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Feb 22, 2011

Health Care Update - Winter 2011

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National News

Medicare Reimbursement Cut Averted

On December 15, 2010, President Obama signed the Medicare and Medicaid Extenders Act of 2010 which provides a one year delay in the implementation of the Sustainable Growth Rate (SGR) Formula for Medicare funding. Absent this “fix,” implementation of the SGR would have resulted in a 25% reduction of Medicare program reimbursement to physicians, effective as of January 1, 2011. This is the fifth time Congress has acted to delay implementation of the SGR. The legislation also extends other expiring Medicare and Medicaid payment provisions, makes additional clarifications and adjustments to both programs and changes the limits on the amount of excess health insurance tax credits that must be repaid to the federal government. Congress has now delayed addressing the SGR five times and no permanent solution is on the horizon.

Federal District Judge Strikes Down PPACA

On January 31, 2011, a federal district court judge in Pensacola, Florida ruled that the individual mandate in the Patient Protection and Affordable Care Act (PPACA) is unconstitutional. The judge further ruled that this provision was not severable, and therefore struck down the entire law, although his ruling stopped short of halting the operation of PPACA going forward. This is the second federal district court judge to find the individual mandate component of PPACA to be unconstitutional (although the first, a district court judge in Virginia, upheld the remainder of the law). Previously, two other federal judges upheld the individual mandate as constitutional. These conflicting decisions are setting up what many expect to be an eventual Supreme Court hearing on the constitutionality of the individual mandate.

The individual mandate, which requires individuals to either purchase health insurance coverage or pay a tax, is effective in 2014. While the individual mandate only makes up a portion of the legislation, it is considered essential to the overall effectiveness of the health insurance exchanges. Additionally, because this provision is not “severable” from the remainder of the legislation, a ruling against the individual mandate could potentially overturn PPACA entirely.

On the legislative front, congressional Republicans have intensified efforts to “repeal and replace” PPACA. In mid-January, House Republicans voted to repeal PPACA, but Senate Democrats are not expected to take up the Bill. Congress is, however, expected to repeal or modify small portions of the legislation, or refuse to appropriate funding for certain components. For instance, President Obama called on Congress to repeal the expanded 1099 reporting requirement, which would require businesses to issue a Form 1099 to any person or corporation providing goods or services in excess of $600. Two separate bills are currently working their way through Congress to eliminate the new 1099 requirement.

Health Reform Spurs Provider Consolidation

As discussed in a recent New York Times article 1 , there has been a significant increase in merger and acquisition activity involving health care providers. As a general matter, for providers to avail themselves of the various financial incentives contained in the health care reform legislation, as well as to alleviate the future impact of reimbursement cuts, health care providers have been looking at consolidation as a means to share costs and savings. Hospitals have taken the lead in terms of mergers, as well as the acquisition of physician practices. In each circumstance, the transaction must be structured in compliance with the fraud and abuse and tax laws and in particular, consideration given must be consistent with the fair market value. Fair market value is commonly determined through engagement of a third party valuation firm. It is essential that the consideration be found to be fair market value in an arms-length transaction and consistent with general market value, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals. Similarly, under the tax-exempt rules, total compensation must be reasonable and the transaction must serve the business purposes of the charitable organization, if applicable. The transaction must also be structured to comply with applicable safe harbors and exceptions under the Anti-Kickback Statute and the Stark Amendment. Special attention needs to also be given to market power and antitrust concerns. As discussed below, the FTC has been actively looking at market power in light of the recent consolidation of health care providers.

New Disclosures for In-Office Imaging

Effective January 1, 2011, new federal law and revised CMS rules have amended the “in-office ancillary services” exception to the federal physician self-referral prohibitions (the “Stark Law”) that will impact all medical practices that refer patients for magnetic resonance imaging (MRI), computed tomography (CT) and positron emission tomography (PET) to the extent such services are rendered in the referring physician’s office. Specifically, physicians must now advise patients receiving such imaging referrals that the services can be provided elsewhere and provide the patient with a written list of at least five alternate suppliers of such services within a 25 mile radius of the physician’s office location. Such disclosure must be made to the patient at the time of referral for each imaging service, rather than a single disclosure to cover all imaging services that the patient may receive on a going forward basis. Failure to make appropriate disclosure can lead to a violation of the Stark Law, which will result in repayment of amounts collected, imposition of monetary penalties and potential False Claims Act liability.

