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Health Law Update—May 12, 2011

Alerts / May 12, 2011

Topics covered in this issue of the Health Law Update include:


The Patient Protection and Affordable Care Act of 2010 (PPACA) added Section 501(r) to the Internal Revenue Code. Code Section 501(r) imposes requirements on hospital organizations that either operate a facility “required by a State to be licensed, registered, or similarly recognized as a hospital” or that the Internal Revenue Service (Service) “determines has the provision of hospital care as its principal function or purpose” constituting the basis for tax-exemption under Code Section 501(c)(3). Such requirements include (1) a community health needs assessment requirement; (2) financial assistance policy requirements; (3) requirements regarding charges; and (4) billing and collection requirements and must be separately satisfied by each hospital facility operated by a hospital organization in order to qualify for, and continue to maintain, federal tax exemption under Code Section 501(c)(3).

The financial assistance policy, limitation on charges and billing and collection requirements became effective for tax years that begin after March 23, 2010. The financial assistance policy requirement mandates that a hospital adopt a written financial assistance policy that details eligibility criteria for such assistance, the basis for calculating amounts charged, methods of application for assistance and actions that may be taken in cases of nonpayment by organizations without separate billing and collections policies. Additionally, a hospital must provide care for emergency medical conditions, regardless of an individual’s eligibility for financial assistance. The limitation on charges requirement provides that a hospital must limit charges for emergency or other medically necessary care provided to individuals eligible for financial assistance to amounts generally billed to individuals who have insurance covering such care, and a hospital is prohibited from using gross charges to bill patients. The billing and collection limitation provides that a hospital must refrain from extraordinary collection actions before making reasonable efforts to determine an individual’s eligibility for financial assistance.

The community health needs assessment requirement will be effective for tax years that begin after March 23, 2012. The assessment must be conducted every three years, and the hospital must adopt an implementation strategy to meet the community health needs identified by the assessment.

Earlier this year, the Service released a revised Schedule H to Form 990. Part V of Schedule H was revised to incorporate the requirements of Code Section 501(r). The Service, in Announcement 2011-20, also set out a mandatory three-month extension for filing Form 990 for certain filers. Specifically, all “hospital organizations” filing Form 990, including Schedule H, with due dates before August 15, 2011, were granted an automatic three-month extension of time to file the 2010 Form 990 and were directed not to file before July 1, 2011.

In addition, on April 20, 2011, the American Hospital Association, the Healthcare Financial Management Association, VHA Inc. and certain state and metropolitan hospital associations sent a letter to the Service that was sharply critical of the revised Schedule H and the mandatory extension to file Form 990. Among other things, the letter called the new reporting requirements in Schedule H onerous and redundant and beyond the requirements of PPACA, and further indicated that the revised Schedule H failed to address certain issues, including the consequences of a facility’s failure to meet the requirements of PPACA. In addition, the letter called the extension of time to file “a source of confusion for many hospitals” and requested further guidance from the Service regarding this issue.

We will be monitoring developments regarding Schedule H and will be reporting on any developments in subsequent Health Law Updates.

For more information, please contact William J. Culbertson at or 216.861.7350 or Christopher J. Swift, or 216.861.7461.

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For providers concerned that proposed or adopted Medicaid rate cuts may violate statutory requirements in providing beneficiaries with adequate access to care, a proposed rulemaking issued by the Centers for Medicare & Medicaid Services (CMS) last week on the Medicaid Program: Methods for Assuring Access to Covered Medicaid Services (Proposed Rule) may offer an opportunity to voice that concern. The Proposed Rule purports to create a standardized transparent process for states to follow that would ensure access to care for Medicaid recipients. Since Medicaid payment rate changes largely are a function of the state budget process, CMS believes such rate changes could lead to a violation of the access requirements under Section 1902(a)(30)(A) of the Medicaid statute. The subject of recent litigation, this appears to mimic the old Boren Amendment challenges to state Medicaid reimbursement rates.

