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FOR PROVIDERS:

Regulations Regarding Electronic Health Records

Click here for a detailed overview of  Proposed Stark Law Exceptions and Anti-Kickback Safe Harbor Regulations for Electronic Health Records

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CMS Releases 2006 Physician Fee Schedule Final Rule;  Defers Inclusion of Nuclear Medicine As A Designated Health Service Until 2007

On November 2, 2005, the Centers for Medicare and Medicaid Services (CMS) released the 2006 Physician Fee Schedule Final Rule.  The fee schedule, which is updated annually based on a statutory-specified formula, amounts to 4.4% reduction in payment rates for physicians’ services.  Congressional intervention would be necessary in order to avoid any reduction in payments.  As CMS administrator Dr. Mark B. McClellan noted, “The existing law calls for a decrease in payment rates for physicians in response to continued rapid increases in use of services and spending growth, and Medicare does not have the authority to change this … The current system is not sustainable, and the payment reduction offers further proof that we must move to a payment system that ensures adequate payments to physicians, but also supports high quality and efficient health care services.”

The Final Rule also adopts the proposed inclusion of diagnostic and therapeutic nuclear medicine services on the list of designated health services for which physicians are prohibiting from self-referring their patients under the physician self-referral or “Stark” rules.  Recognizing that the inclusion of nuclear medicine in the Stark II prohibitions may have an impact on current arrangements, CMS decided to delay the effective date for the regulatory change until January 1, 2007. At that time, all nuclear medicine arrangements will have to comply (i.e. no current arrangements will be grandfathered in).  As a result, current nuclear medicine financial arrangements may have to be restructured prior to January 1, 2007. 

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Wisconsin AG Files Suit Against Milwaukee Hospitals For Overcharging Uninsured

On November 7, 2005, Wisconsin Attorney General Peg Lautenschlager announced that her office would take action against St. Joseph Regional Medical Center and Wisconsin Heart Hospital for engaging in unfair trade practices by overcharging uninsured patients.  The complaints filed with the Department of Agriculture, Trade and Consumer Protection Division allege that the hospitals unfairly charge patients excessive prices, far above the discounted rates charged to managed care companies.  Since Wisconsin lacks a price-gouging statute, the complaints seek special orders prohibiting the hospitals from charging excessive prices to uninsured patients.

The complaints are based upon the experiences of two uninsured patients.  The first, Richard Bodart, is a self-employed worker who was billed $33,646 (excluding doctors’ bills) by Wisconsin Heart Hospital in May 2004 for procedures following a heart attack and a 24 hour hospital stay.  While Bodart did receive a 20% charity care discount (reducing the bill to $26,917) the charges still exceed those paid by managed care payers (who receive, on average, a 34% discount) and Medicare (which would reimburse the hospital approximately $15,000 for the same hospitalization).  The second patient, Orenta Toombs, an uninsured mother of three, was billed $31,614 by St. Joseph Regional Medical Center in May 2002 for emergency gallbladder surgery.  Ballantine chose not to apply for the hospital’s charity care program, and therefore was charged full “sticker” prices, far in excess of rates paid by managed care payers (who receive, on average, a 37% discount on billed charges) and Medicare (which would have reimbursed the hospital around $5,000 for the same services).

In announcing the investigation, Attorney General Lautenschlager noted, “It is grossly unfair to charge the highest prices to those least able to pay, namely uninsured patients.   An indefensible pricing system has developed under which artificially inflated list prices are routinely discounted for the vast majority of patients, and only the unfortunate few are expected to pay those prices … It is the time to correct this unconscionable situation, and I call upon the hospitals of Wisconsin to examine their practices and ensure that uninsured patients are not being treated unfairly.”

Covenant Healthcare of Milwaukee (which owns St. Joseph Regional Medical Center and 48% of the Wisconsin Heart Hospital) dispute all allegations of price gouging.  As a spokesperson for Covenant noted,  “Given the level of uncompensated care we provide in this community, these allegations are unfounded and insulting.”  The president of the Wisconsin Hospital Association further accused Lautenschlager of “playing politics at the expense of community hospitals that are at ground zero when it comes to caring for uninsured patients.” 

