Health Law Update – December 12, 2013

Alerts / December 12, 2013

Welcome to this week's edition of the Health Law Update. Topics covered today include:

We hope you find this information helpful. Please contact me or any member of BakerHostetler's Healthcare Team with questions.


The final physician fee schedule (PFS) and hospital outpatient department payment rules for FY 2014 clearly signal the continued intent by the Centers for Medicare and Medicaid Services (CMS) to transform the healthcare delivery system through the Medicare program's payment systems and policies. In an effort to improve quality of care and reduce the costs of that care through efficiency incentives, the rules' payment changes continue to reconfigure physician incentives, transfer cost and, to a lesser degree, utilization risk to providers.

The Dollar Trees – Annual Payment Rate Changes

CMS generally will increase hospital outpatient prospective payment system (OPPS) payment rates for calendar year (CY) 2014 by 1.7 percent, which is less than the proposed 1.8 percent increase. Ambulatory surgical center (ASC) rates will be increased 1.2 percent, which is higher than the 0.9 percent that had been proposed. The PFS rule proposes a 20.1 percent reduction in physician fees for 2014. Stay tuned -- even the least productive Congress in history likely will not allow a reduction of this magnitude to be implemented. Timing, however, remains an issue, although it appears that a short-term patch will be enacted before the end of the year.

Clinical Laboratory Fee Schedule (CLFS) – Update

CLFS payment rates traditionally have remained static and, once a test was added to the CLFS, the payment rate for that test was not revised. Because the CLFS has been in existence for nearly 30 years, officials at CMS believe that payment rates may be outdated and potentially excessive. The PFS rule indicates that CMS will regularly review and update payments under the CLFS based on "changes in technology." Consequently, the likelihood of future reductions in CLFS payment rates reflecting lab automation should be taken into account when negotiating laboratory fee schedules and arrangements.

Outpatient Prospective Payment System

OPPS pays for most hospital outpatient department services and partial hospitalization services furnished by hospital outpatient departments and community mental health centers. OPPS payments are based on the Ambulatory Payment Classification (APC) group to which a service is assigned. CMS's OPPS rule makes a number of changes that are designed to improve quality and/or efficiency, including:

Increased Bundling of Components. To avoid rewarding providers for the quantity of services delivered, rather than the quality of care furnished, the rule expands the categories of items and services bundled together for payment by adding five additional categories of supporting services included in the primary service payment. This continues the migration of the OPPS toward a prospective payment system and away from a per unit of service fee schedule. The five categories bundled are:

  • Drug, biological and radiopharmaceutical supplies used in a diagnostic test or procedure;
  • Drug and biological supplies used in a surgical procedure;
  • Certain clinical diagnostic laboratory tests;
  • Certain procedures described by add-on codes; and
  • Device removal procedures.

Beginning in CY 2015, CMS will implement 29 comprehensive APCs to replace 29 existing device-dependent APCs to prospectively pay for the most costly hospital outpatient device-dependent services. Comprehensive APCs include payment for both the primary service and all adjunct services provided to support the primary service.

Outpatient Clinic Visit Codes. CMS's bundling and quality incentivization policies also drove CMS to collapse the current five levels of clinic payments into a single code for an outpatient hospital visit. CMS believes this change will incentivize hospitals to provide care in the most efficient manner and discourage upcoding. Payment under the new APC code is based on the mean costs of prior clinic visit codes. This change will have an adverse impact on tertiary care facilities and may inadvertently over-reward low outpatient complexity providers.

The final rule, however, does not collapse the emergency department codes, as had been proposed earlier this year.

New Quality Measures: Hospital Outpatient Quality Reporting (OQR) Program and ASC Quality Reporting Program (ASCQR). The rule also adds four new measures for the OQR program and three new quality measures for the ASCQR, affecting payments beginning in CY 2016, with data collection beginning in CY 2014. The new OQR measures are:

  • Influenza vaccination coverage among healthcare personnel;
  • Endoscopy/polyp surveillance: appropriate follow-up interval for normal colonoscopy in average-risk patients. This measure also was adopted for the ASCQR;
  • Endoscopy/polyp surveillance: colonoscopy interval for patients with a history of adenomatous polyps -- avoidance of inappropriate use. This measure also was adopted for the ASCQR; and
  • Cataracts: improvement in patient's visual function within 90 days following cataract surgery. This measure also was adopted for the ASCQR.

