August 07, 2009 Vol. VII Issue 31

The Centers for Medicare and Medicaid Services (CMS) said payments to acute care hospitals under the inpatient prospective payment system (IPPS) final rule issued July 31 are projected to increase by $1.9 billion in fiscal year (FY) 2010.

CMS in the proposed rule had estimated payments would decrease by $979 million due to downward adjustments to account for changes in documentation and coding practices that do not reflect increases in a patient’s severity of illness.

In the final rule, CMS said it opted not to make the adjustment in FY 2010 without knowing whether FY 2009 spending from documentation and coding is more or less than earlier projected.

Under the final rule, long term care hospitals (LTCHs) would see their payments increase by $153 million in rate year (RY) 2010, up from $135 million projected in the proposed rule.

The final rule will be published in the August 27 Federal Register. The new payment rates will be effective October 1, 2009. 

IPPS Payment Changes  

CMS said the update to the IPPS reflects a 2.1% inflationary increase, which in combination with other payment changes, will result in an estimated $1.73 billion increase in FY 2010 operating payments (a 1.6% bump) and $171 million increase in FY 2010 capital payments (a 1.9% increase).

In the proposed rule, CMS had included a downward documentation and coding adjustment of 1.9 percentage points. At the time, CMS said the downward adjustment was necessary to account for changes in hospital coding practices that resulted when the IPPS switched to Medicare Severity Diagnosis-Related Groups (MS-DRGs) and proposed phasing-in the adjustment over time.

But based on public comments, CMS said it opted not to include the downward adjustment in the final rule.

Also in response to public comments, the agency said it will continue to apply the capital indirect medical education adjustment to payment rates for teaching hospitals. CMS had adopted regulations to phase-out the additional capital payment made to teaching hospitals, but Congress restored the 50% reduction that CMS applied in FY 2009.

“CMS decided based on updated analysis of hospital capital margins and input from commenters not to go forward with full phase-out as previously planned next year.” Instead, hospitals will continue to receive the full capital IME adjustment in FY 2010.

The final rule sets the outlier threshold in FY 2010 to $23,140. CMS said this amount would keep outlier payments equal to 5.1% of total payments under the IPPS.  

CMS also noted hospitals that fail to participate in Medicare’s quality data reporting program would see their updates reduced by two percentage points.

The final rule adopts four new measures to the reporting requirement—two of which are additions to the existing Surgical Care Improvement Project measure set, with the other two directed at promoting hospital participation in nursing sensitive care and stroke care registries.  

CMS did not change the list of hospital-acquired conditions in FY 2010 for which Medicare will no longer pay when present as a secondary diagnosis not reported as present at admission. The final rule, however, “describes CMS’s plans to evaluate the impact of the existing policy on hospital practices and patient care.”

LTCHs Payment Changes 

The LTCH prospective payment system update reflects a 2.5% inflationary increase. CMS in the proposed rule also had included a downward adjustment of 1.8 percentage points to account for changes in documentation and coding practices resulting from the implementation of the Medicare Severity LTC-DRGs.

As with hospitals paid under the IPPS, CMS decided not to implement the downward adjustment in RY 2010. CMS did, however, finalize its proposal to adjust the RY 2010 LTCH by a negative 0.5 percentage points to account for the effect of changes in documentation and coding that occurred in FY 2007 under the previous patient classification system.

View the final rule.

A final rule issued July 31 by the Centers for Medicare and Medicaid Services (CMS) will reduce Medicare payments to skilled nursing facilities (SNFs) by $360 million in fiscal year (FY) 2010.

The final rule recalibrates case-mix indexes (CMIs) to better align Medicare payments with costs, CMS said.

The FY 2010 recalibration of the CMIs results in a reduction in payments to nursing homes of $1.050 billion, or 3.3%, the agency said in a press release. However, the decrease in payment would largely be offset by the FY 2010 update, an increase of 2.2%, or $690 million.

As a result, SNFs will see a total Medicare payment reduction of $360 million, or 1.1%, from 2009.

“CMS is committed to providing high quality care to those in skilled nursing facilities and to paying those facilities properly for that care,” Acting CMS Administrator Charlene Frizzera said. “The adjustments to the payment rates for next year reflect that policy.”

CMS explained that the adjustments were necessary because payments made pursuant to refinements to the Resource Utilization Group (RUG) system in 2006 had resulted in higher than expected Medicare payments.

The agency “is now recalibrating the case-mix weights in order to restore overall payments to their intended levels on a prospective basis,” CMS said.

View a copy of the final rule.

The Centers for Medicare and Medicaid Services (CMS) published August 7 a final rule (74 Fed. Reg. 39762) establishing a 2.5% payment update for Inpatient Rehabilitation Facilities (IRFs) for fiscal year (FY) 2010.

The update is projected to increase total payments to IRFs in 2010 by $145 million and is effective for discharges occurring on or after October 1, 2009, CMS said.

The rule also sets the outlier threshold for FY 2010 at $10,652, the amount estimated to maintain estimated outlier payments equal to 3% of total estimated payments under the IRF prospective payment system for FY 2010, according to the rule.

In addition, the final rule adopts a new regulatory framework that clarifies the coverage criteria for IRFs that will be effective on January 1, 2010.

The coverage criteria provisions establish requirements for preadmission screening of potential IRF patients through which a facility can document that a patient is eligible for intensive rehabilitation services in an IRF setting, post-admission treatment planning requirements, and ongoing coordination of care requirements, the agency said in a press release.

“A major reason for updating the coverage policies is to help IRFs select appropriate patients who need the comprehensive and more costly rehabilitation services furnished in the IRF setting,” the release said.

CMS said it also plans to issue draft guidance on the new coverage criteria that it will place in the Medicare Benefit Policy Manual.

Read the final rule.

The Centers for Medicare and Medicaid Services (CMS) said August 3 that the Round One rebid of the Medicare competitive bidding program for durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) will open in late October

CMS also indicated that efforts to ramp up suppliers on preparing for the 60-day supplier bidding period are underway for each of the nine competitive bidding areas.

CMS is posting information and materials to help guide suppliers through the competitive bidding process at www.dmecompetitivebid.com and is offering a toll-free help line (1-877-577-5331) to answer specific questions and concerns.

The same areas, with the exception of Puerto Rico, included in the initial Round One bidding will be included in the rebid, CMS said.

The Round One rebid also will include the same items as the first Round One with the exception of negative pressure wound therapy items and Group 3 complex rehabilitative power wheelchairs.

The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) temporarily delayed the competitive bidding program for DMEPOS, which initially began July 1, 2008 in ten bidding areas.

The Obama administration announced in April that it would begin to move forward with the DMEPOS competitive bidding program.

According to a CMS fact sheet, bidding registration is set to begin later in August. Suppliers will have until September 30 to obtain necessary accreditation. Suppliers required to submit a surety bond must do so by October 2.