The Attorney General’s investigation follows a civil lawsuit filed in June against three southeastern Wisconsin hospitals, alleging price gouging and unfair pricing for uninsured patients. 

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FTC Administrative Law Judge Strikes Down Merger, Orders Divestiture of Evanston Northwestern Healthcare Corporation

On October 20, 2005, a Federal Trade Commission (“FTC”) Administrative Law Judge (“ALJ”) ruled that a merger of three Chicago area hospitals “substantially lessened  competition” in violation of Section 7 of the Clayton Act.  See In re Evanston Northwestern Healthcare Corp.,   No. 9315 Slip op. (FTC October 21, 2005).  To counter the anti-competitive effects of the merger, the ALG ordered Respondent Evanston Northwestern Healthcare Corp. to sell one of the merged hospitals within 180 days.  Id. 

In January 2000, through a transaction valued in excess of $200 million, co-owned Evanston Hospital and Glenbrook Hospital merged with Highland Park Hospital to form Evanston Northwestern Healthcare Corp. (“ENH”).  Almost immediately after the merger, the merged hospitals began raising prices.  Indeed, post-acquisition evidence showed that the ENH was able to use its post-merger power to obtain price increases significantly above its pre-merger prices and substantially larger than price increases obtained by other comparison hospitals.  The result was higher prices for insurers and healthcare consumers for general inpatient services sold to managed care organizations in the geographic market.

The FTC launched a post-merger investigation, which ultimately resulted in the filing of a antitrust enforcement action in February 2004 (four years following the merger).

In sustaining the FTC’s allegations of anti-trust violation, the ALJ found that the merged hospitals had significant market power within the acute-care hospital services market in the North Shore area.  The ALJ accepted the FTC’s position that “market realities demonstrate that managed care organizations cannot ‘practicably’ turn outside the ENH geographic triangle for substitute hospitals.”  Slip. Op. at 137.  Finding patient flow analysis to be unhelpful, the ALJ reasoned that “although patients may use hospitals outside of the geographic market, the evidence demonstrates that, in this market, these outlying hospitals do not constrain [ENH]’s pricing and they are not hospitals to which managed care organizations can turn to construct viable hospital network.”  Slip. Op. at 140. 

The ALJ further found that ENH had used its increased market power to negotiate higher rates from managed care organizations.  ENH offered several explanations for its price increases, including quality of care improvements, each of which were analyzed and ultimately rejected by the ALJ.  Notably, the availability of post-merger empirical evidence (and economic analysis) allowed for a better evaluation of the merger’s actual anti-competitive effects and helped to rule out other explanation for the price increases.  Moreover, already armed with proof of anticompetitive injury, the FTC no longer needed to rely on an inference of anticompetitive effects from a clearly defined geographic market, and thus only needed to show “the rough contours of a relevant market…in lieu of the usual showing of a precisely defined relevant market and monopoly market share.”  Slip. Op. at 201. 

Also affecting the ALJ’s analysis was an abundance of pre and post merger evidence reflecting ENH’s anti-competitive intent.  The FTC’s investigation revealed that one of the purposes of the merger was to increase the hospital’s bargaining power against large payors.  Indeed, the merging hospitals even argued that the merger was necessary to in order to buttress the hospitals’ bargaining power with the large managed care companies.  The ALJ expressly rejected the Defense’s justification, noting that “the antitrust laws afford neither solace or escape from the rigors of competition induced by managed care.”  Slip. op. at 157. 

Rejecting alternative remedies proposed by ENH to remedy the anti-trust violation, the ALG ordered ENH to sell Highland Park Hospital to a FTC approved buyer within 180 days.  Any action will await the resolution of cross-appeals filed by ENH and the FTC.

