Health Law Update - October 6, 2016

Alerts / October 6, 2016

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

  • The Deeper Dive: Section 1557 Attempts to Return the “Care” to “Healthcare”
  • Come On In and Stay Awhile: IRS Expands Safe Harbors for Bond-Financed Property
  • Capitol Hill Healthcare Update
  • Post-Election Webinar by the BakerHostetler Federal Policy Team
  • Events Calendar
The Deeper Dive: Section 1557 Attempts to Return the “Care” to “Healthcare”

By Amy E. Fouts, Gregory E. Fosheim and Kyle R. Gregory

The U.S. Department of Health and Human Services (HHS) moved to the forefront of anti-discrimination measures when it released a final rule, titled “Nondiscrimination in Health Programs and Activities” (Final Rule), implementing Section 1557 of the Affordable Care Act (ACA), which prohibits discrimination on the grounds of race, color, national origin, sex, age or disability in certain health programs and activities. The Final Rule sets out standards for addressing the prohibition against discrimination on the basis of sex in health programs and the application of Section 1557 to HHS-administered health programs. Hospitals and other healthcare providers are required to be in full compliance with the Final Rule by October 16, 2016, but getting up to speed could take some time. This article outlines some of the many requirements healthcare providers will need to implement to comply with Section 1557.

Scope of the Final Rule

The Final Rule implementing Section 1557 applies to any health program or activity that receives funding from HHS, including but not limited to Medicaid or Medicare Parts A, C and D. The Final Rule applies to, among others, providers such as hospitals that accept Medicare or doctors who receive Medicaid payments, the Health Insurance Marketplaces and issuers that participate in those Marketplaces, and any health program that HHS itself administers. Notably, physicians and suppliers participating in Medicare Part B are not subject to Section 1557; however, they may still be required to comply if they accept Medicaid or meaningful use information technology funding (which ends in 2018).

Providers subject to Section 1557 are considered a “covered entity” by HHS, which is certain to cause confusion with HIPAA regulations. Each covered entity applying for federal financial assistance must assure its compliance with Section 1557 and the regulations promulgated under the Final Rule by submitting an Assurance of Compliance form to the Office for Civil Rights (OCR).

The requirements for compliance with Section 1557 are backed with significant enforcement powers. Failure to comply may result in loss of HHS funding, and the Final Rule reiterates that Section 1557 provides a private right of action, either individually or as part of a class action, to those who believe they experienced prohibited discrimination.

Discrimination Based on Sex and Gender

Under the Final Rule, Section 1557 extends the sex discrimination prohibition of Title IX, which previously applied to education, to individuals in healthcare settings and defines sex discrimination to include discrimination on the basis of the following:

  • Pregnancy
  • False pregnancy
  • Termination of pregnancy or recovery from it
  • Childbirth
  • Marital or familial status
  • Sex stereotyping (including the stereotype that an individual must identify as either male or female)
  • Gender identity

Gender identity is defined to include identity as “male, female, neither, or a combination of male and female” and may be different from the sex assigned to an individual at birth. Generally, covered entities must treat transgender individuals consistently with their own gender identity. That said, the Final Rule does not prohibit separate men’s and women’s toilets, locker rooms or shower facilities as long as comparable gender-neutral facilities are available. It does note, however, that individuals may not be excluded from facilities for which they are otherwise eligible based on their gender identity. Sex-specific programs are permitted only with an “exceedingly persuasive justification,” such as the scientific need to limit participation in a clinical trial to a particular birth sex assignment.

Despite a progressive approach toward transgender health, the Final Rule does not resolve whether sexual orientation discrimination is prohibited by Section 1557. While HHS “support[s] a prohibition on discrimination based on sexual orientation as a matter of policy,” the Final Rule notes that “OCR has decided not to resolve in this Rule whether discrimination on the basis of an individual’s sexual orientation status alone is a form of sex discrimination under Section 1557.” To that end, HHS “will continue to monitor legal developments in this area,” “enforce Section 1557 in light of those developments” and consider issuing further guidance as appropriate.

