Health Law Update—August 6, 2009

Alerts / August 6, 2009

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


IPPS Final Rule Restores Some Planned Cuts

CMS recently released the final fiscal year (FY) 2010 changes to the inpatient hospital prospective payment system (IPPS) rules (Final Rule). The Final Rule, in brief, includes the following changes and updates:

Payment Update. CMS revised and updated the operating and capital “market basket” factors for FY 2010. Using the revised market basket, acute care hospitals can expect an operating market basket update of 2.1 percent for FY 2010. However, hospitals that do not participate in the hospital quality data reporting program will receive only a 0.1 percent market basket update. The actual FY 2010 payment update will be less, however, because of budget-neutrality and other adjustments.

CMS also announced that it is not going to reduce the IPPS payments in FY 2010 to account for the anticipated provider behavioral shifts resulting from the FY 2008 implementation of the new Medicare Severity Diagnosis-Related Groups (MS-DRGs). CMS had proposed to adjust FY 2010 rates by 1.9 percent; however, because it lacked adequate data, the adjustment has been deferred.

Outliers. The Final Rule raises the outlier threshold to $23,140 in order to limit outlier payments to 5.1 percent of total IPPS payments in FY 2010.

Labor Related Share. CMS is lowering the labor-related share of the base IPPS payment rate to 68.8 percent for FY 2010 from 69.7 percent in FY 2009. This is the portion of the IPPS rate that is adjusted by the wage index applicable to the area where the hospital is located.

MS-DRG Relative Weights. In the Final Rule, CMS did not make any changes to the MS-DRG Relative Weights. CMS, however, finalized the reassignment of cases involving patients who have received hip or knee joint replacements, but have contracted an infection that requires the removal of the prosthesis and inpatient hospitalization while the infection is treated, and a new prosthesis implanted to higher-paying MS-DRGs to reflect the complexity of these admissions.

DSH Payment Calculation Adjustments.

Labor and Delivery Days. Patient days associated with beds for labor and delivery services, even when the patient did not occupy a routine bed prior to occupying an ancillary bed, will be included in the Medicare disproportionate share hospital (DSH) calculation.

Observation Beds. CMS will exclude patient days and beds associated with observation services from the DSH calculation and the determination of a hospital’s indirect medical education payment. CMS views observation services as an excludable outpatient service.

Medicaid Numerator Inpatient Day Aggregation Methodology. CMS will allow hospitals to count the number of days in the numerator of the Medicaid fraction of the Medicare disproportionate patient percentage using either (1) date of discharge, (2) date of admission or (3) dates of service. However, hospitals cannot reap the benefit of “double-counting” patient days if they change their methodology.

New Graduate Medical Education (GME) Program Definition. Currently, a new medical residency program is one that receives “initial” accreditation or begins training residents on or after January 1, 1995. The Final Rule clarifies that to be considered a new program, the accreditation must be deemed an “initial,” accreditation as opposed to a reaccreditation. To make the determination, CMS will look at “supporting factors” (such as whether the program director, teaching staff and residents are different). CMS also will consider whether there was a program in the same specialty at a hospital that closed and, more generally, whether that program is part of the FTE caps of any existing hospital. The Final Rule also allows new hospitals that begin training residents for the first time after July 1 to submit a Medicare GME affiliation agreement prior to the earlier of the end of its cost-reporting period or the end of the academic year, in order to participate in a Medicare GME-affiliated group for the remainder of the academic year.

Teaching Payment Adjustments. Teaching hospitals will continue to receive the full capital indirect medical education adjustment in FY 2010.

Quality Reporting Program. The Final Rule adds two new chart-abstracted measures (SCIP–Infection-9 Postoperative Urinary Catheter Removal on Postoperative Day 1 or 2 and SCIP-Infection-10: Perioperative Temperature Management), and two new structural measures (Participation in a Systematic Clinical Database Registry for Stroke Care and Participation in a Systematic Clinical Database Registry for Nursing Sensitive Care).

Hospital-Acquired Conditions. The Final Rule makes no changes to the list of hospital-acquired conditions for FY 2010. However, CMS added two E-codes for surgery on an incorrect patient or incorrect site on the correct person.

Nursing Homes: Recalibrated—No Cash for Clunkers

In its FY 2010 final rule for skilled nursing facilities (SNFs), also placed on display July 31, CMS finalized a 3.3 percent reduction to the FY 2010 SNF payments. The reduction occurred because of provider behavioral coding and documentation shifts following implementation of the expanded Resource Utilization Groups, FY 2006. The net impact of the market basket increase and the “recalibration” yields a 1.1 percent reduction in SNF PPS payments for FY 2010.

