News / Resources

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

• Medical Device and Pharmaceutical Advertising Draft Guidance Posted by FDA
• Third Roundtable Addresses Proposals for Financing Health Reform
  • Proposals for Achieving Savings From the Current Medicare/Medicaid Payment Systems
  • Options for Determining/Maintaining a Hospital’s Federal Tax-Exempt Status
  • Proposals for Modifying the Current Tax Treatment of Health-Related Expenses
  • Proposed “Lifestyle” Revenue Raisers
• Tax-Exempt Debt Market Reform Legislation
• Fraud Update
  • President Obama Signs the Fraud Enforcement and Recovery Act of 2009
  • Medicare Fraud Strike Force Rolling Into a City Near You
  • OIG Approves Charitable Assistance for Patients’ Share of Costs for Advanced Diagnostic Tests
• Ohio Update
  • Handshakes Are Not Necessarily Handshakes in Ohio
  • Uniform Prudent Management of Institutional Funds Act (UPMIFA) Becomes Effective June 1, 2009
• Scott McBride Named Outstanding Healthcare Fraud and Compliance Lawyer
• Events Calendar

MEDICAL DEVICE AND PHARMACEUTICAL ADVERTISING DRAFT GUIDANCE POSTED BY FDA

On May 27, 2009, the Food and Drug Administration (FDA) posted a draft guidance for the medical device and pharmaceutical industries titled Presenting Risk Information in Prescription Drug and Medical Device Promotion (Draft Guidance Document). This guidance describes how the FDA evaluates medical device and prescription drug promotional materials directed to both consumers and healthcare professionals to determine whether the advertising adequately presents risk information. Its intended purpose is to assist promoters of medical device and pharmaceutical products with factors relevant to development of content and format of marketing/advertising communications.

Risk information informs consumers and healthcare professionals about proper use, side effects or contraindications related to medical devices and pharmaceuticals prescribed for or by them. The FDA states that, increasingly, omission or minimization of risk information is the most frequent basis for Warning Letters and other enforcement actions taken by the agency with regard to medical device and pharmaceutical advertising. The agency also cites that over half of consumers state that they do not receive enough risk information in advertising, and that a higher percentage of physicians believe that the ads fail to provide adequate information regarding contraindications and negative side effects.

In the Draft Guidance Document, the FDA emphasizes that while individual components in advertising may be accurate, it is the message conveyed on the whole that often triggers enforcement, stating that “[a] promotional communication that conveys a deceptive net impression of the product could be misleading, even if specific individual claims or presentations are not misleading.” The Draft Guidance Document describes how the FDA considers both content and format in determining misleading advertising, and provides several examples.

Some of the factors the FDA cites as relevant to advertising review include consistent use of language appropriate for the target audience, use of headlines and subheads, emphasis of positive or negative information, failure to list risks in hierarchical order, the amount of risk information contained in a 30-second versus 60-second broadcast, omission of material representations, consideration of the target audience, accuracy and comprehensiveness of risk information, location of risk information, font size and style, contrast used to highlight benefit and risk information, and audio and visual considerations.

Interested parties may submit comments on the Draft Guidance Document to the FDA within 90 days of the release date. A final guidance document will be published at a later date. While non-binding, the Draft Guidance Document does provide marketers of medical device and prescription pharmaceutical products with a better understanding of the factors the FDA considers when evaluating advertising for regulatory compliance.

Please contact Karen A. Weaver at or 310.442.8866 to discuss questions relevant to this article.

THIRD ROUNDTABLE ADDRESSES PROPOSALS FOR FINANCING HEALTH REFORM

On May 12, 2009, Sen. Max Baucus (D-Mont.) and Ranking Member Charles Grassley (R-Iowa) held the third and final roundtable discussion on healthcare reform, previewing the multitude of policies slated for consideration when the Senate Finance Committee marks up reform legislation in June. A corresponding policy options paper (Options Paper) with proposals for financing reform was released by the Committee on May 18, 2009. Potential funding sources discussed by the Options Paper include proposals for achieving savings from the current Medicare and Medicaid payment systems, options for determining/maintaining a hospital’s federal tax-exempt status, alternatives for modifying the tax treatment of certain health-related expenses, including the exclusion for employer-sponsored coverage and proposed “lifestyle” revenue raisers. The Options Paper also provides a list of the President’s revenue-raising provisions that were part of the administration’s FY 2010 budget proposals to Congress.

