Health Law Update—October 3, 2013

Alerts / October 3, 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 U.S. district judge in South Carolina approved the government's request for a civil penalty award and ordered Tuomey Healthcare System, Inc. (Tuomey) to pay more than $237 million in damages and fines in a whistleblower case that accused Tuomey of paying doctors pursuant to compensation arrangements that violated the Stark Law.

The penalty was imposed following a jury's determination in May that Tuomey had violated the Stark Law because the compensation paid to several specialty physicians under part-time employment agreements varied with or took into account the volume or value of referrals to the hospital. The jury also determined that Tuomey violated the False Claims Act (FCA) when it submitted over 21,000 claims to Medicare in the amount of $39 million that were related to the improper physician relationships. The judge awarded the government trebled damages of nearly $118 million, based upon the $39 million value of the false claims, and imposed the minimum FCA fine of $5,500 per claim, for a total in penalties and damages of over $237 million.

The judge also denied all of Tuomey's post-verdict motions regarding substantive issues in the case, including Tuomey's assertion that the scienter requirement for an FCA violation was not established in light of Tuomey's reliance on the advice of counsel with respect to the physician relationships. You may review our previous coverage of the case in the May 16, 2013, and April 12, 2012, issues of the Health Law Update. Tuomey indicated that it would file a notice of appeal and would ask for a stay of the judgment, pending appeal. Another potential issue that may arise given the verdict and judgment is whether the trustees and officers of Tuomey may be indemnified in subsequent litigation in light of a recent legal opinion issued by the South Carolina attorney general. BakerHostetler will provide a more thorough briefing on this topic in a future issue.

This case highlights the risk associated with the multiplicative impact of penalties under the FCA, even when the government does not assess the civil penalties available under the Stark Law.

If you need assistance reviewing your physician compensation arrangements, please contact Donna S. Clark, or 713.646.1302; Robert M. Wolin, or 713.646.1327; or Darby C. Allen, or 713.646.1311.

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A lawsuit brought by a foreign national doctor earning a six-figure income against the physician owner of his former employer alleging violations of a federal forced labor statute is being allowed to go forward, with the recent denial of the defendant's motion to dismiss the case for failure to state a claim.

In Antonatos v. Waraich, pending in a South Carolina federal court, plaintiff Antonatos is a Panamanian citizen who attended medical school and completed his residency in the U.S. In 2010, he applied for a physician position with Palmetto Hospitalists Associates, P.A. (PHA), a firm owned by Waraich, after having seen a written advertisement for the position which noted that the firm had "sponsored a number of J-1/H-1 physicians." After interviewing with Waraich, Antonatos and PHA entered into a five-year contract for Antonatos to practice internal medicine and emergency medicine. Because the position with PHA was in a medically underserved area, it offered the opportunity for Antonatos to remain in the U.S. under the sponsorship of PHA and to apply for legal permanent resident (green card) status under an immigration program that grants such status to an alien physician who has worked full time in a medically underserved area for five years.

In his suit against Waraich (as the alter ego of PHA), Antonatos alleges that the written advertisement for the position made representations about the terms and conditions of the position and that Waraich induced Antonatos to sign the five-year contract by personally verifying the representations described in the written advertisement and by making additional promises about the position and conditions of employment, including promises relating to working hours, travel requirements, support assistance and patient load, among others. Antonatos alleges that Waraich's promises were false and that Antonatos was given duties and responsibilities far different than promised and far different than the American doctors working for Waraich in the same positions. Antonatos asserts that when he complained to Waraich, he was reprimanded and threatened that he would be subject to a lawsuit and to having his visa revoked and being deported if he did not do everything Waraich asked him to do. After continuing in the position for a period, Antonatos found new employment with a facility that would assume the sponsorship of his immigration status and allow him to continue the green card process. Antonatos asserts that upon learning the news, Waraich threatened to revoke his visa and then brought a $250,000 contract suit against him in state court.

Antonatos later commenced this suit in federal court alleging that Waraich violated the Trafficking Victims Protection Reauthorization Act (TVPRA) by knowingly obtaining Antonatos' services by means of false inducements, by forcing him to work under the condition of "peonage and servitude to his great damage" and by threatening to abuse the immigration laws. While acknowledging that the "facts of this case, involving a well-paid, educated professional with no allegation that his freedom of movement was restricted stands in stark contrast to the cases brought pursuant to the TVPRA reviewed by this court," the court concludes that Antonatos' allegations nevertheless fall under the protection of the TVPRA. (Forced labor cases more commonly relate to uneducated individuals, often domestic servants, forced to work in poor conditions, who are underpaid, mistreated, restricted in movement, and under constant threat of deportation.)

Whether Antonatos will ultimately prevail remains to be seen. While physician employers should not be unnecessarily alarmed about the prospects of their foreign national physicians bringing forced labor lawsuits against them, care should be taken to ensure that expectations are accurately conveyed to foreign national physician recruits and that, once on board, their conditions of employment are fair and no different than similarly situated physicians in all respects, including hours worked, number of patients seen, call schedules given, types of services required to be performed, staff assistance provided and travel required.