Inpatient Rehabilitation Facilities

CMS provided a full market basket update of 2.5 percent for FY 2010 for inpatient rehabilitation facility payments. After applying the budget-neutrality adjustments, the final FY 2010 standard payment conversion factor increases from $12,958 in FY 2009 to $13,661 in FY 2010. The final Inpatient Rehabilitation Facility Prospective Payment System rule is available online.

CMS also changed the inpatient rehabilitation facility coverage requirements for patients admitted after January 1, 2010.

Home Care: Payment Reduction Proposed

CMS proposed reducing home health PPS payments for calendar year (CY) 2010 by 0.86 percent as a result of applying the full 2.2 percent market basket update and reducing the 60-day episode rate by 2.75 percent to account for provider documentation and coding behavioral changes and other factors.

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


On July 30, 2009, the Sixth Circuit Court of Appeals ruled against a group of hospitals that had challenged the application of Medicare’s 70 percent bad debt reimbursement policy to bad debts stemming from individuals who are eligible for both Medicare and Medicaid (QMBs). See Detroit Receiving Hospital, et al. v. Sebelius, Case. No. 08-1920 (Sixth Cir. 2009). The Medicare program reimburses hospitals for 70 percent of the bad debts they incur relating to unpaid beneficiary deductible and copayment amounts. Generally, when a beneficiary is eligible for both Medicare and Medicaid, Medicaid covers the beneficiary’s Medicare copayment and deductible responsibilities. However, state Medicaid programs, such as in Michigan and Missouri, impose caps on Medicaid payments; as a result, the copayments and deductible amounts for QMBs may go unpaid. The Medicaid statute prevents hospitals from seeking these unpaid amounts from the QMBs. Therefore, a number of hospitals located in states with caps on Medicaid payments found that they were left with unpaid and unrecoverable bad debts. The hospitals, which are located in Michigan and Missouri, challenged Medicare’s bad debt reimbursement scheme, arguing that the scheme violates Medicare’s cross-subsidization ban (the notion that the costs of providing care for Medicare beneficiaries shall not be borne by non-Medicare beneficiaries). However, the Sixth Circuit ruled against the hospitals, reasoning that because the 70 percent reimbursement rate for bad debts is set by statute, and because the statute setting the rates is more recent and more specific than the statute containing the ban on cross-subsidization, the current bad debt reimbursement scheme is permissible, even with respect to QMBs in states that cap Medicaid payments.

For more information, please contact Gregory N. Etzel, or 713.646.1316, or Krista M. Barnes, or 713.646.1352.


The House Energy and Commerce Committee resumed and completed its markup of the Affordable Health Choices Act (H.R. 3200) last week after several days of intense negotiations with moderate “Blue Dog” Democrats that ended with the adoption of a compromise agreement by the Committee. Key provisions of that agreement include:

  • Negotiated Payment Rates. Authorizes the Secretary of the U.S. Department of Health and Human Services to negotiate payment rates for the public plan that are not lower than the Medicare rate nor higher, in the aggregate, than the average rates paid by private insurance plans participating in the Health Insurance Exchange.
  • Payment Innovation. Creates the Center for Medicare and Medicaid Payment Innovation within CMS for the purpose of testing various payment models and methodologies on a demonstration project basis. If the models being tested improve quality and do not increase spending, provides the Secretary of HHS with discretionary authority for expanding the duration and scope of the models, including implementation on a nationwide basis.
  • CO-OP Option. Establishes a Consumer Operated and Oriented Plan (CO-OP) program under which grants and loans will be provided for the establishment and initial operation of nonprofit, member-run CO-OP plans offered through the Health Insurance Exchange.
  • Medicaid. Reduces the federal share for Medicaid costs (FMAP payments) from 100 percent to 90 percent for required Medicaid expansions beginning in 2015; directs the U.S. Government Accountability Office to conduct separate studies on FMAP payments and Medicaid administrative costs by FY 2011.

A list of the amendments considered by the Committee during markup is available online. For a detailed overview of the House reform bill, please see the July 23, 2009, issue of the Health Law Update.

The reform bill passed by the Energy and Commerce Committee differs significantly from the versions passed by the House Ways and Means and Education and Labor Committees. The Tri-Committees and House leadership are expected to work through the August recess on combining the three versions of the bill into a single measure for a vote on the House floor in September. The House now stands adjourned until September 8, 2009.

The Chair of the Senate Finance Committee, Max Baucus (D-Mont.), has reset the deadline for his Committee to produce a bipartisan measure to September 15. It is anticipated that the six-member group spearheading the Committee’s negotiations on the reform bill—Chair Baucus, Kent Conrad (D-N.D.), Jeff Bingaman (D-N.M.), Ranking Member Chuck Grassley (R-Iowa), Olympia Snowe (R-Maine) and Mike Enzi (R-Wyo.)—will continue deliberating through the month of August. On Friday, the Senate will adjourn until September.