Discrimination Against Persons With Limited English Proficiency

Entities covered under the Section 1557 rule are required take reasonable steps to provide meaningful access to each individual with limited English proficiency (LEP) who is eligible to be served or likely to be encountered in their health programs and activities. The Final Rule incorporates existing requirements of Title VI of the Civil Rights Act of 1964 and HHS LEP policy guidance and outlines specific requirements related to provision of language assistance services.

Notice Requirement

One of the more significant new mandates in the Final Rule is the requirement that each covered entity posts a notice regarding its non-discrimination policies. These notices must be provided in English with multi-lingual taglines and include:

  • Bases of discrimination prohibited under Section 1557;
  • Availability of free and timely auxiliary aids and services and language assistance services, including how to access those services;
  • Contact information for the entity’s employee responsible for Section 1557 compliance; and
  • Entity’s Section 1557 grievance procedures (if applicable) and OCR complaint procedures.

All significant publications and communications directed at the public must include such notice. In guidance accompanying the release of the Final Rule, OCR provided a sample notice and indicated that it views “significant communications” as including the following:

  • Outreach, education and marketing materials;
  • Patient handbooks;
  • Notices requiring a response from individuals;
  • Written notices such as those pertaining to rights or benefits;
  • Consent and complaint forms;
  • Written notices of eligibility criteria, rights, denial, loss or decreases in benefits or services; and
  • Applications to participate in services or programs.

Tagline Requirement and Language Assistance Services

Each covered entity must include taglines in at least the top 15 languages spoken by individuals with LEP in the applicable state, District of Columbia or U.S. territory, notifying such individuals of the availability of language assistance services.

Covered entities are responsible for providing language assistance services, such as oral interpretation and written translation, even if the language is not shown on OCR’s list, when doing so is a reasonable step to provide meaningful access to an individual with LEP. These services must be provided free of charge and protect individuals’ privacy and independence. Individuals with LEP cannot be required to provide their own interpreters, and a covered entity may not rely on an adult accompanying the individual or a minor child to provide these services. Rather, covered entities must use qualified translators and interpreters. Services must be provided in a “timely manner,” but the Final Rule does not include prescriptive time frames.

Come On In and Stay Awhile: IRS Expands Safe Harbors for Bond-Financed Property

By Katy Appleby, Emily C. Crosby and Christopher J. Swift

The Internal Revenue Service recently issued guidance in Rev. Proc. 2016-44 that meaningfully expands the safe harbors pertaining to management contracts affecting bond-financed property such as professional services agreements (e.g., radiology), medical director agreements, on-call agreements, food service agreements and management services agreements. While the new framework offers clarity and increased flexibility for Section 501(c)(3) organizations in negotiating management contracts, particularly longer-term arrangements with service providers, it also presents new challenges and conditions to meet the safe harbor. 

The IRS first provided for the conditions under which a management contract would not result in private business use, or would fall within a safe harbor, in Rev. Proc. 97-13. Those conditions included limits on net profit arrangements, contract term, compensation, and the relationship between the 501(c)(3) organization and its service provider. The IRS then “amplified” the management contract safe harbor with Announcement 2014-67, which added a new and very broad category of permissible five-year arrangements.

Rev. Proc. 2016-44 supersedes the existing safe harbor framework, providing 501(c)(3) organizations and their service providers with several new opportunities and challenges in negotiating management contracts affecting bond-financed property:

