Health Law Update—May 16, 2013

Alerts / May 16, 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.


Former U.S. Supreme Court Justice Louis D. Brandeis once said that "Sunlight is the best disinfectant." The release of charges billed by some 3,337 Medicare hospitals for 100 of the most common inpatient diagnosis related groups (DRGs) by the Centers for Medicare and Medicaid Services (CMS) on May 8, 2013, attempts to cast sunlight on the sometimes baffling and often murky world of hospital charges and fees.

The federal government has worked to foster greater price transparency in healthcare for some time. Beginning with consumer-driven healthcare under the Bush Administration, then Secretary of Health and Human Services, Michael Leavitt observed in 2006 that:

Americans know the price of almost everything they pay for, except for . . . their healthcare . . . . People deserve to know, indeed they have a right to know, what their healthcare costs . . . . Patients should also be able to see an estimate of the overall cost of the procedure, how much their insurer will pay and how much they will be expected to pay. That kind of information will allow patients to become informed consumers making informed choices.

Over the years, Congress has considered a number of legislative proposals aimed at increasing price transparency and disclosure, but all have failed to advance significantly. The Patient Protection and Affordable Care Act (PPACA), however, included a provision within the insurance reform section that requires hospitals to annually publish a list of standard charges for items and services. CMS has not published regulations defining the data to be posted. Consequently, the full scope of this provision remains uncertain.

Using travel industry parlance, the charge data released this month by CMS represents each hospital's "rack rate" as reflected on its "chargemaster" or "charge description master." A relic of the past with regard to Medicare payment principles, the hospital chargemaster lists the gross price for each service/procedure provided and item used. Hospitals readily admit that their chargemaster prices are inflated and bear little systemic relationship to amounts actually collected from patients or third party payers. Consequently, chargemasters are rarely useful for making hospital price comparisons.

Hospitals and some third party payers use the chargemaster as a beginning point for negotiating payment discounts. However, in many cases, both the hospital and third party payer are contractually prohibited from disclosing their negotiated payment rates to patients and/or posting them on the Internet. These rates would be much more useful for price comparisons. Medicare and Medicaid payments generally are based upon cost or a specific charge unrelated to a hospital's chargemaster. As a result, the only patients who may actually pay the "rack rate" for inpatient care are the uninsured, the self-pay and, on occasion, third party payers to noncontracted hospitals.

With that background, one must ask why hospitals spend tremendous amounts of time and effort to maintain a "price list" that often contains some 12,000 to 45,000 individual charge items and procedures when it is rarely used to actually price items and services. The answer lies within the Medicare program, which still requires every participating hospital to maintain a chargemaster. In contrast to the program's early years, when chargemaster data more closely correlated with payment, chargemasters are currently used by Medicare to:

  1. Allocate costs among Medicare and non-Medicare patients (although that is less relevant in a prospective payment environment);
  2. Implement the lower of cost or charges regulations that limit a hospital's payment to the lesser of its charges or its cost or a fee schedule amount;
  3. Establish a cost-to-charge ratio amount that can affect a hospital's payment for certain items and services, including outliers, new technology and transplant organ costs; and
  4. Establish a portion of disproportionate share hospital (DSH) and meaningful use payments.

Will the benefits of CMS's openness and transparency substantially alter the healthcare landscape or simply become another mile marker on the long road to reform and price transparency? The vast disparities in hospital prices revealed by CMS's data release and the parade of headlines that follow could reenergize efforts to stem the cost of healthcare through price competition rather than price controls -- although the disclosure of pricing may well have the pragmatic effect of becoming a price control. So while the casting of sunlight on healthcare pricing is welcomed, its real import is less likely for most consumers who may be more concerned with copayments and deductibles or for physicians upon whom a hospital's charges have less impact than the physician's overall relationship with the provider. Rather, it may lead to demands for disclosure of more relevant pricing data which could be used by Congress and state legislatures in the development of healthcare cost solutions. The wide-ranging charge differentials might also become a double-edged sword in Medicare payment negotiations with Congress.

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

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On May 8, 2013, a jury in the Columbia Division of the U.S. District Court for the District of South Carolina returned a verdict finding that Tuomey Healthcare Systems, Inc. (Tuomey) violated the Stark Law and the federal False Claims Act by submitting 21,730 claims to Medicare tainted by improper relationships with eighteen physicians. The jury verdict is the result of a remand ordered on procedural grounds by the Fourth Circuit Court of Appeals in March 2012.

