News / Resources

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

• Policy Update—The First 30 Days Yield Rapid Movement on Numerous Fronts for the Healthcare Industry
  • Expanding SCHIP Coverage for Children
  • “Stimulating” Healthcare
  • What’s Next?
  • Ohio Now Accepting Preliminary Proposals for Federal Stimulus Funds
  • Baker Hostetler Clients and Friends to Hear Directly From Congressional Leaders on Capitol Hill
• Employment—New I-9 Form Effective April 3, 2009
• Case Law Update
  • Scrubs Solidify Apparent Agency Medical Malpractice Claims
  • Employer’s Unilateral Right to Modify Employee Handbook Invalidates Employee Dispute Arbitration Agreement
  • Deferred Compensation Forfeiture Clause Declared to Be an Unenforceable Non-Compete Agreement
• The Boomerang Effect: Hospital Employment of Physicians Coming Back Around

POLICY UPDATE—THE FIRST 30 DAYS YIELD RAPID MOVEMENT ON NUMEROUS FRONTS FOR THE HEALTHCARE INDUSTRY

With a big assist from the 111th Congress, the Obama Administration has moved rapidly to effect a number of significant policy changes in healthcare. In the span of less than two weeks, the President has signed legislation to expand SCHIP coverage for children, accelerate the transition to a national electronic health network, and bolster insurance coverage for unemployed workers. Taken together, these bills provide for a large infusion of federal dollars into the healthcare system.

Expanding SCHIP Coverage for Children

Congress moved quickly in January to reauthorize the State Children’s Health Insurance Program (SCHIP) by dusting off the failed 2007 attempts (passed and vetoed twice before) and passing a bill well before the rapidly approaching March 31, 2009, deadline. On February 4, 2009, President Obama signed the legislation, H.R. 2—the Children’s Health Insurance Program Reauthorization Act (CHIPRA), extending SCHIP through September 30, 2013. The measure should sustain SCHIP’s current enrollment of about seven million and expand coverage to an additional 4.1 million children by 2013. CHIPRA enables states to expand enrollments to include children with family incomes of up to 300 percent of the federal poverty level ($52,800 for a family of three) at the enhanced federal matching rate associated with the SCHIP program. Financing for the enhanced SCHIP program is funded through a 61-cent increase in the federal excise tax on tobacco, bringing the tax for a pack of cigarettes to one dollar. One of the more contentious provisions restored Medicaid coverage for otherwise eligible children and pregnant women who have been in the United States legally for five years or less. Another contentious provision, a ban on specialty hospitals owned by physicians, was stripped from the bill before its final passage.

In addition to the CHIPRA legislation, President Obama also issued an important memorandum relative to the SCHIP program directing the Secretary of Health and Human Services (HHS) to rescind the policy, commonly referred to as the “August 17 directive.” This directive, issued in 2007, required that states enroll 95 percent of children from families with incomes below 200 percent of the federal poverty level before expanding coverage to those above 250 percent of the federal poverty level.

"Stimulating" Healthcare

On February 17, 2009, President Obama signed into law a $787 billion economic stimulus bill, H.R. 1—The American Recovery and Reinvestment Act, that provides for a myriad of funding, economic incentives and subsidies for health information technology, medical research, state Medicaid programs and extended COBRA coverage for unemployed workers. The new law’s key healthcare provisions and funding allocations include the following:

Medicaid ($86.6 B). States will receive a 6.2 percent FMAP funding increase over 27 months retroactive to October 1, 2008, with one third of the temporary increase allocated to states experiencing large upswings in unemployment rates. To access the temporary FMAP increase, state Medicaid eligibility standards cannot be more restrictive than those in effect on July 1, 2008. Additionally, states will have to comply with Medicaid prompt pay requirements for hospitals and nursing homes. State Medicaid Disproportionate Share Hospital (DSH) Program allotments will receive a 2.5 percent increase in funding for FY 2009 and a 2.5 percent increase above the new FY 2009 DSH allotment in FY 2010. The new law extends the moratoria on the Medicaid regulations for targeted case management, provider taxes and school-based administration and transportation services through June 30, 2009. It also adds a moratorium on the Medicaid regulation for hospital outpatient services through the same period.

Extended COBRA Coverage ($24.7 B). Workers who are involuntarily terminated between September 1, 2008, and December 31, 2009, may be eligible for a 65 percent subsidy for COBRA health insurance premiums for up to nine months if their total annual income does not exceed $125,000 for individuals and $250,000 for families.

Health Information Technology (IT) ($19 B). As part of the overall effort to make U.S. health records electronic by 2014, H.R. 1 allocates $19 billion in grants and payment incentives under the Medicare and Medicaid programs to provider and physician users of health IT beginning FY 2011. The stimulus package also includes significant measures aimed at strengthening and extending privacy and security safeguards for personal health information. Most notably, business associates will be directly regulated under HIPAA and subject to the same civil and criminal penalties as covered entities.

