Health Law Update—February 21, 2013

Alerts / February 21, 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 any member of BakerHostetler's Healthcare Team with questions.


In one of the most closely watched healthcare antitrust cases in years, the U.S. Supreme Court issued its decision in the Federal Trade Commission (FTC) merger challenge to a Georgia hospital merger, Phoebe Putney Health System's (Phoebe) acquisition of Palmyra Medical Center (Palmyra). In reversing the Eleventh Circuit Court of Appeals finding that Phoebe's acquisition of Palmyra was immune from antitrust scrutiny under the so-called state-action doctrine, which provides antitrust immunity for the activities of governmental entities if the activities are undertaken pursuant to a "clearly articulated and affirmatively expressed" state policy to displace competition, the Supreme Court found that "nothing in the Law" providing for the formation of hospital authorities to operate healthcare facilities "or any other provision of Georgia law articulates a state policy to allow authorities to exercise their general corporate powers, including their acquisition power, without regard to negative effects on competition." As a result, Phoebe will have to defend the transaction against the FTC's charge that it was anticompetitive.

Like numerous other states, Georgia's Hospital Authorities Law was enacted "to provide a mechanism for the operation and maintenance of needed health care facilities in several counties and municipalities of th[e] state." In addition to delegating "all the powers necessary or convenient to carry out and effectuate" the law's purposes, Georgia hospital authorities are conferred with 27 powers, including the power "[t]o acquire by purchase, lease, or otherwise and to operate projects." The same year that Georgia's Hospital Authorities Law was enacted (1941), the city of Albany and Dougherty County, Georgia, established the Hospital Authority of Albany-Dougherty County and promptly acquired Phoebe Putney Memorial Hospital.

In 2010, Phoebe agreed to acquire Palmyra, located in Albany just two miles away from Phoebe, from HCA, Inc. Yet despite the fact that Phoebe and Palmyra accounted for a combined 86 percent of the acute-care hospital services provided to patients covered by commercial healthcare plans in the six counties surrounding Albany, and agreeing with the FTC "that, on the facts alleged, the joint operation of [Phoebe] and Palmyra would substantially lessen competition or tend to create, if not create, a monopoly," the Eleventh Circuit concluded that Georgia's law contemplated and shielded the allegedly anticompetitive conduct challenged by the FTC. In doing so, the Eleventh Circuit noted the breadth of powers given to Georgia hospital authorities and reasoned that Georgia's legislature must have anticipated that the grant of power to the hospital authorities to acquire and lease projects would produce anticompetitive effects because "[f]oreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them."

In rejecting the Eleventh Circuit's conclusion, the Supreme Court found that the claim for "state-action immunity fails because there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership." The Court soundly rejected that argument, because the acquisition and leasing powers exercised by the authority in the challenged transaction merely "mirror general powers routinely conferred by state law upon private corporations." Importantly, the Court found that "while the Law does allow the Authority to acquire hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition."

More broadly, the decision has implications for other healthcare transactions that are intertwined with state or local government regulation. The Court's unanimous decision in Phoebe signals that claims of antitrust immunity based on state involvement will be closely scrutinized and skeptically evaluated. Justice Sotomayor's opinion reiterates that state-action immunity is disfavored and rejects the notion that the antitrust laws should defer to state laws and regulations unless the state's intention to displace competition is clearly evident. The Court said: "[F]ederalism and state sovereignty are poorly served by a rule of construction that would allow 'essential national policies' embodied in the antitrust laws to be displaced by state delegations of authority 'intended to achieve more limited ends.'"

With more than 20 full-time antitrust lawyers in our Washington, D.C. office alone (more than 40 firm wide), we have the depth and experience to handle the most challenging transactions. If you have any questions regarding this recent decision, or would like to learn more about our antitrust capabilities, please contact Jonathan L. Lewis, or 202.861.1557; or Lee H. Simowitz, or 202.861.1608.

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Legitimate joint marketing and selling arrangements have the potential to produce efficiencies. This is particularly so, for example, where the arrangement enables the participants to make or market products that they could not do alone. The Antitrust Guidelines for Collaborations among Competitors, Statements of Antitrust Enforcement Policy in Health Care, as well as scores of U.S. Department of Justice (DOJ) business review letters, FTC advisory opinions and enforcement actions provide a wealth of guidance in this area. Yet despite this guidance and the attention accountable care organizations have received, doctors remain in the crosshairs of antitrust enforcers for jointly negotiating contracts with insurance companies (payors) without any clinical or financial integration on their part.

Recently, an Oklahoma association of approximately 350 competing chiropractors, representing nearly half of all chiropractors practicing in Oklahoma, and the association's director became the latest healthcare practitioners to settle price-fixing charges. As alleged in the DOJ's complaint, since at least 2004, the association required chiropractors joining the association to enter into a membership agreement that: (1) designates the association as the party that will "[c]ontract with [the] Third-Party Payor or Network"; (2) "suspends any existing agreement to which the [chiropractor] is a party with any Third-Party Payor or Network"; (3) specifies a reimbursement floor chiropractors must accept; and (4) prohibits member chiropractors from offering payors rebates or incentives, such as waiving deductibles or co-pays.

