Health Law Update – January 15, 2015

Welcome to this week's edition of the Health Law Update. In this issue:

  • Children’s Hospitals Obtain Temporary Injunction Against CMS
  • Who Decides When Medicaid Payment Rates Are Not Enough?
  • New Limitations on RAC Program
  • IRS Issues Final Regulations on Requirements for Charitable Hospital Organizations
  • IRS Interim Guidance Creates New Category of Permissible Arrangements
  • A Step Forward in Approving Lower-Cost “Generic” Biologic Drugs
  • FDA Clarifies Orphan Drug Exclusivity Policy Following Court Defeat
  • FDA Proposes Electronic Distribution of Prescribing Information
  • Top 10 Most Read Health Law Update Blog Posts in 2014
  • Events Calendar

Children’s Hospitals Obtain Temporary Injunction Against CMS

Court Enjoins CMS’s Interpretation of Medicaid DSH Reimbursement Formula

By Susan Feigin Harris and Summer D. Swallow

Challenging actions by the Centers for Medicare & Medicaid Services (CMS) under the Administrative Procedures Act (APA), Texas Children’s Hospital and Seattle Children’s Hospital obtained a preliminary injunction that enjoins CMS’s actions concerning informal instructions it provided to its auditors for calculating disproportionate share hospital (DSH) hospital specific limits (HSL) in Medicaid, commonly referred as Frequently Asked Question No. 33 (FAQ #33). Texas Children’s Hospital v. Burwell, 2014 BL 364694, D.D.C., No. 1:14-cv-2060, 12/29/2014.

FAQ #33 required the auditors to include revenues from commercial third-party insurers in calculating the Medicaid shortfall component of the HSL calculation. CMS’s change to the formula for calculating DSH HSLs meant payments from commercial insurers made on behalf of their insureds, who were also in many cases Medicaid-eligible based on the severity of their medical conditions, would be included in the formula as Medicaid payments even though the hospitals never billed the Medicaid program or received any Medicaid reimbursement for these patients. The impact of FAQ #33 on the hospitals’ 2011 audit calculations, first identified for the hospitals in the late fall, would have identified an “overpayment” of more than $28 million, collectively.

U.S. District Judge Emmet Sullivan of the U.S. District Court for the District of Columbia issued his order on January 29, 2014, only days before the states were required to file their final 2011 DSH audits with CMS. Submission of the final audit could have triggered the states’ recoupment from the hospitals of the $28 million in identified “overpayments.”

The court’s action and decision could have a far-reaching impact on other hospitals that have similarly been subjected to the erroneous application of the DSH HSL Medicaid shortfall component of the formula.

Specifically, Judge Sullivan enjoined CMS from “enforcing, applying or implementing FAQ #33 pending further action of the Court”; ordered CMS to immediately notify the Texas and Washington state Medicaid programs that, pending further order by the court, the enforcement of FAQ #33 is enjoined and that CMS will take no action to recoup any federal DSH funds provided to Texas and Washington based on a state’s noncompliance with FAQ #33; and that any request to stay the order pending appeal will be denied.

The accompanying 46-page opinion details Judge Sullivan’s analysis relating to the comprehensive implementation by CMS of informal guidance issued on their website. Judge Sullivan agreed that FAQ #33 materially changed the law and that CMS skipped over its legal responsibility under the APA to provide notice and comment to stakeholders. “The Act does not include private insurance payments among those that are specifically enumerated as offsets,” wrote Sullivan. Further, Judge Sullivan found that Seattle Children’s and Texas Children’s “are likely to succeed in arguing that FAQ #33 must be set aside as unlawful."

Additionally of import, Judge Sullivan’s decision articulates the link in Medicaid between the state agencies and federal action, recognizing the inextricable link in the state/federal partnership and the fact that the states are acting at the behest of the federal agency. “Medicaid is a 'cooperative venture between the federal and state governments,'” wrote Judge Sullivan. “The defendants enjoy significant authority over this venture: they can reject state plans that do not comport with their view of Medicaid’s requirements (as they did for Texas’s state plan which sought to avoid FAQ #33) and may revoke federal financial participation.”

BakerHostetler, led by partner Susan Feigin Harris, pursued the issue against CMS through a number of venues, including directly before CMS and in state district and ultimately federal district court. “These are non-profit institutions that treat children needing transplants, cancer patients and premature newborns. Eliminating their DSH payments arbitrarily by recharacterizing private insurance payments as Medicaid payments should be vetted by Congress and the healthcare community, rather than slipped through a frequently asked question on a website.”

