Health Law Update—May 30, 2013

Alerts / May 30, 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.


A magistrate judge in the U.S. District Court for the Middle District of Florida recently ordered a hospital defendant in a False Claims Act (FCA) case to turn over two prime documents to the U.S. Department of Justice and the whistleblower that would seem to fall within the traditional confines of the attorney-client privilege. The whistleblower in the case, the director of physician services at Halifax Staffing, Inc., brought the case against her employer, a wholly-owned subsidiary of Halifax Hospital Medical Center (Halifax). The complaint alleges that Halifax entered into several specialty physician employment agreements that provided for compensation that was not commercially reasonable, exceeded fair market value, and/or took into account the volume or value of referrals or other business generated in violation of the federal Stark Law, and in turn, the federal FCA. The federal government has intervened in the case.

Previous Order Regarding Privileged Documents

In November 2012, U.S. Magistrate Judge Thomas Smith ordered Halifax to turn over a slew of documents that Halifax previously had withheld from production on grounds of the attorney-client privilege. The documents consisted of compliance department logs, audit records and e-mail communications involving Halifax's internal legal counsel. With respect to a memorandum authored by Halifax's Associate General Counsel regarding the physician compensation arrangements, however, Magistrate Judge Smith ruled against the whistleblower's argument that the memorandum should be produced because it evidenced "an attorney aiding in the commission of a fraud." Without addressing the elements of the crime-fraud exception to the attorney-client privilege, Magistrate Judge Smith stated that the whistleblower had failed to meet her burden in proving that the exception applied with respect to the memorandum because she had not offered evidence to rebut Halifax's argument that she essentially stole the memorandum.

Renewed Interest in the Memorandum

On May 8, 2013, Magistrate Judge Smith revisited the privilege status of the memorandum after a hearing on the same topic, and ordered the document to be produced. Although the judge did not provide detail in the order, the ruling likely is based upon two important factors. First, the attorney author of the memorandum reportedly stated in her deposition that she sent the memorandum to the Halifax General Counsel and the whistleblower because the whistleblower had requested the legal advice and "was entitled to understand where we were at with our legal opinion of her concern." Thus, the judge's concerns that the whistleblower had not met her burden to prove the crime-fraud exception because she had stolen the memorandum were alleviated. Additionally, Halifax did not object to a Halifax administrator's deposition testimony on the substance of the memorandum under the attorney-client privilege. Thus, Halifax had waived subject matter jurisdiction.

Halifax also was ordered to produce to Magistrate Judge Smith an e-mail from its general counsel and a memorandum from its outside law firm for in camera review of the asserted attorney-client privilege. We will update you regarding future rulings on these documents. Suffice it to say that this case should propel healthcare providers to scrutinize their attorney-client privilege protections. While Magistrate Judge Smith's order leaves much to be desired in the way of an analysis of the crime-fraud exception as it applies to in-house lawyers, providers can and should take steps to ensure that they carefully guard documents containing legal advice.

If you need assistance in assessing your physician relationships for Stark Law compliance or in handling a potential Stark Law investigation, please contact Donna S. Clark, or 713.646.1302; or Darby C. Allen, or 713.646.1311.

top of page


As soon as the Supreme Court released its decision regarding the optional nature of the Affordable Care Act's (ACA) Medicaid expansion provision in June 2012, the hospital industry became concerned over the law's imposed reductions to the disproportionate share hospital (DSH) allotment. The ACA mandated DSH allotment reductions based on the assumption that the number of uninsured individuals would fall sharply beginning 2014 as a result of Medicaid expansion and enrollment in the Health Insurance Exchanges. However, in the new post-Supreme Court decision world, states are making differing choices over whether to opt in or out of Medicaid expansion. The mandatory reductions in DSH allotments to states are a cause for concern to hospitals that rely on DSH funding to help offset the significant costs associated with providing healthcare services to the uninsured and to Medicaid program patients.

On May 15, 2013, the Centers for Medicare and Medicaid Services (CMS) published a proposed rule to implement the State DSH Allotment Reductions that provides a mechanism for calculating the statutory DSH allotment reductions. The ACA established certain factors for consideration in establishing a methodology for such reductions, including:

  1. A smaller percentage reduction for low DSH states;
  2. Larger percentage reductions for states having the lowest percentage of uninsured during the most recent year for which the data is available;
  3. Larger percentage reductions for states that do not target their DSH payments on hospitals with high volumes of Medicaid inpatients;
  4. Larger percentage reductions for states that do not target their DSH payments on hospitals with high levels of uncompensated care; and
  5. Taking into account the extent to which the DSH allotment for a state was included in the budget neutrality calculation for a coverage expansion approved under a section 1115 waiver as of July, 2009.

