Healthcare Law Blog

Health Benefit Exchanges: False Claims Gold Mines?

Sheppard Mullin — Thu, 16 May 2013 08:55:00 -0800

The Affordable Care Act enables the establishment of Health Benefit Exchanges of several types, including (i) State-based, (ii) State-Federal partnerships and (iii) Federally Facilitated Exchanges.[1] The purpose of the Exchanges is to, among other things, "provide competitive marketplaces for individuals and small employers to directly compare available private health insurance on the basis of price, quality and other factors.[2]

In theory, the information provided by the exchanges will "give small businesses the same purchasing clout as larger businesses."[3] Those goals are laudable and hard to quarrel with--anyone who has tried to buy individual health insurance knows that the available information on comparability of insurance plans is at best insufficient and at worst opaque.

Click here to read the entire article as published by Bloomberg BNA.

Time to Revamp Primary Care?

Sheppard Mullin — Fri, 15 Mar 2013 08:41:11 -0800

By Aytan Y. Dahukey

Will bundled payments lead to restructuring of our primary care healthcare delivery system? Healthleaders has a great article discussing the vision for healthcare delivery system reengineering proposed by Thomas H. Lee, MD, the network president of Partners Healthcare and Michael E. Porter, PhD, Bishop William University Professor at the Harvard Business School. The two advocate for a revamping of our understanding of “primary care” doing away with the distinction between primary and specialty care in favor of an integrated care delivery model focused on patients. Lee and Porter propose grouping patients into categories and matching comprehensive physician services with patients. They promote embracing the bundled payment method of payment by insurers to provide incentive for these comprehensive services. The article specifically identifies several groups, including CareMore, as having already begun to transition into this coordinated care model.

Read more by clicking on the link below.

http://www.healthleadersmedia.com/print/PHY-290143/Does-Primary-Care-Need-To-Be-Retooled

Ninth Circuit Off-Label Marketing Decision Suggests More Prosecutions Will Be Coming

Sheppard Mullin — Thu, 07 Mar 2013 10:06:31 -0800

By David Douglass

The Ninth Circuit has reopened a door for off-label marketing prosecutions, and it is important to review your compliance and risk management programs in light of this recent decision. Last December, the pharmaceutical and medical device industries exhaled a sigh of relief in response to the influential Second Circuit’s decision in United States v. Caronia, holding that truthful off-label marketing is a form of protected First Amendment speech that cannot form the basis for a criminal prosecution under 21 U.S.C. §333 of the Food, Drug and Cosmetic Act (“FDCA”). The Caronia decision followed the Supreme Court’s decision in Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (June 23, 2011), which held that a Vermont statute prohibiting pharmaceutical companies from engaging in truthful marketing activities offended the First Amendment. The question after Sorell and Caronia became, can the government still prosecute off-label marketing? On March 4, 2013 the Ninth Circuit said yes, albeit in an unpublished opinion.

In United States v. Harkonen, No. 11-10209 D.C. No. 3:08-cr-00164 MHP-1, the Ninth Circuit affirmed the wire fraud conviction of Scott Harkonen, former CEO of Intermune, for issuing a fraudulent press release touting the performance of the Company’s drug Actimune in clinical trials. Harkonen challenged the conviction as an unconstitutional infringement of his First Amendment rights. Harkonen claimed that the press release was misleading but not fraudulent. According to the Court, however, “[a]t trial, nearly everybody actually involved in the [Actimune] clinical trial testified that the Press Release misrepresented [Actimune’s] results.” Opinion at 3. Indeed, “Harkonen himself was “very apologetic” about the Press Releases’ misleading nature,” the Court observed. Id. The court found ample evidence for the jury to conclude that the Press Release was misleading even if “literally true.” Id., quoting United States v. Woods, 335 F.3d 993, 998 (9th Cir. 2003).

Relying on an early 20th century Supreme Court decision, American School of Magnetic Healing v. McAnnulty, 187 U.S. 94 (1902, Harkonen argued that his conviction should be reversed because “genuine debates over whether a given treatment caused a particular effect are outside the scope of the mail and wire fraud statutes.” Id at 6. The Ninth Circuit rejected this argument holding that “McAnnulty does not categorically prohibit fraud prosecutions for statements about the efficacy of a particular drug; indeed, that false and fraudulent misrepresentations made be made with respect to the curative effect of substances is obvious.” Id., quoting Seven Cases v. United States, 239 U.S. 510, 517 (1916).

At first blush, as we old school lawyers like to say, the court’s holding is consistent with established First Amendment law. While the First Amendment does constrain the reach of the criminal laws, it has never been declared a bar to prosecuting harmful, dangerous or fraudulent speech. If so, as the government will no doubt argue, law abiding companies and their executives have no reason to fear. As long as they engage only in truthful marketing, even off-label marketing, they will not subject themselves to prosecution. Unfortunately, the Ninth Circuit’s opinion reveals that, in the real world, the breadth of the term” “to defraud” gives prosecutors wide latitude to investigate and prosecute disfavored speech. “As used in the criminal mail fraud statutes, the term “to defraud” has its common place definition and includes “any sort of “dishonest method or scheme” and any “trick, deceit, chicane or overreaching.” Id. quoting Carpenter v. United States, 484 U.S. 19, 27 (1987) (emphasis added). In fact, according to the Ninth Circuit, “statements are fraudulent if “misleading or deceptive” and need not be “literally false.” Id. at 7, quoting United States v. Woods, 335 F.3d 993, 998 (9th Cir. 2003).

The trouble we foresee is that one man’s lawful promotion is another man’s criminal deception. Who draws the line between constitutional puffery and felonious chicanery? The answer, unfortunately, is prosecutors in the first instance and juries in the second. If the principle articulated by the Ninth Circuit is followed then the First Amendment protections extended by the Supreme Court in Sorrell and followed by the Second Circuit in Caronia will be eviscerated. The Ninth Circuit’s approach will have a chilling effect on speech because any promotional activity will be vulnerable to prosecution for being criminally deceitful, misleading or even tricky. Apart from the risk of conviction, there is the chilling effect of the spectre of criminal investigation that can form an expensive, prolonged and potentially debilitating cloud over an individual’s life and career.