Importantly, this requirement only applies to the extent the physician makes a referral for MRI, CT and/or PET Services within the physician’s own office and that the physician makes such a referral in reliance on the Stark Law exception. That requirement does not apply where there is no “referral,” as defined in the Stark Law, or the referral is to an outside supplier. For example, the disclosure requirement would not apply to a radiation oncologist’s request for radiation therapy or other ancillary services necessary or integral to the provision of radiation therapy because such a request does not constitute a “referral” under the Stark Law.

No specific form of disclosure is required. At a minimum, however, the listing must include the name, address and phone number of each alternate supplier, and the list should be updated at least annually to ensure accuracy. If there are fewer than five alternate suppliers within a 25 mile radius of the physician’s office location, the disclosure must list all suppliers present within such radius and if no alternate suppliers exist within the radius, the physician must still disclose that the patient has the option to receive the referred services elsewhere. Although hospitals can be listed as alternate providers of the service, they do not count towards the required five listings. It is important that the medical practice maintain a copy of its disclosure in the patient’s medical record, in order to enable to demonstrate compliance with the disclosure rule. Physician practices that make such referrals will need to develop procedures and forms to comply with these requirements.

Ordering/Referring Edits on PECOS

At this time, the Centers for Medicare & Medicaid Services (CMS) has not turned on the automated edits that would deny claims for services that were ordered or referred by a physician or other eligible professional because such provider is not in an approved file in PECOS (the Medicare online enrollment system). CMS is working diligently to resolve the backlog of enrollments and other systems issues. It will provide ample advance notice to the provider and beneficiary communities before CMS begins any such automatic denials. CMS has not announced a definitive date when ordering/referring edits will be turned on.

Physicians or other eligible professionals not currently enrolled in PECOS should take the initiative to enroll sooner rather than later. Once CMS turns on this edit function, claims will be denied if a provider is not in PECOS. To verify that you have an enrollment record in PECOS:

  • Check the Ordering Referring Report on the CMS website, available here. If you are listed on that report, you have a current enrollment record in PECOS.
  • Use Internet-based PECOS to look for your PECOS enrollment record, available here. If no record is displayed, you do not have an enrollment record in PECOS.
  • Check TrailBlazer Web site verification options, click here.

If you are not yet in PECOS, the best way to submit your application is through internet-based PECOS.

FTC Seeks to Unwind Hospital Acquisition

The Federal Trade Commission (FTC) recently filed an administrative challenge to an already consummated acquisition of St. Luke’s Hospital by ProMedica Health System. The challenge seeks divestiture of all assets acquired by ProMedica and the restoration of “two separate, viable and independent businesses.” The FTC’s complaint alleges that the acquisition gives ProMedica market power in Lucas County, Ohio, with respect to general acute care inpatient services and obstetrical services. The FTC alleges ProMedica is likely to use its market power to raise reimbursement rates above competitive levels. In addition, the FTC claims that the acquisition will decrease the quality of hospital services in the market. In a press release, ProMedica claims the “joinder” is a response to health care reform and will enhance the clinical and service line integration required by recent health care reform and that the FTC’s action is inconsistent with those reform initiatives. This case is an important example of the potential risks associated with the active hospital merger and acquisition market, which has experienced dramatic consolidation following the passage of health care reform. However, despite this trend, the FTC will continue to closely scrutinize those mergers and acquisitions that result in market power, regardless of the health care reform incentives associated with consolidation.

No “Categorical” Prohibition Against “Combined” FLSA Collective and Rule 23 Class Actions

The Seventh Circuit ruled yesterday in Ervin v. OS Restaurant Services, Inc., Case No. 09-3029 (Jan. 18, 2011), that “there is no categorical rule against certifying a Rule 23(b)(3) state-law class action in a proceeding that also includes a collective action brought under the FLSA. In reaching this decision, the Court addressed only the narrow issue of whether these two forms of collective and class actions are so incompatible “that plaintiffs trying to pursue both options in a single proceeding will never be able to demonstrate superiority required by Rule 23(b)(3). In a ruling of less significance than the plaintiffs’ bar is likely to argue, the Court answered this question in the negative. This is the first and only court of appeals to reach this issue, and the district courts in the Seventh and other circuits are divided on the result.