The final rule also removes two OQR measures for payments beginning in CY 2015: (1) transition record with specified elements received by discharged emergency department patients (OP-19) and (2) cardiac rehabilitation measure: patient referral from an outpatient setting (OP- 24).

Hospital Value-Based Purchasing (VBP) Program. Under this program, value-based incentive payments are made to hospitals meeting certain performance standards. The final rule adds performance and baseline periods for the catheter-associated urinary tract infection, central line-associated bloodstream infection and surgical site infection measures for the FY 2016 Hospital VBP Program. The final performance period is CY 2014, and the final baseline period is CY 2012. The rule also creates a second level review process for hospitals that are dissatisfied with the result of a VBP program administrative appeal.

Physician Fee Schedule

Primary Care and Chronic Care Coordination Payments. To further support its goal of delivering coordinated care, CMS will begin paying separately for non-face-to-face chronic care management services in 2015 for Medicare beneficiaries who have multiple significant chronic conditions. These payments will be in addition to the current payment for transitional care management services for a beneficiary transitioning from a facility to a community setting.

Physician Value-Based Payment Modifier. The PFS rule continues the implementation of the Physician Value-Based Payment Modifier. The value-based payment modifier is designed to provide a differential payment to physicians based on the quality of care furnished compared to the cost of that care. Beginning in 2016, groups with 100 or more physicians will have both upward and downward value-based adjustments, while groups of 10 to 99 physicians will have only upward value-based payment adjustments. For CY 2016, the adjustment generally will be limited to a maximum of two percent, upward or downward.

PQRS Changes. CMS continues its pattern of changing the Physician Quality Reporting System (PQRS) measures. For 2014, CMS added 57 new individual measures and 2 measures groups and retired a few claims-based measures. Therefore, the PQRS program will contain a total of 287 measures and 25 measures groups in 2014. Many of the changes were designed to align the reporting of quality measures under multiple programs to permit a physician to report the data only once for all reporting programs. In addition, CMS provides an option to report quality data through qualified clinical data registries. Beginning in 2015, a downward payment adjustment will apply to professionals who do not satisfactorily report data on quality measures for covered professional services.

Physician Compare. For 2014, CMS finalizes its proposal to publicly report all measures collected through the PQRS group practice reporting option (GPRO) web interface (that met certain validity and reliability standards) for all groups participating in the 2014 PQRS GPRO and for ACOs.

CMS anticipates posting, as early as 2014, data from the Clinician and Group Consumer Assessment of Healthcare Providers and Systems (CG-CAHPS) on Physician Compare for large group practices and ACOs.

CMS will continue adding to and utilizing the Physician Compare website to publicly report physician data. Consequently, physicians must monitor their performance metrics and data (such as primary and secondary specialties, practice locations, group affiliations, hospital affiliations, Medicare assignment status, education, languages spoken, American Board of Medical Specialties board certification information, quality programs under which information was satisfactorily reported and whether the individual was a successful electronic prescriber) to assure it is properly displayed in response to patient searches.

Licensure/State Law Compliance Required for Incident To Services. As a condition of payment for "incident to" services, the rule requires that such services be furnished in compliance with applicable state law. CMS wants to enhance the quality of care delivered by assuring that providers comply with state standards regarding (1) the qualifications of the individuals who furnish various types of incident to services and (2) the requirements under which services may be furnished in the applicable setting.

Misvalued Codes. CMS continues identifying misvalued codes and made adjustments to bring payments in line with the relative value of the procedures to prevent over-utilization. In the PFS rule, the agency finalizes coding changes on approximately 200 procedures, and approximately 200 additional codes had their work relative value units changed on an interim basis for 2014.

SGR Fix Status

Bipartisan support exists for various draft proposals that repeal the SGR physician payment formula and replace it with a mix of payment freezes and quality and value-based payments to encourage value and quality over volume.

