News / Resources

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

• Privacy—Sweeping Expansion of HIPAA Requirements to Significantly Impact Business Associates
• The President’s 2010 Budget—A Down Payment on Health Reform?
  • Reconfiguring Medicare
  • Other Budget Priorities and Initiatives
  • So What Shape Reform?
  • Baker Hostetler Clients and Friends to Hear Directly From Congressional Leaders on Capitol Hill
• Supreme Court Ruling Opens New Door for Products Liability Actions
• IRS Publishes Final Report on Exempt Organizations Hospital Study
  • Community Benefit Expenditures
  • Executive Compensation
  • Future Scrutiny

PRIVACY—SWEEPING EXPANSION OF HIPAA REQUIREMENTS TO SIGNIFICANTLY IMPACT BUSINESS ASSOCIATES

The American Recovery and Reinvestment Act (Recovery Act), signed into law on February 17, 2009, broadens the scope of the Health Insurance Portability and Accountability Act (HIPAA) to impact not only covered entities—including physicians, hospitals and health plans—but also those entities that support the healthcare industry as “business associates,” which include third-party administrators, consultants, service providers and attorneys. Additionally, organizations that provide data transmissions of protected health information (PHI) to covered entities or business associates now will be required to enter into business associate agreements with covered entities.

The Recovery Act extends specific HIPAA regulatory requirements to business associates. Beginning February 17, 2010, the administrative, physical and technical safeguard requirements of the security regulations, as well as the polices, procedures and documentation requirements will apply to business associates. Traditionally, business associates were required by contract to use certain precautions regarding the use and disclosure of PHI, and if a business associate unlawfully disclosed PHI, it only faced a breach of contract claim by the covered entity. Under the Recovery Act, business associates now face civil and criminal fines and penalties for HIPAA violations.

The U.S. Department of Health and Human Services (HHS) is now required to conduct periodic audits to make sure covered entities and business associates are complying with the new privacy and security requirements. Additionally, generally effective immediately, state attorneys general have been granted expanded authority to enforce violations of HIPAA on behalf of the citizens of their respective states. In light of the HIPAA changes contained in the Recovery Act and the impending regulations, covered entities and business associates should prepare to reevaluate current HIPAA policies, assess levels of access to PHI and prepare to incorporate the required changes into business associate agreements.

For more information, please contact Ameena N. Ashfaq, or 713.646.1329, or Mark Hatcher, or 614.462.4765.

THE PRESIDENT’S 2010 BUDGET—A DOWN PAYMENT ON HEALTH REFORM?

Characterizing healthcare reform as key to the nation’s fiscal recovery, President Obama outlined his FY 2010 budget request to Congress in broad strokes last week. Noting that the United States spends over $2.2 trillion on healthcare each year—or approximately 16 percent of the total economy—the President’s budget establishes a non-binding reserve fund of more than $630 billion as an initial down payment on healthcare reform.

Reconfiguring Medicare

The reserve fund would be financed in part from new revenue generated by certain changes in federal taxes and from savings proposals designed “to promote efficiency and accountability” over ten years that include the following changes to the Medicare program:

• Replacing the current payment mechanism for MedicareAdvantage plans with a competitive bidding system (savings = $176 B).
• Bundling Medicare payments to hospitals for hospitalization and care in a post-acute setting (savings = $18 B).
• Improving Medicare home health payments “to align with costs” (savings = $37 B).
• Linking a portion of Medicare payment for inpatient services to a hospital’s performance on specific quality measures (savings = $12 B).
• Reducing Medicare payments to hospitals with high readmission rates (savings = $8 B).
• Requiring higher-income beneficiaries enrolled in Medicare Part D to pay higher premiums as is currently required for physician and outpatient services (savings = $8 B).
• Using “private sector enhancements” to improve Medicare payment integrity (savings = $2 B).
• Ensuring that Medicare makes appropriate payments for imaging services through the use of radiology benefit managers (savings = $260 M).

The budget document reflects a $330 billion “best estimate” baseline for “comprehensive, but fiscally responsible” physician payment reform. Recall that physician payments will undergo a 20 percent reduction in 2010 unless Congress intercedes. Changes for which no specific details or cost savings are attributed include user fees for surveys and certification by CMS and “addressing financial conflicts of interest in physician-owned specialty hospitals”—possibly indicating that the administration has not settled on a complete prohibition of physician-owned hospitals.

Other Budget Priorities and Initiatives

With respect to drug pricing, the budget establishes a regulatory pathway for generic versions of biologic drugs and increases the Medicaid drug rebate for brand name drugs. It also provides $340 million for expanding loan-repayment programs for doctors, nurses and dentists who agree to practice in medically underserved areas. Additionally, $73 million is allocated toward shoring up and modernizing the healthcare infrastructure in rural areas. As part of the administration’s multi-year plan to double cancer research funding, the budget includes $6 billion within the National Institutes of Health to support cancer research.

