Health Law Alert

Fall/Winter 2003

From the Chair

By: Sanford V. Teplitzky

How ironic is it that Washington, DC, a place that much of the rest of the country believes has been in the dark for years, was not part of the "great blackout of 2003"? Notwithstanding the inability of federal regulators to communicate with much of the northeastern part of the country, life went on — until Hurricane Isabel imposed a filibuster on the entire federal government. Seriously, we commend the many health care providers throughout the affected areas who reacted quickly during both crises to ensure the health, safety, and welfare of those Americans for whom they are responsible.

This issue of the Health Law Alert includes the latest developments, guidance, and issuances from CMS and the OIG. We also address a variety of additional issues relating to long term care, compliance, privacy, reimbursement, tax, drug resales to hospital workers, and the federal False Claims Act.

Contractual Joint Ventures Scrutinized Anew

By: Patrick K. O'Hare

The OIG issued a Special Advisory Bulletin on April 23, 2003 (the "Bulletin") aimed at what the OIG termed "suspect contractual joint ventures." See 68 Fed. Reg. 23,148 (Apr. 30, 2003). The OIG defines these ventures as those which exhibit certain characteristics not uncommon in today's health care environment: a referral stream controlled by the provider initiating the joint venture; the use of a wholly owned subsidiary of the provider to bill and collect for the supplies or services provided to these patients; and an outsourcing management arrangement designed to shift designated business responsibilities to the manager. In a nutshell, the OIG takes the view that the contractual arrangement with the manager (usually an existing health care entity) implicates, and may well violate, the federal antikickback statute. The OIG's position is difficult to justify logically and legally, and leaves numerous unanswered questions for providers participating in contractual joint ventures as well as for those conducting business through wholly owned subsidiaries.

OIG Tackles Discount Issues

By: Robert E. Mazer

The Medicare and Medicaid discriminatory billing prohibition, enacted originally in 1972, provides for the potential exclusion from any federal health care program of an individual or entity which "has submitted or caused to be submitted bills or requests for payments ...[under Medicare or Medicaid] containing charges ...for items or services furnished substantially in excess of such individual's or entity's usual charges ..., unless the Secretary finds there is good cause...." Application of this prohibition has always been uncertain. The level of uncertainty increased dramatically after the marketplace required hospitals and other health care providers to accept payments from insurers and managed care organizations that were substantially less than Medicare and Medicaid payment amounts. Additionally, "charges" - the principal focus of the statutory prohibition - became far less relevant in the determination of third-party payments, which were limited increasingly by fee schedules. The OIG has issued a notice of proposed rulemaking that attempts to reconcile these changes with the long-standing Medicare/Medicaid discriminatory billing prohibition and provides for federal programs to share benefits from negotiated discount arrangements. 68 Fed. Reg. 53,939 (Sept. 15, 2003).

Beware of Misuse of "Medicare" in Marketing Practices

By: Jacqueline C. Baratian*

On April 8, 2003, the OIG issued an Alert cautioning the health care industry that it is a violation of federal law (42 U.S.C. § 1320b-10) for individuals or organizations to misuse HHS departmental words, symbols or emblems to market their services. The OIG issued the Alert in light of what it termed an egregious violation of the prohibition by U.S. Seminar Corporation (U.S. Seminar), a La Mesa, California, company offering Medicare reimbursement and coding seminars.

Over the past 15 years, the OIG has issued approximately 30 cease-and-desist letters to various companies suspected of misusing HHS or Medicare words or symbols in their marketing practices. The overwhelming majority of recipients immediately comply with those letters, allowing for informal resolution of the matter. Those who do not comply with the cease-and-desist letter may find themselves the recipients of an OIG demand letter, which initiates a formal administrative proceeding.

OIG States Position on DME Telemarketing

By: William T. Mathias

In March 2003, the OIG issued a special fraud alert addressing telemarketing by DME suppliers. 68 Fed. Reg. 10,254 (Mar. 4, 2003). The primary purpose of the special fraud alert was to call attention to the statutory prohibition against DME suppliers making unsolicited telephone calls to Medicare beneficiaries regarding the furnishing of covered items. 42 U.S.C. § 1395m(a)(17).

