credentialing is subject to
statutory safeguards under the Arkansas Peer Review Statute, Ark. Code Ann. §§ 20-90-501 to 503 (Repl. 2005).
The high court rejected plaintiffs’ argument that the immunity provisions in this statutory
scheme contemplate a direct cause of action for negligent credentialing.
Having found no cause of action, the high court declined to address whether the Arkansas Peer
Review Statute or the Health Care Quality Improvement Act would immunize NWC from suit.
Finally, the high court held plaintiffs failed to allege facts sufficient to constitute a claim of
outrage against NWC.
Paulino v. QHG of Springdale, Inc., No. 11-26 (Ark. Feb. 9, 2012).
South Dakota Supreme Court Rejects Introduction Of Alleged Apology
Into Evidence
In a February 1, 2012 decision, the South Dakota Supreme Court held state law bars the
introduction into evidence of a medical malpractice plaintiff’s notes showing hospital officials
apologized to the plaintiff.
Dr. Kevin Ronan and his wife, Patricia Ronan, sued Sanford Health d/b/a Sanford Hospital,
Sanford Clinic, and four physicians, Bradley Hruby, Wendell Hoffman, and Richard Hardie, and
David Thomas, alleging defendants failed to promptly diagnose Ronan’s cocci, and failed to
administer steroids.
After a trial, a jury returned a verdict for defendants.
On appeal, the Ronans argued the trial court improperly excluded notes taken by Mrs. Ronan at
a meeting with the Chief Operations Officer and Risk Manager of Sanford Health.
According to the notes, these officials apologized for failing Ronan and admitted the case had
been botched.
The high court held, however, that S.D. Codified Laws § 19-12-14 barred admission of the notes
into evidence. The statute, enacted in 2005, precludes the use of apologies, offers to undertake
corrective action or remedial treatment, and gratuitous acts to assist affected persons by
healthcare providers to prove negligence.
The Ronans argued the notes fell under an exception in the statute for using an admission
against interest to impeach a witness. But the high court rejected this argument because the
Ronans offered the notes into evidence as part of their case-in-chief when there was no evidence
to impeach.
The Ronans also argued the trial court erred in precluding them from impeaching a medical
expert retained by defendants. According to plaintiffs, they wanted to cross-examine the
physician about his decision to cancel an appointment with Dr. Ronan after being retained by
defense counsel as an expert.
The high court affirmed the trail court’s decision to reject this line of questioning as irrelevant.
Ronan v. Sanford Health, No. 25813-a-DG (S.D. Feb. 1, 2012).
Utah High Court Allows Non-Patient's Negligent Prescribing Claim
The Utah Supreme Court held February 28, 2012 that physicians have a duty to exercise
reasonable care to non-parties when prescribing medications to a patient that could pose a risk
of injury to third parties.
In so holding, the high court reversed a lower court decision dismissing a negligence action by
the minor children of a woman who was shot by her husband after he began taking several
prescribed medications.
The high court emphasized the “critical” distinction between acts and omissions when evaluating
the issue of duty in a tort action.
“Acts of misfeasance, or ‘active misconduct working positive injury to others,’ typically carry a
duty of care,” the high court observed. “Nonfeasance—‘passive inaction, a failure to take positive
steps to benefit others, or to protect them from harm not created by any wrongful act of the
defendant’—by contrast, generally implicates a duty only in cases of special legal relationships.”
Negligent prescription cases fall in the former category, the high court said, and therefore do not
require a “special relationship” to implicate a duty on the party of the healthcare provider to third
parties.
Case law indicates that healthcare providers are not required to control their patients’
independent conduct, but does “not support defendants’ view that a healthcare provider may—
with immunity from liability to any nonpatient—negligently prescribe medication that
affirmatively causes a patient to injure nonpatients,” the high court commented.
The high court refused to carve out an exception in negligent prescription cases to the general
duty to exercise care when engaging in affirmative conduct that creates a risk of physical harm
to others.
The high court noted prescription medications span a scale of foreseeable risk for which the
healthcare provider is in the best position to evaluate.
The high court also discounted defendants’ public policy arguments, including concerns about the
effect of imposing such a duty on malpractice insurance and healthcare costs.
“The supposed effects on insurance premiums and patient costs are speculative . . . [a]nd in any
event, the alternative suggested by defendants is to impose these costs on injured parties and
permit negligent physicians to remain unaccountable,” the high court said.
The high court also characterized defendants’ claims that non-patient suits would interfere with
confidentiality in physician-patient relationships as “overblown.”
The case involved a negligence lawsuit against several healthcare providers brought by two
young children, through their conservator, after their father, David Ragsdale, shot and killed
their mother. At the time of the shooting, Ragsdale had been taking a combination of antidepressants and steroids prescribed by a defendant nurse practitioner, under the supervision of
a consulting physician.
The trial court dismissed the action, concluding defendants owed no duty of care to plaintiffs
because no patient-healthcare provider relationship existed and plaintiffs could not step into
Ragsdale’s shoes to pursue a medical malpractice action.
In addition to finding defendants owed a duty to plaintiff non-patients, the high court also held
plaintiffs’ claim “is not a derivative one for harm to their father, but a personal one for their own
injuries.”
Jeffs v. West, No. 20110297 (Utah Feb. 28, 2012).
Medical Records
California Supreme Court Holds Fair Credit Reporting Act Does Not
Preempt Lawsuit Against Debt Collector For Disclosing Confidential
Medical Information
The federal Fair Credit Reporting Act (FCRA) did not preempt an action against a debt collector
for allegedly violating California’s Confidentiality of Medical Information Act (CMIA) by reporting
the plaintiff patients’ medical information to three credit agencies, the California Supreme Court
ruled June 16, 2011 in reversing an appeals court decision.
In so holding, the high court interpreted the FCRA’s preemptive scope narrowly to include only
state laws regulating the accuracy and handling of disputes by those who furnish information to
consumer reporting agencies.
According to the high court, the instant claims under the CMIA involved the unauthorized
disclosure of medical information; a showing that the information was inaccurate was not
necessary to prove the claim. Thus, FCRA preemption was not triggered.
Robert Brown and his wife, individually and as guardians of their minor children, sued Stewart
Mortensen and others for allegedly disclosing the Browns’ and their minor children’s confidential
medical information to consumer credit agencies.
Brown and his children had received dental services that Mortensen, who had an agreement with
their dentist for the collection of outstanding debt, claimed they had not paid for.
To verify the alleged debt, Mortensen sent the family a copy of Brown’s and the children’s dental
charts. Brown denied the alleged debt and complained to Mortensen that the charts contained
confidential medical information, including the Browns’ names, social security numbers, dates of
birth, healthcare providers, and treatment dates.
Despite Brown’s objections, Mortensen disclosed the dental charts, including the confidential
medical information, to three consumer credit reporting agencies.
In the Browns’ subsequent lawsuit, they alleged Mortensen violated the CMIA. The trial court
sustained Mortensen’s demurrer, finding the complaint impermissibly vague.
The California Court of Appeal, Second Appellate District, held the complaint was not
impermissibly vague or confusing, but concluded the FCRA preempted the Browns’ claims. Brown
v. Mortensen, No. B199793 (Cal. Ct. App. Jan. 29, 2010).
Reversing, the high court held the appeals court misconstrued the FCRA’s preemption provision.
While the FCRA generally leaves state law intact, it carves out an exception specifically limiting
the availability of state consumer remedies against furnishers of credit information with respect
to “any subject matter regulated” under the statute.
According to the high court, the statute spells out two discrete areas of regulation: it imposes a
duty to provide accurate information and it dictates what furnishers must do when the
information provided is in dispute.
The appeals court viewed the preemption provision broadly as encompassing all responsibilities
of furnishers, but the high court disagreed and instead limited preemption to state laws
regulating only the two specific areas enumerated in the statute.
Noting the strong presumption against preemption, the high court also pointed out that the
Health Insurance Portability and Accountability Act, which was enacted in 1996 when the FCRA
was amended, only preempts conflicting or less stringent state law.
Thus, the high court continued, the remaining issue is whether the CMIA involved the same
subject matter as the two areas governed by the FCRA.
Answering this question in the negative, the high court noted the CMIA is violated when a
healthcare provider makes an unauthorized, unexcused disclosure of privileged medical
information.
“Notably, the interest protected is an interest in informational privacy, not informational
accuracy; a plaintiff need not show the disclosure was false or misleading.”
The high court found the claims alleged the unauthorized disclosure of medical information and
involved neither accuracy nor credit dispute resolution; thus, FCRA preemption did not apply.
Brown v. Mortensen, No. S180862 (Cal. June 16, 2011).
U.S. Court In New Jersey Declines To Compel Hospital To Provide
Medical Records
The U.S. District Court for the District of New Jersey denied October 12, 2012 a medical
negligence plaintiffs' motion to compel a hospital to provide the medical records of his hospital
roommate.
According to the court, under New York physician-patient privilege law, absent the roommate’s
consent to disclosure or waiver of the physician-patient privilege, the hospital may not disclose
the medical records at issue to plaintiffs.
The court further noted the roommate refused to provide consent for the disclosure of his
records.
Plaintiffs James Maillaro and Joanne Maillaro moved the court to compel production of certain
medical records related to a patient with whom Mr. Maillaro shared a hospital room on July 10,
2008.
Plaintiffs alleged he was placed in a room with the patient “who had medical conditions which
caused . . . [his] surgical site to become infected" with staphylococcus aureus (Staph).
Defendants New York Presbyterian Hospital (NYPH) and Michael Kaiser objected to disclosure of
the medical records calling plaintiffs’ request a “fishing expedition.”
According to defendants, the records are protected by the physician-patient privilege and, under
New York law, "unless the patient waives the privilege[,] a person authorized to practice
medicine shall not be allowed to disclose any information which he acquired in attending a
patient in a professional capacity . . . and which was necessary to enable him to act in that
capacity."
Defendants further argued the records also constituted protected health information as defined
by the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
But, according to defendants, New York’s physician-patient privilege law is more stringent than
HIPAA and thus is not preempted.
The court agreed HIPAA did not preempt New York law and went on to analyze the issue under
the physician-patient privilege statute.
The court ultimately agreed with defendants that because the patient did not provide consent for
the disclosure of his medical records, the hospital was not obligated to provide such records to
plaintiffs.
Maillaro v. New York Presbyterian Hosp., No. 10-3474 (D.N.J. Oct. 12, 2011).
Medicare
Regulatory Developments
CMS Proposes Access To Medicare Claims Data For Public Performance
Reports
The Centers for Medicare and Medicaid Services (CMS) announced June 3, 2011 a proposed rule
that would give “qualified entities” access to Medicare claims data for purposes of aggregating
the information with private sector data and disseminating to the public healthcare provider and
supplier performance reports.
The proposed rule, which implements provisions of the Affordable Care Act, is part of the
administration’s broader effort to improve care and lower costs, CMS said in a press release.
“Performance reports that include Medicare data will result in higher quality and more cost
effective care. And making our health care system more transparent promotes competition and
drives costs down,” said CMS Administrator Donald Berwick, M.D.
Up until now, CMS noted, health plans have had to rely on their own, limited set of claims data
to compile performance reports, which often resulted in contradictory and incomplete information
that consumers and providers viewed as unreliable.
Under the proposed rule, “qualified entities” that met certain requirements would have access to
the Medicare claims data, which they would be required to combine with private sector claims
data “to produce quality reports that are more representative of how providers and suppliers are
performing,” CMS said.
CMS emphasized the proposed rule includes “strict privacy and security requirements for entities
handling Medicare claims data.” The entities also would be subject to continual monitoring by
CMS.
In addition, qualified entities would have to share confidentially the performance reports with
providers and suppliers before their public release so they could review and correct any
inaccuracies.
CMS Proposes CoPs for Community Health Centers
The Centers for Medicare and Medicaid Services (CMS) issued a proposed rule June 17, 2011 (76
Fed. Reg. 35684) that would, for the first time, establish Conditions of Participation (CoPs) for
Community Mental Health Centers (CMHCs).
The proposed rule, CMS said in a press release, includes health and safety standards for CMHCs,
which provide partial hospitalization services to Medicare beneficiaries and offer an alternative to
inpatient care.
According to CMS, the new CoPs focus on a “client-centered, outcome-oriented approach.”
The proposed standards address the following areas:
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Establishing qualifications for CMHCs employees and contractors.
Requiring CMHCs to notify clients of their rights and to investigate and report violations of
these rights.
Convening of a treatment team, developing an active treatment plan, and coordinating
services to ensure an interdisciplinary approach to individualized client care.
Creating a Quality Assessment and Performance Improvement Program, requiring CMHCs
to identify program needs by evaluating outcome and client satisfaction data and making
necessary changes to improve quality of care.
Setting organization, governance, administration of services, and partial hospitalization
services requirements, with an emphasis on governance structure.
The new CoPs would allow CMS to survey CMHCs for compliance, the proposed rule said.
CMS Proposes To Rescind Requirement For Physician Signatures On
Lab Test Requisitions
The Centers for Medicare and Medicaid Services (CMS) issued a proposed rule in the June 30,
2011 Federal Register (76 Fed. Reg. 38342) that would retract the requirement in the calendar
year 2011 Physician Fee Schedule final rule for the signature of a physician or qualified nonphysician practitioner (NPP) on a requisition for clinical diagnostic laboratory tests paid under the
Clinical Laboratory Fee Schedule (CLFS).
CMS said it originally believed the signature requirement “would result in a less confusing
process because a physician's signature would be required for all requisitions and orders,
eliminating the uncertainty over whether the documentation is a requisition or an order, whether
the type of test being ordered requires a signature, or which payment system does or does not
require a physician's or NPP's signature.”
However, CMS noted that industry stakeholders identified many scenarios where it would be
difficult to obtain the physician’s or NPP’s signature on the requisition for clinical diagnostic
laboratory tests under the CLFS.
“In practice, we can see how requiring the physician or NPP to sign the paper requisition could,
in some cases, be very inconvenient and disruptive to the physician, NPP, the beneficiary, and
other patients,” the agency acknowledged in the proposed rule.
CMS said while it was developing educational and outreach materials, “we realized how difficult
and burdensome the actual implementation of this policy was for physicians and NPPs and that,
in some cases, the implementation of this policy could have a negative impact on patient care.”
CMS Final Rule Increases Medicare Payments To IRFs By $150 Million
In FY 2012
Medicare payment rates to the more than 1,200 free-standing and hospital-based inpatient
rehabilitation facilities (IRFs) will increase by 2.2%, or a projected $150 million, under a fiscal
year (FY) 2012 final rule (76 Fed. Reg. 47836) the Centers for Medicare and Medicaid Services
(CMS) published in the August 5, 2011 Federal Register.
The proposed rule (76 Fed. Reg. 24214) issued in April projected a 1.8%, or $120 million,
increase under the IRF Prospective Payment System.
The final rule, which is effective for discharges on or after October 1, 2011, also establishes a
new quality reporting system for IRFs as authorized under the Affordable Care Act.
“The final rule extends to the Inpatient Rehabilitation Facility payment system a quality reporting
program designed to encourage these facilities to adopt practices that will better protect patient
safety and prevent hospital-acquired conditions, which is an essential part of providing wellcoordinated patient-and-family-centered care,” said CMS Administrator Dr. Donald Berwick in a
press release.
Under the final rule, IRFs initially will submit data on two quality measures—urinary catheterassociated urinary tract infection and pressure ulcers that are new or have worsened. IRFs that
do not submit quality data would see their payments reduced by two percentage points
beginning in FY 2014, CMS said.
A third measure—“30-day Comprehensive All Cause Risk Standardized Readmission”—also is
under development, CMS said.
Among other provisions, the final rule also allows IRFs to receive temporary adjustments to their
full-time equivalent intern and resident caps if they take on interns and residents who are unable
to complete their training because the IRF that had been training them either closed or ended its
resident training program.
IPPS Final Rule Increases Medicare Payments To Hospital
The Centers for Medicare and Medicaid Services (CMS) issued August 1, 2011 a final rule that
increases payment rates in fiscal year (FY) 2012 for most general acute care hospitals paid under
the inpatient prospective payment system (IPPS) by 1%, instead of the negative 0.5% update
included in the proposed rule.
According to CMS, the positive rate update in the final rule, which increases payments to acute
care hospitals for inpatient services in FY 2012 by $1.13 billion compared to FY 2011, was due to
the adoption of a higher market basket than earlier projections (3% versus 2.8%); a lower
multifactor productivity adjustment based on more recent data (1% versus 1.2%); and a lower
prospective documentation and coding adjustment of negative 2% rather than the 3.15% called
for under the proposed rule.
Last week, House and Senate lawmakers urged CMS to take another look at proposed cuts in
Medicare payments to hospitals intended to offset coding changes that are not based on changes
in patient severity, which they said would have cut hospital reimbursement by $6 billion in FY
2012.
American Hospital Association President and Chief Executive Officer Rich Umbdenstock said in a
statement the group was “disappointed CMS continues to implement coding cuts,” but “pleased
that it acknowledged the earlier plan would have been detrimental to hospitals’ mission of
caring.”
“CMS has developed its update policy in response to many comments expressing concerns about
our original proposal,” Deputy Administer and Director for the Center for Medicare Jonathan
Blum said in an agency press release. “We believe that our final policy strikes the appropriate
balance between providing a fair update to hospitals and ensuring careful stewardship of the
Medicare Trust Fund.”
The final rule, which will be published in the August 18 Federal Register and is effective as of
October 1, 2011, also provides a 2.5% increase, or $126 million bump, in Medicare payments to
Long Term Care Hospitals (LTCH) under the LTCH PPS for FY 2012. The proposed rule projected
a 1.9%, or $95 million, increase in payments for LTCHs.
Quality Initiatives
The rule also finalizes a number of proposals related to quality initiatives.
The Affordable Care Act (ACA) requires CMS to implement a Hospital Readmissions Reduction
Program that will reduce payments beginning in FY 2013 to certain hospitals that have excess
readmissions for certain selected conditions. The recently announced public-private Partnership
for Patients is aimed at decreasing hospital readmissions by 20% in 2014 compared to 2010.
The final rule adopts initial measures for rates of readmissions for three conditions—acute
myocardial infarction (or heart attack), heart failure, and pneumonia—as well as the
methodology that will be used to calculate excess readmission rates for these conditions.
In addition, the final rule expands to 76 the quality measures that hospitals must report under
the new Hospital Inpatient Quality Reporting Program to receive a full update in FYs 2014 and
2015.
The rule also finalizes the first measure set for a quality reporting program under the LTCH PPS.
Under the final rule, reporting will begin in FY 2013 for payment determination in FY 2014.
Final Rule Increases Medicare Payments To Hospices By 2.5%
The Centers for Medicare and Medicaid Services (CMS) issued July 29, 2011 a final rule that
increases Medicare payments to hospices in fiscal year (FY) 2012 by 2.5%, or a projected $340
million.
The final hospice wage index for FY 2012, published in the August 4 Federal Register (76 Fed.
Reg. 47302), includes a 3% increase in the “hospital market basket” offset by an estimated
0.5% decrease due to updated wage index data and the third-year of CMS’ seven-year phase-out
of a wage index budget neutrality adjustment factor.
The final rule also makes changes to “face-to-face” encounter requirements on physician
certification of beneficiary eligibility for the hospice benefit. Specifically, the final rule allows “any
hospice physician to perform the face-to-face encounter, regardless of whether that same
physician recertifies the patient’s terminal illness and composes the recertification narrative,”
CMS said in a press release.
Hospice Aggregate Cap Calculation Methodology
The final rule adopts changes to the hospice aggregate cap calculation methodology. Numerous
courts have concluded CMS' current methodology for determining the number of Medicare
beneficiaries used in the aggregate cap calculation was inconsistent with the Medicare statute.
Going forward, CMS said that for the cap year ending October 31, 2012 and subsequent cap
years, the hospice aggregate cap will be calculated using the patient-by-patient proportional
methodology. However, the final rule allows hospices to elect to continue to use the current
patient counting method as well.
Quality Reporting
The final rule also implements a new hospice quality reporting program as authorized under the
Affordable Care Act.
Under the program, beginning in FY 2014, any hospice that does not comply with the quality
reporting requirements will see its market basket update reduced by 2 percentage points.
Final SNF PPS Rule Corrects Unintended Rise In FY 2011 Payments
Skilled nursing facilities (SNFs) will see an 11% cut in fiscal year (FY) 2012 Medicare prospective
payment system (PPS) payments under a final rule released by the Centers for Medicare and
Medicaid Services (CMS) July 29, 2011.
The FY 2012 payment, which will be $3.87 billion lower than payments for FY 2011, corrects for
an unintended spike in payment levels and better aligns Medicare payments with costs, CMS said
in a press release.
The agency said it is now recalibrating the case-mix indexes (CMIs) for FY 2012 to restore
overall payments to their intended levels on a prospective basis.
The SNF PPS uses a system known as Resource Utilization Groups Version 4 (RUG-IV). In
transitioning from the previous classification system to the new RUG-IV, CMS adjusted the CMIs
for FY 2011 based on forecasted utilization under this new classification system to establish
parity in overall payments.
But CMS found that the parity adjustment, which was intended to ensure that the new RUG-IV
system would not change overall spending levels from the prior year, instead resulted in a
significant increase in Medicare expenditures during FY 2011.
As a result, the FY 2012 recalibration of the CMIs will result in a reduction to skilled nursing
facility payments of $4.47 billion or 12.6%. However, that reduction would be partially offset by
the FY 2012 update to Medicare SNF payments, the release explained.
CMS pointed out that its recalibration ”removes an unintended spike in payments that occurred
in FY 2011 rather than decreasing an otherwise appropriate payment amount.”
“Even with the recalibration, the FY 2012 payment rates will be 3.4 percent higher than the rates
established for FY 2010, the period immediately preceding the unintended spike in payment
levels,” the agency noted.
The rule also makes a number of additional revisions aimed at enhancing SNF PPS accuracy and
integrity, CMS said.
Legislative Developments
CMS Not Required To Include Records From Medicare Part C
Contractors In FOIA Response
The Centers for Medicare and Medicaid Services (CMS) is not obligated to seek out records from
Medicare Advantage (Part C) contractors in response to a Freedom of Information Act (FOIA)
request, a federal court in Connecticut held May 26, 2011.
The U.S. District Court for the District of Connecticut concluded the materials requested did not
constitute “agency records” for FOIA purposes.
According to the Supreme Court, to qualify as “agency records” under FOIA, the agency must (1)
either create or obtain the requested materials, and (2) be in control of the requested materials
at the time of the FOIA request, the court explained.
Because the materials at issue did not meet these two requirements, CMS may exclude from its
response to the Center for Medicare Advocacy, Inc.’s (Center’s) FOIA request records held by
Part C contractors, the court held.
The Center sought records from CMS under FOIA related to the so-called “improvement
standard,” which CMS and insurers allegedly use to deny or terminate Medicare coverage.
The legality of the improvement standard, which requires Medicare beneficiaries to show
treatments will improve their medical conditions, rather than merely maintaining them, for
coverage, is the subject of litigation the Center currently is pursuing in a Vermont federal district
court. See Jimmo v. Sebelius, No. 5:11cv16-cr (filed Jan. 18, 2011).
The Center filed a FOIA request with CMS seeking information about the training the agency
provides to its employees regarding the standard, as well as the training Medicare Parts A, B,
and C contractors give their employees.
CMS’ records search and response did not include records of Medicare Part C contractors, arguing
its legal authority for FOIA responses was limited to Part A and Part B contractors, and did not
extend to Part C.
The court agreed and therefore granted summary judgment in CMS’ favor.
At issue in the case was whether materials held by Part C contractors constitute “agency records"
for purposes of FOIA.
Applying the Supreme Court standard described above, the court answered the question in the
negative, noting even if CMS had at one time created or obtained the requested material, the
agency did not have control of the materials at the time of the FOIA request.
Although the Department of Health and Human Services defined, by regulation, Part A and Part B
contractors as part of the agency for FOIA purposes, it had not done so with respect to Part C
contractors, the court noted.
Moreover, “it is not immediately clear that FOIA itself would obligate HHS to search for records
held by any health insurance carriers and intermediaries that contract with HHS, whether those
entities were contractors under Medicare Part A, Medicare Part B, or Medicare Part C,” the court
said.
The court also rejected the Center’s argument that Parts, A, B, and C contractors are all “state
actors” for purposes of FOIA, noting no authority for applying the “state action” requirement
outside the constitutional context.
Center for Medicare Advocacy, Inc. v. Department of Health and Human Servs., No. 3:10cv645
(MRK) (D. Conn. May 26, 2011).
U.S. Court In Pennsylvania Says Medicare Advantage Organizations Do
Not Have Private Cause Of Action Under MSP Statute
A federal district court in Pennsylvania ruled June 13, 2011 that Medicare Advantage
organizations (MAOs) do not have a private cause of action under the Medicare Secondary Payer
(MSP) law.
In so holding, the U.S. District Court for the Eastern District of Pennsylvania granted defendant
GlaxoSmithKline’s (GSK’s) motion to dismiss MAO Humana Insurance Co.’s action under the MSP
claiming a right to reimbursement of medical expenses Humana enrollees incurred after using
GSK’s diabetes medication Avandia.
The Medicare Act provides MAOs the right to assume secondary payer status under the MA
statute and MSP law.
The MSP creates a private cause of action to enforce the right to recover payments made by
Medicare that turn out to be the responsibility of a primary plan. The MA statute contains its own
secondary payer provision that references, but does not fully adopt or incorporate the MSP.
GSK settled the claims of many individual plaintiffs concerning Avandia via “inventory”
settlement agreements entered into between the drug maker and plaintiffs’ law firms
representing various claimants.
According to the opinion, GSK’s settlements honored the reimbursement rights of Medicare Part
A and Part B providers, but not the claims for reimbursement from Humana and other Part C
providers.
The court framed the issue as whether the Medicare Act or its implementing regulations grant an
MAO a private right of action to enforce its rights as a secondary payer.
Answering the question in the negative, the court noted while the MA statute references the
MSP, that reference is limited to the MSP’s definitions and does not include the remedies
provided to the United States or the private right of action for damages when a primary plan fails
to provide for primary payment or reimbursement.
The court also found no implied right of action under the factors set forth by the Supreme Court
in Cort v. Ash, 422 U.S. 66 (1975), noting no stated legislative intent to do so, providing a
private right of action would not further the MSP’s cost-saving goals given the Part C program’s
capitated payment structure, and the MA statute’s secondary payer language is permissive
rather than mandatory (unlike the MSP law itself).
Moreover, the court added, Humana is not without a remedy; it could seek payment from its
enrollees in state court under the reimbursement and subrogation provisions of their insurance
contracts.
Finally, the court held a Department of Health and Human Services implementing regulation
indicating MAOs “will exercise the same rights” to recover from a primary plan, entity, or
individual as the Secretary exercises under the MSP regulations was inconsistent with the MA
statute.
Even if the statute was ambiguous, the regulation was not a permissible construction of the
statute, the court held.
In re Avandia Marketing, Sales Pracs. and Prods. Liability Litig., MDL No. 1871 (E.D. Pa. Jun. 3,
2011).
D.C. Circuit Says Cancer Hospital Should Be Allowed To Show “Net”
Impact Of New Drugs On Inpatient Costs
The D.C. Circuit reversed a grant of summary judgment to the Department of Health and Human
Services Secretary in a lawsuit brought by a cancer hospital alleging it did not receive sufficient
Medicare reimbursement for its inpatient costs.
The appeals court found the hospital was not given adequate notice at the administrative appeal
level of a new “net” financial impact requirement for purposes of seeking an upward adjustment
in its “target” amount” for 2000 and 2001 because of “events beyond the hospital’s control)—
i.e., the high-cost of certain new cancer drugs.
Thus, the appeals court remanded to HHS to give the hospital the chance to show the net
financial impact of the new cancer drugs.
The appeals court affirmed, however, a ruling in favor of the Secretary concerning Medicare’s
reimbursement of the hospital’s “reasonable costs” for outpatient care.
Inpatient Costs
As a major cancer treatment and research center, plaintiff University of Texas M.D. Anderson
Cancer Center is exempt from the prospective payment system (PPS) applicable to most other
hospitals.
For inpatient services, cancer hospitals are likewise exempt from the PPS and instead are paid
based on their reasonable costs subject to a congressionally set ceiling known as the “target
amount.”
The ceiling is designed to rise with inflation, but the Medicare Act allows for adjustments to the
target amount “where events beyond the hospital’s control . . . create a distortion in the increase
in costs for a cost reporting period . . . .” 42 U.S.C. § 1395ww(b)(4)(A)(i).
Plaintiff exceeded its target rates in its fiscal years (FYs) ending in 2000 and 2001 by $4.8 million
and $4.18 million, respectively, largely because of costs associated with certain new cancer
drugs.
After holding an administrative hearing, the Provider Reimbursement Review Board (PRRB)
rejected the hospital’s requested adjustment for showing only the gross, rather than net,
financial impact of the new drugs.
The district court upheld the Secretary’s financial decision on this issue, but the D.C. Circuit
reversed.
While the appeals court agreed the net financial impact requirement was reasonable, it
concluded the hospital was not given adequate notice to allow it to make such a showing
regarding the new cancer drugs.
Here, the PRRB announced the requirement after the hospital’s administrative hearing and the
Board had not required an express showing of net financial impact in previous rulings, the
appeals court held.
“In essence, therefore, the Board sprung this requirement on the Hospital after the hearing—
when it was too late for the Hospital to put forward evidence to satisfy the requirement,” the
appeals court said.
Thus, the appeals court reversed and told the district court to remand to HHS to allow the
hospital to make a showing of net financial impact.
Outpatient Costs
Under the Medicare statute, Congress also allowed exempted providers like cancer hospitals to
receive reimbursement for a portion of their current reasonable costs for outpatient services. See
42 U.S.C. § 1395l(t)(7).
Under the statute, cancer hospitals could receive payment for the greater of: (i) the amount that
normally would be paid under the hospital’s outpatient PPS fee schedule; or (ii) the product of
the hospital’s reasonable cost of services furnished in the current year multiplied by the
hospital’s payment-to-cost ratio.
The payment-to-cost ratio is determined by dividing 1996 Medicare payments by 1996
reasonable costs.
“A key point of this statutory formula was to ensure that cancer hospitals would generally receive
reimbursement for at least the same percentage of their actual costs that they had received in
1996,” the appeals court observed.
According to the hospital, the fiscal intermediary incorrectly calculated the hospital’s payment-tocost ratio for the FY ending 2001.
Specifically, the hospital argued certain statutory reduction factors should be applied to the
denominator of the fraction that reduced its actual reimbursements in 1996.
Under the hospital’s interpretation, “cancer hospitals would be entitled to receive more in 2000
than they received in 1996 even if their actual costs were exactly the same as in 1996,” the
appeals court observed.
“Needless to say, . . . it seems extremely unlikely that Congress enacted such a windfall
provision,” the appeals court said.
Finding the hospital’s interpretation unreasonable in light of the statutory language, the appeals
court upheld judgment in favor of the Secretary on this issue.
University of Tex. M.D. Anderson Cancer Ctr. v. Sebelius, No. 10-5201 (D.C. Cir. June 17, 2011).
Ninth Circuit Affirms PRRB Dismissal Of Appeal Based On Failure To
File Position Paper
The Ninth Circuit found June 15, 2011 the Provider Reimbursement Review Board’s (PRRB)
dismissal of an appeal due to untimely filing of a preliminary position paper was not arbitrary or
capricious.
According to the appeals court, the hospital appellant had been forewarned that failure to meet
its filing deadlines could result in dismissal of its appeal. The appeals court found the PRRB
considered the hospital’s arguments for allowing its appeal to go forward and reasonably
dismissed the appeal.
After Kaiser Foundation Hospital-Anaheim (Kaiser) received its notice of program reimbursement
(NPR) from fiscal intermediary Mutual of Omaha Insurance Company, for the fiscal year ending
December, 2001 (FYE 2001), it timely filed a request for a hearing before the PRRB.
Kaiser received the PRRB’s “Acknowledgment and Critical Due Dates” letter on October 9, 2007.
Approximately a month after the due date for Kaiser’s preliminary position paper passed, the
PRRB advised Kaiser that because its position paper was not submitted to the intermediary, its
appeal was being dismissed.
On March 4, 2008, Kaiser petitioned the PRRB for reinstatement of its appeal, and enclosed its
final position paper. The PRRB denied Kaiser’s request.
Kaiser sued the Department of Health and Human Services Secretary Kathleen Sebelius, and the
district court granted Sebelius’ motion for summary judgment.
On appeal, Kaiser argued the preliminary position paper requirement violates the Medicare Act.