National Institutes of Health (NIH) ($10 B). The $10 billion infusion, which represents a 34 percent increase in the NIH budget, allocates $8.5 billion for research grants and $1.5 billion for rebuilding and equipping agency facilities.

Comparative Effectiveness Research (CER) ($1.1 B). The new law establishes the 15-member Federal Coordinating Council for CER for the purpose of fostering “optimum coordination of comparative effectiveness and related health services research conducted or supported by relevant federal departments and agencies, with the goal of reducing duplicative efforts and encouraging coordinated and complementary use of resources.” To that end, the stimulus package allocates $400 million to the Secretary of HHS to accelerate the development and dissemination of CER. According to the Conference Report language, nothing in the CER section “shall be construed to permit the Council to mandate coverage, reimbursement, or other policies for any public or private payer” or for the recommendations of the Council to “be construed as mandates or clinical guidelines for payment, coverage, or treatment.”

Other Provisions of Note. H.R. 1 imposes a moratorium on the Medicare Indirect Medical Education (IME) reduction for capital payments for teaching hospitals in FY 2009, provides $500 million for training health professionals, and raises the annual issuance limit with respect to bank-deductible bond financing for small issuers from $10 million to $30 million for 2009 and 2010.

What’s Next?

It is unclear whether the legislative momentum of the first 30 days will be sustained in succeeding months, given Senator Daschle’s withdrawal as White House Health Czar and nominee for Secretary of HHS. What appears clear, however, is that future focus will be on mitigating healthcare costs. On February 10, 2009, the Senate Budget Committee held a hearing to discuss key healthcare reform issues. In testimony before the committee, Douglas Elmendorf, Director of the Congressional Budget Office (CBO), stated that without changes in policy, the number of uninsured will rise to about 54 million in ten years. Bundling payments for hospital and post-acute care to improve coordination, reducing Medicare payments to hospitals with high readmission rates and incentivizing physicians and hospitals to better collaborate, were among the CBO’s recommendations for payment reforms that could slow the growth of federal healthcare programs. Recognizing and responding to the many challenges, risks and opportunities raised by efforts to control healthcare costs and reform the healthcare system will require close and continuing attention as the legislative and regulatory responses to the administration’s policy agenda develop.

For more information, please contact Susan Feigin Harris, or 713.646.1307, or Kathleen P. Rubinstein, MPA, Policy Analyst, or 713.276.1650.

Ohio Now Accepting Preliminary Proposals for Federal Stimulus Funds

On Wednesday, February 18, 2009, Governor Ted Strickland announced that Ohio will receive at least $8.2 billion in federal funds as part of the American Recovery and Reinvestment Act that President Barack Obama signed into law this week. Additionally, Governor Strickland has announced a new website portal for businesses and organizations to register upcoming projects that may qualify to receive federal stimulus dollars.

For more information, please see the February 19, 2009, Executive Alert on our website.

Baker Hostetler Clients and Friends to Hear Directly From Congressional Leaders on Capitol Hill

On March 25, 2009, in Washington, D.C., clients and friends of Baker Hostetler will have a rare opportunity to hear directly from key members of the Senate and House of Representatives on the many important issues facing our businesses, our economy and our nation. This is the 20th year we have co-sponsored the Annual Legislative and U.S. Government Policy Seminar, which has been called “A who’s who in politics” by the Washington Times.

EMPLOYMENT—NEW I-9 FORM EFFECTIVE APRIL 3, 2009

U.S. law requires that every employer complete Form I-9, Employment Eligibility Verification (I-9 Form), for each new employee within three days of hire. At this time, the employee is required to present original documents that demonstrate both identity and authorization to work in the United States. Effective April 3, 2009, all employers will need to complete a revised I-9 Form for all new employees, as well as for reverification of certain employees with temporary work authorization.

For more information, please see the February 17, 2009, Executive Alert on our website.

CASE LAW UPDATE

Scrubs Solidify Apparent Agency Medical Malpractice Claims

The Idaho Supreme Court recently held in Jones v. HealthSouth Treasure Valley Hospital that Idaho recognizes the doctrine of apparent agency in medical malpractice claims. The patient selected HealthSouth based on the recommendation of her physician and her own tour of the facility. During surgery, an independent contractor performed the autotransfusion services and was alleged, along with two independent anesthesiologists, to have caused a fatal air embolism.

