Health Law Update—December 13, 2007

Alerts / December 13, 2007

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



The federal government has begun focusing on physicians and individuals in kickback cases. The HHS Office of Inspector General's Chief Counsel recently indicated that the government's focus on large organizations was an "ineffective strategy" and that the government was going to begin doing a better job holding the physician gatekeepers accountable for their role in kickback cases. The OIG is also focusing on other individuals responsible for steering organizations into illegal kickback schemes and inadequate quality of care circumstances to help address repeat offenders, particularly among pharmaceutical manufacturers and long-term-care providers.

The U.S. Department of Justice in its investigations is also identifying physicians who have aided organizations' kickback schemes by signing prescriptions and other documents used to present fraudulent claims. The agencies now believe that physicians, in many cases, are the lynchpin required for the success of these fraudulent arrangements. Kirk Ogrosky, Deputy Chief of Health Care Fraud at the DOJ, has indicated that more physicians will be "going to jail" along with their patients who knowingly participate in the schemes. The OIG also indicated that it will more aggressively use civil monetary penalties against individuals where the criminal threshold isn't satisfied.

Recently, the government entered into deferred and non-prosecution agreements with five major orthopedic device manufacturers which required the manufacturers to publicly disclose all of their payments to physicians over the last several years. The OIG is reviewing the "consulting" payments to determine if they were actually inducements to use the company's products and, if warranted, impose administrative sanctions. Physicians being investigated include both hospital-employed physicians and nonhospital-employed physicians. In particular, it appears that the OIG is focusing on whether the physicians performed work commensurate with the payment or simply received the payment for little or no work.

The lists of involved physicians and the payments received are available through the following links:

Smith & Nephew

The U.S. Attorney for the District of New Jersey is conducting a similar investigation against Wright Medical Group, Inc., and Exactech, Inc., which were announced by the companies yesterday. The U.S. Attorney subpoenaed records related to the companies' consulting and professional service agreements with orthopedic surgeons and other medical professionals. If the underlying relationships are similar, we would anticipate these companies will disclose more physician names and compensation amounts.

In some cases, state Boards of Medical Examiners are reviewing the orthopedic device manufacturers' lists of consulting physicians to determine whether any disciplinary action is warranted under the state's Medical Practice Act or whether a referral to a prosecutor is appropriate under state commercial bribery laws. Commercial bribery laws generally prohibit a fiduciary, such as a physician, from intentionally or knowingly soliciting or accepting remuneration from a third party, such as a manufacturer, to influence his or her conduct in respect of a beneficiary, such as a patient, without the beneficiary's consent.

The South Florida multiagency health care fraud task force has likewise stated that it is working to identify and prosecute physicians who actively participate in illegal kickback schemes by signing prescriptions, certificates of medical necessity and other documents used by others to operate the schemes. For example, an 80-year old physician medical director was recently sentenced to 18 months in prison for authorizing and approving the use of a drug, knowing that the patients did not need the drug and that the drug could actually harm them.

The OIG and state Medicaid Fraud Control units have also indicated that they will be focusing on individual executives who make decisions affecting patient care, particularly with respect to quality of care fraud cases in nursing home and long-term-care settings. The OIG, in particular, has indicated an interest in examining management decisions that deprive facilities of adequate funding for staffing or patient needs which result in poor quality of care.

The government's prosecution emphasis is a variant of its prior "friends and family" emphasis with respect to health care consulting firms' client lists several years ago and the IRS' current tax shelter promoter strategy. In these investigations, the government typically uses the consultant's client list as a "road map" to probe the consultant's other clients' practices for the suspected violation. In some cases, the consultant's settlement with the government expressly requires the consultant to cooperate fully and in good faith with the government agency in the civil or criminal prosecution of any client to whom the consultant provided advice.

Careful selection and review of your medical staff members, business associates and contractors is an important step in minimizing exposure to wrong-doing and investigations. As Mom said, "be careful who you play with."

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


CMS Acting Administrator Kerry Weems recently informed Congress of the agency's decision to direct the Recovery Audit Contractors (RACs) for the Medicare program to conduct a re-review of all audited inpatient rehabilitation facility (IRF) claims where an overpayment was found. The CMS directive, which includes audited claims currently under appeal, is in response to significant problems experienced by California providers where RAC reviews of IRF claims reportedly resulted in nearly universal denial rates and high (over 50 percent) reversal rates on appeal.

The RAC program began in 2005 as a three-year demonstration project for identifying improper overpayments and underpayments to Medicare providers under Parts A and B in three states (CA, FL, NY). The Tax Relief and Health Care Act made the RAC program permanent in 2006. Currently operational in six states (Arizona, California, Florida, Massachusetts, New York and South Carolina), the program is slated to expand to all 50 states by 2010.

