Health Law Update—June 24, 2010

Alerts / June 24, 2010

Topics covered in this issue of the Health Law Update include:


As previously reported in the May 13, 2010, edition of the Health Law Update, the Centers for Medicare & Medicaid Services (CMS) issued CMS Ruling 1498-R (the Ruling) on April 28, 2010, which affected thousands of pending hospital claims for Medicare disproportionate share hospital (DSH) payments. The ruling effectively operates to remand “properly pending” DSH claims for three specific DSH issues to fiscal intermediaries for recalculation of new DSH payment amounts arising from revised CMS DSH policies based on CMS’s position that any appeals of these issues are now moot.

A group of hospitals with DSH appeals before the Provider Reimbursement Review Board (PRRB) has requested and received expedited judicial review to challenge the validity of the Ruling. The hospitals’ appeals were based on their fiscal intermediary’s original refusal to include dual eligible patients without Medicare Part A benefits (dual eligible days) in the Medicaid fraction of the DSH calculation. As reported previously, the Ruling remanded all dual eligible days appeals to the intermediary for recalculation consistent with the policy expressed in the Ruling, which was to include such dual eligible days in the Medicare fraction of the DSH calculation. While CMS clearly permitted hospitals to appeal their revised DSH calculations issued by the fiscal intermediary on remand, this group of hospitals sought to circumvent the potentially lengthy wait for new DSH calculations and pursue this issue under their current appeals.

Since the PRRB was bound by regulation to follow the Ruling, it permitted the hospitals to raise their challenge in federal district court. The hospitals challenged the ruling on the grounds that its required relief for the “dual eligible days” appeals is contrary to the Medicare DSH statute, violates the Administrative Procedures Act by establishing a new substantive standard for such dual eligible days and incorrectly divests the PRRB of jurisdiction it has under the Medicare Act (i.e., their appeals are not moot since the relief provided by the Ruling does not match that which was requested). The Ruling could be susceptible to this challenge as the policy set forth in the Ruling recently was rejected by a federal district court in Metropolitan Hospital, Inc. v. HHS, No. 1:09-cv- 128 (W.D. Mich. Apr. 5, 2010). The Metropolitan court held that the dual eligible days belong in the Medicaid Fraction, and that their inclusion in the Medicare Fraction can operate to improperly reduce their DSH payments. The other arguments raised by the hospitals are valid as well, as they all center around the continuing controversy over the treatment of dual eligible days and the Ruling’s sidestepping of that controversy.

CMS will no doubt argue that the Ruling does not prejudice the hospitals because they can raise their issue in a separate appeal after their DSH payments are recalculated under the Ruling’s policy on remand. As pointed out in the previous article, however, the hospitals are claiming that, on the dual eligible day issue, justice delayed may become justice denied. Hospitals with similar appeals should pay attention to this litigation and determine if a similar aggressive strategy is right for them.

If you have any questions regarding this issue or the Ruling in general, please contact Gregory N. Etzel, or 713.646.1316.


While much interest in the health industry has been focused on the promise of shared savings programs and accountable care organizations (ACOs), the bulk of the other delivery system reforms has been largely overlooked. However, it is these reforms that will pave the pathway to accountable care and that also are designed at care coordination in healthcare delivery. Generally, the approach taken in the Patient Protection and Affordable Care Act (PPACA) involves the use of a number of demonstration projects and pilot programs that begin to move healthcare delivery toward an accountable model of care, enhancing primary care, care coordination and extracting penalties for failures in cost containment and quality.

Center for Medicare and Medicaid Innovation

First, PPACA establishes a new Center for Medicare and Medicaid Innovation (CMI), the stated goal of which is to test innovative payment and service delivery models to reduce program expenditures while preserving or enhancing the quality of care furnished. This center and its work shall be in place no later than January 1, 2011. It is through this mechanism that CMS plans on moving its demonstration projects into legislative reality.

Medicaid, Delivery Systems Reforms and the States

Under the Medicaid program, several reforms were initiated, primarily by giving authority to the states. Hospitals should watch for the penalties currently enacted under the Medicare program relating to reductions in payment for hospital-acquired conditions to spill over to the Medicaid program by January 1, 2011.

States may create medical homes for individuals with chronic illness. The states are given some flexibility regarding how to establish payment for providers or teams of healthcare professionals and can take into account the severity of the chronic condition in determining the applicable payment methodology under Medicaid. Since this was scored as a money-saving initiative, we can expect a number of states to embrace this mechanism, given the reality of current budgetary constraints.

PPACA directs the Secretary of the U.S. Department of Health and Human Services (HHS) to establish a demonstration project under Medicaid to evaluate bundled payment for integrated care provided to Medicaid beneficiaries that focuses on an episode of care, including hospital and physician services provided during a hospitalization. Up to eight states will be selected for this project by the Secretary of HHS based on its potential for curbing expenditures while increasing the quality associated with an episode of care. This demonstration program is slated to begin January 1, 2012, and end in 2016.