Proposals for Achieving Savings From the Current Medicare/Medicaid Payment Systems

Building on the proposals for delivery system reform addressed in the first policy options paper released on April 28, 2009, and discussed in the April 30, 2009, issue of the Health Law Update, the third and final Options Paper enumerates proposals aimed at achieving savings within the current Medicare and Medicaid payment systems.

To that end, options under consideration for graduate medical education (GME) and disproportionate share hospital (DSH) payments include (1) adjusting current GME and DSH payment levels to “better reflect actual costs hospitals currently incur in treating the low-income and uninsured and in training medical residents,” (2) reducing DSH payment levels over time concurrent with an anticipated reduction in the uninsured because of health reform, and (3) consolidating Medicare and Medicaid payments to hospitals “as a way to streamline and better account for and coordinate federal funding with the DSH and GME payment areas.”

The Options Paper also follows MedPAC’s recommendations in its 2009 Report to Congress to reduce indirect medical education payments for acute care hospitals, and to reduce or eliminate the market basket (i.e., inflationary) updates for skilled nursing facilities, inpatient rehabilitation facilities, home health agencies and long-term care facilities in FY 2010. Another proposal offers three options for reducing the market-basket update by an amount equal to all, one-half or one-quarter of the expected productivity gains.

Additional proposals singled out as ripe for potential savings include:

• Establishing an expert panel to assist the Centers for Medicare & Medicaid Services (CMS) with evaluating and adjusting payment for advanced diagnostic imaging and other “high-growth, potentially overvalued services”;

• Rebasing home health agency (HHA) payments and establishing a provider-specific annual cap on the number of allowable outlier episodes for which HHAs may be reimbursed in a year;

• Revamping payment for “potentially overvalued” durable medical equipment (DME) items and services;

• Reducing “inappropriate spending variations across and within geographic areas” by adjusting payments to reflect the price of inputs and health status of the local population; and

• Increasing and expanding the brand-name and generic drug rebate amounts paid by drug manufacturers to state Medicaid programs.

Various proposals aimed at achieving savings from Medicare beneficiaries also are addressed. These include options for means-testing Part D premiums, changing out-of-pocket cost-sharing requirements under Parts A and B and imposing cost-sharing requirements for beneficiaries with Medigap coverage.

Options for Determining/Maintaining a Hospital’s Federal Tax-Exempt Status

Proposals under consideration for modifying the rules pertaining to tax-exempt hospitals include an option to codify organizational and operational requirements for determining whether a hospital is a charitable organization under section 501(c)(3). Such requirements would include, among other things, that tax-exempt hospitals regularly conduct a community needs analysis, maintain a minimum annual level of charity care, “not refuse service based on a patient’s inability to pay” and limit aggressive collection actions against patients. Tax-exempt hospitals failing to meet these requirements would be subject to “intermediate sanctions” or an excise tax.

Proposals for Modifying the Current Tax Treatment of Health-Related Expenses

Options under consideration for modifying the current tax treatment of health-related expenses include (1) capping the current tax exclusion for employer-sponsored coverage based on the value of the health insurance policy or the income level of the employee eligible for the exclusion, or both, or converting the employer-provided health insurance exclusion to an individual tax deduction or credit; (2) restricting contributions to Health Savings Accounts (HSAs) and increasing the penalty for withdrawing from an HSA for non-medical expenses; (3) modifying or eliminating Flexible Spending Accounts (FSAs); (4) imposing a standardized definition for “qualified medical expenses” with respect to HSAs, FSAs and itemized medical expense tax deductions; (5) eliminating the itemized deduction for medical expenses or raising the 7.5 percent floor for claiming deductions; (6) modifying the FICA tax exception for medical residents receiving stipends; and (7) extending the Medicare payroll tax to state and local government employees.