While the ACA requires the Secretary of the U.S. Department of Health and Human Services (HHS) to implement the DSH reductions over seven years beginning in 2014, the proposed rule, citing the need for better data, addresses reductions only for the initial two years. To that end, the proposed rule provides for aggregate annual reduction amounts of $500 million in 2014 and $600 million in 2015. A two-year methodology was proposed to allow continued refinement and improvement before the larger reductions are slated to begin in 2017, and CMS is seeking comment on readily available data sources that may be useful to the agency's review.

The DSH allotment reduction formula is described by CMS as accomplishing the statutory goals of the ACA by:

  1. Separating states into two-state groups -- non-low DSH states and low DSH states;
  2. Proportionately allocating aggregate DSH funding reductions to each of the two-state groups based on each group's total unreduced DSH allotment amount;
  3. Allowing a low DSH state percentage reduction factor to adjust each group's DSH funding reduction amount while maintaining the combined aggregate DSH funding reduction; and
  4. Dividing each state group's DSH allotment reduction amount among three statutory identified factors: (a) the Uninsured Percentage Factor (UPF), (b) the High Level of Uncompensated Care Factor (HUF), and (c) the High Volume of Medicaid Inpatients Factor (HMF). Each factor is then weighted, with the UPF having a proposed factor of 33 1/3 percent, and the HUF and HMF assigned a 66 2/3 percent factor.

The proposed rule contains a chart identifying the impact of the proposed formula on each state.

For providers, the proposed rule identifies a new methodology in which their state's uncompensated care amounts will be evaluated. It also offers insights into the continued availability of DSH funding as a viable supplemental payment for offsetting the costs of providing hospital care to the state's uninsured and Medicaid populations.

Comments to the proposed rule are due to CMS by July 12, 2013. As clearly stated in the rule's preamble, CMS is looking for additional data sources and feedback with respect to how the DSH reduction allotments will be imposed across the states. The proposed rule should be reviewed by states and providers that may be able to influence the outcome of the current reduction formula.

For more information relating to the proposed rule, please contact Susan Feigin Harris, or 713.646.1307.

top of page


With the implementation of CMS's new on-line searchable database in partnership with the Association of Health Care Journalists (AHCJ), the public now can view hospital Statements of Deficiencies (Form 2567) on the AHCJ website. The CMS action offers new transparency for hospitals and eliminates the need for consumers and journalists to file Freedom of Information Act (FOIA) requests to view certain hospital deficiencies.

The AHCJ database, however, has become a source of concern for hospitals due to a lack of completeness and an absence of context. For example, only reports issued since January, 2011 are contained in the database, and this information is limited to complaint investigations. Because narrative descriptions frequently are written to support remedial actions, they may skew or distort the magnitude of the deficiency. Additionally, no hospital plan of correction or other responses are contained in the database because CMS had not fully processed this information at the time the data was released. Although the agency has said it will add this information to the database in the future, this action will be contingent on available funding.

The searchable results from the database are difficult, if not impossible, to use when comparing hospitals on a quality or price basis. This is because the data is not integrated with the CMS Hospital Compare website, which includes patient survey information, measures of care, readmission, complications and mortality data, or with the agency's recent release of hospital price information (see the May 16, 2013, issue of the Health Law Update). Also of concern is the absence of certain important protections, such as the right of hospitals to appeal any disputed data posted to the AHCJ website.

As a result of all of these things, consumers (and perhaps investigative news reporters) could possibly misinterpret what information is given and improperly ascribe negative connotations to one or more hospitals. Further, the publication of data from the hospital Statements of Deficiencies on the AHCJ website may increase public pressure for The Joint Commission and other accrediting bodies to release the results of their hospital accreditation surveys. Consequently, hospitals should work to assure their accreditation reports are carefully monitored and correct and that their responses to findings are written with an eye toward possible public disclosure.