The Secretary of HHS must create a Medicaid global payment system demonstration project in five states directed toward large, safety net hospitals or networks and coordinated with CMI. Payment under this model will be adjusted from a fee-for-service structure to a global capitated payment model.

Medicare Delivery System Reforms

Under the Medicare statute, PPACA enacted several pilot and demonstration projects. The Secretary of HHS is directed to create a national pilot project on payment bundling for integrated care during an episode involving hospitalization. This, too, will focus on how best to improve care coordination, quality and efficiency of healthcare services. This statute defines an episode of care to include both the three-day window prior to admission, the length of stay and 30 days following discharge. It is contemplated that a bundled payment would be developed and include the entire episode of care. Additionally, applicable quality measures would be developed for purposes of measuring success against a benchmark. This program will be established sometime before January 1, 2013.

PPACA instructs the Secretary of HHS to conduct a demonstration program to test a payment incentive and service delivery model that uses physician- and nurse practitioner-directed home-based primary care teams designated to reduce expenditures and improve health outcomes. Specifically, the demonstration program is designed to test whether the individuals accountable for providing comprehensive, coordinated, continuous and accessible care to high-need populations at home and across all treatment settings reduce preventable hospitalizations, prevent hospital readmissions, reduce emergency room visits, improve health outcomes, improve the efficiency of care by reducing duplicative diagnostic and lab tests and achieve a high level of beneficiary satisfaction.

Additionally, PPACA extends the existing Medicare gainsharing demonstration projects to enhance existing savings that the current program has proven can occur for specific specialty areas, as well as enhance its existing hospital readmission reduction program.

Beyond Accountable Care Organizations

The multiple programs contained within PPACA are not voluntary and the language used is not “may,” but rather “shall.” Clearly, CMS and Congress are pondering a gradual implementation of multiple approaches to determine how best to reduce costs while maintaining or enhancing quality care. Most of the demonstration programs involve the implementation of care coordination teams and will incentivize payment toward this end. Additionally, the development of appropriate quality metrics will be essential in assuring the eventual success of such programs.

Clients should begin to evaluate whether they are prepared to receive payments that will be structured differently:

Do you have a process whereby you can implement comprehensive care coordination in an effective manner?

Do you have the communication tools necessary, both electronically and within the general hospital, physician, physician extender and nursing culture to create the types of entities that can receive accountable payment, even if this payment does not come as part of an ACO per se, but rather as a bundled payment, or as a payment for the creation of one of the multiple demonstration programs or pilot programs envisioned by PPACA?

We are beginning to work with clients to assure their participation in the rulemaking process and in providing comments, when appropriate, to HHS as it develops its plans for implementation. We also are advising clients relating to the creation of integrated systems or further implementation and creation of medical homes or other care coordination teams to assist clients as they look forward to implementation.

For more information regarding the many programs identified above or for other information relating to PPACA, please contact Susan Feigin Harris, or 713.646.1307.


In broad terms, an ACO is a network of healthcare organizations and providers, including primary care physicians, specialists and hospitals, that can be held accountable for the cost and quality of care delivered to a group of identified patients. This concept is incorporated into health reform via PPACA, Sections 2706 (Medicaid and CHIP pediatric ACOs), 3022 and 10307. As was the case with HMOs, the theory behind ACOs is that greater coordination and cooperation among providers can result in higher quality care and, consequently, a healthier patient population that is less costly to care for. ACOs differ from the bundled payment options under PPACA by promoting efficiency and care on a continuing basis rather than focusing on a single medical episode. ACOs also are distinguishable from the medical home model which typically emphasizes preventive and primary care and often excludes specialists and hospitals. ACOs typically manage the full continuum of care for its members.

PPACA mandates that CMS establish an ACO-based Medicare shared savings program by January 1, 2012. Many organizations already have started organizing and planning their ACO projects. No specific organizational structure has yet emerged as the preferable format for an ACO. PPACA, however, provides that the ACO must be comprised of:

  • Physicians and other professionals in group practices;
  • Physicians and other professionals in networks of practices;
  • Partnerships or joint venture arrangements between hospitals and physicians/professionals;
  • Hospitals employing physicians/professionals; or
  • Other organizations and persons that the Secretary of HHS may approve by regulation.

In an effort to promote a physician-centric model, the American Medical Group Association (AMGA), which represents more than 100,000 physicians, recently issued a series of principles for ACOs that it believes can be actually or “virtually” integrated. A virtual organization may be more difficult to achieve than was the case with the historic “clinic without walls” model as PPACA requires the organization to have a formal legal structure to receive and distribute shared savings and have sufficient professionals to care for a minimum of 5000 beneficiaries for a period of at least three years. However, AMGA believes that an ACO should have stable governance and centralized administration.