The existing congressional proposals would generally freeze current physician payment levels for ten years and reform incentive programs to allow physicians and other healthcare professionals to earn performance-based incentive payments through a compulsory budget-neutral value-based purchasing program. These proposals would combine all of the current quality incentive programs into one comprehensive program. Consequently, the details of CMS's regulatory quality and efficiency programs are likely to change, but the overall regulatory trend will continue to use payment mechanisms to encourage behaviors that reduce the cost of care and improve its quality.

Based on the downward bend to the healthcare cost curve, the Congressional Budget Office recently lowered its 10-year estimate of the cost for repealing the SGR physician payment formula to $116.5 billion. While this may make congressional action easier, with 2013 winding down and the "pay-fors" yet to be resolved, it is likely that physicians will see the can kicked down the road with a short-term fix before major changes are implemented.

For more information, please contact Robert M. Wolin, or 713.646.1327.

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On the heels of the landmark Tuomey case (see the October 3, 2013 issue of the Health Law Update), the federal government recently has seen success in two more False Claims Act cases predicated on alleged Stark Law violations.

Halifax Hospital Medical Center

In November, a federal district court judge in Florida granted partial summary judgment in favor of the government, finding that Halifax Hospital Medical Center (Halifax) violated the Stark Law by entering into prohibited financial relationships with six medical oncologists who referred patients to the hospital.

The medical oncologists' employment agreements provided for access to an incentive bonus pool equal to 15 percent of the operating margin of Halifax's medical oncology program. While the bonus pool was divided up based on each physician's personally performed services, fees for designated health services, including outpatient prescription drugs and outpatient services not personally performed by the physicians, were included in the calculation of the total bonus pool.

The court held the bona fide employee exception was not available to protect the arrangements because the bonuses took into account the volume or value of the physicians' referrals to the hospital for designated health services by including revenues from the physicians' referrals for designated health services in the overall pool.

A jury now will determine the amount of damages under the Stark Law and whether Halifax had the intent required to establish a False Claims Act violation. The jury also will determine whether its employment agreements with three neurosurgeons failed to satisfy the employee exception due to fair market value and commercial reasonableness issues. Damages and penalties easily could exceed half a billion dollars if the government is successful in proving its allegations to the jury.

All Children's Health System

All Children's Health System's (ACHS) motion to dismiss a relator's complaint in a False Claims Act case predicated on alleged Stark Law violations for Medicaid claims recently was denied in part by a federal district judge in Florida. The relator alleges that ACHS's compensation arrangements with 17 physicians exceeded fair market value and that four physicians were paid illegal productivity bonuses.

ACHS offered several arguments supporting its motion to dismiss, including that its submission of claims to Florida Medicaid resulting from referrals from physicians with whom it may have had prohibited financial relationships under the Stark Law could not give rise to a False Claims Act violation.

The court relied on the plain language of the statutes, regulations and previous decisions in rejecting ACHS's argument that False Claims Act liability cannot attach to illegal referrals for Medicaid claims.

These decisions confirm that the government, whistleblowers and courts are scrutinizing financial relationships with referring physicians at an unprecedented level. Moreover, the ACHS case and previous rulings in the Halifax case demonstrate that the Stark Law clearly is not limited to the Medicare world in the eyes of federal judges.

If you need assistance in evaluating your relationships with referring physicians, please contact Donna S. Clark, or 713.646.1302; or Darby C. Allen, or 713.646.1311.

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In what may have been a largely unnoticed rule interpretation affecting hospitals that treat a high percentage of children in the Medicaid program, CMS, in January 2010, issued a response to a Frequently Asked Question (FAQ) regarding the December 19, 2008, Medicaid disproportionate share hospital (DSH) audit rule (DSH Final Rule). Specifically, the CMS FAQ response addressed the reimbursement formula for computing the Medicaid Inpatient Utilization Rate (MIUR) and its impact on qualifying for and obtaining DSH payment in the determination of the hospital specific limit (HSL).