The Idaho Supreme Court held that a “hospital may be found vicariously liable under Idaho’s doctrine of apparent authority for the negligence of independent personnel assigned by the hospital to perform support services.” While the court did not determine whether apparent agency existed in this particular case, it clarified the elements for apparent authority and reiterated that it need only be based on a reasonable belief rather than reliance. Interestingly, the court observed that the following were relevant to determining apparent authority: (1) the autotransfusion company had an exclusive provider agreement; (2) the hospital was responsible for storing the equipment and providing supplies for the surgery; (3) the hospital paid a flat fee for the contracted services and then billed the patient or insurance company directly for the autotransfusion services; (4) the hospital’s consent forms did not indicate that the cell saver technicians were independent contractors; and (5) the hospital provided the cell saver technicians with scrubs that made them indistinguishable from hospital employees.

Based on the court’s decision, hospitals should take a closer look at how they disclose their independent contractor arrangements to patients and perhaps require independent contractors to have distinguishable scrubs.

For more information, please contact Robert M. Wolin, or 713.646.1327, or Tiffany D. Reyes, or 713.646.1357.

Employer’s Unilateral Right to Modify Employee Handbook Invalidates Employee Dispute Arbitration Agreement

A Texas Court of Appeals recently held that an employer’s arbitration policy was unenforceable because the policy was conditioned upon an illusory promise. The arbitration policy required all employee-related disputes be submitted to an arbitrator in accordance with procedures described in an employee orientation manual. The employer, however, reserved the right to revoke or modify the manual at any time and without notice to its employees. In Re: Datamark, Inc., No. 08-07-00328-CV (Tex. App.—El Paso Feb. 5, 2009).

The court held that if an employer can unilaterally terminate an arbitration agreement, its employees would have received no value in exchange for their unconditional promises to arbitrate disputes. Consequently, an employer who retains the unilateral right to unconditionally revoke or modify its arbitration policies risks having its arbitration agreements held unenforceable. The court rejected the employer’s argument that the agreement was not illusory because it was still bound to arbitrate claims filed before any changes were made to the program. The court reasoned that the employer could completely avoid arbitrating employee disputes if it modified its program prior to an employee’s formal request for arbitration.

Arbitration agreements have become common among certain healthcare employers and often are included in employee handbooks which also contain unilateral modification provisions. Employers should carefully draft employee handbook modification provisions to assure that arbitration and other contractual rights are not treated as illusory.

For more information, please contact Robert M. Wolin, or 713.646.1327, or Kati L. Freeman, or 713.646.1364.

Deferred Compensation Forfeiture Clause Declared to Be an Unenforceable Non-Compete Agreement

A Texas Court of Appeals recently held that a medical practice’s deferred compensation program’s forfeiture provision was an unenforceable non-compete agreement. Where a deferred compensation program provides that a former employee’s deferred compensation would be forfeited if he or she practiced medicine within the group’s practice area, the court held that the provision must comply with the stringent requirements applicable to Texas non-compete agreements. Valley Diagnostic Clinic v. Dougherty, No. 13-08-00201-CV (Tex. App.—Corpus Christi Feb. 12, 2009)

The court found that a damages provision, which impacts the ability of a person to render personal services, operates as a restraint of trade and must be judged under the standards applicable to covenants not to compete: (1) the damages provision must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made in which the consideration given by the employer must give rise to the employer’s interest in restraining the employee from competing, and the covenant must be designed to enforce the employee’s return promise in the agreement; (2) the limitations applicable to the forfeiture as to time, geographical area and scope of activity to be restrained must be reasonable; (3) the forfeiture provision must not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise; and (4) in the case of a physician, the forfeiture provision must comply with the patient information and access provisions and covenant buy-out provisions of Tex. Bus. & Com. Code § 15.50(b).

In this case, the court held that the deferred compensation forfeiture provision failed to satisfy the requirement that there be an agreement that is enforceable wholly separate from the covenant not to compete. A promise by the employee to continue practicing with the group cannot support the forfeiture clause because, by its own terms, the forfeiture clause could take effect only after the physician had ceased working for the group. Secondly, according to the court, a compensation provision made only in exchange for a non-compete promise is precisely the sort of restraint of trade that Texas law prohibits. Consequently, deferred compensation provisions must be drafted carefully to assure that they comply with Texas’ non-compete restrictions.

For more information, please contact Robert M. Wolin, or 713.646.1327.

THE BOOMERANG EFFECT: HOSPITAL EMPLOYMENT OF PHYSICIANS COMING BACK AROUND

Cleveland partner Steve Eisenberg recently authored an article, “The Boomerang Effect: Hospital Employment of Physicians Coming Back Around,” published in the February 3, 2009, edition of Physician’s News Digest. According to Eisenberg, “The [healthcare] landscape is looking very much like the mid-90s, where healthcare systems moved to employ as many physicians as possible in as much of a defensive mechanism rather than an offensive strategy. But like Marty McFly learned when he traveled from 1985 to 1955 and back, hospitals, physicians and healthcare lawyers have learned that many things are different in 2008 as compared to the mid-90s.”

For more information, please see the complete article on the Baker Hostetler website.

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