  • AMGA contends that multispecialty medical groups and other organized systems of care are the strongest foundation for ACOs, as such groups are likely to feature care coordination, team-based care and care accountability. In addition, AMGA believes such groups are likely to (1) use care management processes and, as a result, may use fewer resources than other modes; (2) invest in health information technology, form teams of providers, collect and analyze data and provide direct physician feedback on clinical care; and (3) possess greater collaboration among physician specialties and allied health professionals. PPACA requires that ACOs have leadership and management structures that include clinical and administrative systems.
  • AMGA contends that ACOs must be physician led, as physicians are best qualified and are the core component of medical care delivery. Countervailing this argument, however, the Federal Trade Commission (FTC) has found on several occasions that physician and other professional-led groups have used their market position to limit non-physician competitors. For example, on June 17 the FTC charged that the North Carolina Board of Dental Examiners impermissibly ordered non-dentists to stop providing services, which made it harder and more expensive for consumers to obtain clinical services.
  • ACOs, according to AMGA, must be accountable for their clinical results and achieving cost efficiencies. To do so, ACOs must have the necessary infrastructure to measure, assess and advance the effectiveness and efficiency of patient care.
  • AMGA also urged that incentives used to compensate physicians (shared savings or capitation) must be aligned to encourage voluntary provider participation and reward participation risks (e.g., start-up costs, systems investments, “culture” changes and financial uncertainty). Regardless of the ACO incentives, it is important to remember that CMS, in most cases, will continue to reimburse providers on a fee-for-service basis and pay the ACO incentives through shared savings. Whether the payment incentives are sufficiently frequent and strong enough to influence utilization behavior remains to be seen.

While ACOs attempt to shift incentives away from the increased volumes of care generated by the current per item-of-service payments, it remains unclear whether consumers and legislators will permit ACOs to fully implement cost-saving mechanisms. The history of managed care in the U.S. suggests this is going to be a difficult transition, despite physician rather than payor management of the incentives.

  • AMGA also believes that ACOs should be anchored by primary care physicians and services appropriate and adequate to the needs of the population it serves.
  • According to AMGA, ACOs should use internally-produced data and feedback to standardize care processes and continually improve the efficiency and safety of patient care.
  • Finally, AMGA contends that ACOs should have the following core values: (1) quality, including the use of evidence-based guidelines; (2) patient-centered care, as required by PPACA; (3) coordinated care through the use of electronic medical records; (4) accountability for the quality and the cost of care; (5) openness to innovation; (6) physician self-governance; and (7) the development of physician management and executive abilities. The AMGA attributes largely follow PPACA, which requires ACOs to have defined processes to promote evidenced-based medicine, report the necessary data to evaluate quality and cost measures, use electronic prescribing and electronic medical records and coordinate care.

During the passage of PPACA, Congress failed to explicitly address the many federal and state laws, including fraud/abuse, anti-referral, corporate practice of medicine, state insurance laws, civil monetary penalty provision prohibiting hospitals from paying physicians to reduce or limit services, HIPAA/medical privacy and antitrust/unfair competition that create barriers to the integration necessary for implementation of ACOs. However, the Secretary of HHS was given authority to waive many of the Medicare regulatory barriers. An open question is how the Secretary of HHS will exercise this authority and how the U.S. Department of Justice and the FTC will view the antitrust risks associated with ACOs. We will address these issues in future articles.

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


On June 22, 2010, the U.S. Departments of Health and Human Services, Labor and Treasury issued regulations implementing provisions in PPACA dubbed as a “Patient’s Bill of Rights” by the Obama Administration. The rules, which are to be formally published June 28, take effect August 27, 2010, and generally apply (with certain exceptions) to group health plans and health insurers for plan years and policy years beginning on or after September 23, 2010. For more information on the new regulations, please see the June 23, 2010, Alert prepared by the Baker Hostetler Employee Benefits Team.


As required by PPACA, the initial phase of a federal web portal to “guide Americans through a comprehensive landscape of insurance options across the private and public sectors” is slated to go online July 1, 2010. Operating under the auspices of the Office of Consumer Information and Insurance Oversight (OCIIO) within HHS, it is expected that this first phase will offer a summary rundown of available coverage options under private and public plans by state and zip code. A second phase, anticipated for release in October, will offer detailed pricing and benefit information not only with regard to private insurance options but also coverage under Medicaid and the Children’s Health Insurance Program (CHIP). Additionally, according to OCIIO, information concerning federal and state high-risk pools, the Early Retiree Reinsurance Program and the small business tax credit will be available through the web portal. The new portal is expected to include an educational component “to help people better understand insurance terms, their choices and the operation of insurance in the current marketplace” between now and when the Exchanges are established in 2014. For more information about OCIIO, please see the April 29, 2010, issue of the Health Law Update.

For more information, please contact Susan Feigin Harris, or 713.646.1307, or Kathleen P. Rubinstein, MPA, Policy Analyst, or 713.276.1650.


July 14, 2010

Houston partners Susan Feigin Harris and Gregory N. Etzel will speak on “Healthcare Reform—What’s Next?” before the Houston Bar Association Health Section in Houston, Texas.

July 26, 2010

Houston partner Susan Feigin Harris will speak on “Back to the Future: Accountable Care Organizations, Clinical Integration, Medical Homes and Emerging Models for Delivery System Reform” at the 2010 TSCPA Advanced Health Care Conference sponsored by the Texas Society of Certified Public Accountants in San Antonio, Texas.

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. © 2010 Baker & Hostetler LLP

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