The team from BakerHostetler that successfully argued the case on behalf of their clients in federal court included Chris Marraro and Geraldine Edens, in addition to Susan Feigin Harris, and Susan Conway from Graves Daugherty. For more information relating to this case, contact Susan Feigin Harris at or 713.646.1307.

Who Decides When Medicaid Payment Rates Are Not Enough?

By Robert M. Wolin

In 2005, the Florida Pediatric Society, the Florida Association of Pediatric Dentists, and a number of parents and guardians on behalf of their individual children in the Medicaid program brought suit against the state of Florida alleging violations of the following:

  • 42 U.S.C. § 1396a(a)(8) and (a)(10) – requiring that children receive medical and dental services known as Early Periodic Screening Diagnosis and Treatment, with reasonable promptness (Reasonable Promptness);
  • 42 U.S.C. § 1396a(30)(A) – requiring that rates for reimbursing medical and dental providers be set, inter alia, so as to secure access to care for children that is equal to that of other children in the same geographical area (Equal Access); and
  • 42 U.S.C. § 1396a(a)(43) – requiring that the state conduct outreach programs to inform individuals determined to be eligible for Medicaid of the availability of services and to ensure that such patients requesting those services are able to receive them (Outreach).

The plaintiffs contended, in essence, that the root cause of the violations of the Reasonable Promptness and Equal Access requirements were Medicaid provider reimbursement rates that were unreasonably low. The state responded that the plaintiffs had no private right of action to enforce the Reasonable Promptness and Equal Access requirements. The state also argued that the terms “reasonable promptness” and “medical assistance” were vague and that beneficiaries had no access issues. The court found that the plaintiffs “experienced insufficient access to medical care because [the State’s] reimbursement rates are so low that they fail ‘to enlist enough providers so that care and services are available … at least to the extent that [they] are available’ to those with private insurers. 42 U.S.C. § 1396a(a)(30)(A). Moreover, I find that defendants did not inform plaintiffs of services that are available to them, which resulted in several of the named plaintiffs being unable to take advantage of medical services to which they are entitled. The evidence presented at trial makes clear that plaintiffs’ injuries are directly attributable to defendants’ unlawful conduct.” The court also held that the plaintiffs had a right of action under 42 U.S.C. § 1983 to enforce the Reasonable Promptness and Equal Access requirements.

The Affordable Care Act (ACA) provided a temporary increase in Medicaid payments for primary care in 2013 and 2014 by requiring states to pay at least as much as Medicare paid for primary care services. With the start of the new year, however, the Medicare parity requirement ended. The impact will vary from state to state, however, the Urban Institute estimates that physicians receiving the enhanced payments will see their primary care fees reduced by 43 percent, on average. The reduction in rates has the potential to seriously erode access to care.

Providers’ and recipients’ rights to enforce the Reasonable Promptness and Equal Access requirements, however, remain unsettled despite the Florida decision, as the U.S. Supreme Court is poised to hear the Armstrong v. Exceptional Child Center case on January 20th. The Armstrong case will decide whether states must comply with the federal Medicaid Act’s “equal access” provision that is intended to make sure physicians and other healthcare providers receive sufficient payment to provide care to low-income and disabled patients. The Obama administration, in its Supreme Court brief, argued that healthcare providers do not have a legal right to enforce the Equal Access requirement for several reasons: (1) “Medicaid providers are akin to third-party beneficiaries and thus have judicially enforceable contract rights only where the contract was intended to confer on them a legally enforceable right; (2) the language and structure of the Equal Access Medicaid provisions confirm that private enforcement by Medicaid providers would not be appropriate; (3) that the Supreme Court and Congress have assumed, with respect to federal-state programs under the Social Security Act, that there is no private right of enforcement under a nonstatutory cause of action and that a claim is not available under 42 U.S.C. § 1983 for a violation of a federal law as opposed to a federal right; and (4) that the action does not involve a defense at law, nor does it seek immunity from an allegedly preempted state regulation.”

The Armstrong case should be monitored by providers as it may well set the stage for how providers are reimbursed for many years to come, especially in light of the constrained budgets of many states. Please note that BakerHostetler is counsel to a party that submitted amicus curiae brief.

New Limitations on RAC Program

By Scott McBride and Nita Garg

In March 2014, CMS temporarily suspended the Recovery Audit Contractor (RAC) program until it secured new contracts. The contracts for the program expired in June 2014, and in August, CMS said that it would restart the program on a restricted basis under a new contract that allows recovery auditors to review a limited number of claims. With the RAC program timed to go into effect at the start of 2015 contracts, CMS recently announced several changes to the program in response to complaints by providers regarding oversight, burdensome requirements and a lack of transparency.