But the appeals court disagreed. “Although the Ninth Circuit has yet to rule on this issue, other
courts have held that the procedural requirement of two position papers is reasonable and
necessary to the efficient administration of the provider appeals process,” the appeals court
noted.
Agreeing with the other courts who have so held, the appeals court said the position paper
requirements assist in narrowing the issues on appeal and efficiently managing the Board’s
caseload.
The appeals court also rejected Kaiser’s argument that its failure to submit a preliminary position
paper had no effect on the proceedings before the PRRB because Kaiser’s appeal issues were
subject to inclusion in a group appeal.
“To hold otherwise would require us to interject ourselves into the inner workings of the Board’s
hearing process to determine whether the group appeal indeed 'effectively described [Kaiser’s]
claims,' as asserted by Kaiser," the appeals court reasoned.
The appeals court further found the PRRB’s decision was not arbitrary or capricious.
Acknowledging this issue also was one of first impression in the circuit, the appeals court again
noted that other courts have rejected this argument.
Noting Kaiser was forewarned that failure to file the position paper would result in dismissal of
the appeal, the Ninth Circuit held the PRRB’s dismissal of Kaiser’s appeal for failure to file a
preliminary position paper as required by the Board’s procedural rules was not arbitrary or
capricious.
A dissenting opinion argued the PRRB’s dismissal was arbitrary and capricious because “the facts
of this case do not support the Board’s decision.”
Kaiser Found. Hosps. v. Sebelius, No. 09-56200 (9th Cir. Jun. 15, 2011).
Tenth Circuit Grants HHS Motion To Withdraw Appeal In Hospice Cap
Litigation
The Tenth Circuit June 23, 2011 granted the Department of Health Human Services’ (HHS’)
motion to withdraw its appeal of an adverse district court decision finding invalid a regulation
implementing a statutory cap on Medicare payments for hospice care.
The issue has been widely litigated with two circuit courts most recently agreeing the regulation
at issue, 42 C.F.R. § 418.309(b), conflicts with the clear congressional directive for calculating
the annual provider cap. See 42 U.S.C. § 1395f(i)(2)(C).
After the two decisions handed down in March by the Fifth Circuit and Ninth Circuit, HHS moved
to withdraw its appeal in all cases on the issue pending in the Tenth Circuit.
In the instant case, like the other challenges, the hospice provider, Hospice of New Mexico, LLC,
was subject to a Medicare repayment demand for exceeding its cap for the year at issue.
Under the statute, the amount paid for hospice care for an accounting year is limited to a “cap
amount” for the year “multiplied by the number of Medicare beneficiaries in the hospice program
in that year.”
The statute provides the number of Medicare beneficiaries for purposes of this calculation should
be “reduced to reflect the proportion of hospice care that each such individual was provided in a
previous or subsequent accounting year . . .”
The implementing regulation, Section 418.309(b), however, calculates each hospice’s cap
amount using “the number of Medicare beneficiaries who elected to receive hospice care during
the cap period.”The district court agreed with the other courts to consider the issue that HHS’
regulation was invalid because it conflicted with the unambiguous statutory language requiring a
proportional, rather than single-year, allocation method for purposes of the hospice cap.
Ruling on the merits of the hospice provider’s cross-appeal, the appeals court agreed that
remand to HHS was the proper remedy after holding the regulation invalid.
The hospice argued money it reimbursed should have been refunded to it because “to allow HHS
to retain money collected unlawfully” removes any “deterrent against HHS issuing demands it
knows are unlawful.”
But the appeals court said it was “not willing to attribute bad faith to HHS” and noted the hospice
“will be entitled to the return of any overpayments with interest.”
Hospice of N.M., LLC v. Sebelius, Nos. 10-2136, 10-2168 (10th Cir. June 23, 2011).
Tenth Circuit Says Hospital Conceded PRRB’s Lack Of Jurisdiction In
DSH Challenge
A hospital conceded certain disputed patient days for purposes of its Medicare disproportionate
share hospital (DSH) adjustment fell within a partial administrative resolution and therefore the
Provider Reimbursement Review Board (PRRB) lacked jurisdiction over the issue, the Tenth
Circuit ruled June 20, 2011.
In its appeal, the hospital’s arguments focused on the merits of the PRRB’s decision, but did not
address the district court’s holding that the hospital in earlier pleadings conceded certain
“eligible-but-unpaid days” (EBUDs) were part of an administrative settlement, the Tenth Circuit
noted.
“Having thereby failed to preserve its scope-of-the settlement argument in the district court, [the
hospital] cannot now contest the scope of the settlement on appeal to us,” the appeals court
said.
At issue in this case was Stormont-Vail Regional Medical Center’s DSH adjustment for fiscal year
1994, which the provider timely appealed in January 1997.
Stormont-Vail argued the intermediary failed to include in the hospital’s Medicaid fraction
inpatient stays for patients who were eligible for Medicaid benefits but the state Medicaid
program did not pay the hospital because private insurance (i.e. car insurance) exceeded the
diagnosis-related group limit, so-called EBUDs.
The DSH adjustment is determined in part using the Medicaid Fraction, which is the number of
hospital patient days for patients “eligible for medical assistance under a State plan approved”
under Medicaid, but who were not entitled to benefits under Medicare, divided by the total
number of hospital patient days.
While Stormont-Vail’s appeal was pending, the Centers for Medicare and Medicaid Services, in
response to several court rulings, issued Ruling No. 97-2, which changed its policy to allow for
the inclusion of EBUDs in the Medicaid Fraction.
As a result, the intermediary agreed to a settlement that included 14,959 EBUDs in Stormont
Vail’s 1994 DSH adjustment. The intermediary thus issued a revised Notice of Program
Reimbursement (NPR) on June 10, 1998.
Two years later, in June 2000, the hospital submitted a letter to the PRRB that added two issues
to its appeal from the original 1994 NPR: that the intermediary failed to include all EBUDs in the
DSH adjustment, and that the intermediary failed to include “general assistance” days in the
DSH adjustment.
The PRRB ruled it did not have jurisdiction over the two issues because they were covered by the
prior administrative settlement.
The U.S. District Court for the District of Kansas reversed the PRRB’s decision on the issue of
“general assistance” days, but found Stormont-Vail, in the course of its argument on that issue,
conceded the new EBUDs fell within the partial administrative resolution.
Thus, given this concession, the PRRB correctly determined it lacked jurisdiction over the issue.
Stormont-Vail Reg’l Med. Ctr. v. Sebelius, No. 08-4065-JAR (D. Kan. Mar. 22, 2010).
The Tenth Circuit affirmed, noting the district court’s decision on the EBUD issue rested solely on
Stormont-Vail’s concession, which the hospital did not dispute on appeal.
“Most important,” the appeals court said, “Stormont-Vail does not argue that the district court
erred in holding that it had conceded the issue below.”
Thus, the appeals court concluded the hospital waived the issue and affirmed the district court's
decision.
Stormont-Vail Reg’l Med. Ctr. v. Sebelius, No. 10-3123 (10th Cir. June 20, 2011).
D.C. Circuit Reverses Dismissal Of Hospitals’ DSH Challenge, Says
Equitable Tolling Is Available For PRRB Appeal Deadline
The D.C. Circuit reversed and remanded a lower court decision rejecting an action by a group of
hospitals seeking judicial relief from allegedly erroneous Medicare disproportionate share hospital
(DSH) adjustments for fiscal years 1987-1994.
The appeals court first concluded it had jurisdiction over the claims, saying the Provider Review
Reimbursement Board’s (PRRB’s) dismissal of plaintiffs’ claims for lack of jurisdiction was a “final
decision” for purposes of judicial review.
Next, the appeals court held “equitable tolling” of the 180-day limitations period set forth in 42
U.S.C. § 1395oo for filing appeals with the PRRB was available under the statute, although it
declined to rule whether tolling in this case was appropriate, saying this was an issue for the
district court to resolve on remand.
The hospitals tried to appeal their DSH determinations for fiscal years 1987-1994 three months
after the decision in Baystate Med. Ctr. v. Leavitt, 545 F. Supp. 2d 20, amended in part, 587 F.
Supp. 2d 37 (D.D.C. 2008), which found flaws in the data underlying DSH payment
determinations in the context of claims brought by Baystate Medical Center.
Under the regulations, the Department of Health and Human Services Secretary authorized the
PRRB to grant an extension of the 180-day administrative appeal period “for good cause shown,”
but only if the request is made within three years after the intermediary’s notice of program
reimbursement (NPR).
The PRRB dismissed the hospitals’ appeals in the instant action as untimely because they were
filed more than three years after the issuance of the relevant NPRs and held it lacked authority
to grant a request for equitable tolling.
The U.S. District Court for the District of Columbia granted the Secretary’s motion to dismiss the
hospitals’ lawsuit. Auburn Reg’l Med. Ctr. v. Sebelius, No. 07-2075 (JDB) (D.D.C. Feb. 26, 2010).
As a threshold matter, the court found it lacked jurisdiction because the PRRB’s decision
dismissing their appeals as untimely was not a “final decision” subject to judicial review. The
court also concluded Section 1395oo(f) did not authorize “equitable tolling.”
Reversing on appeal, the D.C. Circuit found the Secretary and the lower court misconstrued
applicable case law on the issue of whether the PRRB’s dismissal of plaintiffs’ action as untimely,
thus depriving it of jurisdiction, was a “final decision” reviewable in court.
“Such a dismissal is final in any sense of the word. It is not pending, interlocutory, tentative,
conditional, doubtful, unsettled, or otherwise indeterminate. It is done,” the appeals court said.
After finding a decision of the PRRB denying jurisdiction was a final decision subject to judicial
review, the appeals court next concluded equitable tolling of the limitations period under Section
1395oo(f) was available.
According to the appeals court, the district court incorrectly considered whether plaintiffs offered
any evidence that Congress intended to authorize equitable tolling for provider claims, rather
than whether there was good reason to think Congress did not want equitable tolling.
The appeals court emphasized the presumption of equitable tolling, which the opposing party
must rebut.
In United States v. Brockamp, the Supreme Court found the statute of limitations for filing tax
refund claims could not be equitably tolled.
But unlike the limitations statute at issue there, Section 1395oo(a) simply establishes the 180day deadline without a complex set of exceptions.
“[U]nlike the tax code, the Medicare statute does not create a detailed Jenga tower of deadlines
and exceptions that equitable tolling might topple. Rather, its timing scheme is straightforward
and readily amenable to tolling,” the appeals court concluded.
Thus, the appeals court found no reasons for rebutting the presumption of equitable tolling,
adding that whether tolling is appropriate in the instant case is one the district court must
consider on remand after further fact finding.
Auburn Reg’l Med. Ctr. v. Sebelius, No. 10-5115 (D.C. Cir. June 24, 2011).
U.S. Court In District Of Columbia Refuses To Dismiss Challenge To
Medicare Outlier Methodology, Must Consider Administrative Record
The U.S. District Court for the District of Columbia denied in part July 5, 2011 the Department of
Health and Human Services Secretary’s motion to dismiss plaintiff hospitals’ challenge to the
Medicare methodology to determine outlier payment thresholds.
The court did agree to dismiss plaintiffs’ claim that the Secretary should have made mid-year
adjustments to outlier payments to correct underpayments, finding the hospitals had not
exhausted their administrative remedies on this issue and therefore the court lacked subject
matter jurisdiction.
But as to the hospitals’ other claims challenging the outlier threshold methodology, the court said
it would have to look to the administrative record before reaching a decision.
Plaintiffs own and operate 186 Medicare-participating hospitals that allege they would have
received larger outlier payments in fiscal years 2004 – 2006 if the outlier threshold had been
estimated more accurately.
They sued the Secretary in her official capacity alleging the methodology used to set hospital
outlier payment thresholds was arbitrary and capricious in violation of the Administrative
Procedure Act (APA).
Specifically, plaintiffs contended the Secretary (1) “failed to take into account the established
pattern of declining cost-to-charge ratios . . . despite this problem being repeatedly pointed out
in comments and despite proposed methods to account for this phenomenon and to more
accurately estimate outlier payments”; (2) “failed to consider use of the ‘cost methodology,’
rather than the ‘charge methodology,’ in setting the outlier thresholds” even though the cost
methodology had been more accurate in the past; (3) “failed to require mid-year adjustments”;
and (4) “failed to consider adjustments to the reconciliation process.”
The Secretary moved to dismiss the mid-year adjustment claim for lack of subject jurisdiction
and the three other claims for failure to state a claim on which relief could be granted.
The court agreed it lacked jurisdiction over the mid-year adjustment claim because it was not
encompassed in the Provider Reimbursement Review Board’s (PRRB's) decision to certify
plaintiffs’ claims for expedited judicial review.
The PRRB approved review of the “elements used to project the outlier thresholds,” not the issue
of whether the Secretary should have taken subsequent action to correct the allegedly flawed
outlier threshold methodology, the court found.
But the court refused to dismiss plaintiffs’ remaining challenges to the outlier threshold
methodology under Fed. R. Civ. P. 12(b)(6).
The Secretary argued notices issued in the Federal Register “thoroughly explain” her decision
making concerning the methodology and, therefore, plaintiffs’ claims should be dismissed as a
matter of law because her acts “cannot be considered arbitrary and capricious.”
The court agreed it could consider the Federal Register notices in the context of a Rule 12(b)(6)
motion but concluded “dismissal based solely on its contents would be premature here because a
review of the administrative record is necessary to a determination of whether the Secretary’s
methodology was arbitrary and capricious.”
Although the Secretary contended she explained her reasoning in the Federal Register, plaintiffs’
claims were not aimed at this issue; rather, they alleged the Secretary “inadequately considered
[the issues they raised], and ignored data and comments that were made during the public
comment period.”
Plaintiffs’ claims are "an attack on the adequacy of the Secretary’s decision making, not a facial
attack on a rule’s compliance with a statute,” the court wrote.
Thus, the court must consider both the Federal Register statements and the evidence in the
administrative record.
The court added that its review of the Secretary’s decision making would be “particularly
deferential.”
“But the Secretary has failed to cite, and the Court has not found, any case in which a court
granted a motion to dismiss with similar APA claims on the basis of agency comments in the
Federal Register,” the decision said.
District Hosp. Partners, L.P. v. Sebelius, No. 11-0116 (ESH) (D.D.C. July 5, 2011).
U.S. Court In Oklahoma Refuses To Remand Hospice Cap Litigation
The U.S. District Court for the Eastern District of Oklahoma refused July 12, 2011 to grant the
Department of Health and Human Services (HAS) Secretary’s motion to remand an action in
which a Medicare-certified provider of hospice services sought to pursue a legal challenge to the
Secretary’s determination that plaintiff exceeded the Medicare hospice cap.
The court found remand to the Secretary might preclude plaintiff from seeking attorney fees,
among other concerns. Thus, “[or]emending before a judgment on the merits is rendered is not
appropriate,” the court said.
The issue in the underlying case has been widely litigated, with the Fifth and Ninth Circuits most
recently agreeing the regulation at issue, 42 C.F.R. § 418.309(be), conflicts with the clear
congressional directive for calculating the annual hospice provider cap. See 42 U.S.C. §
1395f(i)(2)(CO).
Most recently, the Tenth Circuit granted June 23 HAS’ motion to withdraw its appeal of a lower
court’s ruling that the regulation was invalid.
But the court noted in the instant case that the Secretary asked for remand so that recalculation
of the hospice cap determination may take place using the methodology set forth in Centers for
Medicare and Medicaid Services (CMS) Ruling No. CMS-1335-I (April 14, 2011).
That ruling states that “CMS continues to believe that the methodology set forth in [the
regulation] is consistent with the Medicare statute. . . ,” the court observed.
“This court declines to implicitly endorse an administrative ruling which intends to continue using
a regulation which courts have found invalid, and when a Tenth Circuit ruling as to validity has
been avoided by appeal dismissal,” the court held.
In addition, the court found defendant “acknowledges that the CMS Ruling only applies to
appeals pending before administrative appeals tribunals. Thus, by its terms, it does not apply to
a hospice in plaintiff’s position.”
Lastly, the court turned to plaintiffs’ request that “defendant be forestalled from seeking
repayment or collection of the underlying alleged overpayment pending a decision by the Tenth
Circuit.”
Noting its previous ruling that the regulation is invalid, the court held “defendant should not be
allowed to seek any recovery at this time.”
Hospice Ctr. of Southeastern Okla., Inc. vs.. Sebelius, No. CAVE-10-401-RAW (E.G. Okla. July,
12, 2011).
U.S. Court In DC Upholds Disallowance Of Providers’ Allocation Of
Nursing Administration Costs
The U.S. District Court for the District of Columbia affirmed July 22, 2011 the Provider
Reimbursement Review Board’s (PRRB’s) decision finding a fiscal intermediary properly
disallowed skilled nursing facilities’ allocation of nursing administration costs based on both
nursing and therapy salaries, which reduced the providers’ Medicare reimbursements by
$390,685.
Plaintiff Genesis Health Ventures, Inc., on behalf of 30 SNFs it owns or managers, sued the
Department of Health and Human Services Secretary, alleging the Board’s decision was arbitrary
and capricious and not supported by substantial evidence in violation of the Administrative
Procedure Act.
At issue is how the SNFs allocated nursing administration costs in their fiscal year (FY) 1996 cost
report.
Before FY 1990, the providers allocated nursing administration costs using “direct nursing
hours,” with the result that all nursing administration costs were allocated to “routine service
cost centers.”
Plaintiff, however, verbally sought permission from its then-fiscal intermediary, Aetna Insurance
Company, to change the allocation basis for the nursing administration cost center to nursing
and therapy “salaries” to reflect that “nursing administration had hands-on responsibilities within
the therapy group.”
According to plaintiff, Aetna gave its verbal approval of the request. Beginning in FY 1990
through FY 1995, the providers therefore submitted cost reports with nursing and therapy
salaries combined as the allocation basis for nursing administrative costs.
For FY 1996, however, the providers’ new intermediary, Veritus Medical Services, adjusted the
cost reports by deleting therapy salaries from the allocation basis, citing its view that nursing
administration costs should never be allocated based on therapy salaries because they were
“ancillary cost centers.”
On appeal, the PRRB upheld the adjustment, finding (1) plaintiff had not received the
intermediary’s written approval to change the allocation methodology as required by Section
2313 of the Provider Reimbursement Manual or (2) the allocation methodology was not
supported by adequate documentation. The Centers for Medicare and Medicaid Services
Administrator declined review.
The federal district court affirmed the PRRB’s decision.
The court found the PRRB did not misinterpret the Section 2313 requirement that a provider
must make a written request to change a basis for allocating a cost center. The fact that a
request is automatically approved if the intermediary fails to respond within 60 days does not
change the initial requirement for a written request, the court said.
Thus, plaintiff could not rely on Aetna’s alleged prior approval, the court said.
The court also upheld the PRRB’s conclusion that plaintiff did not present sufficient auditable
documentation to support the allocation of nursing administration to therapy cost centers. The
court noted the auditable documentation requirement was triggered because plaintiff failed to
obtain proper intermediary approval under Section 2313.
Next, the court rejected plaintiff’s argument that the Board’s decision was inconsistent because
other providers, including ones owned or operated by plaintiff, were allowed to allocate nursing
administration costs based on therapy salaries.
Inconsistency at the intermediary level is not attributable to the Secretary, the court noted.
Finally, the court rejected plaintiff’s argument that the Secretary should be equitably estopped
from disallowing the allocation method at issue because the SNFs' prior fiscal intermediary,
Aetna, had approved it.
This claim failed, the court said, because plaintiff could not show its reliance was reasonable
given the clear requirements of Section 2313.
Genesis Health Ventures, Inc. v. Sebelius, No. 10-00381 (ESH) (D.D.C. July 22, 2011).
U.S. Court In D.C. Refuses To Dismiss Hospitals’ Outlier Litigation
The U.S. District Court for the District of Columbia refused July 15, 2011 to dismiss litigation
challenging Medicare’s outlier regulations citing the need to consider the administrative record
before making a final determination.
Plaintiffs in the litigation are 29 organizations that own or operate hospitals participating in the
Medicare program. Plaintiffs contended that during fiscal years 1998 through 2006 they were
deprived of more than $350 million in outlier payments, which are additional payments Medicare
makes to hospitals for patients who are unusually expensive to treat.
Specifically, plaintiffs challenged the Department of Health and Human Services Secretary’s
outlier payment regulations, fixed loss threshold regulations, and implementation and
enforcement of the outlier payment system.
According to plaintiffs, certain “vulnerabilities” in these regulations allowed “unscrupulous”
hospitals to game the system by submitting excessive reimbursement claims. As a result, these
hospitals received higher outlier payments than they otherwise should have, which, in turn,
caused other hospitals to lose outlier payments to which they were entitled.
After concluding plaintiffs had standing at this stage of the litigation, the court dismissed
plaintiffs’ claim alleging the Secretary failed in “implementing” and “enforcing” the outlier
payment system.
“Plaintiffs’ vague and non-specific allegations challenging the Secretary’s overall ‘implementation’
and ‘enforcement’ of the outlier payment system plainly ‘lack the specificity requisite for agency
action,’” the court held.
The court refused, however, to dismiss plaintiffs’ other claims, rejecting the Secretary’s
argument that plaintiffs were impermissibly challenging “the adequacy of [her] efforts to
prevent, detect, and control false inflation of charges in outlier payments,” which are activities
specifically committed to agency discretion.
The court found the Secretary’s argument “misconstrue[d]” plaintiffs’ claims, noting plaintiffs
expressly disavowed any challenge to the agency’s discretion to bring enforcement actions.
Plaintiffs “intend to argue that the Secretary failed to fully grapple with the effect her regulations
would have (or were having) on the behavior of third parties and the implications of that thirdparty behavior on the outlier payment system as a whole, and that by failing to grapple with this
problem, the Secretary failed to examine all the relevant data and articulate a satisfactory
explanation for her chosen course of action.”
The court declined to reach the merits of the Secretary’s remaining arguments for dismissing
plaintiffs’ claims in the absence of the administrative record.
The court did, however, reject plaintiffs’ claim under the Mandamus Act. Plaintiffs
sought mandamus to compel the Secretary to exercise what they claimed was her nondiscretionary duty to pay them a share of $1.5 billion in proceeds allegedly recovered under the
False Claims Act against hospitals that submitted excessive reimbursement claims.
“In short, far from identifying a clear and indisputable duty owed to them by the Secretary,
Plaintiffs’ claim for mandamus-type relief relies upon a wholly implausible and unsustainable
reading of the relevant statute,” the court commented.
Banner Health v. Sebelius, No. 1:10-cv-01638-CKK (D.D.C. July 15, 2011).
D.C. Circuit Rules For Hospital In DSH Challenge Involving M+C
Days
A federal appeals court held September 13, 2011 the Department of Health and Human Services
(HHS) Secretary improperly calculated a hospital’s Medicare disproportionate share hospital
(DSH) adjustment for fiscal years 1999-2002 with respect to its treatment of certain patient days
attributable to individuals enrolled in Medicare+Choice (M+C).
In so holding, the D.C. Circuit affirmed a lower court decision granting summary judgment to the
hospital on this point, albeit on different grounds.
Unlike the district court, the appeals court concluded the Secretary’s interpretation of the key
issue in the case—i.e., that M+C beneficiaries are still “entitled to benefits under [Medicare] Part
A” and, therefore, should not be counted in the Medicaid fraction of the DSH calculation—was not
foreclosed by the statute.
However, the appeals court ultimately affirmed the lower court’s ruling after finding the
Secretary “must be held to the interpretation that guided her approach to reimbursement
calculations during FYs 1999-2002, an interpretation that differs from the view she now
advances.”
DSH Challenge
Beverly Hospital, a Massachusetts nonprofit hospital owned by Northeast Hospital Corporation,
challenged the amounts of its Medicare DSH payment for FYs 1999-2002 on several grounds,
including on the issue before the appeals court concerning the patient days attributable to those
enrolled in M+C, now Medicare Advantage.
The DSH adjustment is determined using both a Medicare fraction and a Medicaid fraction. At
issue in this case is whether the Medicaid fraction--which is calculated by dividing the hospital
patients eligible for Medicaid, who are not entitled to benefits under Medicare Part A, by the total
number of the hospital’s patient days for a given period--should include in the numerator M+C
enrollees who are Medicaid eligible.
According to the Secretary, M+C enrollees still qualify for Medicare Part A and therefore
should be excluded in the numerator of the Medicaid fraction. As a result, Beverly received a
smaller DSH reimbursement than it otherwise would have had the M+C days been included in
the calculation of the Medicaid fraction.
Northeast contended M+C patients eligible for Medicaid should be counted in the Medicaid
fraction because they are not “entitled to benefits” under Part A. Northeast claimed it was
entitled to an additional $737,419 because of the improper calculation.
M+C Patient Days
The U.S. District Court for the District of Columbia granted summary judgment in Northeast’s
favor on this issue. Northeast Hosp. Corp. v. Sebelius, No. 09-0180 (D.D.C. Mar. 31, 2010).
Unlike the district ocurt, the D.C. Circuit found the Medicare statute did not “unambiguously
foreclose” the Secretary’s interpretation that M+C enrollees are “entitled to benefits under Part
A.”
According to the appeals court, “numerous” other related statutory provisions appear to assume
that M+C enrollees are still entitled to Part A after making the Part C election.
Retroactive Rulemaking
At the same time, the appeals court found the Secretary’s current interpretation stemmed from a
2004 regulation, 42 C.F.R. § 412.106, and applying the interpretation to the 1999-2002 FYs
violated the rule against retroactive rulemaking.
In the 2004 regulation, the Secretary “adopt[ed] a policy” of counting M+C days in the Medicare
fraction. The Secretary argued the 2004 regulation merely confirmed the long-standing view that
M+C days should be included in the Medicare fraction because these enrollees are still “entitled
to benefits under Part A.”
In practice, however, “the Secretary routinely excluded M+C days from the Medicare fraction,”
the appeals court observed.
Instead, the appeals court viewed the 2004 regulation as a clear change in policy.
“We are aware of no statute that authorizes the secretary to promulgate retroactive rules for
DSH calculations. Absent such authorization, the Secretary’s present interpretation, which marks
a substantive departure from her prior practice of excluding M+C days from the Medicare
fraction, may not be retroactively applied to fiscal years 1992-2002,” the appeals court held.
Concurrence
A concurring opinion argued that once a beneficiary elects government-subsidized private
insurance under Part C, they are no longer entitled to benefits under Part A.
The concurrence would rule in favor of the hospital because HHS “misapplied the statute.”
Northeast Hosp. Corp. v. Sebelius, No. 10-5163 (D.C. Cir. Sept. 13).
Sixth Circuit Says Group Health Plan Liable Under Private MSP Action
Brought By Dialysis Provider
A lower court erred in rejecting a dialysis provider’s private cause of action against a group
health plan under the Medicare Secondary Payer Statute (MSP) for dropping coverage of a
patient with end-stage renal disease (ESRD) after she became eligible for Medicare, the Sixth
Circuit ruled September 2, 2011.
Reversing the decision below on this issue, the Sixth Circuit rejected the district court’s
conclusion that the dialysis provider could not maintain a MSP action because it failed to
establish the plan’s liability as the primary payor in prior litigation.
According to the appeals court, the MSP requirement of “demonstrated responsibility” to pay
applies only where Medicare is seeking reimbursement for medical expenses caused by
tortfeasors, not to a healthcare provider’s private cause of action against a traditional insurer.
Plaintiff Bio-Medical Applications of Tennessee, Inc., which operates a kidney dialysis center, is
the assignee of the retiree healthcare benefits of a now-deceased patient insured by defendant
group health plan Central States, Southeast and Southwest Areas Health and Welfare Fund.
When the patient became entitled to Medicare as a result of ESRD, defendant terminated the
patient’s insurance coverage, the opinion said.
Plaintiff sought in count one to recover benefits due under the plan pursuant to the Employee
Retirement Income Security Act (ERISA) and in count two alleged a private cause of action for
double damages under the MSP.
The U.S. District Court for the Eastern District of Tennessee granted plaintiff summary judgment
on the ERISA claim, finding the plan violated the MSP’s prohibition against insurers “taking into
account” an insured’s eligibility for Medicare within the 30 months after the patient became
eligible for benefits due to ESRD when it denied the patient coverage.
Relying on federal court precedent, the court granted, however, the plan’s motion to dismiss
plaintiff’s private cause of action under the MSP, finding a necessary condition precedent—i.e.,
demonstrating the “primary plan’s” responsibility for making the primary payment—had not been
satisfied. Bio-Medical Applications of Tenn. v. Central States, Southeast and Southwest Areas
Health and Welfare Fund, No. 2:08-CV-228 (E.D. Tenn. Dec. 1, 2008).
The MSP provides that primary payor liability must be “demonstrated by a judgment, a payment
conditioned upon the recipient’s compromise, waiver or release (whether or not there is a
determination or admission of liability) of payment for items or services included in a claim
against the primary plan or the primary plan’s insured, or by other means.”
The Sixth Circuit affirmed the district court’s holding on plaintiff’s ERISA claim, agreeing the MSP
prohibits private insurers from terminating an insured’s coverage due to his entitlement to
Medicare benefits during the 30-month period.
But the appeals court reversed the district court’s dismissal of plaintiff’s private MSP action,
which would allow the provider to collect double damages.
In so holding, the appeals court rejected the application of the MSP’s “demonstrated
responsibility” provision in the traditional insurance context.
The plan argued, and the district court agreed, it could not be liable under the private cause of
action because its responsibility to pay had not yet been demonstrated prior to the litigation.
The appeals court reasoned, however, that this provision, which Congress added as an
amendment to the MSP in 2003, was enacted to enable Medicare to sue tortfeasors whose torts
caused medical expenses borne by Medicare, a position the courts previously had rejected.
Thus, the appeals court held the “‘demonstrated responsibility’ provision limits only lawsuits
against tortfeasors, not lawsuits against private insurers.”
The appeals court also concluded Congress intended “to permit lawsuits against tortfeasors only
by Medicare, and not lawsuits against tortfeasors by private parties.”
The appeals court declined to set the reference point for calculating plaintiff’s double damages
award, i.e., what the provider would have obtained from the private insurer versus what
Medicare would have paid.
The appeals court remanded to the district court for further proceedings on this issue to weigh
incentivizing healthcare providers to vindicate Medicare’s interests with the argument that the
MSP permits damages only to the extent Medicare faces injury.
Bio-Med. Applications of Tenn., Inc. v. Central States Southeast and Southwest Areas Health and
Welfare Fund, Nos. 09-6121, 09-6169 (6th Cir. Sept. 2, 2011).
U.S. Court In D.C. Says Congress Barred Judicial Review Of DME
Bidding Program Design, Implementation
A federal district court in the District of Columbia dismissed for lack of subject matter jurisdiction
a challenge to the financial standards established by the Department of Health and Human
Services (HHS) Secretary for durable medical equipment (DME) suppliers under the new
competitive bidding program.
The U.S. District Court for the District of Columbia found the relevant legislation establishing the
DME competitive bidding program precluded judicial review of contract awards and the program’s
design and implementation.
Moreover, the statutory scheme made clear Congress wanted HHS to establish the competitive
program, which is projected to result in substantial Medicare savings, without the risk of
litigation.
“Congress precluded from administrative and judicial review all aspects of the DME Bidding
Program concerning its design and implementation, but left open challenges to post-bid
conduct,” the court observed.
Lawsuit Says Financial Standards Lack Specificity
Plaintiffs in the case, Texas Alliance for Home Care Services and Dallas Oxygen Corporation,
challenged the Secretary’s financial standards, as set forth in a 2007 final rule and subsequent
2009 interim final rule.
The Medicare Modernization Act of 2003 called for implementing the DME competitive program
over several phases, starting with 10 of the largest metropolitan statistical areas in 2007,
expanding the program in 2009, and a nationwide rollout thereafter.
The Secretary issued proposed and final rules establishing the DME competitive bidding program
in 2006 and 2007, respectively.
Due to industry concerns, including about the financial standards, Congress temporarily halted
implementation of the DME competitive bidding program under the Medicare Improvements for
Patients and Providers Act of 2008 (MIPAA).
In MIPAA, Congress delayed implementation of the first phase until 2009 and the second phase
until 2011. Congress also created a mechanism for supplier feedback requiring the Secretary to
provide notice of any missing financial documents and an opportunity to supplement the bid.
The Secretary then issued an interim final rule to incorporate these specific changes, but readopted the same methodologies, including the financial standards, as previously articulated in
the 2007 final rule.
Plaintiffs argued the Secretary’s rulemaking did not describe the financial standards with the
statutorily required specificity in violation of the MMA, the Administrative Procedure Act, and the
Freedom of Information Act.
The Secretary moved to dismiss, arguing the plain text of the MMA precluded judicial review,
plaintiffs lacked standing, and the complaint failed to state a claim for relief.