Facts and Case History

The case was initiated as a whistleblower action brought by a surgeon who alleged Tuomey violated the Stark Law -- and in turn the False Claims Act -- when it entered into a series of part-time employment agreements with several specialty physicians. The agreements at issue provided that each of the physicians would perform outpatient procedures exclusively at Tuomey facilities for ten years and would reassign their third party payments to Tuomey for such services. Under the agreements, the physicians would receive an annual base salary plus two bonuses -- one based on productivity and the other on meeting quality measures. The base salary was calculated on the basis of the previous year's collections from outpatient procedures, while both of the bonuses varied based on Tuomey's net cash collections from outpatient procedures. At the time the contracts were entered into, Tuomey's valuation expert estimated that the average total compensation paid to each physician would be 19 percent higher than Tuomey's collections for their professional services. The government alleged that Tuomey entered into the agreements to dissuade physicians from performing the procedures in their offices or in an unaffiliated ambulatory surgical center.

The jury in the first trial found that Tuomey violated the Stark Law but not the False Claims Act by entering into the contracts and submitting claims to Medicare and Medicaid for the outpatient procedures. The district court judge set aside the entire jury verdict and ordered a new trial on the False Claims Act issue. The court later ordered Tuomey to pay nearly $44.9 million to the government under the common law theories of payment by mistake of fact and unjust enrichment. The Fourth Circuit Court of Appeals vacated the district court's judgment on appeal, reasoning that the jury's findings with respect to Stark Law violations were nullified when the district court granted a new trial, and as a result, the court's order to pay the judgment on the common law claims violated Tuomey's Seventh Amendment right to a jury trial.

Second Trial and Verdict

The new trial lasted four weeks and resulted in an even more devastating outcome for Tuomey, with the jury finding that Tuomey violated the Stark Law and the False Claims Act. Specifically, the jury found that no Stark Law exception was available to protect the arrangement because the compensation paid to the physicians took into account the volume or value of anticipated referrals to the hospital. Additionally, the jury found that Tuomey violated the False Claims Act by submitting approximately $39.3 million in claims to the government that were predicated on improper referrals. The court has not yet entered its judgment on Tuomey's liability; however, penalties and damages under the False Claims Act could exceed $350 million.

The jury reportedly deliberated for less than five hours, contradicting the general notion that the government would avoid putting a Stark Law case in front of a jury for fear that the law is too complicated to secure a favorable ruling. This case also emphasizes the importance of obtaining reliable fair market valuations for each arrangement that potentially implicates the Stark or anti-kickback laws.

If you need assistance in evaluating physician relationships that may implicate the Stark Law, please contact Donna S. Clark, or 713.646.1302; or Darby C. Allen, or 713.646.1311.

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On May 8, 2013, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued an updated Special Advisory Bulletin on the Effect of Exclusion from Participation in Federal Health Care Programs (Special Advisory Bulletin). The Special Advisory Bulletin, which supersedes the OIG's original September 1999 bulletin, offers guidance to individuals and entities that have been excluded from federal healthcare programs, as well as to those who might employ or contract with an excluded individual or entity. In the decade since the release of the original bulletin, the OIG's exclusion authority has been strengthened and expanded by various statutory amendments. The OIG aggressively exercises its expanded exclusion authority, reportedly excluding 3,131 individuals and entities in FY 2012.

No payment will be made by Medicare, Medicaid or other federal healthcare program for any items or services furnished by an excluded individual or entity or at the medical direction or on the prescription of a physician or other authorized individual who is excluded when the person furnishing such item or service knew or had reason to know of the exclusion. In the Special Advisory Bulletin, the OIG reiterates that a provider could be subject to civil monetary penalty (CMP) liability if an excluded person participates in any way in the furnishing of items or services, including administrative and management services, that are payable by a federal healthcare program, regardless of whether the person is an employee, contractor or volunteer.

The OIG offers the following guidance regarding best practices for provider screening obligations:

  • Identify which individuals and entities to screen by reviewing each job category or contractual relationship to determine whether the item or service being provided is in any way payable by a federal healthcare program;
  • Perform initial and periodic (recommends but does not require monthly) checks of the List of Excluded Individuals and Entities (LEIE) online database maintained by the OIG, to determine the exclusion status of potential or current employees and contractors; and
  • Maintain documentation of the initial and subsequent name search performed (such as a printed screen-shot showing the results of the name search), in order to verify results.

Additionally, the OIG encourages providers that identify potential CMP liability on the basis of their relationship with an excluded person to use the recently updated OIG's Provider Self-Disclosure Protocol (SDP) to disclose and resolve the potential CMP liability. See the April 18, 2013, issue of the Health Law Update.

For assistance in evaluating your polices regarding exclusions and/or evaluating your options for disclosures under the SDP, please contact Summer D. Swallow, or 713.646.1306.