Bidding will end in December 2009, and CMS will review bids, finalize contracts, and educate suppliers, providers, and beneficiaries in 2010. DMEPOS competitive bidding will then begin January 1, 2011.

View CMS’ press release and fact sheet.

Unqualified nonphysicians performed 21% of “incident to” services that physicians did not perform personally, the Department of Health and Human Services Office of Inspector General (OIG) found in a report posted August 6.

In the first three months of 2007, Medicare allowed $12.6 million for approximately 210,000 services performed by unqualified nonphysicians, the report found.

Medicare Part B pays for services that are billed by physicians but are performed by nonphysicians under its “incident to” rules, OIG explained.

In order to learn more about such services, OIG examined Part B Medicare National Claims History data for the first quarter of 2007. It randomly selected 250 days during which Medicare allowed services for physicians in a single day that exceeded 24 hours of physician work time.

OIG found that when Medicare allowed physicians more than 24 hours of services in a day, half of the services were not performed personally by a physician.

Medicare allowed $105 million for approximately 934,000 services that physicians personally performed and approximately $85 million for approximately 990,000 services that nonphysicians personally performed during the three-month period OIG examined, the report said.

OIG noted that it was “concerned about the potential scale of this problem” and thus recommended the Centers for Medicare and Medicaid Services (CMS) seek revisions to the “incident to” rule.

According to OIG, the rule should require physicians who do not personally perform the services they bill to Medicare to ensure that no persons except either licensed physicians or nonphysicians who have the necessary training, certification, and/or licensure personally perform the services under the direct supervision of a licensed physician.

OIG also said CMS should require physicians who bill services to Medicare that they do not personally perform to identify the services on their Medicare claims by using a service code modifier.

Lastly, OIG said CMS should take appropriate action to address the claims for services identified that were billed by physicians and performed by nonphysicians that were, by definition, not “incident to” services.

In addition, OIG said CMS should address claims that were for rehabilitation therapy services performed by nonphysicians who did not have the training of a therapist.

In commenting on the report, CMS agreed with all of OIG’s recommendations, except for the recommendation to create a service code modifier.

Read the report, Prevalence And Qualifications Of Nonphysicians Who Performed Medicare Physician Services (OIE-09-06-00430).

A federal district court in Massachusetts issued August 3 final approval of a settlement resolving a nationwide class action alleging drug pricing publisher McKesson Corporation conspired with drug wholesalers to fraudulently “mark up” the average wholesale price (AWP) for numerous prescription drugs.

In the memorandum and order, U.S. District Court for the District of Massachusetts Judge Patti B. Saris said the $350 million settlement was “fair, reasonable, and adequate.”

Saris rejected various objections concerning the allocation among the classes, the methodology for identification of class members, and the notice to the classes.

“I find the allocation among the cash, co-pay, and third-party classes is reasonable. I also find that notice to the classes was innovative, expansive and reasonable,” Saris said.

Much of the six-page order was devoted to determining the award of attorneys’ fees and expenses to class counsel, which Saris set at $70 million.

At issue in the litigation was the so-called “spread,” i.e., the difference between the wholesale average cost (WAC)—what the retailers pay to acquire drugs—and the AWP—what consumers and third-party payors (TPPs) pay to retailers for the drugs.

The lawsuit alleged that in late 2001, McKesson and drug pricing publisher First Databank, Inc. (FDB) entered into a “secret agreement” on how the WAC to AWP markup would be established for hundreds of brand-name drugs. Specifically, McKesson raised the WAC to AWP spread from 20% to 25% for over 400 drugs that previously had received only the 20% markup, according to the lawsuit.

As a result of this artificial increase in the markup of the WAC to AWP spread from 20% to 25%, thousands of TPPs, public entities, and consumers paid increased drug prices, plaintiffs contended.

“As we have consistently stated, we believe the plaintiffs’ allegations are without merit, and that McKesson adhered to all applicable laws,” said John H. Hammergren, McKesson chairman and chief executive officer in a statement last November when the settlement was initially announced.

“Yet when faced with the inherent uncertainty of this litigation, we determined that entering into the settlement agreement was in the best interest of our shareholders, customers, suppliers, and employees,” he said.  

The D.C. Circuit upheld August 4 a the Secretary of the Department of Health and Human Services disallowance of “bad debts” arising from plaintiff-skilled nursing facilities’ (SNFs’) provision of therapy services paid under Medicare Part B, finding the decision in line with controlling Medicare law and regulations.

Affirming a March 2008 federal district court decision granting summary judgment in the Secretary’s favor, the appeals court found the refusal to reimburse the SNFs for uncollectible deductibles and coinsurance did not “contravene” the Medicare statute’s “prohibition against cross-subsidization,” as well as implementing regulations to that effect.

Rather, the appeals court said it was reasonable for the Secretary to conclude that this provision applies only to reimbursement based on reasonable costs, and not to reimbursements based on reasonable charges or on a fee schedule.

Plaintiffs are a group of Medicare-certified SNFs owned and operated by Extendicare Health Services, Inc. that provide therapy services to residents, including Medicare beneficiaries under Part B.

Under the Balanced Budget Act of 1997 (BBA), Congress eliminated a cost-based payment methodology for reimbursing SNFs under Medicare Part A, and replaced it with a prospective payment system based on a federal per diem rate. The BBA provided, however, that Part B services would be paid according to the preexisting physician fee schedule.

As was their prior practice, the SNFs included on their fiscal year 1999 Medicare cost reports claims for bad debts related to uncollectible deductibles and coinsurance arising from therapy services payable under the Part B fee schedule.

The fiscal intermediary denied the claims, saying the Medicare bad debt policy only applied to the reasonable cost payment system, which was no longer in place after the BBA. The Provider Reimbursement Review Board (PRRB) determined the intermediary had improperly denied the SNFs’ bad debts, saying Congress had changed the payment system but did not alter the bad debt policy contained in 42 C.F.R. § 413.80.

The Secretary issued a final decision reversing the PRRB, noting Medicare’s “long-standing” policy of not paying bad debts for any services paid under a reasonable charge or fee schedule methodology.

The SNFs appealed to the district court, which ruled in the Secretary’s favor. The D.C. Circuit affirmed.

The appeals court rejected the SNFs’ contention that the Secretary’s decision violated the Medicare statute’s anti-cross-subsidization provision because nonbeneficiary recipients of SNF services would ultimately end up bearing these costs.

Applying Chevron deference, see Chevron U.S.A. Inc. v. Natural Resources Defense Counsel Inc., 467 U.S. 837 (1984), the appeals court first noted the statute was silent on the subject of bad debt and therefore open to interpretation. The appeals court then held it was reasonable for the Secretary to interpret the anti-cross-subsidization provision as applying only to reimbursement systems based on “reasonable costs.”

Plaintiffs also contended the Secretary had not applied the stated "long-standing" policy consistently, noting that Medicare reimburses providers for bad debt under Part A, which is a prospective payment system, and under the fee schedule for ambulatory surgical centers.