For more information, please contact Pamela D. Nieto, or 713.646.1372.

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With the first week in the Federal Trade Commission's (FTC) and Idaho attorney general's antitrust trial challenging St. Luke's Health System's (St. Luke's) acquisition of the Saltzer Medical Group (Saltzer), a for-profit, physician-owned, multispecialty group comprising approximately 44 physicians located in Nampa, Idaho, already in the books, a lot more is at stake than just whether St. Luke's is eventually ordered to unwind its acquisition of Saltzer.

As reported previously, the FTC and Idaho attorney general are alleging that St. Luke's acquisition of Saltzer is anticompetitive because it creates a single dominant provider of adult primary care physician services in Nampa, Idaho, with a combined share of nearly 60 percent. The newly-combined primary care practices, they allege, give St. Luke's greater bargaining leverage with healthcare plans, with higher prices for services eventually being passed on to local employers and their workers. Other local hospitals contend that the combination may choke off their access to inpatient admissions referred by Saltzer physicians.

So, what's at stake besides whether St. Luke's gets to keep Saltzer? According to recent comments by FTC Commissioner Joshua Wright it will be whether the FTC launches a provider healthcare merger retrospective review -- for the second time. In Commissioner Wright's view, as reported, a loss in Idaho could prompt the FTC to turn its focus to completed hospital-physician deals in an effort to build the experience needed to win such challenges.

Commissioner Wright's comments echo those made by FTC Chairwoman Edith Ramirez earlier this summer. While speaking at a symposium on retrospective analysis of agency determinations in merger transactions, she emphasized what the FTC learned from its first hospital merger retrospective, namely, that the FTC needed to "revamp" its approach to litigating horizontal hospital merger challenges. The FTC's revamped approach now "emphasizes how a merger can leave an insurer -- the direct payor for hospital services -- with few alternatives to include in its network, increase the bargaining leverage of the combined hospital, and lead to higher prices." Beginning with the Evanston case in 2007, the result from this new approach has been "a winning streak that now includes three successfully-litigated merger challenges and a growing list of hospital deals abandoned after the FTC threatened a challenge," according to Chairwoman Ramirez.

Since healthcare "remains a top agency priority," Chairwoman's Ramirez's statements, along with Commissioner Wright's recent words, suggest that a renewed provider healthcare merger retrospective is on the horizon. But where would such a retrospective focus?

Chairwoman Ramirez sees much to be gained by examining more closely the effects of combinations that have "a significant vertical element." An area of examination would include the impact of integration among physicians in different specialties that results from hospital acquisitions of physician practices, she said. Another, where she said the FTC hears "growing concerns," involves "provider consolidation in non-overlapping product or geographic markets," which may lead to higher prices. These combinations might include, for example, "center city hospitals acquiring smaller hospitals in outlying areas or a general acute care hospital acquiring a children's hospital." According to Chairwoman Ramirez, "preliminary economic evidence suggests that harm from this type of integration, ordinarily not what we would challenge, could be real and substantial."

Drawing on the experience of members of our healthcare team in complementary areas of health law, including transactions, tax, labor and employment and healthcare regulation, our team of antitrust lawyers has the depth and experience to handle the most significant antitrust healthcare matters, including transactions and investigations. If you have any questions regarding this matter, or would like to learn more about our healthcare antitrust capabilities, please contact Jonathan L. Lewis, or 202.861.1557; or Lee H. Simowitz, or 202.861.1608.

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The Centers for Medicare and Medicaid Services (CMS) recently issued controversial new criteria for hospitals to use to determine whether a patient's stay in a hospital should be treated as an outpatient observation stay or an inpatient admission. CMS has implemented two related policies to determine whether a patient should be admitted as an inpatient.

Two-midnight Presumption

If an inpatient stay spans two midnights, CMS generally will presume the stay to be reasonable and necessary and absent evidence of gaming or abuse by a facility (including intentional delay in the provision of services), the agency typically will not review the admission decision. Conversely, admissions that do not cover two midnights, presumptively will not be deemed reasonable and necessary. However, the facility can be paid on an inpatient basis for a short stay patient, if the two-midnight benchmark was satisfied at the time of admission.

Two-midnight Benchmark

An inpatient admission generally is deemed to be appropriate when the admitting practitioner has a reasonable and supportable expectation that the patient will need care at the hospital for a period spanning not less than two midnights, based upon the information available to the practitioner at the time of the admission decision. To prevent gaming, CMS requires an inpatient admission order by a practitioner who is familiar with the patient's condition and plan of care that is furnished at or before the time of admission, and the order must be contained in the medical record before the patient's discharge. In addition, the physician must certify, prior to the patient's discharge, that the inpatient hospital services were required on an inpatient basis for the patient's medical treatment. The certification must be signed and documented in the medical record prior to the hospital discharge. The physician order also is a required component of the physician certification. Under the 2014 IPPS rule, this certification now has become a condition for payment rather than simply a condition of participation.