  • The term of the management contract must be the lesser of 30 years or 80 percent of the weighted average reasonably expected economic life of the managed property. This is a significant expansion from the Rev. Proc. 97-13 safe harbors regarding contract term.
  • A reasonable compensation structure (fixed or variable) for the services rendered as long as the compensation is not based on a share of net profits from operating the property. Incentive payments are considered reasonable and therefore permitted if eligibility is determined by the service provider’s performance against quality, performance or productivity standards.
  • The contract must not impose upon the service provider the burden of sharing in any net losses from operating the property or bearing the risk of loss for damage or destruction of the property.
  • The 501(c)(3) organization must exercise a significant degree of control over the property. This can include approval of annual budgets, capital expenditures, dispositions, rates charged for use, and general use of the property.
  • The management contract must provide that the service provider is not entitled to, and will not take, any tax position inconsistent with being a service provider. For example, the service provider must agree that it will not take any depreciation, amortization, investment tax credit or deduction for any payment as rent related to the property.
  • The 501(c)(3) organization must have the independent ability to exercise rights over the property and provider contract; the service provider cannot be in the position to influence or control the organization. This requirement aims to ensure that interested parties are not orchestrating management contracts from both sides of the transaction.

For purposes of this safe harbor, a service provider will not be treated as having a prohibited amount of control if:

– No more than 20 percent of the voting power of the qualified user’s governing body is vested in the service provider’s directors, executives or other employees;

– The service provider’s CEO (or equivalent executive) is not included on the governing body of the qualified user; and

– The service provider’s CEO also is not the qualified user’s CEO or the CEO of any of the qualified user’s related parties.

Rev. Proc. 2016-44 applies to any management contract entered into on or after August 22, 2016, but 501(c)(3) organizations and service providers generally may continue to rely on the safe harbors set forth in Rev. Proc. 97-13 and Announcement 2014-67 (as previously modified) for management contracts entered into before August 18, 2017. However, if such contracts are materially modified, extended, or in some cases renewed, on or after August 18, 2017, the updated contract will be subject to the Rev. Proc. 2016-44 requirements.

Also as a reminder, Rev. Proc. 97-13, Announcement 2014-67 (and Rev. Proc. 2016-44) do not apply to all contracts affecting bond-financed property. Certain arrangements will give rise to private business use even if they otherwise fall within the 97-13 safe harbor (e.g., leases), and others will not result in private business use even if they fail to meet the safe harbor (e.g., those solely related to the property’s primary function).

BakerHostetler is currently engaging with clients in analyzing whether their arrangements fall within Rev. Proc. 2016-44 and in reviewing existing and proposed management contracts to ensure compliance. We will be happy to assist your organization in meeting the new safe harbor requirements.

Capitol Hill Healthcare Update

By Michael A. Ferguson, Christian B. Jones, Adam J. Higgins and Tyler M. Thompson

Congress Adjourns, Eyes Election Then Lame Duck

Congress completed work last week on a stopgap budget that keeps the government open until a post-election lame-duck voting session in December, when lawmakers are expected to move on legislation dealing with medical innovation, mental health reform and possibly efforts to stop CMS’s proposed Medicare Part B drug demonstration program.

The November 8 election will be a key inflection point not only for determining who will be president and which party controls Congress, but also for forecasting potential healthcare reforms in December and into 2017.

Lame Duck: 21st Century Cures

Shortly before lawmakers left Washington, bipartisan healthcare leaders pledged to advance the medical innovation legislation called “21st Century Cures” during the lame duck voting session. In fact, Senate Majority Leader Mitch McConnell, (R-KY), told reporters he thought Cures “could end up being the most significant piece of legislation we pass in the whole Congress.”

But that says more about partisan gridlock that has largely seized Capitol Hill in recent years than it does about the sweeping nature of the bill. Championed by House Energy and Commerce Committee Chairman Fred Upton, (R-MI), the initiative began in 2015 with far-reaching regulatory and reimbursement changes, including a host of new exclusivities for drug companies and automatic coverage for certain new medical devices.

That effort, which met immediate resistance from Democrats, later stalled amid growing criticism over rising prices for both branded and generic drugs. Democrats also insisted on billions of dollars in automatic funding for NIH and FDA, money outside of Congress’s ability to review and change priorities.

Upton hopes to revive Cures in December with a slimmed-down version that includes a few billion dollars in new funding for NIH and the White House’s Cancer Moonshot initiative, along with modest changes to regulatory approvals and clinical trials. Unresolved is how to offset that new funding with cuts to existing healthcare programs and reimbursements.