At issue is whether patients with both Medicaid and private insurance coverage should be included in the calculation of the MIUR in the same way dual eligible patients are included in the MIUR calculation. To that end, CMS provided the following interpretation:

Days, costs, and revenues associated with patients that are dually eligible for Medicaid and private insurance should be included in the calculation of the MIUR for the purposes of determining a hospital eligible to receive DSH payments. Section 1923(g)(1) does not contain an exclusion for individuals eligible for Medicaid and also enrolled in private health insurance. Therefore, days, costs, and revenues associated with patients that are eligible for Medicaid and also have private insurance should be included in the calculation of the hospital-specific DSH limit. As Medicaid should be the payer of last resort, hospitals should also offset both Medicaid and third-party revenue associated with the Medicaid eligible day against the costs for that day to determine any uncompensated amount.

CMS FAQ at pp. 15-16 (emphasis added).

CMS, in implementing this interpretation, instructed DSH auditors to take commercial, third party payments made to hospitals for patients who qualify for both private insurance and Medicaid into account in the DSH HSL calculation. However, CMS did not limit its instruction to DSH auditors solely to instances in which both Medicaid and private insurance, in fact, may have paid to a hospital on an account for an inpatient or outpatient stay (which is extremely rare), but also in circumstances where hospital revenues were received solely from a private insurer (i.e., no bills are transmitted with expectation of payment nor revenues received from the Medicaid program). Historically, the term "dual eligible" has not been defined by CMS as patients that qualify for both Medicaid and private health insurance and no similar definition exists in any federal or state law.

The CMS interpretation, as set out in the January 2010 FAQ, means that, for purposes of determining a hospital's DSH HSL, commercial payments (made at the commercially negotiated contracted rate) are being applied to reduce the hospital's calculated Medicaid shortfall, as though equivalent to Medicaid payments, when the hospital did not identify or include the patient, by day, cost or revenue in its Medicaid cost report. The resulting impact on children's hospitals, especially in Texas and Washington, has been the elimination of their DSH payments for current years. This little known CMS policy change, which also is the subject of legal action in Texas and a court-ordered stay, has not been resolved and remains a cautionary tale for other institutions that may be similarly impacted.

For more information about this reimbursement issue and significant details that form the basis of the decision, please contact Susan Feigin Harris, or 713.646.1307.

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On November 19, 2013, the National Labor Relations Board (NLRB) announced that its general counsel has authorized the issuance of multiple complaints against Wal-Mart Stores, Inc. (Wal-Mart) over a variety of statements made and acts taken by Wal-Mart on or around November 22, 2012, the infamous "Black Friday" when Wal-Mart employees participated in various job actions around the country.

If complaints are issued, they will include allegations that Wal-Mart stores in 14 states retaliated against employees who participated in or supported the job actions. Most troubling are the allegations that statements made during a national news program constituted unlawful threats. During a televised interview on November 20, 2012, a Wal-Mart spokesperson said that "there would be consequences" if employees did not work their regularly scheduled shifts on Black Friday.

Generally speaking, while strikes, such as the employee walk-out on Black Friday, are considered protected activity, economic strikers are not entitled to be paid while they are not working. Moreover, having employees walk out on Black Friday could very well adversely affect Wal-Mart's bottom line; surely, this was an intended consequence of the job action.

So, the general counsel's decision, coupled with the manner in which the NLRB has publicized the cases, makes clear that, once again, there is no more business as usual. Employers need to tread very cautiously when they seek to defend themselves in the court of public opinion or with customers or clients concerned about possible labor strife. This is true whether or not the employees are represented by a union. Indeed, Wal-Mart employees are not represented by a union, and the job actions were not part of an organizing drive.

Healthcare providers, in particular, are vulnerable when labor disputes are aired publicly. If nurses or other healthcare workers threaten to walk off the job even for a day, the need to reassure patients and their families, members of the public, EMS providers and local governments can be very real. Patient safety must never be compromised, and so it is important to carefully vet (in advance) any statements that may be disseminated to members of the public. If healthcare staff (e.g., CNE, unit directors, nurse managers) know what they can and cannot say, they will be able to focus their attention on patient care and avoid the intended "consequences" of the employee job action.