With respect to the Food and Drug Administration (FDA), the budget allocates $1 billion for food and safety oversight and a “substantial increase” for FDA oversight of medical products.

So What Shape Reform?

The budget document says that the President will adhere to a set of eight principles for “transforming and modernizing” America’s healthcare system: (1) protect families’ financial health; (2) make health coverage affordable; (3) aim for universality; (4) provide portability of coverage; (5) guarantee choice; (6) invest in prevention and wellness; (7) improve patient safety and quality care; and (8) maintain long-term fiscal sustainability. With the newly nominated leadership team of Kansas Gov. Kathleen Sebelius for Secretary of HHS and former CMS Administrator Nancy-Ann DeParle as head of the White House Office for Health Reform, greater detail should become available when a line item budget is released in early April. Also, because Congress has yet to rule out using the budget reconciliation process for effecting reform, close and continuing attention to federal budget matters will be absolutely critical.

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

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 the health industry, businesses, our economy and our nation. Among the distinguished list of members from the Senate, House and the administration are Sens. Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), Rep. Earl Pomeroy (D-N.Dak.) and Peter Orszag from the Office of Management and Budget. In this unprecedented year, we are so pleased to bring to our clients those individuals who will be central to the health reform debate.

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

SUPREME COURT RULING OPENS NEW DOOR FOR PRODUCTS LIABILITY ACTIONS

In Wyeth v. Levine, the Supreme Court addressed whether FDA approval of a drug and drug labeling should serve as a complete defense for drug companies from state products liability claims. In a 6-3 decision in favor of Diana Levine (Levine), the Vermont musician who lost part of her right arm following the intravenous administration of Wyeth’s anti-nausea drug, Phenergan, the court rejected the notion of federal regulations pre-empting state actions.

In this matter, Levine was administered a dose of Wyeth’s Phenergan via “IV-push,” wherein the drug is injected directly into the patient’s vein. The corrosive drug was mistakenly injected into an artery rather than a vein, and as a result, Levine developed irreversible gangrene, which necessitated a partial amputation of the limb. Levine filed suit against Wyeth for failure to adequately warn against the dangers of administering Phenergan via the IV-push method. The drug labeling disclosed the risk of gangrene requiring amputation when the drug is inadvertently administered into an artery rather than a vein; however, Levine contended that the labeling failed to instruct clinicians to use the IV-drip administration rather than the IV-push method. She went on to claim that the drug is not reasonably safe for IV administration because the foreseeable risk of gangrene necessitating amputation is too great when weighed against the benefits of the drug. A Vermont jury found in favor of the plaintiff, and on appeal, the decision was upheld by the Vermont Supreme Court.

Wyeth argued that it could not comply with the state duty to modify the Phenergan labeling without violating federal regulations. Wyeth claimed that FDA regulations prohibit pharmaceutical companies from unilaterally changing drug product labeling, as such changes necessitate the filing of a supplemental drug application, which then must be approved by the FDA. Moreover, where drug labeling is part of the new drug application approved by the FDA, Wyeth contended that the warnings issued were approved by the FDA. The court rejected this argument as a “cramped” interpretation and “fundamental misunderstanding” of the FDA’s regulations, and specifically cited the agency’s “Changes Being Effected” doctrine, which permits manufacturers to enhance drug safety warnings at the time a supplemental application is filed, rather than waiting for FDA approval. The court also rejected the notion that responsibility for the adequacy of labeling warnings rests upon the FDA; rather, it reaffirmed that this obligation lies with the manufacturer at all times, noting that, prior to 2007, the FDA did not have the authority to mandate labeling revisions. The court recognized that the FDA could have rejected labeling revisions made under the “Changes Being Effected” doctrine, but stated that in the absence of evidence that the FDA would have done so, the court refused to accept that it was impossible for Wyeth to comply with both federal regulations and the state duty to warn. The court also rejected Wyeth’s argument that state failure-to-warn claims pose an obstacle to the FDA’s regulation of drug labeling by substituting the judgment of juries for that of the expert agency. Rather, the court stated that the FDA has traditionally viewed state law to be a complementary method of drug regulation, offering an additional layer of consumer protection, and reinforcing the idea that responsibility for drugs lies with the manufacturer, and not the FDA.

This decision stands in stark opposition to the decision in last year’s Riegel v. Medtronic, Inc., which held that federal medical device regulations preempt state law claims unless there also has been a violation of federal device regulations. This dichotomy indicates that the preemption fight is far from over, with each case likely turning on the particular state claims and facts at issue.