But the appeals court said those payment systems were still based on costs rather than on charges like the Part B physician fee schedule applicable to SNFs.

“By contrast, the Part B physician fee schedule is based on prices health care providers charge, and ‘[h]istorically, these prices have reflected the entities['] costs of doing business including expenses such as bad debt.’”

Finally, the appeals court rejected the SNFs’ argument that the denial of reimbursement for bad debts was at odds with the implementing regulation, Section 413.80, for the anti-cross-subsidization provision.

The appeals court found it “perfectly reasonable” for the Secretary to interpret this regulation in the same manner as the statute as only applying to cost-based reimbursement systems.

Abington Crest Nursing and Rehabilitation Ctr. v. Sebelius, No. 08-5120 (D.C. Cir. Aug. 4, 2009).

A physician was not entitled to preliminary injunctive relief in an action alleging the Puerto Rico Medical Examining Board violated his constitutional rights when it restricted the practice of cosmetic surgery to physicians with board-certification in plastic surgery or dermatology, the Fifth Circuit held July 23. 

Plaintiff Dr. Efrain Gonzales 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 board-certified physicians, rendering the majority of plaintiff’s practice illegal. 

Plaintiff filed a complaint in federal district court challenging the regulation. According to plaintiff, as a result of the Board’s actions he was forced to relocate to California, causing him substantial expense in time and resources to rebuild his medical practice.  

At the time plaintiff filed his first complaint, and without his knowledge, the Board summarily suspend his license for five years for illegally practicing plastic surgery among other things. 

Plaintiff then moved for a preliminary injunction to prevent the Board from holding a hearing on his suspension and to restore his medical license. The district court denied the motion, finding plaintiff had failed to show he would suffer an irreparable injury.  

While plaintiff’s appeal was pending, the Board issued a final decision suspending plaintiff’s license. Plaintiff then filed a second motion for a preliminary injunction asking the court to vacate, or at least delay, the Board’s order. 

The court again denied plaintiff preliminary injunctive relief. The First Circuit affirmed. 

The appeals court said the first denial of plaintiff’s request for injunctive relief was moot since two years had elapsed since the Board held the hearing plaintiff sought to prevent. 

As to the second denial of injunctive relief, the appeals court found the district court properly held plaintiff failed to show irreparable harm.  

Plaintiff’s contention that he incurred substantial expenses in moving his practice to California represented an injury already suffered, not harm that would result absent a preliminary injunction, the appeals court explained. 

According to the appeals court, plaintiff may be entitled to compensation for past harms if he succeeds on the merits of his claim, but he did not demonstrate the prospect of future harm needed to meet the preliminary injunction standard.  

Moreover, the appeals court continued, plaintiff did not allege any ongoing detriment to his practice in California, nor that the suspension of his license in Puerto Rico caused a serious ongoing reputational injury.

The appeals court said plaintiff could continue to proceed to a trial on the merits of his claims concerning the administrative suspension of his license and the Board’s 2005 notice.  

The appeals court also clarified in dicta that while the Board has power to regulate who can practice cosmetic medicine, plaintiff’s central allegation was that the Board acted “irrationally and arbitrarily” in exercising this undisputed power.  

Newly minted Food and Drug Administration (FDA) Commissioner Margaret Hamburg, M.D. said August 6 that the agency is working to revamp and strengthen its enforcement strategy for the industries subject to its oversight. 

“Companies must have a realistic expectation that if they are crossing the line, they will be caught, and if they fail to act . . . we will,” Hamburg said in a speech before the Food and Drug Law Institute. 

Hamburg outlined a number of initial steps the agency is taking to ramp up enforcement efforts at the FDA, including setting post-inspection deadlines, speeding the issuance of warning letters, and working more closely with regulatory partners. 

FDA also will prioritize enforcement follow-up and be “prepared to act swiftly and aggressively to protect the public.” 

To this end, Hamburg said, FDA will no longer issue multiple warning letters before taking enforcement action. “If we find that we must move quickly to address significant health concerns or egregious violations, we will consider immediate action—even before we have issued a formal warning letter,” Hamburg emphasized. 

Hamburg also said FDA, at her direction, is developing a formal warning letter “close-out” process once a firm has fully corrected violations.  

FDA will indicate on its website when a firm has received a “close-out” letter, Hamburg said. 

“Enforcement of the law is not simply an end in itself. . . enforcement is critical to the agency’s public health mission,” Hamburg said in closing.  

Read the text of Hamburg’s remarks.

The authority to administer and enforce the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Security Rule has been delegated to the Office for Civil Rights (OCR), Department of Health and Human Services (HHS) Secretary Kathleen Sebelius said August 3.

Enforcement authority previously was delegated to the Centers for Medicare and Medicaid Services.

The move to rest enforcement with OCR will eliminate duplication and increase efficiencies, the agency said, noting that OCR has been responsible for enforcement of the Privacy Rule since 2003.

“Security and privacy of health information are increasingly intersecting as the department works with the health industry to adopt electronic health records and participate in an even greater level of electronic exchange of health information,” Sebelius said.

“Privacy and security are naturally intertwined, because they both address protected health information. Combining the enforcement authority in one agency within HHS will facilitate improvements by eliminating duplication and increasing efficiency,” she added.

Improved enforcement of the Privacy Rule and the Security Rule was mandated by the Health Information Technology for Economic and Clinical Health (HITECH) Act, which was part of the American Recovery and Reinvestment Act of 2009.

Read HHS’ press release.

By Michael W. Peregrine, Esq., McDermott Will & Emery LLP and Elizabeth M. Mills, Esq., Proskauer Rose LLP 

Officers, directors, and other corporate fiduciaries of healthcare organizations face the same civil (and possibly criminal) exposure for federal payroll tax withholding or deposit failures as all other employers. Recent court cases indicate that the government will pursue healthcare executive leadership individually. 

On August 3, 2009, in Doulgeris v. United States, No. 8:08-cv-00282 (M.D. Fla.), a federal court held a hospital Chief Executive Officer (CEO) personally responsible for almost $2 million in unpaid payroll taxes. This follows the February 2009 Verret decision (see Health Lawyers Weekly, vol. 7, no. 14, for an article of this decision), in which the U.S. Court of Appeals held a hospital board chair similarly liable for unpaid payroll taxes. Furthermore, the Internal Revenue Service (IRS) has announced its intention to aggressively pursue payroll tax fraud. Accordingly, executive leadership and compliance/legal advisors should be particularly attentive to the prompt satisfaction of organizational payroll tax obligations—especially given the financial challenges impressed by a recessionary economy. For their own protection, as well as to be good financial stewards for the organization, executive leadership should proactively confirm that employment taxes are being paid on a timely basis. 