Specifically, federal law prohibits DME suppliers from making unsolicited telephone calls to Medicare beneficiaries regarding the furnishing of covered items, except in three situations: (1) the beneficiary has given written permission to the supplier to make contact by telephone; (2) the contact is regarding a covered item the supplier has already furnished the beneficiary; or (3) the supplier has furnished at least one covered item to the beneficiary during the last 15 months. The law expressly prohibits payment to a DME supplier who knowingly submits a claim generated by a prohibited telephone solicitation.

OIG Advisory Opinions

By: William T. Mathias and Christine M. Morse

No. 03-01: Physician Employment Does Not Violate Exclusion

On January 13, 2003, the OIG issued an advisory opinion analyzing whether the employment of a physician was permitted under the physician's exclusion from Medicare, Medicaid, and other federal health care programs. The OIG concluded that the employment of the physician was acceptable based on the facts of the particular case.

In November 2000, a physician surrendered his state license to practice medicine after a complaint was filed against him. Based on the surrender of his license, the OIG excluded the physician from federal health care programs effective March 20, 2001.

Final Outlier Rule to Curb Abuses

By: Carel T. Hedlund

With record speed, CMS has published a final rule to change the way in which outlier payments are determined. 68 Fed. Reg. 34,494 (June 9, 2003). The rule finalizes, with some modification, the CMS proposal published on March 5, 2003 in response to perceived abusive charging practices by some hospitals that caused the outlier threshold to skyrocket from $14,500 in FY 2000 to $33,560 in FY 2003, with the result that fewer hospitals qualified for outlier payments. [For more background on the outlier issue, please refer to Ms. Hedlund's article, "CMS Clamps Down on Outlier Payments," which appeared in the Spring/Summer 2003 Health Law Alert.]

Outlier payments are designed to pay for high-cost cases, when the cost of the case exceeds a certain threshold. Of course, the actual cost of a case will not be known until the hospital's cost report is filed and settled several years later. To bridge the gap, the outlier methodology calculates a hospital's "cost" for a case by using the hospital's current charges on the submitted bill multiplied by the hospital's ratio of costs to charges (RCC) from a prior cost report. CMS believes that some hospitals have dramatically increased their charges in order to have a higher calculated cost, and thereby receive a higher outlier payment. In the final rule, codified at 42 C.F.R. § 412.84(h), (i), and (m), CMS has made the following changes to attempt to rectify this situation.

Proposed Medicare Enrollment Rule

By: Laura Callahan*

While formal enrollment in the Medicare program and the use of the CMS 855 forms have been required for some time, CMS has proposed a formal rule to codify the requirement that all providers and suppliers (other than those who have elected to opt out of the Medicare program) complete an 855 form initially and make periodic updates in order to receive and maintain billing privileges in the Medicare program. 68 Fed. Reg. 22,064 (April 25, 2003). The proposed rule is intended to standardize enrollment requirements in a new Subpart P of 42 C.F.R. § 424. However, it will not replace or nullify the existing regulations concerning the establishment of provider/supplier agreements, the issuance of provider or supplier billing numbers, and payment for Medicare-covered services or supplies to eligible providers or suppliers. 68 Fed. Reg. at 22,066.

The proposed rule is meant to require, by law, that providers and suppliers prove their qualifications and identity and submit specified information to CMS before they are granted or permitted to maintain billing privileges in the Medicare program. Under the proposed rule, failure to submit the required information on the 855 form would result in the denial of enrollment of the provider or supplier in the Medicare program or the revocation of billing privileges for a provider or supplier currently enrolled in the program.

Group Therapy: Seeing Through the Murky Water?

By: Donna J. Senft

Therapy services (physical, occupational, and speech language pathology) are appropriately rendered in either individual or group sessions, based upon the patient's individualized need. This is true in both the inpatient and outpatient setting. Although agreement exists regarding the clinical efficacy of group therapy, there have been differing opinions about what constitutes "group" versus "individual" therapy. Considering the extent to which other payors follow Medicare coverage and payment criteria, the rehabilitation community looks closely at Medicare guidance for rendering group versus individual therapy services.