For more information, please contact Ellen Shadur Gross, or 310.442.8816.

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The Texas Health Services Authority (THSA) recently announced its selection of the Health Information Trust Alliance (HITRUST) Common Security Framework (CSF), the most widely adopted information privacy and security framework in the U.S. healthcare industry, to form the basis of the Texas Covered Entity Privacy and Security Certification Program, setting the stage for Texas to become the first state in the nation to implement a formal certification program that incorporates state and federal privacy and security regulations, including HIPAA and the Texas Medical Records Privacy Act (TMRPA). The voluntary certification program, first created in 2011 under Texas House Bill 300 (HB 300), is intended to allow Texas-covered entities to demonstrate their compliance with federal and state privacy and security standards "in order to reduce regulatory penalties, manage risk and increase confidence" in their protection of health information.

In 2011, HB 300 required the THSA to develop a process by which a covered entity (which, as defined under Texas law, includes almost any person or organization that comes into possession of protected health information) could apply for certification of past compliance with the privacy and security standards ratified by the Texas Health and Human Services Commission for the sharing of electronic information. HB 300 also amended the TMRPA to include a list of mitigating factors Texas courts must consider in determining the appropriate penalty for a covered entity that violates the TMRPA, including its compliance history and whether it was certified at the time of the violation. Although the U.S. Department of Health and Human Services (HHS) is not required to consider whether a covered entity has been certified in determining the appropriate civil money penalty to impose for HIPAA violations and breaches, HHS must consider a covered entity's history of prior compliance with HIPAA standards. Accordingly, the THSA has indicated that certification could serve as a "safe harbor" at both the state and federal level.

Two certification options are available that vary based on the size of the entity in question. Larger entities, such as hospitals, likely will be required to undergo an onsite assessment by a third party HITRUST CSF Assessor and to submit documentation from this assessment to HITRUST for review. If the entity meets the requirements for Texas Covered Entity Privacy and Security Certification, HITRUST will provide a recommendation letter that the organization then can submit to the THSA for certification. Smaller entities with annual revenue of less than $5 million will be able to conduct a remote assessment and submit documentation directly to HITRUST for review.

Although certification is voluntary, it is not free. The certification fee varies based on the size of the entity and the complexity of the assessment and can range from $2,500 to $7,500. Certification also expires after one year, meaning covered entities must pay the certification fee annually. Discounts may be available for entities choosing to combine THSA certification with other HITRUST products. The THSA also is encouraging covered entities to use the Texas certification assessment as a supplement to, or substitute for, the periodic risk assessment required under HIPAA, which many entities conduct annually.

Many Texas-covered entities have expressed interest in certification, and other states are closely monitoring the Texas certification program to determine whether they should implement similar programs. However, questions remain regarding the benefits of certification in relation to its cost. The extent to which certification will mitigate state and/or federal penalties is unclear, and while certification may demonstrate that an organization has taken certain steps to protect health information, it will not insulate covered entities from potential breaches and investigations. Whether Texas-covered entities will view certification as a valuable undertaking remains unclear and could depend, at least in part, on the outcome of the first breach involving a certified entity.

If you have questions about the Texas Covered Entity Privacy and Security Certification Program or if you need assistance with related privacy matters, please contact Lynn Sessions at or 713.646.1352, or Cory J. Fox at or 713.646.1358.

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The Health Law Update will not publish its regular bi-weekly issue on Thursday, December 26. We will resume our normal publication schedule after the New Year.

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January 23

Houston counsel Gregory S. Saikin will serve on a panel of healthcare legal specialists at a webinar on "Healthcare Fraud and Abuse: Proactive Steps to Avoid Steep Penalties" sponsored by Strafford Publications, Inc.

January 25-26

Washington D.C. counsel Lee Rosebush will speak on "Glass Half Full, Glass Half Empty? ACA Brings Opportunities, Challenges for Pharmacists" at the Florida Pharmacy Association's Regulatory and Law Conference in Destin, Florida.

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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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