Lame Duck: Medicare Part B

CMS is expected to soon publish its final rule on the controversial Part B drug demonstration project, triggering potential congressional action in December. Republicans, the pharmaceutical industry and medical specialty groups want to kill the pilot, hatched by the Center for Medicare and Medicaid Innovation, saying its near-national scope and mandatory participation is a politically-driven effort to address drug prices. Even some Democrats have raised concerns about the rule, calling for it to be scaled back. Democrats’ reaction to the final rule – and whether the Obama administration will adopt any of its critics’ suggestions – will be a key signal indicating whether any post-election legislative effort to undermine the rule would be bipartisan.

Before leaving Washington last week, 179 House lawmakers wrote to CMS acting administrator Andy Slavitt, calling on him to kill the demonstration. They said the agency has, among other things, failed to adequately consult with stakeholders on Medicare’s knee- and hip-replacement bundle model, the Part B drug pilot and CMS’s expected cardiac bundled-care model.

Lame Duck: Trans-Pacific Partnership (Exclusivity for Biologic Drugs)

The White House in December, with the election in the rear-view mirror, will push for a vote in Congress on the multi-nation trade agreement known as the Trans-Pacific Partnership. But among the stumbling blocks is a key healthcare provision included in the agreement: eight years of marketing exclusivity for biologic drugs, which receive 12 years of protection in the United States. It’s possible the exclusivity language will change after the election, but the White House won’t announce it before November.

Even if the exclusivity aligns with U.S. law – a key demand of Senate Finance Committee Chairman Orrin Hatch, (R-UT) – the trade deal faces significant political obstacles on the Hill. In addition to near-unanimous Democratic opposition, the political center of gravity among the GOP also has shifted on trade, fueled in part by Donald Trump’s criticism of trade deals, calling into serious question whether it could win congressional approval in December.

2017: Debt Ceiling, FDA User Fees

Healthcare stakeholders will face an early test in 2017, when a key vote on raising the government’s borrowing authority may accompany a general deficit reduction package that could include reimbursement and policy changes unfavorable to providers. Washington is expected to reach the debt ceiling in March. No matter who wins the White House, congressional Republicans will want spending cuts in return for raising the debt ceiling. In the healthcare space, Democrats will want to shield beneficiaries from cuts, leaving providers vulnerable to adverse legislation.

After the debt ceiling, Congress will have to renew industry user fees for FDA by next September. Although the branded, generic and biologic drug manufacturers as well as the medical technology industry have agreed with the FDA on user fees and agency performance goals, Congress must approve them – and could include regulatory provisions not agreed to by the industry and the FDA.

Drug prices are likely to remain a politically potent issue into the new year, as congressional investigations will continue into several companies’ pricing history for drugs.

Finally, at the end of 2017, the medical technology industry will see its hard-fought two-year suspension of the device tax expire. The industry will battle all year for renewal of the suspension, hoping to be included in any comprehensive tax reform legislation that may be considered. More probably, the issue will be debated at the end of 2017 as Congress considers a series of other expiring tax provisions.

Note to readers: With Congress adjourning, we’ll resume our healthcare update with a focus on Capitol Hill activity when Congress reconvenes after the November 8 election.

Post-Election Webinar by the BakerHostetler Federal Policy Team
Events Calendar

October 10, 2016

Houston Partner Donna S. Clark will present “Stark/Anti-Kickback Law Update” at the 2016 Texas Health Law Conference, sponsored by the Texas Hospital Association and the Health Law Section of the State Bar of Texas, in Austin, TX.

Houston Partner Susan Feigin Harris and Jeff Wurzburg of CMS will present “Health Reform 2016: An Examination of the Transformation of Healthcare Policy at the Federal Level and Insights into Successful Navigation of the Changing Landscape” at the 2016 Texas Health Law Conference, sponsored by the Texas Hospital Association and the Health Law Section of the State Bar of Texas, in Austin, TX.

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.

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