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OIG Won’t Take Action Against Joint Venture

In Advisory Opinion 05-12, the Office of Inspector General (OIG) determined that a proposed joint venture by three psychiatrists to establish a pediatric day treatment facility for patients, could potentially generate prohibited remuneration in violation of the Anti-Kickback Statute.  Despite finding that the arrangement would not fit into the safe harbor for investments in small entities (because the entire investment interest would be held by investors who are in a position to refer patients to the entity), the OIG nonetheless found that the proposed joint venture included several factors that, “taken together, adequately mitigate the risk of Federal healthcare program fraud and abuse.”

The proposed joint venture included the following arrangements: Each physician would invest one-third of the capital necessary to establish the facility, and each physician’s ownership interest (and return on investment) corresponded with such capital investment.  While each physician was in a position to refer patients, they were not required to do so, and none of the investors would be aware of the volume or value of business generated by the other investors. 

The investors expected that a majority of the facility’s patients would be referred by unaffiliated physicians, and that the business generated by the investor’s referrals would only represent about 5% of the facility’s total revenue.  The facility would treat self-pay patients and patients covered by health insurance plans or enrolled in Medicaid HMOs.  The investors anticipated that about 5% of the facility’s revenue would flow from the federal health programs (with federal revenues from the investors referrals amounting to about 2% of total revenues).

The OIG found that the proposed arrangement revealed several factors which would mitigate the risk for fraud and abuse.  First, the OIG determined that it was unlikely that the proposed joint venture was intended to serve as a vehicle for compensating the physician-owners for referring federal healthcare program beneficiaries to the facility, given the small percentage of revenues expected to flow from Medicaid HMO patients.  Second,  because the investors are competitors, it is unlikely that the proposed joint venture was intended to reward fellow competitors for referrals to one another.  Third,  given the requirement for an independent, pre-admission clinical evaluation, and the limited number of Medicaid beneficiaries referred by the physician-owners, there is minimal risk of over-utilization and excessive expenditures. 

Although the OIG carefully warns that this opinion is limited to the joint venture outlined in the Proposed Arrangement, it is helpful in confirming that joint ventures that do not satisfy the small entity safe harbor may nonetheless be permissible under the Anti-Kickback statute. 

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Tennessee Hospital To Pay $40 million To Resolve Kickback and Stark Law Allegations

Erlanger Medical Center (“Erlanger”) has agreed to pay a $40 million fine in connection with compliance and conflict of interest charges brought by the Justice Department.  The settlement is, however not an admission of wrongdoing by Erlanger as to liability or damages.  As part of the settlement agreement, Erlanger, which is owned by the Chattanooga-Hamilton County Hospital Authority, a public nonprofit corporation, will pay $37 million to the federal government and $3 million to Tennessee.  In addition, Erlanger is required to enter into a five year Corporate Integrity Agreement involving special compliance oversight from the government.  Hospital officials will also be required to undergo training in compliance and contract matters.

The settlement states that starting in 1995, Erlanger entered into a series of transactions through which it paid remuneration, intended to induce physicians to refer patients to its facilities, in violation of the Stark Law and the Medicare Anti-Kickback Statute.  The settlement also states that from 1995 through 2003, in violation of the False Claims Act, Erlanger submitted false claims to Medicare, Medicaid and TRICARE for inpatient and outpatient hospital and home health services referred, ordered or arranged by the covered physicians.  The claims were false because the Stark Law prohibited Erlanger from billing Medicare for items or services referred or ordered by physicians with whom it had such a financial relationships.

The settlement concluded the investigation of Erlanger and any resulting claims against the hospital. However, other investigations concerning matters involving individuals and other companies are pending.

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FOR PHARMACEUTICAL MANUFACTURERS:

OIG Issues Special Medicare Part D Advisory Bulletin Regarding Patient Assistance Programs (PAPs)

On November 7, 2005 the HHS Office of Inspector General (“OIG”) issued a Special Advisory Bulletin providing guidance for pharmaceutical companies operating or sponsoring patient assistance programs (“PAPs”) for new Medicare Part D enrollees.  Specifically, the Bulletin warned of potential fraud and abuse issues (particularly involving the federal Anti-Kickback Statute) which may arise under Medicare Part D (the new voluntary prescription drug program). 