So, what is a company to do? First, don’t panic. The Ninth Circuit’s holding seems to run directly counter to the Supreme Court’s guidance in Sorrel, at least in its potential reach. The fact that the Ninth Circuit issued its decision as an unpublished one means that its holding is limited to the facts of that particular prosecution and signals that the Court is not prepared to apply the holding generally. Second, however, companies need to be thoughtful and deliberate with respect to their marketing activities. Sorrell and Caronia reaffirm the established rule that the First Amendment limits the government’s ability to punish disfavored speech or disfavored speakers. And, with respect to off-label speech, the government is clearly doing both. Strong compliance policies developed and implemented to ensure to the extent possible that promotional activities, especially the activities and statements of the sales force, are truthful, controlled and carefully monitored will not only limit exposure to investigation and prosecution but can also create the record to persuade a prosecutor that prosecution is unwarranted. Where gray areas remain despite a company’s best efforts to implement an effective compliance program advice of counsel can be a key element of risk management. In the event the government initiates an investigation into promotional activities, no doubt biased by a whistleblower, a strong compliance and risk management program can serve as both an effective sword to fight off an investigation as well as an effective shield against prosecution. In those unfortunately inevitable situations in which the government is not so easily dissuaded, it is important to remember the cry of the defense attorney, “It is one thing to proclaim and other thing to prove.” Just because a whistleblower says it, doesn’t make it so. A solid compliance and risk management program also provide a solid foundation for a strong litigation defense.

We are pleased to introduce the newest partner on our health care and life sciences industry teams, David Douglass. David is our Washington D.C. office and brings a wealth of experience advising healthcare and life sciences companies and government contractors on compliance and risk management and representing them in civil and criminal investigations and litigation, including False Claims Act litigation. David is currently Chair of the ABA Health Law Section. He is the former Chair of the Government Enforcement and Corporate Compliance Committee of DRI—The Voice of the Defense Bar. He is also a Fellow of the American College of Trial Lawyers.

CMS Announces Participants in Bundled Payments for Care Improvement Initiative

Sheppard Mullin — Thu, 28 Feb 2013 09:48:08 -0800

The Centers for Medicare & Medicaid Services (CMS) recently announced that over 500 organizations will begin participating in the Bundled Payments for Care Improvement initiative. The large number of participating organizations now exceeds the number of Medicare ACOs, and makes the Bundled Payments initiative the largest voluntary Medicare payment innovation program. Participating organizations are located throughout the United States, and are displayed on CMS’s website.

The Bundled Payments initiative is comprised of four “models of care”, under which Medicare will bundle payments for multiple services that beneficiaries receive during an episode of care. Under the traditional model, Medicare makes separate payments to providers for each of the individual services they furnish to beneficiaries, which rewards the quantity of services offered by providers rather than the quality of care furnished.

Model 1 focuses on episodes of care relating to inpatient stays in the acute care hospital, based on discounted IPPS payment rates.

Model 2 focuses on episodes of care including the inpatient stay and also post-acute care ending either 30, 60, or 90 days after hospital discharge. Episodes of care under Model 3 begin at the initiation of post-acute care, and do not include the inpatient hospital stay. Under Models 2 and 3, participants set a target price for the bundled payment based on discounted Medicare FFS rates. During the episode of care, the participant continues to be paid on a fee-for-service basis. After the episode of care, Medicare compares the total amount of payments made by CMS to the participant to the target price; any amounts exceeding the target price must be repaid to CMS, and any savings may be distributed by the participant to providers.

Finally, Model 4 relates only to inpatient stays in the acute care setting, but payment is made on a prospective basis, and readmissions within 30 days after hospital discharge will be included in the original bundled payment. Participants proposed a target price and CMS will make a single, prospective payment equal to such target price at the beginning of each episode of care.

If you have questions relating to the Bundled Payments initiative, please contact Eric Klein, Kenneth Yood, Aytan Dahukey, Lynsey Mitchell, Eugene Ngai, or Aleah Yung.

False Press Release Leads To Exclusion From Federal Programs

Sheppard Mullin — Tue, 19 Feb 2013 10:05:14 -0800

By Robert Rose

Dr. Harkonen was the CEO of InterMune, Inc, a pharmaceutical company that developed, marketed and sold drugs for lung and liver diseases, including Actimmune. In 2002, the FDA had approved Actimmune to treat only two conditions: chronic granulomatous disease and severe malignant osteopetrosis. A year before the approval, an Austrian clinical trial concluded that Actimmune’s active ingredient was associated with improvement in patients with idiopathic pulmonary fibrosis (IPF), a rare and fatal disease of unknown origin. InterMune did its own clinical trial to confirm whether Actimmune was an effective treatment for IBF.

In 2002, InterMune received the results, which showed that the study had missed its primary endpoint (progression-free survival time), as well as ten secondary endpoints, including survival time. The median survival time for the approximately 200,000 people in the United States with IPF is two to three years after diagnosis.

Nevertheless, InterMune issued a press release with the heading “InterMune Announces Phase III Data Demonstrating Survival Benefit of Actimmune in IPF,” with the subtitle “Reduces Mortality by 70% in Patients with Mild to Moderate Disease.” Dr. Harkonen was quoted as stating: “Actimmune is the only available treatment demonstrated to have clinical benefit in IPF, with improved survival data in two controlled clinical trials. We believe these results will support use of Actimmune and lead to peak sales in the range of $400-$500 million per year, enabling us to achieve profitability in 2004. . .”

Dr. Harkonen was indicted in the Northern District of California in March 2008. He was charged and tried on two felony counts: wire fraud in the press release and misbranding. In September 2009, after a lengthy trial, the jury convicted him of wire fraud but acquitted him of misbranding. His criminal appeal has been argued but not yet decided.

Two years later, in 2011, Dr. Harkonen was notified by the IG of HHS that he was being excluded from Medicare, Medicaid and all other federal health care programs for the mandatory minimum period of five years, based on his wire fraud conviction. An ALJ heard the matter.

The exclusion statute, 42 U.S.C. 1128 (a) (3), requires exclusion after conviction of a fraud offense that was “in connection with the delivery of a health care item or service.” Dr. Harkonen argued that his offense (the misleading press release) had not occurred in connection with the delivery of a health care item or service. He argued that, to prove “delivery,” there must be evidence that some physician actually wrote a prescription for Actimmune as a result of the press release and that there was no such evidence. Further, a physician would examine the test results, rather than rely on the release.

The ALJ rejected those arguments and concluded that the press release provided the required “nexus or common sense connection between the offense and the delivery of a health care item or service.” Dr. Harkonen’s statements in the release “touting the virtues of Actimmune had a potential impact upon the delivery of health care in the community.” The ALJ found that those statements “establish[] that a purpose of the press release was to encourage victims of IPF and their physicians to use Actimmune for the treatment of IPF” and that it was “reasonable to infer that both physicians who could prescribe Actimmune and patients who suffer IPF and could ask for prescriptions were targets of the false press release.”