The court granted dismissal, agreeing with the Secretary on all counts.
No Judicial Review of Bidding Process
The court found the relevant statutory provisions, 42 U.S.C. § 1395w-3(b)(11)(B) and (F),
specifically precluded administrative and judicial review of “the awarding of contracts” and “the
bidding structure.”
According to the court, “both the plain language of § 1395w-3(b)(11) and the statutory scheme,
read in its entirety, foreclose judicial review of the Secretary’s challenged actions.”
In particular, the court found the provision regarding “bidding structure” barred “preimplementation challenges to the Secretary’s specifications of appropriate financial standards.”
The court, citing a recent Federal Circuit decision, noted “Congress clearly intended that
Medicare could proceed with these initial administrative processes without risk of litigation
blocking the execution of the program.”
The court emphasized Congress did not foreclose review of post-bidding actions after the
implementation phase.
Plaintiffs Lack Standing, Complaint Fails on the Merits
In an “abundance of caution,” the court went on to consider the Secretary’s other bases for
dismissing the complaint.
The court held plaintiffs lacked standing, noting nothing about publishing more specific financial
standards “is capable of altering a supplier’s actual financial condition.” Thus, their only potential
concrete injury, the risk of rejection in the DME bidding process, is unaffected by the lack of
publication.
Finally, the court found “no serious dispute that plaintiffs were given an adequate opportunity to
comment on the financial standards.”
In so holding, the court concluded the underlying statute did not require the Secretary to
articulate the financial standards with a certain level of specificity.
Rather, the MMA and MIPAA state only that the Secretary may not award a contract unless a
potential bidder “meets applicable financial standards specified by the Secretary.”
Texas Alliance for Home Care Servs. v. Sebelius, No. 10-cv-747 (D.D.C. Sept. 9, 2011).
U.S. Court In Massachusetts Affirms CMS’ Denial Of Certain
Transitional SNF Payments
The U.S. District Court for the District of Massachusetts adopted September 22, 2011 the opinion
of a magistrate judge, which affirmed the Centers for Medicare and Medicaid Services’ (CMS’)
decision that the plaintiff skilled nursing facility (SNF) does not qualify for favorable
reimbursement rates during a transition to a new Medicare rate structure for SNFs.
According to the court, because both the statute and the regulation at issue are ambiguous, and
the CMS Administrator's interpretation is reasonable, the agency’s determination should be
affirmed.
The statute at issue provides SNFs "that first received payment for services under this
subchapter on or after October 1, 1995," are ineligible for favorable payments during a transition
from one Medicare payment structure to another. See 42 U.S.C. § 1395yy(e)(2)(E).
CMS' implementing regulation provides SNFs are excluded from the favorable payments if they
first received a Medicare payment on or after October 1, 1995 "under present or previous
ownership."
Oak Knoll Health Care Center is the successor to two prior entities, one of which had participated
in Medicare prior to October 1995 and both of which had operated as SNFs for over three years.
The two entities were consolidated into the entity known as Oak Knoll, which began operations in
1995 and received a new Medicare provider number in November of 1995, after the statutory
deadline.
Because Oak Knoll did not receive payment from Medicare under the new provider number until
after the deadline, the Administrator found it was not entitled to favorable transition payments.
Oak Knoll argued the Administrator’s decision was inconsistent with CMS' denial of "new
provider" treatment for Oak Knoll after its consolidation.
But the court agreed with the magistrate that “CMS' application of the new provider exemption
does not bear on Oak Knoll's eligibility for transitional payments.”
“Contrary to Oak Knoll's assertion,” the court said, “the finding that it had ‘operated’ as an SNF
for over three years for purposes of the ‘new provider’ exemption is not the same as a
determination that it ‘first received payment for services’ or ‘received [its] first payment from
Medicare, under present or previous ownership.’"
Looking at the objects and purposes of the respective regulations, the court concluded “[t]here is
ample basis for the Administrator's disparate interpretations of the two regulations based on
their different context, authorization, meaning and goals.”
Oak Knoll Health Care Ctr. v. Leavitt, No. 08-12051-DPW (D. Mass. Sept. 22, 2011).
Eleventh Circuit Says HHS Secretary Did Not Act In Bad Faith In
Pursuing Repayment Of Medicare Benefits
The Eleventh Circuit in an unpublished opinion affirmed October 28, 2011 a lower court’s denial
of attorneys' fees and costs under the Equal Access to Justice Act (EAJA), agreeing the
Department of Health and Human Services (HHS) Secretary did not act in bad faith in pursuing
repayment of Medicare funds under the Medicare Secondary Payer law.
The case began after the passing of Charles Burke, who resided in a Florida nursing home for
approximately 18 months. During that time, Medicare paid $38,875.08 for his medical care.
Carvondella Bradley, on behalf of Charles Burke’s estate, brought a wrongful death suit against
the nursing home, which was settled for $52,500.
The HHS Secretary then asserted Burke’s estate had to reimburse Medicare for Burke’s net
medical expenses of $22,480.89.
A probate court found HHS was entitled to only $787.50 of the settlement funds, but the
Secretary declined to recognize that determination, relying instead on HHS’ Medicare Secondary
Payer Manual.
Bradley paid under protest and then sued. The district court affirmed the Secretary’s
determination. Bradley appealed.
The Eleventh Circuit reversed, finding the Secretary’s decision was not supported by substantial
evidence. The appeals court concluded the Secretary was entitled to only $787.50, as
determined by the probate court, and remanded.
After the district court entered judgment in accordance with the opinion, Bradley moved for
award of attorneys’ fees and costs pursuant to Section 2412(b) of the EAJA.
The district court denied the motion, finding that HHS had not acted in bad faith. Bradley
appealed.
After noting that an award of attorneys’ fees under Section 2412 is discretionary, the appeals
court held the district court’s finding of no bad faith was not clearly erroneous and thus its denial
of attorneys’ fees was not an abuse of discretion.
The district court properly found the court’s appellate decision involved an issue of first
impression and “nothing suggested the Secretary had acted in bad faith,” the appeals court said.
Bradley v. Secretary, U.S. Dep't of Health and Human Servs., No. 11-12782 (11th Cir. Oct. 28,
2011).
Fifth Circuit Says Written Notice Not Required To Show Beneficiary
Knew Of Medicare Non-Coverage
The Fifth Circuit held October 25, 2011 in an unpublished opinion that a Medicare beneficiary was
not liable to a skilled nursing facility for payment of certain custodial services because the
provider failed to rebut the presumption that the beneficiary had knowledge the services would
not be covered by Medicare.
At the same time, the appeals court noted the Administrative Law Judge (ALJ) who ruled in the
beneficiary’s favor applied the wrong legal standard by indicating the only way to show
beneficiary knowledge was through written notice.
“Although written notice is sufficient to rebut the presumption that the beneficiary did not receive
proper advance notice of non-coverage, all the provider must do to rebut that presumption is
establish a ‘clear and obvious’ record that the beneficiary had the requisite knowledge that
coverage would be denied,” the appeals court explained.
The beneficiary was admitted to plaintiff Mississippi Care Center of Morton’s facility, which
provides nursing home and custodial care services.
The services provided to the beneficiary were custodial in nature and therefore not covered by
Medicare.
An ALJ eventually determined the beneficiary was not liable for payment to Morton for the
services in question because it had failed to establish that the beneficiary received proper notice,
namely, a signed written document to that effect.
The appeals court agreed that Morton failed to show the beneficiary had knowledge of Medicare
non-coverage, but made clear that written notice was not required for such a finding.
Mississippi Care Ctr. of Morton, L.L.C. v. Sebelius, No. 10-60594 (5th Cir. Oct. 25, 2011).
U.S. Court In District Of Columbia Holds LTCHs Not Entitled To
Additional Reimbursement During Transition Period For 25% Rule
trial court in the District of Columbia held certain long term care hospitals (LTCHs) were not
entitled to over $500,000 in additional reimbursement during the transition period to the Centers
for Medicare and Medicaid Services (CMS’) so-called 25% policy for hospitals within hospitals
(HwHs) due to the inadvertent omission of certain qualifying language in the final regulation.
Under the policy, no more than 25% of the discharges admitted to a LTCH co-located in an acute
care hospital paid under the inpatient prospective payment system could be from the “host”
hospital for the cost year.
CMS adopted the policy in a 2004 final rule, which was codified at 42 C.F.R. § 412.534. In
response to comments on the proposed rule, the final rule provided a four-year transition period
for LTCH HwHs or LTCH satellites to adapt to the 25% policy.
The final rule preamble stated that for cost reporting periods from October 1, 2004 through
September 30, 2005, existing LTCH HwHs or LTCH satellites would be “grandfathered" with a
‘hold harmless’” first year under which these hospitals would only need to continue to meet
existing separateness criteria.
The preamble also made clear, however, that even for grandfathered hospitals, in the first cost
reporting year, “the percentage of hospitals admitted from the host hospital may not exceed the
percentage of discharges admitted from the host hospital in its FY 2004 cost reporting period.”
After the first cost reporting year, the percentage of discharges admitted from the host hospital
would gradually decrease to the 25% threshold under the rule.
Despite the preamble’s clear articulation of the transition period, the language of the final rule as
codified at Section 412.534 stated only that “[f]or each discharge during the first cost reporting
period beginning on or after October 1, 2004 and before October 1, 2005 the amount paid is the
amount payable under this subpart with no adjustment,” i.e., it omitted the qualification that
grandfathered facilities not exceed the percentage of discharges admitted from the host hospital
in its FY 2004 cost reporting period.
Four months later, CMS issued a correcting amendment to add the qualification to the first
transition year, indicating the language had been inadvertently omitted in the final rule as
codified.
Plaintiffs are Medicare-certified LTCHs operating as HwHs whose percentage of patients admitted
from their host hospitals during the FY 2005 cost reporting period exceeded the percentage of
patients admitted from their host hospitals during the FY 2004 cost reporting period.
They argued they were collectively entitled to $507,401 in additional reimbursement under the
original language of the 2004 final rule.
The Provider Reimbursement Review Board granted expedited judicial review. Before the U.S.
District Court for the District of Columbia, both sides moved for summary judgment.
The U.S. District Court for the District of Columbia held CMS did not violate notice and comment
rulemaking or act arbitrarily and capriciously in applying the corrected language of Section
412.534 to plaintiffs' FY 2005 cost reports.
Plaintiffs argued CMS’ correcting amendment constituted substantive rulemaking without notice
and opportunity for public comment in violation of the Administrative Procedure Act and the
Medicare Act.
But the court disagreed. Although the proposed rule did not set forth the specific transition
period articulated in the preamble and the correcting amendment, “it was merely a mechanism
that the agency decided after public comment to use to implement the 25 percent policy—a
component of the final rule that was subject to extensive public comment before the final rule
was promulgated,” the court said.
In the court’s view, the proposed rule and the preamble to the final rule addressing commenters’
concerns showed the public had an opportunity to comment. The court emphasized the transition
period was an “implementing mechanism for the 25 percent rule” that did not require an
additional notice and comment period.
The court also said the agency’s action was not arbitrary and capricious, and the preamble to the
final rule was sufficient to bind plaintiffs.
Here, CMS was correcting a “ministerial error,” according to the court. “[T]he preamble language
. . . was an unequivocal expression of the agency’s intended meaning of the final rule and the
policy underlying that rule,” the court said.
Select Specialty Hosp.—Akron, LLC v. Sebelius, No. 10-926 (RCL) (D.D.C. Oct. 25, 2011).
Ninth Circuit Affirms MA Plan’s Refusal To Pay For Surgery
The Ninth Circuit upheld November 1, 2011 a Medicare Advantage plan’s refusal to pay for an
enrollee’s surgery, finding the decision did not violate federal law.
Gaye S. Glaser was enrolled in Kaiser Permanente Senior Advantage, a Medicare Advantage plan.
After Glaser was diagnosed with liver cancer, Kaiser’s Tumor Board determined that complete
removal of the tumor could leave too little liver for Glaser to survive, and that surgery would not
eliminate the possibility of cancer recurrence. The Tumor Board recommended instead that
Glaser undergo a form of chemotherapy.
Glaser eventually had surgery to remove the tumor from her liver and Kaiser refused to pay for
it.
Glaser appealed the decision administratively and an administrative law judge (ALJ) found Kaiser
was obligated to pay for the out-of-plan liver resection surgery because it was an “urgently
needed service” under 42 C.F.R. §§ 422.112(a)(9) and 422.113(b)(iii).
Kaiser appealed and the Medicare Appeals Council (MAC) reversed the ALJ’s decision. Glaser
appealed and the district court affirmed the MAC’s ruling.
After Glaser passed away, Heather K.L. Conahan, personal representative of her estate, was
substituted as plaintiff.
On appeal, plaintiff argued Kaiser’s refusal to perform liver surgery rendered its services
unavailable, inaccessible, and inadequate, and therefore Kaiser must cover the out-of-plan
surgery.
The court first noted that, under federal law, a Medicare Advantage organization must make its
covered services “available and accessible.” 42 C.F.R. § 422.112(a).
But the appeals court agreed with the MAC’s determination that Kaiser “denied the enrollee a
referral to an out-of-network provider; it did not deny her medical care that was reasonably
believed to be within the standard of appropriate medical care, as determined by multiple
physicians[.]”
Pointing to evidence that the Kaiser Tumor Board considered Glaser’s treatment options, the
appeals court held the administrative record supports the MAC’s determination that Kaiser’s
services were available, accessible, and adequate, and therefore that 42 C.F.R. § 422.112(a)(3)
does not require Kaiser to pay for the surgery.
Plaintiff next argued Kaiser’s refusal to pay violated 42 C.F.R. § 422.112(a)(9), which requires
Medicare Advantage organizations to cover out-of-plan “urgently needed services.”
The MAC rejected this interpretation of the regulation, concluding that Kaiser’s “recommendation
against surgical resection of the enrollee’s liver tumor did not render their provider network
unavailable or inaccessible, even if this recommendation was against the enrollee’s personal
wishes.”
Again, the appeals court agreed, finding the MAC’s conclusion “is consistent with the text and
history of the Medicare Advantage regulations.”
“Were we to accept Conahan’s construction, Medicare Advantage organizations always would be
required to pay for out-of-plan procedures they refuse to perform,” the appeals court noted.
“Nothing in the regulation suggests that HHS intended such a sweeping result.”
Conahan v. Sebelius, No. 09-17510 (9th Cir. Nov. 1, 2011).
U.S. Court In D.C. Upholds Exclusion Of “Charity Care” Patient Days
In Hospital’s DSH Calculation
The U.S. District Court for the District of Columbia upheld October 24, 2011 the Department of
Health and Human Services Secretary’s exclusion of certain “charity care patient days” from a
Texas hospital’s disproportionate share hospital (DSH) adjustment.
The decision follows the D.C. federal court’s rulings that charity care patient days are not
“eligible for medical assistance” as contemplated under the Medicare and Medicaid statute (see,
e.g., Northeast Hosp. Corp. v. Sebelius, 699 F. Supp. 2d 81 (D.D.C. 2010), and Banner Health v.
Sebelius, 715 F. Supp. 2d 142 (D.D.C. 2010), and the D.C. Circuit’s decision in Adena Reg’l Med.
Ctr. v. Leavitt, 527 F.3d 176 (D.C. Cir. 2008)).
The court here again found the days at issue should not be included in the Medicaid fraction for
purposes of calculating the hospital’s DSH payment, specifically rejecting the hospital’s attempt
to distinguish the instant case from the previous decisions.
Instead, the court emphasized that even where federal Medicaid money may have subsidized the
medical treatment received by the Texas charity care patients at issue, their care still did not
meet the definition of “medical assistance” because they did not fall within the 13 categories of
individuals Congress identified as eligible for federal Medicaid benefits.
DSH Challenge
Covenant Health System, which operates two acute care facilities in Texas, challenged the
amounts of its Medicare DSH payment during the fiscal years 1991 and 1993-1997, contending
the fiscal intermediary improperly excluded from the Medicaid fraction patients days attributable
to those receiving charity care, which caused it to lose out on some $484,243 in DSH
reimbursements.
The Medicaid fraction is calculated by dividing the number of hospital patient days for those who
were “eligible for medical assistance” under a state Medicaid plan, but who were not entitled to
benefits under Medicare Part A, by the total number of the hospital’s patient days for a given
period.
The Provider Reimbursement Review Board found while the patients in the charity care program
did not qualify for federal Medicaid, the patients did qualify for medical assistance under a state
approved plan. The Centers for Medicare and Medicaid Services Administrator reversed, and
Covenant appealed the final decision in court.
Charity Care Patient Days
Applying Chevron deference to the Secretary’s interpretation of the Medicare statute, the court
agreed the charity patient days were properly excluded.
According to the court, “‘eligible for medical assistance under a State plan’ . . . is unambiguously
limited to individuals eligible for federal Medicaid.”
The court continued: “[i]t is undisputed that the charity care patients at issue here do not come
within one of the thirteen categories of individuals eligible for Medicaid” and therefore “they
cannot receive ‘medical assistance’ as that phrase is defined in the Medicaid statute.”
The court rejected Covenant’s attempt to distinguish the instant case from the previous rulings
on the issue, including, among other things, that the Texas charity care program was
incorporated into the state’s Medicaid plan and that the state plan provided for payments to
hospitals for charity care, which were matched with federal Medicaid funds.
According to the court, the Secretary’s approval of the Texas charity care program did not mean
the charity care patients receive treatment pursuant to the state’s Medicaid program, no matter
the extent to which the program is incorporated in the state plan.
Thus, the court granted summary judgment to the Secretary and dismissed the case.
Covenant Health Sys. v. Sebelius, No. 08-cv-00828 (D.D.C. Oct. 24, 2011).
Nevada Supreme Court Holds Medicare Act Preempts State Law
Unconscionability Claim Involving Arbitration Provision In MA
Contract
The Medicare Act preempts a claim that an arbitration provision in a Medicare Advantage (MA)
contract was unconscionable under state common law, the Nevada high court held October 27,
2011.
In so holding, the high court reversed a lower court decision denying Pacificare of Nevada, Inc.’s
motion to compel arbitration of a tort action brought by Dorothy Rogers, an enrollee of
Pacificare’s MA plan, Secure Horizons.
Rogers sued Pacificare for negligence after she contracted hepatitis C from an endoscopy facility
approved by Pacificare for use by its Secure Horizons plan members. According to Rogers,
Pacificare failed to adopt and implement an appropriate quality assurance program.
Pacificare moved to dismiss and compel arbitration pursuant to a provision in Rogers' 2007
contract with the plan.
Rogers alleged, and the district court agreed, the arbitration provision was unconscionable under
Nevada common law and therefore unenforceable.
The Medicare Act provides that the “standards” established under Part C “supersede any State
law or regulation,” except for licensing laws or laws relating to plan solvency, “with respect to MA
plans.”
In Uhm v. Humana, Inc., 620 F.3d 1134 (2010), the Ninth Circuit held the Medicare Act
preempted state law fraud and consumer protection claims against a Medicare Part D sponsor
and its parent company for failing to timely provide prescription drug plan benefits to
beneficiaries.
Plaintiffs in that case alleged they enrolled in the plan in part based on misrepresentations in the
plan’s marketing materials. The Ninth Circuit found Centers for Medicare and Medicaid Services
regulations governing “marketing materials” were “standards” under the Medicare Act and
therefore preempted.
Citing Uhm, the Nevada Supreme Court found the arbitration provision at issue could be
considered “marketing materials” by virtue of its placement in the plan’s explanation of benefits.
Thus, the high court concluded “Nevada’s unconscionability doctrine is preempted to the extent
that it would specifically regulate MA plans.”
The high court rejected Rogers’ argument that the result should be different because the state
law at issue was established through the common law.
“[L]egislative history shows that the [Medicare] Act’s preemption provision has been specifically
amended to include generally applicable common law,” the high court said.
“Allowing state courts to review Medicare contracts for unconscionability risks the same result
that the Ninth Circuit warned of in Uhm, namely, that materials CMS has deemed not
misleading—and therefore allowed to be distributed—will later be determined ‘likely to mislead’
by a state court,” the high court observed.
The high court also found the arbitration provision in the 2007 contract governed the dispute,
even though Rogers did not discover her injury until 2008, when a new contract was in place
that did not contain an arbitration provision.
Rogers received the alleged negligent care in 2007, and the 2007 contract mandated arbitration
for “any and all disputes,” including “any medical services rendered under this contract.”
“Because the 2007 arbitration provision was not explicitly rescinded, the provision survived the
expiration of the 2007 contract and its replacement by the 2008 contract,” the high court held.
Pacificare of Nev., Inc. v. Rogers, No. 55713 (Nev. Oct. 27, 2011).
U.S. Court In California Says HHS Secretary May Pursue Recoupment
Of Medicare Overpayments To Physician
The U.S. District Court for the Central District of California affirmed November 8, 2011 the
Department of Health and Human Services (HHS) Secretary’s decision to recoup overpayments
for claims made under a physician’s Medicare provider number.
At no time in the administrative proceedings below did the physician attempt to establish the
services provided were reasonable and necessary as required under the Medicare Act, the court
found.
Plaintiff Dr. Marco Garcia worked at Sleepless in L.A. Diagnostic Inc., a sleep diagnostic center,
where Medicare was billed for various services under plaintiff's individual provider identification
number.
The California Benefit Integrity Support Center (CAL-BISC) conducted a post-payment audit of
the claims and determined the records furnished were insufficient to support the reasonableness
and medical necessity of the services billed.
CAL-BISC subsequently conducted an on-site provider location verification visit, and found
plaintiff was not at the location listed as the physical address.
As a result, National Heritage Insurance Company (NHIC), the Part B carrier that initially
processed and paid the claims, pursued all Medicare payments paid to plaintiff from the time
period of December 1, 2004, though November 30, 2005, as overpayments.
Plaintiff appealed the determination to the Qualified Independent Contractor (QIC), which
affirmed. Plaintiff requested a hearing before an Administrative Law Judge (ALJ) to challenge the
unfavorable determination of the QIC, but the ALJ upheld the overpayment assessment and
determination.
The Medicare Appeals Council affirmed, and plaintiff then sued HHS Secretary Kathleen Sebelius
under the Administrative Procedure Act (APA).
Throughout the proceedings, plaintiff did not attempt to establish the reasonableness and
necessity of the services at issue, but instead argued he had no involvement in the provision of
these services or in the billing process and therefore should not be liable.
But the court found substantial evidence supported the Secretary’s determination of liability.
The court noted the Medicare Act’s “regulatory scheme places the burden of establishing the
medical necessity of diagnostic tests on the entity submitting the claim.”
The court found substantial evidence in the administrative record to support the Secretary's
conclusion that plaintiff was a Medicare provider of the services at issue, but “[a]t no time in the
administrative appeals process has Plaintiff contested Medicare's determination that the services
he provided were reasonable and medically necessary,” the court said.
Noting further that “[t]he record does not establish that the claimed services were reasonable
and necessary,” the court found the Secretary properly denied plaintiff's claim for Medicare Part
B reimbursement.
The court also found substantial evidence supported the Secretary's conclusion that plaintiff was
not entitled to a waiver of his obligation to repay the overpayment because he "did not know,
and could not reasonably have been expected to know, that payment would not be made for
such services." 42 U.S.C. § 1395pp(a).
“Plaintiff was required to be familiar with Medicare rules and regulations that hold providers
responsible for providing sufficient evidence to establish the medical reasonableness and
necessity of the services billed to Medicare,” the court found.
Garcia v. Sebelius, No. CV 10-8820 (C.D. Cal. Nov. 8, 2011).
U.S. Court In Vermont Refuses To Dismiss Medicare Beneficiary
Lawsuit Challenging “Improvement Standard”
A federal district court in Vermont refused October 25, 2011 to dismiss a lawsuit alleging the
Centers for Medicare and Medicaid Services (CMS) applies an illegal “improvement standard” to
deny coverage to Medicare beneficiaries for beneficiaries with medical conditions that are not
expected to improve.
Except for one individual plaintiff and one organizational plaintiff, the U.S. District Court for the
District of Vermont denied the government’s motions to dismiss for lack of jurisdiction and lack
of standing.
The court also refused the government’s motion to dismiss for failure to state a claim, declining
to conclude
as a matter of law that Plaintiffs’ Improvement Standard theory is factually implausible when it is
supported by at least some evidence in each of the Individual Plaintiffs’ cases and where other
plaintiffs have successfully demonstrated the use of illegal presumptions and rules of thumb
much like Plaintiffs allege here.
The lawsuit was filed in January on behalf of a nationwide class of Medicare beneficiaries by six
individual beneficiaries and seven national organizations representing individuals with long term
and chronic conditions.
In a statement, the Center for Medicare Advocacy, which filed the lawsuit along with Vermont
Legal Aid, said plaintiffs had “overcome a major hurdle” with the court’s ruling.
“Improvement Standard”
Plaintiffs alleged CMS and Medicare contractors use the so-called “improvement standard” to
wrongfully deny, reduce, or terminate coverage for beneficiaries whose medical conditions are
not expected to improve.
In their complaint, plaintiffs dub the “improvement standard” a “covert rule of thumb” or
“clandestine policy” that the Department of Health and Human Services Secretary is aware of but
has taken no steps to curtail.
Under the Medicare Act, coverage determinations must be conducted on an individualized basis
and cannot be the subject of rules of thumb, the court explained.
Plaintiffs sought, among other things, a declaration that the improvement standard is unlawful
and a permanent injunction or writ of mandamus prohibiting the Secretary from applying the
standard.
The government moved to dismiss for lack of subject matter jurisdiction, lack of standing, and
failure to state a claim.
Regulations Prohibit Improvement Standard, HHS Argues
HHS disputed the existence of the improvement standard, citing other “obvious alternative”
explanations for denying plaintiffs coverage and pointing to federal regulations effectively
prohibiting the application of such a policy.
While calling plaintiffs’ cited facts in support of the improvement standard’s existence “decidedly
scant,” the court nonetheless found the evidence sufficient at the pleading stage to allow the
lawsuit to go forward.
“With regard to each Individual Plaintiff, the Amended Complaint cites Agency decisions that are
arguably consistent with the imposition of an Improvement Standard because adjudicators
denied coverage based upon, inter alia, a conclusion that the beneficiary’s condition would not
improve,” the court noted.
Lack of Presentment
The court agreed to dismiss one of the individual plaintiffs for lack of jurisdiction on the ground
she failed to present her claims to the Secretary.
As presentment is non-waivable, this plaintiff argued the exclusivity requirement of 42.U.S.C. §
405(g), as prescribed by 42 U.S.C. § 405(h), should not apply to her claims because she would
be denied judicial review.
With respect to this plaintiff, the home health agency (HHA) in her area refused to accept her as
a patient because Medicare would not pay for her long term care needs.
Thus, no services were provided and no claim for coverage had been presented to the Secretary.
The court agreed with the Secretary that plaintiff could force the HHA to submit a claim through
“demand billing,” i.e. asking the HHA to submit a claim for services to CMS by agreeing to cover
the costs herself if Medicare denies coverage.
According to the court, the plaintiff failed to establish “that she is financially unable to reimburse
her HHA in the event services are not covered or that demand billing is not available to her”;
thus, she did not establish that judicial review was otherwise unavailable.
Waiver of Exhaustion
For the remaining plaintiffs, who had presented their claims to the Secretary, the court agreed to
waive the requirement that they exhaust administrative remedies before pursuing their action in
court.
In so holding, the court highlighted that plaintiffs were not seeking an adjudication on the merits
of their individual claims or an award of benefits; rather they sought declaratory, injunctive, and
mandamus relief.
Finally, the court noted, “the purposes of administrative review would not be served by requiring
exhaustion because Plaintiffs allege violations of a procedural right—that is, the right to a
coverage determination process free from the allegedly unlawful Improvement Standard—for
which they seek relief which is simply not available in the context of an individual claim for
benefits in an administrative review.”
Organization Plaintiffs
The court also concluded the organizational plaintiffs could proceed with the action under 28
U.S.C. § 1361, mandamus jurisdiction, for purposes of the motion to dismiss.
“At the pleading stage, the court need not determine whether to grant a writ of mandamus, it
need only determine whether, after an appropriate evidentiary showing and careful decisionmaking a writ could issue.”
Jimmo v. Sebelius, No. 5:11-cv-17 (D. Vt. Oct. 25, 2011).
Sixth Circuit Says Medicare Entitled To Reimbursement From
Beneficiary’s Third-Party Tort Recovery
The Sixth Circuit held November 21, 2011 that Medicare was entitled to reimbursement of the
full amount it demanded from a beneficiary who was injured and later settled with the thirdparty tortfeasor for medical expenses the program conditionally paid on his behalf.
In so holding, the appeals court found the beneficiary had demanded payment of all his medical
expenses from the tortfeasor and could not now claim Medicare was entitled to only a
proportional allocation of the proceeds based on comparative fault principles.
Vernon Hadden, a Medicare beneficiary, was struck by a public utility vehicle owned by Pennyrile
Rural Electric Cooperative Corporation after the driver swerved to avoid an unidentified motorist.
Haddon incurred medical expenses totaling over $82,000 following the accident.
Medicare conditionally paid his bills in full. Hadden sued Pennyrile, demanding compensation for
all of his medical expenses, among other damages. The company eventually paid Hadden
$125,000 in exchange for a full release of his claims against it.
Pursuant to the Medicare Secondary Payer Act (MSP), Medicare then sought reimbursement from
Hadden of the medical expenses it paid on his behalf. After subtracting attorneys’ fees that
Hadden incurred to obtain the settlement, Medicare determined Hadden owed the program
$62,000.
Hadden paid the amount under protest and then pursued administrative remedies without
success.
Hadden claimed Medicare was entitled to only 10%, or about $8,000, of the more than $80,000
in medical expenses because the settlement with Pennyrile only compensated him for that
percentage of his medical expenses. According to Hadden, a reasonable fault allocation would be
10% for Pennyrile and 90% for the unidentified motorist under Kentucky comparative fault
principles.
The remainder of the settlement, Hadden said, was for damages other than medical expenses
and therefore off-limits to Medicare.
Hadden then sought relief in a Kentucky federal district court, which likewise concluded the
Medicare statute required Hadden to reimburse Medicare the full amount it had demanded.
In a two-one panel decision, the Sixth Circuit affirmed.
The MSP gives Medicare the right to seek “reimbursement” from a “primary plan” (e.g., a
tortfeasor) or the beneficiary, if the beneficiary later receives a payment directly from the
responsible entity, after it is demonstrated that the primary plan was responsible for paying the
medical expenses at issue.
Here, the appeals court said it was undisputed that Pennyrile was a “primary plan” and Hadden
qualified as an “entity that receive[d] payment from a primary plan” and therefore was
responsible for reimbursing Medicare.
The provision, as amended in 2003, also indicates that a “primary plan’s responsibility for such
payment may be demonstrated by a judgment, a payment conditioned upon the recipient’s
compromise, waiver, or release (whether or not there is a determination or admission of liability)
of payment for items or services . . . .”
According to the appeals court, the amended provision makes clear that “the scope of the plan’s
‘responsibility’ for the beneficiary’s medical expenses—and thus of his own obligation to
reimburse Medicare—is ultimately defined by the scope of his own claim against the third party.”
Thus, the appeals court continued, “a beneficiary cannot tell a third party that it is responsible
for all of his medical expenses, on the one hand, and later tell Medicare that the same party was
responsible for only 10%, on the other.”
Here, Hadden demanded Pennyrile pay for all his medical expenses that he incurred as a result
of his accident, not just 10% of them. Thus, this demand defined the scope of his responsibility
to reimburse Medicare, the appeals court said.
The appeals court rejected Hadden’s attempt to liken his case to the Supreme Court’s rejection
of an Arkansas statute that automatically imposed a lien in favor of the state on settlement
payments to Medicaid beneficiaries, see Arkansas Dep’t of Health and Human Servs. v. Ahlborn,
547 U.S. 269 (2006).
That case, the appeals court said, involved the Medicaid, not Medicare, statute and therefore did
not apply here. The Medicaid statute speaks in terms of the settlement payor’s “liability,” not
“responsibility” as the Medicare statute does.
The appeals court also held Medicare was entitled, under the MSP, to recover against Hadden
“‘separate and distinct’ from its rights of subrogation.”
Finally, the appeals court affirmed the district court’s conclusion that the government was not
required to waive Hadden’s reimbursement based on “equity and good conscience,” noting he
presented “little or no evidence of hardship” and “otherwise retained almost $44,000 of the
settlement.”
A dissenting opinion said the majority erroneously concluded the term “responsibility” in the MSP
clearly dictates that a Medicare recipient’s tort recovery from a primary plan is subject to
government reimbursement for the entire amount of Medicare’s conditional payments regardless
of whether the recovery included full payment for the items and services paid for by Medicare.