One of the most significant changes limits the RAC look-back period for patient status reviews to six months after the date of service if the hospital has submitted its claim within three months of the date of service. Previously, recovery auditors had a three-year look-back period, which resulted in acute inpatient hospitals being unable to rebill denials from patient status reviews. This revision now allows providers the opportunity to comply with timely filing rules and re-bill denied Part A claims as Part B claims within one year from the date of service.

Recovery auditors also will be required to maintain a first level of appeal overturn rate of less than 10 percent. Failure to maintain this rate will result in a corrective action plan for the recovery auditor. It is important to note that this rate limit excludes those claims that were denied due to insufficient documentation and claims that were corrected during the appeals process. Additionally, recovery auditors will no longer receive their contingency fee upon denial and recoupment of a claim. Now recovery auditors must wait for payment until the second level of appeal has been exhausted. CMS has stated that this delay in payment is to “assure providers that the decision made by the recovery auditor was correct based on Medicare statutes, coverage determinations, regulations, and manuals.”

Other changes include the establishment of additional documentation request (ADR) limits based on a provider’s compliance with Medicare rules. This change was in response to feedback by providers that current ADR limits fail to take into account provider size or compliance with Medicare rules. These ADR limits also will require that auditors “incrementally apply the limits to new providers under review,” in response to concerns that new providers were receiving requests for the maximum number of medical records allowed.

CMS said that it “is confident that these changes will result in a more effective and efficient program” and has expressed interest in developing a provider satisfaction survey to allow providers a means to rate recovery auditors’ performance. These program changes will be effective with each new RAC contract award, beginning with the DME, home health and hospice recovery audit contract awarded on December 30, 2014.

IRS Issues Final Regulations on Requirements for Charitable Hospital Organizations

By Christopher J. Swift

On December 29, 2014, Final Regulations providing guidance regarding the requirements for charitable hospital organizations were issued by the Internal Revenue Service (IRS). The ACA, enacted March 23, 2010, added new requirements in Section 501(r) that hospital organizations must satisfy to qualify under Section 501(c)(3). Each 501(c)(3) hospital organization is required to meet four general requirements on a facility-by-facility basis:

  • Establish written financial assistance and emergency medical care policies;
  • Limit amounts charged for emergency or medically necessary care to individuals eligible for assistance under the hospital’s Financial Assistance Policy (FAP);
  • Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s FAP before engaging in extraordinary collection actions against that individual; and
  • Conduct a community health needs assessment (CHNA) and adopt an implementation strategy at least every three years.

The IRS issued Proposed Regulations in 2012 and 2013 and has redesigned Form 990 and Schedule H several times since the enactment of Section 501(r). These Final Regulations adopt the Proposed Regulations for the most part. The lengthy preamble considers the comments received on the Proposed Regulations and provides an explanation of the revisions contained in the Final Regulations. Generally, the revisions are beneficial for reporting entities.

The Final Regulations allow reliance on both the 2012 and 2013 Proposed Regulations until a hospital organization’s first taxable year beginning after December 29, 2015.

IRS Interim Guidance Creates New Category of Permissible Arrangements

Public Comments Due January 22, 2015

By Christopher J. Swift

On October 24, 2014, the IRS issued Announcement 2014-67, which “amplifies” Rev. Proc. 97-13 regarding certain management contracts that do not result in private business use.

Prior to this Announcement, Rev. Proc. 97-13 provided that a per-unit fee arrangement must not exceed three years and must be terminable, without penalty or cause, at the end of the second year of the contract term to be a “permissible arrangement.” Different contract terms were permissible for 50 percent periodic fixed fee arrangements and percentage of revenue or expense fee arrangements.

The Announcement adds a new and very broad category of permissible arrangements:

(7) Arrangements in certain 5-year contracts. All of the compensation for services is based on a stated amount; periodic fixed fee; a capitation fee; a per-unit fee; or a combination of the preceding. The compensation for services also may include a percentage of gross revenues, adjusted gross revenues, or expenses of the facility (but not both revenues and expenses). The term of the contract, including all renewal options, does not exceed five years. Such contract need not be terminable by the qualified user prior to the end of the term. For purposes of this section 5.03(7), a tiered productivity award as described in section 5.02(3) will be treated as a stated amount or a periodic fixed fee, as appropriate.