On November 9, 2012, the HHS Departmental Appeals Board (DAB) sustained the ALJ’s decision. In exploring the breadth of “in connection with the delivery,” the DAB cited past cases where embezzlement of drugs for the embezzler’s personal use and even embezzlement of an employer’s bank deposits satisfied this requirement. Each fraud or theft interrupted the delivery of items or services. An actual impact or effect is unnecessary.

He argued to the ALJ that a five-year exclusion by HHS amounted to a second punishment for the same conduct, thus violating the double jeopardy and cruel and unusual protections of the Fifth and Eighth Amendments. That argument has failed on every occasion because Section 1128 (a) exclusions are remedial in nature. The purposes “are to protect federal health care programs and their beneficiaries from individuals who have been shown to be untrustworthy and to deter health care fraud.”

The prosecutors urged ten years’ imprisonment and a $1 million fine. In their sentencing memorandum, they wrote: “The Defendant may be the first high-level executive of a drug company to be convicted of misrepresenting clinical trial results to promote a drug. The sentence that Defendant receives will be noted in the executive suites and board rooms of drug companies across the United States. A substantial sentence for the Defendant will deter current and future officers of drug companies.” Instead, Dr. Harkonen was sentenced by the trial court to three years of probation, with six months of home detention, 200 hours of community service and a $20,000 fine.

Whether or not Actimmune was a useful drug for IPF, the reminder in Dr. Harkonen’s tale is that press releases need scrutiny for more than avoiding claims of securities violations. In the business of health care, three words---“in connection with”---can end a career and destroy a business.

Thinking Ahead - Opinions About Trends and Challenges in Today's Health Care Industry: What Next for WellPoint After the CEO Selection?

Sheppard Mullin — Fri, 15 Feb 2013 11:35:23 -0800

By Eric Klein

This week brought the announcement that WellPoint Inc. selected Joseph Swedish to become its next Chief Executive Officer. Swedish will leave his position as CEO of nonprofit Catholic health system Trinity Health, which has grown to almost $12 billion in assets under Swedish’s leadership and is moving through a merger to become the fifth largest hospital system in the country. Prior to Trinity, Swedish also had worked for for-profit hospital system HCA. Wellpoint, which operates Blue Cross and Blue Shield plans in 14 states, has received some criticism from Wall Street this week for this surprise selection, noting that Swedish is not a traditional insurance company executive. Other commentators have suggested that this selection may indicate an interest by WellPoint in increasing its provider alignment, such as the strategy that was initiated through WellPoint’s acquisition of Medicare Advantage HMO and senior care clinic provider CareMore in 2011. Does this move indicate a higher likelihood of new value-based arrangements between WellPoint’s health plans, on the one hand, and hospitals and medical groups on the other?

Another interesting thought arises, though, rather than the simple extension of the physician alignment strategy that we now see being played out by health plans such as WellPoint, United, Humana and many others.

What if WellPoint decided that the real way to move toward alignment and cost efficiencies in the healthcare system is to use its very large balance sheet (almost $56 billion in assets according to recent SEC filings) and acquire one or more large hospital systems, providing true vertical integration and decidedly differentiating it from competitor United HealthGroup’s Optum initiative, which has to date eschewed investing in hospitals and instead has spent significant amounts on managed care ready physician entities and technology companies that support and service such entities.

If WellPoint wishes to make a bold leap in cost control and not merely achieve incremental gains as healthcare reforms roll out, the true savings currently are identified in the marketplace as being the dollars going now to hospital expenditures. WellPoint could continue as do other health plans and view hospitals merely as contracted providers and subject to ongoing rate negotiations to control costs, or it could take a page from the Kaiser playbook and revamp a large piece of the healthcare continuum of care by truly aligning the health plan, the hospitals and the physicians, especially in light of the recent launch of the bundled payment initiative.

Daring? Yes, but also an interesting thought as to what the healthcare world would look like if Joseph Swedish stayed at the helm of WellPoint and simultaneously returned to his roots as a large hospital system operator. Maybe the WellPoint CEO choice does open up a whole new range of possibilities…

(The following is an opinion piece and represents solely the personal opinions of the author. It does not represent Sheppard Mullin’s position as a law firm and is not intended to be legal advice to any person).

CMS Announces Physician Payments Sunshine Act Final Rule

Sheppard Mullin — Mon, 04 Feb 2013 13:43:44 -0800

The Centers for Medicare and Medicaid Services (CMS) have finally announced the final rule for the Physician Payments Sunshine Act, which will require applicable manufacturers of drugs, devices, biological, or medical supplies covered by Medicare, Medicaid, or the Children’s Health Insurance Program (CHIP) to report payments or transfers of value provided to physicians or teaching hospitals and require applicable manufacturers and applicable group purchasing organizations to report physician ownership or investment interests. This long-awaited rule has been a subject of frustration for Senators Grassley and Kohl, which was supposed to be implemented in 2012. The final rule will be published in the Federal Register on February 8, 2013, but a pre-publication version is available here. Details on the final rule will be forthcoming on this blog.

Pfizer FCPA Settlement Emphasizes the Importance of Robust Compliance Programs for the Healthcare Industry

Sheppard Mullin — Tue, 22 Jan 2013 10:22:19 -0800

By Bora Rawcliffe

The healthcare industry has been under increased SEC and DOJ scrutiny lately for potential FCPA violations. What has been described as an “industry sweep,” has focused primarily on medical device and pharmaceutical companies. These companies are particularly vulnerable to FCPA violations because the DOJ and the SEC have taken the stance that employees of state-owned and state-controlled hospitals or health care providers are considered “foreign officials” under the FCPA. For example, in 2012, enforcement actions against Smith & Nephew, Biomet, Orthofix, and Pfizer were all partly based on this enforcement theory. Enforcement actions such as these typically arise from the efforts of a company, its subsidiaries, or its distributors to influence doctors and other officials to purchase, prescribe, or obtain government regulatory approvals and registrations for a company’s products.

The Pfizer settlement with the DOJ and the SEC, announced on August 7, 2012, is the latest FCPA settlement in the medical device industry. The enforcement action against Pfizer arose, in part, out of improper payments, including hospitality and travel expenses, made to doctors and health care professionals employed by government-controlled or owned healthcare providers in countries such as Bulgaria, Croatia, Kazakhstan, Italy, China, Serbia and Russia. As part of this settlement, Pfizer H.C.P., a Pfizer subsidiary, agreed to pay a $15 million criminal fine. Wyeth LLC, another Pfizer subsidiary, also agreed to pay $18.8 million in disgorgement of profits, including pre-judgment interest, to resolve concerns involving the conduct of Wyeth subsidiaries. Pfizer Inc. agreed to pay more than $23.6 million in disgorgement of profits, including prejudgment interest, to resolve concerns involving the conduct of its subsidiaries. The government did not pursue a criminal plea.