The Bulletin focuses on PAPs that are sponsored by pharmaceutical companies and warns that such PAPs could risk violating fraud and abuse laws if they subsidize only their own products that are reimbursable by the new Medicare Part D prescription drug program.  The Bulletin was careful to note that cash donations to independent, charitable PAPs that subsidize drugs regardless of the manufacturer should not pose risks under the fraud and abuse laws.

Beginning January 1, 2006, the new Medicare Part D prescription drug program will provide prescription drug coverage to those beneficiaries electing to enroll in a Part D plan.  Such beneficiaries, however, will continue to have prescription drug cost-sharing obligations, including a $250 deductible, a 25% share in the cost of prescription drugs between $250 and $2250 (annual costs per beneficiary) and all of the prescription drug costs for the next $2850 (until total drug costs equals $5000, or the beneficiary’s true out of pocket costs reaches $3630). 

PAPs, whether independent charitable organizations or affiliated with pharmaceutical manufacturers, were historically designed to assist uninsured, low income individuals with the high costs of prescription drugs.  Typically, PAPs provide such assistance in the form of cash subsidies and free or discounted drugs.  The Bulletin warned that PAPs that provide cost-sharing subsidies (especially if only for their own products) to beneficiaries enrolled in a new Part D prescription drug plan would raise concerns under the federal Anti-Kickback Statute.   Specifically, the Bulletin expressed concerns that subsidies would be used to help Part D enrollees meet the $3630 true out of pocket expense limits, while increasing the number of enrollees using their products (and eventually being reimbursed by the government after the $3630 catastrophic limit is met).  The Bulletin also warned of potential risks related to cost-sharing subsidies to dispensing supplies  (as opposed to non-routine waiver of cost sharing amounts based on an individual patient’s financial need).

The Bulletin warns that PAPs need not immediately start disenrolling Medicare beneficiaries.  Since participation in Part D is voluntary, PAPs may continue to provide all subsidies to beneficiaries until they enroll in a Part D plan.  The Bulletin noted that PAPs would not risk regulatory action, however, unless they knew or should have known that an individual was enrolled.  Therefore, the OIG advises all pharmaceutical manufacturers to establish procedures to verify whether existing recipients of PAPs assistance have enrolled in a Part D plan, and to transition Part D plan enrollees to non-pharmaceutical sponsored PAPs.

All manufacturers who currently sponsor PAPs should carefully review the Special Advisory Bulletin to determine whether such PAPs should be restructured once Part D becomes effective on January 1, 2006.

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King Pharmaceutical Reaches $124 million settlement with Medicaid

King Pharmaceuticals, Inc. (the “Company”) has agreed to pay $124.1 million, plus interest, to resolve allegations that it overcharged various federal and state government entities for its drug products, and underpaid rebates owed under the Medicaid program. 

The government alleges that from 1994 through 2002, the company failed to report accurately the average manufacturer price (AMP) and best price (BP) for its Medicaid-reimbursed drugs.  King’s officials claims the misreporting was due to unintentional errors in the application of complex calculation.

All pharmaceutical companies that participate in federal and state Medicaid and other governmental pricing programs are required to perform calculations involving complex formulas and provide the results to the governmental authorities that administer the programs.  The program is in place to ensure that Medicaid receives the lowest price available in the marketplace for the program’s reimbursed drugs. 

“This settlement shows that the compliance efforts that the federal government and the pharmaceutical companies have in place can help protect the Medicaid beneficiaries and taxpayers,” said CMS Administrator Mark B. McClellan

In addition to the settlement, the Company has entered into a five year corporate integrity agreement with DHHS/OIG, that the Company is required to keep in place its current compliance program, to provide periodic reports to DHHS/OIG, and to submit its Medicaid rebate calculations to audits. 