While the Announcement discusses the need for guidance for healthcare organizations participating in the Medicare Shared Savings Program, the new category (7) is not expressly limited to contracts relating to the Program. Moreover, this new category permits a longer contract term for arrangements covered by existing categories [(4), (5) and (6) of Rev. Proc. 97-13]. In light of the new category (7), it is unclear why the sections 5.03(4)-(6) of Rev. Proc. 97-13 were not eliminated and the new category (7) added as a replacement section 5.03((4).

This interim guidance creating this new category of permissible arrangements applies both to contracts entered into before January 22, 2015 and to contracts entered into on or after January 22, 2015.

The Announcement also solicits public comments on this interim guidance and on further guidance needed to facilitate participation in the Medicare Shared Savings Program. Public comments should be submitted in writing on or before January 22, 2015.

A Step Forward in Approving Lower-Cost “Generic” Biologic Drugs

By Lee H. Rosebush and Dena Kessler

A federal advisory panel has helped clear the path for what may be the first biosimilar biologic drug ever approved in the United States.

Interestingly, generics of traditional drugs have been available in the U.S. for decades as a less expensive alternative to brand-name drugs and biosimilars have been available in Europe for several years. But in the U.S., the pathway to approval of biosimilars is relatively new. The Biologics Price Competition and Innovation (BPCI) Act, passed as part of the ACA, created an approval pathway for biologics that can be demonstrated to be “biosimilar” to or “interchangeable” with an FDA-licensed biologic drug. In addition to creating a means for approval of lower-cost biosimilars, the BPCI Act also granted original biologic drugs exclusivity for 12 years.

The FDA’s Oncologic Drugs Advisory Committee recently recommended that the FDA approve Novartis’s Zarxio, a drug that the Committee determined has “no clinically meaningful differences” from Amgen’s Neupogen. Neupogen boosts white blood cells in cancer patients.

The FDA is not obligated to follow the Committee’s recommendation, but it will likely carry significant weight as the FDA often agrees with these kinds of recommendations. If ultimately approved by the FDA, Zarxio would be the first biosimilar authorized for marketing in the U.S.

The Committee’s recommendation for Zarxio’s approval is notable not only because it would represent the first biosimilar available in the U.S., but the Committee’s review and analysis of Zarxio’s application also may provide valuable guidance for other manufacturers seeking approval for biosimilars. At least one other drug manufacturer has filed an application seeking FDA approval for a biosimilar. But the FDA has not yet finalized guidance on issues including quality considerations in demonstrating biosimilarity to a reference protein product and the clinical pharmacology data needed to demonstrate biosimilarity, though it has stated that it will “require licensed biosimilar and interchangeable biological products to meet the Agency’s exacting standards of safety and efficacy.” The FDA also recently announced that it plans to issue four guidance documents in 2015 addressing biosimilars.

FDA Clarifies Orphan Drug Exclusivity Policy Following Court Defeat

By Lee H. Rosebush and Dena Kessler

On the heels of a loss in federal court last fall, the FDA recently announced a clarification of its policy concerning orphan drug exclusivity. In short, despite a court ruling requiring the FDA to grant orphan drug exclusivity to a drug over the FDA’s objections, the agency announced it will not deviate from the same interpretation of the Orphan Drug Act that did not win the day in court.

The Orphan Drug Act provides incentives for manufacturers to develop drugs that treat rare diseases. In addition to tax credits and access to certain federal funding, the Act provides an orphan drug’s manufacturer the exclusive right to market the drug for seven years. However, the Act also allows the FDA to approve a subsequent drug if the manufacturer can show that it is “clinically superior” to the first drug.

In 2012, Depomed, Inc., filed suit against the U.S. Department of Health and Human Services (of which the FDA is an agency) seeking orphan drug designation for Gralise, which treats after-shingles pain (also known as postherpetic neuralgia, or PHN). The FDA had already approved a drug in 2002 for the treatment of PHN but it had not been designated by the FDA as an orphan drug. Depomed argued that because no other product had ever been designated as an orphan drug for the treatment of PHN, it did not need to provide evidence of clinical superiority to satisfy that requirement for Gralise’s orphan drug designation application. The FDA eventually granted the request for designation as an orphan drug but stated that Depomed must prove clinical superiority to obtain marketing exclusivity. Depomed then brought its case to court.

Depomed succeeded in its motion for summary judgment before the U.S. District Court for the District of Columbia in September 2014. The court found the plain language of the Orphan Drug Act unambiguously required the FDA to recognize that any drug that has been both designated as an orphan drug for treatment of a qualifying disease and also approved for marketing is entitled to an exclusivity period. The FDA took steps to appeal the decision, but later withdrew its efforts to appeal.