Importantly, Pfizer had a pre-existing compliance program in place, it self-reported potential violations, and undertook extensive remedial efforts to assess and investigate the company’s relationships with doctors and employees of government-owned hospitals and healthcare providers. Nonetheless, the DOJ’s Deferred Prosecution Agreement with Pfizer (DPA) imposed specific and detailed requirements to bolster Pfizer’s compliance programs.

For example, Pfizer is required to improve upon its existing compliance procedures to prevent potential FCPA violations such as by conducting biannual training of employees and executives as well as triennial training of third parties whose activities may bring them under the reach of the FCPA. Similarly, Pfizer is required to continue to maintain controls over its compliance policies such as those addressing gift-giving and hospitality expenditures to government officials and to closely monitor compliance with these policies. Pfizer is also required to conduct periodic testing of compliance efforts and institute due diligence procedures for acquisition targets and third parties. Because of the high level of detail in the DPA, the requirements imposed on Pfizer are a helpful guide for drafting, implementing, and improving FCPA compliance programs.

The SEC and the DOJ further emphasized the importance of effective compliance programs in the recent FCPA Resource Guide released on November 14, 2012. A presentation discussing the “hallmarks of effective compliance programs” as identified in the Resource Guide is available here.

Navigating the Provider Self-Disclosure Protocol

Sheppard Mullin — Wed, 26 Dec 2012 10:34:52 -0800

By Barbara Taylor

Providers can voluntarily disclose potential fraud with respect to Federal health care programs—Medicare, Medicaid, and potentially private insurers to the extent Federal or state funds are involved—by following the Provider Self-Disclosure Protocol ("Protocol") issued by the Department of Health and Human Services, Office of the Inspector General ("OIG"). (See 63 FR 58399 (Oct. 30, 1998).) Before embarking on the Protocol journey, providers must understand that although there are concrete benefits to disclosure, it is not a panacea.

Preliminary Considerations

The purpose of the Protocol is not meant to address mistakes, errors, or negligence. Thus, a crucial threshold issue is determining whether the conduct involves erroneous claims or fraudulent claims. Liability under the civil False Claims Act (“FCA”), the primary Government enforcement tool against health care fraud, and the Civil Monetary Penalties Law (“CMPL”), an administrative remedy similar in scope and effect to the FCA, requires claims to be intentionally false or made with reckless disregard or deliberate ignorance of falsity.

Where a provider has reason to believe that a fraud scheme is ongoing within the organization, the OIG advises that the provider should immediately contact the OIG without first conducting an internal investigation to avoid a substantial risk that proceeding without prior coordination with the Government will compromise the Government's subsequent investigation.

There is no deadline by which a disclosure must be made. Consequently, once the provider has knowledge of qualifying misconduct, deciding when to disclose will depend on the circumstances. It is not, however, necessary to wait for completion of a comprehensive internal investigation. A less detailed initial submission can be sufficient for entry into the Protocol. The provider then has three months within which to submit a full internal investigation report, including a "self-assessment" to estimate the monetary loss to Federal health care programs.

Advantages and Limitations of Voluntary Disclosure

Although the OIG does not guarantee a particular result, advantages of voluntary disclosure can include:

Lower damages payments—The civil FCA provides for mandatory treble damages. The CMPL provides for “not more than 3 times the amount claimed for each such item or service in lieu of damages.” The OIG has “committed to settling liability under the OIG’s authorities generally for an amount near the lower end of the damages continuum, i.e., a multiplier of the value of the financial benefit conferred.” (Daniel R. Levinson, Inspector General, An Open Letter to Health Care Providers, April 15, 2008.) In our experience, the very best available from the OIG is a 1.5 multiplier.
Avoidance of penalties—penalties are generally not included in settlements; in litigated cases, mandatory penalties under the civil FCA range from $5,500 per claim (i.e., invoice) to $11,000, and under the CMPL are $10,000 for "each item or service."
Avoidance of exclusion from Federal health care programs. The risk of exclusion, especially for smaller providers, is real and as Government involvement in health care increases, it will be difficult for any provider to survive without participation in Federal health care programs.
Less likely imposition of corporate integrity agreements. This is a significant benefit given the typically onerous conditions of such agreements.
Potential to obtain a global resolution with other interested agencies, including the Department of Justice ("DOJ"), although this can delay and complicate matters. Even if the DOJ is not part of the settlement, in our experience it is the OIG’s policy to obtain a declination from the DOJ before entering into a CMPL settlement.
Avoidance of the disruption of a formal Government investigation. In our experience, providing the OIG with a comprehensive and credible internal investigation report can result in a resolution without the Government seeking employee interviews or subpoenaing documents.
Blunting the impact of whistleblowers—The potential for a disgruntled employee or contractor to trigger a federal investigation can be lessened by contacting the OIG as soon as practicable after learning of potential fraud and seeking entry into the Protocol. Nevertheless, making a disclosure would not necessarily preclude a whistleblower action from being subsequently filed by a person who is an “original source.” (See 31 U.S.C. § 3730(e)(4).) And although making a disclosure to the OIG would not necessarily be foreclosed where an FCA action has already been filed under seal or an investigation has commenced without the provider’s knowledge, judicial discretion in that action to reduce the damages multiplier (from treble to double) would be eliminated.[1]

Conclusion

Given the Government’s enforcement priorities continuing to focus on health care fraud and the prevalence of whistleblower actions, providers should be prepared to take advantage of the OIG’s voluntary disclosure program. Ultimately, whether or not to make a voluntary disclosure is a serious decision that depends on the totality of circumstances. Consequently, before proceeding down the voluntary disclosure path, prudent providers should consult with counsel experienced in this area.

[1] A court has discretion to reduce civil FCA damages (from treble to double) where a “person” [the defendant] furnishes appropriate officials "with all information known to such person about the violation within thirty days after the date on which the person first obtained the information" and “fully cooperated with any Government investigation of such violation,” but only where “no criminal prosecution, civil action, or administrative action” had already “commenced” and “the person did not have actual knowledge of the existence of an investigation.” (31 U.S.C. § 3729(a)(2)(A)-(C).)

