News / Resources

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

• Threat of FCA Liability as an Audit Tool? AHA Voices Concern to DOJ
• Improper Allocation of Overhead Costs Yields $2.95M FCA Settlement
• Improper Physician/Hospital Relationships Net $7.3M CMP Settlement
• Hospital’s Closing Prompts Civil Rights Complaint; Settlement Includes Continued Healthcare Services to Community
• Missouri Supreme Court Rules Certain Ex Parte Communications Violate HIPAA
• Ben Dusing to Lead Cincinnati White Collar Defense and Corporate Investigations Practice
• Business Transactions Partner George C. Dolatly Joins Healthcare Industry Team
• Events Calendar

THREAT OF FCA LIABILITY AS AN AUDIT TOOL? AHA VOICES CONCERN TO DOJ

The American Hospital Association (AHA) recently requested the U.S. Department of Justice (DOJ) and the U.S. Department of Health and Human Services (HHS) to undertake a policy review of the ongoing enforcement initiatives proceeding under the auspices of the False Claims Act (FCA). The AHA expressed a concern that “aggressive FCA investigations are being initiated upon the discovery of evidence of a mistake or overutilization, making FCA enforcement through negotiated ‘settlement’ a self-fulfilling prophecy.” The AHA highlights the aggressive pursuit of kyphoplasty investigations in the Western District of New York as an example.

The kyphoplasty investigations stem from an FCA investigation in which the DOJ alleged that Kyphon—a manufacturer whose medical device is used in the kyphoplasty procedure—misled physicians and hospitals about the medical necessity of an inpatient stay following the procedure as well as the use of particular billing codes related to the procedure and inpatient stay. The Kyphon case settled for $75 million. The AHA notes that the DOJ has been dispatching “contact” letters to hospitals that suggest a presumption of FCA liability based upon utilization data, effectively “using the threat of FCA liability as an audit tool.” Such letters appear to presume that the physician’s judgment was compromised in every case of a kyphoplasty admission and that the hospitals consented to that judgment.

The AHA notes that the DOJ’s approach requires hospitals to treat each discovery of an overpayment as an FCA case, and incur the significant cost that such cases generate, as opposed to making routine payment adjustments to correct the overpayment.

For more information about the FCA or kyphoplasty investigations, please contact B. Scott McBride, or 713.646.1390, or Ameena N. Ashfaq, or 713.646.1329.

IMPROPER ALLOCATION OF OVERHEAD COSTS YIELDS $2.95M FCA SETTLEMENT

The largest integrated healthcare network in New York—North Shore-Long Island Jewish Health System Inc., North Shore University Hospital and Long Island Jewish Medical Center (collectively, North Shore)—recently agreed to settle an FCA lawsuit for $2.95 million. The settlement is the result of whistleblower allegations that from 1994 through 2001, North Shore obtained reimbursement under Medicare Part A for overhead costs that were not incurred in providing Medicare Part A services. For example, the government alleges that North Shore improperly billed Medicare for expenses related to running a pre-school and operating private physician offices. The government alleged that North Shore provided Medicare with false information, falsely certified its compliance with Medicare rules on the cost report certification page and obtained wrongful reimbursement.

Medicare Part A will reimburse hospitals only for the reasonable costs of services related to the care of Medicare beneficiaries. Under the reasonable cost payment system, hospitals identify costs incurred by categories of expenses called “cost centers.” North Shore allocated overhead costs on the basis of certain statistics. The government contends that expenses related to a preschool and private physician office were over-allocated to Medicare reimbursable cost centers and under-allocated to nonreimbursable cost centers. As a result, the government contends Medicare overpaid North Shore.

North Shore did not admit to any wrongdoing or liability. North Shore released a statement indicating that “it opted to settle the claim rather than engage in protracted litigation and incur substantial attorneys’ fees that would have far exceeded the cost of the agreement we reached with the government.” A former hospital administrator was awarded $560,500 as his relator’s share.

For more information, please contact B. Scott McBride, or 713.646.1390, or Ameena N. Ashfaq, or 713.646.1329.

IMPROPER PHYSICIAN/HOSPITAL RELATIONSHIPS NET $7.3M CMP SETTLEMENT

The Office of Inspector General (OIG) announced a $7.3 million civil monetary penalty settlement with United Shockwave Services, United Prostate Centers and United Urology Centers (collectively, “United”) for alleged violation of the federal anti-kickback and Stark laws. United, owned by physicians, provided lithotripsy and laser services to hospitals. The OIG alleged that United leveraged patient referrals to obtain contracts with hospitals located in Illinois, Indiana and Iowa, threatening to refer patients to competing hospitals in the absence of a contract and promising additional referrals to contracted hospitals. The OIG also alleged that the contractual relationships resulted in violations of the Stark Law. Finally, the OIG examined the relationships between United and the physician-investors, noting that physicians who produced more referrals were offered more shares, and those who did not were asked to divest their interests.

