Health Law Update - May 18, 2017

Alerts / May 18, 2017

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

Capitol Hill Healthcare Update

By Mike Ferguson, Chris Jones, Adam Higgins and Tyler Thompson

Senate Panel OKs FDA User Fees

Legislation reauthorizing FDA user fees for prescription and generic drugs, biosimilars, and medical devices won wide bipartisan approval last week in a Senate committee, teeing up approval by the full Senate, likely after the Memorial Day recess. The Senate HELP Committee approved the five-year renewal on a 21-2 vote. Sens. Bernie Sanders (I-Vt.) and Rand Paul (R-Ky.) voted against it. Taking the agreement negotiated by the FDA and industry stakeholders, the committee added multiple provisions – including pediatric drugs, regulation of hearing aids sold without prescriptions, and device inspections and regulation – that enjoyed bipartisan support within the committee.

Sen. Orrin Hatch (R-Utah) won approval for an amendment requiring the FDA and National Institutes of Health (NIH) to review both the accessibility and barriers to clinical trials for patients who don’t respond to approved medications. The language was an effort to bridge differences between advocates of so-called right-to-try legislation and others concerned about giving patients early access to unapproved medicines. The panel also approved an amendment requiring the FDA to prioritize generic drug applications when only one company is approved to manufacture a drug.

Senators defeated 13-10 a Sanders amendment that would have allowed prescription drugs to be imported from Canada if overseas manufacturing facilities met FDA guidelines. Some opposition to the Sanders amendment was less on its substance and more on not wanting to weigh down the user fee bill with controversial language that could delay or scuttle its approval. Sanders says his amendment would allow cheaper drugs to be sold in the United States, but the pharmaceutical industry and several committee members warned of safety concerns about foreign-sourced drugs.

In an effort to placate committee Democrats, the panel’s chairman, Sen. Lamar Alexander (R-Tenn.), pledged to hold a future hearing on drug prices. Sanders and others are likely to press the drug pricing issue when the user fee legislation is considered on the Senate floor.

Current user fees expire September 30. Congress is pushing to pass a renewal before the end of July. The House Energy and Commerce Health Subcommittee on Thursday approved its version of the bill.

Senate Health Discussions Continue as CBO Score Nears

Senate Republicans continued their behind-the-scenes discussions about how to change the House-approved legislation repealing and replacing the Affordable Care Act (ACA).

A group of more than a dozen GOP senators are involved in active discussions, including several meetings last week. But other, smaller groups of lawmakers also are meeting to trade ideas and share proposals, including provisions on Medicaid, tax credits to encourage low-income Americans to purchase insurance, essential health benefits and pre-existing conditions protections.

At issue is how to fulfill a long-held Republican campaign promise of repealing the ACA but also address senators’ concerns about states that expanded Medicaid coverage as well as House language that could jeopardize coverage of pre-existing conditions for those seeking to purchase insurance on the individual market.

Senate leaders continue to say major changes in the House-approved bill are likely as they work to create a majority of at least 50 senators to support a bill. Republicans hold 52 Senate seats, and Vice President Pence would cast a tie-breaking vote.

Before they can seriously negotiate detailed changes, senators need an economic analysis of the House bill by the Congressional Budget Office (CBO). Because of the Senate’s budget rules, only certain provisions are allowed to be included in the healthcare bill, and the Senate bill also must meet certain fiscal benchmarks. CBO isn’t likely to release its score of the House bill until next week.

House Speaker Paul Ryan and the U.S. Department of Health and Human Services (HHS) Secretary Tom Price last week said they anticipated the Senate would approve its bill before Congress adjourns in late July for a month-long recess. But how Senate leaders navigate the thorny policy and political issues won’t begin to become clear until after the CBO score of the House bill is released.

Governors Call on Congress to Quickly Approve CHIP

In a letter to Capitol Hill, the National Governors Association urges speedy renewal of the Children’s Health Insurance Program (CHIP), but lawmakers are unlikely to act on reauthorizing the program until after Labor Day. The governors’ letter says CHIP has dramatically reduced the child uninsured rate, from 15 percent in 1997 when the law was created to less than 5 percent today. The letter was addressed to the leaders of the Senate Finance Committee and the House Energy and Commerce Committee. CHIP expires September 30.

Governors hoped CHIP could be reauthorized by June, when many states finalize their budgets. But Energy and Commerce Health Subcommittee Chairman Mike Burgess (R-Texas) says passage in September is more likely. The delay is mostly because key healthcare leaders are focused on efforts to repeal and replace the ACA. But some Republican lawmakers have suggested leveraging CHIP’s bipartisan support to attach to it other healthcare provisions, such as allowing insurers to sell policies across state lines, that couldn’t be included in the GOP’s broader healthcare overhaul.