Large General Acute-Care Hospital Abandons Acquisition Of 15-Bed Surgical Specialty Center As A Result Of FTC Challenge

Sheppard Mullin — Tue, 27 Nov 2012 08:38:30 -0800

By David R. Garcia and Helen C. Eckert

Just three days after the Federal Trade Commission, jointly with the Pennsylvania Attorney General, issued an administrative complaint challenging Reading Health System’s (RHS) proposed acquisition of Surgical Institute of Reading L.P. (SIR), a 15-bed surgical specialty center, both entities abandoned the proposed acquisition, citing the high costs associated with a protracted court battle with the government. This FTC victory provides more valuable insight into how antitrust enforcement agencies are evaluating the increasing number of consolidations within the healthcare industry, particularly after passage of the Affordable Care Act. Specifically, this case highlights the government’s very granular analysis of effects on competition through highly specialized “service markets,” as well as the risk for entities that ordinary-course-of-business documents surrounding the proposed consolidation can play a significant role in the government’s challenge. It also appears to be another example of an FTC challenge to a transaction below the Hart-Scott-Rodino reporting threshold.

RHS is a comprehensive, not-for-profit health care system in Berks County, Pennsylvania which operates, among others, a 735-bed general acute-care hospital. According to the FTC, RHS has been and is the dominant healthcare provider in the Reading area due to its market share and ownership of the largest hospital, several outpatient facilities, two large physician groups, and a local provider network. The FTC included within RHS’s market share calculations an outpatient ambulatory surgery center and a provider network, of which RHS has 50 percent ownership, based on the fact that RHS has significant control over the entities’ daily operations and treats them as its own facilities in competitive analyses conducted in the ordinary course of business.

SIR, on the other hand, is a much smaller, for-profit specialty surgical center owned largely by a small group of physicians providing a variety of inpatient and outpatient surgical services, with only 15 licensed beds. Since its opening in 2007, SIR has focused on high quality of care and better patient service, achieving patient satisfaction rates above national standards and well above those of its competitors (including RHS).

The FTC’s complaint alleged that SIR has drawn significant volumes of patients in important surgical service lines away from RHS. RHS, in response, competed aggressively with SIR by lowering its rates and seeking to improve quality to attract patients back to RHS, all benefits of vigorous competition which, according to the FTC, would be lost if the acquisition were allowed to proceed. The FTC also alleged that one of RHS’s primary motivations in acquiring SIR – as evidenced by documents created by RHS executives in the ordinary course of business – was to protect its market share. The FTC’s redacted complaint suggests that RHS executives were alarmed by the loss of patients to SIR and ultimately decided that it made more sense to respond to competition from SIR by acquiring it and eliminating it as a competitor. Other internally-created RHS documents suggested that the acquisition would indeed dampen RHS’s incentive to improve quality and efficiency in response to competition from SIR. And notably, the FTC found no evidence that either RHS or SIR attempted to ever consider or quantify any likely efficiencies from the proposed acquisition.

The FTC concluded that significant anticompetitive effects could be inferred from the direct evidence alone. However, substantial increases in post-acquisition market share and market concentration in each of the relevant markets provided additional support to demonstrate that the acquisition would result in significant harm to competition. The FTC cited four highly specialized relevant “service markets” in which head-to-head competition between RHS and SIR would be eliminated: (1) inpatient orthopedic surgical services; (2) outpatient orthopedic surgical services; (3) outpatient ear, nose and throat surgical services; and (4) outpatient general surgical services. The FTC alleged that the proposed acquisition would result in combined market shares ranging from 49 to 71 percent. Notably, the FTC also hinted at the appropriateness of even more granular analysis of relevant markets delineated by a single medical procedure. For example, the FTC explained, inpatient orthopedic surgical services represented a cluster of basic orthopedic and spine surgical services, such as knee, hip and joint replacement surgeries and spinal fusions. And, while the acquisition’s “likely effect on competition could be analyzed separately for each of the dozens of affected medical procedures,” it was appropriate in this case to evaluate competitive effects across this cluster of services because they are offered to Reading area residents under similar competitive conditions (e.g., by the same set of competitors).

The FTC also alleged that high barriers to entry by new firms and the difficulties the few remaining competitors faced in expanding their services made it impossible to counteract the acquisition’s likely serious competitive harm in the relevant markets. The FTC highlighted the prohibition on both the formation of any new physician-owned hospitals and the expansion of existing ones by the Affordable Care Act, rendering it impossible for a new physicians group to replicate SIR’s 2007 entry into the market. On this point, we note that there has been a dramatic increase in physician-owned outpatient centers in the last ten to fifteen years, and owners of such facilities must be cognizant of the fact that sales of these facilities to their natural purchasers (i.e., hospitals) may be subject to full-dress review by antitrust enforcement authorities as horizontal acquisitions, particularly if such sales are driven by the Affordable Care Act’s prohibition on expansion of physician-owned hospitals.

Finally, in noting the absence of any extraordinary competition-enhancing efficiencies necessary to justify the acquisition in light of the significant potential harm to competition, the FTC relied almost exclusively on the fact that RHS and SIR did not quantify or even consider efficiencies when contemplating the proposed acquisition.

Switching to Electronic Medical Records May Not Be a Cure for Billing Abuses

Sheppard Mullin — Thu, 25 Oct 2012 10:51:58 -0800

By Robert Rose

Last month, in a joint letter by HHS and DOJ to five prominent hospital associations, the government warned that some providers are using electronic medical records (EMR) to “game the system.” The September 24th letter gave examples of “troubling indications” of EMR misuse:

Cutting and pasting the same examination findings for multiple patients—known as “cloning”—to make it appear that physicians conducted more thorough exams that were actually done
Upcoding the intensity or severity of a patient’s condition simply to profit without improving the quality of care

Risk v. Reward

More than half of America’s hospitals have qualified for incentive payments authorized by Congress to encourage the shift to EMR. The government will spend more than $30 billion in economic stimulus funds to aid technology purchases by doctors and hospitals.

Most of the manufacturers and hospitals claim that EMR permits more efficient billing. However, a year-long investigation by The Center for Public Integrity published last month found that thousands of providers have steadily billed higher rates for treating Medicare patients, exceeding $11 billion in fees over the past decade. Regulators say the most aggressive billing, by only 1,700 doctors (of more than 440,000 nationally) cost Medicare $100 million in 2010. The largest share of those doctors specialized in family practice, internal medicine and emergency care.

A specific example cited was Baptist Hospital in Nashville. Its share of the highest paying claims rose 82% in 2010, the year after its emergency room began using EMR software. The hospital’s response was that billing had become more accurate using EMR and that its patients required more care in 2010. The New York Times did an analysis, concluding that hospitals receiving incentives to adopt EMR showed a 47% rise in Medicare payments at higher levels from 2006 to 2010 versus a 32% rise in non-incentivized hospitals.

How Will the Government Respond?

New healthcare laws authorize the Centers for Medicine and Medicaid Services (CMS) to stop payments for suspicion of fraud and to mine the data, searching for outliers. As a result, collections are at a record high and prosecutions in 2011 were 75% higher than in 2008. Earlier this year, the acting administrator of CMS confirmed that it planned to contact as many as 5,000 physicians who had been identified as billing outside the norms. CMS said its aim was “not intended to be punitive or sent as an indication of fraud.”