According to the dissent, such an interpretation could lead to absurd results, including allowing
Medicare to recover the full amount even if the tortfeasor is only partial liable and settles for less
than the amount the program paid.
In the dissent’s view, the 2003 amendment to the MSP provision “was intended to make clear
that tortfeasors are primary plans subject to the Secretary’s reimbursement claims as long as
their liability is demonstrated by some means, including by judgment or settlement,” and did not
“address[] the amount of reimbursement due.”
The dissent also discounted CMS policy, set forth in the MSP Manual, to apply principles of
equitable allocation only in cases where the damages claim is adjudicated on the merits.
Noting the MSP Manual is not entitled to the same deference as agency regulations, the dissent
said the policy “discourages settlements and may ultimately hinder CMS’s efforts to recover
conditional Medicare payments.”
Hadden v. United States, No. 09-6072 (6th Cir. Nov. 21, 2011).
Eleventh Circuit Dismisses Claims Against Medicare Carriers For Lack
Of Jurisdiction
The Eleventh Circuit in an unpublished decision affirmed December 8, 2011 the dismissal of a
provider’s claims against several Medicare Carriers, agreeing with the lower court that subject
matter jurisdiction was lacking.
According to the appeals court, the provider did not appeal the final administrative decision or
file suit against the Department of Health and Human Services (HHS) Secretary as required for
claims arising under the Medicare Act.
In December of 1999, Ngawa Anna White sent a letter to the Alabama State Legislature,
complaining that Blue Cross and Blue Shield of Alabama and other Medicare Carriers had acted
arbitrarily and capriciously in refusing to reimburse Dr. Albert White and other medical providers
for legitimate medical services.
Within six months of the letter, the Carriers initiated an audit of White’s practice and determined
he had received an actual overpayment of $89,650, with a projected overpayment of
$57,975.20, for services he billed to Medicare from January 1, 1999 through June 30, 1999.
After pursuing administrative review, instead of seeking judicial review of that decision by filing
an action in district court against the HHS Secretary, as required by 42 U.S.C. §§ 405(g) and
1395ff(b)(1)(A), White filed the instant action against the Carriers.
White alleged breach of contract, fraud, tort of outrage, loss of consortium, violation of the
constitutional rights to equal protection and due process, violation of civil rights, and a RICO
claim.
The Carriers moved to dismiss the complaint on the grounds that the district court lacked subject
matter jurisdiction because the claims arose under the Medicare Act. The district court granted
the motion and White appealed.
The appeals court first noted that federal courts are stripped of primary federal question subject
matter jurisdiction over claims that arise under the Medicare Act.
Instead, federal courts have jurisdiction over only those cases that are properly appealed from a
final administrative decision, and that are filed against the Secretary of HHS, the appeals court
said.
Here, the district court properly concluded White’s claims arose out of the Medicare Act.
But White did not appeal the final administrative decision, nor did he file suit against the
Secretary of HHS. Therefore, subject matter jurisdiction was lacking, the appeals court held.
White v. Blue Cross and Blue Shield of Ala., No. 10-14083 (11th Cir. Dec. 8, 2011).
U.S. Court In D.C. Says Secretary Should Not Have Denied Adjustment
Of Erroneous Base-Year FTE Count In Closed Cost Report
The U.S. District Court for the District of Columbia found unlawful the Department of Health and
Human Services Secretary’s refusal to adjust a hospital’s erroneous full time equivalent
(FTE) counts used to determine graduate medical education (GME) reimbursement going
forward because the cost report at issue was outside the three-year reopening window.
Granting the plaintiff hospitals’ motion for summary judgment, the court said the Secretary’s
position was inconsistent with the regulatory text, applicable case law, and the Secretary’s own
prior interpretations regarding what constitutes a "reopening" for purposes of the three-year
limitations period.
For example, the court cited another case where the Secretary had not treated base-year
adjustments in closed cost reports as a “reopening.”
The only apparent difference between the earlier case and the instant action, the court
commented, was the former “would have resulted in a financial loss to the agency,” while the in
the latter “the agency stands to gain.”
Moreover, in this case, the hospitals were not seeking a readjustment of their GME
reimbursement for the years that corresponded to the closed cost reports. Rather, the hospitals
only wanted to correct the erroneous base-year FTE counts used to determine GME
reimbursement levels in future years, the court noted.
Plaintiffs are several hospitals owned and operated by Kaiser Foundation Hospitals that receive
Medicare GME reimbursement, which is based in part on the number of FTE residents and interns
in a hospital’s training program.
In 1997, Congress imposed a cap on the number of FTEs a hospital could include for purpose of
calculating future GME payment. The cap was to be determined based on the FTE count in a
hospital’s latest pre-1997 report.
Plaintiffs contended their GME FTE caps were too low because they erroneously failed to include
certain affiliated clinics’ 1996 residents and interns. Plaintiffs did not, however, appeal the FTE
count from the 1996 report or the cap established by their 1998 reports, until after the threeyear reopening window.
The intermediary agreed plaintiffs’ GME FTE caps were erroneous, but denied the appeal citing
the three-year limitations period on reopening.
The Provider Reimbursement Review Board (PRRB) reversed, finding adjusting plaintiffs’ caps to
correct the FTE counts was not a reopening because it would have no effect on their
reimbursement for any of the closed years.
The Centers for Medicare and Medicaid Services Administrator reversed the PRRB’s decision,
finding the GME FTE caps were tied to closed cost reports and increasing the caps would violate
the reopening limitation.
The court agreed with plaintiffs that the Secretary’s position—that adjusting the base-year FTE
counts in the closed cost reports required reopening of the reports—was unreasonable.
In so holding, the court pointed to regulatory text and case law interpretations that the only
intermediary decisions subject to the terms of the reopening regulation are those involving the
total amount of reimbursement.
“The Secretary offers no legal support for her claim that the caps cannot be increased without
modifying the total reimbursement for closed years, particularly where Plaintiffs have disclaimed
such sums,” the court observed.
The court’s decision also took into account the fact that the Secretary’s position seemed to be
inconsistent with previous cases.
Thus, the court held the Secretary’s stance on reopening was unlawful. The court did refuse,
however, plaintiffs’ request to enforce their stipulation with the intermediary regarding the
correct number of FTEs.
Instead, the court concluded remand to the agency was the appropriate remedy.
Kaiser Found. Hosps. v. Sebelius, No. 11-92 (JEB) (D.D.C. Dec. 12, 2011).
U.S. Court In New York Upholds Written Agreement Requirement For
Resident Time In Non-Hospital Settings
A federal district court in New York refused to invalidate a regulation that required a written
agreement for hospitals to obtain Medicare reimbursement of graduate medical expenses (GME)
for time spent by residents in non-hospital settings. See 42 C.F.R. § 413.86(f)(4).
The U.S. District Court for the Northern District of New York found the written agreement
requirement was a reasonable interpretation of the statute, which during the relevant time
period allowed reimbursement for time spent by residents in non-hospital settings where the
resident was engaged in patient care activities and the “hospital incur[red] all, or substantially
all, of the costs for the training program in that setting.”
The court therefore rejected a bid by two hospitals—Kingston Hospital and Benedictine Hospital—
to invalidate the regulation.
After exhausting their administrative appeals, the two hospitals sued the Department of Health
and Human Services Secretary in court alleging they were owed additional Medicare
reimbursement for time spent by their residents at Mid-Hudson Family Health Services Institute
(Institute), which they jointly formed in 1983.
Between 1983 and 2001, Kingston and Benedictine executed three agreements by which they
agreed to cover the Institute’s deficits and provide the Institute with adequate cash flow.
The fiscal intermediary refused to count time spent by Kingston residents in non-hospital settings
throughout 2000 and 2001, resulting in a disallowance of over $1 million. The intermediary
similarly disallowed over $550,000 of Benedictine’s reimbursement for fiscal year (FY) 2000.
The hospitals not only disputed the validity of the written agreement requirement, but also the
Secretary’s determination that they had not met the requirement through their affiliation
agreements with the Institute.
Written Agreement Requirement Valid
Applying Chevron deference, the court upheld the written agreement requirement, finding the
regulation was not arbitrary, capricious, or manifestly contrary to the statutory provisions.
In so holding, the court cited with approval other cases characterizing the written agreement
requirement as a procedural mechanism for satisfying the statutory provisions rather than as a
new substantive requirement.
Affiliation Agreements
The hospitals contended their 1983 agreement to form the Institute rendered them “effectively
responsible for paying” for the residency program.
But the court found the Secretary properly determined this agreement fell short of meeting the
written agreement requirement since it was between the two hospitals, not the non-hospital site;
made “no provision for the costs of the residents’ salaries and fringe benefits”; and was silent as
to "the compensation the hospital was providing to the non-hospital site for supervisory teaching
activities.”
The court did conclude, however, that the Secretary should have considered whether a 2001
affiliation agreement Kingston and the Institute entered into in April 2001, with a July 1, 2001
effective date, met the requirement. At this time, Benedictine left the residency program.
During the administrative proceedings, the agency did not consider the agreement on the merits
because the effective date of the agreement was six months after the beginning of FY 2001 and
after residents were placed into non-hospital settings.
The court pointed out that Kingston’s residency program operates on an academic calendar year
beginning July 1 and ending June 30, and therefore was in place when its residents began their
rotations.
Thus, the court remanded to the Secretary to consider the affiliation agreement on the merits.
Section 713 Exemption
The hospitals also argued they were exempt from the written agreement requirement by Section
713 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which
requires the Secretary, during the one year period beginning on January 1, 2004, to allow all
hospitals to count residents in non-hospital settings for purpose of GME reimbursement
regardless of the financial arrangement between the hospital and the teaching physician
practicing at the non-hospital site.
The Secretary interpreted Section 713 to apply to all training during calendar year 2004 and all
pre-2004 training if the intermediary determined reimbursability during 2004. The Secretary also
concluded that Section 713 required compliance with all aspects of the written agreement
requirement other than the financial arrangement between the hospital and the teaching
physician at the non-hospital site.
Based on this interpretation, the Secretary rejected the application of the Section 713 exemption
to the hospitals in this case.
The court upheld the Secretary’s interpretation of the provision, calling it “indisputably
reasonable.”
Kingston Hosp. v. Sebelius, No. 1:09-cv-1303 (GLS/RFT) (N.D.N.Y. Dec. 8, 2011).
D.C. Circuit Allows Association To Challenge Stark Regulations
Without Exhaustion Of Administration Remedies
The D.C. Circuit held December 23, 2011 that an association of physician-owned joint ventures
could challenge Stark regulations in federal court without first exhausting administrative
remedies.
In so holding, the appeals court reversed the district court’s dismissal of the case.
Although the Medicare Act provides for judicial review of reimbursement decisions, it requires
that claimants first exhaust their administrative remedies, the appeals court explained. In
Shalala v. Illinois Council on Long Term Care, Inc., the Supreme Court recognized an exception
to this requirement for cases where its application “would not lead to a channeling of review
through the agency, but would mean no review at all.” 529 U.S. 1, 17 (2000).
According to the appeals court, the exception applied in this case allowing the plaintiff to pursue
its claim in district court pursuant to general federal question jurisdiction.
Plaintiff Council for Urological Interests is an association of physician-owned joint ventures
formed to purchase specialized equipment for urologic laser surgery.
Under 2008 regulations promulgated by the Department of Health and Human Services (HHS),
urologists who have a financial interest in a joint venture may no longer refer patients to the
venture for laser services, even if the services are provided under arrangement with a hospital,
without running afoul of the federal Stark law.
After the new regulations were issued but before they became effective, the Council filed suit in
the U.S. District Court for the District of Columbia.
The government moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter
jurisdiction, arguing that under the Medicare Act, administrative procedures must first be
exhausted.
The district court agreed, dismissing the action, and the Council appealed.
The government argued the Medicare Act’s failure to provide administrative remedies for nonMedicare providers, such as the Council and its members, reflects congressional intent to limit
the right of judicial review to Medicare providers.
The appeals court noted, however, that Council members are directly targeted by the regulations
they challenged. The 2008 regulations redefine the status of urologist-owned joint ventures in
such a way that the joint ventures can no longer either receive referrals from their urologistowners or bill for services furnished pursuant to such referrals.
“That Council members are not ‘providers’ who can bill Medicare and receive reimbursements
directly hardly makes their interest in the 2008 regulations ‘tangential’ or ‘indirect,’ as the
government argues,” the appeals court held.
The appeals court saw “no ‘clear and convincing evidence’ in the statute’s language or structure
indicating that Congress deliberately intended to completely bar non-providers from seeking
review of regulations that target them directly.”
The appeals court acknowledged that other parties—specifically, the hospitals with which the
Council’s members had contracted—could challenge the 2008 regulations through Medicare Act
channels.
American Chiropractic Association, Inc. v. Leavitt, 431 F.3d 812 (D.C. Cir. 2005) suggested that
the exhaustion requirement at Section 405(h) applies so long as Medicare Act review of a claim
is available to some, though perhaps not all, of a class of affected parties, the appeals court said.
“But here, as the government acknowledges, a whole category of affected parties—that is, joint
ventures providing laser surgery equipment and services—has no way to obtain review through
Medicare Act channels,” the appeals court reasoned.
The appeals court rejected the government’s argument that Section 405(h) applies automatically
once it is determined that some party, somewhere, could bring the Council’s claims before HHS.
“Although we agree that the Illinois Council exception is primarily concerned with whether a
particular claim can be heard through Medicare Act channels, we see nothing in the case law
requiring us to disregard factors that speak to a potential proxy’s willingness and ability to
pursue the plaintiff’s claim,” the appeals court said.
“In cases where the only entities able to invoke Medicare Act review are highly unlikely to do so,
their unwillingness to pursue a Medicare Act claim poses a serious 'practical roadblock' to judicial
review,” according to the court.
Noting that hospitals have little incentive to pursue the Council’s challenge to the regulations, the
appeals court found that “in the specific circumstances of this case invoking section 405(h) would
result not merely in ‘added inconvenience or cost in an isolated, particular case,’ but in the
‘complete preclusion of judicial review.’”
Council for Urological Interests v. Sebelius, No. 11-5030 (D.C. Cir. Dec. 23, 2011).
U.S. Court In Alabama Refuses To Enjoin Termination Of SNF From
Medicare
The U.S. District Court for the Southern District of Alabama denied February 10, 2012 a
preliminary injunction to a skilled nursing facility (SNF) facing the termination of its Medicare
provider agreement.
On January 20, 2012 the court agreed to temporarily enjoin the Department of Health and
Human Service’s (HHS’) termination of Gordon Oaks Healthcare Center in Mobile, AL (Gordon
Oaks), which is operated by GOS Operator LLC, that was set to go into effect January 21, 2012.
But in its latest decision, the court concluded Gordon Oaks had not shown a substantially
likelihood of success on any of its claims—namely, that the agency’s failure to provide a pretermination administrative hearing violated the SNF’s due process rights and that the Secretary
exceeded her statutory authority by terminating a provider agreement without a finding of
“immediate jeopardy” deficiencies and while the administrative process was pending.
Gordon Oaks currently houses 57 residents, some 22 of whom are on Medicaid and eight who are
covered by Medicare.
The Alabama Department of Public Health conducted a series of surveys of Gordon Oaks
beginning on July 21, 2011 through January 18, 2012 that found the SNF was not in substantial
compliance with federal requirements.
Gordon Oaks disputed the deficiencies and formally initiated an administrative appeal with before
the scheduled termination. Given the still pending termination, Gordon Oaks filed a lawsuit on
January 19 seeking emergency injunctive relief.
The court agreed to grant a TRO to block the termination pending further proceedings. GOS
Operator, LLS v. Sebelius, No. 12-0035-WS-N (S.D. Ala. Jan. 20, 2012).
In ruling on Gordon Oaks' motion for a preliminary injunction, the court first overruled the
government’s objection to subject matter jurisdiction.
The court agreed with the government that Gordon Oaks failed to exhaust its administrative
remedies and could not argue the Illinois Council exception, i.e., that deferring judicial review
until after the administrative appeals process was tantamount to no judicial review at all, to the
exhaustion requirement applied. See Shalala v. Illinois Council on Long Term Care, Inc., 529
U.S. 1 (2000).
The court did find, however, the exhaustion requirement should be waived because Gordon Oaks'
claims were entirely collateral to the issues being litigated through the administrative process.
See Mathews v. Eldridge, 424 U.S. 319 (1976).
Here, Gordon Oaks was asserting a constitutional challenge demanding a pre-termination
hearing, which was entirely collateral to its substantive claim of entitlement to participate in
Medicare, the court said.
Gordon Oaks also showed that an erroneous termination of its provider agreement would
damage it in a way that could not be fixed through retroactive payments—i.e., it likely would not
survive the termination.
But despite finding subject matter jurisdiction, the court concluded Gordon Oaks could not
prevail on the merits of its argument for a preliminary junction.
As to its procedural due process claim, the court noted “the overwhelming majority of authorities
. . . have concluded that Medicare providers enjoy no constitutional right to a pre-termination
hearing.”
As to the claim the Secretary lacked authority to terminate a provider agreement without a
finding of “immediate jeopardy,” the court noted the applicable regulatory text specifically
provided HHS could terminate a provider agreement if the facility was not in substantial
compliance with federal regulations.
Moreover, the Medicare statute was ambiguous on this point, and therefore the regulation was
entitled to Chevron deference. According this level of deference, the court found the Secretary’s
interpretation reasonable and in no way contradictory to congressional intent.
The court also held Gordon Oaks failed to show a substantial likelihood of succeeding on its claim
the Secretary exceeded her authority in terminating a provider agreement while an
administrative review was pending.
The court noted no case law supporting Gordon Oaks' interpretation. In addition, the court again
found the Medicare statute ambiguous and, in fact, “counsels strongly against GOS’s
interpretation that Congress intended to tie the Secretary’s hands from terminating a provider
agreement whenever the provider utters the magic words ‘I appeal’ at the administrative level.”
GOS Operator, LLC v. Sebelius, No. 12-00350-WS-N (D. Ala. Feb. 10, 2012).
D.C. Circuit Says Social Security Recipients Can't Avoid Automatic
Enrollment In Medicare
The D.C. Circuit held February 7, 2012 that seniors who receive Social Security cannot disclaim
their legal entitlement to Medicare Part A even if they decline the program’s benefits in favor of
private insurance.
The appeals court affirmed a district court decision granting summary judgment to the
Department of Health and Human Services.
“We understand plaintiffs’ frustration with their insurance situation and appreciate their desire for
better private insurance coverage,” the panel majority wrote. But the appeals held the law was
not on plaintiffs' side.
Plaintiffs, who receive Social Security benefits, sought to avoid being automatically enrolled in
Medicare Part A upon turning 65 so they could keep the more generous benefits offered by their
private insurance.
Under federal law, individuals who receive Social Security benefits and are 65 or older are
automatically entitled to Medicare Part A benefits, which the appeals court called an
“insurmountable problem” for plaintiffs' lawsuit.
While plaintiffs are free to reject Medicare Part A benefits, they cannot disclaim their legal
entitlement to the program, the appeals court explained.
“[T]he problem is that, under the law, plaintiffs remain legally entitled to the benefits regardless
of whether they accept them,” the appeals court said.
To opt out of Medicare Part A, plaintiffs would have to forgo their monthly Social Security
benefits and repay benefits already received.
A dissenting opinion argued there is no statutory requirement that an individual who declines
Medicare Part A coverage must lose/refund their Social Security benefits.
According to the dissent, the Social Security Administration’s Program Operations Manual
System, not the relevant statutory text, is the sole source of such a result. This outcome, in the
dissent’s opinion, is not consistent with the statute and therefore should be found invalid.
Hall v. Sebelius, No. 11-5076 (D.C. Cir. Feb. 7, 2012).
U.S. Court In D.C. Refuses To Remand Case To PRRB, Finds Secretary
Already Had Opportunity To Reverse
The U.S. District Court for the District of Columbia denied January 31 the Department of Health
and Human Services Secretary’s motion to remand to the Provider Reimbursement Review Board
(PRRB) an action challenging certain calculations under Medicare's Inpatient Prospective Payment
System.
Plaintiffs, Medicare-participating hospitals, filed an appeal with the PRRB and sought expedited
judicial review (EJR).
The PRRB determined that it lacked jurisdiction over plaintiffs' appeals under 42 C.F.R. §
405.1804, and also ruled in the alternative that if it did have jurisdiction, it lacked authority to
decide the underlying legal question and EJR was appropriate.
The Centers for Medicare and Medicaid Services (CMS) Administrator did not take any action on
the decision within 60 days, thus the PRRB’s decision was final, the court found.
The court rejected the Secretary's motion for dismissal and remand to permit the Secretary (via
the CMS Administrator) to reverse the PRRB's decision that it lacked jurisdiction. The court found
the Secretary already had the opportunity to reverse the PRRB's decision, but failed to do so
within the required 60-day time period.
“The process that the Secretary suggests is unnecessary, time-consuming, and inefficient,” the
court held. “It would merely serve to delay the resolution of this case on the merits. PRRB's
decision constitutes final agency action, and it is properly before this Court.”
The court disagreed with the Secretary’s argument that this case was analogous to Cape Cod
Hosp. v. Leavitt, 565 F. Supp. 2d 137, 139 (D.D.C. 2008), in which the court granted the
Secretary’s motion for remand.
“It is true that this case is like Cape Cod in that PRRB decided it lacked jurisdiction, the
Administrator failed to take action within the 60-day time period, and the Secretary subsequently
decided that it wanted to reverse PRRB,” the court acknowledged.
However, the instant case is “critically different” in one respect, the court said. Here, the PRRB
decided in the alternative and "in the interest of judicial economy" that, if it had jurisdiction, it
lacked authority to decide the underlying issue of law and EJR was required.
Accordingly, a final decision was rendered, the court found.
Adirondack Med. Ctr. v. Sebelius, No. 11-313 (D.D.C. Jan. 31, 2012).
U.S. Court In D.C. Says HHS Should Not Have Excluded MedicareExhausted Dual Eligibles From Hospital's Medicaid Fraction For DSH
Adjustment
The Department of Health and Human Services (HHS) Secretary should not have excluded
certain Medicare-exhausted dual eligible patient days from a hospital’s Medicaid fraction for
purposes of determining its disproportionate share hospital (DSH) calculation in its 1997 cost
year, the U.S. District Court for the District of Columbia held January 30, 2012.
According to the court, the Secretary’s current interpretations, set forth in a 2004 final rule,
requiring such days be included in the Medicare, rather than Medicaid, fraction of the DSH
calculation represented a substantive change from prior policy and practice.
“[S]ince the Secretary is not authorized to promulgate retroactive rules for DSH calculations, . . .
the Secretary’s current interpretation may not be retroactively applied to the 1997 cost reporting
period,” the court said.
Based on this conclusion, the court did not reach the issue of whether the regulation was a valid
interpretation of the DSH statute. A federal court in Michigan ruled in April 2010 that the
regulation violated the clear language of the statute. Metropolitan Hosp. Inc. v. United
States Dep’t of Health and Human Servs., No. 1:09-cv-128 (W.D. Mich. Apr. 5, 2010).
A hospital’s DSH adjustment is calculated based on the sum of the Medicare and Medicaid
fractions.
At issue in this case was the Medicaid fraction, which is based on the number of patient days for
individuals “eligible for” Medicaid, but not “entitled to” Medicare Part A.
Catholic Health Initiatives—Iowa, Corp., which owns and operates Mercy Medical Center-Des
Moines, argued the Secretary improperly excluded from the hospital's Medicaid fraction patient
days for dual eligible individuals—those eligible for Medicare and Medicaid—who had exhausted
their Part A benefit for the 1997 cost year.
Catholic Health argued the Secretary’s current interpretation of what should be included in the
Medicaid fraction, as set forth in an October 2004 final rule that deleted the word “covered” days
from the applicable regulation, was at odds with the agency’s prior position.
HHS contended, however, the final rule was a “clarification” of its long-standing position that
Medicare-exhausted days should be excluded from the Medicaid fraction.
The court agreed with Catholic Health and granted summary judgment in its favor.
The court did not address whether the 2004 regulation was entitled to Chevron deference and
instead based its decision on a finding the application of that interpretation to the 1997 period at
issue was impermissibly retroactive.
“The Secretary practically concedes that the agency has flip-flopped over the years on the
question of whether dual-eligible exhausted patient days should be counted in the numerator of
the Medicaid fraction, by failing to present any agency statements, regulations, administrative
decisions—or anything else—suggesting that HHS’s views in 1997 and before were consistent
with those expressed in later materials,” the court said.
The court pointed to a 1995 rulemaking it said showed the agency interpreted “entitled to”
benefits under Medicare Part A for purposes of both the Medicare and Medicaid fraction as
requiring that Medicare paid for, or covered, the patient days.
The court also highlighted a November 1996 decision of the Centers for Medicare and Medicaid
Services Administrator that it said showed HHS’ policy or practice of including in the Medicaid
fraction patient days attributable to dual eligible who had exhausted their Medicare Part A
benefits. See Presbyterian Med. Ctr. Of Philadelphia v. Aetna Life Ins. Co. (CMS Adm’r Dec. Nov.
29, 1996).
While subsequent decisions indicated a shift toward the current policy, the court considered this
change a substantive alteration of the Secretary’s prior policy and practice that could not be
retroactively applied to the 1997 cost report at issue.
Catholic Health Initiatives – Iowa, Corp. v. Sebelius, No. 10-cv-411 (RCL) (D.D.C. Jan. 30,
2012).
Alabama Supreme Court Dismisses SNF’s Action Against MA Plan For
Failure To Exhaust Administrative Remedies
A skilled nursing facility’s (SNF’s) action against a Medicare Advantage (MA) plan asserted claims
“arising under the Medicare Act” and therefore the provider had to exhaust its administrative
remedies before proceeding in court, the Alabama Supreme Court held February 17, 2012 in
granting a writ of mandate directing a lower court to dismiss the complaint.
The high court concluded Southern Springs Healthcare Facility’s claims, which included breach of
contract, intentional interference with business relations, negligence and wantonness, and unjust
enrichment, against Blue Cross Blue Shield of Alabama (BCBS) were “inextricably intertwined
with claims for coverage and benefits under the Medicare Act.”
Southern Springs alleged BCBS, through its MA plan Blue Advantage, wrongfully and tortiously
failed to provide coverage and benefits for Medicare-covered services the SNF performed for Blue
Advantage enrollees, despite having a legal and contractual duty to do so.
According to Southern Springs, BCBS had not been providing the same coverage to Blue
Advantage enrollees as they would have received under Medicare Part A.
“Although framed in terms of a contractual dispute between BCBS and Southern Springs,
Southern Springs’ claim is ‘at bottom,’ a claim that the Blue Advantage enrollees are being
denied coverage and/or benefits to which they are entitled under the Medicare Act,” the high
court observed.
Thus, pursuant to Heckler v. Ringer, 466 U.S. 602 (1984), the claims arose under the Medicare
Act and were subject to mandatory administrative procedures and limited judicial review.
Because Southern Springs had not exhausted its administrative remedies, the court lacked
subject matter jurisdiction, the high court said.
The ruling stands in contrast to an earlier federal court decision that remanded the case to state
court after BCBS removed the action.
In remanding the case, the U.S. District Court for the Middle District of Alabama rejected BCBS’
arguments that all of the SNF’s claims arose under the Medicare Act and that the Medicare
Prescription Drug, Improvement, and Modernization Act completely preempted the claims. Main
& Assocs., Inc. v. Blue Cross and Blue Shield of Ala., No. 2:10-cv-326-MEF (M.D. Ala. Mar. 22,
2011).
With respect to its Heckler analysis, the federal district court found the instant case was more
akin to the Fifth Circuit decision, RenCare, Ltd. v. Humana Health Plan of Texas, 395 F.3d 555
(5th Cir. 2004), which found state law claims against an MA plan did not arise under federal law
because they involved private parties and neither the government nor any Medicare enrollees
were parties to the action.
But the Arkansas Supreme Court found RenCare distinguishable. Unlike in RenCare, Southern
Springs alleged enrollees were denied services. The high court also found the dispute was not
based exclusively “on the parties’ privately-agreed-to payment plan”; but rather, involved
“questions of coverage and compliance with the Medicare Act.”
Ex parte Blue Cross and Blue Shield of Ala., BLUE No. 21101464 (Ala. Feb. 17, 2012).
U.S. Court In D.C. Refuses To Reconsider Decision Rejecting Teaching
Hospital’s Bid To Increase FTE Resident Count
A federal district court in the District of Columbia refused February 29, 2012 to reconsider an
earlier decision upholding the Department of Health and Human Services Secretary’s
determination resulting in Medicare recouping nearly $5 million from the plaintiff teaching
hospital in graduate medical education (GME) and indirect medical education (IME)
reimbursement.
In so holding, the U.S. District Court for the District of Columbia determined plaintiff was not
entitled to an increase in its full-time equivalent (FTE) count for residents who were transferred
from another hospital that stopped operating a residency program.
GME and IME reimbursement is determined in part based on the number of FTE residents; the
higher the FTE count, the greater the GME or IME payment for the provider, the court explained.
The Balanced Budget Act of 1997 (BBA) imposed “caps” on the number of residents a hospital
may count for Medicare reimbursement purposes at the number of FTE residents in a hospital’s
“base year” of fiscal year (FY) 1996.
The BBA did permit, however, the Secretary to develop rules allowing hospitals that are
members of the same affiliated group to apply the cap on an aggregated basis.
Under these rules, the Secretary defined an “affiliated group” as “two or more hospitals located
in the same geographic wage area . . . in which individual residents work at each of the hospitals
seeking to be treated as an affiliated group during the course of the approved program.” 42
C.F.R. § 413.86(g)(4) (1997).
Plaintiff Swedish American Hospital is a teaching hospital in Rockford, IL. It operates a family
practice residency program that is sponsored by the University of Illinois College of Medicine
(University).
St. Anthony Medical Center also formerly participated in the residency program. In 1996, after it
withdrew from the program, plaintiff absorbed the residents St. Anthony would otherwise have
trained.
Plaintiff adjusted its GME and IME FTE resident caps upward to reflect the fact it had assumed
the former St. Anthony residents for purposes of its FYs 1999 and 2002 cost reports.
In 2005, however, plaintiff’s fiscal intermediary reopened the cost reports for FYs 1999 through
2002 and adjusted the FTE resident caps downward to omit the residents who had previously
trained at St. Anthony.
As a result, Medicare recouped nearly $5 million from plaintiff. Plaintiff argued the determination
violated the Administrative Procedure Act (APA).
In March 2011, the court granted in part and denied in part the parties’ cross motion for
summary judgment. Plaintiff sought reconsideration of the court’s decision.
The court refused to disturb its earlier ruling, rejecting plaintiff’s claim that it was affiliated with
St. Anthony under a 1997 final rule.
Plaintiff also argued it is located in a rural area and therefore entitled to “special consideration.”
The court acknowledged that under 42 C.F.R. § 413.86(g)(6)(iii) special consideration is due to
rural hospitals including an upwards adjustment in their FTE caps if they create “additional new
programs.” This regulation also provides, however, for no FTE adjustment if the hospital merely
“expand[ds] . . . existing or previously existing programs.”
Here, plaintiff’s program began in the 1970s and was not, by definition, a “new program.”
Moreover, the regulations in place during 1997 defined Rockford as part of a “metropolitan
statistical area” or an “urban area.”
Swedish Am. Hosp. v. Sebelius, No. 08-2046 (D.D.C. Feb. 29, 2012).
U.S. Court In D.C. Says Teaching Hospitals Improperly Denied Medical
Education Payments, Finds Notice Of Regulatory Filing Deadlines
Inadequate
The U.S. District Court for the District of Columbia held March 20, 2012 that the Department of
Health and Human Services (HHS) Secretary should not have denied supplemental education
payments to three Philadelphia hospitals (University of Pennsylvania, Presbyterian Medical
Center, and Pennsylvania Hospital) based on their alleged failure to file their claims within
certain regulatory deadlines.
According to the court, the Secretary did not provide adequate notice that the deadlines applied
to the indirect graduate medical education (IME)/graduate medical education (GME) claims at
issue, even if the plaintiff hospitals had been made aware of the regulatory filing requirements
through a third party.
The court in particular chastised the Secretary for not abiding by the decision in Loma Linda
Univ. Med. Ctr. v. Sebelius, 408 Fed. Appx. 383 (D.C. Cir. 2010), which found teaching hospitals
were not put on notice of the time limits.
“This decision picks up where the D.C. Circuit’s summary affirmance of the district court’s ruling
in the Loma Linda case left off,” said Mark H. Gallant, of Cozen O'Connor, in Philadelphia, PA, one
of the attorneys representing the plaintiffs in the case.