Procedures that are designated as inpatient-only procedures are excluded from the two-midnight benchmark policy.

Hospitals have objected vigorously to this rule, voicing concerns over the potential for payment reductions (particularly if the provider is very efficient) and reduced patient satisfaction. Their complaints have been heard in Congress. Last week, for example, 105 members of the House of Representatives signed a letter requesting CMS to delay this rule. To address these concerns, CMS announced that the agency will transition to the new rules with a three-month grace period, referred to as a "probe and educate" period by CMS, during which hospitals will not face financial penalties as they work to comply with the new inpatient admission rule.

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

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Under the HIPAA Privacy Rule, an individual has the right to adequate notice of how a covered entity may use and disclose protected health information (PHI) about the individual, as well as his/her rights and the covered entity's obligations with respect to that information. Thus, a covered entity must develop and provide individuals with a Notice of Privacy Practices (NPP). See 45 C.F.R. § 164.520. Under the Privacy Rule, a covered entity also is required to promptly revise its NPP when there is a material change to any of its privacy practices stated in the NPP to ensure that individuals are aware of their health information privacy protections and rights. In January 2013, the Final Rule brought a number of material changes to the privacy obligations of HIPAA-covered entities, and thus, NPPs must be revised to reflect such changes.

Just a week prior to the September 23, 2013, Final Rule compliance date, the U.S. Department of Health and Human Services Office for Civil Rights (OCR) and the Office of National Coordinator for Health Information Technology (ONC) released model NPPs. Healthcare providers and health plans are encouraged to use the model notices as guidance for updating communications to patients and plan members. The three models include (1) a notice in the form of a booklet; (2) a layered notice with a summary of the information on the first page and full content on following pages; and (3) a notice with the design elements of a booklet, but in a full-page presentation format. A text-only version also is provided for covered entities that wish to use only content.

The model NPPs include the following Final Rule changes:

  • Breach notification obligations -- a covered entity must include a statement regarding an impacted individual's rights after a breach of unsecured PHI;
  • Description of uses and disclosures requiring authorization, including for:
    • Most uses and disclosures of psychotherapy notes;
    • Uses and disclosures of PHI for marketing purposes; and
    • Disclosures that constitute a sale of PHI.
  • Fundraising -- before a covered entity contacts a patient for fundraising purposes, it must explain its intentions and inform the patient of the right to opt out of receiving such communications;
  • PHI disclosure for underwriting -- a health plan that intends to use or disclose PHI for underwriting purposes must include a statement in its NPP that it is prohibited from using or disclosing PHI that is an individual's genetic information for such purpose; and
  • Restrictions on disclosure of PHI to a health plan -- a covered entity must abide by an individual's request to restrict disclosure to a health plan if the disclosure is for payment or healthcare operations and pertains to a healthcare item or service for which the individual has paid out of pocket in full.

    Covered entities should check their new NPPs against the model NPPs to confirm compliance with the Final Rule, and revise if necessary.

    To ensure that an individual is aware of his or her rights regarding use and disclosure of PHI, a covered entity must make its notice available to any person who requests it, and a covered entity must prominently post and make available its notice on any website it maintains that provides information about its customer services or benefits.

    If you need assistance with your notice of privacy practices or any other HIPAA compliance issues, please contact Lynn Sessions, or 713.646.1352; or Kimberly Wong, or 212.271.2028.

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    October 10

    Cleveland counsel Tom Campanella will speak on "Global Partnering in Health Care" at the Samson Global Leadership Academy sponsored by the Cleveland Clinic in Cleveland, Ohio.

    Los Angeles partner Ellen Shadur Gross will speak on "Employee Relations & Union Awareness" at a live webcast sponsored by The Knowledge Group. Click here to register.

    October 11

    Houston counsel Lynn Sessions will speak on "Health Care" at the 2013 Net Diligence Cyber Risk & Privacy Liability Forum in Marina del Rey, California.

    October 14

    Houston partner Donna Clark will speak on "Fraud and Abuse Update" at the Health Law Conference sponsored by the Texas Hospital Association and State Bar of Texas.

    Houston partner Scott McBride will speak on "Medicaid Investigative and Enforcement Trends" at the Health Law Conference sponsored by the Texas Hospital Association and State Bar of Texas.

    October 16

    Cleveland counsel Tom Campanella will speak on "The Scary Economics of Health Care" at the meeting of the Certified Employee Benefits Society in Cleveland, Ohio.

    October 24

    Houston counsel Lynn Sessions will speak on "Mobile Technology: Health Care's Moving HIPAA and HITECH Targets" during a telephone seminar/audio webcast sponsored by The American Law Institute.

    Houston partner Donna Clark will speak on "Stark Law Implications of Real Estate Transactions" at the 11th Annual Conference of the Higher Education Real Estate Lawyers in San Diego, California.

    December 5

    Cleveland counsel Tom Campanella will speak on "The Affordable Care Act: Where Do We Go From Here?" at the Health Law Lunch Series sponsored by the Cleveland Metropolitan Bar Association in Cleveland, Ohio.

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