Senators Seek Support for Children’s Hospital Education

Two senators are seeking support from their colleagues to boost funding for the training of pediatric medical residents through the Children’s Hospitals’ Graduate Medical Education program. Sens. Sherrod Brown (D-Ohio) and Johnny Isakson (R-Ga.) are circulating a draft letter to leaders of the appropriations subcommittee that funds federal healthcare programs. So far, mostly Democratic senators have agreed to sign on; besides Isakson, the only other Republican is Sen. David Purdue (R-Ga.).

The education program – funded at $295 million this year – is designed to strengthen the pediatric healthcare workforce. Through the program, created by Congress in 1999, 57 hospitals use the funding to train more than 6,000 pediatric providers, addressing critical shortages in pediatric specialty care and improving children’s access to healthcare, according to the Children’s Hospital Association.

Trump Budget Expected to Call for Health Cuts

The White House is expected to release its fiscal 2018 budget request to Congress next week, and lawmakers say they’re anticipating steep cuts in entitlement healthcare programs as President Trump seeks to balance the budget in 10 years. Although the administration’s budget submission is an important indicator of presidential priorities, Congress isn’t obligated to enact them. In fact, earlier this year the Republican Congress rejected Trump’s call for cutting billions of dollars from NIH.

Trump has said Medicare is off limits to changes, but lawmakers say they’re anticipating cuts to income-linked healthcare programs, potentially including Medicaid and CHIP. Discretionary spending – on everything from education to transportation – has largely been held flat in recent years. The only way to balance the budget in 10 years without raising taxes – even assuming robust economic growth – would be to reform entitlement spending.

Meanwhile, the House is in the beginning stages of drafting a budget blueprint for fiscal 2018. The appetite for reforming entitlement programs such as Medicare and Medicaid to rein in government spending has been strong among congressional Republicans, including when Speaker Paul Ryan served as chairman of the Budget Committee. It’s not clear whether Trump’s opposition, at least on Medicare – as well as the ongoing battle over repealing the ACA – could change the GOP’s position on healthcare-related entitlement programs.

BakerHostetler’s "Capitol Hill Healthcare Update" is distributed weekly when Congress is in session. To access previous postings, please see the Health Law Update Blog.

Defending Competitive Harm With Efficiencies: A Fire Swamp of Trouble

The use of efficiencies as a defense remains without a firm footing in law when a transaction has demonstrable and substantial anticompetitive effects.

By Jeff Murray

In Rob Reiner’s classic fantasy adventure The Princess Bride, Princess Buttercup and her true love, Westley, stand at the edge of the notoriously deadly Fire Swamp, chased there by enemies and with only that path forward. “We’ll never survive,” Princess Buttercup darkly intones. “Nonsense,” Westley responds cheerfully, “you’re only saying that because no one ever has.” As recently illustrated by the unsuccessful attempt to join two of the nation’s largest healthcare insurers, pursuing an efficiencies defense against anticompetitive findings regarding a healthcare merger presents every bit as daunting a task and as discouraging a track record.

In 2015, Anthem Inc. and Cigna Corporation struck an agreement to merge, seeking to capitalize on Anthem’s superior rates and Cigna’s superior customer support. This merger was subsequently challenged by the U.S. Department of Justice (DOJ), 11 states and the District of Columbia. U.S. District Judge Amy Berman Jackson enjoined the transaction on the grounds that the supposed efficiencies created by this arrangement could not save this unlawful creation of market power.

The U.S. Court of Appeals for the D.C. Circuit affirmed Judge Jackson, finding no clear error in her judgment of probable reduction in competition and saying that proceeding with the transaction “because of some unverifiable and non-merger-specific amount of price decreases accruing to one segment of the health care market would rewrite rather than enforce the Clayton Act.” The D.C. Circuit said that it would “leave for another day whether efficiencies can be an ultimate defense against [Clayton Act] Section 7 illegality,” but even assuming the viability of an efficiencies defense, it found that Anthem and Cigna still failed to prove those efficiencies trumped likely harm to competition.

In reaching this conclusion, the D.C. Circuit relied on a “helpful tool,” the DOJ and the Federal Trade Commission’s Horizontal Merger Guidelines. Although these Guidelines do not have the force of law, repeated reliance on them by appellate and trial courts have given them that effect in practice. The D.C. Circuit’s reliance on the Guidelines’ principle that “[c]ognizable efficiencies … do not arise from anticompetitive reductions in output or service” represented one of the final nails in the coffin for Anthem and Cigna’s efforts to combine.