Proposed Lifestyle Revenue Raisers

Two “lifestyle” revenue raisers aimed at promoting wellness and healthy choices and curbing “activities that increase overall health care costs” are addressed as well. These include a uniform excise tax on alcoholic beverages and a new excise tax on “sugar-sweetened” beverages. For those of you who can’t live without your daily Vanilla Coke, Pepsi Wild Cherry, one of the Dr. Browns or a Dr. Pepper, the Options Paper defines these beverages as ready-to-drink and fountain beverages sweetened with sugar, high-fructose corn syrup or other similar sweeteners. Beverages sweetened with non-caloric sweeteners would not be subject to the tax.

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

TAX-EXEMPT DEBT MARKET REFORM LEGISLATION

The House Financial Services Committee held a hearing on May 21, 2009, on four bills to address problems in the tax-exempt debt market:

• The Municipal Market Liquidity Enhancement Act of 2009 (H.R. 2551), would permit the Federal Reserve to lend money to a special purpose entity to finance liquidity facilities for auction-rate bonds and variable-rate demand obligations.

• The Municipal Advisors Regulation Act (H.R. 2550), would allow the SEC to regulate municipal financial advisors and establishes specific prohibited transactions for municipal financial advisors, such as engaging in fraudulent or deceptive practices and establishes the fiduciary duties municipal financial advisors owe their clients.

Independent municipal financial advisors historically have not been subject to a comprehensive regulatory scheme and largely have operated unregulated in the markets.

• The Municipal Bond Fairness Act (H.R. 2549), requires rating agencies to rate exempt debt securities based on the risk of default to address the lower ratings historically assigned to tax-exempt bonds as compared to corporate bonds with similar risks of default.

Factors that have been offered to explain the more stringent municipal ratings include the lesser liquidity of municipal bonds, differences in the investor base between municipal bonds and the short-comings in municipal disclosure. The factors causing the lower ratings, according to some witnesses at the hearing, were not appropriate considerations in a credit rating.

• The Municipal Bond Insurance Enhancement Act of 2009 (H.R. 2589) would aid certain exempt bond issuers by providing federal reinsurance for their primary bond insurance.

The American Hospital Association generally supported the liquidity aspects of the legislation and urged Committee Chairman Barney Frank (D-Mass.) to “include tax-exempt hospital bonds in any legislation you propose to provide temporary federal government help for the municipal securities market.” The Healthcare Financial Management Association (HFMA), on the other hand, expressed reservations with the bills.

With respect to the proposed Municipal Market Liquidity Enhancement Act, the HFMA suggested that additional liquidity capacity would be helpful, but that the scope of the liquidity facility program should be narrow, perhaps limited only to existing issues, and designed not to crowd relatively strong, long-term providers of liquidity facilities out of the market.

On the proposed Municipal Advisors Regulation Act, the HFMA indicated that its members would not recommend additional federal regulation of financial advisors, despite its recognition that advisors were somewhat dismissive of the risks inherent in possible worst-case scenarios. HFMA suggested that a private-sector solution would make a better alternative and suggested that it include (1) well-defined standards of conduct; (2) specific education/certification for bond enhancements and complex derivative products like interest rate swaps; and (3) a complaint mechanism monitored by the trade groups for use in identifying “bad actors.”

Finally, the HFMA opposed the proposed Municipal Bond Fairness Act, arguing that the bill would force rating agencies toward an artificial consistency between healthcare and other industry credits. Moody’s Investors Service’s representative at the hearing, however, stated that the bill was consistent with Moody’s intention to recalibrate its exempt bond ratings to enhance comparability with other ratings, once the debt markets restabilized.

While the legislation before the House Financial Services Committee is unlikely to be enacted in the near future, aspects of it may be included in health reform legislation addressing healthcare facility tax-exempt debt.