Until the DOJ started its investigation, the association's website apparently stated that the association "concentrates the power of [its] state chiropractic physicians into one group" and boasted that "[t]hrough [the association], a chiropractor can maintain an individual practice while associating with other chiropractors to increase contract-negotiating power." From 2004 to 2011, the association and its director supposedly exercised that "increase[d] contract-negotiating power" by negotiating at least seven contracts with payors that fixed prices and price-related terms for all association members dealing with those payors. Predictably, higher prices for chiropractic services in Oklahoma resulted.

The DOJ filed its complaint, because the negotiation of the contracts on behalf of the association's members was not ancillary to any procompetitive purpose of the association or reasonably necessary to achieving any efficiencies. Notably, the DOJ alleged, other than for those doctors in the same practice group, the association's members "[did] not share any financial risk in providing chiropractic services, [did] not significantly collaborate in a program to monitor and modify their clinical practice patterns to control costs or ensure quality, [did] not integrate their delivery of care to patients, and [did] not otherwise integrate their activities to produce significant efficiencies."

For more information, please contact Jonathan L. Lewis, or 202.861.1557.

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A 2007 audit initiated by a Medicare Program Safeguard Contractor (PSC) discovered that a North Carolina provider had a high incidence of inpatient billings for patients who did not stay in the hospital overnight. The PSC's three-year sampling of hospital records identified WakeMed Health and Hospitals (WakeMed) as having the largest percentage of "zero-day stay" billings in the state. Subsequent investigations by federal authorities found that WakeMed staff had routinely billed the Medicare program for inpatient stays for cardiac patients either without a physician's order or in contravention of physician orders directing that patients be treated on an outpatient basis. The determination to classify a patient as an inpatient, in some cases, was based either upon whether Medicare would pay for the procedure only on an inpatient basis or if the procedure was listed on an InterQual listing of procedures deemed appropriate for inpatient treatment.

In response, the government sought both civil penalties and -- for the first time against a hospital -- criminal charges for making false statements to Medicare. WakeMed agreed to pay a civil settlement of $8 million based upon an allegation that WakeMed received at least $1.2 million in improper Medicare reimbursement as a result of the scheme. As part of the civil settlement, WakeMed also entered into a five-year corporate integrity agreement (CIA).

With respect to the criminal charges, the federal district court issued an order deferring WakeMed's prosecution for a 24-month period conditioned upon WakeMed's full compliance with the CIA and complete payment of the settlement amount. To that end, the government agreed to dismiss the criminal charges and refrain from pursuing WakeMed's debarment from federal healthcare programs.

In approving deferred prosecution, the court balanced the "seriousness of defendant's offense against the potential harm to innocent parties that could result should this prosecution go forward." The considerations included (1) the impact on the Medicare program and taxpayers; (2) the need to protect WakeMed's employees and healthcare providers "who are blameless but who would suffer severe consequences if WakeMed were convicted and debarred," as WakeMed is the largest employer in the county; (3) the likely interruption in the provision of essential healthcare services to nearly 600,000 patients seen annually by WakeMed; and (4) the needs of the underprivileged in the surrounding area for whom services would be "drastically and inhumanely curtailed."

Had Wakefield been convicted of a felony related to the provision of federally-funded healthcare services, the Centers for Medicare and Medicaid Services (CMS) would have been required to exclude the North Carolina hospital system. Effectively, exclusion is a death sentence for providers, because most hospitals cannot afford the loss of revenue from government-sponsored healthcare programs.

For more information, please contact Robert M. Wolin, or 713.646.1327; or Melissa A. Brown, or 713.646.1397.

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On February 5, 2013, CMS issued its mandatory Recovery Audit Contractor (RAC or Recovery Auditor) program annual report, detailing overpayments, underpayments, RAC performance and savings to the Medicare program. According to the report, Recovery Auditors in FY 2011 collectively identified and corrected $797 million in overpayments and $142 million in underpayments, for a total of $939 million in improper payments being corrected. After taking into consideration all costs, underpayment determinations and appeal reversals, $488 million was returned to the Medicare trust funds in FY 2011. This represents a meteoric increase in RAC activity from FY 2010, during which RACs identified and corrected $92 million in combined overpayments and underpayments.

The report offers providers helpful insights into the RAC program, highlights of which follow below:

Appeals continue to be successful for providers that choose to appeal. Nearly 44 percent of appealed claims by Medicare providers were overturned in FY 2011. Percentages of favorable decisions varied by contractor and by issue; for example, RAC for Region A, Diversified Collection Services, had a staggering 88 percent overturn rate in favor of providers for part B claims appealed; CGI, RAC for Region B, had a 38 percent overturn rate in favor of providers for Part A claims appealed; RAC for Region C, Connolly, had a 28 percent overturn rate in favor of providers for Part A claims appealed; and HealthData Insights, RAC for Region D, had a 74 percent overturn rate in favor of providers for part B claims appealed. Reversed appeals totaled $37.9 million.

