Health Law Update - August 24, 2017

Alerts / August 24, 2017

Welcome to this week's edition of the Health Law Update. In this Issue:

Back to School Rules Recap: Hospital and Physician Cheat Sheet on What CMS Did This Summer

By Kristen McDermott Woodrum, Ernessa B. McKie and Jeffrey R. Murray Jr.

Summer was no vacation for the Centers for Medicare & Medicaid Services (CMS). The agency released a series of significant rules that signal the nature and pace of CMS Medicare payment and policy changes for hospitals and physicians under the Trump administration. For anyone who did take a vacation, this article provides a rulemaking cheat sheet, providing links to the rules you may have missed and highlighting a few of the notable provisions in this CMS guidance. Comments are due soon on a number of the proposed rules, and final rules are expected this fall.

Cancellation of New Mandatory Cardiac and Orthopedic Bundles and Changes to the CCJR Payment Model

On August 17, 2017, CMS published its proposal to cancel the Episode Payment Models and Cardiac Rehabilitation incentive payment models finalized in the waning days of the Obama administration’s CMS. Originally set to become effective this summer, these models were twice delayed after Tom Price took over as Secretary of the U.S. Department of Health and Human Services (DHHS). The proposed rule would also change the Comprehensive Care for Joint Replacement Model (CJR) by roughly cutting its geographic areas in half and making participation voluntary for low-volume and rural hospitals in the 33 remaining areas. CMS cited concern with the mandatory nature of the models and noted that it expects to continue to offer providers opportunities to participate in voluntary initiatives, including episode-based payment models. This change would impact the ability of affected physicians to qualify for the Advanced APM track of the QPP, described below.

CMS will accept comments on this proposed rule until October 16.

FY 2018 Inpatient Prospective Payment System Final Rule

The IPPS final rule, published August 14, 2017, addressed the ongoing operational requirements for the Hospital Inpatient Quality Reporting Program, Hospital Value-Based Purchasing Program (VBP), Hospital Readmissions Reduction Program (RRP), Hospital Acquired Conditions Reduction Program (HAC) and Medicare EHR Incentive Program (MU). There were no significant surprises with respect to the finalized proposals for these programs, except that CMS signaled its intent to incorporate a methodology that considers social risk factors as part of the various CMS quality programs. CMS discussed looking at variables such as income, education, race and ethnicity, employment, disability, community resources, and social support to determine the impact on measured performance and overall quality data reported. Public comment was generally supportive of this approach; however, CMS did not commit to a finalized policy in the final rule.

CMS did not finalize a less popular proposal that would have required a CMS-approved accrediting organization to post all final accreditation survey reports and acceptable plans of correction on their publicly accessible websites. Though CMS believed that the proposal would foster transparency, CMS withdrew the provision altogether without discussing stakeholder comments and only stating that it “may appear as if CMS was attempting to circumvent” the Social Security Act. CMS also finalized a proposal to eliminate the term “newspaper” from the required forms of public notice for the Medicare termination of Ambulatory Surgical Centers, Federally Qualified Health Centers, Rural Health Centers and Organ Procurement Organizations.

CY 2018 Hospital OPPS/ASC Proposed Rule

On July 13, 2017, CMS released the calendar year (CY) 2018 Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs proposed rule (OPPS/ASC Rule).

The OPPS/ASC rule introduced some positives, including a 1.75 percent increase to outpatient hospital prospective payment rates. And after years of discussion at CMS and innovations in total knee arthroplasty (TKA) procedures, the OPPS/ASC rule proposes to remove TKA from the inpatient-only list and add it to the ASC procedures list. CMS is soliciting comments on whether to make the same change for partial and total hip procedures. CMS has previously cited impacts on the CJR and Bundled Payments for Care Improvements Models in rules declining to move TKA to the outpatient setting, so this proposal is consistent with CMS’s change in approach to bundled payment models.

But the OPPS/ASC rule outlined changes that could have major negative ramifications for hospitals. If the proposed rule is finalized, there would be significant payment reductions for the 340B Drug Pricing Program. While hospitals have been reimbursed traditionally for 340B drugs at an average manufacturer sales price plus six percent, under CMS’s proposal, hospitals would only receive payment at the rate of the average manufacturer sales price minus 22.5 percent. Although CMS noted that it was open to comment on the “appropriate” rate, a significant reduction in 340B drug payments could be a hard pill to swallow for participating hospitals.

Finally, while CMS will not finalize a proposal implementing the site-neutral payment policies of Section 603 of the Bipartisan Budget Act of 2015 that would have restricted hospitals’ expansion of services at those excepted hospital departments not subject to the payment adjustments, the agency is still focused on reducing payment rates and differentials, including through its companion Part B rulemaking.
CMS will accept comments on the OPPS/ASC proposed rule until September 11.