For more information, please contact Karen A. Weaver, or 310.442.8866, or Kathryn M. Tarallo, or 202.861.1522.

IRS PUBLISHES FINAL REPORT ON EXEMPT ORGANIZATIONS HOSPITAL STUDY

On February 12, 2009, the Internal Revenue Service (IRS) published its Final Report on the Exempt Organizations Hospital Study (Final Report) it began in 2006. Prompted by a growing call from individuals such as Sen. Grassley for nonprofit hospitals to justify their tax-exempt status, the IRS focused its study on community benefit reporting and hospital executive compensation.

The Final Report is based on 489 responses to questionnaires sent by the IRS to a sample of more than 500 nonprofit hospitals. In addition to these responses, the IRS conducted a more in-depth study of executive compensation paid by 20 nonprofit hospitals, largely chosen because they reported what the IRS initially believed to be high levels of executive compensation. To analyze the data received, participating hospitals were divided among four community types (high-population hospitals, other urban and suburban hospitals, critical access hospitals and other rural hospitals) and five revenue categories (over $500 million in annual revenue, $250 to $500 million, $100 to $250 million, $25 to $100 million and under $25 million).

Community Benefit Expenditures

Significant differences were observed in the type and amount of reported community benefit expenditures among the categories. Particularly, the study found that high-population hospitals reported the largest percentage of community benefit expenditures (an average of 12.7 percent of total revenues), while critical access hospitals and other rural hospitals reported the lowest percentages (averages of 6.3 percent and 8.4 percent of total revenues, respectively). Results of the study also showed that these percentages generally increased with revenue size. Of the types of expenses reported by hospitals as community benefit—uncompensated care, medical training, medical research and community programs—uncompensated care made up the majority of reported community benefit expenditures by hospitals in each of the categories, but represented a greater percentage of total community benefit expenditures by low-revenue, critical access hospitals and other rural hospitals. While no correlation was found between community benefit expenditures and the average per capita income of the hospitals’ surrounding geographic areas, community benefit expenditures did tend to increase as uninsured rates in the hospitals’ surrounding areas increased. Though the reported data contained significant limitations (e.g., only a single tax year was analyzed and the criteria for what constituted a community benefit expenditure was largely left to the reporting hospitals), the numbers provide a picture of just how varying the operations and financial capabilities of tax-exempt hospitals are. It is clear, and the IRS acknowledges in the Final Report, that any attempt to revise or refine the current tax exemption standard for hospitals will inevitably and substantially affect the tax-exempt hospital sector.

Executive Compensation

Regarding executive compensation, the study found the average reported compensation paid to a top hospital management official to be $490,000, with higher levels paid by high-population and suburban hospitals and lower levels paid by rural hospitals (both critical access and non-critical access). Compensation also tended to increase with increased annual revenue, with top management official compensation by the 20 hospitals investigated in more detail averaging $1.4 million. More significant than the actual levels of compensation, however, was the hospitals’ wide-spread reliance on the rebuttable presumption method for determining compensation. Pursuant to 26 C.F.R. § 53.4958-6, a tax-exempt hospital may establish a rebuttable presumption that compensation paid does not constitute an excess benefit transaction if (1) the compensation arrangement was approved in advance by a governing body of the hospital; (2) the members of the governing body who voted to approve the compensation do not have a conflict of interest; (3) the governing body relied on appropriate comparability data in determining that the compensation was reasonable; and (4) the governing body documented its basis for determining the compensation at the time such determination was made. As a result of its study, the IRS found across-the-board compliance with these requirements, and thus support under existing tax law for current exempt hospital executive compensation.

Future Scrutiny

While its recent report is titled “Final,” it is clear that the IRS has not concluded its inquiry into community benefit and executive compensation by tax-exempt hospitals. A substantial revision of the Form 990, Schedule H reporting requirements for exempt hospitals will provide the IRS with more detailed insight into what types of expenses hospitals have traditionally included as “community benefit.” For example, bad debt now must be broken out, with an explanation of what portion is attributable to individuals who qualify for financial assistance under the hospital’s charity care policy and the hospital’s rationale for how much bad debt the hospital believes should constitute community benefit expense. The IRS has also set its sights on the rebuttable presumption method for determining executive compensation, vowing that it “will seek a better understanding of the impact of certain aspects of existing law, including the permitted use of for profit comparables, and the rule excepting the initial contract between the organization and the executive.” What we can be sure of is continued, focused scrutiny of the financial operations and reporting practices of tax-exempt hospitals.

For more information, please contact Christopher J. Swift, or 216.861.7461, or Emily E. Williams, or 216.861.7373.

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the Firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.
[Florida Rule 4-7.2(d)] © 2009 Baker & Hostetler LLP