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Overview of Proposed Stark Law Exceptions andAnti-Kickback Safe Harbor Regulations for Electronic Health Records

On October 11, 2005, the Centers for Medicare and Medicaid Services (“CMS”) and the Office of the Inspector General (“OIG”) issued six proposed rules—three Stark Law self-referral exceptions and three parallel anti-kickback safe harbors.[1]  The proposed rules were intended to provide health care entities with additional flexibility to support and finance e-prescribing and electronic health records (“EHR”) arrangements.  You asked for an overview of the proposed rules related to EHR.

There are two primary goals of adopting EHR regulations.  The first is to improve the quality of health care and reduce errors by connecting information available to health care providers and patients across practice settings.  The second is to enhance measuring and reporting certain health care outcomes in order that payment can be based on realigned financial incentives that reward achieving such outcomes.  Congress predicts that these improvements and enhancements will generate significant future cost savings in federal health care programs.

Policy makers, such as the Department of Health and Human Services’ Commission on System Interoperability, which was created by Congress as part of the Medicare Modernization Act, have directed CMS and OIG to promulgate regulations quickly in order to realize these goals and ultimate savings in the near term.  However, existing technological capacity, such as the “interoperability” of the technology,[3] lags what is needed to effectively implement EHR arrangements nationwide.  Moreover, CMS and OIG have raised concerns about potential program fraud and abuse without adequate regulatory oversight.  For these reasons, among others, the proposed rules are subdivided, with one version applicable during the pre-interoperability phase and a second version applicable during the post-interoperability phase.

The proposed rules are highly fluid and the public comment period has just concluded.  Because the pre-interoperability phase sunsets after one year’s duration[4]—and the comment and drafting period will likely exceed that period of time—it is unlikely (barring a change in the duration of the pre-interoperability phase) that the pre-interoperability rules will ever take effect.  In addition, investing in software and services for donations during the pre-interoperability period and prior to any final rule makes little business sense given the short duration of that period and the uncertainty of the scope and breadth of the final rule.  For these reasons, many legal commentators—and this memorandum—focuses almost exclusively on the proposed rules for the post-interoperability phase.

CMS has proposed Stark Law exceptions 42 C.F.R. §§ 411.357(v),[5] 411.357(w)[6] and 411.357(x), which if implemented would create independent grounds for protection under the Stark Law prohibitions.  The text of 411.357(x) states:

Certified electronic health records items and services.  Non-monetary remuneration (consisting of items and services in the form of software or directly related training services) necessary to receive, transmit, and maintain electronic health records, if all of the following conditions are met:

1. The items and services are provided by a:

• Hospital to physicians who are members of its medical staff;
• Group practice (as defined at § 411.352) to physicians who are members of the group practice (as defined at § 411.351); or
• PDP (prescription drug plan) sponsor or MA (medical assistance) organization to prescribing physicians.

2. The technology is certified in accordance with criteria adopted by the Secretary that are in effect at the time of the donation.

3. Neither the physician nor the physician’s practice (including employees and staff members) makes the receipt of items or services, nor the amount or nature of the items or services, a condition of doing business with the donor.

4. Neither the eligibility of a physician for the items or services, nor the amount or nature of the items and services, is determined in a manner that is directly related to the volume or value of referrals or other business generated between the parties.For the purposes of this paragraph, the determination is deemed not to be directly related to the volume or value of referrals or other business generated between the parties if any one of the following conditions is met:

• The determination is based on the total number of prescriptions written by the recipient;
• The determination is based on the size of the recipient’s medical practice (for example, total patients, total patient encounters, or relative value units);
• The determination is based on the total number of hours that the recipient practices medicine;
• The determination is based on the recipient’s overall use of automated technology in his or her medical practice (without specific reference to the use of technology in connection with referrals made to the donor);
• The determination is based on whether the physician is a member of the hospital’s medical staff, if the donor is a hospital; or
• The determination is made in any reasonable and verifiable manner that is not directly related to the volume or value of referrals or other business generated between the parties.