The most recent development involved an individual (James Doulgeris) appointed by a hospital management company to serve as interim hospital president and CEO while the hospital was undergoing bankruptcy reorganization. In 2003, while the individual served in that capacity, payroll taxes were withheld but not paid. The district court concluded as a matter of law that the CEO was personally liable for the outstanding payroll tax liability. The CEO was a “responsible person” with respect to the obligation to pay over payroll taxes and did not show the court by a preponderance of the evidence that the failure to pay was not willful. The facts of the case illustrate what a “liability trap” the payroll tax issue can be even for well-meaning hospital executives and board members, particularly when economic pressures force an organizational prioritization of accounts payable.  

Federal law provides that a person who is responsible for paying to the federal government funds withheld for the purpose of payroll taxes and who willfully fails to pay such funds over to the government may be held personally liable for the amount that is not paid over.[1] The first question in the case, then, was whether the hospital CEO was a “responsible person” with respect to payroll tax payment. The decision does not address whether the individual was a responsible person, as the court had previously decided that he was as a matter of law. The IRS routinely assumes that corporate officers are responsible persons, and the courts generally agree that officers are responsible persons in the absence of evidence to the contrary.[2] Responsibility is a matter of status, duty, and authority, rather than knowledge.[3]   

The question decided by the Doulgeris decision was whether Doulgeris proved he did not act willfully. The government has the burden of demonstrating by the preponderance of the evidence that the specific person was a responsible person; if it succeeds in doing so the burden shifts to the responsible person to prove that he or she did not act “willfully” in failing to make payment.[4]  

In this context, “willfully” refers to the voluntary, conscious, intentional use (or causing to be used) of funds withheld for payroll taxes for other purposes.[5] Willful conduct is demonstrated when the facts show that the officer in question elected to use money withheld for payroll tax purposes to pay vendors or other suppliers, even though the officer knew that there was an outstanding payroll tax obligation due the government. Willful conduct also can be deduced from a failure to investigate or correct mismanagement after being notified that an outstanding payroll tax obligation was due and outstanding. As the court noted, an officer with responsibility to assure payroll tax payment can not absolve himself of that responsibility by leaving it to another officer to fulfill; i.e. “buck passing” isn’t tolerated in this scenario. 

Here, the withheld taxes in question covered the first two quarters of 2003, when the interim CEO began his term of office. There was no dispute that (a) the hospital properly withheld the taxes; (b) the hospital failed to pay them over to the IRS; (c) the CEO knew of the delinquency; and (d) the CEO had the authority to draw on the hospital bank accounts, including those entitled “payroll” and “taxes,” even though he did not write or sign all hospital checks. Furthermore, it was determined that the CEO co-signed 57 checks on behalf of the hospital totaling over $2.9 million during a period of time the CEO knew the taxes to be delinquent.  

The district court found unpersuasive the hospital CEO’s arguments that the chief financial officer (CFO) was the executive officer in control of accounts payable and other payment decisions, and that the CFO reported to the president of the management company (and not to the hospital CEO). The undisputed facts made it clear to the court that, by signing the checks, the hospital CEO affirmatively decided to use the payroll tax funds to satisfy other creditors of the organization, knowing that the payroll tax obligation was due and owing. Even if the CEO did not make out the checks he ultimately signed (i.e., even given that the CFO “cut” the checks), the court’s view was that his (the CEO’s) signature was necessary to give the checks value and thus caused those checks to be used for purposes other than to pay payroll taxes. The court found particularly persuasive the CEO’s admission that he had the power to directly transfer hospital funds in order to satisfy payroll tax obligations and that he did so when the CFO was out of town. Just because the CEO generally left financial decisions to the CFO was not enough to absolve the CEO of his basic responsibility, especially given the fact that he had the authority to pay the taxes. 

Accordingly, the court concluded that the CEO was indeed a “responsible person” who had acted willfully in failing to pay over withheld payroll taxes during the relevant time period. The CEO was ordered to pay the outstanding amount of $1,935,204.33. 

Doulgeris should be read in connection with the recent Verret decision, as both serve as powerful reminders of the significance of the payroll tax issue. This is particularly the case in a recessionary environment, where financial officers may be hard-pressed to address accounts payable concerns. To be sure, liability for unpaid payroll taxes is not a “new” legal concept or theory; it has certainly “been on the books” for quite some time. What is new, and significant, is the fact that ensuring the timely withholding and payment of payroll taxes by not-for-profit employers has become an important compliance issue for the IRS. It is also clear that the ultimate responsibility for paying over outstanding taxes rests (at least in the mind of the IRS) in board leadership and the CEO. Regardless of which officer, from a day-to-day management perspective, is delegated payroll tax payment liability, and regardless of whether senior leadership knows that there were previous failures to pay, the IRS has little tolerance for efforts of senior leadership (including uncompensated board members) to absolve themselves of ultimate responsibility in this matter. 

The House Energy and Commerce Committee late July 31 cleared a comprehensive healthcare reform bill (H.R. 3200) in a 31-28 vote following negotiations to end a stalemate that had prevented the measure from moving to the floor before the August recess as originally planned.

Five Democrats and all Republican members of the Committee voted against the bill.

The America’s Affordable Health Choices Act of 2009 was crafted by the House Ways and Means, Energy and Commerce, and Education and Labor Committees. While both the Ways and Means and Education and Labor Committees cleared the measure, the bill stalled in the Energy and Commerce Committee over objections from the fiscally conservative Blue Dog Democrats. 

Last week, four of the Committee’s Blue Dogs struck a deal with House leaders that trimmed the cost of the bill by more than $100 billion and increased the small business exception to the “pay or play” employer mandate.

The deal also called for maintaining the public plan option, but allowing providers to negotiate rates directly, rather than tying them to Medicare payment rates.

The deal generated push back from liberal lawmakers, however, particularly over reductions in subsidy levels in the health insurance exchange for low-income individuals.

To address these concerns, during markup the Committee cleared two “unity” amendments that are intended to offset the subsidy cuts. All savings generated under the amendments would be applied to making premiums more affordable for low-income individuals in the health insurance exchange.

Under the first amendment, approved by a 32-26 vote, the public plan would use a formulary to control prices. The amendment also calls for expanding the accountable care organization pilot program in Medicare to Medicaid, subjecting pharmacy benefit managers to additional transparency requirements, and requiring CMS to simplify administrative procedures. 

The second amendment, approved by a vote of 32-23, would allow the Centers for Medicare and Medicaid Services to negotiate prescription drug prices under Medicare Part D.  

The amendment also requires governmental approval before insurers participating in the exchange may increase premiums over a certain level.

In addition, the Committee approved an amendment offered by Representative Anna G. Eschoo (D-CA) that creates a clear regulatory pathway for approving generic versions of costly biotech drugs and provides a 12-year period of exclusivity for the brand-name product.

The amendment cleared by a 47-11 vote despite the opposition of Committee Chairman Henry Waxman (D-CA). Waxman favors a shorter period of exclusivity and previously introduced a measure generally granting the original product five years of exclusive marketing. 