Under the Proposed Rule, CMS adopts the Medicaid and CHIP Payment Advisory Commission (MACPAC) recommendations and proposes that before making any changes to its Medicaid program, states must consider enrollee needs, availability of care and providers and utilization of services. Access to care must be included in consideration of any rate changes. However, CMS will not automatically adjust rates, but rather allow states to redesign service delivery strategies or propose improvements to provider enrollment and retention efforts to account for rate changes.

The Proposed Rule requires states to produce ongoing access data analyses that also will be made public and that will be furnished to CMS with any State Plan Amendments (SPA) in which reductions in provider rates or restructuring of provider payments is requested. States would have ongoing responsibilities to conduct periodic reviews of compliance with access requirements for all Medicaid services. The Proposed Rule also calls for the following:

  1. States must conduct access reviews for a subset of services each calendar year and release results through public records or a website by January 1 and all services once every five years.
  2. Prior to any rate reduction or altering of payment structure, states would submit information from an access review within the year prior to the submission of any SPA.
  3. States must implement an ongoing mechanism to get beneficiary feedback such as beneficiary hotlines or surveys, ombudsmen programs or other equivalent mechanism.
  4. States must develop a process to address access issues it discovers through a corrective action plan that is submitted to CMS and made public, including specific steps and timeline for action within 90 days of discovering the access issues.

CMS expects this process to be public and for such scrutiny to be instituted prior to any rate reductions or changes to payment structure. The process is designed with opportunity for providers and other interested parties to submit input and feedback on the impact of proposed rate reductions and offer ideas of ways to enhance service delivery models and other innovative solutions to encourage continued provider participation and develop procedures.

The Proposed Rule, however, would exclude any changes to payment for services provided through managed care arrangements. Since many states have adopted or are moving to Medicaid managed care payment, this omission leaves a large gap in the transparency process. Moreover, there does not appear to be an enforcement mechanism identified should providers or CMS become concerned that a state’s proposed rate structure could adversely impact beneficiary access, other than the slow and cumbersome state plan amendment review process and CMS imposition of corrective action plans.

The Proposed Rule was published in the Federal Register on May 6, 2011 (76 Fed. Reg. 26342). Providers affected by the Proposed Rule, including those contemplating litigation options, should consider submitting comments to CMS prior to the close of the comment period on July 5, 2011.

For more information, please contact Lynn Sessions at or 713.646.1352 or Susan Feigin Harris, or 713.646.1307.

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CMS recently published a new rule intended to help patients in rural and specialty shortage areas gain access to state-of-the-art medical care through telemedicine services provided by distant hospitals and other telemedicine providers. The rule, which revises the hospital and critical access hospital (CAH) Medicare conditions of participation (CoPs) by enabling a streamlined credentialing and privileging process for the use of telemedicine services, was published in the Federal Register on May 5, 2011 (76 Fed. Reg. 25550) [hereinafter, the Final Rule].

Telemedicine, as viewed by CMS, is the provision of clinical services to patients by physicians or practitioners from a distance via electronic communications. The Final Rule applies to all hospitals and CAHs that seek to utilize telemedicine services of distant physicians or practitioners, and is not limited to rural providers or the narrower subset of providers or sites eligible for the Medicare “telehealth” payment. Prior to implementation of the new rule, hospitals seeking to use telemedicine services were required to review the qualifications of a distant-site physician or practitioner on an individual basis utilizing the hospital’s medical staff credentialing process, notwithstanding that the distant-site physician or practitioner was already credentialed by the distant hospital. This often lengthy and burdensome exchange between providers was thought to hinder patient access to medical expertise from physicians and practitioners located at distant, larger hospitals and academic medical centers.