United entered into a five-year CIA in conjunction with the settlement. The settlement reflects the increasing focus on healthcare fraud investigations in general, and hospital/physician relationships in particular. The settlement also indicates that the OIG will examine the internal relationships between physician-investors and the companies in which they hold interests.

For more information, please contact Donna S. Clark, or 713.646.1302.

HOSPITAL’S CLOSING PROMPTS CIVIL RIGHTS COMPLAINT; SETTLEMENT INCLUDES CONTINUED HEALTHCARE SERVICES TO COMMUNITY

The University of Pittsburgh Medical Center (UPMC) recently entered into a voluntary resolution agreement with the HHS Office for Civil Rights (OCR) in an effort to resolve a complaint brought by a borough council president alleging that closing Braddock Hospital would have a disproportionate or disparate impact on the community’s African American population. Citing financial losses and underutilization of the hospital, UPMC decided to close Braddock Hospital effective early 2010. Community members were fearful of potential difficulties regarding access to care for a predominantly minority community in which many residents were dependent on public transportation.

The agreement, an extension of initiatives UPMC asserts it had committed to prior to the OCR complaint, requires UPMC to offer transportation services, health screening and wellness programs, expanded hours and services at Braddock Family Health Center clinic and additional community outreach. The agreement will remain in effect three years and requires UPMC to make quarterly reports to OCR regarding compliance. OCR recognized “that health care institutions are confronted with difficult economic decisions” but those “decisions must consider the impact on communities and steps must be taken consistent with their obligations under Title VI of the Civil Rights Act of 1964, to ameliorate that impact.” The OCR’s action in this case may presage greater civil rights enforcement in hospital transactions impacting minority communities.

For more information, please contact Summer D. Swallow, or 713.646.1306.

MISSOURI SUPREME COURT RULES CERTAIN EX PARTE COMMUNICATIONS VIOLATE HIPAA

In a recent Missouri Supreme Court opinion, the Health Insurance Portability and Accountability Act (HIPAA) Privacy Rule was found to prohibit ex parte discussions between attorneys for defendants (hospital and treating physician) and other nonparty medical providers in a medical malpractice case, notwithstanding a lower state court’s order previously allowing such communications to occur. The Missouri Supreme Court held that while HIPAA generally permits disclosure of protected health information (PHI) in judicial or administrative proceedings, an informal disclosure of PHI by a nonparty covered entity (provider) to attorneys for defendants, ordered to occur outside of formal discovery channels (e.g., depositions, interrogatories, etc.), is not a sufficient “judicial proceeding” contemplated under HIPAA because (1) both plaintiff and defendant parties would not be present to object to any specific disclosures, and (2) the trial court would have no oversight or control over the disclosures.

In narrowly construing the HIPAA exception for disclosures in judicial or administrative proceedings, the court focused on Missouri state law which, while not expressly prohibiting informal ex parte disclosures, nevertheless could not compel such disclosures of PHI to defense counsel without a patient’s authorization. Further, the court found under Missouri law, the informal ex parte meetings would not be considered judicial proceedings, and that the same information could be obtained through the state’s formal discovery rules. Because neither HIPAA nor state law expressly authorized such disclosures without the patient’s authorization, the Missouri Supreme Court held that the lower court’s ruling allowing such disclosures was incorrect and exceeded its authority. The Missouri Supreme Court declined to address the specific issue of HIPAA federal preemption as unnecessary in the case.

Injured patients bringing suit for state medical malpractice claims and defendant providers may take note of this decision for its narrow interpretation of the HIPAA Privacy Rule provision authorizing disclosures of PHI without a patient’s authorization in judicial and administrative proceedings. Sate ex rel. Proctor v. Messina, No. SC90610, 2010 Mo. LEXIS 199 (August 31, 2010).

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

BEN DUSING TO LEAD CINCINNATI WHITE COLLAR DEFENSE AND CORPORATE INVESTIGATIONS PRACTICE

Benjamin G. Dusing recently joined the Cincinnati office of Baker Hostetler as a partner in the firm’s White Collar Defense and Corporate Investigations practice. A former Assistant U.S. Attorney (AUSA) for two years in the U.S. Attorney’s Office for the Southern District of Ohio (in Cincinnati) and for three years in the U.S. Attorney’s Office for the Eastern District of Kentucky, Mr. Dusing will lead the Cincinnati office’s White Collar Defense and Corporate Investigations practice.

During his career at the DOJ, Ben focused on prosecutions of sophisticated financial and white collar offenses, many of which involved healthcare fraud. In particular, Mr. Dusing criminally prosecuted violations of the anti-kickback laws, Medicare and Medicaid fraud and schemes to defraud private health insurers. In his work as an AUSA, Mr. Dusing also created and led the Northern Kentucky Financial Crimes Working Group, an inter-agency collaborative involving representatives of the FBI, IRS, Secret Service, Postal Inspection Service and multiple state and local law enforcement agencies. Under his direction and leadership, the Financial Crimes Working Group investigated and prosecuted several significant healthcare matters. A seasoned litigator, Mr. Dusing’s prosecutorial experience with the DOJ included more than 20 federal criminal jury trials, ranging from mail and wire fraud schemes to four successful RICO prosecutions.