5. The arrangement is set forth in a written agreement that:

• Is signed by the parties;
• Specifies the items or services being provided and the value of those items and services;
• Covers all of the electronic health records items and services to be furnished by the entity to the physician; and
• Contains a certification by the physician that the items and services are not technically or functionally equivalent to items and services he or she already possesses or has obtained.

6. The entity did not have actual knowledge of, and did not act in reckless disregard or deliberate ignorance of, the fact that the physician possessed or had obtained items and services that were technically or functionally equivalent to those donated by the donor.

7. For items and services that are of the type that can be used for any patient without regard to payor status, the donor may not restrict or take any action to limit the physician’s right or ability to use the items or services for any patient.

8. The items and services do not include staffing of physician offices and are not used solely to conduct personal business or business unrelated to the physician’s medical practice.

9. The electronic health records technology contains electronic prescribing capability that complies with the electronic prescription drug program standards under Medicare Part D at the time the items and services are furnished.

10. The arrangement does not violate the anti-kickback statute (section 1128B(b) of the Act), or any Federal or State law or regulation governing billing or claims submission.

Under the proposed rule 411.357(x), the covered technology would include “certified” electronic health records software and directly-related training services.  Note that the covered technology does not include hardware.  It is unclear whether the exception will cover ongoing technology support services in addition to the direct training services.  The software must include an electronic prescribing component and may include billing and scheduling software, provided that the core function of the software is for electronic health records.  The donated technology must comply with certain standards, including product certification criteria for the EHR system and foundation standards for the electronic prescribing software.  Such criteria will be adopted by the Secretary of Health and Human Services (“the “Secretary”). 

In addition, the proposed rule sets forth four pairs of permissible donors and recipients of the software and services, including:

1. Hospitals to members of their medical staffs.
2. Group practices to physician members.
3. Prescription drug plan sponsors.
4. Medical Assistance organizations.

The donors may use certain criteria to select recipients from those eligible pairings.  However, those criteria are currently limited to prohibitions on the volume and value of referrals and how such a determination is to be made.  Finally, the preamble states there will be a cap in the dollar amount of the value of the software and services protected by the exception.  The Secretary has not identified the amount of the cap. 

With respect to the proposed safe harbor to the anti-kickback prohibitions, the OIG sets forth in graphic format in the Federal Register the same components as CMS set forth in the Federal Register for its exception.  However, unlike CMS, the OIG did not print any language for the safe harbors in its notice of proposed rule making.[7]  This raises a number of unresolved questions regarding the intended scope of the safe harbor as compared to the scope of the exception.  For example, the OIG states that many health care entities currently use existing safe harbors for electronic health technology arrangements, including the employee, discounts and equipment rental safe harbors.  Some observers believe this indicates the OIG’s preference for a smaller cap for its safe harbor than that which will be approved by CMS.  There is some debate among commentators regarding whether the Stark Law exception and anti-kickback safe harbors should overlap or vary somewhat in scope.  Some desire the Stark exception to be as broad as possible because a “bust” is worse than merely failing to fit within a safe harbor.

There are serious questions about who will pay for the software technology, and the hardware to run it.  Medicare will not pay directly, but may contribute indirectly through future pay-for-performance incentives that will be tracked using EHR technology.  Likewise, it is not likely that private payors will pay for EHR.  The likely payor will be health care providers who use EHR.  A key to the success of the proposed rules will likely be whether they free private financing to extend EHR to non-employed physicians.  The proposed rules leave out physicians not on the medical staff of a hospital willing to donate.  It is unclear how donations to physician networks and group practices.  Such networks and practices often include physicians not on the hospital’s medical staff.  The rule also leaves out home health agencies and nursing homes.

The proposed rules remain fluid and the public comment period has just recently concluded.  Hospitals desiring to donate EHR should consider whether waiting for the final rule’s promulgation would be prudent before investing in EHR technology.  Once the interoperability phase has begun, hospitals will better be able to identify what donations of EHR technology will be protected by the proposed safe harbor and fit within the Stark law exception.

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