The dialog regarding Medicare coverage for group therapy began when CMS issued final regulations relating to the physician fee schedule on December 8, 1994. In discussing the methodology for determining payment under the fee schedule, CMS noted:

Security Issues for Long Term Care Providers

By: Pamela J. White*

Security has been an ongoing concern in the long term care industry. Long term care facilities have the crucial responsibility to ensure the safety of their patients, visitors, and employees. Security issues are not limited to physical security, however, as employers also must maintain the security of certain information about patients and employees. There are a number of steps that can be taken to reduce these risks; however, certain legal issues may arise when taking such preventative measures.

Employers in the long term care industry can conduct criminal background checks when considering an applicant for employment. In fact, several states require nursing homes and other health care providers to conduct some form of a criminal background check as part of the hiring process. Besides a criminal background check, other types of background checks may prove useful when trying to determine whether a potential employee poses a security risk. Other checks, such as credit, social security number, and driving record, may yield information about an individual's background that would give an employer reason to pause or investigate further before trusting the individual with patients, employees, money, or private information. If an employer fails to discover relevant information about an applicant and places the applicant in a position where he/she can cause harm, the employer may be exposed to a negligent hiring claim. Damages awards in such cases can be large, especially if a patient or employee suffers significant physical harm.

NPIA Exempts Resales to Hospital Workers

By: E. John Steren

Declining profits and a shrinking pool of qualified labor have left hospitals scrambling to solve the question of how to attract and retain skilled workers without dipping into reserves. One solution to this problem is to provide these individuals with additional benefits rather than cash to bolster their overall compensation packages. Providing discounted prescription drugs, for example, is a practical and significant benefit that helps attract and retain skilled workers without added cost.

Hospitals are in a unique position to offer this type of benefit because of the explicit exemption contained in the Non-Profit Institutions Act (NPIA), 15 U.S.C. § 13c, which permits hospitals to purchase products at a discount despite the anti-price discrimination provisions of the Robinson-Patman Act. The exemption, of course, is qualified by the requirement that the purchase by the hospital be for the hospital's "own use." What constitutes the hospital's own use, however, is not entirely clear and hospitals have frequently questioned whether the resale of discounted prescriptions to one category of affiliated hospital workers or another still qualifies for the exemption.

Compliance Guidance for Pharmaceutical Manufacturers

By: S. Craig Holden

On May 5, 2003, the OIG issued its final Compliance Program Guidance for Pharmaceutical Manufacturers. 68 Fed. Reg. 23,731 (May 5, 2003). The program guidance focuses specifically on pharmaceutical manufacturers (i.e., companies that develop, manufacture, market, and sell pharmaceutical drugs or biological products) and not other segments of the industry (i.e., retail pharmacy chains, etc.); however, the OIG anticipates that the guidance will also be useful to hospitals, physicians, and other providers who interact with manufactures or engage in similar financial arrangements. The final guidance is more expansive and detailed than the draft compliance guidance issued last fall. 67 Fed. Reg. 62,057 (Oct. 3, 2002). The guidance sets forth the OIG's general views on the value of compliance programs for pharmaceutical manufacturers as a mechanism to assist and promote adherence to applicable statutes, regulations, and requirements of the federal health care programs. In recognition of the complexity of the pharmaceutical industry and the diversity among its members, the OIG stresses that the guide is not a compliance program. Rather, it is a set of guidelines to be considered by manufacturers when developing, implementing, or assessing a compliance program.

Earlier Wage Index Deadlines in Place

By: Carel T. Hedlund

In the final rule for the Inpatient Prospective Payment System (IPPS) for FY 2004, CMS made a number of changes to the wage index for both FY 2004 and 2005. 68 Fed. Reg. 45,346 (Aug. 1, 2003).

FY 2004 Wage Index

The FY 2004 wage index is based on wage data from FY 2000 cost reports. The calculation of the FY 2004 wage index will be essentially the same as the FY 2003 wage index, with two exceptions. The first is that CMS will exclude the wage costs and hours data for rural health clinics (RHCs) and federally qualified health centers (FQHCs). Medicare pays for these costs outside of IPPS, and began to collect data to segregate this information beginning with the FY 2000 cost report. Thus, the FY 2004 wage index is the first to exclude this data.

