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The U.S. Department of Justice (DOJ) last week released its fifth significant change to its attorney-client privilege waiver guidelines for organizations (Guidelines) in the last ten years. The latest Guidelines were issued to address threatened Congressional action (S. 3217 and H.R. 3013) against the DOJ's aggressive pursuit of attorney-client privilege waivers and the Second Circuit's recent decision in United States v. Stein, which upheld the dismissal of criminal tax fraud charges against former KPMG employees based upon the U.S. Attorney's interference with their constitutional right to counsel. In Stein, the prosecutors wrongly pressured KPMG to cease paying attorneys for the employee defendants, which had the effect of depriving them of a proper defense. The new Guidelines reduce the pressure on organizations to waive attorney-client privilege in federal investigations.

Organizations will no longer be required to waive the attorney-client or attorney work product privileges to show their cooperation with the government and receive more favorable prosecutorial treatment under the new Guidelines. The government's focus is on the disclosure of facts regarding the alleged misconduct. While organizations remain free to voluntarily waive attorney-client communications or work product, prosecutors may no longer ask or require organizations to waive the privileges, except in very limited circumstances.

However, organizations that conduct internal investigations through lawyers, which may confer attorney-client privilege or attorney work product protection on at least some of the information collected, may still be indirectly required to waive a portion of their privileges in order to disclose what the government deems to be all of the relevant facts. Organizations will receive cooperation credit based upon the facts disclosed, without regard to whether the facts were contained in materials protected by attorney-client privilege or attorney work product or not. If an organization does not disclose relevant facts about the alleged misconduct for any reason, including claims of privilege, it generally will not be entitled to receive the corresponding cooperation credit.

In evaluating cooperation, the Guidelines also provide that prosecutors "should" not take into account whether an organization is advancing or reimbursing attorneys' fees or providing counsel to employees, officers, or directors. Likewise, prosecutors may not request that an organization refrain from taking such action. In addition, prosecutors may not request that an organization refrain from entering into joint defense agreements.

In determining whether or not to prosecute an organization, the government may consider whether an organization has taken meaningful remedial measures. Previously, prosecutors were allowed to consider whether an organization disciplined or terminated employees in evaluating cooperation. Under the new Guidelines, prosecutors may only consider whether an organization has disciplined culpable employees, and only for the purpose of evaluating the organization's remedial measures or compliance program.

While the latest Guidelines are a step in the right direction, additional protections are still required for organizations and their employees and officers. Consequently, Congressional action should not be allowed to whither as a result of the issuance of the Guidelines.

Furthering the suspicion afforded to block lease arrangements in recent governmental commentary, the Office of Inspector General (OIG) declined approval of a proposed block lease arrangement in Advisory Opinion No. 08-10. In the Opinion, a physician practice group that provides radiation and chemotherapy treatments in a facility (the Requestor), proposed to execute block lease arrangements with urology groups. Pursuant to the arrangements, the urologists would lease space and equipment in the Requestor's facility, as well as personnel, for fixed periods of time, during which the urologists would furnish intensity-modulated radiation therapy (IMRT) to their prostate cancer patients. The urologists proposed to bill all third party payors for the IMRT and pay the Requestor a fixed fee for the leased space, equipment, and personnel. The Requestor currently bills third party payors for IMRT services furnished to prostate cancer patients, including some referred by the urologists.

Citing a previously issued Special Advisory Bulletin on Contractual Joint Ventures (68 Fed. Reg. 23148 (April 30, 2003)), the OIG noted that the proposed arrangement established a joint venture between the Requestor and urologists with many of the suspect factors identified in the Bulletin.

The suspect factors included the following:

• The urologists would be expanding into a related line of business, IMRT, which was dependent on referrals from the urologists.
• The urologists would contract out substantially all IMRT operations to the Requestor and assume little business risk.
• The urologists could ensure the success of the business by referring patients and choosing IMRT over other therapies for prostate cancer.
• The Requestor is an established provider of IMRT services and, absent the arrangements, would bill and retain all revenue from the treatments.
• The urologists would use the leased premises, equipment, and staff to serve their own patient base—some of whom previously were referred to the Requestor.

The OIG noted that in agreeing to provide services it could otherwise provide in its own right, the Requestor provided the urologists with the opportunity to generate a fee and a profit, potentially constituting remuneration under the federal Anti-Kickback Law. Thus, the OIG concluded that the proposed arrangement presented a significant risk of use as a vehicle to reward the urologists for referrals in violation of the federal Anti-Kickback Law, and declined to approve the transaction.

In light of the OIG's conclusion, it is recommended that block lease arrangements be reviewed for potential Anti-Kickback Law implications.

Last week, the Illinois 4th District Appellate Court ruled that Provena Covenant Medical Center (Hospital) was not entitled to its long-held Illinois property tax exemption. While this is an Illinois case, it is likely to quickly have national ramifications with local taxing jurisdictions attempting to revoke hospital tax exemptions to help relieve the burdens on local government budgets.

The Hospital devoted only 0.7% of its total revenue to charity care. Of 110,000 admissions to the Hospital only 196 patients received free care and 106 discounted care in the year at issue. While the Court held that a strict numerical ratio was inappropriate as the Hospital could not manufacture patients in need of charitable care, it found that the Hospital did not meet the requirement for a property tax exemption under Illinois law because the Hospital (1) did not dispense charity to all who needed it or applied for it and (2) placed obstacles in the way of those seeking charitable care. The Court held that neither not-for-profit status nor the provision of healthcare services alone is sufficient to qualify for a tax exemption under Illinois law.