In ruling on the plaintiffs’ motion for conditional certification under the FLSA and class certification under Rule 23 on the Illinois state wage and hour claims, the district court adopted the recommendation of the magistrate judge and decided that, as a matter of law, plaintiffs’ could not meet their burden of persuasion in establishing superiority under Rule 23(b)(3) where an FLSA collective action has been certified. The Seventh Circuit, contrary to the lower court, found that the FLSA’s opt-in procedure, as distinguished from Rule 23’s opt-out mechanism, does not necessarily “rule[] out any chance of finding that class treatment under Rule 23(b)(3) is a superior way to structure the case.”

The Court based this finding on several factors. First, the Court rejected the district court’s application of congressional intent and, instead, focused on the text of the FLSA, which it decided does not suggest a conflict between an FLSA collective action and a Rule 23 class action. The absence of express language in the federal statute combined with the Savings Clause and the Seventh Circuit’s view of legislative history, led the Court to the conclusion that “[t]here is ample evidence that a combined action is consistent with the regime Congress has established in the FLSA.” Second, the Court rejected Outback’s argument that a combined opt-in FLSA notice and opt-out class notice is confusing to class members. The Seventh Circuit explained: (1) requiring potential participants to make two discrete choices is not asking “too much” of them; (2) there is no actual evidence that a combined notice is confusing; and (3) two separate lawsuits in two separate forums would be far more confusing.

Finally, distinguishing this case from DeAsencio v. Tyson Foods, 342 F.3d 301 (3d Cir. 2003) (holding that in a combined action, the district court should not have exercised supplemental jurisdiction over parallel state wage and hour law claims), the Seventh Circuit ruled that supplemental jurisdiction over state law claims is proper in cases like this, where the state law claims are closely related to the FLSA collective action and “the disparity between the number of FLSA plaintiffs and the number of state-law plaintiffs is not enough to affect the supplemental jurisdiction analysis.”

While employers surely would have preferred a different result, the Ervin decision does not dramatically impact the defense of “combined” lawsuits. In the Seventh Circuit, employers are unlikely to prevail on a motion to dismiss a Rule 23 state-law claim supplementing an FLSA collective action. However, the narrowness of the Court’s ruling does nothing to lessen the plaintiffs’ burden under Rule 23(b)(3) of establishing that a class action is a superior method of adjudication. In the context of a parallel FLSA collective action, defendants should continue to argue aggressively that plaintiffs cannot meet that burden. On remand, the Court of Appeals has left open this issue, allowing the defendant to do just that.

Hospital’s Contractual Right to Terminate a Physician Does Not Require Due Process

By taking certain precautions, a county hospital can dramatically reduce the risk of possible liability for terminating an independent contractor physician’s contract to provide emergency room services. That seems to be the primary message of a recent Eighth Circuit Court of Appeals decision.

A county hospital in Monticello, Arkansas entered into a contract with a professional services corporation (the “Corporation”) for staffing the emergency room. The Corporation then executed separate independent contractor agreements with physicians to provide ER services. Thus, the physicians had no direct contractual relationship with the hospital. Both contracts provided that the hospital had an unqualified right to remove ER doctors and stated that removal “is not subject to the review provisions in the Medical Staff Bylaws.”

Dr. Schueller was an emergency room physician at the hospital who had entered into an independent contractor agreement with the Corporation. Allegedly as a result of patient complaints about him, the hospital exercised its peremptory right to remove him. He sued the hospital for deprivation of his property (his supposed right to practice medicine at the hospital) without “due process” and for tortious interference with his contractual relations. Summary judgment was entered for the hospital and was affirmed on appeal. The appellate court ruled against the physician because he was not a party to a contract with the hospital, and because both the hospital’s contract and his with the Corporation stated expressly that removal was at the sole discretion of the hospital. Schueller v. Goddard, No. 09-3047 (8th Cir., Feb. 1, 2011)

The lesson of this case is that a public hospital apparently can minimize the risk of litigation over the propriety of removing an independent contractor physician’s privilege to practice at the hospital by the simple expedients of (a) contracting with a separate entity to provide doctors who have entered into an agreement with that entity rather than with the hospital directly, and (b) making sure that the documents contain appropriate exculpatory language. Although the decision relates to a public hospital, the reasoning probably is applicable to private hospitals as well (while “due process” ordinarily is not required when a non-governmental body terminates a contract, a court might deem a hospital’s receipt of federal and state funds to result in imposition of that obligation). The recent case does not deal with the permissibility of removal of a physician in violation of employment discrimination laws or with the question of whether it would be actionable if the termination was the result of a conspiracy among doctors practicing at the hospital to eliminate a competitor.

1 “Consumer Risks Feared as Health Law Spurs Mergers”, New York Times (November 20, 2010).