For more information please contact Robert M. Wolin, or 713.646.1327; or Rhondee M. Damon, or 713.646.1321.

top of page


More than half of America's doctors have now adopted electronic health records (EHRs), and the number of doctors and hospitals using EHRs continues to increase dramatically according to data recently released by HHS. This growth can be traced to the 2009 American Reinvestment and Recovery Act, which provided for incentive payments under Medicare and Medicaid to doctors and hospitals that adopted and meaningfully used EHRs. Since then, EHR adoption has exploded and shows no sign of slowing down.

The statistics are impressive: in 2008, only 17 percent of eligible physicians and 9 percent of eligible hospitals had adopted EHRs; but in 2013 over 50 percent of eligible physicians and 80 percent of eligible hospitals have adopted EHRs -- more than double the number of physicians and hospitals that had adopted EHRs in 2012. According to HHS Secretary Kathleen Sebelius, the healthcare industry has reached a "tipping point" in the adoption of EHRs, which she says is "critical to modernizing our healthcare system" and can help providers "better coordinate care, which can improve patients' health and save money at the same time." Many industry groups, such as the Texas Medical Association (TMA), the Health Information and Management Systems Society (HIMSS), and the HIMSS Electronic Health Record Association (HIMSS EHR Association), seem to agree and have publicly expressed support for the EHR incentive payments.

But not everyone is happy with the EHR incentive program. On April 16, 2013, six Republican senators published a paper that sharply criticized the Obama administration's implementation of the EHR incentive program. The paper raised five key implementation deficiencies:

  1. The lack of a clear path toward interoperability;
  2. Concerns that health information technology (HIT) may increase costs and fail to control costs as previously estimated;
  3. A general lack of HIT program oversight;
  4. Privacy and security risks; and
  5. Concerns over whether providers can afford to maintain the EHR programs long term.

Along with the paper, the senators also issued a letter to HIT stakeholders requesting comments on the issues raised.

The TMA, the HIMSS and the HIMSS EHR Association all responded in support of the EHR incentive program. The TMA pointed out that in order for a clear path toward interoperability to materialize, providers first must have EHRs to interoperate with. The TMA also pointed to the dramatic impact the incentive payments have had on Texas providers -- the number of Texas physicians using EHRs has risen from 25 percent in 2005 to 60 percent in 2012, with another 22 percent planning to adopt EHRs in the next two years. The HIMSS and the HIMSS EHR Association echoed the TMA's interoperability arguments, adding that the program's Stage 1 meaningful use criteria established an important foundation for interoperability. But all three organizations recognized that difficult interoperability concerns will need to be addressed before the cost savings and quality improvement benefits of EHR systems can be fully realized.

Regardless of where one stands in this debate, the EHR incentive program's 2014 participation deadline is rapidly approaching, and providers who begin participating in 2013 may be eligible to receive a greater total incentive amount than those who wait until 2014. If you would like to participate in the EHR incentive program, or if you have questions regarding EHRs or meaningful use, please contact Lynn Sessions, or 713.646.1352; or Cory J. Fox, or 713.646.1358.

top of page


BakerHostetler counsel Lynn Sessions and partner Theodore Kobus III received the 2013 Distinguished Law Firm Writing Award from the Burton Foundation for Legal Achievement for their article, "The Anatomy of a Healthcare Data Breach," published in the June 2012 edition of American Health Lawyers Association's monthly members' magazine, Connections.

The Burton Awards, in association with the Library of Congress, honors partners and counsel in law firms who use plain, clear and concise language in their writing. Thirty winners were chosen from nominations submitted by 1,000 of the country's largest and most prestigious law firms. The 14th annual Burton Awards event will be held at the Library of Congress on June 3, 2013.

In their article, written for the health and life sciences legal community, Sessions and Kobus noted that HHS has demonstrated a willingness to investigate and hold healthcare organizations accountable for not having privacy prevention and response plans in place. Therefore, after advising healthcare providers and related entities to take appropriate action to ensure they are compliant with federal and state healthcare privacy regulations, Sessions and Kobus discussed the costs, notification requirements and suggestions for prevention of a healthcare data breach.
Sessions is a member of the Healthcare Industry and Privacy and Data Protection Teams. Kobus is National Co-Leader of BakerHostetler's Privacy and Data Protection Team.

top of page


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

New York partner Ted Kobus and 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

New York partner Ted Kobus and 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

New York partner Ted Kobus and 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

New York partner Ted Kobus and 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, Illinois.

top of page

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. © 2013 Baker & Hostetler LLP

Related Industries