So what should payers and providers in the healthcare arena take away from this case and the courts’ use of the Horizontal Merger Guidelines? Despite the Guidelines’ allowance in theory of efficiencies as a consideration in merger evaluation, a notion supported by modern currents of economic theory, the use of efficiencies as a defense remains without a firm footing in law when a transaction has demonstrable and substantial anticompetitive effects. Supreme Court guidance won’t soon be forthcoming; Anthem and Cigna filed a certiorari petition but then abandoned the transaction on May 12. Although Princess Buttercup and Westley managed to survive the perils of the Fire Swamp, such a happy ending remains fiction. In real life, success using efficiencies as a defense in this context remains uncharted territory.

The DOJ Enters Another FCA Lawsuit Against UnitedHealth

By Scott McBride and Jennifer Whitton

The U.S. Department of Justice (DOJ) recently filed its complaint in intervention in another whistleblower lawsuit brought under the False Claims Act against the nation’s largest owner and operator of Medicare Advantage (MA) organizations, UnitedHealth Group, Inc. (United). The DOJ’s 39-page complaint alleges that United had fraudulently obtained inflated risk adjustment payments by over reporting diagnosis codes for MA beneficiaries since 2005. At the heart of the complaint is the allegation that United “systematically ignored information” in blind audits that revealed both under reporting (i.e., diagnoses that the providers did not report) and over reporting (i.e., invalid diagnoses not supported by medical records). The complaint alleges that by failing to “look both ways,” United “improperly generated and reported skewed data artificially inflating beneficiaries’ risk scores, avoided negative payment adjustments and retained payments to which it was not entitled.”

The Centers for Medicare & Medicaid Services (CMS) makes a fixed monthly payment for each beneficiary enrolled in an MA plan. These payments are risk adjusted annually for the expected cost of providing medical care to each beneficiary, including health status. A risk score is used by CMS to calculate the MA plan’s Medicare payments for the following year. While the goal is to ensure that MA plans are paid more for less-healthy beneficiaries who are expected to incur higher medical expenses, this payment methodology according to the HHS Office of Inspector General, “creates a powerful incentive for [MA plans] to over-report diagnosis codes in order to exaggerate expected healthcare costs for their enrollees.”

A similar whistleblower case remains pending in the Central District of California, where the DOJ alleges that United knowingly obtained inflated risk adjustment payments based on untruthful and inaccurate information about the health status of beneficiaries enrolled in United’s MA plans. The DOJ has indicated that it wants to consolidate the two cases against United. It is anticipated that the consolidated cases could result in damages exceeding $1 billion.

In a recent press release, Sandra R. Brown, acting U.S. attorney for the Central District of California, said the DOJ’s recent actions in joining the whistleblower lawsuits against United “sends a warning that our office will continue to scrutinize and hold accountable Medicare Advantage insurers to safeguard the integrity of the Medicare program.”

Meanwhile, a U.S. District judge recently ruled that United has standing to sue CMS over a 2014 rule that requires MA organizations to return overpayments within 60 days. The lawsuit, filed by United in January 2016, alleges the rule violates the statutory mandate of “actuarial equivalence” under Medicare law in that it requires MA plans to report and return overpayments “based on an assessment of the health status of the plan’s members that is wholly inconsistent with (and far more searching than) the manner in which CMS assesses the health status of the average traditional Medicare beneficiary.”

Specificity Sometimes Key; Sometimes Not

By Robert Wolin

Time spent drafting and negotiating an agreement often pays dividends in assuring that each party gets the benefits they desire through the agreement and incurs obligations no greater than they intended. Two recent cases, discussed below, demonstrate how small drafting oversights resulted in significant litigation costs to the parties and in one case, the party’s loss of the prime benefit they sought from the arrangement.

Arbitration Agreements Signed Under a Power of Attorney

Beverly Wellner and Janis Clark (POA holders) each held a power of attorney (POA) affording her broad authority to manage her family members, Joe Wellner and Olive Clark, respectively. When Wellner and Clark were admitted to a nursing home, the documents to admit them included an agreement to arbitrate any and all claims or controversies arising out of or in any way relating to their stay at the facility. The POA holders signed the arbitration agreements. After Joe and Olive died, their estates sued the nursing home alleging that their deaths were caused by the facility’s negligence.