The FDA’s recent policy announcement states that, despite the developments in the Depomed case, the agency will adhere to its original interpretation of the Orphan Drug Act and that the court’s ruling is limited solely to Gralise. The FDA stated that “the sponsor of an orphan-designated drug that is the same as the previously approved drug … is required to demonstrate that its drug is clinically superior to the previously approved drug in order for its drug to be eligible for orphan-drug exclusivity upon approval.”

A copy of the FDA’s notice announcing the policy is available here. The opinion granting Depomed’s motion for summary judgment in Depomed v. HHS et al., Civil Action No 12-12592 in the U.S. District Court for the District of Columbia, is available here.

FDA Proposes Electronic Distribution of Prescribing Information

By Lee H. Rosebush and Dena Kessler

Drug manufacturers may no longer be required to distribute prescribing information on paper—with limited exceptions—and instead may have to distribute that same information electronically.

The FDA recently issued a proposed rule that, if enacted, would require drug manufacturers to submit to the agency prescribing information to be posted on the FDA’s website, allowing the information to be changed each time there is a change in the labeling. The rule also would require manufacturers to review and ensure that the information on the FDA’s website is correct, notify the agency if revisions are required and include a statement on the drug packaging directing patients to the website. Additionally, to ensure the information is available when Internet access is not available to a healthcare provider, manufacturers would be required to maintain a toll-free phone number to receive requests for the manufacturer to send an emailed, faxed or mailed paper copy of the information. The phone number service must be available 24 hours a day, seven days a week.

The FDA questioned the effectiveness of distributing prescribing information on paper. The prescribing information that is the subject of the proposed rule is the paper version that is on or in the package from which the drug is dispensed – the one “printed on thin paper in small size font, and … folded multiple times.” Though this prescribing information is intended for use by all healthcare professionals, the FDA noted that many now rely on electronic or other paper versions (liked the Physicians’ Desk Reference) compiled by third parties instead of the paper version issued by manufacturers. Physicians and nurses who write prescriptions typically do not receive the paper version because they do not dispense drugs and pharmacists and hospitals also typically rely on third-party compendia. Patients generally do not receive the paper information because pharmacists usually dispense drugs to patients in containers different from the manufacturer's packaging. The electronic distribution requirements would not apply to patient labeling including patient package inserts or to prescribing information accompanying promotional labeling.

According to the FDA, another purpose of the proposed rule is to “to ensure that the most current prescribing information for prescription drugs will be available and readily accessible to health care professionals at the time of clinical decisionmaking and dispensing.” The paper form of the prescription information may have been printed and distributed before recent labeling changes and distributing the information electronically ensures it can be updated in real time.

The FDA notes that it may grant exemptions from the electronic distribution and labeling requirements in certain circumstances, including for a product intended for use in an emergency room or being stockpiled for an emergency.

The FDA will accept comments on the proposed rule until March 18, 2015.

Top 10 Most Read Health Law Update Blog Posts in 2014

BakerHostetler launched the Health Law Update blog in 2014 as an enhancement of the Health Law Update newsletter. To commemorate this first anniversary, we’ve compiled a list of the top 10 popular posts from the blog’s inaugural year.

There’s a Code for That: Counting Down to ICD-10 and a Poem to Help You Remember!OIG Issues Special Advisory Bulletin Covering Manufacturer Copay Coupons and Medicare Part DFDA Regulation of Compounding Pharmacies: Unsolved MysteriesObligations During the Ebola Crisis: Ethical and Practical ConsiderationsGovernment Sues Hospital for Birthing Mama’s BabiesGet Ready! HHS OCR Announces Next Round of HIPAA AuditsImplications on Pharmacies of Recent OIG Advisory Opinion on Per-Fill FeesEbola Information Quarantine: Balancing Patient Privacy With Public HealthThe Orphan Drug Wars: HHS’s Rebuttal to Its Recent Loss to PhRMAFDA Regulation of Laboratory Developed Tests on the Horizon

To receive new and updated blog posts via e-mail, subscribe to BakerHostetler’s Health Law Update blog. Follow us on Twitter @HealthLawUpdate.

Events Calendar

Join BakerHostetler's healthcare attorneys at various speaking events and webinars.

January 27

Cleveland partner Chris Swift will speak on “Healthcare Industry & Non-Profit Entities ... Top Challenging Tax Issues” at the 24th Annual Ohio Tax Conference in Columbus, Ohio.

April 26

Houston Associate Nita Garg will speak on “HIPAA, Data Breaches, and the Sunshine Act” at the 2015 TAAIS Allergy Practice Managers’ Symposium in Austin, Texas.