“The decision breaks ground in affirming that an agency’s own failure to afford clear and
ascertainable notice of its interpretation of a regulation cannot be cured by a third party’s having
correctly ‘guessed’ what the agency had in mind, and holds that teaching hospitals cannot
receive legally adequate notice of the Secretary’s regulatory ‘interpretation’ based on a warning
from a third party (the Association of American Medical Colleges) that the claims filing rules
would be applied,” he added.
According to Gallant, “the court also essentially recognized these additional IME/GME payments
are statutory entitlements, and it found ‘objectionable’ and ‘unacceptable’ the CMS
Administrator’s ‘stubborn repetition’ that hospitals should have been implicitly aware of the
claims filing deadlines after the district court and the D.C. Circuit had already repudiated the
same assertion in Loma Linda.”
“Although the court—having ruled against the Secretary on notice grounds—declined to
dispositively resolve whether CMS’s ‘interpretation’ of the existing claims filing rule could be
squared with its plain language, Judge Bates nevertheless found that the agency’s ‘interpretation’
of Section 424.30 et al. as applying to Part C IME/GME claims was ‘quite strained’ and ‘at odds
with the relevant regulatory language.’ In a thoughtful analysis, the court concluded that an
agency has a heightened obligation to make its interpretation clearly known to the regulated
public when that interpretation ‘may actually contradict the regulatory text,’” Gallant said.
Kenneth R. Marcus, a partner in the health law practice of Honigman Miller Schwartz and Cohn,
in Detroit, MI, hailed the decision as “a breath of fresh air.” He added that “this and several other
cases have been the unwilling yo-yo’s of the Secretary of HHS for the past several years,
oscillating between federal court and the agency.”
According to Marcus, “this decision should put to rest any argument whether the Secretary is
required to pay the claims where it is now established that notice of the purported filing deadline
was legally inadequate and that a hospital’s actual knowledge of the filing requirement did not
excuse the agency from complying with the law.”
Claims Denial
The hospitals alleged they had been improperly denied supplemental medical education
payments (authorized by the Balanced Budget Act of 1997) by their Medicare intermediary for
fiscal years 1999 and 2000.
The intermediary denied the additional payments citing plaintiffs’ failure to file required UB-92
forms in accordance with time limits established under 42 C.F.R. § 424.44.
Under 42 C.F.R. § 424.30, the Section 424.44 time limits do not apply to services furnished to
Medicare Part C enrollees.
Plaintiffs argued: (a) the Section 424.44 time limits did not apply to claims for IME/GME
payments for services provided to Medicare Part C enrollees; (b) that they never received
adequate notice of the filing requirements for supplemental medical education payment claims;
and (c) that, in any event, they did in fact satisfy the filing requirements.
Prior Proceedings
The Provider Reimbursement Review Board ultimately determined the factual issue—i.e.,
whether plaintiffs complied with the timely filing requirement was moot—after deciding the legal
issue—i.e., whether the filing requirements applied—in plaintiffs’ favor.
But the CMS Administrator reversed, concluding Section 424.44 does apply to claims for
supplemental medical education payments and, in a single paragraph, found that, “even if the
evidence in the record was credible, it was insufficient as a matter of law to show that the UB92s were in fact sent to the intermediary.”
On appeal, the U.S. District Court for the District of Columbia focused its analysis on the factual
issue, noting it had just decided a case raising the same legal question, Cottage Health System
v. Sebelius, No. 08.098 (JDB) (D.D.C. July 7, 2009) (finding adequate notice that claims for
supplemental education payments must be submitted to the fiscal intermediary but remanding to
the Secretary to explain why the regulatory time limits applied).
The court similarly remanded the instant case to the Secretary for further explanation of whether
plaintiffs received adequate notice of the time limits. Hospital of Univ. of Pa. v. Sebelius, No. 081665 (JBD) (D.D.C. July 10, 2009).
The CMS Administrator on remand again concluded the Section 424.44 deadlines applied to the
IME/GME payments for Part C enrollees. According to the Administrator, Congress carved out
these claims from Part C and made them payable under Part A.
On the notice issue, the Administrator concluded teaching hospitals generally understood that
these claims had to be filed in accordance with the regular filing requirements for the UB-92,
pointing to an American Association of Medical Colleges (AAMC) Memorandum to that effect.
Inadequate Notice
In its decision, the district court held the agency’s interpretation of its regulation could actually
contradict the regulatory text, and therefore “the obligation on the agency to provide adequate
notice is at its peak.”
The court acknowledged the Secretary’s interpretation made some sense from a policy
standpoint, but said it need not decide whether this reading was valid since the case could be
resolved on the notice issue.
The Secretary argued plaintiffs here, unlike in Loma Linda, had actual notice of the deadlines
through the AAMC memorandum.
But the court commented the “Administrator’s decision on remand . . . suggests unacceptable
non-acquiescence to Loma Linda.”
“Absent any communication whatsoever from HHS, this third party memorandum is insufficient
to provided adequate notice to plaintiffs, regardless of how plaintiffs reacted to or understood
that memorandum,” the court held.
Thus, plaintiffs did not receive notice of the filing deadlines with “ascertainable certainty,” the
court held.
Hospital of the Univ. of Pa. v. Sebelius, No. 11-464 (JDB) (D.D.C. Mar. 20, 2012).
U.S. Court In Tennessee Rejects HHS' Interpretation Of Ambulance
Service Regulation
The U.S. District Court for the Middle District of Tennessee determined March 8 that federal law
requires no more than a physician’s advance order to certify that non-emergency, scheduled,
repetitive ambulance services are medically necessary and qualify for reimbursement under
Medicare.
In so holding, the court rejected the Department of Health and Human Services Secretary’s
argument that more was needed to establish medical necessity.
A post-payment audit by a Medicare Program Safeguard Contractor concluded that plaintiff First
Call Ambulance Service, Inc. failed to document that many of the beneficiaries it transported
needed to be carried by ambulance.
The contractor assessed an overpayment of $2.645 million. On appeal, First Call argued that a
physician’s certificate was sufficient to document that non-emergency ambulance service was
medically necessary. The final agency decision of the U.S. Department of Health and Human
Services held that proof of medical need was required under 42 U.S.C. § 410-40(d)(2).
Although it noted that the government’s interpretation was entitled to substantial deference, the
district court held that the agency could not ignore the plain language of the regulation, which
requires no more than a physician’s certification of medical necessity.
The court then ordered further briefing to determine whether there was an adequate physician’s
certificate for each of the appealed claims.
First Call Ambulance Service, Inc. v. HHS, No. 3:10-0247 (M.D. Tenn. Mar. 8, 2012).
U.S. Court In D.C. Upholds “Must Bill” Policy For “Bad Debt Claims”
Involving Dual Eligibles, But Remands To Agency To Consider
Providers' Reliance On Prior Enforcement Stance
The U.S. District Court for the District of Columbia upheld March 26, 2012 the Department of
Health and Human Services (HHS) Secretary’s application of its “must bill” policy to two nursing
home providers’ Medicare “bad debt” claims associated with certain dual-eligible residents in
fiscal years (FYs) 2004 and 2005.
The “must bill” policy 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
before Medicare reimburses those amounts as bad debt.
The providers at issue run nursing homes in several states. While the providers admit dualeligibles, they do not participate in Medicaid.
The court found it was not arbitrary and capricious or an abuse of discretion for the Secretary to
apply the “must bill” requirement to the providers, but remanded to the agency to determine
whether the providers here had reasonably relied on the agency’s prior enforcement policy,
which had not previously required them to obtain a Medicaid “remittance advice” (RA) for
Medicare bad debt reimbursement.
The court also left open the possibility that it would rule arbitrary and capricious the Secretary’s
refusal to accept an alternative form of documentation if the providers submitted bills to the
respective state Medicaid programs but were unable to obtain RAs.
The case involves two separate providers of skilled nursing and long term care hospital services:
Cove Associates Joint Venture d/b/a/ Life Care Center of Scottsdale and Select Specialty
Hospital—Denver, Inc. (collectively, plaintiffs).
As they had done in previous years, plaintiffs submitted “bad debt” claims to Medicare for unpaid
cost-sharing amounts associated with services provided to dual-eligible individuals in FYs 2004
and 2005.
Their fiscal intermediaries denied them reimbursement for the bad debt claims, citing the “mustbill” policy.
In both cases, the Provider Reimbursement Review Board (PRRB) reversed, finding no basis for
the agency to apply the policy where the providers did not participate in Medicaid.
The Centers for Medicare and Medicaid Services (CMS) Administrator reversed the PRRB,
reasoning the RAs “are critical as they document the proper payments that should be made from
the respective programs.”
Applying “substantial deference” to the Secretary’s interpretation of her own regulation, the
court upheld the application of the “must bill” policy where the providers did not participate in
Medicaid and were seeking to claim bad debt on cost-sharing amounts associated with dual
eligibles.
The court found the policy consistent with the Medicare statute and regulations, and not “an
unreasonable implementation of either.”
The court also said the “must bill” policy was not new and subsequent guidance by the agency
was a “classic example of an interpretative rule or general statement of policy” not subject to the
notice and comment requirements of the Administrative Procedure Act.
The court acknowledged, however, the “untenable” position plaintiffs faced—i.e., where states
refuse to issue Medicaid RAs because the providers are non-participating.
The court ultimately found plaintiffs were not entitled to summary judgment at this time because
they had only submitted sample bills to the respective Medicaid programs.
“If at some point, Plaintiffs can establish that they have submitted the correct forms and made
the right applications, it may in fact, in those circumstances, be arbitrary and capricious for the
Secretary to not accept an alternative form of documentation or to require that the states
comply with her regulation,” the court observed.
The court also found while the must-bill requirement was long-standing, the agency’s
enforcement of the policy with respect to the non-participating Medicaid providers had changed
and its application here could be arbitrary and capricious on that basis.
Thus, the court remanded to the agency “for reconsideration of the limited issue of whether
Plaintiffs were justified in relying on CMS’ prior failure to enforce the must-bill policy with respect
to dual-eligible reimbursement claims from non-participating Medicaid providers.”
Cove Assos. Joint Venture v. Sebelius, Nos. 1:10-cv-01316 (BJR) and 1:10-cv-01356 (BJR)
(D.D.C. Mar. 26, 2012).
U.S. Court In District Of Columbia Upholds Secretary's Delegation Of
Extrapolation Determination
On April 6, 2012, the U.S. District Court for the District of Columbia held the Department Health
and Human Services Secretary could delegate to a contractor her authority under 42 U.S.C. §
1395ddd(f)(3) to determine that a high level of payment error justifies the use of extrapolation
to determine amounts of Medicare overpayments.
Plaintiff Gentiva Healthcare Corporation, a provider of home health services, sought judicial
review of the Secretary’s assessment of an $805,000 overpayment.
The amount owed was determined by a contractor using an extrapolation method from a sample
of 30 out of 1,951 claims. Through administrative appeals, Gentiva reduced the number of claims
determined to be overpaid from 26 to 6.
In its suit, Gentiva argued Section 1395ddd(f)(3) prohibits the Secretary from delegating to a
contractor her authority to determine that extrapolation is justified.
The court first found the statute ambiguous. Consequently, the question before the district court
was whether the Secretary’s interpretation was reasonable.
The court concluded the Secretary’s interpretation was reasonable because the government lacks
the resources to determine in the first instance whether extrapolation is warranted, and because
providers have ample opportunities to challenge overpayments arrived at through extrapolation.
Gentiva also argued in the alternative that, if the Secretary could delegate this authority to a
contractor, she must do so through notice and comment rulemaking.
However, the court held a delegation of authority is not a rule, and, to the extent that it is, it is
an interpretive rule, and, therefore, may be enacted without either notice or an opportunity to
comment.
Finally, Gentiva argued even if a contractor can determine that the level of payment error is
“sustained” or “high,” no such level of error was present in this case. But the court found Section
1395ddd(f)(3) precludes judicial review of a contractor’s decision to extrapolate.
Gentiva Healthcare Corp. v. Sebelius, Civil Action No. 11-438 (D.D.C. Apr. 6, 2012).
U.S. Court In D.C. Upholds Contemporaneous Written Agreement
Requirement For Resident Time In Non-Hospital Settings
The U.S. District Court for the District of Columbia rejected April 17, 2012 a teaching hospital’s
bid for an additional $122,000 in Medicare reimbursement for off-site medical training costs of
its dental residents.
The court upheld a Department of Health and Human Services (HHS) regulation requiring a
written agreement specifying the teaching hospital would incur substantially all of the costs of
the off-site training.
The court also had no qualms with HHS’ interpretation of the regulation as requiring the written
agreement to be entered into prior to the start of the off-site training.
Plaintiff University Medical Center, Inc. is a teaching hospital in Louisville, KY that has an
affiliation agreement with the University of Louisville (University).
Under this agreement, plaintiff’s dental residents train off-site at the University’s dental school.
Plaintiff and the University signed an agreement on December 20, 1999 under which plaintiff
agreed to assume substantially all of the costs of the dental residents’ training.
Despite the agreement’s retroactive effective date of January 1, 1999, plaintiff’s fiscal
intermediary refused to count resident off-site training time prior to December 20, 1999, the
date the agreement was signed, in calculating plaintiff’s graduate medical education and indirect
medical education payment amounts for that year.
The Provider Reimbursement Review Board disagreed with the fiscal intermediary’s
determination, finding the regulation did not prohibit retroactive written agreements.
But the Centers for Medicare and Medicaid Services Administrator overruled the Board,
concluding the residents' time could only be counted when a “contemporaneous written
agreement” was in effect.
The U.S. District Court for the District of Columbia, no stranger to disputes over Medicare
payments of medical education expenses, said the instant case overlapped with some of the
issues raised in Cottage Health Sys. v. Sebelius, 631 F. Supp. 2d (D.D.C. 2009), in which the
court upheld the contemporaneous written agreement requirement as a permissible
interpretation of the statute.
The court affirmed its holdings in Cottage Health, noting the only distinction between the two
cases was that plaintiff entered into the written agreement before it submitted its cost report for
the year in question. But the court did not view this distinction as significant.
“[T]he Secretary has offered plausible justifications for the requirement that the written
agreement be entered into before residents undergo training: to avoid disputes after the fact
about who had incurred all the costs and to ensure that double payment is not made,” the court
said.
The court also concluded the regulation neither compelled nor proscribed an interpretation
requiring a contemporaneous written agreement.
The court said it was enough that the Secretary’s interpretation was a plausible reading and
supported by comments in the preamble.
The court refused to be drawn into a debate about whether the timing of the execution of an
agreement was relevant to the purpose of the requirement in the first place.
Finally, plaintiff argued the Secretary did not provide adequate notice of the contemporaneous
written agreement requirement and therefore should not be able to deny its medical education
reimbursement on that basis.
Citing the Loma Linda Univ. Med. Ctr. v. Sebelius, 408 Fed. Appx. 383 (D.C. Cir. 2010), case,
which found teaching hospitals were not put on notice of certain time limits, the court said the
issue of fair notice should be applied here as well, but agreed to view the Secretary’s position
with deference.
After examining the record, the court found adequate notice to hospitals of the contemporaneous
written agreement requirement for off-site training, noting in particular an explanation to that
effect in the preamble to the regulation.
University Med. Ctr., Inc. v. Sebelius, No. 11-260 (JDB) (D.D.C. Apr. 17, 2012).
U.S. Court In D.C. Refuses To Specify Standards Governing HHS'
Recalculation Of DSH Payments On Remand
The U.S. District Court for the District of Columbia refused April 17, 2012 to set forth specific
legal standards to govern the Department of Health and Human Services (HHS) Secretary’s
recalculation of disproportionate share hospital (DSH) payment amounts for 16 hospitals on
remand.
In a similar dispute, the D.C. Circuit found the agency should not have applied its current
interpretation of the DSH statute retroactively. Northeast Hosp. Corp. v. Sebelius, No. 10-5163
(D.C. Cir. Sept. 13).
The parties to the instant action agreed that the Northeast decision required dismissal and
remand of their case, but plaintiffs asked the court to issue instructions for HHS to follow on
remand in recalculating their DSH adjustments.
At issue in the cases was whether patient days attributable to participants in the
Medicare+Choice program should be included in the “Medicaid fraction” of the DSH calculation,
with plaintiffs arguing HHS impermissibly excluded these days.
The D.C. Circuit in Northeast determined the Secretary’s interpretation of whether M+C
beneficiaries are still “entitled to benefits under [Medicare] Part A” and, therefore, should not be
counted in the Medicaid fraction of the DSH calculation, was not foreclosed by the statute.
The appeals court concluded, however, “the Secretary’s decision to apply her present
interpretation of the DSH statute to fiscal years 1999-2002 violates the rule against retroactive
rulemaking.”
Granting the Secretary’s motion to dismiss the instant action, and refusing to issue further
instructions on remand, the district court said its role ended “when the D.C. Circuit invalidated
the rule in question.”
The court acknowledged plaintiffs’ desire for clear directions on remand, but said settled
principles of administrative law precluded it from taking further action.
“If the Plaintiffs take issue with the legal standard applied by HHS upon remand, relief lies with
review of that final agency action, not with this Court at this time.”
The court also declined to rule on defendants' obligation to pay interest on any additional
reimbursements owed.
“Defendants do not dispute that the [Medicare] statute requires the payment of interest” and
therefore “there is no actual controversy between the parties at this point,” the court observed.
Baptist Med. Ctr. v. Sebelius, No. 11-1273 (D.D.C. Apr. 17, 2012).
Fourth Circuit Affirms Secretary's Medicare Coverage Denial Of Knee
Device
The Fourth Circuit upheld April 26, 2012 the Department of Health and Human Services (HHS)
Secretary’s determination excluding a device used to treat osteoarthritis in the knee from
coverage under Medicare Part B after finding it was not “reasonable and necessary.”
Affirming the lower court decision, the appeals court stressed the Secretary’s broad discretion in
making coverage determinations.
“[W]e must respect the fact that Congress has chosen to leave the interpretation of the
'reasonable and necessary' requirement of Medicare Part B coverage to the informed discretion
of the Secretary and the professional panels who exercise her authority,” the appeals court
commented.
The appeals court also was not persuaded to change its analysis because the Food and Drug
Administration (FDA) cleared the device for marketing. FDA approval has no bearing on the
Secretary’s coverage determination, the appeals court said.
Moreover, FDA approved the device through the 510(k) “substantially equivalent” process, rather
than the more-stringent pre-market approval process. The latter requires clinical data showing a
device is “safe and effective” whereas the former does not.
The appeals court found this significant given that HHS regulations and guidance relating to
“reasonable and necessary” determinations include a requirement that a particular item has been
found “safe and effective.”
Coverage Denied
The durable medical equipment (DME) at issue in this case is the BioniCare Stimulator System,
Model 1000 (BIO-1000), a medical device used to treat osteoarthritis of the knee by delivering
electrical pulses to the joint.
In July 1997, FDA approved the BIO-1000 under the 510(k) process, finding it was substantially
equivalent to another device already on the market.
While some contractors have provided Medicare coverage for the BIO-1000, others have refused
to cover the device.
Plaintiff Monique D. Almy, the Chapter 7 trustee for the bankruptcy estate of BioniCare, filed a
lawsuit in May 2008, challenging eight groups of claims denying coverage of the device that were
appealed through the entire administrative process to the Medicare Appeals Council (MAC),
which determined the BIO-1000 was not “reasonable and necessary.”
Specifically, the MAC found the company failed to provide evidence in accordance with the
Medicare Program Integrity Manual (MPIM) demonstrating the device was “safe and effective.”
The district court affirmed the MAC’s denials of coverage and granted summary judgment in the
Secretary’s favor.
Broad Discretion
Medicare Part B coverage of DME is subject to either “national coverage determinations” (NCDs)
that are binding throughout Medicare; “local coverage determinations” (LCDs) by private
contractors on an intermediary- or carrier-wide basis; and individual claims determinations,
including whether a particular DME meets the statutory requirement of being “reasonable and
necessary.”
BioniCare contended that because the MAC decisions were based on the safety and effectiveness
of the BIO-1000 generally, rather than the medical necessity of the device for any particular
patient, the Secretary should have issued an NCD or LCD rather than proceeded through
individual adjudications.
But the appeals court said this argument “ignores directly applicable Supreme Court precedent,
which makes clear that the Secretary enjoys full discretion to choose to proceed by adjudication
rather than by rulemaking.”
The appeals court also found no error in applying the criteria governing LCDs to individual
adjudications, noting the MPIM makes clear the same criteria, including the “safe and effective”
requirement, should apply to both determinations.
FDA Clearance Irrelevant
The appeals court emphasized FDA’s clearance of the BIO-1000 for marketing under the 510(k)
process was entirely separate from the Secretary’s authority to determine whether an item of
DME is “reasonable and necessary” for purposes of Medicare Part B coverage.
FDA is charged with applying the standards of the Federal Food, Drug, and Cosmetic Act, not the
Medicare statute, the appeals court observed.
Inconsistent Determinations
Finally, the appeals court rejected BioniCare’s argument that the Secretary’s decision was
arbitrary and capricious because some administrative law judges and contractors reached
inconsistent decisions on coverage of the device.
Some patient-specific differences are inevitable in these determinations and, in any event, “it is
undisputed that these lower-level decisions are not precedential and not binding on the MAC.”
Almy v. Sebelius, No. 10-2241 (4th Cir. Apr. 26, 2012).
Pharmaceuticals
Fourth Circuit Remands To State Court West Virginia’s Lawsuit Against
Pharmacies For Alleged Overcharges
The Fourth Circuit held May 20, 2012 the state of West Virginia’s lawsuit against several major
pharmacies asserting they overcharged consumers for generic drugs belonged in state court.
Affirming the district court’s remand order, the appeals court agreed the suit was not a
“disguised class action” subject to removal under the Class Action Fairness Act (CAFA), as the
defendant pharmacies asserted.
Instead, the state brought the lawsuit in its parens patriae capacity to enforce specific state
consumer protection laws, the appeals court concluded.
As such, the lawsuit was not a “class action” under CAFA, which authorizes the removal of
specified civil actions that are brought under Fed. R. Civ. P. 23 or a “similar” state law or rule
“authorizing an action to be brought by 1 or more representative persons as a class action.”
The specific statutes at issue, a West Virginia law regulating pharmacies and the West Virginia
Consumer Credit Protection Act, are not “similar” to Rule 23; they do not include requirements
for the adequacy of representation, numerosity, commonality, and typicality, the appeals court
found.
Thus, the action was not removable to federal court under CAFA.
West Virginia Attorney General Darrell McGraw initiated the action against CVS Pharmacy, Inc.,
Kmart Holding Corp., the Kroger Co., Wal-Mart Stores Inc., Walgreen Co., and Target Stores,
Inc., alleging they failed to pass on generic drug savings to consumers as required by state law.
The state sought a temporary and permanent injunction against further violations of state law,
restitution and disgorgement of monies obtained as a result of the alleged overcharges,
repayment of the “excess charges” to affected consumers, and civil penalties, among other
things.
The pharmacies argued the action was removable to federal court under CAFA because the state
statutes at issue were “similar” to Rule 23 because they allowed the Attorney General “to
represent in a single action thousands of consumers who all suffer a similar injury—excess
charges.”
The appeals court refused to interpret CAFA’s “similar” language so broadly, noting the state
statutes did not resemble Rule 23 in any other meaningful way.
The appeals court also stressed the state was not a member of the class it sought to represent—
i.e., consumers who allegedly overpaid for the generic medications, the appeals court observed.
Rather, the appeals court likened the state’s role to that of regulator bringing an enforcement
action to pursue relief on behalf of aggrieved individuals.
In reaching its decision, the appeals court made clear it wanted to avoid “trampling on” the
state’s ability to enforce its own statutory requirements, emphasizing federalism principles.
A dissenting opinion pointed out that CAFA does not define “class action” and therefore the court
should look instead to the “essence of the action," and that, in this case, the real parties in
interest are West Virginia consumers.
“Here, the West Virginia Attorney General is representing a large group of West Virginia citizens
who have allegedly been overcharged by the Pharmacies in their purchase of generic drugs. Yet
their claims are too small on an individual basis to justify any one of them bringing suit alone.
This is exactly the type of situation the class actions were designed to address,” the dissent
said.
West Virginia ex rel. McGraw v. CVS Pharmacy Inc., No. 11-1251 (4th Cir. May 20, 2011).
Fourth Circuit Remands To State Court West Virginia’s Lawsuit Against
Pharmacies For Alleged Overcharges
The Fourth Circuit held May 20, 2011 the state of West Virginia’s lawsuit against several major
pharmacies asserting they overcharged consumers for generic drugs belonged in state court.
Affirming the district court’s remand order, the appeals court agreed the suit was not a
“disguised class action” subject to removal under the Class Action Fairness Act (CAFA), as the
defendant pharmacies asserted.
Instead, the state brought the lawsuit in its parens patriae capacity to enforce specific state
consumer protection laws, the appeals court concluded.
As such, the lawsuit was not a “class action” under CAFA, which authorizes the removal of
specified civil actions that are brought under Fed. R. Civ. P. 23 or a “similar” state law or rule
“authorizing an action to be brought by 1 or more representative persons as a class action.”
The specific statutes at issue, a West Virginia law regulating pharmacies and the West Virginia
Consumer Credit Protection Act, are not “similar” to Rule 23; they do not include requirements
for the adequacy of representation, numerosity, commonality, and typicality, the appeals court
found.
Thus, the action was not removable to federal court under CAFA.
West Virginia Attorney General Darrell McGraw initiated the action against CVS Pharmacy, Inc.,
Kmart Holding Corp., the Kroger Co., Wal-Mart Stores Inc., Walgreen Co., and Target Stores,
Inc., alleging they failed to pass on generic drug savings to consumers as required by state law.
The state sought a temporary and permanent injunction against further violations of state law,
restitution and disgorgement of monies obtained as a result of the alleged overcharges,
repayment of the “excess charges” to affected consumers, and civil penalties, among other
things.
The pharmacies argued the action was removable to federal court under CAFA because the state
statutes at issue were “similar” to Rule 23 because they allowed the Attorney General “to
represent in a single action thousands of consumers who all suffer a similar injury—excess
charges.”
The appeals court refused to interpret CAFA’s “similar” language so broadly, noting the state
statutes did not resemble Rule 23 in any other meaningful way.
The appeals court also stressed the state was not a member of the class it sought to represent—
i.e., consumers who allegedly overpaid for the generic medications, the appeals court observed.
Rather, the appeals court likened the state’s role to that of regulator bringing an enforcement
action to pursue relief on behalf of aggrieved individuals.
In reaching its decision, the appeals court made clear it wanted to avoid “trampling on” the
state’s ability to enforce its own statutory requirements, emphasizing federalism principles.
A dissenting opinion pointed out that CAFA does not define “class action” and therefore the court
should look instead to the “essence of the action," and that, in this case, the real parties in
interest are West Virginia consumers.
“Here, the West Virginia Attorney General is representing a large group of West Virginia citizens
who have allegedly been overcharged by the Pharmacies in their purchase of generic drugs. Yet
their claims are too small on an individual basis to justify any one of them bringing suit alone.
This is exactly the type of situation the class actions were designed to address,” the dissent
said.
West Virginia ex rel. McGraw v. CVS Pharmacy Inc., No. 11-1251 (4th Cir. May 20, 2011).
U.S. Supreme Court Finds Vermont’s Prescribing Data Restrictions
Unconstitutional
The U.S. Supreme Court struck down June 23, 2011 a Vermont law regulating the collection and
use of data identifying healthcare providers’ prescribing patterns.
In a 6-3 opinion, written by Justice Kennedy, the Court found the statute was an unconstitutional
restriction on commercial speech.
The decision affirms a November 2010 Second Circuit ruling, IMS Health Inc. v. Sorrell, No. 091913(L) (2d Cir. Nov. 23, 2010), reversing an April 2009 decision by the U.S. District Court for
the District of Vermont finding the law, which was passed in 2007 and went into effect July 1,
2009, regulated protected commercial speech, but withstood scrutiny under the First
Amendment.
In a statement, Pharmaceutical Research and Manufacturers of America Executive Vice President
Josephine Martin called the ruling a "victory for free speech" and "a triumph for patients and
future research and development by biopharmaceutical companies."
“The use of prescriber data, with all patient identification removed, helps companies properly
inform doctors about prescription medicines and their characteristics--including new indications,
proper dosage forms and potential side effects--in a targeted and expedited manner," he said.
Vermont Attorney General William Sorrell said the Court's decision was disappointing, but not
wholly unexpected. “We knew going in that this Supreme Court has frequently sided with large
corporations. Our challenge now will be to continue to work to protect medical privacy and
reduce health care costs without violating the Supreme Court’s ruling. This is a step back, but
not the end of the story.”
Sorrell noted the federal government, 35 states, and organizations representing over 100,000
doctors, consumer groups, and privacy experts supported the state's appeal to the U.S. Supreme
Court to uphold the statute.
Vermont Law
Vermont is one of three states (in addition to Maine and New Hampshire) that have enacted laws
aimed at regulating so called “data mining” of physicians’ and other providers’ prescribing habits,
which is then used by pharmaceutical manufacturers for their marketing activities, known as
"detailing."
The Vermont law, Act 80, prohibits pharmacies and other regulated entities from selling or using
prescriber-identifiable data for marketing or promoting prescription drugs unless the prescriber
consents—i.e., “opts-in.”
Plaintiffs IMS Health Inc., Verispan, LLC, and Source Healthcare Analytics, Inc. (a subsidiary of
Wolters Kluwer Health, Inc.) acquire prescription data from billions of prescription transactions
per year throughout the United States. They then de-identify patient information and sell the
data to their clients, mostly pharmaceutical companies.
Plaintiffs sued in 2007 seeking to enjoin enforcement of the statute, alleging Act 80 violated the
First Amendment and the Dormant Commerce Clause. The district court upheld the law, finding it
passed constitutional muster.
Reversing, the Second Circuit held Act 80 did not survive intermediate scrutiny under the Central
Hudson framework. Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n, 447 U.S. 557
(1980).
The Second Circuit’s decision conflicted with two First Circuit rulings that upheld the similar New
Hampshire and Maine statutes. See IMS Health Inc. v. Mills, No. 08-1248 (1st Cir. Aug. 4, 2010),
and IMS Health Inc. v. Ayotte, 550 F.3d 42 (1st Cir. 2008).
Heightened Scrutiny
In the majority opinion, Kennedy found the Vermont law imposed content- and speaker- based
restrictions on the sale, disclosure, and use of prescriber-identifying information thus warranting
heightened judicial scrutiny.
Specifically, Kennedy noted, the law’s restrictions disfavor speech by pharmaceutical
manufacturers while allowing the acquisition and dissemination of the same information by other
speakers such as, for example, academic organizations.
Thus, to pass constitutional muster, the state must show the statute directly advances a
substantial governmental interest and that the measure is narrowly drawn to achieve that
interest.
Disfavored Speech
Vermont argued its physicians have a “reasonable expectation” that their prescriber-identifying
information will not be used for other purposes and have an interest in keeping their prescribing
decisions confidential.
But the Court majority pointed out the Vermont law only prevents pharmacies from sharing such
information for marketing purposes.
“Perhaps the State could have addressed physician confidentiality through ‘a more coherent
policy,’” Kennedy noted, by, for example, “allowing the information’s sale or disclosure in only a
few narrow and well-justified circumstances.”
The Court also suggested a law providing an “opt-out” instead of an “opt in” would not
necessarily save the restriction because it still would apply only to one type of speaker, in this
case pharmaceutical manufacturers.
Impermissible Burden
The other purpose behind the law, according to Vermont, is to help lower healthcare costs
by spurring greater use of cheaper-priced generics.
While these interests may be legitimate, the Court noted, the Vermont law “does not advance
them in a permissible way.”
The fact that the state finds detailing is too effective in promoting more expensive brand-name
prescription drugs, “does not permit it to quiet the speech or to burden its messengers,” the
Court majority said.
“The State may not burden the speech of others in order to tilt public debate in a preferred
direction,” the Court commented.
The state did not contend that detailing is false or misleading, the Court said.
Instead, the Court continued, the “State’s interest in burdening speech of detailers . . . turns on
nothing more than a difference of opinion."
Dissent
A dissenting opinion, written by Justice Breyer and joined by Justices Ginsburg and Kagan,
argued the statute should not be subject to heightened scrutiny and, in any event, amounted to
a permissible governmental regulation of commercial speech.
“At best the Court opens a Pandora’s Box of First Amendment challenges to many ordinary
regulatory practices that may only incidentally affect a commercial message,” the dissent said.
Sorrell v. IMS Health Inc., No. 10-779 (U.S. June 23, 2011).