To be exempt from Illinois property tax, the Court held that the primary use of the Hospital's property must be for charitable care. While the Court found that a fixed threshold percentage of charitable care was not appropriate for property tax exemption, it held that the volume of charitable care was relevant to the exemption determination. The Court then evaluated the Hospital's charitable care policy and held that it was "merely … a pretense of charity, a pro forma procedure that was not calculated to make a serious evaluation of [a patient's] need" to assure that all who needed charitable care received it. The Hospital's charitable care policy based the waiver or discounting of fees upon the patient's assets and income. However, the Hospital's policy did not take into account the amount of the patient's medical expenses. Consequently, the Court found that the reduction of charges was unrelated to a patient's actual financial need because the "policy ignored completely the financial burden incurred by the patients or families for the medical services rendered…. A true charitable care policy would be more meaningful and would result in a fair evaluation of the patient's ability to pay." Because the policy ignored patients' liabilities, the policy posed, according to the Court, an obstacle to the dispensation of charity care to the needy.

The Court then found that much of the Hospital's claimed charitable care was illusory because in most cases where the Hospital provided discounted charitable care, the patients' remaining balances exceeded the Hospital's average costs in providing the care. Thus, even in instances where discounted care was provided, the Hospital had margin contribution and "therefore, [it] extended no charity at all to those patients."

The Court also held that the Hospital's policy of providing healthcare to all who apply for it does not suffice as a charitable care policy. Simply because the Hospital turns no patient away based on financial circumstances, it does not follow that the Hospital provides charitable care. Specifically, despite the nature of their admission to the Hospital, patients remain contractually liable to the Hospital for their charges.

The Court finally held that the Hospital's write-off of bad debt is not charity, as the write-off involves only the Hospital and its financial records. The Court noted that charity is a gift from one person to another, but a write-off does not relieve the patient's burden because the debtor-creditor relationship remains intact. Moreover, the Court further noted that the Hospital accepted payments on accounts written off, which, according to the Court, undermined the Hospital's argument that write-offs were charitable.

One final important factor in the Court's decision was the standard of review applied. The Court held that it was required to uphold the Illinois Department of Revenue's decision unless the Court found it to be clearly erroneous. Such a standard of review required the Hospital to demonstrate clearly and conclusively that it was a charitable institution, which the Hospital could not demonstrate under the factors set out by the Court.

We will be monitoring this case and will report on any developments in subsequent Health Law Updates.

On August 19, 2008, the Internal Revenue Service (IRS) issued revised "draft" instructions for completing the 2008 redesigned Form 990, Return of Organizations Exempt from Income Tax. While the revised instructions are still marked as a "draft," it is the expressed expectation of the IRS that the final version of the instructions, due to be issued in late 2008, will not contain further material changes. These instructions contain numerous changes to Schedule H for reporting by tax-exempt hospitals as compared with those issued in April 2008, and in general, are intended to provide greater clarity than prior instructions.

Changes to the revised instructions include:

• Narrowing the definition of who is included in "key employee" for purposes of reporting compensation and transactions with interested persons, which is limited to 20 employees.
• Requiring that an organization use reasonable efforts to obtain from interested persons or third parties information to complete certain portions of Form 990, including those related to independence, determining whether relationships exist among directors, trustees, key employees or officers, deterring compensation paid to such persons by related organizations, and determining whether interested persons were involved in certain transactions. The IRS describes what might constitute reasonable efforts, including sending a questionnaire to such individuals.
• Revising the test of whether a voting member of a governing body is independent, which is whether the individual is involved in a transaction that is required to be reported.
• Clarifying that physician clinics and skilled nursing facilities are eligible for treatment as a subsidized health service.
• Clarifying reporting requirements with respect to interested party transaction.

On August 31, 2008, Secretary of Health and Human Services, Michael O. Leavitt, declared a public health emergency pursuant to Section 319 of the Public Health Service Act, to address any public health emergency issues resulting from Hurricane Gustav, three years to the day after doing the same for Hurricane Katrina. The declaration helps to facilitate response assistance and provide grants, funding and orders to allow public health officials and providers to better respond in the face of natural and other disasters.

Section 1135 of the Social Security Act enables the Secretary of HHS to temporarily waive or modify the application of requirements of the Medicare, Medicaid or Children's Health Insurance Program (CHIP) to address an emergency to meet the needs of individuals enrolled in those governmental programs. Under this authority, Secretary Leavitt issued, on August 31, 2008, a waiver of those specific requirements applicable to providers under the Medicare, Medicaid, and CHIP programs. The waiver ensures that healthcare providers can furnish items and services to covered persons in good faith and be assured that they will be reimbursed under the applicable governmental program, even if they are not able to comply with all the applicable laws as a result of the effects of Hurricane Gustav.

The waiver applies to the following:

• Certain conditions of participation and certification requirements applicable to providers;
• The requirement that physicians and other health professionals hold licenses in the state in which they provide services;
• Sanctions under EMTALA for the redirection of an individual to another location to receive a medical screening and examination pursuant to a state emergency preparedness plan or transfer that arises out of hurricane-related emergency circumstances;
• Sanctions related to physician referral;
• Limitations on payments to out-of-network providers under the Medicare Advantage program.

This waiver, along with questions and answers related to Medicare fee-for-service payments in the wake of a Hurricane Emergency, is available on the CMS website.

The waivers became effective at 5:00 p.m. on September 2, 2008, but were made retroactive to August 27, 2008, for the states of Louisiana and Texas; August 28, 2008, for Mississippi and August 29, 2008, for Alabama.

For more information, please contact Susan Feigin Harris, or 713.646.1307.