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

FRAUD UPDATE

President Obama Signs the Fraud Enforcement and Recovery Act of 2009

The Fraud Enforcement and Recovery Act of 2009 (Pub.L. 111-21), as described in detail in the May 14, 2009, issue of the Health Law Update, will provide the government with even broader enforcement powers under the federal False Claims Act (FCA). The House amendments, as accepted by the Senate and signed into law by the President on May 20, 2009, include the following provisions: (1) allowing the government’s pleading, including a complaint or amendment to a relator’s complaint, to relate back to the date of the original complaint; (2) expanding the use of and sharing of a Civil Investigative Demand; (3) expanding the prohibition against discrimination to include those not bound by an employment contract; and (4) allowing the government or relator to serve a qui tam complaint, pleadings, or written disclosure on state and local authorities that investigate the cases on behalf of the government.

For more information, please contact B. Scott McBride, or 713.646.1390, or Summer D. Swallow, or 713.646.1306.

Medicare Fraud Strike Force Rolling Into a City Near You

On May 20, 2009, U.S. Department of Health and Human Services (HHS) Secretary Kathleen Sebelius and U.S. Attorney General Eric Holder announced the Health Care Fraud Prevention and Enforcement Action Team (HEAT), an interagency effort aimed at detecting and preventing fraud in Medicare and Medicaid. HEAT goals include (1) increasing training for providers on Medicare compliance; (2) improving data-sharing between CMS and law enforcement; and (3) strengthening program integrity activities to monitor and ensure Medicare Parts C and D compliance and enforcement. In addition, HEAT will continue current efforts focusing on suppliers of durable medical equipment. To aid these and other efforts to combat healthcare fraud, President Obama’s administration has included $311 million in its proposed FY 2010 budget, a 50 percent increase in funding from FY 2009. Please see the May 14, 2009, issue of the Health Law Update.

Additionally, the Attorney General and HHS Secretary announced the existing HHS-Department of Justice (DOJ) Medicare Fraud Strike Force teams in Southern Florida and Los Angeles will be expanded to Houston and Detroit. The Strike Force teams, including HHS and DOJ staff members, law enforcement agents and prosecutors, enforce Medicare fraud compliance on a targeted local level. Since its inception in 2007, the Medicare Fraud Strike Force team operating in Southern Florida has convicted 146 defendants and secured $186 million in criminal fines and civil recoveries. Providers need to keep an eye on the door for these expanding Strike Force teams.

For more information, please contact B. Scott McBride, or 713.646.1390, or Summer D. Swallow, or 713.646.1306.

OIG Approves Charitable Assistance for Patients’ Share of Costs for Advanced Diagnostic Tests

Under Advisory Opinion 09-04, issued May 11, 2009, the Office of Inspector General (OIG) approved a charitable program that provides cost-sharing financial assistance to HIV-positive and colorectal cancer patients for certain advanced diagnostic tests. The tests assist physicians in accurately prescribing appropriate drug therapies. Donors to the program are comprised of individuals, corporations and foundations, including manufacturers of drug products, pharmacies and suppliers of the types of services used by patients receiving assistance through the program. Donors are not permitted to earmark funds for specific patients, providers, practitioners, services, tests or products, nor are they provided with any specific patient or testing information, and patients are not informed of the identity of donors (though a list of donations is publicly available upon request in accordance with IRS regulations). Further, the charity does not make any referrals or recommendations for physicians, services, tests or products, and patients have complete freedom of choice. To qualify for assistance, patients must meet objective financial need criteria.

The OIG first determined that the donations do not serve as grounds for the imposition of civil monetary penalties or run afoul of the anti-kickback statute because (1) no donor or affiliate directly or indirectly controls the charity or the donated funds; (2) assistance to patients is independent of the donors; (3) the charity does not consider which product, provider, practitioner, service or supplier is used in awarding assistance; (4) assistance is awarded consistently based on an objective, verifiable, uniform financial need criteria; and (5) the charity provides donors with no data allowing them to correlate their donations with the use of their products or services. The OIG then determined that the patient assistance likewise did not trigger civil monetary penalties or implicate the anti-kickback statute because (1) the assistance was provided to patients on a first-come, first-served basis to the extent funding was available; (2) eligibility is based solely on financial need; (3) the patient’s freedom of choice to direct his or her own healthcare was not restricted; and (4) the charity’s mission served as a significant incentive for it to monitor utilization to minimize expenditures.