Supreme Court Finds Federal Law Preempts State Failure-To-Warn
Claims Against Generic Drug Manufacturers
The U.S. Supreme Court in a 5-4 decision held June 23, 2011 that federal drug regulations
applicable to generic drug manufacturers directly conflict with, and thus preempt, state law
failure to warn claims.
In so holding, the Court reversed the holding of the Fifth and Eighth Circuits, which found the
claims were not preempted.
The Court distinguished its decision in Wyeth v. Levine, 555 U. S. 555 (U.S. Mar. 4, 2009), in
which it held a state tort action against a brand-name drug manufacturer for failure to provide
an adequate warning label was not preempted.
According to the Court, in Wyeth, it was possible for the brand-name manufacturer to comply
with both state and federal law but here it would be impossible for the generic manufacturer to
do so.
“The federal statutes and regulations that apply to brand-name drug manufacturers differ, by
Congress’ design, from those applicable to generic drug manufacturers,” the Court noted.
Justice Thomas authored the majority opinion, which was joined by Justices Roberts, Scalia, and
Alito. Justice Kennedy joined in all but Part III–B–2.
Justice Sotomayor wrote a dissenting opinion, which was joined by Justices Ginsburg, Breyer,
and Kagan.
Defendants are generic manufacturers of metoclopramide, a drug commonly used to treat
digestive tract problems, which also is sold under the brand name Reglan.
Because of accumulating evidence that long term metoclopramide use can cause tardive
dyskinesia, a severe neurological disorder, warning labels for the drug have been strengthened
and clarified several times, most recently in 2009.
The original plaintiffs, Gladys Mensing and Julie Demahy, were prescribed Reglan in 2001 and
2002. After taking the drug as prescribed for several years, both developed tardive dyskinesia.
In separate state court tort actions, they sued petitioners, the generic drug manufacturers that
produced the metoclopramide they took.
The Fifth Circuit and Eighth Circuits both held the federal regulatory regime for generic drugs
does not preempt state law failure-to-warn claims, relying heavily on the Wyeth decision.
Applicable Drug Labeling Requirements
The High Court began its analysis by identifying the state and federal laws applicable to the case.
According to the Court, Minnesota and Louisiana tort law require a drug manufacturer that is or
should be aware of its product’s danger to label that product in a way that renders it reasonably
safe.
Under federal law, labeling is governed by the Food, Drug, and Cosmetic Act.
In 1984, Congress passed the Drug Price Competition and Patent Term Restoration Act (HatchWaxman Amendments), under which generic drugs can gain Food and Drug Administration (FDA)
approval simply by showing equivalence to a reference listed drug that the FDA already
has approved.
As a result, the Court noted, brand-name and generic drug manufacturers have different federal
drug labeling duties.
Although plaintiffs argued federal law provided several avenues through which the manufacturers
could have altered their metoclopramide labels in time to prevent their injuries, the Court found
FDA interprets its regulations to require the warning labels of a brand-name drug and its generic
copy must always be the same—thus, generic drug manufacturers have an ongoing federal duty
of “sameness.”
Similarly, the Court rejected plaintiffs’ argument that FDA’s “changes-being-effected” (CBE)
process allowed the manufacturers to change their labels when necessary.
Instead, the Court found FDA interprets the CBE regulation to allow changes to generic drug
labels only when a generic drug manufacturer changes its label to match an updated brand-name
label or to follow the FDA’s instructions.
Preemption Analysis
The Court has held that state and federal law conflict where it is “impossible for a private party
to comply with both state and federal requirements.” See Freightliner Corp. v. Myrick, 514 U. S.
280, 287 (1995).
The Court found such impossibility here. “If the Manufacturers had independently changed their
labels to satisfy their state-law duty, they would have violated federal law,” Thomas wrote.
Plaintiffs next argued the manufacturers could have enlisted FDA’s help in changing both the
generic and brand-name labels of metoclopramide, thus they could have accomplished what is
required under state law.
Accordingly, plaintiffs contended, the manufacturers could not bear their burden of proving
impossibility because they did not even try to start the process that might ultimately have
allowed them to use a safer label.
Although conceding the plaintiffs made “a fair argument,” the Court rejected it.
The question for “impossibility” is whether the private party could independently do under federal
law what state law requires of it, the Court reasoned.
“Accepting Mensing and Demahy’s argument would render conflict pre-emption largely
meaningless because it would make most conflicts between state and federal law illusory,” the
opinion said.
According to the Court, “when a party cannot satisfy its state duties without the Federal
Government’s special permission and assistance, which is dependent on the exercise of judgment
by a federal agency, that party cannot independently satisfy those state duties for preemption
purposes.”
In section III– B–2 of the opinion, which was joined by Justices Roberts, Scalia, and Alito, but
not Justice Kennedy, Thomas fleshed out this finding, explaining the Supremacy Clause “plainly
contemplates conflict pre-emption by describing federal law as effectively repealing contrary
state law.”
“Further,” Thomas wrote, “the provision suggests that courts should not strain to find ways to
reconcile federal law with seemingly conflicting state law."
Wyeth Distinguished
The Court specifically found its holding not in conflict with its Wyeth decision.
In Wyeth, Thomas explained, FDA’s CBE regulation permitted a brand-name drug manufacturer
like Wyeth “to unilaterally strengthen its warning” without prior FDA approval.
The Court conceded “from the perspective of Mensing and Demahy, finding pre-emption here but
not in Wyeth makes little sense,” but said it was “beyond dispute that the federal statutes and
regulations that apply to brand-name drug manufacturers are meaningfully different than those
that apply to generic drug manufacturers.”
“We will not distort the Supremacy Clause in order to create similar preemption across a
dissimilar statutory scheme,” the Court said.
Dissent
In her scathing dissent, Justice Sotomayor argued that because the generic drug manufacturers
could have proposed a label change to FDA to change the inadequate labels, they “have shown
only that they might have been unable to comply with both federal law and their state-law duties
to warn respondents Gladys Mensing and Julie Demahy.”
Sotomayor said she “would require the Manufacturers to show that the FDA would not have
approved a proposed label change.”
“Until today, the mere possibility of impossibility had not been enough to establish pre-emption,”
she wrote.
Sotomayor said the majority opinion “invents new principles of pre-emption law out of thin air to
justify its dilution of the impossibility standard.”
“As a result of today’s decision, whether a consumer harmed by inadequate warnings can obtain
relief turns solely on the happenstance of whether her pharmacist filled her prescription with a
brand-name or generic drug,” the dissent said.
“Today’s decision leads to so many absurd consequences that I cannot fathom that Congress
would have intended to pre-empt state law in these cases,” Sotomayor wrote.
Pliva, Inc. v. Mensing, No. 09–993 (U.S. June 23, 2011).
U.S. Court In District Of Columbia Dismisses Without Prejudice
Remaining Claims In Challenge To D.C. Law Regulating PBMs
A federal trial court in the District of Columbia sided with plaintiff Pharmaceutical Care
Management Association (PCMA) and agreed to dismiss without prejudice their remaining
constitutional challenges to a D.C. law regulating pharmaceutical benefit managers (PBMs).
Affirming a lower court decision, the D.C. Circuit ruled last year the Employee Retirement
Income Security Act (ERISA) preempted Title II of the Access Rx Act of 2004, which it said
“touch[es] upon ‘a central matter of plan administration’” and has “an impermissible effect upon”
employee benefit plans (EBPs). Pharmaceutical Care Management Ass’n v. District of Columbia,
No. 09-7042 (D.C. Cir. July 9, 2010).
Title II of the Act, which the D.C. Council passed in 2004 but that has never gone into effect,
imposed various fiduciary and disclosure duties on PBMs. PCMA challenged the
law asserting ERISA preemption and constitutional claims under the Fifth Amendment’s Takings
Clause, the Commerce Clause, and the First Amendment.
The appeals court did reverse the lower court’s decision as to two specific provisions of the Act
concerning usage pass back and confidentiality requirements. According to the appeals court,
because each of these provisions could be waived by an EBP in its contract with a PBM, there
was no ERISA preemption of these provisions.
The appeals court remanded to the district court for further consideration of PCMA’s
constitutional challenges to these provisions.
On remand, PCMA moved to dismiss its remaining claims without prejudice, while defendants
moved to dismiss the remaining claims with prejudice.
The U.S. District Court for the District of Columbia granted PCMA’s motion and agreed to dismiss
the remaining claims without prejudice under Fed. R. Civ. P. 41(a).
Rule 41(a), which governs voluntary dismissal of an action, requires a court to consider whether
the plaintiff seeks dismissal in good faith and whether the dismissal would cause the defendant
“legal prejudice” based on factors such as excessive delay or lack of diligence by the plaintiff in
prosecuting the action, an insufficient explanation by the plaintiff for taking nonsuit, and the
stage of the litigation.
Defendants argued they would suffer legal prejudice if the court failed to definitely rule on the
constitutionality of Title II, effectively preventing public enforcement of the Act.
“It is beyond quibble that the prospect of a second lawsuit does not constitute legal prejudice,”
the court said. Nor does the expense defendants incurred prior to dismissal amount to legal
prejudice under Rule 41(a), the court added.
Pharmaceutical Care Management Ass’n v. District of Columbia, No. 04-1082 (D.D.C. July 12,
2011).
Ninth Circuit Upholds Constitutionality Of California Law Requiring
PBMs To Conduct Pharmacy Drug Pricing Studies
The Ninth Circuit upheld the constitutionality of a California statute requiring pharmacy benefit
managers (PBMs) to conduct or obtain the results of bi-annual studies (fee studies) that report
state pharmacies’ retail drug pricing for pharmaceutical dispensing services to private uninsured
customers.
Affirming a district court decision denying the PBM defendants judgment on the pleadings, the
appeals court rejected their argument that the statute amounted to “compelled speech” in
violation of the First Amendment of the U.S. Constitution and the free speech provisions of the
California Constitution.
Plaintiffs own five independent retail pharmacies in California. They sued defendant PBMs to
enforce Cal. Civ. Code §§ 2527 and 2528, which require PBMs to conduct the fee studies and
supply them to “clients,” i.e., the third-party payors for whom they perform claims processing
services, the appeals court explained.
Some of the plaintiffs also filed a parallel action in state court. Several state appeals court
decisions ruled the statute violated the California Constitution.
The Ninth Circuit previously considered the consolidated case in a decision reversing the district
court’s conclusion that the pharmacies lacked Article III standing. The appeals court in its earlier
decision ruled the pharmacies had alleged sufficient “injury in fact” for purposes of Article III
standing. Beeman v. TDI Managed Care Servs., No. 04-56369 (9th Cir. June 2, 2006).
In the instant case, the district court ruled it was not bound by the state appeals court decisions
finding the statute unconstitutional. The court also held the statute did not violate the First
Amendment or the California Constitution’s free speech protections.
The Ninth Circuit affirmed.
First, the Ninth Circuit agreed it was not bound to follow the state appeals court’s rulings on the
constitutionality issue under Erie Railway Co. v. Tomkins, 304 U.S. 64 (1938), which requires
federal courts to follow state court decisions absent convincing evidence the state’s highest court
would decide the issue differently.
Although three state appeals court decisions concluded Section 2527 violates the free speech
clause of the California Constitution, the Ninth Circuit found convincing evidence the California
Supreme Court would rule otherwise based on First Amendment jurisprudence.
The Ninth Circuit then went on to find the statute did not violate the First Amendment.
Finding the case presented a facial, rather than “as applied” challenge, the Ninth Circuit
concluded Section 2527 merely requires PBMs to conduct and pass on objective data and in no
way regulates conduct or compels them to advocate on behalf of pharmacies for higher
reimbursement.
“Defendants are not compelled to convey a viewpoint or perform any subjective analysis of the
numbers they report. Instead § 2537 requires only a purely objective, informational exercise, the
results of which PBMs must report to their clients,” the appeals court observed.
The appeals court also upheld the statute under the California Constitution based on its analysis
under the First Amendment.
A dissenting opinion argued the majority violated the Erie doctrine in disregarding the appellate
court decisions.
“Even worse, however, it is the majority that fails to correctly apply First Amendment principles
to fact-based expression, while endorsing unfettered government authority to compel ‘objective’
speech,” the dissent said.
Beeman v. Anthem Prescription Management, LLC, No. 07-56692 (9th Cir. July 19, 2011).
Texas Supreme Court Reverses Vioxx Damages Award, Says Plaintiffs
Failed To Prove Causation
The Texas Supreme Court held August 26, 2011 that plaintiffs failed to adequately prove
causation in their suit against the makers of Vioxx.
In so holding, the high court reversed a sizable jury award in plaintiffs’ favor.
Leonel Garza died after taking the prescription drug Vioxx. His beneficiaries (plaintiffs) sued
Merck & Co., the manufacturer of Vioxx, alleging the drug was defective as designed and as
marketed with inadequate warnings.
At trial, Merck repeatedly challenged the scientific reliability of plaintiffs’ evidence offered to
prove that Vioxx caused Garza’s death, but a jury returned a verdict for plaintiffs, awarding $7
million actual damages, plus $25 million in punitive damages, which the trial court reduced to
the applicable statutory maximum of $750,000.
The appeals court held plaintiffs could not recover on their design-defect claim because they did
not present sufficient evidence of a safer alternative design, but that they could recover on their
inadequate-warning claim.
Merck appealed, arguing to the high court that plaintiffs failed to adequately prove causation.
The high court first noted that in Merrell Dow Pharmaceuticals, Inc. v. Havner, it set
requirements for determining whether epidemiological evidence is scientifically reliable to prove
causation.
In Havner, the court held that when parties attempt to prove general causation using
epidemiological evidence, a threshold requirement of reliability is that the evidence demonstrate
a statistically significant doubling of the risk.
Merck argued Havner requires a plaintiff who claims injury from taking a drug to produce two
independent epidemiological studies showing a statistically significant doubling of the relative
risk of the injury for patients taking the drug under conditions substantially similar to the
plaintiff’s (dose and duration, for example) as compared to patients taking a placebo.
Plaintiffs argue their evidence of clinical trials involving Vioxx is more reliable than the
epidemiological evidence on which the experts in Havner relied, which consisted largely of
unpublished, retroactive, observational studies.
The high court noted that “while the controlled, experimental, and prospective nature of clinical
trials undoubtedly make them more reliable than retroactive, observational studies, both must
show a statistically significant doubling of the risk in order to be some evidence that a drug more
likely than not caused a particular injury.”
Plaintiffs argued they presented more than two studies showing a statistically significant doubling
of the risk of heart attack from taking Vioxx; but the high court disagreed, finding both studies
relied on by plaintiffs had significant differences in dose and duration compared to Garza’s
exposure.
The high court also rejected plaintiffs’ argument that the totality of the evidence presented
showed general causation.
“The totality of the evidence cannot prove general causation if it does not meet the standards for
scientific reliability established by Havner,” the high court held.
“A plaintiff cannot prove causation by presenting different types of unreliable evidence,” the high
court concluded; “[t]hus, we are constrained to hold that the Garzas did not present reliable
evidence of general causation and are therefore not entitled to recover against Merck.”
Merck & Co., Inc. v. Garza, No. 09-0073 (Tex. Aug. 26, 2011).
Eleventh Circuit Finds Learned Intermediary Doctrine Barred Claims
Against Drug Maker
The learned intermediary doctrine barred a plaintiff’s claims against the maker of a biological
product used in her knee surgery, the Eleventh Circuit concluded September 8, 2011.
According to the appeals court, the drug’s package insert was sufficient to discharge the drug
maker’s duty to inform the physician about the use of the drug and it owed no further duty
directly to the plaintiff.
Plaintiffs Denise and Thomas Rounds sued Genzyme Corporation after Denise underwent an
unsuccessful knee surgery using its biologic product Carticel.
Plaintiffs argued Genzyme did not give proper training to her physician regarding “which patients
are Carticel candidates and which are not Carticel candidates.”
Genzyme moved to dismiss, and the district court granted the motion, finding plaintiffs failed to
plead causation and the learned intermediary doctrine barred their claims.
The appeals court agreed with the lower court that the learned intermediary doctrine barred
plaintiffs’ claims.
According to the appeals court, “the Carticel package insert expressly contained warnings,
precautions, and contraindications regarding patient evaluation and use, including identifying as
unsuitable patients who have certain medical conditions.”
The appeals court further found no merit to plaintiffs’ myriad other arguments, finding they
“misapprehend the very nature of the learned intermediary doctrine, which states that a
manufacturer has no duty directly to a patient to warn of risks associated with the product when
the manufacturer has provided accurate, clear and unambiguous information about the risks
associated with a product to the patient’s physician.”
Rounds v. Genzyme Corp., No. 11-11025 (11th Cir. Sept. 8, 2011).
Nevada High Court Says Learned Intermediary Doctrine Does Not
Shield Pharmacist From Liability When Customer-Specific Risk Is
Known
A pharmacist is shielded from liability under the learned-intermediary doctrine for failing to warn
a customer about a medication’s generalized risks; however, the doctrine does not apply where
the pharmacist has knowledge of a customer-specific risk regarding a prescribed medication, the
highest court in Nevada ruled November 23, 2011.
In the latter scenario, the Nevada Supreme Court said, the pharmacist has a duty to exercise
reasonable care in warning the customer or notifying the prescribing doctor of this risk.
Helen Klasch died after suffering a severe allergic reaction to a sulfa-containing antibiotic her
physician prescribed to treat a urinary tract infection.
Klasch thought she might have a sulfa allergy, a fact she conveyed to her physician. The
physician nonetheless prescribed the sulfa-containing medication after Klasch downplayed her
potential allergy, according to the opinion.
Klasch took her prescription to a Walgreen Co. pharmacy, which flagged the prescription based
on her patient profile that indicated she was allergic to sulfa-based drugs.
A Walgreens employer spoke with Klasch by phone concerning why her prescription had been
flagged. Klasch reportedly indicated she had taken the antibiotic before and had not experienced
any adverse reaction. The pharmacist then overrode the computer system’s flag and filled the
prescription.
Following her death, her two children sued Walgreens, alleging its pharmacist breached its duty
of care to their mother by failing to warn her adequately about the prescribed medication’s risks
given her allergy or, alternatively, by failing to communicate with her physician.
The lower court granted Walgreen’s motion for summary judgment, finding the learnedintermediary doctrine limited the pharmacist’s duty to do any more than correctly fill
prescriptions as written.
The high court agreed that the learned-intermediary doctrine, which traditionally has been used
to insulate drug makers from liability in products liability lawsuits where the manufacturer has
provided the patient’s doctor with all relevant safety information for a particular drug, applied in
the context of pharmacist/customer tort litigation.
Thus, under the doctrine, pharmacists have no duty to warn of a prescribed medication’s
generalized risks.
According to the high court, applying the learned-intermediary doctrine to pharmacists serves
the same public policy considerations—injecting the pharmacist into the physician-patient
relationship—as in the drug manufacturer context.
But the high court went on to conclude that the learned-intermediary doctrine does not foreclose
a pharmacist’s potential liability when the pharmacist has knowledge of a customer-specific risk.
In the instant case, Walgreens “arguable had specific information at its disposal regarding
Klasch’s sulfa allergy” and therefore the learned-intermediary doctrine did not insulate the
pharmacy from liability as a matter of law.
The high court reversed summary judgment in Walgreens favor at this point of the litigation,
citing potential factual issues regarding breach of duty and causation.
Klasch v. Walgreen Co., No. 54805 (Nev. Nov. 23, 2011).
Physicians
Ninth Circuit Says Voting Members Of Public Hospital’s MEC Are State
Actors For Section 1983 Purposes
Voting members of a county hospital’s physician credentialing committee who directly
participated in the unlawful suspension of another physician’s staff privileges may be sued under
42 U.S.C. § 1983 for depriving him of due process, the Ninth Circuit ruled June 9, 2011.
Reversing on this issue, the appeals court held that, although the individual committee members
were not county employees, “their physician credentialing decisions on behalf of a county
hospital constitute state action.”
The appeals court also ruled the district court should have allowed the physician to amend his
complaint to assert his claim under Section 1983.
The appeals court affirmed, however, the lower court’s grant of summary judgment to the other
defendants (the hospital and its board of trustees), finding no evidence the physician’s
suspension resulted from any institutional policies.
Plaintiff Dr. Richard Chudacoff, who specializes in obstetrics/gynecology, had medical privileges
at the University Medical Center of Southern Nevada (UMC).
Shortly after being granted staff privileges, plaintiff received a letter from the chief of staff that
the medical executive committee (MEC) had suspended his privileges. According to plaintiff,
before the letter he had no knowledge the MEC was considering any adverse action against him.
Plaintiff argued because he was not “summarily suspended” the MEC had to follow the process
for “routine administrative” actions under the hospital's bylaws and fair hearing plan.
UMC subsequently filed a report with the NPDB stating plaintiff’s privileges were suspended
indefinitely for substandard or inadequate care and/or skill level.
A fair hearing committee disagreed with the suspension but recommended peer review of
plaintiff’s practice, as well as several other measures.
While these proceedings were ongoing, plaintiff sued UMC and the individual members of the
MEC alleging violations of his due process rights under the Fourteenth Amendment.
The U.S. District Court for the District of Nevada granted plaintiff’s motion for partial summary
judgment on his due process claims. The court also found the hospital and various medical staff
defendants involved in the physician’s suspension were not entitled to immunity under the
Health Care Quality Improvement Act (HCQIA), saying the “lack of pre-deprivation hearing was
fundamentally unfair” in this case.
Plaintiff subsequently sought leave to amend to plead his complaint under Section 1983,
acknowledging he could not assert a private right of action under the Fourteenth Amendment.
The district court then granted summary judgment to all defendants on plaintiff’s due process
claims, finding the physician defendants were not state actors and the municipal defendants did
not have a policy or practice of due process violations to support a finding of liability.
Addressing this issue on appeal, the Ninth Circuit found the voting members of the MEC were
state actors for purposes of Section 1983.
The appeals court made clear the issue was not a close call, noting plaintiff brought his suit
against the defendant MEC members not in their capacity as private physicians but based on
their actions taken within the course and scope of their duties as governing members of the
medical staff of a public hospital as mandated by state law.
“Although comprised of privately employed physicians, the Medical Staff of UMC is controlled and
managed by the UMC Board . . . [their] authority to deprive Chudacoff of his staff privileges
flows directly from the UMC, whose authority to regulate physician privileges at a county hospital
is in turn directly authorized by Nevada law,” the appeals court said.
The appeals court also held plaintiff should be allowed to amend his complaint and correct the
“technical pleading matter” by asserting his claim under Section 1983.
The appeals court affirmed, however, summary judgment in favor of the entity defendants,
finding no evidence the suspension of plaintiff's privileges flowed from any institutional policy.
Moreover, plaintiff’s “entire claim against the individually named doctor defendants hinges on
their alleged noncompliance with the official policies and practices of the hospital,” the appeals
court observed.
In a separate, unpublished opinion, the Ninth Circuit affirmed the grant of summary judgment to
defendants on plaintiff’s state law negligence and defamation claims and therefore did not reach
the issue of HCQIA immunity.
Chudacoff v. University Med. Ctr. of S. Nev., Nos. 09-17558 and 09-17652 (9th Cir. Jun. 9,
2011).
Fifth Circuit Affirms Dismissal Of Physician’s Claims Against Texas
Medical Board, Private Physicians
The Fifth Circuit affirmed the dismissal of a physician’s lawsuit against members of the Texas
State Medical Board (Board), two private doctors, and an administrative law judge (ALJ) alleging
various constitutional claims in connection with the revocation—or attempted revocation—of his
medical license.
According to plaintiff Rodulfo Rivera, a former patient filed a complaint against him with the
Board in March 2006, prompting an investigation.
After finding plaintiff no longer competent to practice medicine, the Board asked him to
voluntarily relinquish his license, but he refused. The Board then filed charges against him in the
Texas State Office of Administrative Hearings (SOAH), the opinion said.
Before SOAH held a trial, plaintiff filed the instant action in court, which the various defendants
moved to dismiss.
The district court granted the motions to dismiss and plaintiff appealed.
As to the private physicians, plaintiff alleged they provided, or encouraged his patients to
provide, false information to the Board and conspired with the Board to interfere with his medical
practice.
Affirming the district court’s dismissal as to these defendants, the Fifth Circuit noted plaintiff
failed to allege the private physicians were state actors for purposes of bringing an action against
them under 42 U.S.C. § 1983.
“In fact, the complaint concedes that they are private medical doctors. . . and that they were not
themselves members of the [Board],” the appeals court observed.
The appeals court likewise affirmed the dismissal of the action as to the individual members of
the Board on the grounds of qualified immunity.
Plaintiff alleged these defendants were not entitled to qualified immunity because they failed to
sign their oaths of office and therefore were not acting in their “official capacity.”
But the appeals court disagreed, holding the failure to take an oath under state law was not a
basis to deny qualified immunity.
Finally, the appeals court upheld the dismissal as to the ALJ defendant, also on the ground of
qualified immunity.
In so holding, the appeals court rejected plaintiff’s contention that the ALJ could not claim
qualified immunity because her actions were administrative rather than judicial in nature.
“Rivera provides no basis for holding that qualified immunity is applicable only to officers
engaging in judicial acts,” the appeals court said.
Rivera v. Kalafut, No. 10-4140 (5th Cir. July 27, 2011).
Eighth Circuit Finds Former Nursing Home Physician Not Entitled To
Injunctive Relief
The Eighth Circuit agreed August 8, 2011 with a lower court that a physician who was terminated
from a nursing home failed to show the irreparable harm necessary to obtain an order directing
the nursing home to allow him to access his former patients.
Plaintiff Evgueni Roudachevski, D.O. began practicing at All-American Care Center of Little Rock
(All American Care) in 2008. He stopped working with All-American Care in January 2010, when
another physician replaced him as medical director, but was then rehired to the same position in
July 2010.
In early February 2011, plaintiff became All-American Care’s director of geriatrics and infection
control and was replaced as medical director.
On February 23, 2011, following a disagreement over procedures, plaintiff resigned his board
and director positions but stated in a letter that he would continue to provide medical care for his
current patients.
However, on February 24, plaintiff received a letter terminating his practice at All-American Care.
Plaintiff sued All American Care in Arkansas state court, alleging tortious interference with
contract or business expectancy and violation of the Arkansas Deceptive Trade Practices Act.
Plaintiff sought temporary and permanent injunctive relief and a temporary restraining order
directing All-American Care to allow him access to his patients residing at the home.
The district court denied the motion for a preliminary injunction, and plaintiff appealed.
On appeal, plaintiff argued the abrupt termination of his privileges at All-American Care
disrupted his physician-patient relationships and that the termination caused irreparable harm to
his practice and his patients.
When evaluating whether to issue a preliminary injunction, a district court should consider four
factors: (1) the threat of irreparable harm to the movant; (2) the state of the balance between
this harm and the injury that granting the injunction will inflict on other parties; (3) the
probability the movant will succeed on the merits; and (4) the public interest, the appeals court
explained.
The appeals court agreed with the district court that plaintiff had demonstrated no more than the
possibility of harm.
“To the extent that disruption to the physician-patient relationship itself may, in some
circumstances not present here, cause irreparable harm a preliminary injunction at this stage
could not undo the harm caused to either Dr. Roudachevski or his patients,” the appeals court
noted.
“The relationship between Dr. Roudachevski and his former patients has already been disrupted,
and Dr. Roudachevski’s former patients have developed new physician-patient relationships that
would be disrupted by the reinstatement of Dr. Roudachevski,” the appeals court added.
Rejecting plaintiff’s other arguments on this point, the appeals court concluded the district court
did not err in finding no irreparable harm.
The appeals court also found no error in the district court’s findings on the balance of harms and
public interest factors.
The appeals court further noted even if plaintiff was able to establish a likelihood of success on
the merits, he failed to show irreparable harm and thus a preliminary injunction would be
improper.
Roudachevski v. All-American Care Ctrs., Inc., No. 11-1768 (8th Cir. Aug. 8, 2011).
Sixth Circuit Finds Hospital Has No Obligation To Reinstate Terminated
Resident
A hospital that refused to reinstate a resident after he was terminated for poor professional
conduct and drug abuse did not violate the Americans with Disabilities Act, the Sixth Circuit held
in a July 27, 2011 unpublished opinion.
In so holding, the appeals court agreed with the lower court that the hospital was entitled to
summary judgment because all of the resident’s proffered arguments rebutting the hospital’s
nondiscriminatory reasons for denying the resident’s application were merely speculative.
Plaintiff Adam Hall worked as an anesthesiology resident at OhioHealth Corp.’s Doctors Hospital
until he was terminated for ethics violations, unprofessional conduct, and poor academic
performance.
After receiving treatment for a corticosteroid addiction, Hall applied for reinstatement, but
OhioHealth refused.
Hall sued OhioHealth for disability discrimination in violation of the Americans with Disabilities
Act. The district court granted summary judgment to OhioHealth, finding Hall failed to establish
pretext.
On appeal, Hall offered several facts that he claimed undermined OhioHealth’s proffered
nondiscriminatory reasons for rejecting his application.
Hall first argued OhioHealth certified to the state medical board that he was in “good standing”
with the hospital at the end of his second year, after his behavioral problems arose.
According to Hall, a reasonable jury could find OhioHealth, through its good standing
certification, pardoned him for his past conduct but then used that same conduct to disguise its
true motivation for denying reinstatement.
However, the appeals court found “Hall cites not a single fact from the record supporting this
theory.”
Hall next argued a hospital physician’s unwillingness to train him stemmed from his previous
addiction and that unwillingness affected the hospital’s decision not to reinstate him.
But the appeals court noted “Hall’s addiction does not excuse his unethical, unprofessional
conduct that so discouraged” the physician from wanting to work with Hall.
The appeals court lastly rejected Hall’s argument that OhioHealth offered inconsistent
explanations for its decision to reject him finding no merit in that argument.
“In fact, OhioHealth gave consistent explanations for its decision—Hall’s poor academic
performance, and his unethical and unprofessional conduct,” the appeals court noted.
Hall v. OhioHealth Corp. Doctors Hosp., No. 10-3327 (6th Cir. July 27, 2011).
U.S. Court In Louisiana Dismisses Physician’s Claims Against
Professional Association
The U.S. District Court for the Middle District of Louisiana dismissed August 15, 2011 all of a
physician’s claims against a professional association that investigated and eventually suspended
the physician for unprofessional conduct.
The case began when plaintiff Dr. Anthony S. Ioppolo was retained to provide expert medical
opinion testimony for a plaintiff in a Florida medical malpractice suit.
Prior to the verdict, the defendants in the underlying case, Drs. Christopher Rumana and Mark
Cuffe settled.
Ioppolo alleges that Rumana and Cuffe subsequently wrote a letter to the American Association
of Neurological Surgeons and the American Association of Neurosurgeons (collectively, AANS)
criticizing his ethics, honesty, integrity, and professionalism.
After receipt of the letter, the AANS convened a committee of its members known as the
Professional Conduct Committee (PCC) to investigate the allegations advanced by Rumana and
Cuffe and eventually recommended the imposition of sanctions against Ioppolo.
According to Ioppolo, Rumana and Cuffe violated the AANS by-laws by sending a copy of the
PCC’s preliminary findings to several entities where he maintained professional relationships.
Ioppolo then filed suit against Rumana, Cuffe, AANS and others alleging that the actions of the
defendants constituted defamation, abuse of process, abuse of personal rights, and intentional
infliction of emotional distress.
After several procedural moves, AANS moved to dismiss Ioppolo’s second amended complaint
under Federal Rule of Civil Procedure 12(b)(6).
Turning first to plaintiff’s defamation claim, the court agreed with defendants that the claim must
be dismissed because Ioppolo failed to allege that the AANS itself published any defamatory
statements relating to the disciplinary proceeding in issue to anyone outside of the association.
The court further agreed with defendants that plaintiff failed to establish the elements of his
other claims and dismissed them as well.
Ioppolo v. Rumana, No. 06-193-JJB (M.D. La. Aug. 15, 2011).
First Circuit Upholds Medical Board’s Practice Restriction For Cosmetic
Surgery
The First Circuit upheld September 16, 2011 the constitutionality of a “first-in-the-nation”
regulation promulgated by the Puerto Rico Medical Examining Board (Board) limiting the practice
of cosmetic medicine to physicians with board-certification in plastic surgery or dermatology.
Applying rational-basis review, the appeals court found the regulation did not run afoul of the
Equal Protection or Due Process Clauses of the U.S. Constitution.
Thus, the appeals court held the Board’s members were entitled to judgment in their favor in a
physician’s action challenging the regulation and the suspension of his license for defying the
regulation.
“[T]he Board, acting within the scope of its delegated authority, settled upon a regulatory
classification that bears a rational relationship to the legitimate objective of promoting safe and
effective medical care,” the appeals court held.
Plaintiff Dr. Efrain Gonzalez-Droz was an obstetrician/gynecologist who began performing
cosmetic surgery in 1995.