The Health, Education, Labor and Pensions (HELP) Committee approved its version of the Affordable Health Choices Act on July 15, 2009. A section-by-section summary of the HELP Committee’s bill that includes the adopted amendments is available online.

The versions produced by the Senate HELP and Finance Committees will have to be blended prior to a vote by the full Senate. In a recent statement to the press, Senator Baucus said the version being deliberated by the Committee’s negotiating group is “80 percent identical” to the bill approved by the HELP Committee.

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


The Stark Law prohibits physicians from referring Medicare and Medicaid patients to entities with which they have a financial relationship for certain designated health services unless the relationship qualifies for an exception. Physician groups routinely utilize the in-office ancillary services exception to protect referrals for ancillary services furnished by the group. In commentary contained within the various preambles to the Stark regulations, CMS has noted the proliferation of advanced diagnostic technology within physician offices and solicited comments on revision of the in-office ancillary services exception. A bill recently introduced in the House appears to be the first effort to revise the exception.

The bill, introduced by Rep. Jackie Speier (D-Calif.), and titled the “Integrity in Medicare Advanced Diagnostic Imaging Act of 2009” (H.R. 2962), would amend the exception to eliminate MRI, CT-scanning, and PET-scanning services from the scope of imaging services subject to protection under the exception. The bill also furnishes the Secretary of HHS with the authority to eliminate additional diagnostic imaging services in consultation with physician groups, but excepts certain imaging services, such as x-ray and ultrasound, from potential elimination. If enacted, physicians would be unable to furnish MRI, CT-scanning, and PET-scanning services to their Medicare and Medicaid patients.

Recent studies conducted by the government cite a prolific rise in the use of advanced diagnostic testing at significantly increasing costs. In light of the search for savings to cover the cost of health reform, the concept of narrowing the in-office ancillary services exception may gain momentum.

For more information, please contact Donna S. Clark, or 713.646.1302.


The Medicare Fraud Strike Force operations in Houston, announced in May 2009, have gotten off to a blazing start, with thirty-two physicians, company owners and executives being indicted for schemes to submit more than $16 million in false Medicare claims. In connection with the indictments, arrests were made in Houston, New York, Boston and Louisiana. Local news cameras followed Strike Force agents as they executed 1 of 12 search warrants on healthcare businesses and homes across the Houston area. The accused are charged with scheming to submit claims to Medicare for durable medical equipment supplies, such as power wheelchairs and scooters, “arthritis kits” which were comprised of orthotic braces and heat pads, enteral nutrition products and feeding supply kits that allegedly were medically unnecessary or were never provided. Each of the three Houston Strike Force teams is led by a federal prosecutor from the U.S. Attorney’s Office in Houston or the Criminal Division’s Fraud Section and includes agents from the FBI; Offices of Inspector General from HHS, Office of Personnel Management and the Railroad Retirement Board; Texas Attorney General’s Medicaid Fraud Control Unit and U.S. Drug Enforcement Administration.

Medicare Fraud Strike Force operations in Houston are a part of the Health Care Fraud Prevention and Enforcement Action Team (HEAT), an interagency effort aimed at detecting and preventing fraud in Medicare and Medicaid through enhanced cooperation. Since the inception of Strike Force operations in March 2007, with phase one in South Florida, phase two in Los Angeles in March 2008 and phase three in Detroit in June 2009, the Strike Force has obtained indictments of more than 293 individuals and organizations that collectively have billed the Medicare program for more than $674 million. Among the Medicare Fraud Strike Force’s stated accomplishments are 131 guilty pleas, 21 guilty verdicts and 122 defendants sentenced to prison, sentences ranging from four months to 30 years, with an average length of sentence of four years.

While our attorneys can assist as regulatory counsel for criminal cases, they also are available to assist providers wanting to self-evaluate and address any potential issues before they become the target of a Strike Force investigation.

For more information, please contact B. Scott McBride, or 713.646.1390, or Summer D. Swallow, or 713.646.1306.


On July 27, 2009, the U.S. Attorney’s Office for the Central District of California announced that Tulare Local Healthcare District, Tulare District Healthcare System, and Tulare District Hospital (collectively “Tulare”) will pay $2.4 million plus interest to settle allegations that it provided remuneration in violation of the False Claims Act, the federal anti-kickback statute and the Stark Law to physicians who referred Medicare patients to Tulare. Tulare’s chief financial officer from 1997-2007 initiated the whistleblower suit and was awarded $500,000.

The suit alleged that from 2001-2007, doctors received kickbacks in the form of below-market rate office space lease arrangements, below-market value commercial real estate purchase prices and debt forgiveness for office space improvements and leases in exchange for patient referrals. According to the settlement, which did not identify the doctors or entities by name, 20 physicians, a physician group and a laboratory were involved. The government contends that these inducements violated the Stark Law and anti-kickback statute and resulted in the submission of false claims to the Medicare program in violation of the False Claims Act.