CY 2018 Revisions to Payment Policies Under the Physician Fee Schedule and Other Revisions to Part B

Published on the same day as the OPPS rule, the CY 2018 Physician Fee Schedule rule hits some high and low notes. On a high note, CMS continues to slowly phase in the requirement that Medicare claims for advanced diagnostic imaging include information about the appropriate use criteria. Under the current proposals, providers will be required to include these criteria on claims starting in January 2019. CMS is considering additional chronic care management and telehealth services codes, and the agency seeks comments on whether it should delete the requirement for reporting the telehealth modifier for professional claims.

On a low note, CMS proposes that hospitals will receive 25 percent, rather than the previously established 50 percent, of the applicable OPPS payment rate for services furnished in non-excepted off campus hospital departments beginning in CY 2018. Stakeholders, including the American Hospital Association, strongly object to the rate of reduction for CY 2018. As part of its proposal, CMS requested public comment regarding whether a higher rate, such as 40 percent, might be more acceptable during the transition. CMS also restated its decision not to finalize a policy that restricted the expansion of service lines at off-campus provider-based departments in the CY 2018 OPPS/ASC rule. However, CMS stated that it will continue monitoring the data for changes in billing patterns and utilization.

CMS will accept comments on this Part B proposed rule until September 11.

CY 2018 Updates to the Quality Payment Program

On June 30, 2017, CMS issued another Part B rule, the much anticipated CY 2018 Updates to the Quality Payment Program (QPP), which outlines proposed payment and policy changes to the QPP created by the Medicare Access and Chip Reauthorization Act of 2015 (MACRA). The QPP rule signals CMS’s intent to reduce the pace and burdens of MACRA implementation.

The QPP rule includes key changes impacting both of its tracks: (1) the default Merit-based Incentive Payment System (MIPS) path, which includes upward or downward payment adjustments based on scores in four performance categories, and (2) the Advanced Alternative Payment Model (Advanced APM) path for clinicians who meet the criteria of a Qualifying APM Participant (QP) in an Advanced APM. It also provides detail on new policies that become effective in and after Year 2 of the QPP. We took a deeper dive into the QPP rule this summer through our blog but a few key highlights include:

  • Excluding more clinicians from MIPS by increasing the low-volume threshold.
  • Implementing the virtual group provision of MACRA to allow solo practitioners and groups of 10 or fewer clinicians to combine resources and participate in MIPS as a group.
  • Implementing an option for facility-based clinicians to use their institution’s performance in value-based programs to assess performance in the quality and cost performance categories of MIPS.
  • Allowing flexibility in reporting, providing opportunities for additional bonus points and delaying weighting of the cost performance category of MIPS.
  • Extending, through performance year 2020, the revenue-based nominal risk standard for an alternative payment model to qualify as an Advanced APM, which is eight percent of the average estimated Parts A and B revenues, and lessening certain Advanced APM pathway requirements for participants in medical homes and the Comprehensive Primary Care Plus Model.
  • Updating policies that will apply to the All-Payer Combination Option, which will allow QP status to be determined based on participation both in the current Medicare Part B Advanced APMs and in other alternative payment models that meet the criteria to be an Advanced APM. CMS invites comments on the challenges it recognizes will be involved with this option, which will be limited only to Medicaid, Medicare Advantage and CMMI multi-payer models in performance year 2019.

The comment period on the QPP rule closed August 21.

CMS Digging In on Medicaid DSH Payments

By Susan Feigin Harris and Geraldine E. Edens

During the summer months, several developments have occurred concerning the Medicaid Disproportionate Share Hospital (DSH) policy that the Centers for Medicare & Medicaid Services (CMS) has implemented, to the detriment of a number of hospitals. These hospitals and state hospitals associations have challenged CMS in district courts all over the country and several courts ruled over the summer months, issuing decisions that enjoined the application of the Medicaid DSH policy.

The Offending Policy

The Medicaid Act provides for a supplemental payment to qualifying hospitals that provide care to a disproportionate share of Medicaid program and uninsured patients. Once qualified, the formula determines the hospital-specific limit (HSL) for each hospital, which determines the maximum DSH supplemental payment. The formula, defined in 42 USC § 1396r-4(g)(1)(A), specifically defines the HSL as the “costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by the uninsured patients) by the hospital to individuals who are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year.”