In 2005, the Board issued a notice restricting the practice of cosmetic surgery to physicians who
are board-certified in plastic surgery or dermatology, rendering the majority of plaintiff’s practice
illegal.
Plaintiff continued to perform cosmetic procedures and the Board voted to temporarily suspend
his medical license pending a hearing.
Plaintiff moved to California and opened an office there but also filed a lawsuit in the U.S. District
Court for the District of Puerto Rico challenging the regulation as unconstitutional.
After plaintiff failed to appear at an administrative hearing, the Board suspended plaintiff’s
license for five years for illegally practicing plastic surgery and imposed a $5,000 fine.
In an earlier decision, the First Circuit upheld a lower court decision refusing to grant plaintiff a
preliminary injunction to enjoin the suspension and fine. Gonzalez-Droz v. Gonzalez-Colon, Nos.
08-1437, 08-2189 (1st Cir. July 23, 2009).
The district court ultimately rejected plaintiff’s constitutional challenge on the ground the Board
members were immune from suit.
Although the First Circuit affirmed the grant of judgment in the Board’s favor, it did so on the
ground the regulation was constitutionally sound.
The appeals court held it was reasonable for the Board to regulate the practice of cosmetic
surgery based on patient safety concerns.
Although no specialty board for cosmetic medicine existed, certification in the closely related
fields of plastic surgery and dermatology could reasonably be seen as a sufficient surrogate, the
appeals court said.
“In conducting rational basis review, courts are not tasked with deciding whether a better or
more effective means of classification exists,” the appeals court commented.
The appeals court also rejected the physician’s claims that his suspension violated procedural
due process, noting, among other things, he was provided adequate notice of the suspension,
had an opportunity for a post-deprivation hearing, and a state typically need not provide a predeprivation hearing when it reasonably determines patient safety is at risk.
Finally, the court rejected plaintiff’s substantive due process and retaliation claims.
Gonzalez-Droz v. Gonzalez-Colon, No. 10-1881 (1st Cir. Sept. 16, 2011).
U.S. Court In Illinois Upholds State's Balance-Billing Prohibition
A federal district court in Illinois dismissed a constitutional challenge to an Illinois statute barring
“non-participating facility-based providers” of certain ancillary services to "balance-bill" patients
for services rendered to them at in-network hospitals or ambulatory surgical centers.
Public Act 096-1523 (Act), which was effective June 1, 2011, amends the Illinois Insurance Code
and prohibits “non-participating facility-based providers” from “balance billing” insured patients
for any amount above applicable deductibles and co-payments the patient would pay to a
participating provider.
Non-participating facility-based providers, defined as “a physician or other provider who provides
radiology, anesthesiology, pathology, neonatology, or emergency department services to
insureds, beneficiaries, or enrollees in a participating facility or participating ambulatory surgical
treatment center," must instead seek payment from the patient’s insurer or health plan.
Other non-participating physicians not listed in the Act are not subject to the balance-billing
prohibition.
If no agreement can be reached, either party can submit the dispute to binding arbitration on a
per-bill basis.
Plaintiffs—Peoria Tazwell Pathology Group, S.C.; Consultants in Clinical Pathology, LTD; and
Consultants in Laboratory Medicine and Pathology, LTD—are providers of pathology services in
Illinois who challenged the law, arguing the Act infringes on the constitutional rights of “certain
arbitrarily targeted Illinois physicians” and places a substantial burden on their medical practices.
Specifically, plaintiffs alleged, among other things, the law violated their equal protection and
due process rights, impaired their existing contractual rights and obligations, and was void for
vagueness.
Defendants moved to dismiss for failure to state a claim.
The U.S. District Court for the Northern District of Illinois granted the motion.
Applying rational-basis review to the equal protection claim, the court found plaintiffs failed to
plead sufficient facts that plausibly suggest an irrational classification in the Act.
Moreover, defendants supplied a rational basis for the Act—i.e., to address the scenario where
insured patients who chose a physician within their network at a hospital within their network
receive bills from out-of-network ancillary providers, even though the ancillary providers were
not specifically selected by the patients.
In fact, the court observed, the statute limits the balance-billing prohibition to services that are
provided in a network hospital or ambulatory surgery center by providers who were not selected
by the patients.
While the classification may not be perfect, and could potentially be underinclusive, the test is
whether the classification is conceivably rational, which the court found it was.
Next, the court rejected plaintiffs’ due process claim, finding they failed to allege the Act resulted
in their exclusion from their field.
“At best, Plaintiffs claim that their current arrangement at specific hospitals is potentially less
lucrative or more burdensome that in was before the Act was enacted,” but this is not enough to
support a due process claim, the court concluded.
The court also sided with defendants as to plaintiffs’ claim that the Act violated the Contract
Clause of the U.S. Constitution.
The court found this claim deficient because plaintiffs failed to identify “the precise contractual
right that has been impaired” or “the nature of the statutory impairment.”
The only contracts at issue, the court said, were those between plaintiffs and the healthcare
facilities where they work. But “[t]here is no allegation that this obligation was impaired, and
Plaintiffs allege no specific contractual right conferred on Plaintiffs in return.”
Finally, the court refused to hold the Act was void for vagueness.
Peoria Tazewell Pathology Group, S.C. v. Messmore, No. 11-cv-4317 (N.D. Ill. Sept. 23, 2011).
U.S. Court In Florida Dismisses Physician’s Breach Of Bylaws Claim
Against Hospital For Failing To Allege Intentional Fraud
The U.S. District Court for the Middle District of Florida dismissed October 20, 2011 a physician’s
claim that a hospital breached its bylaws when it suspended his privileges.
According to the court, the hospital was entitled to immunity under the state’s peer review
statute because the physician failed to allege any intentional fraud in connection with the peer
review proceedings.
Plaintiff alleged Largo Medical Center, Inc. revoked his privileges, which were first granted in
1999 and renewed until 2009, because he was Palestinian.
LMC contended, however, his privileges were revoked in part because he was disruptive. LMC
also refused to accept or process any renewals or new applications from plaintiff for staff
privileges.
In his lawsuit, plaintiff alleged LMC violated 42 U.S.C. § 1981 and breached the bylaws, seeking
damages and injunctive relief.
According to plaintiff, LMC, in violation of the bylaws, appointed biased members to the hearing
committee and allowed individuals who were not members of the LMC medical staff to serve on
the committee.
LMC subsequently amended its bylaws to allow non-members of the medical staff to serve on the
committee. According to plaintiff, LMC committed intentional fraud by amending the bylaws and
then passing on those bylaws as the one governing his appeal.
LMC moved to dismiss the action, arguing the Section 1981 claims failed because they were
based on discrimination due to his national origin, rather than race, and the breach of bylaws
claims were subject to peer review immunity.
The court refused to dismiss the Section 1981 claim, saying plaintiff should be given the chance
to prove the alleged discrimination was based on his Palestinian ancestry and/or ethnicity.
Next, the court held the Florida peer review statute did not confer immunity to LMC as to
plaintiff’s breach of bylaws claim seeking injunctive relief. The statute only bars claims for
damages, the court noted.
However, the court agreed with LMC that the peer review statute was implicated by plaintiff’s
damages claim for breach of the bylaws that occurred in connection with peer review
proceedings.
Thus, to maintain the claim, the court noted, plaintiff had to show LMC committed intentional
fraud in carrying out its peer review obligations to survive the motion to dismiss.
According to plaintiff, LMC committed intentional fraud by failing to provide physicians reviewing
one of his patients with a complete medical record and by amending the bylaws and then falsely
representing to him that the amended provisions governed his appeal.
The court agreed to dismiss the claim, finding plaintiff failed to respond to LMC’s arguments
refuting any fraud, “viewing his silence as agreement with LMC’s argument.”
The court said plaintiff appeared to view a violation of the bylaws, in itself, as a sufficient basis
for a breach of bylaws claim, even where the violation occurred in connection with a peer review
proceeding.
“While such an argument may have been successful when a prior version of the peer review
immunity statute existed that only required lack of good faith or malice to be alleged in order to
avoid dismissal based on immunity, the current version of the statute requires allegations of
intentional fraud in order to state a claim for damages resulting from a hospital’s carrying out its
peer review obligations,” the court said.
Awwad v. Largo Med. Ctr., Inc., No. 8:11-cv-1638-T-24-TBM (M.D. Fla. Oct. 20, 2011).
U.S Court In Texas Allows Physician’s Retaliation Suit To Go Forward
The U.S. District Court for the Southern District of Texas refused to dismiss October 26, 2011 a
physician’s retaliation claims against a hospital that allegedly terminated his privileges for
reporting violations of the Emergency Medical Treatment and Labor Act (EMTALA).
In so holding, the court rejected the hospital’s arguments that it was immune from suit under
Health Care Quality Improvement Act (HCQIA) and that plaintiff did not qualify as a
whistleblower under EMTALA.
Plaintiff Walter Zawislak is a physician who maintained medical staff privileges at Memorial
Hermann Hospital until Memorial Hermann suspended his privileges and reported the adverse
action to the National Practitioner Data Bank (NPDB).
According to plaintiff, his privileges were suspended for purported substandard care and reported
to the NPDB in retaliation for disclosing and objecting to Memorial Hermann's alleged EMTALA
violations.
Plaintiff sued. Defendant moved to dismiss arguing Zawislak failed to exhaust his administrative
remedies; he failed to allege facts sufficient to overcome the statutory presumption that
Memorial Hermann is immune from liability pursuant to the HCQIA; and he failed to state a claim
for relief under EMTALA's anti-retaliation provision.
The court first turned to defendant’s argument that plaintiff's claim of defamation arising from
the NPDB report should be dismissed for failure to exhaust administrative remedies.
The court refused to dismiss this claim, finding that resort to administrative remedies is not
required before filing suit under the applicable federal regulation.
Defendant next argued it was immune from suit under the HCQIA, which provides qualified
immunity for peer review participants if a professional review action meets certain standards.
The HCQIA includes a presumption that a professional review action meets each of the standards
unless the plaintiff can rebut the presumption by a preponderance of the evidence, the court
noted.
Here, “[w]hile it is true that Memorial Hermann enjoys a presumption that its professional review
action met the fairness and due process requirements, the Court is persuaded that Dr. Zawislak
has alleged sufficient facts to suggest he may be able to rebut the presumption by a
preponderance of the evidence,” the court found.
“Accepting the factual allegations contained in the complaint as true, the complaint plausibly
alleges that the review committee did not have a reasonable belief that terminating Dr.
Zawislak's privileges was warranted by the facts known,” the court held.
The court next turned to plaintiff’s allegation that he was protected from retaliation by the
whistleblower provision of EMTALA, which prohibits hospitals from taking adverse action against
two classes of individuals: (1) physicians and other personnel who refuse to authorize the
transfer of an individual with an emergency medical condition that has not been stabilized and
(2) hospital employees who report a violation of EMTALA.
Although the court agreed that plaintiff did not fall into the first category of protected
individuals, it found plaintiff did qualify as an employee who reported an EMTALA violation.
The court noted that “[w]hether a physician with hospital privileges is considered an ‘employee’
for the purposes of the whistleblower provision appears to be a case of first impression.”
But the court went on to conclude that the “legislative purpose of the statute is best served by
construing it to prohibit participating hospitals from penalizing physicians with medical
privileges.”
Walter Zawislak v. Memorial Hermann Hosp. Sys., No. H-11-1335 (S.D. Tex. Oct. 26, 2011).
Idaho High Court Says Hospital Not Required To Produce Peer Review
Documents
The Idaho Supreme Court held November 9, 2011 that the state peer review privilege shields a
hospital from having to produce certain peer review documents during discovery in a lawsuit with
a physician who was denied privileges.
Joseph Verska, M.D. was appointed to the medical staff of Saint Alphonsus Regional Medical
Center (Hospital) on January 22, 1996 and thereafter he was reappointed yearly.
After a series of reviews of Verska’s practice initiated in 2004 by the Hospital and in 2006 and
2007 by its Medical Executive Committee, on July 9, 2008, Verska requested a hearing before a
Fair Hearing Panel.
After an evidentiary hearing in late October 2008, the panel made recommendations, which were
rejected by the Hospital. Verska has not had privileges at the Hospital since July 1, 2008.
Verska and The Spine Institute of Idaho, a professional corporation created by Verska,
(plaintiffs) later sued the Hospital and physicians Christian G. Zimmerman and Donald Fox
(collectively, defendants).
Verska alleged defendants conspired to wrongfully harm him, intentionally and/or negligently
interfered with economic advantage, interfered with his prospective contractual relations and
business expectations, defamed him, and intentionally and/or negligently inflicted emotional
distress.
Plaintiffs also alleged the Hospital and Fox breached the implied covenant of good faith and fair
dealing and the Hospital denied Verska fair procedure rights, breached fiduciary duties, and
violated his due process rights.
During discovery, plaintiffs requested material related to the process, activities, and decisions
that led to the Hospital’s decision to deny Verska’s application to be reappointed to the medical
staff and to have his privileges renewed. The Hospital objected on the ground that such
information was protected by the peer review privilege.
The trial court denied plaintiffs’ motion to compel discovery, and plaintiffs appealed.
Plaintiffs argued the statute should not apply for public policy reasons because he alleged the
Hospital’s actions in denying him privileges were motivated by the desire to remove him as a
competitor.
But the high court rejected that argument, finding “[t]he statute does not create an exception for
this type of litigation, and we cannot create such an exception under the rubric of public policy.”
The high court also rejected plaintiffs’ argument that the court should modify the statute even if
unambiguous because to bar their access to the peer review records would be an absurd result.
“[W]e have never revised or voided an unambiguous statute on the ground that it is patently
absurd or would produce absurd results when construed as written, and we do not have the
authority to do so,” the high court held.
The high court further rejected plaintiffs’ argument that the peer review privilege is waived
because of the lawsuit.
“By bringing the lawsuit, the physician does not waive the privilege for purposes unconnected
with the lawsuit, nor does the health care organization or the members of its staff and
committees do so if they elect to rely upon privileged information in defense of the lawsuit,” the
high court found.
Verska v. Saint Alphonsus Reg’l Med. Ctr., No. 37574-2010 (Idaho Nov. 9, 2011).
U.S. Court In Florida Dismisses For Lack Of Jurisdiction Physician’s
Action Alleging Improper Report To NPDB
A Florida federal trial court ruled November 14, 2011 that it lacked jurisdiction to consider a
physician’s lawsuit against a hospital he claimed improperly reported its refusal to grant him
medical staff privileges to the National Practitioner Data Bank (NPDB).
According to the court, the Health Care Quality Improvement Act (HCQIA) does not create a
private cause of action for a physician in connection with the peer review process.
The suit arose after defendants NCH Healthcare System, Inc. and Naples Community Hospital
denied plaintiff Mina G. Zoher, M.D.’s application for medical staff privileges at their two medical
facilities in Naples, FL.
After denying the application, defendants made an adverse action report to the National
Practitioner Data Bank, indicating plaintiff was denied initial appointment and privileges.
According to plaintiff, the NPDB Guidebook states the denial of medical staff privileges based on
a practitioner’s failure to meet a healthcare institution’s established criteria is not a reportable
event.
Instead, plaintiff argued, a medical institution should only report the denial of staff privileges if
the denial is based on a lack of professional conduct.
Plaintiff sought injunctive and declaratory relief pursuant to HCQIA and state law. Plaintiff also
sought monetary damages for defamation under state law.
Plaintiff asserted federal jurisdiction over the HCQIA claims under 28 U.S.C. § 1331, and
supplemental jurisdiction over the state law claims.
The U.S. District Court for the Middle District of Florida granted defendants’ motion to dismiss for
lack of jurisdiction.
The court, citing Eleventh Circuit and other circuit precedent, found no private cause of action
under HCQIA to a physician in connection with the peer review process.
“Since there is no private cause of action, there is no claim that ‘arises under’ federal law within
the meaning of 28 U.S.C. § 1331,” the court said.
Plaintiff also asserted the action arose under the laws of the United States, citing the Federal
Rules of Civil Procedure and the Declaratory Judgment Act.
The court rejected both assertions, saying a federal court’s jurisdiction is derived from the U.S.
Constitution and Congress, not the Federal Rules of Civil Procedure.
“Additionally, the Declaratory Judgment Act does not confer jurisdiction upon the court.”
Zoher v. NHC Healthcare Sys., Inc., No. 2:11-cv-00086-FtM-29DNF (M.D. Fla. Nov. 14, 2011).
Idaho High Court Says No Bad Faith Exception To Peer Review
Privilege
The Idaho Supreme Court rejected November 18, 2011 a physician’s argument that certain peer
review documents should be discoverable in his lawsuit alleging a hospital wrongfully denied him
privileges.
The high court found the documents at issue were shielded from discovery under the state’s peer
review statute, which included no “bad faith” exception.
Plaintiff Dr. Paul J. Montalbano, a neurosurgeon specializing in spine surgery, had medical staff
membership and clinical privileges at Boise-based Saint Alphonsus Regional Medical Center
(SARMC).
According to plaintiff, SARMC created the Spine Medicine Institute in 2006, which operated in
direct competition with him.
SARMC suspended plaintiff’s privileges, allegedly for disruptive behavior. Following a series of
administrative hearings and reviews, SARMC suspended plaintiff for 90 days.
Plaintiff subsequently sued the hospital and several other physicians for civil conspiracy,
defamation, violation of civil due process rights, and a variety of other causes of action.
Plaintiff sought to discover an extensive list of documents “related to the processes, activities,
and decisions that ultimately led to the suspension of his privileges.”
SARMC asserted a peer review privilege pursuant to Idaho Code § 39-1392b. Plaintiff moved to
compel. The trial court concluded the materials related to the peer review process were
protected, but agreed to allow plaintiff to file a permissive appeal of its interlocutory protective
order.
The Idaho Supreme Court affirmed, agreeing the peer review material was protected from
discovery.
Neither party disputed the materials at issue were peer review records as defined by the statute,
which clearly stated that “all peer review records shall be confidential and privileged,” the high
court noted.
Plaintiff argued SARMC’s investigation was motivated by its desire to eliminate him as a
competitor, and not for quality of care purposes.
But the high court found the statute did not create any bad faith exception, noting other state
peer review laws where the legislature had explicitly done so.
Plaintiff also argued he waived the peer review privilege by bringing the lawsuit against the
hospital pursuant to Idaho Code § 39-1392e(f).
The high court said the privilege was not his to waive. Section 39-1392e(f) applies “in defense of
a claim brought by a physician”; thus, permitting “such health care organization and the
members of their staffs and committees” to use the otherwise privileged information “for the
purpose of presenting proof of the facts surrounding such matter.”
“When it is a physician who is making the claim, it is the physician who waives his or her right to
assert the privilege. The physician cannot waive the right of the hospital or anyone else who is
entitled to assert it,” the high court said.
The decision reaffirmed the position taken by the high court in a November 9 case, which
addressed a similar set of facts and reached the same conclusions. See Verska v. Saint
Alphonsus Reg’l Med. Ctr., No. 37574-2010 (Idaho Nov. 9, 2011), HLW v. 9, no. 45.
Montalbano v. Saint Alphonsus Reg'l Med. Ctr., No. 37573 (Idaho Nov. 18, 2011).
Iowa Supreme Court Holds Credentialing Filing Inadmissible Even
Where Hospital Previously Disclosed Documents In Earlier Trial
A hospital that previously produced a physician’s credentialing file and relied on that file at trial
may still object to its use following a reversal and remand for retrial, the Iowa Supreme Court
said December 2, 2011.
The previous decision did not decide the admissibility of the credentialing file and therefore the
law of the case bar did not apply, the high court said.
The high court also found waiver principles did not foreclose the hospital from now arguing
against the admission of the credentialing documents because the state’s peer review statute,
Iowa Code § 147.135(2), not only sets forth a privilege, but also a separate rule of
inadmissibility.
A surgeon with privileges at Catholic Health Initiatives Iowa Corp. d/b/a Mercy Hospital Medical
Center (hospital) was sued for medical malpractice.
Plaintiff in the case also sued the hospital for negligent credentialing. Plaintiff sought production
of the surgeon’s credentialing file from the hospital.
The hospital noted its objections to producing the file, but produced most of the documents
following an order compelling discovery in another case involving the same physician.
The case went to trial, during which the hospital did not object to the introduction of the
credentialing file into evidence and, in fact, offered into evidence numerous documents from the
file.
A jury returned a verdict in plaintiff’s favor. On appeal, the Iowa Supreme Court reversed and
remanded, finding other evidence not related to the credentialing file should have been excluded.
In the interim, an Iowa appeals court ruled the contents of a hospital’s credentialing file fell
within the scope of the state’s peer review privilege to the extent they were in the custody of the
peer review committee. See Day v. Finley Hosp., 769 N.W.2d 898 (2009).
The hospital on remand moved for summary judgment, relying on Day to argue the contents of
the credentialing file were inadmissible and that without the documents plaintiff lacked sufficient
evidence to support his negligent credentialing claim.
Plaintiff argued the doctrine of law of the case precluded the hospital from arguing the
documents were inadmissible and, alternatively, the hospital waived its right to object by
voluntarily producing them and offering them as evidence in the first trial.
The Iowa Supreme Court held the law of the case bar did not apply because the issue of the
credentialing file’s admissibility was not reached in the first appeal. Thus, “the parties were free
to litigate that issue on remand.”
Next, the high court held waiver principles were inapplicable because the relevant statute not
only provides peer review documents are “privileged and confidential,” but also includes a
separate prohibition on their admissibility in evidence.
“Even if the privilege could have been waived here, the rule against admissibility would remain in
effect,” the high court said.
Cawthorn v. Catholic Health Initiatives Iowa Corp., No. 10-1013 (Iowa Dec. 2, 2011).
Maryland High Court Upholds Violation Of Licensing Requirement
Based On Failure To Disclose Medical Malpractice Case On Renewal
Application
Maryland’s highest court upheld November 29, 2011 a medical board’s conclusion that the
submission of a license renewal application by a physician occurred “in the practice of medicine”
for purposes of disciplining an obstetrician/gynecologist who failed to disclose a pending medical
malpractice action against him.
In so holding, the Maryland Court of Appeals found a physician’s completion and filing of an
application to renew his license unquestionably is “a task integral to his . . . practice.”
“Without a license,” the high court noted, the physician “would have no authority to practice.”
Nor did the Maryland State Board of Physicians (Board) err in finding “a license renewal
application is sufficiently intertwined with patient care.”
The Board needs to be able to rely on the accuracy of the information in a license renewal
application to determine wither a particular physician is fit to practice medicine, the high court
observed.
This is especially the case, the high court continued, when the information relates to medical
malpractice lawsuits, which could call into question the physician’s fitness to practice medicine.
In this case, Charles Y. Kim, a board-certified obstetrician/gynecologist, filed an application to
renew his medical license with the Board in August 2006. At the time, there was a medical
malpractice action pending against him.
In November 2006, Kim’s counsel revealed to Board counsel in connection with scheduling a
Case Resolution Conference (CRC) in an unrelated matter that Kim was supposed to be in court
on one of the dates proposed for the unrelated CRC.
The disclosure led to further investigation in which the Board learned Kim was involved in a
medical malpractice action at the time he submitted the renewal application.
Kim, who is Korean and was first licensed in Maryland in 1977, said he has trouble understanding
some aspects of the English language and misunderstood the questions on the application
Following additional administrative proceedings, the Board eventually found Kim violated three
licensing provisions prohibiting unprofessional conduct in the practice of medicine, the willful
making of a false report or record in the practice of medicine, and the willful making of a false
representation in connection with a licensing application.
The Board sanctioned Kim with six months’ probation, a $5,000 fine, and required him to
complete an ethics course.
Kim appealed in court. Both the trial and appeals court affirmed.
The high court first made clear that it was employing a deferential standard in reviewing the
Board’s decision.
Kim argued the Board violated certain administrative rules by using information gleaned during
the CRC scheduling meeting to further investigate him. The rules require the Board to keep such
information confidential.
The high court rejected this argument for two reasons: the confidentiality protection did not
extend to the mere logistics attendant to a CRC—here a scheduling meeting—and in any event
the regulation includes an exception to the confidentiality protection for information that is
available from other public sources, which was the case here.
The high court also upheld the Board’s interpretation of “willful” as not requiring the intent to
deceive, but rather only that the act be “purposeful conduct, which requires neither a bad motive
nor knowing unlawfulness.”
Thus, the high court concluded, “willful,” for purposes of the licensing statute, “requires proof
that the conduct at issue was done intentionally, not that it was committed with the intent to
deceive or with malice.”
Applying that definition, the high court found substantial evidence Kim acted willfully in making a
false statement on his application for renewal of his medical license.
Kim v. Maryland State Bd. of Physicians, No. 1 (Md. Nov. 29, 2011).
U.S. Court In New York Says HCQIA Provides No Private Right Of
Action
The U.S. Court for the Northern District of New York dismissed December 29, 2011 a physician’s
claims against his former employer and other doctors at the hospital, finding that the Health
Care Quality Improvement Act of 1986 (HCQIA) does not provide a private cause of action.
In December 2005, a patient, "JY," arrived at the intensive care unit at Faxton-St. Luke's
Healthcare and came under plaintiff Firooz Tabrizi's care. After approximately one week in the
intensive care and psychiatric units, JY was discharged "against medical advice."
Soon thereafter, Dr. Frederick Goldberg, the hospital’s Vice President, was contacted by the
medical director at Excellus Blue Cross-Blue Shield, who expressed concerns over plaintiff's
treatment of JY. Plaintiff was later informed by letter that his clinical privileges had been
suspended due to concerns raised regarding his treatment of JY.
After a hearing, plaintiff's suspension was confirmed by Faxton’s Board of Directors. Tabrizi then
filed a complaint with the New York Public Health Council, which found no violation of the Public
Health Law. A subsequent suit seeking judicial review was dismissed.
Tabrizi then filed the instant action against defendants Faxton-St. Luke's Healthcare, Dr. Waleed
Albert, Dr. Frederick Goldberg, and Dr. Behrooz Ebrahimi Fard (collectively, defendants).
Plaintiff’s suit alleged (1) violations of the Health Care Quality Improvement Act of 1986, against
all four defendants; (2) breach of contract against Faxton; and (3) intentional interference with
contractual relationships against the three individually named defendants. Defendants moved to
dismiss.
The court noted that although the Second Circuit has yet to address whether HCQIA allows for a
private right of action, the First, Eighth, Tenth, and Eleventh Circuits have found that it does not.
“That HCQIA only grants immunity from monetary damages and not from suit entirely does not,
in turn, indicate that HCQIA itself provides a private cause of action through which an aggrieved
physician can pursue a remedy,” the court reasoned.
Accordingly, the court granted defendants’ motion to dismiss the claims under the HCQIA.
The court turned next to plaintiff’s claim for monetary damages from Fard, Albert, and Goldberg
for their alleged intentional interference with his contractual relationship with Faxton.
Defendants argued this claim was barred by the applicable three-year statute of limitations. The
court agreed, finding the suit was filed four years and eleven months after the original summary
suspension and three years and nine months after the resolution was passed affirming the
suspension.
Finally, the court found it lacked jurisdiction to consider the remaining state law claim of breach
of contract against Faxton and refused to exercise supplemental jurisdiction.
Tabrizi v. Faxton-St. Luke's Healthcare, No. 6:10-CV-1475 (N.D.N.Y. Dec. 29, 2011).
Maryland High Court Says Evidence Of Retaliatory Animus May Defeat
HCQIA Immunity But Upholds Judgment To Hospital In Physician’s
Action Following Non-Renewal Privileges
The Maryland Court of Appeals upheld summary judgment to a hospital based on immunity
under the Health Care Quality Improvement Act of 1986 (HCQIA) in an action brought by a
physician who sued for damages after her privileges were not renewed.
The high court made clear, however, that evidence of retaliatory animus may be asserted to
prevent summary judgment on HCQIA immunity, “provided that it permits a rational trier of fact
to conclude” the defendant failed to comply with the standards for immunity or the action was
not a “professional review action” under the statute.
In so holding, the high court rejected the hospital’s argument that any evidence of retaliatory
animus was entirely irrelevant to the determination of HCQIA immunity.
The high court did conclude summary judgment was appropriate in the instant case “because,
although the plaintiff presented some evidence of retaliatory complaints by hospital staff and
broadly alleged that all of the hospital’s conduct was retaliatory, she presented no evidence that
retaliation had anything to do with the professional review action taken against her.”
Plaintiff Dr. Linda Freilich sued Hartford Memorial Hospital, operated by Upper Chesapeake
Health System, and its Board for damages after they refused to renew her privileges.
According to the opinion, plaintiff had been subject to numerous complaints (35 filed by
physicians and members of the hospital staff and 33 filed by patients), most of which alleged
unprofessional behavior and violations of ethics rules.
Plaintiff argued the complaints against her were made in retaliation for her legitimate reporting
of substandard medical care and to improve quality of care.
The trial court granted the hospital summary judgment based on HCQIA immunity. The appeals
court affirmed.
The Maryland high court also affirmed.
The high court said evidence of retaliatory animus is relevant “if it could lead a rational trier of
fact to conclude that the immunity standards were not met”—i.e., that it “prevented the
defendant from making a ‘reasonable effort to obtain the facts’ or supplanted the required
‘reasonable belief’ that the professional review action was ‘warranted by the facts’ and ‘in the
furtherance of quality health care’” or that “the action was ‘primarily based on . . . any . . .
matter that does not relate to the competence or professional conduct of a physician,” as such
action is not a “professional review action” that qualifies for immunity.
But the court found no evidence the alleged retaliatory-based complaints served as the basis for
the Board’s decision not to renew plaintiff’s privileges.
“[E]vidence of retaliation is simply one of several factors to be considered when determining
whether, in the totality of the circumstances, the professional review action satisfied the
standards for immunity set forth in HCQIA,” the high court said.
“If all of the complaints made against Dr. Freilich were based on retaliation, or even the majority
of them were, we might view the case differently,” the high court commented.
Rather, given the large volume of complaints involved, a reasonable person on the Board could
conclude plaintiff’s conduct was disruptive and negatively affected patient care.
The high court refused to hold that some instances of alleged retaliatory complaints included in
evidence considered by the disciplinary body would be sufficient to defeat HCQIA immunity—“no
matter how bad the physician’s other conduct may be.”
“Such a holding would unfairly undermine the protections offered by HCQIA, and unduly handcuff
peers and hospital administrators who must assess complicated fact situations in the course of
peer review or disciplinary action.”
Freilich v. Upper Chesapeake Health Sys. Inc., No. 4 (Md. Dec. 19, 2011).
U.S. Court In Florida Allows Physician Amendment To Avoid Dismissal
Of His Breach Of Bylaws Suit Against Hospital
The U.S. District Court for the Middle District of Florida allowed January 12, 2012 a physician
leave to amend his complaint for a third time to avoid dismissal of his suit against a hospital
where he formerly held staff privileges.
The court noted in its order that, although it was allowing plaintiff to amend certain counts in his
complaint, it would not authorize any further amendment beyond that authorized in the instant
decision.
Plaintiff Abraham Awwad had medical staff privileges at defendant Largo Medical Center, Inc.
(LMC) until LMC revoked and failed to renew his privileges.
Plaintiff sued, asserting a claim alleging LMC breached the medical staff bylaws. LMC moved to
dismiss. The court granted the motion based on its finding that plaintiff's breach of bylaws claim
related to the peer review process, and Florida’s peer review statute provided immunity for LMC
from monetary damages for actions taken without intentional fraud.
Plaintiff then filed an amended complaint with an added fraud claim, and defendant again moved
to dismiss.
Defendant argued the amended complaint did not sufficiently allege intentional fraud to
withstand peer review immunity.
The court first examined plaintiff’s claim related to the appointment of a particular physician to
the peer review panel.
“While Plaintiff has alleged, to some extent, fraud by LMC, he has not complied with Federal Rule
of Civil Procedure 9(b), which requires that allegations of fraud be pled with particularity,” the
court found.
The court noted that plaintiff failed to allege who from LMC made a purportedly fraudulent
statement, when that statement was made, and where that statement was made. But the court
did allow plaintiff leave to amend the claim.
The court also allowed plaintiff leave to amend his complaint to insert a claim based on LMC's
failure to follow the bylaws' disciplinary steps into his Count V, which is a claim for injunctive
relief due to the breaches of the bylaws and is not barred by peer review immunity.
Awwad v. Largo Med. Ctr., Inc., No. 8:11-cv-1638 (M.D. Fla. Jan. 12, 2012).
Eleventh Circuit Affirms Dismissal Of Physician’s Claims Against
Former Hospital Employer
The Eleventh Circuit in an unpublished decision upheld January 13, 2012 a lower court’s
dismissal of a physician’s claims against the hospital where he formerly held privileges.