For more information, please contact Ameena N. Ashfaq, or 713.646.1329.


The Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) added new mandatory reporting requirements for group health plan arrangements, liability insurance (including self-insurance), no-fault insurance and workers’ compensation plans to ensure better compliance with the Medicare Secondary Payer (MSP) rules. MSP rules determine whether Medicare or other insurance is primary and also enforce reimbursement to Medicare for conditional payments for which a third party is liable.

It is important to recognize that these requirements may be relevant to many types of employers and entities and are not specific to healthcare or insurance providers, but may impact the source and timing of payments to providers.

Group Health Plans

Before MMSEA, there was no mandatory sharing of claims payment information. Some group health plans, however, provided data to CMS under voluntary data-sharing agreements.

“Responsible Reporting Entities” (RREs) are required to report claims information. If an insurer pays the claims and assumes financial risk, the insurer is the RRE. If an insurer does not process the group health plan’s claims, any third-party administrator processing claims will be the RRE. If the plan is self-insured and self-administered, the designated plan administrator or fiduciary is the RRE. RREs generally were required to register with CMS before April 30, 2009, and must begin reporting based on a predetermined schedule beginning October 1, 2009.

Where the group health plans do not know whether a covered individual is a Medicare beneficiary, the RRE may either report on all “Active Covered Individuals” (ACIs) or query CMS’s database to determine an individual’s Medicare status. ACIs include (1) most individuals in a group health plan ages 55-64, (2) most individuals age 65 or older, (3) individuals receiving kidney dialysis or who have had a kidney transplant, and (4) individuals under age 45 who are known to be entitled to Medicare.

If an insured refuses to provide his social security number or health insurance claims number, an RRE should obtain a signed copy acknowledgement from the refusing individual. This step will ensure that the RRE is considered to be compliant with reporting requirements.

Liability Insurance

Under MMSEA, liability insurers, no-fault insurers, workers’ compensation plans and insurers, persons and entities that self-insure RREs must register with CMS by September 30, 2009, if they have data to report. RREs, however, are not obligated to begin testing their reporting systems until January 1, 2010. Required reporting begins April 1, 2010.

If an entity is self-insured for a deductible, but the deductible is paid through an insurer, then the insurer is the RRE. Re-insurance, stop-loss insurance, excess insurance, umbrella insurance, guaranty funds, patient compensation funds, etc., will be deemed to be RREs if they pay the injured claimant rather than reimbursing the insured. Third-party administrators, however, generally are not RREs for liability insurance reporting.

For workers’ compensation plans, if the claims are resolved and paid by a governmental agency, the agency is the RRE. If the employer self-insures workers’ compensation, the employer is the RRE. However, if the employer participates in a workers’ compensation self-insurance pool, the pool is generally the RRE.

RREs were required to begin reporting settlements, judgments, awards or other payments and when the RRE has accepted ongoing responsibility for medical payments beginning on July 1, 2009.


RREs that fail to comply with these requirements may be subject to a penalty of $1,000 per day of noncompliance with respect to each claimant.

Steps to Ensure Compliance with MMSEA

If an outside agent is used to fulfill MMSEA reporting, the contract with the entity should include provisions allowing audits of their compliance with reporting requirements, as well as indemnity in the event the RRE is subjected to penalties or damages.

For more information, please contact Terry Connerton, or 202.861.1613, or Krista M. Barnes, or 713.646.1352.


Many hospitals and healthcare providers, including well-known institutions such as Cedars Sinai, have thousands of dollars languishing in state unclaimed property offices. Most of the funds are from insurance companies, vendors and investment returns. However, in the case of at least one national healthcare company, the funds deposited as unclaimed with the state were from an affiliate. Healthcare providers should check for funds under all of their legal and trade names with their state’s unclaimed property office. A free national search service is available which, for instance, reflected 125 claims for Memorial hospitals across the country. The website contains links to individual state treasurers’ websites that, in some cases, include additional unclaimed funds. For example, the California Controller’s Office reflected 61 unclaimed fund deposits for various Memorial hospitals.

For assistance in searching the databases or obtaining escheated funds please feel free to contact Robert M. Wolin, or 713.646.1327, or Rhondee M. Damon, Paralegal, or 713.646.1321.


September 18

Houston partner Susan Feigin Harris will speak on “Healthcare Reform: A Study in Policy, Politics and a Sign of the Times” at the Healthcare Financial Management Association—Texas Gulf Coast Chapter’s September meeting.

September 22

Columbus and Orlando partner Rick Siehl will present “Legal Implications of Wellness Programs” to the Healthy Ohio Business Council at the OhioHealth Westerville Campus.

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. © 2009 Baker & Hostetler LLP

Related Industries