In an effort to relieve such burdens and improve patient access to care, under the Final Rule, the governing body of a hospital or CAH now will be permitted to rely upon the credentialing decisions of a distant Medicare-participating hospital at which the telemedicine physician or practitioner is located, for purposes of credentialing and privileging at the local hospital. The simplified, streamlined process will enable the hospital or CAH to enter into a written agreement with a distant-site hospital that requires the following:

  • the distant-site hospital is a Medicare-participating hospital (for nonparticipating telemedicine entities, see below)
  • the distant-site hospital’s governing body is responsible for credentialing and privileging that meets the CoPs
  • the distant-site hospital provides a list of the distant-site physician’s or practitioner’s privileges held at the distant-site hospital
  • the distant-site physician or practitioner holds a license recognized by the state in which the hospital’s patients receiving telemedicine services is located
  • the hospital receiving telemedicine services has evidence of an internal review of the distant-site physician’s or practitioner’s performance, including all adverse events and complaints, which is sent to the distant-site hospital.

Additionally, CMS expects that the arrangement with the distant-site hospital will, at a minimum, ensure that the hospital or CAH receiving telemedicine services has access to the complete credentialing and privileging file upon request for each physician or practitioner covered by the agreement.

An improvement from the proposed version of the Final Rule is the recognition that hospitals often need to obtain telemedicine services from distant providers that are not Medicare-participating hospitals, such as teleradiology facilities or other nonhospital entities. Under the Final Rule, a hospital or CAH may rely on the credentialing and privileging decisions of such distant telemedicine entities so long as the hospital’s written agreement with the distant telemedicine entity ensures that the telemedicine entity’s credentialing and privileging process meets at least the requirements of the CoPs, as well as the requirements summarized above. Although CMS does not have direct authority over nonparticipating entities, hospitals and CAHs contracting with distant telemedicine entities will need to provide proof, when surveyed, that both the hospital and the distant telemedicine entity are in compliance with the rule. Therefore, ensuring that a hospital has appropriate access to the credentialing, privileging and quality review records of a distant telemedicine provider will be paramount.

For more information, please contact John S. Mulhollan at or 216.861.7484.

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In a ruling issued on May 4, a federal district court in Texas found that Wal-Mart Stores violated the Texas Optometry Act provision which prohibits manufacturers, wholesalers and retailers of glasses and other vision devices from directly or indirectly controlling or attempting to control the professional judgment or manner of practice or practice of an optometrist. In Forte v. Wal-Mart Stores Inc. (S.D. Tex., No. 2:07-cv-155, May 4, 2011), several optometrists who leased space in Wal-Mart stores to operate optometry clinics alleged that Wal-Mart attempted to control their professional judgment or practice by attempting to influence the optometrists’ office hours. Unlike other corporate practice statutes, the Texas Optometry Act specifically defines “control or attempt to control” to include setting or attempting to influence the office hours of an optometrist. In finding in favor of the plaintiffs and rejecting Wal-Mart’s motion for judgment as a matter of law, the court held that testimony and internal documents produced in the four-day trial were sufficient to enable a jury to reasonably conclude that Wal-Mart’s actions showed an intent and motive to pressure the optometrists and otherwise influence clinic coverage (office hours) as a way to improve sales in the company’s Optical Division. The court also cited the evidence that the lease agreement then in use specifically required disclosure of the optometrists’ schedule of hours. In an earlier ruling in this case, the court held that requiring the optometrists to maintain professional liability insurance did not violate the Texas Optometry Act as it had no bearing or relation to the “practice of optometry.” The court, however, found that the jury’s award of maximum statutory damages of $1,000 per day of violation of the Texas Optometry Act was “manifestly unjust” and ordered a new trial on damages unless plaintiffs could agree to a reduction of the award to $400 per day, or $1.4 million.

For more information, please contact John S. Mulhollan at or 216.861.7484.

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May 18

Cleveland of counsel Tom Campanella will speak on “Health Care Reform Update” at the Regional HFMA (Health Care Financial Management Association) of Northeast Ohio Annual Leadership Institute in Cleveland.

Cleveland of counsel Tom Campanella will participate in a panel discussion on the topic “National Health Reform Begins: Workforce Development in Northeast, Ohio” at Cleveland State University’s Levin College Forum in Cleveland.

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