CMS posted questions and answers (commonly referred to as “FAQs”) on its website in January, 2010. Two FAQs (#33 and #34) require that DSH auditors subtract third party commercial payments made on behalf of Medicaid eligible individuals (FAQ 33) and Medicare program payments made for dual eligible individuals (FAQ 34). The result significantly reduces or eliminates Medicaid DSH payments associated with individuals who qualify for Medicaid due to their illness, but for whom Medicaid is not the primary payor, and for individuals who are dual eligible, as defined by the Medicare program. In essence, CMS redefines the term “dual eligible” to add in private commercial payments in their new policy. CMS argues that the term “costs incurred” means hospital inpatient and outpatient costs minus payments made from commercial third party payors and the Medicare program, all calculated before the subtraction of Medicaid payments on the payment side of the formula.

Hospitals and hospital associations have challenged the application of the policies contained in the FAQs as a new and completely changed methodology, one which was implemented without notice and comment required under the Administrative Procedures Act, as well as a violation of the clear statutory language itself. The first case, Texas Children’s Hospital v. Burwell (D.D.C.), in 2014, resulted in a preliminary injunction entered in favor of Texas Children’s Hospital and Seattle Children’s Hospital that applied to Texas and Washington states, enjoining CMS from enforcing FAQ 33. Summary judgment motions remain pending in that case. However, since 2014, a number of other hospitals in jurisdictions around the U.S. have brought similar lawsuits challenging the FAQs.

Summer Court Action

In June, three additional decisions were issued. The first, issued June 20, 2017, held in favor of Children’s Hospital of the King’s Daughters, Inc. v. Price (No. 17-cv-139; 2017 WL 2936801) (E.D. Va. June 20, 2017), preliminarily enjoining CMS from enforcing FAQ 33 in Virginia. The court ruled that the Medicaid Act does not authorize CMS to include third-party commercial payments in the HSL. The court’s decision was converted to a final judgment in favor of the hospital, issued August 24, 2017. A final judgment was entered June 21, 2017 in the Tennessee Hosp. Ass’n v. Price case, No. 16-cv-3263; 2017 WL 2703540 (M.D. Tenn. June 21, 2017) which challenged both FAQs. The court granted summary judgment in favor of plaintiffs on their APA claim, holding that the policy violated the APA by conflicting with the Medicaid Act and the 2008 rule. Finally, on June 26, 2017, the Minnesota district court permanently enjoined CMS from enforcing FAQ 33 and vacated FAQ 33 as procedurally invalid in the Children’s Health Care v. Price case, No. 16-cv-4064 (D. Minn. June 26, 2017).

The 2017 Final Rule

CMS has not been deterred. Rather, CMS is signaling its intention to move forward with appeals of the adverse FAQ decisions and by pursuing its policy through issuance of a final rule formalizing the embattled FAQ policies. The final rule specifies as “clarifying’ in nature the application of commercial third party payments for Medicaid-eligible patients, and Medicare payments for dual eligibles in the HSL formula. The final rule, promulgated at 42 C.F.R. § 447.299, went into effect on June 2, 2017, but several cases have been filed challenging the promulgation of the final rule, in addition to the FAQs. Legally, a clarifying rule would have retroactive effect, meaning that the final rule would apply to all of the years that would be under audit prior to the “effective date”, but CMS has argued in court that the final rule only applies to services provided subsequently to the effective date. CMS’s assertions are inconsistent and not legally valid, given the specific language used within the final rule itself. The rule has been challenged in the District of Columbia District Court, filed by twelve hospitals, comprised of many of the same hospitals in the Texas, Washington, Minnesota and Virginia FAQ cases. A hearing was held in early August. Additionally, rule challenge cases have been filed by hospitals in Missouri, Pennsylvania, and Kentucky, Mississippi and New Hampshire.

Currently, CMS’s power to enforce DSH audit recoupments has been somewhat checked, but such enforcement is limited only to those states in which the application of the policy has been specifically challenged. If the rule itself is eventually vacated, the application of the DSH formula would be rendered impotent, but conceptually would not apply to the underlying FAQ challenges. The rule challenge court decision could be the next important step in obtaining much- needed financial relief for those hospitals who have not received DSH program year payments or who have been holding reserves for pending recoupments, while sending a message to CMS relating to the ultimate positioning of their legal posture.

Breaching Physician Doubles Down on His Debt

In drafting recruitment agreements, providers should separate the employment agreement from the other agreements to help diffuse breach of employment agreement arguments as a defense to the repayment of recruitment advances.

By Robert M. Wolin

Dr. Robert Halterman entered into a recruitment agreement (Recruitment Agreement), a promissory note (Note) and a physician employment agreement (Employment Agreement) with Johnson Regional Medical Center (JRMC) to work as an OB/GYN. Upon execution of the agreements, JRMC advanced Dr. Halterman $50,000 as a “signing advance.” According to the terms of the Recruitment Agreement, the Note’s monthly payments would be forgiven as long as Dr. Halterman continued his employment at JRMC.