Encouragement of RAC involvement at ALJ appeals continues. CMS has been working with the Recovery Auditors to encourage further involvement in the appeals process, specifically at the Administrative Law Judge (ALJ) level of appeal. An effort to increase involvement is aligned with CMS's goal of reducing unfavorable appeal decisions. As noted in the December 6, 2012 issue of the Health Law Update, a report by the HHS Office of Inspector General found that ALJ decisions were less favorable to appellants when CMS participated in the appeal.

Short-stay reviews represent a large portion of collections. FY 2011 marked the first year that Recovery Auditors "actively" reviewed short-stay inpatient hospital admission issues. While CMS did not specifically break down the collection numbers for short-stay overpayments, it did note that short-stay inpatient hospital services, which should have been provided in the outpatient setting, "represent a significant portion of Medicare's FFS error rate and also represent a large portion of the FY 2011 overpayment collections."

Program expansion efforts continue. A legislative proposal by CMS to retain a portion of RAC recoveries to implement actions that prevent fraud and abuse was included in the President's FY 2013 Budget. Additionally, the agency has requested approval for an 11-state demonstration project that would allow RAC prepayment reviews beginning with short-stay inpatient claims.

Statistical highlights:

  • HealthData Insights was the most prolific collector of overpayments of all the RACs, individually collecting $318 million in overpayments. Connolly returned the most money to providers -- $70 million -- in the form of underpayments.
  • RAC collections were highest in the following states: California ($143 million), New York ($45 million), Illinois ($43 million), Michigan ($39 million), Florida ($32 million) and Missouri ($31 million).
  • Overpayments collected overwhelmingly consisted of Part A claims. Part A claims represented $726 million of overpayments over 174,284 claims; Part B claims represented $37 million in overpayments over 356,456 claims; and DME claims represented $34 million over 295,990 claims.

For more information, please contact B. Scott McBride, or 713.646.1390; or Ameena N. Ashfaq, or 713.646.1329.

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Last week, the U.S. Department of Health and Human Services (HHS) and the DOJ jointly released a report concluding that, for every dollar spent on healthcare fraud investigations in the last three years, the government recovered $7.90 through enforcement, averaging the highest return on investment in the 16-year history of the Healthcare Fraud and Abuse Control Program (HCFAC). The HCFAC Annual Report (Annual Report) also stated that the government recovered more than $4.2 billion in FY 2012.

By way of background, HCFAC is operated by the DOJ and HHS to coordinate law enforcement activities related to healthcare fraud and abuse. HCFAC issues an Annual Report detailing the amounts deposited into the U.S. Treasury or directly into the accounts of other federal agencies as a result of healthcare fraud enforcement efforts.

Notably, the above figures underscore that government efforts to deter healthcare fraud continue even after the conclusion of an enforcement action. For example, of the $4.2 billion recovered, more than one-third was collected through court-ordered criminal fines and restitution. While the Annual Report does not provide specifics of such instances, the court and government often must take affirmative action to collect criminal fines and restitution imposed by the court at the conclusion of a case. In addition, the Annual Report states that $20 million was returned to the U.S. Treasury as a result of asset forfeiture proceedings, which may similarly be brought following the conclusion of an enforcement matter.

The Annual Report likely will provide further mandate for ongoing enforcement activity that we've seen over the last several years. BakerHostetler continues to encourage our clients to maintain active compliance programs to avoid becoming a statistic.

For more information, please contact Gregory S. Saikin, or 713.646.1399 or B. Scott McBride at or 713.646.1390.

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February 28

Houston counsel Lynn Sessions will speak on "Healthcare Privacy Exposure and the HIPAA Final Rule" at a client education forum sponsored by Alliant Insurance Services, Inc. in Houston, Texas.

March 6

Houston counsel Lynn Sessions will speak on "Implications From the Latest HIPAA Ruling" at an educational workshop sponsored by Beazley Group in Kansas City, Missouri.

March 10

Cleveland counsel Thomas S. Campanella will speak on "Hot Topics in Healthcare Policy" at the Annual Conference of the North Central Academy of Podiatric Medicine in Cleveland, Ohio.

April 10

Columbus partner Richard W. Siehl will speak on "Legal Aspects of Healthcare Associated Infections" at the statewide meeting of Health Care Excel in Louisville, Kentucky.

April 11

Columbus partner Richard W. Siehl will speak on "Legal Aspects of Healthcare Associated Infections" at the statewide meeting of Health Care Excel in Indianapolis, Indiana.

April 21 - 24

New York Partner Theodore J. Kobus III will speak on "The Latest Trends in Data Breach Threats" and "Mobile Threats and How Healthcare Can Reduce the Risks" at the HCCA's 17th Annual Compliance Institute in Gaylord National Harbor, Washington, DC.

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