On October 24, the Office of Inspector General for HHS released its work plan for 2013. It intends to “identify fraud and abuse vulnerabilities in [EMR] systems as articulated in literature and by experts” to determine how certified EMR systems address those vulnerabilities. There are no details about the intended enforcement activities because the OIG typically reacts to allegations and tips when they arise and doesn’t disclose publicly its ongoing enforcement actions. The priorities are further discussed in “OIG Outlook 2013,” a video posted on its website.

The OIG has also sent a 54-question survey to the EMR-incentivized hospitals, seeking information about data entry habits, security practices and more. Responses are due October 26.

What to Expect?

While switching to EMR allows for better documentation of care and reduces under billings of visits, EMR can also make it faster and easier to defraud.

Most providers use EMR as it was intended, but regulators are gathering proof that it has become a fraud tool to improve the bottom line. With the HHS/DOJ letter, providers have been warned. The sums involved are huge and data mining, in the hunt for outliers, will increase. EMR and aggressive billing is a combination that attracts attention.

Providers who have switched to EMR can audit or sample their new system for compliance before the government does it. Mine your own data. Look for trends, disparities, sharp year-over-year changes. Monitor your compliance training.

Get sound legal advice before the OIG knocks. Providers come in all sizes and shapes. Being tagged as an outlier based on data alone is the beginning of a long conversation about EMR’s individual impact. Don’t forget, because it’s still true: an ounce of prevention is worth a pound of cure.

SB 804 Requires California Local Health Care Districts To Obtain Fair Market Value Appraisals In Certain Asset Transfers

Sheppard Mullin — Thu, 04 Oct 2012 10:24:23 -0800

By Eugene Ngai

New amendments to California’s local health care district law require districts to obtain a fair market value appraisal if the district transfers fifty percent or more of its assets (in sum or by increment) to one or more nonprofit corporations for less than fair market value, and disclose the fair market value of such assets to the voters for approval of the transfer. These amendments were enacted by SB 804, which Governor Brown signed into law on September 28, 2012.

The existing law permits a district to transfer its assets to a nonprofit corporation “in the absence of adequate consideration” only if the transfer is “for the benefit of the communities served by the district.” If the transfer involves fifty percent or more of the district’s assets, whether by one or multiple transfers, the transfer(s) are deemed to benefit the communities served by the district only if certain conditions are met. These conditions include (1) the requirement to fully discuss the transfer agreement and all arrangements in at least five open and public meetings, (2) the requirement that the district approve all initial members of the nonprofit corporation and any subsequent board members, (3) the requirement that all transferred assets revert back to the district upon termination of the transfer agreement, (4) the requirement that the nonprofit corporation operate and maintain the district’s health care facilities and its assets for the benefit of the communities served by the district, and (5) the requirement that any funds received by district as a result of the transfer be used only to reduce district indebtedness, to acquire needed equipment, to operate or improve the district’s health care facilities, to provide supplement health care services or facilities for the communities served by the district, or to conduct other activities that would further a valid public purpose if undertaken directly by the district.

The amendments enacted by SB 804 impose two additional conditions. In order to show that the transfer is for the benefit of the communities served by the district, the district must (1) obtain a fair market value appraisal of the assets from an independent consultant with expertise in methods of appraisal and valuation, in accordance with applicable governmental and industry standards for appraisal and valuation, and (2) the fair market value appraisal must occur less than six months before the date the district approves the transfer agreement.

Existing requirements also mandate that the elected board of the district submit to the voters, by resolution, a measure proposing the transfer of assets. Now, SB 804’s amendments require that the resolution must also identify the assets proposed to be transferred, the appraised fair market value of those assets, and the full consideration that the district is to receive in exchange for the assets.

For further information about California local health care districts, please contact Eric Klein, Ken Yood, Michael Moore, Robert Sbardellati, Lynsey Mitchell, or Eugene Ngai.

Ambulatory Surgery Centers Finally Get Some Relief

Sheppard Mullin — Thu, 04 Oct 2012 10:07:18 -0800

By Aleah Yung

On Saturday, September 22, 2012, Governor Brown signed SB 1095, which clarifies ambulatory surgery center (“ASC”) pharmacy licensure eligibility. This is great news for ASCs which have struggled since a controversial 2007 court decision had unintended consequences that effected the ability of ASCs to obtain pharmacy licenses.

In September 2007, in Capen v. Shewry, the California Court of Appeals held that ASCs that are owned by a physician or group of physicians are excluded from licensure by the California Department of Public Health (“CDPH”). Based on the ruling, CDPH stopped regulating ASCs, and refrained from issuing new licenses or renewing licenses if such surgery clinics had any degree of physician-ownership. This created problems for ASCs because California law currently states that an ASC must be licensed by CDPH in order for the California Board of Pharmacy (“Pharmacy Board”) to issue it a pharmacy license. In response, ASCs began to utilizing the “medical director work around,” which allowed an ASC to maintain a common stock of drugs by using the personal medical license of their medical director to purchase all medications for the surgery center. However, this created administrative headaches and additional liability for the medical directors. Then in 2010, the Pharmacy Board questioned the legality of the medical director work around and began requiring each doctor who practiced in an ASC to hold a personal pharmacy permit to order and manage their own drugs for their own patients. This position was untenable for many busy ASCs.

The passage of SB 1095 is a huge relief for ASCs. Starting January 1, 2013, the bill expands the Pharmacy Board’s ability to grant licenses, by allowing an accredited outpatient setting or Medicare certified ASC to obtain a limited pharmacy license from the Board.

OIG Publishes Work Plan for 2013 Fiscal Year

Sheppard Mullin — Wed, 03 Oct 2012 10:10:05 -0800

By Eugene Ngai

The Office of Inspector General has published its Work Plan for the 2013 Fiscal Year. This provides health care industry players with an insight into the activities that OIG plans to initiate or continue with respect to federal health care programs and operations in the upcoming fiscal year. Some new areas that OIG plans on investigating include:

the extent to which hospitals acquire ASCs and convert them to hospital outpatient departments and the effect of such acquisitions on Medicare payments;
the extent to which onsite visits occur as part of the Medicare enrollment or reenrollment process and improper use of commercial mailbox addresses; and
review of Medicare claims data to identify questionable billing for ophthalmological services and electrodiagnostic testing.

The full document can be found at the OIG’s website and is attached here. Sheppard Mullin will continue to review the Work Plan and post items of interest to this blog.