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The Texas Legislature recently approved S.B. 166, a bill that would allow healthcare providers, including physicians, nurses, dentists and others to collect and verify patient data by simply swiping a patient's driver's license, reducing admissions paperwork and streamlining patients' access to their healthcare provider. Currently, healthcare providers are prohibited from accessing, compiling or maintaining electronic data derived from driver's licenses under the Texas Transportation Code. But S.B. 166 -- which has been sent to Governor Rick Perry's desk for his signature -- would amend the Transportation Code to exempt healthcare providers from this prohibition.

The Texas Legislature approved a similar exemption in 2007 that permitted hospitals to use the electronic strip on a driver's license as a tool for admitting patients, and S.B. 166 aims to extend this same capability to other healthcare providers. S.B. 166 also seeks to ensure the privacy and security of information obtained from patients' driver's licenses by prohibiting healthcare providers from selling, transferring or otherwise disseminating information derived from driver's licenses to third parties for any purpose, including marketing or advertising. Importantly, healthcare providers may only transfer information obtained from driver's licenses under S.B. 166 in accordance with HIPAA regulations, and a healthcare provider's business associate and any subcontractor who receives the transferred information may only use it to service or maintain the healthcare provider's database of the information. Thus, while S.B. 166 promises to modernize and streamline the patient admissions process for Texas healthcare providers, it also presents unique privacy challenges they cannot afford to ignore.

If you would like assistance in developing policies and procedures regarding the use of driver's licenses to collect patient information or with any related matter, please contact Lynn Sessions at or 713.646.1352; or Cory J. Fox, or 713.646.1358.

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With focus on legal science advocacy, Lance Shea represents clients with federally regulated products (FDA, EPA, etc.). His matters span regulatory and litigation forums and often involve complex scientific evidence. His clients are life science companies in the medical products industries (drugs, medical devices, biotechnology products, etc.), healthcare providers and academic medical centers. Also, he teaches Regulatory Science and Scientific Evidence in the University of Maryland graduate schools of pharmacy and law. In recent regulatory matters, Lance advised clients on assessment of safety signals for prescription drug products, postmarketing studies required under REMS, preparation for cGMP drug and food inspections and efficacy and safety positions based on epidemiology studies of competing medical device products. In litigation matters, he recently represented drug companies in nationwide dockets of products liability cases and a drug/device company in breach of contract litigation.

Prior to joining our firm, Lance practiced for 24 years at Fulbright & Jaworski. He spent far too long in school: University of San Diego (JD, magna cum laude, 1989), Arizona State University (MS Health Sciences, 1986), Arizona State University (BS Health Sciences, with distinction, 1982). He tries to be an avid runner and cyclist in order to mitigate the ill effects of middle age. He's still trying to play the blues.

Lance can be reached at and 202.861.1648.

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May 17

Houston partner Susan Feigin Harris will speak on "Healthcare Squeezed -- Dollars, Deficits, Decisions and Deadlines" at the annual meeting of the Healthcare Financial Management Association's Gulf Coast Chapter in Houston, Texas.

June 11

Houston counsel Lynn Sessions will speak on "Cyber Liability and Data Breaches" as a panelist at the Wortham Client Education Day sponsored by John L. Wortham & Son, LP in Houston, Texas.

June 12

Houston counsel Lynn Sessions will speak on "Anatomy of Health Care Data Breaches -- The Good, the Bad and the Almost Very Ugly" at the American Hospital Association Solutions Seminar in Philadelphia, Pennsylvania.

June 13

Houston counsel Lynn Sessions will speak on "Anatomy of Health Care Data Breaches -- The Good, the Bad and the Almost Very Ugly" at the American Hospital Association Solutions Seminar in Boston, Massachusetts.

June 19

Houston counsel Lynn Sessions will speak on "Anatomy of Health Care Data Breaches -- The Good, the Bad and the Almost Very Ugly" at the American Hospital Association Solutions Seminar in Houston, Texas.

Houston partner Scott McBride will speak on "Practical Strategies for Managing Medicare Audits and Appeals" at ANI: The 2013 HFMA National Institute in Orlando, Florida.

June 20

Houston counsel Lynn Sessions will speak on "Anatomy of Health Care Data Breaches -- The Good, the Bad and the Almost Very Ugly" at the American Hospital Association Solutions Seminar in Chicago, Illinois.

June 21

Houston counsel Lynn Sessions will speak on "HIPAA/HITECH Update and Best Practices in Privacy Protection and Mitigation" at the Association of American Medical Colleges Annual Meeting in Washington, D.C.

June 26

Houston counsel Lynn Sessions will speak on "Developing a Smartphone Policy for Healthcare Providers" during an audio conference sponsored by Lorman Education Services.

July 17

Houston counsel Lynn Sessions will speak on "Physician Integration: Claims Challenges & Best Practices" at the Willis Health Care Practice 17th Annual Forum in Chicago, IIlinois.

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