In approving this program, the OIG followed long-standing OIG guidance allowing industry stakeholders to effectively contribute to the healthcare safety net for financially needy beneficiaries by donating to independent, bona fide charitable assistance programs. The OIG concludes that, if properly structured, such donations raise few, if any, concerns about improper beneficiary inducements.

For more information, please contact Steven A. Eisenberg, or 216.861.7903, or Emily E. Williams, or 216.861.7373.

OHIO UPDATE

Handshakes Are Not Necessarily Handshakes in Ohio

The Ohio Supreme Court, in Olympic Holding Co., L.L.C. v. ACE Ltd. (May 7, 2009), Slip Opinion No. 2009-Ohio-2057, departed from 185 years of precedent by holding that a party seeking to enforce an unsigned contract, in this case a joint venture agreement, could not rely on the other party’s promise to sign the agreement to overcome the statute of frauds—a law barring enforcement of contracts not to be performed within one year unless the agreement is in writing and signed by the other party. Instead of allowing recovery for breach of contract, the court held that a separate claim of promissory estoppel was an adequate remedy for any damages incurred in relying on a false promise to sign an agreement. This decision has implications for legal liability arising in contract negotiations, failed transactions and situations where parties perform in the absence of a signed, written contract.

For more information, please see the Baker Hostetler Executive Alert issued on May 13, 2009, or contact any member of Baker Hostetler’s Transactions or Commercial Litigation Teams.

Uniform Prudent Management of Institutional Funds Act (UPMIFA) Becomes Effective June 1, 2009

UPMIFA has been enacted to update and replace Ohio’s current version of the Uniform Management of Institutional Funds Act (UMIFA). Both are designed to provide clear statutory rules to govern management and investment of endowment funds controlled by charitable institutions. UPMIFA also complements Ohio’s Institutional Trust Funds Act, which provides statutory rules governing wholly-charitable trust funds managed by trustees other than the charity or charities for which the trust funds are held. Effective June 1, 2009, with respect to decisions made or actions taken on or after that date, the Ohio version of UPMIFA will change and improve Ohio’s current version of UMIFA in three important ways: (1) modern portfolio investing principles; (2) solving the “underwater” endowment fund problem by applying a percentage-of-fund-value distribution standard, replacing UMIFA’s “net appreciation over historic dollar value” standard; and (3) easing administrative burdens for modification or release of restrictions.

For more information, please see the full article on the Baker Hostetler website or contact Kevin G. Robertson at or 216.861.7977.

SCOTT MCBRIDE NAMED OUTSTANDING HEALTHCARE FRAUD AND COMPLIANCE LAWYER

Scott McBride, a partner in Baker Hostetler’s Houston office, has been selected as a 2009 Outstanding Healthcare Fraud and Compliance Lawyer by Nightingale’s Healthcare News. Nightingale’s Healthcare News is a newsletter for professionals serving the healthcare industry, healthcare executives and other industry organizations. Each issue contains articles on the latest industry business news and reports on healthcare, transactions, firms and individuals of interest.

Mr. McBride was noted for his work in attaining a fully favorable decision in a Medicare overpayment recovery action of more than $1 million related to mental health services; favorably resolving federal allegations of false billing and failure to heed prior regulatory guidance on behalf of an academic medical center and for attaining a favorable resolution regarding Medicaid billing fraud allegations against a dental practice.

EVENTS CALENDAR

June 12, 2009

Los Angeles partner Karen Weaver will speak on “Responding to 483s/Warning Letters and Avoiding Consent Decrees” at the Southern California Biomedical Council FDA Audit Workshop in Los Angeles, California.

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. © 2009 Baker & Hostetler LLP