One of the most contentious issues associated with the RAC program is how the RACs are paid. Specifically, the RACs recoup a percentage of overpayments they identify on a contingency basis. Critics of the RAC program claim "bounty hunter-style" payments encourage the RACs' aggressive claim denial practices as well as a disproportionate focus on overpayments.

In response to comments from the American Hospital Association and others, CMS released a revised Statement of Work in November 2007 that contains several refinements to the national RAC program. These include (1) removing the contingency payment when a provider overturns a denial at any level; (2) requiring that RACs have a medical director; (3) setting a monthly cap on the number of medical records that a RAC can request from a provider; (4) shortening the look-back period for claims review from four to three years; and (5) providing that no claims with dates of service prior to October 1, 2007 will be reviewed. The revised Statement of Work also postpones the implementation of the RAC program in a number of states. For example, the starting dates for the RAC programs in Texas and Ohio were pushed back to October 2008 and January 2009, respectively.

On November 7, 2007, U.S. Rep. Lois Capps introduced the Medicare Recovery Audit Contractor Program Moratorium Act (H.R. 4105) which would impose a one-year moratorium on the RAC program in an effort to provide CMS with sufficient time to "thoroughly examine the practices of private Recovery Audit Contractors to ensure they are properly interpreting and applying Medicare criteria and using qualified personnel to review claims." The proposed legislation also directs that CMS and the General Accounting Office examine and evaluate the accuracy and effectiveness of the Medicare RAC program in separate reports to Congress.

Meanwhile, CMS is currently analyzing data for a report on the status of the RAC program that is due to Congress by December 31, 2007. Further information on the Medicare RAC program, including a link to the revised Statement of Work and the new expansion schedule, can be obtained through the CMS website at

For more information, please contact B. Scott McBride at or 713.646.1390, or Kathleen P. Rubinstein, MPA, policy analyst at, or 713.276.1650.


A federal court recently held that Pennsylvania could not pay Medicaid providers located outside the Commonwealth, but serving Pennsylvania Medicaid beneficiaries, less than it pays providers located within the state. In this case, Pennsylvania refused to make a Medicaid trauma disproportionate share payment to West Virginia University Hospital, even though the hospital was located a mere six miles from the Pennsylvania border, simply because the hospital was not located in Pennsylvania.

State laws discriminating against out-of-state residents and businesses or imposing more onerous taxes or other burdens on foreign corporations are viewed skeptically by the courts and generally will not be upheld unless the discrimination bears a rational relation to a legitimate state purpose. In the context of Medicaid payments, courts have struck down discriminatory payment schemes under the Equal Protection and Commerce Clauses.

In this case, Pennsylvania argued that Medicaid payments were not subject to the Commerce Clause because program payments constitute permissible subsidy payments to an in-state industry. The court held that Medicaid payments could not be considered subsidies because the payments were not funded purely by state revenue, rather they were jointly funded by Pennsylvania and the federal government. The court also found that the payments were not subsidies because they were not voluntary. Once the trauma disproportionate share payments were incorporated into the state's Medicaid state plan, they were required to be made.

Consequently, providers who have been paid less by Pennsylvania based upon their out-of-state status may wish to consider their options, whether the lower payment resulted from the trauma disproportionate share payment or other program features.

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


The interim charges for Texas House committees were released following the Thanksgiving weekend and several committees are charged with studying important health care reform topics. This summary provides a snapshot of the topics identified for in-depth review.

The House Appropriations Committee is charged with studying "innovative strategies to control costs of major governmental programs" (i.e., Medicaid), including studying deficiencies with disproportionate share and upper payment limit methodologies. The Appropriations Committee is also charged with comprehensively reviewing Medicaid provider rate methodologies, including the impact of cost reports and federal minimum wage changes, taking into account access, quality of care and value. Finally, the Appropriations Committee will study the state's need for all types of health care professionals, especially primary care providers and long-term-care professionals.

The House Committee on Government Reform is charged with evaluating and making recommendations regarding state contracts with pharmacy benefit managers, as well as the feasibility of combining prescription drug programs. The House Insurance Committee is charged with examining insurance markets in other states, identifying barriers and possible enhancements to purchasing insurance with an eye toward augmenting flexibility in purchasing health insurance. This Committee will also evaluate the use of health savings accounts and health reimbursement arrangements, particularly by small businesses, and review possible tax incentives for purchasing private insurance.

The House Committee on Public Health is charged with reviewing the Indigent Health Care and Treatment Act, evaluating the array of wellness initiatives, reviewing the impact of tamper-resistant prescription pad requirements, and evaluating the state of public health emergency preparedness.

For more information regarding the House interim charges or information regarding how you can provide testimony to the various committees, please contact Susan Feigin Harris at, or 713.646.1307, or Kathleen P. Rubinstein, MPA, policy analyst at, or 713.276.1650.

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