California AG Becomes the Latest Antitrust Enforcer to Investigate Hospital/Doctor Group Combinations

Sheppard Mullin — Fri, 21 Sep 2012 09:13:35 -0800

By David R. Garcia and Helen C. Eckert

California’s Attorney General has recently launched a broad investigation into whether increasing consolidation among hospitals and physician groups may be resulting in supra-competitive prices for medical care, according to several media sources. This investigation reflects increased scrutiny by antitrust regulators on a nationwide basis of rapid consolidation among the healthcare industry, which in large part has recently been motivated by the federal Affordable Care Act which encourages efficiency and higher quality through coordination of care among different groups of providers.

The California Attorney General has issued subpoenas to several large hospital systems in California, including Cottage Health System in Santa Barbara, Dignity Health in San Francisco, Sutter Health in Northern California, and Scripps Health and Sharp Healthcare in San Diego. It has also issued subpoenas to large health insurers in the State, and the focus of the investigation appears to be whether the hospital systems’ consolidations with physician groups are conferring on them enough market power to result in a lessening of competition and raising of prices which implicate antitrust concerns.

And, as mentioned, the California Attorney General is not alone in its close scrutiny of hospital’s acquisitions of physician groups. In April 2011, the Federal Trade Commission (in conjunction with the Washington Attorney General) made its first public announcement of an investigation into a proposed physician practice acquisition: one by Providence Health & Services to acquire two cardiology practices in Spokane, Washington (FTC File No. 101 0191). Notably, these proposed acquisitions constituted non-reportable transactions below the Hart-Scott-Rodino threshold. The FTC nevertheless expressed serious concerns regarding possible anticompetitive effects of the acquisitions that could increase healthcare costs in the Spokane area in violation of Section 7 of the Clayton Act. While the parties ultimately abandoned the acquisitions, the FTC made clear that it was closely watching such physician acquisitions which, although having the potential to generate cost savings and quality benefits for patients, also, in some cases, could “create highly concentrated markets that may harm consumers through higher prices or lower quality of care,” and vowed that “the Commission will aggressively enforce the antitrust laws to ensure that consolidation among health care providers will not increase health care costs in local communities across the United States.”

A more recent FTC action resolved just last month (in conjunction with the Nevada Attorney General) challenging Renown Health’s acquisition of two cardiology practices in Reno (FTC File No. 111 0101) also demonstrates the unwillingness of antitrust agencies to overlook potentially anticompetitive acquisitions because of the relatively small size of the transaction, but more significantly, the agencies’ recent inclination to analyze market effects using a very granular, specialty-by-specialty approach. In that action, Renown had acquired one practice consisting of fifteen cardiologists, and a second consisting of sixteen cardiologists. The FTC alleged that this consolidation of two competing cardiology practices into one eliminated competition based on price, quality, and other terms, and led to increased bargaining power of Renown in relation to its payors, resulting in the potential to increase prices. The consent decrees ordered Renown to allow up to ten cardiologists to terminate their employment with it, and prohibited Renown from enforcing non-compete provisions in their employment agreements. The FTC’s analysis of effects on competition through a very granular, specialty-by-specialty basis is, as far as we can determine, as granular as the antitrust analysis has gotten since the beginning of reported actions in healthcare. And, it is likely no coincidence that the granular approach taken in Renown Health is the same specialty-by-specialty approach taken by the FTC and DOJ when analyzing the likely competitive effects of recently-mandated accountable care organizations in their Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations, notwithstanding the agencies’ disclaimer that the statement did not apply to mergers.

It is important to keep in mind, however, in the face of these recent regulatory challenges, the particular antitrust analysis which governs most traditional hospital, physician group consolidations, i.e., non-horizontal mergers. That is, while conventional merger analysis under Section 7 of the Clayton Act (or Section 2 of the Sherman Act) analyzes either the likely market power (or the actual market power) of the merged entity in the relevant market, non-horizontal merger analysis like that required of hospital, physician group consolidations is much more difficult to quantify as there is no overlap in the respective products or services of the merging entities. As such, antitrust enforcement agencies have more recently left largely unchallenged mergers with no product overlap. The increased regulatory interest in the recent rise in hospital, physician group consolidations, however, will require dusting off methods of non-horizontal merger analysis not widely applied in quite some time. Such an analysis requires attempting to determine whether the new entity could preclude other hospitals or physician groups from competing effectively in the relevant geographic market.

Another important issue to keep in mind is that while hospitals may not continue to take for granted exclusivity provisions which restrict the ability of its physician employees to contract individually with payors or affiliate with other entities, determinations of the legality of exclusivity provisions, if challenged, will necessitate a full-blown, fact-dependent rule of reason analysis weighing the potential anti-competitive effects of exclusivity with its pro-competitive efficiencies. This requires a case-by-case inquiry analyzing the market share of the participants in the relevant market, the terms of the exclusive arrangement at issue, the number of physicians required for the hospital provider and its competitors to compete effectively, and the justifications proffered for the exclusivity. Furthermore, exclusivity can take on various forms which in turn can impact the antitrust analysis: exclusivity in horizontal physician group consolidations generally raises more antitrust concerns than exclusivity within a non-horizontal context.

That said, it would be unwise for hospitals and physician groups to take wholesale comfort in the currently somewhat novel, non-horizontal merger analysis or the rule of reason standard governing exclusive agreements given the costs and uncertainty associated with the burden of responding to investigations by antitrust enforcement agencies like the ones outlined above. Moreover, in California, the Attorney General has the broad, essentially unreviewable discretion, to bar any proposed transaction which sells, transfers, or otherwise transfers control of a nonprofit hospital or its material assets to a for-profit entity, and the Attorney General may consider any number of factors deemed relevant by the Attorney General, including whether the proposed transaction is “fair and reasonable” and is in the “public interest” (Cal. Corp. Code §§ 5914).

Only time will tell if the new federal mandate for integration and coordination among different groups of providers will pave the way for more specific, concrete guidance from the various antitrust enforcement agencies as to how to legally structure hospital, physician group consolidations. In the meantime, interested parties will necessarily have to proceed carefully in order to minimize the risk of antitrust scrutiny and maximize the chances of successful outcomes.

Senators Push CMS to Implement Physician Payments Sunshine Act

Sheppard Mullin — Wed, 19 Sep 2012 09:05:39 -0800

By Eugene Ngai

In a roundtable discussion of the Senate Special Committee on Aging last week, Senators Chuck Grassley and Herb Kohl called on CMS to issue final regulations implementing the Physician Payment Sunshine Act, which was enacted as part of the Affordable Care Act. The Sunshine Act requires certain companies such as pharmaceutical and device companies to report to CMS compensation paid to physicians and teaching hospitals, and any ownership or investment interest owned by physicians. CMS would thereafter publish the data from such reports on a publicly available website. Although data collection was initially supposed to start at the beginning of 2012, CMS has not yet promulgated final regulations, and data collection is not expected to start until 2013 at the earliest. Although CMS published a proposed rule on December 19, 2011, CMS has purportedly struggled with addressing the large volume of public comments. The law contemplated that companies would have 90 days after the final rule was issued to prepare for data collection. If CMS intends to provide companies with a similar amount of time to prepare, it will have to publish a final rule over the next few weeks, or further delay the implementation date for data collection.