The nursing facility moved to dismiss the wrongful death cases, arguing that the arbitration agreements prohibited bringing the disputes to court. The Kentucky courts refused to enforce the arbitration agreements, holding they were invalid because neither POA specifically authorized the POA holder to enter into an arbitration agreement. The Kentucky Supreme Court based its determination on the Kentucky Constitution which “declares the rights of access to the courts and trial by jury to be ‘sacred’ and ‘in-violate.’” According to the Kentucky Supreme Court, “a general grant of power (even if seemingly comprehensive) does not permit a legal representative to enter into an arbitration agreement for someone else; to form such a contract, the representative must possess specific authority to ‘waive his principal’s fundamental constitutional rights to access the courts [and] to trial by jury. ’”

The U.S. Supreme Court held that the “Kentucky Supreme Court’s clear-statement rule violates the Federal Arbitration Act by singling out arbitration agreements for disfavored treatment. …” “A court may invalidate an arbitration agreement based on ‘generally applicable contract defenses’ but not on legal rules that ‘apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’ … By requiring an explicit statement before an agent can relinquish her principal’s right to go to court and receive a jury trial, the court did exactly what this Court has barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement.” Consequently, a POA need not include a statement specially authorizing the holder to sign an arbitration agreement

Agreement Fails to Clearly Express the Parties’ Intent

A radiology practice group comprised of five physicians entered into an exclusive joint venture arrangement with a hospital for the provision of radiology professional services in a newly-established outpatient diagnostic imaging center. After splitting into two groups, the five physicians attempted to divide up the hospital contract based upon the number of physicians in each new group. Shortly thereafter, these physicians sold their interests in the imaging center to the hospital.

After the split, the radiologists agreed to furnish professional supervision and interpretations of the studies performed at the imaging center on a joint exclusive basis through the two new groups. According to the agreement, each physician group would provide radiology services pursuant to a schedule (coverage schedule) for the initial contract year and in subsequent years, the two physician groups would agree to the coverage schedule for the next year; if they were unable to agree, the preceding coverage schedule was to remain in place for the following year. After noticing a substantial drop-off in referrals from the imaging center, one of the physician groups filed suit against the hospital for breach of contract.

The Nebraska Court of Appeals held that the agreement between the two groups unambiguously grants the parties the exclusive joint right to provide radiology services for the imaging center but does not “not specifically grant an exclusive right to perform necessary services at [the imaging center] based on the outlined schedule … and does not indicate any prohibition from either provider to perform radiology services during a week ‘assigned’ to the other provider.” Thus the hospital could use one group to provide all of the services without breaching the agreement, despite the fact that the physicians had intended a pro-rata split of the service volume.

The moral of the story here is that drafting must be specific, and clearly express the parties’ intent. In this case the court held that the agreement should have delineated that the hospital could use only the specified group for the specified week. It did not do so. As a result, “[t]he Hospital did not have an exclusive requirement to use [either group] based upon the outlined schedule, only an exclusive requirement to have [one of the groups] as [its] provider.”

No More Tears: A Few Recommended Steps in Response to WannaCry Ransomware

The attack resulted in some hospitals canceling operations and appointments because critical patient data could not be accessed.

By Erich Falke

On May 12, 2017, thousands of companies across the globe saw the first signs of a prolific malware outbreak. The malware, a ransomware variant labeled WannaCry, is capable of encrypting files on a device and moving laterally to encrypt files on associated file shares. On average, the ransom amount that is demanded is the equivalent of $300 in bitcoin. Early reports indicate the ransomware, which may function in 27 different languages, encrypted data on more than 75,000 systems in 99 countries. Russia, Ukraine, India and Taiwan appear to have been the hardest hit. The attack resulted in some hospitals canceling operations and appointments because critical patient data could not be accessed.

The WannaCry ransomware gained entry into computer systems by exploiting a vulnerability in certain versions of Microsoft Windows. Microsoft released a patch for the vulnerability in March 2017. Microsoft also released a blog that guides individuals and businesses through the steps they should take to stay protected from WannaCry. One reason this ransomware has been so prolific is that it is less susceptible to antivrus programs because it is injected into a running process instead of being written to disk.

Two key lessons to be learned from this incident are:

Our incident response team is ready to handle any issues your company may have with this WannaCry ransomware variant or any other data security incidents. Please click here for more information, or call our incident response hotline at 855.217.5204 for immediate help.

For more ways to protect yourself from ransomware and other data security incidents, please read BakerHostetler’s 2017 Data Security Incident Response Report.

Events Calendar

June 16, 2017

Houston Partner Gregory S. Saikin will participate in an “Anti-Kickback Master Class” webinar for the American Bar Association.

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