Prior to joining the U.S. Attorney’s Office, Dusing was an associate with Baker Hostetler in Cincinnati. Before joining Baker as an associate, he held clerkships with the Honorable Eugene E. Siler, Jr., of the U.S. Court of Appeals for the Sixth Circuit, as well as with the Honorable Joseph M. Hood of the U.S. District Court for the Eastern District of Kentucky.

Ben is a member of the Board of Directors for Catholic Charities, the Diocese of Covington, Kentucky’s primary social service organization, and was appointed by the Kentucky Bar Association to represent the 6th Supreme Court District as a Commissioner for the Kentucky Lawyers’ Assistance Program, an agency of the Kentucky state bar charged with assisting, monitoring and disciplining impaired Kentucky lawyers. He also is active with Big Brothers/Big Sisters of Greater Cincinnati and volunteers his time as a big brother and a school-based mentor.

Ben Dusing can be reached at or 513.929.3412.

BUSINESS TRANSACTIONS PARTNER GEORGE C. DOLATLY JOINS HEALTHCARE INDUSTRY TEAM

George C. Dolatly recently joined the New York Office of Baker Hostetler as a partner in the Firm’s Business Group. He focuses his practice on private equity and venture capital transactions, domestic and international mergers and acquisitions, corporate governance matters and corporate finance.

His particular expertise is providing advice on acquisition and financing transactions to clients in the healthcare and life sciences areas, including hospitals, medical device manufacturers, pharmaceutical and biotechnology companies and healthcare technology and services companies. He represents private equity and venture capital funds making investments in these areas, as well as the target companies. In addition, he represents both public and private companies engaged in M&A transactions, whether as purchaser or target, and companies engaged in financing transactions of all kinds, including public offerings and private placements of debt and equity securities. He regularly advises boards of directors and special committees on issues of corporate governance and fiduciary duties. He also provides legal and strategic advice on commercial contracts, joint ventures and general corporate and securities matters.

Significant engagements include representation of:

• Numerous private equity firms and venture capital funds on over 50 private equity and venture capital transactions involving healthcare and life sciences companies, ranging from $1 million to over $250 million, primarily as lead investor. Recent transactions include investments in several biotechnology companies; a manufacturer of devices for the treatment of cardiac arrhythmias; a provider of advanced biomaterials storage, inventory management and worldwide cold-chain logistics; a medical device company developing next generation insulin-dispensing and glucose-monitoring technologies for patients with diabetes; an international manufacturer of flat-panel X-ray detectors; and a manufacturer of courier robots for hospitals.
• A venture capital fund as lead investor in a biotechnology company, in a $65 million transaction structured as a reverse merger and concurrent private placement, the largest transaction of its kind in the history of the biotechnology industry.
• A designer, manufacturer and distributor of endovascular technologies in its $155 million Nasdaq-listed initial public offering.
• An owner and operator of hospital facilities in the $100 million sale and leaseback of two hospital facilities to a publicly-traded REIT.
• Numerous participants in M&A transactions, including a public manufacturer of vascular disease medical devices, in a $50 million acquisition of a German cardiovascular device manufacturer; and a public Canadian retailer of hearing instruments, in its $40 million asset and stock purchase by a multinational acquirer.

In addition to healthcare and life sciences, Mr. Dolatly has advised clients in numerous other industries, including financial services, technology, telecommunications, media and entertainment, insurance, manufacturing, retail, real estate and publishing. His international experience includes transactions throughout the European Union, as well as in Canada, Hong Kong, India, Israel, Japan and Mexico.

Formerly a partner with Fulbright & Jaworski L.L.P., Mr. Dolatly is a member of the American Bar Association, the New York State Bar Association, and the New York City Bar Association.

George Dolatly can be reached at or 212.589.4680.

EVENTS CALENDAR

October 1

Houston partner Susan Feigin Harris will speak on “Health Reform and Its Impact on Children’s Hospitals” at a “brown bag” telephone presentation sponsored by the Children’s Hospital Affinity Group of the American Health Lawyers Association.

October 11

Houston partner Susan Feigin Harris will speak on “Healthcare Reform—What’s Next?” at the 2010 Health Law Conference sponsored by the Texas Hospital Association in Austin, Texas.

Houston partner Donna Clark will present “Fraud and Abuse Update” at the 2010 Health Law Conference sponsored by the Texas Hospital Association in Austin, Texas.

Houston partner Scott McBride will present “Hospital Compliance Programs: The Tween Years” at the 2010 Health Law Conference sponsored by the Texas Hospital Association in Austin, Texas.

October 19

Cleveland partner Thomas Campanella will be speaking on “The Future Role of Physicians Under Healthcare Reform” at the Ohio University College of Osteopathic Medicine in Athens, Ohio.

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