Meanwhile, Senate Charles E. Schumer (D-NY) said August 3 that Democrats have other “contingencies” available if the Senate Finance Committee, which is still working on a bipartisan healthcare reform bill, fails to reach an agreement by September 15, according to published reports.  

One of these contingencies would include using the budget reconciliation process to pass healthcare reform. Under reconciliation procedures, a bill could pass by a simple majority (51 votes) rather than the 60 votes needed to end a filibuster.  

Senator Mike Enzi (R-WY), one of the six Finance Committee members participating in the negotiations, said there was no mid-September deadline for bipartisan healthcare reform talks. 

“We’re making progress, but we still have several significant, outstanding items to work on. I won’t be moved by partisan threats to misuse the budget reconciliation process,” Enzi said in a statement.

Merck & Co. Inc., Schering-Plough Corp., and a joint venture between the two companies, Merck/Schering-Plough Pharmaceuticals (MSP), announced August 5 a $41.5 million settlement with class action litigants relating to the purchase or use of Vytorin and Zetia.

The settlement resolves over 140 class action suits regarding the safety and efficacy of Vytorin and Zetia based upon the results of the ENHANCE clinical trial.

The complete results of that trial were belatedly published in April 2008, although the study ended in May 2006.

In July, the companies reached an agreement with 36 state attorneys general under which they agreed to pay $5.4 million to resolve the states’ investigations of the manufacturers’ delayed release of negative clinical trial results.

The current settlement “will allow the companies to avoid continuing defense costs and remain focused on discovering, developing and delivering novel medicines and vaccines," said Bruce N. Kuhlik, executive vice president and general counsel of Merck.

Thomas J. Sabatino, executive vice president and general counsel of Schering-Plough Corporation, added that the company continues to “believe that VYTORIN and ZETIA in addition to a healthy diet can provide important benefits for physicians in helping their patients with high cholesterol reach their cholesterol goals."

Read the companies’ press release.  

The Medicare Secondary Payer Statute (MSP) does not permit a private individual to assert a qui tam action on behalf of the government, the Second Circuit held July 29, affirming the district court’s dismissal of an individual plaintiff’s claims against a Medicare carrier on behalf of the government.

Under the MSP, a plaintiff may only bring an action to recover a direct injury, the appeals court said.

Plaintiff Jack Woods sued Empire Health Choice, Inc., a Medicare carrier, alleging that Empire had failed to ensure that claims were paid by the applicable primary insurers instead of Medicare under the MSP, 42 U.S.C. § 1395y(b)(3)(A).

The complaint further asserted that Empire was liable under Section 1395y(b)(3)(A) for all amounts paid from Medicare funds for which Empire, as an insurer, was primarily liable.

The district court eventually dismissed the claim, finding Woods lacked standing because the MSP does not create a qui tam action allowing any private party to bring suit on behalf of the government to recover any amounts erroneously paid by Medicare instead of a primary insurer.

On appeal, Woods argued the district court erred in finding the MSP did not create a private right of action.

The appeals court first noted that Woods’ complaint alleged no direct injury to himself. Instead, the complaint asserted only that the government has "suffered substantial pecuniary injury as a result of Empire’s actions, depriving taxpayers of savings to which they are rightfully entitled."

The appeals court found that, even if it considered evidence belatedly proffered by Woods that Empire used Medicare funds to pay for his medical care, such evidence “clearly does not establish that he has suffered an equivalent injury from Empire’s failure to make payments on behalf of other individuals.”

Turning to Woods’ contention that Section 1395y(b)(3)(A) creates a qui tam right of action, the appeals court found this argument lacked merit.

“The distinct language of the MSP strongly indicates that the MSP allows a private party not to bring suit on behalf of the Government to remedy any wrongs done thereto, but rather to bring suit in the party’s own name to remedy the wrong done to it--namely the failure of a primary plan to make the payments required of it on behalf of the private party bringing the suit,” the appeals court found.

In addition, the MSP does not indicate that a private party will necessarily share any recovery with the government, the appeals court found.

“In light of this common feature of qui tam provisions, the MSP’s failure to even contemplate an automatic division of recovery and apparent requirement that the Government bring a separate suit to capture any portion thereof strongly indicate that a private party may bring suit under the MSP only to remedy its own injury,” the appeals court held.

The appeals court further noted that other circuits have also found the MSP does not create a qui tam cause of action.

Woods v. Empire Health Choice, Inc., No. 07-4208-cv (2d Cir. July 29, 2009).

A New Hampshire law requiring a $110 million transfer in supposedly surplus funds from the New Hampshire Medical Malpractice Joint Underwriting Association (JUA) to the state’s general fund is unconstitutional, a New Hampshire trial court held July 29. 

The decision blocks an initial $65 million transfer from the JUA, which was scheduled for July 31. The lawsuit was brought by present and past policyholders of the JUA, a state-created, but privately funded association intended to ensure physicians have access to medical malpractice insurance.  

In a statement, New Hampshire Governor John Lynch said the state would appeal the ruling.  

“We continue to believe the state’s intended use of these surplus funds is in the best interests of the people of New Hampshire and is consistent with the legislative intent in establishing the Joint Underwriting Authority and case law from other states,” Lynch said.  

According to Lynch, the JUA “was established—and given tax-free status as a state entity—in order to provide a service, not a windfall, to doctors.” 

State regulations require all insurers in the state to be members of the JUA. The JUA’s operating plan calls for members to pay a surcharge if the JUA lacks sufficient assets to cover claims. 

For example, in 1985 a 15% surcharge was assessed on all medical malpractice liability insurance sold in the state to cover a $45 million deficit.  

The JUA also provides for distributions of dividends of surplus funds, or reductions of future assessments, as approved by the JUA’s seven-member board. 

On June 24, 2009, the legislature passed an Act finding “the purpose of promoting access to needed health care would be better served through a transfer of excess surplus [in the JUA] to the general fund.”

The policyholders sought court intervention, arguing the proposed transfer was unconstitutional. 

The New Hampshire Belknap Superior Court agreed, finding the Act constituted a taking of property belonging to the JUA, its members, and policyholders and an impairment of their contract obligations in violation of the New Hampshire and U.S. Constitutions. 

The court rejected the state’s argument that the excess JUA funds belong to the state because the JUA is a state agency, noting the JUA is controlled by an independent board; is funded exclusively from assessments of members, premiums paid by policyholders, and investment earnings; and the JUA board and staff are not state employees. 

Next, the court held the Act created an unconstitutional taking of the policyholders’ property.  

“The specific property interest the policyholders claim in this case is a contractual and statutory/regulatory right to the beneficial interest in surplus JUA funds,” the court said.  

According to the court, this right was spelled out both in the language of the policy and in regulations establishing the JUA.  