Senator Grassley’s complete statement can be found here.

Dual Eligibles Coordinated Care Demonstration postponed to July 2013

Sheppard Mullin — Mon, 17 Sep 2012 15:40:26 -0800

By Ken Yood

The California Department of Health Care Services recently announced that it will start its Dual Eligibles Coordinated Care Demonstration in June 2013 instead of January. The Dual Eligibles Coordinate Care Demonstration is expected to lead to the enrollment of up to 560,000 of California’s dual-eligible Medicare-Medicaid patients into managed care plans designed to lower health care costs while maintaining quality of care. Although dual-eligibles in Los Angeles, San Diego, Orange, and San Mateo counties were supposed to be enrolled beginning in January 2013 under the original timeline, DHCS has determined that more time is required, and that those four counties will join San Bernardino, Alameda, Santa Clara, and Riverside counties and begin enrolling beneficiaries in July 2013. California has the largest number of dual-eligibles in the nation, totaling over 1.2 million beneficiaries.

Supreme Court Upholds Individual Mandate in the Affordable Care Act, but Medicaid Expansion is in Question

Sheppard Mullin — Thu, 28 Jun 2012 08:49:57 -0800

By Eric Klein

The Supreme Court ruled today 5-4 that the Affordable Care Act is constitutional and upheld the individual mandate, requiring most Americans to maintain "minimum essential" health insurance coverage. The decision was written by Judge Roberts for the majority. The Court held that the argument relying on the Constitutional commerce clause would not support the Affordable Care Act, but then looked to the constitutional right of Congress to impose taxes. Noting that the enforcement and operational structure for the individual mandate compliance and penalties was administered through the Internal Revenue Service, the Court upheld the individual mandate as a valid exercise of the Taxing Clause of the U.S. Constitution.

A notable result of the decision also was the holding by the Court that the federal government could not penalize states by withholding or withdrawing Medicaid funding for those states which choose not to participate in the Medicaid expansion. The Court reasoned that the type of change contemplated to the Medicaid program by the Affordable Care Act was transformational and not contemplated previously and therefore was not subject to the prior statutory reservation of rights by the federal government that allowed the alteration or amendment of the Medicaid program.

Further analysis of the decision is required, but this holding may allow for states individually to choose not to support the Medicaid expansion program and to do so without fear of reprisal from the federal government. Put another way, the Supreme Court decision potentially removes the "stick" held by the federal government and therefore may require a shift by the federal government to more of a "carrot" approach (i.e., providing incentives to the states for allowing the Medicaid expansion to proceed). Use of an incentive approach obviously will carry a price tag and may be difficult to accomplish, given the current economic conditions and the pending election.

In any event, we expect to see additional legislative or regulatory action to address this Medicaid state expansion aspect of the Supreme Court decision. The question arises though as to whether or not the Obama administration will wish to address this prior to the November election or to undertake this post-election. If post-election, the timing for such regulatory or legislative action may be somewhat pressured in light of the 2014 Affordable Care Act implementation schedule. Therefore, there will be significant state level activity on this issue, with opportunities for industry input, lobbying and contracting. We also anticipate seeing an acceleration of the current hospital and physician consolidation trends in order to accommodate the expected increased covered population.

We will be providing additional analysis of the Supreme Court decision in further blog postings.

Affordable Care Act Supreme Court Decision

Payment Safeguards for Provider Managed Care Arrangements

Sheppard Mullin — Wed, 27 Jun 2012 09:47:53 -0800

By Karie Rego

As California transitions faster than other parts of the country into more and more managed care payment arrangements, the challenges and pitfalls related to payment increase. Thus, providers must identify risks and implement safeguards to protect payments.

New coding issues can require additional attention. Even though in some ways coding is simpler than traditional fee-for-service, in other ways there is a complicated learning curve and the potential of increased government scrutiny. Medicare Advantage, new ACO arrangements and many commercial contract payments are based on the patient’s diagnosis. However, the rules for determining one diagnosis over another are newly evolving with regard to outpatient services, having traditionally been used only to determine inpatient payments. Further, once the diagnosis is determined, the provider will need to consider best practices for evidencing treatment and follow-up for the diagnosis.

The lack of clarity regarding payment also spills over into both government and non-government contracts. Oftentimes contracts fail to specify what coding requirements apply or who is responsible for overpayments found either in plan or government audits.

Finally, with the building of networks, sometimes providers are left out or choose to opt out. Payment for out-of-network providers can be complicated and trigger lawsuits. There also is a California statute with vague language mandating payments for emergency services based on reasonable and customary charges.

Important Safeguards to Consider:

Assess and improve coding and documentation guidance provided as part of outpatient and inpatient shared risk arrangements.

Review the payment provisions in managed care contracts and know the weaknesses and where further negotiation is needed in the coming contract year.

Think about any non-contracted providers receiving payments and how to demonstrate that payments are reasonable.

Managing an Internal Audit

Sheppard Mullin — Tue, 01 May 2012 08:40:31 -0800

By Karie Rego

Internal investigations of billing issues usually involve audits. It is important to approach an audit carefully or the auditors can create more risk for the organization by misinterpreting the standards.

Thus, it is very important to know what you are auditing before you audit. It seems simple but this is often overlooked. Fully researching all the issues involved with a critical eye is key. There may be subtle changes in coding, billing or coverage policy or guidance that caused confusion. There actually may be little reimbursement impact from the error.

After the regulatory scope and applicability are researched an audit protocol should be drafted. The protocol should be carefully worded and tied back to the research. There should be an expectation that the government or opposing party is going to obtain a copy at some point in the negotiation. If an attorney does not draft the protocol, they should review it for language.

If there also is a government or payer review ongoing, review the same records and make your own findings. If you are the one doing the audit as part of a settlement or potential repayment, the size of the audit sample and timeframe is very important. Usually the best course is a smaller sample called a probe audit that restricts or expands the audit as issues are found to have either continued or have resolved.

Creating an audit report for negotiation is important. Overpayments as well as underpayments should be included as offsets are allowed and even specifically referenced in Medicare manuals. The report should include a concise argument for the regulatory position you are taking with regard to coding, contracting or manual provisions.