Within five months, however, Dr. Halterman had resigned from JRMC citing an injured shoulder as his reason for leaving. After accepting Dr. Halterman’s resignation letter, JRMC terminated his employment and demanded payment of the remaining balance due under the Note. Dr. Halterman failed to make any payments, and several months after his resignation, he began working elsewhere as a hospitalist.

JRMC filed suit against Dr. Halterman alleging that he had failed to pay the balance of the Note when due. In response, Dr. Halterman claimed that all three documents constituted a single contract, and that his performance under the contract was excused by JRMC’s breach of contract, JRMC’s fraudulent inducement related to a misrepresentation of Dr. Halterman’s on-call requirements, and/or the physician’s shoulder injury, which prevented him from fulfilling his duties.

The district court held that the agreements, while executed at the same time, constituted two separate contracts – (1) the Employment Agreement and (2) the Note and Recruitment Agreement – based upon the parties’ intent as reflected in the terms of the agreements, independent merger clauses, differing triggers for termination, and differing promises and obligations.

As for Dr. Halterman’s allegations against JRMC, “Even assuming that [the] contentions are true,” the court held that Dr. Halterman “fail[ed] to explain why any of them would allow him to keep the remainder of the loan proceeds.”

Halterman’s obligation to pay the remaining debt under the Note is not excused by his allegations of fraud or breach of the duty of good faith…. To the contrary, [a party] after discovering the fraud, [can elect to] either perform [the contract] or rescind it, and if with knowledge of the fraud he elects to perform it this is equivalent to his making a new contract, and to permit him, under those circumstances to recover for a fraud would be to do violence to every rule upon which compensatory damages are allowed.

By resigning, thus choosing not to perform, Halterman chose rescission as his option. Consequently, he was obligated to repay the balance due to JRMC.

The district court also held that a contractual provision authorizing attorney’s fees was “enforceable in accordance with its terms independent of [any] statutory authorization providing for attorney's fee.” As a result, the district court granted JRMC’s summary judgment motion and awarded JRMC nearly double the remaining balance ($37,894) of the Note. The judgment totaled $64,931.81 – $37,894.88 in principal owed under the Note, $21,696 in attorney’s fees, $3,849.93 in interest, and $1,491 in costs.

The U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s summary judgment to JRMC.

Johnson Regional Medical Center v. Halterman, No. 16-3068 (8th Cir. 2017).

Is the Dam Breaking? Over-the-Counter Hearing Aids

By Robert M. Wolin

The FDA Reauthorization Act (H.R. 2430), recently signed into law by President Donald Trump, included the Over-the-Counter (OTC) Hearing Aid Act, which requires the Food and Drug Administration (FDA) to develop regulations within three years for hearing aids to be sold over-the-counter to individuals with mild to moderate hearing loss.

The Senate passed the legislation 94-1, over the objections of several industry associations, including the Hearing Industries Association, which argued that the legislation did not provide for “the devices [to] be safeguarded, the patient [to] be protected, and the hearing care professional [to] remain involved.”

The deregulation of the hearing aid market is likely to lead to a degradation of provider services, decreased product margins and an influx of new competitors in the hearing aid market.

More important, however, the new law may signal a willingness on the part of Congress to allow greater consumer self-determination in the selection and purchase of healthcare products and services, which could have a significant impact on bypassed providers. This trend bears watching by providers.

In Case You Missed It: The Trending Posts of Summer

For those who missed out over the summer, here’s a recap of recent trending posts from the BakerHostetler Health Law Update blog:

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Events Calendar

September 8, 2017

Houston Partner Lynn Sessions will present “Managing Access and Permissions: Steps to Reduce Your Risks” at the Health Care Compliance Association Boston Regional Conference in Newtown, MA.

September 12, 2017

Cleveland Of Counsel Thomas S. Campanella will present “Positive Disruption in Health Care – How Employees Win” at the Oswald Companies Employer Clients in Cleveland, OH.

September 15, 2017

Cleveland Of Counsel Thomas S. Campanella will present “Evolution of Managed Care Network Designs That Drive Value and Outcomes Based Utilization” at the Managed Markets and Account Management Strategies Conference in Chicago, IL.

September 17, 2017

D.C. Partner Lee Rosebush and D.C. Of Counsel Frank Palumbo will present on Legal Day at the National Association of Specialty Pharmacy Second Annual Specialty Pharmacy Law Conference held in Washington, DC.

November 2, 2017

Houston Partner Lynn Sessions will moderate “Medical: Is It BI or BI?” at the 2017 PLUS International Conference in Atlanta, GA.

November 6, 2017

Cleveland Of Counsel Thomas S. Campanella will present “Analyzing Positive Implications of Health Care Reform and New Payment Models on the Medical Device Value Proposition” at the Medtech Commercial Leaders Forum USA in Princeton, NJ.

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