Moreover, the court continued, “[t]aking JUA funds would decrease investment earnings which are important to the JUA’s ability to meet operating costs and malpractice claims.” 

The court also found the Act was unconstitutional because it impaired the obligations of contracts.  

The court noted the policyholders have a clear contractual relationship with the JUA and the proposed transfer is a “substantial impairment” of those contracts.  

“[N]ot only is the likelihood that the policyholders will receive a dividend decreased, but the likelihood that members and policyholders may be assessed to cover future liability is increased.”  

Tuttle v. New Hampshire Med. Malpractice Joint Underwriting Ass'n, Nos. 09-E-0148, 09-E-0151 (N.H. Super. Ct. July 29, 2009).

States immediately should begin preparing to implement health information technology (IT) and health information exchange (HIE) as they start instituting the federal Health Information Technology for Economic and Clinical Health (HITECH) Act, according to a new report by the State Alliance for e-Health.

The State Alliance is an executive-level body composed of governors, state legislators, attorneys general, and state commissioners, and was created by the National Governor’s Association (NGA) Center for Best Practices in 2006.

The report recommends actions states should undertake now to successfully implement the HITECH Act, including:

• Preparing or updating the state plan for HIE adoption;
• Engaging stakeholders;
• Establishing a state leadership office to manage the different phases of HIE implementation;
• Preparing state agencies to participate;
• Implementing privacy strategies and reforms;
• Determining the HIE business model;
• Creating a communications strategy; and
• Establishing opportunities for health IT training and education.

The role of states in modernizing healthcare will dramatically expand as the HITECH Act is implemented, the report said.

Under the HITECH Act, states will lead in two major ways, the report explained. First, by overseeing planning and deployment of HIE, including applying for and managing grant funds, and second, by managing the Medicaid incentive payments to providers and other eligible recipients.

View the report.

Insurers may use a “preferred hospital” network as part of a Medicare Supplemental Health Insurance (Medigap) policy 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 31.

The opinion requestors offer Medigap policies in the majority of the states and territories in which they are licensed to do insurance business.

The requestors have proposed to participate in an arrangement with one or more preferred provider organizations (PPOs) that would have contracts with hospitals nationwide under which the requestors’ Medigap policyholders would receive discounts of up to 100% on Medicare inpatient deductibles incurred at these hospitals.

Each requestor’s Medigap policy would pay the PPO a fee for administrative services each time one of its insureds receives this discount, OIG explained.

In addition, any policyholder that has an inpatient stay at a network hospital would receive a $100 premium credit against their next renewal premium.

The Proposed Arrangement “is a straightforward agreement by network hospitals to discount the Medicare inpatient deductible for the Requestors’ policyholders,” OIG said at the outset of its opinion.

While such agreements may implicate the Anti-Kickback Statute, OIG said, the proposed arrangement presents a low risk of fraud and abuse.

OIG noted in support of its finding that the waivers would not increase or affect per service Medicare payments; would not increase utilization; would not unfairly affect competition among hospitals; and would not likely affect professional medical judgment.

With respect to the premium credit, which implicates the Anti-Kickback Statute as well as the civil monetary prohibition on inducements to beneficiaries, OIG found it also presents a low risk of fraud and abuse.

Because the premium credit here is premised on a patient choosing a particular provider from a broader group of eligible providers, it falls within the prohibition, OIG explained.

However, there is a statutory exception for differentials in coinsurance and deductible amounts as part of a benefit plan design, if the differential has been properly disclosed to affected parties and otherwise meets any requirements of corresponding regulations, the opinion said.

“While the premium credit is not technically a differential in a coinsurance or deductible amount, it will have substantially the same purpose and effect,” OIG found.

Accordingly, OIG concluded it would not impose administrative sanctions under either the Anti-Kickback Statute or the prohibition on inducements to beneficiaries.

Advisory Opinion No. 09-10 (Dept. of Health and Human Servs. Office of Inspector Gen. July 24, 2009).

As the unemployment rate has crept up closer to double digits, the number of people who lost health insurance coverage has grown by 5 million, according to a recent report by the Henry J. Kaiser Family Foundation. 

The report, Rising Health Pressures in an Economic Recession: A 360 Look at Four Communities, examines the impact of the recession on four American cities (East Meadow, NY; Clearwater, FL; Santa Rosa, CA; and Beloit, WI) with respect to health coverage and access to care.  

Researchers found the current economic downturn “highlights wide gaps” in the healthcare system, particularly for adults who cannot afford COBRA, are ineligible for public coverage, and are precluded by high premiums and/or preexisting conditions from obtaining private coverage. 

At the same time, the existing safety net is “increasingly fragile” and not able to fill the coverage gaps.  

“[W]ithout reforms to broaden Medicaid eligibility, millions of low-income adults with no access to other coverage will remain uninsured,” the report said.  

Even with healthcare reform, “[m]ore immediate steps may be needed to assist Americans who lack access to affordable health coverage and care,” the report concluded.  

Read the report.

Senate Commerce, Science and Transportation Committee Chairman John D. Rockefeller, IV (D-WV) is seeking more information from CIGNA about allegations that it “purges” small businesses whose employees have serious medical problems. 

In an August 3 letter to CIGNA Chief Executive Officer H. Edward Hanway, Rockefeller noted conflicting reports about whether the company engages in the practice. 

According to the letter, CIGNA’s director of corporate communications denied that the company purges small businesses' group health accounts, but other information suggested otherwise. 

For example, Rockefeller pointed to recent testimony from a former CIGNA chief spokesperson, who retired in 2008, that insurers frequently dump small businesses when medical claims exceed underwriters’ expectations. 

Rockefeller also cited a recent CIGNA investor teleconference, saying company executives indicated the company is “actively” decreasing its presence in several markets, “particularly the under 50 book of business.” 

Given these statements, Rockefeller said he found it “hard to believe that CIGNA denies engaging in this practice.” 

Rockefeller asked the company to respond by August 19. 

Read the letter.

The Sixth Circuit affirmed July 30 the dismissal of claims brought by several hospitals alleging the Department of Health and Human Services Secretary’s regulating implementing a 1997 amendment to the Medicare Act that reduced bad debt reimbursement violated the prohibition on cross-subsidization. 

The appeals court found the two provisions were not at odds and held the statutory text was clear on its face in not allowing the exception sought by the hospitals.

Plaintiff hospitals provide services to patients under both Medicare and Medicaid. They alleged that the Secretary's regulation implementing Congress’ 1997 amendment to the Medicare Act, which provides a percentage reduction of the amount of bad debt that would be reimbursed by Medicare, was invalid.

Under the amendment, providers can make up for the remaining loss by continuing collection efforts against Medicare beneficiaries, except when the beneficiaries also are covered by Medicaid, as the Medicaid Act disallows such efforts.

However, because the Medicare Act also states that the Secretary will promulgate regulations to ensure the costs of Medicare will not be borne, or cross-subsidized, by individuals not covered by Medicare, plaintiffs alleged the regulation violated the Medicare Act’s cross-subsidization ban.