In so holding, the appeals court found the lower court did not err in finding the physician’s claims
either lacked merit or were barred by the Health Care Quality Improvement Act (HCQIA).
Raymond Pierson, M.D., an orthopedic surgeon, sued defendant Orlando Regional Healthcare
System (ORHS) after the hospital investigated complaints that Pierson (1) took an excessive
length of time completing his surgeries; (2) scheduled surgery at inappropriate times; (3)
delayed dictating operative notes; and (4) treated elective surgeries as urgent or semi-urgent
cases.
After a hearing, the hearing panel found certain concerns were valid and encouraged the hospital
to work with Pierson to give him an opportunity to correct the deficiencies, but Pierson refused to
acknowledge any deficiencies.
The ORHS board affirmed the appeal panel’s recommendations, and the board filed an adverse
action report with the national practitioner data bank (NPDB).
The district court granted summary judgment to ORHS on Pierson’s claim for breach of contract,
his claim that ORHS should not have enjoyed immunity under the HCQIA, and his claim for
declaratory relief related to the adverse activity report made to the NPDB.
The appeals court noted ORHS told Pierson that it would restore him to the trauma and
emergency call list if he would demonstrate his willingness to live within the hospital’s policies
and protocols, which apply to all the orthopedic surgeons on staff at its hospitals, but Pierson
was unwilling to do so and instead moved out of state.
After reviewing the district court’s analysis, the appeals court found “no reversible error as to the
summary judgment awarded or as to the dismissal of claims.”
Pierson v. Orlando Reg’l Healthcare Sys., Inc., No. 10-15496 (11th Cir. Jan. 13, 2012).
Washington Appeals Court Holds Hospital Not Entitled To HCQIA
Immunity In Physician’s Action Challenging Suspension
A Washington appeals court reversed January 10, 2012 a trial court decision finding a hospital
was entitled to immunity under the Health Care Quality Improvement Act (HCQIA) in an action
brought by a physician whose privileges were temporarily suspended.
The Washington Court of Appeals found the physician had shown, by a preponderance of the
evidence, that the hospital’s professional review action did not meet two of the elements
required for immunity—namely, that the professional review decision was made after a
reasonable effort to obtain the facts and that the physician received adequate notice and
procedures that were fair under the circumstances.
A peer review committee at Yakima Valley Memorial Hospital recommended a suspension of the
hospital privileges of plaintiff Dr. Diana Smigaj, a board-certified obstetrician/gynecologist
(ob/gyn) who also is board certified in maternal-fetal medicine.
The medical chief of staff agreed and notified plaintiff of the suspension. The medical executive
committee reinstated her privileges 11 days later subject to an external review of her cases for
the following three-month period. The reinstatement was not retroactive.
Plaintiff sued the hospital and various physicians and administrators, alleging, among other
claims, the suspension was arbitrary and capricious, illegally motivated by gender discrimination
and anticompetitive animus, void because the hospital did not follow its bylaws, and a breach of
contract and of fiduciary duty.
The trial court granted the hospital summary judgment, finding, among other things, that it was
entitled to immunity under HCQIA.
For HCQIA immunity to apply, there is a rebuttable presumption that (1) the professional review
action was taken in the reasonable belief that it was in furtherance of quality healthcare, (2) the
professional review decision was made after a reasonable effort to obtain the facts, (3) the
physician received adequate notice and procedures that are fair under the circumstances, and
(4) the action was taken in the reasonable belief that, under the facts known, the suspension
was warranted.
The appeals court found a reasonable jury could conclude plaintiff demonstrated, by a
preponderance of the evidence, that the hospital failed to meet elements two and three.
As to the second element, making a reasonable effort to obtain the facts, the appeals court
noted the hospital did not obtain timely reports from the outside reviewer engaged to
review plaintiff's cases and failed to interview hospital physicians and nurses and the chair of the
hospital’s ob/gyn department.
In the appeals court’s view, these deficiencies “constituted an unreasonable investigation under
the circumstances.”
As to the third element, whether the physician received adequate notice and procedures, the
appeals court concluded the hospital failed to demonstrate either the “investigation” or
“imminent danger” exception applied.
Although plaintiff’s suspension was for less than 14 days, there was no evidence the
investigation continued after the initial peer review committee recommended her suspension.
The appeals court also rejected the application of the immediate danger exception, which allows
the immediate suspension of clinical privileges where there is “an imminent danger to the health
of any individual.”
Although the hospital peer review committee concluded a failure to act could result in imminent
danger to patients, its actions belied this assertion, the court said, noting a lag between the
investigation of plaintiff’s cases and the actual suspension.
In addition, the appeals court found the hospital’s informal procedure process did not provide
plaintiff with adequate hearing and notice—she was not notified of the peer review proceedings
prior to the suspension nor given the opportunity to review the reports of the outside reviewer.
Thus, plaintiff established, by a preponderance of the evidence, that the peer review process was
unfair under the circumstances.
Smigaj v. Yakima Valley Mem’l Hosp. Ass’n, No. 29415-3-III (Wash. Ct. App. Jan. 10, 2012).
Ninth Circuit Finds Hospital Has HCQIA Immunity In Physician’s
Action Involving Suspension For Failing To Follow Call Coverage Rule
A hospital was entitled to immunity under the Health Care Quality Improvement Act (HCQIA) in a
lawsuit brought by a physician who was suspended after he failed to designate alternate call
coverage in accordance with the hospital’s rules, the Ninth Circuit held February 3, 2012 in an
unpublished decision.
Affirming the district court’s grant of summary judgment to the hospital, the Ninth Circuit said it
was “troubled” the hospital waited six years to assert HCQIA immunity, noting the failure to do
so resulted in “costly discovery and multiple rounds of motion practice.”
The appeals court nonetheless held HCQIA immunity applied to the action, rejecting the
physician’s arguments that the professional conduct at issue—i.e., his failure to comply with the
alternate call coverage rule—did not justify suspending his privileges and that the hospital failed
to offer him “adequate notice and hearing procedures” in accordance with statutory
requirements.
Plaintiff Richard B. Fox, M.D. is a physician certified in pediatric pulmonology and pediatric
critical care medicine. He was a member of the medical staff at Good Samaritan Hospital in San
Jose, CA where he held privileges for “Pediatric Critical Care Without Consultation in the ICU”
(PICU) and “Pediatric Ventilator Management” (PVM).
Good Samaritan instituted a new “identical privileges” rule for the Pediatrics Department
requiring members holding the PICU or PVM privileges to designate alternate call coverage of
physicians who held the same privileges.
The hospital suspended Fox’s PICU and PVM privileges after he failed to designate alternate call
coverage in accordance with the “identical privileges” rule, which it said was aimed at improving
patient care.
Fox challenged the rule and the suspension of his PICU and PVM privileges both administratively
and in state court to no avail. Fox then filed an action in federal court.
The district court granted summary judgment to Good Samaritan based on HCQIA immunity,
which is presumed to apply to any “professional review action,” taken “based on the competence
or professional conduct of an individual physician.” The appeals court affirmed.
The parties agreed Fox’s competence was not at issue, and the appeals court rejected his
argument that professional conduct could not have motivated the suspension because the
underlying dispute concerned a policy disagreement.
“A doctor’s failure to comply with a rule of the hospital where he practices unquestionably
implicates his professional conduct, whether or not he agrees with the rule,” the appeals court
said.
The appeals court also found the hospital’s failure to report the suspension, though troubling, did
not foreclose HCQIA immunity.
According to the appeals court, failure to report only forecloses immunity if the Department of
Health and Human Services publishes the hospital’s name in the Federal Register, which was not
the case here.
Next, the Ninth Circuit rejected Fox’s claim that the hospital failed to offer him “adequate notice
and hearing procedures . . . as are fair to the physician under the circumstances.”
In the appeals court’s view, the circumstances did not call for a formal administrative hearing
because there was no factual dispute that Fox failed to comply with the hospital’s “identical”
privileges rule.
Instead, the hospital offered Fox the chance to challenge the rule through informal proceedings,
which the appeals court viewed as sufficient “under the circumstances.”
Finally, the appeals court affirmed the district court’s denial of the hospital’s motion for costs,
given its failure to assert HCQIA immunity at the outset of the litigation.
Fox v. Good Samaritan Hosp. LP, No. 5:04-cv-00874-RS (9th Cir. Feb. 3, 2012).
U.S. Court In Hawaii Grants Radiation Oncology Group TRO In Action
Challenging Hospital’s Move To Closed-Facility Model
A federal court in Hawaii granted February 3, 2012 a temporary restraining order (TRO) to
several physicians in a radiation oncology practice facing the loss of their privileges at a hospital
that decided to transition its radiation oncology department to a closed facility.
While noting “serious questions” as to the merits of plaintiffs’ due process claim, the U.S. District
Court for the District of Hawaii found “the public interest, threat of irreparable harm, and balance
of the equities all weigh strongly in favor” of granting the TRO.
The court in particular highlighted concerns that the physicians’ patients, who have cancer, were
likely to suffer irreparable harm “if denied, or even delayed receiving, necessary medical
treatments” that could only be performed at the hospital.
Plaintiffs include five equity members and one employee physician of Pacific Radiation Oncology,
LLC, which until recently provided services to its patients at The Queen’s Medical Center
(Queen’s), among other hospitals.
Queen’s is the only Nuclear Regulatory Commission-licensed facility on Oahu with an operating
room.
In 2011, Queen’s decided only physicians employed by the hospital would be granted privileges
to use its facilities. According to Queen’s, transitioning to a closed-facility model would improve
efficiency and enhance quality of and satisfaction with patient care.
Queen’s offered plaintiffs employment, but they did not accept, due in part to requirements that
they stop providing services at competing facilities.
Plaintiffs’ complaint asserted a number of causes of action, including violations of their
substantive and procedural due process rights under the U.S. and Hawaii Constitutions;
violations of Queen’s bylaws and governing regulations; intentional and tortious interference
with plaintiffs’ contractual obligations to facilities that compete with Queen’s and with plaintiffs’
patients; and unfair, deceptive, anti-competitive, and illegal trade practices in violation of state
law and the federal Anti-Kickback Statute (AKS).
The court first determined that it had federal question jurisdiction over the action because
plaintiffs asserted a claim under the AKS, 42 U.S.C. § 1320a-7b.
Next, the court agreed to partially grant the TRO to enable plaintiffs to perform certain
procedures, enumerated in the decision, on their patients at Queen’s.
The parties did not dispute there were certain radiation oncology procedures that, at present,
could only be provided at Queen’s. Moreover, other procedures could be performed elsewhere,
but arguably should be performed at Queen’s, the court observed.
“Finally, and not the least consideration, the trust and confidence that a patient places in a
particular physician while undergoing treatment for a serious condition is an intangible and
critical component of that treatment, and it is neither fungible nor easily transferred,” the court
said.
Thus, the court found, in the absence of a TRO, plaintiffs’ patients “are likely to suffer irreparable
harm.” The court emphasized this factor weighed heavily in favor of granting the TRO, given “the
threat of harm is potentially a matter of life and death.”
The court also held the balance of equities and public interest weighed in favor of granting the
TRO, noting defendants would suffer little harm by delaying the implementation of the closedfacility policy.
The court did have “serious questions” about whether plaintiffs were likely to succeed on the
merits of their due process claim, which the parties focused on for purposes of the TRO motion,
noting Queen’s has "made strong arguments that their decision to adopt a closed-facility model
was made for legitimate, and not improper, reasons.”
But ultimately the court concluded all the other TRO factors tipped sharply in plaintiffs’ favor.
Pacific Radiation Oncology, LLC v. The Queen’s Med. Ctr., No. 12-00064 LEK-KSC (D. Haw. Feb.
3, 20120).
U.S. Court In Nevada Says Statutory Damages Cap Applies To
Physician’s Breach Of Implied Covenant Claim Against Hospital
A physician’s claim against a hospital for breach of the implied covenant of good faith and fair
dealing sounded in tort not contract and therefore was subject to a $75,000 statutory cap on
damages, a federal district court in Nevada ruled February 28, 2012.
Plaintiff Dr. Richard Chudacoff brought an action against University Medical Center of Southern
Nevada (UMC) contending it violated his constitutional due process rights when it suspended his
clinical privileges without notice or an opportunity to be heard.
Defendants asserted that Nev. Rev. Stat. § 41.035 applied to plaintiff’s cause of action for
breach of the implied covenant of good faith and fair dealing under Nevada law.
Section 41.035 limits awards for damages to $75,000 for actions “sounding in tort” involving
state entities.
Plaintiff argued the statutory damages cap was inapplicable because his claim sounded in
contract.
Following the state courts’ lead, the U.S. District Court for the District of Nevada looked to the
type of damages plaintiff claimed in connection with the breach of the implied covenant of good
faith and fair dealing cause of action.
According to the court, plaintiff clearly sought damages not available in contract—i.e., punitive
damages and emotional suffering.
Thus, the court held the claim was essentially one for “bad faith discharge” that sounded in tort
and was subject to the statutory damages cap.
Chudacoff v. University Med. Ctr. of S. Nev., No. 2:08-CV-00863-ECR-RJJ (D. Nev. Feb. 28,
2012).
U.S. Court In Hawaii Says Hospital Must Continue To Allow Physician
To Perform Certain Radiology Oncology Procedures At Its Facility
A federal court in Hawaii granted March 20, 2012 a preliminary injunction to a physician allowing
him to continue to perform certain procedures at a hospital that decided to transition its radiation
oncology department to a closed-facility model.
The U.S. District Court for the District of Hawaii found Dr. John Lederer had a likelihood of
success on his claim that the hospital’s decision to deny him privileges violated his due process
rights. The court also found he was likely to succeed on his state antitrust and unfair competition
claims.
Plaintiffs Pacific Radiation Oncology, LLC (PRO), which includes five physicians who are either
equity members or employees, and Lederer, individually and as a manager of PRO, until recently
provided services to patients at The Queen’s Medical Center (Queen’s), among other hospitals.
Queen’s is the only Nuclear Regulatory Commission-licensed facility on Oahu with an operating
room.
In 2011, Queen’s decided only physicians employed by the hospital would be granted privileges
to use its facilities. According to Queen’s, transitioning to a closed-facility model would improve
quality and patient safety and ensure continuity of care.
Queen’s offered PRO physicians employment, but they did not accept, due in part to
requirements that they stop providing services at competing facilities.
Plaintiffs’ complaint asserted a number of causes of action, including violations of their
substantive and procedural due process rights under the U.S. and Hawaii Constitutions and
unfair, deceptive, anti-competitive, and illegal trade practices in violation of state law.
The court in February granted plaintiffs a temporary restraining order allowing them to continue
to perform certain listed procedures at Queen's. Pacific Radiation Oncology, LLC v. The Queen’s
Med. Ctr., No. 12-00064 LEK-KSC (D. Haw. Feb. 3, 20120).
Plaintiffs now urged the court to grant a preliminary injunction allowing them to continue to
perform the listed radiology oncology procedures at Queen's until those services were available
at alternative facilities, which plaintiffs indicated they were in the process of developing.
Due Process Claim
The court first determined that it was reasonably likely that Queen's was quasi-public,
considering its initial funding, and therefore was subject to Lederer’s due process claim under
Silver v. Castle Mem’l Hosp., 497 P.2d (564) (1972), which held a public hospital’s decision not
to grant privileges is subject to judicial review.
Next, the court held Lederer was likely to succeed on the merits of his due process claim.
Despite Queen’s position that it adopted the closed-department model to provide optimal care for
patients and for economic reasons, affidavits submitted by the hospital “belie their claim that the
decision was unrelated to the qualifications of the PRO physicians.”
Specifically, the court pointed to testimony that Queen's “viewed PRO physicians’ referral
practices as a serious problem and that this problem was a substantial motivating factor” in the
decision to adopt the closed-department model.
As referral practices was arguably a matter of professional qualifications, Lederer was entitled to
judicial review of his due process claim, the court concluded.
“Further, Dr. Lederer has presented evidence that, under the circumstances, Queen’s decision to
adopt the closed-department model was unreasonable, arbitrary and capricious because it was
part of an attempt to eliminate all competition in the radiation oncology field in Hawaii,” the
court said.
The court refused, however, to grant PRO a preliminary injunction on behalf of the other PRO
physicians, finding it lacked standing to assert their due process claims.
The court noted the other PRO physicians had already filed an amended complaint adding
themselves as plaintiffs.
Anti-Competitive Claim
The court also found Lederer had a likelihood of success on his state law unfair, deceptive, anticompetitive, and illegal trade practices claim.
According to the court, Lederer satisfactorily demonstrated each element of such a claim—
namely, “the manner and timing in which Queen’s implemented its new closed-department policy
was an unfair method of competition under the circumstances; 2) Queen’s actions caused an
injury to Dr. Lederer’s professional practice that is the type of injury that antitrust laws were
intended to prevent; and 3) Dr. Lederer suffered damages.”
The court also found the PRO established “an injury that antitrust laws were intended to prevent”
and suffered damages, but concluded it had failed to show irreparable harm.
Irreparable Harm
As to Lederer, the court said he established a likelihood of suffering irreparable harm in the
absence of a preliminary injunction with respect to two groups of patients—those he had an
existing physician-patient relationship with but who had not yet begun treatment and potential
patients that he would be unable to treat if he lacked access to Queen’s.
With regard to the second group of patients, the court said in the absence of a preliminary
injunction Lederer was likely to lose competitive ground in the industry and likely to affect
his relationships with the physicians who referred him the potential patients.
Balance of Equities/Public Harm
The court said both the balance of equities and the potential for public harm weighed in favor of
granting the preliminary injunction.
According to the court, Queen’s failed to present evidence that it had “a radiation oncologist on
staff with comparable experience and qualifications to Dr. Lederer.”
Moreover, the court noted the preliminary injunction would be limited to only certain procedures
that Lederer could not perform elsewhere and would not apply to other PRO physicians.
Finally, the court refused to set a specific duration for the preliminary injunction and instead
ordered the plaintiffs to file a status report by September 20, 2012 detailing their progress in
securing alternate facilities for performing the procedures covered by the injunction.
Pacific Radiation Oncology, LLC v. The Queen’s Med. Ctr., No. 12-00064 LEK-KSC (D. Haw. Mar.
20, 2012).
U.S. Court In New Mexico Holds Hospital Is Not Entitled To HCQIA
Immunity, Finds Inadequate Notice, Violations Of Bylaws
A federal court in New Mexico denied a hospital’s motion for summary judgment based on
qualified immunity under the Health Care Quality Improvement Act (HCQIA) in a physician’s 42
U.S.C. § 1983 action following the suspension of his privileges.
Plaintiff Dr. Chinonyerem Osuagwu contracted with Gila Regional Medical Center (Gila) to provide
obstetrical/gynecological services in February 2008.
In November 2008, the Medical Executive Committee (MEC) summarily suspended plaintiff’s
privileges to perform elective laparoscopic procedures. Contrary to the bylaws, the MEC did not
base the summary suspension on a finding of “immediate danger” to patients, nor did it
interview plaintiff about the cases in question.
The Peer Review Committee (PRC) subsequently conducted its own proceedings, considering a
number of additional cases that were not initially in question, and recommended plaintiff’s
laparoscopic privileges be suspended indefinitely.
Without any further explanation in the record, the MEC extended the suspension to all
gynecological privileges.
Plaintiff requested a fair hearing per the bylaws. The Fair Hearing Committee (FHC) included the
Chief Medical Officer (CMO), whose multiple roles in the hearing, including as plaintiff’s
“accuser”; “prosecutor”; and “judge,” compromised the integrity of the proceedings, according to
the court.
The FHC recommended plaintiff’s privileges be restored, except for certain laparoscopic
procedures, and be subject to monitoring and additional education requirements.
Despite the FHC’s recommendations, the MEC continued to recommend a suspension of all
plaintiff’s gynecological privileges and also limited his ability to practice obstetrics at Gila.
The hospital’s Board opted to follow the MEC’s recommendations, rather than the FHC’s, and
permanently suspended all plaintiff’s gynecological privileges and imposed other MECrecommended sanctions.
Plaintiff sued Gila and several individual physicians under Section 1983 for damages and
injunctive relief, alleging violations of his due process rights, defamation, and intentional
infliction of emotional distress.
HCQIA provides qualified immunity on the issue of damages if the peer review action was taken:
in the reasonable belief that the action was in furtherance of quality healthcare; after a
reasonable effort to obtain the facts of the matter; after adequate notice and hearing procedures
that are fair to the physician under the circumstances; and in the reasonable belief that the
action was warranted by the facts known.
Reviewing these factors, the U.S. District Court for the District of New Mexico ruled plaintiff
rebutted the presumption of HCQIA immunity by a preponderance of the evidence.
The court found each level of peer review deficient in some respect.
For example, the court cited the MEC’s failure to include plaintiff in its proceedings so he
could cross-examine witnesses as a violation of the bylaws and the minimum standards of
constitutional due process.
According to the court, the CMO’s extensive involvement in the FHC’s proceedings and
deliberations clearly indicated the hearing was not impartial.
The court found “undisputed and compelling evidence” showing the MEC and the PRC did not
make “a reasonable effort to obtain the facts” of the specific cases during plaintiff’s temporary
suspension.
The court also held the MEC did not impose the suspensions and make recommendations to the
Board “in the reasonable believe that the action was warranted by the facts known after such
reasonable effort to obtain facts.”
The court further concluded the MEC, FHC, and Board all failed to take action only “after
adequate notice and hearing procedures” were afforded to plaintiff.
Finally, the court found “compelling evidence” for a jury to conclude the CMO’s report of
plaintiff’s suspension to the National Practitioners Data Bank contained a number of errors that
were known to be false.
Osuagwu v. Gila Reg’l Med. Ctr., No. 11cv1 MV/SMV (D. Mex. Mar. 27, 2012).
Third Circuit Affirms Dismissal Of Physician's Antitrust, Other Claims
Involving Exclusion From Exclusive Contract For Radiology Services
In a non-precedential opinion issued April 17, 2012 the Third Circuit affirmed a lower court’s
grant of summary judgment to a hospital, its director of radiology, and two radiology physician
groups in an action brought by a physician who was denied participation in an exclusive contract
for radiology services at the hospital.
The appeals court agreed the physician’s antitrust claims failed because he had not established
an actionable antitrust injury.
The appeals court also dismissed his claim that defendants violated the New Jersey whistleblower
statute by terminating him based on his complaints regarding their radiology policies and
practices.
Even assuming the physician had made a prima facie case of retaliation, which the appeals court
doubted given the lapse in time between when he first began lodging complaints in 1985 and
his termination in 2000, he could not rebut defendants’ legitimate, non-retaliatory explanation
for his exclusion from the newly formed radiology practice—i.e., his allegedly disruptive
behavior—as “implausible, inconsistent, incoherent, or contradictory.”
Plaintiff George Bocobo, M.D. began performing diagnostic radiology services at South Jersey
health System’s (SJHS’) hospitals in 1985.
According to plaintiff, he began “complaining” about deficiencies at SJHS almost immediately. In
1993, he formed a practice called Radiology Consultants of South Jersey, P.A. (RCSJ) with
several other physicians, including the director of SJHS’ radiology department.
Pursuant to an exclusive contract, RCSJ served as the sole provider of radiology services for two
of SJHS’ hospitals from 1993 until 2001.
During his eight-year tenure with RCSJ, plaintiff was the subject of several complaints, the
opinion said. RCSJ subsequently terminated plaintiff’s employment and several physicians
formed a new group that excluded him. The new group then entered into an exclusive contract
with SJHS. Per his employment contract, plaintiff’s termination from RCSJ also ended his staff
privileges at SJHS.
Plaintiff was able to secure a new position shortly thereafter, although his salary was $20,000
less than he had been making with RCSJ.
Plaintiff sued RCJS, the new radiology practice, SJHS, and two of the physicians (collectively,
defendants) alleging a number of claims, including violations of federal and state antitrust laws
and of the New Jersey Conscientious Employee Protection Act (CEPA).
The district court granted defendants summary judgment on all plaintiff’s claims. The Third
Circuit affirmed.
As to plaintiff’s antitrust claims, the appeals court agreed he had not demonstrated how his
exclusion from the newly formed radiology group negatively impacted the relevant market.
“Viewing the evidence in his favor, Bocobo has not established a nexus between his purported
exclusion from the market for radiology jobs and the anticompetitive effects on that market that
would make Defendants’ exclusive contracts or alleged boycott illegal under the antitrust law,”
the court said.
Moreover, the appeals court noted, plaintiff was not entirely excluded from the radiology job
market, given he was able to secure a position at a nearby hospital within two weeks of his
termination.
Nor did he show that defendants’ conduct was anticompetitive, the appeals court added.
The appeals court also concluded he could not maintain a claim under New Jersey’s
whistleblower statute because he failed to establish a nexus between his termination and the
purported whistleblowing and, in any event, could not rebut defendants’ reason for excluding him
from the new radiology group.
Bocobo v. Radiology Consultants of South Jersey, P.A, No. 07-3142 (3d Cir. Apr. 17, 2012).
Ninth Circuit Accords Absolute Immunity To Nevada Medical Board
On April 16, 2012, the Ninth Circuit affirmed a lower court decision immunizing members of the
Nevada Board of Medical Examiners (Medical Board) from suit.
The appeals court also affirmed the decision of a Nevada federal district court to abstain from
hearing a claim for injunctive relief while state proceedings are pending.
The Medical Board began an investigation of Dr. Kevin Buckwalter for allegedly overprescribing
narcotic analgesics after citizen complaints.
The Medical Board did not notify Buckwalter that it was convening an emergency meeting and
afforded him no opportunity to participate.
After the meeting, the Medical Board notified Buckwalter that he was summarily suspended from
practicing medicine and of the schedule for a full hearing.
After settlement negotiations failed, Buckwalter sued the Medical Board and its members in the
U.S. District Court for the District of Nevada under 42 U.S.C. § 1983 for violating his
constitutional right to due process.
The court dismissed Buckwalter’s claims, finding the action barred by absolute immunity.
The opinion first noted that absolute immunity is accorded to officials of government agencies
“performing certain functions analogous to those of a prosecutor” or a judge.
Here, the Ninth Circuit determined that, when they issued the suspension, members of the
Medical Board were absolutely immune from suit because they were acting in a judicial capacity.
The appeals court also agreed that so-called “Younger abstention,” which requires federal courts
to abstain from hearing claims for equitable relief as long as the state proceedings are ongoing,
implicate important state interests, and provide an adequate opportunity to raise federal
questions, applied here.
Buckwalter v. State of Nev. Bd. of Med. Exam'rs, No. 11-15742 (9th Cir. Apr. 26, 2012).
Tax
Wisconsin High Court Holds Hospital’s Outpatient Clinic Entitled To
Tax Exemption
Reversing an appeals court decision, the Wisconsin Supreme Court ruled July 19, 2011 that a
hospital’s outpatient clinic qualified for a property tax exemption under state law.
In so holding, the high court rejected the appeals court’s determination (Covenant Healthcare
Sys., Inc. v. Wauwatosa, Nos. 2009AP1469, 2009AP1470 (Wis. Ct. App. Aug. 10, 2010) that the
clinic was operated as a doctor’s office and therefore not entitled to the tax exemption.
The high court also determined the clinic was not operated for commercial purposes just because
its revenues exceeded costs.
St. Joseph Outpatient Center (clinic) is a freestanding outpatient medical facility located in the
City of Wauwatosa. The clinic was owned and operated by St. Joseph Hospital Regional Medical
Center, Inc., a Wisconsin nonprofit corporation, during the tax years at issue. St. Joseph’s sole
member is Covenant Healthcare System, Inc., an Illinois nonprofit corporation.
Covenant sought a property tax exemption for the three floors of the building occupied by the
clinic as property used exclusively for the purpose of a hospital under Wis. Stat. § 70.11(4m)(a).
In 2003, 2004, 2005, and 2006 the City of Wauwatosa Assessor denied the tax exemption.
Covenant sued the City under Wis. Stat. § 74.35(3)(d) in an attempt to recover the taxes it paid.
The trial court found in favor of Covenant and the City appealed.
The City argued, and the appeals court agreed, that the clinic is a doctor’s office and therefore
did not qualify for a tax exemption under the statute.
The high court reversed the appeals court’s denial of the tax exemption.
Section 70.11(4m)(a) provides a tax exemption for real property “used exclusively for the
purposes of any hospital of 10 beds or more devoted primarily to the diagnosis, treatment or
care of the sick, injured, or disabled.”
The high court first considered whether the clinic, an offsite facility located five miles from St.
Joseph, was “used exclusively for the purposes” of that hospital.
Answering this question affirmatively, the high court noted the clinic’s urgent care center
dramatically reduced the diversion hours at St. Joseph by handling less serious emergencies;
freed up space for outpatient services; and was fully integrated with St. Joseph’s systems,
including patient medical and pharmaceutical records and billings.
The high court next considered whether the clinic was a “doctor’s office” and therefore not
entitled to the Section 70.11(4m)(a) tax-exemption.
The high court determined the clinic was not a doctor’s office based on the facts that physicians
practicing at the clinic do not receive variable compensation related to the extent of their
services; clinic physicians do not receive extra compensation for overseeing non-physician staff;
the clinic’s bills are generated using the same software system as the bills generated by St.
Joseph; physicians at the clinic do not have their own offices, but instead share unassigned
cubicles; and all equipment at the clinic is the exclusive property of St. Joseph.
Although the clinic does not provide inpatient services and most patients are seen by
appointment during regular business hours, the high court did not view these factors as
dispositive given the other factors that weighed against concluding the clinic was a doctor’s
office.
The high court also considered, and rejected, the City’s argument that the clinic is “used for
commercial purposes” and therefore not entitled to the tax exemption.
According to the high court, the City’s argument on this point essentially equated “profits” with
“revenues in excess of costs.”
The high court made clear that not-for-profit hospitals do not need to operate always at a loss or
without revenue. “[I]n the context of not-for-profit entities, we decline to limit the definition of
‘commercial purposes’ to those purposes which generate profits,” the high court said.
Instead, the high court said, the appropriate consideration is whether profit making is the
“primary aim.”
Here, the clinic’s business plan includes the purpose of promoting a greater faith-based
healthcare presence and the clinic serves a greater portion of Medicare and Medicaid patients
than other city and state hospitals.
Thus, the high court concluded the clinic’s primary aim is not to make a profit and therefore is
not operated for commercial purposes.
Finally, the high court found the clinic’s net earnings did not inure to the benefit of a “member”
such that it did not qualify for the Section 70.11(4m)(a) tax exemption. The high court refused
to consider Covenant, a not-for-profit entity, a “member” for purposes of the statute.
“Such a holding would require every not-for-profit corporation in Wisconsin, in order to maintain
its tax-exempt status, to rewrite its bylaws to provide that upon dissolution, its assets transfer to
unrelated not-for-profit entities. This is an unreasonable result,” the high court said.
A dissenting opinion argued Covenant had not met its burden of proving the facility at issue is
not “used as a doctor’s office.”
In the dissent’s view, the clinic “is similar in use and function to large multi-specialty doctors’
offices that include a walk-in clinic or day surgery center,” noting also that the clinic is five miles
from the hospital property and that patients see physicians generally by appointment only.
Covenant Healthcare Sys., Inc. v. City of Wauwatosa, No. 2009AP1469 and 2009AP1470 (Wis.
July 19, 2011).
Illinois Department Of Revenue Denies Three Hospitals Property Tax
Exemptions
The Illinois Department of Revenue (IDOR) has issued preliminary rulings denying the property
tax-exemption of three nonprofit hospitals—Northwestern Memorial Hospital’s Prentice Women’s
Hospital in Chicago, Edward Hospital in Naperville, and Decatur Memorial Hospital in Decatur,
according to published reports.
In a statement, Illinois Hospital Association (IHA) President MaryJane A. Wurth said the IHA was
“disappointed by and deeply concerned” about IDOR’s latest actions.
“While it is important to note that these rulings are only the first step in the process, IHA feels
that this is tantamount to taxing Illinois hospitals and is very concerned that hospitals will have
to devote precious time and resources in responding to these challenges,” the statement said.
In a closely watched case, the Illinois Supreme Court held in March 2010 that Provena Covenant
Medical Center (PCMC) was not entitled to a property tax exemption for the 2002 tax year.
The high court agreed with an appeals court ruling that Provena Hospitals, which owns and
operates PCMC, failed to show it qualified for either the charitable or religious exemption to the
state property tax.
According to the high court, Provena had not shown the subject property, consisting of 43
separate real estate parcels in Urbana, IL, was used exclusively for charitable or religious
purposes.
The dispute arose after the IDOR refused to grant Provena's renewal application for a property
tax exemption because it failed to sufficiently show it used the property exclusively for charitable
purposes.