Provider-based Rules Take Effect

By: Thomas W. Coons

After years of buildup, the provider-based rules are finally upon us. For cost reporting periods beginning July 1, 2003, all hospitals will be required to comply fully with the provider-based rules. Thus, it is important to know those rules, which CMS has modified significantly; to appreciate the rules' impact on hospital operations and, potentially, on payment; and to consider whether the hospital should formally qualify as provider-based.

"Person" Under FCA Varies - Even in Same Case

By: Harry R. Silver*

The False Claims Act imposes liability on any "person" who, among other things, "knowingly presents, or causes to be presented, to an officer or employee of the United States Government ...a false or fraudulent claim for payment or approval." 31 U.S.C. §3729(a). While the Act itself defines many of its terms, it does not define the word person. Three years ago, in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), the Supreme Court determined that a state was not a person subject to a qui tam action under the False Claims Act. The Court's analysis started from the presumption that, generally speaking, the term person does not include the states unless there is an affirmative showing of statutory intent to the contrary. The Court found no contrary intent. Rather, because punitive damages generally cannot be imposed against states, and because the Court characterized the treble damages and statutory penalties imposed under the FCA as punitive, the Court reasoned that Congress did not intend to make states persons subject to liability under the FCA.

Contractual Remedy Precludes FCA Liability

By: Harry R. Silver*

In a decision with potentially far-reaching implications, the Fifth Circuit has ruled the submission of payment vouchers does not constitute the submission of false claims when the defendant was contractually entitled to continue receiving payments from the government unless and until the government invoked its breach remedies. United States v. Southland Management Corp., 326 F.3d 669 (5th Cir. 2003) (en banc).

The case involved a housing assistance agreement with the Department of Housing and Urban Development (HUD) under which HUD guaranteed the mortgage used to purchase an abandoned apartment complex, and subsidized the tenants' rent payments, in exchange for the owner's agreement to rehabilitate the property and to keep it "in good repair and condition." Under the contract, which was entered into in 1980, the owner was entitled to make monthly requests for housing assistance payments from HUD. Such requests were required to be accompanied by a certification that the apartments were "in Decent, Safe, and Sanitary condition." 326 F.3d at 672.

Courts Interpret "Public Disclosure" Bar of Qui Tam Suits

By: Harry R. Silver*

The False Claims Act bars suits initiated by whistleblowers, known as qui tam suits, if the action is "based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government [sic] Accounting Office report, hearing, audit, or investigation, or from the news media, unless ...the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4)(A). The obvious purpose of this bar, which was enacted as part of the 1986 amendments to the FCA, was to prevent so-called parasitic suits in which whistleblowers filed suits alleging fraud that had been exposed by others. United States v. Bank of Farmington, 166 F.3d 853, 858 (7th Cir. 1999). Nevertheless, there has been no consensus among the courts regarding the proper meaning of the terms based upon, public disclosure, and original source.

Hospital Pleads Guilty After Ignoring Fraud

By: Leon Rodriguez*

Health care institutions that fail to address illegal or non-compliant conduct by their employees or affiliates will find themselves subject to considerable legal risks. These risks are illustrated by the January 8, 2003, guilty plea of United Memorial Hospital (UMH) of Greenville, Michigan, to wire fraud in a case that arose out of the prolonged and unchallenged misconduct of one of its physicians.

The prosecution of UMH arose chiefly out of the conduct of Dr. Jeffrey Askanazi, an anesthesiologist who was separately convicted several years earlier of mail fraud for having submitted false and fraudulent claims for reimbursement of medically unnecessary procedures that he had performed.

"Lick and Stick" Allegations Yield Nation's Largest Medicaid Fraud Settlements

By: S. Craig Holden

Until April 16, 2003, TAP Pharmaceuticals held the title for the largest Medicaid fraud settlement, having paid settlement amounts totaling $55 million. Bayer Corporation (Bayer) and GlaxoSmithKline (GSK) have surpassed the $55 million mark and agreed to pay settlement amounts totaling more than $344 million to resolve allegations that the pharmaceutical companies engaged in a so-called "Lick and Stick" scheme to defraud the Medicaid Drug Rebate program. The investigation into the companies' practices was the result of a whistleblower suit filed by a former Bayer marketing executive, who is now deceased. As a result of the settlement, the former manager's estate will receive approximately $34 million of the federal share of the civil settlement.