From 1998 through 2000, each hospital filed a Medicare cost report that included qualified Medicare beneficiary (QMB) bad debt. The fiscal intermediaries found the bad debt was an “allowable” reasonable cost of services provided, but only reimbursed a portion of the bad debt at the percentages set out in 42 C.F.R. § 413.89(h)(1).

After the Provider Reimbursement Review Board granted expedited judicial review, the district court granted summary judgment in favor of the Secretary and plaintiffs appealed.

On appeal, the Third Circuit found the hospitals were not entitled to the relief because the statutory scheme is clear on its face and provides no exceptions to the bad debt reimbursement reduction for QMB bad debt.

The bad debt reimbursement reduction can be viewed as an overall reduction in payment rates for patients who are covered under both Medicare and Medicaid, which does not violate the cross-subsidization ban at 42 U.S.C. § 1395x(v)(1)(A), the appeals court held.

Congress’ decision to limit bad debt reimbursement may be characterized not as cross-subsidization, but simply as a setting of Medicare payment rates closer to Medicaid payment rates, the appeals court explained.

“Our analysis begins and ends with the statute, because the provisions at issue are clear,” the appeals court said.

Even if the statutory provisions were at odds, the appeals court continued, the bad debt reimbursement reduction provision would govern as it is a more specific policy than the ban on cross-subsidization, which is an over-arching provision that generally guides the Secretary in promulgating regulations regarding reasonable costs for which providers will be reimbursed.

Detroit Receiving Hosp. and Univ. Health Ctr. v. Sebelius, No. 08-1920 (6th Cir. July 30, 2009).

Plaintiffs suing their insurance company alleging violations of the Medicare Act must first exhaust administrative remedies, the Third Circuit said July 29 in a non-precedential opinion.

Because the plaintiffs did not first obtain a final agency ruling, the district court properly dismissed their claims, the appeals court held.

Plaintiffs Isadore and Dorothy Kopstein participate in Independence Blue Cross’ (IBC’s) “Personal Choice 65,” a program providing elderly individuals health insurance and prescription drug benefit coverage through Medicare.

The Kopsteins sued IBC, alleging it intentionally provided misleading information on their benefits related to Medicare Part D’s so-called “donut hole” coverage gap.

Specifically, plaintiffs alleged IBC “knowingly included the entire cost of their contribution in plaintiffs’ $2,200.00 initial coverage, forcing them to incur expenses of $2,577.00 above what was necessary”; and that IBC “insisted that [plaintiffs] pay $3,850.00 while in the coverage gap (donut hole) . . . in direct violation of Medicare rules that clearly state ‘the most you have to pay out-of-pocket in the coverage gap (donut hole) is $3,051.25.’”

IBC removed the case to federal court. The district court then granted IBC’s motion to dismiss the Kopsteins’ amended complaint for failure to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6).

On appeal, the Third Circuit noted “the sole avenue for judicial review” for claims arising under the Medicare Act is through 42 U.S.C. § 405(g).

That section requires a plaintiff to first exhaust all administrative review channels before proceeding in district court, the appeals court explained.

Here, plaintiffs did not obtain a final agency ruling on their claims, instead they contended their particular claims were not of the type that may proceed through the Medicare Act’s administrative review channels.

“However, the Kopsteins have provided no support for the argument that administrative review of their particular claims did not exist or was not available, and based upon our review of the record, we cannot reach such a conclusion,” the appeals court said.

Because a final agency ruling is a prerequisite to federal jurisdiction over Medicare Act claims, the district court properly dismissed the plaintiffs’ claims, the appeals court held.

Kopstein v. Independence Blue Cross, No. 09-1232 (3d Cir. July 29, 2009).

• Three Miami residents—Alejandro Gonzalez, Robert Rodriguez, and Manual Camacho—pled guilty to charges of conspiracy to defraud the Medicare program through HIV-infusion therapy clinics, announced Acting U.S. Attorney for the Southern District of Florida Jeffrey H. Sloman on July 31. According to court documents, over a three-year period Gonzalez and Rodriguez established these medical clinics around South Florida, but no treatments were ever rendered to patients, and instead patients received a kickback for signing-in at a clinic. Over the course of the scheme, Gonzales and Rodriguez billed Medicare for approximately $40 million, of which Medicare paid $12 million. Camacho participated in the scheme by engaging in money laundering on behalf of the other defendants. Read Sloman’s press release. 

• Another Miami resident, Carlos A. Fernandez, was convicted by a federal jury on charges of Medicare fraud in relation to the operation of a durable medical equipment (DME) company, Acting U.S. Attorney Sloman also announced July 31. According to evidence presented at trial, over a three-year period, Fernandez submitted fraudulent claims through his DME company to Medicare, including for beneficiaries that had no physician prescription for the DME billed, and for deceased beneficiaries. In total, Fernandez fraudulently billed Medicare over $3.8 million and received over $800,000. Read Sloman’s press release.

• Dr. Lalit Savla and Alan Perl were indicted on charges of conspiracy to commit insurance fraud totaling over $80,500 in the operation of a medical facility, announced Massachusetts Attorney General Martha Coakley on August 6. According to state investigators, on various dates over a two-year period, Dr. Salva and Perl perpetrated a scheme in which they fraudulently billed insurance companies for treatment administered by unlicensed and untrained individuals at Perl’s rehabilitation and treatment center. Perl allegedly billed six different insurance companies and two healthcare plans, claiming that Dr. Salva treated patients that he never saw. In addition, Perl admitted to examining and administering treatments to patients despite the fact that his medical license had been revoked since 1998. Read Coakley’s press release.

• Christopher Lillo, a dentist practicing in Orange County, NJ, pled guilty to defrauding the Medicaid program out of more than $75,000, New Jersey Attorney General Anne Milgram announced. Lillo admitted that, over a six-year period, he fraudulently billed Medicaid, and as a result, his dental practice received over $300,000 to which it was not entitled. Lillo had contracted with Medicaid to provide “mobile” dental services in various nursing homes and assisted living facilities. As part of his guilty plea, Lillo agreed to pay restitution and a civil penalty totaling over $275,000.  Read Milgram’s press release.

The Department of Health and Human Services (HHS) incorrectly interpreted a regulation governing whether certain residents involved in educational research may be included in the indirect medical education (IME) full-time equivalent (FTE) residents count, the U.S. District Court for the Northern District of Illinois held August 3.

In so holding, the court said the term “portion” in the relevant regulation clearly has a geographic meaning and does not refer to the function the resident is performing, as the Secretary argued.

The plaintiff, the University of Chicago Medical Center, sued HHS Secretary Kathleen Sebelius, alleging that the Secretary improperly calculated the hospital’s Medicare payments for fiscal year 1996 by excluding residents involved in educational research from the IME FTE residents count.

Both parties moved for summary judgment. The court first explained that under the regulation at issue, 42 C.F.R. § 412.105(g)(1), in order for a resident to be included in Medicare’s IME payment, two requirements must be met: (1) the resident must be enrolled in an approved teaching program, and (2) the resident must be assigned to a "portion" of the hospital subject to the prospective payment system (PPS).

The court noted that, while the hospital contended the term “portion” unambiguously refers to a geographical location within a hospital, the Secretary argued that “portion” unambiguously refers to a function a resident is performing within a hospital, regardless of that resident’s physical location.

However, the court found the meaning was clear in the regulation using common rules of statutory construction. “The Secretary’s interpretation of the regulation does not persuade this Court because, as the Hospital correctly contends, the term ‘portion’ unambiguously refers to a geographical location,” the court held.

Moreover, the court found its holding that the term “portion” has a geographical definition comports with the Seventh Circuit’s decision in Rush University Medical Center, 535 F.3d 735 (7th Cir. 2008).

The court noted further support for its finding from the fact that the Secretary’s Medicare Intermediary Manual never advised the auditors to investigate a resident’s function.

“If the Secretary had in fact been applying a functional definition in 1996, the Secretary’s own fiscal intermediary and auditors would have been aware of a need to investigate a resident’s function,” the court commented.

The court turned next to the Secretary’s argument that a resident’s research must directly relate to a patient’s care in order for the resident to be included in the hospital’s IME FTE resident count.

The court found no such requirement mandated by the regulation, noting “the regulation makes no mention of a direct patient care limitation on research.”

“Thus, the finding of a direct patient care requirement in the 1996 regulation would require this Court to read in language that does not appear either on the face of the regulation or in the manifest intentions of the Secretary at the time of the regulation’s promulgation,” the court said.

University of Chicago Med. Ctr. v. Sebelius, No. 07 CV 7016 (N.D. Ill. Aug. 3, 2009).

A federal district court in New Jersey upheld July 17 the Department of Health and Human Services Secretary’s decision not to permanently increase a teaching hospital’s full-time equivalent (FTE) count after displaced residents from another hospital that closed were transferred to its program. 

In an unpublished decision, the court found under the Balanced Budget Act of 1997 (BBA) the Secretary was not empowered to increase a hospital’s base-year FTE count unless the hospital was part of the same affiliated group, in which case the cap could apply on an aggregated basis. 

Here, the closing hospital did not sign the agreement to redistribute its residents and it was no longer in existence; thus, there could not be sharing of residents among affiliated hospitals for purposes of aggregating the cap as defined in agency regulations.  

In 1997, United Hospital declared bankruptcy and permanently closed. United had 49.5 full-time equivalent (FTE) residents rotating through its facility as part of the University of Medicine and Dentistry of New Jersey’s (UMDNJ) residents training program. 

UMDNJ ultimately reassigned those displaced residents to several other hospitals including Hackensack University Medical Center. 

These hospitals entered into an agreement under which Hackensack was allocated 12 of the 49.5 positions. Hackensack then sought to permanently increase its number of FTEs by 12.  

The BBA “caps” 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 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 “[T]wo or more hospitals located in the same urban or rural area . . . or in contiguous areas if individual residents work at each of the hospitals during the course of the program.” 42 C.F.R. § 413.86(b)(1) (1998). 

Because United was now closed, Hackensack’s intermediary found there was no affiliation agreement under the regulatory definition and did not allow a permanent increase to the hospital’s fiscal year 1996 base cap.  

The intermediary subsequently granted Hackensack a temporary adjustment of 4.74 FTEs for indirect medical education costs and 4.38 FTEs for direct graduate medical education costs for accommodating United’s residents in fiscal year 1998.  

The Provider Reimbursement Review Board (PRRB) affirmed the intermediary’s decision, noting it was impossible for residents to work at each of the hospitals under an affiliation agreement because one of the facilities, i.e. United, was closed.  

The PRRB also sustained the intermediary’s methodology for calculating the temporary adjustment to Hackensack’s fiscal year 1996 cap. After the Centers for Medicare and Medicaid Services Administrator declined to review the PRRB decision, Hackensack filed an action in federal district court.  

The U.S. District Court for the District of New Jersey granted summary judgment in the Secretary’s favor. 

The court held the Secretary’s “decision to forego a permanent exception to the resident ‘cap’ imposed by the BBA is consistent with the statutory purpose of the ‘cap,’’ i.e., to reduce costs by limiting the number of residents on a national and facility level that are reimbursed by Medicare.  

Moreover, granting a permanent increase would exceed the authority delegated to the Secretary under the BBA.  

The court also noted the Secretary had broad discretion over determining when the exception to the cap would apply for hospitals that share residents. 

Here, the agreement was not to share residents, only to send the residents from United to Hackensack on a permanent basis.  

“This results in the same effect as trading or selling residency positions from United to Hackensack, which is expressly forbidden by the BBA,” the court said.  

Finally, the court upheld the methodology used to calculate the temporary increase in Hackensack’s FTE count. According to the court, the PRRB made its decision based on available information and explained how it reached the result it did.  

The U.S. District Court for the Western District of Oklahoma held July 10 that a hospice provider had standing to challenge a regulation implementing a statutory cap on Medicare payments. 

While the government argued the court lacked subject matter jurisdiction because plaintiff Compassionate Care Hospice failed to exhaust the administrative process, the court disagreed. 

“[T]here can be no exhaustion requirement for the challenge to the validity of the regulation and whether it comports with Congressional intent,” the court said.  

Plaintiff Compassionate Care Hospice instituted the action after Medicare made a demand for return of overpayments for fiscal year 2006 based on the regulatory cap, 42 C.F.R. § 418.309(b). 

Plaintiff had presented its claims to the Provider Reimbursement Review Board (PRRB) but the PRRB refused to consider them, saying it lacked the authority to grant the requested relief—i.e., to invalidate the regulation. 

Defendant, the Department of Health and Human Services Secretary, argued that without a final agency decision, plaintiff had not exhausted the administrative process and therefore could not show an “injury in fact.”  

But the court found plaintiff had suffered a concrete and imminent injury—the demand that it repay more than $700,000—directly traceable to Medicare’s application of Section 418.309(b). 

Moreover, the court held plaintiff’s injury was redressable by a favorable court decision. “Here the injury is application of the allegedly invalid regulation. Were the Court to hold the regulation invalid, there would be no application and hence no ‘injury.’” 

The regulation has been the subject of nationwide litigation by other hospice providers as well. 

Although the court here did not address the merits of plaintiff’s challenge, a California federal district court recently held the regulation was invalid, saying it ran counter to the clear congressional directive for calculating the annual provider cap. Los Angeles Haven Hospice, Inc. v. Sebelius, No. CV-08-4469 (C.D. Cal. July 13, 2009), see Health Lawyers Weekly, vol. VII, no. 29 (July 24, 2009).